United States: Financial Regulatory Developments Focus - Mar 8, 2018 Issue 9/2018

AML/CTF, SANCTIONS AND INSIDER TRADING

Final EU Standards on Cooperation Among National Regulators Under the Market Abuse Regulation

On February 27, 2018, a Commission Implementing Regulation providing Implementing Technical Standards on the procedures and forms for exchange of information and assistance between national regulators under the Market Abuse Regulation was published in the Official Journal of the European Union. MAR, which entered into force on July 3, 2016, requires national regulators to cooperate with each other in investigations and on supervision and enforcement matters by exchanging information, taking statements from individuals, conducting on-site inspections or investigations and in the recovery of monetary sanctions. The new ITS describe the procedures to be followed by national regulators when making, acknowledging, processing and replying to requests for assistance and when unsolicited assistance is provided and contain standard forms for national regulators to use when doing so.

The ITS enter into force on February 28, 2018 and apply directly across the EU.

The Commission Implementing Regulation is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018R0292&from=EN.

BANK PRUDENTIAL REGULATION & REGULATORY CAPITAL

US Federal Reserve Board Vice Chairman for Supervision Discusses Regulatory Agenda for Foreign Banking Organizations

On March 5, 2018, Randal Quarles, U.S. Board of Governors of the Federal Reserve System Vice Chairman for Supervision, discussed the need to examine post-crisis reforms. Focusing on post-crisis regulations that impact foreign banking organizations operating in the U.S., he noted that regulations should be reviewed to ensure not only efficacy, but also efficiency and transparency. Quarles noted that the Federal Reserve Board will consider additional tailoring and flexibility in light of the impact of regulations on foreign banking organizations. He highlighted two key regulatory examples: enhanced prudential standards and the Volcker Rule. With respect to enhanced prudential standards, Vice Chairman Quarles noted that the Federal Reserve Board has been sensitive to the unique features of non-U.S. financial institutions operating in the United States, noting specific circumstances where the Federal Reserve Board has exercised flexibility to accommodate these differences, including allowing the global risk committee to serve as the risk committee for U.S. operations and recognizing that effective home country stress testing regimes can take many forms.

Further, Quarles noted that the Federal Reserve Board has retained flexibility in the implementation of the intermediate holding company requirement, and just recently approved an application for a foreign banking organization to establish a second intermediate holding company. Vice Chairman Quarles also discussed perceived shortcomings with the Volcker Rule, stating that while the premise is simple, the regulation itself is very complex and "not working well." Vice Chairman Quarles stated that the Federal Reserve Board is actively working with the other Volcker Rule regulatory agencies to find ways to simplify and streamline the Volcker Rule, particularly for institutions that do not have large trading operations, and that the agencies are working on a proposal for public comment that would make "material changes" to the regulation. Specific areas of focus include making definitions of key terms such as "proprietary trading" and "covered fund" as well as the exemption for market-making and the so-called "RENT'D" test as simple and clear as possible.

With respect to the Volcker Rule's impact on non-U.S. financial institutions operating in the United States, Vice Chairman Quarles noted that the agencies are considering changes to the complexity of the exemptions available to foreign banking organizations for trading and engaging in covered fund activities solely outside the United States and the Volcker Rule compliance regime. He also stated that he would expect the enforcement action stay that the agencies granted to foreign funds that are organized outside of the U.S. and offered solely to foreign investors last summer to be extended.

The full text of Vice Chairman Quarles's remarks is available at:
https://www.federalreserve.gov/newsevents/speech/quarles20180305a.htm.

US House of Representatives Votes to Pass Bill on Operational Risk Capital Requirements for Financial Institutions

On February 27, 2018, the U.S. House of Representatives voted 245-169 in favor of passing H.R. 4296. The bill prohibits federal financial regulators from establishing operational risk capital requirements for financial institutions unless the requirements are based upon, and appropriately sensitive to, the risks posed by the institution's current business and operations. The requirements also must be forward-looking, rather than focused on historical losses of the financial institution, and provide for adjustment to capital requirements based upon the operational risk mitigating activities of the financial institution. The bill was originally part of the larger Financial CHOICE Act, which passed the House in June 2017. The bill was read in the U.S. Senate and referred to the U.S. Senate Committee on Banking, Finance, & Urban Affairs.

The full text of the bill is available at: https://www.congress.gov/115/bills/hr4296/BILLS-115hr4296rfs.pdf.

European Central Bank Consults on Draft Guides to Assessing Adequacy of Internal Capital and Liquidity

On March 2, 2018, the European Central Bank published two consultations on draft guides on the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). The draft Guides, which will be relevant to institutions within the Single Supervisory Mechanism, are designed to assist institutions in strengthening their ICAAPs and ILAAPs and encourage the use of best practices by explaining in greater detail the ECB's expectations.

The draft ICAAP and ILAAP Guides each set out seven principles that have been derived from the relevant provisions of the Capital Requirements Directive and that will be considered, among other things, by the ECB in the assessment of each institution's ICAAP or ILAAP as part of the Supervisory Review and Evaluation Process. Frequently Asked Questions have also been published alongside the draft guides.

In addition to the draft Guides and relevant EU law and national law, the ECB also encourages institutions to take into account other relevant publications from the European Banking Authority and international fora such as the Basel Committee on Banking Supervision and the Financial Stability Board.

Feedback on the draft guides is requested by May 4, 2018. The ECB also proposes to hold a public hearing on the consultations on April 24, 2018.

The draft ECB Guide to ICAAP is available at:

https://www.bankingsupervision.europa.eu/legalframework/publiccons/pdf/icaap_ilaap/ssm.icaap_guide_201803.en.pdf, the draft ECB Guide to ILAAP is available at: https://www.bankingsupervision.europa.eu/legalframework/publiccons/pdf/icaap_ilaap/ssm.ilaap_guide_201803.en.pdf and the Frequently Asked Questions are available at: https://www.bankingsupervision.europa.eu/legalframework/publiccons/pdf/icaap_ilaap/ssm.ilaap_guide_201803.en.pdf.

Basel Committee Proposes Revisions to Pillar 3 Disclosure Framework

On February 27, 2018, the Basel Committee on Banking Supervision published a consultation on its proposals for the third phase of the Pillar 3 Framework. Pillar 3 comprises a set of quantitative and qualitative disclosure requirements applicable to banks in relation to capital, risk exposures and risk assessment processes, which are designed to allow other market participants to assess each bank's capital adequacy.

The Pillar 3 framework was last updated in March 2017, following a Basel Committee review. The Basel Committee now proposes some revisions and additions to the Pillar 3 framework which result from the finalization of the Basel III framework in December 2017. The consultation sets out revised disclosure requirements for: credit risk (including disclosures for prudential treatment of problem assets); operational risk; leverage ratio; credit valuation adjustment (CVA); and for overview templates on risk management, risk- weighted assets (RWA) and key prudential metrics. The consultation also sets out new disclosure requirements to benchmark the RWA outcomes of banks' internal models with RWA calculated according to the standardised approaches.

The Basel Committee believes disclosure of information by banks on encumbered and unencumbered asset breakdowns is meaningful to users of Pillar 3 data, as this information enables a preliminary overview on the extent to which a bank's assets remain available to creditors in the event of insolvency. To capture this information, the Basel Committee proposes to introduce a new template for banks to disclose information on their encumbered and unencumbered assets.

The Basel Committee is also proposing new disclosure requirements to provide users of Pillar 3 data with information on the capital ratio of a bank that would result in national supervisors imposing constraints on capital distributions. The template for this disclosure will provide that the disclosure would be mandatory for banks only when required by their national supervisors.

Finally, Template CC1, which was introduced in March 2017 to provide for disclosures on the composition of a bank's regulatory capital, currently applies at the level of the consolidated group. The BCBS seeks feedback on the advantages and disadvantages of expanding the scope of application of Template CC1 to resolution groups.

Comments on the consultation are invited by May 25, 2018.

The consultation is available at: https://www.bis.org/bcbs/publ/d432.pdf and the feedback form is available at: https://www.bis.org/bcbs/commentupload.htm.

European Systemic Risk Board Final Report and Opinion on Use of Structural Macroprudential Instruments in the EU

On February 27, 2018, the European Systemic Risk Board published a final report setting out proposed amendments to the ESRB Handbook on Operationalising Macro-prudential Policy and policy proposals on the legal framework of the systemic risk buffer and the structural buffers for global systemically important institutions (G-SIIs) and O-SIIs.

O-SIIs are institutions that fall short of classification as G-SIIs, but whose failure would have a significant negative effect on the financial system, either at EU level or at the level of an EU Member State. Institutions identified as O-SIIs attract stricter regulatory treatment under the Capital Requirements Directive and Capital Requirements Regulation, in particular being subject to the "O-SII buffer," an institution-specific buffer which focuses on reducing the institution's probability of default.

The ESRB's final report has been prepared by the Expert Group of the ESRB's Instruments Working Group, which has analyzed the use of the macroprudential buffers in the EU over the past three years. The final report sets out the results of a stock-take of the use of the buffers and an evaluation of their effectiveness and efficiency and how the buffers interact. It then goes on to examine the macro-economic impact of the structural buffers and the cyclical buffers (namely, system-wide capital requirements and the counter-cyclical buffer) and how structural and cyclical buffers interact. Finally, it sets out the ERSB's recommendations on guiding principles that could be used for the application of the O-SII and systemic risk buffers and on interaction between the buffers.

The ESRB has a mandate under CRDIV and the CRR to adopt Opinions on the appropriateness of certain macroprudential policy measures before their adoption by EU Member States or the European Central Bank. Alongside the final report, the ESRB has also published an Opinion to the European Commission on structural macroprudential buffers, which builds on the response it provided in October 2016 to a European Commission consultation on the review of the macroprudential policy framework. The Opinion reaffirms the ESRB's view that the CRDIV/CRR legislation provides the essential elements for a sound EU macroprudential framework, but the ESRB makes a number of proposals to enhance the macroprudential toolkit.

The ESRB notes in the Opinion that there is no current consensus on the optimal level of capital requirements and has regard to a recent G20 statement recommending that further significant increases in bank capital requirements should be avoided. Accordingly, the proposals focus on improving the flexibility and transparency of how the structural buffers are applied, rather than on increasing their level.

In relation to the O-SII buffers, the ESRB proposes: (i) an increase in the O-SII buffer cap; (ii) a substantial increase in the additional O-SII buffer cap for subsidiaries; and (iii) an ESRB recommendation providing additional guidance for the calibration of the O-SII buffer, including the scope of the buffer's application.

With regard to the systemic risk buffer (the SRB), the ESRB proposes that mandatory sequencing for its activation (known as the "pecking order") be abolished and the SRB be upgraded to the status of a dedicated instrument to address system-wide structural systemic risks not covered by the CRR. The ESRB also proposes adapting the framework to: enable national regulators (or other designated authorities) to use the SRB to target specific sources of risk; limit the application of the SRB to risks stemming from the systemic importance of individual institutions; and simplify and clarify the notification and approval procedure.

As regards the interaction between the structural buffers, the ESRB notes that the current CRDIV "accumulation rule" means that, if applied on a consolidated basis, only the higher of the G-SII buffer, O-SII buffer and the SRB is currently applicable to an institution. The ESRB considers that, instead, capital requirements related to measures that target different systemic risks should be cumulative. Measures targeting different risks should be accumulated, but—to avoid the double counting of risks—measures targeting the same risks should not.

The ESRB does not expect that adoption of its proposals would lead to significant impact on existing capital requirements for credit institutions. The final report is available at:

http://www.esrb.europa.eu/pub/pdf/reports/esrb.report180227_finalreportmacroprudentialinstruments.en.pdf,

the Opinion is available at: http://www.esrb.europa.eu/pub/pdf/other/esrb.opinion180227_macroprudentialinstruments.en.pdf and the ESRB Handbook on Operationalising Macro-prudential Policy is available at: https://www.esrb.europa.eu/pub/pdf/other/esrb.handbook_mp180115.en.pdf.

The European Commission consultation on review of the EU macroprudential framework is available at: https://www.esrb.europa.eu/pub/pdf/other/esrb.handbook_mp180115.en.pdf and the ESRB's response to the European Commission consultation is available at: https://www.esrb.europa.eu/pub/pdf/other/20161024_ESRB_response_EC.en.pdf?9f455bfff182f9e0a5ea8024dcd41cf8.

To view the full article click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Barnabas W.B. Reynolds
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Shearman & Sterling LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Shearman & Sterling LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions