Prudential Regulator Reports on Climate-Related Financial Risks for the UK Banking Sector

On September 26, 2018, the U.K. Prudential Regulation Authority published a report entitled "Transition in thinking: The impact of climate change on the U.K. banking sector." The purpose of the report is to: (i) examine the financial risks from climate change that impact PRA regulated banks, building societies and designated investment firms; (ii) assess how those entities are responding to and managing the financial risks from climate change; and (iii) assist those entities in understanding the PRA's supervisory approach to the financial risks from climate change. The report will also be used to inform the Bank of England's wider work to assess the system-wide financial risks from climate change.

The report outlines the two key climate-related risk factors that give rise to financial risks for the banking sector. These are: (a) "physical risks" from climate and weather-related events, such as heatwaves, droughts, floods, storms and rises in sea level; and (b) "transition risks" arising from the process of adjustment towards a low-carbon economy. For the banking sector, climate-related risk factors manifest as increasing credit, market and operational risks. The report presents four case studies that demonstrate how the financial risks from climate change are already relevant to the banking sector.

The report sets out the PRA's assessment of how firms in the sector have been enhancing their approach to climate-related risks. The PRA believes the issue needs board-level attention and it will shortly be launching a consultation on its supervisory expectations. It also plans to launch a climate financial risk forum with the Financial Conduct Authority, which will invite participation from the private sector, technical experts and other relevant stakeholders.

The report is available at:

International Task Force Report Shows Momentum Building for Climate-Related Financial Disclosures

On September 26, 2018, the Task Force on Climate-related Financial Disclosures issued a status report outlining progress on adoption of the TCFD disclosure recommendations issued in June 2017. The TCFD was established by the Financial Stability Board in 2015 and its 2017 recommendations provide a voluntary framework for companies to develop more effective climate-related financial disclosures through their existing reporting processes. The recommendations are structured around four areas: (i) governance; (ii) strategy; (iii) risk management; and (iv) metrics and targets.

The TCFD surveyed the disclosures made in the 2017 annual reports of over 1,700 firms from diverse sectors and geographical locations. Despite the limited time since publication of its recommendations, the TCFD found that the majority of firms' disclosures were already aligned with one or more of the TCFD's recommendations. While TCFD's supporters numbered 100 companies on the launch of the recommendations in June 2017, over 500 companies are now supporters of the TCFD, including the world's largest banks, asset managers and pension funds, responsible for assets of nearly $100 trillion. Commenting on the publication of the status report, FSB Chairman Mark Carney stated that "climate-disclosure is becoming mainstream."

A key finding of the report is that, while many companies report on environmental issues, the majority have yet to specifically provide consistent information on the financial implications of climate change for their businesses. A further progress report will be published in 2019 and will analyze firms' 2018 disclosures.

The status report is available at: and TCFD recommendations are available at:


EU Final Report to Extend Exemption From the Clearing Obligation for Certain Intragroup Derivatives


On September 27, 2018, the European Securities and Markets Authority published a final report on the exemption from the clearing obligation for intragroup transactions with a third-country group entity. There are currently three sets of Regulatory Technical Standards made under the European Market Infrastructure Regulation that impose the clearing obligation of certain interest rate derivatives and credit derivatives. Each of these three RTS exempts from the clearing obligation certain intragroup derivatives transactions where one of the counterparties is a third-country group entity and there is no relevant equivalence decision in respect of the third country in which it is situated. An equivalence decision would enable parties that are subject to both the EU and a third country's clearing obligation to comply only with one jurisdiction's requirements, but no equivalence decisions have been made to date. Each of the three RTS sets a different expiry date for the intra-group exemption. These dates fall between December 21, 2018 and July 9, 2019.

Following a consultation launched in July 2018, ESMA's final report contains final draft amending RTS setting out ESMA's proposal to extend the exemption period by amending each of the RTS to have one unified expiry date of December 21, 2020. The final draft amending RTS have been submitted to the European Commission for endorsement.

The Final Report is available at:


UK Brokerage Firm Fined for Inadequate Controls Against Potential Market Abuse

On September, 27, 2018, the U.K. FCA published a Decision Notice (dated June 7, 2018) imposing a fine of £409,300 on a U.K. brokerage firm for failure to take reasonable care to organize and control its affairs responsibly and effectively with adequate risk management systems in relation to the detection and reporting of potential instances of market abuse.

During the period from January 2013 to August 2015, the firm was authorized by the FCA and provided its customers with a range of services, including placing trades on behalf of clients with wholesale Direct Market Access providers. The firm would enter into DMA agreements with the wholesale brokers and separately enter into individual contracts with clients wishing to trade, thereby providing a "back to back" market access service. This arrangement meant that trading activity was primarily monitored by compliance-based surveillance. The firm was unaware until November 2014 that it needed to conduct its own post-trade surveillance and had relied instead on post-trade surveillance checks being undertaken by underlying brokers. The firm did not have an adequate post-trade surveillance capability until August 2015.

The FCA found that the firm failed to take care to ensure that it could conduct post-trade surveillance adequately, which increased the risk that potentially suspicious trading would go undetected. This breached Principle 3 of the FCA's Principles for Businesses. This is the first case to be completed under a new process introduced for partly contested cases. The firm has agreed with the FCA's findings and accepted liability.

However, it has disputed the amount of the penalty and the matter has been referred to the Upper Tribunal for reconsideration of that issue.

The Decision Notice is available at:


US Federal Judge Affirms Commodity Futures Trading Commission's Authority to Police Virtual Currency Fraud

On September 26, 2018, the U.S. District Court for the District of Massachusetts issued an order confirming that the Commodity Futures Trading Commission maintains the authority to police virtual currency fraud. The order was issued in response to a motion to dismiss charges against My Big Coin Pay, Inc. and several individuals for operating a fraudulent virtual currency scheme through which they solicited customers to purchase a virtual currency known as My Big Coin (MBC).

The CFTC's initial enforcement order, filed in January 2018, accused the defendants of operating a fraudulent virtual currency scheme through which they solicited more than $6 million from customers throughout the U.S. by making false and misleading claims that MBC was actively being traded, was backed by gold and could be used anywhere MasterCard credit cards were accepted. The defendants also were alleged to have misrepresented MBC's daily trading price in reports on its website, when no daily trading price existed because MBC was not actively being traded.

The defendants' attorneys sought to have the case thrown out on the basis that the CFTC has no authority to police virtual currency fraud since virtual currencies do not meet the definition of a "commodity" under the Commodity Exchange Act, and that in any case, the CFTC's anti-fraud authority extended only to fraudulent market manipulation.

However, Judge Rya Zobel claimed that MBC is in fact a commodity under the CEA, as the term "commodity" includes a "host of specifically enumerated agricultural products as well as 'all other goods and articles... and all services rights and interests... in which contracts for future delivery are presently or in the future dealt in.'" Judge Zobel determined that the law applies to broad categories of such products, and since bitcoin futures currently trade on exchange, by extension, bitcoin and other virtual currencies, including MBC, fit the definition of "commodities." Judge Zobel also rejected the defendants' argument regarding the limits of the CFTC's anti-fraud authority with respect to commodities, maintaining that the CEA "explicitly prohibit[s] fraud even in the absence of market manipulation."

This court order, along with a similar order issued by the U.S. District Court for the Eastern District of New York in March 2018, should solidify the CFTC's standing to police virtual currency fraud going forward.

The court order is available at:


Proposed Revisions to EU Guidelines on Stress Testing of Money Market Funds

On September 28, 2018, ESMA opened a consultation on proposed updates to the Guidelines on stress test scenarios for Money Market Funds under the Money Market Fund Regulation. The MMF Regulation has applied directly across the EU since July 21, 2018. MMFs are fund vehicles that invest in highly liquid short- term debt instruments, such as government bonds and often regarded as a short-term cash management function alternative to bank deposits.

The MMF Regulation tasks ESMA with developing Guidelines on common reference parameters of the stress test scenarios to be included in the stress tests that managers of MMFs are required to conduct. ESMA's original Guidelines, published in March 2018, include specifications for the stress tests, including common parameters and scenarios which take into account certain hypothetical risk factors. The Guidelines must be reviewed at least annually and updated for any market developments.

The consultation paper proposes updating the section in the Guidelines on the establishment of common reference stress test scenarios, the results of which should be included in the reporting template that managers of MMFs are required to use. ESMA is seeking feedback on the methodology, risk factors, data and the calculation of the impact. The calibration of stress test scenarios is not within scope of the consultation.

However, feedback on how to calibrate the scenarios would be welcomed by ESMA.

Responses to the consultation should be submitted by December 1, 2018. ESMA intends to finalize the revised Guidelines in Q1 2019.

The consultation paper is available at:

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