Bank Prudential Regulation & Regulatory Capital
UK Parliamentary Committee Launches Inquiry into Operational Resilience in the Financial Services Sector
On November 23, 2018, the U.K. Treasury Committee announced the launch of a new Inquiry into IT failures in the financial services sector. The Inquiry has been launched in response to recent IT failures at a number of financial institutions that have led to consumers being unable to access their bank accounts or becoming subject to fraud.
The Committee will assess the causes and consequences of these recent IT failures. Among other things, the Committee will consider the extent to which such incidents are becoming more frequent, sources of concentration risk in the financial sector, the impact of legacy IT systems, the effect of outsourcing on operational resilience, best practices in responding to operational incidents and whether the U.K. regulators are able to regulate firms' capabilities for responding to such incidents.
Written submissions can be made to the Committee by January 18, 2019. The Committee will also appoint a special advisor to provide policy advice to the Committee on the issues. Individuals interested in the role should respond to the call for Expressions of Interest.
The announcement is available at: https://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news-parliament-2017/it-failures-in-the-financial-services-inquiry-launch-17-19/ .
UK Prudential Regulator Proposes Minor Policy Change for Systemic Risk Buffer
On November 22, 2018, the U.K. Prudential Regulation Authority published a consultation paper entitled "The systemic risk buffer: Updates to the Statement of Policy," proposing minor updates to its Statement of Policy, "The PRA's approach to the systemic risk buffer." The consultation is relevant to "SRB institutions," which are: (i) ring-fenced bodies within the meaning in the Financial Services and Markets Act 2000; or (ii) large building societies that hold more than £25 billion in deposits (where one or more of the account holders is a small business) and shares (excluding deferred shares).
The PRA proposes to amend the Statement of Policy to:
- remove the statement that the PRA's approach to reviewing the SoP every two years is mandated by the SRB regulations;
- II. replace references to the PRA's April 2018 consultation, "The PRA's methodologies for setting Pillar 2 capital," with references to the finalized Statement of Policy that was subsequently published; and
- III. include references to the PRA's Supervisory Statement, "U.K. leverage ratio framework," that was recently updated to apply an additional leverage ratio buffer rate to SRB institutions.
As the proposals are of only a minor nature, the consultation period is short and comments on the consultation paper are invited by December 6, 2018.
The consultation paper (PRA CP 29/18) is available at: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultation-paper/2018/cp2918.pdf .
Brexit for Financial Services
European Supervisory Authority Public Statement on Post-Brexit Temporary Recognition for UK CCPs if No UK-EU Deal
On November 23, 2018, the European Securities and Markets Authority issued a public statement entitled "Managing risks of a no-deal Brexit in the area of central clearing." In the statement, ESMA confirms that its Board of Supervisors supports continued access to U.K. CCPs by EU market participants, to limit the risk of disruption in central clearing and to avoid negatively impacting EU financial market stability following the U.K.'s exit from the EU. This would appear likely to take effect pursuant to a temporary or interim equivalence and/or Qualifying CCP determination under the European Market Infrastructure Regulation and the Capital Requirements Directive for the U.K. and its CCPs, effective on Brexit.
ESMA welcomes the Communication issued by the European Commission on November 13, 2018, in which the Commission stated that it proposed to adopt a temporary and conditional equivalence decision to ensure that there will be no post-Brexit disruption to central clearing in the event of a "no-deal" scenario. ESMA confirms that it is engaging with the European Commission, and has already begun engaging with U.K. CCPs, to carry out preparatory work for a proposed recognition process that will ensure EU clearing members and trading venues can continue to access U.K. CCPs as of March 30, 2019. The recognition process will operate provided that the conditions in EMIR and conditions set out in the equivalence decision are all met.
It remains to be seen whether these helpful not non-legally binding statements of intent give sufficient certainty to enable U.K. clearing houses to determine not to exercise termination notices on EU clearing members prior to the end of the year (in light of applicable termination notice periods).
The ESMA public statement is available at: https://www.esma.europa.eu/sites/default/files/library/esma70- 151-1948_managing_risks_of_a_no-deal_brexit_in_the_area_of_central_clearing.pdf and details of the Commission Communication are available at: https://finreg.shearman.com/european-commission-publishes-aspects-of-continge .
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