PwC on Basel Committee’s Views of its Fundamental Review of the Trading Book

On January 26 the Basel Committee on Banking Supervision (BCBS) released its first set of Frequently Asked Questions (FAQs) on the Fundamental Review of the Trading Book (FRTB). The BCBS published the FRTB in January 2016 with the intent to harmonize (i.e., reduce variability) the treatment of market risk across national jurisdictions.[1] It will generally result in higher global capital requirements.

The BCBS calls for each jurisdiction to finalize implementation of the FRTB before January 2019 and for compliance to begin by December 2019. We do not expect US regulators to adopt the standard until 2018 at the earliest … Read more

PwC Offers 10 Key Points on SEC’s Consolidated Audit Trail Plan

On November 15, 2016, the Securities and Exchange Commission (SEC) approved a plan to establish a Consolidated Audit Trail (CAT), which will contain a complete record of all equities and options traded in the U.S.[1] The plan will require national securities exchanges and FINRA (self-regulatory organizations or SROs), alternative trading systems (ATSs), and broker-dealers (collectively, CAT reporters) to submit information on trade events,[2] including customers and prices, to the CAT on a daily basis.[3] The approval of the plan is an important milestone towards full operation of the CAT, which is projected by the end of 2019 … Read more

PwC Discusses Election’s Impact on Advisers’ Duty to Retirement Investors

We believe the recent election will have less impact on the Department of Labor’s (DOL) fiduciary duty rule than some in the media are currently speculating.[1] While some provisions may be modified by a new Administration, we believe the rule’s core framework will remain intact. The industry has already made significant progress toward complying with the rule, and there is general recognition of the importance of removing conflicts of interest between financial advisers and retirement investors. A Trump Administration is unlikely to want to immediately restore such conflicts that could harm the very voters who propelled him into office.… Read more

PwC Discusses OCC’s Scrutiny of Bank Sales Practices

U.S. regulators, led by the Office of the Comptroller of the Currency (OCC), are starting to examine sales practices at large and mid-size banks. They will likely first focus on whether banks have opened accounts for customers without consent as recently highlighted in press reports. Examiners will consider deposit accounts, credit cards, and other unsecured lines of credit, which can generate customer fees or impact credit scores. Many banks have been actively preparing for these exams, and several are far along in conducting their own self assessments (with a couple recently announcing preliminary results).

Beyond this historical inquiry, regulators will … Read more

PwC on Counterparty Credit Limits: Do You Know Where Your Exposures Are?

Over the summer, the Federal Reserve Board (Fed) concluded the comment period on its reproposed single counterparty credit limits (SCCL) rule issued in March 2016.[1] SCCL is intended to reduce systemic risk by limiting a banking organization’s credit exposure to any single unaffiliated counterparty as a percentage of the organization’s capital. The rulemaking applies to organizations with over $50 billion in total consolidated assets, including US bank holding companies (BHCs), intermediate holding companies (IHCs), and foreign banking organizations’ (FBOs)[2] US operations (collectively, “Covered Banks”).

The comments put forth by the industry mainly focus on the reproposed rule’s criteria … Read more

PwC explains New Margin Rule for Broker-Dealers in To-Be-Announced Transactions

On August 15, the Financial Industry Regulatory Authority (FINRA) issued a regulatory notice adopting a requirement that U.S. registered broker-dealers collect margin on To-Be-Announced (TBA) transactions (FINRA Rule 4210).[1] FINRA’s action follows the Securities and Exchange Commission’s approval of FINRA’s earlier proposal[2] which was amended several times.

TBA transactions serve as a significant funding and hedging vehicle for consumer mortgage originations and provide liquidity in the secondary market for mortgage loans. These products have over $184 billion in average daily trading volume, second only to U.S. Treasuries, and have historically not been subject to margin requirements. The Rule … Read more

PwC discusses the SEC’s Reporting and Public Dissemination Rule: Five Key Points

On July 13, the Securities and Exchange Commission (SEC) adopted a final rule related to the reporting and public dissemination of security-based swap (SBS) transaction information. The rule builds on an earlier reporting rule for security-based swap dealers (SBSDs) finalized in 2015.[1]

  1. Cleared trade reporting aligns with the CFTC’s recent amendment to its reporting framework. Last week’s final SEC rule clarifies that registered clearing agencies are required to report any SBS to which they are a direct counterparty. This clarification makes the SEC rule consistent with a recent amendment adopted by the Commodity Futures Trading Commission (CFTC) to its

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PwC explains Brexit: Five Key Points

The UK voters’ decision to exit the EU came as a surprise to many observers, as well as the markets, with the “Leave” campaign even hinting at defeat as the polls closed. The Wall Street echo chamber view that it would make no sense in the end for the UK to leave was just that. The vote has unleashed political, economic, and financial uncertainty that will play out over the months ahead with attendant risk premia rising for affected currencies, equity and fixed income markets, sectors, and individual firms. Market values for banks, insurance companies, and asset managers dropped Friday … Read more

PwC discusses Ten Key Points from the SEC’s Business Conduct Standards for Swap Entities

One down, three to go: SEC rulemaking is heating up.

Last month, the Securities and Exchange Commission (SEC) finalized business conduct standards for security-based swap dealers (SBSDs).[1] The completion of this rule by the SEC is significant because few security-based swap (SBS) rules have been finalized as compared to the numerous rules completed by the Commodity Futures Trading Commission (CFTC) that govern other types of swaps.[2] These business conduct standards represent the first of four rulemakings that must be finalized before SBSDs will have to register with the SEC.[3]

The SEC’s rule will impact how SBSDs communicate … Read more

PwC discusses Five Key Points from Basel’s Proposed Restrictions on Internal Models for Credit Risk

Last week, the Basel Committee on Banking Supervision (Basel) proposed floors and other constraints on the use of internal models for calculating credit risk capital. The proposal aims to reduce complexity and variation in the calculation of regulatory capital among banking institutions, thus improving comparability. To that end, the proposal generally discourages (and in some instances prohibits) the use of internal ratings-based (IRB) approaches in calculating risk weighted assets (RWA) related to credit risk. The proposal’s objective is consistent with Basel’s other recent issuances, i.e., the re-proposed standardized approach for credit risk (issued last December),1 revised final capital requirements … Read more

PwC discusses Year-Ahead US Roadmap for Derivatives Regulation

It has been three years since the first wave of registrants applied to be swap dealers (SDs) with the Commodity Futures Trading Commission (CFTC). Since then, SDs have focused on modifying their operations and building compliance programs that accommodate the flurry of new rules issued by the agency.[1] Despite these efforts, SDs continue to struggle with a lack of clarity in the rules and with a multitude of no-action letters that delay compliance with certain requirements (e.g., related to reporting and inter-affiliate clearing).

Further complicating matters for SDs, global coordination has been a challenge. Pulling back somewhat from previous … Read more

PwC discusses Ten Key Points from Basel’s Fundamental Review of the Trading Book

On January 14th, the Basel Committee on Banking Supervision (BCBS) published its revised capital requirements for market risk. The final standard, also known as the Fundamental Review of the Trading Book (FRTB), is intended to harmonize the treatment of market risk across national jurisdictions and will generally result in higher global capital requirements. BCBS estimates a median capital increase of 22% and a weighted-average capital increase of 40%. However, we believe this impact can be somewhat mitigated by portfolio re-optimization.

  1. Standardized approaches continue to gain regulatory favor. The final framework allows banks to calculate their capital requirements using

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PwC discusses Key Points from Basel’s Re-proposed Standardized Approach for Credit Risk

The Basel Committee on Banking Supervision (BCBS) on December 10th issued the second iteration of its proposed revisions to the standardized approach (SA) for credit risk measurement. Following up on last year’s initial issuance, the proposed revisions are intended to amend BCBS’s currently applicable SA in order to achieve a better balance between risk sensitivity, simplicity, and comparability.

While the latest proposal includes significant changes from last year’s version in response to BCBS’s quantitative impact study (QIS) and industry comments, several important issues remain. Most importantly, the revised proposal does not include an implementation timeline, and kicks the can … Read more

PwC discusses Bank Culture: It’s About More Than Bad Apples

The US Federal Reserve (Fed) again expressed concerns about the culture at financial institutions this month.[1] This has been a recurring theme since the financial crisis, as regulators in the US and abroad have hit industry players with steep fines for employee misconduct. Since 2008, the largest global banks have cumulatively paid out over $300 billion in fines, with US banks paying about half of that amount.

EU and UK regulators have been the most active in pushing banks to address their culture weaknesses.[2] The EU has introduced new rules limiting bonuses paid to senior employees that are … Read more

PwC highlights Ten Key Points from the Fed’s TLAC Proposal

The Fed proposed its long-awaited Total Loss-Absorbing Capacity (TLAC) requirements on October 30th. As expected, the Fed’s proposal came out tougher than the Financial Stability Board’s (FSB) TLAC standard proposed last year,[1] including limitations on capital distributions and bonus payments, and will likely be tougher than the FSB’s final standard expected next week. In an unusual move, the US issued its proposal before the FSB, suggesting that a consensus could not be reached in line with US regulators’ desire for more stringency.

However, the Fed did not go as far in its quantitative TLAC requirements as some feared it … Read more

PwC explains why Broker-Dealers Should Lock in Liquidity

The credit crisis of 2008 highlighted the criticality of effective liquidity management and demonstrated the difficulties broker-dealers face without adequate funding sources. In response, the Financial Industry Regulatory Authority (“FINRA”) has been taking steps to impose new requirements that will impact many broker-dealers, especially those that hold inventory positions or that clear and carry customer transactions.

Following up on guidance issued in November of 2010, FINRA last month issued new liquidity risk management guidance after a year-long liquidity review of 43 member firms under a stressed environment.

While the guidance was issued as a FINRA notice and therefore lacks the … Read more