Edition Highlights:

  • The Bank for International Settlements proposes guidance that replaces the existing minimum capital requirements for market risk in the global regulatory framework, including amendments made after the June 2006 publication of “Basel II: International Convergence of Capital Measurement and Capital Standards – Comprehensive Version.”
  • The Board of Governors of the Federal Reserve System’s recent instructions provide additional details on how bank holding companies should implement the most recent technical amendments to the stress test and capital plan rules.
  • This paper from the Board of Governors of the Federal Reserve System discusses a model that addresses both the buildup and collapse of wholesale banking, and sketches out the transmission of past financial crises to the real sector.

Current coverage period: Through January 2016

Note: Anticipated business impact for covered regulations is shown using the following rating legend:       (*Low) (** Medium) (*** High)

 

CURRENT REGULATIONS:

China Banking Regulatory Commission (CBRC)(**):
The CBRC Solicits Public Opinions on the Guidelines on Internal Auditing of Commercial Banks
Publication Date: Jan 13th 2016

Risks Covered: Compliance Risk, Strategic Risk
Business Processes Impacted: Audit, Legal and Compliance
In order to prompt commercial banks to promote the independence and effectiveness of internal auditing, the China Banking Regulatory Commission (with reference to both international experience and the practice of domestic banks), revised its current guidelines and made supervisory requirements for internal auditing of commercial banks. There are eight chapters and forty-eight clauses in the revised guidelines, including: general principles; organizational structure; rules; responsibilities and limits; auditing processes, outsourcing portions of auditing work; appraising and accountability, supervision and evaluation, and supplementary provisions.1

 

European Banking Authority (EBA)(**):
Draft Guidelines on implicit support under Article 248(2) of Regulation (EU) No 575/2013
Publication Date: Jan 20th 2016

Risks Covered: Compliance Risk, Strategic Risk
Business Processes Impacted: Compliance Risk Management and Stress Testing, Audit, Legal and Compliance
Originator and sponsor institutions that have failed to comply with relevant requirements shall at a minimum hold own funds against all of the securitized exposures as if they had not been securitized. Capital Requirements Regulation, recognizes the potential for diverging interpretations in terms of what constitutes implicit support, and sets out in Article 248(2) a specific mandate for the European Banking Authority to issue guidelines on what constitutes arm’s length conditions and when a transaction is not structured to provide support. This consultation document sets out the agency’s proposal to fulfil this mandate.2

 

European Securities and Markets Authority (ESMA)(**):
Consultation Paper: Draft guidelines on the Market Abuse Regulation
Publication Date: Jan 28th 2016
Risks Covered: Compliance Risk, Operational Risk, Market Risk
Business Processes Impacted: Audit, Legal and Compliance
According to Article 11(11) of Regulation (EU) No 596/2014 of the European Parliament and of the Council on market abuse (MAR), the European Securities and Markets Authority (ESMA) shall issue guidelines pertaining to persons receiving market soundings. As for Article 17(11) of MAR, it provides that ESMA shall issue guidelines on the legitimate interests of issuers to delay inside information and the situations in which the delay of disclosure is likely to mislead the public.3

 

Bank for International Settlements (BIS)(***):
Basel Committee on Banking Supervision: Standards – Minimum capital requirements for market risk
Publication Date: Jan 1st 2016

Risks Covered: Market Risk
Business Processes Impacted: Capital Adequacy and Capital Planning
This Basel Committee on Banking Supervision (BCBS) document sets out revised standards for minimum capital requirements for market risk. The revised market risk framework includes the following key enhancements: 1) A revised internal models-approach (IMA); 2) A revised standardized approach (SA); 3) A shift from Value-at-Risk (VaR) to an Expected Shortfall (ES) measure of risk under stress; 4) Incorporation of the risk of market illiquidity; and 5) A revised boundary between the trading book and the banking book.4

 

Bank for International Settlements (BIS)(**):
Markets Committee: Electronic trading in fixed income markets
Publication Date: Jan 1st 2016
Risks Covered: Liquidity Risk, IT Risk
Business Processes Impacted: Risk Management and Stress Testing, Funding and Liquidity Management
This new report provides a perspective on the increasing use of electronic and automated trading in the fixed income and related derivatives markets (a process referred to as “electronification”). The primary objective of the report is to review this development and assess how electronification may be affecting market structure and quality. Of note, the report focuses on the impact of increasingly sophisticated and automated trade order and execution technologies. The report also highlights two rapidly evolving areas in the fixed income markets. First, trading is becoming more automated in the most liquid and standardized areas of the fixed income markets, often importing technology developed in other asset classes.  Secondly, electronic trading platforms are experimenting with new protocols to bring together buyers and sellers.5

 

International Swaps and Derivatives Association (ISDA)(**):
Derivatives market analysis: Interest rate derivatives
Publication Date: Jan 21st 2016

Risks Covered: Counterparty Credit Risk, Market Risk
Business Processes Impacted: Clearing and Settlement – Exchange Traded and OTC
This report adjusts for the opposing influence of clearing and compression and gives an estimate of underlying interest rate derivatives (IRD) activity. The results are provided as gross notional volume statistics, rather than current market values or counterparty credit exposures. Research in this area finds an increase in underlying IRD activity, although strong uptick in compression volumes has led to a decline in publicly reported notional outstanding figures.6

 

Board of Governors of the Federal Reserve System (the Fed)(***):
Comprehensive Capital Analysis and Review 2016 summary instructions
Publication Date: Jan 28th 2016
Risks Covered: Compliance Risk, Credit Risk, Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing
The Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR) is an important assessment of the capital adequacy of large, complex US bank holding companies (BHCs) and the practices they use to assess their capital needs. The Federal Reserve (Fed) expects these BHCs to have sufficient capital to weather severely adverse operating environments, continue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and serve as credit intermediaries. The report provides information (instructions) regarding requirements and expectations for the stress testing and capital planning cycle (which began January 1, 2016), and the related CCAR exercise (CCAR 2016). Similar to previous years’ instructions, the CCAR 2016 instructions provide information regarding the logistics for a BHC’s capital plan submissions; expectations regarding the mandatory elements of a capital plan; qualitative assessment of a BHC’s capital plan; quantitative assessment of a BHC’s post-stress capital adequacy; response to capital plans and planned capital actions; limited adjustments a BHC may make to its planned capital distributions and; planned supervisory disclosures at the end of the CCAR exercise.7

 

Board of Governors of the Federal Reserve System (the Fed)(***):
2016 Supervisory scenarios for annual stress tests required under the Dodd-Frank Act stress testing rules and the capital plan rule
Publication Date: Jan 28th 2016
Risks Covered: Compliance Risk, Credit Risk, Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing
According to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Board of Governors of the Federal Reserve System (Fed) is to conduct an annual supervisory stress test of bank holding companies (BHCs) with $50 billion or greater in total consolidated assets (large BHCs). They also require BHCs and state member banks, with total consolidated assets of more than $10 billion, to conduct company stress tests at least once a year. This Fed document describes the three supervisory scenarios—baseline, adverse, and severely adverse—it will use in its supervisory stress test for this stress test cycle; that a BHC or state member bank must use in conducting its annual company-run stress test; and that a large BHC must use to estimate projected revenues, losses, reserves, and pro forma capital levels as part of its 2016 capital plan submission. The document also details additional elements that certain BHCs will be required to incorporate into their supervisory scenarios—the global market shock component and the counterparty default component.8

 

Hong Kong Monetary Authority (HKMA)(*):
Countercyclical Capital Buffer (CCyB) – Approach to its Implementation
Publication Date: Jan 27th 2016
Risks Covered: Systemic Risk
Business Processes Impacted: Capital Adequacy and Capital Planning
The purpose of the document is to explain the Monetary Authority’s approach to implementing the Basel III Countercyclical Capital Buffer (CCyB) as part of the capital adequacy framework for authorized institutions incorporated in Hong Kong.9

 

Board of Governors of the Federal Reserve System (the Fed)(*):
Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises
Publication Date: Jan 1st 2016

Risks Covered: Systemic Risk, Liquidity Risk
Business Processes Impacted: Funding and Liquidity Management
Though important progress has been made in developing macroeconomic models of banking crises, most of the literature on the topic focuses on the retail banking sector. The most recent financial crisis triggered a disruption of wholesale funding markets, where banks lend to one another. Consequently, to better understand the financial crisis and draw policy implications, it is key to capture the role of wholesale banking. The purpose of this paper is to present a model that can be viewed as a natural extension of the existing literature, and where the analysis is focused on wholesale funding markets. The suggested model accounts for the buildup and collapse of wholesale banking, and outlines the transmission of the crises to the real sector. The paper also spells out the implications of possible instability in the wholesale banking sector for lender-of-last resort policy in addition to macroprudential policy.10

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.

 

References:

  1. “The CBRC Solicits Public Opinions on the Guidelines on Internal Auditing of Commercial Banks,” China Banking Regulatory Commission. Access at:
    Consultation paper on the guidelines on internal auditing of commercial banks
  2. “Draft Guidelines on implicit support under Article 248(2) of Regulation (EU) No 575/2013,” Consultation Paper, European Banking Authority, January 20, 2016. Access at :
    Consultation paper on implicit support under Article 248(2) of Regulation (EU) No. 575/2013
  3. “Draft guidelines on the Market Abuse Regulation,” Consultation Paper, European Securities and Markets Authority, January 28, 2016. Access at:
    Consultation paper on the market abuse regulation
  4. “Minimum capital requirements for market risk,” Standards, Basel Committee on Banking Supervision, January 2016. Access at:
    Guidance on minimum capital requirements for market risk
  5. “Electronic trading in fixed income markets,” Markets Committee report, Bank for International Settlements, January 2016. Access at:
    Report on electronic trading in fixed income markets
  6. “Derivatives Market Analysis: Interest Rate Derivatives,” Research Note, ISDA, January 2016: Access at: Derivatives market analysis – Interest rate derivatives
  7. “Comprehensive Capital Analysis and Review 2016 – Summary Instructions,” Board of Governors of the Federal Reserve System, January 2016. Access at:
    Comprehensive Capital Analysis and Review 2016 summary instructions
  8. “2016 Supervisory Scenarios for Annual Stress Tests Required under the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule,” Board of Governors of the Federal Reserve System, January 28, 2016. Access at :
    2016 Supervisory scenarios for annual stress tests required under the Dodd-Frank Act stress testing rules and the capital plan rule
  9. “Countercyclical Capital Buffer (CCyB) – Approach to its Implementation,” Supervisory Policy Manual, CA-B-1, V.1-27.01.15, Hong Kong Monetary Authority. Access at:
    Guidance on CCyB – Implementation approach
  10. “Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises,” International Finance Discussion Papers, Board of Governors of the Federal Reserve System, January 2016. Access at:
    Paper on wholesale banking and bank runs in macroeconomic modeling of financial crises

About the Monthly Regulatory Tracker

The tracker 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.

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