On January 13, the Commodity Futures Trading Commission’s (CFTC) Market Participation Division determined that the National Futures Association’s (NFA) swap dealer capital model requirements and review program is comparable to the CFTC’s swap dealer capital model requirements and review program and is an acceptable means of compliance with CFTC Regulation 23.102. Release.
On September 29, 2016, the Office of the Comptroller of the Currency (the “OCC”) published final guidelines establishing enforceable standards for recovery planning. The final guidelines generally apply to banks with average total consolidated assets of $50 billion or more (“covered banks”). If a covered bank fails to meet a guideline, the OCC may require such bank to submit a plan specifying steps the bank would take to comply with the guideline. If, after being notified that it is in violation of a guideline, a covered bank fails to submit an acceptable compliance plan or fails to materially comply with a plan approved by the OCC, the OCC may issue an order enforceable under section 8 of the Federal Deposit Insurance Act. Press Release. Final Guidelines.
On August 1, 2016, the Association for Financial Markets in Europe (AFME) published model clauses for the contractual recognition of bail-in for the purpose of satisfying the requirements of Article 55 of the EU Bank Recovery and Resolution Directive (BRRD).
Article 55 requires financial institutions in the EU to include clauses in a range of contracts to give contractual effect to a bail-in of the relevant liability in a resolution of the institution. The package contains model contractual terms that market participants can use to comply with Article 55 when issuing debt instruments and certain other contracts governed by the law of a jurisdiction outside the EU. There are two types of model clause contained within the package: one for use with debt liabilities and one for use with “other liabilities.”
The model clauses are designed to be compliant with the BRRD and with certain relevant EU member state legislation implementing the BRRD, as well as with the BRRD Delegated Regulation. The model clauses therefore seek to support cross-border effectiveness of resolution and assist banks with complying with the requirements of Article 55 BRRD.
AFME has stressed that the model clauses are a starting point only. Users are strongly encouraged to consult counsel in the relevant non-EU jurisdiction to ensure that the clause is appropriately modified to reflect any requirements of that non-EU law, and is both effective and enforceable in that jurisdiction.
In an associated press release, AFME expressed its continued concerns with the scope of Article 55 BRRD which is very broad, and requires banks to include contractual recognition clauses in contracts giving rise to all liabilities governed by non-EEA law, save where these are expressly excluded from bail-in under the BRRD. The requirement gives rise to significant challenges, such as where banks are unable to unilaterally amend contracts, as in relation to trade finance and membership of financial market infrastructures. A number of authorities have acknowledged that, in many cases, inserting such a clause is impracticable. However, while several authorities have sought to adopt a pragmatic approach to implementation, there remains some uncertainty and potential inconsistency in application.
AFME therefore believes that a clear and consistent approach across the EU is required to provide banks and counterparties with a clear and workable solution. It considers that the scope of Article 55 should be amended to align it with that agreed at the international level through the Financial Stability Board (FSB). The FSB’s Principles for Cross-border Effectiveness of Resolution Actions propose that the scope should cover instruments eligible for loss-absorbing capacity requirements and any other “debt instruments.” AFME considers that this would provide a much clearer scope of liabilities and significantly reduce the impact on firms, while meeting the objective of ensuring resolvability. It believes that alignment with the FSB’s key attributes is particularly important where inconsistencies in approach could severely impact on the competitiveness of EU banks operating in global markets.
The European Banking Authority (EBA) has published final draft regulatory technical standards (RTS) on the specification of the assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the internal ratings-based (IRB) approach in accordance with Articles 144(2), 173(3) and 180(3)(b) of the Capital Requirements Regulation (Regulation 575/2013) (CRR).
The final draft RTS provide a mapping of the minimum IRB requirements as laid down in Chapter 3, Title II, Part Three of the CRR, into fourteen chapters. Each chapter starts with a brief description of the assessment criteria to be used by competent authorities relating to verification requests and of the methods to be used by competent authorities in this context. Under the IRB approach, institutions determine their own funds requirements for credit risk, taking into account their own estimates of risk parameters. Competent authorities may, under the CRR, permit institutions to use the IRB approach, provided that the relevant conditions set out in the CRR are met.
The draft RTS are available here and will now be submitted to the European Commission for endorsement.
On June 2, 2016, ESMA issued a statement (ESMA/2016/902) reminding banks and investment firms of their responsibility to act in their clients’ best interests when selling bail-in-able financial instruments. The statement clarifies how credit institutions and investment firms should apply the requirements under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID) governing the distribution to clients of financial instruments subject to the BRRD resolution regime under the Bank Recovery and Resolution Directive (2014/59/EU).
The statement stresses that firms must comply with their obligations under MiFID and the importance of:
In an accompanying press release, ESMA explained that under the BRRD rules, which came into force in January 2016, firms are likely to issue a significant amount of potentially loss-bearing instruments to fulfil their obligations and raised its concern that investors (in particular retail investors) are unaware of the risks they may face when buying these instruments.
On April 15, 2016, the Securities and Exchange Commission adopted final rules modifying regulations “for security-based swap dealers and major security-based swap participants (security-based swap entities).” The final rules address conduct and compliance officer issues. Release.
On April 4, 2016, the Financial Crimes Enforcement Network, a bureau of the Department of the Treasury (“FinCEN”), proposed amendments to the definitions of ‘‘broker or dealer in securities’’ and ‘‘broker-dealer’’ under the regulations implementing the Bank Secrecy Act (“BSA”). This rulemaking would amend those definitions explicitly to include “funding portals” that are involved in the offering or selling of “crowdfunded securities” pursuant to Section 4(a)(6) of the Securities Act of 1933. The consequence of those amendments would be that funding portals would be required to implement policies and procedures reasonably designed to achieve compliance with the BSA Act requirements currently applicable to brokers or dealers in securities. FinCEN stated that: “The proposal to specifically require funding portals to comply with the Bank Secrecy Act regulations is intended to help prevent money laundering, terrorist financing, and other financial crimes.” Written comments of this proposal must be submitted on or before June 3, 2016.
The Jumpstart Our Business Startups Act, enacted into law on April 5, 2012, established the foundation for a regulatory structure for startups and small businesses to raise funds by offering and selling securities through “crowdfunding” without having to register the securities with the Securities and Exchange Commission (“SEC”) or state securities regulators. In order to take advantage of this exemption for offerings of crowdfunded securities, an issuer must use the services of an intermediary that is either a broker registered with the SEC or a “funding portal” registered with the SEC.
On December 4, 2015, the Board of Governors of the Federal Reserve System (the “Board”) issued a final rule adopting amendments to the Board’s regulatory capital framework (“Regulation Q”) that was issued in June 2013. The final rule provides examples of how to apply the framework to depository institution holding companies that are not organized as traditional stock corporations and how instruments issued by such firms may qualify as regulatory capital. The final rule also issued a temporary exclusion from Regulation Q for savings and loan holding companies that are trusts and depository institution holding companies that are employee stock ownership plans – until the Board can propose appropriate rules for such entities. In addition, the Board extended the applicable compliance date with the revised capital framework to July 1, 2016. The final rule will take effect on January 1, 2016. Press Release. Final Rule.
On December 3, 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency (collectively, “Agencies”) issued a final rule establishing capital requirements, as well as minimum requirements for the exchange of initial and variation margin, for covered swap entities with respect to non-cleared swaps and non-cleared security-based swaps. The purpose of the requirements is to offset the greater risk to such entities, and thus, the amount of margin required will vary based on relative risk. The final rule implements sections 731 and 764 of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 and will take effect on April 1, 2016 – however, the minimum margin requirements will not phase-in until September 1, 2016. All swap counterparties must comply with the variation margin requirements by March 1, 2017, while swap counterparties with more than $3 trillion in outstanding swap activity must comply with both the initial and variation margin requirements by September 1, 2016. Press Release. Final Rule.
