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.

Read more.
 

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.

Read more.

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. 

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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.

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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”).

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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.