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 European Commission’s proposal6 builds on the recommendations of the Liikanen report and aims at protecting the deposit-taking business from potential risky trading activities.
  • The Commodity Futures Trading Commission (CFTC’s) proposal3 on margin requirements would apply the requirements for uncleared swaps within the context of cross-border transactions, and this with limited exclusions.
  • The Basel Committee’s proposal9 on interest rate risk management aims at ensuring appropriate capital for risk and adequate oversight.

Current coverage period: Through June 30th, 2015

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

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

CURRENT REGULATIONS:

Federal Financial Institutions Examination Council (FFIEC)(**):
FFIEC Cybersecurity Assessment Tool
Publication Date: Jun 30th 2015
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Fraud and Financial Crime

The Federal Financial Institutions Examination Council (FFIEC’s) cybersecurity assessment tool1 helps banks and examiners determine the inherent risk profile and the level of readiness of the bank. With 5 levels of maturity (baseline, evolving, intermediate, advanced, and innovative), the institution’s cybersecurity maturity is evaluated under: a) cyber risk management and oversight; b) threat intelligence and collaboration; c) cybersecurity controls; d) external dependency management; and e) cyber incident management and resilience.

Office of the Comptroller of the Currency (OCC)(*):
Semiannual Risk Perspective From the National Risk Committee
Publication Date: Jun 30th 2015
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance,
Risk Management & Stress Testing

The OCC’s report2 observed declining revenues and profitability in OCC-supervised institutions. Key findings from the report include: a) need for heightened awareness of evolving cyber threats and information technology vulnerabilities; b) high compliance risks, in view of the need to comply with new mortgage lending requirements and manage Bank Secrecy Act/Anti-Money Laundering Act risks; c) loosening of underwriting standards in view of competition for limited lending opportunities; and d) reevaluation of business models and risk appetites by banks to generate returns in the light of low interest rates.

Commodity Futures Trading Commission (CFTC)(**):
Proposed Rule Regarding the Cross-Border Application of the Margin
Requirements

Publication Date: Jun 29th 2015
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Clearing and Settlement – Exchange
Traded and OTC, Audit, Legal and Compliance

The CFTC’s proposed rule3 would apply its margin requirements for uncleared swaps in the context of cross-border transactions and with limited exclusion. In addition, the proposed rule would allow covered swap entities to comply with comparable margin requirements in a foreign jurisdiction as an alternative to complying with the its margin rules for uncleared swaps. This is aimed at effectively addressing risks while reducing the potential for conflict with relevant foreign jurisdictions’ margin requirements.

European Systemic Risk Board (ESRB)(*):
Report on misconduct risk in the banking sector
Publication Date: Jun 25th 2015
Risks Covered: Conduct Risk, Compliance Risk
Business Processes Impacted: Risk Management and Stress Testing,
Sales Processes

The report4 from ESRB identifies the mis-selling of financial products, violation of national and international rules and regulations and the manipulation of financial markets as major types of misconduct. Although misconduct risk is typically firm-specific, two dimensions of the potential systemic impact of misconduct by EU banks are identified in this report. In addition, the report explores what steps could be taken by the EU or at international level to promote greater coordination to perform/ confirm consistent approaches and appropriate contingency planning.

Prudential Regulation Authority (PRA)(**):
Supervisory Statement SS27/15 – Remuneration
Publication Date: Jun 23rd 2015
Risks Covered: Compliance Risk
Business Processes Impacted: Audit, Legal and Compliance,
Risk Management and Stress Testing

The PRA’s new guidance5 on remuneration aims to further align risk and individual reward in the banking sector and to discourage irresponsible risk-taking. The primary changes are: a) extending the period during which variable remuneration is withheld following the end of accrual period; b) introduction of clawback rules where staff members return part or all of the variable remuneration that has already been paid to them; and c) strengthening the requirements on dual-regulated firms to apply more effective risk adjustment.

European Commission (EC)(***):
Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions
Publication Date: Jun 19th 2015
Risks Covered: Compliance Risk, Strategic Risk
Business Processes Impacted: Audit, Legal and Compliance,
Risk Management and Stress Testing

The EC has published a draft regulation6 to help reduce excessive risk taking and prevent rapid balance sheet growth as a result of trading activities. The objective is to strengthen the financial stability of member states by protecting the deposit taking business of the largest and most complex EU banks from risky trading activities. The proposed regulation would apply only to banks that are either deemed of global systemic importance or exceed certain thresholds in terms of trading activity or absolute size.

European Banking Authority (EBA)(**)
Draft Regulatory Technical Standards on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of Regulation (EU) No 648/2012
Publication Date: Jun 10th 2015
Risks Covered: Counterparty Risk (CCR), Compliance Risk
Business Processes Impacted: Clearing and Settlement – Exchange
Traded and OTC

The European supervisory authorities have launched a consultation7 on draft Regulatory Technical Standards (RTSs) to outline the framework of the European Market Infrastructure Regulation. For those over-the-counter derivative transactions that will not be subject to central clearing, these draft RTSs prescribe the regulatory amount of initial and variation margin that counterparties should exchange as well as the methodologies for their calculations.

Prudential Regulation Authority (PRA)(**):
The PRA’s approach to supervising liquidity and funding risks
Publication Date: Jun 8th 2015
Risks Covered: Compliance Risk, Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing, Funding and Liquidity Management

The PRA has set out its approach8 to supervise liquidity and funding risks, and covers its expectations in relation to the following: a) the internal liquidity adequacy assessment process; b) the liquidity supervisory review and evaluation process; c) drawing down liquid asset buffers; d) collateral placed at the Bank of England; and e) daily reporting under stress. This is relevant to UK banks, building societies and PRA UK-designated investment firms, among others.

Bank for International Settlements (BIS)(***):
Basel Committee Consultative Document on interest rate risk in the banking book
Publication Date: Jun 8th 2015
Risks Covered: Interest Rate Risk (non-trading book)
Business Processes Impacted: Risk Management and Stress Testing, Capital Adequacy and Capital Planning

The Basel Committee has issued a consultative document9 on the risk management, capital treatment and supervision of interest rate risk in the banking book. The following objectives apply: a) to help confirm that banks have appropriate capital to cover potential losses from exposures to changes in interest rates; and b) to limit capital arbitrage between the trading book and the banking book, as well as between banking book portfolios that are subject to different accounting treatments. These new guidelines are intended to ultimately replace the Committee’s 2004 Principles for the management and supervision of interest rate risk.

European Securities and Markets Authority (ESMA)(*):
ESMA issues Q1 risk dashboard for securities markets
Publication Date: Jun 5th 2015
Risks Covered: Systemic Risk, Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing

ESMA issued its risk dashboard10 for Q1 of 2015 for the European Union (EU)’s securities market. EU institutions’ systemic stress remained at previous levels, with contagion, liquidity, and credit risk remaining high but stable, while market risk increased after having partially materialized already in the previous quarter. Going forward, key risk concerns in the EU include high asset valuations driven by search-for-yield, weak economic prospects and resurgence of public debt policy issues in a number of EU members states.

FORTHCOMING REGULATIONS:

Financial Conduct Authority (FCA)
New priorities for banking reform

The leadership speech11 from Christopher Woolard, Director of Strategy & Competition, FCA reflects on the organization’s continuing priorities for the year, given the pace of change in the financial sector and the growing importance of the competition agenda. Focus will continue on firms’ culture. Other priorities include supervision and enforcement of individuals and specific firms, the increased use of FCA’s competition mandate to benefit consumer interests and market integrity, and the fostering of disruptive innovation in the interests of consumers.

Footnotes:

  1. Federal Financial Institutions Examination Council (FFIEC)(**):
    FFIEC Cybersecurity Assessment Tool
  2. Office of the Comptroller of the Currency (OCC)(*):
    Semiannual Risk Perspective From the National Risk Committee
  3. Commodity Futures Trading Commission (CFTC)(**):
    Proposed Rule Regarding the Cross-Border Application of the Margin
    Requirements
  4. European Systemic Risk Board (ESRB)(*):
    Report on misconduct risk in the banking sector
  5. Prudential Regulation Authority (PRA)(**):
    Supervisory Statement SS27/15 – Remuneration
  6. European Commission (EC)(***):
    Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions
  7. European Banking Authority (EBA)(**) :
    Draft Regulatory Technical Standards on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of Regulation (EU) No 648/2012
  8. Prudential Regulation Authority (PRA)(**):
    The PRA’s approach to supervising liquidity and funding risks
  9. Bank for International Settlements (BIS)( ):
    Basel Committee Consultative Document on interest rate risk in the banking book
  10. European Securities and Markets Authority (ESMA)( ):
    ESMA issues Q1 risk dashboard for securities markets
  11. Financial Conduct Authority (FCA)
    New priorities for banking reform

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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