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, Europe and Asia Pacific. Every month, we will highlight approximately 10 regulations shortlisted on the basis of geography of coverage and anticipated business impacts. Our summaries 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 revised guidance9 on corporate governance highlights the importance of risk governance and expands the guidance on the role of board of directors.
  • The Federal Reserve System’s final rule4 establishes the criteria for identifying a global systemically important bank and the methods that those firms will use to calculate a risk-based capital surcharge.
  • The European Banking Authority’s guidelines6 on product oversight and governance for retail banking products provides a framework for robust product design and distribution.

Current coverage period: Through July 31st, 2015

Note: Anticipated business impact for covered regulations is shown using the following rating legend:

(*Low) (** Medium) (*** High)

CURRENT REGULATIONS:

Bank of England(**):
Statement of Policy : The PRA’s methodologies for setting Pillar 2 capital
Publication Date: July 29th 2015
Risks Covered: Operational Risk, Credit Risk, Market Risk
Business Processes Impacted: Capital Adequacy and Capital Planning, Risk Management and Stress Testing
The statement of policy1 sets out methodologies that the Prudential Regulation Authority (PRA) uses to inform the setting of Pillar 2 capital to which Capital Requirements Directive (CRD) IV applies. Section I deals with individual guidance for credit risk, market risk, operational risk, counterparty credit risk, credit concentration risk, interest rate risk in the banking book and pension obligation risk. Section II provides information on the purpose of the PRA buffer, how it is determined and how it relates to CRD IV buffers. It also provides details on the approach to tackling weak governance and risk management under Pillar 2.

Financial Stability Board (FSB)(*):
OTC Derivatives Market Reforms, Ninth Progress Report on Implementation
Publication Date: July 24th 2015
Risks Covered: Counterparty Credit Risk
Business Processes Impacted: Clearing and Settlement – Exchange
Traded and OTC

According to the FSB’s ninth progress report2 the implementation of over-the-counter (OTC) derivatives market reforms are well underway. The main findings are: a) trade reporting and higher capital requirements for non-centrally cleared derivatives are the most advanced in terms of implementation of reforms; and b) most jurisdictions are only in the early phases of implementing the Basel Committee – International Organization of Securities Commissions framework for margin requirements for non-centrally cleared derivatives.

Office of Financial Research (OFR)(*):
Incorporating Liquidity Shocks and Feedbacks in Bank Stress Tests
Publication Date: July 22nd 2015
Risks Covered: Credit Risk, Liquidity Risk, Operational Risk
Business Processes Impacted: Risk Management and Stress Testing, Funding and Liquidity Management
While stress testing is an important tool to assess the health of the financial system, the principal US stress tests do not consider potential risks in the funding or liquidity channels. This research3 from OFR discusses how four types of shocks that can affect banks could be incorporated into stress tests and how these shocks can affect the regulatory ratios for capital adequacy and liquidity simultaneously. In addition, a bank’s response to a binding regulatory ratio can spread shocks to other banks.

Board of Governors of the Federal Reserve System (the Fed)(**):
Regulatory Capital Rules: Implementation of Risk-based Capital Surcharges for Global Systemically Important Bank Holding Companies
Publication Date: July 20th 2015
Risks Covered: Compliance Risk, Systemic Risk
Business Processes Impacted: Capital Adequacy and Capital Planning, Audit, Legal and Compliance
The Fed has adopted a final rule4 that establishes risk-based capital surcharge for the largest, most interconnected US bank holding companies pursuant to section 165 of the Dodd-Frank Act. The final rule requires a bank holding company (BHC) that is an advanced approaches institution to calculate a measure of its systemic importance. A BHC whose measure of systemic importance exceeds the defined threshold would be identified as a global systemically important bank holding company and would be subject to risk-based capital surcharge.

Board of Governors of the Federal Reserve System (the Fed)(**):
Amendments to the Capital Plan and Stress Test Rules
Publication Date: July 17th 2015
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Capital Adequacy and Capital Planning, Risk Management and Stress Testing
The changes proposed5 by the Fed would apply beginning with the 2016 capital plan and stress test cycles. For all banking organizations, the proposal would remove the tier 1 common capital ratio requirement. For large bank holding companies, the proposal would modify the stress test capital action assumptions. For banking organizations subject to the advanced approaches, the proposal would delay the incorporation of the supplementary leverage ratio for one year and indefinitely defer the use of the advanced approaches risk-based capital framework in the capital plan and stress test rules.

European Banking Authority (EBA)(**):
Guidelines on product oversight and governance arrangements for retail banking products
Publication Date: July 15th 2015
Risks Covered: Compliance Risk, Conduct Risk
Business Processes Impacted: Research and Marketing, Sales Processes
In order to address some of the drivers of conduct failure which can result in consumer detriment, and undermine financial stability and financial system integrity, the EBA has published guidelines6 for product oversight and governance for manufacturers and distributors of retail banking products that fall within its regulatory remit. The guidelines cover specific requirements for both manufacturers (e.g. product testing, disclosure, monitoring, etc.) and distributors (e.g. target market, internal arrangements, etc.).

Commodity Futures Trading Commission (CFTC)(**)
Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants—Cross-Border Application of the Margin Requirements; Proposed Rule
Publication Date: July 14th 2015
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Clearing and Settlement – Exchange Traded and OTC, Audit, Legal and Compliance
The Commission has proposed a rule7 for the application of its margin requirements to cross-border transactions. These are applicable to uncleared swaps for swap dealers and major swap participants. In order to strike a balance among competing requirements, the Commission has consulted a number of foreign regulatory authorities addressing national efforts to implement margin reform and address possible overlaps and conflicts between US and foreign regulatory regimes.

Prudential Regulation Authority (PRA)(**):
Implementing a UK leverage ratio framework
Publication Date: July 10th 2015
Risks Covered: Operational Risk, Compliance Risk
Business Processes Impacted: Risk Management and Stress Testing, Reporting
Under the direction of the Financial Policy Committee, the PRA has issued a consultation8 paper to implement the minimum leverage ratio requirement, with additional requirements for reporting and disclosure. This is applicable to PRA-regulated banks and building societies with consolidated retail deposits equal to or greater than £50 billion. The paper details out the following: a) UK leverage ratio framework; and b) cost and benefit analytics (impact of proposed rules, particularly on reporting and disclosures).

Bank for International Settlements (BIS)(***):
Revised principles on corporate governance for banks issued by the Basel Committee
Publication Date: July 8th 2015
Risks Covered: Strategic Risk
Business Processes Impacted: Risk Management and Stress Testing
To emphasize the significance of effective corporate governance for the safe and sound functioning of banks, the Basel Committee has published corporate governance principles.9 These principles provide guidance on the following key areas: role of board of directors in facilitating effective risk management; board’s collective competence and time obligation; risk governance; roles played by various key stakeholders and the importance of risk culture; board member selection process assessment by supervisors; compensation systems and incentive structure forming a key component of governance.

Bank for International Settlements (BIS)(**):
Consultative Document – Review of the Credit Valuation Adjustment Risk Framework
Publication Date: July 1st 2015
Risks Covered: Counterparty Credit Risk
Business Processes Impacted: Risk Management and Stress Testing
The Basel Committee has undertaken a review10 of the Credit Valuation Adjustment (CVA) Risk Framework with the following objectives: a) confirm that all important drivers of CVA risk and CVA hedges are covered in the Basel regulatory capital standard; b) align the capital standard with the fair value measurement of CVA employed under various accounting regimes; and c) confirm consistency with the proposed revisions to the market risk framework under the Basel Committee’s Fundamental Review of the Trading Book.
FORTHCOMING REGULATIONS:

European Securities and Markets Authority (ESMA)
The European Regulatory Outlook
The focus of the leadership speech by Verena Ross, Executive Director of ESMA,11 is on the European investment landscape. Capital Markets Union (CMU) is an important component of the landscape that will shape the future of finance in Europe by creating a balanced funding system. Technology is a hot topic that certainly brings opportunities, but also creates some challenges for firms and regulators. With increased digitalization, the three European Supervisory Authorities have started working together on the automation of financial advice.

Footnotes:

  1. Bank of England(**):
    Statement of Policy : The PRA’s methodologies for setting Pillar 2 capital
  2. Financial Stability Board (FSB)(*):
    OTC Derivatives Market Reforms, Ninth Progress Report on Implementation
  3. Office of Financial Research (OFR)(*):
    Incorporating Liquidity Shocks and Feedbacks in Bank Stress Tests
  4. Board of Governors of the Federal Reserve System (the Fed)(**):
    Regulatory Capital Rules: Implementation of Risk-based Capital Surcharges for Global Systemically Important Bank Holding Companies
  5. Board of Governors of the Federal Reserve System (the Fed)(**):
    Amendments to the Capital Plan and Stress Test Rules
  6. European Banking Authority (EBA)(**):
    Guidelines on product oversight and governance arrangements for retail banking products
  7. Commodity Futures Trading Commission (CFTC)(**)
    Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants—Cross-Border Application of the Margin Requirements; Proposed Rule
  8. Prudential Regulation Authority (PRA)(**):
    Implementing a UK leverage ratio framework
  9. Bank for International Settlements (BIS)(***):
    Revised principles on corporate governance for banks issued by the Basel Committee
  10. Bank for International Settlements (BIS)(**):
    Consultative Document – Review of the Credit Valuation Adjustment Risk Framework
  11. European Securities and Markets Authority (ESMA)
    The European Regulatory Outlook

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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