This is a monthly initiative aimed at updating the Risk Management community with the most recent regulatory changes impacting Banks & Capital Markets firms. We update our comprehensive regulatory database every month by tracking more than 40 regulatory and industry bodies covering North America, EALA and APAC. Every month, we will highlight approximately 10 regulations shortlisted on the basis of geography of coverage and anticipated business impacts. Our summaries will highlight the risks covered and business processes affected by the regulatory reforms. This newsletter is planned to supplement the existing monthly newsletter “Regulatory Insights” which provides a deeper analysis of business implications & Accenture’s point of view on a single or much smaller set of regulatory changes.
Edition Highlights:
  • The Basel committee’s proposed revisions4 on Basel III leverage ratio would relate to adjustments in the calculation of exposure measures by banks. Internationally-active banks would be required to use a common template for disclosure of leverage ratio.
  • The CFTC’s final rules10 on registration and operation of swap execution facilities address procedures for listing of products, permitted execution methods, and core principles of compliance with related provisions of Title VII of the Dodd-Frank Act.
  • The FCA’s final rules10, for implementation of Alternative Investment Fund Managers Directive, sets out capital adequacy, liquidity, client-asset protection, and business conduct rules for alternative funds such as hedge funds, private equity funds, etc.
Current coverage period: Through June 30th, 2013
Note: Anticipated business impact for covered regulations is shown using the following rating legend:
(Low) ( Medium) ( High)

CURRENT AND PROPOSED REGULATIONS:

Financial Conduct Authority (FCA)(): Implementation of the Alternative Investment Fund Managers Directive
Publication Date:
June 28th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Consumer Protection,
Audit, Legal & Compliance
The final rules1 establish a harmonized framework and strengthen the working of alternative funds such as hedge funds, private equity funds, venture capital funds, etc. Major coverage includes a) conduct of business standards for full-scope & other alternative fund managers, b) prudential regulations covering capital requirements, liquidity and reporting, c) changes in ombudsman services and financial services compensation scheme in relation to redressing of consumer complaints, d) client assets rules for depositories of alternative fund managers (AFM), and e) marketing by AFM.

European Banking Authority (EBA)(): Management of interest rate risk arising from non-trading activities in the context of the supervisory review process
Publication Date:
June 27th 2013
Risks Covered: Interest Rate Risk
Business Processes Impacted: Risk Management & Stress Testing, Funding & Liquidity Management
The proposed regulation2 from the EBA would be aimed at improving interest rate risk (IRR) management in the banking book under Pillar 2 of Basel Accord, namely, the Internal Capital Adequacy Assessment Process. Majority of the proposed additions fall under the areas, namely, a) responsibilities of the board of directors in relation to IRR strategy & policies, b) identification, computation, and allocation of capital to IRR, c) methods of measuring IRR & their assumptions, and d) building of a robust & consistent scenario & stress testing framework.

Bank for International Settlements (BIS)(): Sound management of risks related to money laundering and financing of terrorism
Publication Date:
June 27th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: AML & Counter-terrorist Financing, Risk Management & Stress Testing
Intended to be consistent with the Financial Action Task Force’s standards, the proposed regulation3 would support implementation of the standards by countries with respect to their banks & banking groups. Essential elements of the proposal include a) assessment, understanding, management & mitigation of risks, b) preparation of customer acceptance policy & procedures, c) identification of beneficial owners, verification & risk profiling, d) ongoing monitoring, and e) reporting of suspicious transactions & asset freezing.

Bank for International Settlements (BIS)(): Revised Basel III leverage ratio framework and disclosure requirements
Publication Date:
June 26th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Risk Management & Stress Testing, Reporting
With a view to restricting the accumulation of destabilizing effects of excessive leverage, the Basel III reforms included a ceiling on the leverage ratio, as a supplement to the risk-based capital requirements. Revisions in the proposed rules4 of the Basel committee would relate primarily to the exposure measure, which is the denominator of the leverage ratio. Major changes proposed include a) consistent measurement with reference to deductions / inclusions in regulatory capital, b) clarification on treatment of derivatives and related collateral, c) enhanced treatment of written credit derivatives & securities financing transactions, and d) public disclosure requirements.

Monetary Authority of Singapore (MAS)(): Proposed Regulatory Framework for Financial Benchmarks
Publication Date:
June 14th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Consumer Protection, Trading
The proposed rule5 would introduce a regulatory framework, in line with the standards set by the International Organization of Securities Commissions, for setting of financial benchmarks by preventing attempts to manipulate them. Major coverage of the proposed changes include a) definition of financial benchmark, b) introduction of criminal & civil sanctions, c) a new regulatory regime for administrators, and for submitters of designated benchmarks, and d) powers to compel certain entities to be submitters to designated benchmarks.

Central Bank of Ireland(): Management of Country Risk by Credit Institutions
Publication Date:
June 13th 2013
Risks Covered: Credit Risk
Business Processes Impacted: Risk Management & Stress Testing, Lending & Investment
With a view to effecting improvements in management of lending & investment portfolios, the proposed regulation6 would put in place appropriate policies & procedures for country risk management as a part of implementing Basel Pillar 2 standards. Major proposed coverage includes a) definitions & supervisory approach, b) roles of the board & senior management, c) country risk analysis & ratings, d) limits & exposure management, e) monitoring & reporting, f) stress testing of country risk, and g) disclosure & reporting.

International Monetary Fund (IMF)(): Brazil: Technical Note on Stress Testing the Banking Sector
Publication Date:
June 6th 2013
Risks Covered: Credit Risk, Market Risk, Liquidity Risk
Business Processes Impacted: Risk Management & Stress Testing, Funding & Liquidity Management
The report7 is an outcome of the IMF’s top-down stress tests that covered all banks in Brazil, and focused on credit, market, concentration, income, liquidity and contagion risks. Key findings reveal that a) the vast majority of banks are in a position to withstand substantial levels of stress, including a global recession, b) in terms of liquidity, while there are vulnerabilities, availability of liquid assets would put the system as a whole into a position to withstand substantial stress, and c) while direct contagion risk is limited, indirect contagion through funding markets could have a more adverse impact.

Federal Deposit Insurance Corporation (FDIC)(): Supervisory Insights
Publication Date:
June 6th 2013
Risks Covered: Credit Risk, Compliance Risk, IT Risk
Business Processes Impacted: Risk Management & Stress Testing
The FDIC’s supervisory insights report8, aimed at promoting sound principles and practices of supervision of banks, covers three key components of recent relevance. They are a) supervisory expectations for credit risk due diligence in investment portfolios, b) compliance-focused due diligence in relation to mergers & acquisitions, and c) mitigation of information technology (IT) risks through effective IT examinations, with banks’ continued expansion of use of technology and increased incidence of cyber-attacks.
Securities and Exchange Commission (SEC)(): Money Market Fund Reform; Amendments to Form PF
Publication Date:
June 5th 2013
Risks Covered: Compliance Risk, Market Risk
Business Processes Impacted: Risk Management & Stress Testing, Audit, Legal & Compliance
The SEC’s proposed regulation9 would provide two alternatives to address vulnerability of money market funds (MMF) to heavy redemptions and to mitigate possible contagion from such redemptions. While the first alternative would require the MMF to sell and redeem shares based on the current market-based value of the securities, the second alternative involves imposing of liquidity fees if a fund’s liquidity falls below a specified threshold and to suspend redemptions temporarily. Additional amendments in the proposed rules would require a) enhanced stress testing, b) disclosure of additional information by MMF, and c) provision of additional information by unregistered liquidity funds which can resemble MMF.

Commodity Futures Trading Commission (CFTC)(): Core Principles and Other Requirements for Swap Execution Facilities
Publication Date:
June 4th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal & Compliance, Trading
The CFTC’s final rules10 under title VII of the Dodd-Frank Act apply to the registration and operation of a new type of entity namely swap execution facility (SEF). Major coverage includes a) requirements for registration, b) procedures for listing products and implementing rules, c) information relating to SEF compliance, d) permitted execution methods, e) identification of swaps made available for trading, f) identification of non-cleared swaps or swaps not made available to trade, and g) acceptable practices for compliance with core principles.

FORTHCOMING REGULATIONS:

Board of Governors of Federal Reserve System (the Fed): Basel III implementation in the U.S.

This final rule11 would implement in the U.S. the Basel III regulatory reforms and certain changes required by the Dodd-Frank Act. Under the final rule, among other changes, minimum requirements will increase for both quality and quantity of capital held by banking organizations. Key major changes in the final rule over the proposed one relate to reduction of regulatory burden on community banks, and for smaller, less complex banking organizations. While the phase-in period for larger institutions begins in January 2014, the phase-in period for smaller, less complex banking organizations will not begin until January 2015.

Footnotes
  1. Financial Conduct Authority: Implementation of the Alternative Investment Fund Managers Directive
  2. European Banking Authority: Management of interest rate risk arising from non-trading activities in the context of the supervisory review process
  3. Bank for International Settlements: Sound management of risks related to money laundering and financing of terrorism
  4. Bank for International Settlements: Revised Basel III leverage ratio framework and disclosure requirements
  5. Monetary Authority of Singapore: Proposed Regulatory Framework for Financial Benchmarks
  6. Central Bank of Ireland: Management of Country Risk by Credit Institutions
  7. International Monetary Fund: Brazil: Technical Note on Stress Testing the Banking Sector
  8. Federal Deposit Insurance Corporation: Supervisory Insights
  9. Securities and Exchange Commission: Money Market Fund Reform; Amendments to Form PF
  10. Commodity Futures Trading Commission: Core Principles and Other Requirements for Swap Execution Facilities
  11. Board of Governors of Federal Reserve System (the Fed): Basel III implementation in the U.S.
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. If you require advice or further details on any matters referred to, please contact Accenture.

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