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.

  • UK Financial Conduct Authority Publishes Its Final Approach to Authorization

    The Financial Conduct Authority has published its final document, entitled "FCA Mission: Approach to Authorisation," explaining the purpose of authorization and the FCA's approach to it. The paper sets out details of the FCA's approach to: (i) evaluating whether firms meet the requisite Threshold Conditions and assessing whether individuals are "fit and proper"; (ii) how the FCA uses authorization to promote competition; and (iii) revoking authorization.

    Read more.
  • EU Court Rules That the UK Can Unilaterally Revoke its Brexit Notice

    The Court of Justice of the European Union has ruled that the U.K. is able to unilaterally revoke its notice of intention to withdraw from the EU. Any such revocation could only be made before the draft Withdrawal Agreement entered into force or, if there is no agreement, expiration of the two-year period since the withdrawal notification was made or any extension of that two-year period in accordance with Article 50 of the Treaty on the European Union. The revocation could also only be made after a revocation decision was made by the U.K. according to its constitutional requirements.

    The CJEU decision means that the U.K. Parliament has three options to consider on Brexit: remain in the EU, accept the draft withdrawal agreement negotiated by the U.K. Government or leave the EU on March 29, 2019, without an agreement (known as a "hard Brexit").

    Read more.
  • UK Conduct Authority Consults on Permanent Product Intervention Measures

    The U.K. Financial Conduct Authority has launched two consultations proposing to prohibit the sale, marketing and distribution of binary options to retail consumers and to restrict the sale, marketing and distribution of contracts for difference and similar products to retail customers. Both CFDs and binary options are considered to have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by providers and distributors of the products. The FCA's product intervention powers under the Markets in Financial Instrument Regulation and, where the FCA has gone beyond those powers, the Financial Services and Markets Act 2000, allow it to impose prohibitions or restrictions on certain financial instruments, financial activities or practices to address a significant investor protection concern. The proposed rules would be permanent and would replace the temporary measures introduced, and subsequently renewed, by the European Securities and Markets Authority earlier this year.

    Read more.
  • UK Ring-Fencing Order Brings Full Regime Into Force From January 2019

    The U.K. Financial Services (Banking Reform) Act 2013 (Commencement No. 12) Order 2018 has been made. The Order brings into force, from January 1, 2019, those provisions of the Financial Services (Banking Reform) Act 2013 on ring-fencing that are not already in force, including the prohibition on ring-fenced bodies to carry on excluded activities and provisions on group restructuring. The U.K. ring-fencing laws require U.K. banks which hold more than £25 billion in core deposits and banking groups whose members hold an average core deposit of more than £25 billion to separate their core retail banking business from their investment banking business. Restrictions will limit the products that a ring-fenced bank can offer and where it can conduct business. In particular, a ring-fenced bank will not be able to own a banking subsidiary or branch which is established outside of the EEA.

    View the Order
  • UK Regulations Implementing the EU Securitization Regulation Made

    The U.K. Securitization Regulations 2018 have been laid before Parliament and will come into force on January 1, 2019. The Regulations implement the EU Securitization Regulation (also known as the STS Regulation) into U.K. law.

    The EU Securitization Regulation provides the criteria for identifying which securitizations will be designated as simple, transparent and standardized securitizations, a system to monitor the application of those criteria and common requirements on risk retention, due diligence and disclosure. It also allows (but does not require) originators, sponsors and securitization special purpose entities to use third-party firms to assess whether a securitization meets the STS criteria, provided that those firms are authorized by the relevant national regulator. Originators, sponsors or original lenders of a securitization will be required to retain on an ongoing basis a material net economic interest in the securitization of at least 5%. Related amendments to the Capital Requirements Regulation set out preferential regulatory treatment for investors, in particular, for bank investors, of their exposures to securitizations that are deemed to be STS securitizations.

    Read more.
  • UK Draft Regulations on Credit Ratings in Preparation for Brexit

    HM Treasury has laid before Parliament the draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019 to onshore the EU Credit Rating Agencies Regulation for Brexit. This follows the publication of related explanatory information on October 8, 2018.

    The EU CRA Regulation regulates CRAs established in the EU. The European Securities and Markets Authority directly supervises EU CRAs registered with it under the CRA Regulation. The CRA Regulation provides that banks, investment firms, insurers, reinsurers, management companies, investment companies, alternative investment fund managers and CCPs may only use credit ratings for certain regulatory purposes if a rating is issued by: (i) an EU CRA registered with ESMA; (ii) a third-country CRA under the endorsement regime; or (iii) a third-country CRA under the equivalence/certification regime. Endorsement allows credit ratings issued by a third-country CRA to be used for regulatory purposes in the EU, provided that the rating has been endorsed by an EU CRA. The equivalence/certification regime allows credit ratings issued by a third-country CRA in relation to a third-country entity or financial instrument to be used in the EU for regulatory purposes. It does not cover ratings issued by a third-country CRA for an EU entity or a financial instrument issued in the EU.

    Read more.
  • European Supervisory Authorities Advocate Proportional Approach to Compliance With Certain Aspects of the Securitization Regulation

    The European Supervisory Authorities have issued a joint statement addressing two issues arising from the Securitization Regulation. The Securitization Regulation will apply directly across the EU from January 1, 2019 to securities issued under securitizations on or after January 1, 2019. Securitizations issued before that date may be referred to as STS securitizations, provided that they meet certain conditions.

    The first issue addressed in the joint statement relates to disclosure requirements for EU securitizations. The Securitization Regulation requires originators and sponsors to notify ESMA of any securitization that meets the "Simple, Transparent and Standardized" criteria. ESMA will maintain a list of all such securitizations on its website. Securitization special purpose entities, originators and sponsors of a securitization will be required to make certain information available via a securitization repository to holders of a securitization position, to the national regulators and, upon request, to potential investors. The European Securities and Markets Authority and the European Commission still have to address a number of market concerns on the proposed ESMA disclosure templates (that will be introduced as Technical Standards under the Regulation) as part of these transparency requirements. This is a process that will not be concluded by January 1, 2019.

    Read more.
  • Draft UK Legislation to Onshore the EU Reorganization and Winding Up Directives Published in Preparation for Brexit

    HM Treasury has published a draft statutory instrument to onshore further EU financial services legislation in preparation for Brexit - the draft Credit Institutions and Insurance Undertakings Reorganization and Winding Up (Amendment) (EU Exit) Regulations 2018. An explanatory memorandum has also been published. HM Treasury has prepared the draft SI using powers granted to it under the EU Withdrawal Act 2018 to address failures of retained EU law to operate effectively or other deficiencies arising from the U.K. leaving the EU.

    The draft SI will onshore the EU Credit Institutions (Reorganisation and Winding Up) Directive and certain aspects of Solvency II. These Directives establish EEA frameworks for the reorganization and winding up of EEA banks, building societies, credit unions and insurers. They were transposed into U.K. law in the Insurers (Reorganization and Winding Up) Regulations 2004 (S.I. 2004/353), the Credit Institutions (Reorganization and Winding Up) Regulations 2004 (S.I. 2004/1045), and the Insurers (Reorganization and Winding Up) (Lloyd's) Regulations 2005 (S.I. 2005/1998).

    Read more.
  • Proposed Exemption From EU Margin Obligations for OTC Derivatives Novated to EU Counterparties in Preparation for a "No Deal" Brexit

    The Joint Committee of the European Supervisory Authorities has published a final report and final draft Regulatory Technical Standards to amend the existing RTS on margin requirements for uncleared OTC derivative contracts. The ESAs are proposing the introduction of a 12-month exemption from the margin exchange obligations to facilitate the novation of uncleared OTC derivative contracts to EU counterparties in the event of a "no deal" Brexit. The European Market Infrastructure Regulation requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. The RTS prescribe required margin amounts to be posted and collected and the methodologies by which the minimum amount of initial margin and variation margin should be calculated, as well as listing securities eligible as collateral, such as sovereign bonds, covered bonds, some securitization instruments, corporate bonds, gold and some equities. The variation margin requirements have applied to all counterparties since March 1, 2017.

    Read more.
  • European Commission Publishes Commission Delegated Regulation on the Electronic Central Register Under Payment Services Directive

    The European Commission has adopted Regulatory Technical Standards on the development, operation and maintenance of the electronic central register and access to the information it contains under the Payment Services Directive 2015, known as PSD2. The register will contain details of authorized payment institutions, certain exempt persons and their agents and it will identify the payment services for which each payment institution is authorized or exempt person is registered. PSD2 took effect on January 13, 2018. The electronic central register established by these RTS will be the responsibility of the European Banking Authority. It is intended that these RTS, once published in the Official Journal of the European Union, will be binding and directly applicable in all Member States from twenty days after publication.

    View the Commission Delegated Regulation.
  • UK Payment Systems Regulator Consults on Brexit-Related Changes to Onshore Regulatory Technical Standards Under the Interchange Fees Regulation

    The U.K. Payment Systems Regulator has launched a consultation on its proposals to onshore the Regulatory Technical Standards supplementing the EU Interchange Fee Regulation to ensure the RTS can still operate effectively once the U.K. has left the EU. The consultation will primarily be relevant for card schemes subject to the IFR, parties contracting with card schemes and/or processing entities (e.g. issuers, acquirers) and third-party card payment processors.
    The PSR is empowered by HM Treasury, under the Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018, to correct deficiencies in the RTS and to maintain them after exit day. The RTS set out detailed requirements for payment card schemes and processing entities, to ensure there is the requisite level of independence in accounting, organization and decision-making processes. The PSR proposes to amend the RTS in line with the draft Interchange Fee (Amendment) (EU Exit) Regulations 2018, published by HM Treasury on November 16, 2018 to onshore the IFR. The PSR's consultation paper includes a draft of the Technical Standards (Interchange Fee Regulation) (EU Exit) instrument 2019.
    Comments on the consultation are invited by December 17, 2018. The PSR intends that the finalized version of the EU Exit instrument will take effect on exit day in the event of a no deal scenario.
    View the consultation paper (PSR CP 18/3).
    View details of the draft Interchange Fee (Amendment) (EU Exit) Regulations 2018.
  • Basel Committee on Banking Supervision Agrees Next Steps for Basel Standards

    Central bankers and banking supervisors from over eighty jurisdictions met this week in Abu Dhabi, United Arab Emirates to discuss a range of policy and supervisory topics.

    On November 26-27, 2018 there was a meeting of the Basel Committee on Banking Supervision at which it was agreed that a consultation would take place next year to discuss a framework to consolidate the Committee's standards into a single integrated structure. Moreover, a number of items were agreed:
    • A set of targeted revisions to the market risk framework which is due to be implemented by January 1, 2022.
    • A consultation on potential enhanced disclosures to reduce bank window-dressing behaviour related to leverage ratio will be pursued. The Basel Committee issued a statement in October declaring unacceptable the alleged tendency in banks to engage in so-called window-dressing by temporarily reducing transaction volumes around key reference dates, which has supposedly the effect of allowing banks to report and publicly disclose better leverage ratios.
    • A set of revisions to the Pillar 3 disclosure framework will be published in December.
    • A report will be published in December setting out the range of bank, regulatory and supervisory cyber-resilience practices across jurisdictions.

    View the press release.

    View details of the Basel Committee's consultation on the revised market risk framework.
  • UK Treasury Policy on "In Flight" EU Legislation in Preparation for a "No Deal" Brexit

    Following the introduction to Parliament on November 22, 2018 of the Financial Services (Implementation of Legislation) Bill, HM Treasury has published a Policy Note on the Bill. The Bill gives HM Treasury, in a Brexit no deal scenario, powers to implement and make amendments to a specified list of "in flight" financial services legislation. The Bill covers EU financial services legislation which is proposed or published but that is out of scope of the European Union (Withdrawal) Act 2018 because it will not be operative on or before exit day. Only legislation with an implementation date falling in the two years after exit is covered. The Bill sets out a list of the legislation that is covered, namely:
    • the settlement discipline regime under the Central Securities Depositories Regulation (Articles 6 and 7);
    • the Delegated Cash Penalties Regulation;
    Read more.
  • UK Financial Conduct Authority Reports on Cyber Security Resilience in Financial Services

    The Financial Conduct Authority has published a report entitled "Cyber and Technology Resilience: Themes from cross-sector survey 2017-2018." The FCA compiled the report by requesting 296 firms during 2017 and 2018 to provide a self-assessment of their cyber and technological capabilities, focusing on governance, delivery of change management, managing third-party risks and the effectiveness of cyber defenses. The FCA analyzed the responses and considered data from firm's responses to recent operational incidents to produce the report.

    Read more.
  • UK Conduct Regulator Publishes Second Consultation on Brexit-Related Changes to Its Rulebook and Binding Technical Standards

    The U.K. Financial Conduct Authority has published a second consultation on proposed changes to the FCA Handbook and guidance to ensure a functioning legal and regulatory framework for financial services in the event of a "no-deal" scenario whereby the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement in place and there is consequently no transitional period for firms. The proposed amendments will not take effect on exit day if the U.K. enters into a transitional period.

    The consultation includes the FCA's further proposals in relation to those Binding Technical Standards that it has been empowered by HM Treasury to amend prior to Brexit and to maintain afterwards. Since the FCA's first consultation on Brexit-related Handbook changes in October 2018, HM Treasury has published further policy notes and/or financial services "onshoring" statutory instruments with proposed amendments to retained EU law. Many of the FCA's proposals on the BTS are consequential in nature and follow the amendments proposed in the statutory instruments.

    Read more.
  • Financial Stability Board Appoints new Chair and Vice Chair

    The Financial Stability Board has announced the appointment of Randal K. Quarles (Governor and Vice Chairman for Supervision at the U.S. Federal Reserve System) as its new Chair and Klaas Knot (President of De Nederlandsche Bank) as its Vice Chair for a three-year term starting on December 2, 2018.  Klass Knot will succeed Randal K. Quarles as Chair on December 2, 2021 for the next three-year term.

    The current FSB Chair, Mark Carney, will step down on December 1, 2018 after seven years of leadership. 

    View the press release
    TOPIC: People
  • UK Parliamentary Committee Launches Inquiry Into Operational Resilience in the Financial Services Sector

    The U.K. Treasury Committee has announced the launch of a new Inquiry into IT failures in the financial services sector. The Inquiry has been launched in response to recent IT failures at a number of financial institutions that have led to consumers being unable to access their bank accounts or becoming subject to fraud.

    The Committee will assess the causes and consequences of these recent IT failures. Among other things, the Committee will consider the extent to which such incidents are becoming more frequent, sources of concentration risk in the financial sector, the impact of legacy IT systems, the effect of outsourcing on operational resilience, best practices in responding to operational incidents and whether the U.K. regulators are able to regulate firms' capabilities for responding to such incidents.

    Written submissions can be made to the Committee by January 18, 2019. The Committee will also appoint a special advisor to provide policy advice to the Committee on the issues. Individuals interested in the role should respond to the call for Expressions of Interest.

    View the announcement.
  • European Supervisory Authority Public Statement on Post-Brexit Temporary Recognition for UK CCPs if No UK-EU Deal

    The European Securities and Markets Authority has issued a public statement entitled "Managing risks of a no-deal Brexit in the area of central clearing."  In the statement, ESMA confirms that its Board of Supervisors supports continued access to U.K. CCPs by EU market participants, to limit the risk of disruption in central clearing and to avoid negatively impacting EU financial market stability following the U.K.'s exit from the EU. This would appear likely to take effect pursuant to a temporary or interim equivalence and/or Qualifying CCP determination under European Market Infrastructure Regulation and the Capital Requirements Directive in respect of the U.K. and its CCPs, effective on Brexit.

    Read more.
  • UK Draft Legislation to Onshore EU Packaged Retail and Insurance-Based Investment Products for Brexit

    HM Treasury has published a draft version of the Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019. The EU PRIIPS Regulation requires a standardized disclosure document (called a Key Information Document or KID) to be provided when packaged investment or insurance-based investment products are sold to retail investors.

    The draft Regulations correct deficiencies in the U.K. Packaged Retail and Insurance-based Investment Products Regulations 2017 and in the directly applicable EU PRIIPS Regulation (and its secondary legislation) to be retained on Brexit. The draft Regulations will primarily be relevant for firms that manufacture, sell or advise on retail investment products that fall within the scope of the PRIIPs Regulation. This includes, but is not limited to, asset managers, insurers and investment advisors.

    Read more.
  • UK Prudential Regulator Proposes Minor Policy Change for Systemic Risk Buffer

    The U.K. Prudential Regulation Authority has published a consultation paper entitled "The systemic risk buffer: Updates to the Statement of Policy," proposing minor updates to its Statement of Policy, "The PRA’s approach to the systemic risk buffer." The consultation is relevant to "SRB institutions," which are: (i) ring-fenced bodies within the meaning in the Financial Services and Markets Act 2000; or (ii) large building societies that hold more than £25 billion in deposits (where one or more of the account holders is a small business) and shares (excluding deferred shares).
    The PRA proposes to amend the Statement of Policy to:
    • remove the statement that the PRA’s approach to reviewing the SoP every two years is mandated by the SRB regulations;
    • replace references to the PRA's April 2018 consultation, "The PRA’s methodologies for setting Pillar 2 capital," with references to the finalized Statement of Policy that was subsequently published; and
    • include references to the PRA's Supervisory Statement, "UK leverage ratio framework," that was recently updated to apply an additional leverage ratio buffer rate to SRB institutions.
    As the proposals are of only a minor nature, the consultation period is short and comments on the consultation paper are invited by December 6, 2018.
    View the consultation paper (PRA CP 29/18).
    Return to main website.
  • First EU Blockchain Industry Roundtable

    The European Commission has published a press release on the outcome of the first EU Blockchain Industry Roundtable, which took place on November 20, 2018. The press release notes the establishment of the "International Association for Trusted Blockchain Applications" that will be open to any firm that wishes to contribute to the use of blockchain and distributed ledger technologies in the EU. This new Association will work with the European Commission and EEA states that are part of the European Blockchain Partnership to support interoperability, develop specifications and promote standards and regulatory convergence in this area. The European Blockchain Partnership was established earlier this year and has been signed up to by Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the U.K.

    View the press release.

    View details of the European Blockchain Partnership.
    TOPIC: FinTech
  • UK Sanctions and Anti-Money Laundering Act 2018 Sanctions Provisions Brought Into Force

    The Sanctions and Anti-Money Laundering Act 2018 (Commencement No.1) Regulations 2018  were made on November 21, 2018, bringing into force the majority of the sanctions provisions of the Act with effect from November 22, 2018.

    The Act's provisions empower the U.K. Government to make sanctions regulations to be imposed, where appropriate, to comply with United Nations obligations or other international obligations, to further the prevention of terrorism, for the purposes of national security or international peace and security, or to further foreign policy objectives. The Act also empowers the U.K. Government to create, amend and update regulations for the detection, investigation and prevention of money laundering and terrorist financing and for the purposes of implementing standards published by the Financial Action Task Force relating to combating threats to the integrity of the international financial system.

    The Act received Royal Assent and came partly into force on May 23, 2018. Provisions in force from November 22, 2018 are:
    • sections 1 to 31;  
    • sections 33 to 48;  
    • sections 57 and 58;
    • section 59(4) (to the extent that it relates to Schedule 3, paragraphs 1 to 7 and sub-paragraphs 8(1) to 8(3)); and
    • Schedule 1.

    The remaining Provisions of the Act that will be brought into force at a later date include the provisions related to anti-money laundering.

    View the Commencement Regulations (SI 2018/1213).

    View the Sanctions and Anti-Money Laundering Act 2018.
  • UK Government Publishes Guidance on Proposals to Onshore Primary Markets Legislation for Brexit

    HM Treasury has published explanatory guidance on a draft statutory instrument, the Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations 2019. The statutory instrument is still under development and a draft will be published in due course. The draft Regulations will amend Brexit-related onshoring deficiencies in the U.K. legislation that implemented the EU Prospectus Directive, the Transparency Directive and the Consolidated Admissions and Reporting Directive, which together make up the EU legal framework for primary markets. No deficiencies have been identified for the CARD. 

    Read more.
  • UK Government Publishes Guidance on Proposals to Onshore EU Market Abuse Regulation for Brexit

    HM Treasury has published explanatory information on a draft statutory instrument, the Market Abuse (Amendment) (EU Exit) Regulations 2018. The statutory instrument is still under development and a draft will be published in due course. The draft Regulations will affect the Financial Conduct Authority and all natural and legal persons which issue or trade in financial instruments admitted to trading or traded on an U.K. or an EU trading venue, including legal firms, professional service firms and any legal person that obtains access to the inside information of an issuer.

    Read more.
  • UK Government Refused Challenge of Ability of Court of Justice of the European Union to Rule on Whether Brexit Notification Can Be Revoked

    The U.K. Supreme Court has announced that it has refused the permission to appeal application of the Secretary of State for Exiting the European Union. The application had been made to stop the reference by the Inner House of the Court of Session in Scotland to the European Court of Justice for a preliminary ruling on whether the U.K. can unilaterally revoke its notice of withdrawal from the EU. The court's referral to the CJEU was discussed in our previous post. The Court of Session opined on September 21, 2018 that a reference should be made to the CJEU - Wightman v Secretary of State for Exiting the European Union [2018] CSIH 62.

    The U.K. Department for Exiting the EU has also published a statement on the reference to the CJEU confirming that it has submitted written observations to the CJEU. The Government's position is that the reference to the CJEU is inadmissible on the basis that the CJEU does not answer hypothetical questions or provide advisory opinions.

    An oral hearing before the CJEU is scheduled for November 27, 2018.

    View the Supreme Court's announcement.

    View the DxEU statement.

    View details of the Court of Session Opinion.
  • Final Report on Incentives to Clear OTC Derivatives Published by Global Standard Setting Bodies

    A final joint report on the incentives to clear OTC derivatives has been 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 report is part of the FSB's post-implementation evaluation of the effects of the G20 financial regulatory reforms.

    The report sets out the results of an evaluation of the reforms that have been implemented to incentivize central clearing of OTC derivatives and outlines areas for further consideration by the global standard setting bodies. The reforms considered include mandatory clearing requirements, capital, liquidity and margin requirements, as well as the reforms to CCP resilience, recovery and resolution.

    Read more.
  • Bank of England Guidance to Firms on Valuation Capabilities to Support Resolvability

    The Bank of England has published the "Dear CFO" letter sent by its Resolution Directorate to the Chief Financial Officers of relevant entities in financial groups within the remit of the BoE's principles-based "Statement of Policy on Valuation Capabilities to Support Resolvability." The SoP was published in June 2018 and sets out the BoE's expectations on the minimum standard of valuation capabilities that firms should have in place to ensure that their valuations are sufficiently timely and robust to support the effective resolution of the firm. Firms within the remit of the SoP will need to ensure that suitable capabilities are in place by January 1, 2021.

    Read more.
  • UK Legislation Made for Onshoring the EU SEPA Regulation

    The Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018 were made on November 19, 2018 and will enter into force on the day the U.K. exits the EU. The Regulations are relevant for all Payment Service Providers – banks, payment institutions, e-money institutions and registered Account Information Service Providers.

    Read more.
  • UK Legislation Published to Onshore the European Long-Term Investment Funds Regulation For Brexit

    HM Treasury has published a draft version of the Long-term Investment Funds (Amendment) (EU Exit) Regulations 2018. The draft Regulations correct deficiencies in the directly applicable European Long-term Investment Funds Regulation to be retained on Brexit, which governs funds that invest into infrastructure and other long-term projects. The draft Regulations will primarily affect fund managers operating ELTIFs registered in the UK.

    Read more
  • UK Competition Authority Opens Investigation Into Possible Anti-Competitive Practices

    The U.K. Competition and Markets Authority has announced that it opened an investigation into suspected anti-competitive practices in the financial services sector on November 13, 2018. The investigation is at a very early phase, and the CMA does not consider that at this stage a statement of objections can be issued to any of the parties under investigation. Between now and August 2019 the CMA will be gathering information on the suspected infringement of the Competition Act 1998.

    View the announcement.
    TOPIC: Competition
  • 2018 List of Globally Systemically Important Banks Published

    The Financial Stability Board has published the 2018 list of global systemically important banks. Alongside the 2018 G-SIB list, the Basel Committee on Banking Supervision has published further information relating to its 2018 assessment of G-SIBs, including:
    • a list of all the banks in the assessment sample;
    • the denominators of each of the 12 high-level indicators used to calculate the banks' scores;
    • the 12 high-level indicators for each bank in the sample used to calculate these denominators;
    • the cut-off score used to identify G-SIBs in the updated list and the thresholds used to allocate G-SIBs to buckets for the purpose of calculating the specific higher loss absorbency requirements; and
    • links to disclosures of all banks in the assessment sample.

    The Basel Committee assessment was based on its 2013 methodology for identifying G-SIBs. The revised 2018 assessment methodology will apply from 2021, based on end-2020 data and the corresponding higher loss absorbency requirements will apply from January 1, 2023.

    View the 2018 G-SIB list.

    View details of the revised assessment framework for G-SIBs.
  • Draft UK Legislation Published to Onshore the EU Interchange Fee Regulation for Brexit

    HM Treasury has published a draft version of the Interchange Fee (Amendment) (EU Exit) Regulations 2018, along with explanatory information. The draft Regulations will primarily affect payment system operators, payment service providers (including banks and building societies) and the businesses and individuals who rely on card payment systems. The Payment Systems Regulator will consult separately on consequential changes to its guidance on the IFR once the draft Regulations are made. The PSR will also be responsible for correcting deficiencies in the Binding Technical Standards made under the IFR.

    The draft Regulations amend the EU Interchange Fee Regulation that will be retained on Brexit and the Payment Card Interchange Fee Regulations 2015. The changes are designed to ensure that current laws on interchange fees continues to operate effectively in the U.K. once the U.K. has left the EU.

    Read more.
  • EU Final Draft Technical Standards on Estimating and Identifying an Economic Downturn in IRB Modelling

    The European Banking Authority has published final draft Regulatory Technical Standards on the specification of the nature, severity and duration of an economic downturn in accordance with the Capital Requirements Regulation. The aim of the RTS is to ensure that institutions using the Internal Ratings-Based approach to calculating capital requirements can use a well-defined and common specification of the nature, duration and severity of an economic downturn for portfolios relating to comparable types of exposure.

    The nature of the economic downturn is defined as a set of relevant economic factors and its severity is specified via the most severe values observed on the relevant economic factors over a given historical period. The duration of an economic downturn is specified using the concept of a "downturn period," namely the period of time where the peaks or troughs, which relate to the most severe values of one or several economic factors, are observed.

    Read more.
  • Financial Stability Board Progress Report on Addressing Correspondent Banking Decline

    The Financial Stability Board has published a progress report addressed to the G20 Finance Ministers and Central Bank Governors on the FSB's four-point action plan to assess and address the decline in correspondent banking relationships. The progress report is accompanied by an update to the Correspondent Banking Data Report published by the FSB March 2018. The updated data report includes additional data from July - December 2017 derived from information provided by SWIFT to the FSB, through the intermediation of the National Bank of Belgium. The data report shows a further decline in active correspondent banking relationships in 2017.

    Read more.
  • EU Legislation Published for Relocation of the European Banking Authority Post-Brexit

    A Regulation amending the founding Regulation of the European Banking Authority has been published in the Official Journal of the European Union. The Amending Regulation amends the EBA Regulation to change the seat of the EBA from London to Paris.

    The Amending Regulation enters into force on November 16, 2018 and will take effect on March 30, 2019.

    View the Amending Regulation (EU) 2018/1717.
  • European Central Bank Publishes Final First Chapter of Its Guide to Internal Models

    The European Central Bank has published the final first chapter of its guide to internal models. The Capital Requirements Regulation requires the ECB to assess and grant permission for banks directly supervised by the ECB to use internal models for credit risk, counterparty credit risk and market risk. The ECB's guide sets out how the ECB intends to approach the assessment of whether a firm meets the necessary requirements for the permission to be granted. This chapter is on general topics, comprising overarching principles for internal models, implementation of the internal ratings-based approach, internal model governance, internal validation and audit, model use, change management and third-party involvement. The ECB recently consulted on model-specific chapters, including for credit, market and counterparty credit risks.

    The ECB notes that the guide may need to be amended if the European Commission adopts a different version of the European Banking Authority's final Draft Regulatory Technical Standards on assessment methodology for the IRB approach.

    View the guide.

    View the feedback statement.
  • Three Central Banks Explore Advantages of Wholesale Central Bank Digital Currencies

    The Bank of England, the Bank of Canada and the Monetary Authority of Singapore have published a joint report entitled, "Cross-Border Interbank Payments and Settlements." Referring to current industry projects to address existing problems in cross-border payments affecting end-users, commercial banks and central banks, the report analyzes these issues and discusses proposed new models for processing cross-border transactions. The report sets out three models for cross-border payments and settlements and discusses the key considerations and dependencies of each model. Each model is then assessed against the existing identified challenges in cross-border payments.

    Model 1 is based on existing plans to enhance the current systems within and across jurisdictions, which is considered to be the baseline for discussions. Model 2 is based on an expanded role for domestic real-time gross settlement infrastructure, which would be "super-correspondents" in settling cross-border payments and would replace existing correspondent banks. Model 3 has three variations, all of which are based on cross-border payments between banks being settled with wholesale central bank digital currencies (W-CBDCs). The three variations are: (i) W-CBDCs that can be held and exchanged only in their home jurisdiction; (ii) W-CBDCs held and exchanged within and beyond their home jurisdictions; and (iii) a single universal W-CBDC backed by a basket of currencies issued by participating central banks.

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  • UK Prudential Regulator Finalizes Supervisory Approach for New EU Securitization Framework

    The U.K. Prudential Regulation Authority has published a Policy Statement setting out its approach to supervision under the new EU securitization framework that will take effect from January 1, 2019. The PRA consulted on its proposals in May 2018. The incoming EU framework consists of: (i) the Securitization Regulation, which imposes general requirements for all EU securitization activity and outlines the criteria and process for designating certain securitizations as "Simple, Transparent and Standardised"; and (ii) revisions to the banking securitization capital framework within the Capital Requirements Regulation. Respondents to the PRA's consultation on its approach were largely supportive. The PRA has made some changes (outlined in the Policy Statement) to its consultation text in line with comments received.

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  • Bank of England Writes to UK Firms on Upcoming Obligations for Internalized Settlement Reporting

    The Bank of England has published a letter sent by its Financial Market Infrastructure Directive to compliance officers of U.K. firms that may be affected by forthcoming obligations under the EU Central Securities Depositories Regulation to report internalized settlements from July 2019.

    The BoE considers that the firms likely to be subject to the CSDR's obligations are those with the regulatory permissions for safeguarding and administration of assets or arranging the same. Within this subset of regulated firms, an institution will be considered a settlement internalizer if it settles transfer orders on behalf of clients on its own account rather than through a Central Securities Depository. Settlement internalizers must submit reports to the BoE.

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  • Financial Stability Board Publishes Upcoming Resolution Priorities for Banks, Insurers and CCPs

    The Financial Stability Board has published its 2018 resolution report, entitled "Keeping the pressure up," setting out: (i) the progress in implementing the FSB's resolution policies for CCPs and in the banking and insurance sectors; (ii) the next steps in monitoring and evaluating the effects of resolution reforms; and (iii) the actions and timelines for 2019 and beyond. The FSB highlights that, although substantial progress has been made, firms need to continue work to improve their resolvability, and authorities and lawmakers need to complete the reforms and implement them fully.

    The FSB report describes the priority areas for global systemically important banks, including the implementation of technical and operational capabilities to ensure that a resolution plan can be timely and effectively executed, if needed. Another key area is implementation of the total loss absorbing capacity (TLAC) requirements, in particular, internal TLAC. In June 2018, the FSB launched a call for feedback on the technical implementation of TLAC for G-SIBS to assess whether implementation aligns with the timelines and objectives set out in the TLAC Standard. The FSB will report on the outcomes of that review during 2019. Work will also be required to ensure (i) cross-border recognition of temporary stays on early termination rights in financial contracts; and (ii) continuity of access to financial market infrastructures and FMI intermediaries.

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  • Financial Stability Board Discusses Financial Resources for CCP Resolution

    The Financial Stability Board has published a discussion paper on financial resources to support CCP resolution and the treatment of CCP equity in resolution. The FSB considers that further evidenced-based guidance is needed on this topic and the discussion paper is the first step in developing such guidance by the end of 2020. The FSB intends to use the practical experience of resolution planning that resolution authorities and Crisis Management Groups have gained to develop the guidance. The discussion paper outlines: (i) relevant considerations for evaluating whether a CCP's existing financial resources and tools are satisfactory for implementing the individual CCPs' resolution strategy, including a proposed five-step process and CCP-specific factors that warrant assessment; and (ii) factors that could steer authorities in their approaches to the treatment of CCP equity in resolution, including consideration of whether different ownership structures are relevant.

    Responses to the discussion paper should be submitted by February 1, 2019. The FSB notes that responses to the discussion paper will be used to develop proposed guidance which will be consulted on at the appropriate time.

    View the discussion paper.
  • UK Prudential Regulator Finalizes Changes to the Leverage Ratio Rules for Ring-Fenced Banks

    The U.K. Prudential Regulation Authority has published a Policy Statement on applying the U.K. leverage ratio to systemic Ring-fenced Bodies and reflecting the Systemic Risk Buffer. The SRB is one of the elements of the overall capital framework for U.K. banks and building societies. It will be applied by the PRA to individual institutions and introduced at the same time that ring-fencing comes into force in 2019. RFBs are banks that hold more than £25 billion in core deposits. They must separate their core retail banking business from their investment banking business by January 1, 2019.

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  • UK Conduct Regulator Wants Improvements to Banks' Whistleblowing Arrangements

    The U.K. Financial Conduct Authority has published the outcome of its review of firms' whistleblowing arrangements. The FCA has reviewed how retail and wholesale banks have implemented its whistleblowing rules by looking at firms' policies and procedures, the role of the whistleblowers' champion, firms' whistleblowing annual reports and the relevant training arrangements.

    Both the FCA and the Prudential Regulation Authority published their whistleblowing rules in 2015 and the FCA extended certain of the requirements to U.K. branches of overseas banks in early 2017.

    The FCA has published its findings, including areas of good practices, areas for improvement and the FCA's expectations of firms' whistleblowing arrangements. The FCA urges firms to consider its findings and whether they need to take action to improve their whistleblowing arrangements.

    View the FCA's review webpage.
  • Financial Stability Board Progress Report on Reforming Major Interest Rate Benchmarks

    The Financial Stability Board has published a progress report on ongoing reforms to major interest rate benchmarks. The FSB has been co-ordinating international reform work, through its Official Sector Steering Group, since 2014, when it made several recommendations aimed at addressing cases of attempted manipulation in relation to key IBORs and the decline in liquidity in certain interbank unsecured funding markets. The OSSG launched a third major initiative in 2016, to improve contract robustness to address risks of discontinuation of widely-used interest rate benchmarks. That initiative is being led by the International Swaps and Derivatives Association, which launched a consultation on fallback rates in July 2018.

    The progress report provides an update since the FSB's progress report in October 2017 and covers:
    1. Developments in Interbank Offered Rates, including discussion of the future of LIBOR.
    2. Identification of and transition to risk-free rates, where appropriate, for transactions denominated in USD, EUR, JPY, GBP, CHF, AUD, BRL, CAD, HKD, MXN, SGD and ZAR.
    3. The development of fallback rates to enhance contractual robustness.

    The FSB proposes to publish a further progress report in late 2019.

    View the progress report.

    View details of the October 2017 progress report.

    View details of ISDA's July 2018 consultation on fallback rates.

    View FSB statement welcoming ISDA's July 2018 consultation.
  • Draft EU-UK Withdrawal Agreement Published

    The European Commission and the U.K. government published a draft Withdrawal Agreement and an Outline Political Declaration on the framework for the future relationship between the EU and the U.K. The draft Withdrawal Agreement has been agreed between the negotiators and must still be ratified by the U.K. and EU27 leaders. The full Political Declaration on the future relationship is expected by the end of November 2018, provided the draft Withdrawal Agreement is ratified.

    The draft Withdrawal Agreement outlines how the U.K. will leave the EU and provides for the previously agreed transition period that would run from March 30, 2019 until December 31, 2020. It also provides for the agreements concerning the future relationship to be negotiated expeditiously with the objective of ensuring that the agreements apply from the end of the transition period. This timeframe is reiterated in the Outline Political Declaration. The negotiators have committed to report regularly on progress made on concluding the agreements governing the future relationship between the EU and the U.K.

    The Outline Political Declaration briefly sets out the principles agreed by the negotiators for the future relationship. The Outline confirms that the basis of the future relationship in financial services will be decision-making autonomy and equivalence. The EU and the U.K. are to strive to conclude equivalence assessments before the end of June 2020. The documentation is silent on whether there will be any changes to the processes around equivalency or any expansion to the categories of equivalences under U.K. or EU laws.

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  • International Body Proposes Framework for Assessing Fund Leverage

    The International Organization of Securities Commissions has launched a consultation on a proposed framework to help assess leverage used by investment funds. The consultation follows a recommendation to IOSCO from the Financial Stability Board in its January 2017 report, "Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities." The FSB recommended, among other things, that IOSCO should identify and/or develop consistent measures of leverage in funds to facilitate more meaningful monitoring of leverage for financial stability purposes and help enable direct comparisons across funds and at a global level.

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    TOPICS: FundsShadow Banking
  • European Commission Publishes Aspects of Contingency Plans For No Deal Brexit

    The European Commission has published a Communication establishing certain contingency action plans in preparation for a "no deal" Brexit. The Communication sets out certain actions that the EU is or is proposing to take in the event of a "hard" Brexit. In relation to financial services, the Commission states that it will adopt temporary and conditional equivalence decisions to avoid disruption to derivatives clearing and depositaries services. The decisions would "complement" recognition of U.K. financial market infrastructures. The Commission has also urged these entities to apply in advance for recognition from the European Securities and Markets Authority.

    The Commission reiterates that uncleared OTC derivatives contracts should remain valid and executable until maturity although, where one counterparty is based in the U.K., certain life-cycle events may trigger the need for an authorization or exemption.

    In the Communication, the European Commission further notes that the risks presented to financial services by a "no deal" Brexit have decreased significantly over time because of the action taken by firms to establish new entities or relocate entities and to transfer contracts. In particular, the Commission observes that insurance firms have taken steps to ensure that they can continue to provide services to their clients, including transferring contracts, setting up branches or subsidiaries and merging with firms established in the EU27.

    The Commission also encourages the European Supervisory Authorities to begin preparing cooperation arrangements with the U.K. financial regulators to provide for the exchange of information and supervisory cooperation.

    View the Communication.
  • EU Supervisory Authority Consults on Proposed Guidelines on Money Market Fund Reporting Requirements

    The European Securities and Markets Authority has launched a consultation on proposed Guidelines for Money Market Fund Managers, to assist them in complying with their obligations, under the Money Market Funds Regulation, to report information to the relevant national regulator of each MMF they manage. The reporting obligation applies on at least a quarterly basis (or annually for MMFs with total assets under management not exceeding Euro 100 million). The European Commission adopted Implementing Technical Standards in April 2018, which specify the content of a reporting template that will be developed for the information. The ITS have applied since July 21, 2018 and MMF managers must begin submitting reports under the MMF Regulation in the first quarter of 2020.

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    TOPICS: FundsShadow Banking
  • EU Supervisory Authority Issues Updated Supervisory Briefing on MiFID II Suitability

    The European Securities and Markets Authority has published an updated version of its supervisory briefing on suitability. The original suitability briefing was published in December 2012 to provide guidance to EU national regulators on the suitability requirements under the original Markets in Financial Instruments Directive. The updated suitability briefing reflects the amended requirements introduced by the revised Markets in Financial Instruments Directive and takes into account the new version of ESMA's Suitability Guidelines that was published in May 2018.

    While the updated briefing is primarily aimed at national regulators, it should also assist market participants by providing indications of compliant implementation of the MiFID II suitability provisions.

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  • UK Legislation Published to Onshore Anti-Money Laundering and Counter-Terrorism Financing Legislation for Brexit

    HM Treasury has published a draft of the Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018, along with explanatory information. The draft Regulations will primarily be relevant for payment service providers, anti-money laundering/counter-terrorism financing supervisory authorities and firms that are regulated through the U.K.'s AML/CTF regime. The draft Regulations introduce no material policy changes. Their purpose is to correct deficiencies in U.K. law and retained EU law to ensure that the U.K. AML/CTF regime continues to function effectively after the U.K.'s withdrawal from the EU.

    The draft Regulations amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs), which transposed into U.K. law the provisions of the EU Fourth Money Laundering Directive (4MLD). The draft Regulations also amend the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 and the revised EU Funds Transfer Regulation (Regulation (EU) 2015/847). This EU Regulation gives legal effect to Financial Action Task Force Recommendation 16, on the information accompanying electronic transfers of funds. Additionally, the draft Regulations revoke Commission Delegated Regulation (EU) 2018/1108, which sets out Regulatory Technical Standards for central contact points under 4MLD.

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