The International Organization of Securities Commissions published its final report on the impact of storage infrastructures on the integrity of the price formation process of physically-delivered commodity derivatives contracts traded on regulated exchanges. The report sets out findings and conclusions following research, an industry survey and a public roundtable. IOSCO concludes that the IOSCO Principles for the Regulation and Supervision of Commodity Derivatives Markets provide an adequate framework for implementing effective oversight, governance and operational controls of storage infrastructure. IOSCO does not recommend the creation of additional principles or revision of the existing principles. However, it does consider that it is necessary to develop good practice guidelines and enhance current accepted practices.

Read more.

The US Treasury Department put forth several measures to combat money laundering, corruption and tax evasion, in the wake of the so-called “Panama Papers” document leak. First, the US Treasury issued a final Customer Due Diligence Rule that for the first time requires all financial institutions to collect and verify the personal information of the individuals who own, control, and profit from companies (i.e., the beneficial owners)when those companies open accounts.

Read more.

The International Swaps and Derivatives Association launched the Resolution Stay Jurisdictional Modular Protocol and the UK (PRA Rule) Jurisdictional Module. Certain jurisdictions require banks and investment firms to include clauses in certain contracts with non-EU counterparties by which the counterparty agrees to recognize the powers of the firm’s national regulator to impose a temporary stay on the exercise of early termination rights. The new protocol seeks to help banks comply with new requirements. Many jurisdictions have implemented national regimes on the recovery and resolution of banks and investment firms.  However, whether the actions of a national regulator in relation to a failing or failed firm would be recognized by regulators, authorities and courts in other jurisdictions is uncertain and may require contractual support in some countries. Without a global statutory framework in place, the Financial Stability Board recommends jurisdictions to implement laws to ensure that their powers will be recognized on a contractual basis. The UK (PRA Rule) Jurisdictional Module is intended to assist compliance with the UK’s requirements on recognition of temporary stays. 

View the Resolution Stay Jurisdictional Modular Protocol and the UK (PRA Rule) Jurisdictional Module.

View ISDA’s press announcement. 

The European Banking Authority published a discussion paper on innovative uses of consumer data by financial institutions. The focus of the paper is the risks and benefits to consumers and financial institutions arising from the use of commercially available data. Recent innovations include financial institutions combining consumer data they hold internally with data sourced externally from private and public companies and social media.  Financial institutions are able to use consumer data, such as buyer behavior, to provide incentives such as shopping discounts to increase consumer consumption of financial services.  Benefits for consumers of such innovative usage may include cost reductions and improved quality in products and services offered as financial institutions can more accurately cater to customer needs. Financial institutions can benefit through the creation of new sources of revenue, achieved through better product and service development and sharing consumer data with third parties.

Read more. 

The European Securities and Markets Authority published a Final Report on the revised draft Regulatory Technical Standard on transaction reporting under the Markets in Financial Instruments Regulation. ESMA is proposing amendments to the final draft RTS submitted to the European Commission on September 28, 2015. ESMA’s final draft RTS included a non-definitive list of example transactions which would not attract the reporting obligation under MiFIR, but that list that was silent on acquisitions or disposals that were solely the result of a transfer of collateral. The amendment updates the list to include collateral transfers as a type of “transaction” that should not be reported under MiFID II. The definition of transaction in the RTS is based on the concepts of “acquisition” or “disposal” of a financial instrument. ESMA concluded that including transfers of collateral, as a reportable transaction, would lead to a significant increase in reported data that is not susceptible to market abuse which would serve only to burden the market. Details of collateral are already reported under EMIR and will be reported under the Securities Financing Transaction Regulation for some transactions.  ESMA has submitted the Final Report to the Commission with the intention of having it taken into account in the context of the Commission’s endorsement of the final draft RTS.

View the update and final report.

Executive Vice President of the US Federal Reserve Bank of New York Simon Potter discussed steps the US Board of Governors of the Federal Reserve System has taken to improve the US monetary policy framework following the financial crisis in line with its principles of returning to normalization. He discussed the importance of creating a framework that can provide liquidity for monetary policy implementation and transmission. However, Potter noted that there are important tradeoffs to consider, in that financial market participants may anticipate that central banks, like the Federal Reserve, will make liquidity abundant during times of stress and manage their own liquidity conservatively. He suggested that the Basel III liquidity regulations, namely the liquidity coverage ratio which the US has adopted and the net stable funding ratio which the Federal Reserve has recently proposed, help to mitigate the risk that banks would rely too much on the central bank for liquidity. Potter also noted the importance of the US monetary policy framework being transparent in order to enable market participants to make better-informed decisions. Specifically, drawing parallels to the financial crisis, he observed that a central bank can help foster the contribution of liquidity to the financial system by market participants by committing itself to maintain liquidity.

View Potter’s speech.

The Bank of England and Financial Services Act 2016 was passed by the UK Parliament. The Act includes amendments to the Senior Manager and Certification Regime and extends the SM&CR to all UK authorized firms. The amendments include removing the presumption of responsibility for a senior manager when a breach of regulatory provisions occurs in the area that he is responsible for, replacing it with a duty of responsibility. In addition, the UK regulators are granted specific powers to take enforcement action against all non-executive directors of firms for their misconduct. The extension of the SM&CR follows from the recommendations of the Fair and Effective Markets Review, published in June 2015, that the regime should be extended to wholesale participants in the fixed income, currency and commodity markets.  

Certain provisions of the Act came into effect immediately. The provisions on senior management will come into effect once HM Treasury adopts regulations providing for the effective date. It is not yet known when the extension to all UK authorized firms will occur but the UK regulators have mentioned 2018 in the past. 

View the Act.

View HM Treasury’s press release.

View the Bank of England’s press release.

You might like to view our client note. 

The SEC approved amendments to revise the rules related to the thresholds for registration, termination of registration and suspension of reporting under Section 12(g) of the Securities Exchange Act of 1934. These amendments implement provisions of the Jumpstart Our Business Startups Act (JOBS Act) and the Fixing America’s Surface Transportation Act (FAST Act). 

To implement the JOBS Act, the SEC proposed amendments to Exchange Act Rules 12g-1 through 4 and 12h-3 to reflect the new thresholds. The SEC also proposed to establish thresholds for savings and loan holding companies consistent with those for bank holding companies, as well as to revise the definition of “held of record” in Exchange Act Rule 12g5-1. 

Subsequent to the SEC’s proposed amendments, the FAST Act revised the thresholds for savings and loan holding companies and the statutory changes were effective upon enactment of the Act. The final rules will become effective 30 days after publication in the Federal Register.

View the SEC press release. 

View the final rule. 

Executive Vice President and Head of the Wholesale Product Office at the US Federal Reserve Bank of New York, Richard Dzina, discussed the importance of improving the cyber resiliency of financial market infrastructures (FMIs) in light of escalating cyber threats with systemic consequences. Dzina cited the recent consultative report by the Committee on Payment and Market Infrastructures and the Board of the International Organization of Securities Commissions which provides guidance on cyber resilience for FMIs, including the expectation that their critical operations resume within a two-hour period following disruption. Heralding joint industry efforts as well as those taken by individual institutions, Dzina highlighted backup site (so-called "third site") capacity as a lynchpin to improving the resiliency of FMIs. Specifically, he recommended that FMIs invest in technologically diverse off-network third site solutions as a backstop to the measures they have in place to prevent against cyber-attacks. He stressed the importance of FMIs, particularly those at the epicenter of the financial system, continuously investing in improvements to resiliency and cybersecurity.

View Dzina’s speech.

The US Board of Governors of the Federal Reserve System approved a joint notice of proposed rulemaking to establish a net stable funding ratio in the US, in line with the framework previously established by the Basel Committee on Banking Supervision. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation previously approved the rule on April 26, 2016. The net stable funding ratio would require covered institutions to maintain stable sources of funding, including capital and long-term debt, over a one-year horizon. Specifically, a covered company’s ratio of (i) “available stable funding,” a measure of the stability of its equity and liabilities over a one-year time horizon to (ii) “required stable funding,” a calculation made based upon the liquidity characteristics of the institution’s assets, derivative exposures and commitments over the same one-year horizon, must be at least 1.0. With respect to assets that qualify as “available stable funding,” asset categories are assigned an “available stable funding” (ASF) weight, with Tier 1 regulatory capital and Tier 2 capital instruments with a maturity of over one year receiving a 100% ASF weight, and trade date payables, certain short-term funding and certain short-term retail brokered deposits receiving a 0% ASF weight. The rule is aimed at reducing liquidity risk by ensuring that a covered institution retains sufficient liquid assets in the event of funding disruptions or a liquidity run in order to remain viable. 

Read more.

The European Commission announced that it would not, at this stage, be proposing legislation to regulate crowdfunding. The Commission pledged to report on whether crowdfunding should become regulated at EU-level as part of its Capital Markets Union Action Plan. The CMU aims, amongst other things, to broaden funding sources for small and medium sized enterprises as crowdfunding has become an important source for such funding. The European Commission has assessed national regimes and best practice across the EU and found that the crowdfunding sector is currently fairly small and is concentrated locally. Some Member States have implemented local rules to regulate the sector. However, the European Commission found that the outcomes are generally aligned and that national regimes aim to protect investors whilst allowing the development of this source of funding. However, the Commission noted that the sector is changing rapidly so it will continue to monitor the sector and assess whether regulation is required in the future to harmonize the approaches taken across the EU and ensure investor protection. 

View the Commission’s press release.

View the Commission’s report.

The European Securities and Markets Authority published the results of its first EU-wide stress test for central counterparties, including recommendations for improving CCPs’ internal methodologies. ESMA must perform an annual stress test of all EU CCPs under the European Market Infrastructure Regulation. The exercise tested 17 European CCPs which held over €150 billion worth of default resources with more than 900 clearing members across the EU. The purpose of the stress test is to test the resilience and safety of the European CCP sector and identify any possible vulnerabilities, focusing on CCP credit risk when faced with multiple clearing member defaults and simultaneous price shocks. The results indicate that CCP resources are generally sufficient to cover losses resulting from the default of two EU-wide clearing member groups combined with historical and hypothetical market stress scenarios. However, under more severe stress scenarios, CCPs were faced with sector-wide residual uncovered losses varying from €0.1 billion to €4 billion. ESMA recommends that CCP internal methodologies can be improved by CCPs incorporating into their creditworthiness assessments of clearing members, the potential exposures their clearing members may face due to their membership in other CCPs and that regulators should ensure that CCPs revise the price shocks used in their internal stress test methodologies where the stress price shocks applied by CCPs were identified as not being as conservative as the minimum price shocks or as extreme as the most severe historical shocks. 

View the update.

View the Q&A on ESMA’s stress test. 

The European Banking Authority published an Opinion on the European Commission's intention not to endorse final draft Regulatory Technical Standards on additional collateral outflows, prepared under the Capital Requirements Regulation. The final draft RTS, submitted to the Commission in March 2014, set out the materiality and the measurement of additional collateral outflows resulting from the impact of an adverse market scenario on a firm's derivatives transactions, financing transactions and other contracts. The technical standards are also a component of the liquidity coverage ratio for which the final standards came into force at the end of 2015.  The EBA's final draft RTS include a historical look-back approach (known as HLBA) method for calculating additional liquidity outflows corresponding to collateral needs resulting from the impact of an adverse market scenario on a firm's derivatives transactions, financing transactions and other contracts that was more conservative than that adopted by the Basel Committee on Banking Supervision in April 2014. The European Commission, which delayed the assessment of the final draft RTS pending the adoption of the LCR RTS, requested the EBA to amend its final draft RTS on additional collateral outflows to align with the HBLA approach adopted by the Basel Committee on the basis that the liquidity outflows under the EBA's HBLA approach would be much higher for major players in the derivatives markets and that netting could be allowed as most collateral received by banks is in the form of cash or sovereign debt. The EBA agrees with the European Commission and has submitted revised final RTS to the Commission for endorsement. 

View the Opinion and revised final draft RTS.

The US Federal Reserve Board proposed a rule to support US financial stability by enhancing the resolvability of large, complex financial firms. The proposed rule would require US global systemically important banking institutions and the US operations of foreign GSIBs to amend certain bilateral, uncleared qualified financial contracts, including derivatives, repurchase agreements, reverse repurchase agreements and securities lending and borrowing agreements, to prohibit the immediate cancellation of such contracts and the exercise of certain other default rights by counterparties if the firm enters bankruptcy or a resolution proceeding. Under the proposal, GSIBs may comply by using QFCs that are modified by the International Swaps and Derivatives Association 2015 Resolution Stay Protocol.
 

The European Securities and Markets Authority published two Opinions proposing amendments to two of its draft Regulatory Technical Standards under the Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation, together known as MiFID II. In September 2015, ESMA submitted the two final draft RTS to the European Commission for endorsement. In April 2016, the Commission requested ESMA to amend each of the final draft RTSs. ESMA’s opinions are in response to the Commission’s request. 

Read more.

The Commodity Futures Trading Commission approved a final rule to amend a requirement found in CFTC Regulation 23.500(i) that swap dealers and major swap participants exchange the terms of swaps with their counterparties for portfolio reconciliation so that SDs and MSPs need only exchange the “material terms” of swaps. The final rule also amends the definition of “material terms” in CFTC Regulation 23.500(g). The final rule benefits SDs, MSPs, and their counterparties by allowing them to focus on reconciling data fields that impact swap valuation and counterparty obligations, without impairing the CFTC’s ability to oversee and regulate the swaps markets.

View the CFTC press release. 

View the final rule.

Federal Reserve Bank of New York President William Dudley delivered remarks at the Federal Reserve Bank of Atlanta 2016 Financial Markets Conference, focusing on the connection between liquidity and financial stability. Dudley first addressed market liquidity, noting that evidence that market liquidity has diminished is mixed. Turning to funding liquidity, Dudley emphasized the link between funding liquidity and capital requirements and asked whether more should be done to support funding liquidity. Dudley noted the importance of the availability of a lender-of-last resort, and remediating any gaps in the lender-of-last-resort function. As an example, Dudley noted the limited ability of the Federal Reserve Board to provide funding to a securities firm, even on a fully collateralized basis, and suggested that providing such firms with access to the Discount Window “might be worth exploring.” Dudley also noted that the Bank for International Settlement's Committee on the Global Financial System is engaged in a project to determine what lender-of-last-resort gaps currently exist, focusing, in particular, on those that may create vulnerability in terms of financial stability. One area that he anticipates will receive considerable attention is whether there are any gaps with respect to the activities of globally systemic firms that operate on a cross-border basis. He also noted that greater attention needs to be paid to the appropriate role for the home- versus host-country supervisor and that the regulatory and supervisory responses for large, systemically-important firms that operate on a cross-border basis need to be closely coordinated, especially during times of stress. Dudley stressed that expectations about who will be the lender-of-last-resort need to be well understood in both the home and host countries.

View the speech.

The Prudential Regulation Authority published a consultation paper on regulatory reporting of financial statements, forecast capital data and IFRS 9 requirements, setting out the PRA’s proposals on future reporting of balance sheet, statement of profit and loss and forecast capital data. The consultation paper is relevant to PRA-authorized banks, building societies and designated investment firms. It also outlines proposals for reporting of P&L data by non-EEA banks that are authorized to accept deposits through a branch in the United Kingdom. The proposals are part of the PRA’s execution of its strategy for the collection of valid, accurate and meaningful information, including a review of reporting requirements to assist the PRA in gaining the information required to engage in judgement-based supervision. Balance sheet and P&L data assist the PRA in its macro-prudential and monetary policy analysis. Responses to the consultation are due by July 29, 2016. 

View the consultation paper.

The Financial Conduct Authority published a Policy Statement, including final rules on changes to the FCA Handbook required to implement the Market Abuse Regulation. MAR will apply directly across the EU from July 3, 2016, replacing the current Market Abuse Directive. Some of the changes to the FCA rules reflect MAR’s direct application in the UK. In contrast, the Market Abuse Directive will need to be transposed into national law, including the FCA Handbook. The FCA rules need to be amended to either refer directly to MAR (e.g. for definitions) or to reflect the position under MAR. For example, MAR requires, amongst other things, issuers to provide an explanation for a delay in the disclosure of inside information under certain circumstances. The FCA's rules will require such notification to be made in writing when requested. 

The new FCA rules will apply from July 3, 2016. However, the FCA does note that some changes may be required depending on the final version of the EU technical standards due under MAR.

View the Policy Statement.

The Financial Conduct Authority, in its capacity as securities listing authority, published a report on proposed changes to improve the UK’s wholesale debt listing regime.  The report comes following an initiative launched by the FCA, the UK Debt Market Forum, where a series of meetings were held stakeholder groups of the UK primary debt capital markets. The purpose of the Forum was to seek expert feedback to assist the FCA in developing practical measures to increase the effectiveness of the UK’s primary listed debt markets without negatively impacting current standards. The report outlines proposed measures that the FCA has implemented following the feedback received. The FCA has proposed an extension of its “Wholesale Debt Approach”.
 

The European Securities and Markets Authority published an update on reporting obligations in relation to information on structured finance instruments which ESMA receives under the Credit Rating Agency Regulation. The CRA Regulation was originally based on the Code of Conduct Fundamentals for CRAs published by the International Organization of Securities Commissions. ESMA is required under the CRA Regulation to set up a website where information on SFIs can be published to enable reporting entities – originators, issuers and sponsor entities - to submit data files containing the relevant information in accordance with their reporting requirements. EMSA is required to issue technical instructions by July 1, 2016, to assist with the reporting obligations that will apply from July 1, 2017. ESMA has reported that it will not be in a position to receive information on SFIs from reporting entities by January 1, 2017, as it is currently unable to set up a website or issue the technical instructions. This is because there is no legal basis for funding the website. ESMA expects the new securitization legislation currently being finalized to provide clarity on the future obligations regarding reporting on SFIs.

View the update.

The SEC released a plan for a proposed national market system that would create a single database, the Consolidated Audit Trail, to track all US activity in the equity and options markets. The establishment of the CAT will allow regulators to be better positioned to identify and investigate market misconduct, and will increase the effectiveness of market research and monitoring. The CAT would be conducted through a Delaware limited liability company that the self-regulatory organizations would own jointly, and participating self-regulatory organizations and the SEC would have access to the data in the CAT for regulatory and oversight purposes. The plan sets out the record keeping and reporting information that SROs and broker-dealers would be required to submit at various stages in the lifecycle of an order or transaction. Public comments on the plan are due within 60 days of the plan’s publication in the Federal Register.
 

The OCC issued a bulletin reminding all OCC-supervised banks of their obligations to maintain and retain their records and the OCC’s authority to obtain prompt and complete access to each bank’s books and records and communicate freely with its employees, officers and directors. The guidance is being issued in response to the OCC’s discovery that certain communications technology being made available to banks contains data deletion and encryption features which could inhibit the OCC’s ability to access bank data and records. The guidance notes that the permanent deletion of internal communications is in conflict with the OCC’s expectations for sound governance, compliance, risk management and safety and soundness principles.

Jennifer Shasky Calvery announced that she will step down as Director of the US Treasury Department’s Financial Crimes Enforcement Network at the end of May. She has served as FinCEN Director since September 2012. FinCEN has not announced her successor.

The FDIC approved a final rule that amends how banks with less than $10 billion in assets that have been insured for a minimum of five years are assessed for deposit insurance. The rule updates the data and revises the methodology that the FDIC uses to determine the risk-based assessments for such institutions. FDIC Chairman Martin J. Gruenberg anticipates that more than 93% of small banks will pay lower rates under the revised framework. The final rule will be used for rate determinations once the FDIC’s insurance fund reaches 1.15%, but not before the third quarter of 2016.
 

The European Commission adopted a Delegated Regulation supplementing the Markets in Financial Instruments Directive with regard to organizational requirements and operating conditions for investment firms. The adopted Delegated Regulation outlines specific organizational requirements for investment firms performing investment services and ancillary services. In particular, the adopted Delegated Regulation provides procedures for compliance, risk management, complaints handling, personal transactions, outsourcing and conflicts of interest as well as the additional organizational requirements for underwriting and placing services and the production and dissemination of investment research. The adopted Delegated Regulation outlines the operating conditions for investment firms. It also specifies the rules which an investment firm must comply when providing services or ancillary services to clients. For example, it requires information to be provided to clients and potential clients on the costs and charges associated with investment services and financial instruments. The adopted Delegated Regulation further specifies that information, which is to include an explanation of the risks arising from the insolvency of the issuer and related events, such as a bail in, must also be provided. 

The European Banking Authority published a consultation paper on draft regulatory technical standards under the Capital Requirements Regulation on the disclosure of encumbered and unencumbered assets. The CRR requires the EBA to develop draft RTS to specify institutions’ disclosure of balance sheet value per exposure class broken down by asset quality and the total amount of the balance sheet value that is unencumbered. The draft RTS sets out the data required to be disclosed on encumbered and unencumbered assets, the format, and the timing of the publication. The EBA has developed the draft RTS to take into account the European Systematic Risk Board recommendations, which stated that the EBA and regulators should monitor the level, evolution and types of asset encumbrance. The EBA published its first report analyzing asset encumbrance in September 2015. The report revealed that there had been no increase in levels of asset encumbrance over the past four years. The ESRB further recommended that the EBA issue guidelines and harmonized templates and definitions on transparency requirements for credit institutions on asset encumbrance.  

The US Government Accountability Office issued a report on the resolution plan review processes developed by the US Federal Deposit Insurance Corporation and the US Board of Governors of the Federal Reserve System. The report found that, although the resolution plan rule has improved the resolvability of large systemically important financial companies in the United States, the lack of transparency by US regulators regarding how the regulators assess and review plans could undermine public and market confidence in resolution plans.
Along with these findings, the GAO report issued a series of recommendations to improve the resolution review process. Among other recommendations, the GAO report encouraged the FDIC and Federal Reserve to publicly disclose information about their respective processes for assessing the credibility of resolution plans and revising the resolution plan rule’s filing requirements in order to provide companies with more time to respond to feedback and guidance from the regulators on their resolution plans.

View the GAO report.

The European Banking Authority published the first list of Other Systemically Important Institutions in the European Union. O-SIIs are institutions which have been deemed by national regulators to be systemically relevant in addition to the Global Systemically Important Institutions that have already been identified. The EBA has compiled the list based on the findings of the relevant national regulators across the EU. National regulators relied on the EBA Guidelines on the identification of O-SIIs, which included recommended uniform criteria, including size, importance (substitutability or financial system infrastructure), complexity (or cross-border activities) and interconnectedness of such institutions. The EBA’s guidelines on the identification of O-SIIs were developed in accordance with the Capital Requirements Directive and on the basis of internationally agreed frameworks established by the Financial Stability Board and the Basel Committee for Banking Supervision. The EBA will publish an updated list of O-SIIs annually along with a revised definition of any CET1 capital buffer requirements set by national regulators. 

View the list of O-SIIs.

View the EBA’s guidelines. 

The European Commission published a status report on progress made since the adoption of the Capital Markets Union Action Plan. The European Commission's Action Plan, published in September 2015, set out the steps for the medium and long term in five priority areas: (i) providing more funding choices to EU businesses; (ii) ensuring an appropriate regulatory framework for long term investment and financing of Europe's infrastructure; (iii) increasing investment and choices for retail and institutional investors; (iv) improving bank lending capacity; and (v) removing cross-border barriers and developing more harmonized capital markets for all Member States. The Commission's Status Report details the actions taken to date, the key steps planned for the rest of 2016 and measures that will be delivered in 2017-18. 

View the Status Report.

View the Action Plan. 

The Basel Committee on Banking Supervision published an erratum to its April 2016 consultation paper on proposed revisions to the Basel III leverage ratio framework. The proposals contained in the consultation paper include amendments to: (i) the measurement of derivative exposures by adopting a modified version of the standardized approach for measuring counterparty credit risk exposures; (ii) treatment of regular-way purchases and sales of financial assets so as to achieve consistency across accounting standards; (iii) treatments of provisions; and (iv) credit conversion factors for off-balance sheet items, by aligning them with the standardized approach to credit risk. In addition, the Basel Committee proposes to impose additional requirements on global systemically important banks, setting out various options, including whether the additional requirement should apply uniformly to all G-SIBs or be tailored and whether the form should be a higher minimum requirement or a buffer requirement. Responses to the consultation are still required by July 6, 2016. The Basel Committee intends to finalize the revised leverage ratio requirement in 2016 so as to allow time for its implementation by January 1, 2018. 

View the erratum.

View the amended consultation paper. 

The European Commission published three separate letters rejecting European Securities and Markets Authority draft technical standards and requesting amendments in accordance with the Markets in Financial Instruments Directive II. The first letter concerns draft regulatory technical standards on transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives. The draft RTS submitted by ESMA lays down the criteria for whether bonds and structured finance products are considered to be liquid and further sets out the parameters and methods for the calculation of those thresholds above which waivers or deferrals may be granted. The Commission largely agreed with the approach taken by ESMA in drafting the standards, however, it stated that the definition of liquidity and the factors for determining the waiver threshold should be reviewed with a more cautious approach. The Commission concluded that it would not endorse the draft RTS until the approach to defining a liquid market for bonds is further aligned with the approach for all other non-equity instruments.  
 

Two letters from Olivier Guersent DG FISMA of the European Commission to Andrea Enria, Chairperson of the European Banking Authority, on issues associated with its review of the Capital Requirements Regulation were published. The first letter, dated April 12, 2016, was in response to the EBAs report on net stable funding requirements under the CCR. The EBA report concluded that NSFR standards developed by the Basel Committee on Banking Supervision fit well with the European banking framework but also flagged some European specificities. By the end of 2016, the Commission, if it deems appropriate, should submit a legislative proposal on the NSFR to the European Parliament and Council relying on the EBA Report when assessing the provisions of the Basel NSFR standard to ensure that a possible NSFR proposal does not hinder the financing of the real economy. The purpose of the letter is to request additional guidance on two areas of the EBA Report. First, with regards to the treatment of derivatives in the NSFR, the Commission is of the view that more specific analysis is required. The Commission expressed concern that the 20% required stable funding factor applied to gross derivatives liabilities and the recognition of margin received as compared to margin posts have not been comprehensively analyzed or subjected to the necessary extensive public consultation. Furthermore, the EBA should provide a complementary assessment on the impact of the provisions and an analysis of the impact on the treatment and calibration of derivatives. 

The Financial Conduct Authority published its proposed changes to the Decision Procedure and Penalties Manual and the Enforcement Guide for implementation of the Market Abuse Regulation. The MAR will apply directly across the EU from July 3, 2016. The FCA must amend and update its rules and guidance to bring them in line with MAR. The FCA's proposals are based on draft secondary legislation which HM Treasury is expected to lay before Parliament in the coming weeks. The draft secondary legislation will, amongst other things, amend the scope of the FCA's powers to impose financial penalties and public censure as well as giving the FCA additional powers to impose sanctions for breaches of MAR or any of its underlying legislation. The new powers include the power to prohibit an individual from carrying out a management function or dealing in financial instruments on their account. The FCA has already consulted on amendments to its Handbook, including the Market Conduct handbook and the disclosure and transparency rules. Policy statements on those proposals are expected soon. The current consultation closes on May 22, 2016. The FCA intends to publish the policy statement in June 2016. 

View the consultation paper.

The Financial Conduct Authority published a consultation paper on its proposed rules and guidance for the secondary annuity market due to start in April 2017. The consultation is aimed at parties interested in pensions and retirement issues, including providers and distributors of annuities, retirement income and planning products, sponsors of occupational Defined Benefit and Defined Contribution Schemes and firms providing advice in this area. The consultation discusses how consumers will be able to sell their annuity incomes on the secondary market. The changes proposed will primarily affect consumers who hold or will hold annuities in their name and contingent beneficiaries with an interest in such annuities.  

FDIC Chairman Martin Gruenberg discussed improvements in cross-border cooperation with respect to the resolution of systemically important financial institutions. He highlighted ongoing conversations among leading financial jurisdictions at an FDIC-hosted high-level meeting of the heads of the finance ministries, central banks and leading financial regulatory bodies in the United States and the UK. Gruenberg also discussed the close working relationship between the FDIC and the EU’s Single Resolution Board as well as the regular meetings of the joint working group maintained by the FDIC and EC focused on resolution and deposit insurance issues. In addition to meetings with other regulatory authorities, he cited the importance of the cross-border crisis management groups for each of the global systemically important financial institutions. Significantly, he noted that in his opinion, should a systemically important financial institution in the United States experience severe financial distress today, it would be able to be resolved in an orderly manner under either the Orderly Liquidation Authority under Dodd-Frank Act, or under traditional bankruptcy law. Gruenberg concluded by noting the value of having a single agency, the FDIC, be responsible for both deposit insurance and resolution authority in the United States.

View Chairman Gruenberg’s speech.

The UK Government published an Action Plan for anti-money laundering and counter terrorism financing. The Government is aiming to overhaul the UK approach to AML and CTF by giving new capabilities and legal powers to law enforcement agencies, improving the effectiveness of the supervisory regime and addressing inconsistencies in the regime, improving information sharing between the public and private sectors and increasing the international reach of the UK law enforcement agencies and enhancing international information sharing. The Government published a Call for Information on the system of appointing supervisors for AML and CTF and the powers of supervisors to incentivize compliance and adoption of the risk-based approach. An annex to the Action Plan includes proposed legislative changes. The Action Plan includes a list of deliverables which includes the involvement of the Home Office, the National Crime Agency, HM Treasury and the British Bankers' Association. The shorter term deliverables include running the pilot Joint Money Laundering Intelligence Taskforce, which provides for information sharing between banks and the NCA, on a permanent basis, creating a register of banks' specialisms, exploring new powers to tackle money laundering and completing the review of the supervisory regime. Responses to the Call for Information and the consultation on legislative proposals should be submitted by June 2, 2016.

View the Action Plan.

View the Call for Information on the AML Supervisory Regime.

View the Consultation Paper on Legislative Proposals.

The Basel Committee on Banking Supervision published a list of jurisdiction specific pre-announced buffer decisions.  In December, 2010, the Basel Committee published Basel III: a global regulatory framework for more resilient banks and banking systems. As required under Basel III, this document outlines details of global regulatory standards on bank capital adequacy and liquidity, including a countercyclical buffer. The countercyclical buffer regime will be phased-in in accordance with the capital conservation buffer between January 1, 2016, and December 31, 2018 becoming fully effective on January 1, 2019. To assist in bank compliance, jurisdictions can pre-announce buffer levels when raising the countercyclical buffer up to 12 months in advance.  A jurisdiction may also announce a decrease in the requisite countercyclical buffer, the effect of which is immediate. The list includes all Basel Committee member jurisdictions, their pre-announced buffer decisions, and the current buffers in place. Jurisdictions include Argentina, China, France, India, Indonesia and the United Kingdom. The updated list also includes buffer information on the non-member jurisdiction Norway. 

View the update. 

A Commission Delegated Regulation, which amends Regulatory Technical Standards on the time horizons for liquidation of different classes of financial instruments, was adopted by the European Commission. Under the European Markets Infrastructure Regulation, central counterparties are required to call and collect adequate initial margins to cover the risk stemming from a cleared contract. The proposed delegated regulation amends the margin period of risk for clients for EU CCPs from a two-day period for clients’ accounts (as under the original RTS) to a one-day gross basis. EU CCPs will therefore be able to offer both a two-day net margin model and a one–day gross margin model. The delegated regulation will come into force twenty days following publication in the Official Journal of the European Union. 

View the delegation regulation.

You might like to view our client note. 

HM Treasury published a consultation paper on the UK Government’s proposed secondary market due to be introduced in April 2017. The market would extend the recently introduced pension freedoms and flexibilities to individuals, who retired prior to April 2015. In December 2015, the Government announced that tax changes would come into effect from April 2017 which would allow individuals to receive all of the proceeds following the sale of an annuity as a taxable lump sum, arrange for the buyer to pay all of the proceeds into a flexi-access drawdown fund, or arrange for the proceeds to be used to buy a new ‘flexible’ annuity. The consultation invites comment on the draft secondary legislation which creates (i) new specified activities for firms intending to purchase annuities or act as intermediaries in the secondary market; and (ii) a new specified activity for annuity providers who are intending to buy back annuities that have been issued. The consultation also discusses proposed amendments to the Appointed Representative Regulations which would exempt appointed representatives, acting under the responsibility of an authorized principal, from needing regulatory authorization to act as intermediaries in the secondary market and to buy back annuities. The consultation also proposes amendments to the By Way of Business Order to make clear that those buying rights to annuity income streams will be subject to the requirements to be authorized or exempt under the Financial Services and Markets Act 2000 and the Regulated Activities Order. HM Treasury stated that regulation of the specified secondary market activities will enhance the Financial Conduct Authority’s supervisory oversight in this area. Responses to the consultation are due by June 2, 2016. 

View the consultation paper. 

The National Credit Union Administration re-proposed a rule that would establish incentive-based compensation restrictions on certain financial institutions. The OCC, the FDIC and the Federal Housing Finance Agency followed with their own versions of the proposed rule on April 26, 2016, and the Federal Reserve Board approved its version of the rule on May 2, 2016. The OCC, FDIC, FHFA and Federal Reserve Board proposed rules are substantially similar to the NCUA proposal. The proposed rule, issued pursuant to Section 956 of the Dodd-Frank Act, will ultimately take the form of a joint rulemaking among these agencies and the Securities and Exchange Commission, and replaces an earlier proposal issued in 2011. 

The Federal Reserve Board named Matthew J. Eichner as the director of its Division of Reserve Bank Operations and Payment Systems, effective May 1, 2016. Eichner has served as deputy director of the division since January 2015.

CFTC Chairman Timothy Massad and authorities for three Canadian provinces signed a March 2014 Memorandum of Understanding regarding (i) cooperation and coordination between the jurisdictions in respect of derivatives and securities markets and (ii) the exchange of information with respect to the supervision and oversight of regulated entities that operate on a cross-border basis in the United States and in Canada. Chairman Massad executed counterparts to the MOU along with the chairs of regulatory authorities of the provinces of New Brunswick, Saskatchewan and Nova Scotia. The MOU covers markets and organized trading platforms, central counterparties, trade repositories, and intermediaries, dealers and other market participants. Specifically, the MOU is intended to protect investors and customers, foster the integrity of financial markets and reduce systemic risk. The MOU previously only covered coordination between the CFTC and Alberta, British Columbia, Ontario and Quebec.

View the CFTC press release. 

View the Memorandum of Understanding.

The European Banking Authority published a report, including final Guidelines, on how confidential information collected under the EU Bank Recovery and Resolution Directive should be disclosed. The BRRD restricts the disclosure of confidential information by recipients of such information in the course of their professional activities unless certain conditions are met. One of these conditions is that the information is in summary or collective form such that the relevant entity cannot be identified. The EBA's Guidelines stipulate that confidential information should be provided either in a brief statement or on an aggregate basis, in anonymized form, taking into account the number of institutions, specific patterns and the context of the disclosure. Regulators of EU member states have six months from when the translated versions are published by the EBA to implement the Guidelines.
 
View the report and Guidelines.

A Commission Delegated Regulation on central clearing for credit default swaps supplementing the European Markets Infrastructure Regulation was published in the Official Journal of the European Union. Under the Regulation, two classes of credit default over-the-counter derivatives are subject to the clearing obligation under EMIR: iTraxx Europe Main and iTraxx Europe Crossover.

Read more. 

US Treasury Secretary and chairman of the Financial Stability Oversight Council, Jacob Lew, provided remarks at a meeting of the FSOC regarding the release of the FSOC’s review of the asset management industry. The statement released by the FSOC is not a rulemaking but rather, reflects the assessment of the FSOC on key areas of focus and risk in the asset management industry. Lew highlighted two key findings that are the focus of the statement—liquidity and leverage risk. With respect to liquidity, the FSOC found that financial stability concerns may arise from liquidity and redemption risks in pooled investment vehicles, including mutual funds in particular. The statement includes a number of policy recommendations for mitigating such risks, including the implementation of robust liquidity management practices and disclosures for mutual funds, and clearer guidelines that would limit a fund’s ability to hold assets having limited liquidity. With respect to leverage, Lew’s statement notes that while leverage does not generally appear high in all hedge funds, risk may still be present in these funds. He stated that regulators need to better understand the risks being taken by such funds and to engage in further analysis and information sharing in order to reach conclusions as to whether the use of leverage by private funds presents significant financial stability risk.
 

New York Fed President William Dudley discussed the importance to the global economy of economic growth and prosperity in the United States and the European Union. He applauded progress that has been made to date towards strengthening global banking systems, including increased capital and liquidity standards for international banks. However, he noted that more needs to be done in order to solve the so-called “too big to fail” problem. Specifically, Dudley stated that impediments to an orderly cross-border resolution need to be fully identified and dismantled, and cross-border regulatory cooperation needs to be further enhanced, including through greater exchange of confidential supervisory information. Moreover, he noted the importance of establishing a level playing field across jurisdictions in respect of cross-border resolution, so that the regulatory focus would be on safety and soundness rather than “trying to protect, favor, or shield national champions.”

The US Securities and Exchange Commission, in its ongoing effort to regulate the over-the-counter security-based swap markets, adopted final rules under Title VII of the Dodd-Frank Act implementing comprehensive business conduct standards and chief compliance officer requirements for security-based swap dealers and major security-based swap participants (collectively, security-based swap entities). As a general matter, the SEC’s final rules impose upon security-based swap entities (i) an obligation to facilitate informed customer decision-making, (ii) requirements to enhance transparency with customers and (iii) supervision and chief compliance officer requirements, among other enhanced professional standards of conduct. The rules also address their cross-border application and the availability of substituted compliance.

The final rules become effective 60 days after publication in the Federal Register. The compliance date for the customer protection rules will be based on the compliance date of the registration rules for security-based swap dealers and major security-based swap participants.

View the SEC final rules.

The Financial Conduct Authority published an Occasional Paper which assesses whether high frequency traders, on a systematic basis, foresee when trading orders are going to arrive at different trading venues and trade in advance of other traders by using their speed to their advantage. The FCA used a novel dataset with full order-book data on 120 stocks traded on lit venues in the UK in 2013. The results show that HFTs cannot systematically trade ahead of other market participants at a millisecond frequency but that HFTs are able to anticipate order flow over longer time periods (seconds and tens of seconds). However, it is uncertain whether HFTs are able to react quicker to new information due to their lower latency, or are able to better anticipate order flow (because, for example, other market participants are predictable when placing orders).

View the Occasional Paper.

The US Federal Deposit Insurance Corporation’s Systemic Resolution Advisory Committee held a meeting to discuss the latest updates and advice on issues related to the resolution of systemically important financial companies pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. At the meeting, the committee covered topics including, the “living will” updates, orderly liquidation updates, and developments in resolution planning in the European Union.

View the agenda for the Systemic Resolution Advisory Committee meeting.