The European Banking Authority published final draft Regulatory Technical Standards on the procedures for excluding transactions with non-financial counterparties established in a third country (which do not hold positions over the clearing threshold, or so called NFC-s) from the own funds requirement for credit valuation adjustment risk. The final draft RTS will supplement the requirements of the Capital Requirements Regulation. The EBA consulted on proposed draft RTS in August 2015. Firms' transactions with any NFC- will be excluded from the own funds requirements for CVA risk under the CRR, whether or not the NFC- is established in the EU. As NFC-s established in non-EU countries are not subject directly to EU regulation, the final draft RTS clarify that firms are responsible for: (i) taking the necessary steps to identify all NFC-s under this exemption and calculating accordingly their own funds requirements for CVA risk; (ii) ensuring that exempt counterparties established outside the EU would qualify as NFC-s if they were established in the EU; and (iii) ensuring that counterparties calculate the clearing threshold according to the relevant provisions in EMIR and do not exceed those thresholds. The EBA has also included an option for firms to verify the status of third country counterparties at the time of trade inception or on a periodic basis to take account of the situation that firms frequently enter into trades with NFC-s established in a third country. The final draft RTS align the treatment of NFC-s established in a non-EU country with the treatment of NFC-s established in the EU as recommended by the EBA in its February 2015 report. The final draft RTS has been submitted to the European Commission for endorsement. 

View the RTS.

The US Federal Reserve Board announced that Scott G. Alvarez, general counsel, will retire later in 2017, after nearly 36 years of service to the Federal Reserve Board. The Federal Reserve Board will begin a search for his successor.

View the Federal Reserve Board press release.

The Financial Conduct Authority published a Discussion Paper on open-ended investment funds investing in illiquid assets. The FCA is seeking feedback on whether its rules and regulatory approach to open-ended funds that hold illiquid assets are appropriate. The paper considers some of the risks that may arise when investors use open-ended investment funds to gain exposure to illiquid assets such as land, buildings, infrastructure and unlisted securities. The FCA is concerned that fund managers that manage funds that hold illiquid assets may face challenges when investors want to withdraw their funds quickly and at short notice. These include achieving realistic valuations of the underlying assets, and whether the need to accept increased redemption requests might lead a manager to favor exiting investors over those that wish to keep their money in the fund, particularly under stressed conditions. The results of the UK's referendum on whether to leave the EU led to uncertainty in the financial markets and open-ended funds had to work out how to value their property portfolios accurately and how to manage a significant increase in redemptions. The FCA paper describes the liquidity management issues experienced by certain UK property funds and how the FCA responded to those issues, describes the current UK regulations that apply to funds investing in illiquid funds and makes suggestions for possible approaches to the regulation of liquidity.

The FCA has requested feedback on the points raised by May 8, 2017. Once it has assessed the responses, the FCA will decide whether it needs to amend its rules or policy approach. If changes are required, the FCA will publish a consultation paper setting out its proposals. 

View the Discussion Paper.

The International Organization of Securities Commissions published a research Report on financial technologies, or FinTech – innovative business models and emerging technologies that have the potential to transform the financial services industry. The Report focuses on the delivery of securities and capital markets products and services through FinTech, examining financing platforms, retail trading and investment platforms, institutional platforms and distributed ledger technologies. The Report analyzes the risks, benefits and opportunities of the products and services and summarizes some of the most recent regulatory responses. 

View the Report.

A Commission Delegated Regulation, in the form of Regulatory Technical Standards, on additional liquidity outflows corresponding to collateral needs resulting from the impact of an adverse market scenario on an institution's derivatives transactions was published in the Official Journal of the European Union. The Capital Requirements Regulation requires firms to add an additional outflow for collateral needs that would result from an adverse market scenario on a firm's derivatives transactions, financing transactions and other contracts if material. Due to materiality considerations, the EU has adopted the RTS for derivatives transactions first. The rules apply only to collateralized derivative transactions, including those that mature within 30 days. The RTS require that the calculation of the additional collateral outflows be based on the Historical Look Back Approach for market valuation changes developed by the Basel Committee on Banking Supervision. The text of the final RTS does not materially differ from the revised draft RTS, which the European Banking Authority submitted to the European Commission on May 3, 2016. The RTS will enter into force on February 28, 2017 and will apply directly across the EU. 

View the RTS. 

The European Securities and Markets Authority published a Report on the application of Distributed Ledger Technology to the securities markets. Distributed ledgers, sometimes referred to as blockchains, are essentially records or ledgers of electronic transactions that are maintained by a shared or distributed network of participants instead of a centralized entity. ESMA consulted in late 2016 on how DLT applies to securities markets. The Report provides ESMA's analysis of the key risks and benefits of DLT as applied to securities markets and how DLT maps to existing EU regulation.

ESMA is of the view that DLT could provide a number of benefits to securities markets but is also concerned that it may introduce new risks or magnify existing risks. Benefits of DLT include more efficient clearing and settlement services, enhanced reporting and supervision functions at firms and regulators for data sharing and risk management purposes, reduced costs related to the development of recovery plans in a cyber-attack or system breakdown scenario, reduced counterparty risk and enhanced collateral management. ESMA is concerned with a variety of risks, in addition to the well-documented issues of cyber security and fraud, such as the possible ramifications for market fairness and competition as well as financial instability. 

Read more.

The CFTC’s Division of Market Oversight issued a time-limited no-action letter stating that, from February 14, 2017 to August 14, 2017, it will not recommend an enforcement action for failure to file a notice when relying on certain aggregation exemptions from federal position limit levels. Absent this relief, on February 14, 2017, market participants would have been required to file notices to rely on certain aggregation exemptions under CFTC regulation 150.4(c).

DMO also announced the availability of a portal that provides the form and manner for filing aggregation exemption notices. This new portal is available on the Forms & Submissions page of www.cftc.gov.

Although the no-action letter provides temporary relief from the aggregation notice filing compliance date of February 14, 2017, DMO is providing the portal for participants who choose, of their own accord during the relief period, to file a notice with the CFTC of their intent to take advantage of certain aggregation exemptions under CFTC regulation 150.4(c).

View CFTC staff letter.

The US Board of Governors of the Federal Reserve System released the scenarios to be used by banks and supervisors for the 2017 Comprehensive Capital Analysis and Review and stress test exercises (DFAST) mandated by the Dodd-Frank Act. The Federal Reserve Board concurrently issued instructions to firms participating in CCAR. For the 2017 cycle, a total of 13 of the largest and most complex bank holding companies will be subject to both the quantitative evaluation of their capital adequacy as well as a qualitative evaluation of their capital planning capabilities. The Federal Reserve Board had announced earlier, on January 30, 2017, that 21 firms with less complex operations will no longer be subject to the qualitative portion of CCAR.

Read more.

A Commission Delegated Regulation in the form of Regulatory Technical Standards for benchmarking portfolio assessment standards and assessment-sharing procedures was published in the Official Journal of the European Union. The RTS supplement the Capital Requirements Directive. The CRD requires that national regulators monitor the range of risk-weighted exposure amounts or own funds requirements (except as regards operation risk) for the exposures or those relating to transactions in benchmark portfolios resulting from the internal approaches adopted by firms. Regulators are also required to assess, at least annually, the quality of the relevant approaches adopted by firms. The EBA is required to assist regulators in their assessments. The RTS set out the standards for the assessment by national regulators and procedures for sharing of those assessments with other relevant EU national regulators and with the EBA. The RTS enter into force on February 23, 2017 and will apply directly across the EU. 

View the RTS.

President Trump issued a Presidential Memorandum requiring the US Department of Labor to reconsider its proposed “fiduciary rule,” which subjects many of the investment recommendations from financial advisors to retail retirement clients to ERISA’s fiduciary standards and remedies. The Memorandum directs the Department of Labor to prepare an updated economic and legal analysis of the rule to determine whether, among other things, it may adversely affect the ability of Americans to gain access to retirement information and financial advice.

Read more.

President Trump signed an executive order setting forth “core principles” in the regulation of the US financial system and directing the Treasury Secretary to review and report back to the President within 120 days on the extent to which current government policies promote those principles and recommendations for actions to promote them. The core principles include the following: “prevent taxpayer-funded bailouts”; “foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry”; “enable American companies to be competitive with foreign firms in domestic and foreign markets”; “advance American interests in international financial regulatory negotiations and meetings”; and “restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.”

View Shearman & Sterling publication on the Trump executive order.

View executive order text.

The UK Government launched a consultation on implementation of the revised EU Payment Services Directive in the UK. The new Payment Services Directive (known as PSD2) aims to make payments between Member States as secure, easy and efficient as those made within a Member State. PSD2 focuses on electronic payments and payment services within the EU, regulating new types of payment services and payment services providers, which are currently unregulated, and stimulating competition in the electronic payments market. 

The Government's consultation comprises a consultation on issues to be considered in implementing PSD2 in the UK and proposed draft regulations. The draft regulations will revoke the existing Payment Services Regulations although large parts of the new draft regulations will replicate parts of the existing PSRs. Consequential changes will also be required to other UK legislation, including the Electronic Money Regulations 2011. The consultation is relevant to banks, building societies, e-money institutions, payment institutions and payment users. 

Read more.

The Financial Stability Board published proposed Guidance on central counterparty resolution and resolution planning. The aim of the proposed Guidance is to assist national authorities and FSB member jurisdictions in implementing effective resolution regimes, credit resolution strategies and plans for CCPs that are consistent with the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions and the financial market infrastructure guidance annexed to the Key Attributes. The FSB published a Discussion Note on August 16, 2016 which sought feedback on aspects of CCP resolution that are key to the design of effective resolution strategies. The FSB's proposed Guidance is based on responses to that Discussion Note as well as further consultations with FSB member authorities. The FSB is seeking feedback on, amongst other things, the powers that resolution authorities should have to maintain the continuity of critical CCP functions, return the CCP to a matched book and address default and non-default losses, the treatment of equity of existing CCP owners in a CCP resolution and cross-border enforcement of resolution actions. Among others, it is proposed that resolution authorities should have power to write down initial margin as well as variation margin.  The assessment for the "no creditor worse off" test is proposed to be based upon what would happen following exercise of all CCP post-default powers. Responses to the consultation are requested by March 13, 2017.

View the consultation paper. 

View the FSB's summary of responses to the discussion paper. 

View the discussion paper.

The Financial Conduct Authority and Prudential Regulation Authority published a joint Policy Statement on changes to their enforcement decision-making processes. The changes are in response to the recommendations set out in HM Treasury's Review of enforcement decision-making at the financial services regulators (known as the Enforcement Review), published in December 2014, and the report by Andrew Green QC in the enforcement actions following the failure of HBOS (known as the Green Report), published in November 2015. The Enforcement Review and the Green Report made three overlapping recommendations about the regulators' decision-making processes covering pre-referral decision-making, communication and cooperation between and within the regulators and informing the subject of an investigation about the matters under investigation. 

Read more.

The European Banking Authority published a Report on high earners using data accumulated as at the end of 2015. The Capital Requirements Directive, as amended, imposes compensation requirements on banks for staff who are considered to have a material impact on the bank's risk profile, and there is a cap on the ratio of fixed to variable compensation for identified staff – known as the bonus cap. The EBA is required to publish aggregated data on high earners who earn EUR1 million or more per financial year. The EBA's report analyzes information for the year 2015 and compares it to 2014 data. The analysis shows, amongst other things, that the number of high earners awarded EUR 1 million or more in annual remuneration has increased by 33%, largely as a result of changes in the exchange rate between the euro and pound sterling.  The number of identified staff was largely unchanged between 2014 and 2015.

In previous years the EBA has published this data at the same time as the benchmarking of remuneration trends. Going forward, the benchmarking information will be published only biannually. The data on high earners will continue to be published annually.
 
View the Report.

The European Securities and Markets Authority announced details of the 2017 EU-wide CCP stress test exercise. The European Market Infrastructure Regulation requires ESMA to conduct the exercise at least once per year to assess the resilience and safety of the EU’s CCPs from a systemic risk viewpoint. The exercise covers 17 EU CCPs and includes all products currently cleared by the CCPs. ESMA may issue recommendations to address any issues that are highlighted by the exercise. The results of the exercise are expected to be published in Q4 2017.

View ESMA's announcement and framework methodology. 

The UK Prudential Regulation Authority published a Policy Statement, final rules and updates on several Supervisory Statements on the reporting, prudential and recovery and resolution requirements to implement the ring-fencing requirements for banks. The PRA's policy and final rules are relevant to all firms that are required to ring-fence their core banking activities before the implementation date of January 1, 2019.  These firms are, broadly speaking, those with at least £25 billion of “core” deposits (defined as deposits from individuals and small businesses) and those that expect to exceed the threshold by January 1, 2019. UK banking groups that have more than £25 billion of core deposits will need to ring-fence the entity or entities that accept core deposits - called ring-fenced bodies - by transferring other business lines to different legal vehicles or undertaking other business separations.

Read more.

The US Senate Finance Committee approved the nomination of Steven Mnuchin to serve as Secretary of the Treasury, overruling an attempt by Senate Democrats to stall the nomination vote by boycotting the committee hearing by temporarily suspending committee rules that require at least one Democratic committee member to be present to conduct business. The full US Senate is expected to vote on his nomination the week of February 6th.

View results of the Senate Finance Committee vote.

The European Securities and Markets Authority launched a consultation on proposed Guidelines on the transfer of data between trade repositories. The European Market Infrastructure Regulation requires counterparties and CCPs to report trades to a trade repository while ensuring that details of their derivatives contracts are reported without duplication. EMIR also requires trade repositories to maintain reported information for a period of ten years following the termination of the derivative. 

The Policing and Crime Act 2017 was enacted. The Act has wide reaching implications, including for the financial services industry.  Among other things, the Act creates new civil monetary penalties and increases the maximum term of imprisonment for breaches of financial sanctions in the UK. The new monetary penalties regime will be administered by the Office of Financial Sanctions Implementation, which was established on March 31, 2016 and sits within HM Treasury. The OFSI may impose a monetary penalty if it is satisfied, on the balance of probabilities, that a breach has been committed and the offending person knew or had reasonable cause to suspect that their actions would be in breach of the obligations under the financial sanctions legislation. The maximum term on conviction for indictment has been set at seven years, and at six months for summary conviction.

Read more.

State financial regulators released a new, voluntary tool designed to help banks and non-depository financial institutions better manage Bank Secrecy Act/Anti-Money Laundering risk. The BSA/AML Self-Assessment Tool was developed by the Conference of State Bank Supervisors and state regulators and aims to help institutions better identify, monitor and communicate BSA/AML risk. In this way, the tool is intended to reduce uncertainty surrounding BSA/AML compliance and encourage greater transparency within the financial sector.

View the CSBS press release regarding the BSA/AML Self-Assessment Tool.

The CFPB provided summary and highlights information regarding the implementation of the Prepaid Rule, which creates tailored provisions for prepaid accounts governing disclosures, limited liability and error resolutions, and periodic statements. The CFPB concurrently issued a compliance guide on remittance transfers.

View the CFPB compliance guide on the Prepaid Rule.

View the CFPB compliance guide on remittance transfers.

Representative Patrick McHenry (R-NC) issued a letter to Federal Reserve Chair Janet Yellen, calling on the Federal Reserve to cease negotiating “binding” international financial regulatory standards in such forums as the Financial Stability Board and the Basel Committee “until President Trump has had an opportunity to nominate and appoint officials that prioritize America’s best interests.” Rep. McHenry serves as Chief Deputy Whip in the US House of Representatives and as Vice Chairman of the Financial Services Committee of the US House of Representatives.

View text of Rep. McHenry’s letter.
 

The European Securities and Markets Authority published an open letter to the European Commission asking it to consider several issues relating to its supervisory and sanctioning powers under the European Market Infrastructure Regulation and emphasizing similar aspects relating to Credit Rating Agencies. The letter follows the Commission's Report, published on November 23, 2016, assessing the issues arising from the implementation of the requirements of EMIR in which the Commission proposed a legislative review of EMIR in 2017. ESMA submitted four reports to the Commission in 2015 on the functioning of EMIR which included recommendations on how EMIR could be enhanced. The letter highlights the areas in those reports that ESMA considers the Commission should consider as part of the EMIR review this year. 

Read more.

The US Federal Reserve Board adopted a final rule amending the capital plan and stress test rules effective for the 2017 cycle. The final rule removes large and noncomplex firms, specifically those with total consolidated assets of at least $50 billion but less than $250 billion, nonbank assets of less than $75 billion, and that are not deemed, pursuant to the Federal Reserve’s Regulation Q, to be US global systemically important banks, from the qualitative assessment of the Federal Reserve’s Comprehensive Capital Analysis and Review, thereby significantly reducing the burden on such firms. Accordingly, the qualitative review in CCAR is now focused on the 13 largest, most complex financial institutions.

View text of the final rule.

The European Securities and Markets Authority published its Opinion on the extent to which different types of units or shares (share classes) of the same Undertakings in Collective Investment in Transferable Securities fund should differ from one another. There is currently no common framework across the EU for share classes. Some member states prohibit the set-up of different share classes within a single fund while others permit varying degrees of flexibility. Investors in a UCITS fund invest in a common pool of assets, individual share classes or sub-sets of investors can be attributed different rights although there is no legal segregation of assets between the share classes. ESMA sets out four high-level principles in its Opinion which apply when different share classes are set.

Read more. 

The Chief Operating Officer of the US Securities and Exchange Commission, Jeffrey Heslop, announced that he will depart the agency in February. Kenneth Johnson, SEC Chief Financial Officer, will become the Acting COO.

Acting Chairman of the US Commodity Futures Trading Commission Giancarlo announced that the CFTC’s General Counsel, Jonathan L. Marcus, is leaving the agency. Mr. Marcus joined the agency in 2011 as Deputy General Counsel for Litigation, and was promoted to General Counsel in 2013. Robert A. Schwartz, currently the Deputy General Counsel for Litigation and Adjudication, will become the Acting General Counsel.

On January 27, 2017, Acting Chairman Giancarlo announced several additional staff changes at the Commission:

-            Amir Zaidi has been appointed to lead the Division of Market Oversight.

-            Vincent McGonagle has been named as the Acting Director for the Division of Enforcement.

-           Jeffrey Bandman will step down from his role as Acting Director of the Division of Clearing and Risk to become an advisor on issues related to Financial Technology (FinTech). John Lawton, a 36-year employee of the Commission, has taken over as Acting Director of the Division of Clearing and Risk.

The US Federal Reserve Board issued a progress report which outlined accomplishments and anticipated future steps related to the ongoing initiatives that the Federal Reserve Board has underway to enhance the speed, efficiency and security of the US payment system. The progress report highlights collaborative efforts that are being pursued by the Federal Reserve Board in conjunction with various private sector businesses, financial services providers, financial institutions, consumer groups and government agencies in furtherance of the strategies outlined in the January 2015 publication of “Strategies for Improving the US Payment System.” The progress report details the work-to-date and future plans of two payments industry task forces that have effectuated the initiatives—one devoted to faster payments and the other to a more secure payment system.

View the progress report.

House Financial Services Committee Chairman Jeb Hensarling (R-TX) issued a statement in which he criticized the Dodd-Frank Wall Street Reform and Consumer Protection Act for institutionalizing big bank bailouts. He noted that Republicans on the Financial Services Committee are eager to work with President Trump and the new administration to replace the Dodd-Frank Act with his draft legislation, The Financial CHOICE Act. Additionally, Chairman Hensarling announced subcommittee assignments for Republican members on the House Financial Services Committee.

View statement.

View the subcommittee assignments.

The European Securities and Markets Authority published an Opinion on Spanish-based pension schemes that are to be exempted from the clearing obligation under the European Market Infrastructure Regulation. The Opinion was requested by Comisión Nacional del Mercado de Valores (the Spanish Regulator responsible for supervising and inspecting Spanish Stock Markets). Transitional exemptions from the clearing obligation under EMIR can be granted to pension scheme arrangements that meet certain criteria, essentially, when over-the-counter derivatives contracts are entered into and are used for hedging purposes. To obtain an exemption, requests must be made by the pension scheme to a national regulator and the national regulator must then seek an Opinion from ESMA before making a final exemption decision. ESMA must consult the European Insurance and Occupational Pensions Authority before adopting an Opinion.

ESMA has adopted the Opinion on the basis that the Spanish Regulator is of the view that Personal Pension Funds would encounter difficulties in meeting variation margin requirements for centrally-cleared transactions due to limited holdings of cash within the entity (e.g. lower investment returns or transaction costs) and the risk of inefficiencies as a result of converting assets into cash. 

View ESMA’s Opinion.

The Financial Stability Board published a Report on regulatory approaches to re-hypothecation of client assets. The Report is in response to the recommendation that the possibility of harmonizing client asset rules with regard to re-hypothecation should be examined as per Policy Recommendation 8 of the FSB's Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos. The FSB's conclusion is that there is no immediate rationale for harmonizing regulatory approaches to re-hypothecation of client assets. The FSB encourages its member jurisdictions to implement the recommendation in the Policy Framework (Recommendation 7) which provides that authorities should ensure that regulations governing re-hypothecation of client assets should encompass three principles relating to sufficient disclosure to clients, use of client assets that may be re-hypothecated and limitations on the ability to re-hypothecate client assets. 

View the Report.

View the FSB Policy Framework. 

The Financial Stability Board published the final measure and metrics for non-cash collateral re-use in securities financing transactions. The measure and metrics are part of the FSB's global securities financing data collection initiative, the Standards for which were published in November 2015. The Standards identify a data element on collateral re-use eligibility to be collected for collateral received or posted for SFTs by national regulators to be provided (on an aggregated national/regional level) to the FSB. The globally aggregated data on re-use of collateral will be used to assess global trends in non-cash collateral re-use and to monitor the degree of interconnectedness in the collateral markets and the build-up of leverage.

The FSB's Report sets out the collateral re-use measure - which will only cover SFTs - and the data elements required for computing the collateral re-use measure and the associated metrics. The FSB notes that national authorities might require reporting entities to compute the collateral re-use measure themselves rather than just the underlying data. Many FSB members are currently working on the operational arrangements to initiate the official data collection and aggregation from end-2018 data. Data related to collateral re-use will be transmitted by FSB members to the FSB for global aggregation from January 2020. The FSB will review the measure and metrics of collateral re-use five years after the launch of the global data collection with regard to collateral re-use measures. The FSB encourages national authorities to consider monitoring collateral re-use activities beyond SFTs, as appropriate. 

View the Report.

The OCC issued examination procedures to supplement OCC Bulletin 2013-29 entitled “Third-Party Relationships: Risk Management Guidance,” which was originally issued October 30, 2013. These procedures use the concepts and definitions in OCC Bulletin 2013-29 but are designed to help examiners: (i) tailor the examination of each bank commensurate with the level of risk and complexity of the bank’s third-party relationships; (ii) assess the quantity of the bank’s risk associated with its third-party relationships; (iii) assess the quality of the bank’s risk management of third-party relationships involving critical activities; and (iv) determine whether there is an effective risk management process throughout the life cycle of the third-party relationship. The procedures include detailed questions examiners can ask when examining covered national banks and federal savings associations.

View the examination procedures.

The FCA published a consultation paper on proposed changes to the client money distribution rules in the Client Assets Sourcebook of the FCA Handbook - CASS 7A - as a result of the special administration regime review. The client money rules govern how client assets are to be distributed by an insolvency practitioner managing a failed investment firm. The proposals focus on rule changes following the introduction in early January 2017 by the Government of draft regulations to improve the regime in line with the Bloxham Report's recommendations, i.e. The Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017, the Amending SAR Regulations.

Read more. 

A Commission Implementing Regulation amending Implementing Technical Standards on the format and frequency of trade reports submitted to trade repositories was published in the Official Journal of the European Union. The original ITS, published in the Official Journal on December 21, 2012, supplements the reporting requirements in the European Market Infrastructure Regulation. The European Securities and Markets Authority provided final draft amending ITS to the European Commission in November 2015. ESMA considered that the original standards needed to be updated to incorporate the feedback and Q&As during implementation of the reporting requirement under EMIR since 2013. The text of the final amending ITS differs from the text of ESMA's final draft ITS, however, the changes are minor. 

Read more.

A Commission Delegated Regulation amending Regulatory Technical Standards on the minimum details of data to be reported to trade repositories was published in the Official Journal of the European Union. The original RTS were published in the Official Journal on February 23, 2013 and supplement the reporting requirements imposed by the European Market Infrastructure Regulation. The European Securities and Markets Authority provided final draft amending RTS to the European Commission in November 2015. ESMA considered that the current standards need to be updated to incorporate the feedback and Q&As during implementation of the reporting requirement under EMIR since 2013. The text of the final amending RTS differs from the text of ESMA's final draft RTS; however, the changes are minor. The revisions to the original RTS include: (i) allowing the use of multiple reports for the reporting of complex derivatives provided that counterparties agree the number of reports to be submitted; (ii) adding a new definition for the notional amount of a derivative; (iii) clarifying the reporting requirements for cleared trades; and (iv) requiring that all collateral that has been posted and received is reported, including amending the fields for reporting of collateral to, amongst other things, split the value field into initial margin posted and variation margin posted. The amending RTS will enter into force on February 10, 2017. The revised reporting obligations will apply from November 1, 2017, which should allow counterparties enough time to prepare for the incoming changes.

View the amending RTS.

The Bank of England and Financial Services Act 2016 (Commencement No 4 and Saving Provision) Regulations 2017 came into force. The Regulations set March 1, 2017 as the date on which certain provisions of the Bank of England and Financial Services Act 2016 will apply, including, those provisions which will transfer the functions of the Prudential Regulation Authority to the Bank of England. Those functions will be exercised through the Prudential Regulation Committee. 

View the Regulations. 

Trump Administration Chief of Staff Reince Priebus issued a memorandum to the heads of executive departments and agencies instituting a temporary freeze of regulations that have not yet become effective in order to allow for review of such regulations by the President’s appointees or designees. The memorandum, issued on the day of President Trump’s inauguration, contains an exception for “emergency situations or other urgent circumstances relating to health, safety, financial or national security matters.” The memorandum is somewhat unclear as to its applicability to independent regulatory agencies such as the US financial regulators including the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, the Commodity Futures Trading Commission and the Securities and Exchange Commission.

Read more.

The European Commission launched a public consultation on the Capital Markets Union program and how it could be updated and completed, building on the initiatives that the Commission has presented so far, as part of the mid-term review. The mid-term review of the CMU action plan is scheduled for June 2017. The CMU Action Plan was published in September 2015 and set out priorities for putting in place the building blocks of a CMU by 2019. The Commission also published a Communication in September 2016 reaffirming its commitment to the CMU, calling for an acceleration of reform and outlining steps to increase the rate of completion. The Commission has completed 15 of the initiatives set out in the Action Plan (approximately half), including making progress on core legislative initiatives such as the proposed Prospectus Regulation and Securitization Regulation. Several more initiatives are expected to be launched in the coming months, including a proposal for simple efficient and competitive personal pensions, promotion of the FinTech sector with an appropriate regulatory environment and sustainable finance. 

Read more.

The CFTC designated Commissioner J. Christopher Giancarlo per seriatim as Acting Chairman of the agency. Mr. Giancarlo joined the CFTC on June 16, 2014 after being unanimously confirmed by the US Senate on June 3, 2014, to serve as a Commissioner of the CFTC. Commissioner Giancarlo succeeded Timothy Massad who had served as Chairman since June 5, 2014.

View CFTC press release.

The European Commission published a draft Commission Delegated Regulation amending the Regulatory Technical Standards on margin requirements for uncleared derivatives. The amending RTS relate to the phase-in of the variation margin requirements for intra-group transactions and supplement the European Market Infrastructure Regulation. The original RTS on risk mitigation techniques for uncleared OTC derivatives was published in the Official Journal of the European Union on December 15, 2016. The correction is due to a technical error in the adoption process which resulted in the two paragraphs on the phase-in of the variation margin requirements to intra-group transactions being omitted.

EMIR requires counterparties to uncleared over-the-counter derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. The original RTS prescribe how margin is to be posted and collected and the methodologies by which the minimum amount of initial margin and variation margin should be calculated, as well as specifying a list of securities eligible as collateral for the exchange of margins, such as sovereign securities, covered bonds, specific securitizations, corporate bonds, gold and equities.

Read more.

The US Commodity Futures Trading Commission’s Division of Enforcement issued two new Enforcement Advisories outlining the factors the Enforcement Division will consider in evaluating cooperation by individuals and companies in the agency’s investigations and enforcement actions.

The CFTC gives credit for cooperation in determining whether enforcement action is warranted, the nature of charges that should be brought and the appropriate level of sanctions to impose or seek. With the issuance of the recent advisories, the Enforcement Division aims to further incentivize individuals and companies to cooperate fully and truthfully in CFTC investigations and enforcement actions, including by providing high-quality cooperation, self-reporting to the Enforcement Division and providing early and material assistance to the Division.

The advisories complement the CFTC’s Office of the Whistleblower and Whistleblower Program, which provide monetary incentives to individuals who report possible violations of the Commodity Exchange Act that lead to a successful enforcement action, as well as privacy, confidentiality and anti-retaliation protections for whistleblowers who share information with or assist the CFTC.

View the advisories.

And view advisories.

The European Banking Authority published translations of the final Guidelines specifying the application of the definition of default in relation to the Internal Ratings Based Approach and the Standardized Approach under the Capital Requirements Regulation. Publication of the translations triggers the date by which national regulators must inform the EBA as to whether they intend to comply with the Guidelines. That notification is due by March 20, 2017. The Guidelines will apply to national regulators and firms from January 1, 2021. However, national regulators have discretion to accelerate implementation of the Guidelines. The CRR sets out the definition of default of an obligor that is used for the purposes of the IRB and Standardized Approaches. The purpose of the Guidelines is to harmonize the definition of default across the EU framework so that EU banks apply regulatory requirements to their capital positions in a more consistent and comparable way, especially in the context of IRB models. 

Read more.

The CFTC announced that Division of Enforcement Director Aitan Goelman will leave the agency on February 3, 2017. A successor has not yet been named.

View CFTC press release.

The SEC announced the establishment of a comprehensive arrangement with the Hong Kong Securities and Futures Commission (SFC). The new supervisory cooperation arrangement will augment the SEC’s and the SFC’s ability to share information about regulated entities that operate in the United States and Hong Kong, including investment advisers, broker-dealers, securities exchanges, market infrastructure providers and credit rating agencies. The new comprehensive arrangement expands upon the one from 1995 that was limited to investment management activities.

Supervisory cooperation arrangements establish mechanisms for ongoing consultation and the exchange of information regarding the oversight of global firms and markets. Such information may include routine supervisory information as well as information regulators need to monitor risk concentrations, identify emerging risks and better understand a globally active regulated entity’s compliance culture. These arrangements also facilitate the ability of the SEC and its counterparts to conduct on-site examinations of registered entities located outside the United States.

View Memorandum of Understanding.

The US Board of Governors of the Federal Reserve System finalized a rule increasing the maximum civil money penalty limits for 2017, as required by law. A civil money penalty is a fine imposed by a federal agency to penalize misconduct.

In November 2015, a law was passed that requires all federal agencies to adjust their maximum civil money penalty limits annually for inflation, rather than every four years as previously required. The maximum civil money penalty limits depend on several factors, including the severity and type of violation. Additionally, the law dictates the annual adjustment formula for federal agencies.

The new penalty amounts apply as of January 15, 2017.

View the final rule.

The SEC announced that General Counsel Anne K. Small will leave the agency later this month. Upon Ms. Small’s departure, Sanket Bulsara, Deputy General Counsel for Appellate Litigation, Adjudication, and Enforcement, will become the Acting General Counsel.

View SEC press release.

The European Banking Authority and the European Securities and Markets Authority published a Report on the joint functioning of the Capital Requirements Regulation and the European Market Infrastructure Regulation. The focus of the Report is on capital requirements for central counterparties that also hold a banking license, leverage and liquidity for CCPs, large exposures, difference in application of the margin period of risk and the requirements on a client's exposures to clearing members.

The EBA and ESMA note that although the EMIR and CRR requirements may appear to be redundant for CCPs holding a bank license, because some aspects of the EMIR requirements are more stringent, they are in fact based on different definitions of capital and take into account different types of risks. Therefore, CCPs holding a banking license are subject to both capital requirements as matter of principle, with some exemptions when they are properly justified. There are currently 17 authorized CCPs, of which three hold a banking license - Eurex Clearing AG, LCH Clearnet SA and European Commodity Clearing AG.

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The European Securities and Markets Authority published translations of the final Guidelines on information expected or required to be disclosed on commodity derivatives markets or related spot markets under the Market Abuse Regulation in the official languages of the EU. MAR replaced the current Market Abuse Directive and its implementing legislation from July 3, 2016. The publication of the translations triggers the application of the Guidelines from March 17, 2017. The Guidelines are relevant to national regulators and to commodity derivatives market participants such as investors, financial intermediaries, operators of trading venues and persons professionally arranging and executing transactions in commodity derivatives. National regulators have until March 17, 2016 to advise ESMA whether or not they intend to comply with the final Guidelines.

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