UK: Financial Regulatory Developments Focus – June 14, 2018 Issue 23/2018

Bank Prudential Regulation & Regulatory Capital

Transitional Periods Further Extended for Own Funds Requirements for Exposures to CCPs

On June 4, 2018, a Commission Implementing Regulation was published in the Official Journal of the European Union, following a consultation by the European Commission in April 2018 which closed on May 15, 2018. The Commission Implementing Regulation extends the transitional periods related to own funds requirements for exposures to CCPs that are set out in the Capital Requirements Regulation and the European Market Infrastructure Regulation.

Thirty-two third-country CCPs have been recognized by the European Securities and Markets Authority to date. However, a number of third-country CCPs are still awaiting recognized status and their recognition process is not scheduled to be completed by the expiry of the existing CRR and EMIR transitional periods on June 15, 2018. Without an extension of the transitional periods, banks and investment firms in the EU (or which are subject to consolidated supervision in the EU) would need to increase their own funds requirements for their exposures to those CCPs that are awaiting recognized status.

The Commission Implementing Regulation takes effect on June 7, 2018 and will apply directly across the EU. The effect of the Commission Implementing Regulation is to extend the transitional periods by a further six months, to expire on December 15, 2018.

The Commission Implementing Regulation ((EU) 2018/815) is available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018R0815&from=EN.

Financial Stability Board Seeks Comment on Technical Implementation of TLAC

On June 6, 2018, the Financial Stability Board sought feedback on the technical implementation of standards on the adequacy of total loss-absorbing and recapitalization capacity for Global Systemically Important Banks in resolution—the TLAC Standard. The FSB wants to assess whether implementation aligns with the timelines and objectives set out in the TLAC Standard. The TLAC Standard is being phased in, with G-SIBs expected to reach the first minimum requirement by January 1, 2019.

The FSB is due to report to the G20 on the implementation of TLAC by the end of 2019. The comments provided in response to the call for feedback will help the FSB to prepare that report. The FSB highlights that the objective of the call for feedback is to monitor implementation by jurisdictions of the TLAC Standard and to identify whether there are any technical issues or operational challenges in implementation. The aim is not to seek views on the substantive aspects of the standard or whether any changes should be made to it. The FSB will consider whether further implementation guidance is needed based on the feedback.

The FSB requests views and evidence on:

  • The regulatory adoption of the TLAC principles and Term Sheet;
  • Cross-border aspects of the implementation of the TLAC Standard;
  • G-SIBs' issuance strategies and overall progress towards meeting external and internal TLAC requirements;
  • Distribution of TLAC instruments and liabilities in the market; and
  • Any technical issues or material factors impacting implementation of the TLAC Standard.

Responses to the call for feedback should be submitted via email by August 20, 2018.

The call for feedback is available at: http://www.fsb.org/wp-content/uploads/P060618.pdf.

Basel Committee on Banking Supervision's 2018-2019 Work Program

On June 5, 2018, the Basel Committee on Banking Supervision published its 2018–2019 work program, setting out its focus areas for policy development, supervision, implementation and monitoring. Industry will welcome the news that the Committee intends to adopt a limited number of new policy initiatives, concentrating primarily on cyber risk, operational resilience and proportionality. On the implementation of the Committee's post-crisis reforms, one of the more immediate actions will be to finalize the revised market risk framework, which is due to be implemented by January 1, 2022. Other revisions to be finalized include the assessment framework for G-SIBs and the Pillar 3 disclosure framework. Other work will include:

  • Furthering discussions on the regulatory treatment of sovereign exposures.
  • Continuing to promote strong supervision, which will involve holding discussion sessions and workshops on emerging challenges for supervision, such as how supervisors should comprehensively assess risks when banks change their business models, oversight of third-party origination practices and oversight of risk management practices, in particular, lending standards, collateral management and valuation practices.
  • Finalizing the principles on stress-testing practices in 2018 and, if needed, adopting further guidance on Pillar 2 practices.
  • Evaluating and monitoring the impact of its reforms and assessing emerging risks.
  • Assessing whether any measures are merited in relation to crypto-assets and monitoring the risks arising from fintech.

The Basel Committee will also continue to monitor steps taken or planned by its member jurisdictions and the timeliness of implementation by members of Basel standards. The Basel Committee will report in October 2018 on the adopting of Basel standards by its member jurisdictions.

The Basel Committee's work programme is available at: https://www.bis.org/bcbs/bcbs_work.htm?m=3%7C14%7C573%7C72#workprogramme.

Financial Market Infrastructure

European Money Markets Institute Announces Cessation of Three Euribor Tenors

On June 7, 2018, the European Money Markets Institute announced the planned cessation of three of the current tenors for the Euro Interbank Offered Rate (Euribor). EMMI is the administrator for Euribor, a major euro interest reference rate for unsecured interbank short-term lending and borrowing. Euribor was classed as a critical benchmark of systemic importance for financial stability by the European Commission in 2016.

EMMI published a consultation paper in March 2018 seeking views from stakeholders on a proposed hybrid determination methodology for Euribor that will transition Euribor away from a quote-based to a transaction- based methodology. As part of that consultation, EMMI sought feedback on whether to discontinue the calculation and publication of three of the eight tenors it publishes, due to low levels of activity underpinning the markets those tenors represent. The majority of respondents to the consultation supported the discontinuation of the two week, two month and nine month tenors and consequently EMMI will proceed with its proposal.

To allow market participants adequate time to adjust to this change, including through appropriate contractual arrangements, the cessation of the three tenors will take effect from December 3, 2018.

EMMI intends to issue a feedback paper on the other aspects of its consultation by the end of June 2018.

The announcement is available at: https://www.emmi-benchmarks.eu/assets/files/D0237B-2018-CESSATION OF EURIBOR TENORS.pdf and details of the March 2018 consultation on the Euribor Methodology is available at: https://finreg.shearman.com/european-money-markets-institute-consults-on-hybr.

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