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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 7 June 2018.
The Futures Industry Association (FIA) released survey results that provide a high-level snapshot into clearing brokers’ Brexit contingency plans, the issues they face when structuring and executing such plans, and the policy proposals that would help address these issues. FIA sets out a number of proposals to preserve market access and prevent fragmentation.
The Financial Conduct Authority (FCA) published Quarterly Consultation Paper No 21 (CP18/14), in which it consults on miscellaneous amendments to the FCA Handbook. The deadline for responses is 31 July 2018 for proposed changes to the FEES manual, and 30 June 2018 for all other proposals.
The FCA published the latest version of its policy development update, which provides information on its recent and upcoming publications. Future publications include a policy statement on the EU Money Market Funds Regulation (CP18/4), which is expected in Q2 2018.
The Prudential Regulation Authority (PRA) published its latest regulatory digest, which highlights key regulatory news and publications delivered in May 2018. This issue provides summaries of various banking and insurance publications and updates, including the PRA's consultation paper on the new EU securitisation framework (CP12/18) and its policy statement on financial management and planning by insurers (PS10/18).
The Basel Committee on Banking Supervision (BCBS) published details of its work programme for 2018/2019. The BCBS maintains a two-year work programme that outlines the strategic priorities for its policy, supervision and implementation activities. The programme is endorsed by the group of governors and heads of supervision, and is developed under the direction of the Committee chair.
The European Central Bank (ECB) published an updated version (dated 30 May 2018) of its memorandum of understanding (MoU) with the Single Resolution Board (SRB) in respect of co-operation and information exchange.
The European Banking Authority (EBA) published its final draft amended Implementing Technical Standards (ITS) on supervisory disclosure, which specify the format, structure, contents list and annual publication date of the supervisory information to be disclosed by competent authorities. The amended draft ITS incorporate the changes to the EU legal framework and the establishment of the Single Supervisory Mechanism (SSM).
The ECB and the EBA wrote a joint letter to EU legislators in which they express concern regarding proposals by some stakeholders to allow losses arising from the sale of non-performing loans (NPLs) to be eliminated from the dataset used for loss given default (LGD) estimation by the banks selling the NPLs. Introduction of the data waiver would result in underestimation of LGD and inadequate capital requirements, they warn.
The Bank of England (BoE) published an evaluation of its resolution arrangements by its Independent Evaluation Office (IEO) and, at the same time, the BoE issued its response to the evaluation. The IEO's report stresses that significant progress on resolution arrangements has been made by the BoE over the past decade, with BoE staff leading the way in international fora on developing the policy framework for resolution and taking steps to put policy into practice. The IEO comments that the BoE's work with the industry means that firms are more resolvable now than they were during the financial crisis, and costs of failure would increasingly be absorbed by investors, rather than by taxpayers. However, the IEO concludes that much also remains to be done if the major UK banks are to be fully resolvable by 2022.
The Financial Stability Board (FSB) is seeking feedback on the technical implementation of its total loss-absorbing capacity (TLAC) standard. The FSB is not seeking views on the standard itself or any desired changes, but on whether implementation is proceeding in a manner consistent with the timelines and objectives set out in the standard, and any technical issues or operational challenges in implementation.
The FSB launched its third thematic peer review on resolution regimes, aiming to evaluate implementation by FSB jurisdictions of the resolution planning standard set out in its ‘Key attributes of effective resolution regimes for financial institutions’, and in associated guidance in relation to banks. Feedback is sought by 4 July 2018. The peer review report will be published in the first half of 2019.
The European Commission adopted an implementing regulation extending the transitional periods related to own funds requirements for exposures to central counterparties (CCPs) set out in the Capital Requirements Regulation (EU) 575/2013 (CRR) and the European Market Infrastructure Regulation (EU) 648/2012(EMIR). The transitional periods under Article 497(2) of CRR and Article 89(5a) of EMIR have been extended until 15 December 2018.
The Institute of International Finance, ISDA and Global Financial Markets Association submitted the joint response letter to the Basel Committee’s consultation on Pillar 3 disclosure requirements. The associations endorse the underlying policy goals of the Pillar 3, but have raised concerns about the quantity and granularity of disclosure requirements.
On 4 June 2018, an appeal lodged by Anthony Braesch and others against European Commission decision C(2017) 4690 final of 4 July 2017 in Case SA.47677 was published in the Official Journal of the EU. The Commission decision approved Italian plans to support a precautionary recapitalisation of bank Monte dei Paschi di Siena (MPS) under EU State aid rules, on the basis of it being an effective restructuring plan. The Commission also verified the capital injection by the Italian State could be granted as a precautionary recapitalisation within the meaning of the Bank Resolution and Recovery Directive 2014/59/EU (BRRD), concluding that all the conditions of the BRRD were met. The matter is Case T-161/18 Braesch and Others v Commission and was lodged with the General Court on 5 March 2018.
The Treasury Select Committee published correspondence between its chair, Nicky Morgan MP, and the CEO of the FCA, Andrew Bailey, on the TSB IT system failure. Discussing the TSB CEO’s evidence to the Committee, Mr Bailey said that while the FCA had no reason to believe that TSB intentionally made misleading or incorrect statements, it did consider that the CEO, Dr Pester, was ‘portraying an optimistic view of the services, for example by noting that the majority of TSB customers could transact as normal’.
The Fixed Income, Currencies and Commodities (FICC) Markets Standards Board (FMSB) published a transparency draft of a new statement of good practice on information and confidentiality for fixed income and commodities markets. The statement of good practice seeks to bring clarity to the issue of sharing information in those markets and dealing with confidential information within a firm. Feedback is sought by 31 August 2018.
The European Securities and Markets Authority (ESMA) issued the latest iteration of its risk dashboard, covering risks in the EU's securities markets for the first quarter 2018. ESMA's overall risk assessment remains unchanged from the fourth quarter of 2017 at high levels.
Société Générale SA, a global financial services institution based in Paris, and its wholly owned subsidiary, SGA Société Générale Acceptance NV, agreed to pay a combined total penalty of more than US$860m to resolve charges with criminal authorities in the US and France. This includes US$585m relating to a multi-year scheme to pay bribes to officials in Libya and US$275m for violations arising from its manipulation of the LIBOR benchmark interest rate.
The Commercial Court set aside freezing orders, which had been granted against various defendants on the claimant Romanian company's ex parte applications, in circumstances where there had been substantial and serious breaches of full and frank disclosure on the part of the claimant. The freezing orders had been made in the context of a claim alleging fraud to a total value of about US$108m and €14.8m. The judgment is available at:  EWHC 662 (Comm).
The FCA issued a press release stating that it had fined Canara Bank £896,100 and imposed a restriction preventing it from accepting deposits from new customers for 147 days due to anti-money laundering (AML) systems failings at the bank.
The FCA published consultation paper (CP18/15), outlining how it will regulate claims management companies (CMCs) when regulation passes to the FCA on 1 April 2019. The CP sets out the draft rules and guidance the FCA proposes to make in relation to claims management activities. It explains how the FCA proposes to authorise and supervise firms and the steps it will take if CMCs breach FCA rules. The consultation closes on 3 August 2018, with a policy statement expected in Q4 2018.
The FCA provided an update on the response to its payment protection insurance (PPI) campaign. The FCA publishes PPI campaign response data during months when it has had live advertising.
ESMA formally adopted new measures on the provision of contracts for differences (CFDs) and binary options to retail investors. The measures have been published in the Official Journal of the EU. They will apply for a period of three months from 2 July 2018 for binary options and from 1 August 2018 for CFDs. The European Insurance and Occupational Pensions Authority (EIOPA) said it supports the product intervention measures taken by ESMA.
ESMA published a set of Q&As on its temporary product intervention measures on the marketing, distribution or sale of CFDs and binary options to retail clients in the EU.
The Council of the EU adopted a decision to amend Annex IX (Financial Services) to the Agreement on the European Economic Area (EEA Agreement) in order to incorporate delegated and implementing regulations related to EMIR.
The chair of ESMA, Steven Maijoor, delivered a speech on benchmarks entitled 'Towards benchmark stability and integrity' at the 50th AGM and Conference of the International Capital Market Association (ICMA) 2018. The speech considers the development and future of benchmarks regulation in the EU.
The International Swaps and Derivatives Association (ISDA) published an initial digital representation of the Common Domain Model (CDM). ISDA says the CDM will reduce complexity and create greater efficiency in the derivatives market. The CDM is intended to provide a standard digital representation of events and actions that occur during the life of a derivatives trade, expressed in a machine-readable format. Using this common standard will enhance consistency and facilitate interoperability across firms and platforms, irrespective of the programming language ultimately used for each technology.
The Commodity Futures Trading Commission (CFTC) met to advance several rulemakings, including proposed revisions to the Volcker rule, a proposed rule to permanently maintain the current threshold for swap dealer registration, and a final rule regarding access to swap data repositories. The proposed rule advanced on a 2-1 vote, with CFTC Chairman Chris Giancarlo and Commissioner Brian Quintenz voting in favor, and Commissioner Rostin Behnam opposing.
The FSB published the responses it received to its second consultation document on governance arrangements for the unique product identifier (UPI). The consultation closed on 28 May 2018.
The deputy governor, financial stability at the BoE, Sir Jon Cunliffe, made a speech entitled ‘Central clearing and resolution—learning some of the lessons of Lehmans’. It was given at the FIA’s annual International Derivatives Expo in London. Sir Jon addressed the progress that has been made in the last few years to reform derivatives markets, how the concentration of counterparty risk in central counterparties (CCPs) is managed, and why it is necessary to have a resolution regime for CCPs.
The Investment Association (IA) published a series of best practice principles designed to improve the functioning of the bond markets during exchange and tender offers—the process whereby an issuer exchanges its existing bonds for new bond issuance or buys them back for cash. IA has identified a number of areas of concern within the processes, including a general lack of transparency as to the rationale, process and outcome of such transactions, potentially leaving investors with insufficient information to allow them to reach a sound investment decision.
The European Parliament published a briefing on its initial analysis of the European Commission's impact assessment (IA) of the proposed European Crowdfunding Service Providers (ECSP) Regulation and related amendment to MiFID II.
The FCA published research findings which identify the messages—'prompts' and 'alerts'—most effective at encouraging customers to consider their banking arrangements. The report identifies that customers prefer longer, more informative messages. The report also identifies a number of key 'prompt' and 'alert' design features that the FCA suggests should potentially act as guidance for banks.
The government appointed four ‘industry champions’ to work with the banking, securities, pensions, insurance, wealth management and investment sectors to increase the amount of dormant funds that can be released for good causes. They will also bolster efforts to reunite customers with assets from bank accounts that have been untouched for more than 15 years.
HM Treasury launched a consultation seeking views on the current funeral plan market due to the government’s assertion that the current self-regulatory framework for the funeral plan sector doesn’t properly ensure the fair treatment of consumers. The government calls for a more robust regime. The consultation closes on 1 August 2018.
The European Commission adopted a Delegated Regulation amending Delegated Regulation (EU) 2015/35 (the Solvency II Delegated Act) with regard to the calculation of regulatory capital requirements for securitisations and simple, transparent and standardised (STS) securitisations held by insurance and reinsurance undertakings.
The PRA published a letter from its CEO, Sam Woods, to the chair of the Treasury Select Committee, Nicky Morgan MP, providing an update on the Solvency II risk margin. Mr Woods said the risk margin is too sensitive to the level of interest rates, and is therefore too high at current low levels of interest rates.
The PRA published a 'Dear CEO' letter sent to firms providing feedback from recent PRA review work on the market conditions facing specialist general insurers.
The Council of the EU published a third presidency compromise text on the proposal for a regulation of the European Parliament and of the Council on a pan-European personal pension product (PEPP).
The European Parliament's Committee on Economic and Monetary Affairs (ECON) published a draft motion for resolution on International Financial Reporting Standards: IFRS 17 Insurance Contracts, which will be voted on by ECON members at its meeting on 18-19 June 2018. The resolution raises some concerns regarding the new standard and calls for further analysis by the European Commission and the European Financial Reporting Advisory Group (EFRAG).
EIOPA published technical information on the relevant risk-free interest rate term structures (RFR) with reference to the end of May 2018.
EIOPA published the technical information on the symmetric adjustment of the equity capital charge for Solvency II with reference to the end of May 2018. The updated symmetric adjustment is 0.31%.
Article 2, point 3, of Directive (EC) 2002/92 had to be interpreted as meaning that the concept of 'insurance mediation' included work preparatory to the conclusion of an insurance contract, even in the absence of any intention on the part of the insurance intermediary concerned to conclude a genuine insurance contract. The Court of Justice of the European Union so held, among other things, in proceedings concerning the loss of sums invested in products in the context of capital life assurance taken out with insurance mediation companies which had taken out professional indemnity insurance with the appellant insurance company. The judgment is available at: Case C-542/16.
The BoE, in conjunction with the New Payments System Operator (NPSO) and the Payment System Regulator (PSR), launched a six-week consultation on the adoption of a common global 'language' or messaging standard, known as 'ISO 20022', for payments in the UK. The standard will be adopted across CHAPS, Faster Payments and Bacs, the UK's three main interbank payments systems, which together process over eight billion payments per year, with a total value of over £90trn.
The chair of the Treasury Committee, Nicky Morgan MP, wrote to the CEO (Europe) of Visa, Charlotte Hogg, to find out why Visa’s system failed on 1 June 2018. Many consumers and businesses were unable to make or accept payments on the day. Ms Morgan asked how Visa will ensure that a similar failure doesn’t happen again, and whether customers or merchants will be entitled to compensation.
In a judgement dated 30 May 2018, Edmund Falkenhahn AG v The Liechtenstein Financial Market Authority (Case E-9/17), the European Free Trade Association (EFTA) Court has provided an advisory opinion on the interpretation of Article 7 (safeguarding ) and Article 11 (issuance and redemption) of Directive 2009/110/EC (2EMD) (the Electronic Money Directive).
The BoE published a response to HM Treasury's Call for Evidence on Cash and Digital Payments in the New Economy, which was launched on 13 March 2018. The BoE acknowledges that the usage of cash is evolving, but it says that there is, and is likely to remain for the foreseeable future, a significant public demand for banknotes.
The ECB published a speech given by Pentti Hakkarainen, member of the supervisory board of the ECB, at the Lisbon Research Centre on Regulation and Supervision of the Financial Sector Conference, Lisbon on 6 June 2018. The speech focused on the digitalisation of the banking sector and the risks this posed for supervisors.
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