The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
UK Financial Conduct Authority Outlines its Policy for Compelling Banks to Contribute to LIBOR
The U.K. Financial Conduct Authority has published a policy statement explaining the methodology the FCA would expect to use if it needed to compel banks to contribute to LIBOR (the London Interbank Offered Rate). LIBOR, which is administered by ICE Benchmark Administration, is a long-established and systemically important benchmark that underpins transactions in many different markets globally. The FCA’s powers to compel contributions to LIBOR under the Financial Services and Markets Act 2000 have been superseded by similar powers under the EU Benchmarks Regulation, which came into effect on January 1, 2018. LIBOR has been designated a critical benchmark under the Benchmarks Regulation.
The FCA published a consultation paper in June 2017 on how its compulsion powers would need to be amended to align it with the Benchmarks Regulation. Since that consultation, the FCA has announced that all 20 panel banks that currently submit to LIBOR have agreed to continue to do so until the end of 2021. The FCA envisages that, by that time, sufficient progress will have been made on the evolution of LIBOR and transition to alternative benchmarks (which will be based on actual transactions) that the FCA may never need to use its compulsion powers.
View the policy statement (FCA PS18/5).
European Central Bank Confirms Collective Agreement Between TARGET2 Participants
The European Central Bank has confirmed that a collective agreement signed between the central banks operating TARGET2 component systems and the central securities depositories operating on the TARGET2-Securities platform can enter into force. The provisions of the Collective Agreement will take effect on March 20, 2018. The Collective Agreement provides a definition of a “common moment of entry” for payments and securities transfer orders that are matched in the systems of the signatories to the agreement. This common moment of entry will either be the moment at which a transfer order has been declared compliant with the technical rules of T2S by either the T2S platform or, if the CSD is operating a separate matching component, by the CSD. Defining the common moment of entry makes it possible to establish the point at which securities transactions become irrevocable and accordingly will provide certainty regarding the treatment of outstanding transactions if a participant becomes insolvent.
International Standards Body Proposes Recommendations for Trading Venues on Managing Extreme Market Volatility
The International Organization of Securities Commissions has launched a consultation on proposed recommendations for trading venues and their regulators to consider when implementing, operating and monitoring volatility control mechanisms to preserve orderly trading. The consultation supports IOSCO’s objective of ensuring that markets are fair, efficient and transparent and focuses on automatic volatility interruptions and mechanisms to halt trading or reject orders.
UK Benchmarks Legislation Amended
The Financial Services and Markets Act 2000 (Benchmarks) (Amendment) Regulations 2018 have been published to correct a drafting issue in the Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018, which are due to implement parts of the EU Benchmarks Regulation with effect from February 27, 2018.
Under the U.K. Benchmarks Regulations, which were laid before Parliament on February 5, 2018, transitional provisions will apply until revoked on May 1, 2020. The transitional provisions include a provision that applies to existing benchmark administrators only in respect of benchmarks they were administering on or before June 30, 2016. The effect of the transitional provision is that these existing benchmark administrators will not need to obtain regulatory permission under the Financial Services and Markets Act.
The newly published Amendment Regulations amend the U.K. Benchmarks Regulations to ensure that the transitional provision applies to existing benchmark administrators in relation to benchmarks administered before, on and after June 30, 2016. These benchmarks administrators will also be able to rely on the transitional provision in respect of new benchmarks during the transitional period.
The Amendment Regulations take effect on February 26, 2018.
View the Amendment Regulations (S.I. 2018/204).
View the explanatory memorandum.
View details of the U.K. Benchmark Regulations.
Bank of England Consults on Incident Reporting Rule for CCPs
The Bank of England has published a consultation paper on a new rule to formalize the supervisory expectation that CCPs will report any incidents relating to their information technology systems to the BoE. The BoE's move from a supervisory expectation to a rule will align its requirements with the UK's approach to implementing the Cyber Security Directive. Under that Directive, CCPs are classed as operators of essential services and must take measures to manage risks to their network and information systems as well as notify their regulator of incidents which have a significant impact on the continuity of the services they provide.
The consultation paper states that the BoE encourages other financial market infrastructures to follow the rule. However, it will not be a binding requirement for them.
The consultation closes on April 3, 2018. The rule is expected to come into effect by May 9, 2018, which is the date by which Member States must implement the Cyber Security Directive.
View the consultation paper.
European Securities and Markets Authority Outlines 2018 Work Programme for Credit Rating Agencies, Trade Repositories and Monitoring of Non-EU CCPs
The European Securities and Markets Authority has published a document combining its 2017 Annual Report and 2018 Work Programme in relation to Trade Repositories, Credit Rating Agencies and third-country Central Counterparties.
ESMA is the single direct supervisor of Credit Rating Agencies and Trade Repositories in the European Union. It also has direct responsibilities regarding the registration, supervision and recognition of TRs based outside the EU. The 2017 Annual Report highlights its direct supervisory activities and key achievements in 2017 in respect of eight registered TRs, 26 registered CRAs and four certified CRAs. ESMA recognised 10 third-country CCPs in 2017 and conducted monitoring of the activities and services provided by those third-country CCPs in the EU.
ESMA has conducted a supervisory risk assessment regarding CRAs and TRs in the EU. The 2018 Work Programme sets out the supervisory priorities for the year ahead that ESMA has identified for CRAs and TRs and also highlights issues affecting both CRAs and TRs where ESMA will be conducting further work. These areas include Brexit, fees charged by CRAs/TRs, internal control frameworks, cloud computing and guidelines for periodic information.
European Securities and Markets Authority Outlines 2018 Plans for EU Supervisory Convergence
In addition to the key priorities, the 2018 programme also sets out ESMA key objectives and main planned outputs in relation to a number of thematic and cross-cutting issues, including: investor protection and intermediaries; secondary markets; investment management; market integrity (including market abuse and benchmarks); post-trading (including CCPs, securities financing and settlement); corporate finance (in particular the new prospectus regime); corporate reporting; market data; financial innovation; IT infrastructure; and peer reviews.
The European Securities and Markets Authority has published its Supervisory Convergence Work Programme for 2018. It highlights a total of five key priorities for its work on supervisory convergence in 2018, comprised of three ongoing priorities (application of the revised Markets in Financial Instruments framework, data quality and investor protection) and two new priorities (Brexit and financial innovation).
European Securities and Markets Authority Issues Final Guidelines on CCP Conflicts Management
The European Securities and Markets Authority has published a Final Report setting out Guidelines for compliance, by central counterparties authorized under the European Market Infrastructure Regulation, with their obligations to manage conflicts of interest under EMIR and related Regulatory Technical Standards. ESMA was not directly mandated by provisions in EMIR to prepare the Guidelines. Instead, ESMA has prepared the Guidelines pursuant to the wider mandate in its founding regulation to ensure common, uniform and consistent application of the relevant provisions of EMIR and the RTS.
The Final Report summarises the feedback ESMA received to its consultation on draft Guidelines, which ran between June 1, 2017 and August 24, 2017, and sets out the final form of the Guidelines. After clarifying the concept of conflicts of interest in the context of a CCP's commercial relationships, the Guidelines summarize the organisational arrangements CCPs should have in place, along with additional measures that apply in a group context. Finally the Guidelines specify a procedure for conflicts of interest management.
The Guidelines apply to all EU national regulators that supervise CCPs, and will take effect on April 7, 2018. This date is also the deadline for national regulators to inform ESMA whether they comply or intend to comply with the Guidelines, with reasons for non-compliance. All CCPs must report to their national regulator on their compliance with the Guidelines.
EU Authorities Appoint Industry Working Group on Euro Risk-Free Rates
Following the November 2017 call for expressions of interest, the European Commission, the European Central Bank, the European Securities and Markets Authority and the Belgian Financial Services and Markets Authority announced the composition of a new working group on euro risk-free rates (that is, excluding bank credit risk). The working group will consist of 21 banks, which will be the voting members, and five non-voting industry associations (the European Money Markets Institute, the European Fund and Asset Management Association, the International Capital Market Association, the International Swaps and Derivative Association and the Loan Market Association). The European Investment Bank has also been invited to join the working group. The Commission, ECB, ESMA and FSMA will participate as observers. The working group is charged with identifying and recommending alternatives to the benchmark rates currently used in the EU – the EURIBOR and EONIA. The choice of alternative reference rates for the euro is expected by the end of 2018. The working group must also develop best practices for contract robustness and an adoption plan for the new reference rates, including any transitional plan for legacy contracts referencing the existing benchmarks.
View the working group information.
View the working group terms of reference.
UK Benchmarks Legislation Published
The Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018 have been laid before Parliament and will come into force mainly on February 27, 2018. Certain provisions will come into force on July 1, 2018 and transitional provisions apply until revoked on May 1, 2020.
The UK already has a fairly comprehensive regime for benchmark regulation. The new UK Regulations make the necessary changes to UK primary and secondary legislation to align it with the EU Benchmarks Regulation, which introduces a common framework and consistent approach to benchmark regulation across the EU and which has been directly applicable throughout the EU since January 1, 2018. The UK Regulations appoint the Financial Conduct Authority as "competent authority" for the purposes of the EU Benchmarks Regulation.
UK Financial Conduct Authority Consults on Benchmarks Enforcement Powers
The UK Financial Conduct Authority has published a consultation setting out proposed changes to its Decision Procedure and Penalties manual and its Enforcement Guide. The amendments to DEPP and EG reflect changes introduced by the EU Benchmarks Regulation, which took effect on January 1, 2018. The Benchmarks Regulation has been implemented in the UK by the Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018, which will make the necessary changes to the UK statutory framework when they come into force mainly on February 27, 2018.
EONIA Review Shelved
The administrator of the Euro OverNight Index Average, the European Money Markets Institute, has announced its decision not to pursue a thorough review of the EONIA benchmark.
EONIA represents the weighted average of all overnight unsecured lending transactions in the interbank market undertaken in the European Union and European Free Trade Association countries. EMMI, which also administers Euribor, had been engaged in a review program since December 2015 with the objective of enhancing EONIA's governance and operation to align it with the requirements of the EU Benchmarks Regulation, which took effect on January 1, 2018.
Results of EU-Wide CCP Stress Test 2017 Published
The European Securities and Markets Authority has published a report setting out the results of its second EU-wide CCP stress test exercise. The European Market Infrastructure Regulation requires ESMA to conduct the exercise at least once per year to assess the resilience and safety of EU CCPs. The second stress test tested the resilience of 16 European CCPs, with approximately 900 clearing members EU-wide.
The 2017 stress test builds on the first stress test conducted in 2016, which only examined counterparty credit risk. The second stress test included liquidity risks and examined whether CCPs would meet their liquidity needs under different stress scenarios. ESMA has published some Q&A to accompany the report.
View the ESMA report.
View the ESMA Q&A.
EU Secondary Legislation under the Benchmark Regulation Published
Four Commission Delegated Regulations supplementing the Benchmark Regulation have been published in the Official Journal of the European Union. The Benchmark Regulation regulates the provision of benchmarks, contributions of data to a benchmark and the use of benchmarks within the EU. It sets out the authorization and registration requirements for benchmark administrators, including third country entities, and stipulates requirements for governance and control of administrators. The Benchmark Regulation establishes different rules for different categories of benchmarks, depending on the risks involved, and imposes additional requirements on benchmarks considered to be critical. It also sets out the powers of national regulators to mandate, under certain conditions, contributions to or the administration of a critical benchmark.
European Securities and Markets Authority Has Concerns on Fees Charged by Credit Rating Agencies and Trade Repositories
The European Securities and Markets Authority has published a Thematic Report, following its supervisory review of the current fee structures in the credit rating and trade repository industries. The CRA Regulation requires CRAs to ensure that fees for the credit rating and ancillary services are not discriminatory and are based on actual costs. Similarly, the European Market Infrastructure Regulation requires TRs to provide non-discriminatory access and charge publicly disclosed and cost-related fees.
ESMA has compiled its Thematic Report using information from publicly available resources, periodical submissions to ESMA and dedicated requests for information from supervised entities. It has also used information gained from users of CRA and TR services. The Thematic Report identifies three areas in which CRAs and TRs need to improve their fee practices and to which ESMA proposes to give supervisory priority. These are: transparency and disclosure, the fee-setting process and interaction with entities related to CRAs and TRs.
The Thematic Report is accompanied by factsheets summarizing ESMA's findings on TRs' and CRAs' fees.
View the Thematic Report.
View Factsheet on Trade Repositories' Fees.
View Factsheet on CRAs' Fees.
Proposed EU Guidelines on CCP Requirement for Anti-Procyclicality Margin Measures
The European Securities and Markets Authority is consulting on proposed guidelines for national regulators of CCPs on the application of the rules requiring CCPs to adopt anti-procyclicality margin measures.
The European Market Infrastructure Regulation requires CCPs to impose, call and collect margins to limit its credit exposures from clearing members. A CCP must also regularly monitor and, if necessary, revise the level of its margins to reflect current market conditions taking into account any potentially procyclical effects of those revisions. The Regulatory Technical Standards on requirements for CCPs provides that CCPs must use at least one of three options to limit procyclicality to the extent that the financial soundness of the CCP is not negatively affected.
During the EMIR Review, ESMA highlighted that the implementation of these requirements differs across CCPs and that the effectiveness and supervision of these measures could be improved. The draft guidelines seek to clarify and ensure consistent application of the requirements across the EU.
LIBOR Categorized as a Critical Benchmark under EU Legislation
A Commission Implementing Regulation amending the list of critical benchmarks used in financial markets under the Benchmark Regulation has been published in the Official Journal of the European Union. The amending Regulation adds the London Interbank Offered Rate - LIBOR - to the list of critical benchmarks.
The Benchmark Regulation provides for different categories of benchmarks depending on the risks involved, imposing additional requirements on benchmarks considered to be critical, including the power of national regulators to mandate, under certain conditions, contributions to or the administration of a critical benchmark.
For the most part, the Benchmark Regulation applied from January 1, 2018. Certain provisions, giving powers to the European Securities and Markets Authority to prepare draft technical standards and to the Commission to adopt delegated legislation, applied from June 30, 2016. The original Implementing Regulation, which entered into force on August 13, 2016, listed the Euro Interbank Offered Rate as the first critical benchmark. The amending Implementing Regulation entered into force on December 29, 2017.
View the amending Implementing Regulation.
UK Financial Conduct Authority Publishes Near-Final Rules for Implementation of the EU Benchmarks Regulation
The UK Financial Conduct Authority has published a Policy Statement setting out responses to its earlier consultation in June 2017 on proposed Handbook changes to ensure that the Handbook is consistent with the provisions of the EU Benchmarks Regulation, which takes effect on January 1, 2018. The Policy Statement includes further clarifications, in particular on the treatment of commodity benchmarks, on one-off application fees and annual periodic fees and on other Handbook rules and guidance that the FCA will apply in addition to the BMR.
The Policy Statement includes the final form of the legal instrument which contains the Handbook changes. The FCA will make the Handbook changes once it has the necessary regulatory authority under proposed changes to UK secondary legislation.
The Handbook changes will affect benchmark administrators and also firms that are already supervised under EU financial services legislation and that either use or contribute input data to benchmarks.
View the Policy Statement (PS17/28).
UK Government Makes Orders De-recognising CHAPS and Amending Designation of Cheque & Credit
HM Treasury has made two Orders which take effect from December 20, 2017.
The first Order amends the designation Order in force since April 2015 designating Cheque & Credit as a regulated payment system. The changes relate to the specification of the arrangements constituting Cheque & Credit, allowing for development in the Cheque & Credit Rules relating to the processing of the images of cheques and other paper instruments. The Order also makes references to participants as well as members of Cheque & Credit.
The second Order revokes the recognition order of January 5, 2010 specifying CHAPS as a recognized payment system under the Banking Act 2009.
View the Order amending the designation of Cheque & Credit.
View the Order for de-recognition of CHAPS.
LIBOR Benchmark Confirmed until 2021
The Financial Conduct Authority has confirmed that the 20 panel banks for the LIBOR benchmark have agreed to support LIBOR until at least 2021. The announcement follows the statement by the FCA's Chief Executive, Andrew Bailey, earlier this year that the future of LIBOR could not be guaranteed because the underlying markets (the markets for unsecured wholesale term lending to banks) are no longer sufficiently active. Work around moving from LIBOR to alternative reference rates is underway. For example, the Bank of England announced in October this year that the implementation date for the reformed Sterling Overnight Index Average Interest Rate Benchmark, known as SONIA, would be April 18, 2018. The BoE took over as administrator of SONIA in April 2016. The transition to the reformed SONIA is set for April 2018.
View the FCA's statement.
View Andrew Bailey's speech.
Court of Justice of the European Union Ruling on Scope of a Regulated Market Under MiFID
The Court of Justice of the European Union has given a preliminary ruling on the meaning and scope of "regulated market" under the Markets in Financial Instruments Directive following a referral by the Dutch Administrative Court of Appeal for Trade and Industry. A regulated market is defined in MiFID I as "a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments - in the system and in accordance with its non-discretionary rules - in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title IIII". The definition is unchanged in MiFID II which will replace MiFID I from January 3, 2018.
European Central Bank Regulations and Decisions on Systemically Important Payment Systems Published
Two regulations and two decisions of the European Central Bank on systemically important payment systems have been published in the Official Journal of the European Union and will enter into force on December 6, 2017. These regulations and decisions have been made by the ECB in its capacity as supervisor under the Single Supervisory Mechanism for Eurozone banks, following the first comprehensive assessment of SIPS.
The two regulations amend: (i) the ECB Regulation on oversight requirements for SIPS, to make clarifications and amendments deemed necessary for the application of the highest oversight standards; and (ii) the ECB Regulation on the powers of the ECB to impose sanctions, to ensure that sanctions can be effectively imposed for oversight infringements.
The two decisions cover procedural aspects for the ECB to impose corrective measures for non-compliance with the ECB Regulation on oversight requirements and the methodology for calculating sanctions when the oversight requirements are infringed.
View Regulation Amending the Regulation on Oversight Requirements.
View Regulation Amending the Regulation on ECB Sanctions Powers.
View Decision on Procedural Aspects.
View Decision on Sanctions Calculation Methodology.
UK Central Securities Depositaries Regulations 2017 Published
HM Treasury has published the Central Securities Depositories Regulations 2017, together with an explanatory memorandum. The Regulations implement, in part, certain Articles of the EU Central Securities Depositaries Regulation. The CSDR provides a harmonized regulatory and prudential regime for Central Securities Depositaries, harmonizes and increases the robustness and resilience of securities settlement arrangements and creates a single market for CSD services across the EU. The CSDR has come into full effect in stages since September 17, 2014, subject to a number of transitional provisions that have necessitated staggered implementation within UK legislation. These latest Regulations disapply certain overlapping provisions of the domestic regime and extend the enforcement regime under the Financial Services and Markets Act 2000 to grant additional enforcement powers to the Bank of England and the Financial Conduct Authority. The Regulations create a new category of recognized body, known as a Recognized Central Securities Depository, and establish the procedures to be followed by persons acquiring control over RCSDs. Recognized investment exchanges, clearing houses and CSDs will be required to have appropriate procedures in place for the reporting of infringements. The Regulations also empower the BoE to make rules codifying the requirement that central counterparties notify the BoE of a cyber-incident. The Regulations take effect from November 28, 2017.
View the Central Securities Depositaries Regulations 2017.
View the Explanatory Memorandum.
US Regulator Warns EU about Proposed Extraterritorial Overreach
The Commodity Futures Trading Commission Chairman J. Christopher Giancarlo has authored an opinion piece in the Wall Street Journal warning of potential consequences if the European Union mishandles Britain's impending exit from the EU. The European Commission's proposed amendments to the European Market Infrastructure Regulation and the regulation establishing the European Securities and Markets Authority would provide ESMA and the European Central Bank with greater supervisory powers over third-country CCPs. Specifically, Chairman Giancarlo argued that the European Commission’s proposed rulemaking that would authorize regulation of financial entities outside the EU by the European Central Bank and ESMA would result in overlapping and uncoordinated regulation in US financial markets. Chairman Giancarlo believes this lack of harmonization and clear jurisdictional limitations could prove expensive and damaging to US economic growth and ultimately impact job growth. Additionally, Chairman Giancarlo suggests that submitting to European rules could set a dangerous precedent going forward which could result in further imposition of European costs and regulatory burdens on the US economy.
View the article.
UK SONIA Interest Rate Benchmark Implementation Date Set: April 23, 2018
The Bank of England has announced the implementation date for the reformed Sterling Overnight Index Average Interest Rate Benchmark, known as SONIA. The BoE took over as administrator of SONIA on April 25, 2016. SONIA is currently based on a market for brokered deposits which has limited transaction volumes. From April 23, 2018, the methodology will change to a volume-weighted trimmed mean. The BoE will also take on the remaining aspects of administration, including the calculation and publication of SONIA. The reformed benchmark will cover overnight unsecured transactions negotiated bilaterally as well as those arranged via brokers, using the Bank's Sterling Money Market Data Collection as the data source. The BoE also published the Key features and policies for SONIA which is a summary of how SONIA will be calculated and administered, including the governance arrangements. The BoE intends to assess the benchmark's compliance with the Principles for Financial Benchmarks in due course.
View the SONIA Key Features and Policies document.
View the BoE's announcement.
Financial Stability Board Seeks More Action on Reforming Benchmarks
The Financial Stability Board has published a progress report on reforms to existing interest rate benchmarks and on the construction and implementation of alternative near risk-free interest rates (RFRs). This follows the FSB's recommendations for reforms in this area, published in July 2014. The report examines the progress made towards achieving those recommendations. The FSB’s recommendations in the July 2014 report called for a strengthening of existing interest rate benchmarks, such as LIBOR, EURIBOR and TIBOR, collectively coined “IBORs,” and other reference rates based on unsecured bank funding costs by underpinning them to the greatest extent possible with transaction data. In addition, the FSB proposed steps to develop alternative near risk-free interest rate benchmarks.
On the progress to fortify the IBORs the FSB notes that challenges remain. In particular, the FSB is concerned that the underlying reference transactions are limited for some maturities and that as a result some submissions remain based on various factors, including transactions and judgement of the submitters.
The FSB’s view is that good progress has been made with the second strand of the recommendations relating to the identification of RFRs. Alternative RFRs have been identified or selected in Australia, Brazil, Canada, Hong Kong, Japan, Switzerland, the United Kingdom and the United States and headway has been made in reforming EONIA in the Euro area. The FSB encourages other member jurisdictions, such as Mexico and South Africa, to accelerate their intended measures. Furthermore, the FSB notes that limited advancement has been made towards transitioning the existing benchmarks to the RFRs and that impetus should be maintained to achieve the FSB recommendations.
The FSB will publish a further progress report in 2018.
View the progress report.
European Securities and Markets Authority Consults on Guidelines for Non-Significant Benchmarks
The European Securities and Markets Authority has launched a consultation on proposed Guidelines on the obligations applying to the provision of and contribution to non-significant benchmarks under the Benchmarks Regulation. The Benchmarks Regulation requires administrators of all benchmarks to establish a permanent and effective oversight function for the provision of their benchmarks. The proposed Guidelines detail the composition, characteristics, positioning and governance arrangements of the oversight function. The draft Guidelines also detail the governance and control requirements for supervised contributors. The proposed Guidelines would apply to administrators of benchmarks, supervised contributors of benchmarks and to the relevant benchmark national regulators.
The Benchmarks Regulation will apply in full from January 1, 2018. The consultation closes on November 30, 2017. ESMA intends to publish its final Guidelines after the European Commission has published its Delegated Regulations that also relate to these topics.
View the consultation paper.
EU to Establish Industry Working Group on Euro Risk-Free Rates
The European Commission, the European Central Bank, the European Securities and Markets Authority and the Belgian Financial Services and Markets Authority have announced that a new working group will be established which will be tasked with identifying and recommending alternatives to the benchmark rates currently used in the EU – the EURIBOR and EONIA. The working group, in consultation with market participants, will recommend an alternative risk-free reference rate and develop plans to transition from the existing benchmarks to the new RFR.
The European Central Bank also announced that it will start providing an overnight unsecured index before 2020 to provide further options for the choice of alternative rates for the euro area.
View the joint press release.
View the ECB’s press release.
International Swaps and Derivatives Association Publishes Recommendations for a CCP Recovery and Resolution Framework09/18/2017
The International Swaps and Derivatives Association has published a paper outlining recommendations for a CCP Recovery and Resolution Framework.
The ISDA's paper focuses on CCPs that clear derivatives, although many of its recommendations will be relevant to clearing houses that clear other instruments. It is intended to build on the guidance from CPMI-IOSCO and the FSB. The paper sets out certain key points for CCPs, their supervisors, resolution authorities and other policy makers to consider when implementing CCP recovery and resolution mechanisms.
In brief, the ISDA's recommendations cover: (i) the level of transparency that should be afforded to clearing participants about the expected recovery and resolution strategies for a CCP, so that participants can manage and control their potential exposure; (ii) the timing of the resolution regime and the necessary flexibility that should be incorporated into the regime to allow for further recovery measures; (iii) the allocation of losses after a clearing member default, including by making cash calls and the application of variation margin gains haircutting (initial margin haircutting is not supported by the paper however); (iv) tools to rebalance a CCP's book, including the use of partial tear-ups as a last resort, but excluding forced allocation of positions to non-defaulting clearing members; (v) claims for clearing participants that suffer losses beyond a certain point in CCP recovery or resolution; (vi) the allocation of non-default losses; and (vii) ensuring adequate liquidity from central banks on standard market terms.
European Commission Considers it Unnecessary to Exclude Exchange-Traded Derivatives From the Open Access Provisions of MiFIR
The European Commission has published a Report to the European Parliament and the Council recommending that Exchange-Traded Derivatives (ETDs) do not need to be excluded from the scope of the provisions of the Markets in Financial Instruments Regulation that provide for open and non-discriminatory access to CCPs and to trading venues.
Final Standards on Aggregation and Publication of Derivatives Data by Trade Repositories
The European Securities and Markets Authority has published proposed amendments to its Regulatory Technical Standards under the European Markets Infrastructure Regulation, following a public consultation between December 2016 and February 2017. ESMA provided final draft RTS to the European Commission in 2012 specifying the frequency and the details of the information to be made available by Trade Repositories to the relevant authorities and the information to be published by TRs. The RTS also specified the operational standards required to aggregate and compare data across TRs and for the relevant authorities to have access to information as necessary.
European Securities and Markets Authority Consults on Guidelines on Internalised Settlement Reporting Under the Central Securities Depositaries Regulation
The European Securities Markets Authority has published a consultation on proposed guidelines to ensure common, uniform and consistent application of the provisions of the Central Securities Depositaries Regulation that apply to internalized settlement reporting and to the exchange of information between ESMA and national regulators.
European Commission Proposals for a "Location Policy" and Enhanced Supervision of Third Country CCPs
The European Commission has published legislative proposals to amend the European Market Infrastructure Regulation and the Regulation establishing the European Securities and Markets Authority. The proposals are on the supervision of CCPs, both EU CCPs and third-country CCPs, and include the controversial new proposals for a formal EU "location policy" for CCPs.
EU Clarification on CCP Portfolio Margining Requirements
The European Securities and Markets Authority has published an Opinion addressed to EU national regulators on the portfolio margining requirements for CCPs under the European Market Infrastructure Regulation. The Regulatory Technical Standards on portfolio margining that supplement the European Market Infrastructure Regulation provide that a CCP can offset or reduce the required margin across instruments, which it clears if the price risk of one instrument is significantly and reliably correlated to the price risk of other financial instruments. In those cases, a CCP may apply portfolio margining. European legislation provides certainty over the requirements only to a limited degree because there is no indication as to which instrument or product can be considered the same or which elements are needed for an instrument or product to be considered the same. ESMA's Opinion aims to provide clarification as to when two contracts can or cannot be considered the same instrument for the purpose of portfolio-margining, referencing all asset classes. In addition, ESMA confirms that CCPs have to limit the reduction in margin requirement when conducting portfolio-margining across different instruments.
View ESMA's Opinion.
European Securities and Markets Authority Issues Opinion on the Proposed EU Regulation on CCP Recovery and Resolution
The European Securities and Markets Authority has issued an Opinion on the European Commission's proposed EU Regulation on CCP Recovery and Resolution. The proposal gives CCPs' national regulators under the European Market Infrastructure regulation powers of supervision and early intervention with regards to CCP recovery. It further asks Member States to designate National Resolution Authorities to develop CCP resolution plans and ensure the resolvability of CCPs established in their Member State and for the establishment of a resolution college. ESMA is tasked with taking on a mediator role. In its Opinion, ESMA states that it broadly supports the regulatory approach taken by the Commission. However, ESMA considers that the EU legislators should consider the budgetary implications of the role assigned to ESMA and include a provision in the final CCP Recovery and Resolution Regulation for ESMA to draft a report on the issue, as was the case for EMIR. While it supports the introduction of binding mediation, ESMA raises some concerns over the proposed mediation mechanism. ESMA also states that further detailed requirements on the content of recovery plans, such as what recovery tools could be used to allocate default losses or to cover non-default losses, would be useful.
View the ESMA Opinion.
European Securities and Markets Authority Publishes Final Draft Technical Standards Under the Benchmarks Regulation
The European Securities and Markets Authority has published its final Report containing draft regulatory and implementing technical standards under the Benchmarks Regulation. The Benchmark Regulation sets out the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks.
Final EU Standards on the Prudential Requirements for Central Securities Depositories Published
Regulatory Technical Standards supplementing the Central Securities Depositories Regulation setting out the prudential regime for central securities depositories was published in the Official Journal of the European Union. A distinction is made in CSDR between CSDs that offer banking-type ancillary services and are also authorized as credit institutions (i.e. banks) and CSDs that are not permitted to offer ancillary banking services. The RTS cover: (i) the capital requirements applicable to all CSDs; (ii) the additional risk-based capital surcharge which takes into account the risks, including intra-day credit and liquidity risks that arise from the ancillary banking services of CSDs; and (iii) the framework and tools for monitoring, measuring, managing, reporting and disclosing the intra-day credit and liquidity risks. CSDs that carry out ancillary banking services will also need to comply with the Capital Requirements Regulation and the RTS impose stricter requirements than those in CRR in some respects.
EU Secondary Legislation on Internalised Settlements Published03/10/2017
A Commission Delegated Regulation on the content of the reports on internalised settlements was published in the Official Journal of the European Union. The Delegated Regulation will supplement the Central Securities Depositories Regulation. The CSDR requires settlement internalisers to report on settlements that they internalise. The Delegated Regulation specifies the content of such reporting, stating that reports should provide for detailed information on the aggregated volume and value of settlement instructions settled by settlement internalisers outside of securities settlement systems. The reports must specify, among other things, the asset class, type of securities transactions, type of clients and issuer CSD.
In addition, Implementing Technical Standards on templates and procedures for the reporting and transmission of information on internalised settlements was published in the Official Journal of the European Union on March 10, 2017. The ITS provide the templates and forms that CSDs must use when reporting the required information to their national regulator.
Final EU Standards on Authorization, Supervision and Operational Requirements for Central Securities Depositories Published03/10/2017
Regulatory Technical Standards supplementing the Central Securities Depositories Regulation on the authorization, supervisory and operational requirements for CSDs was published in the Official Journal of the European Union. The RTS cover, among other things: (i) the authorization and identification requirements for applicant CSDs; (ii) recognition of a third-country CSD; (iii) risk monitoring tools and governance arrangements that a CSD must establish; (iv) record keeping systems, policies and procedures that a CSD must establish; and (v) rules for CSDs to participate in other entities.
In addition, Implementing Technical Standards on the standard forms, templates and procedures for authorization were published in the Official Journal of the European Union on the same day. The ITS cover the forms, templates and procedures for authorization, review and evaluation of CSDs, for the cooperation between home and host national regulators, for the consultation of authorities involved in the authorization to provide banking-type ancillary services, for access involving CSDs, and the format of the records to be maintained by CSDs.
EU Regulation on Penalties for Settlement Fails Published
A Commission Delegated Regulation on the parameters for the calculation of cash penalties for settlement fails and the operations of CSDs in host Member States was published in the Official Journal of the European Union. The Delegated Regulation will supplement the Central Securities Depositories Regulation. The CSDR requires CSDs to impose cash penalties on participants to their securities settlement systems that cause settlement fails. The Delegated Regulation sets out the methodology, penalty rates and reference prices that CSDs should use to calculate those penalties.
Committee on Payments and Market Infrastructures Publishes Analytical Framework of Distributed Ledger Technology
The Committee on Payments and Market Infrastructures published a report on distributed ledger technology in payment, clearing and settlement. In the context of payment, clearing and settlement, DLT enables entities to carry out transactions without relying on a central entity to maintain a single ledger. Financial market infrastructures are entrusted by their participants with maintaining a central ledger and, in some cases, managing certain risks on behalf of participants. It has therefore been commented that DLT could reduce the reliance on a central ledger managed by a FMI.
The objective of the report is to provide central banks and authorities with an analytical framework for assessing DLT arrangements, focusing on those that involve restricted ledgers where access is limited to approved users only.
Bank of England Re-Proposes Averaging Methodology for SONIA
The Bank of England published a supplementary consultation paper on its revised proposed averaging methodology to be used for the Sterling Overnight Index Average Interest Rate Benchmark, known as SONIA. The BoE took over as administrator of SONIA on April 25, 2016. SONIA is currently based on a market for brokered deposits which has limited transaction volumes. In October 2016, the BoE consulted on its proposals to reform SONIA in four areas, including the SONIA calculation methodology. The Bank proposed to switch the current calculation to measuring the average rate using a volume-weighted median, rather than a volume-weighted mean. Following feedback to that proposal, the BoE is now proposing that SONIA be calculated as the volume-weighted trimmed mean rate of eligible transactions. This is calculated by removing transactions at outlying rates and calculating the mean of the remaining transactions.
Responses to the consultation are due by March 16, 2017. By the end of March 2017, the BoE intends to publish its final approach to the design of SONIA and the transition and publication arrangements in a summary and response to feedback document which will cover both this consultation and the October 2016 consultation. The BoE had intended to transition from the current benchmark to the proposed reformed SONIA between October and December of 2017. However, the BoE now expects that the transition will take place in March or April 2018.
View the consultation paper.
Financial Stability Board Consults on Guidance on CCP Resolution and Resolution Planning
The Financial Stability Board published proposed Guidance on central counterparty resolution and resolution planning. The aim of the proposed Guidance is to assist national authorities and FSB member jurisdictions in implementing effective resolution regimes, credit resolution strategies and plans for CCPs that are consistent with the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions and the financial market infrastructure guidance annexed to the Key Attributes. The FSB published a Discussion Note on August 16, 2016 which sought feedback on aspects of CCP resolution that are key to the design of effective resolution strategies. The FSB's proposed Guidance is based on responses to that Discussion Note as well as further consultations with FSB member authorities. The FSB is seeking feedback on, amongst other things, the powers that resolution authorities should have to maintain the continuity of critical CCP functions, return the CCP to a matched book and address default and non-default losses, the treatment of equity of existing CCP owners in a CCP resolution and cross-border enforcement of resolution actions. Among others, it is proposed that resolution authorities should have power to write down initial margin as well as variation margin. The assessment for the "no creditor worse off" test is proposed to be based upon what would happen following exercise of all CCP post-default powers. Responses to the consultation are requested by March 13, 2017.
View the consultation paper.
View the FSB's summary of responses to the discussion paper.
View the discussion paper.
European Securities and Markets Authority Announces Details of 2017 EU-Wide CCP Stress Test
The European Securities and Markets Authority announced details of the 2017 EU-wide CCP stress test exercise. The European Market Infrastructure Regulation requires ESMA to conduct the exercise at least once per year to assess the resilience and safety of the EU’s CCPs from a systemic risk viewpoint. The exercise covers 17 EU CCPs and includes all products currently cleared by the CCPs. ESMA may issue recommendations to address any issues that are highlighted by the exercise. The results of the exercise are expected to be published in Q4 2017.
View ESMA's announcement and framework methodology.
Proposed EU Guidelines on Transfer of Data Between Trade Repositories
The European Securities and Markets Authority launched a consultation on proposed Guidelines on the transfer of data between trade repositories. The European Market Infrastructure Regulation requires counterparties and CCPs to report trades to a trade repository while ensuring that details of their derivatives contracts are reported without duplication. EMIR also requires trade repositories to maintain reported information for a period of ten years following the termination of the derivative.
EU Peer Review Report on Supervision of CCP Compliance with Margin and Collateral Requirements
The European Securities and Markets Authority published the results of a peer review it has conducted into how national regulators ensure and assess compliance by CCPs with the margin and collateral requirements under the European Market Infrastructure Regulation. Under EMIR, ESMA has a coordination role between national regulators to build a common supervisory culture and consistent supervisory practices. ESMA is required to conduct a peer review of the supervisory activities of the national regulators of CCPs at least annually. ESMA's report on the peer review provides an overview of the approaches of national regulators and sets out ESMA's assessment of the degree of convergence between those approaches. ESMA found inconsistencies in the frequency and depth of the supervision of CCPs (even for CCPs of a similar size or complexity). ESMA highlights various areas for improvement to enhance supervisory convergence, including identification of new services which require an extension of a CCP's authorization, determining significant changes to a CCP's risk model and the ongoing review of CCP collateral policies. The report sets out some examples of good practice that ESMA observed during the review, such as having direct access to the data of a supervised CCP. ESMA intends to follow up on the findings from the peer review by, amongst other things, identifying appropriate tools to enhance supervisory convergence.
View ESMA's peer review report.
Final EU Equivalence Decisions on Regulatory Regimes Under the European Market Infrastructure Regulation Published
Ten decisions on the equivalence of third country regulatory regimes under the European Market Infrastructure Regulation were published in the Official Journal of the European Union.
CCPs established in third countries whose supervisory and legal regimes have been deemed to be equivalent to the EU regime may provide clearing services to clearing members or trading venues established in the Union. Such a CCP must be recognized by the European Securities and Markets Authority in accordance with the processes outlined in EMIR. The regulatory and legal regimes of India, New Zealand, Japan, Brazil, Dubai International Financial Centre and the UAE have been granted equivalence in relation to CCPs.
UK Payment Systems Regulator Consults Further Remedies for Competition Issues Relating to Bank Ownership of Payment Infrastructure
The Payment Systems Regulator published proposals for remedying the lack of competition in the provision of UK payments central infrastructure for Bacs, FPS and LINK which means that the incumbent provider, VocaLink, faces limited competitive pressure and minimal incentives to provide more efficient and innovative services.
The PSR published its final report on its market review into the ownership and payment infrastructure competitiveness in the UK on July 28, 2016. The final report identified the competition issues and outlined potential remedies, including undertaking competitive procurement exercises, such as issuing guidance and requiring operators of payment service providers to follow a prescribed set of processes and implementing enhanced interoperability, including a common international messaging standard, for Bacs and FPS, and divestment by the four largest shareholders in VocaLink. Following feedback to those initial proposals, the PSR is now consulting on mandating competitive procurement exercises for Bacs, FPS and LINK when the operators of these systems purchase central infrastructure services and introducing the ISO 20022 messaging standard in future procurements for Bacs and FPS.
Proposed European Regulation on CCP Recovery & Resolution Published
The European Commission published a legislative proposal for a Regulation on the recovery and resolution of CCPs. The aim of the proposed Regulation is to set up a framework for the orderly recovery of a CCP through implementation of recovery plans. Under the proposal, a CCP's recovery plan will need to be agreed between the CCP and its clearing members. If the recovery measures do not restore the CCP’s viability, the CCP's resolution authority will have the power to take action to ensure the continuity of the CCP's critical functions and, if needed, resolve the CCP. This includes setting up bridge CCPs. In the event of losses arising under a resolution, these will be borne by a CCP's owners, creditors and counterparties in line with the hierarchy of claims in insolvency. Managers of a CCP will be capable of being replaced and held accountable for wrongdoing under the applicable national laws. The CCP recovery and resolution framework would apply to all CCPs established in the EU. It is not proposed that the recovery and resolution framework would apply to the wider group of a CCP, but a resolution authority would be able to decide on a case-by-case basis whether a recovery plan should include a parent company.
European Securities and Markets Authority Opines on Supervisory Approach for CCPs’ Service Extension
The European Securities and Markets Authority published an Opinion outlining a common supervisory approach for regulators dealing with central counterparties that seek to extend or change their existing authorization under the European Market Infrastructure Regulation or to adopt a significant change to their risk model and parameters. The purpose of the Opinion is to build a common supervisory culture by creating uniform procedures and consistent approaches throughout the EU. EMIR requires a CCP wishing to extend its business to additional products and services not covered by its initial authorization to apply to its regulator for an extension, and to obtain validation before adopting any significant changes to its risk model and parameters. EMIR does not define or specify what “additional services and activities” are, nor the notion of “significant change.” The Opinion provides indicators to assist regulators to identify when a change is significant and to seek the college’s opinion, as required by EMIR, on the extension of services and activities.
HM Treasury Consults on New Rules for Financial Market Infrastructure Special Administration Regime
HM Treasury published a consultation paper on rules for a financial market infrastructure special administration regime. A form of special administration for certain financial market infrastructure companies, excluding central counterparties, was introduced by The Financial Services (Banking Reform) Act 2013, known as FMI administration. CCPs are already subject to the special resolution regime in the Banking Act 2009. The entities covered by the FMI administration regime are non-CCP operators of payment systems and central securities depositories. HM Treasury is seeking views on new rules, and modifications to existing general insolvency rules, required to facilitate the effective functioning of an FMI administration. The proposed rules outline the application procedure for an FMI administration order and specify the application of the Insolvency (England and Wales) Rules 2016 with modifications.
Final EU Technical Advice Under Benchmark Regulation Published
The European Securities and Markets Authority published its final Technical Advice to the European Commission on certain aspects of the EU Benchmark Regulation. The Benchmark Regulation sets out the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks. The European Commission requested the Technical Advice from ESMA in February 2016. The Technical Advice covers: (i) the definition of benchmarks; (ii) measurement of the reference value of benchmarks; (iii) criteria for the identification of critical benchmarks; (iv) endorsement of a benchmark or family of benchmarks provided in a third country; and (v) transitional provisions.
The majority of the Benchmark Regulation will apply from January 1, 2018. Certain provisions, giving powers to ESMA to prepare draft technical standards and to the Commission to adopt delegated legislation, applied from June 30, 2016. ESMA intends to publish its final draft technical standards due under the Benchmark Regulation by April 1, 2017.
View the Technical Advice.
Federal Reserve Bank of New York Releases Operating Policy on Market Operations Counterparties
The New York Fed released a statement of its policies towards managing its open market operations counterparty relationships with private entities, which includes primary dealers in US Treasury securities. Generally, the New York Fed seeks to transact with regulated banks and broker-dealers of a sufficient scale that do not cause an undue level of credit risk exposure. The policy contains a series of expectations that the New York Fed has for counterparties, which includes following Treasury Market Practices Group or Foreign Exchange Committee best practices, providing insights and information to the New York Fed, meeting regulatory requirements and having a sound compliance program in place. The policy also discusses the behavioral expectations the New York Fed has for counterparties, which include that the firm participates competitively in operations where the firm is selected as a counterparty, maintains the required scale and continues to meet the standards of the New York Fed in terms of legal services, transaction support and resiliency and continuity. Under the revised standards for primary dealers, the amount of required regulatory net capital (as computed in accordance with the net capital rule of the SEC) for a broker-dealer has been reduced from $150 million to $50 million.
View the New York Fed's policy.
Bank of England Consults on Reform of Sterling Overnight Index Average Interest Rate Benchmark
The Bank of England published a consultation paper on the Bank’s proposals to reform the Sterling Overnight Index Average Interest Rate Benchmark, known as SONIA. The Bank of England, which took over as administrator of SONIA on April 25, 2016, notes that despite being viewed as critical for the sterling financial markets, SONIA is currently based on a market for brokered deposits which has limited transaction volumes. The consultation builds on the Bank’s earlier consultation in mid-2015, where it proposed that SONIA should capture a broader range of unsecured overnight deposits by including bilaterally negotiated transactions alongside brokered transactions. The Bank is seeking feedback on its proposals in four areas: (i) the SONIA calculation methodology: the Bank is proposing to switch the current calculation to measuring the average rate using a volume-weighted median, rather than a volume weighted mean; (ii) the definition of SONIA: the Bank is proposing to amend the definition of SONIA to reflect recent EU and IOSCO benchmark regulatory reforms and to account for international best practices for benchmark administration; (iii) transition planning: the Bank is working with market participants to transition from the current benchmark to the proposed reformed SONIA between October and December of 2017; and (iv) publication policies: the Bank is proposing to publish SONIA at 9:00 a.m. on the business day following the business to which the data pertains and to charge users who receive SONIA data on a timely basis directly from the Bank. Responses to the consultation are due by December 31, 2016. The Bank is expected to publish the final methodology for and definition of SONIA, the transition arrangements, and the publication and licensing arrangements in early 2017.
View the consultation paper.
US Federal Reserve Board Adopts Rating System to Supervise Financial Market Infrastructures
The US Federal Reserve Board issued a notice that it had adopted the “ORSOM” rating system for its review of FMIs over which the Federal Reserve Board has jurisdiction, including financial market utilities designated as systemically important by the Financial Stability Oversight Council. The ORSOM system judges FMIs on five categories which the Federal Reserve Board noted highlight the issues FMIs face: Organization, Risk management, Settlement, Operational risk and IT, and Market support, access and transparency. The Federal Reserve Board’s notice also specifies particular regulations and guidance that would be examined under each ORSOM category. The rating scale runs from 1, strong, to 5, unsatisfactory, in each category, with the FMI receiving a 1-5 aggregate overall rating as well.
View The Federal Reserve Board’s release.
Financial Stability Board Reports on Risks Posed by Central Counterparties and the CCP Workplan
The Financial Stability Board published a progress report on its CCP workplan. The progress report provides an update on implementation of a workplan agreed on by the FSB, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructure and the International Organization of Securities Commissions (the Group) in April 2015. The workplan focuses on the resilience, recovery planning and resolvability of CCPs and coordinating the roles of each organization in achieving a new international framework for CCPs.
EURIBOR Categorized as a Critical Benchmark under EU Legislation
A Commission Implementing Regulation establishing a list of critical benchmarks used in financial markets under the Benchmark Regulation was published in the Official Journal of the European Union. The Benchmark Regulation provides for different categories of benchmarks depending on the risks involved, imposing additional requirements on benchmarks considered to be critical, including the power of national regulators to mandate, under certain conditions, contributions to or the administration of a critical benchmark. The Commission Implementing Regulation stipulates that the Euro Interbank Offered Rate is a critical benchmark on the basis that it is important for credit loans and mortgages in the EU. EURIBOR is the first benchmark to be listed. The Commission Implementing Regulation entered into force on August 13, 2016. For the most part, the Benchmark Regulation will apply from January 1, 2018. Certain provisions, giving powers to the European Securities and Markets Authority to prepare draft technical standards and to the Commission to adopt delegated legislation, applied from June 30, 2016.
View the Commission Implementing Regulation.
UK Payment Systems Regulator Reports on Bank Ownership of Payment Infrastructure
The Payment Systems Regulator published its final report on its market review into the ownership and payment infrastructure competitiveness in the UK. The final report follows the PSR’s interim report which was published in February 2016. The PSR has concluded that there is currently no effective competition in the provision of UK payments central infrastructure services for Bacs, FPS and LINK (notwithstanding general satisfaction by operators and PSPs in terms of value for money, quality of service and innovation received from providers). This is partly because the operators have not periodically run competitive procurement processes or sufficiently tested the market when reproducing core infrastructure services. This means that the incumbent provider, VocaLink, has faced limited competitive pressure and minimal incentives to provide more efficient and innovative services.
US Markets Granted Equivalence Status under European Market Infrastructure Regulation
The European Securities and Markets Authority published a list of US designated contract markets considered equivalent to a regulated market in the European Union. The list is based on a Commission Implementing Decision published in the Official Journal of the European Union on July 2, 2016, which considered that 15 DCMs located in the United States are equivalent. The DCMs have been deemed equivalent for purposes of the definition of over-the-counter derivatives in the European Markets and Infrastructure Regulation. This means that derivative contracts traded on these DCMs would not be deemed to be OTC derivatives and therefore not be subject an obligation to clear the transactions, report on them and undertake risk mitigation steps as if they were OTC, under EMIR. To be deemed equivalent, a third country market must comply with legally binding requirements in its home state equivalent to the Markets in Financial Instruments Directive and must also be subject to effective supervision and enforcement in that third country on an on-going basis.
View the Commission Implementing Decision.
View ESMA’s library on post trading.
European Central Bank Revises Eurosystem Oversight Policy Framework
The European Central Bank published a revised version of its Eurosystem Oversight Policy Framework, which describes the role of the Eurosystem in oversight of financial market infrastructure. Eurosystem promotes the safety and protection of FMIs and acts as the central bank of issues in EU and international cooperative arrangements for securities and derivatives clearing and settlement systems. FMI includes payment systems, and clearing and settlement systems. The revised version of the current framework, which builds on the edition published in September 2015, takes into account the significant regulatory and institutional changes and market developments that have affected Eurosystem’s oversight function since July 2011. This includes the revised and enhanced harmonized international standards and EU law such as the CPSS-IOSCO Principles for Financial Market Infrastructures.
View the oversight policy.
International Guidance on Cyber Resilience for Financial Market Infrastructures Published
The Bank for International Settlements' Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions published Guidance on cyber resilience for financial market infrastructures. The Guidance supplements the CPMI-IOSCO Principles for Financial Market Infrastructures and aims to assist FMIs to improve their cyber resilience. The Guidance is not intended to impose additional standards on FMIs, but rather to provide FMIs with further detail on how they can enhance their cyber resilience capabilities and limit the increasing risks that cyber threats pose to financial stability. FMIs are expected to take a risk-based approach to implementing the Guidance and to act immediately to improve their cyber resilience, taking the Guidance into account. In particular, FMIs are expected to develop plans by June 2017 to improve their capability to meet the two-hour return to operations requirements.
View the Guidance on cyber resilience for financial market infrastructures.
EU Regulation on Benchmarks Finalized
The final EU Regulation on Benchmarks was published in the Official Journal of the European Union. The Benchmark Regulation has been introduced in response to the numerous instances of benchmark manipulation that have emerged in recent years. In addition, the Benchmark Regulation is intended to harmonize across the EU the rules that have implemented the International Organization of Securities Commissions Principles for Financial Benchmarks and Principles for Oil Price Reporting Agencies.
The Benchmark Regulation sets out the authorization and registration requirements for benchmark administrators, including third country entities, requirements for governance and control of administrators, provides for different categories of benchmarks depending on the risks involved and imposes additional requirements on benchmarks considered to be critical, powers of national regulators to mandate, under certain conditions, contributions to or the administration of a critical benchmark.
EU Legislation Extends Central Counterparty Authorization Period
A Commission Implementing Regulation on the extension of the transitional periods related to own funds requirements for exposures to central counterparties set out in the Capital Requirements Regulation and European Markets Infrastructure Regulation was published in the Official Journal of the European Union. The authorization process for existing CCPs established in the European Union is on-going but will not be completed by the June 15, 2016 deadline. There are still two CCPs established in the Union that await authorization. The implementing Regulation extends the transitional period by an additional six months to December 15, 2016.
The implementing Regulation entered into force on June 11, 2016.
View the Regulation.
Bank of England Paper on Legal Framework for Central Counterparty Default Management Process
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.
International Organization of Securities Commissions Recommends the Development of Guidelines to Combat Issues Arising from the Impact of Storage and Delivery Infrastructure on Commodity Derivatives Market Pricing
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.
US Federal Reserve Bank of New York Executive Vice President Discusses Resilience of Financial Market Infrastructures
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.
European Securities and Markets Authority Makes Recommendations after First EU-Wide Stress Test of Central Counterparties
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.
EU Legislation Imposing Clearing Obligation for Credit Default Swaps Published
A Commission Delegated Regulation on central clearing for credit default swaps supplementing the European Markets Infrastructure Regulation was published in the Official Journal of the European Union. Under the Regulation, two classes of credit default over-the-counter derivatives are subject to the clearing obligation under EMIR: iTraxx Europe Main and iTraxx Europe Crossover.
Federal Reserve Bank of New York President Discusses Challenges of Cross-Border Regulation
New York Fed President William Dudley discussed the importance to the global economy of economic growth and prosperity in the United States and the European Union. He applauded progress that has been made to date towards strengthening global banking systems, including increased capital and liquidity standards for international banks. However, he noted that more needs to be done in order to solve the so-called “too big to fail” problem. Specifically, Dudley stated that impediments to an orderly cross-border resolution need to be fully identified and dismantled, and cross-border regulatory cooperation needs to be further enhanced, including through greater exchange of confidential supervisory information. Moreover, he noted the importance of establishing a level playing field across jurisdictions in respect of cross-border resolution, so that the regulatory focus would be on safety and soundness rather than “trying to protect, favor, or shield national champions.”
European Securities and Markets Authority Announce First EU-wide Stress Tests for EU CCPs
The European Securities and Markets Authority announced it will publish its first EU-wide stress tests for EU Central Counterparties. Under the European Markets Infrastructure Regulation ESMA is mandated to conduct stress tests for CCPs. The stress test will evaluate the resilience and safety of the European CCP sector and identify any vulnerabilities. The focus of the exercise is to test counterparty credit risk that CCPs would face in the event of multiple clearing member default combined with simultaneous market price shocks. The results of the stress test will be published on an anonymized and aggregated basis on April 29, 2016.
View the announcement.
Bank of England to Take Up Benchmark Administrator Role
The Bank of England announced that effective April 25, 2016, it would become the administrator of the Sterling Overnight Index Average interest rate benchmark. SONIA provides bank and building societies’ overnight funding rates in the sterling unsecured market. It is designated as a specified benchmark under UK legislation. The Wholesale Market Brokers’ Association is currently the administrator of SONIA and is regulated by the Financial Conduct Authority. Under the new arrangements, the WMBA will be the calculation and publication agent for the SONIA benchmark, with the Bank of England assuming overall responsibility and providing governance and oversight. The Bank of England has been working to reform SONIA since March 2015 and intends to broaden the range of transactions supporting SONIA to include bilaterally negotiated and brokered transactions. The Bank of England's new money market data collection, announced in July 2015, will be used as the data source once it is properly established. The full transition is expected to be completed by Q2 2017.
View the Bank of England's announcement.
One-Day Margin Period of Risk for EU Central Counterparty Client Accounts Proposed by European Securities and Market Authority
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.
European Securities and Markets Authority Proposals to Improve Access by Regulators to Trade Repository Data
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.
EU and US Authorities Adopt Determinations on Supervision of EU and US CCPs
An equivalence Decision on the derivatives regulatory regimes for derivatives clearing organisations in the United States was published in the Official Journal of the European Union. The Decision follows the announcement by the European Commission and the Commodity Futures Trading Commission of a common approach on the supervision of CCPs operating in the US and EU. The Decision declares that the legal and supervisory arrangements of the CFTC for DCOs that have been declared systemically important derivatives clearing organisations by the Financial Stability Oversight Council or DCOs that have opted into additional standards similar to the SIDCO regime (so-called “Subpart C DCOs”) are equivalent to the EU requirements under EMIR, provided that the DCO’s internal rules and procedures meet the following requirements: (i) for derivatives contracts executed on regulated markets, a minimum liquidation period of two days for initial margin is applied to clearing members’ proprietary positions; (ii) for all derivative contracts, measures are in place to limit procyclicality which are equivalent to the options under EMIR; and (iii) the DCO has sufficient pre-funded available resources enabling it to withstand the default of at least two clearing members to which it has the largest exposures under extreme conditions.
UK Payment Systems Regulator Publishes Interim Outcome of Review into the Supply of Indirect Access to Payment Systems
03/10/2016The UK Payment Systems Regulator published its interim report relating to its market review into the supply of indirect access to payment systems. The PSR considers that competition in the supply of indirect access is going in the right direction for indirect payment services providers. However, the regulator has concerns about choice, service quality and the ability of indirect payment services providers to switch providers. Responses to financial crime regulation is limiting the provision of indirect access. The PSR does not intend to take regulatory action at this stage but will monitor developments in the industry to assess whether its concerns are addressed. The PSR is seeking feedback on its interim findings and its approach and comments are due by May 5, 2016.
View the PSR's interim report.
Second Review of Implementation of the International Principles for Financial Benchmarks
The International Organization of Securities Commissions published its Second Review of the Implementation of IOSCO's Principles for Financial Benchmarks by Administrators of the Euro Inter-Bank Offer Rate, the London Inter-Bank Offer Rate and the Tokyo Inter-Bank Offer Rate. The IOSCO Principles were first published in 2013 to enhance the reliability of benchmark determinations. The first review on the implementation of the Principles was published in 2014 and included remedial recommendations for the administrators of EURIBOR, LIBOR and TIBOR. The Second Review reports on progress made in implementing the recommendations set out in the 2014 review report. IOSCO found that the three administrators – European Money Markets Institute, ICE Benchmark Administration and JBA TIBOR Administration – have all taken steps to implement the recommendations and that most of the recommendations have already been implemented or steps taken to implement them. IOSCO has made individual recommendations for each administrator so as to ensure the full implementation of the Principles. IOSCO does not intend to conduct a follow up review; however, national regulators are expected to monitor progress made towards full implementation of the IOSC Principles for Financial Benchmarks.
View the Second Review report.
View the First Review report.
View the IOSCO Principles.
UK Payment Systems Regulator Report into Banks and UK Payment Infrastructure
The Payment Systems Regulator published an interim report following its market review into bank ownership and payment infrastructure competitiveness in the UK. The PSR's motivation to conduct the review stems from its statutory objective to promote competition and innovation in the market for payment systems and the services that the systems provide. The Report outlines the PSR's provisional finding that there is no effective competition in the central payment infrastructure market.
International Swaps and Derivatives Association Publishes Principles for US/EU Trading Platform Recognition
The International Swaps and Derivatives Association published a paper which analyzes the regulatory frameworks in the US and EU for the supervision and oversight of trading platforms and aims to provide principles for the recognition of EU trading platforms by the US Commodity Futures Trading Commission. Both the US and the EU have introduced rules which require certain derivatives to be traded on trading platforms. The US rules, which came into force in October 2013, provide that US persons may only trade the relevant derivatives on platforms that have registered as a Swap Execution Facility and that are subject to the oversight of the CFTC. The EU Markets in Financial Instruments Regulation, which is currently due to come into force on January 3, 2017 unless proposed legislation is passed to delay it for a year, requires certain derivatives to be traded on EU trading venues. ISDA considers that the CFTC should be able to make comparability decisions, deeming EU trading platforms comparable with those in the US, by focusing on the outcomes and core objectives of the EU regime, thereby recognizing EU trading platforms as SEFs. This would allow US persons to trade on an EU trading venue in compliance with the US trade execution rules.
View ISDA's paper.
US Board of Governors of the Federal Reserve System Issues Interim Final Rule Regarding Dividend Payments on Reserve Bank Capital Stock
The US Board of Governors of the Federal Reserve System issued an interim final rule amending Regulation I to implement provisions of the Fixing America’s Surface Transportation Act. The FAST Act reduced the dividend rate applicable to certain Reserve Bank depository institution stockholders that have total consolidated assets of more than $10 billion to the lesser of (i) 6 percent or (ii) the most recent 10-year Treasury auction rate prior to the dividend payment. The dividend rate for other member banks remains at 6 percent. Typically, Reserve Banks pay dividends to member banks twice each year in June and December.
The interim final rule also adjusts the treatment of accrued dividends when a Reserve Bank issues or cancels capital stock owned by a large member bank. Comments to the interim final rule will be accepted for 60 days from publication in the Federal Register.
View the Federal Reserve Board press release.
View the interim final rule.
European Commission Request for Technical Advice on Proposed Benchmark Regulation
The European Commission asked the European Securities and Markets Authority for technical advice on potential delegated acts due under the proposed European Benchmark Regulation. The proposed Benchmark Regulation aims to ensure that benchmarks produced and used in the EU are robust, reliable, fit for purpose and free from manipulation. The Commission's mandate requests technical advice from ESMA on matters including: (i) what constitutes administering arrangements for determining a benchmark, taking into account different existing business practices; (ii) what constitutes the issuance of a financial instrument for the purposes of defining the use of a benchmark; and (iii) the conditions under which a national regulator may decide that there is an objective reason for the provision of a benchmark or family of benchmarks in a third country. In response to the Commission's request, ESMA published a discussion paper on the Regulation and its technical implementation. The proposed Regulation is expected to enter into force in June 2016. ESMA has been asked to provide its technical advice four months after the Regulation's entry into force. Currently, the Benchmark Regulation and delegated acts are expected to apply 18 months after the Regulation enters into force.
View the Commission's request for technical advice.
View the Commission's covering letter to ESMA.
View ESMA's discussion paper.
UK Regulator Publishes Final Rules on Fair, Reasonable and Non-Discriminatory Access to Regulated Benchmarks
The Financial Conduct Authority published a Policy Statement on Fair, Reasonable and Non-Discriminatory access to regulated benchmarks, setting out the feedback it received to its consultation last year. The Policy Statement includes the FCA's final rules which affect the administrators of eight regulated benchmarks: the ICE London Inter Bank Offered Rate (ICE LIBOR), the Sterling Overnight Index Average (SONIA), the Repurchase Overnight Index Average (RONIA), the WM/Reuters London 4pm Closing Spot Rate, the ICE Swap Rate, the LBMA Gold Price, the LBMA Silver Price and the ICE Brent Index. The rules go beyond the general competition powers of the FCA and include specific requirements on benchmark administrators in relation to access. The FCA rules are changed from those in the initial consultation in being limited to users that are exchanges, clearing houses and multilateral trading facilities, consistent with EU regulations, in particular the Markets in Financial Instruments Regulation (which is due to apply from January 3, 2017). The FCA's final rules enter into force on April 1, 2016.
View the Policy Statement.
European Securities and Markets Authority Publishes 2015 Annual Report and Workplan for 2016
The European Securities and Markets Authority published a report providing an overview of its 2015 supervisory work relating to Credit Rating Agencies and Trade Repositories and setting out its workplan for 2016. ESMA's focus for 2016 includes: (i) improving the quality of credit ratings; (ii) improving trade repository quality data and data access; (iii) improving CRA governance and strategy; (iv) devoting resources to its enforcement work where it is aware of facts that may be infringing regulatory requirements; and (v) enhancing international cooperation with third country supervisors.
View the report.
European Securities and Markets Authority Publishes Technical Standards on Settlement Discipline
The European Securities and Markets Authority published a final report setting out draft Regulatory Technical Standards on settlement discipline as required under the Central Securities Depository Regulation. The RTS cover measures for preventing settlement fails through automated matching, a hold and release mechanism, and partial settlement. The RTS also provide measures for monitoring and addressing settlement fails such as a mechanism for cash penalties and a buy-in process. ESMA has submitted the final draft RTS to the European Commission for endorsement.
View the Final Report and RTS.
US Office of Financial Research 2015 Annual Report to Congress Notes Increased Threats to Financial Stability
The US Office of Financial Research issued its 2015 Annual Report to Congress. Among other things, the report states that threats to US financial stability have “edged higher” since last year’s report, but remain in the moderate range. According to the OFR, that assessment has not changed since the Federal Reserve Board incrementally increased short-term interest rates in December. Additional OFR findings highlighted in the report include how policymakers have taken important steps to eliminate implied taxpayer support for large, complex financial institutions whose serious distress could threaten financial stability. Furthermore, the report notes that while clearing derivatives trades through central counterparties has significant benefits in reducing the risks to counterparties of default, a CCP can also be a single point of vulnerability for failure and creates the potential for propagation of risks.
View the OFR Annual Report to Congress.
European Systemic Risk Board Assesses Risks Posed by CCP Interoperability Arrangements
The European Systemic Risk Board published a report on the systemic risk implications of CCP interoperability arrangements which are governed by the European Market Infrastructure Regulation. There are currently five interoperable links in operation in the EU, including four authorized EU CCPs, a Swiss CCP and its Norwegian branch. The ESRB considers that the EU's current regulatory framework for interoperability is sound. However, the ESRB recommends that: (i) more regulatory granularity should be included in the framework to provide clarity for supervisors and regulators, to avoid regulatory arbitrage and to ensure a harmonized EU approach; (ii) the expected proposed legislation on CCP recovery and resolution should clarify the interaction of an interoperability arrangement with the default waterfall framework as well as portability and other default management measures; (iii) further analysis of the risks involved in interoperable arrangements for derivatives should be carried out; and (iv) the ESRB should be given a consultative role on the future development of any guidelines and rules on interoperability. The European Securities and Markets Authority recommended in February 2015 that the interoperability provisions in EMIR, which are limited to transferable securities and money-market instruments, should not be extended to OTC derivatives but could be extended to Exchange-Traded Derivatives. The European Commission must take the ESRB and ESMA reports into account when it prepares its report to the European Parliament and Council on the issue.
View the ESRB report.
Federal Reserve Bank of New York Concludes Mortgage Operations Counterparty Pilot Program
The Federal Reserve Bank of New York announced the end of its Mortgage Operations Counterparty Pilot Program on December 31, 2015. The program, first announced in August 2014, was intended to discover ways to expand the range of firms acting as counterparties in the Federal Reserve’s open market operations, and to analyze the extent to which firms beyond the primary dealer community can raise the New York Fed’s operational capacity and resiliency in its monetary policy operations. Three firms participated in the MOC pilot program and began transacting with the Open Market Trading Desk in secondary market outright operations of agency mortgage-backed securities in December 2014. The results of the pilot programs will provide useful inputs in the Desk’s ongoing evaluations of the Federal Reserve’s counterparty framework.
View the New York Fed press release.
Final EU Revised Payment Services Directive Published
The revised EU Payment Services Directive, known as PSD2, was published in the Official Journal of the European Union. The aims of PSD2, which focuses on electronic payments and payment services within the EU, include making payments between Member States as secure, easy and efficient as those made within a Member State, regulating new types of payment services and payment services providers which are currently unregulated and stimulating competition in the electronic payments market. Member States must transpose PSD2 into their national laws by January 13, 2018 and apply those laws from that date, subject to certain exceptions and transitional measures. PSD2 will appeal the current Payment Services Directive with effect from January 13, 2018.
Final Draft EU Standards on the Prudential Requirements for Central Securities Depositories Published
The European Banking Authority published final draft Regulatory Technical Standards which set out the prudential regime for central securities depositories under the Central Securities Depositories Regulation. A distinction is made in CSDR between CSDs that offer banking-type ancillary services and which are also authorised as credit institutions (i.e. banks) and CSDs that are not permitted to offer ancillary banking services. The final draft RTS cover: (i) the capital requirements applicable to all CSDs; (ii) the additional risk-based capital surcharge which takes into account the risks, including intra-day credit and liquidity risks, that arise from the ancillary banking services of CSDs; and (iii) the framework and tools for monitoring, measuring, managing, reporting and disclosing the above-mentioned credit and liquidity risks. CSDs that carry out ancillary banking services will also need to comply with the Capital Requirements Regulation and the final draft RTS impose stricter requirements than those in CRR in some respects. The final draft RTS have been sent to the European Commission for endorsement. The CSDR, which introduces common standards for settlements across the EU, will apply directly across the EU from January 1, 2023 to transferable securities issued after that date and from January 1, 2025 to all transferable securities.
View the final draft RTS.
UK Government Publishes New Payment Account Regulations
HM Treasury published the Payment Account Regulations together with an explanatory memorandum. The Regulations implement the Payment Accounts Directive which sets common standards for payment service providers across EU Member States. The three main policy objectives of the PAD are: (i) to improve transparency and comparability of payment account fees used on a daily basis for payment transactions (i.e. personal current accounts); (ii) to make it less burdensome for consumers to be able to move their current account from one payment service provider to another; and (iii) to ensure that EU residents have access to banking services and that a sufficient number of accounts that offer basic features are available. The new Regulations cover: (i) the obligations on payment service providers to enable consumers to make informed choices when choosing a payment account; (ii) non-discrimination in the provision of and access to payments accounts; and (iii) switching payments accounts and the facilitation of cross-border account opening for consumers. The Regulations will enter into force on September 18, 2016 except for those provisions related to the obligation of the Financial Conduct Authority to publish a list of the most representative services linked to a payment account and subject to a fee which will come into effect six months after the publication of that list.
View the Regulations.
UK Payment Systems Regulator Report on Access and Governance of Payment Systems
The Payment Systems Regulator published its first annual report on access and governance of payment systems. The report sets out the progress of operators of designated payment systems in achieving more open and flexible direct access to payment systems and making the governance of payment system operators more inclusive and transparent. The report states that operators could do more to enable access for smaller banks and non-bank payment service providers and must ensure that the views of those that rely on payment systems are represented in the decision making of operators. The PSR also reports that progress has been made so far on clearer and fairer requirements for direct access, transparency of payment system operator decisions and better representation of payment systems' users' views.
View the report.
European Securities and Markets Authority Consults on CCP Time Horizon for Liquidation Period
The European Securities and Markets Authority published a consultation paper on a review of the Regulatory Technical Standards for CCPs on the time horizons for the liquidation period for margin held by CCPs for exchange-traded derivatives. The RTS currently specify a two-day time horizon as the liquidation period used in the time horizons for margin calculations, across all CCP accounts for exchange-traded products. The original RTS use this two-day liquidation period but based on net margin models, where offsetting positions of different customers cancel one another out. A key economic difference has been noted between the US and EU regimes for CCP margins, in that the US only requires a one day liquidation period but is calculated on a gross basis across all customer positions. A degree of harmonization of the two regimes is proposed to assist the EU in adopting a long-awaited equivalence decision for US CCPs under EMIR, with proposed adoption of the alternative of a “one day gross” model for European CCP customer accounts. The two-day standard for clearing members' house accounts and the five-day liquidation period for OTC products would be retained. The consultation follows on from ESMA's discussion paper published in August 2015. Comments are due by February 1, 2016.
View the consultation paper.
US Federal Deposit Insurance Corporation Chairman and US Comptroller of the Currency Delivers Remarks to US House of Representatives Financial Services Committee Discussing Recent Developments by the US Financial Stability Oversight Council in Addressing Systemic Risk
The Chairman of the FDIC, Martin J. Gruenberg and the Comptroller of the Currency, Thomas J. Curry, testified before the Committee on Financial Services in the US House of Representatives on the progress achieved by the US Financial Stability Oversight Council in fulfilling its mandate. Both Chairman Gruenberg and Comptroller Curry discussed the actions taken by the FSOC toward (i) identifying risks to financial stability arising from entities designated as systemically important financial institutions; and (ii) identifying and addressing systemic risk in the US financial system. On the issue of SIFI designation, both Chairman Gruenberg and Comptroller Curry noted the final rule and guidance issued by the FSOC, setting forth the formal process used by the FSOC in making such a determination. Comptroller Curry noted further the final rule and interpretive guidance issued by the FSOC for identifying and designating systemically important financial market utilities.
On the issue of identifying and addressing systemic risk, Chairman Gruenberg pointed to the FSOC Annual Reports, which provides the basis for analysis of potential emerging risks to US financial stability.
View the full text of Chairman Gruenberg’s testimony.
View the full text of Comptroller Curry’s written testimony.
UK Government Consults on Implementation of Central Securities Depositories Regulation
HM Treasury published a consultation on the implementation of the Central Securities Depositories Regulation. The CSDR introduces common standards for settlements across the EU, such as the harmonization of the rules governing central securities depositories which operate the infrastructures enabling settlement, and the timing of securities settlement in the EU. The consultation seeks views on proposed changes to domestic legislation so that provisions of domestic law which overlap with the CSDR are disapplied and changes and enforcement powers are provided for. The CSDR will apply directly across the EU from January 1, 2023 to transferable securities issued after that date and from January 1, 2025 to all transferable securities. Certain provisions will only apply from the date of entry into force of any delegated acts adopted by the Commission under the CSDR.
View the consultation.
US Office of the Comptroller of the Currency Issues Updated Guidance Regarding Risk Assessment System
The US Office of the Comptroller of the Currency issued updated guidance regarding its risk assessment system. Specifically, the updated guidance (i) clarifies the relationship between the RAS and CAMELS; (ii) revises the definition of banking risk in order to apply across all risk categories, and broadens the concept of risk to include potential impacts from losses, reduced earning, and market value of equity; (iii) expands the “quality of risk management” assessment to include a new category of “insufficient” between satisfactory and weak in order to better categorize and communicate concerns; and (iv) expands the assessment of strategic and reputation risks to include both quantity of risk and quality of risk management.
View the text of the OCC press release.
Committee on Payments and Market Infrastructures and International Organization of Securities Commissions Report on Implementation of Principles for Financial Market Infrastructures
The Committee on Payments and Market Infrastructures and International Organization of Securities Commissions published a report on the implementation of the Principles for Financial Market Infrastructures. The Principles are the international standards for payment, clearing and settlement systems as well as trade repositories aiming to ensure that the infrastructure supporting global financial markets is resilient enough to endure financial shock. The Principles consist of five general responsibilities for the relevant national regulators for FMIs: (i) regulation, supervision and oversight of FMIs; (ii) regulatory, supervisory and oversight powers and resources; (iii) disclosure of policies relating to FMIs; (iv) application of the Principles for FMIs; and (v) cooperation with other regulators. The report covers the implementation of the Principles in 28 participating jurisdictions and states that most jurisdictions have achieved a high level of observance of the responsibilities: 16 jurisdictions fully observed all responsibilities for all FMI types and two jurisdictions either fully or broadly observed each of the five responsibilities for all FMI types. Annex 3 of the report sets out the findings for each jurisdiction.
View the report.
Financial Stability Board Releases Progress Report on FX Benchmark Reforms
The Financial Stability Board published a report detailing its progress in implementing its September 2014 recommendations for reforms to Foreign Exchange benchmarks. Although the report states that progress has been made in implementing many of the recommendations, the FSB notes that there are still areas where progress has been mixed. Specifically, among other things, the report reiterates that the FSB recommendations are intended to apply to all FX benchmarks, not just the London 4pm fix benchmark. The FSB asserts that a more complete implementation of the recommendations, particularly regarding other FX benchmarks, is essential to building upon improvements already witnessed.
View the report.
European Securities and Markets Authority Publishes Final Draft Technical Standards to Harmonise Functioning of European Central Securities Depositories
The European Securities and Markets Authority published a final report and final draft Regulatory and Implementing Technical Standards on improving securities settlement in the European Union and on Central Securities Depositories requirements. This follows from ESMA’s previously published discussion paper and consultation paper which sought views on the proposed technical standards. The final report sets out the feedback received from the consultation paper and ESMA’s proposed changes to the RTS and ITS on CSD as well as the RTS and ITS on internalised settlement. The two final draft standards on CSDs cover: (i) the authorisation and identification requirements for applicant CSDs, including forms and templates for CSDs applying for authorisation; (ii) recognition of a third-country CSD; (iii) risk monitoring rules that a CSD must establish; (iv) record keeping; and (v) general requirements for cooperation arrangements between regulators in home and host member states. The two final draft standards on internalised settlement cover: (i) templates and procedures for the reporting and transmission of information on internalised settlements; and (ii) specifications for the content of reporting on internalised settlements. The RTS on settlement discipline will become available later in a separate report, as ESMA still needs to review responses received to its more recent consultation on the operation of the buy-in process. ESMA will submit the final draft RTS and ITS to the European Commission for endorsement.
View the final report and technical standards.
US Federal Reserve Board Approves Enhancements to Reserve Banks' Same-Day ACH Service
On September 23, 2015, the US Federal Reserve Board approved enhancements to its automated clearing house service that will require its receiving depository institutions to process same-day payments. Morning settlements will now be cleared by 1pm, and afternoon settlements by 5pm, according to the approved plan. Originating banks will be required to pay a 5.2 cent interbank fee to receiving banks for each same-day electronic payment. The enhancements become effective September 23, 2016.
View the press release.
European Central Bank Revises Policy on Location of CCPs
The European Central Bank published a revised version of its Eurosystem Oversight Policy Framework which describes the role of the Eurosystem in oversight of payment systems. The Framework has been amended to remove the references to the Eurosystem location policy for CCPs. The revision follows the judgment of the General Court of March 4, 2015 on the UK Government's challenge of the Framework (as it then stood) and which annulled the Framework in so far as it set a requirement for CCPs to be located within the Eurozone. The Framework aimed to prevent CCPs in the European Union but outside the Eurozone from being able to have access to ECB Euro settlement facilities. Following that judgment, the ECB and the Bank of England announced that they had agreed to enhanced information exchange and cooperation arrangements for UK CCPs with significant euro-denominated business and that both central banks would extend the scope of their standing swap line order to aid the provision of multi-currency liquidity support by both central banks to CCPs established in the UK and the euro area. The ECB has also published Standards for the use of CCPs in Eurosystem foreign reserve management operations, which had been the subject of a separate legal challenge by the UK Government. The Standards would govern the use of CCPs for Interest Rate Swaps denominated in foreign currencies, aiming to limit the risks that would arise when these types of IRSs are cleared through a CCP.
View the revised Eurosystem Oversight Policy Framework.
View the ECB Standards for use of CCPs.
Workplan and Progress Report Published on Improving CCP Resilience
The Financial Stability Board, together with the Basel Committee on Banking Supervision, the Committee on Payments and Markets Infrastructures and the International Organization of Securities Commissions jointly published a CCP workplan, dated April 2015. The workplan focuses on the resilience, recovery planning and resolvability of CCPs and coordinating the roles of each organisation in achieving these goals. A progress report on such work was published simultaneously, providing an update on work that has been done so far and listing an action plan with expected dates of delivery. The progress report states amongst other things that: (i) work on stress testing policies and practices have advanced and guidance will be developed after further analysis of other resilience topics such as CCP recovery and risk management has been carried out; (ii) a report on all CCP resilience and recovery issues will be published by mid-2016 for consultation; and (iii) a report analyzing the interdependencies between CCPs and major clearing members and any resulting systemic implications on global financial stability will be published by end-2016.
View the workplan.
View the progress report.
Payment Systems Regulator Survey on Payment Service Providers and Indirect Payment Systems
The UK Payment Systems Regulator announced that it is conducting a survey aimed at payment service providers who access payment systems indirectly. The survey is intended to inform the PSR’s consideration of whether action is required in the context of its two market reviews, which are on: (i) the supply of indirect access to payment systems, launched in May 2015; and (ii) the ownership and competitiveness of infrastructure provision (the hardware, software, secure telecommunications network and operating environments that are used to manage and operate payment systems), first announced in November 2014. Responses to the survey are due by September 23, 2015.
View the survey form.
US Comptroller of the Currency Discusses Innovation and Risk Management
On August 7, 2015, the Comptroller of the Currency Thomas J. Curry gave a speech at a conference sponsored by the Federal Home Loan Bank of Chicago, entitled "Leading Toward the Future; Ideas and Insight for a New Era." In that speech, Mr. Curry discussed the ways in which innovation can benefit the financial system, the crucial role banks play in spurring such innovation, and efforts the OCC is undertaking to better comprehend the benefits and risks of innovative products and services. Mr. Curry noted that the OCC must develop a robust process in order to evaluate new approaches and encourage responsible innovation, while ensuring appropriate risk management and compliance with laws and regulations.
View the press release.
European Securities and Markets Authority Provides Technical Advice under Central Securities Depositories Regulation
The European Securities and Markets Authority published its technical advice to the European Commission under the Regulation on improving securities settlement in the European Union and on central securities depositories, known as CSDR. The technical advice will be considered by the Commission in its preparation of delegated acts which it is required to pass under the CSDR. The technical advice is on penalties for settlement fails and on the substantial importance of a Central Securities Depository. Under CSDR, there is an obligation to settle instructions on the intended settlement date and a daily cash penalty applies for any failed settlement. ESMA’s technical advice is on the parameters for calculating the basic amount of the cash penalty, including the circumstances which may justify an increase or a reduction in the basic penalty amount. An EU passport is provided for under the CSDR which allows an EU-registered CSD to provide its services in any EU member state. Cooperation arrangements are required to be established between the home and host member states for the supervision of the CSD, in particular where the activities of the CSD are of “substantial importance for the functioning of the securities markets and the protection of investors” in the host member state. The Commission’s delegated act is required to set out which operations of a CSD could be considered of substantial importance.
View the technical advice.
Next Steps for UK Payment Systems Regulator
The UK Payment Systems Regulator published an update on the work it has done to ensure that access, direct or indirect, to payment systems is fairer and also identified next steps to be taken. The PSR has introduced new access and reporting rules for operators and has imposed a disclosure obligation on the four main sponsor banks providing indirect access. The PSR will continue to work with operators and sponsor banks to help them adapt to the new regulatory requirements and will publish the findings from its review of their compliance reports later in 2015. The PSR launched a market review into the supply of indirect access to market systems and aims to publish an interim report on the review by January 2016 and a final report by May 2016.
View the report.
Financial Conduct Authority Publishes Outcome of Review on Financial Benchmarks
The Financial Conduct Authority published the results of its thematic review into the oversight and control of financial benchmark activities. The review assessed the extent to which firms had responded to concerns and issues highlighted in recent benchmark enforcement cases, whether firms had implemented appropriate oversight and controls to manage the risks involved in their benchmark activities and the understanding within firms of the International Organization of Securities Commissions' Principles for Financial Benchmarks. The review found that all of the 12 banks and broking firms involved in the review had taken steps to change their approach to benchmark activities but that work was still required by all the firms and includes six key messages for firms involved in benchmark activities, which are: (i) firms need to ensure that they identify all of the activities which constitute benchmark activity or could affect a benchmark; (ii) senior management in firms need to act quickly to implement improvement plans; (iii) firms need to strengthen their governance and oversight of benchmark activities; (iv) further work is required on identifying and managing conflicts of interest; (v) robust controls need to be established for in-house benchmarks; and (vi) firms exiting benchmark activities need to give due consideration to the wider impact of their actions. The report sets out good and bad practices that were observed at the firms assessed by the FCA. The FCA expects those firms that were provided feedback during the review to act to make the necessary improvements and for all firms and users of benchmarks to consider the key messages and results of the review.
View the report.
US Regulators Release Joint Staff Report Regarding the US Treasury Market
The US Department of Treasury, the Federal Reserve Board, the Federal Reserve Bank of New York, the US Securities and Exchange Commission and the US Commodity Futures Trading Commission issued a joint report analyzing the significant volatility in the US Treasury market on October 15, 2014. The joint report provides insight and detailed analysis of the market conditions and offers a number of developments which may help explain the conditions that likely contributed to the volatility. Specifically, the report finds that among other things, changes in global risk sentiment and investor positions, a decline in order book depth and changes in order flow and liquidity provision together provide important insight into the developments of that day. The report also highlights the changing structure of the US Treasury market and proposes next steps to further enhance the public and private sectors’ understanding of changes to the structure of the US Treasury market and their implications. The report recommends continued analysis of US Treasury market structure and functioning, focusing on trading and risk management practices, the availability of public data and continued efforts to strengthen monitoring and inter-agency coordination related to trading across the US Treasury cash and futures markets.
Financial Stability Board Progress in Reforming Major Interest Rate Benchmarks
The Financial Stability Board published an interim progress report on reforms to existing interest rate benchmarks and on the construction and implementation of alternative near risk-free interest rate benchmarks. This follows the FSB’s recommendations for reforms in this area, published in July 2014. The report examines the progress made towards achieving those recommendations. The FSB’s recommendations in the July 2014 report called for a strengthening in existing interest rate benchmarks, such as LIBOR, EURIBOR and TIBOR, collectively coined “IBORs,” and other reference rates based on unsecured bank funding costs by underpinning them to the greatest extent possible with transaction data. In addition, the FSB proposed steps to develop alternative near risk-free interest rate benchmarks, given that there are certain financial transactions, including many derivatives transactions, that it considers better suited to such reference rates.
Since July 2014, the administrators of the most widely used IBORs have taken steps to accommodate the FSB’s recommendations. Such steps included reviews of respective benchmark methodologies and definitions, data collection exercises and feasibility studies, consideration of transitional and legal issues, and broad consultations with submitting banks, users and other stakeholders. Also, detailed data collection exercises have been implemented in key markets, and work is now ongoing to identify potential alternative near risk-free interest rate benchmarks, where these do not currently exist. The FSB will continue to monitor progress in implementing the FSB’s recommendations in the year ahead and will prepare an updated progress report for publication by the FSB in July 2016.
Assessment of Implementation of Principles for Financial Market Infrastructures Announced
The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions announced that they had begun the first Level 3 assessment of the implementation of the Principles for Financial Market Infrastructures. The review aims to assess the consistency of outcomes achieved through implementation of the PFMIs and will focus on requirements for financial risk management by CCPs by considering the outcomes achieved by a number of globally and locally active CCPs clearing exchange-traded and OTC derivatives. The results of the assessment are intended to be published in 2016.
View The announcement.
European Securities and Markets Authority Final Report on Extension of Scope of Interoperability Arrangements
The European Securities and Markets Authority published a final report on the interoperability arrangements between EU‑based CCPs. The report is required under the European Market Infrastructure Regulation. Interoperability arrangements made between two or more CCPs enable a counterparty using one CCP to execute a trade with a counterparty that chooses to use a different CCP. The report, which describes current interoperability arrangements for different product types such as equities and government bonds recommends that the interoperability provisions in EMIR (which are currently limited to transferable securities and money‑market instruments only) are not yet extended to OTC derivatives, given the additional complexities involved in an interoperability arrangement between CCPs clearing OTC derivative contracts. The report does, however, recommend that the interoperability provisions in EMIR be extended to Exchange‑Traded Derivatives, as one interoperability arrangement already exists (between LCH.Clearnet Ltd and Oslo Clearing), as is the general framework for assessing the risk involved as a result. This proposal will next be considered by the European Commission and may prove to be controversial.
View the final report.
European Securities and Markets Authority Consults on Implementing the Buy‑in Process under the Central Securities Depositories Regulation
The European Securities and Markets Authority published proposed draft Regulatory Technical Standards on the buy‑in process, including the timeframe for delivery of financial instruments which ESMA is required to prepare under the EU Central Securities Depositories Regulation. The CSDR came into force on September 17, 2014. ESMA consulted in December 2014 on the buy‑in process, noting that there is currently no uniform approach to buy‑in by central securities depositories, CCPs and trading venues. Feedback to the consultation suggested that buy‑in should be executed by a bank or execution dealer that was not connected to the parties in the failed transaction. The current consultation therefore focuses on which entity should be responsible for operating the buy‑in process for OTC transactions that are not centrally cleared. ESMA seeks feedback on three proposed options: trading level execution, trading level with fall‑back option execution and CSD participant level execution. Responses to the proposals are due by August 6, 2015. ESMA must provide all of the final draft RTS under the CSD to the European Commission by the end of September 2015.
View the consultation paper.
UK Payment Systems Regulator Publishes Final Terms of Reference for Market Review on Payments System Infrastructure
The Payment Systems Regulator published the final terms of reference for its market review into the ownership and competitiveness of the UK payments system infrastructure. The review aims to ascertain whether current infrastructure services are effective for service users and able to support new developments and innovations. The review focuses in particular on interbank payment systems BACS, FPS and Link, and is based around the seven following questions: (i) whether there is effective competition in the provision of infrastructure services in interbank payments; (ii) whether current ownership arrangements of infrastructure providers affect competition; (iii) whether there are any barriers to effective competition; (iv) what the likelihood is of entry or expansion in respect of provision of infrastructure services; (v) whether there are any efficiencies resulting from the present ownership arrangements; (vi) how demand affects competition in the provision of infrastructure services; and (vii) what the benefits of greater levels of competition might be. The review will aim to address any concerns identified with a view to publishing new directions, recommendations or guidance if necessary, as well as encouraging further industry initiatives and self-regulation if needed. The PSR welcomes views on the key questions outlined in the terms of reference and aims to publish its final report in the second quarter of 2016.
View the terms of reference.
Delay on Delivery of European Technical Standards under Central Securities Depositories Regulation
The European Securities and Markets Authority published a letter, dated June 17, 2015, from it to the European Commission that informs the Commission that ESMA will be providing the technical standards due under the Central Securities Depositories Regulation in September 2015. The original due date for delivery of the technical standards was June 18, 2015. The delay to delivery of the standards is due to the European Commission’s Legal Services undertaking an early review of the standards to ensure conformity and consistency of EU legislation. There is not expected to be a delay in adoption by the European Commission of the technical standards under CSDR. The CSDR introduces common standards for settlements across the EU, such as the harmonization of the rules governing central securities depositories which operate the infrastructures enabling settlement, and the timing of securities settlement in the EU. The CSDR will apply directly across the EU from January 1, 2023 to transferable securities issued after that date and from January 1, 2025 to all transferable securities. Certain provisions will only apply from the date of entry into force of the relevant delegated act adopted by the Commission under the CSDR.
View ESMA's letter.
Financial Conduct Authority Calls for Input on Innovation in Digital and Mobile Solutions in Financial Services
The Financial Conduct Authority issued a call for input, asking two specific questions on digital and mobile solutions for financial services, so that it may obtain market views on: (i) specific UK or EU rules and policies that may currently restrict the development of new and innovative products; and (ii) rules and policies that should be introduced to facilitate innovation in this field. The FCA is asking for specific examples, taking into account both UK and EU perspectives. The call for input also provides a summary on the FCA’s considerations related to the digital and mobile space to date, such as the demand for the regulation of digital currencies and concerns about regulatory requirements creating lengthy customer terms and conditions that are deemed not to be appropriate for digital and mobile solutions. Responses to the Call for input are due by September 7, 2015.
View the call for input.
Assessment Report on Implementation of the Principles for Financial Market Infrastructures
The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions published the second report on Level 1 assessments of implementation monitoring of the Principles for Financial Market Infrastructures. Level 1 assessments are based on self-assessments by individual jurisdictions on how they have adopted the PFMIs through legislation, regulations and other policies. The PFMIs are international standards for payment, clearing and settlement systems and trade repositories aimed at ensuring that such
infrastructure is robust and able to withstand financial stability shocks. Level 1 assessments will next be undertaken in 2016.
View the report.
Extension of Transitional Provisions for Exposures to CCPs Formally Announced
Following the announcement by the European Commission, that the transitional period for regulatory capital requirements for EU banks’ exposures to CCPs under the EU Capital Requirements Regulation would be extended from June 15, 2015 to December 15, 2015, the Implementing Regulation was published in the Official Journal of the European Union on June 9, 2015. The Implementing Regulation comes into effect on June 12, 2015. The extension is intended to allow further time for CCPs, both from the EU and from non-EU jurisdictions, to become authorized or recognized under the European Market Infrastructure Regulation. One of the requirements for recognition of a third country CCP is that the third country’s regime for supervision of CCPs is deemed to be equivalent to that of the regime under EMIR. Equivalence decisions for CCP regimes have only been given for Hong Kong, Singapore, Australia and Japan. Decisions for major jurisdictions, such as the US, are still outstanding. Authorization or recognition under EMIR will give the CCP the status of being a Qualifying CCP, which is relevant for clearing member firms to calculate their capital requirements for exposures to CCPs under the CRR. Lower capital requirements will be imposed for exposures to a QCCP than for exposures to a non-QCCP CCP.
View the Implementing Regulation.
View our client note on third country equivalence under EMIR.
UK Financial Conduct Authority Consults on Fair, Reasonable and Non-Discriminatory Access to Regulated Benchmarks
The Financial Conduct Authority published a consultation paper setting out proposals for fair, reasonable and non-discriminatory access to regulated benchmarks by benchmark administrators. This is further to the policy statement published by the FCA in March 2015 on the seven new benchmarks it will be regulating and supervising. The policy statement included the FCA’s final rules amending Chapter 8 of the Market Conduct Sourcebook (MAR 8), originally designed for benchmarks determined through a submission process, such as LIBOR. The FCA’s proposals are in response to concerns raised about the unconstrained ability of administrators to set the prices of access to benchmark information and benchmark licenses. The new proposals limit the ability of benchmark administrators to exploit their market power in a way that could encourage unfair competition. The new rules would apply to existing and future pricing and licensing arrangements and would not apply retrospectively. Responses are due before August 3, 2015 and the FCA aims to publish a policy statement and final rules towards the end of 2015.
View the consultation paper.
Bank of England Publishes Consolidated Version of Rules for Recognized Clearing Houses
The Bank of England published a consolidated version of its rules for Recognized Clearing Houses. RCHs are regulated by the Financial Services and Markets Act 2000 and are subject to the FSMA 2000 (Recognition Requirements) Regulations 2001, though different recognition requirements will apply under the European Market Infrastructure Regulation for RCHs that are also CCPs. RCHs that are also CCPs must comply with domestic requirements as well as EMIR. All UK RCHs must comply with the BoE rules.
View the BoE RCH rules.
US Securities and Exchange Commission Approves Pilot to Assess Tick Size Impact for Smaller Companies
The US Securities and Exchange Commission approved a proposal by the national securities exchanges and the US Financial Industry Regulatory Authority regarding a two-year pilot program widening the minimum quoting and trading increments, known as "tick sizes" for stocks of some small firms. The pilot program aims to assess whether wider tick sizes would improve the quality of small company stocks for issuers and investors.
View the the SEC press release.
European Parliament and Council Agree on New Draft Payment Services Directive
The Council of the European Union issued a press release stating it had reached a tentative agreement with the European Parliament on a draft directive that would further the development of electronic payments in the EU market. The new directive will incorporate and repeal the existing Payment Services Directive to create a new framework for emerging and innovative payment services, including internet and mobile payments, providing a more secure and harmonized environment for payments. Once the full text is finalized, the draft directive will need to be confirmed by the Council, submitted to the European Parliament for a vote and then to the Council for adoption. Once adopted, member states will have two years to transpose the directive into national law.
View the press release.
TARGET2-Securities Group of European Central Bank Publishes Impact Analysis on T2S Harmonization Standards Non-Compliance
The TARGET2-Securities advisory group of the European Central Bank published an impact analysis report on non-compliance with T2S harmonization standards. The standards aim to provide a single centralized platform for securities settlement in central bank funds across European securities markets. In November 2014, six jurisdictions declared that it would not be likely that they would be able to comply with some of the obligatory harmonization standards by the time their markets plan to migrate to T2S. These jurisdictions are Belgium, France, Germany, the Netherlands, Romania and Switzerland. The report states that there have been no new cases of non-compliance with T2S harmonization standards. The T2S group has assessed the impact of non-compliant T2S markets on the T2S community as a whole. For the Belgian, Dutch, French, Romanian and Swiss markets, the impact of non-compliance is deemed to be manageable and the T2S group has asked for the further monitoring of implementation plans. A decision for the German market has been postponed until the next impact analysis.
View the impact analysis.
Financial Conduct Authority Finalizes Guidance for MTF Operators on Regulatory Requirements for MTF Rules and Procedures
The Financial Conduct Authority published final guidance for Multilateral Trading Facility operators on regulatory requirements for MTF rulebooks and procedures as set out in the Market Conduct Sourcebook of the FCA Handbook. The FCA consulted on its proposed guidance late in 2014 which was based on feedback received through a thematic review. The FCA expects all MTF operators to be able to demonstrate that they have considered the good practice observations included in the guidance when setting their approach to compliance with the Market Conduct requirements.
View the final guidance.
UK Government and European Central Bank Agree to Cease Legal Action on CCP Location Policy
The European Central Bank and the Bank of England published a joint press release announcing that they had agreed to enhanced information exchange and cooperation arrangements for UK CCPs with significant euro-denominated business. Further, both central banks are extending the scope of their standing swap line order to aid the provision of multi-currency liquidity support by both central banks to CCPs established in the UK and the euro area. As a result of the measures, the UK Government announced that it would withdraw the two as yet undecided cases brought by the UK Government against the ECB’s CCP location policy. The announcements follow the General Court judgment on March 4, 2015, which annulled the ECB’s Eurosystem Oversight Policy Framework which had the effect of requiring CCPs with significant euro-denominated business to be located within the eurozone. The ECB has not yet made any announcement about the documents which are the subject of the two cases to be withdrawn (Decision of 11 December 2012 on the terms and conditions of TARGET2 and the ECB’s Statement of Standards published on 18 November 2011 in so far as it sets out a location policy for CCPs).
View the ECB / BoE press release.
View the UK Government’s announcement.
US Securities and Exchange Commission Proposes Rule to Require Broker-Dealers Active in Off-Exchange Markets to Become Members of National Securities Association
The US Securities and Exchange Commission proposed rule amendments to require broker- dealers trading in off-exchange venues to become members of a national securities association. The amendments would seek to heighten regulatory oversight of active proprietary trading firms. The proposed amendments to Rule 15b9-1 under the Exchange Act of 1934 would narrow the current exemption available to certain broker-dealers from membership of a national securities association if the broker-dealer is a member of a national securities exchange, carries no customer accounts and has annual gross income of no more than $1,000 that is derived from securities transactions effected otherwise than on a national securities exchange of which it is a member. The exemption was originally tailored to exchange specialists and other floor members that might need to utilize limited hedging or other off-exchange activities secondary to their floor-based business. The proposed amendments would also update the exemption that permits off-exchange transactions necessary to comply with the regulatory requirements preventing trade-throughs. The public comment period on the proposed rule amendment will last 60 days following its publication in the Federal Register.
UK Payment Systems Regulator Up and Running
The UK Payment Systems Regulator published the regulatory framework for payment systems in the UK which sets out the PSR’s approach to regulation of payment systems and related industry, work programme regulatory tools and guiding principles. The new PSR is fully operational as of April 1, 2015. Two market reviews were announced alongside the publication of the regulatory framework. The first review is into the ownership and competitiveness of payment systems infrastructure which will look into the ownership of a small number of banks of both BACS, Faster Payments Services and LINK payment systems and the central infrastructure for those systems, VocalLink. The second review is into the supply of indirect access to payment systems which is provided only by Barclays, HSBC, Lloyds and RBS. The PSR is seeking comments on the scope of the reviews with a view to finalizing the terms of reference for each review by the end of May at which time more detailed timetables will be available.
View the regulatory framework.
Launch of New UK Payments System Regulator
The Financial Conduct Authority published a press release relating to its November 2014 consultation paper on the Payment Systems Regulator, which is the new UK regulator that will regulate the largest UK payment systems. The press release states that any of the directions mentioned in the consultation that were to come into force on April 1, 2015 will not come into force until April 30, 2015. This is so that stakeholders have more time to consider the FCA’s final directions and views that are to be published in the FCA’s PSR policy statement before the end of March 2015.
View the FCA press release
Bank of England Publishes Annual Report on Supervision of Financial Market Infrastructures
The Bank of England published its annual report on the supervision of Financial Market Infrastructures which sets out the way in which the BoE has exercised its responsibilities in relation to recognized payment systems, CCPs and securities settlement systems over the past year. The report discusses the progress that has been achieved on issues including: (i) credit and liquidity risk; (ii) recovery and resolution; (iii) operational risk management; (iv) governance; and (v) disclosure. The report lists the forward-looking priorities that the bank intends to focus on in the next year, such as: (i) assessing the UK CCPs’ stress-testing practices; (ii) evaluating proposals on CCP recovery and resolution that may extend to other types of FMI; (iii) addressing the root causes of excess operational risk; and (iv) improving resilience against cyber-attacks.
View the report
Review of CCP Stress Testing
The International Organization of Securities Commissions and Committee on Payments and Market Infrastructures jointly announced that they have begun a review of CCP stress testing. The aim of the review is to identify how the Principles for Financial Market Infrastructures standards published jointly by IOSCO and the CPMI in 2012 are being implemented, and whether any further guidance is needed.
View the joint press release
HM Treasury Publishes Legislation in Preparation for Newly Formed Payment Systems Regulator Becoming Fully Operational
HM treasury published the Banking Act 2009 (Inter-Bank Payment Systems) (Disclosure and Publication of Specified Information) (Amendment) Regulations 2015. These Regulations widen the remit of information-sharing between the Bank of England and the Payment Systems Regulator, allowing the BoE to share information that it has obtained through its oversight of interbank payment systems with the PSR. The BoE will therefore no longer be limited to only share information with the PSR that is relevant to financial stability. On the same day, HM Treasury also published the Payment Services (Amendment) Regulations 2015. These regulations amend the Payment Services Regulations 2009 and transfer the supervision and enforcement functions on access to payment systems from the Competition Markets Authority to the newly formed PSR. Both regulations enter into force on April 1, 2015, the date on which the PSR becomes fully operational.
View the Regulations and Explanatory Memoranda
View the Regulations and Explanatory Memoranda 2
View the Regulations and Explanatory Memoranda 3
View the Regulations and Explanatory Memoranda 4
EU General Court Finds Against the European Central Bank’s CCP Location Policy
The EU General Court delivered its judgment on the UK Government’s challenge of the European Central Bank’s CCP location policy set out in the ECB’s Eurosystem Oversight Policy Framework. The EU General Court has annulled the Eurosystem Oversight Policy Framework in so far as it sets a requirement for CCPs involved in the clearing of securities to be located within the Eurozone. The policy’s aim was to prevent CCPs in the European Union but outside the Eurozone from being able to have access to ECB Euro settlement facilities. The outcome is that UK CCPs will have access to Euro settlement facilities with the ECB, as generally required under EMIR, without being forced to relocate their businesses.
View the judgment
European Banking Authority Consults on Technical Standards for Prudential Requirements for CSDs
The European Banking Authority launched a consultation on proposed draft Regulatory Technical Standards on the prudential requirements for central securities depositories. The EBA is required to prepare the RTS under the EU Regulation on Settlement and Central Securities Depositories, which aims to increase the safety and efficiency of securities settlement and settlement infrastructures. The EBA is consulting on three proposed draft RTS which cover: (i) capital requirements for CSDs; (ii) the additional risk-based capital surcharge applicable to CSDs carrying out ancillary banking activities; and (iii) the framework and tools for monitoring, measuring, managing and reporting of the credit and liquidity risks related to any ancillary banking activities offered by a CSD. The consultation closes on April 27, 2015. The EBA must submit the draft RTS to the Commission by June 18, 2015.
View the consultation
UK Legislation Implementing the EU Regulation on Settlement and Central Securities Depositories
UK legislation implementing part of the EU Regulation on Settlement and Central Securities Depositories was enacted. The Financial Markets and Insolvency (Settlement Finality) (Amendment) Regulations 2015 amend relevant UK legislation to reflect the change brought in by the EU Regulation that requires national regulators to notify the European Securities and Markets Authority of any designation of a payment or securities settlement system. In the past, such notifications were made to the European Commission. The UK designated national regulators for these purposes are the Bank of England and the Financial Conduct Authority.
View the UK legislation
Additional Benchmarks Brought Within UK Regulatory Perimeter
UK legislation was enacted to bring additional benchmarks within the UK regulatory perimeter. The additional benchmarks are ISDAFIX, Sterling Overnight Index Average, also known as SONIA, Repurchase Overnight Index Average, also known as RONIA, WM/Reuters London 4 p.m. Closing Spot Rate, London Gold Fixing, LBMA Silver Price and ICE Brent Index. The LIBOR benchmark was already subject to regulation. Bringing the additional benchmarks within the regulatory perimeter are a result of the initial recommendations on benchmarks of the Fair and Effective Markets Review. A Policy Statement was also published by the Financial Conduct Authority on March 10, 2015, on the seven new benchmarks it will be regulating and supervising. This includes the FCA's final rules amending Chapter 8 of the Market Conduct Sourcebook (Mar 8), which was originally designed for benchmarks determined through a submission process, such as LIBOR. The rules have now been adapted to the new benchmarks being brought into regulation, and in particular to benchmarks without submitters. The new rules also introduce perimeter guidance to identify persons that carry out the regulated activity of acting as benchmark submitters. The new legislation and FCA rules enter into force on April 1, 2015.
View the legislation and FCA Policy Statement
Launch of Global Legal Entity Identifier Foundation Website
The Global Legal Entity Identifier Foundation announced the launch of its new website. GLEIF was created by the Financial Stability Board and established the Legal Entity Identifier, a 20-digit alphanumeric code which is a common standard and a unique key made public that is to be used unambiguously to identify legal entities in the course of various activities such as financial transactions across different markets, products and regions.
View the new Website.
US Federal Reserve Issues "Strategies for Improving the US Payment System"
The US Federal Reserve issued "Strategies for Improving the US Payment System" which introduces a plan for collaborating with payment system stakeholders. The plan aims to enhance the efficiency of the US payment system and caters to large and small businesses, emerging payments firms, card networks, payment processors, consumers and financial institutions. The paper outlines the Federal Reserve’s intent to create a task force to identify a more effective approach to safer and faster payment capabilities. To further clarify the details on payment system improvement the Federal Reserve will host a webcast at 1:00 PM Eastern Time on January 29, 2015. The webcast will share views on the Federal Reserve’s vision for the future US payment system and plans for collaborating with stakeholders to achieve shared goals. In addition, a subsequent series of FedForum teleseminars on February 4 and 10 will present an overview of the strategies and a question-and-answer session.
Access to the webcast.
Registration for the FedForum events.
View the US Federal Reserve paper.
US-EU Financial Market Regulatory Dialogue Meeting
The participants of the US-EU Financial Market Regulatory Dialogue met to discuss key regulatory topics including the implementation of Basel III capital, leverage, derivatives reforms, benchmarks and developments on cross-border resolution. Amongst other issues, the Financial Stability Board’s proposals for an international minimum standard on total loss absorbing capacity were welcomed and EU participants raised concerns about the Volcker Rule’s effect on foreign funds. The participants included representatives of the European Commission, the European Securities and Markets Authority, the Securities Exchange Commission, US Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Commodity Futures Trading Commission. The next meeting will take place in Brussels, Belgium in July 2015.
View the joint US-EU Financial Market Regulatory Dialogue statement.