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:

Federal Deposit Insurance Corporation (FDIC):
FFIEC Joint Statement on Managing the LIBOR Transition
Publication Date: July 1st 2020

Risks Covered: Conduct Risk
Business Processes Impacted: Consumer/Investor Protection
The agency has announced that the Federal Financial Institutions Examination Council (FFIEC) has issued a Joint Statement on Managing the LIBOR Transition, which highlights the financial, legal, operational, and consumer protection risks that should result from the expected discontinuation of LIBOR for institutions with exposure to the reference rate.1

Office of the Comptroller of the Currency (OCC):
National Bank and Federal Savings Association Digital Activities
Publication Date: July 7th 2020

Risks Covered: Cyber Security Risk
Business Processes Impacted: Business Continuity Management
The agency is reviewing its regulations on bank digital activities to make sure that its regulations continue to evolve with developments in the industry. This advance notice of proposed rulemaking (ANPR) solicits public input as part of this review. Comments were to be submitted by August 3, 2020.2

Financial Industry Regulatory Authority (FINRA):
FINRA Encourages Firms to Notify FINRA if They Engage in Activities Related to Digital Assets
Publication Date: July 9th 2020
Risks Covered: Operational Risk
Business Processes Impacted: Risk Management and Stress Testing
The agency has encouraged firms to keep their Risk Monitoring Analyst (formerly known as a “Regulatory Coordinator”) informed if the firm, or its associated persons or affiliates, engaged, or intended to engage, in activities related to digital assets, including digital assets that are non-securities. The Authority appreciates members’ cooperation with the request and is encouraging firms to continue to keep their Risk Monitoring Analyst abreast of their activities related to digital assets until July 31, 2021.3

Commodity Futures Trading Commission (CFTC):
Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
Publication Date: July 10th 2020
Risks Covered: Prudential Risk
Business Processes Impacted: Netting and Collateral Management
The regulator is seeking comment on a proposed amendment to the margin requirements for uncleared swaps for swap dealers (“SD”) and major swap participants (“MSP”) for which there is no prudential regulator (the “CFTC Margin Rule”). Comments to be received by September 8, 2020.4

Financial Reporting Council (UK) (FRC):
FRC principles for operational separation of audit practices
Publication Date: June 6th 2020
Risks Covered: Operational Risk
Business Processes Impacted: Audit, Legal and Compliance
The council has announced its principles for operational separation of the Big Four firms’ audit practices. The outcomes the agency is seeking include: prioritization of audit quality in audit practice governance; the total amount of profits distributed to the partners does not persistently exceed the contribution to profits of the audit practice; the culture of the audit practice prioritizes high-quality audit by promoting ethical behavior; and auditors act in the public interest and work to benefit shareholders and the wider society. The agency is now asking the Big Four firms to agree to operational separation of their audit practices on this basis and set out a transition timetable so that implementation can be completed no later than June 30, 2024.5

Financial Conduct Authority (FCA):
EBA Guidelines on ICT and Security Risk Management
Publication Date: July 6th 2020
Risks Covered: Credit Risk
Business Processes Impacted: Risk Management and Stress Testing
The authority has announced that it intends to comply with the European Banking Authority’s final guidelines on information and communication technology (ICT) and security risk management for credit institutions.6

Financial Conduct Authority (FCA):
EIOPA Guidelines on outsourcing to cloud service providers
Publication Date: July 8th 2020
Risks Covered: Cyber Security Risk
Business Processes Impacted: Consumer/Investor Protection
The authority has notified the European Insurance and Occupational Pensions Authority (EIOPA) that the final Guidelines on outsourcing to cloud service providers for insurance and reinsurance undertakings are not applicable to regulated activities within the UK’s jurisdiction.7

European Commission (EC):
European payments: The European Commission welcomes the initiative by a group of 16 banks to launch a European payments initiative (EPI)
Publication Date: July 2nd 2020
Risks Covered: Compliance Risk
Business Processes Impacted: Payments
The agency has announced that the European Commission welcomes the agreement reached by 16 major Eurozone banks from Belgium, France, Germany, Spain and the Netherlands to launch a European payments initiative (EPI) with the objective of offering a unified payment solution for consumers and merchants across the continent. EPI is currently launching its implementation phase and is expected to become fully operational in 2022.8

Insurance Europe (IE):
Insurers comment on EIOPA’s work on IBOR transitions, call for clarity on treatment of risk-free rates
Publication Date: July 1st 2020
Risks Covered: Interest Rate Risk (non-trading book)
Business Processes Impacted: Clearing & Settlement – Exchange Traded and OTC
The regulator has published a response to the European Insurance and Occupational Pensions Authority’s (EIOPA) discussion paper stating that there is a lack of clarity regarding how EIOPA’s Risk-Free Rate will be amended to reflect the transition away from IBOR rates. And where transition is already in progress, this creates an obstacle to the transition as insurers are unlikely to be willing to transition their asset exposures away from IBOR-based swaps until the transition risks can be fully understood and measured.9

European Payments Council (EPC):
Brexit from 1 January 2021 onwards: get ready for the end of the transition period
Publication Date: July 14th 2020
Risks Covered: Credit Concentration Risk
Business Processes Impacted: Payments
The regulator has published an update setting out the information that is to be included in each Single Euro Payments Area (SEPA) transaction that involves a UK-based (SEPA) payment scheme participant and is settled after the Brexit implementation period ends. The council asks all payment service providers (PSPs) to implement these measures without delay ‘to ensure a continued smooth processing of cross-border SEPA payments’ after December 31, 2020.10

Consumer Financial Protection Bureau (CFPB):
Payday, Vehicle Title, and Certain High-Cost Installment Loans
Publication Date: July 22nd 2020
Risks Covered: Conduct Risk
Business Processes Impacted: Consumer/Investor Protection
The agency is issuing final rule to amend its regulations governing payday, vehicle title, and certain high-cost installment loans. Specifically, the regulator is revoking provisions of those regulations that: Provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms. This rule is effective from October 20, 2020.11

Federal Reserve (The Fed):
Federal Financial Institutions Examination Council Issues Joint Statement on Managing the LIBOR Transition
Publication Date: July 24th 2020
Risks Covered: Interest Rate Risk (non-trading book)
Business Processes Impacted: Business Continuity Management
The agency has noticed that the Federal Financial Institutions Examination Council (FFIEC) issued a statement on July 1, 2020 that: (i) highlights the resulting risks from the expected discontinuation of LIBOR; and (ii) encourages supervised institutions to continue their efforts to transition to alternative reference rates to mitigate associated risks.12

Financial Conduct Authority (FCA):
Extending implementation deadlines for the Certification Regime and Conduct Rules
Publication Date: July 17th 2020
Risks Covered: Conduct Risk
Business Processes Impacted: Consumer/Investor Protection
The agency has issued a consultation paper on extending implementation deadlines for the Certification Regime and Conduct Rules. The paper proposes reflecting the Treasury’s extension in FCA’s requirements for the Conduct Rules, providing an extra 16 weeks (from December 9, 2020 to March 31, 2021) for firms to complete their Directory Persons reporting, among other things. All comments were to be submitted by August 14, 2020.13

Financial Conduct Authority (FCA):
Coronavirus and customers in temporary financial difficulty: draft updated guidance for insurance and premium finance firms
Publication Date: July 24th 2020
Risks Covered: Business Cycle Risk
Business Processes Impacted: Payments
The agency has published updated guidance for insurance and premium finance firms which is supposed to help deal with difficulties caused by the coronavirus pandemic. The guidance came into force on May 18, 2020 and after 3 months the authority decided to extend it for a further 3 months, until October 31, 2020, along with clarifying the expectations on how firms should treat customers at the end of a payment deferral.14

Insurance Europe (IE):
Response to FSB consultation on effective practises for cyber incident response and recovery
Publication Date: July 17th 2020
Risks Covered: Cyber Security Risk
Business Processes Impacted: Business Continuity Management
The agency has published its response to a consultation by the Financial Stability Board about effective practices for cyber incident response and recovery which aims to create tools that can be used to assist financial institutions before, during and after a cyber incident.15

European Insurance and Occupational Pensions Authority (EIOPA):
Issues Paper on resilience solutions for pandemics
Publication Date: July 27th 2020
Risks Covered: Credit Risk
Business Processes Impacted: Payments
The agency has issued a paper looking into resilience solutions for pandemics. The paper recognizes that private insurance solutions alone are not enough to protect society against the financial consequences of future pandemics. Comments to the paper to be submitted by September 25, 2020.16

European Insurance and Occupational Pensions Authority (EIOPA):
EIOPA publishes the Ultimate forward rate (UFR) for 2021
Publication Date: July 17th 2020
Risks Covered: Interest Rate Risk (non-trading book)
Business Processes Impacted: Funding and Liquidity Management
The authority has published the calculation of the Ultimate Forward Rate (UFR) for 2021. The agency has calculated the UFR for 2021 in line with the methodology to derive the UFR. The applicable UFR, for the Euro, will be 3.6% as of January 1, 2021.17

European Banking Authority (EBA):
Draft Regulatory Technical Standards on requirements that an internal methodology or external sources used under the internal default risk model are to fulfil for estimating default probabilities and losses given default under Article 325bp(12) of Regulation (EU) No 575/2013 (Capital Requirements Regulation 2 – CRR2)
Publication Date: July 22nd 2020
Risks Covered: Compliance Risk
Business Processes Impacted: Lending and Investment
The agency has issued a Consultation Paper on draft Regulatory Technical Standards pertaining to default probabilities (PDs) and losses given default (LGDs) for default risk model for institutions using the new Internal Model Approach (IMA) under the Fundamental Review of the Trading Book. All comments are to be received by October 22, 2020.18

International Swaps and Derivatives Association (ISDA):
Bloomberg Begins Publishing Calculations Related to IBOR Fallbacks
Publication Date: July 21st 2020
Risks Covered: Interest Rate Risk (non-trading book)
Business Processes Impacted: Clearing & Settlement – Exchange Traded and OTC
The Bloomberg Index Services Limited (BISL) has started to calculate and publish fallbacks for certain key interbank offered rates. The ISDA is to publish amendments to its standard interest rate derivatives definitions and that incorporate these new fallbacks which are adjusted versions of various risk-free rates (RFRs).19

International Swaps and Derivatives Association (ISDA):
ISDA Launches Risk-free Rate Adoption Indicator
Publication Date: July 28th 2020
Risks Covered: Business Interest Rate Risk (non-trading book)
Business Processes Impacted: Payments
The Association has launched a new indicator to monitor the adoption of alternative risk-free rates (RFRs) in derivatives trading.20

FORTHCOMING REGULATIONS:

Office of the Comptroller of the Currency (OCC); Federal Reserve; Federal Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA)
Margin and Capital Requirements for Covered Swap Entities
Multiple regulators are adopting a final rule that amends the agencies’ regulations requiring swap dealers and security-based swap dealers under the agencies’ respective jurisdictions to exchange margin with their counterparties for swaps that are not centrally cleared (Swap Margin Rule).21

Financial Reporting Council (UK) (FRC)
International Standard on Auditing (ISA) (UK) 315 Jul 2020
The agency has published a revised version of its ISA (UK) 315, which outlines the auditor’s responsibility to identify and assess the risks of material misstatement in financial statements. This ISA (UK) is effective for audits of financial statements for periods commencing from December 15, 2021. Early adoption is permitted.22

European Commission (EC)
Guideline (EU) 2020/978 of the European Central Bank of 25 June 2020 on the exercise of the discretion under Article 178(2)(d) of Regulation (EU) No 575/2013 of the European Parliament and of the Council by national competent authorities in relation to less significant institutions with regard to the threshold for assessing the materiality of credit obligations past due (ECB/2020/32)
The agency has published its guideline on the threshold for assessing the materiality of credit obligations past due and irrespective of the method used for the calculation of their risk-weighted exposure amounts. The national competent authorities (NCAs) are to comply with this guideline no later than December 31, 2020.23

International Swaps and Derivatives Association (ISDA); Futures Industry Association (FIA)
FIA and ISDA position paper on the CSDR settlement discipline regime
Both regulators have published a position paper outlining their members’ concerns in relation to the settlement discipline regime under the Central Securities Depositories Regulation (CSDR) and which comes into effect in February 2021. The paper requests legislative changes and/or regulatory interpretations to address these concerns.24

Office of the Comptroller of the Currency (OCC)
National Banks and Federal Savings Associations as Lenders
The agency is proposing a regulation to help bring clarity to the topic of a national bank/Federal savings association bank making a loan as a “true lender.” Comments were to be received by September 3, 2020.25

Commodity Futures Trading Commission (CFTC)
Capital Requirements of Swap Dealers and Major Swap Participants
The agency has approved a final rule which adopts new regulations and amends existing regulations to implement sections 4s(e) and (f) of the Commodity Exchange Act (CEA) and as added by section 731 of the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This rule is effective as of October 6, 2021.26

Financial Industry Regulatory Authority (FINRA)
FINRA Requests Comment on Proposed Changes to TRACE Reporting Relating to Delayed Treasury Spot and Portfolio Trades
The agency is requesting comment on two proposed changes to the Trade Reporting and Compliance Engine reporting rules that were recommended by the Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee. Comments to be submitted by September 14, 2020.27

European Commission (EC)
The agency has published its response to the European Central Bank’s announcement of pan-European reach for Euro instant payments by 2021. The Commission welcomes the announcement because of current obstacles to the take-up of instant payments in the European Union.28

Footnotes:

1.“FFIEC Joint Statement on Managing the LIBOR Transition,” Federal Deposit Insurance Corporation, July 1, 2020. Access at: FFIEC Joint Statement on Managing the LIBOR Transition.

2. “National Bank and Federal Savings Association Digital Activities,” Federal Register, July 7, 2020. Access at: National Bank and Federal Savings Association Digital Activities.

3. “FINRA Encourages Firms to Notify FINRA if They Engage in Activities Related to Digital Assets,” Financial Industry Regulatory Authority, July 9, 2020. Access at: FINRA Encourages Firms to Notify FINRA if They Engage in Activities Related to Digital Assets.

4. “Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants,” Federal Register, July 10, 2020. Access at: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants.

5. “FRC principles for operational separation of audit practices,” Financial Reporting Council, July 6, 2020. Access at: FRC principles for operational separation of audit practices.  

6. “EBA Guidelines on ICT and Security Risk Management,” Financial Conduct Authority, July 6, 2020. Access at: EBA Guidelines on ICT and Security Risk Management.

7. “EIOPA Guidelines on outsourcing to cloud service providers,” Financial Conduct Authority, July 8, 2020. Access at: EIOPA Guidelines on outsourcing to cloud service providers.

8. “European payments: The European Commission welcomes the initiative by a group of 16 banks to launch a European payments initiative (EPI),” European Commission, July 2, 2020. Access at: European payments: The European Commission welcomes the initiative by a group of 16 banks to launch a European payments initiative (EPI).

9. “Insurers comment on EIOPA’s work on IBOR transitions, call for clarity on treatment of risk-free rates,” Insurance Europe, July 1, 2020. Access at: Insurers comment on EIOPA’s work on IBOR transitions, call for clarity on treatment of risk-free rates.

10. “Brexit from 1 January 2021 onwards: get ready for the end of the transition period,” European Payments Council, July 14, 2020. Access at: Brexit from 1 January 2021 onwards: get ready for the end of the transition period.

11. “Payday, Vehicle Title, and Certain High-Cost Installment Loans,” Federal Register, July 22, 2020. Access at: Payday, Vehicle Title, and Certain High-Cost Installment Loans.

12. “SR 20-17 / CA 20-12: Federal Financial Institutions Examination Council Issues Joint Statement on Managing the LIBOR Transition,” Federal Reserve System, July 24, 2020. Access at: Federal Financial Institutions Examination Council Issues Joint Statement on Managing the LIBOR Transition.

13. “Extending implementation deadlines for the Certification Regime and Conduct Rules,” Financial Conduct Authority, July 17, 2020. Access at: Extending implementation deadlines for the Certification Regime and Conduct Rules.

14. “Coronavirus and customers in temporary financial difficulty: draft updated guidance for insurance and premium finance firms,” Financial Conduct Authority, July 24, 2020. Access at: Coronavirus and customers in temporary financial difficulty: draft updated guidance for insurance and premium finance firms.

15. “Response to FSB consultation on effective practises for cyber incident response and recovery,” Insurance Europe, July 17, 2020. Access at: Response to FSB consultation on effective practises for cyber incident response and recovery.

16. “Issues Paper on Shared Resilience Solutions for Pandemics,” European Insurance and Occupational Pensions Authority, July 27, 2020. Access at: Issues Paper on resilience solutions for pandemics.

17. “EIOPA publishes the Ultimate forward rate (UFR) for 2021,” European Insurance and Occupational Pensions Authority, July 17, 2020. Access at: EIOPA publishes the Ultimate forward rate (UFR) for 2021.

18. “Draft Regulatory Technical Standards on requirements that an internal methodology or external sources used under the internal default risk model are to fulfil for estimating default probabilities and losses given default under Article 325bp(12) of Regulation (EU) No 575/2013 (Capital Requirements Regulation 2 – CRR2),” European Banking Authority, July 22, 2020. Access at: Draft Regulatory Technical Standards on requirements that an internal methodology or external sources used under the internal default risk model are to fulfil for estimating default probabilities and losses given default under Article 325bp(12) of Regulation (EU) No 575/2013 (Capital Requirements Regulation 2 – CRR2).

19. “Bloomberg Begins Publishing Calculations Related to IBOR Fallbacks,” International Swaps and Derivatives Association, July 21, 2020. Access at: Bloomberg Begins Publishing Calculations Related to IBOR Fallbacks.

20. “ISDA Launches Risk-free Rate Adoption Indicator,” International Swaps and Derivatives Association, July 28, 2020. Access at: ISDA Launches Risk-free Rate Adoption Indicator.

21. “Margin and Capital Requirements for Covered Swap Entities,” Federal Register, July 1, 2020. Access at: Margin and Capital Requirements for Covered Swap Entities.

22. “ISA (UK) 315 (REVISED JULY 2020): Identifying and Assessing the Risks of Material Misstatement,” Financial Reporting Council, July 14, 2020. Access at: International Standard on Auditing (ISA) (UK) 315 Jul 2020.

23. Guidelines (EU) 2020/978 of the European Central Bank of 25 June 2020, Official Journal of the European Union, July 8, 2020. Access at: Guideline (EU) 2020/978 of the European Central Bank of 25 June 2020 on the exercise of the discretion under Article 178(2)(d) of Regulation (EU) No 575/2013 of the European Parliament and of the Council by national competent authorities in relation to less significant institutions with regard to the threshold for assessing the materiality of credit obligations past due (ECB/2020/32).

24. “FIA and ISDA position paper on the CSDR settlement discipline regime,” Futures Industry Association, July 1, 2020. Access at: FIA and ISDA position paper on the CSDR settlement discipline regime.

25. “National Banks and Federal Savings Associations as Lenders,” Office of the Comptroller of the Currency, July 22, 2020. Access at: National Banks and Federal Savings Associations as Lenders.

26. “Capital Requirements of Swap Dealers and Major Swap Participants,” Commodity Futures Trading Commission, July 24, 2020. Access at: Capital Requirements of Swap Dealers and Major Swap Participants.

27. “FINRA Requests Comment on Proposed Changes to TRACE Reporting Relating to Delayed Treasury Spot and Portfolio Trades,” Financial Industry Regulatory Authority, July 16, 2020. Access at: FINRA Requests Comment on Proposed Changes to TRACE Reporting Relating to Delayed Treasury Spot and Portfolio Trades.

28. “European payments: The European Commission welcomes the European Central Bank’s (ECB) announcement that will ensure pan-European reach for euro instant payments by 2021,” European Commission, July 2, 2020. Access at: European payments: The European Commission welcomes the European Central Bank’s (ECB) announcement that will ensure pan-European reach for euro instant payments by 2021

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