The Basel Committee on Banking Supervision has published updated versions of its frequently asked questions on two aspects of the Basel III prudential framework.

The Basel Committee has updated the FAQ it published in August 2015 on the standardized approach for measuring counterparty credit risk exposures, providing answers to additional questions concerning collateral taken outside of netting sets, the treatment of Eurodollar futures, supervisory delta adjustments for negative interest rates, credit derivatives and effective notional calculations. The Basel Committee has also updated the FAQ it published in January 2017 on market risk capital requirements, with the addition of answers to three new questions on the standardized approach, the internal models approach and the trading book boundary and scope of application.

View the updated FAQ on the standardized approach for counterparty credit risk.

View the updated FAQ on market risk capital requirements.

The U.K. Financial Conduct Authority and the Australian Securities and Investments Commission have signed an enhanced cooperation agreement on FinTech innovation. The new agreement supersedes the previous cooperation agreement entered into by the two countries' regulators in March 2016. It aims to enable public officials and private parties to work together to foster Fintech innovation and help early-stage Fintech firms to expand their businesses. The FCA and ASIC will, through their Innovation Hubs, explore ways to speed up the process of authorization of innovative businesses that are already authorized in the other jurisdiction. The framework agreed between the regulators includes a referral mechanism and mutual access to regulatory sandbox testing environments, enabling the two authorities to refer FinTech businesses between their respective sandboxes. The Authorities also plan to share and use information on innovation in their respective markets.

Commenting on the enhanced cooperation agreement, U.K. Chancellor of the Exchequer Philip Hammond stated that "This is our most ambitious collaboration to date, bringing together regulators, policy-makers and private sector leaders to collaborate on growing our respective fintech markets in tandem."

View the Enhanced Cooperation Agreement.

View the FCA press release.

The U.K. Competition and Markets Authority has published the second in a series of working papers on specific aspects of its market investigation into the supply and acquisition of investment consultancy services and fiduciary management services. The working paper should be read alongside the Issues Statement on the investigation, which was published in September 2017. The intention to publish a series of working papers on aspects of the investigation was outlined in a progress report in February 2018. The first working paper, relating to information on fees and quality, was published on March 1, 2018.

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The Basel Committee on Banking Supervision has published a consultation document on a technical amendment to the Pillar 3 disclosure requirements and the regulatory treatment of accounting provisions. The proposals are relevant in jurisdictions implementing an expected credit loss accounting model and for those adopting transitional arrangements for the regulatory treatment of accounting provisions. The Basel Committee is proposing to introduce a new requirement in the Pillar 3 standard to reflect any transitional effects for the impact of ECL accounting on regulatory capital.

The consultation closes on May 4, 2018.

View the consultation paper.

The Basel Committee on Banking Supervision has published a consultation on proposed revisions to the standard it published in January 2016 on the minimum capital requirements for market risk. The Basel Committee has been monitoring the implementation of the standard and its impact on banks' market risk capital requirements since the standard was published and has identified several issues.

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The Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2018 has been published. This Amendment Order amends the Financial Services and Markets Act 2000 (Carrying on Regulated Activities By Way of Business) Order 2001 to clarify the position of borrowers who raise funds through peer-to-peer lending platforms.

The Amendment Order provides that, subject to a number of conditions, if a borrower using peer-to-peer lending uses the capital of, or interest on, money received by way of deposit solely to finance its other business activities, this is to be regarded as evidence indicating that the borrower is not carrying on the business of accepting deposits. This clarifies that only firms whose core business involves borrowing through a peer-to-peer platform would need to obtain a banking license and be regulated as a "deposit taker." The Amendment Order resolves uncertainty for businesses borrowing via peer-to-peer platforms (and for the platforms themselves) by clarifying the circumstances in which those borrowers would be considered to be carrying on the regulated activity of accepting deposits.

The Amendment Order comes into force on March 22, 2018.

View the Amendment Order (S.I. 2018 No. 394)..

View the explanatory memorandum.

The European Banking Authority has published a compliance notification form on its website, seeking confirmation, by May 21, 2018, of compliance (or intention to comply) with the Final Guidelines on Internal Governance it published in September 2017.

The EBA was mandated under the Capital Requirements Directive to provide guidelines on the corporate governance arrangements, processes and mechanisms required under that Directive. CRD IV requires that institutions must have robust governance arrangements, which include a clear organizational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks they are or might be exposed to, adequate internal control mechanisms, including sound administration and accounting procedures and remuneration policies and practices that are consistent with and promote sound and effective risk management. The EBA consulted in October 2016 on proposed updates to its previous guidelines on internal governance, which were published in September 2011.

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The European Banking Authority has published a report following its assessment of the credit risk mitigation framework under the Capital Requirements Regulation. Credit risk mitigation is defined in the CRR as a "technique used by an institution to reduce the credit risk associated with an exposure or exposures which that institution continues to hold". The incentive for institutions in using CRM techniques is that CRM can attract a reduction in capital requirements.

This CRM report forms the fourth and final phase of the EBA's roadmap for the implementation of the regulatory review of the internal models based approach. That roadmap, launched in February 2016, favoured continued use of the IRB approach (that is, the Foundation IRB Approach and the Advanced IRB Approach) and set out plans for the introduction, in four phases, of changes which aim at harmonizing definitions and supervisory practices in the definition of default, the estimation of risk parameters and treatment of defaulted assets, credit risk mitigation techniques and disclosure in four phases.

The EBA considers that increased clarity of the CRM framework is an integral part of the IRB review and the EBA has analyzed, in the CRM report, whether an overhaul of the CRM framework as presented in the CRR would be beneficial.

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Following consultation in late 2017, the European Securities and Markets Authority and European Banking Authority have jointly published final Guidelines on the assessment of the suitability of members of management bodies and key function holders in credit institutions, investment firms, financial holding companies and mixed financial holding companies. These assessments are required under the Capital Requirements Directive and the revised Markets in Financial Instruments Directive.

Under the CRD and MiFID II, an assessment of the suitability of members of a management body should take into account factors such as sufficiency of time commitment, honesty, integrity and independence of mind of a member of the management body. The management body must have adequate collective knowledge, skills and experience among its members.  Firms should devote adequate human and financial resources to the induction and training of such members. Diversity is also to be taken into account when selecting members of the management body. In the case of key function holders, the Guidelines also specify requirements regarding the suitability of the heads of internal control functions and the chief financial officer of credit institutions and certain investment firms. The Guidelines apply to any other persons assessed as key function holders under the firm's risk-based approach. An Annex is provided as a template for firms to record the results of relevant assessments.

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The U.K. Financial Conduct Authority has published two consultations, seeking feedback on draft documents setting out its regulatory approach to supervision and enforcement. The two documents, once finalized, will form part of a series of formal "approach documents" explaining the FCA's approach to regulation in more depth. They should be read alongside the FCA's Mission document, which was first published in October 2016 and most recently updated in November 2017.

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The European Securities and Markets Authority has published an Opinion on the treatment of package orders in the context of the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation requires that the trading of certain derivatives must take place on a regulated market, multilateral trading facility, organised trading facility or on an equivalent third-country trading venue.

Package orders are used by investment firms and their clients to conduct trades for risk management and hedging purposes. They are composed of two or more financial instruments that are priced as a single unit. The execution of each component is simultaneous and contingent upon on the execution of all the other components. Under MiFIR, the trading obligation is designed to apply at instrument level, not package level – the obligation attaches to the components of a package, but not to the package as a whole. Difficulties may arise where a package order contains a mixture of instruments, where some are subject to the trading obligation while others are not. ESMA considers that the components of a package need to be executed on a trading venue only where it is feasible to do so without creating undue operational or execution risk.

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The Wolfsberg Group has published a set of Frequently Asked Questions on financial crime country risk. Country risk is the additional risk created by investing in, or lending cross border to, a foreign country in the context of credit facilities.

The FAQs cover: (i) the meaning of country risk in the context of financial crime compliance; (ii) the data sources that should be considered when developing a methodology to assess country risk; (iii) the frequency with which data sources should be refreshed; (iv) how sanctions should be considered in country risk methodologies; (v) the models or methodologies available to financial institutions to measure country risk, and how (and how frequently) financial institutions should test and validate their effectiveness; (vi) matters to be considered when purchasing and using an off-the-shelf commercial product to determine financial crime country risk ratings; (vii) whether there is standard or conventional methodology to assess country risk; (viii) how missing data points should be dealt with; (ix) whether overrides or discretionary risk rating changes should be allowed; (x) who should maintain ownership of the organization's FCCR Methodology; (xi) who uses the assessment results and how are the ratings disseminated; (xii) how the FCCR rating methodology should drive customer due diligence and enhanced due diligence requirements; and (xiii) whether a financial institution should have a country risk assessment expressed as a country risk rating.

Read more.

The Financial Stability Board has published a Progress Update on its work on the creation of a common lexicon of terms to support the work of the FSB, standard-setting bodies, authorities and private sector participants to address cyber-security and cyber-resilience in the financial sector.

The FSB explains in the Progress Update that the cyber lexicon is not intended as a comprehensive lexicon of all cyber-security and cyber-resilience related terms. Its scope will be limited and focused on the core terms necessary to support the objective of the lexicon, which is to support the work of the above bodies, in particular by creating a cross-sector common understanding of relevant cyber security and cyber resilience terminology and by facilitating assessment and monitoring of financial stability risks in cyber-risk scenarios. It is expected that the lexicon will assist in the work of the FSB and standard-setting bodies to provide guidance related to cyber-security and cyber resilience.

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The European Commission and the U.K. government have jointly published the latest draft withdrawal agreement for the U.K.'s departure from the EU which, among other things, reflects the agreement reached on the post-Brexit transition period.

The draft withdrawal agreement includes some sections which are agreed (subject to legal drafting) and others which remain to be finalized. It includes final wording concerning an agreed "transition" or "implementation" period, that will run until December 31, 2020. The draft agreement departs from the previous draft circulated by the European Commission on March 15, 2018, by providing that the U.K. will be free to negotiate, sign and ratify international agreements in its own capacity during the transition. Any agreements negotiated by the U.K. must not enter into force or apply during the transition period, unless authorised by the EU.

The draft agreement also contains the agreed legal text for citizens' rights and concerning the financial settlement, as well as agreed text on a number of other provisions. Financial services and other services remain among issues that are not addressed by any agreed text. The U.K. and EU negotiators aim to finalize the entire withdrawal agreement by October 2018.

View the draft withdrawal agreement.

The G20 has published a Communiqué following the meeting of Finance Ministers & Central Bank Governors in Buenos Aires on March 19 – 20, 2018.

Among other things, the Communiqué states that the G20 welcomes the finalization of Basel III and remains committed to full, timely and consistent implementation and finalization of the reforms. The G20 looks forward to the outcome of the evaluation of the reforms to identify and address any unintended consequences, which is being led by the Financial Stability Board.

The G20 also commits to continue to address the decline in correspondent banking relationships. It welcomes the FSB's March 2018 progress report on correspondent banking and calls on the FSB to monitor, with the FATF, the International Monetary Fund, the World Bank Group and the Global Partnership for Financial Inclusion, the adoption of the recommendations in the FSB's March 2018 report "Stocktake of Remittance Service Providers' Access to Banking Services."

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The Financial Action Task Force has published its report to G20 Finance Ministers and Central Bank Governors, in advance of their meeting in Buenos Aires scheduled for March 19 – 20, 2018. In the report, the FATF reiterates its commitment to tackle all sources, techniques and channels used in terrorist financing and to continue its work to increase financial transparency and improve the environment for remittances.

The report gives an overview of the FATF's recent work by providing stock-takes on the following workstreams:

• strengthening the FATF's institutional basis, governance and capacity;
• countering the financing of terrorism and proliferation;
• improving transparency and the availability of beneficial ownership information;
• supporting financial inclusion and access to regulated financial services;
• bank de-risking and the impact on remittances;
• FATF engagement with judges and prosecutors to improve the effectiveness of the criminal justice system; and
• the risks and opportunities of FinTech, RegTech and virtual currencies.

Read more
 

The Financial Stability Board has published two reports relating to its actions to address the decline in correspondent banking. The first report is a progress report addressed to the G20 Finance Ministers and Central Bank Governors on the FSB's four-point action plan to assess and address the decline in correspondent banking relationships. It sets out the actions taken since the FSB's July 2017 progress report and describes the work that remains to be completed at international level and implemented at national level by regulators and banks. That work includes:

• Implementing the recommendations and action plan on access to banking services by remittance providers (set out in the second report, which is described below);
• National implementation of the new Financial Action Task Force and revised Basel Committee guidance on correspondent banking, which the FSB thinks can mostly be achieved by national regulators issuing statements to clarify their expectations so that they are reflected in supervisory practices as well as banks' risk management practices;
• Improving efficiencies in and enhancing standardization of Know Your Customer utilities, including encouraging the use of the Wolfsberg Correspondent Banking Due Diligence Questionnaire; and
• Progressing the enhancement and further development of solutions to capture the trade finance components of correspondent banking.

Read more. 

The Bank of England has published a report entitled "Stress testing in the U.K. banking system: key elements of the 2018 stress test," providing details of the Annual Cyclical Scenario, which is the only stress test that the BoE will conduct in 2018. The report is accompanied by detailed guidance for participating banks and building societies.

The ACS will examine the impact on participant banks and building societies of three types of severe stress, which will be assumed to be synchronized. These are: (i) a U.K. and global macroeconomic stress; (ii) a traded risk stress (linked to a financial market scenario consistent with the macroeconomic scenario); and (iii) an independent misconduct costs stress. Seven banks and building societies will participate in the 2018 ACS. The report states that these participants account for around 80% of the outstanding stock of lending to the U.K. real economy by banks regulated by the Prudential Regulation Authority.

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The European Commission has opened an exploratory consultation on implementing the final aspects of Basel III into EU law, which will require changes to the Capital Requirements Directive and the Capital Requirements Regulation. Basel III was finalized on December 7, 2017. The final package revises the standardized and Internal Ratings-Based approach for credit risk, the Credit Valuation Adjustment risk framework, the leverage ratio framework, including the introduction of a leverage buffer for Global Systemically Important Banks, the operational risk framework and the new output ratio floor. The revised standards are due to take effect from January 1, 2022 and will be phased in over five years. The European Commission is seeking feedback on the various elements of the Basel III package, including how the revisions will impact the EU banking sector and wider economy, how they compare to the current EU requirements and whether they pose any particular implementation challenges.

The Commission's consultation closes on April 12, 2018.

View the consultation paper and response form.

View the final Basel III package.

Following its consultation in late 2017, the European Central Bank has published the final Addendum to its Guidance for Eurozone banks on non-performing loans. The ECB published its final Guidance for banks on NPLs on March 20, 2017. The Addendum sets out the ECB’s supervisory expectations on the minimum levels of prudential provisions expected for new NPLs. It is intended to function as a starting point for dialogue between the ECB and individual institutions. As with the Guidance, the Addendum is not legally binding but would apply to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. An institution that does not comply with the ECB’s supervisory expectations, as set out in the Addendum, would be able to provide its rationale to the ECB as part of the dialogue. The supervisory expectations in the Addendum will be incorporated into the 2021 Supervisory Review and Evaluation Process. In the meantime, firms are expected to review their credit underwriting policies and begin provisioning for any loan classified as a NPL.

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The European Central Bank has published a second consultation paper on a new unsecured overnight interest rate for euro transactions. This second consultation follows the ECB's announcement in September 2017 of its intention to develop the new benchmark and an initial consultation in November 2017 on its high level features. The new ECB rate will represent the euro unsecured money market in the very short tenor (i.e. overnight) and will be based entirely on transactions in euro that are reported by banks in accordance with the ECB's money market statistical reporting. It will complement existing benchmark rates produced by the private sector and serve as a backstop reference rate. The ECB proposes to produce the new rate by 2020.

The second consultation sets out a proposed definition of the underlying interest and scope of the benchmark, based on responses received to the first consultation. On the basis of the proposed definition of the rate's underlying interest, the second consultation considers the defined methodology of the new rate, along with the key operational and technical parameters. The consultation document also proposes contingency calculation rules in case certain representativeness thresholds are not met.

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The European Banking Authority has published a Roadmap setting out its conclusions following responses to its August 2017 discussion paper on its approach to financial technology. The EBA adopts the definition of FinTech that is used by international standard-setting bodies, namely, “technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”.

Regulators and supervisors must balance, on the one hand, the needs for consumer protection, a level playing field, the integrity of financial markets and the stability of the financial system against, on the other hand, the need to ensure the opportunities presented by FinTech can be fully realized.

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The Joint Committee of the European Supervisory Authorities has published a final report on the use of Big Data by financial institutions. The Final Report has been prepared following feedback to a discussion paper published in December 2016 by the Joint Committee’s sub-Committee on Consumer Protection and Financial Innovation. “Big Data” is the term used to refer to situations where high volumes of different types of data, produced with high velocity from a wide variety of data sets and sources, is processed (often in real time) by IT tools, such as powerful processors, software and algorithms. Big Data tools have been in use for several years in some sectors, but less so in others. Nevertheless most respondents to the ESAs’ discussion paper agreed that Big Data may have an impact on almost all financial institutions and on their products and services. The use of Big Data techniques can help financial institutions to improve their understanding of customers’ preferences and their interactions with customers and clients. This can enable them to tailor products to their target markets and support effective product governance. However, the use of Big Data also entails risk.

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The U.S. House of Representative passed the Financial Institutions Examination Fairness and Reform Act (H.R. 4545) by a vote of 283-133.  The bill would amend the Federal Financial Institutions Examination Council Act of 1978 to require federal financial institution regulatory agencies to issue final examination reports within 60 days of the later of a financial institution’s exit report or the provision of additional information by a financial institution regarding its examination.  The bill would also permit financial institutions to obtain an independent review of material supervisory determinations contained in a final report of examination, including the right to an Administrative Law hearing.  The bill would also establish the Office of Independent Examination Review, which, among other things, would receive and investigate complaints from financial institutions with respect to examinations, examination practices and examination reports, review written examination procedures of federal financial regulatory agencies and conduct supervisory appeals.

View full text of the bill.

The U.S. Board of Governors of the Federal Reserve System adopted a proposal to extend for three years, with revisions, certain forms, including the Interagency Notice of Change in Control (FR 2081a), Interagency Notice of Change in Director or Senior Executive Officer (FR 2081b), Interagency Biographical and Financial Report (FR 2081c) and the Interagency Bank Merger Act Application (FR 2070) forms. The revisions to the Interagency Bank Merger Act Application form include additional requested items, such as projected financial statements and capital figures as of the end of each of the first three years of operation following consummation of the merger.  In doing so, the Federal Reserve Board noted that the form’s prior requirement of one year of projected financial statements was not viewed as sufficient.  The Federal Reserve Board also explained that the additional requested items in the revised Bank Merger Act Application form are typically requested in follow-up questions in connection with the application, and that the changes will increase the efficiency with which Bank Merger Act applications are processed. The revisions to the Bank Merger Act Application form also include clarifications, the deletion of certain requested items, definition updates and minor editing changes. The notice highlights that the Federal Reserve Board worked with the U.S. Office of the Comptroller of the Currency and U.S. Federal Deposit Insurance Corporation in drafting the revisions to these forms.

View full text of the Federal Reserve Board notice.

The European Banking Authority has published its advice to the European Commission on the use of statutory prudential backstops to prevent the building up of new non-performing loans. The Commission consulted in November 2017 on proposals for statutory prudential backstops to address insufficient provisioning for newly originated loans that turn into non-performing loans and requested the EBA to provide technical advice on its proposals by November 27, 2017. On March 14, 2018, the Commission published its legislative proposals to amend the Capital Requirements Regulation to require minimum loss coverage for non-performing exposures.

The EBA’s advice provides an overview of the Commission’s November 2017 proposal and discusses certain technical aspects, such as the interaction of the proposals with the introduction of IFRS 9 as well as the existing prudential framework. The EBA’s advice also provides a quantitative assessment of the proposal which, the EBA stresses, is a conservative impact analysis given the data available and time constraints under which the report was produced.

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The U.K. Financial Conduct Authority has published a policy statement explaining the methodology the FCA would expect to use if it needed to compel banks to contribute to LIBOR (the London Interbank Offered Rate). LIBOR, which is administered by ICE Benchmark Administration, is a long-established and systemically important benchmark that underpins transactions in many different markets globally. The FCA’s powers to compel contributions to LIBOR under the Financial Services and Markets Act 2000 have been superseded by similar powers under the EU Benchmarks Regulation, which came into effect on January 1, 2018. LIBOR has been designated a critical benchmark under the Benchmarks Regulation.

The FCA published a consultation paper in June 2017 on how its compulsion powers would need to be amended to align it with the Benchmarks Regulation. Since that consultation, the FCA has announced that all 20 panel banks that currently submit to LIBOR have agreed to continue to do so until the end of 2021. The FCA envisages that, by that time, sufficient progress will have been made on the evolution of LIBOR and transition to alternative benchmarks (which will be based on actual transactions) that the FCA may never need to use its compulsion powers.

View the policy statement (FCA PS18/5).

The European Commission has launched a package of legislative and non-legislative measures to address remaining and future non-performing loans in the EU. Since the 2007/8 financial crisis, there has been a build-up of NPLs in the EU, which impacts banks’ viability and lending capabilities. NPLs are loans where the borrower has difficulties in making scheduled payments to cover interest and/or capital reimbursements. A loan is classified as an NPL when it is either more than 90 days past due or the loan is assessed as unlikely to be repaid by the borrower.

The package comprises:

• A proposed Regulation amending the Capital Requirements Regulation to introduce a statutory prudential backstop, which will require banks to have minimum loan loss coverage for newly originated loans;
• A proposed new Directive on credit services, credit purchasers and the recovery of collateral which seeks to enable banks to deal more efficiently with NPLs by introducing an accelerated extrajudicial collateral enforcement mechanism and facilitating the outsourcing of servicing of loans to specialized credit servicers; and
• A Technical Blueprint for Member States to set up National Asset Management Companies where NPLs have become a significant issue in a particular Member State. It is intended for use in restructuring of banks in compliance with the EU Bank Recovery and Resolution Directive and State Aid rules.

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The U.K. Payment Systems Regulator has published a consultation on a review of the six formal General Directions (Directions GD 1-6) and one Specific Direction (SD1) it adopted in 2015 under the Financial Services (Banking Reform) Act 2013. These Directions were all intended to improve access to and the governance of payment systems in the U.K. GD1 sets out the PSR’s expectations of regulated participants in payment systems to have an open and co-operative relationship with it. GD2, GD3 and SD1 set out requirements on operators relating to access to interbank and card payment systems and GD4-6 set out requirements for the governance of interbank payment systems.

Since the Directions were adopted in 2015, the PSR has gained experience of applying the Directions in practice and there have been a number of market and legislative changes, including the introduction of the Payment Services Regulations 2017. The PSR considers that the Directions should now be reviewed to reflect these market and legislative developments and to ensure that they remain relevant, proportionate and correctly targeted. The consultation paper sets out each of the Directives along with the PSR’s proposals to revoke, revise or retain the Direction in its current form.

The PSR invites comments on the proposals by June 8, 2018.

View the consultation paper.

The U.K. Banking Standards Board has published its Annual Review for the year 2017-2018. The BSB is a non-statutory organization established in April 2015 to help raise standards of behaviour and competence across the U.K. banking sector. Voluntary membership of the BSB is open to all banks and building societies operating in the U.K. The Annual Review sets out the key findings of the second annual assessment exercise conducted at member firms.

The BSB uses quantitative and qualitative data to assess firms against an Assessment Framework to establish how far each of nine characteristics is demonstrated within each firm. These characteristics are: honesty; competence; reliability; responsiveness; personal/organizational resilience; accountability; openness; respect; and shared purpose. The quantitative aspect of the assessment consists of an employee survey asking 37 core questions that allow comparison across and between firms and over time. The qualitative aspect incorporates views and perspectives from all levels and parts of the firm, obtained by various means, including written submissions, interviews and focus groups.

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The U.S. Senate passed a significant financial services reform bill 67-31 on a bipartisan basis that would eliminate certain requirements of the Dodd-Frank Act, including, most notably, increasing, from $50 billion to $250 billion, the threshold at which a large banking organization automatically becomes a systemically important financial institution that is subject to stricter supervisory standards.  The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) would also (i) exempt banks with less than $10 billion total consolidated assets from the Volcker Rule; (ii) exempt certain funds placed on deposit with certain central banks by a custodial bank from the calculation of the supplementary leverage ratio; (iii) reduce certain reporting and supervision requirements applicable to community banks; and (iv) ease certain securities law requirements.  A number of the provisions of the bill track legislation that has been passed by the U.S. House of Representatives over the past year, the most significant of which is the Financial Choice Act of 2017, which would amount to an omnibus revision of the Dodd-Frank Act.  The House will now have to consider the Senate bill, and the differences between the two bills will likely be negotiated and resolved in a Conference Committee of the House and Senate.

View full text of the bill.

HM Treasury has published a call for evidence which aims to inform the government's understanding of cash and digital payments in the new economy. Statistics show that the advance of digital technology has impacted how people manage their finances, with a large increase in the use of digital payments and a decrease in the use of cash. The UK Government is seeking input on how it can support the transition from cash to digital payments. The Government would like to ensure that cash remains available and secure to those who need to use it. In addition, the Government is concerned with how it can do more to prevent cash being used illegitimately, mostly to evade tax and to launder money.

Responses to the consultation should be provided by June 5, 2018.

View the call for evidence.

A Commission Delegated Regulation has been published in the Official Journal of the European Union. The Delegated Regulation supplements the revised Payment Services Directive with Regulatory Technical Standards for strong customer authentication and common and secure open standards of communication.

PSD2 requires that strong customer authentication is used for accessing a payment account online, initiating a payment transaction and carrying out a transaction through a remote channel. “Strong customer authentication” means an authentication based on the use of two or more elements categorized as knowledge (something only the user knows), possession (something only the user possesses) and inherence (something the user is) that are independent, in that the breach of one does not compromise the reliability of the others, and is designed in such a way as to protect the confidentiality of the authentication data.

Read more.

The U.S. Financial Stability Oversight Council approved certain amendments to its procedures for hearings under Titles I and VIII of the Dodd-Frank Act.  The amendments add Section 117 of the Dodd-Frank Act to the scope of its hearing procedures, and make other conforming technical and streamlining amendments. Section 117 of the Dodd-Frank Act (the so-called Hotel California provision) applies to certain bank holding companies and provides that in the event one of these entities ceases to be a bank holding company, it shall thereupon be treated as a nonbank financial company subject to supervision by the U.S. Board of Governors of the Federal Reserve System. Section 117 also provides that an entity designated as a nonbank financial company pursuant to this section may request a hearing before the FSOC to appeal this treatment.  The amendments are effective immediately, but the FSOC will accept written comments received within 30 days of the publication of the amendments in the Federal Register.

View full text of the FSOC resolution.

The European Commission has published a Communication on the law applicable to the proprietary effects of transactions in securities. The Commission's objective is to clarify the conflicts of law provisions in the Financial Collateral Directive, the Settlement Finality Directive and the Winding-up Directive. These Directives apply to book-entry securities and instruments, the existence or transfer of which presupposes their recording in a register, an account, or centralized deposit system. All three Directives designate the applicable law based on the place of the relevant register or account. However, there is a degree of uncertainty because the provisions in the Directives use different language and because there is diverse interpretation and application of the provisions across the EU. The Communication confirms the Commission's view that the terms 'maintained' and 'located' used in these Directives mean the same thing and that the different ways across the EU of determining where the account or register is 'maintained' or 'located' are valid. The Commission's views are subject to any potential future decisions of the Court of Justice of the European Union on these issues.

The Commission will monitor developments in this area and assess whether any further action is necessary. National authorities are called upon to take the Commission's clarifications into account when applying the conflicts of law provisions of the FCD, SFD or WUD. The Communication should be read in conjunction with the Commission's proposed Regulation on the law applicable to the third-party effects of assignments of claims.

View the Communication.

View the proposed separate Regulation on assignment of claims.

The European Commission has published a proposed Regulation on the law applicable to the third-party effects of assignments of claims. The proposed Regulation was published alongside a Communication on the law applicable to the proprietary effects of transactions in securities.

Existing conflicts of law rules as to the contractual elements of the assignment of claims are governed at EU-level by the Rome 1 Regulation. However, there are no EU-level conflicts of law rules on the proprietary elements (or third-party effects) of the assignment of claims. The proprietary elements relate to who has ownership rights over a claim, which requirements must be met by an assignee to give him legal title over the claim and the resolution of competing claims. Currently, each Member State's conflicts of law rules govern the assignment of claims. These rules are inconsistent across the EU because they use different connecting factors to determine the applicable law - the rules in some Member States are based on the law of the assigned claim, others are based on the law of the assignor's habitual residence and other conflicts of law rules are based on the law of the assignment contract. In addition, some conflicts of law rules are unclear, particularly where they are not stated in legislation. Without legal certainty, market participants may not be aware of or choose to ignore the risk and then encounter unexpected losses; or they may mitigate the risk by seeking legal advice which will result in higher transaction costs; or they may be dissuaded by the legal risk, choose to avoid it and miss business opportunities.

Read more. 

The Committee on Payments and Markets Infrastructures and the Markets Committee of the Bank for International Settlements have issued a joint report that considers two types of central bank digital currency: (i) a wholesale CBDC for use in financial markets and limited to select financial institutions; and (ii) a general purpose CBDC that would be available for use by the public. The report analyzes the implications of both types of digital currency in the core central banking areas of payments, monetary policy implementation and financial stability.

As regards wholesale CBDCs, the report finds that, while they might be useful for payments, more work is needed to assess their full potential. The report also finds that a wholesale CBDC would not alter the basic mechanics of monetary policy implementation, but that its transmission could be affected. The report states that a general purpose CBDC could have wide-ranging implications for banks and the financial system and could also have effects on the efficiency of financial intermediation. As a result, the report concludes that any jurisdiction considering the launch of a CBDC should carefully and thoroughly consider the implications before making any decision.

The joint report has been published in advance of the meeting of the G20 central bank governors and finance ministers, scheduled for March 19-20, 2018, which, among other things, proposes to discuss the technology behind cryptocurrencies.

View the joint report.

View the press release.

As part of its work on creating a European Capital Markets Union, the European Commission has published a legislative package of amendments, comprising a proposed Regulation and a proposed Directive.

The proposed Directive amends the Directive on Undertakings for Collective Investment in Transferable Securities Directive and the Alternative Investment Fund Managers Directive by introducing new or amending existing elements of that legislation. This includes deletion or amendment of provisions of the UCITS Directive or AIFMD that are dealt with in the proposed new Regulation. The proposed Directive also inserts a definition of “pre-marketing” in AIFMD, which is designed to allow AIFMs to target investors by testing their appetite for upcoming investment opportunities or strategies through pre-marketing. Pre-marketing is defined as "a direct or indirect provision of information on investment strategies or investment ideas... in order to test [investor] interest" in an AIF that has not yet been established.

The proposed Regulation aims to increase transparency on the rules and procedures applicable to cross-border marketing of investment funds and regulatory fees and charges levied by national competent authorities.

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The Banking Standards Board has published the "BSB Statement of Principles for Strengthening Professionalism - The role of the firm", which is a guiding statement of principles intended to assist banks and building societies to strengthen professionalism in the banking sector. The BSB has defined professionalism in UK banking as "attitudes, judgement and high standards of behaviour, knowledge and skill expected of individuals working in banking". The Statement consists of six principles, each of which is supported by action points on how the principle can be achieved.

The Statement does not impose any legal or regulatory obligations on firms or replace any regulation. It is intended to assist firms in structuring their own practices and to build on regulatory initiatives, such as the Senior Managers and Certification Regimes.

View the BSB Statement.

The European Commission has published legislative proposals for a new EU covered bonds framework. The legislative package consists of a proposed Directive on the issue of covered bonds and covered bond public supervision and a proposed Regulation to amend the prudential treatment of covered bonds under the Capital Requirements Regulation. The proposals are part of the EU's Capital Markets Union project and follow from the work of the European Banking Authority in this area, in particular, its 2016 recommendations for an EU covered bonds framework.

The proposed Covered Bonds Directive will apply to covered bonds issued by EU credit institutions, which means that only EU credit institutions will be able to issue covered bonds governed by the framework. Issuers using the EU covered bonds label will need to comply with the proposed Directive but can also use the label with national labels. Covered bonds are debt obligations issued by credit institutions and secured against a ring-fenced pool of assets to which bondholders have direct recourse as preferred creditors. The proposed Directive provides requirements for issuing covered bonds and the structural features of covered bonds, including dual recourse and bankruptcy remoteness. There are also provisions to address liquidity risk through the imposition of a liquidity buffer related to the cover pool and transparency provisions requiring information to be disclosed to covered bond investors. In addition, the proposed Directive provides for supervision at national level of covered bonds.

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The U.S. Board of Governors of the Federal Reserve System published updates to its Comprehensive Capital and Analysis Review and Dodd-Frank Act Stress Tests questions and answers guide.  The Federal Reserve Board provided additional questions and answers with respect to a number of topics, including general CCAR considerations, range of practice and supervisory expectations, FR Y 14-A report supporting documentation and the remediation of supervisory findings.

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The European Central Bank has confirmed that a collective agreement signed between the central banks operating TARGET2 component systems and the central securities depositories operating on the TARGET2-Securities platform can enter into force. The provisions of the Collective Agreement will take effect on March 20, 2018. The Collective Agreement provides a definition of a “common moment of entry” for payments and securities transfer orders that are matched in the systems of the signatories to the agreement. This common moment of entry will either be the moment at which a transfer order has been declared compliant with the technical rules of T2S by either the T2S platform or, if the CSD is operating a separate matching component, by the CSD. Defining the common moment of entry makes it possible to establish the point at which securities transactions become irrevocable and accordingly will provide certainty regarding the treatment of outstanding transactions if a participant becomes insolvent.

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The Financial Stability Board has published the finalized version of its Supplementary Guidance on its Principles and Standards on Sound Compensation Practices, following feedback to a consultation it launched in June 2017. The Supplementary Guidance relates to the use of compensation tools to address misconduct risk. Misconduct, for the purposes of the Supplementary Guidance, should generally be understood as conduct that falls short of expected standards, including legal, professional, internal conduct and ethical standards.

The Supplementary Guidance is consistent with the FSB’s existing Principles and Standards on Sound Compensation Practices and provides guidance on better practice for addressing misconduct risk without adding any new or additional principles or standards. It is broken down into sections covering: (i) governance of compensation and misconduct risk; (ii) effective alignment of compensation with misconduct risk; and (iii) supervision of compensation and misconduct risk. FSB members are asked to apply the Supplementary Guidance to significant institutions and in a way consistent with the law and regulation of their jurisdictions.

View the Supplementary Guidance.

The U.K. Financial Conduct Authority has launched a short online survey seeking information from European Economic Area firms currently operating in the UK under a passport. The information obtained will identify those firms for which a “temporary permission” may be relevant following the U.K.’s withdrawal from the European Union. The possibility of a “temporary permission regime” was raised by HM Treasury in December 2017 as a means by which firms previously operating under a passport would be able to enter into new business and fulfil existing contracts with U.K. customers for a period of time after exit day, while seeking full authorization in the U.K.. HM Treasury has not yet prepared legislation relating to the temporary permissions regime, and EU-U.K. negotiations are in any event ongoing, however the FCA believes that it is likely that firms operating under a passport would need to inform it of their intention to operate under the temporary regime via a straightforward notification process in advance of the U.K.’s withdrawal.

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The European Banking Authority has commenced a consultation on draft Guidelines on the management of non-performing and forborne exposures. The Capital Requirements Directive requires in-scope banks and investment firms to have robust governance arrangements and effective processes to identify, manage, monitor and report the risks to which the firm is exposed. The EBA is responsible for issuing related guidelines to further harmonize across the EU how firms implement these obligations.

Since the 2007/08 financial crisis, there has been a build-up of non-performing loans in the EU, which impacts banks’ viability and lending capabilities. In March 2017, the European Central Bank finalized its Guidance on managing NPLs, which applies to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. The EBA’s draft Guidelines similarly aim to reduce the build-up of non-performing exposures (NPEs) in a bank’s balance sheet.

The EBA’s proposed Guidelines set out sound risk management practices for banks for managing NPEs, forborne exposures (FBE) and foreclosed assets and apply to all exposures that fall within the definition of non-performing and forbearance in the ITS on Supervisory Reporting (Commission Implementing Regulation (EU) No 680/2014). The finalized Guidelines will also apply to national regulators responsible for assessing firms’ risk management of NPEs and FBEs, as part of the Supervisory Review and Evaluation Process. National regulators must also ensure that firms comply with the Guidelines on an individual, sub-consolidated and consolidated basis.

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The U.K. Joint Money Laundering Steering Group has launched a short consultation on minor changes to Part II of its anti-money laundering and counter-terrorist financing guidance in relation to two sectors, namely asset finance and syndicated lending.

In the press release announcing the draft revised guidance, the JMLSG clarifies that the revisions do not make substantive changes to the existing guidance. Instead, the proposals provide clarification on the workings of these two sectors, how to identify customers and how risks should be assessed.

The JMLSG invites comments on the proposed revisions by March 30, 2018.

View the consultation.

The European Commission has issued a Communication on FinTech to the European Parliament, the European Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions.

The Communication sets out the Commission's Action Plan for FinTech, building on responses from the Commission's public consultation on its policy approach to FinTech, which ran from March to June 2017, and on the work of the Task Force on Financial Technology which was established in November 2016. The Action Plan is part of the Commission's efforts to build a Capital Markets Union and a true single market for consumer financial services. It is also part of its drive to create a Digital Single Market. The Communication is accompanied by Frequently Asked Questions on FinTech and a factsheet.

At this stage, the Commission considers that there is limited need for regulatory or legislative action or reform. However, the outcome of ongoing monitoring and assessment of innovative technologies may point to the need for regulatory action at EU level in the future. The current Action Plan is concerned with initiatives designed to facilitate the emergence of innovative models throughout the EU (through sandboxes and similar approaches), to enable innovative models to scale up (through consistent licensing, common standards and interoperability). The Commission also aims to improve the uptake of technological innovation in the financial sector, by ensuring the suitability of the regulatory regime, reducing barriers to entry for innovative firms such as cloud service providers and, in particular, harnessing the potential of blockchain and other distributed ledger technologies. The Action Plan further outlines planned initiatives to strengthen cybersecurity as well as the integrity of the financial system.

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The European Commission has published a proposed Regulation on European Crowdfunding Service Providers for Business. The proposed ECSP Regulation is part of the EU Capital Markets Union initiative and the Commission's FinTech Action Plan. It aims to increase access to finance through crowdfunding for innovative companies, start-ups and SMEs.

The Commission is seeking to introduce an "EU label for crowdfunding service providers" which would be authorized and supervised by the European Securities and Markets Authority and able to passport their services across the EU. Currently, different EU Member States apply different levels of regulatory requirements to CSPs. Some Member States require CSPs to comply with onerous obligations under the Markets in Financial Instruments package, some apply more lenient regimes, while others allow CSPs to benefit from exemptions and remain unregulated. The Commission's view is that this divergence hampers the potential scaling-up of crowdfunding activity, because CSPs need to comply with different legal and regulatory requirements and adjust their business models accordingly if they want to provide services in more than one EU Member State. The Commission is not proposing that current national frameworks be repealed. Instead, those frameworks can continue to exist, which will allow CSPs to choose to either provide or continue providing services on a domestic basis under national laws or to provide services under the proposed ECSP Regulation. However, the Commission is proposing that the MiFID II Directive be amended to exclude CSPs from its obligations.

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The European Commission has published a Communication on completing the Capital Markets Union by 2019. The Communication confirms the Commissions commitment to completing the CMU by mid-2019 and announces the publication of the FinTech Action Plan, including a proposed Regulation on Crowdfunding, and the Sustainable Finance Action Plan. Legislative proposals on covered bonds, the cross-border distribution of collective investment funds and the law applicable to third-party effects of assignment are expected to be published on March 12, 2018. In May 2018, the Commission intends to publish a proposed Directive on credit servicers, credit purchasers and the recovery of collateral as well as impact assessments on the SME listing regime and the resolution of investment disputes.

The Commission states that completion of the CMU is more urgent due to the impending exit by the UK from the EU because the UK is currently the EUs largest financial centre. The Commission notes that an effective CMU will need to "open-up markets to give better access to finance for EU businesses and more and innovative investment opportunities for savers." 

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The European Securities and Markets Authority has published on its website trading volumes and calculations for the purposes of the Double Volume Cap under the Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation. The published data covers the periods January 1, 2017 to December 31, 2017 and February 1, 2017 to January 31, 2018.

The DVC has been introduced under MiFIR as a measure to limit the amount of dark pool trading, which can harm price formation in equity markets. The DVC places a cap on the volume of equities trading using two of the available waivers from the pre-trade transparency obligations of the MiFIR, namely the negotiated transaction waiver and the reference price waiver. The double cap comprises a per-venue cap of 4% of the total volume of trading in a particular financial instrument on all EU trading venues across over the previous 12 months and an EU-wide cap of 8%. ESMA is required to publish reports on the volume of trades that have relied on the waivers.  National regulators must suspend, for six months, trading under the waivers that exceeds either of the caps.

The publication of the data follows a delay announced by ESMA in January 2018 due to issues with the quality and completeness of data that had been submitted.

View the ESMA press release.