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.
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.
European Commission Formally Withdraws Proposals for an EU Regulation on Bank Structural Reform
Following its announcement in its 2018 Work Programme of its intention to withdraw 15 pending EU legislative proposals, the European Commission has announced the formal withdrawal of that legislation, which includes the 2014 Proposal for a Regulation on structural reform of the EU banking sector.
The original proposal built on the 2013 recommendations of a high level expert group on reforming the structure of EU banking sector, chaired by Bank of Finland Governor and European Central Bank Governing Council member Erkki Liikanen. For banks within its scope, the provisions of the proposed regulation would have imposed a ban on proprietary trading and would have empowered supervisors to require banks to ring-fence certain trading activities from a deposit-taking entity.
US Regulators Extend Resolution Plan Filing Deadline for 14 US Financial Institutions
The U.S. Federal Reserve Board and FDIC have announced that they were extending the filing deadline for the resolution plans of 14 U.S. financial institutions to December 31, 2019. The agencies note that the deadline was extended to allow for additional time to provide feedback to these institutions with respect to their last resolution plan submissions and for the institutions to file their next resolution plan submissions. The agencies also reiterated that, pursuant to the Economic Growth, Regulatory Reform, and Consumer Protection Act, financial institutions with less than $100 billion in total consolidated assets are no longer subject to resolution plan requirements, and that over the course of the next 18 months, the agencies will determine which financial institutions with $100 billion or more, but less than $250 billion in total consolidated assets will be subject to the resolution plan process going forward.
View the FDIC press release.
View the Federal Reserve press release.
US Federal Reserve Board and US Federal Deposit Insurance Corporation Seek Comment on 2019 Resolution Plan Guidance
The U.S. Board of Governors of the Federal Reserve System and U.S. Federal Deposit Insurance Corporation have published revised resolution plan (or "living wills") guidance for the eight largest and most complex U.S. banking institutions. The proposed guidance would be applicable to resolution plans submitted beginning in 2019. The proposed guidance is largely based upon, and consistent with, prior guidance issued by the Federal Reserve Board and FDIC in 2016 - through the publication of Guidance for 2017 §165(d) Annual Resolution Plan Submissions by Domestic Covered Companies that Submitted Resolution Plans in July 2015 - and has been informed by, and updated as a result of, Federal Reserve Board and FDIC review of recent resolution plan submissions by these institutions. Consistent with prior guidance published by the Federal Reserve Board and FDIC, the proposed guidance is organized into six substantive areas: (1) Capital; (2) Liquidity; (3) Governance Mechanisms; (4) Operational; (5) Legal Entity Rationalization and Separability; and (6) Derivatives and Trading Activities. The proposed guidance includes updates to the Derivatives and Trading Activities and Operational: Payment, Clearing, and Settlement Activities Sections, and makes other clarifying changes. The changes and updates are intended, in part, to help streamline submissions by these institutions and to provide additional clarity with respect to the process. Comments to the proposed guidance will be due 60 days from its publication in the Federal Register.
View the full text of the proposal.
US Federal Reserve Board Releases 2018 CCAR Results
The U.S. Board of Governors of the Federal Reserve System announced the results of this year's Comprehensive Capital Analysis and Review process. This year, 35 financial institutions participated in the CCAR process. The CCAR process consists of a quantitative assessment, which evaluates an institution's capital adequacy and planned capital distributions against its ability to continue operating and lending throughout times of economic and financial market stress. In addition to the quantitative analysis, institutions that are designated "large and complex firms" or supervised by the Large Institution Supervision Coordinating Committee are subject to a qualitative assessment, which evaluates the reliability of each institution's analyses and other processes for capital planning. Of the 35 institutions that participated, 18 were subject to both quantitative and qualitative assessments, while the remaining 17 were only subject to the quantitative assessment. In connection with the CCAR process, the Federal Reserve Board objected to the capital plan of one institution due to qualitative concerns. Two institutions were issued a conditional no-objection to their capital plans and will be required to maintain their capital distributions at the levels paid by these institutions in recent years. A third institution was issued a conditional no-objection to its capital plan, subject to the institution "taking certain steps regarding the management and analysis of its counterparty exposures under stress."
View the full text of the 2018 CCAR results.
Federal Reserve Bank of New York Executive Vice President and Director of Research Discusses Supervisory Stress Testing Objectives
Federal Reserve Bank of New York Executive Vice President and Director of Research, Beverly Hirtle, discussed the macroprudential objectives of supervisory stress testing; focusing on structural and cyclical macroprudential considerations.
Financial Stability Board Finalizes Guidance to Support G-SIB Resolution Planning
Following consultation on draft guidance in November 2017, the Financial Stability Board has published two finalized guidance papers on aspects of the recovery and resolution of global systemically important banks.
The first guidance paper sets out Principles on Bail-in Execution. The Principles are designed to assist resolution authorities developing bail-in resolution strategies and making resolution plans for G-SIBs operational. The Principles cover six aspects of bail-in execution: (i) bail-in scope; (ii) valuation; (iii) exchange mechanic; (iv) securities law and securities exchange requirements; (v) governance and (vi) communications.
US Board of Governors of the Federal Reserve System Announce Stress Test Results
The U.S. Board of Governors of the Federal Reserve System announced the results of the eighth and latest round of Dodd-Frank Act stress testing.
View full text of the 2018 DFAST Methodology and Results.
European Banking Authority Issues Annual Report for 2017
The European Banking Authority has published its Annual Report for 2017.
The Annual Report summarizes the progress made in a number of workstreams undertaken by the EBA in 2017, including the EBA's work on: (i) developing and maintaining an EU Single Rulebook for banking; (ii) promoting supervisory convergence; (iii) developing resolution policies and promoting common approaches for the resolution of failing financial institutions; (iv) determining and monitoring key risks in the banking sector across Europe; (v) strengthening the EBA's role as EU data hub for the collection, use and dissemination of banking data; (vi) protecting consumers, monitoring financial innovation and contributing to easy retail payments in the EU; (vii) Brexit preparations; (viii) international engagement; and (ix) cross-sectoral work by the European Supervisory Authorities under the Joint Committee.
European Banking Authority Mediates Disagreement on Two Cross-Border Banking Groups' Resolution Plans
The European Banking Authority has published a redacted Decision on the disagreement between the Single Resolution Board and the National Bank of Romania, in their capacity as national resolution authorities under the EU Bank Recovery & Resolution Directive and the Single Resolution Mechanism Regulation. The Decision is the first that the EBA has made in its role as mediator between two resolution authorities responsible for agreeing the resolution plan for a EU cross-border banking group. The SRB and NRB failed to reach agreement on the resolution plan for two different banking groups. The EBA's Decision relates to both cases as the underlying facts and situation were similar.
The EBA's Decision requires the SRB and NRB to include detailed resolvability assessments and a consideration of the impediments to resolvability within any resolution plan that is adopted by either or both of the parties. Both resolution authorities must report within one month of the Decision to the EBA on the steps that they have taken to comply with the Decision and must make subsequent reports on a quarterly basis until the adoption of a joint decision on a group resolution plan.
View the Decision.
Bank of England Confirms Approach to Valuation Capabilities of Firms to Support Resolvability
Following its consultation in August 2017, which closed in November 2017, the Bank of England has published its Statement of Policy on its 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. In the BoE's view, limitations to a firm's valuation capabilities may constitute an impediment to resolvability where those limitations would not reliably enable valuations that support the firm's intended resolution strategy.
The BoE has made several changes to its proposed Statement of Policy following consultation responses. Briefly, these are: (i) extending the compliance deadline to January 1, 2021 and introducing a provision for firm-specific compliance dates to be set in certain cases; (ii) explicitly requiring operational documentation of how capabilities would be used in a resolution scenario; and (iii) including a provision whereby certain smaller and simpler firms may not need to have resolution valuation models in place.
UK Prudential Regulator Confirms its Approach to MREL Reporting
The U.K. Prudential Regulation Authority has published a Policy Statement on reporting the minimum requirement for own funds and eligible liabilities and an updated Supervisory Statement "Resolution Planning", following a consultation which ran from January 8 to April 9, 2018. MREL is a minimum requirement for firms to maintain equity and eligible debt liabilities that can bear losses before and in resolution and results in a top up to standard regulatory capital requirements, similar in concept to the old Tier 3 requirements under Basel II. The requirement will apply to U.K. authorized banks, building societies and PRA-designated investment firms, parent undertakings of those firms that are financial holding companies and to U.K. authorized subsidiaries of such firms. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.
Bank of England Confirms its Approach to Setting Internal MREL in Groups
The Bank of England has published a Policy Statement setting out its feedback to the responses it received to its October 2017 consultation on its approach to setting a minimum requirement for own funds and eligible liabilities. MREL is a minimum requirement for firms to maintain equity and eligible debt liabilities that can bear losses before and in resolution and results in a top-up to standard regulatory capital requirements, similar in concept to the old Tier 3 requirements under Basel II. The requirement will apply to U.K. authorized banks, building societies and PRA-designated investment firms, parent undertakings of those firms that are financial holding companies and to U.K. authorized subsidiaries of such firms. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.
The BoE's October 2017 consultation set out proposals for changes to the BoE's 2016 Statement of Policy on its approach to setting "external" MREL for resolution entities, to include the BoE's approach to "internal" MREL, i.e. instruments that are issued to a resolution entity from other legal entities in a group. Internal MREL is intended to cover U.K.-headquartered banking groups as well as U.K. subsidiaries of overseas banking groups.
US Board of Governors of the Federal Reserve System Announces Scheduled Release Date for Stress Test and CCAR Results
The U.S. Board of Governors of the Federal Reserve System announced the dates for the release of the results from the most recent round of supervisory stress tests conducted as part of the Dodd-Frank Act and related Comprehensive Capital Analysis and Review exercise. The results from the D-FAST supervisory stress tests and CCAR will be released on June 21, 2018, and June 28, 2018, respectively.
View Full text of the Federal Reserve Board press release.
Financial Stability Board Seeks Comment on Technical Implementation of TLAC
The Financial Stability Board is seeking feedback on the technical implementation of standards on the adequacy of total loss-absorbing and recapitalization capacity for Global Systemically Important Banks in resolution - the TLAC Standard. The FSB wants to assess whether implementation aligns with the timelines and objectives set out in the TLAC Standard. The TLAC Standard is being phased in, with G-SIBs expected to reach the first minimum requirement by January 1, 2019.
The FSB is due to report to the G20 on the implementation of TLAC by the end of 2019. The comments provided in response to the call for feedback will help the FSB to prepare that report. The FSB highlights that the objective of the call for feedback is to monitor implementation by jurisdictions of the TLAC Standard and to identify whether there are any technical issues or operational challenges in implementation. The aim is not to seek views on the substantive aspects of the standard or whether any changes should be made to it. The FSB will consider whether further implementation guidance is needed based on the feedback.
The FSB requests views and evidence on:
1. the regulatory adoption of the TLAC principles and Term Sheet;
2. cross-border aspects of the implementation of the TLAC Standard;
3. G-SIBs' issuance strategies and overall progress towards meeting external and internal TLAC requirements;
4. distribution of TLAC instruments and liabilities in the market; and
5. any technical issues or material factors impacting implementation of the TLAC Standard.
Responses to the call for feedback should be submitted via email by August 20, 2018.
View the call for feedback.
Financial Stability Board Launches Third Thematic Peer Review on Bank Resolution Planning
The Financial Stability Board has launched its third thematic peer review on bank resolution planning, with the aim of evaluating implementation, by FSB member jurisdictions, of the resolution planning standard contained in the FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions and associated guidance for banks.
The third thematic peer review will cover resolution planning for all globally or domestically systemically important banks in FSB member jurisdictions and any other banks that could be systemic in failure and that are included in resolution planning at a jurisdictional level. Given that much of the FSB's work has focused on G-SIBs in recent years, the focus of this third review will be on banks other than G-SIBs. It will consider how, and to what extent, the expectations in FSB guidance have been applied to these institutions.
EU Authorities Highlight Importance of Bail-In Risk Disclosures for Retail Investors in Bank Debt Liabilities
The European Banking Authority and the European Securities and Markets Authority have published a joint statement on the treatment of retail holdings of debt financial instruments under the EU Bank Recovery and Resolution Directive and the revised Markets in Financial Instruments Directive. The EBA and ESMA highlight that care is needed when bail-in is implemented in relation to debt liabilities held by retail customers. There have been a number of mis-selling cases as a result of firms not complying with the investor protection requirements at the point of sale of banks' debt liabilities to retail investors.
The EBA and ESMA emphasize that to ensure that debt instruments are distributed to clients for whom they are suitable, firms must properly implement the MiFID II investor protection requirements. Those requirements oblige firms to, among other things, act honestly, fairly, professionally and in the best interests of clients, disclose certain information to potential and existing clients and conduct suitability assessments. In addition, the product governance framework requires manufacturers and distributors of financial products to act in the client's best interests at all stages of the life-cycle of products or services. In particular, firms must identify the target market for complex products to a greater level of detail than other products. Instruments subject to bail-in must be classified as complex products.
US Federal Reserve Board Vice Chairman for Supervision Randal Quarles Discusses Cross-Border Resolution
U.S. Board of Governors of the Federal Reserve System Vice Chairman for Supervision Randal Quarles discussed the importance of finding the correct balance in cross-border resolution.
European Banking Authority Proposes Revised Technical Standards for Resolution Reporting
The European Banking Authority has published a final report and final revised draft Implementing Technical Standards on resolution reporting requirements. The EBA proposes to replace the existing ITS with the revised ITS to reflect the evolution in the policy and practices applied by authorities in the development of resolution plans for financial institutions. The new framework is proposed to become operational in 2019 when resolution authorities collect information as of December 31, 2018.
The revised draft ITS set out the procedures and a minimum set of standard templates for use by institutions when providing information to resolution authorities that is needed to draw up and implement resolution plans. The power of resolution authorities to apply simplified obligations or to require further information from a firm is specifically provided for in the revised draft ITS, in line with the EU Bank Recovery and Resolution Directive. In addition, the revised draft ITS specify the information required from groups and from individual entities. Furthermore, the revised draft ITS set the frequency, reference dates and remittance dates and the format for submission of information.
The EBA confirms that the final draft revised ITS take into account comments received during consultation and provides a summary of the main changes that have been made.
International Standard Setters Publish Framework for Supervisory Stress Testing of Multiple CCPs
The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions have published a Framework for the supervisory stress testing of CCPs, following a joint consultation launched in June 2017.
In April 2015 the CPMI and IOSCO were asked by the G20 to develop, in conjunction with the Financial Stability Board and the Basel Committee on Banking Supervision, a "CCP workplan" for identifying and addressing remaining gaps and potential financial stability risks related to CCPs that are systemic across multiple jurisdictions and for helping to enhance their resolvability.
UK Prudential Regulation Authority Publishes its 2018/19 Business Plan
The Prudential Regulation Authority has published its Business Plan for 2018/19 which sets out its strategic goals and workplan to deliver those goals. The PRA also published a consultation paper on its fees and levies for 2018/19 alongside the Business Plan as well as a report to the Prudential Regulation Committee on the adequacy of PRA resources and independence of PRA functions.
Read a summary of the PRA's goals and workplan.
European Commission Launches Package to Address Non-Performing Loans Build-Up in the EU
The European Commission has launched a package of legislative and non-legislative measures to address remaining and future non-performing loans in the EU. Since the 2007/8 financial crisis, there has been a build-up of NPLs in the EU, which impacts banks’ viability and lending capabilities. NPLs are loans where the borrower has difficulties in making scheduled payments to cover interest and/or capital reimbursements. A loan is classified as an NPL when it is either more than 90 days past due or the loan is assessed as unlikely to be repaid by the borrower.
The package comprises:
- A proposed Regulation amending the Capital Requirements Regulation to introduce a statutory prudential backstop, which will require banks to have minimum loan loss coverage for newly originated loans;
- A proposed new Directive on credit services, credit purchasers and the recovery of collateral which seeks to enable banks to deal more efficiently with NPLs by introducing an accelerated extrajudicial collateral enforcement mechanism and facilitating the outsourcing of servicing of loans to specialized credit servicers; and
- A Technical Blueprint for Member States to set up National Asset Management Companies where NPLs have become a significant issue in a particular Member State. It is intended for use in restructuring of banks in compliance with the EU Bank Recovery and Resolution Directive and State Aid rules.
European Commission Provides Clarification on the Law Applicable to the Proprietary Effects of Transactions in Securities
The European Commission has published a Communication on the law applicable to the proprietary effects of transactions in securities. The Commission's objective is to clarify the conflicts of law provisions in the Financial Collateral Directive, the Settlement Finality Directive and the Winding-up Directive. These Directives apply to book-entry securities and instruments, the existence or transfer of which presupposes their recording in a register, an account, or centralized deposit system. All three Directives designate the applicable law based on the place of the relevant register or account. However, there is a degree of uncertainty because the provisions in the Directives use different language and because there is diverse interpretation and application of the provisions across the EU. The Communication confirms the Commission's view that the terms 'maintained' and 'located' used in these Directives mean the same thing and that the different ways across the EU of determining where the account or register is 'maintained' or 'located' are valid. The Commission's views are subject to any potential future decisions of the Court of Justice of the European Union on these issues.
The Commission will monitor developments in this area and assess whether any further action is necessary. National authorities are called upon to take the Commission's clarifications into account when applying the conflicts of law provisions of the FCD, SFD or WUD. The Communication should be read in conjunction with the Commission's proposed Regulation on the law applicable to the third-party effects of assignments of claims.
View the Communication.
View the proposed separate Regulation on assignment of claims.
European Commission Proposes Legislation to Provide Legal Certainty for Cross-Border Assignment of Claims
The European Commission has published a proposed Regulation on the law applicable to the third-party effects of assignments of claims. The proposed Regulation was published alongside a Communication on the law applicable to the proprietary effects of transactions in securities.
Existing conflicts of law rules as to the contractual elements of the assignment of claims are governed at EU-level by the Rome 1 Regulation. However, there are no EU-level conflicts of law rules on the proprietary elements (or third-party effects) of the assignment of claims. The proprietary elements relate to who has ownership rights over a claim, which requirements must be met by an assignee to give him legal title over the claim and the resolution of competing claims. Currently, each Member State's conflicts of law rules govern the assignment of claims. These rules are inconsistent across the EU because they use different connecting factors to determine the applicable law - the rules in some Member States are based on the law of the assigned claim, others are based on the law of the assignor's habitual residence and other conflicts of law rules are based on the law of the assignment contract. In addition, some conflicts of law rules are unclear, particularly where they are not stated in legislation. Without legal certainty, market participants may not be aware of or choose to ignore the risk and then encounter unexpected losses; or they may mitigate the risk by seeking legal advice which will result in higher transaction costs; or they may be dissuaded by the legal risk, choose to avoid it and miss business opportunities.
European Commission Proposes EU Covered Bonds Legislative Package
The European Commission has published legislative proposals for a new EU covered bonds framework. The legislative package consists of a proposed Directive on the issue of covered bonds and covered bond public supervision and a proposed Regulation to amend the prudential treatment of covered bonds under the Capital Requirements Regulation. The proposals are part of the EU's Capital Markets Union project and follow from the work of the European Banking Authority in this area, in particular, its 2016 recommendations for an EU covered bonds framework.
The proposed Covered Bonds Directive will apply to covered bonds issued by EU credit institutions, which means that only EU credit institutions will be able to issue covered bonds governed by the framework. Issuers using the EU covered bonds label will need to comply with the proposed Directive but can also use the label with national labels. Covered bonds are debt obligations issued by credit institutions and secured against a ring-fenced pool of assets to which bondholders have direct recourse as preferred creditors. The proposed Directive provides requirements for issuing covered bonds and the structural features of covered bonds, including dual recourse and bankruptcy remoteness. There are also provisions to address liquidity risk through the imposition of a liquidity buffer related to the cover pool and transparency provisions requiring information to be disclosed to covered bond investors. In addition, the proposed Directive provides for supervision at national level of covered bonds.
US Department of the Treasury Releases Report and Recommendations Regarding the Orderly Liquidation Authority
The U.S. Department of the Treasury released its report and recommendations regarding the Orderly Liquidation Authority established under Title II of the Dodd-Frank Act. The report proposes a “bankruptcy first” approach to the resolution of financial institutions, recommending the establishment of a new chapter of the U.S. Bankruptcy Code. This new Chapter 14, which has been the subject of academic and industry debate for several years, would generally involve placing the top-tier parent of a financial group into bankruptcy proceedings and transferring the subsidiaries to a new bridge company and would also include procedural features tailored to address specific nuances in respect of the resolution of financial institutions.
US Board of Governors of the Federal Reserve System and US Federal Deposit Insurance Corporation Announce Resolution Plan Feedback
The US Board of Governors of the Federal Reserve System and US Federal Deposit Insurance Corporation announced that they have provided feedback to 19 non-US-based financial institutions on their 2015 resolution plans, and the Federal Reserve Board provided links to the feedback letters that were issued to each of these 19 financial institutions. The agencies noted in the announcement that given the limited complexity of these financial institutions’ US operations, the agencies will further tailor their expectations for the upcoming resolution plan submissions by these institutions, which are due no later than December 31, 2018.
View the Federal Reserve Board press release and feedback letters for each of the banks.
UK Prudential Regulation Authority Proposes MREL Reporting Requirements
The Prudential Regulation Authority has published proposals which would require firms to report on their progress in meeting their minimum requirement for own funds and eligible liabilities (MREL) requirement. MREL is a minimum requirement for firms to maintain equity and eligible debt liabilities that can bear losses before and in resolution and results in a top up to standard regulatory capital requirements, similar in concept to the old Tier 3 requirements under Basel II. The requirement will apply to UK authorized banks, building societies and PRA-designated investment firms, parent undertakings of those firms that are financial holding companies and to UK authorized subsidiaries of such firms. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.
The PRA is proposing to amend the Supervisory Statement on Resolution Planning to set out its expectations on the information firms should provide in relation to their MREL requirement. The PRA would share the information received with the Bank of England which is the UK's resolution authority. The PRA intends to use the information received to monitor a firm's progress in complying with its MREL requirement and to assess whether a firm is, or is likely to be, in breach of its MREL requirement.
EU Finalizes Changes to Ranking of Unsecured Debt Instruments in Insolvency Hierarchy
An EU Directive amending the Bank Recovery and Resolution Directive has been published in the Official Journal of the European Union. The amending Directive amends the ranking of unsecured debt instruments in the insolvency hierarchy for the purpose of bank resolution and insolvency proceedings by introducing non-preferred senior debt instruments as a separate category of senior debt. These new instruments will rank junior to all other senior liabilities but will be senior to subordinated debt. The debt instruments must have an original contractual maturity of at least one year, must not contain embedded derivatives or be derivatives themselves and the contractual documentation, including the prospectus where applicable, relating to their issuance must explicitly refer to their lower ranking under normal insolvency proceedings.
Member states are required to transpose the amending Directive into national law by December 29, 2018 and must apply the laws from the date of transposition. The new provisions will apply to unsecured claims resulting from debt instruments issued on or after the date of application of the amending Directive. The insolvency ranking of all outstanding unsecured claims resulting from instruments issued before that date will be governed by the relevant national law as adopted at December 31, 2016, unless the national law permitted firms to issue subordinated liabilities in which case the instrument will be ranked as non-preferred senior debt instruments issued under the amending Directive.
View the BRRD Insolvency Hierarchy Directive.
Eurozone Single Resolution Board Outlines its MREL Policy for 2017 and Next Steps
The Single Resolution Board has published its second policy statement on the minimum requirement for own funds and eligible liabilities (MREL). MREL is the EU equivalent of the minimum amount of loss-absorbing capacity that is also covered by the international standard of total loss absorbing capacity (TLAC) developed by the Financial Stability Board. MREL was introduced in May 2014 by the Bank Recovery and Resolution Directive for all EU banks, including those banks within the SRB's remit. 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 Banking Union).
The SRB's MREL policy for 2017 provides for a multi-year timeframe, with transition periods which will allow individual banks to implement the requirement by progressively building up their MREL capacity. This replaces the preliminary MREL approach used in 2016. The SRB will set bank-specific binding consolidated MREL targets for the majority of the largest and most complex Eurozone banks, including all global systemically important institutions (G-SIIs) and banks with resolution colleges under its remit.
In 2018, the SRB will focus on: (i) enhancing the MREL targets based on the outcome of the SRB’s resolvability assessment; (ii) refining its location policy within groups and developing a framework for individual and internal MREL; and (iii) developing a policy for transfer strategies.
View the SRB Policy for 2017.
US Banking Agencies Announce Joint Determinations for Living Wills of Largest US Banks
The US Board of Governors of the Federal Reserve System and the US Federal Deposit Insurance Corporation announced that none of the most recent resolution plans for the eight largest and most complex domestic banking organizations had deficiencies that were so severe as to require resubmission. The agencies did, however, note that half of the resolution plans that were submitted had “shortcomings” that must be addressed in the institutions’ next submissions due July 1, 2019. The Federal Reserve Board and the FDIC also stated that while this round of resolution plans demonstrates that significant progress that has been made in the area of resolution planning, more work needs to be done, especially in the areas of resolvability, internal loss-absorbing capacity, derivatives and payment, clearing and settlement activities. The agencies also noted that institutions should be cognizant of changes to their risk profiles that will need to be accounted for in future resolution plans. The Federal Reserve Board and the FDIC noted that they continue to explore ways to improve the resolution planning process and are considering extending the cycle for resolution plan submissions from annual to once every two years, to reflect the time needed to prepare and review the plans.
View joint agency press release.
European Commission Delegated Regulation on Contributions to the Expenditure of the Single Resolution Board Published
Commission Delegated Regulation (EU) 2017/2361 on the final system of contributions to the administrative expenditures of the Single Resolution Board has been published in the Official Journal of the European Union. 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 Banking Union).
The Delegated Regulation sets out a final system for the determination and raising of the contributions to administrative expenditures of the SRB, which will replace the provisional system introduced in 2014. While the provisional system covered only a limited subset of entities, namely entities which are considered significant by the European Central Bank, the final system will apply for all entities that are subject to the Single Resolution Mechanism.
The Delegated Regulation will take effect from January 8, 2018.
View the Delegated Regulation.