The “Regulatory Reform” newsletter is the monthly initiative aimed at updating the Finance and Risk community with the most recent regulatory changes impacting Banks and Capital Markets firms. We update our comprehensive regulatory database every month by tracking more than 40 regulatory and industry bodies covering North America, EALA and APAC. Every month, we will seek to highlight approximately 10 regulations shortlisted on the basis of geography of coverage and anticipated business impacts. Our summaries will seek to highlight the risks covered and business processes affected by the regulatory reforms. This newsletter is planned to supplement the existing newsletter “Regulatory Insights” which provides a deeper analysis of business implications and Accenture’s point of view on a single or much smaller set of regulatory changes.
Edition Highlights:
  • The Basel Committee’s final regulation9 on leverage ratio would lay out major components of the Basel III leverage ratio and their reporting.
  • The Fed’s expectations5 for recovery and resolution preparedness would require large bank holding companies to improve capabilities across the board.
  • The Senior Supervisors Group’s report7 on counterparty data highlights areas of work to be done to improve firms’ ability to measure and report risks.

Current coverage period: Through January 31st, 2014
Note: Anticipated business impact for covered regulations is shown using the following rating legend:
(Low) (Medium) (High)

CURRENT REGULATIONS:

Board of Governors of the Federal Reserve System (the Fed) (): Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations
Publication Date:
February 18th, 2014
Risks Covered: Compliance Risk, Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing
The Fed’s final rule1, applicable for U.S. bank holding companies (BHCs) and foreign banking organizations (FBOs) with total consolidated assets of at least $ 50 billion, would stipulate enhanced prudential standards. They include a) risk-based capital and leverage, b) liquidity standards, c) risk management and risk committee requirements, d) stress testing, and e) debt-to-equity limits for companies under certain conditions. Some of the amendments over the proposed rule establish risk committee and stress testing requirements for smaller BHCs and FBOs.

Australian Prudential Regulation Authority (APRA) (): Prudential Standard – Governance
Publication Date:
January 31st, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Risk Management and Stress Testing
The APRA’s final guidance2 is aimed at ensuring sound governance by competent board of directors to facilitate effective decision making in firms. Key requirements include a) size and composition of board, b) independence of chairperson, c) procedures for assessing performance, d) setting up of board remuneration committee with a view to aligning remuneration and risk management, and e) setting up of board level audit and risk management committees with clear roles and responsibilities.

International Organization Of Securities Commissions (IOSCO) (): Recommendations Regarding the Protection of Client Assets
Publication Date:
January 31st, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Risk Management and Stress Testing, Consumer Protection
The IOSCO has published a report3 offering its recommendations regarding protection of client assets. This is meant as guidance for regulators to help them improve their supervision of intermediaries holding client assets. The report lays out the roles and responsibilities of both the intermediaries and the regulators in protecting such assets – while the intermediary must comply with the rules and regulations applicable in their jurisdictions, the regulator must ensure monitoring the intermediary’s compliance with the rules and maintain a regime to effectively safeguard client assets.

International Monetary Fund (IMF) (): Financial Soundness Indicators and the Characteristics of Financial Cycles
Publication Date:
January 27th, 2014
Risks Covered: Business Cycle Risk
Business Processes Impacted: Risk Management and Stress Testing
In this working paper4, the authors have shown through empirical assessment that financial soundness indicators (FSIs) are relevant in gauging the soundness of the financial system. However, they further go on to establish that strengthening banks’ FSIs during a downturn may actually be detrimental to the soundness of the financial system at the macro level, as it worsens the credit crunch when the credit and money supply have already been shrinking. The authors recommend policy makers be cognizant of the timing of changes in the banks’ FSIs, and avoid making it counterproductive by tightening requirements during a recession.

Board of Governors of the Federal Reserve System (the Fed) (): Supervisory Expectations for Recovery and Resolution Preparedness for Certain Large Bank Holding Companies
Publication Date:
January 24th, 2014
Risks Covered: Compliance Risk, Liquidity Risk, Operational Risk
Business Processes Impacted: Recovery and Resolution Planning, Audit, Legal and Compliance
The Fed has released a supervision and regulation letter5 to clarify the heightened supervisory expectations for the recovery and resolution preparedness of certain large bank holding companies. The guidance is applicable to eight domestic bank holding companies. The expectations require firms to have consistent and robust capabilities across the following broad areas: collateral management, payment, clearing and settlement activities, funding and liquidity, management information systems, and shared and outsourced services.

Prudential Regulation Authority (PRA) (): Consultation Paper – The PRA Rulebook
Publication Date:
January 21st, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Reporting
The PRA has issued a consultation paper6 on the proposed redrafting of certain modules in the PRA’s current handbook inherited from the FSA, to create a clear and concise PRA rulebook. The most important changes pertain to the following: fundamental rules, information gathering, use of skilled persons, notifications, auditors and permissions and waivers. The rulebook will be split into banking and insurance sectors, with a further split into directive and non-directive firms, which is intended to help firms to work out what rules apply to them.

Senior Supervisors Group (SSG) (): Progress Report on Counterparty Data
Publication Date:
January 15th, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Risk Management and Stress Testing
Describing data quality management a critical piece of risk management, the report7 calls progress made in the last 5 years in terms of enabling timely and accurate counterparty risk management to be largely unsatisfactory. Key observations include a) reliance on non-standardized, manual processes by many firms, b) while there are improvements in data capture, risk estimation in general and stress testing in particular is impacted by lack of accurate data, and c) the need for significant work to be done on a priority basis by both regulators and firms to improve data governance.

Bank for International Settlements (BIS) (): Sound management of risks related to money laundering and financing of terrorism
Publication Date:
January 15th, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Anti-money Laundering and Counter-terrorist Financing,
Risk Management and Stress Testing
Intended to be consistent with the Financial Action Task Force’s standards, the final regulations8 of the Basel committee would support implementation of the standards by countries with respect to their banks and banking groups. Major elements include a) assessment, understanding, management and mitigation of risks, b) preparation of customer acceptance policy and procedures, c) identification of beneficial owners, verification and risk profiling, d) ongoing monitoring, and e) reporting of suspicious transactions and asset freezing.

Bank for International Settlements (BIS) (): Basel III leverage ratio framework and disclosure requirements
Publication Date:
January 12th, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Risk Management and Stress Testing, Reporting
The Basel committee’s final regulation9 would set out the Basel III leverage ratio framework as a backstop to risk-based capital framework and its reporting. Key coverage includes a) capital measure, b) treatment of different types of exposures namely, on balance sheet, derivatives, off-balance sheet and securities financing transactions, and c) disclosure using a common template covering breakdown of leverage into regulatory elements and reconciliation of accounting values with exposure measure under the Basel III leverage ratio.

Bank for International Settlements (BIS) (): Revisions to Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools
Publication Date:
January 12th, 2014
Risks Covered: Liquidity Risk
Business Processes Impacted: Funding and Liquidity Management, Risk Management and Stress Testing
The Basel committee’s final regulation10 would modify the definition of high quality liquid assets (HQLA) within the framework of liquidity coverage ratio (LCR). As per the modification, the inclusion of committed liquidity facilities provided by central banks within HQLA is restricted to those jurisdictions that have insufficient HQLA to satisfy the requirements of the banking system. Subject to some conditions and as a part of national discretion, a restricted version of committed lending facilities may be used by all jurisdictions.

Financial Stability Board (FSB), International Organization Of Securities Commissions (IOSCO) (): Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions
Publication Date:
January 8th, 2014
Risks Covered: Systemic Risk, Compliance Risk
Business Processes Impacted: Risk Management and Stress Testing
The FSB and the IOSCO have published a paper11 for public consultation covering specific methodologies to identify Non-Bank and Non-Insurer (NBNI) G-SIFIs (Global Systemically Important Financial Institutions). These methodologies complement the current ones that cover banks and insurers. The work is based on the following principles: a) The broader objective is to identify NBNI financial firms whose failure would significantly disrupt the global financial system b) The overall framework should be consistent with that defined to identify global systemically important banks (G-SIBs) and global systemically important institutions (G-SIIs).

FORTHCOMING REGULATIONS:

Securities and Exchange Commission (SEC): The SEC in 2014
Giving a detailed account of metamorphic changes sweeping across global securities markets, both in terms of technology and financial products, the SEC leadership speech12 identifies rulemaking initiatives in its agenda for 2014. Key ones include equity market structure, broker-dealer financial responsibility, duties of broker-dealer and investment advisors, Dodd-Frank executive compensation, systemic risk issues, management of clearing agencies and credit rating agencies, and target date funds.

Footnotes:

  1. Board of Governors of the Federal Reserve System (the Fed): Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations
  2. Australian Prudential Regulation Authority: Prudential Standard – Governance
  3. International Organization Of Securities Commissions (IOSCO): Recommendations Regarding the Protection of Client Assets
  4. International Monetary Fund (IMF): Financial Soundness Indicators and the Characteristics of Financial Cycles
  5. Board of Governors of the Federal Reserve System (the Fed):  Supervisory Expectations for Recovery and Resolution Preparedness for Certain Large Bank Holding Companies
  6. Prudential Regulation Authority (PRA): Consultation Paper – The PRA Rulebook
  7. Senior Supervisors Group (SSG): Progress Report on Counterparty Data
  8. Bank for International Settlements (BIS): Sound management of risks related to money laundering and financing of terrorism
  9. Bank for International Settlements (BIS): Basel III leverage ratio framework and disclosure requirements
  10. Bank for International Settlements (BIS): Revisions to Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools
  11. Financial Stability Board (FSB), International Organization Of Securities Commissions (IOSCO): Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions
  12. U.S. Securities and Exchange Commission: The SEC in 2014
DISCLAIMER: This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional. If you require advice or further details on any matters referred to, please contact your Accenture representative.
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