United States: Financial Regulatory Developments Focus - 25 February 2014

In this newsletter, we provide a snapshot of the principal European, US and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.

Regulatory Capital

EBA Publishes Draft RTS on Bankers' Bonuses

On 19 February 2014, the European Banking Authority ("EBA") published final draft Regulatory Technical Standards ("RTS") on classes of instruments that can be used as variable remuneration. The RTS specify requirements for Tier 1 and 2 instruments and other instruments and define the write-down, write-up and conversion mechanisms for Tier 2 and other instruments. Under the Capital Requirements Directive ("CRD"), firms are required to award at least 50% of the variable remuneration of staff who have a material impact on the firm's risk profile, in instruments. The instruments must consist of shares, share-linked or equivalent non-cash instruments and, where possible, Additional Tier 1, Tier 2 or other instruments. The draft RTS are subject to endorsement by the European Commission. Once in force, the RTS will apply across the EU. The remuneration requirements under CRD have applied since 1 January 2014. The final draft RTS are available at: http://www.eba.europa.eu/documents/10180/589319/EBA+RTS+2014+02+%28RTS+on+instruments+for+variable+remuneration%29.pdf.

EBA Publishes Discussion Paper on the Impact on the Volatility of Own Funds of the Accounting and Prudential Changes in the Treatment of Defined Benefit Pension Plans

On 17 February 2014, the EBA published a discussion paper on the impact on the volatility of own funds of the accounting and prudential changes in the treatment of defined benefit pension plans. Under the Capital Requirements Regulation ("CRR"), the EBA is responsible for preparing a report to the Commission on this issue. The European Commission must prepare a report to the European Council and Parliament on the issue by 31 December 2014 and, if necessary, propose legislative measures to adjust net benefit pension fund assets or liabilities for the calculation of own funds. Under the CRR, firms must deduct net defined benefit pension assets from Common Equity Tier 1. Comments on the discussion paper are due by 14 April 2014. The discussion paper is available at: http://www.eba.europa.eu/documents/10180/583941/EBA+DP+2014+01+%28DP+on+Pensions%29.pdf.

Federal Reserve Board Approves Final Rule Strengthening Supervision and Regulation of Large US Bank Holding Companies and Foreign Banking Organizations

On 18 February 2014, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") approved a final rule strengthening supervision and regulation of large US bank holding companies and foreign banking organizations. The final rule establishes a number of enhanced prudential standards for large US bank holding companies and foreign banking organizations to help increase the resiliency of their operations. These standards include liquidity, risk management, and capital. It also requires a foreign banking organization with a significant US presence to establish an intermediate holding company over its US subsidiaries, which will facilitate consistent supervision and regulation of the US operations of the foreign bank. The final rule was required by section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. US bank holding companies subject to the rule will need to comply by 1 January 2015. The full text of the Federal Reserve Board final rule is available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20140218a1.pdf.

FDIC Extends Public Comment Period for Single Point of Entry Resolution Strategy

On 18 February 2014, the Federal Deposit Insurance Corporation (the "FDIC") announced that it has extended the comment period for the Single Point of Entry ("SPOE") strategy for the resolution of Systemically Important Financial Institutions. All comments on the SPOE strategy must now be received on or before 20 March 2014. The full text of the extension notice can be found at: http://www.fdic.gov/news/news/press/2014/pr14010a.pdf.

Federal Agencies Permit Certain Banking Organizations to Begin Using Advanced Approaches Framework to Determine Risk-Based Capital Requirements

On 21 February 2014, the Federal Reserve Board and the Office of the Comptroller of the Currency ("OCC") permitted certain banking organizations to begin using an additional approach to determine their risk-based capital requirements. Under the agencies' "Advanced Approaches" capital framework, which implements standards developed by the Basel Committee on Banking Supervision, firms must meet specific risk measurement and management criteria when calculating their risk-based capital requirements. The framework applies to large, internationally active banking organizations—generally those with at least $250 billion in total consolidated assets or at least $10 billion in total on-balance sheet foreign exposure—and includes the depository institution subsidiaries of those firms. Concurrently, the Federal Reserve Board issued a final rule clarifying that bank holding companies using the Advanced Approaches framework will incorporate those changes into the capital planning and stress testing cycles that begin 1 October 2015. The final rule provides the Federal Reserve Board and the institutions additional time to integrate the Advanced Approaches framework into their respective stress testing and capital planning processes. The full text of the Federal Reserve Board final rule is available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20140221.pdf.

Financial Services

EU Political Agreement on Proposed Deposit Guarantee Scheme Directive

The Council of the European Council announced on 18 February 2014 that it had reached political agreement with the European Parliament on the proposed Deposit Guarantee Scheme Directive (the "DGS Directive") that revises the current European legislation in place. The new DGS Directive will ensure better protection for depositors of EU banks. In addition to increasing the level of coverage of deposits to EUR100,000, the DGS Directive will reduce the time limit for paying out depositors from 20 to 7 working days from 2024. The final text of the DGS Directive is still to be adopted formally by the European parliament. EU member states will have one year from the entry into force of the DGS Directive to transpose its provisions into national law. The Council's announcement is available at: http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/1410 59.pdf.

ESMA Publishes Third Annual Report on EU Credit Rating Agencies

The European Securities and Markets Authority ("ESMA") published its third annual report on EU credit rating agencies on 21 February 2014. ESMA considers that credit rating agencies have improved their compliance with the Credit Rating Agencies Regulation, however, improvements are necessary on the validation of rating methodologies, internal governance and IT systems. In addition to completing the current reviews into the monitoring of structured finance ratings by rating agencies and on small and medium-sized agencies, ESMA intends to launch a new review into how credit rating agencies review and validate their rating methodologies. ESMA's report is available at: http://www.esma.europa.eu/news/Press-release-ESMA-sets-out-CRA-supervision-focus-2014?t=326&o=home.

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Barnabas W.B. Reynolds
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