The Prudential Regulation Authority published new waivers for firms on the notifications required for depositor protection. The recent changes require firms to notify all depositors of the limit change from £85,000 to £75,000 by September 1, 2015 and provide the Information Sheet to depositors between January 1 and July 1, 2016. The PRA’s preference is that firms send out the notification of changes to all depositors by September 1, 2015 and do not send out the Information Sheet or exclusions notification before January 1, 2016. However, to relieve some of the burden on firms, the PRA will allow firms to send the deposit limit change notification by September 1, 2015 to any depositor who is no longer covered by the depositor protection scheme and any depositor who holds aggregate eligible deposits of over £50,000 and either: (i) make the required systems or other changes to ensure that no Information Sheets or exclusions notifications are sent to depositors prior to January 1, 2016; or (ii) amend the Information Sheet to the new limit of £75,000 and send it with the exclusions notification on account opening and as an annual mailing between now and July 1, 2016.

View the modification by consent.

The European Securities and Markets Authority published its technical advice to the European Commission under the Regulation on improving securities settlement in the European Union and on central securities depositories, known as CSDR. The technical advice will be considered by the Commission in its preparation of delegated acts which it is required to pass under the CSDR. The technical advice is on penalties for settlement fails and on the substantial importance of a Central Securities Depository. Under CSDR, there is an obligation to settle instructions on the intended settlement date and a daily cash penalty applies for any failed settlement. ESMA’s technical advice is on the parameters for calculating the basic amount of the cash penalty, including the circumstances which may justify an increase or a reduction in the basic penalty amount. An EU passport is provided for under the CSDR which allows an EU-registered CSD to provide its services in any EU member state. Cooperation arrangements are required to be established between the home and host member states for the supervision of the CSD, in particular where the activities of the CSD are of “substantial importance for the functioning of the securities markets and the protection of investors” in the host member state. The Commission’s delegated act is required to set out which operations of a CSD could be considered of substantial importance.

View the technical advice.

The European Banking Authority published a consultation paper including draft Regulatory Technical Standards on the procedures for excluding a firm’s transactions with Non-Financial Counterparties established in non-EU countries from the own funds requirements for Credit Valuation Adjustment risk under the Capital Requirements Regulation. A firm’s transaction with a NFC is excluded from the own funds requirements for CVA risk under the CRR, whether or not the NFC is established in the EU. This is the case as long as transactions do not exceed the clearing threshold specified in the European Market Infrastructure Regulation. As NFCs established in non-EU countries are not subject directly to EU regulation, the draft RTS clarify that firms are responsible for: (i) taking the necessary steps to identify all NFCs under this exemption and calculating accordingly their own funds requirements for CVA risk; (ii) ensuring that exempt counterparties established outside the EU would qualify as NFCs if they were established in the EU; and (iii) ensuring that counterparties calculate the clearing threshold according to the relevant provisions in EMIR and do not exceed those thresholds. The draft RTS align the treatment of NFCs established in a non-EU country with the treatment of NFCs established in the EU. Comments are due by November 5, 2015.

View the consultation paper.

The European Commission published a report on its assessment of the appropriateness of the rules governing the levels of application of the prudential requirements under the Capital Requirements Directive and the Capital Requirements Regulation, together CRD IV. In the EU, subject to certain exceptions, the supervision of a banking group which includes several banks or investment firms is undertaken at the level of the entire banking group (so called consolidated supervision) as well as at the individual level. The outcome of the assessment is that the Commission does not think that it is appropriate to propose amendments to the rules at this time as consideration needs to be given to the impact of the Single Supervisory Mechanism, implementation of the liquidity coverage requirement and the application of the Bank Recovery and Resolution Directive. 

View the report.

The US Office of the Comptroller of the Currency issued a bulletin clarifying its expectations regarding the extent to which national banks and federal branches or agencies of foreign banks may make or take delivery of a physical commodity to hedge commodity derivatives risks. Among other things, the bulletin includes guidance on the calculation required to determine whether physical hedging activities are a nominal portion of risk management activities. Pursuant to the OCC bulletin, physical hedging positions are considered "nominal" if the bank’s commodity position is no more than 5 percent of the notional value of the bank’s derivatives that: (i) are in that particular commodity; and (ii) allow for physical settlement within 30 days. The guidance also reiterates the OCC’s expectation that a bank, prior to engaging in physical commodity hedging activities, should submit to the OCC a detailed plan for such activities and receive from the OCC a prior written supervisory nonobjection.

View the OCC bulletin.

The Prudential Regulation Authority published a Policy Statement which sets out further rules that have been migrated from the joint Financial Conduct Authority/PRA Handbook to the PRA’s Rulebook. The PRA began reshaping the materials inherited from the Financial Services Authority to create a Rulebook which contains PRA rules only and follows the split of the FSA into the PRA and the FCA. The Policy Statement includes rules on passporting, regulatory reporting and reverse stress testing and final Supervisory Statements on: (i) the aggregation of holdings for the purpose of the prudential assessment of controllers; (ii) the internal capital adequacy assessment process or ICAAP and the supervisory review and evaluation process or SREP; (iii) guidelines for completing regulatory reports (entering into force on 1 January 2016); and (iv) internal governance. The Supervisory Statements set out the PRA’s expectations of firms in the relevant areas. The PRA has postponed publishing a Rulebook part and a related Supervisory Statement for internal governance of third-country branches because of the impact that the final rules under the Senior Managers Regime for third-country branches will have on those rules and its Supervisory Statement. The PRA intends to launch its online Rulebook before the end of 2015.

View the Policy Statement.
 

The UK government announced the launch of the Financial Advice Market Review which will be led by HM Treasury and the Financial Conduct Authority and include a separate expert advisory panel made up of leading individuals from financial services providers, financial advisors and consumer representatives. The review will assess the current regulatory and legal framework for the provision of financial advice and guidance to consumers and its effectiveness in ensuring access to the information, advice and guidance for consumers. The review will gather a broad range of initial evidence and then conduct the assessment on narrower terms according to where the advice gap is most evident. The initial evidence gathering will request examples of problems in obtaining advice in investments, savings, pensions and retirement income products, mortgages, consumer credit and general insurance. A consultation is expected to begin around the start of Q3 2015 and proposals are expected to be produced before the Budget is announced in 2016.

View the terms of reference.

The UK Payment Systems Regulator published an update on the work it has done to ensure that access, direct or indirect, to payment systems is fairer and also identified next steps to be taken. The PSR has introduced new access and reporting rules for operators and has imposed a disclosure obligation on the four main sponsor banks providing indirect access. The PSR will continue to work with operators and sponsor banks to help them adapt to the new regulatory requirements and will publish the findings from its review of their compliance reports later in 2015. The PSR launched a market review into the supply of indirect access to market systems and aims to publish an interim report on the review by January 2016 and a final report by May 2016.

View the report.
 

The European Banking Authority published a call for evidence under the Capital Requirements Regulation on Small and Medium Enterprises and the related capital reduction for loans to SMEs, also known as the Supporting Factor. The Supporting Factor allows banks to counterbalance the rise in capital resulting from the capital conservation buffer. Under the CRR, banks should use the capital relief produced through the Supporting Factor exclusively to provide an adequate flow of credit to SMEs in the European Union. The call for evidence aims to collect views from stakeholders and the industry to contribute to the report to the European Commission on lending trends and lending conditions for SMEs, as well as the potential risks associated with SMEs in the context of capital reduction. The final report on SMEs and the Supporting Factor will be published by the EBA in the first quarter of 2016. Responses to the call for evidence are due by October 1, 2015.

View the call for evidence.

An Amending Regulation which amends the Regulation with Implementing Technical Standards on instructions, templates and definitions for the supervisory reporting of institutions under the Capital Requirements Regulation was published in the Official Journal of the European Union. The amendments do not include any substantive changes to the original Regulation and relate only to the replacement of templates in the annexes of the Regulation. The changes aim to enhance precision in the submission, definitions and instructions relating to the supervisory reporting of institutions.

View the Amending Regulation.

Christopher Woolard has been appointed to the FCA Board as Director of Strategy and Competition for a three year term as of August 1, 2015.

Megan Butler, Executive Director of International Banks Directorate at the Bank of England, will undertake a one year secondment as Director of Supervision—Investment, Wholesale & Specialists at the FCA, as of September 1, 2015. Sarah Breeden, Director of Overseas Banks Division will act as Executive Director of International Banks Directorate during Ms. Butler’s absence.

The Prudential Regulation Authority published a Policy Statement which includes final rules which will allow depositors affected by the recent change in level of deposit protection to adjust to the new limit without loss of interest or incurring any penalties. The PRA announced on July 3, 2015 that the existing £85,000 level of deposit protection will change to £75,000 after December 31, 2015. Depositors that are contractually tied into products with balances above £75,000, either currently or at product maturity, will be able to request, until December 31, 2015, to withdraw funds between the old and new limits. Firms are prohibited from requiring a depositor making such a request to close an entire account unless the funds are placed into a new product with similar terms. A firm must return funds to a depositor within the earlier of two months of the request or by January 31, 2016. The PRA also published a revised Supervisory Statement on depositors and dormant account protection which now includes the PRA's expectations of firms regarding the definition of "affected person", notification requirements, withdrawal of affected funds and the charges, penalties and loss of interest.

View the Policy Statement.

View the amended rules.

View the revised Supervisory Statement. 

The European Securities and Markets Authority published a consultation paper on draft Regulatory Technical Standards for European Long-Term Investment Fund Regulation. An ELTIF is a new kind of fund vehicle which aims to contribute to financing the sustainable growth of the European Union's economy through targeting long-term investment.  To achieve this aim, ELTIFs are subject to various rules concerning the types of assets in which they can invest. For example, an ELTIF should invest at least 70% of its capital in “eligible investment assets” (which are generally illiquid).  ELTIFs are EU AIFs managed by authorized AIFMs and are therefore additionally subject to the AIFMD rules. The draft RTS aim to determine amongst other things: (i) the characteristics of the facilities made available to retail investors such as those for making subscriptions, payments to unit or shareholders, or repurchasing or redeeming units or shares; (ii) given that an ELTIF may not use financial derivative instruments except where it solely serves the purpose of hedging risks inherent to other investments of an ELTIF, the criteria for establishing the circumstances in which financial derivative instruments solely serve hedging purposes; and (iii) the circumstances in which the life of an ELTIF is considered to be sufficient in length. ELTIFs are expected to increase the volume of non-bank finance for companies investing in the European Union.

View the consultation paper.

The Federal Reserve Board announced the appointment of Federal Reserve Bank of Chicago Senior Vice President Sean Rodriguez as the Faster Payments Strategy Leader. Mr. Rodriguez will chair the Federal Reserve’s Faster Payments Task Force, comprised of more than 300 payment system stakeholders interested in improving the speed of authorization, clearing, settlement and notification of various types of personal and business payments.

The European Securities and Markets Authority announced the new members of its Consultative Working Group for the Investor Protection and Intermediaries Standing Committee. The new chair of the Committee is Jean-Paul Servais, Chair of the Belgian Financial Services and Markets Authority. The Committee is responsible for work on investor protection in the provision of investment services and activities by investment firms and banks, including the conduct of business rules, distribution of investment products, investment advice and suitability, and for providing technical advice and draft technical standards to the European Commission on relevant issues under the Markets in Financial Instruments Directive.

The European Securities and Markets Authority published its Advice to the European Commission, Parliament and Council on the potential extension of the EU passport to non-EU countries under the Alternative Investment Fund Managers Directive. It also published its Opinion on the functioning of the EU passport under the AIFMD and on the operation of the National Private Placement Regime. Under current rules, non-EU Alternative Investment Fund Managers and EU AIFMs of non-EU Alternative Investment Funds are only able to market their funds into member states when permitted by the relevant NPPR. ESMA has now assessed six non-EU jurisdictions: Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the US. ESMA's Advice states that there are no obstacles for extending the passport to Guernsey and Jersey AIFs and AIFMs. The same applies to Switzerland, pending certain amendments to the Swiss Federal Act on Stock Exchanges and Securities Trading. ESMA states that there is currently a lack of evidence for an appropriate assessment to be made in respect of Hong Kong, Singapore and the US, though it will complete its assessment of these jurisdictions as soon as possible. An assessment of other jurisdictions will also be undertaken. ESMA's Opinion states that some issues have been identified related to the use of the EU passport, including divergent approaches to marketing rules. The Opinion concludes that there is insufficient evidence to show that either the passport or NPPR have raised any major issues in the functioning and implementation of the AIFMD framework. ESMA recommends that a further Opinion on the functioning of the passport and the NPPR is prepared after a longer period of implementation has elapsed in all Member States.

View the Opinion and Advice.

The International Organization of Securities Commissions published its Thematic Review of the implementation on the timeliness and frequency of disclosure to investors according to Principles 16 and 26 of the IOSCO Objectives and Principles of Securities Regulation. Thirty‑seven jurisdictions participated in the review. Principle 16 relates to issuers and states that there should be full, accurate and timely disclosure of financial results, risk and other information material to the decisions of investors. The review found that there are differences on the type of information that must be disclosed and the timing of the disclosures: listed issuers are more often subject to disclosure requirements compared to other issuers, and disclosure deadlines for listed issuers are tighter. Principle 23 relates to Collective Investment Schemes and states that regulation should require necessary disclosure to evaluate the suitability of a CIS for a particular investor and the value of the investor’s interest in the scheme. The review found that timely disclosure requirements on value, risk reward profile and costs of CISs were found to be in place for all jurisdictions.

View the Review. 

The US Federal Financial Institutions Examination Council, a formal interagency body that prescribes reporting standards for financial institutions, of which the US Board of Governors of the Federal Reserve System, the US Office of the Comptroller of the Currency and the US Federal Deposit Insurance Corporation (the "agencies") are members, approved for publication a proposal to extend, with certain revisions (including revisions to the officer declaration requirement), the Foreign Branch Report of Condition (FFIEC 030 and FFIEC 030S).

The FFIEC 030 collects information regarding the structure and geographic distribution of assets, liabilities and off-balance-sheet data of foreign branches of insured US banks and savings associations. The FFIEC 030S (the Abbreviated Foreign Branch Report of Condition) collects financial data items for smaller, less complex branches. Included in the proposed revisions is an amendment to the officer declaration requirement. Currently, the report must be signed by an officer who states that the report is true and correct to the best of his or her belief. The amendments would make explicit a requirement that the officer who signs the declaration must be an officer of the parent US institution, and the new form of declaration would state not only that it is true and correct to the best of the officer’s knowledge and belief, but also that the report has been prepared in conformance with FFIEC instructions. Other amendments would reduce the required information if the single-country consolidation option is elected and add a field on the cover page for the institution to indicate whether the branch meets the criteria for annual or quarterly filing. The proposal would be effective as of the December 31, 2015 report date. Comments are due by September 28, 2015.

View the proposal.

The Financial Conduct Authority published the results of its thematic review into the oversight and control of financial benchmark activities. The review assessed the extent to which firms had responded to concerns and issues highlighted in recent benchmark enforcement cases, whether firms had implemented appropriate oversight and controls to manage the risks involved in their benchmark activities and the understanding within firms of the International Organization of Securities Commissions' Principles for Financial Benchmarks. The review found that all of the 12 banks and broking firms involved in the review had taken steps to change their approach to benchmark activities but that work was still required by all the firms and includes six key messages for firms involved in benchmark activities, which are: (i) firms need to ensure that they identify all of the activities which constitute benchmark activity or could affect a benchmark; (ii) senior management in firms need to act quickly to implement improvement plans; (iii) firms need to strengthen their governance and oversight of benchmark activities; (iv) further work is required on identifying and managing conflicts of interest; (v) robust controls need to be established for in-house benchmarks; and (vi) firms exiting benchmark activities need to give due consideration to the wider impact of their actions. The report sets out good and bad practices that were observed at the firms assessed by the FCA. The FCA expects those firms that were provided feedback during the review to act to make the necessary improvements and for all firms and users of benchmarks to consider the key messages and results of the review.

View the report.

The International Organization of Securities Commissions published a report which sets out the findings of its review on the progress by countries in adopting legislation, regulation and policies for derivatives market intermediaries as set out in the IOSCO “International Standards for Derivative Market Intermediary Regulation.” The Standards cover the scope of regulatory reform, registration requirements, capital standards for non-prudentially regulated DMIs, conduct of business standards, business supervision standards and recordkeeping standards. The review found that most jurisdictions are in the process of implementing legal frameworks which cover the same areas as the Standards and recommends that an implementation assessment need not be undertaken before the end of 2016.

View the Report.

The Prudential Regulation Authority published: (i) a Policy Statement on assessing capital adequacy under Pillar 2; (ii) a Statement of Policy on the PRA’s methodologies for setting Pillar 2 capital; (iii) a Supervisory Statement on Pillar 2 reporting; and (iv) a Supervisory Statement on the Internal Capital Adequacy Assessment Process that must be undertaken by firms and the Supervisory Review and Evaluation Process conducted by the PRA. The documents are applicable to banks, building societies and PRA-designated firms. Pillar 2 aims to ensure that firms have sufficient capital to cover potential risks not sufficiently addressed in the prescriptive Pillar 1 requirements. The Pillar 2 framework enters into force on January 1, 2016. The PRA's Policy Statement on assessing capital adequacy under Pillar 2 contains feedback received on its consultation paper of January 2015 on proposals to enhance transparency and accountability in setting Pillar 2 capital requirements. The Policy Statement explains that firms must carry out an ICAAP in accordance with the PRA's rules and it is not sufficient to only replicate the PRA's methodologies as the ICAAP is the responsibility of a firm's management body.

View the Policy Statement.

View the Statement of Policy.

View the Supervisory Statement on Pillar 2 reporting.

View the Supervisory Statement on the ICAAP and SREP.

The European Banking Authority launched a consultation on proposed guidelines for cooperation agreements between deposit guarantee schemes. Under the recast Deposit Guarantee Schemes Directive, designated authorities or deposit guarantee schemes must enter into written cooperation agreements. The proposed guidelines set out the objectives and minimum content of such cooperation agreements as well as a multilateral framework cooperation agreement which deposit guarantee schemes or designated authorities could adhere to unless they enter into bilateral agreements which go beyond the level of detail required by the framework agreement. In addition, the EBA proposes a sequence and timing framework governing when an EU host deposit guarantee scheme pays depositors of an EU branch of a non-EU headquartered firm. The consultation is open until October 29, 2015.

View the consultation paper.

The European Banking Authority published a table setting out metrics to identify Global Systemically Important Institutions in the EU. The table sets out the size, interconnectedness, substitutability, complexity and cross-jurisdictional activity of the largest 37 banks in the EU whose leverage ratio exposure measure exceeded €200 billion in 2014. This information is disclosed annually by the EBA. G-SIIs are subject to higher capital requirements and their identification as G-SIIs is the responsibility of their national regulator. A higher capital requirement applies one year after the publication by the national regulator of a bank’s scoring result, allowing the bank sufficient time to adjust to the new buffer requirement. 

View the EBA press release and chart.

The European Systemic Risk Board published two reports on issues to be considered in the review of the European Market Infrastructure Regulation which the European Commission is responsible for conducting by August 17, 2015. The first report is on the efficiency of margining requirements to limit pro-cyclicality and the need to define additional intervention capacity in the area, focussing on margins and haircut setting for CCPs because the technical standards on margin for uncleared derivatives are not yet final. The second report considers the wider ambit of EMIR. In the reports, the ESRB makes several recommendations to the European Commission for the improvement of EMIR, including: (i) binding guidance on the three options available to a CCP for taking into account potential pro-cyclicality of margin requirements; (ii) a less flexible framework for calibrating collateral haircuts; (iii) that CCPs should be required to prepare an overall tolerance for pro-cyclicality policy and be subject to more granular transparency requirements for pro-cyclicality; (iv) a further review of EMIR in 2018; (v) a swift process for removal or suspension of mandatory clearing requirements; (vi) the replenishment of default funds and the skin-in-the-game design under EMIR and at an international level; and (vii) broader access rights for national regulators to trade repository data.

View the first report.

View the second report.

The Financial Conduct Authority has published final guidance for firms on risks to customers from performance management. The guidance applies to all firms with staff that deal directly with retail customers. The guidance is intended to assist firms in ensuring that the risk of misselling from performance management is managed and to monitor performance management, looking for indicators of undue pressure to identify poor practices. The FCA will reconsider the guidance once the Markets in Financial Instruments Regulation and Directive, known as MiFID II, come into effect on January 3, 2017.

View the guidance.

The Bank of England announced the appointment of David Thorburn and Dr Norval Bryson as independent members of the Board of the Prudential Regulation Authority, effective September 1, 2015.

The UK Banking Standards Board announced the appointment of Saker Nusseibeh, CEO of Hermes Investment Management, to its Board from September 2015.

The FCA published final guidance and amended rules on its new competition law powers. The FCA obtained concurrent competition powers for the provision of financial services on April 1, 2015 which allow it to: (i) conduct investigations under the Competition Act 1998 and the Treaty on the Functioning of the European Union; and (ii) carry out market studies and make market investigation references to the Competition and Markets Authority under the Enterprise Act 2002. The finalized guidance clarifies how the FCA intends to use its new competition powers. The final rules, which come into effect from August 1, 2015, impose an obligation on authorized firms to report to the FCA any significant infringement of any applicable competition law.
 

View the Shearman & Sterling client publication on the FCA’s Concurrent Competition Powers.

View the FCA Policy Statement, including final rules.

View the final guidance on the FCA’s powers and procedures under the Competition Act 1998.

View the final guidance on the FCA’s market.

The Financial Stability Board published its ninth report on the implementation of OTC derivatives reforms. The report notes that implementation of the reforms continues to progress but that challenges do still exist. Issues that are being addressed at international level include harmonization of transaction reporting, a framework for uniform trade and product identifiers, coordination on CCP resilience and cross-border regulatory issues. The FSB will continue to monitor and report on implementation of the reforms including the effects thereof.

View the FSB report.

The Markets Committee of the Bank for International Settlements announced that the Foreign Exchange Working Group has been established. The objective of the FX Working Group is to strengthen code of conduct standards and principles in FX markets through the establishment of a single global code of conduct and related principles to ensure increased adherence to the code.

View the announcement.

The EU Agency for the Cooperation of Energy Regulators has announced that it has approved the first five third-party Registered Reporting Mechanisms under the Regulation on wholesale energy market integrity and transparency, known as REMIT. From October 7, 2015, market participants must report their wholesale energy market transactions admitted to trading at Organized Market Places, including orders to trade, to ACER. Market participants must either be approved by ACER as an RRM or report through a third-party RRM to fulfill the obligation. Further reporting obligations come into effect on April 7, 2016, which will require market participants to report OTC standard and non-standard supply contracts and transportation contracts.

View the announcement.

The European Securities and Markets Authority published proposed guidelines on sound remuneration policies under the Undertakings for the Collective Investment of Transferable Securities Directive, known as UCITS V. A minor revision of the guidelines on sound remuneration policies under the Alternative Investment Fund Managers Directive, known as AIFMD, is also proposed. The proposed UCITS V guidelines are based on the Guidelines on sound remuneration practices developed under AIFMD. ESMA intends to publish a final report and guidelines in Q1 2016 ahead of the implementation deadline for the UCITS V Directive of March 18, 2016. The consultation is open until October 23, 2015.

View the consultation paper.

The Basel Committee and the International Organization of Securities Commissions published final criteria for identifying simple, transparent and comparable securitizations. The aim of the criteria is to assist parties to a securitization to assess the risk involved across similar products, although they do not serve as a substitute for investor due diligence. The criteria are non-exhaustive and non-binding.

View the final criteria.

The Financial Conduct Authority announced that Antonio Simoes, Chief Executive Officer for HSBC in the UK, will become Chair of the FCA Practitioner Panel from August 1, 2015. Mr. Simoes will succeed Alison Brittain, former Group Director of Retail at Lloyds Banking Group.

The UK Government published proposals to amend the Limited Partnership Act 1907 as it applies to funds. The aim of the proposals is to remove unnecessary legal complexity and administrative burdens so as to ensure that the UK limited partnership remains the market standard for European private equity and venture capital funds and other private funds. The proposals include: (i) for private fund vehicles that are limited partnerships to be designated as private fund limited partnerships upon registration; (ii) adding a non-exhaustive list of activities that a limited partner of a private fund limited partnership may carry out without being considered to take part in the management of the business; (iii) removing the requirement for limited partners in private funds to make capital contributions; (iv) allowing the partners in a private fund to agree who should wind up the limited partnership and removing the requirement to obtain a court order; and (v) removing the requirement for certain details to be provided when a private fund is established as a limited partnership. The consultation is open until October 5, 2015.

View the consultation.

View the draft amendment instrument.

The European Banking Authority published two reports on the findings of two benchmarking exercises conducted under the Capital Requirements Directive IV. The exercises aim to assess and improve the consistency and comparability of Risk-Weighted Assets across large EU banks. The first report deals with findings on internal approaches applied for the calculation of RWAs for Low Default Portfolios across large EU firms. The study found that 75 percent of the observed differences in Global Charge levels across institutions can be explained by the proportion of defaulted exposures in a portfolio and portfolio mix. When each portfolio is looked at separately, the impact of defaulted exposures explains around 50 percent of GC differences for both large corporate and institutions portfolios. The remaining 50 percent could be attributed to bank-specific issues such as Internal Ratings-Based parameters or risk management practices. Data was collected from 41 institutions for this study. The study was based only on draft technical standards. The report states that more in-depth analysis is required on the impact of collateral on internal loss-given-default estimates as well as comparisons between the IRB and standardized approaches. The second report deals with the internal approaches applied for Counterparty Credit Risk exposures under the Internal Model Method and Credit Valuation Adjustment Risk according to the Advanced Approach. This study was carried out using data collected by the Basel Committee for Banking Supervision and shows significant variability in the calculation of CCR and CVAR when using the IMM across banks, especially where equity and foreign exchange OTC derivatives are concerned.

View the press release and both reports.
 

The European Banking Authority published a report, dated June 16, 2015, following a peer review of the EBA Guidelines on the assessment of the suitability of members of the management body and key function holders in banks. The EU Capital Requirements Directive provides that a bank must have at least two suitable persons who effectively direct the business. The EBA Guidelines set out the criteria and processes for banks and their supervisors to follow when assessing the suitability of proposed and appointed members of the management body and provisions for the assessment of key function holders. The peer review results show that national regulators mostly apply the EBA Guidelines, that best practices have been identified but that there is no harmonized practice amongst EU Member States in many areas of the Guidelines. The EBA intends to set out best practices in a revised version of the EBA Guidelines and to recommend a legislative initiative on certain points to ensure further alignment of practices among Member States.

View the report.

View the EBA Guidelines.

The UK Government launched a consultation on proposed amendments to the governance and regulatory architecture in line with the announcement made alongside the Queen’s speech in May about a new Bank of England Bill. The proposals include ending the subsidiary status of the Prudential Regulation Authority by bringing it within the BoE and calling it the Prudential Regulation Committee. The PRA’s functions would transfer to the BoE and the PRC would have the responsibility for exercising them, retaining the independence of the PRA to make rules, policies and supervisory decisions. The new PRC would be set up on the same basis as the Monetary Policy Committee of the BoE. Other proposals include: (i) formalizing the working relationship established between HM Treasury and the BoE for coordination in a financial crisis and the development of resolution strategies for banks and large investment firms; (ii) adjusting the statutory status of the Financial Policy Committee from a sub-Committee of the Court of Directors of the BoE to a Committee of the BoE in line with the MPC; (iii) transferring responsibility for setting the BoE’s financial stability strategy from the Court of the BoE to the FPC; and (iv) decreasing the size of the Court and including the new Deputy Governor position for Markets and Banking. The consultation is open until September 11, 2015.

View the consultation paper.

President Barack Obama announced his intent to nominate Dr. Kathryn M. Dominguez to serve on the Board of Governors of the Federal Reserve System. Dr. Dominguez is a Professor of Public Policy and Economics in the Gerald R. Ford School of Public Policy and the Department of Economics at the University of Michigan.

The US Board of Governors of the Federal Reserve System issued a final rule under Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring all US bank holding companies with $250 billion or more in consolidated total assets or $10 billion or more in consolidated total on-balance sheet foreign exposures to annually calculate their systemic importance using the methodology in the final rule. BHCs that meet the “G-SIB threshold” will be required to hold additional common equity tier 1 capital (the “G-SIB surcharge”) as an addition to the capital conservation buffer under the Federal Reserve’s minimum risk-based capital requirements. Eight US firms are currently expected to qualify as G-SIBs under the final rule. Similar to the proposed rule, under the final rule, estimated surcharges for the eight G-SIBs range from 1.0 to 4.5 percent of each firm’s total risk-weighted assets. Failure to meet the G-SIB surcharge will result in limitations on a G-SIB’s ability to make certain capital distributions and discretionary bonus payments. The Final Rule is generally similar to the proposed rule issued in December 2014 and is largely based on, but stricter than, an international standard adopted by the Basel Committee on Banking Supervision. The G-SIB surcharge will be phased in starting in 2016, and will become fully effective on January 1, 2019.

View the press release.

View the final rule.

View the Shearman & Sterling client publication.

The Prudential Regulation Authority published a Supervisory Statement setting out the liquidity coverage requirement reporting standards which firm's will need to comply with on an interim basis between October 1, 2015, the date the LCR applies under the original implementing technical standards, and the date of the new LCR requirements come into effect following the adoption by the European Commission of revised ITS on liquidity reporting. Firms are required to submit LCR data to national regulators under the CRR and CRD. The PRA considers that firms should report their LCR positions in the interim period so that their liquidity resilience can be monitored. However, if firms report their LCR positions according to the provisions of the original ITS, their LCR positions will not be properly determined. Therefore, the PRA has set out in the Supervisory Statement the data that firms are required to submit in the interim period.
 

View the Supervisory Statement.

The US Board of Governors of the Federal Reserve System issued a final order establishing enhanced prudential standards for General Electric Capital Corporation. GECC is a nonbank financial company designated by the Financial Stability Oversight Council for supervision by the Federal Reserve Board. The final order establishes the application of enhanced prudential standards in two phases due to the recent announcement by General Electric – the parent company of GECC – of its plan to shrink GECC’s systemic footprint and only retain businesses that support GE’s core business. Enhanced prudential standards for GECC are similar to those applicable to large bank holding companies with certain alterations to reflect GECC’s unique business model. Enhanced prudential standards include capital requirements, capital-planning and stress-testing, liquidity requirements, and risk-management and risk-committee requirements. GECC must begin compliance with relevant requirements from January 1, 2016.

View the press release.

The UK Government announced the appointment of new external members to the Financial Services Trade and Investment Board, the body created in 2013 to ensure that Britain's position as a global finance centre is strengthened. The new external members are: (i) Helena Morrissey, CEO, Newton and Chair, The Investment Association; (ii) Inga Beale, CEO, Lloyd’s of London; (iii) John McFarlane, Chairman, Barclays, and incoming Chairman, TheCityUK; and (iv) Nathan Bostock, CEO, Santander UK.

The US Board of Governors of the Federal Reserve System proposed a rule modifying its regulations for capital planning and stress testing. Specific changes include altering the timing for several requirements that have not yet been integrated into the stress testing framework. Notably, banks subject to the supplementary leverage ratio would not be required to incorporate the ratio into their stress testing until the 2017 cycle. Additionally, all banks would continue to use standardized risk-weighted assets for capital planning and stress testing while the use of advanced approaches risk-weighted assets (applicable to banks with more than $250 billion in total consolidated assets or $10 billion in on-balance sheet foreign exposures) would be delayed indefinitely. The proposal would also remove the requirement that banking organizations calculate a tier 1 common capital ratio. Currently, banks are required to project post-stress regulatory capital ratios in their stress tests using the tier 1 common capital ration, but as the common equity tier 1 capital ratio becomes fully phased in under the Federal Reserve Board’s regulatory capital rule, it would generally require more capital than the tier 1 common capital ratio. The Federal Reserve Board only expected the tier 1 common capital ratio to remain in force until the common equity tier 1 capital requirement was adopted. The proposed changes would take effect for the 2016 capital plan and stress testing cycles. Comments on the proposal will be accepted through September 24, 2015. The Federal Reserve Board is also currently considering several issues related to its capital plan and stress testing rules and any modifications relating to these issues will be effected through a separate rulemaking, with changes thereunder taking effect no earlier than the 2017 cycle.

View the press release.
 
View the proposed rule.

The FCA announced that Chief Executive Martin Wheatley would be standing down from September 12, 2015. Mr. Wheatley will continue to act as an advisor to the FCA Board until January 31, 2016, particularly on the implementation of the recommendations of the Fair and Effective Markets Review.

The five US federal financial regulatory agencies – US Federal Reserve Board, the US Office of the Comptroller of the Currency, the US Federal Deposit Insurance Corporation, the US Securities and Exchange Commission and the US Commodity Futures Trading Commission – issued a new Volcker Rule Frequently Asked Question 16 addressing the status of certain US-registered investment companies and foreign public funds as “banking entities” during their “seeding period.” Certain RICs and foreign public funds are currently excluded from the Volcker Rule’s definition of “covered fund” and FAQ 16 ensures that they will not be treated as “banking entities” under the Volcker Rule solely due to a banking entity’s ownership of the registered investment company or foreign public fund during the “seeding period” absent evidence that the RIC or foreign public fund was being used to evade the Volcker Rule’s requirements.

View Volcker Rule FAQ 16.

The EBA published (i) amending Regulatory Technical Standards on the treatment of non-delta risk of options in the standardized market risk approach; and (ii) amending RTS on the criteria to identify categories of staff whose professional activities have a material impact on a firm’s risk profile. According to the EBA, the amendments are necessary corrections following changes introduced by the European Commission during the legal adoption process of the original RTS. The RTS were prepared under the CRR and CRD.
 

View the amending RTS.

The Basel Committee for Banking Supervision published guidelines for identifying and dealing with weak banks. The guidelines revise and update the 2002 Basel Committee guidance for dealing with weak banks to take into account the changes in regulatory expectations and practices on early intervention, resolution frameworks, recovery and resolution planning, stress testing and macroprudential oversight. The revised guidelines are directed to supervisors and resolution authorities as well as international financial institutions advising supervisors.

View the guidelines.