Global Regulatory Brief: Risk and financial stability, April edition
The Global Regulatory Brief provides monthly insights from regulatory bodies on developments within risk and regulation. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Risk and financial stability regulatory developments
After exacerbated inflationary pressures, central banks, led by the Fed, began raising interest rates at the fastest pace in over four decades. Banks were affected by these interest-rate changes to varying degrees and we’re still seeing the fallout from heightened risk. Navigate the regulatory challenges that are reshaping financial markets with confidence.
- Regulators respond to turbulence in the global banking sector
- Federal Reserve Board announces additional funding to eligible depository institutions
- SEC publishes changes to technology infrastructure, consumer privacy, and cybersecurity rules and requirements
- FCA publish observations on the UK investment firm prudential regime
- Final negotiations on the implementation of Basel III in the EU begin
- European Parliament adopts position on enhancing settlement discipline
- Singapore consults on adjustment spreads for legacy SIBOR contracts
Regulators respond to turbulence in the global banking sector
Regulators across the world have issued statements in response to the recent turbulence and heightened volatility in the global banking and financial sector. In Europe, the European Banking Authority (EBA) along with ECB Banking Supervision has welcomed the recent action by the Swiss authorities and stated that the European banking sector remains resilient, with robust levels of capital and liquidity. The BoE has issued a similar statement, underlining that the UK banking system is well capitalized and funded, and remains safe.
The US Department of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation issued a joint statement regarding the recent bank failures and steps taken to mitigate the effects and safeguard the banking system.
In Asia, the Monetary Authority of Singapore (MAS) published a press release stating that Singapore’s banking system remains sound and resilient. The Hong Kong authorities have issued a similar statement.
Additionally, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank have announced a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements. To improve the swap lines’ effectiveness in providing US dollar funding, the central banks currently offering US dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20 2023, and will continue at least through the end of April.
Federal Reserve Board announces additional funding to eligible depository institutions
The Federal Reserve also announced that additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. With approval of the Treasury Secretary, the Department of Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds.
Michael S. Barr, the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, will lead a review of the supervision and regulation of Silicon Valley Bank. A report will be publicly released by May 1, 2023.
SEC publishes changes to technology infrastructure, consumer privacy, and cybersecurity rules and requirements
The SEC has proposed amendments to expand and update Regulation Systems Compliance Integrity (SCI), the set of rules adopted in 2014 to help address technological vulnerabilities in the US securities markets and improve Commission oversight of the core technology of key US securities markets entities (SCI entities). The proposals would expand the scope of SCI entities to include registered security-based swap data repositories; all clearing agencies that are exempt from registration; and certain large broker-dealers, in particular, those that exceed a total assets threshold or a transaction activity in national market system stocks, exchange-listed options contracts, US Treasury securities, or Agency securities. The propose amendments would also require that an SCI entity’s policies and procedures include the maintenance of a written inventory and classification of all SCI systems and a program for life cycle management; a program to prevent the unauthorized access to such systems and information therein; and a program to manage and oversee certain third-party vendors, including cloud service providers, of covered systems. The public comment period will remain open until 60 days after the date of publication of the proposing release in the Federal Register.
The SEC also proposed amendments to Regulation S-P that would enhance the protection of customer information by, among other things, requiring broker-dealers, investment companies, registered investment advisers, and transfer agents (collectively, “covered institutions”) to provide notice to individuals affected by certain types of data breaches that may put them at risk of identity theft or other harm. The proposal would require covered institutions to adopt written policies and procedures for an incident response program to address unauthorized access to or use of customer information. The proposed amendments would also require, with certain limited exceptions, covered institutions to provide notice to individuals whose sensitive customer information was or is reasonably likely to have been accessed or used without authorization. The proposal would require a covered institution to provide this notice as soon as practicable, but not later than 30 days after the covered institution becomes aware that an incident involving unauthorized access to or use of customer information has occurred or is reasonably likely to have occurred. The public comment period will remain open until 60 days after the date of publication of the proposing release in the Federal Register.
To address ongoing cybersecurity concerns, the SEC proposed requirements for market entities such as broker-dealers, clearing agencies, major security-based swap participants, the Municipal Securities Rulemaking Board, national securities association, national securities exchanges, security-based swap data repositories, security-based swap dealers, and transfer agents to address their cybersecurity risks. The proposal would require all market entities to implement policies and procedures that are reasonably designed to address their cybersecurity risks and, at least annually, review and assess the design and effectiveness of their cybersecurity policies and procedures, including whether they reflect changes in cybersecurity risk over the time period covered by the review. The proposal – through new notification requirements applicable to all market entities and additional reporting requirements applicable to market entities other than certain types of small broker-dealers – would improve the SEC’s ability to obtain information about significant cybersecurity incidents affecting these entities. The public comment period will remain open until 60 days after the date of publication of the proposing release in the Federal Register.
The SEC also reopened the comment period on previously proposed rules and amendments related to cybersecurity risk management and cybersecurity-related disclosures for registered investment advisers, investment companies, and business development companies. The initial comment period for the rules – first proposed in Feb. 2022 – was Apr. 11, 2022. The reopened comment period will end 60 days after the publication of the reopening release in the Federal Register.
FCA publish observations on the UK investment firm prudential regime
The FCA has published its observations on the implementation of the investment firms prudential regime (IFPR) that began on January 1, 2022 and represents the new UK prudential regime for MiFID investment firms. The IFPR aims to refocus prudential requirements beyond the risks faced by the firm to also consider the risks the firm might pose to consumers and markets.
Under IFPR firms are required to hold sufficient resources to support on-going activities and wind-down in an orderly manner. In-scope firms are also required to complete an internal capital adequacy and risk assessment (ICARA) process to identify the risk of harm and produce reasonable estimates of own funds and liquid assets threshold requirements. In their observations, the FCA has identified insufficiently adequate assessments of threshold requirements, insufficient attention to wind-down plans, inaccurate or incomplete data submissions, poorly explained reduction in risk capital, and a lack of comprehensive own funds and liquid assets, among other issues. The FCA also noted that firms demonstrating best practices provided their senior management with in-depth training on IFPR. The FCA intends to publish a report after the completion of its review.
Final negotiations on the implementation of Basel III in the EU begin
Negotiators from the EU institutions have initiated final discussions on proposals amending the Capital Requirements Regulation and Directive (CRR/D) that will implement the remaining Basel III standards into European law. A range of issues will be decided, such as the credit risk framework, the market risk framework, the output floor and ESG risks. There is also an expectation that the final text will have implications for the prudential treatment of crypto, macroprudential buffers and securitisation. The next meeting will take place in mid-April and a political agreement on the rules is expected by the summer. Formal adoption and publication in the Official Journal of the EU should take place before the year-end.
In late February, the European Banking Authority (EBA) published a no-action letter stating that national competent authorities (NCAs) should not prioritize any supervisory or enforcement action in relation to the new banking book – trading book boundary provisions under the Basel III standard for market risk. This comes as legislators seek to postpone the application date of the boundary provisions under the Fundamental Review of the Trading Book (FRTB) framework until January 1, 2025.
On March 21, the EBA issued specific reporting requirement proposals for consultation relating to market risk. This process is designed to ensure that supervisors receive a comprehensive set of information on the instruments and positions to which institutions apply FRTB approaches.
European Parliament adopts position on enhancing settlement discipline
The EP has reached its final position on the Central Securities Depositories Review (CSDR) review in which MEPs agreed that the controversial process of “mandatory buy-ins” – that require market participants to buy or borrow certain securities to settle failed trades – should only be a last-resort for addressing settlement failure. Settlement fails occur when a party of a transaction does not deliver a security or funds on time, and MEPs propose to apply deterrent and proportionate cash penalties. The EP is seeking powers for the EU to suspend mandatory buy-ins where necessary.
In addition to settlement failure, the CSDR review aims to improve the wider regulatory framework for Central Securities Depositories (CSDs) by attempting to minimize administrative burdens and cross-border obstacles so that CSDs can operate across the EU with one single license. MEPs also back measures allowing CSDs to access banking services to improve their settlement service offering. Final negotiations between the EP, member states and European Commission over the coming weeks and months will result in a final set of rules before the year-end.
Singapore consults on adjustment spreads for legacy SIBOR contracts
Singapore has begun the second phase of the orderly transition to a SORA-based interest rate landscape with the publication of a new consultation on the setting of adjustment spreads to convert legacy retail loans referencing SIBOR to a SORA reference. Singapore’s Steering Committee for SOR & SIBOR Transition to SORA (SC-STS) says the conversion of a legacy SIBOR contract to a SORA-based contract requires an adjustment spread to account for inherent differences between SIBOR and Compounded SORA, such as the credit and term risk premium absent in SORA. To account for uncertainty in the macroeconomic and interest rate conditions for 2023 and 2024, the consultation proposes an approach that would give retail customers options for transition that best meet their needs, provides certainty and transparency to retail customers and banks, and safeguards against extreme adjustment spread outcomes. The consultation is open for comment until April 28, 2023.
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