This newsletter summarizes recent regulatory changes impacting Banking, Capital Markets and Insurance firms.

This newsletter covers some of the more recent regulatory changes impacting Banking, Capital Markets and Insurance firms. We track more than 70 regulatory and industry bodies across North America, Europe and Asia Pacific. The shortlisted entries highlight the risks covered and business processes affected by the regulatory reforms.

CURRENT REGULATIONS:

Office of the Comptroller of the Currency (OCC):
Bank Secrecy Act/Anti-Money Laundering: Joint Statement on Enforcement of BSA/AML Requirements
Publication Date: August 13th 2020

Risks Covered: Liquidity Risk
Business Processes Impacted: Audit, Legal and Compliance
A group of agencies has issued a joint statement to clarify how they plan to apply the enforcement provisions of the Bank Secrecy Act (BSA) and related Anti-Money Laundering (AML) laws and regulations. The joint statement does not create new expectations or standards.1

Federal Reserve (The Fed):
Federal Reserve highlights research and experimentation undertaken to enhance its understanding of the opportunities and risks associated with central bank digital currencies
Publication Date: August 13th 2020

Risks Covered: Cyber Security Risk
Business Processes Impacted: Payments
The agency issued a press release highlighting the research and experimentation undertaken to enhance its understanding of the opportunities and risks associated with central bank digital currencies. This complements a broad set of payments-focused innovation projects currently underway at the Fed.2

HM Treasury (HMT):
Joint Statement on the U.S. – UK Financial Innovation Partnership meeting
Publication Date: August 6th 2020
Risks Covered: Conduct Risk
Business Processes Impacted: Consumer/Investor Protection
The agency issued a joint statement on discussions held and which focused on deepening US and UK ties in financial innovation, including: digital payments; operational resilience; cross-border testing of innovative financial services; regulatory and supervisory technology; bilateral market access issues; connections between financial technology firms and financial institutions.3

Financial Conduct Authority (FCA):
Dear CEO letter: increased client money balances since coronavirus (Covid-19)
Publication Date: August 12th 2020
Risks Covered: Systemic Risk
Business Processes Impacted: Portfolio Advisory and Management
The agency has published a Dear CEO letter targeting firms that have reported an increase in client money balances in their reporting from January to June 2020, as a result of re-balancing their portfolios to mitigate volatility during the coronavirus pandemic.4

Office of the Superintendent of Financial Institutions (OSFI):
Update on OSFI’s Activities with respect to IFRS 17 – Insurance Contracts
Publication Date: August 7th 2020
Risks Covered: Operational Risk
Business Processes Impacted: Business Continuity Management
The agency has updated its summary of milestones and activities as it supports a robust implementation of International Financial Reporting Standard 17 – Insurance Contracts (IFRS 17).5

European Systemic Risk Board (ESRB):
Reforming bank stress testing in the EU: reflections in light of the EBA’s discussion paper on the issue
Publication Date: August 5th 2020
Risks Covered: Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing
The agency published the first Insight paper by its Advisory Scientific Committee, regarding the reform of bank stress tests in the European Union (EU). The document expresses serious concerns about two main proposals presented in the European Banking Authority’s discussion paper of January 2020, which contained proposals for reforms to its EU-wide stress test framework.6

European Banking Authority (EBA):
EBA consults on the use of RegTech solutions and ways to support the uptake of RegTech across the EU
Publication Date: August 12th 2020
Risks Covered: Conduct Risk
Business Processes Impacted: Data Quality Management
The agency has launched a RegTech industry survey to invite all relevant stakeholders, such as financial institutions and information and communication technology (ICT) third-party providers, to share their views and experience on the use of RegTech solutions. The aim of the survey is to better understand ongoing activity in this area, raise awareness of RegTech within the regulatory and supervisory community, and inform any relevant future policy discussion.7

Bank for International Settlements (BIS):
Basel Committee releases consultative documents on principles for operational risk and operational resilience
Publication Date: August 6th 2020
Risks Covered: Operational Risk
Business Processes Impacted: Lending and Investment
The agency has published a consultative document seeking comments on proposed principles for operational resilience. Given the natural relationship between operational resilience and operational risk, the Basel Committee is also proposing to update its principles for the sound management of operational risk (PSMOR).8

European Banking Authority (EBA):
Guidelines on criteria for the use of data inputs in the risk measurement model referred to in Article 325bc under Article 325bh(3) of Regulation (EU) No 575/2013
Publication Date: August 12th 2020
Risks Covered: Operational Risk
Business Processes Impacted: Data Quality Management
The agency has published a consultation paper on draft guidelines that clarify the conditions to be met by the data related to modelable risk factors, which institutions should use in their expected shortfall (ES) calculations. The guidelines indicate that the data used to compute the ES risk measure should be: accurate; appropriate; is frequently updated; is complete and consistent in its use in the ES risk measure.9

Federal Financial Supervisory Authority (BaFIN):
European Commission issues readiness communication
Publication Date: August 3rd 2020
Risks Covered: Business Cycle Risk
Business Processes Impacted: Business Continuity Management
At the end of the year, the transition period agreed upon between the European Union (EU) and the UK for the period following the country’s withdrawal from the EU on January 31, 2020 comes to an end. Against this background, the Commission issued a “Communication on readiness at the end of the transition period” on July 9, 2020, and which was supplemented by sector-specific readiness notices.10

Financial Crimes Enforcement Network (FinCEN); Office of the Comptroller of the Currency (OCC); Federal Reserve (The Fed); Federal Deposit Insurance Corporation (FDIC); National Credit Union Administration (NCUA):
Joint Statement on Bank Secrecy Act Due Diligence Requirements for Customers Who May Be Considered Politically Exposed Persons
Publication Date: August 21st 2020
Risks Covered: Operational Risk
Business Processes Impacted: Fraud and Financial Crime
The Federal Reserve System has released a supervision and regulation letter announcing that it, along with a number of other regulatory bodies, have issued a joint statement to address due diligence questions raised by banks related to the Bank Secrecy Act and the Anti-Money Laundering regulatory requirements for customers that banks may consider to be politically exposed persons (PEPs).11

Hong Kong Monetary Authority (HKMA):
Report on “Artificial Intelligence in Banking: The Changing Landscape in Compliance and Supervision”
Publication Date: August 21st 2020
Risks Covered: Compliance Risk
Business Processes Impacted: Business Continuity Management
The agency has published its second Applied Research report, titled “Artificial Intelligence in Banking: The Changing Landscape in Compliance and Supervision”. The document aims to assess the current status of artificial intelligence adoption in the Hong Kong banking industry and its implications for banking compliance and supervision.12

Office of the Comptroller of the Currency (OCC); Federal Reserve; Federal Deposit Insurance Corporation (FDIC):
Regulatory Capital Rule: Temporary Changes to and Transition for the Community Bank Leverage Ratio Framework
Publication Date: August 26th 2020
Risks Covered: Interest Rate Risk (non-trading book)
Business Processes Impacted: Netting and Collateral Management
A group of agencies issued final revisions to the community bank leverage ratio framework made under two interim final rules. The final rule adopts these with no changes. Under the final rule, the community bank leverage ratio is to remain at 8 percent through calendar year 2020, is to increase to 8.5 percent through calendar year 2021, and 9 percent thereafter.13

Securities and Exchange Commission (SEC):
SEC Adopts Rule Amendments to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K
Publication Date: August 26th 2020
Risks Covered: Systemic Risk
Business Processes Impacted: Consumer/Investor Protection
The agency has announced that it voted to adopt amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K.14

Office of the Comptroller of the Currency (OCC); Federal Reserve; Federal Deposit Insurance Corporation (FDIC):
Regulatory Capital Rule and Total Loss-Absorbing Capacity Rule: Eligible Retained Income
Publication Date: August 26th 2020
Risks Covered: Operational Risk
Business Processes Impacted: Funding and Liquidity Management
The agencies are adopting, as final, the revisions to the definition of eligible retained income made under the interim final rule. The final rule revises the definition of eligible retained income to make more gradual any automatic limitations on capital distributions that could apply under the agencies’ capital rule. The final rule is effective January 1, 2021.15

Financial Conduct Authority (FCA):
Market Watch issue 64: market conduct and Brexit and MiFID II transaction reporting issues
Publication Date: August 27th 2020
Risks Covered: Liquidity Risk
Business Processes Impacted: Capital Adequacy and Capital Planning
The agency has published the latest edition of its Market Watch, which provides important information to help Markets In Financial Instruments Directive (MiFID) II firms prepare for the end of the transition period between the UK and European Union.16

European Securities and Markets Authority (ESMA):
Risk parameters in ESMA’s guidelines on stress test scenarios under the Money Markets Fund Regulation to be updated
Publication Date: August 27th 2020
Risks Covered: Conduct Risk
Business Processes Impacted: Risk Management and Stress Testing
The agency has confirmed that the 2019 Guidelines on stress test scenarios under the Money Market Funds Regulation (MMFR) will be updated in 2020. The update is to include a modification of the risk parameters that are to reflect recent market developments related to the pandemic crisis.17

Bank of England (BoE):
Does quantitative easing boost bank lending to the real economy or cause other bank asset reallocation? The case of the UK
Publication Date: August 14th 2020
Risks Covered: Operational Risk
Business Processes Impacted: Data Quality Management
The agency has published a staff working paper investigating the impact of the asset purchase program (APP) on the composition of UK banks’ assets, as well as the implications of bank lending to the real economy and using a unique database on the program.18

Financial Conduct Authority (FCA):
Extension of Annual Financial Crime Reporting Obligation
Publication Date: August 14th 2020
Risks Covered: Operational Risk
Business Processes Impacted: Fraud and Financial Crime
The agency has published a consultation paper proposing to extend the scope of the FCA’s annual financial crime reporting obligation, as set out in the FCA Handbook SUP 16.23 Annual Financial Crime Report (REP-CRIM). This is to include firms that carry on regulated activities that could pose higher money laundering risk.19

Alternative Reference Rates Committee (ARRC):
ARRC Updates Best Practices to Encourage Adherence to ISDA Protocol During Escrow Period – ISDA Protocol will Implement New Fallbacks for Legacy Derivatives Products
Publication Date: August 19th 2020
Risks Covered: Business Cycle Risk
Business Processes Impacted: Clearing and Settlement – Exchange Traded and Over-the-Counter (OTC)
The committee has updated its recommended Best Practices in anticipation of the International Swaps and Derivatives Association’s upcoming IBOR Fallback Protocol that should be available soon. The IBOR Fallback Protocol is critical to making sure that existing derivatives contracts feature durable fallbacks, given LIBOR is not be expected to be published after the end of 2021.20

FORTHCOMING REGULATIONS:

Financial Industry Regulatory Authority (FINRA)
FINRA Shares Practices Firms Implemented to Prepare for the LIBOR Phase-out
The agency has reminded firms to evaluate their exposure to LIBOR and review their preparedness to manage LIBOR’s phase-out. To understand how firms are preparing for the phase-out, the agency surveyed a representative cross-section of member firms, including some firms with significant trading volume or positions in LIBOR-linked securities.21

Federal Reserve (The Fed)
Federal Reserve Board announces individual large bank capital requirements, which will be effective on October 1, 2020
The agency has announced individual large bank capital requirements which go into effect on October 1, 2020. The table shows the total common equity tier 1, or CET1, and the capital requirements for each large bank.22

International Organization of Securities Commissions (IOSCO)
IOSCO examines the evolution of liquidity provision in equity securities markets
The board has published a report that explores how liquidity provision has evolved in equity securities markets in recent years. The report and key elements identified were prepared prior to the COVID-19 pandemic.23

Monetary Authority of Singapore (MAS)
MAS Announces Key Initiatives to Support SORA Adoption
The agency has released a set of initiatives to support the adoption of the Singapore Overnight Rate Average (SORA) by issuing SORA-based floating rate notes on a monthly basis starting August 21, 2020. This should enhance transparency and data availability on SORA, encourage prescribing SORA as a financial benchmark under the Securities and Futures Act, and the issuance of a Statement of Compliance with the International Organization of Securities Commissions (IOSCO) Principles for Financial Benchmarks for SORA.24

Consumer Financial Protection Bureau (CFPB)
Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z): Seasoned QM Loan Definition
The agency is proposing to amend Regulation Z, to create a new category of qualified mortgages (Seasoned QMs) for first-lien, fixed-rate covered transactions that have met certain performance requirements over a 36-month seasoning period, are held in a portfolio until the end of the seasoning period, comply with general restrictions on product features, points and fees, and meet certain underwriting requirements.25

Securities and Exchange Commission (SEC)
Amendments to the National Market System Plan Governing the Consolidated Audit Trail to Enhance Data Security
The agency is proposing amendments to the national market system plan governing the consolidated audit trail. The proposed amendments are designed to enhance the security of the consolidated audit trail.26

Prudential Regulation Authority (PRA)
PRA statement on Covid-19: IFRS 9 and capital requirements – Guidance as Covid-19 specific payment deferrals come to an end
The board has published a statement clarifying its approach to IFRS 9 and capital requirements, in response to updated Financial Conduct Authority (FCA) guidance on specific Covid-19 related retail mortgage payment deferrals, which have come to an end.27

Insurance Europe (IE)
Position on evaluation of EU strategy for adaptation to climate change
The agency has published its response to the European Commission’s consultation on European Union (EU) strategy for adaptation to climate change. The agency thinks that adaptation guidelines, mainstreaming of adaptation measures and the sharing of information through EU databases can help member states tailor specific solutions that work best for their conditions. The focus should be shifted to a more proactive approach that prioritizes prevention, risk reduction and resilience building.28

Footnotes:

  1. “Bank Secrecy Act/Anti-Money Laundering: Joint Statement on Enforcement of BSA/AML Requirements,” Office of the Comptroller of the Currency, August 13, 2020. Access at: Bank Secrecy Act/Anti-Money Laundering : Joint Statement on Enforcement of BSA/AML Requirements.
  2. “Federal Reserve highlights research and experimentation undertaken to enhance its understanding of the opportunities and risks associated with central bank digital currencies,” Federal Reserve, August 13, 2020. Access at: Federal Reserve highlights research and experimentation undertaken to enhance its understanding of the opportunities and risks associated with central bank digital currencies.
  3. “Joint statement on the U.S.-UK Financial Innovation Partnership meeting,” GOV.UK, August 6, 2020. Access at: Joint Statement on the U.S. – UK Financial Innovation Partnership meeting.
  4. Letter on client money balances, Financial Conduct Authority, August 12, 2020. Access at: Dear CEO letter: increased client money balances since coronavirus (Covid-19).
  5. “Update on OSFI’s Activities with respect to IFRS17 – Insurance Contracts,” Office of the Superintendent of Financial Institutions, August 7, 2020. Access at: Update on OSFI’s Activities with respect to IFRS 17 – Insurance Contracts.
  6. “Reforming bank stress testing in the EU: reflections in light of the EBA’s discussion paper on the issue,” European Systemic Risk Board, August 2020. Access at: Reforming bank stress testing in the EU: reflections in light of the EBA’s discussion paper on the issue.
  7. “EBA consults on the use of RegTech solutions and ways to support the uptake of RegTech across the EU,” European Banking Authority, August 12, 2020. Access at: EBA consults on the use of RegTech solutions and ways to support the uptake of RegTech across the EU.
  8. “Basel Committee releases consultative documents on principles for operational risk and operational resilience,” Bank for International Settlements, August 6, 2020. Access at: Basel Committee releases consultative documents on principles for operational risk and operational resilience.
  9. “Guidelines on criteria for the use of data inputs in the risk-measurement model referred to in Article 325bc under Article 325bh(3) of Regulation (EU) No 575/2013,” European Banking Authority, August 12, 2020. Access at: Guidelines on criteria for the use of data inputs in the risk measurement model referred to in Article 325bc under Article 325bh(3) of Regulation (EU) No 575/2013.
  10. “Brexit – European Commission issues readiness communication,” Federal Financial Supervisory Authority, August 3, 2020. Access at: European Commission issues readiness communication.
  11. “SR 20-21: Joint Statement on Bank Secrecy Act Due Diligence Requirements for Customers Who May Be Considered Politically Exposed Persons,” Federal Reserve, August 21, 2020. Access at: Joint Statement on Bank Secrecy Act Due Diligence Requirements for Customers Who May Be Considered Politically Exposed Persons.
  12. “Report on “Artificial Intelligence in Banking: The Changing Landscape in Compliance and Supervision,” Hong Kong Monetary Authority, August 21, 2020. Access at: Report on “Artificial Intelligence in Banking: The Changing Landscape in Compliance and Supervision”.
  13. “Regulatory Capital Rule: Temporary Changes to and Transition for the Community Bank Leverage Ratio Framework,” Office of the Comptroller of the Currency; Federal Reserve; Federal Deposit Insurance Corporation, August 26, 2020. Access at: Regulatory Capital Rule: Temporary Changes to and Transition for the Community Bank Leverage Ratio Framework.
  14. “SEC Adopts Rule Amendments to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K,” Securities and Exchange Commission, August 26, 2020. Access at: SEC Adopts Rule Amendments to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K.
  15. “Regulatory Capital Rule and Total Loss-Absorbing Capacity Rule: Eligible Retained Income,” Office of the Comptroller of the Currency; Federal Reserve; Federal Deposit Insurance Corporation, August 26, 2020. Access at: Regulatory Capital Rule and Total Loss-Absorbing Capacity Rule: Eligible Retained Income.
  16. Market Watch 64, Financial Conduct Authority, August 2020. Access at: Market Watch issue 64: market conduct and Brexit and MiFID II transaction reporting issues.
  17. “Risk Parameters in ESMA’s Guidelines on Stress Test Scenarios Under the Money Markets Fund Regulation to be Updated,” European Securities and Markets Authority, August 27, 2020. Access at: Risk parameters in ESMA’s guidelines on stress test scenarios under the Money Markets Fund Regulation to be updated.
  18. “Does quantitative easing boost bank lending to the real economy or cause other bank asset reallocation? The case of the UK,” Bank of England, August 2020. Access at: Does quantitative easing boost bank lending to the real economy or cause other bank asset reallocation? The case of the UK.
  19. “Extension of Annual Financial Crime Reporting Obligation,” Financial Conduct Authority, August 2020. Access at: Extension of Annual Financial Crime Reporting Obligation.
  20. “ARRC Updates Best Practices to Encourage Adherence to ISDA Protocol During Escrow Period – ISDA Protocol will Implement New Fallbacks for Legacy Derivatives Products,” Alternative Reference Rates Committee, August 19, 2020. Access at: ARRC Updates Best Practices to Encourage Adherence to ISDA Protocol During Escrow Period – ISDA Protocol will Implement New Fallbacks for Legacy Derivatives Products.
  21. “FINRA Shares Practices Firms Implemented to Prepare for the LIBOR Phase-out,” Financial Industry Regulatory Authority, August 5, 2020. Access at: FINRA Shares Practices Firms Implemented to Prepare for the LIBOR Phase-out.
  22. “Federal Reserve Board announces individual large bank capital requirements, which will be effective on October 1,” Federal Reserve, August 10, 2020. Access at: Federal Reserve Board announces individual large bank capital requirements, which will be effective on October 1, 2020.
  23. “IOSCO examines the evolution of liquidity provision in equity securities markets,” International Organization of Securities Commissions, August 11, 2020. Access at: IOSCO examines the evolution of liquidity provision in equity securities markets.
  24. “MAS Announces Key Initiatives to Support Adoption of SORA,” Moody’s Analytics, August 5, 2020. Access at: MAS Announces Key Initiatives to Support SORA Adoption.
  25. “Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z): Seasoned QM Loan Definition,” Consumer Financial Protection Bureau, August 28, 2020. Access at: Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z): Seasoned QM Loan Definition.
  26. “Amendments to the National Market System Plan Governing the Consolidated Audit Trail to Enhance Data Security,” Securities and Exchange Commission, August 21, 2020. Access at: Amendments to the National Market System Plan Governing the Consolidated Audit Trail to Enhance Data Security.
  27. “PRA statement on Covid-19: IFRS 9 and capital requirements – Guidance as Covid-19 specific payment deferrals come to an end,” Bank of England, August 26, 2020. Access at: PRA statement on Covid-19: IFRS 9 and capital requirements – Guidance as Covid-19 specific payment deferrals come to an end.
  28. “Position on evaluation of EU strategy for adaptation to climate change,” Insurance Europe, August 24, 2020. Access at: Position on evaluation of EU strategy for adaptation to climate change.

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