Managing Upstream Risk Regulatory Reform Review: An Asian perspective

www.pwc.com/sg
Managing
Upstream Risk
Regulatory Reform Review:
An Asian perspective
February 2014
Contents
1.
Editorial4
Regulatory Updates
Banking
2.1 FATCA and International Taxation
2.2 Investor Protection
2.3 Financial Benchmarks
2.4MiFID
2.5 Financial Market Infrastructures
2.6 OTC Derivatives
2.7 Credit Rating Agencies
2.8 Asset Quality Review
2.9 Stress Testing
2.10 Single Supervisory Mechanism
2.11 Single Resolution Mechanism
2.12 CRD IV/CRR
2.13EMIR
2.14 Payment Systems
2.15 AML and Financial Crime
2.16 Data Protection
12
3.
Insurance
28
4.
Asset Management
29
5.
Watch This Space
30
6.
Contact Our Experts
31
7.
Glossary32
2.
1. Editorial
On 12 February 2014 the IIF President and CEO Tim Adams wrote to The
Honourable Joe Hockey MP, Treasurer of the Australian Treasury, ahead of
the G20 meeting of finance ministers and central bank governors in Sydney.
Mr Adams highlighted three major policy areas that are critical for promoting
stronger growth and making the economy more resilient against shocks:
complete the global regulatory reform agenda; promoting investment in
infrastructure; and encouraging policies that strengthen capital flows to
emerging markets.
The UK and Singapore on 25 February 2014 announced an agreement to
set up a UK-Singapore Financial Dialogue, which will focus on deepening
financial and economic cooperation between two countries. London and
Singapore are two of the world’s leading international financial centres and
play similar roles as financial hubs and major asset management centres
for Europe and Asia respectively. They are also the largest and third largest
foreign exchange centres in the world. Alongside the Dialogue, the Ministers
also agreed to support the establishment of a new, private sector forum to
boost the development of the offshore Renminbi market. The forum will be
led by the private sector and focus on increasing cooperation between the UK
and Singapore markets.
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Regulatory Reform Review | Editorial
As expected, the focus of this year’s Budget was on
achieving a fair and equitable society. Many of the
proposed tax measures (such as the enhanced PIC
Scheme) were focused on assisting SMEs to improve
their productivity and encourage innovation – and
rightfully so. Similarly, Singapore-based companies
will benefit from enhanced financing aid to assist
them in expanding overseas. Certainly, these are key
steps towards enhancing the vibrancy of Singapore’s
economy.
But what about foreign multinational corporations
(MNCs) that are already operating in Singapore,
looking to expand their presence in Singapore or
considering Singapore as a strategic hubbing and
headquarter location? Foreign direct investment
(FDI) continues to form a key pillar of Singapore’s
economy. The continued inflow of FDI and know-how
will be critical in developing advanced capabilities to
safeguard Singapore’s current position as a dynamic
place for doing international business.
An excerpt from PwC Singapore’s
Budget Commentary 2014
On 21 February 2014 the Singapore Minister for
Finance announced the budget for 2014. The Budget
included an extension of the fund management tax
incentives and enhancements. According to the 2012
Singapore Asset Management Industry Survey by
MAS, Singapore-based managers managed S$1.62
trillion of assets. Hopefully the recently-announced
extension of the incentives and the enhancements
will help us break through the 1.62 trillion figure
quickly and establish greater market share in the
global asset management area.
The confirmation that tax deductions are available
for distributions paid on Basel III Additional Tier 1
instruments that are not shares, will give Singaporeincorporated banks additional capital raising options
for boosting their capital base. It would be interesting
to see what type of instruments will be covered. For
example, one would expect contingent convertibles
(CoCos) to be considered, as such instruments have
been popular with global banks looking to boost Tier
1 capital requirements under Basel III after the global
This year’s Budget contained certain enhancements
and tax measures to promote Singapore as a research
and development (R&D) and intellectual property
(IP) hub, which invariably could be applicable to
MNCs. However, foreign MNCs today are faced with
increasing uncertainties as they globalise. Aside from
weak market environments, political uncertainties
and an overall rise in the cost of doing business,
MNCs are also facing fast-changing developments
in the international tax environment – and as such,
would find respite in certainty and clear tax policies.
Amidst these uncertainties, we would have looked
forward to measures which reiterated Singapore’s
support for FDI and enhancement of Singapore’s
competitiveness. These could have included, for
instance, proactive clarification of Singapore’s
forward-looking stance on certain international
tax developments. And on a more concrete note,
the government could have provided welcome
clarification and more certainty on the safe harbour
exemption rules on the sale of shares as well as
enhancements to the current foreign tax credit
system. Perhaps we can look forward to some of these
developments through off-Budget releases in the
coming months.
financial crisis.
Editorial | Regulatory Reform Review
5
An excerpt from IMF’s “Leaning Against
the Wind: Macroprudential Policy in
Asia”
Drawing from a newly constructed database
covering 13 Asian economies and 33 countries from
other regions over 2000 Q1 to 2013 Q2, the paper
finds that macroprudential measures have been
used quite extensively in Asia, more than in other
regions. This holds in particular for housing-related
measures. Measures that have been quite common
both in Asia and other regions include changes in
reserve requirements on local currency deposits,
while there has been little action in all regions
regarding credit limits, dynamic provisioning,
liquidity tools, consumer loans, and capital measures.
Also, measures to discourage transactions in
foreign currency and residency-based capital flow
management policies have been used less frequently
in Asia than in other regions.
The stance of macroprudential and capital flow
management measures has been tightened over time,
especially after 2006. Nevertheless, these policies
have also been used as a counter-cyclical tool, as they
were loosened at the height of the global financial
crisis in 2009 in most regions, including Asia.
In advanced Asia, where monetary policy is
sometimes constrained by various forms of fixed
exchange rate regimes (e.g., Hong Kong SAR and
Singapore), policy makers have increasingly relied
on macroprudential and capital flow management
measures to reduce systemic vulnerabilities from low
domestic interest rates and strong capital inflows. In
emerging Asia, instead, macroprudential and capital
flow management tools and monetary policy have
been complementing each other. In more recent
years, they have moved in different directions, as
inflation and asset price cycles diverged.
Notwithstanding limitations from data availability
and quality, the empirical analysis on the effects
of macroprudential and capital flow management
measures, based on an event study, cross-country
macro panel analysis and bank-level micro panel
regressions, suggests the following conclusions:
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Regulatory Reform Review | Editorial
• Macroprudential policy actions appear to have
contributed to reduce credit growth in Asia. In
both the macro- and micro-econometric analyses,
though, only housing-related measures are found
to have had a significant impact. This may reflect
the heavy use of housing-related measures in
Asia compared to other domestic prudential
tools. Changes in reserve requirements and in
capital regulation are not found not to have had
any significant effect on bank loan in the microanalysis, a somewhat surprising finding that holds
regardless of bank characteristics.
• The CFM index summarising measures to
discourage transactions in foreign currency
and residency-based capital flow management
measures has not had any significant impact on
overall credit growth in Asia.
• By contrast, CFM measures appear to have
contributed to dampen housing price growth
in the full country sample, but this finding is
entirely driven by emerging Europe. For Asia,
CFM and housing-related tools have been
effective in reducing housing price inflation only
in the country group that has used them more
intensively, namely advanced Asia.
• CFM policies are found to have discouraged
portfolio equity inflows in the full country sample,
but not in Asia. By contrast, CFM and MPP
measures are not found to have had any significant
impact on debt inflows.
• Housing-related macroprudential policies have
also helped dampen bank leverage in Asia,
although their effect is estimated to be quite small.
Regulatory Updates
2.Banking
2.1 FATCA and International
Taxation
Final and temporary regulations for
FATCA
The regulations contain over 50 discrete
amendments and clarifications to the FATCA
regulations issued in January 2013 to provide
clarifications and to take into account certain
stakeholder suggestions regarding ways to
further reduce burdens consistent with FATCA’s
compliance objectives. Modifications also are
intended to harmonise the FATCA regulations
with the approach taken in the FATCA IGAs.
Key amendments and clarifications include
those relating to:
US Treasury and IRS release
updates to FATCA regulations
On 20 February 2014, the US Treasury and the
IRS released two key updates to the FATCA
provisions and related regulations:
1. Final and temporary regulations for FATCA;
and
2. Coordinating regulations for Chapters 3, 4
and 61.
These regulations are lengthy (over 550 pages)
and contain numerous changes that will likely
impact how FATCA is implemented by FFIs
around the world. A high level summary of the
changes follows.
1. The accommodation of direct reporting to the
IRS, rather than to withholding agents, by
certain entities regarding their substantial US
owners;
2. The treatment of certain special-purpose debt
securitisation vehicles;
3. The treatment of disregarded entities as
branches of FFIs;
4. The definition of an expanded affiliated
group; and
5. Transitional rules for collateral arrangements
prior to 2017.
Banking | Regulatory Reform Review
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Coordinating regulations for
Chapters 3, 4 and 61
The regulations also harmonise the
requirements contained in FATCA with the
pre-FATCA rules under Chapters 3 and 61 and
Section 3406. Chapter 3 contains reporting
and withholding rules relating to payments of
certain US source income to non-US persons.
Chapter 61 and Section 3406 address the
reporting and withholding requirements for
various types of payments made to certain US
persons.
[FATCA]’ has played in the G20 Finance
Ministers and Central Bank Governors’ efforts
on the multilateral automatic exchange of tax
information.
1. An introduction and overview on automatic
exchange of information; and
2. Text of the model Competent Authority
Agreement (CAA) and CRS due diligence
processes.
The changes made by the coordinating
regulations relate to four key areas:
1. Rules for identification of payees;
While the documents released do not include
any specific timelines, we understand that FIs
in countries which adopt the standard will
be required to undertake the necessary due
diligence obligations in 2016 with reporting
starting in 2017.
At a 23 February meeting in Sydney, leaders
from the G-20 formally endorsed the CRS.
Model CAA
2. Coordination of the withholding
requirements under Chapter 3, Section 3406
and FATCA;
3. Coordination of Chapter 61 and FATCA
regarding information reporting with respect
to US Persons; and
4. Conforming changes to the regulations
implementing the various regimes.
A total of 42 countries have already committed
to adopting the CRS and the expectation is
that at least some of these agreements will be
entered into later this year. The documents
released are:
OECD publishes Common Reporting
Standard
The CAA is arranged in 7 sections. Section 1
deals with definitions, but is less comprehensive
than Article 1 of the Model 1 FATCA IGA.
The OECD on 13 February 2014 released the
Common Reporting Standard (CRS), which
seeks to establish a new global standard for
automatic exchange of financial account
information between governments.
Section 2 covers the type of information to be
exchanged and this follows the Model 1 IGA
with the addition that the tax residencies and
not citizenship of the account holder are also
required.
Broadly, the CRS will operate in a manner
similar to that of the Model 1 IGA under the
US FATCA provisions. As with FATCA, the
CRS model imposes obligations on FIs to
identify reportable accounts and obtain the
accountholder identifying information that is
required to be reported for such accounts with
their local tax administration. It also provides
the scope of the information to be collected and
exchanged with the accountholder’s residency
country.
Section 3 deals with the time and manner
of exchange of the information. Competent
Authorities are required to exchange the
information by September of the year following
the year to which the information relates. This
is the same as is required under the Model 1
IGA.
Section 4 requires the Competent Authorities
to notify each other in the event of incorrect
or incomplete reporting or non-compliance
by an FI in their jurisdiction. Each Competent
Authority is also responsible for addressing
errors or non-compliance through its domestic
laws.
According to the OECD, the CRS draws
extensively on previous work on the automatic
exchange of information and ‘recognises
the catalytic role that implementation of
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Regulatory Reform Review | Banking
Section 5 contains the confidentiality and
data safeguards that need to be adhered to by
the Competent Authorities. As noted in the
overview to the documents, a jurisdiction must
have the legal framework and administrative
capacity and processes to ensure confidentiality
of data received before entering into an
agreement. This may mean that certain
jurisdictions will be unable to enter into a CRS
agreement until they meet these requirements.
Sections 6 and 7 allow for consultations
between the Competent Authorities,
amendments to the agreement and the term
of the agreement, including suspension in
the event of significant non-compliance and
termination of an agreement with 12 months’
notice.
CRS due diligence processes
The CRS Annex deals with due diligence
processes to be followed and is similar to Annex
1 of the Model 1 IGA. As with the Model 1
IGA, the CRS Annex sets out the due diligence
processes for pre-existing and new individual
and entity accounts. This section also provides
various definitions that were not included
within the CAA.
Next steps
The details released on 13 February 2014 at
least will allow institutions to determine the
scope of their obligations under the CRS, but
still leave many questions to be answered. The
OECD currently is developing commentary to
accompany the CRS, which is expected to be
published in June 2014. This should provide
details on how the CRS is to be implemented.
Michael Brevetta
US Regulatory Lead/FATCA Lead
Risk Assurance, PwC Singapore
[email protected]
Banking | Regulatory Reform Review
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2.2 Investor Protection
Update
On 5 February 2014 the research department
of the IOSCO published a staff working paper
on the risks and benefits of Financial Return
(FR) crowd-funding. The report provides a
global overview of the crowd-funding industry
along with a mapping exercise of the global
regulatory landscape. It seeks to identify
investor protection issues and to determine
whether crowd-funding poses a systemic risk to
the global financial sector. FR crowd-funding is
a type of market-based finance that could help
stimulate economic recovery by channelling
capital to SMEs. However, FR crowd-funding
poses many risks and raises an array of investor
protection issues. The working paper identifies
the main benefits of FR crowd-funding as the
following:
• Provides a boost to economic growth through
flows of credit to SMEs and other users in the
real economy;
Hong Kong
SFC HK on 27 February 2014 began a twomonth consultation concerning the future
regulation of alternative liquidity pools. The
SFC proposes to enhance and standardise the
regulatory obligations imposed on Hong Kong
licensed corporations that operate ALPs, by
including within the Code of Conduct (Note 2)
comprehensive requirements governing their
operation. As a consequence of doing this, the
SFC will cease its current practice of imposing
conditions on the licences of ALP operators on a
case-by-case basis.
The SFC’s proposals draw on initiatives for the
regulation of ALPs that have been developed in
other major markets and also reflect regulatory
responses that the SFC considers desirable
within the particular context of the Hong Kong
market.
The proposals set out in the SFC’s consultation
paper cover the following key areas:
• Fills a credit gap left by banks;
• Restricting access to ALPs to institutional
investors only.
• Offers lower cost of capital/high returns,
leveraging off a lower cost basis; and
• Enhancing the level of disclosure to ALP
users.
• Provides a new product for portfolio
diversification.
• Ensuring the priority of agency orders over
proprietary orders initiated by ALP operators
and their affiliates.
The main risks are:
• Platform risk;
• Limiting the level of visibility of trading
information available to the staff of ALP
operators.
• Risk of fraud;
• Maintaining system adequacy.
• Risk of illiquidity; and
• Introducing additional control, record
keeping and reporting requirements.
• Risk of default;
• Risk of investor inexperience.
The FR crowd-funding market has doubled year
on year for the last five years to an estimated
$6.4 billion in 2013, driven by annual growth of
90 per cent in peer-to-peer lending. Peer-to-peer
lending has spread across the globe, making
FR crowd-funding a global phenomenon. The
equity crowd-funding market is more modest in
size and has grown at a slower pace.
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Regulatory Reform Review | Banking
2.3 Financial Benchmarks
Update
The FSB was tasked by the G20 in 2013 to
co-ordinate and guide work on the necessary
reforms to short-term interest rate benchmarks,
to ensure that widely-used benchmarks are
held to appropriate standards of governance,
transparency and reliability. Within its broader
mandate, the FSB will promote adoption
and implementation of principles and good
practices that emerge regarding the benchmark
setting process. According to a press release
published on 14 February 2014 by the BIS,
a high-level Official Sector Steering Group
(OSSG) of regulators and central banks is
taking this work forward.
Recently, a number of concerns have
been raised about the integrity of FX rate
benchmarks. The FSB has consequently
decided to incorporate an assessment of FX
benchmarks into its ongoing programme of
financial benchmark analysis. To take this work
forward, a new sub-group on Foreign Exchange
Benchmarks has been established. The new
group will be chaired by Guy Debelle (Assistant
Governor, Financial Markets, Reserve Bank of
Australia) and Paul Fisher (Executive Director
for Markets, Bank of England), both members
of the OSSG. The FX Benchmarks Group will
undertake a review of FX benchmarks and will
analyse market practices in relation to their
use and the functioning of the FX market as
relevant. Conclusions and recommendations
will be transmitted by the FSB to the Brisbane
Summit.
Banking | Regulatory Reform Review
11
2.4MiFID
Update
On 12 February 2014 the CFTC and EC released
a statement announcing significant progress
made towards harmonising a regulatory
framework for CFTC-regulated swap execution
facilities (SEFs) and EU-regulated multilateral
trading facilities (MTFs), as contemplated
under the Path Forward statement issued in
July 2013.
“The two commissions have provided
confirmation this week that a global race-tothe-top in derivatives regulation is possible,”
said Acting Chairman Wetjen. “As the CFTC
moves forward with the swap trading mandate
in the US, it must and will continue to work
with its counterparts in Europe and elsewhere
to meet the G20 commitments and ensure that
standardised trading on regulated platforms
protects global liquidity formation and provides
much-needed pre-trade transparency to market
participants.”
The Path Forward statement set out that
the CFTC and EC would work together on
extending appropriate, time-limited transitional
relief to certain MTFs, in the event that the
CFTC’s trade execution requirement was
triggered before March 15, 2014; provided
these platforms were subject to, among other
things, sufficient pre- and post-trade price
transparency requirements, comparable
provisions providing for non-discriminatory
access by market participants, and appropriate
governmental oversight.
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Regulatory Reform Review | Banking
Accordingly, CFTC and EC have engaged in
further dialogue regarding the treatment of
MTFs under the CFTC’s regulatory regime,
building upon the common objective to
rigorously and expeditiously implement the
G-20 commitments, particularly with regard to
mandatory trading on regulated and organized
platforms. As a result, CFTC staff today issued
two no-action letters providing relief to certain
EU-regulated MTFs.
Subject to certain important conditions that will
preserve and incentivise harmonisation of key
transparency and risk mitigation safeguards,
CFTC staff issued a “Conditional No-Action
Letter” which provides no-action relief for:
1. Qualifying MTFs from the SEF registration
requirement under section 5h(a)(1) of the
Commodity Exchange Act (CEA);
2. Parties executing swap transactions on
qualifying MTFs from the trade execution
mandate under CEA section 2(h)(8); and
3. Swap dealers and major swap participants
executing swap transactions on qualifying
MTFs from certain requirements under the
CFTC’s business conduct rules and for which
these registrants otherwise would receive or
be subject to similar regulatory treatment if
executing swap transactions on SEFs.
CFTC’s staff separately issued a Short-Term
No-Action Letter to provide limited relief for
all registered MTFs through March 24, 2014,
in order to provide sufficient time for MTFs to
identify themselves to the CFTC as a condition
to the relief and comply with certain other
conditions for obtaining relief pursuant to the
Conditional No-Action Letter.
Banking | Regulatory Reform Review
13
2.5 Financial Market
Infrastructures
Update
THE EU published on 11 February 2014 a
detailed assessment of implementation of
the ECB’s observance of the CPSS-IOSCO
responsibilities of authorities for FMI. A
summary of the assessment is as follows:
• The oversight framework of the ECB is
comprehensive – The ECB has developed
a wide-ranging oversight policy, including
quantitative and qualitative criteria to
identify, monitor, and remedy any potential
systemic risks related to FMIs. It has also
developed oversight standards covering
a broad range of infrastructures, service
providers, and payment schemes within the
EA. Furthermore, it has extensive oversight
cooperation with a wide range of authorities
both at the European level and globally.
Within the EU, the ECB has been a driving
force to promoting stability and integrating
financial infrastructures. Globally, the ECB
is deeply involved in shaping the regulatory
framework for FMIs by assuming the
leadership in developing new principles. It
is also involved in several global cooperative
oversight arrangements covering globally
critical payment systems, posttrading FMIs,
and the service provider SWIFT.
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Regulatory Reform Review | Banking
• The ECB should be entrusted to coordinate
the Eurosystem oversight function to
ensure that international principles for
FMIs are consistently enforced throughout
the EA – The regulation and oversight of
systemically important FMIs has differed
across the EA with potential contagion
systemic risk affecting the stability of the
EA financial system. The adoption of the
PFMIs as legally binding is a step in the right
direction. However, these principles are not
sufficiently detailed to ensure a uniformed
and harmonized implementation across
the EA, since their enforcement for post
trade FMIs will be conducted by national
competent authorities on a decentralised
basis (except for trade repositories, for
which the supervisory responsibility
lies with ESMA). Currently, the ECB is
the lead overseer for payment systems,
including TARGET2, EURO 1, STEP 2 and
CLS (as concerns the settlement of euro
transactions), but not for systemically
important post-trade FMIs with crossborder
reach. Therefore, there is merit in entrusting
the ECB with responsibility to ensure that
these principles are consistently enforced
throughout the EA. Assuming such a
role would strengthen financial stability
across the EA by ensuring EA-wide policy
objectives, harmonised regulation, and
consistent implementation.
• Recognise the role of the ECB/Eurosystem
as central bank of issue for the regulation
and oversight of all types of post-trade FMIs
– The role of the ECB/Eurosystem as central
bank of issue of the euro is recognised in
relation to CCP regulation and oversight
under EMIR. In line with the CPSS-IOSCO
Responsibilities, the ECB role should also
recognised as central bank of issue for the
regulation and oversight of central securities
depositories (CSDs), securities settlement
systems (SSSs) and TRs.
• The ECB should rely more on its power
to issue legally binding corrective action
to effectively enforce its oversight
responsibilities – To implement its oversight
responsibilities, the ECB currently relies
mainly on ‘soft’ tools and measures such
as moral suasion, publication of oversight
assessments, public statements, and
cooperation with other authorities. These
tools have worked so far, but with more
demanding oversight standards this may not
be effective in all circumstances in forcing
the system’s operators to promptly address
potential deficiencies. The ECB should rely
more on legally binding corrective action
to effectively enforce its responsibilities,
including imposing sanctions, penalty,
suspending some operations or services, etc.
As it does not have an exclusive mandate
over post-trade FMIs, the ECB should
coordinate its corrective measures with the
relevant securities regulators and banking
supervisors. Furthermore, the ECB should
be actively involved in any EU legislation
addressed to FMIs, as it would affect the
effectiveness of its oversight responsibility.
• The ECB’s oversight role is effectively
structured and organised, but further clarity
on the separation between its roles as
service provider and overseer is warranted
– The operation and oversight functions are
hosted by separate Divisions within the same
Directorate General and, while entrusted
to two different Working Groups, treated
within the same Eurosystem’s committee
(in clearly separated agenda items, which
may meet in different compositions and
for which there are separate mailing lists
and access to documents for oversight and
operation). The two functions report to
separate members of the ECB Executive
Board. To avoid any potential or appearance
of a conflict of interest, consideration could
be given to providing further clarity to
the public on the separation between the
operation function and oversight function,
aimed at enhancing transparency and
accountability.
• The ECB’s oversight capacity should be
strengthened – The ECB oversight team has
the responsibility to define the Eurosystem’s
strategy and policy, develop rules and
guidance, coordinate the Eurosystem
works, and contribute to the works of
international fora. In addition, the ECB will
soon participate in several EU colleges for
CCPs. In order to implement the new riskbased approach in a credible way and be
able to contribute actively to the works of
European and international fora, the ECB
needs to strengthen the capacity and the
skill of its staff. ECB oversight staff should
be significantly increased.
Banking | Regulatory Reform Review
15
2.6 OTC Derivatives
Update
The FSB on 4 February 2014 published a
consultation paper, “Feasibility study on
approaches to aggregate OTC derivatives data”,
discussing the key requirements and challenges
involved in the aggregation of TR data, and
proposes criteria for assessing different
aggregation models. The public consultation
paper examines the three broad types of model
for an aggregation mechanism: a physically
centralised model; a logically centralised
model; and the collection and aggregation by
authorities themselves of raw data from TRs.
Within these three broad types of model, a
variety of detailed alternatives exist that would
provide differing levels of sophistication of
service.
The paper analyses the key factors and
challenges associated with the three models,
taking into account the range of needs of
authorities for aggregated data across TRs and
focusing on those considerations that are most
relevant to the potential choice of model. It
divides these considerations into two types:
• Legal considerations, including those
relating to submission of data to the
aggregation mechanism, access to the
mechanism, and governance of the
mechanism: and
• Data and technology considerations,
including those related to data
standardisation and harmonisation, data
quality, information security, and other
technological considerations.
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The study is focusing on the feasibility of
options for data aggregation in the current
regulatory and technological environment
and given the existing (and planned) global
configuration and functionality of TRs. The
aggregation options are being considered on
the basis that they would complement, rather
than replace, the existing operations of TRs and
authorities’ existing direct access to TR data.
Consultation will close on 28 February 2014.
Regulatory Reform Review | Banking
ISDA announced that the 2014 ISDA Credit
Derivatives Definitions will go live from
September 2014. In a news release dated
3 February 2014, it was reported that this
working group has determined the appropriate
implementation date for the new Definitions
would be the September 2014 CDS roll
date. Over the past three months, the ISDA
Credit Steering Committee has worked with
infrastructure providers and clearing houses
to develop an appropriate implementation
schedule for the new Definitions, including an
assessment of the various changes to existing
infrastructure that are necessary to support
the change. The 2014 ISDA Credit Derivatives
Definitions will introduce several new terms,
including a new credit event that would be
triggered by a government bail-in of a financial
reference entity.
On 5 February 2014 ISDA released a progress
report on clearing and compression based on
their analysis of the IRD market. Key findings
include:
• Approximately 90 per cent of the IRD market
that is clearable or has been mandated for
clearing has in fact been cleared.
• Conversely, less than 10 per cent of
outstanding IRD notional consists of
transactions that are potentially clearable
but were not cleared.
• Approximately $73 trillion, or 13 percent
of the IRD market at June 30, consisted of
non-clearable transactions. This includes
$65 trillion in products that cannot be
cleared, and $8 trillion in products that can
be cleared but are denominated in currencies
that cannot.
• An estimated $29 trillion of IRD transactions
were conducted with non-financial
corporates that do not face clearing
mandates.
ISDA also on 6 February 2014 announced the
launch of the ISDA SwapsInfo website. ISDA
SwapsInfo aims to enhance transparency in the
OTC derivatives markets by pulling together in
one place a wealth of publicly available data
on IRD and CDS. The data is available in a
consistent format and the resulting consolidated
time series are easy to download and analyse.
The website allows for the transformation of the
following data into interactive charts:
• Daily volume-weighted average CDS prices
(for select products) and trading volumes,
measured by notionals and trade count, as of
January 2013.
• Weekly market risk activity, measured by
notional outstanding and trade count, for
CDS single names and indices since 2010.
• Weekly gross and net notional outstanding
and trade count for CDS single names and
indices since 2008.
For IRD:
• Daily volume-weighted average IRD prices
(for select products) and trading volumes,
measured by notionals and trade count, as of
January 2013.
• Weekly notional outstanding and trade count
for a range of IRD products since 2012.
For CDS:
In addition, ISDA SwapsInfo includes a Monthly
Market Commentary in which the Association
analyzes the data on the website to highlight
key trends in the OTC derivatives markets.
Banking | Regulatory Reform Review
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2.7 Credit Rating Agencies
Update
IOSCO on 10 February 2014 published
a consultation report, “Code of Conduct
Fundamentals for Credit Rating Agencies”,
proposing significant revisions and updates to
the current IOSCO CRA Code. The proposed
revisions are designed to strengthen the IOSCO
CRA Code by:
1. Do you agree that issuers, originators or
sponsors of a structured finance instrument
established in the EU shall jointly agree upon
and designate the entity responsible for
providing the information to ESMA?
2. Do you consider that national laws on
protection of personal data could impact the
publication of the information contained in
this draft Regulation?
• Enhancing provisions regarding protecting
the integrity of the credit rating process,
managing conflicts of interest, providing
transparency, and safeguarding non-public
information;
• Adding measures regarding governance,
training, and risk management; and
• Seeking to improve the clarity of the IOSCO
CRA Code.
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The proposed revisions result, in part,
from the experience of IOSCO members in
supervising CRAs. They also are informed by
IOSCO´s previous work on CRAs, including a
survey report describing the key risk controls
established by CRAs to promote the integrity
of the credit rating process and the procedures
established to manage conflicts of interest.
Consultation will close on 28 March 2014.
On 11 February 2014 ESMA released a
consultation paper seeking stakeholders’ views
on the draft RTS ESMA is required to adopt
under the CRA3 Regulation. The paper is
divided into three parts, setting out the draft
RTS on SFI, draft RTS on the European Rating
Platform, and a first version of the draft RTS
on fees charged by CRAs to their clients. The
respective list consultative questions are as
follows:
Regulatory Reform Review | Banking
SFI
3. Do you consider the list of information
requested pursuant to Article 4 as
appropriate?
4. Do you consider the frequency of the
information to be reported pursuant to
Article 6 as adequate?
ERP
1. Do you agree with the chosen frequency of
reporting?
2. Do you agree with the choice of including
also press releases and sovereign rating
reports in the ERP and why?
Fees
1. Do you agree with the chosen frequency of
reporting?
2. Do you agree with the choice of including
also press releases and sovereign rating
reports in the ERP and why?
Consultation will close on 11 April 2014.
2.8 Asset Quality Review
Update
On 3 February 2014 the ECB announced its
progress made in its on-going comprehensive
assessment and confirmed that it will apply the
parameters for the stress test released by the
EBA on 31 January 2014. Along with the AQR,
the stress test forms part of the comprehensive
assessment aiming to enhance the transparency
of the balance sheets of significant banks and
to rebuild investor confidence prior to the ECB
taking over its supervisory tasks in November
2014. Key points are as follows:
• The comprehensive assessment will revalue
the most important level-3 securities (assets
that are illiquid and difficult to value)
whenever banks have material exposures in
their banking or trading books. For banks
with the most important trading books, it
will also involve qualitative reviews of the
core trading book processes and quantitative
reviews of the derivative pricing models.
• For the stress test element of the
comprehensive assessment, as announced
by the EBA, the capital threshold for the
baseline scenario will be 8 per cent CET1,
whereas for the adverse scenario, a threshold
of 5.5 per cent CET1 will apply. Additional
capital instruments that mandatorily convert
to CET1 may be eligible to address a capital
shortfall arising in the adverse scenario, as
long as the conversion trigger is set at 5.5
per cent or above. Only instruments with
unconditional contract clauses relating to
such conversion will be eligible.
• Sovereign exposures in the held-to-maturity
portfolios (HTM) will be treated in the
same way as other credit exposures in that
portfolio. The same types of securities in the
available-for-sale (AFS) and held-for-trading
(HFT) portfolios will be marked-to-market,
in line with the scenario employed.
The ECB is currently finalising the AQR
methodology working together with national
supervisors. The full methodology will be
released in the course of the first quarter of
2014.
Banking | Regulatory Reform Review
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2.10
Single Supervisory Mechanism
Update
On 7 February 2014 the ECB launched public
consultation on draft ECB SSM Framework
Regulation which lays the basis for the work
of the SSM when the Central Bank takes over
as a supervisor of EA banks in November 2014.
The draft Framework Regulation describes the
rules and procedures governing the following
aspects:
• Assessment of a bank’s significance to
determine whether it falls under the ECB’s
direct or indirect supervision;
• The ECB’s oversight of the whole system;
• Cooperation between the ECB and the
NCAs with a view to ensuring a smooth
functioning of the SSM;
• Language regime for the various processes
within the SSM;
• General principles for the conduct of
supervisory procedures by the ECB;
• Procedures relating to the SSM’s microprudential and macro-prudential tasks;
2.9 Stress Testing
Update
In a news report published by Reuters on
10 February 2014, European regulators will
exempt banks that had mandatory EC-approved
restructuring plans in place last year - such as
Monte dei Paschi di Siena - from the harshest of
stress tests in 2014. The EBA is due to conduct
stress tests of euro zone lenders as part of a
sector-wide check up by the ECB before taking it
takes on supervision from national regulators in
November 2014.
In a Jan. 31 statement that outlines the stress
tests, the EBA said tests for exempted banks
would be run on 2014-16 balance sheet
projections rather than on a snapshot at 31
December 2013. Under its restructuring plan,
Monte Paschi, which got 4.1 billion euros ($5.6
billion) in EU aid last year, is set to cut RWA to
about 81 billion euros in 2017 from about 93
billion in 2013.
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Regulatory Reform Review | Banking
• Arrangements for close cooperation with
countries whose currency is not the euro;
and
• Administrative penalties for breaches of the
relevant law.
In addition to the consultative document and
accompanying explanatory report, a Q&A
document has also been published on the
website. As required under the Regulation
establishing the SSM, the final version of
the ECB SSM Framework Regulation will be
published by 4 May 2014.
2.11
Single Resolution Mechanism
Update
Finance ministers on 17 February 2014 gathered
to discuss the IGA establishing the common
resolution fund to be used to help finance
bank restructuring as one of the key elements
under the SRM. It was previously reported
that Germany, Finland and the Netherlands
are still taking a hard line on certain aspects,
starting with the period during which national
contributions from banks, placed in national
compartments in the fund, will gradually be
pooled.
• The resolution mechanism will rely on the
Single Rule Book established in the bank
recovery and resolution directive (BRRD)
so as to ensure a level playing field between
participating and non-participating Member
States.
• The legal framework on which to base the
mechanism and fund is the Regulation. As
such all issues must be open to discussion
within the trialogues.
This follows a letter that Parliament president
Martin Schulz sent to commission president
José Manuel Barroso criticising the council’s
attempts to negotiate the SRM on an
intergovernmental basis. Schulz has called upon
the commission “to fulfil its duty to defend the
proposal and use all the tools and powers it
has at its disposal to firmly stand against the
decision of the council whose legality is more
than doubtful”. The letter represents the second
public objection from the parliament after chair
of the ECON committee Sharon Bowles sent a
letter to the Greek presidency of the EU on the
same subject on 15 January 2014, following an
intergovernmental conference on the subject
on 9 January 2014. Bowles’ letter called for
all banks to be treated equally, “irrespective
of which country they are established in, and
that the system must be credible and efficient”,
whilst warning that “these core principles are
endangered by the ‘general approach’ of the
council on the SRM regulation, including an
intergovernmental agreement.
Perceived as a crucial element of the banking
union, the SRM is an attempt to create rules for
the orderly resolution of failing banks within
the eurozone and those member states that
decide to join the banking union, by setting up a
single resolution fund.
At the meeting of the ECOFIN Council in
Brussels on 17 February 2014, lead MEPs
highlighted key criteria to ministers stressing
that these elements would allow for taxpayer
protection, a swift and efficient decision
making process, and equal treatment of banks,
summarised below:
• Decision making on individual resolution
cases must be credible, efficient and
predictable. This regards all resolution tools
including application of bail in and - where
needed - the use of the single resolution
fund. As such, the political interference
through the involvement of Member States
should be avoided since it adds complexity,
slows down the processes, and inevitably
leads to power-politics which will undermine
equal treatment between banks.
• The Single Resolution Fund must be single
and equally accessible from the start. The
contributions will come from banks and
should therefore not be considered as
belonging to one Member State or another.
The ‘national compartments’ of the Council
model creates an un-level playing field.
Council’s mechanism also allows taxpayer
money to be brought in before exhausting
the fund, which goes contrary to the very
objective of the SRM. To enable credibility, a
repayable loan facility should be established
from the beginning of the building up of the
Fund.
Banking | Regulatory Reform Review
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2.12 CRD IV/CRR
Update
On 5 February 2014 the Joint Committee of
the ESAs launched a public consultation on
draft Implementing Technical Standards (ITS)
on the mapping of the credit assessments to
risk weights of External Credit Assessment
Institution (ECAIs). These ITS will be part
of the Single Rulebook in banking aimed at
enhancing regulatory harmonisation across the
EU.
Capital requirements under the Standardised
Approach are based, among other factors, on
the credit quality of the exposure, which is
calculated on the basis of credit assessments
provided by ECAIs. These draft ITS specify
the elements that should be taken into
consideration to determine the correspondence
(‘mapping’) between risk weights and credit
assessments provided by a particular ECAI.
This ‘mapping’ has to be provided for all
ECAIs, as defined by the Capital Requirements
Regulation (CRR), including any credit
rating agency that is registered or certified
in accordance with the Regulation on CRAs
or a central bank issuing credit ratings that
are exempt from the application of the CRA
Regulation. In particular, the following
elements have been taken into account in the
mapping process:
• Specific requirements have been established
for the calculation of the default rate,
which should improve the objectivity and
consistency of the ‘mappings’;
• Default experience obtained from external
ratings of other ECAIs or credit scores
produced by the ECAIs themselves have been
considered;
• In case no external or internal default
rate data is available, an estimate of the
quantitative factor has been required based
on the assessment provided by the ECAIs.
In addition, a description of the implementation
of the qualitative factors has been provided
in the explanatory boxes of these draft ITS.
Consultation will close on 5 May 2014.
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Regulatory Reform Review | Banking
2.13 EMIR
Update
EMIR compliance obligations started on 16 August 2012 (record keeping) when the
primary legislation came into force. Other obligations have been coming into effect
as detailed requirements have been developed in secondary legislation. The FCA has
been monitoring UK market readiness during this time, but until today has not given
strong signals about enforcement. On 21 February 2014 the FCA announced its first
hard compliance date for an EMIR obligation. Firms must comply with the EMIR Art
11 operational risk obligations (which came into effect on 15 September 2013) no
later than by 30 April 2014.
This new message is specific to “firms”, a term usually reserved for FS regulated
entities, while the older text above it discusses obligations for “counterparties”, a
term covering FS regulated entities and corporates. However, I do not believe the
distinction is intentional and there would be no legislative defence for corporate
who fail to meet the date.
ESMA on 11 February 2014 issued updated Q&As on the implementation of EMIR.
The updated Q&As clarify, among others, issues related to reporting to TRs such as
on how to construct and generate Unique Trade Identifiers (UTI), the reporting of
empty/not available fields and the UPI taxonomy. New Q&As are listed in the table
below.
Question
Answer
Do entities with a charitable nature or
otherwise a non-profit profile have to report
under EMIR?
If the activity performed by the entity with a
charitable nature or otherwise a non-profit profile
falls under the definition of economic activity that
qualifies it as an undertaking, the charity or nonprofit entity would be subject to the obligations
applicable to non-financial counterparties for the
derivatives transactions concluded, including the
reporting obligation.
What should be the procedure for NFC that
had notified the relevant competent authority
and ESMA that they were above the clearing
threshold on the basis of certain assumptions,
but are in fact below the clearing threshold
on the basis of amended and correct
assumptions?
When the clearing threshold is no (and would not
have been) exceeded if the NFC had applied from the
beginning the correct assumptions for the calculation
of the clearing threshold, the NFC should inform
the competent authority and ESMA of this fact. The
NFC will be regarded as a NFC- for past and future
obligations.
Do the procedures prescribed in Article 11
of EMIR have to be implemented between
a financial or non-financial counterparty
subject to EMIR, and a counterparty that is
exempted as defined in Article 1 of EMIR?
No. However, both the exempted and non-exempted
counterparties may on a voluntary basis choose to
establish any contractual arrangements with the
objective of replicating the obligations of Article 11
of EMIR.
Do the provisions of Article 4 of EMIR
and Article 2 of Commission Delegated
Regulation (EU) No 149/2013 on indirect
clearing apply only to products which are
subject to the clearing obligation or to all
products?
The fact that the provisions are lodged within Article
4 of EMIR and are said to be for the purpose of
meeting the clearing obligation means that that they
only apply to OTC derivatives.
On 13 February 2014, the EC adopted regulatory technical standards specifying the
contracts that are considered to have a direct, substantial and foreseeable effect
within the Union or to prevent the evasion of rules and obligations. The rules were
developed by the ESAs and have been endorsed by the EC without modification.
Banking | Regulatory Reform Review
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2.14
Payment Systems
Update
On 4 February 2014 the ECB published a
guide to help assess the security of internet
payment systems which intends to facilitate
harmonised, efficient and comparable
assessments conducted by the relevant
supervisory or oversight authorities within the
EU and European Economic Area. It outlines
assessment questions for all aspects covered
in the “Recommendations for the security
of internet payments” that were approved
by the Governing Council in January 2013.
These include governance, risk management
and mitigation, customer information and
due diligence, the initiation, monitoring
and authorisation of payments, protection
of sensitive payment data, and customer
awareness and education. The European
Forum on the Security of Retail Payments has
given special attention to providing further
clarification with regard to the evaluation
of strong customer authentication and the
protection of sensitive payment data. The
recommendations are summarised below.
• Governance – PSPs and payment schemes
should implement and regularly review a
formal security policy for internet payment
services.
• Risk assessment – PSPs and payment
schemes should carry out and document
thorough risk assessments with regard to the
security of internet payments and related
services, both prior to establishing the
service(s) and regularly thereafter.
• Incident monitoring and reporting – PSPs
and payment schemes should ensure the
consistent and integrated monitoring,
handling and follow-up of security incidents,
including security-related customer
complaints. PSPs and payment schemes
should establish a procedure for reporting
such incidents to management and, in the
event of major payment security incidents,
the competent authorities.
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Regulatory Reform Review | Banking
• Risk control and mitigation – PSPs and
payment schemes should implement security
measures in line with their respective
security policies in order to mitigate
identified risks. These measures should
incorporate multiple layers of security
defences, where the failure of one line of
defence is caught by the next line of defence
(“defence in depth”).
• Traceability – PSPs should have processes
in place ensuring that all transactions, as
well as the e-mandate process flow, are
appropriately traced.
• Initial customer identification, information
– Customers should be properly identified
in line with the European anti-money
laundering legislation 16 and confirm their
willingness to make internet payments using
the services before being granted access to
such services. PSPs should provide adequate
“prior”, “regular” or, where applicable, “ad
hoc” information to the customer about the
necessary requirements (e.g. equipment,
procedures) for performing secure internet
payment transactions and the inherent risks.
• Strong customer authentication – The
initiation of internet payments, as well as
access to sensitive payment data, should be
protected by strong customer authentication.
• Enrolment for and provision of
authentication tools and/or software
delivered to the customer – PSPs should
ensure that customer enrolment for and the
initial provision of the authentication tools
required to use the internet payment service
and/or the delivery of payment-related
software to customers is carried out in a
secure manner.
• Log-in attempts, session time out, validity
of authentication – PSPs should limit the
number of log-in or authentication attempts,
define rules for internet payment services
session “time out” and set time limits for the
validity of authentication.
• Transaction monitoring – Transaction
monitoring mechanisms designed to prevent,
detect and block fraudulent payment
transactions should be operated before
the PSP’s final authorisation; suspicious or
high risk transactions should be subject to a
specific screening and evaluation procedure.
Equivalent security monitoring and
authorisation mechanisms should also be in
place for the issuance of e-mandates.
Singapore
• Protection of sensitive payment data –
Sensitive payment data should be protected
when stored, processed or transmitted.
• Customer education and communication –
PSPs should provide assistance and guidance
to customers, where needed, with regard
to the secure use of the internet payment
services. PSPs should communicate with
their customers in such a way as to reassure
them of the authenticity of the messages
received.
• Migration of magnetic stripe cards to the
more secure EMV chip cards;
• Implementation of a dynamic password
(One-Time-Password) to authenticate
customers before online transactions with
participating merchants are approved;
• Notifications, setting of limits – PSPs should
set limits for internet payment services and
could provide their customers with options
for further risk limitation within these limits.
They may also provide alert and customer
profile management services.
• Customer access to information on the
status of payment initiation and execution –
PSPs should confirm to their customers the
payment initiation and provide customers in
good time with the information necessary to
check that a payment transaction has been
correctly initiated and/or executed.
On 19 February 2014 MAS announced on its
website that security measures in place for
payment cards in Singapore were robust by
international standards but card customers
should nonetheless take the necessary
precautions when using their cards. MAS
was responding to media queries about
unauthorised online purchases made at a
Taiwanese merchant, some of which were
made using payment cards issued in Singapore.
Singapore is one of the few countries in the
world to have put in place a comprehensive set
of security measures for payment cards. Banks
in Singapore have taken several measures in
recent years, including:
• SMS/email notification to customers each
time a card transaction is made or a preapproved limit is exceeded; and
• Secure activation procedures for new and
replacement cards.
There has been no evidence to-date of a
breach of payments security among banks in
Singapore. However, the Authority cautioned
that payment card transactions also involve
parties (e.g. merchants) other than regulated
financial institutions and that data theft
can occur at these entities. Preliminary
investigations indicate that this was the case
in the recent incident of unauthorised online
purchases charged to Singapore payment
cards. MAS has received confirmation from the
banks that most affected customers have been
contacted and assured that they would not be
liable for the unauthorised charges.
Banking | Regulatory Reform Review
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2.15
AML and Financial Crime
Update
Under the Russian Presidency, the second FATF Plenary meeting of FATF-XXV was
held in Paris on 12-14 February 2014. The main issues dealt with by this Plenary
were:
Producing two public documents as part of its ongoing work to identify jurisdictions
that may pose a risk to the international financial system:
• FATF Public Statement on jurisdictions with strategic AML/CFT deficiencies:
Jurisdictions subject to a FATF call on its members and other
jurisdictions to apply counter-measures to protect the international
financial system from the on-going and substantial money
laundering and terrorist financing (ML/FT) risks emanating from
the jurisdictions.
Iran, Democratic People’s
Republic of Korea
Jurisdictions with strategic AML/CFT deficiencies that have not
made sufficient progress in addressing the deficiencies or have not
committed to an action plan developed with the FATF to address the
deficiencies.
Algeria, Ecuador, Ethiopia,
Indonesia, Myanmar,
Pakistan, Syria, Turkey,
Yemen
• Improving Global AML/CFT Compliance: on-going process - Jurisdictions with
strategic AML/CFT deficiencies for which they have developed an action plan
with the FATF:
Jurisdictions which have strategic AML/CFT deficiencies for which
they have developed an action plan with the FATF
Albania, Angola, Argentina,
Cuba, Iraq, Kenya, Kuwait,
Kyrgyzstan, Lao PDR,
Mongolia, Namibia, Nepal,
Nicaragua, Papua New
Guinea, Sudan, Tajikistan,
Tanzania, Uganda, Zimbabwe
Jurisdictions not making sufficient progress
Afghanistan, Cambodia
Jurisdictions no longer subject to the FATF’s on-going global AML/
CFT compliance process
Antigua and Barbuda,
Bangladesh, Vietnam
• Approving and publishing follow-up reports to the mutual evaluations of Aruba
(Kingdom of the Netherlands), Austria, Canada, Luxembourg, Mexico and the
Netherlands.
• Receiving an update on AML/CFT improvements in Antigua and Barbuda,
Bangladesh and Vietnam.
• Reviewing the voluntary tax compliance programmes in several jurisdictions.
• Adopting and publishing universal procedures for assessments conducted by
assessment bodies.
• Continuing to develop guidance on effective implementation of beneficial
ownership requirements.
• Exploring common issues between AML/CFT and data protection experts.
• Conducting further research on the AML/CFT implications of virtual currency.
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Regulatory Reform Review | Banking
Update
On 10 February 2014, HKMA Executive
Director of Banking Supervision released a
circular to all AIs regarding the BCBS paper
“Sound management of risks related to
money laundering and financing of terrorism”
published on 15 January 2014. HKMA will
undertake a review of local legal and regulatory
AML/CFT requirements for AIs in order to
implement the revised international standards
and will also have regard to the BCBS paper
during that review. The HKMA will consult the
industry on its proposals in due course.
HKMA released a second circular on virtual
commodities such as Bitcoin and their
associated ML/TF risks. The circular provided
that AIs should assess the extent to which
their services are vulnerable to ML/TF abuse,
especially where emerging technological
developments may facilitate anonymity. Virtual
commodities that are transacted or held on the
basis of anonymity fall into this category and
pose significantly higher inherent ML/TF risks,
including risks associated with potential or
existing customers that may use AIs’ accounts
or other services for any activities relating to
virtual commodities. Therefore, the circular
advised AIS to:
• Ensure an escalated level of vigilance
commensurate with these risks when
considering whether to establish or maintain
business relationships with customers who
are operators of schemes related to virtual
commodities;
• Take into account whether such operators
have established continuously effective
controls against money laundering involving
the virtual commodities when assessing the
ML/TF risks associated with the operators;
• Conduct comprehensive risk identification
and assessment, taking into account
potential regulatory requirements locally
and overseas, when considering to offer any
new banking or investment products relating
to virtual commodities; and
• Notify and discuss with the HKMA before
an AI offers to customers any product
that involves or is linked to any virtual
commodity (irrespective of whether the
link has economic substance or is simply for
marketing purposes).
2.16
Data Protection
Update
On 14 February 2014 HKMA revised its
Supervisory Policy Manual module IC-6 on
the sharing and use of consumer credit data
through a credit reference agency to the Code
of Practice on Consumer Credit Data. The Code
was revised on 1 April 2011 to include positive
mortgage data sharing to encourage responsible
borrowing and lending. The Code provides
practical guidance to credit providers, including
AIs and their subsidiaries within the meaning
of §2 of the Banking Ordinance, and credit
reference agencies on the handling of consumer
credit data. It deals with issues relating to
the collection, accuracy, use, security, access
and correction of consumer credit data.
Amendments were made relating to minimum
standards that AIs should observe in relation
to the sharing and use of consumer credit data
through a credit reference agency.
Banking | Regulatory Reform Review
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3. Insurance
Update
According to a news report dated 5 February 2014, Insurance Europe said
in response to the IAIS consultation on BCR proposals that the BCR to be
developed by the IAIS for G-SIIs need to strike the correct balance between
risk-sensitivity and complexity. On the assumption that the BCR is temporary,
Insurance Europe supports a factor-based approach to its measurements. Such
an approach would combine certain risk measures and factors, in order to
be able to calculate the level of capital needed. The number of measures and
factors required to make the BCR risk-sensitive enough to capture insurers’
risk profiles will need to be identified by the field-testing exercise that the IAIS
will start next month. Achieving both simplicity and enough accuracy to avoid
any unintended consequences will be a significant challenge, particularly
given the tight timetable that has been set for finalising the BCR.
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Regulatory Reform Review | Insurance
4. Asset Management
An excerpt from PwC’s “Asset Management 2020: A Brave New World”
Amid unprecedented economic turmoil and regulatory change, most asset managers have afforded
themselves little time to bring the future into focus. But the industry stands on the precipice of a number
of fundamental shifts that will shape the future of the AM industry. The way many asset managers
operate in 2020 will be significantly different compared with the 2013 model.
The asset management landscape in 2020
Huge rise in assets and shift in
investor base
The rise in the volume of investable assets is set to increase from around $64 trillion
today to $102 trillion by 2020, a compound growth rate of nearly 6%. Assets under
management in the SAAAME (South America, Asia, Africa and the Middle East)
economies are set to grow faster than in the developed world. Growth in assets will be
driven by three key trends: the government-incentivised shift to individual retirement
plans; the increase of high-net-worth-individuals (HNWIs) from emerging populations;
the growth of sovereign wealth funds (SWFs).
Pressures on the asset management
industry
Alongside rising assets, there will be rising costs. First, the costs of complying with
regulation will remain high. Commercial cost pressures will rise as firms grow their
distribution networks. Fees will be under continued pressure amid the ongoing
push for greater transparency and comparability. Investment in technology and
data management will need to be maintained or increased to maximise distribution
opportunities and to cope with regulation and reporting.
Nothing to hide, nowhere to hide,
and nothing at risk
Full transparency over investment activity and products will exist at all levels; there
will be nowhere for non-compliant managers to hide as regulatory and tax reciprocal
rights criss-cross the globe. By 2020, only the plain vanilla managed account will
remain outside regulatory reporting. By 2020, regulators will have real-time access to
portfolios, cross-referenced to market data.
Gamechangers that will redefine the industry
Asset management moves centrestage
Changing demographics and markets will thrust asset management to centre-stage.
First, regulation will hinder banks and insurers by forcing them to abandon proprietary
investing and other core businesses. Second, as the world ages, retirement and
healthcare will become critical issues that only asset management can solve. Third,
asset managers will become more important in the capital raising required to support
growing urbanisation and cross-border trade. Fourth, asset managers will be at the
centre of efforts by SWFs to diversify their huge pools of assets. Messaging will need
to be systematic and consistently focused on the value the asset management industry
brings.
Distribution is redrawn - regional
and global platforms dominate
By 2020, four distinct regional fund distribution blocks will have formed allowing
products to be sold pan-regionally. These are: north Asia, south Asia, Latin America and
Europe.
Fee transparency goes global
By 2020 virtually all major territories will have introduced regulation to better align
interests with the end customer. RDR or similar regulation on fee models will apply to
all major markets, including Asia.
Alternatives become more
mainstream, passives are core and
ETFs proliferate
By 2020, alternatives and passive products together will represent 35% of assets
managed by the industry. The separation between alpha and beta will accelerate as
investors increase their investment allocation to passive products in search of low fees
and broad beta market exposure. In some parts of the world, alternatives will move into
the mainstream to the extent that “alternative” is no longer in common usage by 2020.
New breed of global managers
emerges
The creation of new regional blocks and new fund platforms to service those blocks
will place the emphasis on cost and efficiencies as never before. Economies of scale
will become paramount. As a result, some of today’s large global managers, as well
as a handful of alternative managers, will become mega-managers with a foot in all
geographies and channels. Branding and developing talent will be at the forefront for a
competitive advantage.
Asset Management | Regulatory Reform Review
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Watch This Space
• EBA’s consultation on draft technical standards on the margin
periods for risk used for the treatment of clearing members’
exposures to clients;
• A write up on the interview with Gabriel Bernardino about the
work of EIOPA in preparing for Solvency II;
• Results of the Euribor-EBF joint review, stating that significant
progress has been made regarding the setting process;
• A write up on the FCA’s finalisation on conduct of business rules for
consumer credit firms;
• ISDA’s 2014 Credit Derivatives Definitions introducing several new
terms as well as several amendments to standard credit derivatives
trading terms; and
• ECB’s third report on card fraud concluding that more will need to
be done to ensure the security of online card payments as internet
fraud has increased with a growing number of internet purchases.
30
Regulatory Reform Review | Watch This Space
Contact Our Experts
Regulatory Reform Review by PwC Singapore
Chris Matten
Radish Singh
Banking & Capital Markets
Advisory Leader
+65 6236 3878
[email protected]
Associate Director
+65 6236 3022
[email protected]
Dominic Nixon
Kwok Wui San
Asia Financial Services Leader
+65 6236 3188
[email protected]
Singapore Regulations
Leader
+65 6236 3087
[email protected]
Mark Jansen
Roy Clark
Asia Pacific FATCA Leader
+65 6236 7388
[email protected]
Singapore Insurance Leader
+65 6236 7368
[email protected]
Justin Ong
Chen Voon Hoe
Singapore Asset Management
Leader
+65 6236 3708
[email protected]
Partner, Financial Services
+65 6236 7488
[email protected]
Julia Leong
Jennifer Pattwell
Partner, Financial Services
Partner, Financial Services
+65 6236 7669
[email protected]
The Experts
+65 6236 7378
[email protected]
Contact Our Experts | Regulatory Reform Review
31
Glossary
32
Regulatory Reform Review | Glossary
ABS ACGA ACGS ADI
AEOI AI AIFMD AML AML/CTF ASIC ASX ATS BCBS BIR BIS BNM BSP CCP CDD CET 1 CIS CMDTF CPSS CRDIV CROs CVA DDP DIM DNC EBA EC EDP EIBOR EMC EMIR EOI ESMA EU FA FAIR FATCA FATF FBOs FCA FDI FDIC FII FinCen FINRA FIs FMA FMCB FMIs FPC FPI FSA FSB FSTB FTT GSEs HFT Association of Banks in Singapore
Asian Corporate Governance Association
ASEAN Corporate Governance Scorecard
Authorised deposit-taking Institutions
Automatic Exchange of Information
Authorised Institutions
Alternative Investment Fund Manager’s Directive
Anti-Money Laundering
Anti-Money Laundering/Counter-Terrorism Financing
Australian Securities and Investments Commission
Australian Stock Exchange
Alternative Trading Systems
Basel Committee on Banking Supervision
Bureau of Internal Revenue
Bank for International Settlements
Bank Negara Malaysia
Bangko Sentral ng Pilipinas
Central Clearing Party
Customer Due Diligence
Common Equity Tier 1
Collective Investment Schemes
Capital Markets Development Taskforce
Committee on Payment and Settlement Systems
Capital Requirements Directive IV
Chief Risk Officers
Credit Valuation Adjustment
Designated Depository Participants
Dim Sum Bonds
Do Not Call
European Banking Authority
European Commission
Excessive Deficit Procedure
Emirates Interbank Offered Rate
Emerging Markets Committee
European Market Infrastructure Regulation
Exchange of Tax Information
European Securities and Markets Authority
European Union
Financial Advisor
Financial Advisory Industry Review
Foreign Account Tax Compliance Act
Financial Action Task Force
Foreign Banking Organizations
Financial Conduct Authority
Foreign Direct Investment
Federal Deposit Insurance Corporation
Foreign Institutional Investor
Financial Crimes Enforcement Network
Financial Industry Regulatory Authority
Financial Institutions
Financial Markets Authority
Financial Markets Conduct Bill
Financial Market Infrastructures
Financial Policy Committee
Foreign Portfolio Investor
Financial Services Authority
Financial Stability Board
Financial Services and Treasury Bureau
Foreign Transaction Tax
Government-Sponsored Enterprise
High Frequency Trades
HMRC HQA ICBC ICD IIF IDB IFSB IGA IMF IOSCO IRS IRDA ISDA ITS
JFSA KRX KYC LCR LDP LFTR LIBOR LTR MAS MiFID II/ MiFIR MMF MOU NAV NFC NFFE NFSP NOFHC OECD OFT OTC OTF PBC PDPA PDPC PEPs PLC POS
PRA QFI RBI RFMC RMB RWAs
SEBI SEC SEHK
SFC SFTs SGX SIDD TRC TRM UK UN US WFE WMS HM Revenue & Customs
High Quality Assests
Industrial and Commercial Bank of China
Institute of Corporate Directors
Institute of International Finance
Inter-Dealer Broker
Islamic Financial Services Board
Inter-Governmental Agreements
International Monetary Fund
International Organization of Securities Commissions
Internal Revenue Service
Insurance Regulatory and Development Authority
International Swaps and Derivatives Association
Implementing Technical Standards
Japan Financial Services Authority
Korea Exchange
Know Your Customer
Liquidity Coverage Ratio
Low-Default Portfolios
Licensed Foreign Trade Repository
London Interbank Offered Rate
Licensed Trade Repository
Monetary Authority of Singapore
Markets in Financial Instrument Directive
Money Market Funds
Memorandum of Understanding
Net Asset Value
Non-Financial Company
National Federation of Federal Employees
Non-Financial specified person
Non-Operative Financial Holding Company
Organisation for Economic Co-operation and Development
Office of Fair Trading
Over-the-Counter
Organised Trading Facility
People’s Bank of China
Personal Data Protection Act
Personal Data Protection Commission
Politically Exposed Persons
Public Listed Company
Point of Sale
Prudential Regulatory Authority
Qualified Foreign Investor
Reserve Bank of India
Regime for Fund Management Companies
Renminbi
Risk Weighted Assets
Securities and Exchange Board of India
Securities and Exchange Commission
Hong Kong Exchanges and Clearing Limited
Securities & Futures Commission of Hong Kong
Securities Financing Transactions
Singapore Stock Exchange
Separately Identifiable Department or Division
Tax Residency Certificate
Technology Risk Management
United Kingdom
United Nations
United States
World Federation Exchange
Wealth Management Services
Glossary | Regulatory Reform Review
33
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