The NYSDFS approved the application of Coinbase, Inc., a wholly owned subsidiary of Coinbase Global, Inc., for a virtual currency and a money transmitter license. As part of its review of Coinbase’s application, NYSDFS analyzed the company’s anti-money laundering, capitalization, consumer protection and cyber security policies. Coinbase, which is subject to ongoing supervision by NYSDFS, offers services for buying, selling, sending, receiving and storing bitcoin.

NYSDFS approved five firms for virtual currency charters or licenses, while denying other applications that did not meet NYSDFS’s standards. In addition to Coinbase, NYSDFS granted licenses to XRP II and Circle Internet Financial and charters to Gemini Trust Company and itBit Trust Company. ChangeCoin Inc., Ovo Cosmico Inc., Snapcard Inc. and OKLink PTE. LTD. each received application denial letters ordering them to stop any New York operations.

NYSDFS has previously licensed technology-based money transmitters under New York’s money transmitter law, online lenders under New York’s banking law and virtual currency exchanges under New York’s financial services law.

View NYSDFS press release.

NYSDFS Superintendent Maria T. Vullo submitted a comment letter opposing the OCC’s proposal to create a new national bank charter for FinTech companies. Vullo noted that a one-size-fits-all federal charter will not work to create a level-playing field among all financial services companies, or to alleviate risks. Rather, she argued, the proposal increases risk, creates an opportunity for regulatory arbitrage and attacks states sovereignty.

The letter provides that the OCC has never regulated nonbank financial institutions, and that state regulators like NYSDFS are experienced and therefore better equipped to regulate cash-intensive nonbank financial service companies. Furthermore, the NYSDFS argued that the National Bank Act does not provide the OCC with authority to create this new proposed charter, which would create an entirely new federal regulatory program resulting in regulatory uncertainty and possible evasion of important state consumer protection laws. The letter also notes that a national charter would likely stifle, rather than encourage innovation, since it would provide a means for large “too big to fail” firms to control the development of technology solutions, thereby harming existing banks and small businesses seeking to serve local communities.

NYSDFS has called on state regulators, legislators and other policymakers to oppose the OCC’s proposed special charter and support the nation’s strong state-based regulatory system.

View NYSDFS comment letter.

The OCC launched the agency’s new web-based Central Application Tracking System (CATS). The system will assist authorized national banks, federal savings associations and federal branches and agencies with drafting, submission and tracking of licensing and public welfare investment applications and notices. CATS also allows OCC analysts to receive, process and manage those applications and notices. CATS replaces e-Corp and CD-1 Invest, the current OCC electronic filing systems.

The OCC plans to roll out institutions’ access to CATS in three phases. The first phase includes banks that are frequent electronic filers with the OCC. The second and third phases of the roll-out of CATS are scheduled to begin in spring 2017. OCC staff will notify institutions regarding the date of their access to CATS several weeks before such access is available.

View OCC bulletin regarding the new system.
 

The Prudential Regulation Authority published a Policy Statement and final rules on raising the deposit protection limit. The Policy Statement follows the consultation paper published by the PRA in November 2016. It is proposed that the DPL will be raised to £85,000 from January 30, 2017. The Policy Statement provides feedback to the responses received to the consultation paper. The PRA received 24 responses, with most respondents supportive of the proposals to reset the DPL at £85,000. The purpose of the revised DPL is to provide depositors with PRA-authorized firms commensurate protection to that of depositors with firms authorized by regulators in other EU Member States. The Deposit Guarantee Schemes Directive requires non-Euro Member States to adjust their deposit protection limits every five years to ensure they are equivalent to the euro limit of EUR100,000 (£85,000 was added as a figure following recent currency fluctuations).

The DPL is effective from January 30, 2017. Firms will need to make changes to customer-facing materials required to implement the new deposit limit as soon as practicable from January 30, 2017, and at the latest, by June 30, 2017. The PRA expected firms to train their customer-facing staff to answer questions from customers about the change in the deposit limit, regardless of whether a firm's written materials are amended by January 30, 2017.

View the Policy Statement.

View the final rules.

The Prudential Regulation Authority and the Financial Conduct Authority published a joint consultation paper on the management expenses levy limit for the Financial Services Compensation Scheme in 2017/2018. The MELL proposed for 2017/18 is £74.54 million. The FSCS is a last resort compensation fund for consumers of failed authorized financial services firms that fall under the regulatory remit of the FCA and PRA. The MELL is the maximum amount which the FSCS may levy in a year without further consultation. The proposed MELL of £74.54 million consists of £69.24 million for FSCS management of expenses and £5.3 million as an unlevied contingency reserve. The consultation also contains the proposed rules for the PRA and FCA to set the MELL in 2017/18. Responses to the MELL for 2017/18 as outlined in the consultation are due by February 13, 2017. The PRA and FCA aim to finalize and publish the rules in a policy statement to be published in March 2017 and final rules are expected to take effect from April 1, 2017 with invoices to be sent out to firms from July 2017.

View the consultation paper.

A Commission Delegated Regulation, in the form of Regulatory Technical Standards specifying conditions for data waiver permissions, was published in the Official Journal of the European Union. The Capital Requirements Regulation outlines the requirements specific to own-loss given default (“own-LGD”) for regulators when quantifying the risk parameters to be associated with rating grades or pools. The RTS lays down the mandatory conditions under which national regulators may grant firms permissions to use data covering a period of two years, rather than five years, for probability of default, own-LGD and own-conversion factor estimates as set out in the CRR. The RTS stipulates that exposures to central governments, central banks, banks and investment firms would be eligible for data waiver permissions, subject to certain additional requirements being met. First, exposures to corporates would be eligible for data waiver permissions where they are not structurally characterized by few or no observed defaults. Second, types of exposures which were not included in the bank or investment firm’s portfolio at the time when the firm started to implement the Internal Ratings Based Approach should not be eligible for a data waiver permission. 

Read more.

The Federal Reserve, the OCC and the FDIC extended the comment period on an advance notice of proposed rulemaking on enhanced cyber risk management standards. The proposal, originally issued on October 26, 2016, addressed enhanced cyber risk management standards for large and interconnected entities under the supervision of the federal banking agencies. The proposal addressed five categories of cyber standards: cyber risk governance; cyber risk management; internal dependency management; external dependency management; and incident response, cyber resilience and situational awareness. In its notice announcing the extension of the comment period, the federal banking agencies noted that the range and complexity of the issues addressed in the proposal resulted in the extension of the public comment period. All comments on the proposal are due on February 17, 2017.

View text of notice of extension of comment period.

The Financial Conduct Authority published a guide on applications and notifications under the Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation, together the MiFID II package. MiFID II will apply from January 3, 2018. It will introduce, among other things, new processes and forms for authorizing investment firms and new activities, such as operating an Organised Trading Facility. It will also require notifications to be made to the FCA. The FCA's guide covers applications for investment firm authorizations, new data reporting service providers authorizations, recognition of investment exchanges and variation permission as well as the notifications required by authorized firms and exchanges, including passporting notifications. 

In particular, investment firms should note that the FCA will be using new forms for authorizations and variation of permission for investment services and activities from January 30, 2017, and the new passporting notifications from July 31, 2017. All applications for authorization of investment firms and DRSPs or variation of permission must be submitted by July 3, 2017 to allow the FCA time to assess the applications before the MiFID II implementation date. Passporting notifications must be submitted by December 2, 2017 so that the FCA can send them to other EU regulators before January 3, 2018. 

The information in the guide is currently up to date. The FCA intends to provide updates on processes for applications and notifications, where necessary, through its website. 

View the guide.

The US Office of Foreign Assets Control issued a guidance document regarding the provision of certain legal and compliance services by US attorneys and compliance personnel respect to US Sanctions laws. Contemporaneous with the issuance, the US Treasury Department also published new FAQs on the guidance. In the press release accompanying the issuance of the guidance, OFAC made clear that the guidance does not reflect a change in OFAC’s policy, but is published in order to respond to inquiries received by OFAC.

View text of the OFAC guidance.

The US House of Representatives passed H.R. 238, the Commodity End-User Relief Act, a bipartisan bill to reauthorize the US CFTC. Although the bill largely mirrors previous legislation to reauthorize the CFTC, it included several regulatory reforms, including a provision regarding the regulation of cross-border swaps, and a provision that would require the CFTC to vote in order to change the current de minimis swap dealer registration threshold of $8 billion.

View text of the bill.

The Financial Stability Board published a report on policy recommendations to address structural vulnerabilities from asset management activities. The FSB recommendations aim to address four structural vulnerabilities from asset management activities that could cause financial stability risks: (i) liquidity mismatch between fund investment assets and redemption terms and conditions for fund units; (ii) leverage within funds; (iii) operational risk and challenges in transferring investment mandates or client accounts in stressed conditions; and (iv) securities lending activities of asset managers and funds. The FSB makes 14 recommendations, some of which have been amended since the proposed recommendations were consulted on in the last half of 2016. The recommendations are addressed to national supervisors of asset management activities and to the International Organization of Securities Commissions. Certain types of data are identified that the FSB considers should be collected by national supervisors and/or IOSCO. Steps are specified that national supervisors should take to address the potential financial stability risks. For example, issuing specific guidance to facilitate the use of exception liquidity management tools and the coordination of system-wide stress testing (albeit this is still in an exploratory stage). Another recommended step included requiring asset managers to establish comprehensive risk management frameworks which also cover risks other than the orderly transfer of client accounts and investment mandates. 

View the Report. 

The European Securities and Market Authority published an Opinion on the scope of the product intervention powers under the Markets in Financial Instruments Regulation. The Opinion focuses on the impact of the exclusion for fund managers from the scope of the MiFIR intervention powers. MiFIR gives national regulators the power to temporarily prohibit or restrict the marketing, distribution or sale of certain financial instruments (such as units or shares in Undertakings in Collective Investment in Transferable Securities or Alternative Investment Funds) in the EU by investment firms and banks, whether the UCITS or AIF is internally or externally managed, or financial instruments with certain specified features or a type of financial activity or practice. The intervention power only applies to banks authorized under the Capital Requirements Directive and to investment firms authorized under the revised Markets in Financial Instruments Directive (known as "MiFID Firms"), when providing investment services and/or performing investment activities and to market operators including any trading venues they operate. The intervention powers will apply from January 3, 2018, in accordance with the application date of MiFIR.

Read more. 

The US House of Representatives passed H.R. 78, the SEC Regulatory Accountability Act, sponsored by Rep. Ann Wagner (R-MO). The Act would require the US Securities and Exchange Commission to justify the costs and benefits of a proposed regulation prior to its issuance of the same. In addition, before issuing a regulation, the SEC would also be required to do the following: (i) identify the nature and source of the problem its proposed regulation is meant to address; (ii) identify and assess available alternatives; and (iii) ensure that any regulations are consistent and written in plain language. The legislation also contains language requiring the SEC to conduct a retrospective review of its regulations every five years and to perform post-adoption impact assessments of major rules.

View text of the bill.

The European Securities and Markets Authority published a follow-up report to the 2015 peer review on best execution. The Markets in Financial Instrument Directive requires investment firms to provide best execution for their clients when executing their clients' orders. ESMA conducted a peer review on how national regulators supervised and enforced the requirements in 2011 and 2012 and published the results in February 2015, recommending, amongst other things: (i) prioritization of best execution by national regulators; (ii) the allocation of supervisory resources; and (iii) the adoption of a proactive approach to monitoring compliance with best execution requirements, including through onsite inspections. In 2016, ESMA began to assess whether national regulators had taken steps to address the shortcomings identified in the peer review. The 2017 report shows that national regulators are being more proactive in their supervision of best execution. However, there are still some deficiencies that need to be addressed as some national regulators were not able to show progress in relationship to deficiencies previously identified. ESMA's view is that regular and proactive supervision and monitoring of compliance with the best execution requirements is the only way to ensure investor protection in this area. Firms will continue to be subject to best execution requirements when the MiFID II package comes into effect on January 3, 2018 and ESMA urges national regulators to act to ensure that there is compliance with best execution requirements by investment firms.

View ESMA's 2017 follow-up report.

View the 2015 peer review report.

The European Banking Authority published a Decision of the Board of Supervisors of the EBA, dated December 23, 2016, adopting Rules of Procedure for the investigation of a breach of EU law. The Regulation establishing the EBA gives the EBA the power to investigate an alleged failure by a national regulator to apply the requirements of the Capital Requirements Regulation or the Capital Requirements Directive or their application in a way which appears to be a breach of EU law. The Decision sets out factors, criteria and other related matters that the EBA will take into account when it receives a request from a third party to initiate an investigation or to EBA own initiative investigations.

View the Decision.

The European Banking Authority published an updated recommendation on the equivalence of the confidentiality regimes of third country supervisory authorities. The EU Capital Requirements Directive provides that third country supervisory authorities may participate in a college of supervisors set up for an international cross-border bank if: (i) it is considered appropriate for that authority to participate; and (ii) the authority is subject to confidentiality requirements that are equivalent to those set out in the CRD. The EBA's recommendations only relate to the equivalence of the confidentiality regimes. The appropriateness issue is to be determined by each college of supervisors.

In April 2015, the EBA recommended that the confidentiality regimes of the supervisory authorities in the following countries should be considered as equivalent to the CRD IV requirements: Bosnia-Herzegovina, Brazil, Canada, China, FYR Macedonia, Mexico, Montenegro, Serbia, Singapore, Switzerland, Turkey and the United States. Those recommendations applied from April 2, 2015. The EBA updated the recommendations to include Albania from September 12, 2015.

The EBA has updated the recommendations again adding Australia, Hong Kong, Japan and Kosovo. The latest recommendations applied from January 12, 2017.

View the updated recommendations.

The UK Government published draft legislation to amend the Special Administration Regulations, i.e. The Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017, the Amending SAR Regulations. The purpose of the draft legislation is to improve the return of client money when an investment firm fails. The changes are in line with the Bloxham Report's recommendations which aim to minimize the market impact of a failed firm's entry into special administration. The draft Amending SAR Regulations amend the scope of the SAR Regulations to include firms that manage an alternative investment fund or Undertakings for the Collective Investment of Transferable Securities or who act as a trustee or depositary for an AIF or UCITS. The Amending SAR Regulations will make the transfer of client assets from a failing firm to another financial institution easier because restrictions on transfers will be removed, including removing any restriction affecting what can or cannot be assigned as well as any requirement to obtain client consent. The draft Amending SAR Regulations also improve the bar date mechanism and provide for continuity of services for the safe custody of client assets. The draft Amending SAR Regulations are subject to Parliamentary scrutiny. They are expected to come into force in February 2017.

View the Amending SAR Regulations.

View the Bloxham report.

The New York State Department of Financial Services (NYSDFS) Superintendent Maria T. Vullo announced that the Department’s transaction monitoring and filtering program regulation took effect as of January 1st. Under the final regulation, institutions regulated by the NYSDFS must: maintain programs to monitor and filter transactions for potential Bank Secrecy Act and anti-money laundering violations and suspicious activity reporting; maintain a filtering program to prevent transactions that are prohibited by the Office of Foreign Assets Control; and submit a confirmation to the NYSDFS regarding compliance with the final rule.

View Shearman & Sterling client alert on the final rule.

View press release.

The US Office of the Comptroller of the Currency released its Semiannual Risk Perspective for Fall 2016, which highlights key risks facing national banks and federal savings associations. The report highlighted that strategic risk remains high as banks make changes to their business models and adopt innovative products. The OCC also noted that banks continue to ease underwriting practices to boost loan volume and to respond to competition from bank and nonbank lenders in commercial, commercial real estate and auto lending, according to the report. The credit risk associated with such practices is increasing due to increased risk layering, rising loan policy exceptions and weaker covenant protection. The report cited operational risk as another key risk, particularly cybersecurity threats, increased reliance on third-party relationships and the need for sound governance over sales practices. The report is based on data received from national banks and federal saving associations through June 30, 2016.

View Report.

The European Banking Authority published translations of the final Guidelines on the correction required for the calculation of Modified Duration for debt instruments subject to prepayment risk under the Capital Requirements Regulation. The Guidelines will apply from March 1, 2017.

The CRR establishes two methods to calculate capital requirements for general interest rate risk. The relevant methods are the Maturity-Based calculation and the Duration-Based calculation of general risk. The final Guidelines apply to the Duration-Based calculation. The Duration-Based calculation uses the concept of Modified Duration pursuant to the formula outlined in the CRR. This method is only valid for instruments that are not subject to prepayment risk. The EBA is mandated to issue guidelines establishing how to correct the Modified Duration calculation to reflect prepayment risk. The EBA Guidelines propose two approaches to correct the calculation. One option is to treat the debt instrument with prepayment risk as if it is a combination of a plain vanilla bond and an embedded option. The Modified Duration of the plain vanilla bond is therefore corrected with the change in value of the embedded option, which is estimated according to its theoretical delta, resulting from a 100 basis point movement in interest rates. The other option is to directly calculate the change in value of the whole instrument subject to the prepayment risk resulting from a 100 basis point movement in interest rates.

View the Guidelines.

The Basel Committee on Banking Supervision announced that it had, along with the Group of Central Bank Governors and Heads of Supervision, made progress towards completing the Basel Committee’s post-crisis regulatory reforms, known as Basel III. However, despite the progress, more time is needed to finalize some areas, including the final calibration, before those proposals can be reviewed by the GHOS. This impacts the meeting of the GHOS which had been scheduled for early January, which has been postponed accordingly. The Basel Committee gave no specific date as to when the work would be completed, saying only that it expects to complete the work in the near future.  

View the press release.

The European Banking Authority published a letter, dated December 23, 2016, in which it requests an extension of time from the European Commission for delivering certain draft technical standards which were due to be delivered by December 31, 2016 under the Capital Requirements Regulation and the Capital Requirements Directive. The EBA is requesting an extension for the Regulatory Technical Standards and the Implementing Technical Standards on the authorization of banks because of a combination of its significant workload and considerable resource constraints and issues arising in respect of new entrants and FinTech companies in addition to the need to achieve a balance between allowing Member States to retain their own authorization processes whilst harmonizing the information required. The EBA expects to be able to deliver the ITS and RTS by mid-2017. 

The EBA is also requesting an extension for the RTS on consolidation methods which it has experienced difficulties with because of the interactions with the Basel framework and with the European Commission's recent adoption of legislation to amend CRR. The EBA expects to be able to finalize the draft RTS by the end of 2017. 

Read more.

The US Federal Reserve Board, the OCC and the Federal Deposit Insurance Corporation announced the annual adjustment to the asset-size thresholds used to define small bank, small savings association, intermediate small bank and intermediate small savings association under the Community Reinvestment Act (CRA) regulations.

Read more.

The New York State Department of Financial Services (NYSDFS) reproposed its first-in-the-nation cybersecurity regulation to protect New York State from the threat of cyber-attacks. The proposed regulation, which will be effective March 1, 2017, will require banks, insurance companies and other financial services institutions regulated by NYSDFS to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.

The NYSDFS considered comments submitted regarding the previously proposed regulation during a 45-day comment period, which ended on November 14, 2016, and has incorporated appropriate comments in the updated regulation that will be‎ subject to an additional final 30-day notice and public comment period. The NYSDFS will focus its final review on any new comments that were not previously raised in the original comment process.

View reproposed regulation.

The OCC issued a final rule, 12 C.F.R. § 7.1022, that prohibits national banks and federal savings associations (FSAs) from dealing or investing in industrial or commercial metals.

The final rule covers metal, including alloy, in a physical form primarily suited to industrial or commercial uses, such as copper cathodes and aluminum T-bars. The final rule supersedes a prior OCC determination permitting national banks to trade copper. The rule, however, still recognizes that national banks and FSAs may hold industrial or commercial metal under authorities that are distinct from dealing and investing. For example, national banks and FSAs may acquire industrial or commercial metal through foreclosures on loans and then sell the metal to mitigate loan losses.

The rule carries out an OCC recommendation included in its report to Congress and the Financial Stability Oversight Council under section 620 of the Dodd-Frank Act. Section 620 required the federal banking agencies to conduct a study of the activities and investments that banking entities may engage in under state and federal law and to consider the associated risks and how banking entities mitigate those risks.

The effective date of the final rule is April 1, 2017. Banks with existing holdings of industrial and commercial metal acquired through dealing or investing activities must divest of such metal as soon as reasonably practical, but no later than one year after the effective date of the final rule, subject to four one-year extensions available from the OCC in particular cases.

View the final rule.

The US Federal Reserve published the aggregate global indicator amounts for the purposes of calculating the “Method 1” G-SIB Surcharge for 2016. The Federal Reserve Board’s G-SIB surcharge rule establishes a methodology to identify global systemically important bank holding companies in the United States based on certain indicators that are correlated with systemic importance. Under the G-SIB surcharge rule, a firm must calculate its G-SIB score using a specific formula (“Method 1”).

Read more.

OFAC published updated regulations on Iranian Transactions and Sanctions Regulation. The amended regulation narrows the definition of “goods of Iranian origin” and “Iranian-origin goods,” allowing for the export and reexport of medical devices and agricultural commodities to Iran. Further, the amended regulation expands the definition of “non-Iranian goods” to include goods transported on a vessel or aircraft through Iranian territorial waters or stopped at a port or place in Iran en route to a destination outside of Iran that have not otherwise come into contact with Iran.

View text of the OFAC regulation.

View FAQs on the regulation.

The European Banking Authority published a report on the cyclicality of banks' capital requirements. The report examines whether the EU's risk-sensitive capital requirements create unintended pro-cyclical effects and whether any remedial steps are necessary or justified. The EU's capital requirements framework is set out in the Capital Requirements Regulation and the Capital Requirements Directive, together known as CRD IV. CRR requires the European Commission to prepare a biennial report for the European Parliament and the Council of the European Union on the issue. This report from the EBA is intended to feed into that report. 

The EBA concludes that the impact of the EU capital requirements framework on the EU economic cycle is limited and that there are no strong reasons for shifting from the risk-sensitive framework. The EBA notes that EU banking legislation provides tools for regulators to respond to any pro-cyclicality concerns, as appropriate, and recommends periodic monitoring of the potentially cyclical impact of the EU bank regulatory framework (not only regulatory capital) and further research into the effectiveness and efficiency of counter-cyclical instruments. 

View the EBA's report.

The European Securities and Markets Authority published the results of a peer review it has conducted into how national regulators ensure and assess compliance by CCPs with the margin and collateral requirements under the European Market Infrastructure Regulation. Under EMIR, ESMA has a coordination role between national regulators to build a common supervisory culture and consistent supervisory practices. ESMA is required to conduct a peer review of the supervisory activities of the national regulators of CCPs at least annually. ESMA's report on the peer review provides an overview of the approaches of national regulators and sets out ESMA's assessment of the degree of convergence between those approaches. ESMA found inconsistencies in the frequency and depth of the supervision of CCPs (even for CCPs of a similar size or complexity). ESMA highlights various areas for improvement to enhance supervisory convergence, including identification of new services which require an extension of a CCP's authorization, determining significant changes to a CCP's risk model and the ongoing review of CCP collateral policies. The report sets out some examples of good practice that ESMA observed during the review, such as having direct access to the data of a supervised CCP. ESMA intends to follow up on the findings from the peer review by, amongst other things, identifying appropriate tools to enhance supervisory convergence. 

View ESMA's peer review report.

The FDIC released a handbook, developed to facilitate the process of establishing new banks, by offering guidance for navigating the phases of establishing an insured institution. The handbook, titled “Applying for Deposit Insurance—A Handbook for Organizers of De Novo Institutions,” is part of recent efforts by the FDIC to increase transparency and clarity regarding the deposit insurance application process. The standards in the Handbook relax certain requirements that had been imposed as a result of the financial crisis. Comments on the handbook are due February 20, 2017.

View handbook.

The European Commission announced the membership composition of the High-Level Expert Group on sustainable finance. The purpose of the Expert Group is to provide recommendations for a comprehensive EU strategy on sustainable finance as part of the Capital Markets Union. The Commission will draw on such recommendations when determining how to integrate considerations of sustainability into the EU’s rules for the financial sector. The Group’s advice will outline how the EU should design appropriate and proportionate financial policies, incentives and signals for financial institutions, corporate capital-raisers and markets to direct capital towards sustainable finance and to take operational steps to protect the stability of the financial system from risks related to the environment. The Group will start meeting as of January 2017. An interim report is expected around the middle of the year and a final report in December 2017.
 
View the announcement.

The Joint European Supervisory Authorities published an open letter notifying the European Commission that they would be unable to meet the deadline of December 26, 2016 for submitting final draft Regulatory Technical Standards supplementing the Fourth Anti-Money Laundering Directive. The 4AMLD mandates the ESAs (made up of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority) to draft RTS on the measures that banks and other financial institutions should undertake to manage the potential risks of money laundering and terrorist financing where they have branches or majority-owned subsidiaries in third countries that prohibit the implementation of AML and CTF measures consistent with those required by 4AMLD. The delay is attributed to the ESAs' prioritization of other mandates under the 4AMLD for the Joint Committee Work Programme 2016. The ESAs deprioritized the draft RTS as enquiries with regulators and ESA stakeholder groups suggested that there were no countries that prohibited the requisite implementation of AML and CFT measures. Consequently, unlike under other mandates under the 4AMLD, the draft RTS would have limited application in practice. The ESAs intend to start working on the mandate in 2017 and expect to be able to submit final draft RTS by December 31, 2017.

View the letter.

A Commission Implementing Decision was published in the Official Journal of the European Union, updating the list of third countries with equivalent regulatory arrangements in relation to prudential requirements for banks and investment firms for the purpose of the treatment of exposures. The Decision lists the countries whose arrangements for supervision and regulation of banks and investment firms are deemed by the European Commission to be equivalent to the standards of the EU as set out in the Capital Requirements Regulation. The Decision is based on assessments that reviewed the supervisory and regulatory arrangements in each country for: (i) banks; (ii) investment firms; and (iii) exchanges. The following nations and territory are now equivalent across categories (i) and (ii): Turkey, New Zealand, the Faroe Islands and Greenland. This Decision will enter into force on January 10, 2016.

View the list of equivalent third countries and territories.

The European Commission published a legislative proposal for a Directive on countering money laundering by criminal law. The proposed Directive is intended to harmonize and establish minimum rules concerning the definition of criminal offenses and sanctions in the area of money laundering. The proposed Directive would implement international obligations such as the Warsaw Convention and Financial Action Task Force recommendations. 
 
The proposed Directive provides for three specific money laundering activities that, when conducted intentionally, would be punishable as a criminal offense. Member States would be able to impose more stringent rules, for example, by making money laundering committed recklessly or by serious negligence a criminal offense. 

Read more.

The European Banking Authority published its third impact assessment report for the liquidity coverage ratio requirements under the Capital Requirements Directive and Capital Requirements Regulation, together known as CRD IV. CRR mandates the EBA to prepare the LCR impact assessment report annually. The aim of the report is to assess the impact of the EU's LCR regulation on the EU banking sector. The report indicates a constant improvement of the average LCR across EU banks since 2011. In addition, it states that the average LCR for EU banks at the end of December 2015 was approximately 134%, with an aggregate gross shortfall of EUR 10.9 billion. This increase has been attributed to an increase in liquid assets.

The EBA is also required to report to the European Commission on whether the EU's timeframe should be amended to fit with the Basel III timeline. The report reviews the phasing-in of the liquidity coverage requirements, in particular, assessing whether there is a case for deferring the introduction of the 100% minimum binding standard from January 1, 2018 until January 1, 2019. Under the CRR and related secondary legislation, the EU LCR minimum requirement was set at 60% from October 1, 2015 and is gradually increasing to 100% in January 2018, a year ahead of the Basel implementation date. The EBA concludes that there is no significant evidence to recommend amending the current transitional framework because the existing level of non-compliance with the LCR under full implementation is low.

View the report.

The Joint Committee of the European Supervisory Authorities published a report outlining final joint Guidelines for the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector. The Joint Committee consists of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. The final Guidelines follow a consultation on draft guidelines published on July 3, 2015, and will replace previous guidelines published by the ESAs’ predecessors in 2008.

The purpose of the final Guidelines is to provide legal certainty and clarity on assessment processes relating to increases of control and acquisitions of banks, investment firms and insurance firms, bringing a more harmonized, clear and transparent process in prudential assessments by national regulators. In addition, the final Guidelines seek to provide clearer details on what information is required from proposed acquirers. The guidelines cover questions related to: (i) indirect acquisitions of qualifying holdings, persons acting in concert and decisions to acquire; (ii) assessment periods; and (iii) financial soundness of acquirers. The report summarizes the main points and comments that were raised in the twelve responses to its Consultation. 

Read more.

The European Banking Authority published recommendations for harmonizing the EU framework for covered bonds. For banks investing in covered bonds that meet certain criteria, the Capital Requirements Regulation sets preferential risk weights to be applied. The recommendations are set out in a report which builds on the EBA's 2014 Report on EU covered bond frameworks and capital treatment. The aim of the recommendations is to ensure that only financial instruments which comply with certain harmonized structural, credit risk and prudential standards are capable of being covered bonds, and as such have access to the special regulatory and capital treatment provided. Harmonizing the EU framework on covered bonds is part of the Capital Markets Union initiative launched by the European Commission in September 2015

Read more.

Over the past month, President-elect Donald Trump has made several selections for key administration posts. Notably, President-elect Trump said he would nominate Steven Mnuchin to serve as Treasury Secretary. Mnuchin was the Trump campaign’s national finance chair. He is also a former Goldman Sachs Partner and led the investor group that acquired the failed IndyMac Bank from the FDIC and operated it as OneWest Bank. While serving as campaign finance chair, Mnuchin outlined some of the economic priorities of the Trump administration: in August he said that a Trump administration would be “focused on lowering business taxes, making sure that US corporations are competitive around the world, bringing back cash from all around the world that’s sitting offshore.” President-elect Trump has also chosen Wilbur Ross as Commerce Secretary, a businessman who has not held any previous public office.

The Joint Committee of the European Supervisory Authorities published a final Report containing Good Supervisory Practices for reducing sole and mechanistic reliance on credit ratings. The ESAs consist of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. The purpose of the Report is to reduce the sole and mechanistic reliance on credit ratings, in accordance with requirements set out in legislation such as the Credit Rating Agencies Regulation, and to ensure a level of cross-sectoral consistency in the implementation of certain elements of the CRR. The ESAs have produced the report to assist regulators supervising entities such as banks, investment firms, insurance and reinsurance undertakings and investment companies. In particular, regulators' responsibilities of monitoring the adequacy of their supervised entities credit risk assessment processes, assessing the use of contractual references to credit ratings and encouraging them to mitigate the impact of any such references. The Report provides an overview of how regulators may approach their supervisory responsibilities under the CRA legislative package.

The Report contains two sets of common good practices. In the first, the ESAs propose a general framework for the monitoring of the use of credit ratings and the treatment of references to credit ratings in credit assessments. They also suggest potential alternatives or complementary measures to ratings and also how to address issues of proportionality arising from the varying scale and complexity of supervised entities. In the second set, there are specific practices to establish a common approach for supervision of how credit ratings are used across specific business processes, in particular, where credit ratings are most in danger of being used in a mechanistic way.

View the Report.

The Council of the European Union announced that it had reached an agreement with the European Parliament on prospectuses for the issuing and offering of securities. Finalization of the agreement comes after the provisional agreement reached on December 7, 2016. The draft Prospectus Regulation is part of the EU's Capital Markets Union plan. The proposed Prospectus Regulation will replace the current EU Prospectus Directive, revising the regime for companies to raise money on public markets or by public offer to potential investors. The aim is to simplify the rules and administrative obligations for companies wishing to issue shares or debt on the market and reducing the costs of preparing a prospectus, thus fostering cross-border investments in the single market, while at the same time still enabling investors to make informed investment decisions. Some compromise has been reached in the final agreement, such that no prospectuses will be required for capital raisings and crowdfunding projects up to EUR1 million. It has also been agreed, among other things, that the threshold beyond which the issuance of a prospectus is mandatory be increased from €5 million to €8 million in capital raised. Below that threshold, issuers can raise capital in accordance with rules set for local growth markets. The Council expects Parliament to approve the regulation at first reading, with the final text then to be submitted for adoption by the Council.  

View the Council's press release.

You may like to view our client note on the European Commission's proposal for a Prospectus Regulation.

The European Banking Authority published for consultation draft Guidelines on supervision of significant branches. The proposed Guidelines set out how the consolidating supervisor, the home supervisor and the host supervisor should cooperate to prudentially supervise and coordinate monitoring of significant branches requiring intensified supervision. An "intensification test" is proposed to assess which branches should be designated as significant-plus branches. Significant-plus branches will be those that are assessed as important for the firm of the group or as performing critical functions or as important for the financial stability of the host Member State. A branch that is assessed to be a significant-plus branch would be subject to intensified supervision which would entail, amongst other things, a separate branch risk assessment, regular on-the-spot checks and inspections, extensive sharing of supervisory intelligence, coordinated application of supervisory and precautionary measures and reflection of the branch in the firm&'s recovery planning. The consultation closes on March 20, 2017.

View the consultation paper.

The US CFTC issued time-limited no-action relief to derivatives clearing organizations (DCOs) and reporting entities for certain swaps reporting obligations amended by the Amendments to Swap Data Recordkeeping and Reporting Requirements for Cleared Swaps that was released on June 27, 2016. The no-action relief letter relieves DCOs from their obligations to report original swap terminations as required by the rule for up to six months or until DCOs can sufficiently test required changes to their reporting systems.

The CFTC also announced no-action relief for entities submitting swaps for clearing with DCOs acting under exemptive orders or no-action relief that has been provided by the CFTC. Entities submitting such swaps are relieved from obligations to terminate the original “alpha” swap and to report any swaps between DCO counterparties acting under such exemptive orders or no-action relief. Entities are also relieved from their obligation to report certain primary economic terms data fields for swaps intended to be cleared by such DCO counterparties as cleared swaps. The relief is conditioned upon the entity providing certain information to fulfil its reporting obligations.

View no-action letters.

Also view no-action letters.

The US Federal Reserve Board approved a final rule requiring large (generally defined as consolidated assets of $50 billion or more) depository institution holding companies, and certain nonbank financial companies supervised by the Federal Reserve, to publicly disclose their liquidity coverage ratio. The final rule requires these covered financial institutions to publicly disclose quantitative and qualitative information regarding their liquidity coverage ratio calculation on a quarterly basis. The disclosures must be made in a direct and prominent manner on the company’s public internet site or in a public financial or other public regulatory report and must remain available for five years. The Federal Reserve stated that requiring institutions to report their medium-term liquidity position would provide “a better indication of the overall strengths and weaknesses of a company’s liquidity position” rather than an examination of short-term swings in a company’s liquidity position. The final rule is similar to the rule proposed in November 2015; however, the rule as adopted extends the implementation timeline of the public disclosure requirements by nine months. Under the new rule, covered companies, which include those that have $700 billion or more in total consolidated assets or those that have $10 trillion or more in assets under custody, will need to start complying with the public disclosure requirements beginning on April 1, 2017. Other covered companies will be required to comply with the public disclosure requirements beginning on April 1, 2018.

View text of the final rule.

The US Federal Reserve, the FDIC, the US National Credit Union Administration and the OCC issued FAQs to assist institutions in implementing the new accounting standard for credit losses, which was recently issued by the US Financial Accounting Standards Board. The new standard, “Financial Instruments—Credit Losses,” replaces the existing incurred loss methodology in US GAAP and establishes the new current expected credit losses methodology (CECL). The FAQs expand on the “Joint Statement on the New Accounting Standard on Financial Instruments—Credit Losses,” which the agencies issued in June 2016. The agencies plan to continue issuing FAQs regarding the implementation of the CECL methodology.

View notice to the banks.

View FAQs.

The Joint Committee of the European Supervisory Authorities launched a consultation paper on the use of big data by financial institutions. The ESAs are the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. Big data refers to the collection, processing and use of high volumes of different types of data from various sources, using IT tools and algorithms. Big data is used to reveal patterns or correlations, to generate new ideas or solutions or to more accurately predict future events. The objective of the consultation is for the ESAs to better understand the impact of the increased use of big data on the financial industry and to assess whether any supervisory or regulatory actions are needed. The ESAs do not consider that the existing EU legislation on data protection, competition, consumer protection and sectoral financial services regulations explicitly addresses big data. The discussion paper seeks feedback on whether there is sufficient flexibility in the existing legislation to cover big data, whether there are any gaps and how the existing legislation impacts the use of big data by the financial services sector. Responses to the consultation are requested by March 17, 2017. The ESAs expect to publish their decision on next steps, if any, before the end of 2017. 

View the Discussion Paper. 

The Financial Stability Board published an updated progress report outlining its action plan to assess and address the decline in correspondent banking. Correspondent banking relationships enable banks to access financial services in different jurisdictions and provide cross-border payment services to their customers. There has been an increasing concern about the decline in the number of correspondent banking relationships because the ability to send and receive international payments could be impacted, which may have repercussions on growth and the stability and integrity of the financial system. The FSB presented a four point action plan to the G20 in November 2015. The progress report describes the progress that has been made and outlines the deliverables for 2017 to further address the issues. 

Read more.

The Financial Stability Board published a consultative paper containing draft Guiding Principles on the internal total loss-absorbing capacity or Internal TLAC of global systemically important banks. The FSB is proposing the Guiding Principles to support the implementation of the TLAC Standard. The TLAC Standard is designed to ensure that failing G-SIBs will have sufficient loss-absorbing and recapitalization capacity available in resolution. The FSB committed to develop implementation guidance on the TLAC Standard, in particular for internal TLAC. Internal TLAC is the loss-absorbing resources that a resolution entity commits to its material subsidiaries. The proposed Guiding Principles cover, among other things: (i) the process for identifying material sub-groups, the composition of sub-groups, the distribution of internal TLAC between the entities within material sub-groups and the treatment of unregulated or non-bank entities; (ii) the role of home and host authorities and the factors to be considered when determining the size of the internal TLAC requirement; (iii) practical considerations relating to the issuance and composition of internal TLAC; (iv) the trigger mechanism for internal TLAC; and (v) cooperation and coordination between home and host authorities in triggering the write-down and/or conversion into equity of internal TLAC. Responses to the consultation are due by February 10, 2017. The FSB intends to review the technical implementation of the TLAC Standard by the end of 2019.

View the consultative paper.

US Financial Crimes Enforcement Network (FinCEN) announced that it is granting a further extension of time for certain Report of Foreign Bank and Financial Accounts (FBAR) filings. The extension was announced in light of the notice of proposed rulemaking FinCEN issued on March 10, 2016, which proposes to revise regulations implementing the Bank Secrecy Act regarding FBARs. Specifically, one of the proposed amendments in the notice would expand and clarify the exemptions for certain US persons with signature or other authority but no financial interests over foreign financial accounts. On December 8, 2015 FinCEN issued Notice 2015-1 to extend filing date for FinCEN Form 114 - FBAR for some individuals with signature authority over but no financial interest in one or more foreign financial accounts to April 15, 2017 (and has granted identical extensions that applied to similarly situated individuals since 2011). FinCEN is now further extending the filing due date to April 15, 2018, for individuals whose filing due date for reporting signature authority was previously extended by Notice 2015-1. This extension applies to reporting of signature authority held during the 2016 calendar year, as well as all reporting deadlines extended by previous Notices 2015-1, 2014-1, 2013-1, 2012-1 and 2012-2, along with Notices 2011-1 and 2011-2. For all other individuals with an FBAR filing obligation, the filing due date remains April 15, 2017.

View FinCEN Notice.
 

The UK Bank Recovery and Resolution Order 2016 came into force. The Order implements in part the Bank Recovery and Resolution Directive which sets out the framework for the recovery and resolution of banks and investment firms. The Order amends the Banking Act 2009, the Financial Services and Markets Act 2000 and certain related secondary legislation to, amongst other things, ensure that the Bank of England as the UK's resolution authority and the Prudential Regulation Authority and Financial Conduct Authority as the regulators have powers to manage the failure of a bank or investment firm and their group companies to ensure that critical functions continued to be performed. The Order also provides specific powers to the PRA and FCA to replace directors and senior managers and appoint temporary managers in accordance with the BRRD, amends provisions relating to triggers of contractual termination rights and adds new provisions relating to the resolution of UK branches of third-country institutions.

View the Order.

The International Organization of Securities Commission published its final Report outlining Guidance on reporting in compliance with its Principles for Financial Benchmarks. The purpose of the Guidance is to increase the consistency and quality of reporting by Benchmark Administrators on their compliance with the Principles, which were published in July 2013. The Principles outline a set of recommended practices that should be implemented by Benchmark Administrators and Submitters. The Report follows a survey of 29 benchmarks conducted by IOSCO, to identify any relevant challenges and issues, on topics such as the status of their implementation of the Principles and the number of benchmarks they administered. IOSCO developed the Guidance on the feedback received.  

View the Report.

View the Principles.