The Regulatory Reform blog is the latest, 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 30 regulatory and industry bodies covering North and South America, Europe, Africa, the Middle East and the Asia Pacific region. Every month, we will highlight approximately 10 regulations shortlisted on the basis of geography of coverage and anticipated business impact. Our summaries will highlight the risks covered and business processes affected by the regulatory reforms.

Edition Highlights:

• Clearing and settlement rules are a key focus area as regulators continue to work through the new over-the-counter (OTC) rules.
   
• The US Commodity Futures Trading Commission’s final rules mandate robust risk management, compliance and other internal and external business conduct requirements on swap dealers, major swap participants and futures commission merchants.
   
• Comprehensive standards for financial market infrastructure laid down by the Bank for International Settlements cover the whole spectrum of the trade life cycle for securities, derivatives and other financial transactions.
   
• The Financial Stability Oversight Council's final rule details the three-stage process to identify nonbank financial companies that would be subject to enhanced supervision under the Dodd-Frank Act.

Current coverage period: Through April 30, 2012
Note: Anticipated business impact for covered regulations is shown using the following rating legend:
(Low) (Medium) (High)
 

CURRENT REGULATIONS:

Commodity Futures Trading Commission (CFTC)(): Commodity Options
Publication Date: April 27, 2012
Risks Covered: Operational Risk, Compliance Risk
Business Processes Impacted: Trading, Clearing and Settlement—a Exchange-Traded and OTC
The CFTC adopted a final rule and an interim final rule in relation to commodity options. As per the final rule that repeals and replaces its current regulations, commodity options are permitted subject to the same rules as all other swaps, with minor revisions. Subject to certain conditions including recordkeeping, monitoring of position limits, risk management and reporting, the interim final rule incorporates an exemption for certain physically settled commodity options that have option buyer as commercial user of the commodity underlying the option.

Commodity Futures Trading Commission (CFTC), Securities and Exchange Commission (the SEC)(): Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant," "Major Security-Based Swap Participant" and "Eligible Contract Participant"
Publication Date: April 18, 2012
Risks Covered: Operational Risk, Compliance Risk
Business Processes Impacted: Trading, Clearing and Settlement—Exchange-Traded and OTC
This final rule of the CFTC and the SEC defines the terms contained in the title of the regulation. With phase -in timelines and procedures, the rule establishes the threshold for the de minimis exclusion from swap dealer registration requirements in case of the CFTC-regulated swaps and security-based swaps of the SEC. Subject to certain conditions, swaps entered into by insured depository institutions in relation to origination of loans for their customers and swaps that qualify as hedges are excluded in arriving at the de minimis threshold.

Bank for International Settlements (BIS), International Organization of Securities Commissions (IOSCO)(): Principles for Financial Market Infrastructures
Publication Date: April 16, 2012
Risks Covered: Operational Risk, Compliance Risk
Business Processes Impacted: Payments, Risk Management and Stress Testing, Clearing and Settlement—Exchange-Traded and OTC
For the purposes of the final report, financial market infrastructure is defined as “a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions.” Major coverage includes a) legal basis, b) governance, c) framework for comprehensive management of risks, d) physical deliveries, e) participant-default rules and procedures, f) communication procedures and standards, and g) disclosure of market data by trade repositories.

Bank for International Settlements (BIS)(): Peer review of supervisory authorities' implementation of stress testing principles
Publication Date: April 13, 2012
Risks Covered: Counterparty Risk (CCR), Credit Risk, Market Risk, Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing
The review found that countries are at varying stages of maturity in terms of implementing the Basel Committee’s 2009 stress-testing principles. While a few countries were found to be advanced, nearly half of the countries were in early stage of implementation. Many common areas of future improvement in stress testing were highlighted in the survey namely a) integrating results into decision-making, b) governance, c) severity of scenarios, d) data and IT infrastructure, and e) modeling issues.

Commodity Futures Trading Commission (CFTC)(): Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management
Publication Date: April 9, 2012
Risks Covered: Compliance Risk
Business Processes Impacted: Clearing and Settlement—Exchange-Traded and OTC
The CFTC’s final rules under Title VII of the Dodd-Frank Act sets standards for clearing of swaps through a) documentation between a customer and a futures commission merchant (FCM), b) timing of acceptance or rejection of trades for clearing by derivatives-clearing organizations and clearing members, and c) risk management procedures for FCMs, swap dealers and major swap participants that are clearing members. The rule is expected to enable non-discriminatory access to trading and clearing, faster processing of trades and effective risk management for clearing members.

European Banking Authority (EBA)(): Results of the Basel III monitoring exercise as of 30 June 2011
Publication Date: April 4,2012
Risks Covered: Counterparty Risk (CCR), Credit Risk, Market Risk
Business Processes Impacted: Risk Management and Stress Testing
With data from 158 large international banks from June 2011, the EBA’s report covers changes in three key areas, namely capital, leverage and liquidity, assuming full implementation of the Basel III framework on the date the data was submitted. Major results for the three key areas a) common equity tier 1 would decline from an average of 10.2 percent to 6.5 percent with some banks failing to meet the 4.5 percent Basel III minimum, b) against the Basel III minimum of 3 percent, the leverage ratio of group 1 and group 2 banks would be 2.7 percent and 3.4 percent respectively, and c) the aggregate short fall of liquid assets would represent 3.7 percent of total assets of the aggregate sample.

European Banking Authority (EBA)(): Draft Regulatory Technical Standards on Own Funds
Publication Date: April 4, 2012
Risks Covered: Compliance Risk
Business Processes Impacted: Risk Management and Stress Testing
The EBA’s consultation on draft regulatory technical standards (RTS) is a part implementation of the capital requirements regulation (CRR) and the capital requirements directive (CRD) IV which are expected to be applicable as of January 1, 2013. The capital reforms aim to raise both the quality and quantity of the regulatory capital base to improve risk-absorbing capacity. The draft RTS covers a) common equity tier 1 capital (CET 1), b) additional tier 1 capital, c) deductions from CET 1, d) general requirements, and e) transitional provisions.

Commodity Futures Trading Commission (CFTC)(): Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants
Publication Date: April 3, 2012
Risks Covered: Operational Risk, Compliance Risk
Business Processes Impacted: Trading, Clearing & Settlement—Exchange-Traded and OTC
Final rule of the CFTC mandates swap dealers (SD) and major swap participants (MSP) that are registered with the CFTC in relation to a) risk management procedures, b) monitoring of trading to prevent violations of applicable position limits, c) diligent supervision, d) business continuity and disaster recovery, e) disclosure and the ability of regulators to obtain general information, f) antitrust considerations, g) conflicts-of-interest requirements for SDs, MSPs and futures commission merchants (FCM) with regard to firewalls between research and trading and between clearing and trading, and h) designation of a chief compliance officer and setting up of compliance function by SDs, MSPs and FCMs.

Financial Stability Oversight Council (FSOC))(): Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies
Publication Date: April 3, 2012
Risks Covered: Systemic Risk, Business Cycle Risk
Business Processes Impacted: Risk Management and Stress Testing
Under section 113 of the Dodd-Frank Act, the FSOC is vested with powers to determine that a nonbank financial company shall be supervised by the Fed and shall be subject to prudential standards in accordance with title I of the Dodd-Frank Act. In the final rule, the FSOC provides a detailed description of a three-stage process that the FSOC intends to use. In stage 1, uniform quantitative metrics are applied to identify nonbank financial companies for a more detailed, qualitative analysis in stage 2. Stage 3 builds on reviews in stages 1 and 2, and may lead to submission of additional information by a nonbank financial company.

Board of Governors of the Federal Reserve System (the Fed)(): Definition of ‘‘Predominantly Engaged in Financial Activities’’
Publication Date: April 2, 2012
Risks Covered: Compliance Risk
Business Processes Impacted: Audit, Legal and Compliance
The Fed’s amendment to its notice of proposed rulemaking requests comments on the scope of activities to establish requirements to determine whether a company is “predominantly engaged in financial activities.” Under Title 1 of the Dodd-Frank Act, a company can be designated as a nonbank financial company only if 85 percent or more of its revenues or assets are related to activities that are financial in nature under the Bank Holding Company Act. Thirty-four activities have been identified by the rule as falling under financial activities.
 
 
FORTHCOMING REGULATIONS:

Federal Deposit Insurance Corporation (FDIC): Initiatives under the Dodd-Frank Act—objectives planned
The FDIC, as a part of its responsibilities under the Dodd-Frank Act, has plans to issue proposed rules on the following: a) qualified financial contract recordkeeping requirements for financial companies, b) orderly liquidation procedures for brokers/dealers, and c) bank holding companies as source of financial strength for their subsidiary depository institutions.
In addition to the much-anticipated final rules on prohibition on proprietary trading (“Volcker rule”), other final rules planned are a) stress tests for financial companies, b) incentive-based compensation arrangements, c) margin and capital requirements for swaps, and d) credit risk retention (“skin in the game”).

This blog is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances. If you require advice or further details on any matters referred to, please contact Accenture.

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