Introduction
Welcome to the latest edition of our financial services updater.
Highlights this week include:
- BCBS consultation on supervisory guidance for managing risks associated with the settlement of foreign exchange transactions.
- ISDA Dodd-Frank Documentation Initiative.
ARROW visit coming up? It is important that firms properly prepare themselves for an ARROW visit. There are many ways in which we can assist in this preparation to ensure that the process runs smoothly. For further information please contact either Jonathan Herbst or Peter Snowdon.
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Banking
Top news from the European Commission - Banking union - Commission to propose a single banking supervision mechanism
In a press release the European Commission has stated that it will present proposals to design a single banking supervision mechanism in the euro area. The single supervision mechanism will be built around the European Central Bank (ECB).
The Commission has provisionally stated that the proposals will be presented on 11 September 2012. It then expects them to the adopted by the end of the year, in order for the new system to enter into force early in 2013, as a key component of a “banking union”.
The Commission’s proposals will address the key questions of:
- The concrete functioning of the new supervisory role for the ECB.
- The relationship between national supervisors and the ECB.
- Bridging the interface between euro area countries and those not participating in the euro.
- Clarifying the role of the European Banking Authority.
View Top news from the European Commission - Banking union - Commission to propose a single banking supervision mechanism, 24 August 2012
Lending Standards Board Annual Report 2011/12
The Lending Standards Board (LSB) is the successor organisation to the Banking Code Standards Board and began work on 2 November 2009. Among the LSB’s key objectives is to assist firms to interpret and meet the requirements of the Lending Code (the Code). The Code replaced the Banking Codes following the transfer of responsibilities for the conduct of business regulation for deposit and payment products to the FSA on 1 November 2009.
The LSB has now published its Annual Report 2011/12. In the Annual Report the LSB notes that its extensive reviews found evidence of good standards of support for customers in financial difficulties although it did find a number of Code breaches and areas of poor practice at one subscriber.
The Annual Report also states that financial difficulties will remain central to the LSB’s future monitoring work and that it will undertake a further themed review later this year. Work is also planned to look at how firms handle disputed credit card transactions and what might be done to improve the clarity and timeliness of communications to customers who incur charges for unarranged overdrafts.
View Lending Standards Board Annual Report 2011/12, 17 August 2012
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Clearing and settlement
BCBS consultation on supervisory guidance for managing risks associated with the settlement of foreign exchange transactions
The Basel Committee on Banking Supervision (BCBS) has published a Consultation Document on supervisory guidance for managing risks associated with the settlement of foreign exchange (FX) transactions.
The draft supervisory guidance expands on and is intended to replace the September 2000 supervisory guidance for managing settlement risk in FX transactions. The BCBS states that the draft supervisory guidance provides a more comprehensive and detailed view on governance arrangements and the management of principal risk, replacement cost risk and all other FX settlement-related risks. Also, it promotes the use of payment-versus-payment (PVP) arrangements, where practicable, to reduce principal risk.
The draft supervisory guidance is organised into seven guidelines that address governance, principal risk, replacement cost risk, liquidity risk, operational risk, legal risk and capital for FX transactions. The key recommendations emphasise the following:
- A bank should ensure that all FX settlement-related risks are effectively managed and that its practices are consistent with those used for managing other counterparty exposures of similar size and duration.
- A bank should reduce its principal risk as much as practicable by settling FX transactions through the use of financial market infrastructures that provide PVP arrangements. Where PVP settlement is not practicable, a bank should properly identify, measure, control and reduce the size and duration of its remaining principal risk.
- A bank should ensure that when analysing capital needs, all FX settlement-related risks should be considered, including principal risk and replacement cost risk and that sufficient capital is held against these potential exposures, as appropriate.
View BCBS Consultation Document on supervisory guidance for managing risks associated with the settlement of foreign exchange transactions, 17 August 2012
ISDA Dodd-Frank Documentation Initiative
The International Swaps and Derivatives Association (ISDA) is launching a series of protocols which are designed to assist the over-the-counter (OTC) derivatives industry in implementing the regulatory requirements of the US Dodd-Frank Act.
The first protocol was launched on 13 August 2012 and consists of a series of amendments to existing ISDA documentation, as well as standardized questionnaires that enable counterparties to match and exchange “know-your-customer” information securely.
The protocols form a core element of the ISDA’s DF Documentation Initiative which will, among other things, provide a standard set of amendments to facilitate the updating of existing swap relationship documentation for Dodd-Frank compliance purposes as well as other standard industry documentation, such as general and product specific risk disclosures.
View ISDA Dodd-Frank Documentation Initiative, 13 August 2012
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Collective investment schemes
Assessing the possible sources of systemic risk from hedge funds
The FSA has published a report which sets out the results of its latest Hedge Fund Survey (HFS) conducted in March 2012 and the Hedge Fund as Counterparty Survey (HFACS) conducted in April 2012.
The key findings of the March 2012 HFS and April 2012 HFACS include:
- Aggregate assets under management increased in the survey period, predominantly due to positive returns, but also helped by generally positive net subscription.
- The footprint of surveyed hedge funds is modest in most markets when measured by the value of their exposures and by turnover. Possible exceptions are the convertible bond, interest rate derivative and commodity derivative markets.
- Leverage remains largely unchanged and modest for most funds. Fixed-income arbitrage strategies report the highest leverage, both in terms of gross exposures relative to net asset value (NAV) and total borrowings relative to NAV.
- In aggregate, surveyed hedge funds report that they are able to liquidate their assets in a shorter timeframe than the period after which their liabilities would fall due.
- Counterparty exposures of surveyed hedge funds remain fairly concentrated among five banks.
- Measures of portfolio concentration, including qualifying funds’ top ten positions as a percentage of gross market value and the number of open positions, has remained largely unchanged for most surveyed funds.
The FSA intends to repeat the HFS in September 2012 and the HFACS in October 2012.
View Assessing the possible sources of systemic risk from hedge funds, 21 August 2012
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Insurance
CP12/20: Review of the client money rules for insurance intermediaries
The FSA has published Consultation Paper 12/20: Review of the client money rules for insurance intermediaries (CP12/20).
In CP12/20 the FSA proposes amendments to chapter 5 of the Client Assets sourcebook (CASS 5). There are nine chapters in CP12/20:
- Chapter 1: Overview of proposals.
- Chapter 2: Improving the effectiveness of segregation and use of risk transfer. The FSA sets out proposals in relation to the non-statutory trust, and how firms can move from operating a non-statutory trust to a statutory trust.
- Chapter 3: Simplifying the distribution and transfer of client money. The FSA reviews the distribution rules, both for primary pooling and secondary pooling, together with costs relating to distribution.
- Chapter 4: Improving diversification of client money. The FSA aims to clarify its views in relation to diversification of client money and sets out its proposal on the amount of client money which can be held in a group bank.
- Chapter 5: Enhancing record keeping and reconciliations. The FSA covers the accrual method of calculating the client money requirements. It also discusses additional guidance on trust letters and its proposal on the CASS 5 resolution pack.
- Chapter 6: Enhancing the requirements on segregation and placement of client money. The FSA sets out proposals relating to credit write backs, unclaimed client money, unallocated client money, client money held at third parties, prudent over-segregation, money held as designated investments, commission, same day draw down and money due to a client from a firm.
- Chapter 7: Improving governance and reporting to the FSA. The FSA sets out proposals in relation to firms’ governance on CASS oversight, client money audit reports and section C of the Retail Mediation Activities Return.
- Chapter 8: Section 53 of the Marine Insurance Act 1906. The FSA discusses its views on this section.
- Chapter 9: Commencement date and structure of the draft rules.
The deadline for comments on CP12/20 is 30 November 2012. The FSA expects to publish its feedback to the consultation and final rules in Q2 2013.
View Consultation Paper 12/20: Review of the client money rules for insurance intermediaries, 28 August 2012
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Regulation & compliance
ECON draft report on shadow banking
The European Parliament's Committee on Economic and Monetary Affairs (ECON) has published a draft report on shadow banking. The draft report contains a draft motion for a European Parliament resolution on shadow banking together with an explanatory statement prepared by ECON rapporteur Saïd El Khadraoui.
The draft motion contains a number of points including:
- Agrees with the Financial Stability Board’s definition of shadow banking as "a system of intermediaries, instruments, entities or financial contracts generating a combination of bank-like functions but outside the regulatory perimeter or under a regulatory regime which is either light or addresses issues other than systemic risks and without access to central bank liquidity facility or public sector credit guarantees."
- Supports the creation by the European Central Bank of a central EU database on euro repo transactions, and invites the Commission to submit a legislative proposal for the creation of such a database by the end of 2013, after undertaking a feasibility study.
- Stresses the need to obtain a fuller overview of risk transfers by financial institutions in order to determine who has purchased what from whom and how the transferred risks are supported. The Commission is invited to undertake a study in early 2013 and submit a report by mid 2013 regarding the feasibility of setting up a public non-profit utility as a central registry for risk transfers, which should be able to capture and monitor risk transfer data in real time.
- That the proposed extension of CRD IV to non-deposit taking finance companies not covered by the definition in the proposed Capital Requirements Regulation (CRR) is necessary.
- Recognises the benefits Exchange Traded Funds (ETFs) provide by giving retail investors access to a wider range of assets but stresses the risks ETFs carry in terms of complexity, counterparty risk, liquidity of products and possible regulatory arbitrage. The Commission is invited to submit a legislative proposal at the beginning of 2013 to tackle these potential structural vulnerabilities.
View ECON draft report on shadow banking, 14 August 2012
HM Treasury draft clauses to inform responses to consultation on broadening the financial sector resolution regime
On 1 August 2012, HM Treasury published a Consultation Document entitled Financial sector resolution: Broadening the regime. In this consultation the Government set out proposals on enhancing the mechanisms available for dealing with the failure of systemically important non-banks. The consultation covers four broad groups:
- Investment firms and parent undertakings.
- Central counterparties (CCPs).
- Non-CCP financial market infrastructures.
- Insurers.
The deadline for comments on the Consultation Document is 24 September 2012.
HM Treasury has now published draft legislative clauses together with explanatory notes to inform responses to the Consultation Document. The draft clauses have been prepared on the basis that the Financial Services Bill, as introduced to the House of Lords on 23 May 2012, has been enacted and that it is in force.
View Draft clauses to inform responses to HM Treasury’s consultation document “Financial sector resolution: broadening the regime”, 23 August 2012
View Explanatory notes to draft clauses to inform responses to consultation on broadening the financial sector resolution regime, 23 August 2012
FSA revises Remuneration Policy Statement self-assessment templates and tables
The FSA has updated its web page on the Remuneration Code. The updated web page now contains the following templates and code staff lists:
- Tier 1 firms: Template and code staff list.
- Tier 2 firms: Template and code staff list.
- Tiers 3 and 4 firms: Template and code staff list.
The Remuneration Policy Statement templates allow firms to record their remuneration policies, practices and procedures and assess their compliance with the Remuneration Code. The Code staff list allows firms to keep a record of all Remuneration Code staff identified for the current performance year.
View FSA revises Remuneration Policy Statement self-assessment templates and tables, 22 August 2012
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Seminars
OTC derivatives international roundtables
Norton Rose Group will be hosting a series of international roundtables on the European Market Infrastructure Regulation (EMIR).
In August / September there will be two roundtables in London, one for buy-side clients and another for energy clients.
Further roundtables will take place in our offices in Amsterdam, Hong Kong and Singapore.
The roundtables in Hong Kong and Singapore will give participants the chance to get an insight into EMIR and draw comparisons with local regulatory developments.
The invitation to the international roundtables can be found here.
If you can not access this link, please copy and paste the address below into your web browser.
http://www.nortonrose.com/invitations/2012/otc-oracle-an-international-overview-of-the-new-clearing-and-collateralisation-requirements-for-otc-derivatives-67515.aspx
40 minute briefing series - May to September 2012
We are pleased to announce that the invitation for the next series of 40 minute briefings is now available.
If you can not access this link, please copy and paste the address below into your web browser.
www.nortonrose.com/invitations/2012/your-guide-to-the-key-regulatory-challenges-in-2012-65614.aspx
Financial services regulatory products: Phoenix, Pegasus, OTC Oracle and AIFMD expert
Having difficulty keeping up with the pace of the Government's regulatory reform proposals?
Phoenix is our new financial services product that is an online resource designed to help those who are starting their UK regulatory reform projects. It sets out the latest developments and timing of the Government's reform programme plus the key resource papers from the Treasury, Bank of England, FSA and the ICB. The latest Norton Rose LLP briefing notes, videos and webcasts are also available.
The Phoenix main page can be found here.
Behind the curve on the MiFID review?
We have launched a second online resource product called "Pegasus". Pegasus is a new financial services product that is an online resource designed to assist those starting work on MiFID review projects.
The Pegasus main page can be found here.
G20 commitment on clearing
Our third online resource product is OTC Oracle. OTC Oracle is designed to assist clients track the implementation of the G20 commitment to have all standardised OTC derivatives traded on exchanges or electronic trading platforms, where appropriate, and cleared through CCPs by the end of 2012. OTC Oracle sets out the latest developments and timing plus the key resource papers from each of the EU, Canada, Hong Kong and Singapore.
The OTC Oracle main page can be found here.
AIFMD expert
Our fourth online resource product is AIFMD expert. AIFMD expert is designed to assist clients and contacts of Norton Rose LLP when conducting their projects on the Alternative Investment Fund Managers Directive. It sets out the latest developments and timing of the AIFMD plus the key resource papers from the Commission, ESMA and the FSA. Clients and contacts are also given access to the latest Norton Rose LLP briefing notes, slides and webcasts.
The AIFMD expert main page can be found here.
Financial services Fireside Fridays
Please click on the links below:
Financial services & markets webinars
We are currently experiencing significant changes in the European financial services regime that could have a particular impact on both financial firms and non-financial firms that trade energy, commodities and emissions. To assist our clients we have produced a series of short webinars which will look at the forthcoming regulatory changes and their impact on the financial regulation of trading.
Financial services webcasts
Please click on the links below:
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