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:

  • Backed by a global survey of capital adequacy standards for securities firms, the International Organization of Securities Commissions’ consultation10 seeks to revamp its current capital adequacy standards.
  • The release of the Fed’s Dodd-Frank stress test results5 confirms the largest U.S. institutions are better positioned to continue to lend, with improvements in capital adequacy.
  • The European Securities and Markets Authority3 is advocating the use of product governance standards to improve consumer protection, with specific reference to complex financial products.

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

CURRENT REGULATIONS:

European Banking Authority (EBA) (): Prudent Valuation under Capital Requirements Regulation
Publication Date:
March 31st, 2014
Risks Covered: Compliance Risk, Market Risk
Business Processes Impacted: Audit, Legal and Compliance, Risk Management and Stress Testing
The EBA’s final rules1 on prudent valuation would set out a methodology to calculate fair value adjustments with a view to achieving an appropriate degree of certainty in dealing with trading book positions. With a view to accommodating institutions with limited exposure to fair valued positions, a simplified approach to computing fair value adjustments is proposed in addition to an advanced approach, applicable for bigger institutions. Standards for systems, controls and documentation to support the valuation process are also part of the final rules.

Bank for International Settlements (BIS) (): The standardised approach for measuring counterparty credit risk exposures
Publication Date:
March 31st, 2014
Risks Covered: Counterparty Risk (CCR), Compliance Risk
Business Processes Impacted: Risk Management and Stress Testing, Audit, Legal and Compliance
With a view to developing a risk sensitive methodology for computing capital requirements for counterparty credit risk, the Basel Committee’s finalized rules2 would replace a number of previous approaches/methods, especially, the existing standardized approach. Key changes include a) differentiation between margined and unimagined trades, b) more meaningful recognition of netting benefits, c) limited discretion for national authorities, and d) minimizing the use of banks’ internal estimates and avoidance of unwarranted complexity in the capital framework.

European Securities and Markets Authority (ESMA) (): Structured Retail Products – Good practices for product governance arrangements
Publication Date:
March 27th, 2014
Risks Covered: Operational Risk, Compliance Risk
Business Processes Impacted: Audit, Legal and Compliance, Consumer Protection, Portfolio Advisory and Management
The ESMA has issued an opinion3 pertaining to certain aspects of manufacturing and distribution of structured retail products. The good practices for product governance arrangements set out in the opinion for the product providers can improve their ability to deliver on investor protection, particularly covering the following: the complexity of the products they manufacture and distribute, the nature and range of investment services and activities they undertake, and the type of investors they target. As per ESMA, these good practices will bridge the gap until the Markets in Financial Instruments Directive (MiFID) II product governance requirements are finalized.

Commodity Futures Trading Commission (CFTC) (): Review of Swap Data Recordkeeping and Reporting Requirements
Publication Date:
March 26th, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Risk Management and Stress Testing, Reporting, Trading
The CFTC has requested public comments on the Commission’s swap data record keeping and reporting requirements4 under part 45 and related provisions, with the objective to improve swap transactions data quality and to determine how the reporting rules should be enhanced to ensure effective reporting. The recommendations for such requirements were made by the interdivisional staff working group formed by the Commission, and the topics covered include the following: the reporting of primary economic terms, confirmation and continuation data; the manner in which the reporting rules address different transaction types, business models and data flows present in swaps markets; the reporting of cleared swaps; and data harmonization.

Board of Governors of the Federal Reserve System (the Fed) (): Dodd-Frank Act Stress Test 2014:Supervisory Stress Test Methodology and Results
Publication Date:
March 20th, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Risk Management and Stress Testing
The Fed released the results5 of its fourth annual stress test that it conducts to gauge the resiliency of the financial sector in the US and to ensure that the largest firms have strong capital positions. As per the summary results, the largest institutions are collectively better positioned to continue to lend to households and businesses, and to meet their financial commitments in an extremely severe economic downturn than they were five years ago. The results also indicate that their capital positions are continuing to improve since the financial crisis. To improve the comparability and fairness of the results the Fed used independent projections of balance sheet and risk-weighted asset growth instead of relying on the firms’ own calculations.

Bank Negara Malaysia (BNM) (): New Reference Rate Framework
Publication Date:
March 19th, 2014
Risks Covered: Credit Risk, Compliance Risk
Business Processes Impacted: Lending and Investment, Risk Management and Stress Testing
The bank has announced that effective January 2nd, 2015, the Base Rate will replace the Base Lending Rate as the primary reference rate for new floating rate loans. The new reference rate framework6 is designed to offer a more transparent reference rate in order to help consumers make better decisions when choosing from the many loan products offered by financial institutions. The shift to the new framework should not have any impact on the effective lending rates charged to retail consumers as determined by the lender’s assessment of the borrower’s credit standing, market funding rates and other competitive considerations.

Prudential Regulation Authority (PRA) (): Consultation Paper – Claw back
Publication Date:
March 13th, 2014
Risks Covered: Operational Risk, Compliance Risk
Business Processes Impacted: Audit, Legal and Compliance, Risk Management and Stress Testing
The PRA’s consultation7 paper proposes amendments to the remuneration code with a view to ensuring that remuneration practices are consistent with effective risk management. The proposals require firms to amend employment contracts to enable them to apply claw back to vested variable remuneration on a group-wide basis. In addition, the proposals clarify the PRA’s position and expectations on the application of claw back in some cases, for example, in cases where malfeasance is indirect.

Board of Governors of the Federal Reserve System (the Fed), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC) (): Supervisory Guidance on Implementing Dodd-Frank Act Company-Run Stress Tests
Publication Date:
March 13th, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Risk Management and Stress Testing
Applicable to firms with total consolidated assets between $10 billion and $50 billion, the final guidance8 from the U.S. federal bank regulatory agencies brings out supervisory expectations for Dodd-Frank stress test practices. Major coverage on a) assessment of impact of macroeconomic scenarios on consolidated losses, revenues, balance sheet (including risk-weighted assets) and capital, b) data sources and segmentation, c) model risk management, d) loss estimation, e) pre-provision net revenue estimation, and f) projection of provisions for loan and lease losses.

Securities and Exchange Commission (SEC) (): Standards for Covered Clearing Agencies
Publication Date:
March 12th, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Risk Management and Stress Testing, Audit, Legal and Compliance, Clearing and Settlement – Exchange Traded and Over-the Counter (OTC), Reporting
The Commission has proposed certain rules9 to establish standards for risk management, operations and governance of registered clearing agencies that meet the definition of a “covered clearing agency”. These pertain to specific sections of the Securities Exchange Act of 1934, and the Payment, Clearing, and Settlement Supervision Act of 2010 adopted in Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Commission is consulting with the Financial Stability Oversight Council and the Board of Governors of the Federal Reserve System and has considered the relevant international standards as required by the Clearing Supervision Act.

International Organization Of Securities Commissions (IOSCO) (): A Comparison and Analysis of Prudential Standards in the Securities Sector
Publication Date:
March 10th, 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Risk Management and Stress Testing
Aimed at updating its capital adequacy standards for securities firms, the IOSCO’s report10 seeks to highlight similarities and differences among different capital adequacy frameworks across the globe. While the focus is on the two key approaches, namely the net capital rule, and the capital requirements directive, a number of national variations are also recognized in the report. Key themes used for comparative analysis included regulatory scope, risk capture, components of capital, and use of internal models.

FORTHCOMING REGULATIONS:

Financial Conduct Authority (FCA): Business Plan 2014/2015

As a new activity on the topic of consumer credit11, the FCA will take over the responsibilities from the Office of Fair Trading which will impact a sizeable number of consumer credit firms and their customers. In addition, FCA will work towards an operational launch in April 2015 of a new regulator to oversee the UK’s payment systems. In terms of new regulations, key priorities are on prudential requirements for personal investment firms, Alternative Investment Fund Managers Directive, Markets in Financial Instruments Directive, consumer protection in relation to selling payment protection insurance, and Retail Distribution Review.

Footnotes:

  1. European Banking Authority (EBA): Prudent Valuation under Capital Requirements Regulation
  2. Bank for International Settlements (BIS): The standardised approach for measuring counterparty credit risk exposures
  3. European Securities and Markets Authority (ESMA): Structured Retail Products – Good practices for product governance arrangements
  4. Commodity Futures Trading Commission (CFTC): Review of Swap Data Recordkeeping and Reporting Requirements
  5. Board of Governors of the Federal Reserve System (the Fed): Dodd-Frank Act Stress Test 2014:Supervisory Stress Test Methodology and Results
  6. Bank Negara Malaysia (BNM): New Reference Rate Framework
  7. Prudential Regulation Authority (PRA): Consultation Paper – Claw back
  8. Board of Governors of the Federal Reserve System (the Fed), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC): Supervisory Guidance on Implementing Dodd-Frank Act Company-Run Stress Tests
  9. Securities and Exchange Commission (SEC): Standards for Covered Clearing Agencies
  10. International Organization Of Securities Commissions (IOSCO): A Comparison and Analysis of Prudential Standards in the Securities Sector
  11. Financial Conduct Authority (FCA): Business Plan 2014/15
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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