The European Securities and Markets Authority published a peer review report on compliance with the suitability requirements under the existing Markets in Financial Instruments Directive. The review assessed during the period January 1, 2013, to December 31, 2014 how national regulators approach supervision of firms to ensure compliance with the MiFID suitability requirements when investment advice is given to retail clients. The MiFID suitability requirements aim to ensure that firms only recommend suitable investment products to investors taking into account the client's profile.  ESMA found, amongst other things, that only some regulators provide information on the tools they use to monitor compliance with the suitability requirements, many regulators do not undertake targeted supervision projects relating to suitability and enforcement action is rare as most regulators consider that their supervisory approach is sufficient to address any issues. ESMA will analyze the findings and determine areas where further convergence between the approaches taken by national regulators is needed. 

View the review report.

The UK Payment Systems Regulator announced that after consideration, it had decided that it would not be imposing any new access or governance requirements on card payment schemes. The PSR introduced governance requirements for interbank payment systems in 2015. The PSR has considered the information it has gathered as well as the improvements made in the area through EU legislation, in particular, the Payment Services Regulations 2009. The PSR will continue to assess whether any changes are necessary.

View the announcement.

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 a report identifying three main areas of risk and vulnerability affecting the stability of the EU financial system. The ESAs noted that investment funds had experienced markedly lower returns during the second half of 2015. The ESAs observed that the low interest rate environment coupled with high non-performing loans ratios in some countries, has contributed to the subdued profitability of banks in the EU. The report concludes that a proactive stance is required to address the high level of non-performing loans at some banks. The report highlighted the trend of increasing interconnectivity of bank and non-bank entities. The ESAs noted that interconnectedness could act as a potential channel for the propagation of shocks and thereby contribute to negative systematic events. The ESA recommends that the regulators should implement enhanced supervisory monitoring of concentration risks, cross-border exposures and regulatory arbitrage. The ESAs also highlights the risks associated with a potential contagion stemming from China and other emerging markets. Following a decade of strong contributions to global economic growth from emerging economies and China, the recent economic slowdown in these economies could have substantial effects on the EU in future. To forecast the risk in market exposure to these economies, the ESAs suggest that these markets should be covered in risk analysis exercises such as stress test exercises.  Supervisors are also asked by the ESAs to carefully evaluate any optimistic assumptions relating to returns on cross border activity.

View ESA report. 

US Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg discussed the consolidation of community banks, noting that while many of the smallest (with assets less than $100 million) have either consolidated or ceased operations, the number of larger community banks (with assets of between $1 billion and $10 billion) has actually increased over the past 30 years. He further noted that approximately 93 percent of FDIC-insured institutions are considered “community banks” and play an important role in providing small loans to farms and businesses and deposit services to communities across the US. However, Gruenberg observed that community banks face many challenges including a decline in net interest margins.

Read more. 

The US Department of Labor announced final rules that will, for the first time, subject investment advice to IRA and other non-ERISA plan clients to ERISA’s fiduciary standards and remedies. Currently, brokers and dealers and other advisers to retail retirement clients are required to adhere to a “suitability” standard with respect to their investment advice. Under the new rule and related prohibited transaction exemptions, which will be applicable beginning in April 2017, these financial professionals must act in the “best interests” of their client in order to continue receiving common forms of compensation (such as commissions, third party payments and other forms of variable remuneration). In eliminating certain compliance requirements, the final rule is less stringent than the proposed rule issued in April 2015, but it still represents a major departure from the status quo.

View Shearman & Sterling's client memorandum discussing the new rule and related exemptions. 

View the final rule.

View the fact sheet released by the White House.

US Federal Deposit Insurance Corporation Vice Chairman Thomas M. Hoenig discussed the decline of traditional community banks over the last thirty years and the resulting concentration of the US financial system in a few large financial firms. Hoenig outlined his recommendation of a model of regulatory relief that would provide greater flexibility to banks operating in the United States. Notably, Hoenig’s framework would abandon references to size thresholds, but would instead grant regulatory relief to banks that: (i) hold no trading assets or liabilities; (ii) hold no derivatives positions other than interest rate and foreign exchange derivatives; (iii) have a total notional value of all their derivatives exposures (including cleared and non-cleared derivatives) of less than $8 billion; and (iv) maintain a ratio of GAAP tangible equity-to-assets of at least 10 percent. He suggested that such banks should potentially be exempt from Basel capital standards, stress testing requirements, and certain reporting requirements.

View Vice Chairman Hoenig’s speech. 

At the SIFMA Anti-Money Laundering and Financial Crimes Conference, Jennifer Fowler, Deputy Assistant Secretary of the US Treasury, spoke regarding progress that the US has made in strengthening its framework for anti-money laundering and combatting the financing of terrorism. Fowler noted that the Financial Action Task Force is currently undergoing a mandatory assessment of its AML/CFT framework, focusing not only on technical compliance with the FATF standards, but more importantly, how effectively those standards are implemented. Fowler also addressed ways the US can improve in combating illicit finance, specifically, among other things, by: (i) seeking to clarify and strengthen customer due diligence requirements for financial institutions; and (ii) ensuring that companies know and disclose their ultimate, or beneficial, owners to the government at the time of company formation.

View Fowler’s speech. 

The US Board of Governors of the Federal Reserve System's Division of Banking Supervision and Regulation and Basel Coordination Committee issued a bulletin that provides supervisory guidance with respect to the issuance of the Basel Committee on Banking Supervision’s second consultative paper published on March 4, 2016, “Standardised Measurement Approach for Operational Risk.”
The BCBS paper proposes certain revisions applicable to large, internationally active banking organizations, including a non-model-based method for calculating operational risk-weighted assets and a withdrawal of the advanced measurement approaches (AMA) for operational risk from the Basel capital framework. In its bulletin, the Federal Reserve Board states that it will consider the BCBS proposals in connection with the US advanced approaches risk-based capital rule in a manner consistent with the US notice and comment process, during which time the existing AMA capital requirements will remain in effect.

View the Federal Reserve Board guidance.   

The European Banking Authority published a consultation paper proposing amendments to the regulatory technical standards for determining proxy spread and the specification of a limited number of smaller portfolios for credit valuation adjustment risk under the Capital Requirements Regulation. On February 25, 2015, the EBA published a report on the relevance of the RTS provisions. In particular, the EBA focused on a CVA data collection exercise of 32 banks from 11 jurisdictions. The EBA concluded, based on the collection exercise, that there were difficulties in determining appropriate proxy spreads and market loss given default for a large number of counterparties because spreads may never be observed on markets. The amending RTS provides alternative approaches for the purpose of identifying appropriate proxy spread and market loss given default, in response to the issues outlined in the previous EBA report. The consultation invites responses on whether the amendments address the issues raised in the previous EBA report and whether the amendments are needed. Responses to the consultation are due by July 6, 2016. 

View the EBA consultation.

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

View the consultation paper.

The Financial Conduct Authority published its thematic review on how firms in the fund management sector meet investors' expectations. The FCA considered whether UK authorized investment funds and segregated mandates were operated in line with investors' expectations as outlined in market material, disclosure material and investment mandates. A sample of 23 funds was reviewed, which were all Undertakings for Collective Instruments in Transferable Securities (UCITS) schemes sold to retail investors. The FCA found that generally fund management firms had taken the right steps to meet investors' expectations and comply with their responsibilities to investors and that firms generally provided adequate information about funds' strategies, characteristics and inherent risks. This provides customers and financial advisers with better opportunities to make informed investment decisions. The review highlights the need for investors to be provided with accessible information on the risks associated with investing; the FCA found that most firms disclosed the key risks associated with their funds. The FCA will be writing to all the firms involved the review to provide individual feedback. Firms that were deemed not to have effectively managed their risks are required by the FCA to make the associated improvements. The FCA noted that it will follow up on the results of the review through its routine supervision.

View the review.

The International Organization of Securities Commissions published a report on cyber security in securities markets from an international perspective. The purpose of the report is to assist IOSCO members and market participants to enhance their cyber security in securities markets. The report outlines from an international perspective the various approaches adopted by market participants and the initiatives implemented by different regulators. The report focuses on the main regulatory challenges associated with cyber security issues across reporting issuers, trading venues, market intermediaries, asset managers and financial market infrastructures. The report states that regulators could cooperate to improve cyber security through the exchange of information on threats, security vulnerabilities and previous cyber-attacks that could ultimately be relevant for other regulated entities and market participants. Specifically, information on methods used by cyber criminals, exploited vulnerabilities they are aware of, ways of preventing similar attacks previously committed and emerging cyber risk trends. IOSCO concludes that the fluid nature of securities markets requires market participants and regulators to constantly evolve their responses to cyber security issues.

View the report.

A Commission Delegated Regulation and Commission Implementing Regulation supplementing the Market Abuse Regulation were published in the Official Journal of the European Union. The Delegated Regulation extends the exemption to certain public bodies and central banks of third countries from the obligations set out in MAR, including amongst others, the Reserve Bank of Australia, Central Bank of Brazil, Bank of Canada and the People's Bank of China. 
 

The European Securities and Market Authority published its final report and amending regulatory technical standards on the margin period for Central Counterparty client accounts. The amending RTS change the time horizons for the liquidation period for gross omnibus accounts and individual segregated accounts for exchange traded derivatives and securities. ESMA considers that a CCP, in a liquidation period, should be able to either transfer or liquidate the position of the defaulting clearing member and furthermore, have sufficient margin to cover exposures arising from such transfer or liquidation.

Read More. 

The European Securities and Market Authority published its final report containing final draft amending regulatory technical standards regarding requirements for regulator access to Trade Repositories data and the subsequent aggregation and comparison of that data. The European Market Infrastructure Regulation requires ESMA to develop draft technical standards specifying the frequency and the details of the information to be made available to regulators by TRs. TRs are to provide regulators with access as required. ESMA has amended the RTS, first published in 2013, to provide regulators with better access to data and to improve their ability to compare and aggregate data. For the exchange of data between TRs and regulators, ESMA has proposed an XML template based on ISO 20022 methodology. ISO 20022 is a universal message scheme for the financial services industry. This methodology can be used to facilitate aggregation and comparison of data across repositories. The amended RTS also defines the minimum operational standards to allow direct and immediate access to TR data and the aggregation and comparison of data across TRs. The amended RTS sets out definitive timelines for the provision of data to regulators. ESMA expects this will enable regulators to better plan and schedule their internal processes for gathering and analysis of TR data. The RTS provides minimum standards for secure machine to machine connection and data exchange between TRs and regulators. In particular, ESMA has proposed enhanced procedures for data security, including the use of electronic signatures and data encryption protocols when providing regulators access to TR data. ESMA's proposed amendments to operation standards on data access also require TRs to validate in a timely manner requests from regulators. ESMA has submitted the additional final draft RTS to the European Commission for endorsement.

View the final report.

The US Commodity Futures Trading Commission and the Securities and Exchange Commission jointly proposed guidance relating to the treatment of certain electric power and natural gas contracts. Specifically, the guidance proposes that certain capacity contracts in electric power markets and certain natural gas contracts known as peaking supply contracts should not be considered "swaps" under the Commodity Exchange Act, because such contracts are examples of customary commercial arrangements as described in the final rule defining what constitutes a "swap". The proposed guidance will be open for comment for 30 days after it is published in the Federal Register.

View the proposed Guidance.

The US Internal Revenue Service issued a proposal under Section 385 of the Internal Revenue Code with respect to the treatment of instruments issued by corporations in related-party transactions as debt or equity for federal tax purposes. On the same day, the US Treasury Department also took action to limit US corporate “inversions” and to restrict earnings stripping aspects of such transactions.

Specifically, the US Treasury regulations would, among other things, limit corporate inversions by disregarding foreign parent stock attributable to certain prior inversions or acquisitions of US companies. Additionally, debt issued by a US subsidiary to its foreign parent would be treated as equity under certain circumstances. The proposals have raised concerns with respect to the impact on US subsidiaries of foreign banking organizations, specifically intermediate holding companies subject to the Federal Reserve Board’s total loss absorbing capacity (TLAC) requirements. These new proposals add further complexity regarding the tax treatment of TLAC debt.

View the IRS proposed regulations.

View the Treasury Department press release. 

While speaking at the Federal Reserve Bank of Boston’s 2016 Cybersecurity Conference, Boston Fed President Eric Rosengren addressed risks in the cyber realm, noting that such risks are not abating. In Rosengren’s view, banking organizations need to continue to evolve as these risks morph, and as new innovations and expectations of convenience introduce new challenges to security. Rosengren stated, “cyber risks make it imperative that we all work together to ensure that resiliency, monitoring, detection, and recovery capabilities are operational in the financial system.”

View Rosengren’s remarks. 

The US Board of Governors of the Federal Reserve System proposed changes to various reporting forms, including FR Y-7N, FR Y‑7NS and FR Y-7Q, requiring collection of fourteen new data items to monitor compliance with enhanced prudential standards for foreign banking organizations. The new data items, adopted pursuant to Subparts N and O of Regulation YY, would be used to determine whether an FBO with total consolidated assets of $50 billion or more meets capital adequacy standards at the consolidated parent company level that are consistent with the Basel capital framework.

The proposed revisions would be effective September 30, 2016, and, for certain items, March 31, 2018. Comments to the Federal Reserve Board proposal are due by June 3, 2016.

View the proposal.   

The US Board of Governors of the Federal Reserve System released a final rule that would permit certain US general obligation state and municipal securities to count towards the high-quality liquid assets (HQLA) that large banking organizations may use to satisfy the liquidity coverage ratio (LCR) requirement. The LCR, as adopted by the federal banking agencies in September 2014, requires large banking organizations to hold a minimum amount of HQLA no less than their total net cash outflow amount over a 30-day forward-looking period of significant financial stress. Specifically, the final rule allows certain investment-grade, US general obligation state and municipal securities to qualify as HQLA up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities. Although the LCR rule did not initially allow US municipal securities to be treated as HQLA, the Federal Reserve noted that subsequent analysis suggested that certain US municipal securities should qualify as HQLA because they have liquidity characteristics similar to other classes of HQLA, including corporate debt securities, and thus should receive similar treatment. The rule goes into effect on July 1, 2016. While the US LCR rule was an interagency rulemaking with substantively identical rules implemented by the Federal Reserve, the US Federal Deposit Insurance Corporation, and the US Office of the Comptroller of the Currency, neither the OCC nor the FDIC issued a similar rule with respect to the treatment of municipal securities as HQLA.

View the Final Rule.

In early April, the Federal Reserve Bank of New York released a staff report entitled “Organizational Complexity and Balance Sheet Management in Global Banks,” which analyzes the evolution of banks from standalone institutions to being subsidiaries of complex financial conglomerates. The paper suggests the organizational complexity of the family of a bank is a fundamental driver of the business model of the bank itself, as reflected in the management of the bank’s own balance sheet. Based on microdata on global banks with branch operations in the United States, the report shows that branches of conglomerates in more complex families have a markedly lower lending sensitivity to funding shocks. The balance sheet management strategies of banks are very much determined by the structure of the organizations the banks belong to and the complexity of the conglomerate can change the scale of the lending channel for a large global bank by more than 30 percent.

View the New York Fed staff report. 

In early April, the Board of Governors of the Federal Reserve System's Divisions of Research and Statistics and Monetary Affairs released a staff working paper entitled “Bank Regulation under Fire Sale Externalities,” addressing the optimal design of, and interaction between, capital and liquidity regulations in a model characterized by fire sale externalities. In particular, the authors analyze whether it suffices to introduce capital regulations alone and let banks freely choose their liquidity ratios or whether liquidity also needs to be regulated. The results of the study indicate that the pre-Basel III regulatory framework, with its reliance only on capital requirements, was inefficient and ineffective in addressing systemic instability caused by fire sales. The paper notes that capital requirements can lead to less severe fire sales by forcing banks to reduce risky assets, however, it also shows that banks respond to stricter capital requirements by decreasing their liquidity ratios. Anticipating this response, the regulator preemptively sets capital ratios at high levels and ultimately, this interplay between banks and the regulator leads to inefficiently low levels of risky assets and liquidity. The paper concludes that macroprudential liquidity requirements that complement capital regulations, as in Basel III, restore constrained efficiency, improve financial stability and allow for a higher level of investment in risky assets.

View the Federal Reserve Board staff working paper. 

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.

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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. 

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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.