The Basel Committee on Banking Supervision published a consultation paper on the risk management, capital treatment and supervision of interest rate risk in the banking book. The proposals expand upon, and are intended to ultimately replace, the Basel Committee’s 2004 Principles for the Management and Supervision of Interest Rate Risk. The objectives of the proposals are to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates and to limit capital arbitrage between the trading book and the banking book, as well as between banking book portfolios that are subject to different accounting treatments. The published proposal
presents two options for the capital treatment of interest rate risk in the banking book: (i) a Pillar 1 (Minimum Capital Requirements) approach; and (ii) an enhanced Pillar 2 approach. Comments to the proposal are due by September 11, 2015.

View the consultation document.

View the 2004 Principles for the Management and Supervision of Interest Rate Risk.

US Financial Stability Oversight Council staff released guidance providing additional information regarding the calculation of Stage 1 thresholds, used by the FSOC to help identify nonbank financial companies for potential supervision by the Board of Governors of the Federal Reserve System and to determine application of enhanced prudential standards to such companies. To assist its determination, the FSOC created a three-stage process, where it applies in Stage 1 six quantitative thresholds to a broad group of nonbank financial companies to assess whether any may be subject to further evaluation in Stage 2. The recent FSOC guidance describes the components of each of the thresholds, applicable accounting standards that are applied, data sources that are utilized, entities included in the calculations, the frequency of calculations and periodic review of the Stage 1 thresholds.

View the FSOC staff guidance.

The Prudential Regulation Authority published a Policy Statement setting out the final rules on its approach to regulating liquidity under the Capital Requirements Regulation. The Policy Statement provides feedback on the responses received by the PRA to the consultation on liquidity published in November 2014, and refers to a new Supervisory Statement on supervisory liquidity and funding risks which was published on the same day. The Policy Statement is aimed at UK banks, EEA banks with a branch in the UK, PRA-designated investment firms, as well as third country banks or PRA-designated investment firms. The Policy Statement includes new rules and feedback on issues related to: (i) the phasing-in of the Liquidity Coverage Requirement and additional liquidity requirements on top of the LCR; (ii) liquidity reporting and disclosure, including changes made to address concerns about the increased and burdensome volume of liquidity data that is to be reported; and (iii) interim LCR reporting. The Supervisory Statement deals with issues including (i) the Internal Liquidity Adequacy Assessment Process; (ii) the liquidity supervisory review and evaluation process; (iii) the drawing down of liquid asset buffers; (iv) collateral placed at the Bank of England; and (v) reporting of liquidity positions. The rules and Supervisory Statement come into effect on October 1, 2015, with the exception of Annex E, which will delete the requirement to submit certain liquidity returns and which will enter into force following a further review.

View the policy statement.

View the supervisory statement.

The International Organization of Securities Commissions published its final report titled Good Practices on Reducing Reliance on credit rating agencies in Asset Management, which lists a set of eight good practices intended to help asset managers avoid over-reliance on external credit ratings in the industry. To address concerns, IOSCO recommends that the Financial Stability Board consider potential ways to reduce possible investor overreliance on external ratings which are driven by regulatory requirements, such as those in the Basel framework or the Solvency regime applicable to insurers. The report highlights the importance of asset managers having the appropriate expertise and processes in place to evaluate and manage the credit risk associated with their investments.

View the IOSCO Final Report.

The Financial Conduct Authority published a Policy Statement and final rules on changes to the pension transfer rules. The amendments, which were consulted on in March this year, are needed to ensure that the rules reflect the change to legislation that made it a regulated activity to advise on the conversion or transfer of safeguarded pension benefits into flexible benefits. The FCA has also made changes to the Conduct of Business rules so that pension transfer requirements apply to all pension transfers, regardless of when the transferred benefits are accessed. The new rules came into force on June 8, 2015.

View the Policy Statement.

The revised EU Directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the “4th Anti-money Laundering Directive” or “4MLD”) and the Regulation on information accompanying transfers of funds were published in the Official Journal of the European Union. Together, the legislation represents the revised EU framework on anti-money laundering and terrorist financing. Member States have until June 26, 2017 to transpose the requirements of the 4th Anti-money Laundering Directive into national law. The 4th Anti-money Laundering Directive will repeal, from June 26, 2017, the current anti-money laundering Directive and its related Implementing Directive. The Regulation will apply directly in all Member States from June 26, 2017 and will repeal the 2006 Regulation on information on the payer accompanying transfers of funds from that date.

View the 4th Anti-Money Laundering Directive.

View the Regulation.

The US Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight issued no-action relief from introducing broker and commodity trading advisor registration to persons located outside the US that facilitate swap transactions for International Financial Institutions that have offices in the US. The relief granted by the DSIO is consistent with prior treatment of IFIs, including for purposes of the swap dealer definition and mandatory clearing requirements.

The definition of IFIs, for purposes of the no-action letter and in accordance with prior CFTC policy, is limited to certain specified institutions and organizations, including but not limited to, the International Monetary Fund, the International Bank for Reconstruction and Development, the European Bank for Reconstruction and Development and the International Development Association, among others.

View the CFTC Staff Letter 15-37.

The US Commodity Futures Trading Commission’s Division of Market Oversight issued a no-action letter (CFTC Staff Letter 15-38) extending time-limited relief to Swap Dealers and Major Swap Participants from the obligation to report valuation data for cleared swaps. The no-action relief applies to (i) all SDs and MSPs that are reporting counterparties under regulation 45.8, for the purposes of section 45.4(b)(2)(ii) of the CFTC’s regulations, and (ii) all cleared swaps for which the SD or MSP has the obligation to report valuation data under section 45.4(b)(2)(ii).
According to the no-action letter, the DMO will not recommend that the CFTC take enforcement action against an SD or MSP for failing to comply with the requirements of the CFTC’s regulation to report valuation data. 

Originally expiring on June 30, 2015, in accordance with the time-limited relief provided previously in CFTC Staff Letter 14-90, the no-action letter issued on June 15, 2015, extends the relief until June 30, 2016.

View the press release.

View the CFTC Staff letter 15-38.

View the CFTC Staff letter 14-90.

The European Commission announced an extension of the exemption from the clearing obligation for pension funds from August 16, 2015 to August 16, 2017. The announcement was accompanied by a draft Commission Regulation which will, once it has come into effect, amend the European Market Infrastructure Regulation to give effect to the extension. The Commission noted that if pension funds were subject to the clearing obligation now, they would need to source cash for the margin requirements of CCPs. The Commission, and other EU regulators, have asked CCPs to develop a solution that would allow pension funds to clear derivatives without the obligation being too burdensome for pension funds but which will also allow CCPs to liquidate positions rapidly in the event of a default. To date, no solution has been confirmed.

View the draft Commission Regulation.

The European Banking Authority published a final report, dated June 3, 2015, including final draft Regulatory Technical Standards on the criteria that national regulators must take into account before allowing firms to use the Advanced Measurement Approaches for calculating capital requirements for operational risk under the Capital Requirements Regulation. The draft RTS aim to encourage regulatory harmonization across the European Union and also detail the assessment methodology that is to be used by national regulators. The draft RTS cover: (i) the qualitative and quantitative criteria that firms must meet before they are granted permission to use AMA models; (ii) the criteria for the supervisory assessment of key methodological components of the operational risk measurement system; and (iii) the common standards for the supervisory assessment of a bank’s operational risk governance.

View the final draft RTS.

The US Securities and Exchange Commission’s Division of Economic and Risk Analysis published additional analysis related to its proposed rules for pay ratio disclosure. Among other things, the analysis considers the potential effects of excluding different percentages of employees from the pay ratio calculation. In September 2013, the SEC proposed rules that would require the disclosure of the median of the annual total compensation of all employees of the issuer, the annual total compensation of the chief executive officer of the issuer and the ration of the median of the annual total compensation of all employees of the issuer to the annual total compensation of the chief executive officer of the issuer. The analysis and proposed rules are available for public comment until July 6, 2015.

View the SEC analysis.

View the proposed SEC rules for pay ratio disclosure.

Following the announcement by the European Commission, that the transitional period for regulatory capital requirements for EU banks’ exposures to CCPs under the EU Capital Requirements Regulation would be extended from June 15, 2015 to December 15, 2015, the Implementing Regulation was published in the Official Journal of the European Union on June 9, 2015. The Implementing Regulation comes into effect on June 12, 2015. The extension is intended to allow further time for CCPs, both from the EU and from non-EU jurisdictions, to become authorized or recognized under the European Market Infrastructure Regulation. One of the requirements for recognition of a third country CCP is that the third country’s regime for supervision of CCPs is deemed to be equivalent to that of the regime under EMIR. Equivalence decisions for CCP regimes have only been given for Hong Kong, Singapore, Australia and Japan. Decisions for major jurisdictions, such as the US, are still outstanding. Authorization or recognition under EMIR will give the CCP the status of being a Qualifying CCP, which is relevant for clearing member firms to calculate their capital requirements for exposures to CCPs under the CRR. Lower capital requirements will be imposed for exposures to a QCCP than for exposures to a non-QCCP CCP.

View the Implementing Regulation.

View our client note on third country equivalence under EMIR.

The Financial Conduct Authority published a consultation paper setting out proposals for fair, reasonable and non-discriminatory access to regulated benchmarks by benchmark administrators. This is further to the policy statement published by the FCA in March 2015 on the seven new benchmarks it will be regulating and supervising. The policy statement included the FCA’s final rules amending Chapter 8 of the Market Conduct Sourcebook (MAR 8), originally designed for benchmarks determined through a submission process, such as LIBOR. The FCA’s proposals are in response to concerns raised about the unconstrained ability of administrators to set the prices of access to benchmark information and benchmark licenses. The new proposals limit the ability of benchmark administrators to exploit their market power in a way that could encourage unfair competition. The new rules would apply to existing and future pricing and licensing arrangements and would not apply retrospectively. Responses are due before August 3, 2015 and the FCA aims to publish a policy statement and final rules towards the end of 2015.

View the consultation paper.

The US Board of Governors of the Federal Reserve System, the US Federal Deposit Insurance Corporation and the US Office of the Comptroller of the Currency (collectively, the Federal banking agencies), released a statement reiterating the disclosure requirements for the annual company-run stress tests conducted by financial institutions with total consolidated assets between $10 billion and $50 billion. In the statement, the Federal banking agencies emphasized the requirement for such medium-sized firms to disclose certain information regarding the annual stress tests, including: (i) a description of the types of risks included in the stress test; (ii) a summary description of the methodologies used to conduct the stress test; (iii) estimates of losses, revenue, and net income; (iv) post-stress capital ratios; and (v) an explanation of the most significant causes for the changes in regulatory capital ratios. In addition, as the Federal banking agencies have previously stated, the company-run stress tests are intended to produce hypothetical results and are not intended to be forecasts or expected outcomes.

Stress test results must be disclosed between June 15, 2015 and June 30, 2015. Any questions regarding the disclosures made in connection with the stress tests should be directed to the firms.

View statement released by the Federal banking agencies.

The Amending Regulation setting out Regulatory Technical Standards on own funds requirements for institutions under the EU Capital Requirements Directive and Capital Requirements Regulation, together known as CRD IV, was published in the Official Journal of the European Union. The Amending Regulation applies to banks and investment firms and specifies the conditions in which a drag on own funds is disproportionate in terms of distributions on: (i) an individual Common Equity Tier 1 instrument; and (ii) the total own funds of the firm. The Amending Regulation also deals with preferential distributions regarding preferential rights to payments of distributions as well as preferential distributions regarding the order of distribution payments. The Amending Regulation enters into effect on June 22, 2015.

View the Regulation.

The European Banking Authority published a questionnaire on the assessment of third country equivalence with the regulatory and supervisory framework under the Capital Requirements Directive IV package. The questionnaire aims to assess whether third countries apply regulatory and supervisory provisions equivalent to those in the EU framework. The questionnaire will be sent to certain third countries so that the regimes of those countries can be assessed. For third countries that are deemed to be equivalent, more favorable treatment in terms of capital requirements could be available for EU credit institutions with relevant exposures to entities located in these countries, though only after the European Commission adopts an Implementing Decision determining the equivalence of the third country’s prudential supervisory and regulatory requirements.

View the questionnaire.

The US Office of the Comptroller of the Currency, the US Federal Deposit Insurance Corporation, and the Federal Reserve Board (collectively, the "federal bank regulatory agencies") approved a notice requesting comment on a third set of regulatory categories as part of their review to identify outdated or unnecessary regulations applied to insured depository institutions. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 requires federal bank regulatory agencies to review their regulations at least once every 10 years and to categorize and publish the regulations for comment. Consistent with the EGRPRA, the federal bank regulatory agencies have grouped regulations applicable to insured depository institutions into 12 regulatory categories: (i) Applications and Reporting; (ii) Banking Operations; (iii) Capital; (iv) Community Reinvestment Act; (v) Consumer Protection; (vi) Directors, Officers and Employees; (vii) International Operations; (viii) Money Laundering; (ix) Powers and Activities; (x) Rules of Procedure; (xi) Safety and Soundness; and (xii) Securities. The latest notice seeks comment on regulations in the following three categories: (i) Consumer Protection; (ii) Directors, Officers and Employees; and (iii) Money Laundering. Comments will be accepted within 90 days after publication in the Federal Register. Although the current notice seeks comment on the three specifically enumerated categories above, comments are accepted on any of the established categories of regulation as well as on all rules that have been finalized before the publication of the last EGRPRA notice which is expected by year-end. The European Commission also recently launched its Better Regulation Agenda, which among other things, aims to improve the review of existing EU laws.

View the Federal Register Notice.
View the EGRPRA website.

The European Banking Authority published a final report on the monitoring of Additional Tier 1 capital instruments issued by EU firms. Under the EU Capital Requirements Regulation, the EBA must monitor the quality of own funds instruments issued by EU institutions. The report presents the EBA’s recent monitoring results and updates the EBA’s earlier report on the topic, published on May 4, 2015. The EBA has examined 15 AT1 issuances made between August 2013 and November 2014, five of which were made under a conversion mechanism and 10 under a temporary write-down mechanism, for a total amount of €21.4 billion. The report states that certain provisions or wording of existing AT1 instruments should be avoided or revised to minimize uncertainty. Wording used should be consistent with that in the CRR, for example, "non-objection" cannot be used as a substitute for "supervisory permission," a term used in the CRR. Also, certain issuances include partial regulatory calls. This means that only a portion of the instruments may be called by an institution if the corresponding part of the issuance is, due to a regulatory change, no longer recognized in Tier 1 capital. The report states that only regulatory calls for the full amount of instruments are acceptable, irrespective of whether a regulatory changes triggers full or partial derecognition from AT1 capital. The EBA intends to continue monitoring certain AT1 issuances, expects that future issuances will use some level of standardization and advises that terms and conditions should not be unjustifiably complex. The EBA will also develop standardized terms and conditions for AT1 issuances which would not be compulsory for firms but would help to ensure compliance with regulatory provisions.

View the report.

The Director of the CFTC’s Office of International Affairs, Sarah E. Josephson, announced her resignation as director of the OIA and return to her previous position as the CFTC Deputy Director in the Division of Clearing and Risk. Special Counsel, Jeffrey M. Bandman, has been appointed Acting Director of OIA while the CFTC conducts a search for a new director.

The SEC named Andrew J. Donohue the SEC Chief of Staff.Mr. Donohue will replace Lona Nallengara who leaves the SEC in June. As chief of staff, Mr. Donohue will be a senior adviser to SEC Chair Mary Jo White on all policy, management and regulatory issues.

The Prudential Regulation Authority published a policy statement on ring-fencing rules concerning legal structure, governance and continuity of services and facilities. The policy statement applies to banks that are required to ring-fence their core activities, banking groups with core deposits exceeding £25 billion and financial and other institutions who deal with ring-fenced bodies. The document sets out the new rules and the new "Ring-Fenced Bodies" Part to the PRA Rulebook, all in near-final versions. A second consultation paper on ring-fencing will be published later in 2015. Final versions of all the rules and supervisory statements relating to ring-fencing will be published in the first half of 2016.

View the policy statement.

The Bank of England published a report on stress testing the UK banking system, which includes guidance on the traded risk methodology for participating banks and building societies. The document sets out the approach that banks are expected to take in the execution of the stress test of the UK banking system relating to trading positions. The guidance is designed to assist firms to carry out their own analysis for the stress test. The BoE also published a traded risk and structured finance scenario. This is a "tail risk" scenario, designed to assess the resilience of banks to deterioration in global economic conditions.

View the report.

View the scenario.

The US Financial Stability Oversight Council unanimously approved and published its 2015 annual report. The report discusses a variety of issues, including significant financial market and regulatory developments, potential emerging threats to the financial stability of the US, and recommendations on methods to mitigate such threats. The findings in the FSOC report emphasize, among other things, the need for the continuing enhancement of cyber security for all market participants, the ongoing investigation into whether existing rules and standards are sufficiently robust to mitigate the potential risk that central counterparties could transmit credit and liquidity problems among financial institutions and markets during periods of market stress, and the efforts made to reduce gaps that remain in the scope and quality of data sharing among regulators.

View the 2015 FSOC annual report.

View press release.

The European Banking Authority published its final guidelines on the circumstances in which an institution shall be considered as "failing or likely to fail" under the Bank Recovery and Resolution Directive. The guidelines are aimed at national regulators and resolution authorities who will determine at their discretion whether an institution is failing or likely to fail. The guidelines set out the broad elements that should be taken into account for such a determination, namely: (i) a current or likely infringement of the requirements for continuing authorization in a way that would justify the withdrawal of authorization; (ii) assets currently lower or likely to be lower than liabilities; (iii) a current or likely inability to pay debts or other liabilities as they fall due; and (iv) a need for extraordinary public financial support. The guidelines will apply from January 1, 2016.

View the guidelines.

The Prudential Regulation Authority published a consultation paper on contractual stays in financial contracts governed by non-EEA law. The consultation paper proposes a new rule to be included in the PRA rulebook that would require the contractual adoption of UK resolution stays in certain financial contracts governed by the laws of a jurisdiction outside the EEA. The rule would apply to PRA regulated banks and investment firms, prohibiting firms from creating new obligations or materially amending existing obligations under a financial contract governed by third country law, unless there is agreement in writing with the counterparty to the contract concerning stays in resolution. The rule’s aim is to reduce risks of contagion from the failure of a firm and to support orderly resolution so that when resolution action is taken against a firm, this does not immediately lead to the early termination of financial contracts governed by third country law while its financial contracts governed by UK or EU law are stayed. The deadline for comments on the proposed rule is August 26, 2015.

View the consultation paper.

The European Banking Authority published a final report on 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. The report includes the final guidelines which apply from January 1, 2016, and are addressed to national regulators, relevant credit institutions and investment firms. The final guidelines update and repeal the guidelines published on October 3, 2006 by the Committee of European Banking Supervisors. The guidelines set out the expectations for the identification and mitigation of IRRBB risks by firms. The level of application of the guidelines should be consistent with the level of application of the supervisory review and evaluation process.

View the report.

The European Securities and Markets Authority published its opinion on the impact of the European Market Infrastructure Regulation on requirements under the Undertakings for Collective Investment in Transferable Securities Directive for OTC derivative transactions that are centrally cleared. ESMA recommends that the provisions on the counterparty risk limits for OTC derivatives in the UCITS Directive should be amended to take into account the clearing obligation of certain OTC derivatives under EMIR. ESMA’s opinion is that the UCITS Directive should not differentiate between OTC derivatives and exchange traded derivatives. The distinction should rather be between cleared and uncleared derivative transactions which would allow a UCITS to treat ETDs and cleared derivatives transactions with similar counterparty risk characteristics in the same way.

View ESMA’s opinion.

The Bank of England launched a consultation on its proposed approach for exercising its power to direct firms to address impediments to resolvability under the Banking Act 2009, including a proposed Statement of Policy. The Banking Act 2009 implements the Bank Recovery and Resolution Directive. The BoE, in preparing the resolution plan for a firm, must assess the resolvability of a firm. If any substantive impediments are identified during that assessment or otherwise, the BoE has the power to require the firm to remove any such obstacle, including requiring the amendment of a group financial support agreement, the disposal of certain assets or a change to its legal or operational structure. The proposed Statement of Policy also includes a list of possible scenarios in which the BoE might consider using its power of direction, including: (i) the issuance of debt instruments at parent company level to allow for loss absorption and recapitalization of group entities; (ii) to ensure continuity of services in resolution such as operational services, trading agreements and access to payment services and financial market infrastructures; and (iii) for systems to be put in place to support rapid and effective valuation. The consultation is open until August 22, 2015. The BoEintends to issue later this year a separate statement on its power to direct firms to maintain a minimum requirement for own funds and eligible liabilities, known as MREL.

View the consultation paper.

The  Financial Conduct Authority published the terms of reference for its upcoming market study into competition in investment and corporate banking. The need for the market study emerged during the FCA’s review of competition into the wholesale sector. The aim of the market study is to assess whether competition for investment banking and corporate banking services is functioning well, focusing on primary market and related activities provided in the UK. The market study will concentrate on: (i) choice of banks and advisers, including the competitive landscape, clients’ purchasing behavior and entry and expansion within the sector; (ii) limited transparency, including the adequacy of information available to clients, transparency of the allocation process and the impact of established practices, processes or regulation on transparency in the IPO process; and (iii) bundling and cross-subsidization of investment and corporate and banking services, including whether there are any resulting adverse effects on competition and clients. The outcome of the market study may lead the FCA to adopt measures to promote effective competition. However, the FCA will be taking into account related initiatives such as the Fair and Effective Markets Review, the implementation of MiFID II and the Capital Markets Union, and may decide that no further action is required if any concerns arising from the market study are likely to be satisfied by upcoming legislative measures or otherwise. The FCA will be accepting comments on the terms of reference until June 22, 2015, although the regulator is not formally consulting on the terms. The FCA intends to publish an interim report, including any proposed remedies that may be necessary, by the end of the year and a final report in spring 2016.

View the terms of reference.

The Financial Conduct Authority published a letter from its Director of Supervision, Clive Adamson, to the Remuneration Committee Chair of banks, building societies and investment firms with total assets exceeding £50 billion. The letter highlights the FCA’s expectations on the application of malus (bonus clawback) ahead of the annual review of remuneration policies and practices by the FCA and the Prudential Regulation Authority. Following the first annual review, the FCA published guidance to share best practices on the application of malus to variable remuneration and ex-ante risk adjustments.

View the letter.

The US Board of Governors of the Federal Reserve System issued a proposal adding certain general obligation state and municipal bonds to the range of assets a banking organization may use to satisfy the Liquidity Coverage Ratio requirement. Under the LCR requirement adopted by the federal banking agencies in September 2014, large banking organizations are required to hold High-Quality Liquid Assets that can be easily and quickly converted into cash within 30 days during a period of financial stress. The proposed rule would allow investment grade, general obligation US state and municipal bonds to be counted as HQLA up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities. The limits on the amount of a state or municipality’s bonds that could qualify are based on the specific liquidity characteristics of the bonds. The proposed rule would apply only to entities subject to the LCR and supervised by the Federal Reserve Board. The deadline for comments on the proposed rule is July 24, 2015.

View the proposed rule.

The Prudential Regulation Authority published a consultation paper which includes a draft Supervisory Statement on the PRA’s expectations for board governance. The purpose of the Supervisory Statement would be to identify those aspects of board governance to which the PRA attaches particular importance and on which the PRA is likely to focus during the course of supervision. The draft Statement confirms the PRA’s view that the accountability of Senior Managers under the new Senior Manager Regime would be additional and complementary to the collective responsibility of the board members. The proposed Supervisory Statement would apply to all PRA-regulated firms—banks, insurance firms, certain large investment firms and credit unions. However, the PRA recognizes that different governance models apply depending on the nature and size of the firm and that the degree of supervisory attention may vary from firm to firm depending on the risk profile of the firm and the potential impact of failure of a firm. The PRA’s judgments on the adequacy of governance arrangements may also be influenced by a firm’s recovery and resolution strategy, including (i) the extent to which the PRA is satisfied that the board of a material subsidiary can demonstrate that it is capable of independent action; (ii) culture; (iii) management incentives and business goals of the firm; and (iv) the extent to which those may differ from the PRA’s statutory objectives. Responses to the consultation are due by September 14, 2015.

View the consultation paper.

The European Commission published a consultation document on the review of the European Market Infrastructure Regulation. Under EMIR, the European Commission must submit a report, together with any relevant legislative proposals, by August 17, 2015 to the European Parliament and the European Council, both of which will assess: (i) the potential need for measures to facilitate access by CCPs to central bank liquidity facilities; (ii) the systemic importance of transactions of non-financial counterparties in OTC derivatives and the impact of EMIR on such firms; (iii) the supervisory framework for CCPs; (iv) the efficiency of margining requirements to limit procyclicality and the need to define additional intervention capacity in this area; and (v) the development of CCPs’ policies on collateral margining and their adaptation to the specific activities and risk profiles of their users. The Commission intends to focus only on those aspects of EMIR that have already been implemented, leaving out, for example, the obligation to exchange collateral for non-cleared derivatives. The report will also take into account other issues identified in the implementation of EMIR as well as reports submitted by the European Securities and Markets Authority to the European Commission on, for example, the application of the clearing obligation and the application of the segregation requirements. Feedback on the consultation is due by August 13, 2015.

View the consultation paper.

The European Securities and Markets Authority published an opinion, dated May 7, 2015, on the composition of CCP colleges under the European Market Infrastructure Regulation following the establishment of the Single Supervisory Mechanism and the European Central Bank assuming direct responsibility for prudential supervision of large banks within the SSM. ESMA’s opinion clarifies which authorities qualify as a college member as well as the voting rights that the ECB will hold as a college member.

View ESMA’s opinion.

The European Banking Authority published three sets of final guidelines on the implementation of the resolution tools under the Bank Recovery and Resolution Directive. The final guidelines, which will apply to national resolution authorities from August 1, 2015, are: (i) guidelines on the determination of when the liquidation of assets or liabilities under normal insolvency proceedings could have an adverse effect on one or more financial markets; (ii) guidelines on factual circumstances amounting to a material threat to financial stability and on the elements related to the effectiveness of the sale of business tool; and (iii) guidelines on the minimum list of services or facilities that are necessary to enable a recipient to operate a business transferred to it under the BRRD.

View the final guidelines.

The Prudential Regulation Authority published a Policy Statement on depositor and dormant account protection which sets out the final rules that aim to reduce the adverse effects that the failure of a firm may have on the stability of the UK financial system as well as improve depositor confidence. The Policy Statement includes the amended rules for the Depositor Protection and Dormant Account Scheme rules in the PRA Rulebook. An updated Supervisory Statement on the PRA’s expectations of firms in connection to the amended rules was also published on the same day. The amended rules include a definition of public authority, extend deposit protection to deposits held by local authorities with an annual budget of up to €500,000, add a requirement for firms to inform depositors of deposits that are no longer covered by a deposit guarantee scheme from July 3, 2015 and a new requirement for deposit-takers to provide the Financial Services Compensation Scheme with information held on dormant accounts that have been transferred to a dormant account fund operator.

View PRA’s Policy Statement.
View updated Supervisory Statement.

Benjamin M. Lawsky, the superintendent of the New York Department of Financial Services, New York’s top financial regulator, announced his departure from the NYDFS effective late June 2015. Mr. Lawsky’s successor has not yet been announced.

The European Commission launched its Better Regulation Agenda. Through this package, the Commission aims to: (i) enhance transparency in the EU decision-making process by introducing a new web portal where initiatives can be tracked and by providing more opportunities for stakeholders to comment throughout the policy lifecycle, including allowing for feedback after the Commission has adopted a legislative proposal or, for secondary legislation, before adoption by the Commission or Member States; (ii) improve the quality of new laws through better impact assessments of draft legislation and amendments by: (a) transforming the current Commission Impact Assessment Board into an independent Regulatory Scrutiny Board with an expanded role; and (b) ensuring that impact assessments are carried out throughout the legislative process; and (iii) improve the review of existing EU laws by amending the Regulatory Fitness and Performance Programme (known as REFIT) so that it is more targeted, looks at the most serious sources of inefficiency and quantifies costs and benefits whenever possible. The European Commission also announced that it will enter into negotiations with the European Parliament and Council on a proposed new Interinstitutional Agreement on Better Law-making, endeavoring to reach an agreement by the end of 2015. The US federal bank regulatory agencies are also currently reviewing potential outdated or unnecessary regulations.

View the Better Regulation documents.

The Regulation on European long-term investment funds was published in the Official Journal of the European Union. The Regulation sets out harmonized rules for the authorization, investment policies and operating conditions of EU alternative investment funds, or parts thereof, that are marketed in the European Union as European long-term investment funds. The Regulation will apply in all EU Member States from December 9, 2015 and Member States are not able to add additional requirements for areas covered by the Regulation.

View the Regulation.

The US Office of the Comptroller of the Currency released a final rule integrating policies and procedures for certain corporate activities and transactions by national banks and federal savings associations. The OCC aims to make the regulatory regime for both national banks and federal savings associations more efficient and streamlined, where possible, to promote fair supervision and to promote the safe and sound operation of the institutions it supervises. The final rule makes technical and conforming changes that will allow certain provisions to apply to national banks and federal savings associations and provides clarity on OCC licensing offices’ responsibilities. The rule also updates the description of the OCC supervision structure and contact information.
 

View the published Federal Register notice.

View the OCC press release.

The European Banking Authority published letters between itself and the European Commission on the application of the proportionality principle to the remuneration requirements under the EU Capital Requirements Directive and Capital Requirements Regulation. The proportionality principle states that firms should implement the remuneration provisions in a manner and to the extent that is appropriate to the firm’s size, internal organization and the nature, scope and complexity of its activities. The EBA requested the Commission's views on the approach that the EBA should adopt to interpreting the proportionality principle in its guidelines on sound remuneration policies. The EBA noted that on a legal interpretation of CRD IV the remuneration principles must be applied proportionately, but that there could be no waiver for small or non-complex firms. However, a waiver might be justified on policy grounds for small and non-complex firms because variable remuneration paid is low and the incentives for employees to take risks is low but implementing costs would be significant. The European Commission confirmed that the EBA should follow its legal interpretation as to do otherwise would be to take a policy decision, which is outside of its powers. The EBA is consulting on draft guidelines on sound remuneration policies, adopting the Commission's approach.

View the EBA letter.

View the Commission’s response.
 

The European Securities and Markets Authority published letters between itself and the European Commission which set out their agreement for the deadline for delivery by ESMA of technical standards due under the Market Abuse Regulation, the Markets in Financial Instruments Directive II and Markets in Financial Instruments Regulation to be postponed to the end of September 2015. The extension is a result of the European Commission conducting an early legal review of draft technical standards. The early legal review will assess the legality and legislative consistency of technical standards under the Undertakings for Collective Investment in Transferable Securities V Directive, the Transparency Directive, the Central Securities Depository Regulation, MAR and MiFID II.

View ESMA’s letter.
 

View the European Commission’s letter

The European Banking Authority published its proposed draft Regulatory Technical Standards on the valuation of derivatives under the Banking Recovery and Resolution Directive. Under the BRRD, a resolution authority may bail-in relevant derivative liabilities provided that the authority complies with certain conditions including exercising the bail-in power only upon or after closing out the derivatives and ensuring that derivatives subject to a netting agreement are bailed-in on a net basis following the terms of the netting agreement. Before exercising the bail-in power, a resolution authority is required to ensure that an independent valuation of the assets and liabilities of a firm is carried out. For derivative liabilities, the valuation will determine a value of those derivative liabilities at the moment of exercise of the resolution power. The EBA’s proposed draft RTS (i) provides a methodology for resolution authorities to follow with the close-out amount being based on the principle of replacement cost; and (ii) sets out the approach for resolution authorities to follow when comparing the destruction in value that would arise from the close-out with the losses that those derivatives would incur in a bail-in which should be done on a case-by-case basis. The consultation closes on August 13, 2015. The EBA is required to submit the final draft RTS to the European Commission by January 3, 2016. Member states are required to implement the bail-in tool by January 1, 2016.
 

View the EBA’s consultation.

Martin J. Gruenberg, Chairman of the US Federal Deposit Insurance Corporation, delivered a speech regarding the progress the FDIC has made in developing a framework for the orderly resolution of large, complex, systemically important financial institutions (SIFIs) in the event that a SIFI experiences failure or other financial distress. Among other topics, the speech addressed the FDIC’s effort to strengthen the bankruptcy process and define the purpose of Orderly Liquidation Authority, a public-sector bankruptcy process prescribed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act) for institutions whose resolution under the US Bankruptcy Code Bankruptcy Code would pose systemic concerns.

View the full text.

The European Supervisory Authorities published a report setting out the outcome of their review of EU legislative disclosure and due diligence requirements for securitizations and making recommendations for removing inconsistencies across the EU framework. The recommendations constitute the ESA’s response to the European Commission’s consultation on securitization published in February 2015 as part of the Capital Markets Union initiative. The EU framework for structured finance instruments, covering investor due diligence, originator, issuer and sponsor retention and disclosure requirements, is established under a number of EU legislative measures including the Prospectus Directive, the Capital Requirements legislation, the Alternative Investment Fund Managers Directive, the Credit Rating Agency Regulation and Solvency II. The ESAs are recommending: (i) harmonization of due diligence requirements across investor types; (ii) that investor due diligence needs and requirements are met by the disclosure requirements; (iii) a standardized investor report which is available in a centralized public space; (iv) that loan by loan data should be provided to investors; (v) that data providers should be able to fulfill disclosure requirements provided the data owner retains responsibility for the quality of the information; (vi) that all investors should be able to conduct stress tests on all types of structured finance instruments; (vii) a review of the definitions and key terms in the legislation with a comprehensive glossary to support the framework; and (viii) mandatory disclosure requirements for all structured finance instruments admitted to trading on an EU regulated market or offered to the public.
 

View the ESA’s report.

The US Commodity Futures Trading Commission and the US Securities and Exchange Commission, after consultation with the US Board of Governors of the Federal Reserve System, jointly issued an interpretation concerning forward contracts with embedded volumetric optionality. The interpretation clarifies certain aspects of the original CFTC proposal made in November 2014 and identifies when an agreement, contract or transaction would fall within the forward contract exclusions from the “swap” and “future delivery” definitions in the Commodity Exchange Act, allowing for forward contracts that provide for variations in delivery amount (i.e., contains “embedded volumetric optionality”).

Although the interpretation was issued jointly, it is solely an interpretation of the CFTC and does not apply to the exclusion from the swap and security-based swap definitions for security forwards or to the distinction between security forwards and security futures products.
 

View the CFTC’s Final Interpretation.

View the ‘Fact Sheet’.

The European Banking Authority published a consultation paper comprising draft Regulatory Technical Standards on the assignation of risk weights to specialized lending exposures under the Capital Requirements Regulation. Specialized lending exposures are exposures to entities created explicitly to finance or operate physical assets. The CRR allows for special treatment of these exposures within the internal model based approach using a set of supervisory risk weights made up of five categories. The proposed RTS aim to determine how banks take into account certain factors, such as financial strength, political and legal environment and transaction characteristics, when assigning risk weight to specialized lending exposures. The draft RTS also specify how banks should combine those factors to determine the final assignment to a certain category. Responses to the consultation are due by August 11, 2015.

View the consultation paper.

The European Securities and Markets Authority launched a consultation on proposed regulatory technical standards on the clearing obligation for additional classes of OTC interest rate derivatives not already included in the first RTS on the clearing obligation for interest rate swaps. The additional classes of OTC interest rate derivatives are those denominated in certain non-G4 European currencies. The additions are: (i) fixed-to-float interest rate swaps denominated in Czech Koruna, Danish Krone, Hungarian Forint, Norwegian Krone, Swedish Krona and Polish Zloty; and (ii) forward rate agreements denominated in Norwegian Krone, Swedish Krona and Polish Zloty. The consultation also includes a summary of the clearing obligation procedure, the structure of the classes of OTC interest rate derivatives and the determination of the classes subject to mandatory clearing. Comments on the proposed RTS should be provided to ESMA by July 15, 2015.

View the consultation paper.

The Federal Reserve Bank of New York announced the creation of a new group called the Wholesale Product Office. The WPO, currently a function within the Federal Reserve Bank of New York’s Executive Office, manages the Fedwire Funds, Fedwire Securities, and the National Settlement Service. Richard P. Dzina will serve as the head of the WPO as of July 1, 2015, as well as a member of the Federal Reserve Bank of New York’s Management Committee.

View the press release.

The Bank of England published a consolidated version of its rules for Recognized Clearing Houses. RCHs are regulated by the Financial Services and Markets Act 2000 and are subject to the FSMA 2000 (Recognition Requirements) Regulations 2001, though different recognition requirements will apply under the European Market Infrastructure Regulation for RCHs that are also CCPs. RCHs that are also CCPs must comply with domestic requirements as well as EMIR. All UK RCHs must comply with the BoE rules.

View the BoE RCH rules.