The Abu Dhabi Global Market announced that it was officially open for business and that the Financial Services Regulatory Authority was ready to accept applications for a license from financial institutions. The ADGM is the newest international financial centre and it has adopted English common law by applying it in its jurisdiction for civil and commercial law. The application of English common law will govern matters such as contracts, tort, trusts, equitable remedies, unjust enrichment, damages, conflicts of laws, security and personal property.

Shearman & Sterling helped develop ADGM's world-class legal and regulatory regime to be in line with international standards to provide the sophistication and certainty found in the world’s top financial centres. The firm drafted all the Financial Services and Markets Regulations and Financial Services Regulatory Authority Rules as well as legislation governing matters such as companies, insolvency, interpretation, commercial licensing, arbitration, courts, employment, limited liability partnerships, real property and strata title.

View the ADGM press release.

The European Supervisory Authorities published two consultations on proposed joint guidelines for: (i) financial institutions on the factors for financial institutions to consider when assessing money laundering and counter terrorist financing risks associated with individual business relationships or occasional transactions and the extent to which a firm's customer due diligence can be adjusted based on the risk identified; and (ii) national regulators on the supervision of AML/CFT on a risk sensitive basis. The guidelines are required to be prepared by the ESA's by the Fourth Anti-Money Laundering Directive, also known as 4AMLD, which Member States must transpose into national law by June 26, 2017. The proposed guidelines would apply to banks, investment firms, insurers, insurance intermediaries, money brokerage firms, collective investment undertaking marketing its units or shares and to branches of those firms (regardless of whether their head office is located in an EU Member State or a third country) and to national regulators of those financial institutions. The consultations are open until January 22, 2016 and the ESA's expect to finalise them in Spring 2016. The final guidelines will apply from June 26, 2017.

View the proposed Risk Factors Guidelines.

View the proposed Risk-based Supervision Guidelines.

The Bank of England published its approach to stress testing and evaluating the resilience of the UK banking system and set out its plans in this regard for the next three years. The BoE's approach will include the introduction of an annual cyclical scenario, assessing risks to the banking system that derive from financial cycles, taking into account domestic, global and markets elements. This annual cyclical scenario will include all PRA-regulated banks and building societies with total retail deposits greater than £50 billion, on an individual or consolidated basis, at a firm's financial year end date. Currently, this means the following firms will be included: Barclays plc, HSBC Holdings Group, Lloyds Banking Group, Nationwide Building Society, Royal Bank of Scotland Group, Santander UK plc and Standard Chartered Bank Group. UK subsidiaries of foreign-owned investment banks will be excluded. Every other year, the BoE will also biannually explore scenarios that are unrelated to the financial cycle and for which risks to financial stability and individual banks are deemed to be emerging. Therefore, in 2016, there will be a European Banking Authority stress test and a UK cyclical scenario test. In 2017, there will be both a UK cyclical and exploratory scenario test (for the first time). In 2018, the BoE intends to only run a UK cyclical scenario test. The results of the 2015 UK stress test are expected to be published on December 1, 2015.

View the BoE's approach to stress testing.

The European Securities and Markets Authority published translations of its Guidelines on the application of the definition of commodity derivatives under the Markets in Financial Instruments Directive (known as MiFID I). The guidelines aim to provide a common, uniform and consistent application of the definition of commodity derivatives. There is no commonly adopted definition of derivatives in the EU under MiFID I and ESMA was concerned that this would lead to the inconsistent application of the European Market Infrastructure Regulation where it refers to the MiFID commodity derivatives definition. The Guidelines are also relevant to the reporting obligations under the Regulation on wholesale energy market integrity and transparency, known as REMIT.  The Guidelines also aim to ensure continuity when MiFID II replaces MiFID I from January 3, 2017. The Guidelines were initially published on May 6, 2015 with ESMA's final report and feedback and applied from August 7, 2015.

View the Guidelines.

The US Securities and Exchange Commission named Wenchi Hu and Christian Sabella as Associate Directors in the SEC’s Division of Trading and Markets. As Associate Director of Risk and Supervision, Ms. Hu will be responsible for supervising registered clearing agencies including those firms that clear securities-based swaps. Mr. Sabella will become Associate Director of Regulation, for which he will spearhead a team issuing recommendations for SEC policy and rulemaking focused on financial market infrastructure including clearing agencies, transfer agents and security-based swap data repositories. Ms. Hu joined the SEC in 2011 as a senior special counsel in the Office of Compliance Inspections and Examinations before moving to the Office of Derivatives Policy in the Division of Trading and Markets. Mr. Sabella joined the SEC in 2011 as a branch chief in the Office of Trading Practices.

View the SEC press release.

The European Commission published its report to the European Parliament and the Council on the capital requirements for covered bonds as incorporated in the Capital Requirements Regulation. Under CRR, for banks investing in covered bonds that meet certain criteria a preferential risk weights is applied. The Commission is required to report on the appropriateness of: (i) the preferential risk weights taking into account types of cover assets, level of transparency on the cover pool and the impact of the covered bond issuance on the issuer's unsecured creditors; (ii) extending the preferential risk weights to covered bonds secured by certain aircraft loans; (iii) including covered bonds guaranteed by residential loans as eligible assets; (iv) the derogation for covered bonds backed by securitization instruments; and (v) the derogation for covered bonds backed by other covered bonds. The Commission considers the European Banking Authority's recommendations on the EU covered bond framework published in 2014 and sets out where it agrees with those recommendations and its proposed steps to implement them, including consulting with stakeholders on proposed changes to the legislative requirements. The Commission's recent consultation on the EU's covered bond framework under the Capital Markets Union initiative is also relevant and will impact on how the capital treatment for covered bonds is revised.

View the Commission's Report.

View the EBA's Report.

 
The Prudential Regulation Authority launched a consultation on its proposed criteria and methodology for identifying other systemically important institutions, i.e. institutions that are not classed as globally systematically important financial institutions but whose failure would have a significant negative effect on the UK financial system. According to the Capital Requirements Directive, national regulators are required to identify O-SIIs that are banks, investment firms or mixed financial holding companies incorporated in their jurisdiction. That requirement derives from the Basel Committee on Banking Supervision framework for domestic systemically important banks or D-SIBs. In developing its proposals, the PRA states that it has to take into account the relevant EBA Guidelines on the assessment of O-SIIs. The PRA must identify as O-SIIs those firms whose distress or failure would have a systemic impact on the UK or EU economy or financial system due to size, importance, complexity, cross-border activity and interconnectedness. Firms that are designated as O-SIIs by the PRA will be subject to enhanced supervision by the PRA. However, the PRA considers that O-SIIs are likely to be those firms that are currently subject to PRA supervision as a Category 1 firm and therefore there will be minimal impact on the firms. The PRA intends to publish the first list of O-SIIs in Q1 2016 and thereafter annually by December 1, each year. The consultation is open until January 18, 2016. The PRA will publish its final Statement of Policy in Q1 2016.
 
View the PRA consultation paper.

The Regulatory Oversight Committee launched a consultation on its proposed approach to incorporating data on branches into the Global Legal Entity Identifier System, known as GLEIS. The ROC is proposing that only branches that meet the following conditions would be eligible for an LEI: (i) the branch is an international branch; (ii) the branch is registered in a publicly accessible local business registry or local regulatory registry in its host country; and (iii) the head office of the branch already has an LEI so that the two entities could be linked through their respective LEIs. Responses to the consultation are due by November 16, 2015.

View the consultation paper.

The US Securities and Exchange Commission published a report of private fund industry statistics and trends. The SEC aggregated and anonymized data private fund advisors have submitted to the SEC on Form ADV and Form PF. The report, which the SEC intends to update periodically, reflects information reported from the first calendar quarter of 2013 through the fourth calendar quarter of 2014. Among other things, the report includes statistics about the distribution of borrowings, an analysis of hedge fund gross notional exposure to net asset value, information regarding beneficial ownership and a comparison of average hedge fund investor and hedge fund portfolio liquidity.

View the report.

HM Treasury announced that certain amendments would be made to the Senior Manager and Certification Regime and that the SM&CR would be extended to all UK authorized firms. Amendments include: (i) removal of the presumption of responsibility for a senior manager when a breach of regulatory provisions occurs in the area that he is responsible for; and (ii) granting the regulators specific powers to take enforcement action against all non-executive directors of firms for their misconduct. The extension of the SM&CR follows from the recommendations of the Fair and Effective Markets Review in June 2015 that the regime should be extended to wholesale participants in the fixed income, currency and commodity markets.  Both the amendments and the extension will be effected through primary legislation in the form of the Bank of England and Financial Services Bill that has been laid before Parliament. However, secondary legislation will also be amended to ensure that the reverse burden of proof and the notification requirements for breach of regulatory rules do not come into effect when the SM&CR comes into effect, which will be on March 7, 2016. It is currently expected that the extension of the SM&CR to all other UK financial institutions will be implemented during 2018. 

View the policy paper.

You may wish to review our related client note.

The Prudential Regulation Authority published a consultation paper proposing the creation of a new framework that would require firms to ensure operational continuity of shared services that are considered critical to the economy. This would mean that in the event of failure of a firm, recovery action, resolution or post-resolution restructuring would be facilitated. This consultation is relevant to banks, building societies and PRA-authorised investment firms and follows the PRA's previous discussion paper on this topic, published in October 2014, which includes draft rules and a supervisory statement. The consultation paper does not define the size of firms that are intended to be in scope, but notes that those firms that are deemed to perform functions critical to the economy as well as ring-fenced bodies and global systemically important banks are likely to be included. Similarly, the EU Bank Recovery and Resolution Directive would also preserve critical functions of firms by allowing authorities to place them into resolution, and in light of this, the PRA is consulting on such proposals. The PRA aims to publish an addendum to the consultation which will define the scope of the requirements together with a Bank of England consultation on the calibration of the minimum requirement for own funds and eligible liabilities. The PRA invites respondents to provide comments on the proposals but notes that respondents may wish to wait for the publication of the addendum before doing so. The addendum will set the closing date for the consultation period.
 
View the consultation. 

The Prudential Regulation Authority published a consultation paper on the implementation of ring-fencing for core UK financial services and activities, as required under the Financial Services and Markets Act 2000. Core activities are defined as: (i) facilities for accepting deposits or other payments into an account and provided in the course of carrying on the core activity of accepting deposits; (ii) facilities for withdrawing money or making payments from such an account; and (iii) overdraft facilities in connection with such an account. In this consultation, the PRA sets out new proposals for ring-fencing policies, including on: (i) prudential requirements for subsidiaries of Ring-Fenced Bodies; (ii) prudential requirements for other potential affiliates that would not necessarily be regulated by the PRA; (iii) intragroup prudential arrangements for groups containing RFBs; and (iv) the use of financial market infrastructures including inter-bank payment systems, Central Securities Depositories and CCPs. The proposals are relevant to all firms that are required to ring-fence their core activities before the implementation date of January 1, 2019 (which are firms, broadly speaking, with at least £25 billion of core deposits) and to growing firms that expect to meet this threshold by 2019. The PRA expects firms that currently meet the core deposits threshold of £25 billion to submit near-final plans to their PRA and FCA supervisors, taking into consideration the proposals in this consultation paper, by January 29, 2016. The PRA intends to publish a policy statement, final rules and supervisory statements by mid-2016 setting out the feedback to this consultation. Comments on the consultation paper are due by January 15, 2016.

View the consultation.

A corrigendum was published in the Official Journal of the European Union correcting the date of entry into force of Article 4(6) of the Markets in Financial Instruments Regulation. Under Article 4(6), the European Securities and Markets Authority must develop Regulatory Technical Standards on national regulators' powers to waive the pre-trade transparency requirements under which market operators and investment firms operating a trading venue must make public information such as current bid and offer prices for shares, exchange-traded funds and other similar financial instruments traded on a trading venue. In particular, the RTS should specify, amongst other things, the range of bid and offer prices to be made public for each class of instrument, as well as the depth of trading interest at those prices and the negotiated transactions that do not contribute to price formation. This provision should have been applicable from the date MiFIR entered into force, July 2, 2014, however Article 55 did not include the cross-reference.

View the corrigendum.

The US Consumer Financial Protection Bureau issued a final rule intended to streamline the process of reporting residential mortgage market information for financial institutions. Regulation C implements the Home Mortgage Disclosure Act and requires lenders to report certain information regarding home loans for which they receive applications or that they originate or purchase. The final rule amends current Regulation C requirements by calling for more specific information from lenders, such as property value, term of the loan, and the duration of any teaser or introductory interest rates. In addition, financial institutions will be obligated to deliver certain information about mortgage loan underwriting and pricing, such as an applicant’s debt-to-income ratio, the interest rate of the loan, and the discount points charged for the loan.

Aside from requiring lenders to report more detailed information, the final rule also attempts to simplify the reporting process by easing reporting requirements for some small banks and credit unions and aligning reporting requirements more closely with industry standards.   The rule also provides guidance on compliance with both new and existing requirements under Regulation C.

View the CFPB press release.

View the Final Rule.

The US Commodity Futures Trading Commission’s Division of Market Oversight extended existing time-limited no-action relief for swaps executed as part of certain package transactions  that currently receive relief from the requirement that such swaps be executed on a Designated Contract Market or Swap Execution Facility under CFTC Letter 14-137, which was issued in November 2014.

In the CFTC no-action letter, the CFTC found that requiring certain package transactions be executed on a SEF or DCM still presents challenges to both counterparties as well as to SEFs and DCMs. Because many of the challenges previously necessitating no-action relief for certain package transactions have still not yet been resolved, the CFTC is extending relief from the trade execution requirement to enable market participants to continue to execute certain package transactions in a flexible manner.

In a statement issued concurrently with the no-action letter, CFTC Commissioner J. Christopher Giancarlo criticized this fourth extension of no-action relief, noting that the need for repeated extensions proves that the CFTC’s efforts to force certain complex package transactions to trade via a SEF’s limited execution methods is “simply not workable.” In the statement, Commissioner Giancarlo expressed support instead for allowing SEFs flexibility to implement the execution methods currently used to trade package transactions in global markets.

View the press release. 

View CFTC Staff Letter 15-55.

The Federal Reserve Board issued SR Letter 15-10/CA 15-8 to announce the expansion of its Emergency Communications System – a service that maintains a database of emergency contacts to allow the Federal Reserve System staff to communicate with financial institutions in case of a natural disaster or operational emergency. The expansion will require supervised institutions to identify and register "designated cyber emergency contact(s)" that Federal Reserve staff may contact in the case of cyber emergencies. The Federal Reserve will periodically test the system to verify the contact’s business telephone number and e-mail address and the confirmation of delivery of test messages.

View the Federal Reserve Board press release.

View the SR Letter 15-10/CA 15-8.

The US Board of Governors of the Federal Reserve System issued guidance intended to clarify the criteria and process used by the Federal Reserve Board in determining whether to waive or to conduct pre-membership safety-and-soundness and consumer compliance examinations of insured depository institutions that are looking to either: (i) become state chartered member banks of the Federal Reserve System; or (ii) merge with another institution where a state member bank would be the surviving entity, including those with $10 billion or less in total consolidated assets. Specifically, the Federal Reserve Board stated that a state nonmember bank, national bank, or savings association seeking to convert its status to a state member bank will not generally be required to complete a safety-and-soundness or consumer compliance examination prior to the conversion if the institution seeking membership meets the criteria for "eligible bank," as set forth in the Federal Reserve Board’s Regulation H, together with certain additional safety and soundness criteria set forth in the guidance (collectively, the "eligibility criteria"). Under circumstances where an insured depository institution is looking to merge with another institution where a state member bank would be the surviving entity, a safety-and-soundness or consumer compliance examination of the insured depository institution will not be required so long as the state member bank meets all of the eligibility criteria on an existing and pro-forma basis.

View the guidance.

The UK Supreme Court considered the case of United States of America v Nolan. The case gave thought to whether a statutory instrument made under section 2 of the European Communities Act 1972 could effectively be deemed to amend a UK Act of Parliament. It was held that the ECA was wide enough for a statutory instrument to be effective in this way, however the Court found that the question was “difficult and borderline”. The EU Financial Collateral Directive was implemented in the UK via the Financial Collateral Regulations 2003, a statutory instrument, that was also made under the same section of the ECA. The Directive relates to title transfer financial collateral arrangements and security financial collateral arrangements made between certain classes of qualifying persons. Lord Mance considered previous case law on section 2 of the ECA, and in particular the decision taken in Cukurova Finance International Ltd v HM Treasury which related to the FCR. Lord Mance considered that Cukurova's unsuccessful challenge was "greatly underestimated", suggesting that it may have been wrongly decided, casting doubts on the enforceability of certain aspects of the FCR.  In our view, these remarks are obiter dicta, given that the particular situation of these regulations was not at issue in the case.
 
View the decision in USA v Nolan.

The US Federal Deposit Insurance Corporation announced the appointment of Lawrence Gross, Jr., as the new Chief Information Officer. As CIO, Mr. Gross will advise senior leaders at the FDIC on a number of information technology-related issues including governance, investment, program management, strategic planning, and security. Mr. Gross has over 25 years of experience in technology-related roles both in the federal government and in military service.

View the FDIC press release.

The SEC announced that Michael Liftik will replace Erica Williams as deputy chief of staff of the agency. Since April 2013, Mr. Liftik has been a Senior Advisor to SEC Chair Mary Jo White, counseling on enforcement policy matters and cases. He has worked with the SEC staff and other agencies to address issues such as the asset management industry, cybersecurity, and macroeconomic trends. He also serves as the representative of Chair White on the Deputies Committee of the Financial Stability Oversight Council.

View the SEC press release.

The Federal Reserve Bank of New York announced that Kevin Stiroh has been named executive vice president in the New York Federal Reserve’s Integrated Policy Analysis Group as well as head of its Financial Institution Supervision Group, effective October 26, 2015. In his new roles, Mr. Stiroh will lead the teams responsible for supervising financial institutions in the Federal Reserve’s Second District. Mr. Stiroh has over 15 years of experience at the New York Federal Reserve and holds a Ph.D. in economics from Harvard University.

View the New York Federal Reserve press release.

The European Stability Mechanism appointed Andrew Harkness and Jean Guill to its Board of Auditors for a period of three years.

View the press release.

The European Parliament announced that it adopted the revised Directive on Payment Services known as PSD2, which will repeal the current PSD. The aims of PSD2, which focuses on electronic payments and payment services within the EU, include making payments between Member States as secure, easy and efficient as those made within a Member State, regulating new types of payment services and payment services providers which are currently unregulated and stimulating competition in the electronic payments market. The Directive is expected to be formally adopted by the EU Council of Ministers and will then be published in the Official Journal of the European Union. Member States will then have two years to introduce PSD2 into national law.

View the text of the revised Directive.

View the press release.

A Delegated Regulation correcting the text of the Regulatory Technical Standards on requirements for investor, sponsor, original lenders and originator institutions for exposures to transferred credit risk under the Capital Requirements Regulation was published in the Official Journal of the European Union. Minor errors were made in the RTS published in various languages of the EU, and the revisions correct such errors, including clarifying that materially relevant data does not have to be provided to investors at an individual loan level in all circumstances and that it may be sufficient to provide such data on an aggregate basis in certain circumstances. The Delegated Regulation enters into force on October 28, 2015.
 
View the Delegated Regulation.

The US Board of Governors of the Federal Reserve System announced the approval of the applications by Royal Bank of Canada and its subsidiary, RBC USA Holdco Corporation, to acquire City National Corporation and its wholly owned subsidiary, City National Bank, under section 3 of the Bank Holding Company Act. City National is a $33 billion banking organization. The Federal Reserve Board’s approval comes approximately seven months after submission of the application, which was the subject of comments opposing the application. On the same day, the Federal Reserve Board approved the application by Royal Bank of Canada to establish a limited federal branch in New Jersey. As a limited federal branch, it will only take deposits permitted to be taken by an Edge corporation under section 25A of the Federal Reserve Act.

View the press release announcing the approval of the acquisition.

View the Federal Reserve Board order approving the acquisition.

View the Federal Reserve Board press release approving the limited branch.

View the Federal Reserve Board order approving the limited branch.

The European Banking Authority published final translations of its Guidelines on the management of interest rate risk arising from non-trading activities, also known as interest rate risk in the banking book or IRRBB, which is the risk to firms arising from adverse movements in interest rates. Under the Capital Requirements Directive, national regulators must require a firm to take measures if its economic value declines by more than 20 per cent of their own funds as a result of a sudden and unexpected change in interest rates of 200 basis points which is termed supervisory "standard shock". National regulators must also take steps when a change occurs, as defined by the EBA in these Guidelines. The Guidelines set out the definition of such change and the methods for the calculation of the outcome of the supervisory "standard shock", which is the shock applied to a firm's portfolio to determine the impact on the economic value of the firm, as well as specify the identification, management and mitigation of IRRBB. The Guidelines apply from January 1, 2016. They will repeal the Guidelines of the Committee of European Banking Supervisors published in 2006. The Guidelines are addressed to national regulators and relevant credit institutions and investment firms. National regulators must notify the EBA by December 7, 2015 as to whether they comply or intend to comply with the Guidelines.
 
View the Guidelines.

The Prudential Regulation Authority and Financial Conduct Authority jointly published a consultation paper on proposals for regulatory references that are employment references passed between firms when an individual moves roles. The proposals form part of the wider reforms aiming to strengthen accountability in the banking and insurance sectors and are relevant to candidates applying for new roles, including senior management functions under the Senior Managers Regime, significant harm functions under the Certification Regime and other roles within insurance firms and credit unions. The proposals include: (i) a requirement for firms to request regulatory references covering a period of six years from former employers; (ii) specific disclosures for inclusion in regulatory references, such as whether the firm has ever concluded that a candidate was at any point in the last six years deemed not fit and proper to perform a function, the details and basis of any disciplinary action taken and details of any other roles performed by a candidate within a firm whilst working as an employee of that firm; and (iii) a requirement for firms not to enter into any arrangements that would prevent them from disclosing relevant information. Final rules are expected to be in place for the start of the accountability regime on March 7, 2016. Comments on the consultation are due by December 7, 2015. 

View the consultation paper.

The Prudential Regulation Authority and Financial Conduct Authority published Policy Statements and final rules on whistleblowing. The rules require firms to implement internal whistleblowing procedures, to inform employees of the internal procedures and the whistleblowing services provided by the PRA and FCA and to ensure that employment contracts and settlement agreements do not deter employees from whistleblowing. The rules will apply to UK banks, building societies and credit unions with assets of £250 million or greater, PRA-designated investment firms, insurance and reinsurance firms within the scope of Solvency II and the Society of Lloyd's and managing agents. UK branches of overseas firms are not in scope but the regulators will consider this further once the effectiveness of these new rules can be properly assessed. The scope of the new rules therefore captures those UK firms that fall within the Senior Manager and Certification Regimes which come into effect on March 7, 2016. Firms will have until September 7, 2016 to implement the new whistleblowing rules. However, firms will have to assign a senior manager who is a non-executive director as the whistleblowers' champion by March 7, 2016 and that individual will be responsible for overseeing the firm's implementation of the new whistleblowing rules.   

View the PRA Policy Statement.
 
View the FCA Policy Statement.

The US Federal Financial Institutions Examination Council’s Task Force on Consumer Compliance revised interagency examination procedures for Regulation P, which governs the privacy of consumer financial information. Under Regulation P, financial institutions are prohibited from disclosing nonpublic personal information about consumers to unaffiliated third parties, with certain exceptions if the institution meets various opt-out and notice requirements. Regulation P also requires financial institutions to inform customers of their privacy policies and practices.Among other things, the revised examination procedures reflect a rulemaking by the US Consumer Financial Protection Bureau from October 2014 that creates an alternate delivery method financial institutions can use in their annual disclosure of privacy practices to customers. The examination procedures also reflect the recodification of Regulation P by the CFPB in December 2011. The revised examination procedures supersede previous Regulation P interagency examination procedures issued by the FFIEC via CA 11-4.

View the Federal Reserve Board press release.

View the revised interagency examination procedures.

The European Securities and Markets Authority published its final Guidelines on Alternative Performance Measures for listed issuers. An APM is a financial measure of historical or future financial performance, position or cash flow and is usually derived from financial statements prepared by an issuer. The Guidelines aim to assist users in making investment decisions and encourage European issuers to publish comparable, transparent and reliable information on their financial performance so that users can obtain a comprehensive understanding of their performance. The Guidelines apply to issuers with securities traded on regulated markets who are required to publish regulated information under the EU Transparency Directive, any persons responsible for drawing up a prospectus under the EU Prospectus Directive and relevant EU national regulators. The guidelines will apply to APMs disclosed on or after July 3, 2016.

View the Guidelines.

The US Securities and Exchange Commission announced that Chyhe Becker has been named the Associate Director in the Division of Economic and Risk Analysis, responsible for the Office of Litigation Economics. The appointment is effective immediately.

View the press release.

The US Consumer Financial Protection Bureau sent a letter to mortgage industry trade groups specifying details regarding initial examinations for compliance with the Know Before You Owe mortgage disclosure rule (also known as the TILA-RESPA Integrated Disclosure regulation). The rule, which became effective October 3, 2015, requires institutions supervised by the CFPB to introduce more simplified mortgage disclosure forms. The CFPB intends to conduct initial examinations for compliance with the rule. Although the initial examinations will take into account the scale and scope of modifications necessary for each supervised institution, the CFPB letter re-stated the expectation that supervised institutions should make a good faith effort to comply with the rule. To that end, the letter detailed the various factors that CFPB examiners will take into consideration, which include: (i) the institution’s implementation plan, including actions taken to update policies, procedures and processes; (ii) its training of appropriate staff; and (iii) its handling of early technical problems.

View the press release.

The European Securities and Markets Authority published a final report on the possibility of establishing mappings of credit ratings published on the European Rating Platform (a public website to be launched by ESMA in 2016 which will allow comparability of all ratings given by rating agencies registered and authorized in the EU), as required under the amended Credit Rating Agencies Regulation. Credit rating mapping would assist users of credit ratings in comparing ratings given by different credit agencies for the same entities. ESMA recommends that the European Commission not take any action at this point in terms of mapping and that ESMA should instead focus on constantly updating its information and data which allows users of credit ratings to carry out their own research. ESMA also published two sets of technical advice to the European Commission. The first is on reducing sole and mechanistic reliance on external credit ratings which considers the measures in place to date to reduce reliance on credit ratings and recommends that efforts should focus on removing reliance on credit ratings instead of trying to remove references to credit ratings in all EU legislation. The second is on competition, choice and conflicts of interest in the credit rating industry which considers the impact of certain provisions of the CRA Regulation on competition, conflicts of interest and structured finance instruments which were introduced in 2013. The European Commission must report to the European Parliament and Council by December 31, 2016 on whether references to credit ratings in EU legislation should be removed when the latest provisions of the CRA are implemented. ESMA proposes to reassess the implementation of the CRA Regulation within the next three to five years.
 
View the report and technical advice.

The European Securities and Markets Authority sent a letter to Jonathan Hill, Commissioner for Financial Stability, Financial Services and Capital Markets Union at the European Commission on the Regulatory Technical Standards for indirect clearing for OTC derivatives under the European Market Infrastructure Regulation and the draft RTS on exchange-traded derivatives under the Markets in Financial Instruments Regulation. Both the final RTS under EMIR and the draft RTS under MiFIR aim to specify the types of indirect contractual arrangements that do not increase counterparty risk. Under MiFIR, the draft RTS on indirect clearing must be consistent with the RTS under EMIR. ESMA considers that the RTS under EMIR need to be revised to take into account the feedback received on the proposed draft RTS under MiFIR.  ESMA therefore intends to consult on the possible changes to the EMIR RTS to align them with the draft MiFIR RTS. ESMA will submit the draft MiFIR RTS and draft amended EMIR RTS to the European Commission together, following its consultation.

View the letter.

The European Securities and Markets Authority published its final report and final draft Regulatory Technical Standards on the clearing obligation for certain classes of credit derivatives. Under the European Market Infrastructure Regulation, ESMA is required to develop draft RTS setting out the OTC derivatives that should be subject to the clearing obligation, the date/s from which the obligation should apply and the minimum remaining maturity of OTC derivatives. The final draft RTS provide for the following two iTraxx Index CDS to be subject to the clearing obligation: (i) untranched iTraxx Index CDS (Main, EUR,5Y); and (ii) untranched iTraxx Index CDS (Crossover, EUR,5Y). ESMA has to a large extent adopted the same approach that it took for the RTS on the clearing obligation for IRS (which the European Commission adopted on August 6, 2015). The final draft RTS on the clearing obligation for CDS provide for the same categories of counterparties to be subject to the CDS clearing obligation as will be subject to the IRS clearing obligation. Similarly, the obligation for the different counterparties will be phased in according to counterparty type.  ESMA has submitted the final draft RTS on a clearing obligation for CDS to the European Commission for endorsement.

View the final draft RTS on a clearing obligation for CDS.

The SEC announced the launch of a new rulemaking database to provide for greater transparency into the SEC’s rulemaking process. Unlike the structure of the current SEC website, the new database allows users to sort rules by date, status (e.g., proposed, completed, etc.), and SEC division (e.g., Investment Management, Trading and Markets, etc.).

View the SEC announcement of the new database.

View the SEC rulemaking index.

The Basel Committee on Banking Supervision published a report relating to the regulatory consistency of Risk-Weighted Assets for counterparty credit risk. This report is part of the BCBS’s wider Regulatory Consistency Assessment Program, which is intended to ensure consistent implementation of the Basel III framework. The report examines variability in banks’ modeling of derivatives, specifically exposure modeling, by presenting findings from a hypothetical test portfolio exercise. The report concentrates on the internal models method and the advanced credit valuation adjustments risk capital charge for OTC derivative trades. This report completes the BCBS’s review, in respect of trading-related internal models, and follows two earlier exercises that focused on market risk RWAs that were published in January 2013 and December 2013. In the report, the BCBS presents key findings, lists a number of observed good practices, and highlights areas where banks and supervisors may seek to harmonize practices to reduce variability in outcomes.

View the report.

The Comptroller of the Currency, Thomas J. Curry, issued a statement recognizing October as National Cybersecurity Awareness Month, as designated by President Obama. Mr. Curry stated that the goal of the month is to “raise awareness of threats to the data systems that have become part of our everyday lives and to encourage each of us to take steps to safeguard those systems.” Mr. Curry’s statement noted the increasing prevalence of cybersecurity breaches and encouraged banks/thrifts and supervisory agencies to work together to prevent breaches and to ensure that institutions have a plan in place to effectively detect, assess, and respond to cyber-attacks.

View the press release.

The European Stability Mechanism announced that Françoise Blondeel has been promoted to its Management Board. Ms Blondeel was previously Head of Middle and Back Office at the ESM and will now also be in charge of the ESM’s internal coordination.

View the press release.

The Financial Stability Board published a report detailing its progress in implementing its September 2014 recommendations for reforms to Foreign Exchange benchmarks. Although the report states that progress has been made in implementing many of the recommendations, the FSB notes that there are still areas where progress has been mixed. Specifically, among other things, the report reiterates that the FSB recommendations are intended to apply to all FX benchmarks, not just the London 4pm fix benchmark. The FSB asserts that a more complete implementation of the recommendations, particularly regarding other FX benchmarks, is essential to building upon improvements already witnessed.

View the report.

William C. Dudley, President and Chief Executive Officer of the US Federal Reserve Bank of New York, delivered a speech at the SIFMA Liquidity Forum reiterating the need to strike a proper balance between sound regulation and liquidity in financial markets. Specifically, his remarks examined market liquidity in two important fixed-income markets: the US Treasury market and the US corporate bond market. He discussed, among other things, methods on how to measure liquidity, evidence of how liquidity has changed in recent years, factors that could influence liquidity provision, and costs associated with shifts in liquidity. Dudley expressed his support for the recommendations in the recently issued interagency report on the October 15, 2014 Treasury market flash rally, including the need to better understand the implications of the evolving Treasury market structure and liquidity and how changes in regulation and market structure influence liquidity conditions more generally. Specifically, he called for study and data analysis as to whether there is a decrease in liquidity and/or an increase in liquidity risk that is costly or poses a risk to financial stability and whether regulation can be altered to improve the balance between enhancing financial stability and the costs of such regulation, including adverse impacts on liquidity.

View the speech.

The European Commission published its Action Plan for building the Capital Markets Union which follows its earlier consultation. The Action Plan sets out the steps for the medium and long term that the Commission intends to take in five priority areas: (i) providing more funding choices to EU businesses; (ii) ensuring an appropriate regulatory framework for long term investment and financing of Europe's infrastructure; (iii) increasing investment and choices for retail and institutional investors; (iv) improving bank lending capacity; and (v) removing cross-border barriers and developing more harmonized capital markets for all Member States. The Action Plan includes a detailed action list and indicative timeline of steps that the Commission intends to take, including publishing proposals to amend the Prospectus Directive before the end of 2015. Several proposals and consultations were published with the Action Plan, including (i) a call for evidence on the impact of the EU regulatory framework for financial services which seeks feedback on unnecessary regulatory burdens, inconsistencies, gaps and unintended consequences; and (ii) a proposed Commission Delegated Regulation amending the regulatory capital requirements for several categories of assets held by insurance and reinsurance undertakings.

View the Action Plan.

View the Call for Evidence.

View the proposed Commission Delegated Regulation.

The European Commission launched a consultation into the review of the European Venture Capital Funds Regulation and the European Social Entrepreneurships Funds Regulation as part of its Capital Markets Union initiative. The Commission is seeking views on steps that could be taken to improve the take-up of EuVECA and EuSEF funds through amendments to the two Regulations. Proposals include: (i) allowing managers authorized under the Alternative Investment Fund Managers Directive to be able to offer EuVECA and EuSEF funds to clients; (ii) exempting managers of EuVECA and EuSEF funds from authorization under AIFMD once they exceed the EUR500 million threshold; (iii) reducing the minimum subscription threshold for non-professional investors to attract more private investors; (iv) harmonization of registration requirements, including related costs; (v) extending the EuVECA and EuSEF Regulations to third country managers; (vi) extending the range of eligible assets that a EuVECA fund can invest in; and (vii) harmonizing requirements for the marketing of funds and fees for cross-border notifications. The consultation closes on January 6, 2016.

View the consultation paper.

The European Commission launched a consultation on proposed action to address the legal and practical issues in the EU covered bond market to facilitate cross-border investment within the EU and from third countries. The consultation forms part of the Commission's Capital Markets Union initiative. The regulation of covered bonds is a matter of Member State national laws although the prudential treatment of covered bonds is provided for in a variety of EU legislative acts such as the Units for Collective Investment in Transferable Securities Directive, the Capital Requirements Regulation and the Bank Recovery and Resolution Directive. There are differences between the legal frameworks and supervisory practices of various EU Member States for covered bonds as highlighted by the European Banking Authority in its July 2014 report. The Commission is proposing a more integrated EU-wide covered bond framework that could be reflected in legislation and/or a set of recommendations and the consultation paper includes a discussion of the various approaches that might be taken in an effort to introduce harmonisation across the EU. The consultation closes on January 6, 2016. 

View the EU Covered Bond consultation paper. 

The US Board of Governors of the Federal Reserve System announced its approval of the applications by: (i) M&T Bank Corporation to acquire Hudson City Bancorp, Inc.; and (ii) by M&T’s subsidiary bank, Manufacturers and Traders Trust Company, to merge with Hudson City Savings Bank. Upon consummation of the transactions, M&T will have consolidated assets of approximately $132.5 billion, making it the 25th largest insured depository organization in the United States (currently it is 31st). M&T agreed to purchase Hudson City and submitted applications to the Federal Reserve Board in respect of the transaction in 2012. However, the Federal Reserve Board initially identified weaknesses in M&T’s risk management program, including issues in M&T’s Bank Secrecy Act/anti-money laundering compliance management program and its consumer compliance program and thus postponed consideration of the deal at M&T’s request until M&T was able to remediate these concerns.

View the press release.

View the Order.

The Prudential Regulation Authority published an updated Supervisory Statement on reports provided by skilled persons under the Financial Services and Markets Act 2000. Under FSMA, the PRA may appoint, or may require a firm or a certain individual to appoint a skilled person to provide the PRA with a report giving an independent view of a firm's activity. This is part of the PRA's supervisory approach to firms, to identify, assess or prevent risks, track the development of previously identified risks or to use as part of possible remedial measures. The Supervisory Statement is to be read alongside the Use of Skilled Persons Part of the PRA Rulebook, which specifies the rules on contracts entered into with skilled persons. The updated Supervisory Statement provides greater clarity on the use of a skilled person as part of the PRA's supervisory approach and in particular as a discretionary supervisory tool. The Supervisory Statement includes: (i) the PRA's considerations when appointing a skilled person; (ii) the PRA's considerations when determining whether it should use its powers under FSMA to obtain a report by a skilled person or to appoint a skilled person to collect or update information; and (iii) the PRA's expectations of an appointed skilled person.

View the Supervisory Statement.

The European Banking Authority published its first analysis on asset encumbrance for EU banks, using data received from the 200 banks that provide it with such data. This first analysis initiates the regular monitoring of levels of asset encumbrance at EU level and future reports will be published annually. The analysis aims to assist supervisors in assessing how banks manage funding stress as well as the impact that switching from unsecured to secured funding might have on banks in conditions of stress. The report is based on data received for December 2014 and March 2015 further to a requirement under the Capital Requirements Regulation for banks to report levels of repurchase agreements, securities lending and all forms of asset encumbrance to national regulators. The analysis shows that the overall weighted average encumbrance ratio was 27% in March 2015, with ratios at country level that range from 0% for Estonia and 44% in Denmark and Greece. The report shows there has been no increase in levels of asset encumbrance over the past four years, based on a comparison with a similar report released by the European Systemic Risk Board in 2011. 

View the report.

The European Commission published two proposed Regulations as part of its Capital Markets Union initiative which aim to revive the EU securitization markets. The proposed Regulation on common rules on securitization and creating a European framework for simple, transparent and standardized securitization (referred to as STS Securitization) sets out the eligibility criteria for STS securitizations such as risk retention rules, due diligence and disclosure requirements. The proposed Regulation also includes requirements for supervisory requirements, amendments to other EU legislation to ensure consistency, an exemption, subject to certain criteria being met, from the clearing obligation for OTC derivative contracts entered into by covered bond entities and securitization special purpose entities and rules on third country securitizations. The second proposed Regulation would amend the Capital Requirements Regulation to revise capital requirements for banks and investment firms originating, sponsoring or investing in securitizations. The objective of the proposals is to align the CRR provisions with the revised Basel framework of 2014 as was recommended by the European Banking Authority in its report on qualifying securitizations in July. The proposed revisions to CRR seek to adopt a more risk-sensitive approach to STS securitization which is currently in the early stages of development at international level. Both legislative proposals are subject to the European legislative process. 

View the proposed STS Securitization Regulation.
 
View the proposed CRR Amendment Regulation.

The European Commission published a guide for small and medium enterprises on how to use crowdfunding. The guide describes the different types of crowdfunding available, such as peer-to-peer lending as well as equity, revenue-sharing, and debt-securities crowdfunding and includes details on how to plan and prepare for crowdfunding.

View the guide.

The European Securities and Markets Authority published a final report and final draft Regulatory and Implementing Technical Standards on the Market Abuse Regulation which replaces the Market Abuse Directive and applies from July 3, 2016. The report sets out the changes to the draft technical standards from those proposed in ESMA's initial consultation. The final draft technical standards cover: (i) detailed requirements for reporting of suspicious orders or transactions; (ii) the establishment, maintenance and termination of accepted market practices for certain behaviour not to be considered market manipulation; (iii) the arrangements, procedures and record keeping requirements that persons conducting market soundings must comply with for a market sounding not to be considered insider dealing, including the systems and notification templates and technical means for appropriate communication; (iv) the conditions that buy-back programmes and stabilisation of securities must meet not to be considered insider dealing or market abuse, including conditions for trading, restrictions on time and volume, price conditions and disclosure and reporting obligations; (v) notification requirements for trading venues of financial instruments for which a request for admission to trading is made, admitted to trading or traded for the first time; (vi) technical means and rules for public disclosure of insider information and rules on disclosure delays; (vii) arrangements for the objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflict of interest; (viii) the precise format of insider lists; and (ix) the format and template for notification of managers transactions. ESMA will submit the final report and final draft RTS and ITS to the European Commission for endorsement. 

View the final report and technical standards.