Shearman & Sterling LLP | Financial Regulatory Developments Focus
Financial Regulatory Developments Focus
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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.

  • Global Authorities Consult on Governance for OTC Derivatives Data Elements
    08/16/2018

    The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions have published a consultation paper on governance arrangements for OTC derivatives data elements other than the Unique Transaction Identifier and the Unique Product Identifier. Critical data elements are an important aspect of reporting derivatives transactions to a trade repository. The consultation paper proposes the key criteria for the CDE maintenance and governance, the different areas of CDE governance and governance functions and allocation of the governance functions to different bodies.

    Responses to the consultation should be submitted by September 27, 2018 using the dedicated response form, available through the links below.

    View the press release.

    View the consultation paper.
    TOPIC: Derivatives
  • Financial Stability Board Consults on Implementation of the Legal Entity Identifier
    08/16/2018

    The Financial Stability Board has launched a thematic peer review on implementation of the Legal Entity Identifier and is inviting feedback on implementation of the LEI at the same time. The objective of the LEI system is for unique identifiers to be held by all legal entities participating in financial markets across the globe. It is envisaged that the LEI system will lead to better data aggregation, enhance systemic risk monitoring and reduce costs to market participants.

    Using the peer review, the FSB will: (i) consider the approaches and strategies used by FSB members to implement the LEI, including its adoption for regulatory requirements; (ii) assess whether current levels and rates of LEI adoption are sufficient to support the ongoing and anticipated needs of FSB member authorities; (iii) identify the challenges in further advancing the implementation and use of the LEI; and (iv) if appropriate, make recommendations for addressing any challenges.

    Read more.
  • UK Government Releases Post-Brexit Draft Legislation for Deposit Protection
    08/15/2018

    HM Treasury has published draft Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018. The draft regulations are expected to be laid before Parliament in autumn 2018 and to come into force mostly on the day the U.K. withdraws from the EU. These draft regulations are part of HM Treasury's measures to onshore EU legislation under the provisions of the European Union (Withdrawal) Act 2018. The key changes proposed are:
    • transferring the power to review, adjust and set the coverage level from EU bodies to the Prudential Regulation Authority, with approval from HMT; and
    • removing the cooperation arrangement under which the U.K. Financial Services Compensation Scheme administers compensation payments to depositors at U.K. branches of EEA banks on behalf of EEA deposit guarantee schemes. A transitional provision will allow the FSCS to continue after Brexit to accept instructions and funds from EEA DGS should an EEA firm operating in the U.K. fail immediately before Exit Day.

    View the draft Regulations.

    View the explanatory guidance.
  • EU Implementing Regulations for Benchmark Regulation Published
    08/09/2018

    Two Commission Implementing Regulations supplementing the Benchmark Regulation have been published in the Official Journal of the European Union. The Benchmark Regulation, which took effect across the EU in January 2018, 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.

    Read more.
    TOPIC: Securities
  • UK Post-Brexit Secondary Legislation on Short Selling Published
    08/09/2018

    Draft U.K. secondary legislation has been published to onshore the EU Short Selling Regulation on the day the U.K. exits the EU. The draft Short Selling (Amendment) (EU Exit) Regulations 2018 (or U.K. SSRs) are expected to be laid before Parliament in Autumn 2018 and to come into force mostly on the day the U.K. withdraws from the EU. The draft U.K. SSRs are made under the provisions of the European Union (Withdrawal) Act 2018 to address failures of retained EU law relating to short selling to operate effectively and other deficiencies arising from Brexit.

    The explanatory guide to the U.K. SSRs states that changes for firms with shares admitted to trading on a U.K. venue should be minimal. The procedure for notifying U.K. instruments to the Financial Conduct Authority will be kept and instruments admitted to trading on U.K. venues will continue to have the same restrictions applied to them.

    Read more.
  • EU and UK Authorities Clarify Trading Obligation Expectations for Pension Schemes
    08/08/2018

    The European Securities and Markets Authority has published a further statement on the transitional exemption from the clearing obligation for pension scheme arrangements under the European Market Infrastructure Regulation and delegated regulations. Transitional provisions provide for PSAs to be exempt from the clearing obligation until August 16, 2018. There is no provision in EMIR that would allow for a further extension of this exemption period. It is proposed that this exemption will be further extended under the proposal to amend EMIR, known as EMIR Refit. ESMA issued a statement on July 3, 2018 stating that national regulators are expected not to prioritize "their supervisory actions towards entities that are expected to be exempted again in a relatively short period of time and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner."

    This new statement clarifies that ESMA does not expect national regulators to focus on any non-compliance by PSAs with the related trading obligation under the Markets in Financial Instruments Regulation. Financial counterparties that are exempt from the clearing obligation under EMIR are also exempt from the trading obligation under MiFIR. It is likely that the clearing obligation exemption will expire before it is extended under EMIR Refit and therefore the trading obligation exemption would also lapse.

    Read more.
    TOPICS: DerivativesMiFID II
  • UK Financial Conduct Authority Confirms it is Open to a Range of Booking Models for Brexit Preparations
    08/08/2018

    The U.K. Financial Conduct Authority has published a "Dear CEO" letter on firms' cross-border booking models in preparation for Brexit. In the letter the FCA reminds firms that where the firm is expanding its European presence, it must still be possible for the FCA to supervise the firm's U.K. business and firms must still meet their threshold conditions. However, unlike other EU regulators, the FCA is not stipulating specific requirements for booking models. Instead, the FCA states that it is "open to a broad range of legal entity structures or booking models. This includes those making use of back-to-back and remote booking, providing their associated conduct risks are effectively controlled and managed. Our starting point is therefore not to restrict business models but to understand the principles and practice involved and how the conduct risks that arise from them are managed."

    Read more.
  • Global Bodies Consult on Incentives to Centrally Clear OTC Derivatives
    08/07/2018

    A consultation paper on incentives to centrally clear OTC derivatives has been jointly published by the Financial Stability Board, the International Organization of Securities Commissions, the Basel Committee on Banking Supervision and the Committee on Payments and Market Infrastructures. The paper is part of the FSB's post-implementation evaluation of the effects of the G20 financial regulatory reforms. The consultation paper sets out the results of an evaluation of the reforms that have been implemented to incentivize central clearing of OTC derivatives, including mandatory clearing requirements, capital, liquidity and margin requirements, as well as the reforms to CCP resilience, recovery and resolution. The evaluation found that:
    • the changes observed in OTC derivatives markets are consistent with the G20 Leaders' objective of promoting central clearing as part of mitigating systemic risk and making derivatives markets safer.
    • the relevant post-crisis reforms, in particular the capital, margin and clearing reforms, taken together, appear to create an overall incentive, at least for dealers and larger and more active clients, to centrally clear OTC derivatives.
    Read more.
    TOPIC: Derivatives
  • Regulators Unveil Plans to Launch Global Financial Innovation Network
    08/07/2018

    12 international financial regulators and related organizations have announced the launch of the Global Financial Innovation Network. The announcement, which was accompanied by a consultation paper on the role and objectives of the GFIN, serves as part two of a whitepaper published earlier this year by the U.K. Financial Conduct Authority on the possibility of forming a "global sandbox." The GFIN, as proposed, would consist of three components: (i) information sharing and collaboration through a network of regulators; (ii) joint policy work and regulatory trials; and (iii) cross-border firm trials.

    The GFIN hopes to build upon existing information sharing agreements to allow information sharing to take place on a larger and quicker scale, which would allow regulators to fill information gaps related to innovation, technological trends and emerging issues. This would help FinTech firms navigate international regulations by providing a comprehensive forum through which to interact with multiple regulators. In addition, the GFIN aims to provide a space to encourage joint policy work and address areas of divergence between financial services regulators, particularly with respect to emerging technologies and legacy business models and regulatory frameworks. As envisioned, the GFIN would also facilitate cross-border trials of emerging technologies across global jurisdictions.

    Read more.
    TOPIC: FinTech
  • Upcoming Priorities for the Global FX Code
    08/06/2018

    The Global Foreign Exchange Committee has published a paper entitled: "The FX Global Code at One Year: a Look Back and a Look Ahead." The FX Global Code was published by the GFXC in May 2017. It superseded and substantively updated existing guidance for participants in FX markets previously provided by the Non-investment Products (NIPs) Code. The Code comprises a set of global principles of good practice for the FX market, covering a broad range of areas, including ethics, governance, execution, information-sharing, risk management, compliance, trade confirmation and settlement.

    The paper discusses the achievements of the GFXC and the way in which the Code has been received by market participants over the past year. These include increased awareness of and commitment to the Code, further integration of the Code into the business practices of FX market participants and evolution of the Code with changes in the FX market, in particular for transparency and disclosure.

    The GFXC's upcoming priorities are outlined in the paper. These include:
    • continuing the existing GFXC working groups - the disclosures working group and the cover and deal working group; and
    • establishing two new GFXC working groups - one on buy-side outreach and the other to further integration of the Code.

    View the paper.
  • Bank of England Establishes Enforcement Decision Making Committee and Appoints Members
    08/03/2018

    Following a consultation that ran between November 2017 and February 2018, the Bank of England has published a policy statement on the procedure and necessary revisions to existing policies and procedures required for the establishment of an Enforcement Decision Making Committee.

    The EDMC has been established as a response to a recommendation from HM Treasury arising from its review of enforcement decision-making at the U.K. financial regulators. HM Treasury had recommended the establishment of a functionally-independent decision-making committee composed of independent members with expertise suited to the Prudential Regulation Authority's regulatory focus. The BoE has gone beyond HM Treasury's original recommendation and, going forward, the EDMC will be the BoE's decision-making body in contested enforcement cases that relate to all areas in which the BoE has enforcement powers (that is, prudential regulation, financial market infrastructure, resolution and note issuances). It will ensure the necessary functional separation between the BoE's investigation teams and decision-makers.

    Alongside the Policy Statement, the BoE has published revised statements of policy and procedures reflecting the EDMC's establishment. These cover the EDMC's remit and operation and the selection, appointment, remuneration and governance of EDMC members. The BoE has also issued a press release announcing its appointment of six EMDC members. Members are appointed for renewable, fixed, three-year periods and cannot serve more than two consecutive terms.

    Read more.
    TOPICS: EnforcementPeople
  • UK Conduct Regulator Consults on Rule Alignments for EU Securitization Framework
    08/01/2018

    The U.K. Financial Conduct Authority has launched a consultation on proposed changes to its rules to ensure consistency with the provisions of the directly applicable EU Securitization Regulation (also known as the STS Regulation) and related amendments to the Capital Requirements Regulation, which take effect across the EU on January 1, 2019. This forthcoming EU legislation will introduce a new framework for simple, transparent and standardized securitizations, intended to make the EU securitization market function more effectively.

    Read more.
    TOPICS: FundsSecurities
  • UK Financial Conduct Regulator Proposes to Apply Principles and Conduct Rules to Payment Service Providers and Electronic Money Firms
    08/01/2018

    The U.K. Financial Conduct Authority has launched a consultation on general standards and communication rules for the payment services and e-money sectors.

    Payment Service Providers and e-money firms are authorized or registered under the Payment Services Regulations 2017 and Electronic Money Regulations 2011, respectively. The Payment Services Regulations 2017 brought certain of these firms within the scope of the FCA's rulemaking powers.

    Read more.
  • UK Conduct Regulator Reminds Firms of Obligations on Selling High-Risk Products to Retail Clients
    08/01/2018

    The U.K. Financial Conduct Authority has issued a statement on selling high-risk speculative investments to retail clients following the European Securities and Markets Authority's product intervention on contracts for difference products.

    ESMA issued decisions in March and June 2018 to temporarily prohibit the marketing, distribution or sale of binary options and to impose restrictions on the marketing, distribution or sale of CFDs to retail clients. In the CFD decision, ESMA had clarified that turbo certificates were outside the scope of the CFD restrictions. However, in its recently updated Q&A on its product intervention, ESMA acknowledges that turbo certificates have comparable features to CFDs, such as leverage.

    Read more.
  • Global Recommendations for Trading Venues to Manage Extreme Volatility
    08/01/2018

    The International Organization of Securities Commissions has published a report on mechanisms used by trading venues to manage extreme volatility and preserve orderly trading. Following its consultation earlier this year, IOSCO is making eight recommendations for trading venues and their regulators to consider when implementing, operating and monitoring volatility control mechanisms to preserve orderly trading.

    Read more.
  • US Office of the Comptroller of the Currency Begins Accepting National Bank Charters from FinTech Companies
    07/31/2018

    The U.S. Office of the Comptroller of the Currency announced that it would begin accepting national bank charter applications from non-depository FinTech companies that seek to engage in the business of banking.  In connection with the announcement, the OCC released a policy statement that outlines the OCC’s chartering authority with respect to non-depository FinTech companies, the OCC’s stated support for reasonable innovation, and the chartering standards and supervisory expectations applicable to such institutions.

    Read more.
    TOPIC: FinTech
  • US Treasury Publishes Report on Nonbank Financials, Fintech, and Innovation
    07/31/2018

    The U.S. Department of the Treasury released its report on Nonbank Financials, Fintech, and Innovation.  The FinTech report is the fourth in a series mandated by U.S. President Donald Trump’s Executive Order 13772 on Core Principles for Regulating the United States Financial System.

    Read more.
    TOPIC: FinTech
  • US Office of the Comptroller of the Currency Publishes Updated Business Combinations Booklet
    07/31/2018

    The U.S. Officer of the Comptroller     of the Currency released an updated version of the Comptroller’s Licensing Manual Business Combinations booklet.  The booklet, which was updated in November of 2017, has been revised to make certain technical corrections and process updates with respect to clarifications regarding the public notice and comment period and a change in the public comment calculation period.

    View full text of the revised booklet.
  • Final Draft EU Technical Standards on Securitization Risk Retention Requirements
    07/31/2018

    The European Banking Authority has published a final report and final draft Regulatory Technical Standards under the EU Securitization Regulation (or STS Regulation) on the risk retention requirements for originators, sponsors and original lenders. The Securitization Regulation requires, among other things, originators, sponsors or original lenders of a securitization to retain on an ongoing basis a material net economic interest in the securitization of at least 5 %. The final draft RTS specify in greater detail the risk retention requirement, including the modalities of retaining risk, the measurement of the level of retention, the prohibition of hedging or selling the retained interest and the conditions for retention on a consolidated basis.

    The final draft RTS have been submitted to the European Commission for endorsement. The final RTS will apply directly across the EU twenty days after publication in the Official Journal of the European Union.

    The Securitization Regulation, which will apply from January 1, 2019, has replaced the risk retention requirements in the Capital Requirements Regulation. Once the final RTS enter into force, the existing Commission Delegated Regulation ((EU) No 625/2014) on risk retention requirements, made under the Capital Requirements Regulation, will be repealed.

    View the final draft RTS.

    View the existing Delegated Regulation on risk retention requirements

    View details of the EBA's consultation on the draft RTS.
  • Final Draft EU Technical Standards on Homogeneity Conditions for STS Securitizations
    07/31/2018

    The European Banking Authority has published a final report and final draft Regulatory Technical Standards under the EU Securitization Regulation on the conditions for a securitization to be considered homogenous. Homogeneity is one of the requirements for a securitization to be classed as a simple, transparent and standardized securitization or STS securitization. Exposures related to STS securitizations will attract lower risk weightings for firms subject to the Capital Requirements Regulation. The new EU securitization framework will apply across the EU from January 1, 2019.

    Read more.
  • Final Draft EU Technical Standards on Home-Host Regulatory Cooperation Under the Revised Payment Services Directive
    07/31/2018

    The European Banking Authority has published a final report and final draft Regulatory Technical Standards under the revised Payment Services Directive on cooperation between national regulators in home and host states of a payment institution that operates cross-border in the EU. PSD2 took effect on January 13, 2018. The final report summarizes the feedback the EBA received to the proposed draft RTS and sets out the EBA's responses. The EBA confirms that it has made a number of the changes to the text of the final draft RTS as a result of the feedback.

    The final draft RTS specify the framework for cooperation between supervisors of payment institutions operating on a cross-border basis, including the method for cooperation and details of information that should be provided between regulators. The final draft RTS also specify the means, details and frequency of reporting that a host national regulator may request from payment institutions concerning activities carried out in its territory through agents or branches. The final draft RTS will further apply to the framework for cooperation, and for the exchange of information, between national regulators for electronic money institutions providing services cross-border in the EU.

    The EBA has submitted the final draft RTS to the European Commission for endorsement. The final RTS will apply across the EU twenty days after publication in the Official Journal of the European Union.

    View the final report and final draft RTS.
  • UK Payment Systems Regulator Reports on the UK Contactless Mobile Payment Sector
    07/31/2018

    The U.K. Payment Systems Regulator has published a Report setting out its understanding of the Contactless Mobile Payments sector, following information-gathering during 2016 and 2017. CMPs are in-store payments made by consumers, using apps installed on their mobile devices, usually using Near Field Technology for communication between the mobile device and the retailer's point-of-sale terminal and with payment security enabled via a "tokenization" process.

    The PSR conducted two calls for information in 2016 and 2017, to increase its understanding of:
    • whether the way CMPs operate and the way they are being offered in the U.K. potentially affects competition, innovation and the interests of people and organizations that use payment systems (and, if so, how); and
    • whether there were any restrictions affecting the provision of tokenization services.

    The Report explains how CMPs work from a functional and technical perspective, outlines the main participants and their respective roles, summarizes the PSR's consideration of particular issues and proposes next steps.

    Read more.
  • International Swaps and Derivatives Association Publishes ISDA 2018 US Resolution Stay Protocol to Facilitate Compliance with US Stay Regulations
    07/31/2018

    The International Swaps and Derivatives Association has published the ISDA 2018 U.S. Resolution Stay Protocol. The protocol was developed to facilitate compliance with regulations issued by the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency that require global systemically important banking organizations to include contractual stays on early termination rights within in-scope qualified financial contracts, including swaps and repurchase agreements.

    Adherence to the protocol will allow covered entities to comply with the U.S. stay regulations by amending in-scope QFCs to ensure that they are consistent with the limits on counterparties' exercise of default rights under Title II of Dodd-Frank and the Federal Deposit Insurance Act. The protocol will also limit counterparties' ability to exercise cross-default rights based on the insolvency or resolution of an affiliate of a covered entity.

    ISDA members and non-members may adhere to the protocol beginning from the second half of August 2018. ISDA also announced it would also publish frequently asked questions to provide market participants with additional background information on the protocol and the U.S. stay regulations.

    The first compliance date for the U.S. stay regulations is January 1, 2019.

    View the protocol.

    View ISDA's press release.

    View Shearman & Sterling's client alert regarding the U.S. stay regulations.
  • UK Financial Conduct Authority Proposes Changes to Rules Governing Peer-to-Peer Lending Platforms
    07/27/2018

    The Financial Conduct Authority has launched a consultation on new rules for loan-based crowdfunding platforms, also known as peer-to-peer lending platforms. The FCA implemented rules regulating FCA-authorized firms operating investment-based and loan-based crowdfunding platforms on April 1, 2014. Investment-based crowdfunding is governed by the Markets in Financial Instruments package and the Alternative Investment Fund Managers Directive, as transposed into U.K. law. The regime for P2P lending is a national one and is less detailed and prescriptive.

    The FCA began a post-implementation review of the crowdfunding sector and the applicable regimes in 2016. In the post-implementation review, the FCA identified that harm may be caused to investors as a result of poor business practices and due to the business models that some platforms have adopted. The consultation paper summarizes the FCA's findings from that review and sets out the FCA's proposals to change certain rules and guidance.

    Read more.
  • European Commission Requires Drafting Amendments to Proposed Technical Standards for Reporting of Securities Financing Transactions
    07/27/2018

    The European Commission has published a Communication announcing its intention to adopt, with amendments, the Regulatory Technical Standards and Implementing Technical Standards prepared by the European Securities and Markets Authority under the Securities Financing Transactions Regulation. ESMA submitted final draft RTS and ITS to the Commission in March 2017.

    The Commission has amended the draft RTS on the details of Securities Financing Transactions to be reported to Trade Repositories and the draft ITS on the format and frequency of reports on the details of SFTs to TRs. The draft RTS and ITS had contained wording to the effect that ESMA would have the power to endorse global unique trade identifiers for transactions or the global legal identifier system as it applies to the branch of an entity. This wording would have had the effect of delegating regulatory powers on potential future reporting requirements directly to ESMA, which is not possible under the legal framework for the European Supervisory Authorities. The Commission has made amendments to clarify that the Commission, rather than ESMA, has the responsibility to introduce changes to the reporting requirements, on the basis of a proposal by ESMA.

    Read more.
  • UK Regulator Consults on Changes to Definition of Default for Credit Risk
    07/27/2018

    The Prudential Regulation Authority has opened a consultation on proposals to implement the European Banking Authority's recent regulatory products on the definition of default in the Capital Requirements Regulation. The CRR risk quantification provisions set out that a default occurs when an obligor is past due more than 90 days on any material credit obligation to a firm, its parent or any of its subsidiaries. The materiality of the credit commitment is to be assessed against a threshold set by the national regulator according to its view of a reasonable level of risk.

    The EBA developed a roadmap of regulatory products that aim to reduce unwarranted variability in the risk weighted assets calculated using banks' Internal Ratings-Based models. Three of these products pertain to the definition of default: the Regulatory Technical Standards on the materiality threshold for credit obligations past due, the Guidelines on the application of the definition of default and the EBA Opinion on the use of the 180 days past due criterion.

    Read more.
  • Financial Action Task Force Publishes Report on Professional Money Laundering
    07/26/2018

    The Financial Action Task Force has published a report on professional money laundering. The report is intended to assist authorities to target professional money launderers and the structures that they set up and use to launder money and to disrupt the organizations of their criminal clients. PMLs are referred to by the FATF as "individuals, organisations and networks that are involved in third-party laundering for a fee or commission." PMLs specialize in providing professional money laundering services, such as locating investments or purchasing assets, establishing companies or legal arrangements, acting as nominees, recruiting and managing networks of cash couriers or money mules, providing account management services and creating and registering financial accounts. By providing detailed explanations of the roles performed by PMLs, the FATF aim to facilitate the identification and understanding of how PMLs operate. The report provides recent examples of financial organizations acquired by criminal operations or co-opted to aid money laundering and focuses on some of the common methods used to launder funds, such as trade-based money laundering, account settlement mechanism and underground banking.

    Read more.
  • UK Regulator Seeks Input on EU Packaged Retail and Insurance-based Investment Products Regulation
    07/26/2018

    The Financial Conduct Authority has issued a call for input on the Packaged Retail and Insurance-based Investment Products Regulation. Since January 1, 2018, the EU PRIIPs Regulation has required manufacturers of PRIIPs to prepare and publish a stand-alone, standardized Key Information Document for each of their PRIIPs. Those advising retail investors on PRIIPs, or selling PRIIPs to retail investors, must provide retail investors with a KID in good time before the transaction is concluded.

    The FCA is seeking input about the initial experience of: (i) those producing, advising on, or distributing PRIIPs and preparing and providing KIDs; and (ii) consumers using KIDs to decide whether to invest in these investment products. In addition, the FCA is asking for feedback on the scope of the PRIIPs Regulation, in particular, which instruments fall in or out of the scope of the requirements, and on practical aspects of certain cost and risk disclosure requirements.

    Feedback to the call for input should be provided by September 28, 2018. The FCA intends to publish a feedback statement in Q1 2019.

    View the call for input.
  • US Federal Reserve Board Launches New Consumer Protection Bulletin
    07/26/2018

    The U.S. Board of Governors of the Federal Reserve System launched the Consumer Compliance Supervision Bulletin.  The bulletin will be published by the Federal Reserve Board’s Division of Consumer and Community Affairs, and will provide high-level summaries of supervisory issues, highlight violations that have been identified, include practical guidance with respect to the management of consumer compliance risks and enhance transparency with respect to the Federal Reserve Board’s consumer compliance supervisory program.  The current issue of the bulletin includes content with respect to fair lending, unfair or deceptive acts or practices and regulatory and policy developments.

    View full text of the bulletin.
  • UK Payment Systems Regulator Will Review Supply of Card-Acquiring Services
    07/24/2018

    The U.K. Payment Systems Regulator has published for consultation its draft terms of reference for a planned market review into the supply of card-acquiring services in the U.K. Merchants that accept card payments from customers purchase card-acquiring services from specialist providers to enable card payments to be accepted and processed on their behalf. The market review is a response to concerns raised by stakeholders that the supply of these services may not be working well for some merchants and, ultimately, consumers.

    The market review will examine: (i) the nature and characteristics of card-acquiring services; (ii) the providers of these services and how their market shares have developed historically; (iii) how merchants buy card-acquiring services; (iv) the availability of credible alternatives to card-acquiring services for some or all merchants; and (v) how competition is working in the sector, including looking at issues around the fees merchants pay and the quality of service they receive.

    The PSR is inviting feedback on its draft terms of reference until September 14, 2018. The PSR intends to publish finalized terms of reference, including a timetable for the review, before the end of 2018.

    View the draft terms of reference for the review (MR 18/1.1).
  • UK Secondary Legislation Published to Align Ring-Fencing With Financial Sanctions Legislation
    07/24/2018

    The Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) (Amendment) Order 2018 has been made and will come into force on October 31, 2018.

    The Amendment Order amends the definition of a "core deposit" (set out in The Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014) for the purposes of the U.K. framework for the ring-fencing of retail from wholesale/investment banking. Under the U.K. framework, if a deposit is not a "core deposit," then carrying on the regulated activity of accepting deposits in relation to that non-core deposit can take place in the non-ring-fenced bank.

    Read more.
  • European Banking Authority Makes Policy Recommendations for Proposed Introduction of European Secured Notes
    07/24/2018

    The European Banking Authority has published a final report in response to a call for advice from the European Commission, in the context of the Commission's Capital Markets Union project, to help the Commission assess the case for introducing European Secured Notes, an additional instrument which would be available for institutions to gain funding on the capital markets, particularly infrastructure loans and loans to Small and Medium Sized Enterprises. ESNs are defined in the call for advice as "dual recourse financial instruments on an issuer's balance sheet applying the basic structural characteristics of covered bonds to two non-traditional cover pool assets - SME bank loans and infrastructure bank loans."

    The Commission asked the EBA to assess whether a dual recourse instrument, similar to covered bonds, may provide a useful funding option to banks engaged in lending to SMEs and infrastructure projects and to determine an appropriate EU framework and regulatory treatment for this new product.

    In the final report, the EBA: (i) assesses the business case for ESNs; (ii) analyzes the potential implications of issuances of ESNs on asset encumbrance; and (iii) considers the risk profile of SME loans and project finance. The EBA makes suggestions on the pool eligibility criteria and the structure and features of ESNs and on their potential regulatory treatment. The EBA makes five main policy recommendations on crucial aspects for the Commission to consider when possibly designing the legislative framework for ESNs. These relate to the structure, cover assets and regulatory treatment of SME ESNs, the EBA's reservations about introducing Infrastructure ESNs and the impact of ESNs on asset encumbrance.

    View the final report.
    TOPIC: Securities
  • UK White Paper Published on How the Withdrawal Agreement Will Be Implemented in the UK
    07/24/2018

    The U.K.'s Department for Exiting the EU has published a further Brexit white paper, entitled: "Legislating for the Withdrawal Agreement between the United Kingdom and the European Union." The paper describes the Bill that will implement the terms of the Withdrawal Agreement in the U.K. The Bill, which must pass before exit day (March 29, 2019) will only be introduced once Parliament has approved the finalized Withdrawal Agreement as required under the EU (Withdrawal) Act 2018. In the paper, the Government sets out how it envisages the Bill will implement the U.K.'s withdrawal and provides detail on those parts of the draft Withdrawal Agreement that have been agreed so far: citizens' rights, the implementation period and the negotiated financial settlement. The final provisions of the Bill will be subject to the final terms of the Withdrawal Agreement. The paper also sets out the procedures for Parliament's approval of the terms of the final Withdrawal Agreement.

    Read more.
  • UK Secondary Legislation Published for Post-Brexit Temporary Permissions Regime
    07/24/2018

    A draft of one of several pieces of U.K. legislation has been published, that will establish a temporary permissions regime after the U.K.'s withdrawal from the EU. Temporary permission will be available for EEA firms currently operating in the U.K. under financial services passports. The draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 are expected to be laid before Parliament in Autumn 2018 and to come into force mainly on the day after they are made, apart from some provisions that will apply on the day the U.K. withdraws from the EU. The draft Regulations also amend the Financial Services and Markets Act 2000 and related legislation to remove references to EEA passport rights.

    The draft Regulations have been prepared under the provisions of the EU (Withdrawal) Act 2018, which sets out an enhanced scrutiny procedure for secondary legislation used to amend certain retained EU law. This means that the draft Regulations will require the approval of both Houses of Parliament before they are made.

    Read more.
  • UK Legislation Published for a Post-Brexit Recognition Regime for CCPs
    07/24/2018

    A draft of the Central Counterparties (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 has been laid before Parliament. The finalized Regulations will come into force partly on the day after the day they are made and fully on the day the U.K. withdraws from the EU.

    The draft Regulations have been prepared using the power under the European Union (Withdrawal) Act 2018 to address failures of retained EU law to operate effectively or other deficiencies arising from the withdrawal of the U.K. from the EU. These draft Regulations deal with "onshoring" certain aspects of the European Market Infrastructure Regulation that relate to the regulatory framework for CCPs. The Bank of England wrote to non-U.K. CCPs in December 2017, outlining how it envisaged that non-U.K. CCPs will be recognized to provide services in the U.K. once the U.K. has withdrawn from the EU. Recognized status under EMIR enables third-country CCPs to provide clearing services to clearing members or trading venues established in the EU. The BoE explained in its letter that U.K. domestic law requirements for the recognition of non-U.K. CCPs would be substantially the same as the current requirements under EMIR, although references to international MoUs being in place would change, such that these must be established between third countries and relevant U.K. authorities.

    Read more.
  • UK Plans Temporary Designation Regime for Settlement Finality Designation Post-Brexit
    07/24/2018

    The U.K. Government has announced that it intends to legislate to ensure, after U.K. withdrawal from the EU, the continuation of U.K. settlement finality protections currently provided under the Settlement Finality Directive and implemented in the U.K. by the Financial Markets and Insolvency (Settlement Finality) Regulations 1999. The SFRs establish various insolvency carve-outs for designated market infrastructure systems and also legislate for finality of transactions within such systems. However, only EU systems are in scope.

    The SFD requires Member States to notify the European Securities and Markets Authority with information concerning the national systems (and the respective system operators) they have designated to be included within the scope of the SFD protections. Member States must also designate the national authorities that must be notified when insolvency proceedings are opened against a participant or a system operator. Under the protections afforded by the SFD, transfer orders which enter into designated systems within certain deadlines are guaranteed to be finally settled, regardless of whether the sending participant has become insolvent or transfer orders have been revoked in the meantime. Under the SFD, each Member State automatically recognizes systems that have been designated by other Member States.

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  • G20 Sets October 2018 Deadline for Financial Action Task Force to Clarify AML/CTF Standards For Crypto Assets
    07/23/2018

    The G20 Finance Ministers & Central Bank Governors have issued a communiqué following their meeting in Buenos Aires on July 21 - 22, 2018. Among other things, the communiqué requests that the Financial Action Task Force clarify, by October 2018, how its global anti-money laundering and counter-terrorist financing standards apply to crypto assets.

    The FATF's global standards (also known as the 40 Recommendations) promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. However, the FATF standards do not refer explicitly to crypto assets or the associated service providers and intermediaries, which creates uncertainty as to the scope of AML/CTF obligations that may apply to them.

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  • US Federal Reserve Vice Chairman Randal Quarles Sworn in for Second Term
    07/23/2018

    Randal Quarles, current Vice Chairman for Supervision, was sworn in for his second term as a member of the U.S. Board of Governors of the Federal Reserve System.  Vice Chairman Quarles’s term as Vice Chairman for Supervision ends in 2021, while his term as a member of the Federal Reserve Board ends in 2032.

    View full text of the Federal Reserve Board press release.
    TOPIC: People
  • UK Proposals for a Register of Beneficial Ownership for Foreign Entities
    07/23/2018

    The U.K.'s Government Department for Business, Energy & Industrial Strategy has launched a consultation on a draft Bill that would introduce a register of beneficial owners for overseas legal entities that own U.K. property. Since April 6, 2016, the U.K. has required U.K. companies, limited liability partnerships and societates europaeae to establish and maintain a register of persons with significant control over them and since June 30, 2016 and those entities have been required to file such information with Companies House where it is publicly available on the People with Significant Control register.

    Currently, information about overseas owners of land or property is often limited to the entity's name and territory of incorporation and it is unclear who ultimately owns and/or controls the entity. The aim of the draft Bill is to prevent and combat the use of land in the U.K. by overseas entities for the purposes of laundering money or investing illicit funds.

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  • Five EU Banks Fined for Issuing Credit Ratings Without Authorization
    07/23/2018

    The European Securities and Markets Authority has fined five EU banks for issuing credit ratings without being authorized to do so by ESMA. The Credit Rating Agencies Regulation requires firms to register with ESMA as a Credit Rating Agency before issuing credit ratings to ensure that such ratings are independent, objective and of adequate quality.

    ESMA found that the banks had each issued credit research to their clients that included shadow ratings and opinions. ESMA deemed that these aspects of the reports amounted to a credit rating as defined in the CRA Regulation. None of the five banks have been authorized by ESMA under the CRA Regulation, nor have any of them applied for such authorization.

    The banks have a right of appeal to the Board of Appeal of the European Supervisory Authorities.

    View ESMA's press release and decision notices.
  • UK Working Group Outlines Risk Mitigation Considerations for Bond Market Participants During Transition From LIBOR
    07/23/2018

    The U.K. Working Group on Sterling Risk-Free Reference Rates has published a paper to raise awareness among market participants of some of the current market uncertainties surrounding issuance of long-dated bonds referencing LIBOR. The Working Group is tasked with helping to bring about broad-based transition to the Sterling Overnight Index Average rate by end-2021 across Sterling bond, loan and derivative markets. SONIA has been selected as the preferred alternative risk-free rate for Sterling and, among other work, the Working Group is in the process of developing market conventions for SONIA-linked bonds. A key milestone for the Working Group will be its publication, later in 2018, of best practice for referencing SONIA in bond markets.

    In the paper, the Working Group outlines some of the risks faced by bond market participants who are continuing to issue, offer and purchase new Sterling bonds referencing LIBOR, in particular where those bonds are long-dated. "Long-dated" refers to bonds set to mature beyond the end of 2021, when banks' commitments to submit data for purposes of LIBOR are due to end. The Working Group suggests certain steps market participants could take to mitigate some of the risks arising where LIBOR continues to be referenced in new Sterling bonds issued in the interim period before market conventions and infrastructure for referencing alternatives to LIBOR are fully developed.

    View the paper.
  • Bank of England Confirms its Renewed Real-Time Gross Settlement System Can Interface With DLT
    07/23/2018

    The Bank of England has published the outcomes from a "Proof of Concept" it ran to understand how its renewed Real-Time Gross Settlement service could be capable of supporting settlement in systems operating on innovative payment technologies, such as those built on Distributed Ledger Technology. The BoE has operated the RTGS service since 1996 to provide a safe and reliable means of settling high-value cash payments in real time in sterling central bank money. The BoE published a blueprint for renewal of the RTGS in May 2017, setting out how it proposed to overhaul the system to ensure higher resilience, broader access, wider interoperability, improved user functionality and strengthened end-to-end risk management of the high-value payment system.

    Read more.
  • UK Law Commission Seeks Input on Proposals for Reform of Anti-Money Laundering and Counter-Terrorism Financing Law in England and Wales
    07/20/2018

    The Law Commission has published a substantial consultation paper entitled "Anti-Money Laundering: the SARs Regime," seeking views on proposals to reform the law of England and Wales governing anti-money laundering. In particular, the report considers issues around Suspicious Activity Reports, which are the mechanism by which the private sector make disclosures relating to money laundering and terrorism financing.

    The Law Commission has identified a number of legal difficulties that arise from the current regime and, following extensive fact-finding meetings with stakeholders, it has also identified a number of issues in the current regime that are causing particular practical difficulties. In the consultation paper, the Law Commission: (i) identifies the most pressing problems and proposes provisional solutions to improve the current regime; (ii) consults on reforming the consent regime within the Proceeds of Crime Act 2002 (POCA), which sets out the process whereby an individual who suspects that they are dealing with the proceeds of crime can seek permission to complete a transaction by disclosing their suspicion to the U.K. Financial Intelligence Unit of the National Crime Agency; and (iii) seeks to generate and consider ideas for long term reform.

    Read more.
  • UK Conduct Regulator Confirms Policy on Recognizing Industry Codes of Conduct in Unregulated Markets
    07/20/2018

    The U.K. Financial Conduct Authority has published a Policy Statement outlining its final policy and rule amendments on its approach to recognizing industry codes of conduct in unregulated markets, including the process and criteria for doing so. In the FCA's view, industry codes of conduct can be useful in helping firms to communicate what is expected of individuals to meet their conduct obligations under the Senior Managers and Certification Regimes. The SM&CR, which currently only applies to banks, credit unions, building societies and large investment firms (including EEA branches), will be extended to insurers from December 2018 and to all other FCA-regulated firms from December 2019.

    The FCA consulted in November 2017 on proposals to formally recognize industry codes of conduct in markets that are outside the regulatory perimeter and to publish a list of recognized industry codes on its website. The consultation set out the criteria to be met for recognition of industry codes and proposed that recognition would apply for a renewable period of three years.

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  • European Banking Authority Publishes Final Revised Pillar 2 Guidelines
    07/20/2018

    Following a consultation between October 2017 and January 2018 on a package of revisions to certain of its Guidelines, the European Banking Authority has published three final reports and revised Guidelines aimed at strengthening the Pillar 2 framework.

    The revised Guidelines have been prepared in line with the EBA's April 2017 Roadmap for revisions of the Pillar 2 framework, to keep the SREP Guidelines that were published in December 2014 (and in force from January 2016) up to date with respect to the EU and international standards. The EBA also aims to promote best supervisory practices and address issues identified in the EBA's ongoing work on assessment of supervisory convergence.

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  • Upcoming Changes to the EU Single Resolution Board's Composition
    07/20/2018

    The EU Single Resolution Board has announced that Sr. Mauro Grande, Board Member and Director of Resolution Strategy and Cooperation, intends to leave his position. Sr. Grande has been with the SRB since its inception in March 2015. Sr. Grande will vacate the position once a successor is appointed, which is expected in the next few months. The European Commission and the SRB have jointly published a vacancy notice and applications for the position can be made until September 12, 2018.

    View the SRB's announcement.
    TOPIC: People
  • UK Conduct Regulator Outlines Scope of Digital Regulatory Reporting Pilot
    07/20/2018

    The U.K. Financial Conduct Authority has published the terms of reference (dated June 2018) for the pilot phase of its Digital Regulatory Reporting project. The FCA is working with the Bank of England in the RegTech sphere to explore ways of using technology to link regulation, compliance procedures and firms' policies and standards together with firms' transactional applications and databases.

    The FCA published a Call for Input in February 2018 following a TechSprint in November 2017, at which a 'proof of concept' was achieved, showing that it was feasible to make regulatory reporting requirements machine readable and executable. Using this "Digital Regulatory Reporting" would allow firms to map their regulatory requirements directly to the data that they hold. Potential benefits include automated, straight-through processing of regulatory returns, greater accuracy in data submissions and faster implementation of changes in regulatory requirements, as well as cost reduction and improvements to competition.

    Read more.
    TOPIC: FinTech
  • European Banking Authority Responds to Caius Capital LLP's Challenge Against Regulatory Capital Treatment of UniCredit CASHES
    07/20/2018

    The European Banking Authority has published a response following allegations by Caius Capital LLP that UniCredit S.p.A.'s regulatory capital treatment in respect of a 2008 issuance of convertible and subordinated hybrid equity-linked securities (CASHES), which had been sanctioned by regulators including the European Central Bank, was incorrect. On May 3, 2018, Caius wrote a letter to the EBA, asking it to open an investigation for a breach of EU law on the basis that the structure of the transaction called into question the eligibility of ordinary shares underlying the CASHES as CET1 capital under the EU Capital Requirements Regulation. Caius has since published further letters restating and expanding upon its arguments that a portion of UniCredit's regulatory capital currently recognized as CET1 under the EU rules is ineligible for such classification.

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  • Financial Action Task Force Reports to G20 and Financial Action Task Force' US Presidency Announces Priority Work for 2018-2019
    07/19/2018

    The Financial Action Task Force has published its report to the G20 Finance Ministers and Central Bank Governors. The report gives an overview of recent FATF work and its proposed next steps in its current workstreams. The United States takes over the FATF Presidency for the period July 2018 to June 2019 and has separately published a document summarizing its priority and other initiatives for the duration of its presidency.

    Read more
  • EU Consultation on Revised Guidelines on Periodic Reporting by Credit Rating Agencies
    07/19/2018

    The European Securities and Markets Authority has launched a consultation on proposed revised Guidelines on periodic reporting by credit rating agencies. Under the EU Credit Rating Agencies Regulation, ESMA is responsible for direct supervision of EU CRAs registered with it. ESMA wishes to update its existing Guidelines, first published in 2015, to better reflect ESMA's supervisory powers and duties. In particular, ESMA does not consider that the current approach of determining reporting requirements according supervisory fees matches its risk-based approach to supervision. ESMA is proposing to establish reporting categorizations for CRAs as well as reporting calendars based on reporting categorization. Furthermore, ESMA is proposing to standardize the reporting templates and to provide additional reporting instructions.

    The consultation closes on September 26, 2018. ESMA intends to publish the Final Report on the Guidelines before the end of 2018.

    View the consultation.
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