The European Securities and Markets Authority published draft Guidelines on trading halts by regulated markets under the revised Markets in Financial Instruments Directive. MiFID II requires regulated markets to temporarily halt or constrain trading if there is a significant price movement in a financial instrument (equity, equity-like and debt instruments) on that market or a related market in a short period. Regulated markets must also, in exceptional cases, cancel, vary or correct any transaction. ESMA is required to develop Guidelines on the calibration of those trading halts, taking into account the liquidity of the different asset classes and sub-classes, the nature of the market model and types of users. ESMA is also proposing Guidelines, at its own initiative, which set out how trading halts should be communicated to market participants and other venues and on the procedure and format of submissions by regulated markets to national regulators setting out the parameters for halting trading. The Guidelines will apply to national regulators, trading venues (regulated markets, MTFs and OTFs) and all trading systems allowing or enabling algorithmic trading. The consultation closes on December 6, 2016. ESMA intends to finalize the Guidelines in Q1 2017.

View the consultation paper. 

The CFPB issued a final rule that applies federal consumer protections under Regulations E and Z for prepaid account users for the first time. Prepaid accounts may be loaded with funds by a consumer or by a third party, such as an employer. Consumers generally can use these accounts to make payments, store funds, withdraw cash at ATMs, receive direct deposits or send money to others.

Read more.

The OCC issued risk management guidance to national banks, federal savings associations and federal branches and agencies regarding the periodic reevaluation of risks in connection with providing correspondent banking accounts for foreign banks. The guidance provides a collection of best practices for banks to consider when undertaking such periodic reevaluations and when determining whether to retain or terminate certain accounts. Such practices include, among others, communicating these decisions to bank senior management with consideration given to potential international financial inclusion impacts, considering mitigating information obtained from foreign financial institutions and ensuring a clear audit trail of the reasons and method used for account closure.

The guidance restates the OCC’s supervisory expectation that banks assess risks associated with foreign correspondent banking as part of their on-going risk management and due diligence practices. As a general matter, decisions to retain or terminate banking relationships reside with the bank. The OCC does not direct banks to open, close or maintain individual accounts without regard to the risks presented by an individual customer or the bank’s ability to manage the risk.

View OCC guidance.

The European Securities and Markets Authority published draft Guidelines on the target market assessment for the new product governance requirements in the revised Markets in Financial Instruments Directive. The product governance requirements require firms which manufacture and distribute financial instruments and structured deposits to act in their clients’ best interests during all the stages of the life-cycle of products or services. The requirements in MiFID II were further specified in secondary legislation which was adopted by the European Commission in April 2016. ESMA's proposed Guidelines focus on the ‘target market assessment’, which has been identified as the most important for achieving consistent application of the product governance requirements across the EU. 

The proposed Guidelines set out, amongst other things, the determination of the potential target market by the manufacturer or distributor in terms of categories to be considered and differentiation on the basis of the nature of the product manufactured or distributed, regular reviews to assess whether products and services are reaching the target market and the distribution of products manufactured by entities not subject to the MiFID II product governance requirements by MiFID II distributor firms. ESMA has also included practical examples and case studies on the application of certain aspects of the proposed Guidelines. The consultation closes on January 5, 2017. ESMA will consider the feedback it receives and intends to publish a final report in Q1 or Q2 2017. 

View the consultation paper.

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

The proposed Guidelines will apply to the management body of market operators which are the individuals who operate a regulated exchange and to DRSPs. Investment firms operating a multilateral trading facility, an organized trading facility or banks operating a trading venue will not be subject to the proposed Guidelines. Instead the management bodies of operators of these other types of trading venues will be subject to separate Guidelines developed under other provisions of MiFID II and the Capital Requirements Directive which ESMA and the European Banking Authority are expected to consult on soon. The consultation closes on January 5, 2017. ESMA will consider the feedback it receives and intends to publish a final report in Q1 or Q2 2017.

View the consultation paper. 

The US Federal Reserve Board and the FDIC posted the public portions of the required “targeted submissions” for eight systemically important US banking institutions. This follows the joint determination of the agencies in April of this year that each of the 2015 resolution plans of Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street and Wells Fargo was not credible or would not facilitate an orderly resolution under the US Bankruptcy Code, the standard established in the Dodd-Frank Act. Accordingly, the agencies issued joint letters to these firms detailing the deficiencies in their plans and requisite actions to be taken by the firms to address them. The firms were given until October 1, 2016 to remediate their deficiencies and file a targeted submission to the agencies detailing the remediation. A firm that has not remediated the identified deficiencies may be subject to more stringent prudential requirements.

The agencies jointly identified weaknesses in the 2015 resolution plans of Goldman Sachs, Morgan Stanley and Citigroup that the firms must address in their 2017 resolution plans. These firms were also required to file targeted submissions by the October 1st deadline.

View targeted submissions.

and.

Nearly 500 members of two national task forces convened by the US Federal Reserve Board began their review of nineteen proposals submitted by interested task force members across the payments industry that outline potential approaches for a faster payment system in the United States.

One task force is focused on faster payment capabilities, while the other is working to enhance payment system security. The review by the two task forces, each of which includes representatives of financial institutions, consumer groups, payment service providers, financial technology firms, businesses, government agencies and other interested parties, follows an independent analysis of the proposals by a global consulting firm, which assessed the proposals against 36 effectiveness criteria created by members of both task forces earlier this year.

A final two-part report is expected to result from the Faster Payments Task Force work effort. The first section, slated for release in January 2017, will describe the task force history and background. The report will detail gaps in the current payments landscape, identify opportunities for improvements and outline the benefits to the public of a faster payment system and the needs it would serve.

The second section of the final report, targeted for release in mid-year 2017, will include a discussion and assessment of the specific proposals, offering models of what an end-to-end faster payment system in the United States could look like and demonstrating how each proposal measured up against the various effectiveness criteria. This section will also identify strategic issues deemed important to the successful development of faster payments in the United States and recommend industry actions required to advance their implementation and adoption.

View Federal Reserve Board press release.

The European Commission adopted Regulatory Technical Standards on risk mitigation techniques for uncleared OTC derivatives. The European Market Infrastructure Regulation requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. These RTS prescribe the regulatory margin amounts 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 outlining a broad list of securities eligible as collateral for the exchange of margins, such as sovereign securities, covered bonds, specific securitizations, corporate bonds, gold and equities.

The Joint Committee of the European Supervisory Authorities submitted final draft RTS to the Commission on March 8, 2016. The Joint Committee is made up of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. On July 28, 2016, the European Commission requested the ESAs to amend the final draft RTS and submit a modified version for approval. The ESAs rejected many of the proposed amendments in an Opinion published on September 8, 2016, including certain amendments relating to concentration limits on initial margin for pensions scheme arrangements, the proposed amendments to the calculation of the threshold against non-netting jurisdictions, amendments relating to the treatment of covered bonds and the treatment of bilateral derivative contracts where a counterparty is a CCP, transactions with third country counterparties and the process for regulators on the exemption of intragroup derivative contracts.

Read more.

The European Securities and Markets Authority published a consultation paper containing draft Regulatory Technical Standards specifying the scope of the consolidated tape for non-equity financial instruments under the Markets in Financial Instruments Directive II. The RTS on the scope of tape for equity instruments was previously endorsed by the European Commission on June 2, 2016. ESMA's proposed draft RTS will amend the endorsed RTS on the equity consolidated tape by adding a list of non-equity asset classes that are to be included in the CTP electronic data stream. The list includes classes of bonds (excluding exchange traded commodities and notes), structured finance products, securitized derivatives, interest derivatives, foreign exchange derivatives, contracts for differences and emission allowances.

Read more.

The Bank of England announced that the results of the UK 2016 banking stress test would be reported to the relevant firms involved on November 29, 2016 and published on November 30, 2016. The 2016 test is the first to be designed under the new approach to stress testing published in October 2015 and covers seven UK banks and building societies: Barclays plc, HSBC Holdings plc, Lloyds Banking Group plc, Nationwide Building Society, The Royal Bank of Scotland Group plc, Santander UK plc and Standard Chartered plc. 

The Bank also announced that for the first time the UK stress test next year will include two scenarios: the annual cyclical scenario, which assesses the risks to the banking system resulting from the financial cycle, and an additional "exploratory" scenario which assesses a bank's resilience to a wider range of potential threats. 

View the announcement.

The European Securities and Markets Authority published Model Written Arrangements for Benchmark Colleges (dated September 30, 2016). The Benchmark Regulation requires the national regulator of a benchmark administrator that provides a critical benchmark to establish a college of regulators. ESMA will be a member of each of the colleges. The Model Written Arrangements are intended to provide a framework for establishing a college and for the exchange of information between the relevant regulators. 

View the Model Written Arrangements.

The European Banking Authority published final Guidelines on implicit support for securitization transactions under the Capital Requirements Regulation. Examples of such transactions include purchases of deteriorating credit risk exposures from an underlying pool or improvement of quality of credit enhancements through the addition of higher quality risk exposures. The CRR places restrictions on providing implicit support to securitizations. These rules apply in addition to the so-called "skin in the game" requirements on originators to retain part of the risk on securitizations. To prevent uncapitalized risks of implicit support, the CRR requires that any reduction in capital requirements gained through a securitization must be justified by a corresponding transfer of risk to third parties. The CRR also states that a transaction is not considered to provide support to a securitization if it is executed under arm’s length conditions and taken into account in the assessment of significant risk transfer. The CRR requires a sponsor or originator institution that has failed to comply with this requirement to, at a minimum, hold own funds against all of the securitized exposures as if they had not been securitized. The Guidelines set out an objective test in relation to the definition of arm's length conditions.

Read more.

The US Federal Reserve Board’s October 2016 Senior Loan Officer Opinion Survey revealed that, in general, banks did not change standards on commercial and industrial loans while they tightened standards on commercial real estate loans over the third quarter; banks also reported easing of standards on residential mortgage loans, whether or not the loans were eligible for purchase by government-sponsored enterprises. Banks also noted a weakening of demand from middle- and large-market firms for commercial loans and stronger demand for construction and land development loans in the CRE space. The Federal Reserve Board also asked special questions on commercial and industrial loan demand, and banks indicated that they do not expect changes in demand.

View the Federal Reserve Board’s survey report.

The European Securities and Markets Authority published a consultation paper on its proposed draft Implementing and Regulatory Technical Standards for the Securities Financing Transactions Regulation. Securities financing transactions involve the use of securities to borrow cash or other higher investment-grade securities, or vice versa. Such transactions can include repurchase transactions, securities lending and sell/buy backs. The purpose of the SFTR is to increase the transparency of such shadow banking activities. The SFTR will require both financial and non-financial market participants to report details of their SFTs to an approved EU trade repository. The draft RTS outlines the procedure and criteria for registration as a trade repository under the SFTR, the use of internationally agreed reporting standards, reporting logic and the main aspects of the structured content of SFT reports, the requirements regarding transparency of data, data collection, aggregation and comparison as well as access levels for different regulators. 

Read more.

The European Securities and Markets Authority published a Final Report and final Guidelines on information expected or required to be disclosed on commodity derivatives markets or related spot markets under the Market Abuse Regulation. This follows the consultation that ESMA undertook in March 2016. MAR replaced the current Market Abuse Directive and its implementing legislation from July 3, 2016. One of the changes that MAR will introduce is the expansion of the definition of inside information relating to commodity derivatives to cover price sensitive information relevant to the related spot commodity contracts as well as the derivative. This means that transactions in commodity derivatives based on inside information relating to underlying spot transactions will be expressly prohibited. In addition, the market manipulation prohibitions will include transactions in derivatives markets that manipulate the related spot commodity transaction and transactions in spot commodity markets that manipulate the related derivative. 

Read more.

The OCC published a final rule adopting enforceable guidelines for recovery planning by insured national banks, insured Federal savings associations and insured Federal branches of foreign banks with at least $50 billion in average total consolidated assets. The guidelines are effective on January 1, 2017, but are subject to phased-in compliance based on an institution’s asset size: six months for institutions with $750 billion or more, 12 months for institutions with $100 billion or more but less than $750 billion, and 18 months for institutions with $50 billion or more but less than $100 billion. The guidelines provide a framework for evaluating the financial impact of a severe stress on an institution, and various measures an institution could implement to be able to withstand such a period of stress.

The recovery plan must address the following elements, among others: triggers reflecting the bank’s vulnerabilities, recovery options, impact assessments for each option, escalation procedures, communications procedures and any other information that the OCC communicates in writing to the bank regarding the recovery plan. The OCC noted that it has no specific expectations regarding the length or detail of recovery plans, so long as the plan is specific to the characteristics of each institution. The OCC emphasized that recovery plans should be integrated into a bank’s risk governance framework, and a bank should coordinate its recovery plan with its holding company’s recovery and resolution planning. The guidelines also call for at least annual review of a bank’s recovery plan by management and the bank’s board, as well as management review after any material event.

View FR publication of final rule.

The Prudential Regulation Authority published a Policy Statement and Supervisory Statement setting out its final policy approach to underwriting standards for buy-to-let mortgage contracts. The Supervisory Statement sets out the minimum standards that firms should use to underwrite buy-to-let mortgage contracts, including minimum requirements for affordability assessments. It also clarifies that the PRA's expectation is that the reduction of capital requirements under the Capital Requirements Regulation for loans to small and medium-sized enterprises should not be applied where the purpose of the loan is to fund a buy-to-let business. The standards will apply to all PRA-regulated firms undertaking buy-to-let lending that are not subject to regulation by the Financial Conduct Authority. The PRA expects firms within scope to ensure that the standards are adopted by other firms within their groups that undertake buy-to-let lending. 

The new standards will need to be implemented by relevant firms by January 1, 2017 for the interest cover ratio tests and interest rate affordability stress tests. The remaining standards will need to be implemented by September 30, 2017.
 
View the Policy Statement.

View the Supervisory Statement. 

The Bank of England published a consultation paper proposing the introduction of a draft Code of Practice and Supervisory Statement on governance in recognized payment system operators. The final Code and the Supervisory Statement will contain the minimum governance requirements and expectations for recognized payment system operators to meet. Recognized payment systems include Bacs, CREST, CHAPS, LINK and Faster Payment Services. The Principles for financial market infrastructures, developed by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions, form the basis of the draft Code although the Bank has also taken into account other sources such as the UK Corporate Governance Code. Amongst other things, the draft Code would require a recognized payment system operator to be a systemic risk manager (by promoting the safety and efficiency of the payment system and supporting the stability of the financial system), review its performance annually and document its governance policies and procedures. It would also set out the requirements for composition of the board and expectations on governance arrangements. It is not intended that the Code would apply to a recognized payment system that is operated by a recognized clearing house or central securities depository because those entities are already subject to similar requirements under the European Market Infrastructure Regulation or the Central Securities Depositories Regulation.  The Bank of England is proposing that the Code be implemented 12 months after publication of the final version. The consultation closes on December 2, 2016.

View the consultation paper. 

The European Securities and Markets Authority published for consultation the draft technical standards it is required to prepare under the Benchmark Regulation. The Benchmark Regulation sets out the authorization and registration requirements for benchmark administrators, including third country entities and requirements for governance and control of administrators.  It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be critical and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of a critical benchmark.

Read more.

A Commission Implementing Regulation amending Regulatory Technical Standards on the reporting of financial information under the Capital Requirements Regulation was published in the Official Journal of the European Union. The RTS lay down uniform requirements in relation to supervisory reporting to regulators, pursuant to the Capital Requirements Regulation, in the following areas: (i) own funds requirements and financial information; (ii) losses stemming from lending collateralized by immovable property; (iii) large exposures; (iv) leverage ratio; and (v) Liquidity Coverage requirements and Net Stable Funding Requirements. The amending Regulation amends the definitions, templates, and instructions used for the purposes of supervisory reporting. The amending Regulation is based on draft RTS submitted by the European Banking Authority in March 2016. The amending Regulation will enter into force on October 19, 2016 and will apply from December 1, 2016 with the first reporting date being December 31, 2016.

View the amending Regulation. 

The Financial Conduct Authority launched its third consultation on the implementation of the revised Markets in Financial Instruments Directive in the UK. The consultation paper is split into two parts. The first part is on conduct of business requirements and covers topics such as inducements, research, client categorization, disclosure requirements, independence, dealing and managing, suitability, appropriateness and investment research. The second part covers a range of issues such as product governance, supervision and authorization, knowledge and competence requirements and perimeter guidance. 

The FCA's conduct of business proposals follow on from its Discussion Paper published last year which covered two general issues: whether the MiFID II conduct rules should apply to insurance-based investments and pensions and whether the MiFID II rules applicable to the activities of advising on or selling structured products should be incorporated into the FCA's Conduct of Business sourcebook. On the first issue, the FCA has decided to wait until EU implementing measures under the Insurance Distribution Directive are finalized before it sets out its proposals. The FCA is intending to consult on implementing the IDD in 2017. On the second issue, the FCA has decided to proceed with incorporating such MiFID II rules into the Conduct of Business sourcebook. The FCA is proposing to apply individual conduct rules to those activities, which is in line with the provisions in MiFID II. 

Read more.

The US Comptroller of the Currency, Thomas J. Curry, spoke at a conference of the Association of Certified Anti-Money Laundering Specialists about the OCC’s role in the BSA/AML regulatory regime and the risks the regime is meant to curtail. Curry noted that risks in the BSA and AML space are increasing and that banks must have effective systems for BSA and AML management and timely reporting. He cautioned against overly reactionary “de-risking,” where institutions shrink their exposure to high risk geographies and customers, warning that it can lead to entire regions being excluded from the global financial system.

Curry noted that regulators can work with banks they supervise to help them maintain and enhance risk-management systems by communicating expectations clearly. He highlighted specific actions regulators have recently taken, including the joint fact sheet published by the US Treasury on the BSA and AML examination process regarding foreign correspondent banking. He also highlighted upcoming OCC guidance that will clearly lay out the risk management expectations for banks regarding their foreign correspondent portfolios, including best practices for banks on governance, communications and risk mitigation regarding correspondent accounts. Curry closed by reiterating the key points from the joint fact sheet, namely that the OCC, like its fellow federal regulators does not follow a “zero-tolerance” approach to enforcement, and that a decision to terminate a banking relationship or exit a line of business lies solely with a bank.

View Comptroller Curry's speech.

The European Banking Authority published 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. 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. The Guidelines expand on various aspects of the application of the definition of default including the “days past due” criterion for default identification, indications of unlikeliness to pay, specific aspects of the application of the definition of default for retail exposures, application of the default definition in a banking group, treatment of external data and criteria for a return to non-defaulted status. 
 

The US Securities and Exchange Commission voted to establish enhanced standards for the operation and governance of securities clearing agencies that are deemed systemically important by the Financial Stability Oversight Council or that are involved in complex transactions, such as security-based swaps. Covered securities clearing agencies are required to adopt specific enhancements related to financial risk management, governance, recovery planning, operations and disclosure to market participants. The rules, if adopted, will come into effect 60 days after the final rule is published in the Federal Register, and covered security clearing agencies would be required to comply with the rule’s requirements within 120 days thereafter.

The SEC also voted to propose to apply the enhanced standards to other categories of securities clearing agencies, including all SEC-registered clearing agencies that are central counterparties, central securities depositories or securities settlement systems. Comments are due on the proposed amendments within 60 days of publication of the release in the Federal Register.

View proposed rule.

The European Banking Authority published final Guidelines on compensation policies and practices related to the sale and provision of retail banking products and services. The purpose of the Guidelines is to protect consumers from risks associated with poor compensation policies and practices that promote the mis-selling of financial products. The Guidelines apply to compensation paid to staff employed by credit institutions, credit intermediaries, payment institutions and electronic money institutions when selling deposits, payment accounts, payment services, electronic money, residential mortgages and other forms of credit to consumers. The Guidelines contain a framework for such firms to implement compensation policies and practices to improve the correlation between compensation of sales staff and the fair treatment of consumers, with the overall objective of reducing the risk of mis-selling whilst also minimizing conduct costs for firms. The final Guidelines have been amended following feedback received during consultation. Amendments include separate requirements for approval and monitoring of compensation policies and practices, clarification of the type of information to be recorded by firms to achieve compliance, limiting delegation of design and monitoring of compensation policies to ensure that the management body retains ultimate responsibility and clarification that the need to obtain advice on the compensation policies and practices is limited to firms that have established a compensation committee. The implementation date of Guidelines has been postponed from January 3, 2017 to January 13, 2018. The extension is to provide market participants with enough time to implement the Guidelines given the revised application date of MiFID II of January 3, 2018 and align with the application date of the Payment Services Directive II, January 17, 2018.

View the Guidelines.

The CFTC expanded the existing clearing requirement to interest rate swaps through an amendment to regulation 50.4(a), requiring that market participants submit a covered swap for clearing by a derivatives clearing organization. The amendment expanded four interest rate swap classes to require clearing by a DCO: (i) fixed-to-floating interest rate swaps denominated by the Australian dollar, Canadian dollar, Hong Kong dollar, Mexican peso, Norwegian krone, Polish zloty, Singapore dollar, Swedish krona and Swiss franc; (ii) basis swaps denominated in Australian dollars; (iii) forward rate agreements denominated in Norwegian krone, Polish zloty and Swedish krona; and (iv) overnight index swaps (OIS) denominated in Australian and Canadian dollars, as well as US dollar-, euro- and sterling-denominated OIS with termination dates up to three years. Unlike the proposed rulemaking, AUD-denominated forward rate agreements were not included in the final rule. Compliance with the final rule will be phased in over a two-year period according to an implementation schedule based on when analogous clearing requirements will take effect in other jurisdictions.

View final rule.

View Q&A document.

Janet Yellen, Chair of the Federal Reserve, testified before the Committee on Financial Services of the US House of Representatives. Yellen began by discussing the Federal Reserve Board’s efforts to strengthen regulation on the largest financial institutions, specifically efforts to strengthen the resiliency and provide for the resolvability of large and complex institutions. She discussed several changes to the Comprehensive Capital Analysis and Review program that have been made or are being contemplated by the Federal Reserve Board. She also highlighted efforts to reduce and streamline regulatory requirements applicable to community banks and proposed that Congress consider carving out community banks from the Volcker Rule and the incentive compensation limits of the Dodd-Frank due to the lower likelihood of the presence at community banks of the sorts of risks those provisions guard against. Yellen closed by briefly discussing current conditions in the financial system. She highlighted the improved financial conditions and funding positions of US G-SIBS, as well as the facts that large and regional banks are well capitalized and increasing in profitability and that community banks are significantly healthier and returning to profitability.

View FRB transcript of Chair Yellen's testimony.

The Prudential Regulation Authority and the Financial Conduct Authority launched a consultation proposing amendments to the Senior Manager & Certification Regime. Most of the changes result from the legislative changes made in the Bank of England and Financial Services Act 2016. However, the regulators are also proposing some other changes which they consider appropriate having had the opportunity to assess the SM&CR in practice.

Read more. 

The Prudential Regulation Authority and the Financial Conduct Authority published proposed revised guidance on remuneration, principally to bring their guidance into line with the European Banking Authority's Guidelines on Sound Remuneration Policies which apply from January 1, 2017. The remuneration rules and guidance will apply to banks, building societies and investment firms, including UK branches of non-EEA headquartered firms.

Read more. 

The Prudential Regulation Authority published a Policy Statement and final rules on buy-outs of deferred variable remuneration, i.e., where a firm compensates a new employee for deferred variable remuneration not received from a previous employer due to the employee having left the former firm. Current compensation rules, which seek to encourage greater alignment between risk and reward, as well as more effective risk management, allow employers to withhold or reduce unpaid or unvested awards (i.e., the "malus" rules) or recoup paid or vested awards (i.e., the "clawback" rules). The PRA is concerned that the practice of buy-outs could undermine these rules as employees could evade accountability for their actions during a previous employment by moving to a new employer who buys out their cancelled deferred remuneration.

Read more.

The Prudential Regulation Authority and the Financial Conduct Authority launched separate consultations on proposals to extend some of their whistleblowing requirements to UK branches of non-EEA banks. The proposals do not apply to UK branches of EEA banks. The regulators are proposing that non-EEA banks should be required to inform their employees about the regulators' whistleblowing services. Moreover, any non-EEA banking group that has both a UK subsidiary and a UK branch should inform branch staff about the subsidiary's whistleblowing arrangements. The PRA is also proposing that all insurers should inform employees about whistleblowing procedures. Since September 7, 2016, UK banks, building societies and credit unions with assets of £250 million or greater, PRA-designated investment firms, insurance and reinsurance firms within the scope of Solvency II or regulated by the Society of Lloyd's, as well as Lloyd's managing agents, have been required to implement internal whistleblowing procedures.They must also inform employees of the internal procedures and the whistleblowing services provided by the PRA and FCA and to ensure that employment contracts and settlement agreements do not deter employees from whistleblowing. Responses to the consultation are requested by January 9, 2017. The final rules are expected to apply from September 2017.

View the PRA's consultation paper.

View the FCA's consultation paper.

The Prudential Regulation Authority and the Financial Conduct Authority published revised rules on regulatory references for banking and insurance firms subject to the Senior Manager and Certification Regime and the Senior Insurance Manager Regime, respectively. Regulatory references are employment references passed between firms when an individual moves roles.

Read more. 

The Financial Conduct Authority published a discussion paper about how and why the legal function currently falls within the Senior Manager & Certification Regimes and whether it should continue to do so. In the lead up to implementation of the SM&CR in March 2016, the FCA became aware of significant uncertainty amongst firms as to whether an individual responsible for the management of a firm's legal function would require approval as a Senior Manager. Where heads of legal are responsible for compliance, there is a clear need to register, but the position is less clear for heads of legal who do not hold this additional function.

Read more. 

Timothy Massad, Chairman of the CFTC, spoke at the SIFMA annual meeting about clearinghouse regulation, technological changes and finishing Dodd-Frank rulemaking. Massad first highlighted ongoing CFTC work regarding stress testing across multiple clearinghouses to study systemic issues and interdependencies, recovery plans for systemically important clearinghouses and CFTC’s involvement in international coordination of clearinghouse recovery and resolution.

He next focused on two technological issues, cyberattack risk and automated trading. He highlighted CFTC rules about cyberdefense testing for market infrastructure firms. He also discussed efforts the CFTC took to address challenges posed by automated trading including working to finalize Regulation AT, which is designed to address the risk of disruption posed by automatic trading.

Chairman Massad discussed CFTC’s work finalizing rules required by Dodd-Frank Act, including margin rules on uncleared swaps effective on September 1, 2016. He noted that the CFTC is considering lowering the de minimis threshold (when an entity’s swap dealing activities require the entity to register with the CFTC) for swap dealing (from $8 billion to $3 billion). He also noted that the CFTC intends to repropose rules on capital requirements for swap dealers and major swap participants and that he expects the CFTC to issue a rule on certain aspects of cross-border application of swaps rules this fall.

View Chairman Massad's remarks.

The G20 published its Anti-Corruption Action Plan for 2017-2018 and called on countries to implement the United Nations Convention against Corruption. The G20 established the Anti-Corruption Working Group in 2010, a body which is guided by rolling two-year action plans. The new Action Plan outlines areas of priority for the G20 and the Working Group, which amongst other things, include seeking to promote concrete and practical action to achieve enforcement of anti-corruption laws by taking steps to improve co-operation between law enforcement and other relevant authorities within and between member countries, implementing the Financial Action Task Force Recommendations on Transparency and Beneficial Ownership of Legal Persons and continuing to focus on combatting bribery and exploring the possible adherence of all G20 countries to the OECD Anti-Bribery Convention. The Working Group has been tasked with preparing a more detailed implementation plan, so that progress with the priorities can be tracked. It will report in 2017, on progress in implementing the commitments.

View the Action Plan.

The Prudential Regulation Authority issued a Policy Statement relating to implementing risk-based levies for the Financial Services Compensation Scheme deposits. The Policy Statement contains final rules amending the Depositor Protection Part of the PRA Rulebook and a final Statement of Policy on the Financial Services Compensation Scheme and the calculation of firm contributions to the Scheme. The final rules and Statement of Policy are relevant to UK banks, building societies, credit unions, overseas firms with PRA deposit-taking permission, and the FSCS (the UK's administrator of its Deposit Guarantee Scheme). The rules applied from October 1, 2016.

Read more.

The Bipartisan Policy Center, a US-based non-profit organization, issued a paper entitled “Did Policymakers Get Post-Crisis Financial Regulation Right?” The paper analyzes the effects of financial regulation post-financial crisis and reported that, as a general matter, consumers are better protected than before the crisis but that there were increased barriers to affordable credit. In addition, the paper reported on unintended consequences of increased financial regulation, including the curtailment or shift of certain activities from banks to nonbank providers and a lack of coordination on rulemaking. Finally, the BPC recommended that the next president and Congress instruct regulators and appoint an independent commission to conduct a formal assessment of the post-crisis financial regulatory structure.

View BPC paper.

The US BoG of the Federal Reserve System issued a proposed rule modifying the capital plan and stress testing rules for the 2017 test cycle. The proposed changes include eliminating the qualitative portion of Comprehensive Capital Analysis and Review for certain large and noncomplex firms (generally, firms with less than $250 billion in total consolidated assets), along with reduction in the amount of data that such firms are required to submit on the FR Y-14 regulatory reports. Such institutions however, would remain subject to quantitative CCAR requirements and to normal supervision by Federal Reserve Board regarding their capital planning. The proposed rule would be effective for the 2017 CCAR. Comments on the proposal are due by November 25, 2016.

In a speech given the same day, FRB Governor Tarullo stated that the Federal Reserve Board is considering adoption of a “stress capital buffer approach” to setting post-stress capital requirements whereby the G-SIB capital surcharge would be factored into the estimate of the amount of capital required under stress. However, Governor Tarullo emphasized that this was a preliminary proposal and would not apply to the 2017 cycle of CCAR.

View proposal.

View Govenor Tarullo speech.

A Commission Delegated Regulation outlining Regulatory Technical Standards specifying the information on financial contracts that a firm may be required to maintain was published in the Official Journal of the European Union. The Bank Recovery and Resolution Directive gives resolution authorities the power temporarily to suspend the termination rights of any counterparty to a contract with a firm that is under resolution. Both national regulators and resolution authorities may require a firm to maintain detailed records of financial contracts (generally, these are securities contracts, commodities contracts, futures and forwards contracts, swap agreements and inter-bank borrowing agreements) including as to whether or not they include suspensory provisions. 

The RTS set out the minimum set of information on financial contracts that should be included in the detailed records held by a firm, which includes information such as whether a contract includes contractual recognition of resolution powers, information on value and valuation, collateral, termination rights, maturity and netting arrangements. The RTS also prescribe the circumstances in which the requirement to hold such records should be imposed and take a wide approach by including all firms or entities that might be subject to resolution actions.

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The US Federal Reserve Board issued a notice of proposed rulemaking to tighten capital and other regulatory requirements on financial holding companies that participate in physical commodity trading activities, to remove copper from the list of metals that bank holding companies are permitted to own and store as an activity closely related to banking and to rescind previous orders authorizing certain FHCs to engage in energy management services and tolling activities. A FRB staff memo on the proposed rule published on the same day identified fourteen FHCs that presently have the authority to engage in various physical commodity activities. As justification for the proposed rule, the FRB stated that legal risks associated with physical commodities activities can, at times, exceed the committed capital and insurance policies of the FHC, and that risk, with other legal and reputational risks, can pose a threat to safety and soundness of an FHC engaged in physical commodity activities.

In addition, the Federal Reserve Board proposed to rescind specific authorization to the five FHCs authorized to participate in energy tolling and energy management services. The FRB is reconsidering whether those activities are complementary to financial activities as is physical commodity trading. The Federal Reserve indicated that these activities do not support and are not directly related to otherwise permissible commodities derivatives activities or other financial activities. Comments on the proposed rule must be submitted by December 22, 2016.

View proposed rule.

View staff memo.

Representative Patrick McHenry (R-NC), introduced a bill entitled “Financial Services Innovation Act of 2016,” that would, among other things, establish Financial Services Innovation Offices (FSIOs) at applicable agencies in order to (i) support the development of financial innovations and (ii) establish procedures to streamline the time and cost of financial innovations. In addition, the proposed legislation includes a petition process through which covered persons (i.e., anyone offering financial services innovation products or services that submits a petition to an FSIO) may request a waiver from any regulation by submitting required information, including an alternative compliance strategy.

View full text of the proposed legislation.

The US Treasury Secretary testified before the US House Financial Services Committee regarding the 2016 FSOC Annual Report. Secretary Lew’s remarks included a discussion of the forward-looking approach taken by FSOC and its efforts to engage with stakeholders and the public and to avoid “one-size fits all” regulations. Members of the House Financial Services Committee questioned Secretary Lew on a variety of topics, focusing on the categorization of “Too Big to Fail” and the designation of systemically important financial institutions. In addition, the committee asked Secretary Lew for his views on the joint Federal Reserve Board, FDIC, and OCC report to Congress which recommended repealing the authority for bank holding companies to engage in merchant banking activities. Secretary Lew distanced himself from the report, stating that the Treasury was not involved in its preparation.

View Secretary Lew's opening remarks.

The Financial Policy Committee of the Bank of England released a statement following its meeting on September 20, 2016. The FPC considers that the current outlook for financial stability in the UK remains challenging following the outcome of the referendum in June for the UK to leave the EU. The FPC has reaffirmed that it expects to maintain a countercyclical buffer rate of 0% until at least June 2017 unless any material changes warrant an amendment. The Prudential Regulation Authority's expectation is that banks should not increase dividends and other distributions as a result of the CCyB being maintained at 0%. 

View the statement.

The European Banking Authority published final draft Implementing Technical Standards on the common procedures, forms and templates for the consultation process between the relevant national regulators when carrying out the prudential assessment relating to proposed acquisitions of qualifying holdings in credit institutions.  The Capital Requirements Directive requires regulators to fully consult with each other when carrying out the assessment of a proposed acquirer of qualifying holdings. The final draft ITS supplements this requirement by setting out the requirements for the designation of contact points by regulators, as well as a timeframe and process for submitting the consultation notice and for providing the response. The final draft ITS provide templates for the response from the regulator from whom information has been requested. It also outlines language requirements and means of communication, as well as how mutual feedback would be carried out. The EBA has made certain amendments to the version of the ITS that it consulted on previously to take into account the final draft ITS prepared on a similar topic under the Markets in Financial Instruments Directive II, which was published by the European Securities and Markets Authority in March 2015. Those amendments seek to align the requirements across sectors. The final draft ITS must be submitted to the Commission for adoption before it can enter into force.  

View the final draft ITS.

The European Banking Authority published a consultation paper proposing draft Guidelines on how to stipulate the minimum monetary amount of professional indemnity insurance required for authorization under the Payment Services Directive II. PSD2 entered into force on January 12, 2016, and will apply from January 13, 2018. The PSD2 recognizes new types of payment services that have emerged in the area of internet payments, such as payment initiation services and account information services. The PSD2 sets out the criteria on how to stipulate the minimum monetary amount of professional indemnity insurance or other comparable guarantee to be held by regulated firms. The draft Guidelines also set out the criteria, indicators, calculation methods and a formula that regulators should use when granting authorization or registration. The consultation paper explains the EBA's proposal for the use of a formula to calculate the minimum monetary amount of professional indemnity insurance or any comparable guarantee, when and how the lowest tier (the default value) should be used when calculating the monetary amount, provides details on indicators for the criteria set out in the PSD2 and the proposed methodology for some of the indicators. Responses to the consultation are due by November 30, 2016. 

View the consultation page. 

The European Banking Authority published proposed draft technical standards on fee terminology and disclosure documents under the Payment Accounts Directive. The PAD aims to assist consumers to understand the fees of payment service providers and to make informed decisions about which account is most suitable for customers, by setting common standards for PSPs across EU Member States, harmonising the terminology used by PSPs and introducing fee information templates. The EBA is responsible for preparing draft Regulatory Technical Standards setting out the Union standardized terminology for the most common services linked to a payment account, as well as  Implementing Technical Standards on the standardized presentation format of the fee information document (FID) and the statement of fees (SoF). The EBA's consultation paper sets out its proposed RTS and ITS, the options it has considered and the rationale for choosing the proposed requirements and examples of completed FIDs and SoFs. Responses to the consultation are due by December 22, 2016. 

View the consultation paper.

The European Securities and Markets Authority published a discussion paper on the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation is applicable to classes of derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation, (ii) are admitted to trading on at least one trading venue (a regulated market, multilateral trading facility, organized trading facility or a third country equivalent trading venue) and (iii) are sufficiently liquid. ESMA is required to prepare Regulatory Technical Standards setting out which derivatives (or a subset of derivatives) that have been declared subject to the clearing obligation (currently comprising only certain interest rate swaps and credit default swaps) will also be subject to the trading obligation and the date on which the obligation will take effect. ESMA is seeking feedback on its approach to implementing the trading obligation for derivatives, including its application to certain types of counterparties and the possibility of the obligation being phased in, and on its initial assessment of some classes of derivatives that might become subject to the obligation. The discussion paper also sets out how the trading obligation has been implemented in other jurisdictions, such as the US, Japan, Switzerland, Mexico, Argentina and China. 

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HM Treasury published a consultation paper on amending the definition of regulated advice under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to bring it in line with the definition of “investment advice” set out in the Markets in Financial Instruments Directive. The consultation follows the Financial Advice Market Review, conducted by HM Treasury and the Financial Conduct Authority last year, which assessed how consumers could access advice on their finances more easily. The FAMR recommended that the government should consult on amending the definition of regulated advice in accordance with the MiFID definition, to the effect that only advice which makes a personal recommendation would be regulated. The consultation proposes a revised definition and seeks feedback on the costs and benefits of this change and any potential risks by November 15, 2016.

View the consultation page.

A Commission Delegated Regulation identifying high-risk third countries with strategic deficiencies under the Fourth Money Laundering Directive was published in the Official Journal of the European Union, based on deficiencies identified by Financial Action Task Force. 

The Regulation lists high-risk third countries which have provided a written high-level political commitment to address identified deficiencies and have developed an action plan with the FATF; countries listed: Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Syria, Uganda, Vanuatu and Yemen. The Regulation identifies Iran as a high-risk third country that has provided a written high-level political commitment to address identified deficiencies and has decided to seek technical assistance in the implementation of the FATF action plan. The Regulation also identifies the Democratic People's Republic of Korea (DPRK) as high-risk third country which presents ongoing and substantial money-laundering and terrorist-financing risks, having repeatedly failed to address identified deficiencies.

View the Regulation.

FDIC Chairman Martin Gruenberg issued a statement on the release of updated data regarding the FDIC’s Deposit Insurance Fund. (DIF) The DIF balance stood at almost $78 billion, leading to a reserve ratio of 1.17%, an eight-year high. Chairman Gruenberg’s statement noted that the FDIC still intends to reach the statutory minimum ratio of 1.35% set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, before September 30, 2020.

View text of Chairman Gruenberg’s statement.