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:
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The proposed credit risk retention rules of the SEC & the other U.S. regulators1, subject to some exemptions, would require securitizers to have ‘skin in the game’ through requiring them to retain at least 5 percent of the credit risk of the assets securitized by them.
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The proposed point-of-sale disclosure rules of the Basel committee jointly with other regulators6 would require written disclosure to consumers on costs, risks, financial benefits, and other features of the financial products that are offered to consumers.
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Practical aspects of implementation of the European Markets Infrastructure Regulation are the subject of the guidance note of the ESMA9. Major coverage includes risk mitigation techniques for OTC derivatives, and reporting to trade repositories.
Current coverage period: Through August 31st, 2013
Note: Anticipated business impact for covered regulations is shown using the following rating legend:
(
Low) ( Medium) ( High)
Note: Anticipated business impact for covered regulations is shown using the following rating legend:
(
Low) ( Medium) ( High)
Fprud
CURRENT REGULATIONS:
Securities and Exchange Commission (SEC), Office of the Comptroller of the Currency (OCC), Department of the Treasury – Secretary (U.S. DOT), Federal Housing Finance Agency (FHFA), Federal Deposit Insurance Corporation (FDIC) (): Credit Risk Retention
Publication Date: August 28th 2013
Risks Covered: Credit Risk, Compliance Risk
Business Processes Impacted: Risk Management & Stress Testing, Audit, Legal & Compliance
The joint proposed rule1 would implement credit risk retention requirements under the Dodd-Frank Act with a view to aligning the interests of the securitizer with those of the investors in asset-backed securities. As per this provision, securitizers of asset-backed securities are required to retain not less than 5 percent of the credit risk of the assets collateralizing the asset-backed securities. One of the exemptions from these requirements is in case of asset-backed securities that are collateralized exclusively by qualified residential mortgages.
Financial Stability Board (FSB) (): Assessment Methodology for the Key Attributes of Effective Resolution Regimes for Financial Institutions
Publication Date: August 28th 2013
Risks Covered: Systemic Risk
Business Processes Impacted: Recovery & Resolution planning
The FSB’s consultation2 is aimed at serving as guidance to regulatory jurisdictions that have planned to adopt recovery and resolution regimes for financial institutions, including financial market infrastructure. Key coverage includes a) conduct of compliance assessment, b) assessment of policy measures for global systemically important financial institutions, c) sector-specific considerations (banks, securities & investment firms, etc.), d) preconditions for effective resolution regimes, and e) assessment methodology.
): Assessment Methodology for the Key Attributes of Effective Resolution Regimes for Financial InstitutionsPublication Date: August 28th 2013
Risks Covered: Systemic Risk
Business Processes Impacted: Recovery & Resolution planning
The FSB’s consultation2 is aimed at serving as guidance to regulatory jurisdictions that have planned to adopt recovery and resolution regimes for financial institutions, including financial market infrastructure. Key coverage includes a) conduct of compliance assessment, b) assessment of policy measures for global systemically important financial institutions, c) sector-specific considerations (banks, securities & investment firms, etc.), d) preconditions for effective resolution regimes, and e) assessment methodology.
Financial Stability Board (FSB) (): Enhanced Disclosure Task Force Progress Report
Publication Date: August 21st 2013
Risks Covered: Operational Risk, Compliance Risk
Business Processes Impacted: Reporting, Risk Management & Stress Testing
The FSB commissioned study3 on the level and quality of implementation of its October 2012 report on enhancing risk disclosure practices of banks consists of findings from a self-assessed survey of global systemically important banks (G-SIB) & domestic SIBs, and an assessment of the banks’ disclosure practices in annual reports. Major conclusions include a) overall positive impact of the October 2012 report, b) increase in disclosure of recommended information from 34% (just before publication of the report) to 50% in the annual reports of 2012, which is projected to increase to 72% in 2013, and c) challenges faced due to technology or reporting system limitations, among others.
): Enhanced Disclosure Task Force Progress ReportPublication Date: August 21st 2013
Risks Covered: Operational Risk, Compliance Risk
Business Processes Impacted: Reporting, Risk Management & Stress Testing
The FSB commissioned study3 on the level and quality of implementation of its October 2012 report on enhancing risk disclosure practices of banks consists of findings from a self-assessed survey of global systemically important banks (G-SIB) & domestic SIBs, and an assessment of the banks’ disclosure practices in annual reports. Major conclusions include a) overall positive impact of the October 2012 report, b) increase in disclosure of recommended information from 34% (just before publication of the report) to 50% in the annual reports of 2012, which is projected to increase to 72% in 2013, and c) challenges faced due to technology or reporting system limitations, among others.
Board of Governors of the Federal Reserve System (the Fed) (): Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice
Publication Date: August 19th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Risk Management & Stress Testing, Finance
Relevant for building of capital plans at large bank holding companies (BHC) domiciled in the U.S. with total consolidated assets of $ 50 billion or more, the Fed’s report4 brings out key expectations for capital planning in addition to describing the range of capital planning practices. Key areas of improvement include a) accounting for all risks in the capital planning process, b) use of stress scenarios and modeling techniques that address vulnerabilities particular to the BHC’s business model and activities, and c) strong governance around capital planning process, including risk management practices that support capital planning.
): Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current PracticePublication Date: August 19th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Risk Management & Stress Testing, Finance
Relevant for building of capital plans at large bank holding companies (BHC) domiciled in the U.S. with total consolidated assets of $ 50 billion or more, the Fed’s report4 brings out key expectations for capital planning in addition to describing the range of capital planning practices. Key areas of improvement include a) accounting for all risks in the capital planning process, b) use of stress scenarios and modeling techniques that address vulnerabilities particular to the BHC’s business model and activities, and c) strong governance around capital planning process, including risk management practices that support capital planning.
Monetary Authority of Singapore (MAS) (): Local Implementation of Basel III Liquidity Rules – Liquidity Coverage Ratio
Publication Date: August 16th 2013
Risks Covered: Liquidity Risk
Business Processes Impacted: Risk Management & Stress Testing
Proposed to replace the existing liquidity framework of the MAS, the consultation5 is aimed at implementing the Basel III standard of Liquidity Coverage Ratio (LCR). Key modifications over the global implementation would include a) implementation at aggregated country level versus entity level, b) varying requirements for foreign bank branches under certain conditions, c) LCR by currency, d) additions to the definition of High Quality Liquid Assets, e) treatment of minimum cash balance, and f) approach to trade finance instruments.
): Local Implementation of Basel III Liquidity Rules – Liquidity Coverage RatioPublication Date: August 16th 2013
Risks Covered: Liquidity Risk
Business Processes Impacted: Risk Management & Stress Testing
Proposed to replace the existing liquidity framework of the MAS, the consultation5 is aimed at implementing the Basel III standard of Liquidity Coverage Ratio (LCR). Key modifications over the global implementation would include a) implementation at aggregated country level versus entity level, b) varying requirements for foreign bank branches under certain conditions, c) LCR by currency, d) additions to the definition of High Quality Liquid Assets, e) treatment of minimum cash balance, and f) approach to trade finance instruments.
Bank for International Settlements (BIS), International Organization Of Securities Commissions (IOSCO) (): Point of Sale disclosure in the insurance, banking and securities sectors
Publication Date: August 15th 2013
Risks Covered: Compliance Risk, Reputation Risk
Business Processes Impacted: Audit, Legal & Compliance, Consumer Protection
The proposed regulation of the joint regulatory forum6 on point-of-sale (POS) disclosures to consumers aims at aligning the regulatory practices across banking, capital markets, and insurance sectors. Major requirements include a) disclosure of key characteristics including costs, risk, financial benefits, and other features of products on offer, b) clear, fair, not misleading and written disclosure documents for consumers, and c) establishment of clear responsibility for preparing and making available the documents including responsibility for its contents.
): Point of Sale disclosure in the insurance, banking and securities sectorsPublication Date: August 15th 2013
Risks Covered: Compliance Risk, Reputation Risk
Business Processes Impacted: Audit, Legal & Compliance, Consumer Protection
The proposed regulation of the joint regulatory forum6 on point-of-sale (POS) disclosures to consumers aims at aligning the regulatory practices across banking, capital markets, and insurance sectors. Major requirements include a) disclosure of key characteristics including costs, risk, financial benefits, and other features of products on offer, b) clear, fair, not misleading and written disclosure documents for consumers, and c) establishment of clear responsibility for preparing and making available the documents including responsibility for its contents.
Commodity Futures Trading Commission (CFTC) (): Enhanced Risk Management Standards for Systemically Important Derivatives Clearing Organizations
Publication Date: August 15th 2013
Risks Covered: Systemic Risk, Credit Risk
Business Processes Impacted: Risk Management & Stress Testing, Clearing & Settlement – Exchange Traded & OTC
The final rules7 would implement enhanced risk management standards for systemically important derivative clearing organizations under the Dodd-Frank Act, with a view to enabling them to be qualifying counterparties under the standards established for financial market infrastructures. Major requirements include a) increased financial resources for more complex organizations or for those that are systemically important in multiple jurisdictions, b) enhanced standards for business continuity and disaster recovery, and c) special enforcement authority for the CFTC.
): Enhanced Risk Management Standards for Systemically Important Derivatives Clearing OrganizationsPublication Date: August 15th 2013
Risks Covered: Systemic Risk, Credit Risk
Business Processes Impacted: Risk Management & Stress Testing, Clearing & Settlement – Exchange Traded & OTC
The final rules7 would implement enhanced risk management standards for systemically important derivative clearing organizations under the Dodd-Frank Act, with a view to enabling them to be qualifying counterparties under the standards established for financial market infrastructures. Major requirements include a) increased financial resources for more complex organizations or for those that are systemically important in multiple jurisdictions, b) enhanced standards for business continuity and disaster recovery, and c) special enforcement authority for the CFTC.
Federal Deposit Insurance Corporation (FDIC) (): Company-Run Stress Tests
Publication Date: August 9th 2013
Risks Covered: Credit Risk, Market Risk, Operational Risk
Business Processes Impacted: Risk Management & Stress Testing
The proposed guidance8, applicable to all FDIC-supervised banks and savings associations with at least $10 billion but less than $50 billion in total consolidated assets, spells out supervisory expectations for stress tests under the Dodd-Frank Act. Key areas of coverage include a) supervisory scenario building with at least three macroeconomic scenarios, b) risk-based segmentation of portfolios and business activities, c) estimation of losses & pre-provision net revenue, and d) balance sheet and risk-weighted asset positions.
): Company-Run Stress TestsPublication Date: August 9th 2013
Risks Covered: Credit Risk, Market Risk, Operational Risk
Business Processes Impacted: Risk Management & Stress Testing
The proposed guidance8, applicable to all FDIC-supervised banks and savings associations with at least $10 billion but less than $50 billion in total consolidated assets, spells out supervisory expectations for stress tests under the Dodd-Frank Act. Key areas of coverage include a) supervisory scenario building with at least three macroeconomic scenarios, b) risk-based segmentation of portfolios and business activities, c) estimation of losses & pre-provision net revenue, and d) balance sheet and risk-weighted asset positions.
European Securities and Markets Authority (ESMA) (): Implementation of the European Market Infrastructure Regulation
Publication Date: August 5th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Clearing & Settlement – Exchange Traded & OTC
Purpose of the guidance9 is to provide clarity on practical aspects of implementation of European Market Infrastructure Regulation (EMIR) to regulatory authorities, market participants, and the general public. Major coverage includes a) definition of OTC derivatives, b) risk mitigation techniques for OTC derivatives not cleared by a central counterparty (CCP), c) segregation & portability, and organization requirements of CCP, and d) classification of financial instruments for reporting to trade repositories.
): Implementation of the European Market Infrastructure RegulationPublication Date: August 5th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Clearing & Settlement – Exchange Traded & OTC
Purpose of the guidance9 is to provide clarity on practical aspects of implementation of European Market Infrastructure Regulation (EMIR) to regulatory authorities, market participants, and the general public. Major coverage includes a) definition of OTC derivatives, b) risk mitigation techniques for OTC derivatives not cleared by a central counterparty (CCP), c) segregation & portability, and organization requirements of CCP, and d) classification of financial instruments for reporting to trade repositories.
Prudential Regulation Authority (PRA) (): Strengthening capital standards: implementing CRD IV
Publication Date: August 2nd 2013
Risks Covered: Counterparty Risk (CCR), Liquidity Risk
Business Processes Impacted: Risk Management & Stress Testing
The PRA’s approach to implementing the Capital Requirements Directive IV, commonly known as Basel III, is contained in the consultation paper10. Key components addressed are a) framework for capital conservation & countercyclical buffers, b) supervisory review process under Pillar II, c) governance & remuneration, d) passporting and cooperation between member states, e) definition of capital, f) risk management standards for credit, market, operational, and liquidity risks, and g) framework for exposure to groups & large exposure.
): Strengthening capital standards: implementing CRD IVPublication Date: August 2nd 2013
Risks Covered: Counterparty Risk (CCR), Liquidity Risk
Business Processes Impacted: Risk Management & Stress Testing
The PRA’s approach to implementing the Capital Requirements Directive IV, commonly known as Basel III, is contained in the consultation paper10. Key components addressed are a) framework for capital conservation & countercyclical buffers, b) supervisory review process under Pillar II, c) governance & remuneration, d) passporting and cooperation between member states, e) definition of capital, f) risk management standards for credit, market, operational, and liquidity risks, and g) framework for exposure to groups & large exposure.
FORTHCOMING REGULATIONS:
Bank for International Settlements (BIS)
Margin requirements for non-centrally cleared derivatives
With a gradual phase-in over a four-year period starting in December 2015, the final rules of the Basel Committee11 would require, with some exceptions in case of physically settled contracts, collection and posting of margins on derivatives that are not cleared by a central counterparty. To minimize the liquidity impact of margin requirements on market participants, the rules spell out a number of measures including one-time re-hypothecation of initial margin collateral subject to stringent conditions.
Footnotes
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Securities and Exchange Commission (SEC), Office of the Comptroller of the Currency (OCC), Department of the Treasury – Secretary (U.S. DOT), Federal Housing Finance Agency (FHFA), Federal Deposit Insurance Corporation (FDIC): Credit Risk Retention
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Financial Stability Board: Assessment Methodology for the Key Attributes of Effective Resolution Regimes for Financial Institutions
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Financial Stability Board: Enhanced Disclosure Task Force Progress Report
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Board of Governors of the Federal Reserve System: Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice
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Monetary Authority of Singapore: Local Implementation of Basel III Liquidity Rules – Liquidity Coverage Ratio
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Bank for International Settlements (BIS), International Organization Of Securities Commissions (IOSCO): Point of Sale disclosure in the insurance, banking and securities sectors
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Commodity Futures Trading Commission (CFTC): Enhanced Risk Management Standards for Systemically Important Derivatives Clearing Organizations
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Federal Deposit Insurance Corporation (FDIC): Company-Run Stress Tests
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European Securities and Markets Authority (ESMA): Implementation of the European Market Infrastructure Regulation
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Prudential Regulation Authority (PRA): Strengthening capital standards: implementing CRD IV
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Bank for International Settlements: Margin requirements for non-centrally cleared derivatives
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