The European Commission has published a Communication in which it calls for completion of the Banking Union by 2019 and provides a path on how that could be achieved. The Banking Union is made up of the Single Supervisory Mechanism, the Single Resolution Mechanism and the deposit guarantee scheme. The Communication is addressed to the European Parliament, the Council of the European Union, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions. The Communication sets out the Commission's view on the steps needed to complete the Banking Union.

Read more.

The European Banking Authority has launched a consultation on proposals to amend the Implementing Technical Standards on the forms and templates to be used by institutions when providing information to resolution authorities for the purpose of drawing up and implementing resolution plans. The EBA proposes to amend the ITS to account for evolution in the policy and practices applied by authorities in the development of plans for financial institutions since the issue of the ITS in 2015. The amendments include content changes to many of the templates and deletion of some others. A new template has been added, which will collect information on deposit guarantee scheme arrangements. The consultation also sets out proposals to clarify the scope of the reporting framework in line with the EU Bank Recovery and Resolution Directive and to specify minimum procedural and technical reporting requirements. There are also proposals for the application of simplified reporting obligations for small institutions.

Comments on the proposals are invited by December 11, 2017 and must be made using an online submission form.

View EBA consultation paper.

View the annexes, response form and other related information.

On October 11, 2017, Eurasian Natural Resources Corporation was granted permission by the Court of Appeal to appeal the High Court's ruling articulating a significant restriction on the scope of legal professional privilege (in particular, litigation privilege). The Law Society of England & Wales - which has expressed concern about the High Court's ruling and its implication for when and how companies and their employees are protected by privilege - has since announced that it has applied to the Court for permission to intervene in the appeal.

Although the ENRC case was brought by the UK Serious Fraud Office, the High Court's ruling - and the future decision by the Court of Appeal - will impact upon the way investigations are conducted in the context of (prospective) criminal prosecutions by the UK Financial Conduct Authority as well.

Read more. 

The International Organization of Securities Commission has published a final report on the non-traditional products and services offered by credit rating agencies. The report follows IOSCO's consultations and other panel discussions with CRAs, users of other CRA products and other market participants.

Read more.

The Financial Stability Board has published a progress report on reforms to existing interest rate benchmarks and on the construction and implementation of alternative near risk-free interest rates (RFRs). This follows the FSB's recommendations for reforms in this area, published in July 2014. The report examines the progress made towards achieving those recommendations. The FSB's recommendations in the July 2014 report called for a strengthening of existing interest rate benchmarks, such as LIBOR, EURIBOR and TIBOR, collectively coined "IBORs," and other reference rates based on unsecured bank funding costs by underpinning them to the greatest extent possible with transaction data. In addition, the FSB proposed steps to develop alternative near risk-free interest rate benchmarks.

On the progress to fortify the IBORs the FSB notes that challenges remain. In particular, the FSB is concerned that the underlying reference transactions are limited for some maturities and that as a result some submissions remain based on various factors, including transactions and judgement of the submitters.

The FSB’s view is that good progress has been made with the second strand of the recommendations relating to the identification of RFRs. Alternative RFRs have been identified or selected in Australia, Brazil, Canada, Hong Kong, Japan, Switzerland, the United Kingdom and the United States and headway has been made in reforming EONIA in the Euro area. The FSB encourages other member jurisdictions, such as Mexico and South Africa, to accelerate their intended measures. Furthermore, the FSB notes that limited advancement has been made towards transitioning the existing benchmarks to the RFRs and that impetus should be maintained to achieve the FSB recommendations.

The FSB will publish a further progress report in 2018.

View the progress report.

The European Securities and Markets Authority has published a briefing on the Legal Entity Identifier for compliance with the revised Markets in Financial Instruments package. MiFID II has applied across the EU since January 3, 2018. The LEI provides a clear and unique identification of legal entities participating in financial instruments. Firms need an LEI to ensure compliance with their reporting obligations under a number of existing EU regulations and directives, including the European Market Infrastructure Regulation, the Market Abuse Regulation and the Securities Financing Transactions Regulation. The purpose of ESMA's briefing is to flag to investment firms, investment firm clients, trading venues, issuers and Approved Reporting Mechanism firms that they will need an LEI to fulfil their obligations under MiFID II. In addition, the use of the LEI is required, or is in the process of being implemented, in other jurisdictions, including the United States, Canada and Asia-Pacific.

View the briefing.

A Commission Delegated Regulation amending the Regulatory Technical Standards on data to be published and made available by trade repositories and operational standards for aggregating, comparing and accessing the data was published in the Official Journal of the European Union. The amending Delegated Regulation revises the original RTS by further specifying the operational standards that trade repositories must have in place to aggregate data so that data can be compared across trade repositories and regulators can have direct and immediate access to the data.

The amending Delegated Regulation enters into force on October 27, 2017, and will apply from November 1, 2017.

View the Amending Delegated Regulation.

A Commission Delegated Regulation exempting compliance with the pre- and post-transparency requirements for non-equity transactions with the Bank for International Settlements and the central banks of 12 third countries has been published in the Official Journal of the European Union. The Market in Financial Instruments Regulation, which applies from January 3, 2018, exempts transactions from the trade transparency rules where a member of the European System of Central Banks is a counterparty to the transaction, provided that the transaction is entered into in the performance of monetary, foreign exchange or financial stability policy and the central bank notifies its counterparty that the exemption applies. The exemption does not apply to transactions entered into by a member of the ESCB in the performance of their investment operations. MiFIR allows the European Commission to extend the exemption to other central banks. The Delegated Regulation provides for the exemption to be extended to the BIS and to central banks in Australia, Brazil, Canada, Hong Kong, India, Japan, Mexico, the Republic of Korea, Singapore, Switzerland, Turkey and the US. The list may be amended in the future to add or remove a central bank. The Delegated Regulation enters into force on October 27, 2017, and will apply from January 3, 2018.

View the Delegated Regulation.

The Financial Stability Board has published a press release summarizing the outcome of its plenary meeting in Berlin on October 6, 2017, at which it considered potential vulnerabilities in the financial system and discussed a number of areas from its workplan.

Read more.

The Basel Committee on Banking Supervision has announced that it has agreed to allow jurisdictions discretion to lower the Net Stable Funding Ratio's treatment for derivatives liabilities. The discretion will allow jurisdictions to lower the required 20% stable funding factor for derivatives liabilities to a floor of 5%. The NSFR measures the assumed degree of stability of liabilities and the liquidity of assets over a one-year horizon. Implementation of the NSFR is expected to begin on January 1, 2018 and this agreement is intended to facilitate implementation. The Committee is considering whether any further revisions to the treatment of derivative liabilities are warranted and will carry out a public consultation on any further proposed changes.

View the announcement.

The Prudential Regulation Authority has published a consultation on proposed changes and clarifications to requirements relating to intragroup transactions in the Large Exposures (LE) Part of the PRA Rulebook. The PRA is making the proposals following its review of its framework for the prudential treatment of financial groups.

The LE framework complements the capital framework by aiming to protect firms from large losses resulting from the sudden default of a single counterparty or a group of connected counterparties. The consultation proposals aim to simplify the overall intragroup LE framework, improve the consistency of the process of granting intragroup permissions and facilitate the orderly resolution of banking groups.

Under the LE framework, firms can apply to the PRA for intragroup permissions, under which exposures to certain group members (entities within a firm's core UK group (CUG)) are exempt from the LE limit and are also excluded from a firm's leverage ratio. The LE framework also permits a firm to apply to the PRA to increase its total exposures to certain cross-border group entities (known as non-core LE group (NCLEG) entities) from 25% to 100% of its own eligible capital.

Read more. 

The Prudential Regulation Authority has published a consultation on proposals to amend the Groups policy framework it has in place for the application of prudential standards to firms on an individual and consolidated basis within banking groups. The consultation proposals are being put forward following a review by the PRA of its Groups policy framework to ensure that it remains coherent and fit for purpose in light of post-crisis financial reforms such as ring-fencing and the Basel III reforms.

The PRA proposes to amend relevant Statements of Policy and Supervisory Statements and the Internal Capital Adequacy Assessment part of the PRA rulebook to implement changes that will enable: (i) assessment and mitigation of the risks to group resilience due to the use of "double leverage" (which occurs when one or more parent entities in a group funds some of the capital in its subsidiaries by raising debt or lower forms of capital externally); (ii) assessment and mitigation of the risks highlighted by prudential requirements applied by local national regulators on overseas subsidiaries of UK consolidation groups; and (iii) improved monitoring of the distribution of financial resources across different group entities. The consultation paper also sets out some further policy proposals to refine the Groups policy framework.

Comments on the proposals are invited by January 4, 2018. The resulting policy will be implemented fully from January 1, 2019. The PRA also requests that, where practical and applicable, firms should aim to incorporate the consultation proposals in their 2018 ICAAP/Individual Liquidity Adequacy Assessment Process (ILAAP) submissions ahead of full implementation.

View the PRA consultation paper on groups policy and double leverage (CP19/17).

The European Central Bank has published for consultation an Addendum to its Guidance for banks on non-performing loans. The ECB published its final Guidance for banks on NPLs on March 20, 2017. The proposed Addendum sets out the ECB's proposal to supplement its Guidance with quantitative supervisory expectations concerning the minimum levels of prudential provisions expected for new NPLs. The ECB notes that the proposed measures should be regarded as prudential backstops which are intended to prevent the excessive future build-up of non-covered aged NPLs on banks' balance sheets. The ECB is proposing that banks would be expected to provide full coverage for the unsecured portion of new NPLs after two years at the latest and for the secured portion after seven years at the latest.

As with the Guidance, the proposed Addendum would be non-binding but would apply to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. If a bank did not comply with the Addendum, then it would need to explain its non-compliance. Any non-compliance could lead to supervisory action being taken. The ECB intends the Addendum to become applicable as soon as it is finalized and for the backstops to apply to new NPLs classified as non-performing from January 2018.

The consultation closes on December 8, 2017. 

View the ECB's proposed Addendum.

View the ECB's Guidance on NPLs.

The UK Prudential Regulation Authority has published a Policy Statement setting out refinements to the Pillar 2A Capital Framework, under which the PRA sets capital requirements for risks that are either not captured or not fully captured under the Capital Requirements Regulation. The PRA consulted on the Pillar 2A refinements in a February 2017 consultation which closed on May 31, 2017. The PRA's proposals will be implemented largely as consulted on, save for minor amendments.

The PRA has made the following changes to the Reporting Pillar 2 Part of the PRA Rulebook:

· adjustments to the PRA’s Pillar 2A approach for firms using the standardised approach (SA) for credit risk;

· revisions to the PRA’s internal ratings-based (IRB) benchmark used for assessing credit risk; and

· additional considerations the PRA will make, as part of the SREP, for SA firms using International Financial Reporting Standard (IFRS) as their accounting framework.

The PRA has also made consequential changes to update:

· its Supervisory Statements "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" and "Pillar 2 reporting, including instructions for completing data items FSA071 to FSA082"; and

· its Statement of Policy "The PRA’s methodologies for setting Pillar 2 capital".

The revised Pillar 2A framework, which will affect banks, building societies and PRA-designated investment firms, takes effect from January 1, 2018.

View the Policy Statement (PRA PS22/17).

The Financial Stability Board has launched a consultation on governance arrangements for the unique product identifier. The development of a UPI was identified in September 2014 by the FSB as a critical element for a mechanism to produce and share global aggregated derivatives reporting data, along with the development of a unique transaction identifier and the harmonization of other key data elements. The receipt of aggregated derivatives reporting data will enable national regulators to better assess systemic risk and perform other market oversight functions. In the UPI system envisaged, a unique UPI Code would be assigned to each distinct OTC derivative product and map to a set of reference data elements having specific values that together describe the product. The collection of reference data elements and their values for each product would reside in a corresponding UPI Reference Data Library that would be administered by either one UPI Service Provider or one of a number of UPI Service Providers.

The consultation paper outlines the potential governance functions that the FSB anticipates should be performed (such as ongoing UPI generation and oversight of the UPI System) and key criteria the FSB has preliminarily identified to assess UPI governance arrangements. The consultation also sets out considerations for using one or many UPI Service Providers.

Comments on the consultation are invited by November 17, 2017.

Read more.

Following positive feedback to a combined consultation issued in June 2017, the Bank of England's Financial Policy Committee and the Prudential Regulation Authority are proceeding with proposed changes to the UK leverage ratio framework. The aim of the proposals (summarized below) was to ensure that the leverage ratio framework does not act as a barrier to the effective implementation of any monetary policy action that leads to an increase in central bank reserves.

In the June 2017 consultation, the FPC consulted on a draft Recommendation to the PRA that the PRA amend its rules on the leverage ratio to: (i) allow firms to exclude from the calculation of the total exposure measure (which serves as the denominator for the leverage ratio) those assets constituting claims on central banks, where they are matched by deposits accepted by the firm that are denominated in the same currency and of identical or longer maturity; and (ii) require a minimum leverage ratio of 3.25%. Central bank claims include reserves held by a firm at a central bank, banknotes and coins constituting legal currency in the jurisdiction of the central bank, and assets representing debt claims on the central bank with a maturity of no longer than three months.

Read more.

The Bank of England has published a consultation paper setting out proposed changes to the Statement of Policy it issued in November 2016 on its approach to setting a minimum requirement for own funds and eligible liabilities (MREL). MREL is the requirement for firms to maintain a minimum amount of loss-absorbing resources to ensure that, should the firm fail, the resolution authority can use the firm's own financial resources to absorb losses and recapitalize the business so it can continue to provide critical functions without the need to rely upon public funds. 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 BoE's 2016 Statement of Policy focused on "external" MREL, i.e. the calibration of the MREL of UK resolution entities. This consultation sets out the BoE's proposals on "internal" MREL, i.e. instruments that are issued to the resolution entity from other legal entities in a group. The consultation paper sets out the scope of internal MREL, how it should be calibrated, which instruments are eligible and the proposed transitional period for the application of the requirements. Internal MREL is intended to cover UK-headquartered banking groups as well as UK subsidiaries of overseas banking groups.

Read more. 

The Bank of England has published an update to its 2014 approach to resolution. The BoE is the resolution authority responsible for the resolution of financial institutions in the UK. The document describes the key features of the UK resolution regime, how the BoE would be likely to implement a resolution and the BoE's overall responsibilities as the UK's resolution authority. The annexes to the document set out how the BoE is addressing certain barriers to resolvability, such as Loss-absorbing capacity (TLAC and MREL), valuation and the bail-in process and ensuring the continuity of contracts through resolution. The BoE intends to improve transparency on the steps being taken by firms to remove barriers to resolvability by publishing, from 2019, summaries of firms’ resolution plans and its summary assessments of their effectiveness. This approach mirrors the approach taken by the US regulators.

View the BoE's approach to resolution.

The European Central Bank's Advisory Group on Market Infrastructures for Securities and Collateral has published a report on the potential impact of Distributed Ledger Technologies on securities post-trading harmonisation and on the wider EU financial market integration.

The wide-ranging Report is divided into three parts. Part I of the Report considers the impact of DLT on accounts and account structures, the issuance of securities and Delivery Versus Payment. Part II of the Report considers the impact of DLT on settlement,  collateral management, asset servicing and regulatory and business reporting. The final part of the Report considers cyber-resilience, digital identity in DLT networks, data protection and professional secrecy, interoperability in a DLT environment and the impact of DLT adoption on TARGET2-Securities harmonization activities and on the wider EU financial integration agenda.

View the Report.

The European Securities and Markets Authority has launched a consultation on proposed Guidelines on the obligations applying to the provision of and contribution to non-significant benchmarks under the Benchmarks Regulation. The Benchmarks Regulation requires administrators of all benchmarks to establish a permanent and effective oversight function for the provision of their benchmarks. The proposed Guidelines detail the composition, characteristics, positioning and governance arrangements of the oversight function. The draft Guidelines also detail the governance and control requirements for supervised contributors. The proposed Guidelines would apply to administrators of benchmarks, supervised contributors of benchmarks and to the relevant benchmark national regulators.

The Benchmarks Regulation will apply in full from January 1, 2018. The consultation closes on November 30, 2017. ESMA intends to publish its final Guidelines after the European Commission has published its Delegated Regulations that also relate to these topics.

View the consultation paper.

The European Banking Authority has published an Opinion on the design of a new EU prudential framework for non-bank, non-systemically important investment firms. The EBA published a report in December 2015 in response to a Call for Advice from the European Commission on the suitability of certain aspects of the EU prudential regime for investment firms. In that report, the EBA recommended that it was necessary to distinguish between investment firms for which the requirements in the Capital Requirements Directive and the Capital Requirements Regulation are appropriate and investment firms for which those requirements are inappropriate and for which a separate prudential regime should be established. The Commission issued a second CfA in June 2016 asking for: (i) advice on the criteria to identify the investment firms for which the CRD IV requirements are appropriate and which rules should apply to them; and (ii) advice on the new prudential regime for investment firms that should not be subject to CRD IV. The EBA published an Opinion on point (i) on October 19, 2016 concluding that investment firms that have been identified, according to the current EU regulatory framework contained in the relevant technical standards and EBA Guidelines, as global systemically important institutions (G-SIIs) or other systemically important institutions (O-SIIs) should be subject to the full requirements of CRD IV although these criteria might need to be revised through technical standards to take into account the specificities of investment firms. This latest Opinion is in response to the second part of the Cfa and follows the EBA's November 2016 Discussion Paper on its proposals.

Read more. 

The European Securities and Markets Authority has published final Guidelines on the requirements for the management body of market operators and Data Reporting Services Providers. The revised Markets in Financial Instruments Directive requires all members of the management body of any market operator to be of sufficiently good repute, possess sufficient knowledge, skills and experience to perform their duties, to commit sufficient time to perform their functions and to act with honesty, integrity and independence of mind. Market operators must also promote diversity and allocate adequate human and financial resources to the induction and training of the management body. Similar requirements are placed on the management body of DRSPs, but DRSPs are not required to promote diversity and allocate adequate human and financial resources to the induction and training of the management body.

Read more.

The Committee on Payments and Market Infrastructures is consulting on a possible strategy to improve the security of wholesale payments involving banks, financial market infrastructures and other financial institutions. The CPMI is a global standard setter, mandated to promote the safety and efficiency of payment, clearing, settlement and related arrangements. It formed a task force in 2016, to look into the evolving threat and increasing sophistication of wholesale payments fraud. The CPMI taskforce undertook a stocktake of current practices. The resulting discussion note highlights for consultation seven elements relating to preventing, detecting, responding to and communicating about wholesale payments fraud.

Stakeholders are invited to provide input on the proposed strategy by November 28, 2017. Consultation responses will contribute to guidance on the seven elements, which the CPMI aims to develop by early 2018.

View the CPMI Discussion Note.

The European Securities and Markets Authority has published a final Report and final draft Regulatory Technical Standards on the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation is applicable to classes of derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation, (ii) are admitted to trading or traded on at least one EU trading venue (a regulated market, multilateral trading facility, organized trading facility or a third country equivalent trading venue) and (iii) are sufficiently liquid. The trading obligation will apply to financial counterparties and to non-financial counterparties. Where ESMA determines that a class of derivatives should be subject to the MiFIR trading obligation, third country trading venues would only be permissible for trading by EU entities when determined to be equivalent by the European Commission.

The final draft RTS on the trading obligation provide for the trading obligation to apply to fixed-to-float interest rate swaps denominated in euros, US dollars and pound sterling and to index credit default swaps (iTraxx Europe Main and iTraxx Europe Crossover). The trading obligation for both IRS and CDS will apply from January 3, 2018, unless the clearing obligation for a particular class of derivatives has not yet entered into force.

Read more.

The European Securities and Markets Authority has made a public statement on the joint work plan of ESMA and national regulators for opinions on pre-trade transparency waivers and position limits under the revised Markets in Financial Instruments package. MiFID II will apply from January 3, 2018.

MiFID II introduces a new position limit regime for commodity derivatives. National regulators will be required to establish and apply position limits on the size of a net position in commodity derivatives traded on trading venues and economically equivalent OTC contracts. The limits will apply to the size of a position that a person can hold. Position limits set by a national regulator must be confirmed in an opinion issued by ESMA.

The pre-trade transparency obligations require market operators and investment firms operating a trading venue to make public current bid and offer prices and the depth of trading interests at those prices which are advertised through their systems for equity and non-equity financial instruments.

Read more.

Following its consultation earlier this year, the Prudential Regulation Authority has published a final Supervisory Statement on compliance with the European Banking Authority's Guidelines on disclosure.

The EBA published final Guidelines on compliance with the regulatory disclosure requirements in the Capital Requirements Regulation on December 14, 2016. The EBA's Guidelines aim to ensure harmonized implementation of the Basel III Pillar 3 requirements that were released in January 2015. The Guidelines introduce specific guidance and formats for Pillar 3 disclosures, including tables and templates. The Guidelines apply to Globally and Other Systemically Important Institutions. However, national regulators are able to require other firms to apply the Guidelines when complying with their Pillar 3 disclosure obligations under CRR.

Read more.

The European Commission, the European Central Bank, the European Securities and Markets Authority and the Belgian Financial Services and Markets Authority have announced that a new working group will be established which will be tasked with identifying and recommending alternatives to the benchmark rates currently used in the EU – the EURIBOR and EONIA. The working group, in consultation with market participants, will recommend an alternative risk-free reference rate and develop plans to transition from the existing benchmarks to the new RFR.

The European Central Bank also announced that it will start providing an overnight unsecured index before 2020 to provide further options for the choice of alternative rates for the euro area.

View the joint press release.

View the ECB’s press release.

Following a market investigation reference from the Financial Conduct Authority, the Competition and Markets Authority has published the issues statement for the market investigation it is carrying out into the supply of investment consultancy services and fiduciary management services to, or the acquisition of such services by, institutional investors and employers.

The CMA's issues statement sets out its general approach to the market investigation and outlines potential issues and possible remedies that might be put in place if competition issues are found. In particular, the CMA focuses on: (i) whether difficulties in customers' ability to assess, compare and switch investment consultants means that investment consultants have little incentive to compete for customers; (ii) whether conflicts of interest on the part of investment consultants reduce the quality and/or value for money of services provided to customers; and (iii) whether barriers to entry and expansion mean there are fewer challengers to put pressure on the established investment consultants to be competitive , which could lead to worse outcomes for customers.

The CMA is requesting feedback on the issues statement by October 12, 2017.

View the Statement of Issues.

View the CMA Case Page.

View the CMA Press Release.

The European Commission has published legislative proposals designed to strengthen and further integrate the supervisory framework of the European Union. The proposals build on contributions to the Commission's public consultation in autumn 2016 on the European Systemic Risk Board and its public consultation in spring 2017 on the European Supervisory Authorities – the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority.

Read more.

The Financial Conduct Authority has published a statement reminding firms that the Guidelines of the Joint Committee of the European Supervisory Authorities on the prudential assessment of acquisitions and increases of qualifying holdings will apply with effect from October 1, 2017. The Prudential Regulation Authority has provided a similar statement by way of notification on its website.

Read more.

The European Banking Authority has published a Discussion Paper on significant risk transfer in securitization, seeking views on proposals to strengthen the regulatory and supervisory framework of significant risk transfer. The EBA's proposals are based on the newly agreed European securitization framework, comprising the Securitization Regulation and amendments to the Capital Requirements Regulation, which is due to come into effect in 2018. The Securitization Regulation includes new requirements on risk retention, due diligence, transparency and a new regime for simple, transparent and standardized securitizations (known as STS securitizations). STS securitizations will provide preferential regulatory capital treatment for investors, in particular, for bank investors through the related CRR amendments.

The EBA is proposing to strengthen the supervisory treatment of structural features used in securitizations that may impede the ability of originators to meet the SRT requirements on a continuous basis. The structural features are those that are not covered in the EBA's 2014 Guidelines on SRT for securitization - amortization structure, call options, excess spread and synthetic securitization. The EBA proposes a set of safeguards for each structural feature and a requirement that originators submit a risk transfer self-assessment to the national regulator when submitting their SRT notification.

Read more.

The Financial Conduct Authority has devoted the September 2017 issue of its Market Watch newsletter to a discussion of aspects of FCA reporting functionality and the means by which firms can meet their reporting obligations under MiFID II from January 3, 2018. Market Watch issue 53 provides details of: (i) the requirement for firms subject to MiFID II transaction reporting obligations (and their eligible clients) to have a Legal Entity Identifier and what firms need to do to obtain one; (ii) how firms can apply to become a submitting entity to make submissions of market data via the FCA's Market Data Processor; (iii) the requirements external users will need to meet to be able to request extracts of transaction reports from the FCA via the MDP entity portal, which goes live on January 3, 2018; (iv) the ways in which operators of trading venues and investment firms can fulfill their market data reporting obligations by using outsourcing arrangements with third parties; and (v) clarification that Systematic Internalisers must submit instrument reference data to the FCA for financial instruments where the underlying instrument is a financial instrument traded on a trading venue, or an index or a basket composed of financial instruments traded on a trading venue.
 

View FCA Newsletter (Market Watch Issue 53).

The Financial Conduct Authority has issued a press release informing firms that applications to the regulator for authorization or variation of permission in time for MiFID II implementation are now urgent. The FCA has previously issued statements warning that firms requiring either new authorization or a variation to existing permissions needed to submit applications to the FCA by July 3, 2017, and that any submissions made after that date ran the risk that the FCA would not be able to determine the application in time for January 3, 2018.
 
The FCA considers that it has made good progress. However, any firms that have not yet submitted applications, or that have been contacted by the FCA for more information on a submitted application, must act without delay. Firms that have not yet submitted complete applications for new permissions must now also include contingency plans to allow for the possibility that permissions may not be in place by January 3, 2018. 
 
The press release also highlights that some proprietary traders which are not currently authorized may need authorization under MiFID II, for example, proprietary traders that access trading venues by means of direct electronic access (DEA) provided by a regulated firm or which engage in algorithmic trading. Firms that provide DEA have a duty under MiFID II to carry out due diligence on their prospective DEA clients and the FCA suggests that these firms work closely with their clients to ensure they are aware of the potential need to be authorized.
 
View the Press Release.
 
View Client Briefing: Deadline Looms for Regulated Firms to Vary Their Permissions to Comply With MiFID II.
 

The International Swaps and Derivatives Association has published a paper outlining recommendations for a CCP Recovery and Resolution Framework.
 

The ISDA's paper focuses on CCPs that clear derivatives, although many of its recommendations will be relevant to clearing houses that clear other instruments. It is intended to build on the guidance from CPMI-IOSCO and the FSB. The paper sets out certain key points for CCPs, their supervisors, resolution authorities and other policy makers to consider when implementing CCP recovery and resolution mechanisms.
 

In brief, the ISDA's recommendations cover: (i) the level of transparency that should be afforded to clearing participants about the expected recovery and resolution strategies for a CCP, so that participants can manage and control their potential exposure; (ii) the timing of the resolution regime and the necessary flexibility that should be incorporated into the regime to allow for further recovery measures; (iii) the allocation of losses after a clearing member default, including by making cash calls and the application of variation margin gains haircutting (initial margin haircutting is not supported by the paper however); (iv) tools to rebalance a CCP's book, including the use of partial tear-ups as a last resort, but excluding forced allocation of positions to non-defaulting clearing members; (v) claims for clearing participants that suffer losses beyond a certain point in CCP recovery or resolution; (vi) the allocation of non-default losses; and (vii) ensuring adequate liquidity from central banks on standard market terms.
 

View the Paper.

The Financial Conduct Authority has made a market investigation reference to the Competition and Markets Authority in relation to investment consultancy and fiduciary management services. The institutional investors who use investment consultancy services are mainly pension schemes but also include charities, insurance companies and endowment funds.

Read more.

The European Banking Authority has published Guidelines for national regulators aimed at ensuring the convergence of supervisory practices in the assessment of the information and communication technology (ICT) risk under the supervisory review and evaluation process (SREP).

Read more.
 

The European Commission has published a Report to the European Parliament and the Council recommending that Exchange-Traded Derivatives (ETDs) do not need to be excluded from the scope of the provisions of the Markets in Financial Instruments Regulation that provide for open and non-discriminatory access to CCPs and to trading venues.

Read more.

The European Banking Authority has published final draft Implementing Technical Standards setting out the common templates to be used and the procedures to be followed by resolution authorities when reporting to the EBA the minimum requirement for own funds and eligible liabilities (MREL) that has been set for each financial institution in their jurisdiction. The MREL requirement is the EU equivalent, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board. The TLAC standard is the minimum amount of loss-absorbing capital an institution needs to hold so that bail-in tools can be deployed successfully on a resolution.

Read more.

The Basel Committee on Banking Supervision has issued a consultative document on the implications of fintech for the financial sector. The consultation document assesses how technology-driven innovation in financial services, or "fintech", may affect the banking industry, banks' business models and the activities of supervisors in the near to medium term.

The Basel Committee has identified 10 observations and recommendations on supervisory issues for consideration by banks and their supervisors, which focus on risk management and the approaches that could be adopted to address the risks. The consultation considers various future potential scenarios - in addition to the banking industry scenarios, three case studies focus on technology developments (big data, distributed ledger technology and cloud computing) and three on fintech business models (innovative payment services, lending platforms and neo-banks). Responses to the consultation are requested by October 31, 2017.

View the consultation paper.

The European Securities and Markets Authority has published final Guidelines governing the transfer of data between trade repositories (TRs) registered or recognised by ESMA.

The Guidelines cover: (i) the reporting without duplication of derivative contract data by counterparties and CCPs; (ii) transfer of derivatives data between trade repositories at the request of the counterparties to a derivative, or the entity reporting on their behalf; (iii) transfer of data from a TR whose registration has been withdrawn; and (iv) the requirements on TRs to promptly record information received and maintain information for at least ten years following termination of the relevant contracts.

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The European Commission has launched a consultation seeking views about the current state of post-trade markets, the main trends and challenges faced by post-trade services providers and their users, the existence and scale of remaining or new barriers to post-trade services used in financial transactions, the risks associated with such barriers and the best ways to address them.

Alongside the consultation, the Commission has published the report of the European Post-Trade Forum (EPTF), an expert group established by the Commission in early 2016 to assess the evolution of the EU post-trade landscape and the progress made in removing the "Giovannini barriers" to post-trade services. The EPTF report identifies those Giovannini barriers that have been successfully addressed since 2001 but cites further barriers that have arisen due to technological and market developments in the intervening fifteen years, in particular developments in derivatives markets, securities finance activities, collateral management and post-trade reporting.

The Commission consultation seeks stakeholders' views on a wide ranging set of questions, including: the relative importance of trends in post-trade in the EU; technological advances (such as distributed ledger technology and other FinTech developments); financial stability concerns arising from the susceptibility of post-trade areas to systemic risk; the means by which EU post-trade markets could become more attractive internationally; the near and longer term strategy for EU post-trade services and the challenges the markets are likely to face.

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The Bank of England has published a consultation setting out policy proposals on the minimum standard of valuation capabilities that firms should have in place to ensure that their valuations are sufficiently timely and robust to support the effective resolution of the firm. In the BoE's view, limitations to a firm's valuation capabilities may constitute an impediment to resolvability where those limitations would not reliably enable valuations that support the firm's intended resolution strategy.

The consultation paper sets out the BoE's thinking around how minimum requirements for valuation capabilities would be applied and outlines the rationale behind its "timeliness" and "robustness" policy objectives. The consultation paper provides detail on proposed principles that firms would be expected to meet and summarises the rationale underlying each principle. The principles cover: (i) data and information; (ii) valuation models; (iii) valuation methodologies; (iv) valuation assumptions; (v) governance; (vi) transparency; and (vii) assurance.

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The European Banking Authority has published a discussion paper seeking views on its assessment of areas in which it could conduct further work in the innovative field of financial technology. The discussion paper considers the work on FinTech already carried out in the EU and internationally. In the EU, this includes work by the European Supervisory Authorities and the European Commission and Parliament and at SSM level the work of the European Central Bank in developing policy on the assessment of licensing applications for FinTech credit institutions. Internationally, work has been carried out by both the FSB and the Basel Committee on Banking Supervision in order to assess the developments, risks, opportunities and challenges of FinTech.

The discussion paper outlines the work carried out by the EBA in relation to FinTech, including the preliminary findings of a mapping exercise it carried out in May 2017 to gain a better insight into the financial services offered, and innovations applied, by FinTech firms in the EU, and their regulatory treatment.Based on the results of the mapping exercise, the EBA identifies a number of areas that merit further analysis. 

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The UK Government has published its response to its April 2017 public consultation which sought views on the legal measures that would be needed in order to continue to be able to impose and implement sanctions following the UK's withdrawal from the European Union. Due to the fact that many of the current sanctions regimes are established via powers in the European Communities Act 1972, the UK will need new legal powers to replace these once that Act is repealed and the April 2017 consultation set out proposals for a new sanctions framework to address this need. The Government intends to introduce a Sanctions Bill during the current Parliamentary session which will ensure that the UK has the necessary legal powers to implement sanctions after the UK's exit from the EU. The Bill will also give the UK greater flexibility in choosing when and how to introduce new measures. The Government proposes that the Bill will create new powers to impose, implement and enforce sanctions regimes, drawing on the current EU model. Additionally, new asset-freezing provisions will make it easier to stop suspected terrorists from accessing their money. Flexibility will be provided by introducing an annual review of regimes to ensure that they remain appropriate and by provisions that will enable the government to issue exemptions when needed, for example in delivering humanitarian aid in regions affected by sanctions. The Bill will also provide a framework for individuals and organisations to challenge any sanctions imposed on them.

View Government's Press Release.

View Government Response to Consultation.

The Financial Conduct Authority has launched a consultation on changes to its client money rules (CASS 7) 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 FCA introduced the 30-Day Rule in July 2014 to restrict the practice of some firms of depositing client money in unbreakable deposits for periods of up to years. The placing of client money in lengthy unbreakable terms attracts the risk of diminution if a firm is unable to withdraw that money in response to market events and the risk that client money may not be available for distribution in the case of a firm insolvency. Therefore, the FCA was (and remains) of the view that placing client money in unbreakable deposits for long periods is incompatible with the purpose of the client money regime. However, it is now proposing to allow the use of 31-90 day unbreakable deposits following feedback from firms about an increasing reluctance of banks to provide 30-day unbreakable deposits.

The reduced appetite from banks appears to have arisen due to the interaction between the 30-Day rule and the liquidity requirements of the prudential regime. 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.

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The European Banking Authority has published a final report and final Guidelines on major incident reporting under the revised Payment Services Directive. PSD2 requires payment services providers to establish and maintain effective incident management procedures for, among other things, detecting and classifying major operational or security incidents. PSPs are required to notify their home state regulator if a major incident occurs.

The Guidelines apply to EU PSPs and to national EU regulators of EU PSPs and cover internal and external events that are malicious or accidental. The Guidelines also cover incidents that originate outside of the EU, but that affect the payment services provided by an EU PSP directly or indirectly. The Guidelines will apply across the EU from January 13, 2018.

The Guidelines set out the criteria that PSPs should use to classify an operational or security incident as "major" and the format for a PSP to notify its regulator of any major incident. The Guidelines also set out how national regulators should assess the relevance of the incident and the details that should be shared with other domestic authorities.

View the final report and Guidelines on major incident reporting under PSD2.

The Financial Conduct Authority has published a Policy Statement and final rules following its January 2017 consultation on proposed changes to the client money distribution rules (CASS 7A) affecting the return of client assets following a firm's failure or other pooling events. The rule changes, which come into effect on July 26, 2017, are designed to speed up the distribution of client assets, improve consumer outcomes and reduce the market impact of an investment firm failure. Following consultation feedback, the FCA is introducing the majority of the proposed changes in the form consulted on. However, minor changes have been made to the proposals on post-transfer client notifications (a 14-day deadline will be introduced rather than the 7-day deadline originally proposed) and on the proposed guidance on reconciliations that follow a primary pooling event. The FCA also provided new guidance concerning the need for firms to designate as client transaction accounts those accounts which the CCP makes available as customer accounts for such purposes. The FCA will not be proceeding with its original proposal to require firms to provide annotated samples of their client statements.

View the FCA Policy Statement (PS 17/18).

The Financial Conduct Authority has published a consultation paper on its proposed rule changes to implement the extension of the Senior Managers& Certification Regime (SM&CR) to all firms that are authorized under the Financial Services and Markets Act 2000 and solo-regulated by the FCA. The SM&CR has been in place for banks, building societies, credit unions and PRA-designated investment firms since March 2016, whilst certain insurers have been subject to the separate Senior Insurance Managers Regime. The remainder of authorized firms have continued to be subject to the Approved Persons Regime, which will be replaced when the extended application of SM&CR takes effect.

Given that the extension of SM&CR will capture a very wide range of firms, the FCA has tailored the principles and tools used for the banking regime to fit the different risks, impact and complexity of the firms that will be affected by the extended SM&CR. The rules proposed by the FCA comprise (i) a "core regime" consisting of a standard set of requirements that will apply to all FCA solo-regulated firms; (ii) an "enhanced regime" which will apply extra requirements to the very small number of solo-regulated firms whose size, complexity and potential impact on consumers warrant more attention; and (iii) a reduced set of requirements which will apply to firms the FCA has categorized as "limited scope" firms.

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The Prudential Regulation Authority has launched a consultation on an update to its November 2016 Supervisory Statement, "The minimum requirement for own funds and eligible liabilities (MREL) - buffers and Threshold Conditions". The Supervisory Statement (SS 16/16) set out the PRA';s expectations on the relationship between the minimum requirement for own funds and eligible liabilities (MREL) and both capital and leverage ratio buffers, as well as 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 Supervisory Statement states that the PRA expects firms not to count Common Equity Tier 1 (CET1) capital towards both MREL and the buffer requirements.

Since its publication of the Supervisory Statement in November 2016, the PRA has been asked about the approach to be taken in the situation where MREL is calibrated on the basis of one capital regime (e.g. leverage, in circumstances where the leverage requirement is larger than the risk-weighted requirement), but the largest requirement for buffers derives from the other regime (e.g. risk-weighted capital). The PRA is consulting on revisions to SS 16/16 to clarify that the expectations set in SS16/16 are not intended to create a different buffer requirement from that which is usable in the going-concern regime.

The PRA invites responses to the consultation by September 29, 2017. The PRA aims to publish a revised supervisory statement by the end of 2017.

View the PRA's consultation paper.

The U.S. Commodity Futures Trading Commission’s (CFTC) Divisions of Swap Dealer and Intermediary Oversight (DSIO), Clearing and Risk, and Market Oversight issued a time-limited no-action letter providing relief to certain CFTC-registered swap dealers (SDs) that operate outside of the United States (Non-U.S. SDs) from specific transaction-level requirements pursuant to the Commodity Exchange Act.

The letter sets forth certain limitations and the relief is subject to the effective date of CFTC action determining which transaction-level requirements are applicable to certain swaps between non-U.S. SDs and their U.S. counterparts. This relief comes as a result of compliance issues raised by a DSIO-issued advisory on November 14, 2013 regarding applicability of the CFTC’s transaction-level requirements in certain circumstances.

View CFTC Staff Letter 17-36.