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, 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 proposed revisions8 to corporate governance principles would strengthen risk governance, and the roles played by the three lines of defense.
  • The Federal Reserve’s final rules5 would modify the stress testing and capital planning cycle, and limit capital distribution by bank holding companies.
  • The International Organization of Securities Commissions’ report10 identifies potential sources of systemic risks in securities markets and is meant to assist in mitigating the risk.
Current coverage period: Through October 31st, 2014
Note: Anticipated business impact for covered regulations is shown using the following rating legend:
( Low) ( Medium) ( High)

CURRENT REGULATIONS:

Bank for International Settlements (BIS)():
Basel III: the net stable funding ratio (NSFR)
Publication Date:
Oct 31st 2014
Risks Covered: Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing, Funding and Liquidity Management
The Net Stable Funding Ratio (NSFR), defined as “the amount of available stable funding relative to the amount of required stable funding”, is a significant component of Basel III reforms. The final rules1 would require banks to maintain a stable funding profile in relation to their on-and off-balance sheet activities. Key changes set out in the final rules require stable funding for a) short-term exposures to banks and other financial institutions, b) derivatives exposures, and c) assets posted as initial margin for derivatives contracts.

Office of Financial Research (OFR) ():
“Who is who?; Who owns who?; and Who owns what?”- Remarks of Matthew Reed, Chief Counsel, Office of Financial Research, U.S. Department of the Treasury at the CUSIP Annual Industry Summit
Publication Date:
Oct 29th 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance
Highlighting the need for better information, rather than more information, for improving transparency in the financial services industry, the OFR leadership speech2 deals with the future of the Legal Entity Identifier (LEI) initiative and its role in promoting better data to market participants. With the issue of almost 300,000 LEIs from 180 countries to date, regulations requiring the LEI are being issued at an increasing speed in many regions. Lack of awareness by regulators and misunderstandings about the costs and benefits of LEI appear to come in the way of adopting the LEI in a number of jurisdictions.

European Securities and Markets Authority (ESMA) ():
ESMA Guidelines on enforcement of financial information
Publication Date:
Oct 28th 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Reporting, Audit, Legal and Compliance
ESMA’s guidelines3 aim to achieve a high level of harmonization in setting priorities for enforcement which would form a basis for the examination of financial statements of listed companies by ESMA and other European national enforcers. These common priorities include a) preparation and presentation of consolidated financial statements and related disclosures, b) financial reporting by entities which have joint arrangements and related disclosures, and c) recognition and measurement of deferred tax assets.

Financial Stability Board (FSB) ():
Structural Banking Reforms: Cross-border consistencies and global financial stability implications
Publication Date:
Oct 27th 2014
Risks Covered: Compliance Risk, Systemic Risk
Business Processes Impacted: Audit, Legal and Compliance,Risk Management and Stress Testing
The content of the report4 is structural banking reforms that have recently been implemented or proposed in a number of jurisdictions, and which explain a significant share of global banking assets. While the main findings of the report acknowledge the role played by the reforms in promoting global financial stability by reducing systemic risks in jurisdictions that implemented the reforms, authorities in other jurisdictions identify a number of potentially negative cross-border implications. Further work is planned in 2015 by the Basel Committee, and the Organization for Economic Cooperation and Development (OECD).

Board of Governors of the Federal Reserve System (the Fed) ():
Capital Plan and Stress Test Rules
Publication Date:
Oct 27th 2014
Risks Covered: Credit Risk, Market Risk, Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing, Capital Adequacy and Capital Planning
The Fed issued certain amendments5 to the capital plan and stress test rules applicable to bank holding companies (BHC) based on their size. These include changes to the start date of capital plan and stress test cycles and limiting the ability of a BHC to make capital distributions under certain conditions. The final rules also clarify the characteristics of a stressed scenario to be included in the company run stress tests. The rule will be effective November 26, 2014 except the amendment to § 225.8(g)(3) which will be effective on April 1, 2015.

European Banking Authority (EBA) ():
Results of 2014 EU-wide stress test
Publication Date:
Oct 26th 2014
Risks Covered: Credit Risk, Market Risk, Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing,Capital Adequacy and Capital Planning
Conducted with the aim of assessing the resilience of European Union (EU) banks to adverse economic developments, the EBA’s EU-wide stress tests6 covered 123 banks that account for more than 70% of total EU banking assets. Key results include a) on average, Common Equity Tier 1 (CET1) of the tested banks dropped by 260 basis points, main cause of the impact is credit losses, b) 24 banks failed stress test as their actual CET1 dropped below the threshold CET1 level for adverse and baseline scenarios, and c) maximum shortfall of capital is EUR 24.6 bn. Supervisory action would follow from competent authorities.

Financial Stability Board (FSB) ():
FSB welcomes industry initiative to remove cross-border close-out risk
Publication Date:
Oct 11th 2014
Risks Covered: Systemic Risk
Business Processes Impacted: Risk Management and Stress Testing
The FSB has welcomed7 the International Swaps and Derivatives Association (ISDA) announcement of the agreement to a protocol to improve cross-border resolution actions. Once the protocol is enacted it will help reduce the risk that a bank with significant cross-border operations could trigger a cascade of termination events in bilateral over-the-counter (OTC) derivatives contracts that leads to disruption in the wider market. As part of this agreement, an initial set of 18 global systemically important banks and other large dealer banks have committed to execute the protocol by November.

Bank for International Settlements (BIS) ():
Guidelines: Corporate governance principles for banks
Publication Date:
Oct 10th 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Risk Management and Stress Testing
The Committee has revisited its guidance8 for corporate governance that was issued in 2010 as principles for enhancing corporate governance, based on ongoing developments in this area and the FSB peer review recommendations received. Two key objectives of the revision are: to explicitly reinforce the collective oversight and risk governance responsibilities of the board, and, to emphasize key components of risk governance and their relationship to a bank’s risk capacity.

Bank of England, Prudential Regulation Authority (PRA) ():
The implementation of ring-fencing: consultation on legal structure, governance and the continuity of services and facilities
Publication Date:
Oct 6th 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance
As part of its wider resolution and resilience agenda, the PRA has issued a consultation paper9 to set out its proposed ring-fencing policy, including rules and supervisory statements, in three areas: a) the legal structure of banking groups, b) governance, and c) the continuity of services and facilities. This is relevant for banks that will be required by the Financial Services and Markets Act 2000 to ring-fence their “core activities”, defined by the Act as the regulated activity of accepting deposits.

International Organization Of Securities Commissions (IOSCO) ():
Securities Markets Risk Outlook 2014 – 2015
Publication Date:
Oct 1st 2014
Risks Covered: Systemic Risk
Business Processes Impacted: Risk Management and Stress Testing
As part of its annual series, the IOSCO has published this Risk Outlook10 with the aim of defining a global and forward looking approach to understanding risks from the securities markets that could become systemic and to highlight noteworthy trends and potential vulnerabilities. It is also meant to assist regulators in implementing IOSCO’s principles on identifying, assessing and mitigating systemic risks and on reviewing the regulatory perimeter. It also raises public awareness of key issues and potential systemic risks in securities markets.

FORTHCOMING REGULATIONS:

European Banking Authority (EBA): EBA Work Programme 2015
In the regulatory area11, the fundamental objective would be to continue to play a central role in the development of a single rule book aimed at achieving a level playing field for financial institutions, among others. The focus of regulatory work would be on a) Capital Requirements framework, b) Bank Recovery and Resolution Directive, and c) contributions to other regulatory tasks, such as the Anti-Money Laundering Directive, European Market Infrastructure Regulation, and Markets in Financial Instruments legislation.

Footnotes:

  1. Bank for International Settlements (BIS): Basel III: the net stable funding ratio (NSFR)
  2. Office of Financial Research (OFR): “Who is who?; Who owns who?; and Who owns what?”- Remarks of Matthew Reed, Chief Counsel, Office of Financial Research, U.S. Department of the Treasury at the CUSIP Annual Industry Summit,
  3. European Securities and Markets Authority (ESMA): ESMA Guidelines on enforcement of financial information
  4. Financial Stability Board (FSB): Structural Banking Reforms: Cross-border consistencies and global financial stability implications
  5. Board of Governors of the Federal Reserve System (the Fed): Capital Plan and Stress Test Rules
  6. European Banking Authority (EBA): Results of 2014 EU-wide stress test
  7. Financial Stability Board (FSB): FSB welcomes industry initiative to remove cross-border close-out risk
  8. Bank for International Settlements (BIS): Guidelines: Corporate governance principles for banks
  9. Bank of England, Prudential Regulation Authority (PRA): The implementation of ring-fencing: consultation on legal structure, governance and the continuity of services and facilities
  10. International Organization Of Securities Commissions (IOSCO): Securities Markets Risk Outlook 2014 -2015
  11. European Banking Authority (EBA): EBA Work Programme 2015
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.

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