The European Banking Authority published a Decision permitting the use of unsolicited credit assessments of certain External Credit Assessment Institutions for calculating firm capital requirements. The Decision aims to harmonize regulation related to the use of solicited and unsolicited credit assessments across the European Union. 

The Competition and Markets Authority published a provisional decision on market issues regarding personal current accounts and retail banking services for small-and medium-sized enterprises. The decision is part of the CMA’s retail banking investigation which commenced on June 19, 2013. The decision outlines proposals to combat issues hindering competition in personal current accounts and in banking services for SMEs. The CMA considers that competitive pressures in retail banking are weak and that diversification of the banking sector is not the most efficient and accurate way to increase competition.  Instead, the CMA is proposing a package of remedies, focused on innovation and the provision of information to customers, coupled with technological development. 

Read more.

The European Commission adopted Regulatory Technical Standards on the arrangements, systems and procedures for market participants disclosing inside information while conducting market soundings. The Market Abuse Regulation, which will apply from July 3, 2016 across the EU, provides that when a disclosing market participant discloses inside information during a market sounding, that disclosure will be deemed to be made in the normal course of the exercise of the person's employment, profession or duty provided that certain conditions are met. Such disclosure would not therefore constitute market abuse. The adopted RTS require disclosing market participants to establish procedures which describe the way in which market soundings are conducted, to provide certain information to the person receiving the market sounding, including, where possible, an estimate as to when the information will cease to be inside information, and to keep records of the persons who have received market soundings. 

As part of his remarks at the Institute of International Bankers Annual Anti-Money Laundering Seminar, US Financial Crimes Enforcement Network Deputy Director Jamal El-Hindi discussed certain US Department of Treasury efforts that have been rolled out in the last several months, including: (i) the final customer due diligence (CDD) rule; (ii) draft legislation requiring legal entities to provide beneficial ownership information at the company formation stage; and (iii) the use of FinCEN’s geographic targeting orders. The CDD final rule amends existing Bank Secrecy Act regulations to clarify and strengthen obligations of covered financial institutions, specifically banks, brokers or dealers in securities, mutual funds, futures commission merchants and introducing brokers in commodities. The final rule also adds a new requirement that these financial institutions know and verify the identities of the natural persons who own, control and profit from the legal entities the financial institutions service. Finally, the rule harmonizes BSA program rules and makes explicit several components of customer due diligence that have long been expected under existing regulations. El-Hindi noted how FinCEN relied on significant engagement with industry in finalizing this rule.

Read more.

The Federal Reserve Bank of New York published a post on its Liberty Street Economics blog assessing the impact of interagency guidance intended to curtail leveraged lending issued by the Office of the Comptroller of the Currency, Federal Reserve Board and the FDIC in March of 2013. The post shows that banks, in particular the largest institutions, cut leveraged lending while nonbanks increased such lending after the guidance. During the same period of time, nonbanks increased their borrowing from banks, possibly to finance their growing leveraged lending activity. The post notes that this evidence highlights an important challenge of macroprudential policies. Since those policies reach beyond individual banks and target risk in the entire banking system, they are more likely to trigger significant responses that may have unintended consequences.
 

Chief Information Officer and Chief Privacy Officer of the US Federal Deposit Insurance Corporation, Lawrence Gross, testified before the Committee on Science, Space, and Technology of the U.S. House of Representatives’ Subcommittee on Oversight. He discussed the FDIC’s information security program and its ability to identify, analyze, report and remediate data security incidents. Gross noted that employees and contractors receive annual training to ensure they will report incidents when they have access to sensitive information. The FDIC also has a security incident response and escalation plan in place to ensure the systematic gathering and analysis of facts relevant to the incident, and an interdisciplinary team responsible for determining the appropriate course of action if there is an elevated risk of harm. After all facts have been gathered, the FDIC takes steps to mitigate the risk of harm and undertake appropriate reporting and notifications commensurate to the severity of the incident.  Gross also detailed several remedial steps the FDIC is currently taking to further lower the risk of sensitive information being exposed.

The European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority (known as the Joint Committee of the European Supervisory Authorities) published an Opinion on the European Commission's proposed amendments to the ESA's final draft Implementing Technical Standards on the mapping of credit assessments to the risk weights of External Credit Assessment Institutions under the Capital Requirements Regulation and Solvency II Directive. The ESA's submitted their final draft ITS to the European Commission in November 2015. The Commission notified the ESAs on March 30, 2016 that it intended to adopt the ITS with amendments by relaxing the ESA's approach to the mapping of ECAIs. The ESA's do not agree with the proposed amendments for several reasons including the fact that the Commission's approach favors promoting competition over financial stability risk concerns.  

View the Opinion.

A Commission Delegated Regulation containing Regulatory Technical Standards specifying the conditions for the application of derogations, concerning currencies with constraints on the availability of liquid assets, under the Capital Requirements Regulation was published in the Official Journal of the European Union.  The CRR sets out a Liquidity Coverage Requirement which requires firms to hold liquid assets to maintain adequate levels of liquidity buffers to cope with any possible imbalances between liquidity inflows and outflows. Firms may derogate from the LCR where the requirement exceeds the availability of those assets in a particular currency. 

Read more.

The Prudential Regulation Authority published a consultation paper on its proposed approach to Pillar 2 liquidity requirements for intraday risk, debt buyback and non-margined derivatives, including a proposed policy statement. The Capital Requirements Directive gives national regulators discretion to set Pillar 2 liquidity requirements, in addition to the standard Pillar 1 Liquidity Coverage Ratio which applies to all firms. The PRA is proposing that:   (i) the level of application for setting Pillar 2 requirements should be aligned to the Pillar 1 approach; (ii) there should be no specific disclosure requirements under Pillar 2, other than the disclosure of the high quality liquid assets required to cover Pillar 2 risks which are part of the LCR disclosure requirements; (iii) it will use supervisory discretion, guided by a firm's outstanding debt or exposures, to assess liquidity risk linked with debt buyback and non-margined derivatives; and (iv) the assessment of intraday liquidity risk will be based on a firm’s maximum net debits, stress testing framework and key characteristics, as well as the markets in which it operates. 
 

The International Organization of Securities Commissions announced that Mr. Ashley Alder had been appointed as the new Chair of the IOSCO board. Mr. Adler replaces Mr. Greg Medcraft, who has been chair for three years. Mr. Jean-Paul Servais will succeed Mr. Alder in his current position of Vice Chair.  Mr. Alder is also the Chief Executive Officer of the Securities and Futures Commission (SFC) Hong Kong.

View the announcement.

The European Banking Authority published an Opinion on the European Commission’s proposed amendments to the EBA's final draft Implementing Technical Standards on benchmarking of internal approaches to regulatory capital. The Capital Requirements Directive sets out a framework for supervisory benchmarking of the internal approaches that EU firms use to calculate own-funds requirements for credit and market risk exposures. The final draft ITS, submitted by the EBA to the Commission in March 2015, include the benchmarking portfolios, templates, definitions and IT solutions for usage in that exercise. On April 16, 2016, the European Commission informed the EBA that it intended to adopt the final draft ITS with amendments.  

Read more.

The US Office of the Comptroller of the Currency released a mid-cycle status report on key actions that it has taken to date pursuant to its Committee on Bank Supervision’s annual operating plan for the fiscal year that commenced on October 1, 2015. The plan sets forth the agency’s broad supervision priorities and objectives and is used to develop individual bank supervisory strategies and make related resource allocation decisions.  Key actions completed in the first half of fiscal year 2016 include issuing various supervisory communications, including 557 reports of examination, conducting workshops, issuing guidance and reports surveying best practices, and ongoing outreach meetings and presentations to industry members. The OCC’s supervisory priorities for the duration of the 2016 fiscal year include compliance, operational resiliency, credit risk management, stress testing, strategic planning and execution, corporate governance, and interest rate risk.

View the OCC’s mid-cycle status report.  

The US Board of Governors of the Federal Reserve System announced that the Office of Financial Policy and Research has been renamed as the Division of Financial Stability and designated as a division of the Federal Reserve. Federal Reserve economist Nellie Liang, who was appointed to establish the office in November 2010 will stay on as director. The Division of Financial Stability is responsible for the Federal Reserve’s work on financial stability, including coordinating its interagency and international work, and its role as a member of the Financial Stability Oversight Council and the Financial Stability Board. According to the press release, the change reflects the growth in responsibilities and staffing of the Division. 

View the press release. 

The Bank of England published a Financial Stability Paper on legal certainty for central counterparty default management processes. In the context of legal certainty, the paper focuses on the ability of CCPs effectively to manage a large member default. The paper provides analysis of the three key stages in the process of managing a default at a clearing house: (i) declaration of default; (ii) returning to a matched book; and (iii) managing collateral to absorb the losses caused by the default.

The paper examines the rules governing CCP default management and the extent to which they provide legal certainty. The current legal framework provides certainty around many aspects of financial markets which has been created through the interaction of contract and legislation at both UK and EU levels. Legislation such as the UK Companies Act 1989, European Market Infrastructure Regulation, Settlement Finality Regulation and the Financial Collateral Arrangements (No. 2) Regulation all provide protections but apply in different situations resulting in a patchwork of partial safe harbors. The Bank of England highlights various steps that could be taken to make this legislative framework more robust and coherent.

View the Financial Stability Paper.

The European Banking Authority published a consultation paper on draft guidelines on liquidity coverage ratio disclosures, to complement the disclosure requirements of liquidity risk management under the Capital Requirements Regulation. The CRR provides general disclosure framework for firms for each category of risk where liquidity risk should be considered. Disclosure of ratios and figures to regulators is required under the CRR, in particular, ratios and figures that provide external stakeholders with a comprehensive view of the firm’s management of risk. In January 2015 the Liquidity Coverage Ratio Delegated Act was published, specifying the LCR for credit institutions. The ratio targets ensure that credit institutions maintain an adequate level of liquidity buffer to cover net liquidity outflows in the context of stressed conditions over a period of thirty days. The EBA proposes these draft guidelines to harmonize and specify disclosures required under the general principles in the CRR on liquidity and LCR. 

The European Banking Authority published a letter from it to the European Commission relating to the Calls for Advice on various aspects of the revised international regulatory capital requirements. The Commission has requested advice from the EBA on the revision of the own funds requirements for market risk, counterparty credit risk, exposures to CCPs, large exposures and the net stable funding requirement. 

Read more.

US Deputy Attorney General Sally Yates discussed the history and implementation of the so-called “Yates Memo,” a September 2015 policy statement issued by the US Department of Justice entitled “Individual Accountability for Corporate Wrongdoing.” Yates stressed that the prosecution of individual employees and executives has always been a priority of the DOJ, and is essential to having a substantial impact on corporate culture. She highlighted the application of the policy to corporate actors in the financial services sector.  However, determining which individuals are actually responsible for corporate misdeeds can be challenging in light of blurred authority lines and large amounts of documents that may be subject to privacy protection laws. Accordingly, Yates shared that the DOJ convened a group of Department lawyers to focus on ways the DOJ could overcome these challenges, and their discussions culminated in the issuance of the Yates Memo. 

US Commodity and Futures Trading Commission Commissioner Christopher Giancarlo discussed the potential of distributed ledger technology, which he called "the biggest technological innovation in the financial services industry and financial market regulation in a generation or more." He noted the potential for distributed ledger technology to reduce dependence on third parties, mitigate centralized systemic risk, and perform margin payments in the event of a counterparty default.  In addition to the operational and transactional advantages that distributed ledger technology could bring to firms, Giancarlo suggested that it could also help financial market regulators in overseeing the broader financial market. As he has done in prior speeches, Giancarlo emphasized that in order for this technology to flourish, regulators must take a “do no harm” approach. He noted that regulations regarding distributed ledger technology are likely years away but suggested five steps for regulators to take to ensure that they “do no harm” to allow for distributed ledger technology innovation. Specifically, he recommended that the CFTC and other regulators designate teams to work collaboratively with FinTech companies, foster a regulatory environment that spurs innovation, participate directly in proof of concepts to ensure they understand the technology, work with innovators to determine how rules and regulations should be adopted, and collaborate globally.

View Commissioner Giancarlo’s speech.

The European Commission adopted a Delegated Regulation outlining the regulatory technical standards on the elements of a business reorganization plan and the minimum contents for reporting progress in the implementation of the plan. The adopted Delegated Regulation will supplement the requirements set out in the Bank Recovery and Resolution Directive which requires a firm that has been bailed in to submit a plan to the resolution authority on how the firm, or parts of it, might be restored to long-term viability within a reasonable timescale.

The adopted RTS require a business reorganization plan to set out the firm's strategy for restoring viability, the projected financial performance of the firm and how it meet its prudential regulatory requirements on a going-forward basis and quarterly implementation milestones and performance indicators. The business reorganization plan must be also include information that will allow the national regulator and resolution authority to conduct a viability assessment of the proposed strategy for restoration.

Read more. 

The Banking Supervision division of the European Central Bank announced that it is currently undertaking comprehensive assessments of four European Banks. The banks being assessed are Abanka d.d. (Slovenia), Akciju sabiedrība "Rietumu Banka" (Latvia), Banca Mediolanum S.p.A. (Italy) and Citibank Europe Plc (Ireland). The assessments are being undertaken separately to the European Banking Authority stress test. The assessments commenced in March 2016 and the ECB expects results to be published in November 2016.

View the announcement. 

Several industry associations jointly published a paper titled International Cybersecurity, Data and Technology Principles and urged the Financial Stability Board and the International Organization of Securities Commissions to take the Principles into account when developing policy and standards on cyber security, data and technology. The industry associations believe that cyber security for global financial institutions can only be addressed at an international level and are concerned that the rules of individual jurisdictions may lead to technology systems of global businesses becoming disintegrated, resulting in harm to competition, innovation and investors. The industry associations recommend that the Principles should be taken into account when any country creates laws, regulations, rules or standards on cyber security that could affect the framework of financial services firms that operate on a global basis. The industry associations are the European Banking Federation, the Global Financial Markets Association and the International Swaps and Derivatives Association.

View the Principles. 

Two pieces of secondary legislation brought the revised provisions published on May 5th in the Bank of England and Financial Services Act 2016 on senior manager misconduct into force. The revised provisions replace the presumption of responsibility for a senior manager when a breach of regulatory provisions occurs in the area that he is responsible for (originally brought in by the Financial Services (Banking Reform) Act 2013), with a duty of responsibility. For a senior manager to be found guilty of misconduct by one of the UK regulators, the Prudential Regulation Authority and/or Financial Conduct Authority will need to prove that a senior manager did not take reasonable steps to prevent the contravention by his firm from occurring or continuing.

View the Order.

View the Regulations. 

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.