United States: Financial Regulatory Developments Focus - October 20, 2015

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

Bank Prudential Regulation & Regulatory Capital

US Board of Governors of the Federal Reserve System Issues Guidance on Examinations of Insured Depository Institutions Prior to Membership as, or Merger Resulting in, a State Member Bank

On October 13, 2015, the US Board of Governors of the Federal Reserve System issued guidance intended to clarify the criteria and process used by the Federal Reserve Board in determining whether to waive or to conduct pre-membership safety-and-soundness and consumer compliance examinations of insured depository institutions that are looking to either: (i) become state chartered member banks of the Federal Reserve System; or (ii) merge with another institution where a state member bank would be the surviving entity, including those with $10 billion or less in total consolidated assets. Specifically, the Federal Reserve Board stated that a state nonmember bank, national bank, or savings association seeking to convert its status to a state member bank will not generally be required to complete a safety-and-soundness or consumer compliance examination prior to the conversion if the institution seeking membership meets the criteria for "eligible bank," as set forth in the Federal Reserve Board's Regulation H, together with certain additional safety and soundness criteria set forth in the guidance (collectively, the "eligibility criteria"). Under circumstances where an insured depository institution is looking to merge with another institution where a state member bank would be the surviving entity, a safety-and-soundness or consumer compliance examination of the insured depository institution will not be required so long as the state member bank meets all of the eligibility criteria on an existing and pro-forma basis.

The guidance is available at: http://www.federalreserve.gov/bankinforeg/srletters/SR1511.htm.

UK Regulator Consults on Identifying Other Systemically Important Institutions

On October 19, 2015, the Prudential Regulation Authority launched a consultation on its proposed criteria and methodology for identifying Other Systemically Important Institutions, i.e. institutions that are not classed as globally systematically important financial institutions but whose failure would have a significant negative effect on the UK financial system. According to the Capital Requirements Directive, national regulators are required to identify O-SIIs that are banks, investment firms or mixed financial holding companies incorporated in their jurisdiction. That requirement derives from the Basel Committee on Banking Standards framework for domestic systemically important banks or D-SIBs. In developing its proposals, the PRA states that it has to take into account the relevant EBA Guidelines on the assessment of O-SIIs. The PRA must identify as O-SIIs those firms whose distress or failure would have a systemic impact on the UK or EU economy or financial system due to size, importance, complexity, cross-border activity and interconnectedness. Firms that are designated as O-SIIs by the PRA will be subject to enhanced supervision by the PRA. However, the PRA considers that O-SIIs are likely to be those firms that are currently subject to PRA supervision as a Category 1 firm and therefore there will be minimal impact on the firms. The PRA intends to publish the first list of O-SIIs in Q1 2016 and thereafter annually by December 1, each year. The consultation is open until January 18, 2016. The PRA will publish its final Statement of Policy in Q1 2016.

The consultation paper is available at: http://www.bankofengland.co.uk/pra/Documents/publications/cp/2015/cp3915.pdf.

Bank Structural Reform

UK Regulator Consults on Implementation of Ring-Fencing for Core UK Financial Services and Activities

On October 15, 2015, the PRA published a consultation paper on the implementation of ring-fencing for core UK financial services and activities, as required under the Financial Services and Markets Act 2000. Core activities are defined as: (i) facilities for accepting deposits or other payments into an account and provided in the course of carrying on the core activity of accepting deposits; (ii) facilities for withdrawing money or making payments from such an account; and (iii) overdraft facilities in connection with such an account. In this consultation, the PRA sets out new proposals for ring-fencing policies, including on: (i) prudential requirements for subsidiaries of Ring-Fenced Bodies; (ii) prudential requirements for other potential affiliates that would not necessarily be regulated by the PRA; (iii) the application of the systemic risk buffer for RFBs; (iv) intragroup prudential arrangements for groups containing RFBs and proposals on concessions, distributions, double leverage and intragroup holdings of capital; and (v) the use of financial market infrastructures including inter-bank payment systems, Central Securities Depositories and CCPs. The proposals are relevant to all firms that are required to ring-fence their core activities before the implementation date of January 1, 2019 (which are firms, broadly speaking, with at least £25 billion of core deposits). The proposals are also relevant to growing firms that expect to meet this threshold by 2019. The PRA expects firms that currently meet the core deposits threshold of £25 billion to submit near-final plans to their PRA and Financial Conduct Authority supervisors, taking into consideration the proposals in this consultation paper, by January 29, 2016. Growing firms expecting to meet this threshold by 2019 must determine whether such a submission would be appropriate for them by consulting with their supervisors. The PRA intends to publish a policy statement, final rules and supervisory statements by mid-2016 setting out the feedback to this consultation. Comments on the consultation paper are due by January 15, 2016.

The consultation is available at: http://www.bankofengland.co.uk/pra/Documents/publications/cp/2015/cp3715.pdf.

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