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.
EU Proposals to Amend the EU-Wide Stress Test Framework for Banks
The European Banking Authority has commenced a consultation on proposed changes to the EU-wide stress test framework for banks. The EU-wide stress test contributes to improving the financial resilience of banks. Responses to the consultation may be submitted until April 30, 2020. The EBA is holding a public hearing on the proposals on February 21, 2020. The 2020 EU-wide stress test is going to run under the current framework, the results of which will be published in July 2020.
The EBA is proposing to amend the framework to have two parts. The first would be the supervisory element, based on a common EU methodology. It would include the current constrained bottom-up approach, but also have an option for national regulators to adjust or replace banks' estimates based on top-down models and other tools. The second part would be the bank element and would be based on the same common methodology applied in the supervisory part. However, banks would be given more discretion to calculate their projections, provided an explanation and disclosure of the rational and impact of any deviations is possible. The quality of disclosure of the results would remain high, with only the supervisory leg being amended to limit the quantity of disclosure. Feedback is also sought on the approach to scenario designs.
View the consultation paper and other details.
UK Conduct Authority Publishes Findings of Review of Risk Modelling and Other Portfolio Management Tools in the Asset Management Sector
The U.K. Financial Conduct Authority has published a report on its review of how firms in the asset management sector selected and used risk modelling and other portfolio management tools. The review was undertaken to assess how firms identify and manage the risks as well as firms' ability to respond to system failures or service interruptions.
Financial Stability Board Publishes Feedback to Resolution Planning Disclosures Consultation
The Financial Stability Board has published a statement summarizing the feedback it received to its June 2019 consultation on firms’ public disclosures on resolution planning and resolvability. The consultation sought feedback on a series of questions regarding general and firm-specific disclosures made by systemically important banks and other firms subject to resolution planning requirements.
Financial Stability Board Publishes Feedback to Derivatives and Trading Portfolios’ Solvent Wind-Down Consultation
The Financial Stability Board has published a statement summarizing the feedback it received to its June 2019 consultation on the solvent wind-down of derivatives and trading portfolios. The consultation sought feedback on a series of questions regarding existing wind-down practices that may be used as a recovery option for global systemically important institutions that find themselves under stress. The FSB intended to consider publishing guidance on solvent wind-down planning depending on the responses elicited by the consultation.
Financial Stability Board Publishes 2020 Work Program
The Financial Stability Board has published its work program for 2020. The FSB confirms that it will continue to monitor developments to identify and manage new and emerging risks, work to finalize the outstanding components of the post-crisis reforms and assess the implementation of reforms as well as their effects. Key areas of focus will be:
- LIBOR transition: the FSB will monitor implementation of the benchmark reforms and report on outstanding issues.
- Global stablecoins: the FSB will launch a consultation on global stablecoins in April 2020.
- Global payment systems: the FSB will work with other international bodies to develop and deliver a roadmap for using digital innovations to improve global cross-border payments.
- FinTech: the FSB will report on the perspective of emerging market and developing economies.
View the FSB work program for 2020.
Basel Committee on Banking Supervision Publishes Consultation on Credit Valuation Adjustment Risk
The Basel Committee on Banking Supervision has published a consultation paper seeking feedback on its final amendments to the credit valuation adjustment risk framework set out under the Basel III standards. The paper provides a detailed description of the amendments and sets out the proposed revised standards. Responses to the consultation should be submitted by February 25, 2020.
Basel Committee on Banking Supervision Publishes Guidance on Sector-Specific Capital Buffers
The Basel Committee on Banking Supervision has today published its guiding principles for the operationalization of a sectoral countercyclical capital buffer (or "SCCyB"). The SCCyB complements the Basel Committee's countercyclical buffer by establishing capital requirements that could be imposed on a particular sector, in addition to the countercyclical buffer that is based on banks' total risk weighted assets. The SCCyB will only apply to jurisdictions that choose to implement it on a voluntary basis and will not form part of the Basel standards.
European Banking Authority Publishes Consultation on Draft MREL and TLAC Disclosure and Reporting Standards
The European Banking Authority has published a consultation paper on its draft Implementing Technical Standards for supervisory reporting and public disclosure of minimum requirements for own funds and eligible liabilities (or “MREL”) and total loss-absorbing capacity (or “TLAC”). Responses to the consultation should be submitted by February 22, 2020. The EBA expects to submit the final draft ITS to the European Commission in June 2020.
European Banking Authority Publishes Roadmap for Technical Standards and Guidelines Supplementing the Risk Reduction Package
The European Banking Authority has published a roadmap for the risk reduction package that involved changes to the EU Capital Requirements Regulation, the Capital Requirements Directive and the Bank Recovery and Resolution Directive. The EBA is mandated within the changed legislation to prepare technical standards, guidelines and reports on governance and remuneration, large exposures, resolution, reporting and disclosure. The EBA's roadmaps set out the timelines for delivery of all of the mandates, including where deadlines have been adjusted by the EBA.
View the EBA's roadmaps for the risk reduction package.
View details of CRD5 and CRR2.
View details of BRRD 2.
Financial Stability Board Publishes 2019 Resolution Report
The Financial Stability Board has published its 2019 Resolution Report, providing updates on its implementation of policy measures to enhance the resolvability of systemically important financial institutions.
EU Single Resolution Board Launches Consultation on Expectations for Banks
The Eurozone Single Resolution Board has launched a public consultation on its proposed “Expectations for Banks”, a draft document outlining best practice for banks in implementing resolution planning. The consultation is being undertaken as part of the SRB’s endeavours to work with Eurozone banks and other stakeholders and to demonstrate transparency in its approaches and decisions.
Basel Committee on Banking Supervision Considers Key Supervisory and Policy Initiatives
The Basel Committee on Banking Supervision met on October 30-31, 2019 to discuss key policy and supervisory issues, including: (i) a proposed consultation on adjustments to the credit valuation adjustment risk framework; (ii) a proposed consultation on revised market risk and sovereign exposure disclosure requirements; (iii) a proposed discussion paper on the prudential treatment of cryptoassets; (iv) a proposed consultation on guidelines for enhanced cooperation between prudential regulatory authorities and anti-money laundering/counter-terrorism financing authorities; and (v) its reports into the implementation of the Net Stable Funding Ratio and large exposures standards in Argentina and China. All of the proposed consultation papers, as well as the NSFR/large exposures reports, are expected to be published in November 2019.
Other topics under discussion included benchmark rate reforms, the implementation of the Basel Committee's guidance on managing foreign exchange settlement risk and the usability of capital buffers. On the latter subject, the Basel Committee has also published a newsletter reiterating the importance of the capital buffer framework and emphasizing that the buffers are designed to be usable. The Basel Committee has announced that Canada will host the 21 International Conference of Banking Supervisors on October 21-22, 2020.
View the Basel Committee's press release on its October 30-31 2019 meeting.
View the Basel Committee's newsletter on capital buffers.
View details of the 21 International Conference of Banking Supervisors.
European Central Bank Issues Statement on Liquidity of Euro Area Banks
The European Central Bank has issued a statement on the results of its 2019 supervisory stress test. The European Central Bank is responsible for direct prudential supervision of certain significant banks based in the Eurozone as part of the Single Supervisory Mechanism. It found that the vast majority of banks directly supervised by the ECB have overall comfortable liquidity positions, although there were some vulnerabilities that required further attention.
UK Prudential Regulator Launches Consultation on Asset Encumbrance Rules
The U.K. Prudential Regulation Authority has launched a consultation on its proposed expectations of how firms manage prudential risks associated with asset encumbrance. The PRA’s expectations are relevant to all PRA-authorized firms, other than credit unions and insurance firms. Responses should be submitted by January 17, 2020.
European Banking Authority Publishes Strategic Focus Areas for 2020
The European Banking Authority has published its 2020 Work Programme. The Programme details six strategic areas of focus for 2020 and these are:
- Support the development of the risk reduction package and the implementation of the global standards in the EU. The EBA will work on developing level 2 legislation required by the revised Capital Requirements Regulation and Directive, the revised Bank Recovery & Resolution Directive and the new Covered Bonds Directive and Investment Firm Regulation and related Directive (the latter two have not yet entered into force). The EBA will continue to work on the implementation of the market risk requirements, following the finalization of the Basel Committee on Banking Standard's fundamental review of the trading book (FRTB). In particular, in 2020, the EBA anticipates implementing the reporting requirement and certain aspects of the FRTB revisions for the internal model approach and for the treatment of non-trading book positions subject to FX or commodity risk. Another priority will be finalization of the EBA's roadmap for the internal ratings-based approach for calculating minimum capital requirements for credit risk.
- Providing efficient methodologies and tools for supervisory convergence and stress testing. The EBA intends to consult on Pillar 2 changes during 2020 and will conduct the 2020 stress test for EU banks.
Financial Stability Board Publishes Summary of Workshop on Continuity of Access to Financial Market Infrastructure
The Financial Stability Board has published a summary of an industry workshop, held on May 21, 2019, on continuity of access to financial market infrastructures for firms in resolution. The FSB held the workshop to assist in its efforts to monitor implementation of the FSB Guidance on continuity of access to FMI for firms in resolution, published in July 2017. The Guidance provides for arrangements to allow continuity of access to FMIs for a global systemically important bank in resolution. The Guidance applies to FMIs as providers of clearing, payment, securities settlement and/or custody services, to G-SIBs and other banks that are subject to resolution (referred to here as firms) and recovery planning requirements, as well as the G-SIB resolution authorities and regulators of the FMIs.
European Banking Authority Recommends Changes to EU Deposit Guarantee Scheme Directive
The European Banking Authority has published an Opinion on the eligibility of deposits, coverage level and cooperation between deposit guarantee schemes. The EU Deposit Guarantee Scheme Directive requires the European Commission to report on the implementation of the Directive. The EBA's Opinion is the first of three opinions that it will issue to support the Commission in preparing the report. The other two opinions are expected before the end of 2019, one covering deposit guarantee scheme pay outs and the other DGS funding and uses of DGS funds.
UK Regulators Finalize Resolvability Assessment Framework for Banks
Following their consultation earlier this year, the Bank of England and the Prudential Regulation Authority have finalized the new Resolvability Assessment Framework. The Framework comprises: (i) the BoE's approach to assessing resolvability, which includes the outcomes that the BoE considers necessary to support resolution; (ii) new PRA rules that require firms to assess their resolvability, submit a report to the PRA on the assessment and publish a summary statement on the assessment; and (iii) the BoE making public statements on the resolvability of each individual firm that is in-scope of the PRA's new rules.
Eurozone Resolution Board Publishes Approach to Public Interest Assessment
The Single Resolution Board has published a paper setting out its approach to the Public Interest Assessment under the resolution framework for Eurozone banks. The SRB is the resolution authority for all banking groups and entities as well as cross-border groups that are subject to direct prudential supervision by the European Central Bank (i.e., for banks within the Eurozone Banking Union). Under the resolution framework, an assessment is undertaken as to whether it would be in the public interest for a failing bank or a bank that is likely to fail to be resolved. The assessment is based on the objectives of maintaining financial stability, protecting covered depositors and safeguarding public funds. Where resolution is not appropriate, a bank would instead be subject to national insolvency procedures.
The SRB's paper outlines the factors that it would take into account when carrying out the public interest assessment and how it applies the legal criteria. The paper also includes examples of how the SRB has conducted the assessment in practice by reference to recent resolutions involving banks such as Banco Popular Español S.A., Banca Popolare di Vicenza S.p.A, Veneto Banca S.p.A. and ABLV Group.
View the SRB paper.
Financial Stability Board Reports on Implementation of the TLAC Standard
The Financial Stability Board has published a report on the Review of the Technical Implementation of the Total Loss-Absorbing Capacity (TLAC) Standard. The FSB conducted a review of implementation of the TLAC Standard by jurisdictions that covered the Global Systemically Important Banks to which the TLAC Standard applied as at January 1, 2019 and the home and material host jurisdictions of those G-SIBs. The focus of the review was assessing whether implementation aligns with the timelines and objectives set out in the TLAC Standard.
Eurozone Single Resolution Board Publishes Update to MREL Policy
The Eurozone Single Resolution Board has published an addendum to its 2018 policy statement on minimum requirements for own funds and eligible liabilities. The addendum takes into account changes made as part of the EU’s “Banking Package”, published in the Official Journal of the European Union on June 7, 2019, in particular the EU’s implementation of the Total Loss Absorbing Capacity (TLAC) standard by changes made under the revised Capital Requirements Regulation (CRR2).
European Commission Publishes Progress Report on European Economic Monetary Union
The European Commission has published a report on progress made in Europe since the publication of "The Five Presidents' Report" of 2015, in which five of the EU's key figures set out their agenda for deepening the EU's Economic and Monetary Union. The report is published ahead of the Euro Summit on June 21, 2019, where EU leaders will meet to review progress in tackling the challenges faced by the EU.
Revisions to EU Bank Recovery and Resolution Directive Finalized
A new Directive amending the EU's Bank Recovery and Resolution Directive, widely referred to as "BRRD2", has been published in the Official Journal of the European Union.
International Bodies Seek Public Input on Central Counterparty Auctions Discussion Paper
The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions have published a joint discussion paper on central counterparty default management auctions. Comments should be provided by August 9, 2019.
Financial Stability Board Consults on Resolution-Related Disclosures and Solvent Wind-Down of Derivatives and Trading Portfolios
The Financial Stability Board has published two consultation papers on: (i) Public Disclosure of Resolution Planning and Resolvability; and (ii) Solvent Wind-down of Derivatives and Trading Portfolios. The first consultation paper focuses on disclosures made by financial institutions on their resolution planning and resolvability during “peace time” (i.e., times when there is no resolution commencing or in progress). The second consultation paper focuses on considerations that national regulators and global systemically important banks should take into account when commencing the solvent wind-down of a G-SIB’s derivative and trading book activities.
Financial Stability Board Consults on Impact of the Too-Big-To-Fail Reforms
The Financial Stability Board has begun its evaluation of the post-2008 financial crisis reforms on banks that were deemed "too big to fail", publishing the summary terms of reference. The evaluation will consider whether the implemented reforms are reducing the systemic and moral hazard risks associated with systemically important banks (or SIBs). The FSB is also asking for feedback from financial institutions and other stakeholders on the impact of these reforms. In particular, the FSB is seeking input on how the reforms have achieved their objectives, the impact of the reforms on SIBs, whether the impact differs for different types of banks, the impact of the reforms on financial system resilience and whether there are any unintended consequences of the reforms. The FSB asks those submitting responses to provide evidence, where possible. Responses should be submitted by June 21, 2019. The FSB intends to use the responses to prepare a draft report on the impact, which would be issued for consultation in June 2020. The final report is expected by the end of 2020.
View the summary terms of reference.
View the request for feedback.
UK Prudential Regulation Authority Sets Out 2019 Systemic Risk Buffer Rates
The Prudential Regulation Authority has released its first systemic risk buffer rates, which will apply from August 1, 2019. The rates determine the amount of additional regulatory capital which must be held by "systemic risk buffer institutions" (i.e. U.K. financial institutions which have been deemed to be systemically important). In scope firms are the so-called "ring-fenced bodies" within the meaning in the Financial Services and Markets Act 2000 and include large building societies holding more than £25bn in deposits. The buffer applicable to each institution is intended to reflect the relative costs to the U.K. economy if the institution in question were to fall into distress.
Final EU Technical Standards For Eligibility For Simplified Obligations Under The Bank Recovery And Resolution Directive
An EU Delegated Regulation under the Bank Recovery and Resolution Directive has been published in the Official Journal of the European Union. The Delegated Regulation sets out Regulatory Technical Standards specifying the criteria for assessing the impact of a bank or investment firm's failure on financial markets, on other institutions and on funding conditions.
Under the BRRD, where a national regulator or resolution authority is determining whether to grant simplified obligations to a bank or investment firm, it must assess the impact that the failure of the institution could have by reference to a number of factors specified in the BRRD. The Delegated Regulation sets out a two-stage test based on quantitative and qualitative criteria to determine whether an institution is eligible for simplified obligations. Different criteria apply depending on whether the institution is a bank or an investment firm. Institutions meeting quantitative criteria at stage one must then meet qualitative criteria at stage two to be assessed as eligible.
Only institutions that meet the quantitative criteria (i.e., the impact of their failure is not assessed as requiring the full obligations to apply) will proceed to the second stage.
The Delegated Regulation will be directly applicable across the EU from March 24, 2019.
View the Delegated Regulation.
EU Handbook on Valuation for Purposes of Resolution
Following a consultation process in November 2018, the European Banking Authority has published a Handbook on valuation for purposes of resolution. The Handbook, which is addressed to national and EU resolution authorities, aims at fostering the convergence and consistency of valuation practices as well as the interaction with independent valuers across the EU.
The Handbook is the result of close cooperation with national resolution authorities and the Single Resolution Board. It is intended to bridge the resolution regulatory approach with valuation practices, by: (i) providing concrete guidance on the practical steps of the valuation process and the specific valuation criteria applicable to the various resolution tools; and (ii) with a view to facilitating the adoption of an informed decision by the resolution authority, indicating the content that is expected to be included in the valuation report. The Handbook focuses on valuations before resolution and as such supports resolution decisions, which immediately impact shareholders and creditors. However, it also covers valuations after resolution, aimed to determine the "no creditor worse off" principle, which provides that no creditor or shareholder shall incur greater losses than they would have incurred if the institution had been wound up under normal insolvency proceedings.
View the Handbook on valuation for resolution.
Eurozone Single Resolution Board Publishes Policy Statement on Second Wave of 2018 MREL Policy
The Eurozone Single Resolution Board has published the second wave of its 2018 minimum requirements for own funds and eligible liabilities as part of resolution planning required under the Bank Recovery and Resolution Directive and related Single Resolution Mechanism Regulation. The SRB published the first wave of the 2018 MREL requirements in November which applied to banks that did not have binding MREL targets in 2017.
UK Regulators Consult on the Resolvability Assessment Framework for Banks
The Bank of England and Prudential Regulation Authority have launched a package of consultations on proposals for the U.K.'s resolvability assessment framework for banks, with the aim of meeting the BoE's commitment to ensure that all banks are resolvable by 2022. The PRA consultation is relevant for U.K. banks and building societies with £50 billion or more in retail deposits on an individual or consolidated basis. The BoE's consultation is wider in scope and affects all firms with bail-in or partial-transfer resolution strategies and material U.K. subsidiaries of an overseas-based banking group. Responses to the consultations should be submitted by April 5, 2019.
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).
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.
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.
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.
Eurozone's Single Resolution Board Publishes 2019 Work Programme
The EU Single Resolution Board has published its 2019 Work Programme, setting out its priorities and principal tasks for the next year. The SRB is the resolution authority for all banking groups and entities as well as cross-border groups that are subject to direct prudential supervision by the European Central Bank (i.e., for banks within the Eurozone Banking Union).
The SRB's work in 2019 will include, among other things, the following:
- increasing the scope of banks with developed resolution plans and enhancing existing resolution plans to reflect the development of new or updated SRB policies;
- the adoption of more than 100 group-level decisions on minimum requirement for own funds and eligible liabilities (MREL) and the determination of over 530 MREL targets for individual entities;
- enhancing the analysis of potential impediments to resolvability of banks;
- the development of better ICT solutions for crisis management, including establishing a dedicated team to assist individual Crisis Management Teams in implementing the improvements; and
- the adoption of several new and updated SRB policies covering, for example, MREL decisions, resolvability assessments and operational continuity.
The SRB expects a significant increase of the number of resolution plans for less significant institutions, the development of which falls within the remit of the Eurozone national regulators.
View the SRB's 2019 Work Programme.
EU Legislation to Update Technical Standards for Resolution Reporting
A Commission Implementing Regulation supplementing the EU Bank Recovery and Resolution Directive has been published in the Official Journal of the European Union. The Implementing Regulation sets out Implementing Technical Standards on the information to be provided to resolution authorities to enable them to draw up and implement resolution plans for credit institutions or investment firms. Reflecting experience gained by resolution authorities in resolution planning, the Implementing Regulation repeals and replaces the existing Implementing Technical Standards set out in Regulation (EU) 2016/1066, which specifies the procedure and introduced a minimum set of templates for the provision of information to resolution authorities.
The Implementing Regulation introduces a single data point model, as is the practice in supervisory reporting, and introduces common validation rules to safeguard the quality, consistency and accuracy of the data items reported by institutions. Detailed common validation rules will be published electronically by the European Banking Authority on its website.
European Commission Adopts Revised Implementing Standards for Resolution Reporting
The European Banking Authority announced on October 29, 2018 that it acknowledged the European Commission's adoption of a draft Commission Implementing Regulation setting out revised Implementing Technical Standards on the procedures and standard forms and templates to be used to provide information for the resolution plans of credit institutions and investment firms. The Implementing Regulation supplements the Bank Recovery and Resolution Directive and will repeal the existing ITS, reflecting the evolution in the policy and practices applied by authorities in the development of resolution plans for financial institutions. The EBA submitted its final report with final revised draft ITS to the European Commission in April 2018.
European Commission Adopts Technical Standards for Eligibility for Simplified Obligations under the Bank Recovery and Resolution Directive
The European Commission has adopted a draft Delegated Regulation under the Bank Recovery and Resolution Directive, setting out Regulatory Technical Standards specifying the criteria for assessing the impact of an institution's failure on financial markets, on other institutions and on funding conditions.
Under the BRRD, where a national regulator or resolution authority is determining whether to grant simplified obligations to an institution, it must assess the impact that the failure of the institution could have due to a number of factors specified in the BRRD. The European Banking Authority submitted final draft RTS to the European Commission in December 2017. The RTS adopted by the Commission set out a two-stage test based on quantitative and qualitative criteria to determine whether an institution is eligible for simplified obligations. Institutions meeting quantitative criteria at stage one must then meet qualitative criteria at stage two to be assessed as eligible.
The draft Delegated Regulation will now be subject to a three-month scrutiny period by the European Parliament and the Council of the European Union. Assuming no objections have been raised by the co-legislators during that period, the Delegated Regulation will then be published in the Official Journal of the European Union and enter into force 20 days later. Once in force, the delegated regulation will have direct effect across the EU and will replace existing EBA Guidelines on simplified obligations.
View the draft Delegated Regulation and Annexes.
View details of the EBA's final draft RTS.
Bank of England Consults on Approach to Resolution Statements of Policy and Onshored Binding Technical Standards for Brexit
The Bank of England has published a consultation paper entitled "UK withdrawal from the EU: The Bank of England’s approach to resolution statements of policy and onshored Binding Technical Standards." The consultation forms part of a package of consultations, "Dear CEO" letters and other communications published by the BoE and the Prudential Regulation Authority on October 25, 2018.
The consultation covers:
- the BoE’s proposals to fix deficiencies in the onshored Binding Technical Standards under the Bank Recovery and Resolution Directive, for which it is responsible in its capacity as U.K. resolution authority. The PRA has consulted separately on proposals for the BRRD BTS that are within its remit; and
- the BoE's proposed guidance on how the existing Statements of Policy on resolution should be interpreted after Brexit. These SoPs cover the BoE's: (i) power to direct institutions to address impediments to resolvability; (ii) approach to setting a minimum requirement for own funds and eligible liabilities (MREL) within groups, and further issues; and (iii) policy on valuation capabilities to support resolvability. li >
The proposals are relevant to all firms that are subject to the BoE's resolution powers, such as banks, larger investment firms and CCPs.
European Banking Authority Sets Out Its Work Priorities for 2019
The European Banking Authority has published its Work Programme for 2019, setting out details of, and planned main outputs from, 37 separate work streams across the following five key strategic priorities:
- Leading the Basel III implementation in the EU.
- Understanding risks and opportunities arising from financial innovation.
- Collecting, disseminating and analyzing banking data.
- Ensuring a smooth relocation of the EBA to Paris.
- Fostering the increase of the loss-absorbing capacity of the EU banking system.
The EBA also confirms that work related to Brexit will remain a horizontal priority for the EBA in 2019 and explains that the EBA's other activities may be affected in the future by Brexit-related developments. Should that be the case, any substantial change in the work programme will be communicated in due time, in order to seek steering and approval from its Management Board and Board of Supervisors.
View the EBA's 2019 Work Programme.
Draft UK Post-Brexit Regulations to Onshore the EU Bank Recovery and Resolution Directive Published
HM Treasury has published draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 to onshore the EU Bank Recovery and Resolution Directive in preparation for the U.K.'s exit from the EU. An explanatory guide to the draft Regulations has also been published. The draft Regulations will make changes to the existing U.K. legislation which transposed the BRRD into U.K. law, which is mainly the Banking Act 2009 and the Bank Recovery and Resolution (No 2) Order 2014, and to certain Delegated Regulations adopted by the European Commission under the BRRD. The aim of the draft Regulations is to ensure that the U.K. Special Resolution Regime is "legally and practically workable on a standalone basis" when the U.K. leaves the EU.
UK Government Consults on Transposition Measures for the EU Bank Creditor Hierarchy Directive
HM Treasury has published a consultation on the U.K. Government's proposed approach to implementing the EU Bank Creditor Hierarchy Directive (also known as the Insolvency Hierarchy Directive) into U.K. domestic law. Member states are required to transpose the BCHD into national law by December 29, 2018 and must apply the laws from the date of transposition.
The BCHD is part of a package of reforms aimed at further strengthening the resilience of EU banks. It lays down harmonized rules for the insolvency ranking of unsecured debt instruments for the purposes of the EU recovery and resolution framework. The BCHD introduces statutory subordination across the EU, by amending the Bank Recovery and Resolution Directive so as to require Member States to create a new class of non-preferred senior debt in their creditor hierarchy. Instruments meeting the relevant criteria to fall within the new class will be eligible to meet subordination requirements under the provisions of the Total Loss Absorbing Capacity (TLAC) term sheet and its EU equivalent, the requirement for Minimum Requirement for Own Funds and Eligible Liabilities (MREL). HM Treasury explains in the consultation paper that the statutory subordination introduced by the BCHD will not prevent the U.K.'s preferred approach, which is to require structural subordination (i.e. subordination within the terms of capital instruments).
UK Regulator Confirms its Expectations on Reporting for Resolution Planning
The Prudential Regulation Authority has issued an update on the application of its supervisory statement, "Resolution Planning." The supervisory statement sets out the PRA's expectations on the resolution planning information that firms must submit to comply with their obligations under the EU Bank Recovery and Resolution Directive. The update confirms the approach that will be taken by the PRA and the Bank of England as the U.K.'s national resolution authority.
US Federal Reserve Board and FDIC Extend Resolution Plan Submission Deadlines for Certain Institutions
The U.S. Board of Governors of the Federal Reserve System and U.S. Federal Deposit Insurance Corporation announced that the agencies have extended the submission deadline for the resolution plans (commonly referred to as “living wills”) for one designated non-bank and four foreign banking organizations. The announcement extends the submission deadline for the non-bank financial company from December 31, 2018 to December 31, 2019, and extends the submission deadline for the four foreign banking organizations from July 1, 2019 to July 1, 2020. The agencies noted that the extended deadline will allow for feedback to be provided to the institutions with respect to their prior resolution plan submissions, and will also provide time for the institutions to prepare their next resolution plan submissions. The FDIC also announced that it will be extending the resolution plan submission deadline for all insured depository institutions to no sooner than July 1, 2020.
View full text of the FDIC and Federal Reserve press release.
International Swaps and Derivatives Association Publishes ISDA 2018 US Resolution Stay Protocol to Facilitate Compliance with US Stay Regulations
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 Brings First Service Provider to Payment Systems Within Special Administration Regime
The Financial Market Infrastructure Administration (Designation of VocaLink) Order 2018 has been laid before Parliament. The Order relates to the special administration regime for operators of financial market infrastructures, which came into force on July 13, 2018. Relevant FMIs are operators of recognized payment systems, excluding recognized CCPs (which are already subject to the Banking Act resolution regime in the U.K.) and recognized central securities depositories operating a securities settlement system. However, HM Treasury is able to designate certain service providers to FMIs as infrastructure companies and so bring them within the FMI administration regime.
The Order designates VocaLink as an infrastructure company in connection with its provision of services to the operators of Faster Payments Service, Bacs and LINK. HM Treasury judges that an interruption in VocaLink's services to these operators of payment services would have a serious adverse effect on their operation.
The Order comes into force on August 9, 2018.
View the Order (SI 2018/858).
View the explanatory memorandum.
UK Special Administration Regime for Financial Market Infrastructure Brought Into Force
A U.K. Order, the Financial Services (Banking Reform) Act 2013 (Commencement No. 1) (England and Wales) Order 2018, has been made. The Order brings into force, from July 13, 2018, the provisions in the Financial Services (Banking Reform) Act 2013 relating to the special administration regime for operators of financial market infrastructures. Relevant FMIs are operators of recognized payment systems, excluding recognized CCPs (which are already subject to the Banking Act resolution regime in the U.K.) and recognized central securities depositories operating a securities settlement system.
US Federal Reserve Board and US FDIC Publish Public Sections of July 2018 Resolution Plans
The U.S. Board of Governors of the Federal Reserve System and U.S. Federal Deposit Insurance Corporation published the public portions of the July 2018 resolution plans for four foreign banking organizations, which plans focus on the institutions’ U.S. operations. The public sections of the resolution plans summarize certain elements of the plans and how the resolution plans would be executed. The public portions of the resolution plans are published exactly as submitted by the institutions and are available on the Federal Reserve Board and FDIC websites.
View full text of the FDIC release.
View full text of Federal Reserve Board press release.
European Central Bank Publishes Best Practices for Eurozone Recovery Plans
The European Central Bank has published a report on recovery plans. The ECB is responsible for direct prudential supervision of certain significant banks based in the Eurozone as part of the Single Supervisory Mechanism. Under that remit, the ECB has analyzed the recovery plans of numerous Eurozone banks. The report sets out the ECB's experience of that process and best practices that have been adopted by some banks. The report is intended to assist Eurozone banks to improve their recovery planning, although the report itself is restricted to the recovery plans of significant institutions.
View the ECB's report.