The Basel Committee on Banking Supervision published a second report on banking book risk-weighted asset valuation. The report forms part of the Regulatory Consistency Assessment Programme with the aim of effecting full implementation of the Basel III framework. The Committee's first report in 2013 focused on probability of default and loss-given-estimates for sovereign, bank and corporate exposures. This second report examines the variability of RWA in banks that use internal models to calculate their risk regulatory capital requirements.

Read more.

The US Office of the Comptroller of the Currency published a white paper on its vision for responsible innovation in the federal banking system and the eight principles that it will follow in developing a framework to evaluate new financial products and services, including formal outreach to the industry and collaboration with other regulators. The OCC also solicited feedback on how the OCC can facilitate responsible innovation, including what additional tools and resources could assist national banks and federal savings associations with regard to innovation. Comptroller Thomas J. Curry discussed the paper and the OCC's general approach to financial innovation in remarks he gave at Harvard. He discussed the challenges that financial technology companies pose to traditional banks, and how these challenges encourage banks to evolve and improve the products and services they offer to businesses and consumers, but cautioned that banks must do so in a responsible way that is consistent with sound risk management practices. Curry mentioned the possibility of creating a new office dedicated to innovation, and noted the OCC’s commitment to work with banks to identify and understand new technology and help banks manage associated risks and comply with consumer safeguards. Comments on the white paper are due by May 31, 2016. The OCC will host a forum on June 23, 2016, to discuss comments on the white paper and lead a discussion on financial services innovation.

View the OCC's White Paper.

View Comptroller Curry’s speech.

The European Securities and Markets Authority published its final report on Guidelines on the sound remuneration policies under the Units in Collective Undertakings Directive and the Alternative Investment Fund Managers Directive, including the final Remuneration Guidelines under UCITS V and revised Remuneration Guidelines under the AIFMD. ESMA also published a letter addressed to the European Commission, the European Parliament and the Council of the European Union in which ESMA recommends that legislation is required to provide clarity on the application of the proportionality principle to the remuneration requirements under EU laws.  
 

The UK House of Commons Treasury Committee wrote to the Chancellor of the Exchequer informing him that it had commissioned a report into the Maxwellisation process. Maxwellisation allows those who are going to be criticized in a public report an opportunity to respond to such criticisms and comment on relevant texts prior to their publication. The Treasury Committee's view is that one of the reasons for the delay in the publication of the UK regulators report into the collapse of HBOS was that Maxwellisation was applied, which took some 14 months. The HBOS report was published in December 2015 - seven years after HBOS failed. The Treasury Committee has asked Andrew Green QC to prepare a report on the legal requirements for, the issues that arise in the application of, Maxwellisation and to make recommendations on how Maxwellisation can be applied in a fair and proportionate manner in future public financial enquiries. The report will focus on the financial services sector only. 

View the Treasury Committee's letter.

View the Terms of Reference of the Maxwellisation Review.

US Federal Reserve Bank of New York President William Dudley addressed the role of the US Board of Governors of the Federal Reserve System and its structure and governance. He provided a detailed overview of the history of the creation and evolution of the Federal Reserve through the 20th century. He defended the Federal Reserve's actions during the financial crisis, noting that critiques of regulators should focus on shortcomings that led to the economic and financial instability of the crisis and not the Federal Reserve's intervening actions to mitigate the consequences. Dudley discussed the significant changes the Federal Reserve has taken since the financial crisis, including establishing the Large Institution Supervision Coordination Committee to look at the largest institutions and the Office of Financial Stability Policy Research to focus on the financial system at a holistic level. He also noted that the Federal Reserve has taken steps to improve transparency, including more speeches by FOMC members, regular testimony, press conferences and public notices after FOMC meetings. He cautioned against making changes to the structure of the Federal Reserve and the implementation of a formal rule for the Federal Reserve to adhere to in setting monetary policy.

View President Dudley's speech. 

US Deputy Treasury Secretary Sarah Bloom Raskin discussed the steps financial sector participants should take to respond and recover from a cyber attack. She noted that the key to an effective response and recovery involves preparation, coordination and practice, especially given that in a widespread cyber attack on the financial system, time would be of the essence. While the financial system has not yet experienced such an attack, Raskin warned that recent interconnected cyber attacks, including large-scale Distributed Denial of Service (DDoS) attacks, theft and misuse of customer data and destruction of systems and data, suggest that coordination is imperative in the face of such large-scale attacks. Moreover, Raskin discussed the government’s, and specifically, the US Treasury’s role in responding to, and helping the financial sector recover from, such an attack. Specifically, she mentioned the Treasury’s role in coordinating with federal and state financial and banking regulators, as well as other government agencies to effectively communicate information and to enhance incident response preparation, including response playbooks and cybersecurity table-top exercises. Raskin encouraged the private sector to create robust cyber incident playbooks which identify key players, actions and timelines to be employed in the event of a cyber attack.

View Deputy Treasury Secretary Raskin’s speech.

US Securities and Exchange Commission Chair Mary Jo White discussed the importance of strong governance and investor protection in the wake of developments and innovation in technology and financial markets. Specifically, Chair White discussed the importance of pre-IPO companies making accurate disclosures, and in particular the implications and potential consequences of the increase in so-called "unicorns" which are private start-up firms with valuations that exceed $1 billion. White also remarked on the need to protect investors that are investing under new SEC rules for capital raising under the JOBS Act -Regulation D, Regulation A+ and Regulation Crowdfunding - all of which are designed to allow smaller companies to access the capital markets. White noted that implicit in improving investor protection are strong financial controls and corporate governance, topics which are particularly important for private pre-IPO companies particularly as they go public and grow, often exponentially. Tools such as ensuring relevant expertise on boards and implementing investor protections while pre-IPO companies are private can help mitigate against the risks faced by rapidly growing start-ups. Finally, White noted that the SEC is closely monitoring developments and related investor protection issues in digital finance or fintech, namely blockchain technology, automated investment advice (robo-advisors) and online marketplace lending platforms.

View Chair White’s speech. 

A Commission Implementing Regulation which amends implementing technical standards on supervisory reporting of institutions as regards the reporting of the leverage ratio, was published in the Official Journal of the European Union. The ITS amends the requirement to report the leverage ratio to regulators under the Capital Requirements Regulation. The amending ITS updates prescribed notional values for institutions and derivatives traded to which certain reporting requirements are attached. The amending ITS provides updated leverage reporting ratio templates and instructions for completing the templates. The amending ITS enters into force on April 20, 2016. The regulation shall apply from the first reporting reference date six months from the date of publication in the Official Journal of the European Union.  

View the ITS. 

The Prudential Regulation Authority published a Policy Statement and Supervisory Statement on board responsibilities. The Policy is relevant to all PRA-regulated firms - banks, insurers, designated investment firms, building societies, friendly societies and credit unions. The Supervisory Statement provides PRA guidance on aspects of corporate governance to which the PRA attaches particular importance and to which the PRA may devote particular attention in the course of its supervision. The list, which is not definitive, includes firm strategy, culture, risk appetite and management, board composition, roles of executive and non-executive directors, board time and resources, management information and transparency, succession planning, remuneration, subsidiary boards and board sub-committees. The Supervisory Statement notes that specific accountabilities of individual directors established by the Senior Managers Regime are additional and complementary to the collective responsibility shared by directors as members of the board.

View the policy statement.

View the supervisory statement. 

A new “Office of Financial Sanctions Implementation” (OFSI) was established within Her Majesty’s Treasury, with responsibility for ensuring that sanctions are “properly understood, implemented and enforced in the UK”.  Despite an expansion in the number of sanctions programmes in the EU in recent years, as well as increasingly complex rules, there have not been any significant enforcement actions in the UK, a situation which contrasts with the enthusiastic enforcement practices of US sanctions enforcement agencies. OFSI is expected to work closely with other regulatory authorities, such as the FCA, to apply a more effective sanctions enforcement regime than has previously been the case. To this end, the government is also legislating to ensure that suitable remedies are available for sanctions enforcement.  Provisions in the Policing and Crime Bill outline new administrative penalties, monetary penalties and an increase in the maximum custodial sentence for breaching financial sanctions to seven years on conviction on indictment (or six months imprisonment on summary conviction).
 

The Financial Stability Board announced that it would publish proposed policy recommendations to address structural vulnerabilities in asset management activities. The recommendations will aim to address several risks that such activities present: funds' liquidity mismatch, leverage within funds, operational risk and challenges in transferring investment mandates in a stressed situation and securities lending activities of asset managers and funds. The FSB intends to finalize the recommendations by the end of 2016. The announcement was included in a press release which summarizes the outcomes of the FSB's recent meeting in Tokyo. The FSB will also be focusing on CCP resolution this year and intends to publish guidance on CCP resolution by September and consult on standards or guidance on issues relating to CCP resolution before the end of the year. 

View the FSB announcement.

US Treasury Secretary Jack Lew addressed the Carnegie Endowment for International Peace, commenting on the evolution of economic sanctions programs as a tool for US foreign policy. He emphasized the importance of using sanctions, but also cautioned against overusing sanctions and using sanctions where they may have a negligible impact. Critically, Lew noted that economic sanctions are meant to be forward-looking and to change future behavior, rather than to be punitive for past bad actions. Focusing on three key lessons that apply to the appropriate use of sanctions, Lew noted the importance of: (i) working with US allies to have broad, international support for economic sanctions; (ii) recognizing the appropriate time to provide relief from sanctions in order to preserve US credibility and the ability to use sanctions programs to motivate behavior changes; and (iii) investing in infrastructure to help implement and support targeted sanctions programs. Secretary Lew remarked on the high costs of sanctions programs, and the potential for overuse to result in negative externalities, including driving business and financial transactions outside of the US.

View Treasury Secretary Lew’s speech.

The European Securities and Markets Authority launched a consultation on proposed guidelines on information expected or required to be disclosed on commodity derivatives markets or related spot markets under the Market Abuse Regulation. MAR will replace 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. The definition of inside information for commodity derivatives includes information which is "reasonably expected to be disclosed or is required to be disclosed in accordance with legal or regulatory provisions at the Union or national level, market rules, contract, practice or custom, on the relevant commodity derivatives markets or spot markets". ESMA's proposed guidelines aim to set out the types of information that would be considered inside information for commodity derivatives or spot transactions by establishing a non-exhaustive indicative list of information that would be reasonably expected or required to be so disclosed. The consultation closes on May 20, 2016 and ESMA aims to publish its final report by late Q3 2016. 
  
View the consultation paper.

The European Banking Authority published its Benchmarking of Remuneration and High-Earners 2014 report. Under the Capital Requirements Directive, as amended, banks are subject to compensation requirements for staff who have a material impact on the bank's risk profile, and there is a cap on the ratio of variable to fixed compensation for identified staff – known as the bonus cap. The EBA is required to benchmark EU compensation trends and to publish aggregated data on high earners who earn EUR1 million or more per financial year. The EBA's report analyzes information for the year 2014 and compares it to 2013 data. The analysis shows, amongst other things, that: (i) the number of high earners has increased by 21.6%, mostly due to changes in the exchange rate between the euro and pound sterling; (ii) differences in national implementation remain, in particular the application of deferral and pay-out in instruments; (iii) the number of identified staff has increased by 84.34% following the application of the technical standards on criteria to identify staff who have a material impact on a firm's risk profile (introduced in June 2014); and (iv) the ratio between variable and fixed remuneration for identified staff dropped to 65.48% from 104.27% in 2013. The European Commission will take the report into account in its review of the compensation provisions under the CRR. 

View the EBA's report.

US Commodity Futures Trading Commission Commissioner Christopher Giancarlo discussed distributed ledger technology, commonly known as DLT or blockchain and its potential to "revolutionize the world of finance." He noted some of the potential uses of blockchain technology, including increasing settlement efficiency and speed, linking recordkeeping networks, reducing transaction costs and increasing market access. Giancarlo also noted potential opportunities in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis. Citing the collapse of Lehman Brothers, Giancarlo emphasized that blockchain technology could provide regulators better visibility into trading portfolios between counterparties, allowing them to react sooner in the face of financial deterioration. Analogizing the development of blockchain to the inception of the internet, Commissioner Giancarlo called on US regulators to let the private sector lead and to avoid impeding innovation and investment as the technology develops. He advocated for a principles-based approach developed in coordination between US and foreign regulators. Finally, he noted that regulators should revisit existing rules and recordkeeping requirements to be sure that they do not inhibit innovation. With respect to the CFTC specifically, he said his agency will revisit Rule 1.31 - a recordkeeping rule that requires all books and records to be kept in their original form or native file format.

View Commissioner Giancarlo’s speech.

The Prudential Regulation Authority published proposals on minimum standards for firms when underwriting buy-to-let contracts. The proposals would apply to all PRA-regulated firms undertaking buy-to-let lending that are not subject to regulation by the Financial Conduct Authority. The PRA is proposing that such firms be required to use an affordability test when assessing a buy-to-let mortgage contract as an interest coverage ratio test and/or an income affordability test. In addition, a standard set of variables would be established that would need to be shown in the tests. 

In addition, the PRA has proposed clarification on the application of the small and medium-sized enterprise supporting factor on buy-to-let mortgages which would apply to all firms subject to the Capital Requirements Regulation.  Under the CRR, the SME supporting factor is used to reduce the capital requirements on loans to SMEs on qualifying retail, corporate and real estate exposures. The PRA's view is that buy-to-let borrowing is not included in that reduction and the PRA expects firms to consider the purpose of a loan before applying the SME supporting factor. The consultation closes on June 29, 2016.

View the consultation paper.

The Bank of England released details of the UK 2016 banking stress test, the first to be designed under the new approach to stress testing published in October 2015. The 2016 stress test will cover 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. These are the same firms that participated in the 2015 stress test. The stress test will consist of a macroeconomic stress scenario, a traded-risk stress scenario, a misconduct costs stress and an annual cyclical scenario. The results of the stress test will be published in Q4 2016. 

View details of the UK 2016 stress test.

The Financial Policy Committee of the Bank of England published a Statement from its policy meeting on March 23, 2016. The Statement summarizes the conclusions reached by the FPC. The FPC has decided to increase the UK countercyclical buffer rate from 0% of risk-weighted assets to 0.5% with effect from March 29, 2017. The current overlapping aspects of Pillar 2 supervisory capital buffers will be reduced at the same time as a one-off adjustment. The UK CCyB rate will apply to all UK banks and building societies as well as investment firms not exempted by the Financial Conduct Authority. According to the rules of the European Systemic Risk Board, this buffer will also apply to EU banks lending into the UK either on a cross-border basis or through a local branch. The Prudential Regulation Authority has published a Statement clarifying its approach to adjustments to firms' buffers as the CCyB, systemic and conservation buffers are implemented up to 2019. The PRA intends to ensure that the supervisory buffers will be reduced as soon as practicable after the CCyB rate comes into effect which will depend on the timing of a firm's supervisory review and evaluation process. The adjustments aim to ensure that the transition to the new capital framework avoids double counting in capital buffers covering the same risk and give firms time to transition to the requisite capital buffers by the end of 2019. 

The FPC will also assess the implementation and design of internationally-agreed post-crisis regulations to determine whether liquidity could be enhanced. The outcome of that assessment is expected later in 2016.

View the FPC Statement.

View the PRA Statement.

The Basel Committee on Banking Supervision launched a consultation on changes to the advanced internal ratings based approach and the foundation IRB approach so as to reduce variation in capital requirements for credit risk. The Basel Committee is proposing to: (i) remove the IRB approaches for certain portfolios which will then be subject to the standardized approach to credit risk; (ii) remove the option to use the advanced IRB approach for exposures to corporates that are part of consolidated groups that have annual revenues of more than EUR 200m; (iii) remove the IRB approaches for specialized lending that use banks' estimates of model parameters; and (iv) introduce a floor to the internal model method for counterparty credit risk based on a percentage of the applicable standardized approach. The consultation closes on June 24, 2016. The Basel Committee has committed to finalizing all the proposed changes to the IRB approaches by the end of 2016. 

View the consultation paper.

Commission Delegated Regulation with regard to obligations of depositaries was published in the Official Journal of the European Union. The Undertakings for Collective Investment in Transferable Securities (UCITS V) Directive outlines requirements regarding depositaries' duties, delegation arrangements and the liability regime for UCITS assets under custody. The Regulation supplements the obligations set out in UCITS V. It specifies definitions and details of written contracts for the appointment of a depositary including, amongst other things, that the written contract should comprise all necessary details for the appropriate safe-keeping of all UCITS assets by the depositary or a third party delegated with safekeeping functions and for the depositary to properly fulfil its oversight and control functions. The written contract must also provide sufficient detail on the categories of financial instruments in which the UCITS may invest and cover the geographical regions in which the UCITS plans to invest.

View more. 

The UK Payment Systems Regulator published its final Guidance on the application of the EU Interchange Fee Regulation. The IFR, which is directly applicable across the EU, applies to payment card schemes, issuing and acquiring payment service providers, processing entities, other technical service providers and, in certain circumstances, merchants. The IFR applies to the following payment card schemes: MasterCard, Visa Europe, American Express, Diners Club International, JCB International and Union Pay International. The PSR's Guidance covers: (i) the classification of schemes for IFR purposes; (ii) interchange fee caps and the possible exemption from those caps for some three-party schemes; (iii) the PSR's powers and procedures, including penalties for non-compliance; and (iv) the business rules.
 

The Prudential Regulation Authority published its proposals for transposing certain aspects of the Markets in Financial Instruments legislative package, which comprises the Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation, collectively known as MiFID II. The PRA's proposals relate to the passporting regime and algorithmic trading only – the PRA will consult on other aspects related to MiFID II in due course. 

View more. 

The European Central Bank Regulation on the exercise of options and discretions relating to the prudential requirements for credit institutions was published in the Official Journal of the European Union. The prudential treatment of options and discretions by regulators is outlined in the Capital Requirements Directive and the Capital Requirements Regulation, known collectively as CRD IV. The ECB is the prudential regulator for Eurozone banks and directly supervises the large Eurozone banks under the Single Supervisory Mechanism, designated as "significant credit institutions". The ECB Regulation sets out the waivers, options and discretions that the ECB has decided to apply to significant credit institutions in its capacity as the prudential regulator of these firms, and which will replace those adapted by the national regulators. The waivers and discretion cover own funds, capital requirements, liquidity and large exposures. The ECB Regulation will apply, subject to limited exceptions, from October 1, 2016, although transitional provisions have been included so that existing national provisions will apply until the ECB sets a common approach for those waivers and discretions not covered in this Regulation. The ECB also published its Guide to harmonizing the exercise of options and discretions regarding the prudential supervision of credit institutions. 

View the ECB Regulation.

View the ECB Guide. 

​The European Banking Authority published a report on the Small and Medium-sized Enterprise Supporting Factor. The SME SF was introduced by the Capital Requirements Regulation to counterbalance the rise in capital requirements resulting from the Capital Conservative Buffer whilst providing an adequate flow of credit to SMEs. The report provides: (i) analysis of the lending trends and conditions for SMEs; (ii) analysis of the effective riskiness of EU SMEs over a full economic cycle; and (iii) the consistency of funds requirements laid down in the CRR for credit risk to SME's. The EBA has concluded that there is currently not enough evidence to suggest that the SME SF has provided additional stimulus for lending to SMEs as compared to larger corporate entities. However, the EBA has also recognised that it may be too early to make strong conclusions based on the current analysis. The EBA makes four recommendations: (i) continued monitoring and a reassessment of the SME SF so as to understand its impact on lending; (ii) a more comprehensive approach for the review of risk weights; (iii) review of the amount owed limit criterion and in the application of the SME SF to understand its purpose and costs of application; and (iv) harmonisation of the SME definition in the CRR.

View the EBA's Report. 

The European Commission launched a consultation seeking views on key insolvency principles and standards which could ensure that national insolvency frameworks work in a cross-border context. The consultation is part of the Commission's Capital Markets Union Action Plan which aims to remove barriers to the free flow of capital. Responses will be used to identify which aspects could be included in a legislative initiative or other related actions. It takes the form of various multiple choice questions and one open question, which seem to be aimed at initial framing of how this initiative should be taken forwards. The consultation is open until June 14, 2016.

View the consultation website.

The European Banking Authority launched a consultation on reporting financial information across EU jurisdictions using national Financial Supervisory Reporting Generally Accepted Accounting Practices (GAAP). The EBA reported that institutions across the EU have identified issues with current templates. The consultation has been decentralised so that all questions and feedback on the draft template are provided to jurisdiction specific Regulators and not through the EBA. The EBA believes it will benefit from the expertise of authorities from different jurisdictions given their knowledge of the local GAAP. The consultation follows from a previous consultation in December, 2015, on proposed changes to the FINREP based on the IFRS 9 requirements. Responses to the consultation are due by April 15, 2016. The EBA stated that it will release a subsequent updated version of the FINREP. 

View the EBA press release.

View the draft FINREP GAAP template.

A Commission Delegated Regulation, in the form of Regulatory Technical Standards, was published specifying procedural and content related requirements for the recovery and resolution of banks and certain investment firms under the EU Bank Recovery and Resolution Directive. In particular, the RTS set out the requirements for: the content of recovery plans, the criteria for the assessment of recovery plans, content of resolution plans and assessment criteria for resolvability, conditions for group financial support and the circumstances in which a person is independent from both the resolution authority and the institution or entity in recovery or resolution. The RTS also provides for: recognition of write-down and conversion powers, procedure and content of notifications to a regulator when a firm is assessed as failing or likely to fail and rules specifying the operational functioning of resolution colleges. The RTS must still be approved by the European Parliament and the Council of the European Union and be published in the Official Journal before they can enter into force. 

View the Delegated Regulation.

The European Council announced that it had agreed to extend an exemption for commodity dealers under the Capital Requirements Regulation, until December 31, 2020. The CRR currently exempts commodity dealers from large exposures requirements and own fund requirements until December 31, 2017. That date was set on the basis that the Commission would have conducted a review of the prudential regime applicable to commodity dealers and to investment firms by the end of 2015 and, if appropriate, proposed a legislative regime adapted for the risk profile of commodity dealers and investment firms. The Commissions' review is still in progress. The European Commission published its proposed legislative amendments to the CRR in December 2015 on the basis that the extension will avoid the need for relevant firms to temporarily comply with the full CRR requirements in 2018 before being subsequently moved to a tailored regime within two to three years.

The European Banking Authority published translations of its final guidelines on product oversight and governance arrangements for retail banking products. The retail banking products included are mortgages, personal loans, deposits, payment accounts, payment services and electronic money. The guidelines are addressed to EU national regulators and financial institutions and require the establishment of product oversight and governance arrangements for the design, bringing to market and review of retail banking products over their lifecycle. The guidelines will apply from January 3, 2017, to all products brought to market after that date as well as to existing products that are significantly changed after that (the EBA has not provided clarification on the meaning of "significantly changed").

View the Translated Guidelines. 

The European Banking Authority published a consultation paper on standardised methods to compute capital requirements for general interest rate risk under the Capital Requirements Regulation. The CRR provides for two standardised methods, the so-called Maturity-Based calculation for general interest risk and the Duration-Based calculation of general risk. The Duration-Based calculation uses the concept of Modified Duration which is valid only for instruments not subject to repayment risk. Modified Duration is used to measure the sensitivity in price for a unit change in its internal rate of return of any financial asset that consists of fixed cash flows. A correction to the duration is necessary to reflect the repayment risk. The CRR provides the mandate for the EBA to issue guidelines on how the Modified Duration for debt instruments which are subject to repayment risk should be corrected. The EBA proposes two approaches to correct the Modified Duration calculation: (i) treat the debt instrument with repayment risk as if it was a combination of a plain vanilla bond and an embedded bond; or (ii) calculate directly the change in value of the whole instrument subject to repayment risk resulting from a 100 basis point movement in Interest Rates. Submissions to the consultation are due by June 22, 2016.

View the Consultation Paper. 

The European Securities and Markets Authority published translations of its guidelines on the assessment of the knowledge and competence of individuals providing investment advice or information about financial instruments, investment services or ancillary services to clients on behalf of investment firms. Under the revised Markets in Financial Instruments Directive, an investment firm is required to ensure that individuals giving investment advice or providing information about financial instruments, investment services or ancillary services to clients have the necessary knowledge and competence to do so and satisfy the firm's obligations on suitability, appropriateness and reporting and provision of information to clients. Where requested by its national regulator, an investment firm may be requested to demonstrate that these requirements have been met. National regulators must publish the criteria that will be used to assess such knowledge and competence. ESMA's guidelines, which apply to national regulators and investment firms, specify criteria for the assessment of knowledge and competence, establishing the minimum standards that staff providing the relevant services should meet. The guidelines will come into effect on January 3, 2017.
 

The UK Payments Systems Regulator published its final Guidance for designated representative bodies making so-called "super complaints" under the Financial Services (Banking Reform) Act 2013. The representatives can issue complaints to the Payments Systems Regulator when one or more features of a UK operated market (or a market that operates only in part in the UK) for services provided by payment systems are, or appear to be, significantly damaging the interests of payment service users. Super complaints are complaints made on behalf or as a result of issues affecting a large number of users. The list of designated representative bodies published by HM Treasury in February will become effective on April 1, 2016. The first designated representative bodies are: (i) the National Association of Citizens Advice Bureaux; (ii) the General Consumers’ Association; (iii) the Consumer Council for Northern Ireland; (iv) the National Federation of Self Employed and Small Businesses; and (v) Age UK.
 

The Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, National Credit Union Administration, Office of the Comptroller of the Currency and Financial Crimes Enforcement Network issued guidance for certain banks, savings associations, credit unions and US branches and agencies of foreign banks (collectively, “banks”) clarifying the applicability of the customer identification program (CIP) regulations implementing Section 326 of the USA PATRIOT Act to prepaid cards.

According to the guidance, a bank’s CIP should apply to the holders of certain prepaid cards issued by the institution as well as to holders of such cards purchased from third-party program managers that design, manage and operate prepaid card programs on the bank’s behalf. The guidance clarifies when, under the CIP rule, the bank should obtain information in order to verify the identity of the cardholder, including obtaining the name, date of birth, address and identification number (e.g., the Taxpayer Identification Number) of the cardholder.

Since prepaid cards have become mainstream financial products, US regulators have emphasized the implementation of strong and effective controls to mitigate money laundering and other financial crime risks associated with the issuance of prepaid cards and the processing of prepaid card transactions. Some controls have already been put in place, including limits on card value and the frequency and number of transfers permitted, as well as due diligence on third parties and cardholders. 

View the interagency guidance. 

The US Board of Governors of the Federal Reserve System approved the application by Goldman Sachs Bank USA under the Bank Merger Act to assume substantially all (approximately $17 billion) of the deposit liabilities and certain assets of GE Capital Bank, a subsidiary of General Electric Corporation, including assets GE Bank uses to manage its online deposit-taking platform. The acquisition was announced in August 2015, and the Federal Reserve Board extended processing of GS Bank’s application in light of numerous public comments that challenged the transaction on various grounds, including that GS is already too big to fail. In approving the transaction, among other findings, the Federal Reserve Board concluded that the transaction would have a negligible impact on the systemic footprint of GS (which has approximately $860 billion in total assets) and would improve the stability of funding available to GS Bank by diversifying its sources of funding.

View the Federal Reserve Board order.  

The European Securities and Markets Authority published three letters from it to the European Commission concerning certain Regulatory Technical Standards under the revised Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation, together known as MiFID II. The Commission wrote to ESMA on March 14, 2016, notifying ESMA that amendments are required to the RTS on position limits for commodity derivatives, non-equity transparency requirements and on the exemption from licence requirements under MiFID II for commodity trading firms (the ancillary activities exemption). ESMA has confirmed that it will act swiftly in preparing its Opinions on the proposed amendments. It is as yet unknown whether the other RTS produced by ESMA last year have been accepted by the European Commission.
  
View the letters.

The European Banking Authority published a final Decision setting out the formula to be used by creditors when calculating the benchmark rate under the Mortgage Credit Directive. The MCD requires creditors to provide consumers with certain pre-contractual personalized information, including calculated illustrations of the annual percentage rate of charge and of the maximum instalment amount based on the highest value of any external reference rate used in calculating the borrowing rate, or, where the creditor does not use an external reference rate, the highest value of a benchmark rate as specified by a national regulator or the EBA. The EBA has therefore developed a formula for creditors to use to calculate such a rate which uses the underlying rate of the European Central Bank for Eurozone countries, or the Member State's central bank rate for non-Eurozone countries. The Decision will come into effect once it is published in the Official Journal of the European Union.

View the Decision.

US Comptroller of the Currency Thomas J. Curry delivered remarks before the National Community Reinvestment Coalition, where he addressed how banks are adapting to financial technology changes and the Office of the Comptroller of the Currency’s role in supporting responsible bank innovation. Among other things, Comptroller Curry noted that the OCC will soon publish a paper outlining its views on financial services innovation that will enable the agency to “evaluate innovative products, services, or processes that require regulatory approval and identify potential risks associated with adoption.”

View the Comptroller’s speech.  

The European Commission adopted a Delegated Regulation on the classes of arrangements to be protected in a partial property transfer or where a contract is forcibly modified by a resolution authority. The EU Bank Recovery and Resolution Directive provides for certain types of arrangements to be protected during the partial transfer of assets, rights and liabilities of a bank under resolution as well as when a resolution authority requires a contract to which the bank is a party to be modified. The objective is to prevent assets, rights and liabilities that are linked to each other from being split. The Delegated Regulation sets out in detail the conditions that security, set-off, netting and structured finance arrangements (including securitizations and investments used for hedging) must meet to benefit from the protection.The Delegated Regulation reminds creditors that they will need to review and modify the terms of their credit exposures to EU banks and investment firms so as to ensure that they maximize their rights to determine a net exposure to that entity and avoid their credit exposure increasing if assets and liabilities are not transferred together. The Delegated Regulation must still be approved by the European Parliament and the Council of the European Union. When it enters into force, it will apply directly in all member states across the EU.

View the Delegated Regulation.

As part of the Federal Reserve Bank of New York’s Conference on Bank Supervision, senior officials of several US bank regulatory agencies delivered remarks regarding the effectiveness of bank supervision and key components of the bank supervisory process. In the conference’s opening remarks, NY Fed President William Dudley noted the importance of distinguishing between effective and ineffective supervision, particularly given the confidential nature of the bank supervisory process. Federal Deposit Insurance Corporation Vice Chairman Thomas Hoenig subsequently noted several critical features of successful oversight of financial institutions including: (i) subjecting commercial banks of all sizes to full-scope examinations, (ii) having regulators require that the largest banks disclose important supervisory findings to allow the public to better understand their financial condition and (iii) recognition by supervisors of their limits and emphasizing that banks hold sufficient capital to backstop management mistakes and bad luck.

View President Dudley’s speech.

View Vice Chairman Hoenig’s speech.   

The Financial Stability Board published its second Thematic Review on Resolution Regimes. The report considers the range and nature of resolution powers in FSB member jurisdiction for resolution authorities in the banking sector. The FSB has found that: (i) not all jurisdictions have implemented a bank resolution regime with a comprehensive set of powers which aligns with the FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions and that those jurisdictions that do are primarily the home jurisdictions of global systemically important banks; (ii) the powers that are most often not included in regimes are those relating to bail-in, the imposition of temporary stays on the exercise of early termination rights and the power to ensure continuity of essential services during a bank resolution; and (iii) more progress has been made in implementing processes for recovery planning than for resolution planning and resolvability assessments. The FSB is recommending that the identified gaps in powers are addressed. FSB member countries must report to the FSB by December 2016 on the actions that they have taken or intend to take to address the issues for their bank resolution regime. 

View the FSB's report.

Thomas C. Baxter, general counsel and executive vice president of the Federal Reserve Bank of New York, announced his decision to retire from the New York Fed in September, 2016, after 36 years of service. Mr. Baxter also serves on the New York Fed’s Management Committee and as deputy general counsel for the Federal Open Market Committee. Mr. Baxter will step down in June, but will continue to advise the New York Fed president and assist in the legal group’s transition until September. The New York Fed will immediately begin the search for Mr. Baxter’s successor.

View the New York Fed press release.   

Comptroller of the Currency Thomas J. Curry announced the appointment of Grace Dailey as Senior Deputy Comptroller for Bank Supervision Policy and Chief National Bank Examiner. Comptroller Curry also announced that Grovetta Gardineer will fill the newly created position of Senior Deputy Comptroller for Compliance and Community Affairs. Ms. Dailey will succeed Jennifer Kelly, who is retiring at the end of April after 37 years of service to the OCC. Ms. Gardineer assumes her new title and responsibilities immediately.

View the OCC press release.    

Commission Implementing Regulation on implementing technical standards on the timing, format and template of notifications to regulators by trading venues of financial instruments was published in the Official Journal of the European Union. In accordance with Market Abuse Regulations trading venues are required to notify regulators daily with information relating to the trade of financial instruments. The ITS required trading venues to report to their national regulators on the financial instruments which were subject to a request for admission to trading or admitted to trading or traded on the trading venue and set out, in accordance with the MAR, the required format and details of trading activity that must be provided. The information required for example, for the trade of Derivatives, includes the expiry date, price multiplier and underlying issuer. The full list of requirements are contained in the Annex to the ITS. It is intended that the related reporting obligations under the Markets in Financial Instruments Regulation will align with the obligations under these ITS. The ITS will apply from July 3, 2016.

View the ITS.

Commission Implementing Regulation on the implementation of technical standards regarding the timing, format and template of notifications to regulators by trading venues of financial instruments was published in the Official Journal of the European Union. In accordance with the Market Abuse Regulation, trading venues are required to notify national regulators daily with certain transaction information. The ITS sets out the required format and details of trading activity that must be provided. With regards to derivatives trading, for example, information relating to the expiry date, price multiplier, and underlying issuer must be disclosed. The full list of requirements is contained in the Annex to the ITS. It is intended that the related reporting obligations under the Markets in Financial Instruments Regulation will align with the obligations under these ITS. The ITS will apply from July 3, 2016.

View the ITS.
 

The Commodity Futures Trading Commission approved a final rule that removes certain reporting and recordkeeping requirements for trade option counterparties that are neither swap dealers nor major swap participants (Non-SD/MSPs), such as commercial end-users that transact in trade options in connection with their businesses.  The final rule became effective on March 21, 2016.

The final rule eliminates the Form TO annual notice reporting requirement for otherwise unreported trade options in CFTC regulation 32.3(b). Furthermore, Non-SD/MSPs will not be subject to part 45 reporting requirements in connection with their trade options. The CFTC did not impose a proposed reporting requirement that a commercial participant would need to provide notice to the CFTC of its trade options activities if such activities had a value of more than $1 billion in any calendar year.

The final rule also eliminates the swap-related recordkeeping requirements for Non-SD/MSPs in connection with their trade option activities.  However, Non-SD/MSPs transacting in trade options with SDs or MSPs must obtain a legal entity identifier and provide it to their SD/MSP counterparties.

CFTC No-Action Letter 13-08, which has provided conditional relief for Non-SD/MSPs from certain swap-related reporting and recordkeeping requirements, has been withdrawn.  Also, given the elimination of the Form TO reporting requirement, CFTC staff is of the view that a trade option counterparty that is a Non-SD/MSP is not required to report its otherwise unreported trade options for calendar year 2015 on Form TO.

The final rule will become effective upon publication in the Federal Register. 

View the final rule. 

The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2016 was made. The Order amends legislation relating to the regulation of activities connected with lending, primarily the Financial Services Act and Markets Act (2000). The Order extends the scope of regulated activities for certain types of activities which previously did not qualify as a regulated activity, for the purpose of the FSMA, are now deemed a regulated activity. For example, it provides amendments to the regulated activity of operating electronic systems in relation to lending. The amend states that the activity is regulated whether the operation collects interest or not under the lending agreement, and where a person carrying on that activity, facilitating another person transferring their rights under an agreement to a third party, is a regulated activity. The Order also serves partly to implement the Mortgage Credit Directive Order. For example, the Order extends the scope of the regulated activities of arranging and advising on regulated mortgage contracts so that mortgages entered into before October 31, 2004 (which are regulated as consumer credit agreements before March 21, 2016) are included within the activities from that date. The Order came into force on March 17, 2016.

View the Order. 

An equivalence Decision on the derivatives regulatory regimes for derivatives clearing organisations in the United States was published in the Official Journal of the European Union. The Decision follows the announcement by the European Commission and the Commodity Futures Trading Commission of a common approach on the supervision of CCPs operating in the US and EU. The Decision declares that the legal and supervisory arrangements of the CFTC for DCOs that have been declared systemically important derivatives clearing organisations by the Financial Stability Oversight Council or DCOs that have opted into additional standards similar to the SIDCO regime (so-called “Subpart C DCOs”) are equivalent to the EU requirements under EMIR, provided that the DCO’s internal rules and procedures meet the following requirements: (i) for derivatives contracts executed on regulated markets, a minimum liquidation period of two days for initial margin is applied to clearing members’ proprietary positions; (ii) for all derivative contracts, measures are in place to limit procyclicality which are equivalent to the options under EMIR; and (iii) the DCO has sufficient pre-funded available resources enabling it to withstand the default of at least two clearing members to which it has the largest exposures under extreme conditions. 
 

The Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight announced that certain banking entities subject to Appendix B of Part 75 of the CFTC’s regulations, which implements section 619 of the Dodd-Frank Act known as the “Volcker Rule,” should submit their CEO attestations through the following email address: VolckerAttestation@cftc.gov. Appendix B includes requirements that a CEO attestation be submitted to the CFTC regarding the banking entity’s Volcker Rule compliance program.

View the CFTC press release.  

The Federal Deposit Insurance Corporation adopted a final rule to increase the Deposit Insurance Fund to the statutorily required minimum level of 1.35 percent. Subject to certain minor changes, the rule largely mirrors the proposed rule, which was published for comment in November.

The primary purposes of the DIF are to protect the depositors of insured banks and to resolve failed banks. The Dodd-Frank Act increased the minimum for the DIF reserve ratio, the ratio of the amount in the fund to insured deposits, from 1.15 percent to 1.35 percent and required that the ratio reach that level by September 30, 2020. The reserve ratio at the end of 2015 was 1.11 percent, with a DIF balance of $72.6 billion.

The DIF is funded mainly through quarterly assessments on insured banks. Pursuant to a 2011 FDIC rule, regular assessment rates for all banks will decrease when the reserve ratio reaches 1.15 percent, which the FDIC anticipates will occur in the first half of 2016. Banks with total assets of less than $10 billion will have substantially lower assessment rates under the 2011 rule. The final rule will impose on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments. The FDIC expects the reserve ratio will likely reach 1.35 percent after approximately two years of payments of the surcharges.

The final rule will become effective on July 1. If the reserve ratio reaches 1.15 percent before that date, surcharges will begin July 1. If the reserve ratio has not reached 1.15 percent by that date, surcharges will begin the first quarter after the reserve ratio reaches 1.15 percent.

View the final rule. 

At an American Bankers’ Association Conference in Washington, DC, US Senate Banking Committee Chairman Richard Shelby and US House of Representatives Financial Services Committee Chairman Jeb Hensarling both raised concerns regarding the current regulatory regime and certain requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, Chairman Shelby addressed the costs and burdens of financial regulation under the Dodd-Frank Act, specifically criticizing the $50 billion threshold for identifying systemically important financial institutions, and noted plans to continue to push his regulatory relief bill, The Financial Regulatory Improvement Act of 2015, through the Senate. Chairman Hensarling also outlined proposed legislation that would reform the Dodd-Frank Act, including eliminating certain Dodd-Frank Act and Basel III requirements for banks that hold higher levels of capital.

View Chairman Shelby’s remarks.

View coverage of Chairman Hensarling’s remarks.