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Allen & Overy's weekly update on Key Regulatory Topics 29 September 2017 - 5 October 2017



Please see the Markets section for an update on ESMA’s comments on Brexit.

PRA speech on Brexit issues for banks and insurers

On 4 October, the BoE published a speech given by Sam Woods, BoE Deputy Governor, Prudential Regulation, and PRA Chief Executive Officer, on geofinance. In the speech, Mr Woods provided an overview of the issues faced by the PRA and by PRA-regulated firms in their preparations for Brexit: (i) supervision of EU banks post-Brexit; (ii) implications of UK firms restructuring; (iii) authorisations of EEA firms; (iv) cross-sectoral problems; and (v) transitional period. Mr Woods also criticised the European Commission's proposal that non-EU groups above a certain size or systemic importance must establish a common intermediate parent undertaking. This proposal forms part of the Commission's legislative proposal for the CRD V. He suggested that, if the aim of the reform is to bring large investment firms within the scope of the SSM, it would be better to have a system of designation for those firms, along the lines of the UK model.


ECB publishes opinion on proposed Regulation amending EMIR supervisory regime for EU and third-country CCPs

On 4 October, the ECB published an opinion (CON/2017/39) on the proposed Regulation amending the ESMA Regulation and EMIR with regard to the procedures and authorities involved for the authorisation of CCPs and recognition of third-country CCPs. The ECB generally welcomes the proposed Regulation. It strongly supports the initiative to enhance the role of the relevant members of the ESCB, as central banks of issue of the currencies of financial instruments cleared by CCPs, in the process for the supervision of EU CCPs and the recognition of third-party CCPs. Specific proposals to amend the drafting of the proposed Regulation are set out in a technical working document, which is attached to the opinion.

ECB consultation on draft addendum to guidance to banks on tackling non-performing loans

On 4 October, the ECB published a consultation paper on a draft addendum to the ECB guidance on non-performing loans. The addendum supplements the guidance which was published on 20 March and reinforces the guidance with regard to fostering timely provisioning and write-off practices. Alongside the consultation, the ECB has also published a set of FAQs on the addendum. A public hearing on the consultation will take place at the ECB's headquarters on 30 November. The deadline for responses is 8 December. Following the consultation, the ECB will publish the responses received, together with a feedback statement.

EC opinion backing increased regulatory powers for ECB

On 3 October, the EC published an opinion (C(2017) 6810 final) on the ECB's recommendation of 23 June, in which the ECB asked for a greater role in regulating clearing systems for financial instruments, including CCPs, by amending Article 22 of the Statute of the ESCB. The Commission has issued a favourable opinion and strongly welcomes the initiative to provide the ECB with a clear regulatory competence in the area of central clearing. It fully supports the ECB in its wish to amend Article 22 of the Statute. An annex, published alongside the opinion, contains some amendments to the text proposed by the ECB to underline the need for consistency with the regulatory powers between the ECB, the EP, the Council of the EU, and the Commission. In an accompanying press release, the Commission notes that the recommended change to the Statute will enable the ECB to fully perform the responsibilities that the Commission's legislative proposal amending EMIR foresees for central banks of issue in the process of authorisation, recognition and oversight of CCPs based both within and outside the EU. A factsheet from the Commission explains that once the opinion is adopted, it will be transmitted to the EP and Council of the EU, who will handle the recommended amendment to the Statute in the ordinary legislative procedure. This means that the matter will be handled in parallel with the proposed amendments to EMIR.

EC adopts Delegated Regulation supplementing Benchmarks Regulation

On 3 October, the EC adopted a Delegated Regulation (C(2017) 6537 final) with regard to the establishment of the conditions to assess the impact resulting from the cessation of or change to existing benchmarks under the Benchmarks Regulation. The Delegated Regulation is based on an optional empowerment in Article 51 of the Benchmarks Regulation. To ensure that competent authorities apply Article 51(4) of the Benchmarks Regulation in the same manner, the Delegated Regulation sets out in detail under which conditions they can conclude that the cessation or changing of an existing benchmark could result in a force majeure event, or could frustrate or otherwise breach the terms of a financial contract or financial instrument, or the rules of an investment fund, referencing an existing benchmark. The next step is for the Council of the EU and the EP to consider the Delegated Regulation. If neither of them objects, it will enter into force twenty days after it is published in the OJ.

ESMA publishes updated Q&As on EMIR and CSDR implementation

On 2 October, ESMA published: (i) an updated version of its Q&As on the implementation of EMIR. In the updated version of the Q&As, there is an amended answer to general question 1 on funds and counterparties. The amended answer applies from 1 November. In addition, the Q&A on the definition of OTC derivatives (general 1) has been modified. There is also a new Q&A (CCP 22) on the ongoing monitoring of collateral requirements; and (ii) an updated version of its Q&As on the implementation of the CSDR which features three new Q&As: CSD 5(c) on the protection of securities of participants and those of their clients; CSD 7(b) and (c) on the provision of banking-type ancillary services; and CSD 10(a)-(c) on requirements for CSD links.

FCA publishes new webpage, checklist and compliance statement templates for benchmark administrators' authorisation and registration applications under BMR

On 29 September, the FCA published a new webpage for benchmark administrators applying for authorisation or registration under BMR. On the new webpage, the FCA notes that, although formal applications to become an authorised or registered benchmark administrator do not open until 1 January 2018 (the date on which the BMR applies across the EU), benchmark administrators can submit an early draft application to the FCA. Submitting an early application allows the FCA to review draft applications before the time limits under the BMR (that is, four months for authorisation and 45 days for registration) are triggered. Applications should be made through Connect, the FCA's online system. However, the draft forms may change and, from 1 January 2018, firms may need to make amendments to their draft applications. Firms will be able to finalise their draft applications from this date by notifying the FCA case officer reviewing their application and submitting the application fee. The FCA has also updated its "how to apply for authorisation" webpage to include new information on the authorisation application process for benchmark administrators. Separately, the FCA has made available the following draft documents, to be used by benchmark administrators applying for registration under the BMR: (i) draft checklist: Benchmark administrator registration (dated October); (ii) annex I: Template for compliance statement under Article 25(7) of the BMR; and (iii) annex II: Template for compliance statement under Article 26(3) of the BMR. Third country benchmark administrators must apply to be added to ESMA's list of benchmarks in one of three ways: equivalence, recognition or endorsement. The FCA will make available the application forms for recognition and endorsement from 1 January 2018.

ESMA consults on draft guidelines on non–significant benchmarks under Benchmarks Regulation

On 29 September, ESMA published a consultation paper on draft guidelines for non-significant benchmarks under the BMR The BMR envisages that ESMA may issue guidelines setting out the obligations that will apply to non-significant benchmarks in four areas. The consultation paper dedicates a separate chapter to each area, summarising the proposed content of the guidelines for each, as well as outlining the objectives and policy issues: (i) procedures, characteristics and positioning of oversight function, under Article 5 of the BMR (see chapter 5); (ii) appropriateness and verifiability of input data, under Article 11 (see chapter 6); (iii) transparency of methodology, under Article 13 (see chapter 7); and (iv) governance and control requirements for supervised contributors, under Article 13 (see chapter 8). The first three areas listed above apply to administrators of non-significant benchmarks, and the fourth to supervised contributors to non-significant benchmarks. The deadline for comments on the draft guidelines is 30 November.

Council of EU Presidency compromise proposal on proposed Regulation amending EMIR dated 28 September 2017

On 29 September, the Council of the EU published a Presidency compromise proposal (12618/17) on the proposed Regulation amending EMIR as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories. The EC adopted its legislative proposal to amend EMIR in May. This followed publication in November 2016 of its report on the outcome of a review of EMIR under Article 85(1) of that Regulation.

ESMA updates Q&As on Benchmarks Regulation: September 2017

On 29 September, ESMA published an updated version of its Q&As on the implementation of the BMR (ESMA70-145-11). Four new Q&As have been added relating to: (i) application of the BMR to EU and third country central banks; (ii) exemption relating to single reference price; (iii) definition of family of benchmarks; and (iv) definition of use of a benchmark.

EC adopts three Delegated Regulations supplementing Benchmarks Regulation

On 29 September, the EC adopted three Delegated Regulations supplementing the BMR: (i) Commission Delegated Regulation (C(2017) 6474 final) supplements the BMR with regard to specifying technical elements of the definitions laid down in paragraph 1 of Article 3 of the BMR relating to public availability and administering the arrangements for determining a benchmark; (ii) Commission Delegated Regulation (C(2017) 6464 final) supplements the BMR with regard specifying how the nominal amount of financial instruments other than derivatives, the notional amount of derivatives and the net asset value of investment funds are to be assessed; and (iii) Commission Delegated Regulation (C(2017) 6469 final) supplements the BMR with regard to specifying how the criteria of Article 20(1)(c)(iii) are to be applied for assessing whether certain events would result in significant and adverse impacts on market integrity, financial stability, consumers, the real economy or the financing of households and businesses in one or more member states. The next step will be for the Council of the EU and the EP to consider the Delegated Regulations. If neither of them objects, the Delegated Regulations will enter into force 20 days after their publication in the OJ. They will be directly applicable in all member states.


SMR- PRA publishes policy statement on SMR form changes

On 3 October, the PRA published a policy statement on strengthening accountability in banking: changes to SMR forms (PS24/17). PS24/17 sets out the PRA's feedback to responses to chapter 4 of its June 2017 consultation paper (CP8/17). The PRA's final rules implementing its proposals are set out in the PRA Rulebook: CRR Firms, Non CRR Firms: Senior Managers Regime Amendment (No. 2) Instrument 2017 (PRA 2017/33). All of the forms will become live on the PRA website on 12 November. The PRA states that, with effect from that date, RAPS will be able to: (i) apply for pre-approval of individuals seeking to perform the chief operations senior management function (SMF24) (or, if already approved as other SMFs, for them to be transferred to the new SMF24 function); (ii) apply for pre-approval of individuals seeking to perform the head of key business area function (SMF6) based on the revised criteria (or, if already approved as other SMFs, for them to be transferred to the SMF6 function); and (iii) resubmit the SoR(s) of the individual(s) who have been allocated the outsourcing prescribed responsibility. The PRA confirms that there will be no formal closing date for submitting applications or notifications. However, it encourages firms to submit these documents "as soon as reasonably practicable" after 12 November. The PRA advises any firms looking to appoint individuals as SMF24s or SMF6s (based on the new criteria) before 12 November to complete their applications in draft using the old forms and submit them to their PRA supervisor for discussion with a view to updating them and submitting them formally on 12 November.


Retail Finance - FCA report on rates of return for FCA prescribed projections

On 4 October, the FCA published a report (dated September) on rates of return for FCA prescribed projections. The FCA prescribes the maximum rates of return that financial services companies must use in their calculations when providing retail customers with projections of future benefits. The rules regarding projection rates are set out in chapter 13 of the FCA's COBS. The FCA prescribed projection rates are in COBS 13, Annex 2. The report provides answers to the following key questions: (i) whether the current intermediate rate of return continues to represent the appropriate single rate for illustrating potential returns for those products subject to the COBS projection requirements; (ii) the appropriateness of the 0.5% adjustment for tax-disadvantaged products; and (iii) the continuing validity of the long-term inflation assumptions of 2.5% for prices and 4% for earnings. In answering these questions, the CED examines the returns on government bonds, corporate bonds, equities, property, the product asset mix, and several key economic variables (that is, GDP growth, earnings growth and inflation). For the first time, the CED also directly estimates the return on cash and money markets. Section 7 of the report sets out the projections for returns over the next 10 to 15 years.

Consumer Finance Association and BCCA announce completion of merger

On 4 October, the CFA announced the completion of its merger with the BCCA. The CFA and BCCA announced in July that they would be merging. The new association, which will be run by Jason Wassell, former BCCA Chief Executive, brings together lenders, brokers and service suppliers. It will be the principal trade association representing the short-term lending sector in the UK. The joint team will work remotely across the UK.

Pension - FCA publishes update on defined benefit pension transfers work

On 3 October, the FCA published an update on its work relating to DB pension transfers. The FCA's focus results from the significant growth in consumers transferring from DB schemes to personal pensions (to take advantage of the pensions freedoms introduced in April 2015). The FCA has looked at how advisory firms have adapted their business models and processes, and the risk of harm to consumers transferring out of DB schemes. The update is based on an analysis of the information provided to the FCA over the last two years by 22 firms engaged in DB business, as well as a subsequent analysis of a sample of client files of 13 firms and 12 firm visits. The FCA's key findings relate to: (i) specialist transfer firms. In particular the FCA found that some of these firms made transfer recommendations without considering a receiving scheme or investments, or knowing the introducing adviser's intentions for investment; and (ii) suitability of advice. In particular, the FCA found that advisers had failed to make appropriate comparisons between the DB scheme and the intended receiving scheme. As a result, advice was based on incorrect or inaccurate comparisons.

Payments - New FCA webpages on PSD2

On 3 October, the FCA published the following new webpages relating to the revised PSD2: (i) a webpage to help firms identify the key relevant changes to them from PSD2; (ii) for firms that are already regulated, webpages for banks and building societies, APIs, authorised EMIs, small payment institutions and small EMIs; (iii) webpages on exclusions under PSD2 relating to limited networks, electronic communications and commercial agents; and (iv) webpages for firms that are not currently regulated but who intend to offer regulated payment services. These relate to firms offering AIS, firms offering both AIS and PIS and firms offering either AIS or PIS (or both) combined with other payment or e-money services.

Payments – EC adopts Delegated Regulation on RTS on standardised terminology under PAD

On 28 September, the EC published a Delegated Regulation (C(2017) 6451 final) and Annex that it has adopted supplementing the PAD with regard to RTS for standardised terminology for the most representative services linked to a payment account. The next step is for the Council of the EU and the EP to consider the Delegated Regulation. If neither of them objects, it will enter into force twenty days after it is published in the OJ.

Financial Crime

ESMA publishes further updated Q&A on MAR

On 29 September, ESMA published a further updated version of its Q&A on the MAR. ESMA has added a new question addressing how an issuer should deal with the situation where it has delayed a disclosure of inside information in accordance with Article 17(4) of MAR but subsequently the information loses the element of price-sensitivity and accordingly its inside nature (new Question 5.2). ESMA notes that under Article 17(1) of MAR issuers must inform the public as soon as possible of inside information that directly concerns them, but under Article 17(4) may delay disclosure if certain conditions are met. When an issuer does delay disclosure it must, immediately after the information is disclosed to the public, inform the competent authority of that fact and provide a written explanation on how the conditions set out in Article 17(4) were met.


ESMA updates Q&A on application of AIFMD and UCITS Directive: October 2017

On 5 October, ESMA published two sets of Q&A: (i) Q&A on AIFMD which includes three new Q&As on the: (a) application of remuneration disclosure requirements to staff of the delegate of an AIFM to whom portfolio management or risk management activities have been delegated; (b) manner of disclosure of AIFM delegates' staff remuneration in annual reports; and (c) periodic reporting (under Article 13 of the SFTR) for UCITS and AIFs to investors on the use of SFTs and total return swaps; and (ii) Q&A on UCITS Directive which includes one new question on periodic reporting for UCITS and AIFs to investors on the use of SFTs and total return swap.


FOS publishes feedback statement to consultation on amending voluntary jurisdiction rules On 4 October, the FOS published a feedback statement to its consultation in June 2017 on proposed amendments to its VJ rules to reflect the FCA's final rules and guidance on PPI complaints.

EIOPA publishes work programme for 2018

On 29 September, EIOPA published a single programming document (dated 28 September 2017) (EIOPA-BoS-17-261), which contains EIOPA's work programme for 2018 in Section III of the document. Its 2018 work programme includes plans to: (i) strengthen consumer protection; (ii) develop and strengthen the regulatory framework for protection of consumers; and (iii) implement a strategy for a comprehensive risk-based and preventive framework for conduct of business supervision that serves as basis for appropriate supervisory action. EIOPA has also introduced into its annual work programme the cross-cutting theme of InsurTech. A cross departmental taskforce will work to help ensure that financial innovation by means of ongoing digitalisation affecting existing and evolving business and distribution models does not develop in a way that causes undue detriment of consumers.


ESMA updates three MiFID II Q&As

On 3 October, ESMA published updated versions of its Q&As on: (i) investor protection; (ii) market structures; and (iii) transparency under the MiFID II and MiFIR. ESMA has added new Q&As covering: (i) client categorisation; (ii) post-sale reporting; (iii) recording of telephone conversations and electronic communications; (iv) best execution; (v) information on costs and charges; (vi) DEA and algorithmic trading; (vii) multilateral and bilateral systems; (viii) transparency requirements; (ix) non-equity transparency; and (x) the SI regime.

FSB consults on governance arrangements for unique product identifier

On 3 October, the FSB published a consultation paper on governance arrangements for the UPI. In the consultation paper, the FSB sets out proposals for the key criteria, areas of governance, and the functions within these areas of governance, for the UPI governance arrangements. It also seeks feedback on certain issues relating to UPI service providers, cost recovery and fee models, and the reference data library that will underlie the UPI system. Comments can be made on the FSB's proposals until 17 November. In addition, the FSB plans to hold a consultative roundtable on UPI governance on 11 October, in Montreal. The FSB expects to publish a further consultation paper in early 2018, on proposals for the allocation of the UPI governance functions to various entities, and further aspects of the UPI services provider model. It envisages that one or more UPI service providers will be selected during 2018. The FSB explains that the consultation complements the technical guidance published by the CPMI and the IOSCO in September on the harmonisation of data elements that are reported to TRs.

ESMA publishes official translations of guidelines on transaction reporting, order record keeping and synchronisation under MiFID II

On 2 October, ESMA published the official EU language versions of its guidelines on transaction reporting, order record keeping and clock synchronisation under the MiFID. An accompanying press release states that NCAs to which the guidelines apply must, within two months, notify ESMA whether they comply or intend to comply with them.

ESMA publishes final report on RTS on MiFIR trading obligation for derivatives

On 29 September, ESMA published its final report (dated 28 September) on draft RTS on the trading obligation for derivatives under MiFIR. The final report explains ESMA's revised approach taking into account feedback it received from its September 2016 discussion paper. It sets out ESMA's final approach for IRS classes and CDS classes that should be subject to the trading obligation, and its approach for the date from which the obligation should apply. The draft RTS are set out in an annex to the final report. ESMA states in an accompanying press release that it submitted the draft RTS to the Commission for its endorsement on 28 September 2018. It says that the Commission has expressed to ESMA its strong commitment to apply the trading obligation from the start date of the MiFID II framework. ESMA has therefore stated 3 January 2018 as the envisaged date of application of the RTS. The Commission has three months to decide whether to endorse the draft RTS.

ESMA publishes guidelines on suitability assessment for management bodies of market operators and DRSPs under MiFID II

On 29 September, ESMA published guidelines (dated 28 September) on the management bodies of trading venue market operators and DRSPs (ESMA70-154-271). The guidelines are accompanied by a final report (ESMA70-154-266) (also dated 28 September). ESMA was required under Article 45(9) (for market operators) and Article 63(2) (for DRSPs) of the MiFID II to produce guidelines to clarify the requirements that apply to members of the management bodies of these two types of entities. The guidelines clarify how information is to be recorded by market operators and DRSPs to make it available to competent authorities for the exercise of their supervisory duties.

ESMA comments on MiFID II implementation and Brexit

On 29 September, an article was published on comments by Stephen Maijoor, ESMA Chair, on implementation of MiFID II and Brexit. Mr Maijoor believes that while implementation of the new rules under the MiFID II and MiFIR may trigger some glitches, broader disruption is not anticipated. The article also reports that the FCA has said that it would not punish firms for "not meeting all requirements straight away where there is evidence they have taken sufficient steps to meet the new obligations by the start date". In a similar vein, Mr Maijoor commented that it is likely that regulators would look differently on a violation on 4 January 2018 from one at a later date. Regarding Brexit, Mr Maijoor observed that MiFID II had been designed on the basis that the most liquid European market would indeed be within the EU. He believes that the exit of the UK from the single market would affect some elements of MiFID. However, this will depend very much on the outcome of the Brexit negotiations. According to Mr Maijoor, ESMA has begun assessing the impact of a possible "hard" Brexit on the stability of the EU's securities market. This includes considering the position of CRAs and trade repositories, and protection for EU investors in UK-based mutual funds.


EC Delegated Regulation supplementing IFR on separation of payment card schemes and processing entities

On 4 October, the EC published the text of a Delegated Regulation supplementing the IFR with regard to RTS establishing the requirements to be complied with by payment card schemes and processing entities to ensure the application of independence requirements in terms of accounting, organisation and decision-making process (C(2017) 6652 final). The next step will be for the Council of the EU and the EP to consider the Delegated Regulation. If neither of them objects, it will enter into force 20 days after its publication in the OJ. It will directly apply in all member states.


PRA consultation paper on groups policy framework and double leverage

On 4 October, the PRA published a consultation paper on its groups policy framework and double leverage (CP19/17). The PRA proposes a number of changes to ensure that it remains fit for purpose in the light of the post-crisis financial reforms. These include changes that will require: (i) assessment and mitigation of the risks to group resilience due to the use of double leverage, which occurs when one or more parent entities in a group funds some of the capital in its subsidiaries by raising debt or lower forms of capital externally (see chapter 2); (ii) assessment and mitigation of the risks highlighted by prudential requirements applied by local regulatory authorities on overseas subsidiaries of UK consolidation groups (see chapter 2); and (iii) improved monitoring of the distribution of financial resources across different group entities (see chapter 3). To implement the above proposals the PRA will update the following, revised versions of which are included in the appendices to CP19/17: (i) (SS31/15) on the ICAAP and the SREP; (ii) statement of policy on the PRA's methodologies for setting Pillar 2 capital; (iii) statement (SS24/15) on the PRA's approach to supervising funding and liquidity risk; and (iv) the Internal Capital Adequacy Assessment Part of the PRA Rulebook. The deadline for comments is 4 January 2018. The PRA states that, once the proposals are finalised, the policy will be implemented fully from 1 January 2019. Where practical and applicable, the PRA expects firms to aim to incorporate the consultation proposals in their 2018 ICAAP/ ILAAP submissions ahead of full implementation.

PRA publishes consultation paper on changes to large exposures framework

On 4 October, the PRA published a consultation paper on changes to its LE framework (CP20/17). The PRA's proposals aim to simplify the overall intragroup LE framework, improve the consistency of the process of granting intragroup permissions and facilitate the orderly resolution of banking groups. The PRA intends to achieve this by: (i) enhancing guidance on the application of criteria for core UK group (CUG) and non-core LE group (NCLEG) permissions; (ii) changing the NCLEG calibration basis for firms that have both a CUG and an NCLEG permission; (iii) changing how the NCLEG permission applies at the UK consolidated group level; and (iv) updating supervisory statement (SS16/13) on large exposures to reflect the updates to the PRA's expectations as outlined in CP20/17. The PRA is also proposing to allow firms to apply to exempt from the LE limit exposures identified and reported as internal MREL. The text of the proposed amendments to the PRA Rulebook and a revised version of SS16/13 are included in the appendices to CP20/17. The deadline for comments is 4 January 2018. The PRA proposes that the changes to the rules and proposed guidance take effect following publication of the final policy.

FPC record of 20 September 2017 meeting

On 3 October, the BoE published the record of the meeting of its FPC on 20 September. The record provides a more detailed summary of the statement published by the BoE on 25 September and outlines the latest progress made on implementing the FPC's existing recommendations and directions. Some of the points of interest include content relating to Brexit, such as: (i) the FPC has reviewed the state of contingency planning across the financial sector, informed by responses to the PRA request for firms to detail their contingency plans; (ii) there are operational restrictions to firms' plans to mitigate risks to the continuity of insurance contracts. Loss of authorisation could affect firms' ability to continue to collect premiums and pay out on claims on outstanding insurance contracts, which in some cases extend for several years; and (iii) the risk of disruption to wholesale UK banking services appears to be slightly higher than previously thought. This is because a number of EEA firms branching into the UK are not sufficiently focused on addressing this issue. The PRA is engaging with firms to improve the state of their contingency planning. The FPC's next meeting will be on 22 November and the record of that meeting will be published on 5 December.

PRA publishes policy statement on amendments to supervisory statement on internal ratings based approaches

On 3 October 2017, the PRA published a policy statement (PS23/17) setting out amendments to its supervisory statement on IRB approaches (SS11/13). In PS23/17, the PRA confirms that it will proceed with the amendments to SS11/13, with two additional clarifications relating to the calibration of margins of conservatism in PD and LGD estimation and to the monitoring of rating systems. Appendix 1 to PS23/17 contains the revised version of SS11/13. This version supersedes the version published in June.

PRA publishes policy statement on changes to UK leverage ratio framework relating to treatment of claims on central banks

On 3 October, the BoE published a policy statement on changes to the UK leverage ratio framework relating to the treatment of claims on central banks (PS21/17). PS21/17 provides the PRA's feedback to the responses received to the consultation paper published by the PRA and the FPC in June. The policy statement is relevant to PRA-regulated banks and building societies with retail deposits equal to or greater than £50 billion on an individual or a consolidated basis. In response to the FPC's recommendation at its meeting on 20 September, and in line with its proposals in CP11/17, the PRA is amending its Rulebook to: (i) align it with its July 2016 modification by consent to exclude central bank claims matched by deposits in the same currency and of identical or longer maturity from the definition of the total leverage exposure measure in the UK leverage ratio framework; (ii) increase the minimum leverage ratio requirement from 3% to 3.25% of total exposures; and (iii) align the UK leverage ratio reporting and disclosure requirements to the proposed definition of the total exposure measure and 3.25% minimum leverage ratio requirement. The PRA has also published an updated version of SS46/15, together with an updated reporting template FSA083 and accompanying instructions. The PRA's feedback to the responses is set out in chapter 2 of PS21/17, grouped by topic. The FPC's feedback is set out in its updated FPC leverage ratio policy statement, also published on 3 October. As the reporting changes come into effect immediately, they will apply to firms' reporting and disclosure requirements for end-December onwards.

PRA publishes policy statement on revisions to Pillar 2A capital framework

On 3 October, the PRA published a policy statement on refining its Pillar 2A capital framework (PS22/17). In PS22/17, the PRA confirms that it will proceed with these proposals, although in response to feedback it has made changes to the statement of policy concerning the proposed risk weight used for personal loans as part of the IRB benchmark and the treatment of CRE exposures. The appendices to PS22/17, which have been published separately, set out: (i) the final version of PRA Rulebook instrument: CRR Firms: Reporting Pillar 2 Amendment No 1 Instrument 2017 (PRA 2017/32). This instrument makes amendments to the Reporting Pillar 2A Part; (ii) the revised versions of SS31/15, SS32/15 and the statement of policy on the PRA's methodologies for setting Pillar 2 capital. The revised Pillar 2A capital framework will come into force on 1 January 2018. The PRA has also published a version of SS32/15 that will come into force on 1 January 2019. This version, which contains guidance for ring-fenced groups, was originally published in February, alongside PS3/17. It has been amended to take account of the revisions finalised in PS22/17. The PRA notes that, in March, the FPC announced that it would review the optimal level of capital requirements in the UK banking system in light of the outcome of ongoing negotiations to finalise Basel III standards and the implementation of IFRS 9. The PRA will consider the conclusions of this review and monitor the impact of IFRS 9, and, if appropriate, may consider further refinements to its Pillar 2A policy.

BoE consults on approach to internal MREL

On 2 October, the BoE published a consultation paper on its approach to setting internal MREL. In the consultation, the BoE proposes amendments to its November 2016 statement of policy on setting MREL which focused on the approach to external MREL. In particular, the BoE is seeking views on issues relating to: (i) the scope of internal MREL. The BoE sets out when it will set internal MREL above capital requirements for a material subsidiary of a group; (ii) the calibration of internal MREL. The BoE expects that internal MREL for a material subsidiary will be scaled in the range of 75% to 90% of the full amount of external MREL that it would otherwise be required to maintain if the material subsidiary were itself a UK resolution entity and its external MREL were set in accordance with the statement of policy; and (iii) the criteria that instruments should meet to qualify as internal MREL resources. The BoE proposes that all the eligibility criteria that apply to external MREL resources should apply equally to internal MREL eligible liabilities. The BoE is also proposing amendments to the statement of policy relating to loss-absorbing capacity for operational continuity and the setting of external MREL for MPE groups. The deadline for responses is 2 January 2018. The consultation paper also sets out the BoE's current thinking on other MREL-related issues: restrictions on firms' ability to hold each other's MREL, the disclosure of MREL resources by firms and MREL reporting. The BoE states that it intends to consult further on these issues once there is greater clarity on the development of related EU reforms.

EBA publishes opinion on design of a new prudential framework for investment firms

On 29 September, the EBA published an opinion (EBA/Op/2017/11) in response to the EC's call for advice relating to the prudential requirements applicable to MiFID investment firms for which the prudential regime under CRD IV is not appropriate. The EC requested technical advice from the EBA in June 2016. The EBA's opinion includes a series of recommendations to develop a single set of requirements that are reasonably simple, proportionate and relevant to the nature of MiFID investment firms authorised to provide investment services and activities. It addresses: (i) design and calibration of capital and liquidity requirements; (ii) consolidated supervision; (iii) reporting requirements; (iv) the suitability of the proposed framework for commodity derivatives firms; and (v) need for macroprudential tools. The EBA also makes recommendations on the applicability of the CRD IV remuneration requirements and corporate governance rules to investment firms, and suggests introducing very simple prudential requirements for small investment firms that provide limited services or activities.


BoE publishes updated document on approach to resolution

On 2 October, the BoE published an updated document setting out its approach to resolving a failed bank, building society or investment firm. The document provides guidance on the way that the BoE carries out its statutory responsibilities as the UK's resolution authority. The BoE refers to it as the "Purple Book". Part 1 of the Purple Book explains the objectives of the resolution regime, its key features, the main strategies the BoE has developed to deal with failing banks, and the arrangements for safeguarding the rights of depositors, clients, counterparties and creditors. Part 2 looks at how the BoE would be likely to implement these resolution strategies. This could involve: (i) bail in; (ii) partial transfer; and (iii) insolvency, and will be influenced by the size of the firm. Part 3 explains the BoEs "business as usual" responsibilities as UK resolution authority. The annexes provide detail on how the BoE is addressing some specific barriers to resolvability. The document indicates that, from 2019, the BoE will publish summaries of major UK firms' resolution plans and summary assessments of their effectiveness.

ECON publishes draft reports on proposed BRRD II Directive and SRM II Regulation

On 29 September, the ECON published two draft: (i) draft report (PE610.851v01-00) on the Commission's proposal for a Regulation to amend the SRM (proposed SRM II Regulation); (ii) draft report (PE610.856v01-00) on the Commission's proposal for a Directive to amend the BRRD and the implementation in the EU of the FSB's TLAC standard (known, collectively, as BRRD II). The draft reports each contain a Parliament legislative resolution on the proposed Regulation and Directive (as applicable), the text of which sets out suggested amendments to the EC's original legislative proposal. They each contain an explanatory statement by the rapporteur, Gunnar Hökmark.

EBA and US financial regulatory agencies agree framework co-operation agreement on bank resolution

On 29 September, the EBA published a framework co-operation arrangement that it has entered into with a number of US financial regulatory agencies. The objective of the arrangement is to promote resolution planning and co-operation for cross-border institutions. It sets out the basis for subsequent co-operation arrangements on bank crisis management and resolution between any of the EU supervisory or resolution authorities listed in an annex to the arrangement (which includes the BoE and PRA for the UK) and any of the participating US Agencies. It covers topics relating to crisis management, including early intervention, resolution planning, resolvability assessment, and resolution. The participating US Agencies are the Board of Governors of the Federal Reserve System, the FDIC, the OCC, the SEC, and the New York State Department of Financial Services.


ESMA publishes work programme for 2018

On 5 October, ESMA published its 2018 Work Programme, which sets out its priorities and areas of focus for 2018 in support of its mission to enhance investor protection and promote stable and orderly financial markets. ESMA’s activities of supervisory convergence, assessing risks, single rulebook and direct supervision for 2018 will be: (i) providing guidance and promoting the consistent application of MiFID II and MiFIR by market participants and NCAs; (ii) ensuring the quality, integration, usability and transparency of the data that ESMA collects; (iii) contributing to the development of Level 2 measures in relation to the revised Prospectus regime; and (iv) enhancing the effectiveness and lasting impact of supervisory activities at individual CRA and TR level. ESMA’s priorities and key areas of work for 2018: (i) promoting supervisory convergence; (ii) assessing risks to investors, markets and financial stability; (iii) completing the single rulebook for EU financial markets; and (iv) Directly supervising specific financial entities.

EBA publishes work programme for 2018

On 5 October, the EBA published its work programme for 2018. The work programme describes the EBA's objectives for 2018, expected results and main outputs, which are defined under the EBA's seven strategic areas for 2017-2020 outlined in its work programme for 2017. Three of the EBA's priorities for 2018 include: (i) contributing to developments relating to the CRR, the CRD IV and the BRRD, and reviewing the consequences of the BCBS's revision of the trading book; (ii) monitoring and evaluating the impact of the UK leaving the EU to protect the public interest by contributing to the short, medium and long-term stability and effectiveness of the financial system; and (iii) evaluating and contributing with regard to the FinTech regulatory perimeter, prudential and operational risks and opportunities, impacts on the business models of credit institutions, consumer protection, retail conduct of business issues, and changes in other areas such as resolution of financial firms and anti-money laundering.

EC infringement decisions on Spain, France, Austria and Denmark in relation to PAD, Solvency II, Omnibus II Directive and the Consumer Rights Directive.

On 4 October, the EC published a press release on key infringement decisions. These include: (i) referring Spain to the ECJ for failing to notify measures for fully implementing the PAD. To date, complete implementation has not been formally notified by the Spanish authorities. This leads the Commission to conclude that the PAD is, at present, not implemented completely into Spanish law; (ii) sending a letter of formal notice to France asking it to fully enact the Solvency II Directive and the Omnibus II Directive. If France does not act within the next two months, the Commission advises that it may send a reasoned opinion on this matter; and (iii) sending a letter of formal notice to each of Austria and Denmark asking them to put their national legislation in line with the Consumer Rights Directive. The Commission is urging Austria and Denmark to take swift action to ensure that the Directive is correctly implemented. It explains that, amongst other things, Denmark should ensure it has effective, proportionate and dissuasive penalties in place for cases when traders breach the consumer rights rules. The Commission considers that Austria has introduced penalties that do not appear to be sufficiently dissuasive, and do not cover all breaches of the Directive. If these member states do not act within the next two months, the Commission advises that it may send them a reasoned opinion.

FCA and PRA publishes joint occasional consultation paper

On 3 October, the FCA and the PRA published a joint occasional paper (PRA CP18/7 / FCA CP17/34). The paper sets out proposed changes to the PRA Rulebook Parts and supervisory statements, such as: (i) Chapter 3: Market risk: CRD IV amendment which proposes to amend the ICAA Part of the PRA Rulebook regarding market risk; and (ii) Chapter 5: Application requirements: CRR and CRD IV amendments which proposes to amend multiple PRA Rulebook Parts to ensure that the calculation bases used in the PRA Rulebook take account of the exercise of any CRR discretions available to the PRA. Chapter 7 contains a joint FCA and PRA form, PRA Rulebook and FCA Handbook proposals. A related PRA webpage provides a useful table outlining the contents of the paper. The deadline for responses to the paper are: (i) Tuesday 17 October for the administration instrument (Appendix 15); (ii) Friday 3 November for Chapters 7 and 8; and (iii) Tuesday 9 January 2018 for Chapters 2 – 6, 9 and 10.




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