Worldwide: Financial Regulatory Developments Focus — Issue 18, May 9, 2018

AML/CTF, Sanctions and Insider Trading

FINRA Updates AML Rules to Conform to Upcoming Customer Due Diligence Requirements

On May 3, 2018, the Financial Industry Regulatory Authority published amendments to FINRA Rule 3310, the anti-money laundering compliance program rule. The FINRA amendments seek to harmonize Rule 3310 with the Customer Due Diligence Requirements for Financial Institutions rule issued by the U.S. Financial Crimes Enforcement Network on May 16, 2018. Amended Rule 3310 requires firms to conduct ongoing customer due diligence, establish procedures to understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile, conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, maintain and update customer information, including information regarding the beneficial ownership of legal entity customers. Amended Rule 3310 becomes effective on May 11, 2018, which coincides with the compliance date for FinCEN's CDD Rule.

The full text of Regulatory Notice 18-19 is available at:

Bank Prudential Regulation & Regulatory Capital

US Federal Reserve Board Approves Amendments to Regulation A

On May 7, 2018, the U.S. Board of Governors of the Federal Reserve System approved final amendments to Regulation A (Extensions of Credit by Federal Reserve Banks). The amendments make technical changes to provisions regarding establishing the primary credit rate in a financial emergency and delete obsolete provisions of Regulation A. With respect to the former, Regulation A will be amended to provide that in a financial emergency (defined as "a significant disruption to the U.S. money markets resulting from an act of war, military or terrorist attack, natural disaster, or other catastrophic event"), the primary credit rate will be the target federal funds rate or, if the Federal Open Market Committee has established a target range for the federal funds rate, a rate corresponding to the top of the target range. The amendments also delete references to credit ratings for Term Asset-Backed Securities Loan Facilities, given that the program has expired. The amendments to Regulation A will take effect on June 8, 2018.

The full text of the final rule is available at:

US Federal Reserve Board Vice Chairman for Supervision Randal Quarles Discusses Liquidity Regulation and the Federal Reserve Board's Balance Sheet

On May 4, 2018, U.S. Federal Reserve Board Vice Chairman for Supervision Randal Quarles discussed the relationship between liquidity and other post-crisis regulation and the Federal Reserve Board's balance sheet. Referencing the Federal Reserve Board's recent proposals to modify the enhanced supplementary leverage ratio and stress capital buffer, Vice Chairman Quarles noted that changes to financial regulations can serve to encourage prudent behavior without any material capital reduction or cost to the system's resiliency and can lead to greater efficiency of the financial system as a whole. Vice Chairman Quarles discussed the role that insufficient liquidity played in the financial crisis, and explained that post-crisis regulation, such as the introduction of the Liquidity Coverage Ratio in 2014, has resulted in changes to market dynamics and bank behavior. In particular, he noted that many large banks have adjusted their funding profiles, reducing their reliance on short-term wholesale funding, and their asset profiles, increasing their holdings of cash and other high-quality liquid assets. Noting that many institutions rely on their reserve balances at the Federal Reserve to meet their LCR HQLA requirements, Quarles discussed the impact that shrinking the Federal Reserve's balance sheet could have on such holdings. Vice Chairman Quarles concluded that there is a significant amount of heterogeneity in how these institutions meet their LCR  requirements and reserve balances are only one type of available HQLA. Quarles noted that the Federal Reserve will monitor how the distribution of reserve balances evolves as well as the volume and composition of deposits and movements in interest rates in continuing to shrink the Federal Reserve's balance sheet and make other monetary policy decisions.

The full text of Vice Chairman Quarles's speech is available at:

UK Prudential Regulation Authority Finalizes Model Risk Management Principles for Stress Testing

On April 30, 2018, the Prudential Regulation Authority published a Policy Statement and a finalized Supervisory Statement following a consultation which ran from December 2017 to March 2018 on model risk management principles for stress testing. In the consultation, the PRA proposed that firms that use stress testing models, and that participate in the Bank of England's annual concurrent stress test, should follow in full a set of four proposed principles when establishing and adopting risk management practices in relation to their models. Firms not participating in the BoE's annual stress test should instead seek to apply the four principles on a proportionate basis, taking into account their size, complexity, risk profile and the relevance to the firm of using stress test models.

The Policy Statement sets out feedback on the three responses it received to the consultation. The PRA has made a number of changes to the consultation draft of the Supervisory Statement to address issues raised by respondents. In particular, the PRA has made changes to the wording of Principles 1.2 (Model Inventory), 2.1 (Board oversight), 2.3 (Model developers, owners, users and control functions), 3.1 (Model purpose and design), 3.7 (Business Involvement), 3.8 (Model uncertainty), 3.9 (Model Monitoring), 4.1 (Scope and validation of review) and 4.2 (Independence). In addition, it has included a further section in the Supervisory Statement to set out its expectations on the application of materiality considerations.

The expectations in the finalized Supervisory Statement take effect on June 1, 2018. All firms applying the principles should undertake a self-assessment of their stress test model risk management practices against the principles. This should be done as part of the Internal Capital Adequacy Assessment Process. Firms' findings should be reported in the ICAAP documents from January 1, 2019 onwards, depending on the frequency of the Supervisory Review and Evaluation Process.

The Policy Statement (PS7/18) is available at:, the finalized Supervisory Statement (SS3/18) is available at: and details of the consultation are available at:

UK Prudential Regulation Authority Finalizes Policy on Groups and Double Leverage

On April 30, 2018, the PRA published a Policy Statement setting out its proposals to amend the Groups policy framework it has in place for the application of prudential standards to firms on an individual and consolidated basis within banking groups.

The PRA consulted between October 2017 and January 2018 on proposals to enable: (i) assessment and mitigation of the risks to group resilience due to the use of "double leverage" (which occurs when one or more parent entities in a group funds some of the capital in its subsidiaries by raising debt or lower forms of capital externally); (ii) assessment and mitigation of the risks highlighted by prudential requirements applied by local national regulators on overseas subsidiaries of U.K. consolidation groups; and (iii) improved monitoring of the distribution of financial resources across different group entities.

Following feedback received, the PRA has made three changes to the proposals, which it does not consider to be significant changes. The first and second changes affect the PRA Supervisory Statement, "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" by: (a) changing the definition of "double leverage" so that it is accounting based to reflect the reporting practices of stand-alone holding companies; and (b) clarifying the level of application of the double leverage formula. The third change affects the PRA Statement of Policy, "The PRA's methodologies for setting Pillar 2 capital" by amending the formula for double leverage.

The changes are set out in:

  • an amendment within the Internal Capital Adequacy Assessment part of the PRA rulebook;
  • an update to PRA Supervisory Statement, "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP);"
  • an update to PRA Statement of Policy, "The PRA's methodologies for setting Pillar 2 capital;" and
  • an update to PRA Supervisory Statement, "The PRA's approach to supervising funding and liquidity risks."

The PRA rulebook change, updated Supervisory Statements and updated Statement of Policy will all take effect on January 1, 2019. The PRA recommends that, where practical and applicable, firms should continue to aim to incorporate the policy proposals in their ICAA and Individual Liquidity Adequacy Assessment (ILAA) submissions ahead of full implementation.

The Policy Statement (PS9/18) is available at:, the updated Supervisory Statement on ICAAP and SREP (SS31/15) (January 2019) is available at:, the updated Statement of Policy on the PRA's methodologies for setting Pillar 2 capital (January 2019) is available at: and the updated Supervisory Statement on liquidity and funding risks (SS24/15) is available at:

UK Regulator Confirms Revised Pillar 2 Reporting Requirements

On April 30, 2018, the PRA published a Policy Statement confirming that updated Pillar 2 reporting requirements will apply from October 1, 2018 for banks, building societies and PRA-designated investment firms. This follows the PRA's consultation on the proposed updates, which ran from December 6, 2017 to March 5, 2018. The PRA proposed a new data item to capture stress-testing data currently included in firms' ICAAP documents. This change aims to increase transparency and comparability in stress test data provided alongside ICAAP documents and to decrease the operational risks associated with capturing stress test data manually. The PRA also proposed reducing the frequency of reporting of the data items in the Reporting Pillar 2 part of the PRA Rulebook for some firms as well as consolidating the definition of several reporting parts of the PRA Rulebook into the Glossary.

The PRA received no responses to the consultation and is proceeding with the proposals as consulted, except for: (i) adding wording to Rule 2.9 of Reporting Pillar 2 to clarify that it applies to firms with total assets equal to or greater than £5 billion at the relevant level of consolidation used as the basis of their ICAAP; (ii) moving the definition of 'Supervisory Reporting ITS' to the central Glossary; and (iii) making minor amendments to reflect a change in terminology from 'Firm Data Submission Framework (FDSF)' to 'Stress Testing Data Framework (STDF).'

The PRA has also published updated rules, an updated Supervisory Statement on Pillar 2 Reporting (SS32/15) and an updated Statement of Policy on the PRA's methodologies for setting Pillar 2 capital. Further updates to the Supervisory Statement and the Statement of Policy will apply from January 1, 2019 as a result of the PRA's amendment to the Groups policy and double leverage.

The Policy Statement is available at:, the updated Supervisory Statement (October 2018) is available at:, the updated Statement of Policy (October 2018) is available at: and the updated PRA Rulebook rules are available at:

Consumer Protection

US Department of Labor Issues Guidance on Fiduciary Rule Compliance

On May 7, 2018, the U.S. Department of Labor issued a Field Assistance Bulletin regarding an anticipated mandate by the United States Court of Appeals for the Fifth Circuit effectuating its opinion that vacates the Fiduciary Rule and related exemptions and amendments in their entirety. The DOL guidance notes that fiduciaries may continue to rely on its previously issued temporary enforcement policy, which notes that the DOL will not pursue prohibited transaction claims against fiduciaries who are working in good faith to comply with certain prohibited transaction exemptions issued in connection with the Fiduciary Rule or treat those fiduciaries as violating the applicable prohibited transaction rules. In addition, the temporary enforcement policy notes that investment advice fiduciaries may also choose to rely upon other available exemptions to the extent applicable after the Fifth Circuit's decision.

The full text of the DOL bulletin is available at:


US Treasury Counselor to the Secretary Craig Phillips Discusses Regulatory Reform

On April 30, 2018, U.S. Treasury Counselor to the Secretary, Craig Phillips, spoke at the International Swaps and Derivatives Association's 33rd annual general meeting regarding regulatory policies of relevance to ISDA members. Mr. Phillips expressed Treasury's support for the recent white paper released by U.S. Commodity Futures Trading Commission Chairman J. Christopher Giancarlo. Mr. Phillips also discussed the reports that have been released by Treasury with respect to the Core Principles identified in President Trump's Executive Order 13772, noting that Treasury is currently working on finalizing its report with respect to non-bank financial companies, financial technology and innovation, which he noted will be released in the near future. Mr. Phillips summarized a number of key recommendations from each report that has been released, and specifically noted several recommendations with respect to better calibration of post-crisis OTC derivative reforms and further regulation regarding the oversight and resolution process for CCPs. Mr. Phillips was critical of proposals issued by the European Commission and European Central Bank with respect to EU and non-EU CCPs, noting that the proposals include redundant and unnecessary recognition requirements, increase costs for firms and may fragment global markets. Finally, Mr. Phillips discussed LIBOR and work by the Federal Reserve Board's Alternative Reference Rates Committee to promote LIBOR alternatives, such as the Secured Overnight Financing Rate, which is now being published by the Federal Reserve Bank of New York.

The full text of Mr. Phillip's remarks is available at:

EU Supervisory Authorities Consult on Aligning EMIR Clearing and Risk-Mitigation Obligations For Securitizations With Those For Covered Bonds

On May 4, 2018, the Joint Committee of the European Supervisory Authorities published two consultations on proposed amendments to: (i) Regulatory Technical Standards on the clearing obligation under the European Market Infrastructure Regulation for certain classes of OTC derivatives; and (ii) RTS on risk-mitigation techniques for OTC derivative contracts not cleared by a CCP. The proposed changes aim to incorporate the provisions of the Securitization Regulation (also known as the STS Regulation), which entered into force on January 17, 2018.

The Securitization Regulation notes that there is a degree of substitutability between covered bonds and securitizations. The Securitization Regulation therefore amends EMIR, among other things, to ensure consistency of treatment between the regime for derivatives transactions associated with covered bonds and the one for securitizations, with respect to the clearing obligation and the margin requirements for non- centrally cleared OTC derivatives. The ESAs have been mandated to make the necessary changes to existing RTS to effect consistent treatment.

Under EMIR, derivatives transactions associated with covered bonds benefit from an exemption from the clearing obligation, provided that the OTC derivatives have been used only to hedge interest rate or currency mismatches and that there are arrangements in place which adequately mitigate counterparty credit risk.

Covered bonds are also subject to special provisions on the level and type of collateral required with respect to OTC derivative contracts.

The first consultation, on amendments to the EMIR clearing obligation, sets out proposed amendments to relevant existing RTS, to extend the exemption from the clearing obligation to Simple, Transparent and Standardized (or STS) securitizations.

The second consultation, on risk-mitigation techniques, sets out proposed amendments to the existing RTS, to extend to STS securitizations the provisions on the level and type of collateral for risk mitigation that were adopted for covered bonds. The proposed treatment will apply only where a STS securitization structure meets a specific set of conditions equivalent to the ones required to covered bonds issuers.

The proposals in either consultation only cover securitizations that qualify as STS securitizations under the Securitization Regulation. Comments on both consultations are requested by June 15, 2018. A public hearing will take place at the EBA's premises on May 31, 2018, from 15.00 to 16.00 U.K. time.

The consultation on the EMIR clearing obligation is available at: and the consultation on risk-mitigation techniques for non-centrally cleared OTC derivatives is available at:

The relevant existing RTS on the clearing obligation are available at: and

The existing RTS on risk-mitigation techniques (Regulation (EU) No 2016/2251) is available at:

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