The European Central Bank is consulting on a draft ECB guide on the assessment methodology for the internal model method and the advanced CVA capital charge for counterparty credit risk under the Capital Requirements Regulation. IMM and A-CVA are internal models used by banks to calculate counterparty credit risks for over-the-counter (OTC) derivatives and securities financing transactions.

Read more.

The European Banking Authority has launched a consultation on draft Regulatory Technical Standards on the homogeneity of underlying exposures in securitizations under the new EU framework for simple, transparent and standardized securitizations. The new framework is made up of the STS Regulation and amendments to the existing Capital Requirements Regulation. The STS Regulation, which will come into effect in 2018, provides the criteria for identifying which securitizations will be designated as STS securitizations, a system to monitor the application of those criteria as well as common requirements on risk retention, due diligence and disclosure for all financial services sectors. The amended CRR sets out the regulatory treatment of exposures to securitizations that are deemed to be STS securitizations.

The "simple" criterion provides, among other things, that the securitization must be backed by a pool of underlying exposures that are homogenous in terms of asset type and that the underlying exposures must include obligations that are contractually binding and enforceable, with full recourse to debtors and, where applicable, guarantors. The homogeneity requirement in the STS Regulation is designed to better enable investors to assess risk and conduct robust due diligence.

Read more.

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, and the US National Credit Union Administration released interagency examiner guidance regarding financial institutions affected by major disasters. In accordance with the guidance, examiners will continue to assign component and composite ratings for these affected financial institutions, taking into account how the disaster has affected certain of the ratings factors, such as capital adequacy and asset quality. The guidance also notes that examiners should evaluate management capability, but should distinguish between problems intrinsic to the management of the institution, and those problems caused by the major disaster. The guidance notes that a major disaster may result in a lower component or composite rating for an affected institution, but that formal or informal action that would typically be considered for lower-ranked institutions may not be required, taking into account the institution’s disaster recovery plan and policies, which should also be evaluated for reasonableness, among other factors. If action is required, the guidance instructs examiners to appropriately tailor the response to the specific circumstances affecting the institution.

View the interagency supervisory guidance.

The European Banking Authority has launched a consultation on draft Regulatory Technical Standards on risk retention requirements for originators, sponsors and original lenders under the new EU securitization framework for simple, transparent and standardized securitizations. The new framework is made up of the STS Regulation and amendments to the existing Capital Requirements Regulation. The STS Regulation, which will come into effect in 2018, provides the criteria for identifying which securitizations will be designated as STS securitizations, a system to monitor the application of those criteria as well as common requirements on risk retention, due diligence and disclosure for all financial services sectors. The amended CRR sets out the regulatory treatment of exposures to securitizations that are deemed to be STS securitizations.

The STS Regulation requires, among other things, originators, sponsors or original lenders of a securitization to retain on an ongoing basis a material net economic interest in the securitization of at least 5 %. The draft RTS specify in greater detail the risk retention requirement, including the modalities of retaining risk, the measurement of the level of retention, the prohibition of hedging or selling the retained interest and the conditions for retention on a consolidated basis.

Read more.

The Financial Conduct Authority has published a feedback statement on Distributed Ledger Technology, following the discussion paper it issued in April 2017.

Respondents to the discussion paper provided the FCA with details of various use cases for DLT in the context of payments, asset management, securities trading, financial crime and regulatory reporting. The feedback statement summarizes stakeholder feedback and the FCA's response in relation to: the operational risks arising from permissioned and permissionless networks; the risks and legal and regulatory issues associated with digital currencies and initial coin offerings; digital asset trading and smart contracts; the ability of DLT to improve regulatory reporting and the benefits it could bring in tackling financial crime; and whether DLT is compatible with the requirements of the EU General Data Protection Regulation.

Read more.

The European Securities and Markets Authority has published two revised Opinions providing further guidance on the post-trade transparency and position limits requirements relating to transactions on non-EU trading venues under the revised Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation. ESMA first published the Opinions in May 2017.

The first Opinion sets out ESMA's view on determining third-country trading venues for the purpose of transparency under MiFIR. MiFIR requires EU investment firms to make information on transactions in financial instruments traded on a trading venue public. Details of actual transactions must be made public as close to real time as possible – for equities, within one minute of trading, and for non-equities, within 15 minutes (reducing to five minutes in 2020). The Opinion sets out ESMA's view of which transactions between EU and non-EU firms, and which transactions conducted on third-country trading venues should be subject to these post-trade transparency requirements. The Opinion provides objective criteria for identifying those third-country venues that have similar post-trade transparency requirements as EU trading venues. Trades on third-county venues that satisfy the criteria will not need to be made transparent post-trade.

Read more.

The European Securities and Markets Authority has launched a consultation on draft Regulatory Technical Standards under the new EU Prospectus Regulation which entered into force on July 20, 2017. ESMA seeks feedback on the draft RTS in relation to: key financial information for the prospectus summary; data for the classification of the prospectus and how to ensure that such data is machine readable; advertisements; supplements; and publication of the prospectus.

ESMA invites responses to the consultation by March 9, 2018. ESMA will then finalize the draft RTS for submission to the European Commission by July 21, 2018.

View the consultation paper (ESMA31-62-802).

The US Financial Stability Oversight Council published its 2017 annual report. The report addresses topics such as financial and regulatory developments and potential emerging threats and vulnerabilities, and makes a number of recommendations with respect to these topics. The report notes that market conditions have been relatively stable over the last year, and discusses the FSOC’s rescission of its designation of two nonbank financial institutions for supervision by the US Board of Governors of the Federal Reserve System—American International Group, Inc. and General Electric Capital Corporation, Inc. One key issue in the report is the continuing and growing threat that cybersecurity risks pose to the financial system. The report notes that although progress has been made in this area, more work is required to guard against significant cybersecurity events in the future. The report also discusses FinTech initiatives, both in the context of how innovation is changing financial market structure and financial products. The report notes that while these innovations can provide great benefits, they also create new risks to, and potential vulnerabilities in, the financial system.

View the FSOC report.

The EU Single Resolution Board and the US Federal Deposit Insurance Corporation announced that they had signed a cooperation agreement which would provide for information sharing and cooperation in policymaking and resolution planning for cross-border financial institutions. The preamble of the agreement notes that given the interconnectedness of the global financial system, such cooperation is necessary to promote financial stability in the event of an institution’s failure. While not legally binding, the agreement sets forth the general framework of the relationship and the principals designed to advance the resolution goals of each agency.  The agreement also sets forth the policies and procedures that govern the relationship between the SRB and FDIC, including the scope of the agreement, permissible uses of information shared between the agencies and the mechanisms that each agency can use to effectuate consultation, cooperation and information sharing.

View the cooperation agreement between SRB and FDIC.

The Financial Stability Board, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures and the International Organization for Securities Commissions have jointly launched a review of the regulatory reforms on incentives for central clearing of OTC derivatives. The review forms part of the FSB’s commitment to evaluate the effects of the G20 Financial Regulatory reforms. Qualitative survey forms have been published for participants in the clearing space (CCPs, clients/end-users, clearing members and banks providing clearing services to clients) to complete on a group-wide basis.

The deadline for submitting completed surveys is January 26, 2018. A final report on the impact of the G20 reforms is expected by the end of 2018.

View the surveys and related information.

The European Banking Authority has published standardized data templates for non-performing loans, following calls from the European Commission and the Council of the European Union to develop templates that would assist in developing the NPL secondary markets. The templates are not a supervisory reporting requirement, but a market standard to be used by banks on a voluntary basis.

View the EBA’s press release.

View the templates.

An amending Delegated Regulation has been published in the Official Journal of the European Union which closes a loophole in the Markets in Financial Instruments Directive provisions relating to systematic internalisers. In February this year, the European Securities and Markets Authority highlighted the possibility that investment firms operating broker-crossing networks might try to circumvent the MiFID II requirements by setting up networks of connected SIs which would allow SIs to cross third party buying and selling interests via matched principal trading or other types of back-to-back transactions.

Read more.

The European Banking Authority has published a final report setting out final draft Regulatory Technical Standards and Implementing Technical Standards under the revised Payment Services Directive.

PSD2 requires that the EBA develop, operate and maintain an electronic central register that contains information as notified by national regulators. The EBA consulted earlier in the year on its proposals for the central register and that consultation closed in September 2017.

Read more.

The European Commission has adopted Implementing Decisions for equivalence of the legal and supervisory framework of Australia, Hong Kong and the USA for national securities exchanges and alternative trading systems in accordance with the revised Markets in Financial Instruments Directive.
 

MiFID II requires EU investment firms to ensure that the trades they undertake in shares admitted to trading on regulated markets, or traded on trading venues should take place on regulated markets, multilateral trading facilities or systematic internalisers, or third-country trading venues assessed by the European Commission as equivalent. These latest three equivalence decisions by the European Commission will allow investment firms to comply with MiFID II when shares are traded on trading venues in these three countries.
 

View Implementing Decision for Australia.
 

View Implementing Decision for Hong Kong.
 

View Implementing Decision for USA.

The US House Financial Services Committee announced that it had approved 13 bills, several of which were focused on regulatory reform for financial institutions. Representative Jeb Hensarling noted in an accompanying press release that the Financial Services Committee remains committed to, among other things, reducing regulatory red tape that burdens and affects financial institutions.

Read more.

The Financial Services and Markets Act 2000 (Markets in Financial Instruments) (No. 2) Regulations 2017 have been published, and will take effect mainly from January 3, 2018. Some technical provisions will come into force a day earlier, on January 2, 2018, for the purpose of making corrections to other legislation in advance of the implementation date for the revised Markets in Financial Instruments Directive.

Read more.

The UK Financial Conduct Authority and Prudential Regulation Authority have issued further consultations on aspects of the extension of the Senior Managers and Certification Regime to all firms authorized under the Financial Services and Markets Act 2000.

The FCA has published three separate consultations, which build on its previous consultation in July 2017 and set out further proportionate proposals to account for the wide differences in the sizes and nature of firms that will be brought within the regime. In the July 2017 consultation, the FCA proposed an extended SM&CR consisting of a standard set of requirements for firms within the "core" regime, and further "enhanced" or simplified "limited scope" requirements for other firms as appropriate. The PRA has published a further consultation supplementing its July 2017 consultation on the PRA's substantive proposals for extension of the SM&CR to insurers.

Read more.

A Commission Delegated Regulation setting out Regulatory Technical Standards for the disclosure of encumbered and unencumbered assets has been published in the Official Journal of the European Union. The RTS supplement the Capital Requirements Regulation by setting out the requirements on firms to disclose balance sheet value per exposure class, broken down by asset quality and the total amount of unencumbered assets on the balance sheet. The final RTS set out the data required to be disclosed, the format and the timing of the disclosure. Additional disclosure requirements are set for larger banks.

The final RTS enter into force on January 2, 2018. The additional disclosure requirements for larger banks will apply from January 2, 2019.

View the final RTS.

The UK Prudential Regulation Authority has published a policy statement setting out final amendments to its supervisory statements on "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" and its Statement of Policy "The PRA's methodologies for setting Pillar 2 capital". These changes were proposed in a consultation by the PRA in July 2017, which closed in October 2017. Following feedback to the consultation, the PRA will proceed with the amendments it proposed in July, subject to some minor changes.

Read more.

The European Banking Authority has published finalized guidelines to assist payment services providers to conduct appropriate risk assessment and risk management of operational and security risks. The finalized guidelines contain some changes from the draft guidelines on which the EBA launched a consultation in May 2017.

Read more.

Chairman of the US Securities and Exchange Commission Jay Clayton released a public statement regarding cryptocurrencies and initial coin offerings (ICOs). In the statement, Chairman Clayton notes rapid growth in these areas and how expanding areas of innovation in this space may impact retail consumers and market professionals. With regard to retail consumers, Clayton reiterated that these investments carry with them reduced investor protections in comparison to traditional investments, highlighting that no ICOs have been registered with the SEC to date. For market professionals, Chairman Clayton stressed that, ICOs, while an innovation in the field, may still constitute securities transactions subject to SEC regulation, noting that much of the distinction between ICOs and traditional offerings may be more of a matter of form, rather than substance. Clayton also raised this point as it relates to cryptocurrencies, stating that merely calling a product a “currency” does not change the analysis of whether it is a security. Chairman Clayton further discussed the need for adequate disclosure, processes and investor protections with regard to ICOs, and stated that for cryptocurrencies, market professionals should either be able to demonstrate that the product is not a security, or comply with securities regulations.

View full text of Chairman Clayton’s statement.

The UK Financial Conduct Authority has published two consultations, seeking feedback on draft documents setting out its regulatory approach to authorization and competition. 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.

In the consultation on its approach to authorization, the FCA explains the public value and purpose of requiring authorization to conduct regulated financial services activities and the FCA's current approach to authorizing firms and individuals. The FCA seeks feedback on four questions: (i) understanding of the Threshold Conditions that firms and individuals must meet for authorization, and any areas where the FCA might be more specific; (ii) how the FCA might improve its approach to supporting firms and individuals to meet the minimum standards and how the FCA might better promote competition; (iii) whether the FCA has suggested the correct commitments to firms making authorization applications and what other commitments could be made; and (iv) whether the FCA has prioritized the right strategic goals, and, if not, what additional goals could add the most public value to the FCA's work.

Read more.

The US Federal Reserve Board announced that it is seeking comments regarding a proposed change to its Payment System Risk Policy.  In a related action, the Federal Reserve Board has also announced that it is eliminating the strength of support assessment (SOSA) ranking used for FBOs because the information that informs such rankings (such as information on parent banks, home country accounting practices and financial systems, and international regulatory developments) has become more readily available to U.S. supervisors.  The proposed changes to the PSR Policy would affect US branches and agencies of foreign banking organizations, and result in changes to the methods used in determining the net debit cap of an FBO and its ability to request a streamlined procedure with regard to the FBO’s maximum daylight overdraft capacity. The calculation method currently takes into account whether the FBO is a financial holding company, as well as the FBO’s SOSA ranking. The Federal Reserve Board notes that the changes to the PSR Policy may result in a reduction of the net debit cap for some FBOs, but contends that the changes will not constrain the US operations of FBOs generally, while more accurately reflecting the usage of intraday credit by FBOs. Comments to the proposal are due on or before February 12, 2018.

View the FRB's PSR Policy Proposal.

View FRB's SR Letter regarding SOSA.

The European Banking Authority has published its final draft Regulatory Technical Standards on central contact points under the revised Payment Service Directive. The RTS will apply where a payment institution or electronic money institution with its head office in one member state provides payment services on a cross-border basis, under the right of establishment, through agents in another (host) member state. PSD2 gives the national regulators in the host member state the option of requiring that payment institutions or electronic money institutions operating through agents must establish a central contact point in the host territory, to ensure adequate communication and information reporting and effective supervision.

Read more.

Following its consultation earlier this year on its expectations on recovery planning, the Prudential Regulation Authority has published a Policy Statement which sets out the PRA's final revised expectations on the content of recovery plans and the approach to recovery planning for groups which include a ring-fenced body. Alongside the Policy Statement, the PRA has published a new Supervisory Statement on recovery planning and an updated Supervisory Statement on RFBs. The PRA decided to publish the new Supervisory Statement because its experience in assessing firm's plans showed that there was a need to improve the quality of recovery plans and to increase the prospect of plans being credible. The new Supervisory Statement on recovery planning therefore supersedes the previous one, SS-18/13.

Read more.

The U.K. Government has published a U.K. Anti-Corruption Strategy 2017 to 2022 setting out how the U.K. Government intends to combat corruption over the next five years. The Strategy identifies the following six priorities:

1. Reduce the insider threat in high risk domestic sectors;

2. Strengthen the integrity of the United Kingdom as an international financial centre;

3. Promote integrity across the public and private sectors;

4. Reduce corruption in public procurement and grants;

5. Improve the business environment globally; and

6. Work with other countries to combat corruption.

In strengthening the United Kingdom’s position as an international financial centre, the Government intends to ensure greater transparency over ownership and control of legal entities, stronger enforcement, enhanced anti-money laundering and counter-terrorist financing measures and a better means for sharing information between the public and private sectors.

View the strategy.

​The Prudential Regulation Authority has published an updated Supervisory Statement, “The minimum requirement for own funds and eligible liabilities (MREL) - buffers and Threshold Conditions”. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.

The updated Supervisory Statement set out the PRA’s expectations on the relationship between the minimum requirement for MREL and both capital and leverage ratio buffers. It follows the PRA’s consultation earlier this year clarifying that it did not intend to create a different buffer requirement from that which is usable in the going-concern regime. The Supervisory Statement also discusses the implications that a breach of MREL would have for the PRA’s consideration of whether a firm is failing, or likely to fail, to satisfy the Threshold Conditions. The PRA has confirmed that it expects firms not to count Common Equity Tier 1 (CET1) capital towards both MREL and the capital buffer requirements.
 
The Supervisory Statement applies to PRA-regulated banks, building societies and PRA-designated investment firms. 

View the updated Supervisory Statement. 

The Federal Reserve Bank of New York announced the appointment by the Federal Reserve Board of Dr. Rosa Gil as a Class C director of the FRBNY.

View the Federal Reserve Bank of Richmond press release regarding the appointment.
 

The Federal Reserve Board announced that it was appointing Kenneth Montgomery as its payment security strategy leader. In this role, Mr. Montgomery will chair the Secure Payments Task Force, and lead the Federal Reserve’s efforts to increase security and safety of the U.S. Payments system.

View Federal Reserve press release regarding the appointment.
 

The Financial Conduct Authority has published a Policy Statement setting out new Handbook rules and guidance to implement some of the recommendations arising from the Financial Advice Market Review launched by the FCA jointly with HM Treasury in August 2015.

Read more.

The Board of Governors of the Federal Reserve System announced final plans for the production of three new reference rates regarding overnight repurchase transactions of Treasury Securities. The rates will be produced by the Federal Reserve Bank of New York, in consultation with the US Office of Financial Research. The three rates—Tri-Party General Collateral Rate, Broad General Collateral Rate, and Secured Overnight Financing Rate (SOFR)—are based on transaction-level data from segments of the repurchase market, and were the subject of an August 30, 2017 Federal Reserve Board request for public comment. The three interest rates will be constructed to reflect the cost of short-term secured borrowing in highly liquid and robust markets and each rate will be calculated as a volume-weighted median of transacted rates. The FRBNY intends to begin publishing these rates in the second quarter of 2018.  The Federal Reserve Board also noted that although the Alternative Reference Rates Committee selected (in June 2017) SOFR as its recommended alternative to U.S. Dollar LIBOR, the details of the transition from U.S. Dollar LIBOR are outside the scope of the request for comment and this announcement.

View Federal Reserve Board press release and corresponding notice.

The Federal Reserve Board announced a suite of proposals intended to increase the transparency of its stress testing program. One key aspect of the proposals is intended to increase transparency in the modeling used by the Federal Reserve Board to estimate hypothetical losses in its stress testing, including in the Comprehensive Capital Analysis and Review (CCAR). Specifically, the Federal Reserve Board will make available certain information available to the public that has previously not been released: (i) a range of loss rates, estimated using the Federal Reserve Board's models, for loans held by CCAR firms; (ii) portfolios of hypothetical loans with loss rates estimated by the Federal Reserve Board's models; and (iii) more detailed descriptions of the Federal Reserve Board's models, such as certain equations and key variables that influence the results of those models. The Federal Reserve Board is also seeking comments on a proposed “Stress Testing Policy Statement” that would increase transparency around the development, implementation, and validation of models used by the Federal Reserve Board in its CCAR and Dodd-Frank Act Stress Test (DFAST) processes. Finally, the Federal Reserve Board proposed modifications to its framework regarding annual hypothetical economic scenarios. Specifically, the proposal will clarify when the Federal Reserve Board may make changes to certain factors used in the framework, including changes to the unemployment rate and house price index.

Read More.

A Commission Implementing Regulation on the extension of the transitional periods related to own funds requirements for exposures to CCPs set out in the Capital Requirements Regulation and European Markets Infrastructure Regulation has been published in the Official Journal of the European Union. Thirty-two third country CCPs have been recognized by the European Securities and Markets Authority to date. However, there are still third country CCPs that are awaiting recognition status. Without an extension of the transitional periods, banks and investment firms in the EU (or which are subject to consolidated supervision in the EU) would need to increase their own funds requirements for their exposures to those CCPs that are not yet recognized. The Implementing Regulation extends the transitional period to June 15, 2018.

The proposals to amend the CRR include an amendment to these transitional provisions. The proposed amendment would remove the need for the European Commission to continuously extend the transitional period by basing the transitional deadline instead on the timing of an application for recognition by a third country CCP.

View the Implementing Regulation.

The Basel Committee on Banking Supervision has published a discussion paper on the regulatory treatment of sovereign exposures. The discussion paper sets out the issues raised by the Task Force on Sovereign Exposures, which the Basel Committee set up in 2015, and presents potential ideas for addressing those issues. The Basel Committee's view is that all sovereign exposures entail risk but they also play an important role in the banking system, financial markets and broader economy. The suggestions presented in the discussion paper seek to balance the prudential risks with the Basel Committee's mandate to enhance financial stability.

Read more.

The Joint Committee of the European Supervisory Authorities has published a final report setting out revised draft Implementing Technical Standards for the assessment of credit quality under the Capital Requirements Regulation. Under the CRR, firms that use the Standardised Approach to credit risk (rather than the internal ratings based approaches or internal models) can use external credit assessments to determine the credit quality of exposures. Credit quality can be determined by reference to the credit assessments of External Credit Assessment Institutions. The corresponding risk weight to which an exposure's credit quality should be mapped to establish the credit risk of that exposure is set out in an Implementing Regulation published in October 2016. ECAIs are defined as credit rating agencies registered or certified in accordance with the Credit Rating Agency Regulation or any central banks issuing ratings that are exempt from the application of the CRA Regulation.

Read more.

US FRB of NY Executive VP Kevin Stiroh spoke at a culture roundtable session regarding misconduct, risk, culture, and supervision. The remarks were based on a white paper that was published the same day. Mr. Stiroh’s remarks focused primarily on employee misconduct risk in the financial services industry, noting that since 2008 financial institutions have paid over $320 billion in related fines. Mr. Stiroh also highlighted the damaging effect that employee misconduct has not only on the employer and financial institutions, but also on the financial system as a whole. Mr. Stiroh contended that misconduct is the result of low cultural capital—a confluence of processes and procedures, stated values, and senior management and employees who are empowered to reinforce and conduct their day-to-day activities that promotes a culture of compliance. Mr. Stiroh also suggested that lack of cultural capital may be the result of market failures brought about by factors such as externalities, principal-agent problems and adverse selection, arguing that one possible means to remedy these issues is through internal supervision; with supervisors willing to support a culture of compliance, close gaps in rules, and advance value of safe and sound practices. To this end, Mr. Stiroh highlighted to attendees the important role that supervisors play in maintaining high levels of cultural capital at financial institutions.

View Mr. Stiroh's speech.

The European Banking Authority has published a cumulative impact assessment setting out its analysis of the impact of the finalized "Basel III" prudential framework on EU banks.

Read more.

The Basel Committee on Banking Supervision has published the last part of the Basel III reforms. The revisions are to the standardized approach and the 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 will take effect from January 1, 2022 and will be phased in over five years.

The revisions to the standardized approach to credit risk include, among other things, recalibrating the risk weights for rated exposures to banks, a specific risk weight for exposures to small and medium-sized enterprises, a standalone treatment of exposures to project finance, object finance and commodities finance, more risk-sensitive approaches for exposures for residential and commercial real estate, subordinated debt, equity exposures and unrated exposures to banks. There is also a new standalone treatment for covered bonds.

The IRB approach for credit risk has been amended by: (i) removing the option to use the advanced IRB approach for certain asset classes, including for exposures to large and mid-sized corporates, banks and other financial institutions and for exposures to equities; (ii) adopting "input" floors; and (iii) providing more specification of parameter estimation practices to reduce risk-weighted asset variability.

Read more.

The Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation announced their joint support for the finalization by the Basel Committee of the “Basel III” agreement on bank capital standards, which were formulated initially in response to the financial crisis. The revised international standards will take effect in January 2022 and will be phased in over five years.  The agencies announced that they will be considering how to best implement these standards in the United States, and that all proposed changes will be effected through the procedures of standard notice-and-comment rulemaking.

View FRB press release on joint-agency announcement.

View FDIC press release on joint-agency announcement.

View OCC press release on joint-agency announcement.

The Prudential Regulation Authority has launched a consultation on model risk management principles for stress testing. The PRA is proposing a set of four principles which are intended to assist firms in developing and implementing policies and procedures to identify, manage and control the risks inherent in the use of stress test models. The principles will be set out in a new Supervisory Statement entitled "Model risk management principles for stress testing", a draft of which is provided in the annex to the consultation paper. The Supervisory Statement would present the PRA's expectations on the model risk management practices firms should adopt when using stress test models.

The four proposed principles are that:
1. Banks have an established definition of a model and maintain a model inventory.
2. Banks have implemented an effective governance framework, policies, procedures and controls to manage their model risk.
3. Banks have implemented a robust model development and implementation process, and ensure appropriate use of models.
4. Banks undertake appropriate model validation and independent review activities to ensure sound model performance and greater understanding of model uncertainties.

Read more.

The Joint Committee of the European Supervisory Authorities has published a final Report and final draft joint Regulatory Technical Standards on the measures that financial institutions should take to mitigate the risks of money laundering and terrorist financing where a third country's laws do not permit the application of group-wide policies and procedures. The Fourth Money Laundering Directive, which entered into force on June 26, 2015, requires a financial institution to put policies and procedures in place to mitigate and manage the money laundering and terrorist financing risks to which it is exposed. Where a financial institution is part of a group, the policies and procedures must be implemented at group level. Additional policies and procedures must be implemented where a financial institution has a branch or majority-owned subsidiary in a third country whose laws do not allow the implementation of group-wide policies.

Read more.

HM Treasury has published the second UK Investment Management Strategy which sets out the UK Government's long-term strategy for ensuring that the UK remains a globally competitive location for asset management. The Government believes that action should be taken now to respond to the challenges and the opportunities for the asset management industry arising out of Brexit, and that this is the best time to renew the 2013 Strategy, which focused mostly on fund domicile issues.

Read more.

The Prudential Regulation Authority has published a consultation paper proposing updates to the Pillar 2 reporting requirements. The PRA is proposing a new data item to capture stress testing data currently included in firms' Internal Capital Adequacy Assessment Process documents. The purpose is to enhance transparency and comparability in stress test data provided alongside ICAAP documents and to decrease the operational risks associated with capturing stress test data manually. The PRA is also proposing to reduce the frequency of reporting of the data items in the Reporting Pillar 2 part of the PRA Rulebook for some firms to take a more proportionate approach. In addition, the PRA proposes to consolidate the definition of several reporting parts of the PRA Rulebook into the Glossary.

The proposals are relevant to banks, building societies and PRA-designated investment firms. The proposed changes would impact the PRA rules, the Supervisory Statement on Pillar 2 Reporting (SS32/15) and the Statement of Policy on the PRA's methodologies for setting Pillar 2 capital.

The consultation closes on March 6, 2018. The PRA intends its final policy to take effect from October 1, 2018.

View the consultation paper.

The European Commission has published a Communication on further steps towards completing Europe's Economic and Monetary Union. The Commission is proposing several initiatives. First, the Commission is proposing a regulation to establish a European Monetary Fund. The EMF would replace the existing European Stability Mechanism and would act as a backstop to the Single Resolution Fund. Any support that the EMF provided to the SRF would need to be fully repaid by the Single Resolution Board from its own resources, including contributions from the industry. There are also proposals on new budgetary instruments for a stable euro area within the EU framework, changes to the Common Provisions Regulation, proposals to strengthen the Structural Reform Support Programme and a proposal to establish a European Minister of Economy and Finance. The Communication is supplemented by a proposed roadmap for implementing these steps over the next 18 months. The proposed roadmap indicates the dates by which certain of the Commission's proposed financial services legislation would be finalized. The risk-reduction package (amendments to the Capital Requirements framework and the Bank Recovery and Resolution Directive) would be finalized by mid-2018 and the Capital Markets Union legislative initiatives, including the review of the European Supervisory Authorities and the European Market Infrastructure Regulation, would be finalized by mid-2019.

View the Commission's Communication.

A Commission Implementing Regulation has been published in the Official Journal of the European Union, which amends the Implementing Technical Standards, published in 2014, for the reporting by institutions on own funds and the provision of financial information.

Read more.

The US Senate Committee on Banking, Housing & Urban Affairs announced the advancement of S. 2155, the “Economic Growth, Regulatory Relief and Consumer Protection Act.” This legislation was supported by 16 of the Banking Committee’s 23 members, and is intended to ease regulation on credit unions and smaller banks. On the same day, Vice Chairman of the FDIC Thomas Hoenig released a statement in support of the legislation, noting its goal is supporting economic growth, while easing the regulatory burden on smaller, less risky, financial institutions.

Read more.

The Packaged Retail and Insurance-based Investment Products Regulations 2017 have been published and will enter into force on January 1, 2018.

The Regulations implement in part the EU Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs Regulation). From January 1, 2018, the PRIIPs Regulation will introduce requirements on manufacturers of PRIIPs to produce a standardized Key Information Document in an official language of all EU countries into which offerings are made. It also requires those advising on or selling PRIIPs to provide retail investors with KIDs in good time before the investor enters into the investment.

This legislation has major implications for many parts of the financial sector, since PRIIPs as defined are likely to include most financial instruments (other than shares). For example, for bonds and exchange traded derivatives, new selling restrictions or disclosures are needed for many financial products.

The Regulations designate the Financial Conduct Authority as the competent authority for the purposes of the PRIIPs Regulation and confer enforcement powers on the FCA. The FCA will be empowered to make orders prohibiting persons from marketing PRIIPs or requiring them to suspend marketing. The FCA will also have the power to issue statements on contraventions of the PRIIPs Regulation and/or to impose penalties.

View the Regulations (S.I. 2017 No 1127).

View Correction Slip published on December 11, 2017.

View the Explanatory Memorandum.

The US OFR released its 2017 annual report to Congress and 2017 financial stability report. In connection with its release of these reports, the OFR notes that it has developed and implemented new vulnerability monitoring and stress index tools, which were used in preparing the OFR’s findings. The OFR reports outline 3 key threats to financial stability. First, the danger that cybersecurity threats pose not only to the financial industry, but also to the broader economy in general. The financial stability report notes that regulators are continuing to develop more robust cybersecurity standards, but that gaps still remain. The second threat discussed in the reports is the orderly resolution of a systemically important financial institution in the event of failure. The reports note that while the current framework makes orderly resolution more feasible, there are shortcomings in the framework with regard to nonbank financial institutions. The reports also highlight the important role that Orderly Liquidation Authority plays in resolution framework. Finally, the third key threat is the evolving structure of financial markets. Specifically the reports highlight the risks posed by lack of substitutes for essential services, such as settlement of US Treasury securities; market fragmentation, and replacing LIBOR with a new reference rate.

View OFR's 2017 Annual Report to Congress.

View OFR's 2017 FS Report.

The US Board of Governors of the Federal Reserve System, and the US Federal Deposit Insurance Corporation sent letters to Representative Blaine Luetkemeyer stating that they are considering seeking public input regarding improvements to the agencies’ Interagency Guidance on Leveraged Lending. Then Acting Comptroller of the US Office of the Comptroller of the Currency sent a similar letter to Representative Luetkemeyer in November. Representative Blaine Luetkemeyer had requested via letter that the agencies discontinue their enforcement of leveraged lending restrictions. The request by Rep. Luetkemeyer was predicated upon an October determination by the U.S. Government Accountability Office that the leverage lending guidance issued by the agencies fell under the Congressional Review Act. Because of this, the guidance may have no effect until it has been submitted to, and reviewed by, Congress.

The European Commission has adopted a Commission Implementing Decision on the equivalence of the legal and supervisory framework applicable to designated contract markets and swap execution facilities in the United States for the purposes of the trading obligation for derivatives under the Markets in Financial Instruments Regulation. From January 3, 2018 MiFIR will require that derivatives declared subject to the trading obligation must be traded on EU trading venues or third-country trading venues recognized by the European Commission as equivalent. Derivatives that will be subject to the trading obligation are euro, dollar and pound interest rate swaps in the most common benchmark tenors, as well as index-based credit default swaps.

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