This is a monthly initiative aimed at updating the Risk Management 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 45 regulatory and industry bodies covering North America, Europe, Africa, Latin America and Asia Pacific. Every month, we will highlight 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 item in the blog is planned to supplement an existing monthly feature namely, “Regulatory Insights” which provides a deeper analysis of the business implications of a single or much smaller set of regulatory changes.

Edition Highlights:

  • The Basel committee’s proposals on measuring & controlling large exposures focus on concentration risk associated with single counterparties and groups of connected counterparties. Major changes include a) proposed enlarged scope of exposure to include securitization structures, and b) proposed rigorous limits management for global systemically important banks.
  • The Fed’s report on Dodd-Frank supervisory stress tests describes the outcome for large U.S. bank holding companies and nonbank financial companies. The net income reduction, as a result of severely adverse scenarios used, leads to a substantial decline in aggregate post-stress capital ratios in comparison to actual levels in Q3 of 2012.
  • The European Banking Authority proposes harmonization of the definition of forbearance and nonperforming exposures that would apply to loans & debt securities. If implemented, this will impact credit quality assessments, valuation, credit portfolio monitoring, and reporting.
Current coverage period: Through March 31st, 2013
Note: Anticipated business impact for covered regulations is shown using the following rating legend:
( Low) ( Medium) ( High)


Bank for International Settlements (BIS)(): Supervisory framework for measuring and controlling large exposures
Publication Date:
March 26th 2013
Risks Covered: Credit Concentration Risk
Business Processes Impacted: Risk Management & Stress Testing
Addressing both direct & indirect exposure (for example, exposures to providers of credit protection) across all operations and books of banks, the proposed regulation focuses on concentration risk associated with single counterparties and group of connected counterparties. Major proposed changes include a) coverage of exposures to funds, securitization structures and collective investment undertakings to address exposures to shadow banking, b) proposed rigorous limits on exposures between global systemically important banks to keep contagion within acceptable levels, and c) proposed treatment of specific exposure types, namely sovereign exposures and entities connected with such exposures.

European Banking Authority (EBA)(): On Supervisory reporting on forbearance and non-performing exposures
Publication Date:
March 26th 2013
Risks Covered: Credit Risk, Market Risk
Business Processes Impacted: Reporting, Risk Management & Stress Testing
Citing the need for harmonized definitions for asset quality assessments and key valuation decisions in credit portfolio management of banks, the EBA’s consultation builds on existing definitions for forbearance and non-performing exposures. If implemented, this would apply to loans and debt securities that are on-balance sheet, and some off-balance sheet items. While both the proposed new definitions bring together varied practices under common terms, they would not modify or supersede existing definitions. With separate reporting templates for forbearance and non-performing exposures, consolidated reporting of country-specific exposures in some cases have also been proposed.

Financial Conduct Authority (FCA)(): The FCA’s use of temporary product intervention rules
Publication Date:
March 25th 2013
Risks Covered: Compliance Risk, Reputation Risk
Business Processes Impacted: Consumer Protection, Audit, Legal & Compliance
The Financial Services Authority’s final rule sets out the process for its successor, the FCA, to use the temporary product intervention rules (TPIR) when it makes emergency rules to protect consumers. TPIR are rules made before consultation that would allow the FCA to take action ranging from restricting the use of certain product features to banning of products altogether in most serious cases. Some of the instances in which FCA might consider invoking TPIR include a) presence of risk of selling products to wrong customers and, b) selling of inherently flawed products in the market.
Bank for International Settlements (BIS)(): Recognising the cost of credit protection purchased
Publication Date:
March 22nd 2013
Risks Covered: Compliance Risk, Counterparty Risk (CCR)
Business Processes Impacted: Risk Management & Stress Testing, Finance
The Basel Committee’s proposals would impose additional Pillar I regulatory capital requirements in cases where there are potential opportunities of regulatory capital arbitrage (meaning reduction in capital requirements without commensurate reduction in risks within the credit risk mitigation framework. Under this proposal, banks would be required to compute exposure amount equivalent to the present value of premiums for credit protection purchased that has not been recognized as expenses in arriving at net earnings. With 1250% risk weight on such exposures subject to a threshold, attractiveness of capital arbitrage could diminish.
European Central Bank (ECB)(): SEPA Migration Report
Publication Date:
March 21st 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Payments
In its first report on migration towards Single Euro Payments Area (SEPA), the ECB describes the current status of migration, and provides guidance on the management of the transition process. Major coverage include a) preparedness of payment service providers, b) preparedness of payment service users, and c) other migration developments including exceptions for non-euro area countries. Citing undesirable effects of late migration on stakeholders, the report calls for improving awareness and beefing up of internal preparations by both service providers and users.
International Organization Of Securities Commissions (IOSCO)(): Regulatory Issues Raised by Changes in Market Structure
Publication Date:
March 21st 2013
Risks Covered: Compliance Risk, Counterparty Risk (CCR)
Business Processes Impacted: Trading, Clearing & Settlement – Exchange Traded & OTC
The IOSCO’s consultation provides an overview of current state of market fragmentation covering trading of equities and exchange-traded funds on exchange market systems, non-exchange market systems, and trading over the counter. Basis information gathered and analysis carried out, the report a) identifies possible outstanding issues, b) identifies risks posed by existing or developing market structures, and c) provides recommendations to address the risks.
European Securities and Markets Authority (ESMA)(): Questions & Answers on Implementation of the European Market Infrastructure Regulation
Publication Date:
March 15th 2013
Risks Covered: Counterparty Risk (CCR), Compliance Risk
Business Processes Impacted: Clearing & Settlement – Exchange Traded & OTC, Trading
With the purpose of promoting common supervisory approaches and practices in implementing the EMIR, the document provides responses to questions posed by the general public, market participants, and competent authorities. Coverage includes a) definition of OTC derivatives in the context of clearing by central counterparties, b) calculation of the clearing threshold, c) exemption from clearing obligation, d) collateral portability, e) classification of financial instruments for reporting purposes, f) reporting of collateral and valuation, and g) reporting of outstanding positions.
Board of Governors of the Federal Reserve System (the Fed)(): Federal Reserve announces results of Comprehensive Capital Analysis and Review (CCAR)
Publication Date:
March 14th 2013
Risks Covered: Liquidity Risk, Compliance Risk
Business Processes Impacted: Risk Management & Stress Testing, Funding & Liquidity Management
The Fed’s report covers the framework and results of intensive assessment of capital adequacy of large, complex U.S. bank holding companies (BHC) and their capital management practices. For the analysis of capital plans of firms, in addition to the Fed’s projection of post-stress capital ratios for each BHC, the projection also incorporated the stress loss and revenues from the Dodd-Frank stress test 2013. The projections show declines in the capital ratios from the beginning of the CCAR exercise in the third quarter of 2012 for all the BHCs under the hypothetical severely adverse scenario. In aggregate, the declines in capital ratios ranged between 2.7 percent and 5 percentage points, with considerable variation across BHC.
Board of Governors of the Federal Reserve System (the Fed)(): Dodd-Frank Act Stress Test 2013:Supervisory Stress Test Methodology and Results
Publication Date:
March 7th 2013
Risks Covered: Liquidity Risk, Compliance Risk
Business Processes Impacted: Risk Management & Stress Testing, Funding & Liquidity Management
The report describes the outcome of Dodd-Frank supervisory stress tests carried out by the Fed on large bank holding companies and nonbank financial companies designated by the Financial Stability Oversight Council. In the hypothetical, severely adverse scenarios designed by the Fed were applied on input data provided by the participating firms using a set of models selected or developed by the Fed. The report states that the net income reduction, as a result of severely adverse scenario, results in substantial decline in regulatory capital ratios for all the participating firms, with aggregate tier 1 common ratio falling from an actual 11.1 percent in the third quarter of 2012 to a post-stress level of 7.7 percent in the fourth quarter of 2014, after accounting for assumed capital actions for the participating firms.
HM Treasury (UK)(): A new approach to financial regulation: transferring consumer credit regulation to the Financial Conduct Authority
Publication Date:
March 6th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal & Compliance, Consumer Protection
Signaling a shift of consumer credit regulation from the Office of Fair Trading to the FCA, the proposed consultation describes the high-level regulatory model and approach for regulation of the consumer credit market under the FCA. Major coverage includes a) carry forward of conduct requirement and rules to the new regime, b) authorization regime to carry out consumer credit business, c) changes in scope of regulation, d) enforcement and redress, with considerable strengthening of regulatory enforcement powers, and e) interim permissions.

Prudential Regulation Authority (PRA): Financial Market Infrastructure Supervision
Financial market infrastructures (or FMIs, whose main types are recognized payment systems, securities settlement systems, and central counterparties) can support smooth functioning of the economy. Supervision of FMI is thus important in maintaining the stability of the financial system. Major pillars of PRA’s planned approach to regulation include a) governance, b) promotion and maintenance of standards, c) loss absorbency through financial risk mitigants, d) recovery and resolvability, and e) transparency and disclosure.
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