President Trump made many statements during the campaign regarding actions he plans to take to reverse Obama administration sanctions policies. These included revisiting the agreement to ease sanctions on Iran, rolling back the sanctions program against Russia, and reversing the Obama administration’s policy of easing sanctions on Cuba. However, we believe that reversing course on these policies is much easier said than done.
For example, several of the Obama administration’s sanctions policies – including those involving Iran and Russia – were part of multilateral actions rather than unilateral sanctions programs, so breaking from such agreements will be difficult. Iran … Read more
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. 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, including customers and prices, to the CAT on a daily basis. 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
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. 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
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
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. 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) US operations (collectively, “Covered Banks”).
The comments put forth by the industry mainly focus on the reproposed rule’s criteria … Read more
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). FINRA’s action follows the Securities and Exchange Commission’s approval of FINRA’s earlier proposal 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
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.
- 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
… Read more
Attackers last February reportedly stole $81 million from the Bangladesh Central Bank by obtaining and exploiting the bank’s credentials for the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. The attack – one of the biggest bank robberies in history – exploited weaknesses in cyber, fraud, and possibly insider threat controls, illustrating the need for banks to combine financial crime risk areas that were previously either siloed, or at best tenuously connected.
Specifically, the attackers exploited cyber weaknesses by designing custom malware tailored to bypass controls and network logging systems used by the Bangladesh Central Bank. The attackers also … Read more
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
The Consumer Financial Protection Bureau (CFPB) released recommendations in March for how banks and credit unions can better protect elderly customers from financial exploitation. The CFPB issued its recommendations as the elderly population continues to rapidly grow, positioning banks and credit unions for a significant increase in elder financial exploitation (EFE) attacks.
Other regulatory bodies have taken notice of this growing threat as well and are putting forth regulations and guidance of their own. For example, the Financial Industry Regulatory Authority (FINRA) last year proposed a regulation requiring broker-dealers to take action in response to suspected EFE.
EFE is … Read more
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). 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. These business conduct standards represent the first of four rulemakings that must be finalized before SBSDs will have to register with the SEC.
The SEC’s rule will impact how SBSDs communicate … Read more
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
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. 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
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.
- Standardized approaches continue to gain regulatory favor. The final framework allows banks to calculate their capital requirements using
… Read more
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
The US Federal Reserve (Fed) again expressed concerns about the culture at financial institutions this month. 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. The EU has introduced new rules limiting bonuses paid to senior employees that are … Read more
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, 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
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
The debate over asset managers’ potential systemic risk has been ongoing for some years, with little agreement between the industry, US regulators, and global standard setting bodies. US regulators themselves have been divided – the SEC has in particular been skeptical that asset managers or individual funds can be the source of systemic risk of a magnitude akin to that posed by large banks.
Nevertheless, consensus is finally forming on the need to address specific risks of the industry. With the designation of asset managers as systemically important financial institutions (“nonbank SIFIs”) by the Financial Stability Oversight Council (“FSOC”) now … Read more
Despite millions of dollars spent on enhancements, cybersecurity remains the area of risk management with the largest gap between threat and preparedness. As the frequency and sophistication of cyber attacks have increased significantly in recent years, counter measures have failed to keep pace.
This gap is especially important for financial institutions, which by our estimate are over 30% more likely to be targeted by cyber crime. While the biggest banks have been dealing with cyber threats for years, they and their smaller peers are largely responding to threats reactively. More specifically, banks continue to address past issues rather than responding … Read more