Benelux forum 2014 - Regulation update

Benelux Forum – March 2014

Richard Young

Regulatory Affairs - SWIFT

[email protected]

Regulation Update

Agenda

• Section 1

• Background to Regulatory Changes

• The Changing EU Regulatory Structure

• Section 2

• SEPA and Payment Services Directive

• Basel III and CRD IV

• FATCA

• AML & Financial Sanctions

• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking

• CPSS-IOSCO Principles for FMIs

• Funds Regulation – UCITS, AIFMD

• LEI

• Section 3

• Timetables

G20 Commitments & EU Single Market –

Driving Regulatory Change

G20 Commitments

• Capital

Requirements/Capital

Buffers

• Liquidity Monitoring

• Shadow Banking Industry

regulation

• Greater Market

Transparency

• Safer OTC Derivatives

• Robust Market

Infrastructure

EU

• Progress the Single Market in

Financial Services by

continuing deployment of

measures to remove barriers

to cross border transactions.

+ • EU Interpretation of G20

Commitments

3

Rule-Making Process

Legislative Process

G20

Policymaking Process

Political Commitment

G20 Commitments & Regulatory Development

ESRB European Systemic

Risk Board

ESCB European System of Central

Banks

CGFS Committee on the Global

Financial System

IASB International Accounting

Standards Board

IOSCO International Organisation

of Securities Commissioners

BIS Bank for

International Settlements

BCBS Basel Committee on Banking Supervision

CPSS Committee on Payment and Settlement Systems

FSB Financial Stability Board

ODRF OTC Derivatives Regulators

Forum

IMF International Monetary

Fund

ODSG OTC Derivatives Supervisors

Group

US Senate

US House of Representatives

European Council

European Parliament

CRD IV

Dodd Frank Act

MIFID/R

EMIR

CSDR

Congressional Oversight

EC Endorsement & EP/Council non-objection

US Administration

CFTC

SEC

European Commission

ESMA

EBA

EIOPA

4

Adherence / Compliance

2009

2013+

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

Changing EU Regulatory Structure – Single

Supervisory Mechanism • September 2012 - EU propose Single Supervisory Mechanism (SSM) for euro

area.

– A regulation conferring strong powers on the ECB for the supervision of all

banks in the euro area, with a mechanism for non-euro countries to join on a

voluntary basis.

– Focus on decision making in the EBA to ensure balance and integrity of the

single market.

– First step to Banking Union

• March 2013 Deal reached with EU Parliament on the SSM - banks with assets

of €30 billion, or larger than one-fifth of their country's economic output, are

supervised by the ECB rather than national supervisors.

• The next pillar of Banking Union is the SRM (Single Resolution Mechanism).

Ongoing discussions between EU Parliament and Council: member states

decision making powers over bank resolution, which institution would ultimately

be responsible for resolution and the borrowing capacity of the Single

Resolution Fund.

ECB Preparing to take up SSM role from November 2014

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

SEPA and Payment Services Directive

• SEPA

• Early 2012 agreement reached between EU Parliament, Commission

and Council on SEPA end date. Resulting timings:

− A common and single end date of end January 2014 for the migration of

euro retail credit transfers and euro direct debits to SEPA instruments.

Deadline recently extended to August 2014

− An exclusion of the High Value Payment Systems from its scope.

− Mandatory use of ISO 20022 XML as the standard for euro retail CT and

DD messages for the interbank space AND for customers sending or

receiving bulk files.

− A ban on per transaction Multilateral Interchange Fees (MIFs) for DDs as

from 1 November 2012 for cross-border and 1 November 2017 for

domestic direct debits

− Industry Challenges:

− Corporate Segment Take Up

− Differing Time lines per Geographic Area and Instrument Types –

complexity of Implementation

8

No further deadline extensions beyond August 2014

SEPA and Payment Services Directive Contd. • Payment Services Directive (PSD II) Review

• In July 2013 the EU Commission published legislative proposals to update the

existing Payments Services Directive.

• The new measures consist of a revised PSD Directive, together with a new

Regulation on Multilateral Interchange Fees

• PSD II facilitates and renders more secure the use of low cost internet payment

services by including within its scope new so-called payment initiation services

(PIS).

• Banks, PIS and all other PSPs will need to improve online transaction security

by including strong customer authentication for payments.

• Payment Systems will be required to open up and allow access to ALL PSPs,

subject to appropriate risk assessments including; such areas as governance

and business continuity arrangements, all of which will be overseen by local

regulators.

• The PSD II Regulation on interchange fees imposes a cap on the interchange

fees PSPs can charge for consumer debit and credit card transactions, which

take place within the EU. It will also ban surcharges on such cards imposed

9

When: Agreement unlikely before EU Parliament elections, earliest

implementation 2016?

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

Basel III and CRD IV

• Capital and Liquidity standards – Implementing Basel III in the EU. • Changes to the Capital Requirements Directive (CRD) – new

Regulation and updated Directive:

• Directive covers access to deposit taking facilities, regulation covers prudential requirements including: • capital: Increasing the amount of own funds banks need to hold as well as the quality of

those funds..

• liquidity: Improving short-term resilience of the liquidity risk profile of financial institutions

with introduction of a Liquidity Coverage Ratio (LCR) - the exact composition and

calibration of which will be determined after an observation and review period in 2015.

• leverage ratio: In order to limit an excessive build-up of leverage on credit institutions' and

investment firms' balance sheets, a leverage ratio be subject to supervisory review is

proposed. Implications of a leverage ratio will be closely monitored prior to its possible

move to a binding requirement on 1 January 2018.

• counter party credit risk: measures are introduced which are consistent with the

regulatory policy for OTC (over the counter) derivatives, i.e. to encourage central clearing

When: Agreement reached Feb 2013, entry into force expected

from Jan 2014 – implementation phased in to 2019

11

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

Foreign Account Tax Compliance Act (FATCA) • US tax authorities are concerned that US

persons escape their US tax obligations

by holding assets through offshore

accounts;

• Non – US Financial Institutions designated

as Foreign Financial Institutions (FFIs);

• FFIs suffer 30% withholding unless they

enter into IRS agreement;

• Participating FFIs must identify US

account holders and may withhold

payments to non-participating FFIs or

recalcitrant accounts.

• IGAs increasingly common = reporting to

local tax authority

GIIN – Global Intermediary Identification

Numbers to be added to SWIFTRef

13

When: 25 April 2014 for the initial FFI list, ready for withholding to start from

1st July 2014. Participating FFIs will be expected to begin FATCA tax client

reporting in respect of 2014 information by March 31, 2015.

US Person

Bank

Account

Platform

Insurance

Product

Fund Custodian

Trust

Broker

IFA/ Wealth

Manager

Foreign

Financial

Institutions

Proceeds from

Income & Sales

US Assets

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

AML Review (4th AML Directive – AMLD)

The proposals provide for a more risk-based approach based on an understanding of the

AML and Counter Terrorist Financing risks which impact individual countries. The new

Directive:

• Clarifies and reinforces the rules on customer due diligence and introduces new

provisions to deal with politically exposed persons (i.e. people who may represent a

higher risk of corruption by virtue of the positions they hold).

• Goes beyond the FATF requirements by bringing within its scope all persons dealing in

goods for cash payment of €7,500 or more.

• Ensures a more comprehensive coverage of the gambling sector (in the light of concerns

that the sector is vulnerable to money laundering) and includes an explicit reference to tax

crimes (tax evasion)

• Includes a reinforcement of the sanctioning powers of the regulators by introducing a set

of minimum principle-based rules to strengthen administrative sanctions and a

requirement for them to coordinate actions when dealing with cross-border cases.

15

• This review is to the existing 3rd Anti Money Laundering

Directive which was adopted in 2005 and transposed into

EU Member States' legislation in 2007.

• AMLD implements international standards set by the

Financial Action Task Force (FATF) on anti-money

laundering and terrorist financing. The 4th AMLD will

include standards updates made by the FATF in 2012.

• Example; payment service providers must ensure the transfer of funds is

accompanied by information such as:

– the name of the payer;

– the payer's account number, or a unique transaction identifier

– the payer’s address, or national identity number, or customer

identification number, or date and place of birth.

– the name of the payee; and

– the payee's account number or a unique transaction identifier

• The new Recommendations also have strengthened transparency

requirements for reliable information to be available about the ownership

and control of companies, trusts, and other legal persons or legal

arrangements.

AML Review (4th AML Directive – AMLD) – Contd.

Improving Transparency

16

When – Legislation Feb 2013, Council and Parliament discussions during

2014. Implementation 2015?

• Along with the general review of the AMLD there is a

also a Regulation on the information accompanying the

transfer of funds.

Financial Sanctions

• Sanctions lists are increasingly imposed by national governments and

bodies such as the EEAS and the UN in pursuit of foreign policy objectives

and to fight crime and terrorism.

• Compliance with Sanctions regimes is a challenge for the financial industry

(and for SWIFT).

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

EMIR – European Market Infrastructure Regulation

• Moving OTC Derivatives as far as possible to centralised clearing through one or

more CCPs - G20 Commitments

– ESMA will decide the derivatives contracts across asset class included in

mandatory central clearing;

– All EU counterparties must comply – although exemptions for non-financial

counterparties below ‘clearing threshold’, intra-group transactions and pension

schemes.

• Standardisation of OTC Derivatives contracts permitting exchange trading and

clearing;

• Non-cleared derivatives subject to bilateral risk mitigation; G20 Commitments

• Increased market transparency via reporting to Trade Data Repositories (at least

one per asset class). G20 Commitments

When – Entry into force August 2012; Reporting Feb 2014, Clearing

obligations – Q4 2014?

19

EMIR – Contd. - Focus on CCPs

• EMIR includes rules for the operation of CCPs including:

– Client asset segregation; CCPs must offer an account structure so that Clearing

member assets can be distinguished from the assets of the CCP and Clearing

member client assets can be distinguished from the Clearing members assets

(omnibus segregation). The CCP may also, at the request of a clearing member,

set up individually segregated accounts in which the positions and assets of

indirect clients of a client may be recorded, but there is no obligation to do so.

– CCPs must collect margin limiting credit exposure from clearing members until

the liquidation of the relevant positions. The margin must be sufficient to cover

losses resulting from 99% of exposure movements over a time horizon. Margin

calls will be collected on an intra-day basis. Margins collected must be adequate

to cover the risk stemming from positions registered in each individual client

segregated account.

– Further measures to limit CCPs credit exposures are contained in the

requirements for pre-funded default funds to cover losses not covered by margin

requirements.

20

EMIR - Contd. - Focus on Non-Central Clearing

• EMIR also covers non-centrally cleared OTC derivatives. Some technical

standards are still under development, but will take their starting point from

the BCBS-IOSCO work.

• EMIR mandates risk mitigation for non-centrally cleared trades including:

– Timely confirmation (phasing in, but for financial counterparties this will be

required by T+1 from later in 2014), ideally by electronic means;

– Portfolio reconciliation and dispute resolution;

– Daily mark to market of outstanding contracts;

– Risk-management procedures that require the timely, accurate and

appropriately segregated exchange of collateral (note: it is expected that

the EMIR rules in relation to the margining for non-centrally cleared

derivatives will be largely based on the BCBS-IOSCO framework and will

have a similar application timeline)

– Capital hit to cover risk not protected by collateral exchange

Reminder - Cleared or not-cleared - all transactions need to be reported

– by both counterparties

21

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

MiFID Review – Markets in Financial Instruments

Directive

• Originally implemented in November 2007 to promote greater competition in securities

trading across the single market, review includes G20 commitments on Derivatives

trading.

• MiFID Review: Revised Directive and new Regulation (Mifid & Mifir)

• The review includes:

– increased transparency and oversight in respect of the trading of derivatives,

including pushing OTC derivatives trading as far as possible onto regulated platforms

– G20 Commitment;

– a new type of regulated trading venue – Organized Trading Facilities (OTFs), OTFs

will provide an additional channel for the trading of bonds, structured finance

products, emissions allowances and derivatives;

– increased transparency across asset class, with expanded pre and post trade and

transaction reporting obligations for all types of traded securities;

– new rules around high frequency trading and place restrictions on commodity

derivatives;

– a harmonised third country equivalence regime, including passporting;

– removal of barriers for access to post-trade infrastructure.

When: Political Agreement in Feb 2014, Level 2 Rule making 2014/15,

Implementation 2H 2016?

23

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

Central Securities Depository Regulation (CSD-R)

• Regulation of CSDs and Harmonisation of EU Settlement cycle

– Regulatory standards at the EU level for access to and operation of CSDs

– CSD Governance and scope of services

– Cross border issuance of Securities into CSDs (Giovannini Barrier 9)

– Harmonisation of settlement cycles on T+2 (Giovannini Barrier 6) from

2015

plus procedures to address settlement fails

– Full dematerialisation by 2025

– Account segregation

– Trade date confirmation measures

– Support by CSDs for open messaging and reference date standards

When – Political Agreement Feb 2014, Entry Into Force Summer

2014 ESMA Level 2 Q4 2014/Q1 2015

Full Implementation 2015/16

25

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

Shadow Banking – EU Communication Autumn 2013

• Measures to address Shadow Banking covered in recent EU

Commission communication, included the following areas:

– Increasing transparency, including use of LEI, collection and

exchange of data between authorities and use of trade

repositories, data collection on securities financing e.g. ECB

proposal on repo central repository

– Specific new legislative framework for money market

funds;

– Initiative on securities financing transactions - repo and

securities lending.

– Strengthened Prudential Banking arrangements;

– Greater supervision of the shadow banking sector.

27

Shadow Banking Contd.– Securities Financing

Transactions (SFT) – Reporting and Transparency

• An EU framework under which financial and non-financial

counterparties of an SFT will report transaction details to a

Trade Repository (TR). The intention is to build upon the TR

infrastructure which is already in place for the collection of trade

reports relating to derivatives.

• Measures to increase the transparency of the use of SFTs to

investors. The aim here is to ensure that investors are aware of

the risks associated with the use of SFTs. As such UCITS and

AIFMs must inform their investors on the use they make of

SFT’s, as well as of other financing structures.

• Transparency on rehypothecation. Counterparties will retain the

right to rehypothecate assets, but only if the providing

counterparty has granted prior consent

28

When – Political Agreement during 2015, Entry Into Force 2016?

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI)

30

Foster financial stability

Limit systemic risk

Increase safety

Support greater

efficiency

• Published by CPSS-IOSCO

• 24 principles

• Issued for consultation in 2011

• Finalised in April 2012

• Applied by local supervisors

from 2013

HVPS LVPS

RPS SSS CCP CSD TR

Critical

Services

Providers

(annexe F)

CPSS-IOSCO Consultation on the

Assessment of CSPs – December

2013

CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI)

(contd.) – How SWIFT helps Compliance as a CSP

31

PFMI Annex F:

Oversight expectations

applicable to CSPs

Description

SWIFT 3402 and High

Level Expectation

Assurance report

Risk Identification

management

Manage relevant operational and financial risks

Information Security

Efficient policies to secure confidentiality & integrity of information

Reliability and resilience Be available, reliable and resilient, including continuity plan

Technology planning Robust method to plan technology selection and use

Communication with users Clear communication to understand risk management on critical services

√

√

√

√

√

Today, SWIFT supports FMIs in their Compliance…

FMI Resolution

• EU Commission expects to publish a legislative proposal for the

resolution of non-bank financial institutions. This will include the

resolution of Financial Market Infrastructures – particularly CCPs and

CSDs.

• EU Parliament has already published an own initiative report on a

recovery and resolution framework for non-banks, which will be voted on

later this year. This has protection of client assets at its core. This

report, along with the FSB consultation is likely to inform the content of

the Commission legislative proposal.

Diagram below, taken from the report, illustrates the default waterfall for a CCP under EMIR

32

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

Funds Regulation-UCITS

Enhancement to the EU Directive 85/611/EEC from 1985 designed to allow Collective

Investment Schemes to operate freely i.e. be sold ‘across border’ or ‘passported’

within the EU on the basis of authorisation from one member state.

• UCITS V (the latest manifestation of the above) is designed to define the

notion of safekeeping and to clarify custody duties.

• It also proposed to harmonise depositary oversight duties between

different legal structures, restrict delegation to safekeeping duties and

ensure that risks are specified where sub-custodian networks are used.

• It is proposed to clarify depositary liability by introducing a 'strict liability'

standard obliging depositaries to return instruments lost in custody.

• It is proposed to introduce consistent eligibility criteria for depositaries

across the EU, which must be either credit institutions or investment firms

subject to extensive conditions.

When - UCITS V, dealing with depositary obligations (and

remuneration questions) introduced Summer 2012, expected

political agreement 1H 2014, Implementation 2015?

34

Alternative Investments Directive (AIFMD)

• The Directive impacts all funds that are not harmonised under the UCITS Directive

e.g. Hedge Funds, Private Equity and Real Estate investment funds

• The Directive:

– establishes a secure and harmonised EU framework for monitoring and

supervising the risks that these funds pose to their investors, counterparties,

other financial market participants and to financial stability; and

– permits, subject to compliance with strict requirements, alternative investment

managers to provide services and market their funds across the internal market

of the EU.

– Defines depositary responsibilities e.g. Depositaries must reconcile their records

with prime brokers’ records and with third parties to whom custody functions are

delegated. Where third parties are used it is still the responsibility of the main

depositary to ensure the safety of the fund’s assets and to ensure that all

obligations for accurate record keeping are discharged.

When – Implemented July 2013 but with transition of 1 year for

existing AIFs, transposition delayed in some states. Further

implementation guidance awaited in others

35

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

LEI

Local

Operating

Unit (LOU)

Local

Operating

Unit (LOU)

Local

Operating

Unit (LOU)

Central

Operating

Unit (COU)

Board of

Directors

Regulatory

Oversight

Committee

Governance

Operations

•Composed of international financial market

regulators

•Upholds governance principles and oversees

that global LEI system functions for public

interest

•Made up of Plenary & Executive Committee

• Oversees functioning of the COU, operational

integrity and implementation, maintenance of

standards specified by the ROC

• Appointed & overseen by ROC, composed of

stakeholders from financial & nonfinancial firms

• COU ensures the application of uniform global

operational standards and protocols to maintain

uniqueness of LEI and high data quality

• Manages federation through LOUs

• Maintain a central logical database of

identifiers and corresponding reference data

• LOUs provide local provision of all LEI

functions which the Regulatory Oversight

Committee determines do not need to be

centralized.

• Service providers such as local registries and

numbering agencies 37

Defined Infrastructure

SWIFT/DTCC GMEI Utility –

125,000 + Pre-LEIs issued (57% of

the total Pre-LEIs issued – 32% of

which apply to the EU)

Agenda

• Section 1



• Section 2



• FATCA


• EMIR

• MiFID Review

• CSD Regulation

• Shadow Banking



• LEI

• Section 3

• Timetables

Q2 ‘13 – CPSS_IOSCO Members

begin assessments

39

2013 2014

Timeline Summary – Key Regulatory Initiatives

Q1 ‘13 – 17 Phased

Implementation

FATCA 1 JULY ‘14 Withholding

obligations introduced

CPSS-IOSCO

Principles for FMIs

Adherence

Basel III

(CRD IV in EU) Adherence

July 2013 Entry into Force

of CRD IV in EU,

Phased implementation in EU (CRD IV) and

globally 2015 - 2019

2015 2016

February 12 – Reporting

OTC/listed Derivatives Adherence

European Market

Infrastructure

Regulation (EMIR)

March – TS - Entry into

Force

Q4 2014 beginning of

Clearing obligations

March 2014

Final Text MIFID/MIFIR

CSD-R

Shadow Banking

(Sec. Lending & Repo)

UCITS V

Dodd-Frank

Feb 2014

Final Text Adherence

Jan 14 EC legislative

proposal

Adherence

Adherence

Q1 2014

Political Agreement

Adherence Expected Rule Making

Expected Rule Making

Adherence

Expected Rule

Making

Expected Rule

Making

Adherence

Expected Legislative Timeline

Questions ?

40

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Benelux forum 2014 - Regulation update

Economy & Finance