In this week's newsletter, we provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructure providers, asset managers and corporates.
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AML/CTF, Sanctions and Insider Trading
Financial Action Task Force Consults on Draft Risk-Based Approach Guidance for the Securities Sector
On July 6, 2018, the Financial Action Task Force published for consultation draft Risk-Based Approach Guidance for the securities sector. The FATF is developing the Guidance to assist countries, regulators, Financial Intelligence Units and participants in the securities sector to adopt a risk-based approach to anti- money laundering and countering financing of terrorism. The draft Guidance aims to assist in the risk-based design and implementation of applicable AML/CTF measures by providing general guidelines and examples of current practices and facilitate the effective implementation and supervision of national AML/CTF measures by focusing on risks and on mitigation measures. The FATF is also hoping that the draft Guidance will aid the development of a common understanding of what the risk-based approach to AML/CTF entails in the context of the securities sector. The Guidance will not be binding once it is finalized. The draft Guidance should be read in conjunction with the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation and the 2009 Report on Money Laundering and Terrorist Financing.
The draft Guidance sets out the key principles involved in applying a risk-based approach to AML and CTF. There are separate sections providing specific guidance to securities providers and intermediaries and to securities supervisors on the effective implementation of a risk-based approach. The annexes provide examples of supervisory practices that have been adopted and examples of suspicious activity indicators in relation to securities.
The FATF is seeking feedback on the draft Guidance. In particular, the FATF would like to know if the guidance provides sufficient clarity and whether any additional guidance could be incorporated. The FATF would also welcome further examples of adopted supervisory practices and examples of suspicious activity indicators.
Responses to the consultation should be provided by August 17, 2018, including by providing a red line of the draft Guidance. The FATF intend to adopt the final Guidance at its October 2018 plenary meeting.
The consultation page is available at: http://www.fatf-gafi.org/publications/fatfgeneral/documents/public-consultation-guidance-securities.html?_sm_au_=iVVJMfRLJFJFfTR7.
Bank Prudential Regulation & Regulatory Capital
US Federal Financial Regulators Release Statements Regarding Implementation and Impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act
On July 5 and 6, 2018, the U.S. Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation released statements regarding the implementation and impact of the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The agencies released a joint statement on July 6, 2018, which discusses rules that are jointly administered by the agencies and immediately affected by the EGRRCPA. These include regulations, such as company-run stress testing, resolution plans, the Volcker Rule, high volatility commercial real estate exposures, examination cycles, municipal obligations as high-quality liquid assets and appraisals for certain rural transactions. Certain changes to these rules and regulations are immediately effective, while other changes will require further rulemaking from the agencies. The statement also explains that while certain formal requirements are being relaxed under the EGRRCPA, the agencies will continue to supervise the banks under their jurisdiction and will, for example, continue to review the risk management and capital planning practices of these institutions through the regular supervisory process.
On July 6, 2018, the Federal Reserve Board released a separate statement on certain Federal Reserve Board-specific rules and regulations affected by the EGRRCPA. In addition to further guidance regarding high volatility commercial real estate exposures, the Federal Reserve Board statement discusses changes to assessments, enhanced prudential standards and other requirements, such as certain reporting, disclosure and recordkeeping requirements. Regarding assessments, the Federal Reserve Board noted that while it will collect assessments from bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets for the year 2017, it will not collect assessments from bank holding companies and savings and loan holding companies with less than $100 billion in total consolidated assets going forward. With respect to enhanced prudential standards, the Federal Reserve Board noted that it will not take any action to require bank holding companies with less than $100 billion in total consolidated assets to comply with certain existing regulatory requirements, including the enhanced prudential standards under Regulation YY, the liquidity coverage ratio requirements under Regulation WW and the capital planning requirements under Regulation Y. A detailed list of affected regulatory requirements is provided as an attachment to the Federal Reserve Board statement.
On July 5, 2018, the OCC and FDIC each released statements with respect to the EGRRCPA's effect on the Home Mortgage Disclosure Act. These statements noted that the EGRRCPA provides two separate partial exemptions from HMDA reporting requirements, which are generally available for certain financial institutions that originated fewer than 500 closed-end mortgage loans or those that originated fewer than 500 open-end lines of credit in each of the two preceding calendar years. With respect to these transactions, financial institutions that qualify for a partial exemption are exempt from the collection, recording and reporting requirements for certain data points specified in Regulation C. The statements also provide guidance with respect to the submission and formatting of Loan/Application Registers, and note that the U.S. Consumer Financial Protection Bureau will be issuing guidance later this summer regarding the applicability of the EGRRCPA to HMDA data collected in 2018.
The Joint agency statement is available at: https://www.occ.treas.gov/news-issuances/news-releases/2018/nr-ia-2018-69a.pdf; the OCC statement regarding the HMDA is available at: https://www.occ.treas.gov/news-issuances/bulletins/2018/bulletin-2018-19.html, the FDIC statement on the HMDA is available at: https://www.fdic.gov/news/news/financial/2018/fil18036a.pdf and the Federal Reserve Board statement is available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180706b1.pdf.
EU Technical Standards Published on Assessment Methodology for Use of Advanced Measurement Approaches for Calculating Operational Risk Capital Requirements
On July 6, 2018, a Commission Delegated Regulation was published in the Official Journal of the European Union, which supplements the Capital Requirements Regulation with Regulatory Technical Standards on the assessment methodology to be used by national regulators when deciding whether to permit institutions to use Advanced Measurement Approaches for operational risk. The RTS cover: (i) the qualitative and quantitative criteria that firms must meet before they are granted permission to use AMA models for calculating their capital requirements to cover operational risk; (ii) the criteria for the supervisory assessment of key methodological components of the operational risk measurement system; and (iii) common standards for the supervisory assessment of a bank's operational risk governance.
The Delegated Regulation was made by the European Commission on March 14, 2018 and is based on final draft RTS submitted to the European Commission by the European Banking Authority in June 2015. The Delegated Regulation comes into effect across the EU on July 26, 2018. For institutions currently using AMA models or whose application to do so is pending, the Delegated Regulation will apply from July 26, 2019 and certain provisions related to correlation will not apply until July 26, 2020.
The Commission Delegated Regulation (EU) 2018/959 is available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018R0959&from=EN.
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