The Bank of England has published statements of commitment to the FX Global Code, the UK Money Markets Code and the Global Precious Metal Code. By issuing the statements, the BoE is demonstrating that it will abide by the principles of the three market codes, both when acting as a market participant and also when its activities include acting as agent for HM Treasury in managing the UK's official reserves in the Exchange Equalisation Account. HM Treasury has separately confirmed that it is content with the BoE's ability to adhere to the codes. Six other central banks in the European System of Central Banks have also simultaneously issued their own statements of commitment to the Global FX Code and it is expected all ESCB banks will have done so by May 2018.

Read more.

A Commission Delegated Regulation on Regulatory Technical Standards for the materiality threshold for credit obligations past due has been published in the Official Journal of the European Union. The Delegated Regulation supplements the Capital Requirements Regulation with regard to the conditions for use of the internal ratings-based approach. The CRR risk quantification provisions set out that a default occurs when an obligor is past due more than 90 days on any material credit obligation to a firm, its parent or any of its subsidiaries. The materiality of the credit obligation is to be assessed against a threshold set by the national regulator according to its view of a reasonable level of risk. The European Banking Authority was obliged to prepare draft RTS specifying the conditions for setting that threshold by a national regulator.

The Delegated Regulation sets out those conditions for retail exposures and for exposures other than retail exposures as well as providing for notification of materiality thresholds to the EBA, the updating of the thresholds and the applicable date for thresholds.

The Delegated Regulation applies from May 7, 2018.

View the Delegated Regulation.

The European Securities and Markets Authority has published a final report and final draft Implementing Technical Standards on forms and procedures for cooperation of National Regulators and ESMA with other EU Authorities under the Market Abuse Regulation. MAR, which entered into force on July 3, 2016, requires national regulators and ESMA to cooperate and exchange information with certain EU authorities in investigations and on supervision and enforcement matters by exchanging information, taking statements from individuals and conducting on-site inspections or investigations. The other authorities are the European Commission, the Agency for Cooperation of Energy Regulators, national regulatory authorities responsible for related spot markets and, in relation to emission allowances, the auction monitor and relevant auction national regulators. The final draft ITS describe the procedures to be followed for making, acknowledging, processing and replying to requests for assistance and when unsolicited assistance is provided and contain standard forms to be used when doing so. The European Commission has three months to consider whether to adopt the ITS.

View the final report and draft ITS.

The US Office of the Comptroller of the Currency, the US Board of Governors of the Federal Reserve System, the US Federal Deposit Insurance Corporation, the US Farm Credit Administration and the US Federal Housing Finance Agency issued a joint notice of proposed rulemaking seeking comment regarding the minimum margin requirements for covered swap entities (the “Swap Margin Rule”).  The proposed rule would amend swap margin requirements to ensure conformity with rules recently adopted by the Federal Reserve Board, the OCC and the FDIC, which impose restrictions on certain swap and other financial contracts that are deemed to be qualified financial contracts.  The proposed rule would amend the definition of “Eligible Master Netting Agreement” to align with the revised definition of “Qualifying Master Netting Agreement” in the recent rules adopted by the Federal Reserve Board, the OCC and the FDIC, and would ensure that a netting agreement for a firm subject to the Swap Margin Rule is not excluded from the definition of “Eligible Master Netting Agreement” solely on the basis of the firm’s compliance with the recently promulgated qualified financial contract rules.  The proposed rule would also provide that certain legacy agreements would not become subject to the Swap Margin Rule solely on the basis of their amendment to comply with the qualified financial contract rules recently promulgated by the Federal Reserve Board, the OCC and the FDIC.  Comments to the proposed rule are due no later than 60 days following publication in the Federal Register.

View interagency notice of proposed rulemaking.

Jerome Powell was sworn in as Chairman of the US Board of Governors of the Federal Reserve System.  Mr. Powell also serves as Chairman of the Federal Open Market Committee.

View the Federal Reserve Board press release.

The European Commission has published a letter to the European Securities and Markets Authority in response to a query from ESMA on the interpretation of the Money Market Funds Regulation concerning "reverse distribution". Reverse distribution involves the cancellation of fund units in certain market environments, notably where negative interest rates prevail.

ESMA had concluded, in its public consultation on its draft Implementing Technical Standards for the MMFR, that the reverse distribution mechanism (often referred to as "share cancellation" or "share destruction") was not compatible with MMFR. ESMA's final draft ITS therefore did not provide for information on the "destruction" of shares to be included in quarterly reporting to national regulators. ESMA received industry feedback to its consultation to the effect that reverse distribution is a common market practice, accepted by both national regulators and investors. ESMA sought legal advice from the Commission. The Commission's response, dated January 19, 2018, confirms that reverse distribution is not compatible with the MMFR, and invites ESMA to issue guidance to ensure supervisory convergence on this issue.

View the letter.

New UK secondary legislation has been laid before Parliament to make the necessary minor technical changes to align UK legislation with recently introduced changes to EU legislation. An EU regulation amending the European Venture Capital Funds Regulation and European Social Entrepreneurship Funds Regulation took effect from November 30, 2017. The amending regulation made various changes to the EuSEF Regulation and EuVECA Regulation to extend the range of eligible managers for EuSEF and EuVECA funds, to extend the range of eligible assets and to prohibit registration fees and simplify the registration process.

This has necessitated new legislation in the form of the Alternative Investment Fund Managers (Amendment) Regulations 2018. These UK amending regulations make minor changes to the Alternative Investment Fund Managers Regulations 2013 in relation to the procedures to be followed when applying to register as a manager of a European social entrepreneurship fund or a European venture capital fund and for the refusal or revocation of such registration. The UK amending regulations also update definitions found in other UK secondary legislation. The changes come into force in part on March 1, 2018 and in part on April 2, 2018.

View the Alternative Investment Fund Managers (Amendment) Regulations 2018 (S.I. 2018/134).

View the explanatory memorandum.

The Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018 have been laid before Parliament and will come into force mainly on February 27, 2018. Certain provisions will come into force on July 1, 2018 and transitional provisions apply until revoked on May 1, 2020.

The UK already has a fairly comprehensive regime for benchmark regulation.  The new UK Regulations make the necessary changes to UK primary and secondary legislation to align it with the EU Benchmarks Regulation, which introduces a common framework and consistent approach to benchmark regulation across the EU and which has been directly applicable throughout the EU since January 1, 2018. The UK Regulations appoint the Financial Conduct Authority as "competent authority" for the purposes of the EU Benchmarks Regulation.

Read more.

The UK Financial Conduct Authority has published a consultation setting out proposed changes to its Decision Procedure and Penalties manual and its Enforcement Guide. The amendments to DEPP and EG reflect changes introduced by the EU Benchmarks Regulation, which took effect on January 1, 2018. The Benchmarks Regulation has been implemented in the UK by the Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018, which will make the necessary changes to the UK statutory framework when they come into force mainly on February 27, 2018.

Read more.
 

The Chief Executive of the Financial Conduct Authority, Andrew Bailey, gave a speech on Brexit at the Future of the City dinner. Mr. Bailey called for a joint commitment by the political authorities to a defined implementation period before the end of March this year and confirmed that the FCA regards Brexit as a top priority. He discussed the operational issues that may arise as a result of Brexit, for example, contractual continuity for derivatives and insurance contracts, UK CCP clearing services and the holding and sharing of data. He also highlighted that mutually agreed and enacted provisions in both the UK and the EU were needed to properly address these matters. The FCA is working with the UK Government to ensure that the UK has a functioning regulatory regime on the date of Brexit and during any transitional period. The UK Government has confirmed that it will introduce draft legislation, if needed, to ensure an interim regulatory permissions regime and to ensure contractual continuity.

In addition, Mr. Bailey discussed the advantages to both the EU and the UK of adopting a mutual recognition regime post-Brexit which continues the existing open financial markets. He noted that during the EU's negotiations with the US on the Transatlantic Trade and Investment Partnership, the EU proposed the inclusion of financial services in the trade agreement, which was based on mutual recognition and close regulatory cooperation, and suggested that the proposal could be used as a starting point for the EU and UK to agree a framework for mutual recognition.

View the text of the speech.

The US Board of Governors of the Federal Reserve System issued a cease-and-desist order against a large US financial institution.  The order requires the institution to utilize its resources to ensure compliance with consent orders issued by other US federal financial regulators.  The order also requires the institution to submit written plans to its applicable Federal Reserve Bank that are designed to further enhance board-level oversight and governance of the institution and further improve the institution’s compliance and operational risk management program.  These plans must be approved by the relevant Federal Reserve Bank and are subject to third-party review once implemented.  In addition, the institution may not grow until the requirements of the cease-and-desist order are satisfied, absent specific Federal Reserve Board approval.  Concurrently with the release of the cease-and-desist order, the Federal Reserve Board sent letters addressed to the institution’s board of directors, its former lead independent director, and its former Chair describing governance deficiencies identified by the Federal Reserve Board.  The Federal Reserve Board press release accompanying the publication of the order also noted upcoming changes in the composition of the institution’s board of directors.

View the Federal Reserve Board announcement.

The European Securities and Markets Authority has published a report setting out the results of its second EU-wide CCP stress test exercise. The European Market Infrastructure Regulation requires ESMA to conduct the exercise at least once per year to assess the resilience and safety of EU CCPs. The second stress test tested the resilience of 16 European CCPs, with approximately 900 clearing members EU-wide.

The 2017 stress test builds on the first stress test conducted in 2016, which only examined counterparty credit risk. The second stress test included liquidity risks and examined whether CCPs would meet their liquidity needs under different stress scenarios. ESMA has published some Q&A to accompany the report.

View the ESMA report.

View the ESMA Q&A.

The administrator of the Euro OverNight Index Average, the European Money Markets Institute, has announced its decision not to pursue a thorough review of the EONIA benchmark.

EONIA represents the weighted average of all overnight unsecured lending transactions in the interbank market undertaken in the European Union and European Free Trade Association countries. EMMI, which also administers Euribor, had been engaged in a review program since December 2015 with the objective of enhancing EONIA's governance and operation to align it with the requirements of the EU Benchmarks Regulation, which took effect on January 1, 2018.

Read more.

The US Office of the Comptroller of the Currency and the US Board of Governors of the Federal Reserve System released the 2018 scenarios for the Dodd-Frank Act Stress Test (DFAST), and the Federal Reserve Board issued its instructions to the firms participating in the 2018 Comprehensive Capital Analysis and Review (CCAR).

Read more.

The U.K. Home Office has published guidance on sharing of information within the regulated sector under the Criminal Finances Act 2017. The CFA 2017 amends the Proceeds of Crime Act 2002 and the Terrorism Act 2000 to allow banks and other financial institutions to voluntarily share information with each other about a suspicion that a person is engaged in money laundering or a terrorist financing offense. The National Crime Agency is also permitted to request banks and financial institutions to voluntarily share information. The new information sharing provisions cover the entire regulated sector. However, implementation is being phased in, starting with banks and financial institutions.

The guidance confirms that sharing of information is voluntary and does not change the mandatory obligation to file a Suspicious Activity Report if appropriate. It also confirms that in sharing information, firms must ensure that they comply with data protection requirements, including under the incoming General Data Protection Regulation. In addition, the guidance confirms that where information is shared in good faith under the relevant CFA 2017 provisions, the POCA 2002 tipping off offense does not apply.

The guidance sets out the roles and responsibilities of firms involved in information sharing, the processes and procedures for submitting notifications and disclosures to the NCA and the interaction of the new provisions with the existing money laundering provisions.

View the guidance.

The International Organization of Securities Commissions has published its final report and recommendations on liquidity risk management for open-ended collective investment schemes. It has also published a report on good practices and considerations in open-ended fund liquidity and risk management. These reports follow the consultation run last year and constitute IOSCO's final response to the Financial Stability Board Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities, published in January 2017, which called on IOSCO to review and revise its guidance, where appropriate.

The first report, Recommendations for Liquidity Risk Management for Collective Investment Schemes, sets out recommendations for managing the liquidity of CIS to ensure the protection of investor's interests, including in stressed market conditions. The Recommendations are addressed to those responsible for liquidity risk management of CIS and to national regulators. There are 17 recommendations covering the CIS design process, day-to-day liquidity management and contingency planning. The report replaces IOSCO's 2013 report on liquidity risk management for CIS.

Read more. 

The European Commission has announced the launch of the EU Blockchain Observatory and Forum. The Commission intends the new Forum to build on existing initiatives and to ensure the feasibility of Blockchain use cross-border. It is also expected to assist in tackling difficulties arising from the use of Blockchain, such as disintermediation, trust, security and traceability. Furthermore, the Blockchain Observatory and Forum will support cross-border cooperation on practical use cases and be an open forum for discussing and developing new ideas.

The Commission's FinTech Action Plan is expected to be issued in Spring.

View the press release.

The Financial Conduct Authority has appointed Nausicaa Delfas as Executive Directive of International. The appointment creates a new role at the FCA and highlights the importance of developing the FCA's strategy for international engagement, especially in the lead up to the UK's withdrawal from the EU.

View the FCA's press release.

The US Commodity Futures Trading Commission is considering a new measure to calculate the size of the interest rate swap (IRS) markets. Under the methodology proposed in a paper by CFTC Chief Economist Bruce Tuckman, the value of the IRS markets would be determined by the calculation of what the paper refers to as "Entity-Netted Notionals" (ENNs) instead of the current gross notional measure used today, which the paper argues overstates risk transfer in the markets.

ENNs would be calculated by: (1) converting the long and short notional amounts of each counterparty to five-year risk equivalents; (2) netting longs against shorts in a given currency within pairs of legal entities; and (3) summing the resulting net longs or shorts across counterparties. Under this calculation, the value of the current IRS markets would be approximately $15 trillion, which represents roughly 8% of the current $179 trillion market valuation under the current notional calculation.

In a speech introducing the paper, CFTC Chairman J. Christopher Giancarlo argued that the new measure would ensure the IRS markets are more easily compared to other markets, and, in particular, that it would bring their value closer to other fixed income markets, such as the markets for US Treasuries, corporate bonds, mortgages and municipal securities. However, he also acknowledged that ENNs are not intended to measure counterparty or operational risk and said his intention is not necessarily to use the calculation to rethink regulatory thresholds, such as the swap dealer de minimis registration threshold.

The CFTC is looking for market reaction to the ENNs proposal.

View the Office of the Chief Economist's paper.

View Chairman Giancarlo's speech.

The US House of Representatives passed five bills focused on regulatory reform for financial institutions.  The bills passed by the House include:  the Housing Opportunities Made Easier Act (H.R. 2255), which amends the Truth in Lending Act to allow mortgage appraisal services to be donated to organizations eligible to receive tax-deductible contributions;

Read more.

Treasury Secretary Steven Mnuchin testified before the US Senate Committee on Banking, Housing, & Urban Affairs at the committee’s Financial Stability Oversight Council annual report to Congress hearing.  In his prepared statement, Secretary Mnuchin noted that the FSOC annual report recommended that member agencies review existing rules and regulations to reduce overlap and duplication, modernize regulations that have become outdated and tailor regulations to fit the size and complexity of the financial institutions for which the regulations are applicable.  Secretary Mnuchin praised Congress for the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act, a legislative proposal that seeks to ease the regulatory burden on smaller community-based financial institutions, and urged both the US Senate and the US House of Representatives to take quick action to reduce regulatory burdens.  Secretary Mnuchin also stressed that cybersecurity is a key risk identified in the FSOC annual report. While Secretary Mnuchin stated that progress has been made with regard to cybersecurity, he highlighted the danger that a large-scale cybersecurity incident could significantly disrupt the financial system, especially given the ever-increasing reliance on technology.

View full text of Secretary Mnuchin’s statement.

The US Government Accountability Office released a report that details the compliance of six US federal financial institution regulators (the US Board of Governors of the Federal Reserve System, the US Office of the Comptroller of the Currency, the US Federal Deposit Insurance Corporation, the US Securities and Exchange Commission, the US Commodity Futures Trading Commission and the US Consumer Financial Protection Bureau) with the requirements of the Regulatory Flexibility Act (RFA).  Under the RFA, regulators must either consider a proposed rule or regulation’s impact on smaller financial institutions and consider potential alternatives, or certify that the proposed rule or regulation will not have a significant impact on a large percentage of small financial institutions.  The GAO report identified a number of weaknesses with the agencies’ compliance with both aspects of the RFA, including a lack of transparency with respect to documentation supporting an agency’s regulatory flexibility analysis, and missing information in certifications. The GAO report makes 10 recommendations—each tailored to respond to perceived weaknesses at specific regulators—with each of the 6 reviewed agencies receiving at least 1 recommendation. The recommendations include enhancing transparency, developing policies and procedures that better document and explain the respective agency’s analysis, and requiring the agencies to review existing evaluation frameworks to ensure harmonization with the requirements of the RFA.

View full text of the GAO report.

The US Board of Governors of the Federal Reserve System and US Federal Deposit Insurance Corporation announced that they have provided feedback to 19 non-US-based financial institutions on their 2015 resolution plans, and the Federal Reserve Board provided links to the feedback letters that were issued to each of these 19 financial institutions. The agencies noted in the announcement that given the limited complexity of these financial institutions’ US operations, the agencies will further tailor their expectations for the upcoming resolution plan submissions by these institutions, which are due no later than December 31, 2018.

View the Federal Reserve Board press release and feedback letters for each of the banks.

The US Consumer Financial Protection Bureau published a notice in the Federal Register requesting public comment regarding the agency’s Civil Investigative Demands (CID) processes.  Further to statements issued by CFPB Acting Director Mick Mulvaney, the request for information provides an opportunity for the public to provide comments aimed at improving and streamlining the CID processes for consumers and financial institutions.  The request for information asks for comment regarding a number of aspects of the CFPB’s CID processes, including suggestions for modifying or updating CID processes, proposed improvements to how information is conveyed to entities that receive CIDs and suggestions regarding the timing and deadlines under the existing CID framework.  Comments are due by March 27, 2018.

View CFPB’s Information Request.

The US Consumer Financial Protection Bureau published a final rule that amends the regulations implementing the Electronic Funds Transfer Act (Regulation E), and the Truth in Lending Act (Regulation Z), and corresponding official interpretations.  The final rule makes a number of modifications to these regulations, including changes to error resolution requirements and limited liability provisions, which will now apply after a consumer’s identity has been verified, designed to promote prompt registration of prepaid cards by individuals.  In addition, the final rule clarifies how the prepaid rule applies to credit cards linked to digital wallets, which promotes consumer use of digital wallets, while providing the same protections that apply to traditional credit card accounts.  The final rule also delays the effective date of these provisions until April 1, 2019.

View the CFPB’s final rule.

The US Board of Governors of the Federal Reserve System, the US Office of the Comptroller of the Currency and the US Federal Deposit Insurance Corporation announced that the agencies will give favorable consideration under the Community Reinvestment Act for bank activities that helped with revitalization and stabilization of the US Virgin Islands and Puerto Rico, which were designated as major disaster areas because of Hurricane Maria.  The agencies announced that financial institutions located anywhere in the United States, including outside of the affected areas, will receive favorable CRA consideration for their community development activities concerning affected areas and individuals, provided that the institution has been responsive to the CRA needs of its own assessment area.  The agencies clarified that favorable CRA consideration will be given to institutions that aid affected areas and individuals—including those who have been displaced and relocated outside of the affected areas—regardless of census information or the personal income of the individual being assisted.  The agencies did, however, note that greater weight will be given to activities that assist areas and individuals that are of low and moderate income.

View the interagency statement regarding the announcement.

US Associate Attorney General Rachel Brand issued a letter regarding the use of agency guidance, defined in the memo as “any agency statement of general applicability and future effect. . .that is designed to advise parties outside of the federal Executive Branch about legal rights and obligations,” as a tool for civil enforcement actions.  In the letter, Ms. Brand references a November 16, 2017 memo from US Attorney General Jeff Sessions entitled “Prohibition of Improper Guidance Documents.” The letter from Ms. Brand reiterates that guidance documents may not be used to circumvent the notice-and-comment rulemaking process.  The letter also highlights that Department of Justice personnel are prohibited from using agency guidance documents as a means to require that regulated entities take or refrain from any action not otherwise mandated by law or regulation, and that non-compliance with agency guidance should not in and of itself result in an enforcement action.  The letter notes that while agency guidance may be used for other purposes, such as showing that the financial institution had knowledge regarding its obligations under law or regulation, DOJ personnel should not use non-compliance with agency guidance as presumptive or conclusive evidence that a financial entity violated the underlying law or regulation.

View full text of DOJ letter.

The European Commission has published a report to the European Parliament and the Council of the European Union on the implementation and impact of the second Electronic Money Directive, known as 2EMD. 2EMD establishes a legal framework for the issuance and redemption of e-money and covers the rights and obligations linked to the redemption of funds by consumers, the licensing of e-money institutions and the prudential requirements applicable to e-money institutions, which updates the regime under the first Electronic Money Directive to align it with requirements on payment institutions under the revised Payment Services Directive. It applies to e-money service providers in the EEA. The regime has been sparsely used in practice, with few firms operating under its auspices.

2EMD requires the Commission to assess its implementation and impact and to propose legislative changes, if appropriate. The report was due on November 1, 2012, however, the Commission delayed its publication because a majority of member states had failed to transpose 2EMD into their national laws by the transposition date of April 2011. The Commission also wanted to take into account the impact of PSD2, which includes numerous cross-references to 2EMD.

Read more.

The UK Financial Conduct Authority has issued a public statement on the Packaged Retail and Insurance-based Investment Products Regulation, which took effect on January 1, 2018.

The PRIIPs Regulation requires manufacturers of PRIIPs to prepare and publish a stand-alone, standardized Key Information Document for each of their PRIIPs. Those advising retail investors on PRIIPs, or selling PRIIPs to retail investors, must provide the retail investors with a KID in good time before the transaction is concluded.

Read more.

The UK Financial Conduct Authority has launched a consultation on necessary changes to its Handbook for the functioning of the Money Market Funds Regulation, which came into force on July 21, 2017. Although the MMF Regulation is directly applicable under EU law, some areas of the UK regulatory framework will need to be changed to ensure they align with it. The FCA's consultation sets out proposals to make certain amendments to the Handbook to ensure that it is consistent with the requirements of the MMF Regulation.  The FCA also proposes to introduce application fees for the authorization of MMFs and periodic fees to help meet the cost of supervising MMFs’ adherence to the MMF Regulation.

The MMF Regulation is one of a range of EU policy measures to address risk arising from so-called "shadow banking", which is the term often used to refer to credit intermediation by entities and activities outside the banking sector. The financial crisis revealed that some MMFs were vulnerable during periods of high market turbulence, during which it was difficult for these funds to maintain liquidity and stability, particularly in the face of investor runs. Consequently they could pose a serious risk of contagion in the wider financial system. The MMF Regulation strengthens, in particular, the quality and liquidity of the asset portfolios held by MMFs. It also establishes, for some of these funds, capital buffers in order to cover the gaps in valuation associated with fluctuations in their asset value.

Read more.

The United States Senate Committee on Banking, Housing and Urban Affairs held a hearing for three individuals whose nominations to US federal financial institution regulator positions are pending.  The nominees and their respective positions are:  Ms. Jelena McWilliams to be Chairperson and a Member of the Board of Directors of the US Federal Deposit Insurance Corporation; Dr. Marvin Goodfriend to be a Member of the US Board of Governors of the Federal Reserve System; and Mr. Thomas E. Workman to be a Member of the US Financial Stability Oversight Council.

View transcript of Ms. McWilliam’s prepared statement.

View transcript of Dr. Goodfriend’s prepared statement.

View transcript of Mr. Workman’s prepared statement.

The US Senate voted 84-13 in favor of confirming Jerome Powell as the next Chair of the US Board of Governors of the Federal Reserve System.  During the confirmation vote, Chairman of the US Senate Committee on Banking, Housing and Urban Affairs, Mike Crapo, delivered a statement in favor of Mr. Powell’s nomination.  Mr. Crapo stressed the importance of the position of Federal Reserve Board Chair, and praised Mr. Powell for his prior experience, regulatory and market knowledge and track record.

View Mr. Crapo’s statement at Mr. Powell’s confirmation vote.

The Joint Committee of European Supervisory Authorities has published an Opinion addressed to EU national regulators to develop a common understanding of the appropriate use, by credit and financial institutions, of innovative methods to meet Customer Due Diligence obligations.

All firms that are subject to the Fourth Money Laundering Directive must put in place effective policies and procedures, including effective CDD procedures, to address the risk that their businesses may be used for money laundering or for terrorist financing purposes. 4MLD is "technology neutral" and does not set out specific steps or procedures that must be followed for CDD. There is scope, therefore, for new ways to verify customers' identity, for example non-face-to-face verification using traditional identity documents (such as passports) through portable devices or verification via centralized databases. Innovative means such as artificial intelligence are also increasingly used for monitoring customer relationships, for risk assessment and in decision-making processes.

The ESAs recognize that innovative solutions can improve the effectiveness and efficiency of AML/CFT controls and firms often use innovative solutions to meet demand for improved customer experience and costs savings. The ESAs believe that firms should not be prevented from using such solutions, provided that proper safeguards have been put in place to mitigate the ML/TF risk associated with the firm's business relationships and risk profile. The ESAs' Opinion highlights additional factors that national regulators can take into account when assessing the adequacy of any proposed use of innovative CDD solutions. These include: oversight and control mechanisms; the quality and adequacy of CDD measures; the reliability of CDD measures; delivery channel risk; and geographical risks.

View the Opinion.

The UK Financial Conduct Authority has published a Policy Statement and final rules to introduce changes to its client money rules to amend the existing 30-Day Rule, under which firms are prevented from placing client money in bank accounts with unbreakable terms of longer than 30 days. The client money rules require firms to deposit client money in an account opened with an authorised bank, a central bank or in a qualifying money market fund. An unbreakable deposit is one where the firm placing the deposit has no contractual ability to request the return of the monies prior to the end of the agreed term.

The rule changes have been made following feedback from firms that banks have been increasingly reluctant to provide 30-day unbreakable deposits. This reluctance appears to have been due to the interaction of the client money and prudential regimes. All client money is subject to the Liquidity Coverage Ratio which requires banks to have highly liquid assets to cover 100% of their potential net cash outflows over 30 days. Unbreakable deposits of a maximum of 30 days are therefore capital inefficient for banks.

Read more.

New York State Department of Financial Services Superintendent Maria Vullo issued a press release reminding regulated entities and licensed persons of the NYDFS’s upcoming February 15, 2018 compliance certification deadline under New York’s cybersecurity regulation that was implemented in March of 2017.  New York’s cybersecurity regulation generally requires (i) that regulated entities establish, review and assess cybersecurity policies and procedures designed to protect consumer data, (ii) that regulated entities have a Chief Information Security Officer, and (iii) that the policies and procedures are approved by an entity’s board of directors or a senior officer.  Covered entities and individuals will be required to submit the certification, which attests to compliance with New York’s cybersecurity regulation for 2017, through the NYDFS’s cybersecurity portal.  The press release also provides a link to a series of frequently asked questions regarding the cybersecurity regulation generally, and the upcoming filing deadline, including which subparts of the regulation are applicable to this year’s certification, and those that will be applicable to the 2019 certification.  Superintendent Vullo also announced that the cybersecurity evaluation will be incorporated into all NYDFS examinations of regulated entities.

View full text of the press release.

Vice Chairman of the US Board of Governors of the Federal Reserve System, Randal Quarles, delivered remarks at the American Bar Association Banking Law Committee’s annual meeting. In his remarks, Mr. Quarles discussed his approach as Vice Chair of Supervision and outlined a number of items that were areas of focus. Mr. Quarles noted that the post-crisis regulatory framework was largely complete—with the exception of the implementation of the Basel III framework—and noted that this provided an opportunity to reflect on these regulations and assess their utility and move towards efficient and transparent regulation. Mr. Quarles reiterated the need to reduce the regulatory burden for smaller financial institutions and echoed prior comments from Federal Reserve Board Chairman-nominee Jerome Powell that key regulatory areas that need improvement include resolution planning, stress testing and simplification of the Volcker Rule. Specifically, he noted that the relevant agencies have begun work on a proposal to streamline the Volcker Rule and “congeal around a thoughtful Volcker rule 2.0.”  Mr. Quarles also discussed a few emerging areas for consideration, including (i) tailoring regulation to match    an institution’s size, footprint, risk profile and business model, (ii) a re-evaluation of loss absorbency requirements, (iii) a recalibration of the leverage ratio and (iv) the Federal Reserve Board’s framework for control determinations under the Bank Holding Company Act, which he generally views as too opaque.

View full text of VC Quarles' speech.

The US House Financial Services Committee announced that it had advanced 15 bills, many of which would alter the regulatory framework for financial institutions.

Read more.

The US Federal Reserve Board issued a notice finalizing its revisions to the Form FR Y-7 (Annual Report for Foreign Banking Organizations), regarding how a foreign banking organization should certify its compliance with US risk committee and home country capital stress testing requirements under Regulation YY.

Read more.

The European Commission has published a Communication to the European Parliament, the Council of the European Union and the European Central Bank, setting out its first progress report on the implementation of the "Action Plan To Tackle Non-Performing Loans in Europe" that was adopted by the Council in July 2017. The Communication discusses addressing NPLs as part of risk reduction in the financial sector and reports that the general improvement in NPL ratios over recent years continued in 2017. The ratio of NPLs is at its lowest level since Q4 2014. The Communication concludes by stressing the importance of maintaining the pace of NPL reduction and the need, not only for continued action by individual banks and by Member States, but also for concerted action at EU level by the Commission and other EU institutions, including the ECB.

A Commission Staff Working Document, published jointly with the Communication, provides further detail on the workstreams identified as necessary to deliver the Action Plan and on developments in selected Member States.

Read more.

The European Securities and Markets Authority has issued a call for evidence on the possible use of its product intervention powers under the Markets in Financial Instruments Regulation to impose restrictions and/or prohibitions on the marketing, distribution and sale of contracts for difference and binary options to retail investors.

Read more.

Four Commission Delegated Regulations supplementing the Benchmark Regulation have been published in the Official Journal of the European Union. The Benchmark Regulation regulates the provision of benchmarks, contributions of data to a benchmark and the use of benchmarks within the EU. It sets out the authorization and registration requirements for benchmark administrators, including third country entities, and stipulates requirements for governance and control of administrators. The Benchmark Regulation establishes different rules for different categories of benchmarks, depending on the risks involved, and imposes additional requirements on benchmarks considered to be critical. It also sets out the powers of national regulators to mandate, under certain conditions, contributions to or the administration of a critical benchmark.

Read more.

The UK Prudential Regulation Authority has announced that it is postponing by six months the introduction of a new liquidity reporting template, PRA110. PRA110 is intended to capture information on cashflow mismatch risk within the Pillar 2 framework.

The Capital Requirements Directive gives national regulators discretion to set additional Pillar 2 liquidity requirements. The Pillar 2 framework involves additional capital requirements set through regulatory discretion and complements the Pillar 1 Liquidity Coverage Ratio requirements, by capturing those liquidity risks that are either not captured or not fully captured under Pillar 1. The PRA consulted in July 2017 on a draft liquidity reporting template for CFMR, to be numbered PRA110. PRA110 will build on the European Banking Authority's maturity ladder reporting template, which will apply from March 2018, by including additional columns and rows to capture additional information. The PRA originally proposed that the PRA110 template would be implemented on January 1, 2019 and that, on implementation of PRA110, it would terminate the old FSA047 and FSA048 returns.
 

Read more.

A Commission Delegated Regulation amending the Regulatory Technical Standards on authorization, organizational requirements and the publication of transactions for data reporting services providers under the revised Markets in Financial Instruments Directive has been published in the Official Journal of the European Union.

MiFID II requires consolidated tape providers to collect post-trade information published by trading venues and approved publication arrangements and to consolidate this into a continuous live data stream made available to the public, both for equity instruments and non-equity products.

The amending Regulation adds provisions to the existing RTS to set out the scope of the consolidated tape for non-equity products (i.e., bonds, structured finance products, emission allowances and derivatives). In particular, the amending Regulation:

•  permits non-equity CTPs to specialize in one or more asset classes to increase the likelihood of a viable business case for non-equity consolidated tape provision;

•  specifies the APAs and trading venues that have to be included in the non-equity consolidated tape, based on the required consolidated tape coverage ratio of 80% of all transactions published in an asset class in the EU; and

•  requires CTPs to reach minimum coverage ratios by January 1, 2019.

The amending Regulation applied from January 3, 2018. However, the provisions relating to CTPs will apply from September 3, 2019. The amending Regulation does not differ substantively from the final draft RTS submitted to the European Commission on March 31, 2017.

View the amending Regulation.

The Joint Committee of the European Supervisory Authorities has published final Guidelines on preventing terrorist financing and money laundering in electronic fund transfers under the EU Wire Transfer Regulation. The Wire Transfer Regulation, which applied from June 26, 2017, requires payment service providers, among other things, to have effective procedures to detect transfers of funds that lack the required information on the payer and the payee and to determine whether to execute, reject or suspend a transfer of funds that lacks that information.

The Guidelines set out the factors that payment service providers should consider when establishing and implementing procedures to detect and manage transfers of funds which do not have the required payer and payee information to ensure that their procedures are effective. The Guidelines also specify what a payment service provider should do to manage the risk of money laundering or terrorist financing where that information is missing or incomplete. Further, the Guidelines will assist payment service providers to determine which fund transfers fall within the scope of the Wire Transfer Regulation and how the exemptions might apply. National regulators are required to use the Guidelines when assessing the adequacy of a payment service provider's procedures.

The Guidelines will apply to all payment service providers and intermediary payment service providers as well as their national regulators from July 16, 2018.

View the Guidelines.

The European Banking Authority has published a final Report and final Guidelines on uniform disclosures under the Capital Requirements Regulation regarding the transitional period for mitigating the impact of the introduction of International Financial Reporting Standard 9 (known as IFRS 9) on own funds.

IFRS 9, which applies for accounting periods beginning January 1, 2018, will require the measurement of impairment loss allowances to be based on an expected credit loss accounting model rather than on an incurred loss accounting model. The application of IFRS 9 could lead to a sudden significant increase in expected credit loss provisions and consequently to a sudden decrease in an institution's Common Equity Tier 1 capital. For this reason, institutions that prefer not to recognize the full impact of IFRS 9 (or analogous ECL models) immediately have the option of phasing in implementation of IFRS 9 over a transitional period.

IFRS 9 is being implemented in the EU through a regulation amending the CRR which sets out transitional provisions. The amending Regulation applied directly across the EU from January 1, 2018. A firm that uses the transitional arrangements must publicly disclose its own funds, capital ratios and leverage ratios both with the application of the transitional arrangements and also on a "fully-loaded" basis, i.e., as if the transitional arrangements had not been applied.

Read more.

The Financial Action Task Force has published a Report on the financing of recruitment for terrorist purposes, as part of its strategy on combating terrorist financing. The Report has been compiled using input from relevant authorities and country experts from jurisdictions within the FATF Global Network, including the Asia Pacific, Eurasian, Middle-East and North African regions.

The Report examines the typical methods of recruitment to terrorist organizations and the costs associated with those methods. Recruitment methods vary from region to region. Techniques include recruitment via religious groups in some regions and online recruitment via social media in others. The Report also presents case study data on the sources of funds available to terrorist recruiters and the general expenditures involved in the recruitment process.

The Report concludes by recommending improved inter-agency and international co-operation to share information and analyze suspected recruiters and financial supporters of terrorist organizations. The Report recommends that national operational and security agencies engage more with the private sector, non-profit organizations and social media and other internet providers, by providing better contextual information and guidance to enable those providers to identify the financial flows associated with terrorist recruitment.

View the Report.

The European Securities and Markets Authority has published a Thematic Report, following its supervisory review of the current fee structures in the credit rating and trade repository industries. The CRA Regulation requires CRAs to ensure that fees for the credit rating and ancillary services are not discriminatory and are based on actual costs. Similarly, the European Market Infrastructure Regulation requires TRs to provide non-discriminatory access and charge publicly disclosed and cost-related fees.

ESMA has compiled its Thematic Report using information from publicly available resources, periodical submissions to ESMA and dedicated requests for information from supervised entities. It has also used information gained from users of CRA and TR services. The Thematic Report identifies three areas in which CRAs and TRs need to improve their fee practices and to which ESMA proposes to give supervisory priority. These are: transparency and disclosure, the fee-setting process and interaction with entities related to CRAs and TRs.
The Thematic Report is accompanied by factsheets summarizing ESMA's findings on TRs' and CRAs' fees.

View the Thematic Report.

View Factsheet on Trade Repositories' Fees.

View Factsheet on CRAs' Fees.

The US Board of Governors of the Federal Reserve System announced its 2018 chair and deputy chair appointments for Federal Reserve Banks. Each year, the Federal Reserve Board appoints one member from each Federal Reserve Bank’s nine-member board of directors to serve as chair, and one member to serve as deputy chair.

View the Federal Reserve Board press release announcing the appointments.

The Financial Conduct Authority has published a "Dear CEO" letter that was sent to firms that offer contracts for difference products to retail customers on either an advisory or discretionary portfolio management basis (including pursuant to limited power of attorney). The "Dear CEO" letter follows a review conducted by the FCA which assessed internal processes, policies, controls and oversight arrangements at a sample of 19 providers and 15 distributors of CFD products to retail customers. The "Dear CEO" letter identifies a number of areas of concern: target market identification and alignment of the target market to the characteristics of the product; communication, oversight and challenge; the process for taking on new distributors; management of conflicts of interest; the use of management information and key performance indicators; client categorisation; and remuneration arrangements.

The FCA considers that there is a high risk that firms across the sector are not meeting its rules and expectations when providing and distributing CFDs and that consumers are likely to experience poor outcomes unless these poor practices are addressed. The letter highlights the need for firms overall to improve a number of oversight and control arrangements to reach the standard required by FCA rules and guidance. The FCA will conduct further work on CFDs and firms may be asked to take part in a follow-up review to assess how they have responded to the feedback in the Dear CEO letter. The FCA will also be assessing firms' compliance with the new Product Intervention and Product Governance sourcebook, which came into effect on January 3, 2018, implementing as rules the product governance requirements of the revised Markets in Financial Instruments Directive.

View the "Dear CEO" letter.

The US Board of Governors of the Federal Reserve System announced a final rule adjusting the maximum amount of its civil money penalties. This adjustment is made to account for inflation, and is required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The announcement contains a table reflecting each adjusted civil money penalty, organized by statute. The adjusted civil money penalties took effect on January 10, 2018.

View text of the final rule.