Financial Stability Board

FSB Launches Evaluation of TBTF for SIBs

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On May 23, the Financial Stability Board (FSB) published a press release announcing the launch of an evaluation of its too-big-to-fail reforms (TBTF) for systemically important banks (SIBs).

The evaluation (i) will focus on the effects of the FSB’s TBTF reforms for SIBs (including increased capital buffers, total loss-absorbing capacity, enhanced supervision and resolution regimes); and (ii) will analyze the impact of the reforms on global systemically important banks and domestic systemically important banks, and will cover all FSB jurisdictions.

The aims of the evaluation are to (i) assess whether the reforms for which implementation has been completed or is well underway are reducing the systemic and moral hazard risk associated with SIBs; and (ii) examine the broader effects of the reforms on the financial system.

The evaluation will be based on the FSB’s July 2017 framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms.

FSB Statement on Reforms to Interest Rate Benchmarks

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On July 12, 2018, the Financial Stability Board (“FSB“) published a statement on reforms to interbank offered rates (“IBORs“) and the development of overnight risk-free rates (“RFRs“) and term rates. The FSB’s comments include the following.

  • Benchmarks that are used extensively must be especially robust to ensure financial stability. The FSB welcomes the progress that has been made by public authorities and the private sector in identifying and developing overnight RFRs that are sufficiently robust.
  • Overnight RFRs are robust because they are anchored in active, liquid underlying markets. However, the lack of underlying transactions in the term interbank and wholesale unsecured funding markets could make IBORs susceptible to manipulation. The FSB therefore encourages the development and adoption of overnight RFRs where appropriate, for example in businesses where term properties are not needed, or where exposure to bank credit risk is not necessary or desirable.
  • In the markets where IBORs are disappearing, for example, those currently reliant on the London Interbank Offered Rate (“LIBOR“), there needs to be a transition to new reference rates. In some other markets, authorities and market participants continue to work on further reform or strengthening of IBORs, in tandem with their efforts to identify and facilitate the wider use of RFRs.
  • An overnight RFR may not, however, be the optimal rate in all the cases where term IBORs are currently used. The FSB recognises that in some cases there may be a role for term rates, including RFR-derived term rates, or term rates derived from other liquid markets.

ECB Opinion on Implementation of TLAC

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On November 10, 2017, the European Central Bank (“ECB“) published an opinion (dated November 8, 2017) on the European Commission’s legislative proposals to implement the Financial Stability Board’s (FSB) total loss absorbing capacity (“TLAC“) standard.

The opinion relates to the Commission’s legislative proposals to amend the following Regulations and Directive in order to implement TLAC in the EU: Bank Recovery and Resolution Directive (2014/59/EU) (“BRRD“), Regulation for Single Resolution Mechanism (Regulation 806/2014) (“SRM Regulation“), CRD IV Directive (2013/36/EU) and Capital Requirements Regulation (Regulation 575/2013) (“CRR“). The Commission published its legislative proposals in November 2016.

The ECB welcomes these proposals but highlights some areas for consideration, including issues relating to:

Implementation of the TLAC standard in the EU;

  • Amendments to the minimum requirement for own funds and eligible liabilities (“MREL“);
  • Transitional arrangements for MREL;
  • Early intervention measures; and
  • Pre-resolution moratorium tool.

Specific proposals to amend the drafting of the proposed Regulations and Directive, together with some additional proposals to amend the current texts of the BRRD, SMR Regulation, CRR and CRD IV Directive are set out in a technical working document, which is attached to the opinion.

Council of the EU Announces Political Agreement on MMF Regulation

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On November 16, 2016, the Council of the EU published a press release announcing that its presidency has reached a provisional agreement with representatives of the European Parliament on the proposed Regulation on Money Market Funds (“MMF Regulation“). The press release can be read in full here.

The agreement reached at the final meeting of political negotiators covers the core issues concerning the regulation of MMFs, such as liquidity and diversification requirements, assets in which MMFs can invest (including the role of government debt) and transparency. It also provides for the European Commission to produce a report on the functioning of the MMF Regulation.

Although an overall agreement has been reached at the political level, a number of technical issues relating to the MMF Regulation are yet to be finalized. Once these are resolved, the agreement will then be submitted to the Council’s Permanent Representatives Committee (COREPER) for endorsement on behalf of the Council. The Parliament and the Council will then be called on to adopt the MMF Regulation at first reading.

The MMF Regulation is designed to ensure the smooth operation of the short-term funding market. It follows efforts by the G20 and the Financial Stability Board (FSB) to strengthen the oversight and regulation of the shadow banking system.

Financial Stability Board Issues Asset Management-Related Policy Recommendations

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On June 22, 2016, the Financial Stability Board (FSB) published for public consultation Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities. The document sets out 14 proposed policy recommendations to address the following structural vulnerabilities from asset management activities that could potentially present financial stability risks:

  1. Liquidity mismatch between fund investments and redemption terms and conditions for fund units;
  2. Leverage within investment funds;
  3. Operational risk and challenges in transferring investment mandates in stressed conditions; and
  4. Securities lending activities of asset managers and funds.

The key recommendations for liquidity mismatch and leverage focus on both public and private funds.

The FSB reported that it “intends to finali[z]e the policy recommendations by the end of 2016, some of which will be operationalized by the International Organization of Securities Commissions (IOSCO).”

Financial Stability Board Publishes Responses to Consultation on Proposed Reforms of the Forex Market

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On August 20, the Financial Stability Board (FSB) published responses to its consultation in respect of proposed reforms in the forex market.  The consultation was launched on July 15 and recommended reforms relating to: (i) the calculation methodology of the WMR benchmark rates; (ii) the publication of reference rates by central banks; (iii) market infrastructure in relation to the execution of fix trades; and (iv) the behavior of market participants around the time of the major forex benchmarks.

The FSB intends to provide final conclusions and recommendations to the Brisbane G20 Leaders Summit in November 2014. Responses.

Resolving Financial Institutions – A Joint Paper by the FDIC and the Bank of England

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On December 10, the Bank of England (the Bank) and the Federal Deposit Insurance Corporation (the FDIC) published a joint paper entitled ‘Resolving Globally Active, Systemically Important, Financial Institutions’ (G-SIFIs).  The joint paper sets out the strategies that the Bank and the FDIC have designed to enable large and complex cross-border firms to be resolved without threatening financial stability or putting public funds at risk.  The paper builds on the work of the Financial Stability Board, and focuses on the application of “top-down” resolution strategies whereby a single resolution authority applies its powers at parent company level.

In the UK, this will involve the use of the powers under the Banking Act 2009 and those that are anticipated to be provided by the European Union Recovery and Resolution Directive and the Financial Services Bill, and will involve the bail-in (write-down or conversion) of creditors at the top of the group in order to restore the whole group to solvency.

OTC Derivative Market Reforms – Financial Stability Board Progress Report

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On November 1, the Financial Stability Board (FSB) published the fourth in a series of progress reports on implementing OTC derivative market reforms. The report looks particularly at OTC market infrastructure across the FSB’s member countries, reviewing the ability to provide clearing services, collect and disseminate data and provide organised trading platforms.

The key messages contained in the report are:

  • market structure is already in place and can be scaled up without impeding progress in meeting G20 commitments for OTC derivatives trading, central clearing and reporting;
  • international  policy work on the four safeguards for global clearing is completed and implementation is proceeding at a national level; and
  • regulatory uncertainty remains the most significant impediment to further progress and to comprehensive use of market infrastructure.

The deadline for submitting feedback on the report is November 30.

FSB Approves Global LEI System

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On May 30, the Financial Stability Board (FSB) approved the establishment of a global legal entity identifier (LEI) system that will provide a unique global identifier for parties to financial transactions. The LEI system was developed as part of the mandate of the Dodd-Frank Act directing the Treasury to collect financial transaction data from financial companies. The FSB projects a launch of the global LEI system by March 2013. FSB Release.