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 regulatory database every month by tracking more than 40 regulatory and industry bodies covering North America, Europe and Asia-Pacific. Every month, we will seek to highlight approximately 10 regulations shortlisted on the basis of geographic 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:

  • Report on credit risk management7 from the International Organization of Securities Commissions and Bank for International Settlements (BIS) provides new insights into risks created by excessive reliance on internal models, and the growing need for high-quality liquid collateral.
  • The Federal Reserve System’s guidance6 explains the components of an effective third-party management program that can identify, measure, monitor, and control the risks associated with outsourcing.
  • The European Securities and Markets Authority’s advice9 regarding the new Market Abuse Regulation extends the scope of market manipulation to cover new trading tactics and market realities.

Current coverage period: Through February 28th, 2015
Note: Anticipated business impact for covered regulations is shown using the following rating legend:
( Low) ( Medium) ( High)

CURRENT REGULATIONS:

European Banking Authority (EBA) ( ):
EBA Report On Credit Valuation Adjustment (CVA) under Article 456(2) of Regulation (EU) No 575/2013 (Capital Requirements Regulation — CRR) and EBA Review On the application of CVA charges to non-financial counterparties established in a third country under Article 382(5) of Regulation (EU) No 575/2013 (Capital Requirements Regulation — CRR)
Publication Date: February 25th 2015
Risks Covered: Counterparty Credit Risk, Compliance Risk
Business Processes Impacted: Risk Management and Stress Testing, Capital Adequacy and Capital Planning
The EBA’s report1 deals with calculation of own funds requirements for Credit Valuation Adjustment (CVA) risk. Key coverage include: a) accounting and internal practices, b) the Basel CVA charge, c) implementation of the Basel CVA framework, d) consequences of the CVA charge on industry practice, e) findings and policy recommendations, and f) review on the application of CVA charges to non-financial counterparties established in a third country.

The Financial Accounting Standards Board (FASB) ( ):
Derivatives and Hedging – Disclosures about Hybrid Financial Instruments with Bifurcated Embedded Derivatives
Publication Date: February 24th 2015
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Finance and Performance Management, Reporting
The FASB’s proposal2 is aimed at providing decision-useful information to investors in the notes to financial statements about hybrid financial instruments that contain bifurcated embedded derivatives. As per the amendments, an entity would be required to disclose information that links each bifurcated embedded derivative to its related host contract. This would reflect the overall value and cash flows for the entire financial instrument.

International Organization of Securities Commissions (IOSCO) ( ):
A Comparison and Analysis of Prudential Standards in the Securities Sector – Final Report
Publication Date: February 24th 2015
Risks Covered: Credit Risk, Market Risk, Operational Risk,
Compliance Risk
Business Processes Impacted: Capital Adequacy and Capital Planning, Risk Management and Stress Testing
The IOSCO’s report3 focuses on comparing Net Capital Rule (NCR) approaches, particularly those followed in the US, and the one based on the Capital Requirements Directive (CRD), which has foundations in the Basel Committee’s approach. Major findings include: a) presence of national variations in prudential frameworks, b) variations in regulatory scope in different jurisdictions as to what activities and instruments constitute regulated activities, and c) variations in approaches to deal with risk and calibration of risks.

European Commission (EC) ( ):
An EU framework for simple, transparent and standardised securitisation
Publication Date: February 18th 2015
Risks Covered: Credit Risk, Counterparty Credit Risk
Business Processes Impacted: Capital Adequacy and Capital Planning, Risk Management and Stress Testing
The EC’s consultation4 is aimed at creating a new European Union (EU) securitization framework. Key questions for review include: a) identification criteria for qualifying securitization instruments, b) risk retention requirements for qualifying securitization, c) compliance with criteria for qualifying securitization, d) standardization, transparency and information disclosure, and e) prudential treatment for banks and investment firms.

European Securities and Markets Authority (ESMA) ( ):
Addendum Consultation Paper MiFID II/MiFIR
Publication Date: February 18th 2015
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Trading, Reporting
ESMA’s consultation paper5 on Markets in Financial Instruments Directives (MiFID) and Regulation (MiFIR) covers non-equity asset classes (namely, foreign exchange derivatives, credit derivatives, other derivatives, and contracts for difference). It touches on analysis with a view to defining liquid market and calculations in relation to pre-trade and post-trade transparency for each of the non-equity asset classes. Transparency requirements in respect to bonds, structured finance products, emission allowances and derivatives are set out in the last section of paper.

Board of Governors of the Federal Reserve System (the Fed) ( ):
Information Technology Examination Handbook
Publication Date: February 6th 2015
Risks Covered: IT Risk, Third Party/Vendor Risk, Cybersecurity Risk
Business Processes Impacted: Business Continuity Management, Information Technology
The Fed has published updated guidance6 for examiners, financial institutions and technology service providers in order to help them effectively manage risks associated with outsourcing. The guidance explains various aspects of an effective third party management program and could be used to identify measure, monitor and control risks arising out of outsourcing. This applies to financial institutions supervised by the Fed including those with $10 billion or less in total consolidated assets.

International Organization of Securities Commissions (IOSCO), Bank for International Settlements (BIS) ( ):
Developments in credit risk management across sectors: current practices and recommendations
Publication Date: February 5th 2015
Risks Covered: Credit Risk, Counterparty Credit Risk, Compliance Risk
Business Processes Impacted: Audit, Legal and Compliance, Risk Management and Stress Testing
The joint forum, based on a global survey of supervisors and banking, securities and insurance sector firms has published7 its recommendations for consideration by the supervisors. The survey aims to understand the current state of credit risk management with the following 4 broad themes being addressed: a) regulatory changes developed/implemented since 2006, b) credit risk issues currently being faced, c) developments in the evaluation/management of credit risk, and d) cross-sectoral implications for supervisory/regulatory treatment.

Securities and Exchange Commission (SEC) ( ):
Cybersecurity Examination Sweep Summary
Publication Date: February 3rd 2015
Risks Covered: IT Risk, Third Party/Vendor Risk, Cybersecurity Risk
Business Processes Impacted: Fraud and Financial Crime, Brokerage Services, Information Technology
Based on examinations of more than 100 broker-dealers and investment advisors, the SEC has released an alert8 that deals with cybersecurity at brokerage and advisory firms and provides suggestions to investors on ways to protect their online investment accounts. The review assessed a cross-section of the industry and focused on how the firms: identify cybersecurity risks, establish policy, procedures and oversight, protect their networks and information, manage risks associated with remote access to client’s information/requests and third party vendors, and detect unauthorized activity.

European Securities and Markets Authority (ESMA) ( ):
Final Report – ESMA’s technical advice on possible delegated acts concerning the Market Abuse Regulation
Publication Date: February 3rd 2015
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Trading
The ESMA has published technical advice and standards9 pertaining to the new Market Abuse Regulation (MAR), in order to make MAR applicable to market participants and investors. The published advice includes: MAR market manipulation indicators, suggestions on how to determine which regulator to notify in cases of delayed disclosure of inside information, clarifications on the enhanced disclosure of managers’ transactions, and procedures and arrangements to ensure sound whistleblowing infrastructures.

Bank for International Settlements (BIS) ( ):
Guidance on accounting for expected credit losses
Publication Date: February 2nd 2015
Risks Covered: Credit Risk
Business Processes Impacted: Finance and Performance Management, Risk Management and Stress Testing
The Basel Committee has published a consultative document10 to provide guidance on accounting for expected credit losses. Structured around 11 key principles, the paper identifies the supervisory requirements for sound credit risk practices that can affect the assessment and measurement of allowances under the applicable accounting framework. The guidance provided is not intended to set out regulatory capital requirements on expected loss provisioning under the Basel capital framework.

 FORTHCOMING REGULATIONS:

Financial Reporting Council (FRC)
Priorities 2015 – 16

With the recent scandals that have impaired trust in corporate culture, the FRC believes that trustworthy behavior by directors and professionals, as well as good reporting, can engender confidence, and encourage investment. For this reason, the FRC’s 2015 plan11 focuses on high quality outcomes in the following three areas: a) corporate governance and investor stewardship, b) corporate reporting that is fair, balanced and understandable, and c) confidence in the value of audit.

Footnotes:

  1. European Banking Authority (EBA): EBA Report On Credit Valuation Adjustment (CVA) under Article 456(2) of Regulation (EU) No 575/2013 (Capital Requirements Regulation — CRR) and EBA Review On the application of CVA charges to non-financial counterparties established in a third country under Article 382(5) of Regulation (EU) No 575/2013 (Capital Requirements Regulation — CRR)
  2. The Financial Accounting Standards Board (FASB): Derivatives and Hedging – Disclosures about Hybrid Financial Instruments with Bifurcated Embedded Derivatives
  3. International Organization Of Securities Commissions (IOSCO): A Comparison and Analysis of Prudential Standards in the Securities Sector – Final Report
  4. European Commission (EC): An EU framework for simple, transparent and
    standardised securitisation
  5. European Securities and Markets Authority (ESMA): Addendum Consultation Paper MiFID II/MiFIR
  6. Board of Governors of the Federal Reserve System (the Fed): Information Technology Examination Handbook
  7. International Organization Of Securities Commissions (IOSCO), Bank for International Settlements (BIS): Developments in credit risk management across sectors: current practices and recommendations
  8. Securities and Exchange Commission (SEC): Cybersecurity Examination Sweep Summary
  9. European Securities and Markets Authority (ESMA): Final Report – ESMA’s technical advice on possible delegated acts concerning the Market Abuse Regulation
  10. Bank for International Settlements (BIS): Guidance on accounting for expected credit losses
  11. Financial Reporting Council (FRC): Priorities 2015 – 16

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.

About Accenture

Accenture is a global management consulting, technology services and outsourcing company, with approximately 323,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.

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