Earlier this year, the Securities and Exchange Commission (SEC) issued guidance regarding “robo-advisers,” automated investment advice tools accessed via web-based or mobile platforms with minimal human interaction.1 The guidance is an important reminder to the industry that robo-advisers are subject to the same regulatory framework as traditional advisers and highlights several unique regulatory considerations stemming from their distinct business model. The SEC also, for the first time, included these considerations as a part of this year’s examination priorities.
The SEC’s sharpened focus on robo-advisers is a response to their dramatic increase in use over the past several years, largely … Read more
On August 3, the Federal Reserve (Fed) proposed for comment a new supervisory rating system to assess the safety and soundness of Large Financial Institutions (LFIs).1 This is the first change to the Fed’s supervisory rating system since the financial crisis, and aims to simplify and clarify the existing five-component supervisory assessment process2 by assigning ratings across three pillars: (1) capital, (2) liquidity, and (3) the effectiveness of governance and controls.
1. Doubling down on capital and liquidity. The proposal is designed to focus future ratings on two areas where the Fed has made the most changes … Read more
On August 3, the Federal Reserve (Fed) proposed for comment supervisory guidance for boards
of directors of Fed-supervised institutions1 (i.e., Board Effectiveness (BE) guidance). The proposed BE guidance is the result of a multi-year review by the Fed of existing guidance and practices of boards of directors across supervised firms. It is intended to consolidate and replace existing board supervisory expectations from 27 SR Letters, which include 170 supervisory expectations for boards, with 33 expectations of effective boards. The 33 proposed expectations are categorized into five attributes which the Fed intends to assess a firm’s board of directors, including: … Read more
The recently released public sections of the 2017 resolution plans submitted by the eight US global systemically important banks (G-SIBs)1 provide a unique window into the banks’ resolution planning efforts that have developed over the last five years. Notably, the 2017 plans not only describe how the banks have enhanced their resolution plans but also highlight improvement in their intrinsic resolvability, which is indicative of the mindset change that has evolved over the past seven years: resolution planning has developed from a one-time compliance “project” to an important strategic consideration for business-as-usual (BAU) financial and operational choices.
These fifth… Read more
In the 100 days since his election, President Trump and members of his cabinet have continued public calls for a rollback of Dodd-Frank and related regulations enacted since the financial crisis, while offering few concrete actions or proposals. Initially, Wall Street (and specifically bank stocks) rallied heavily in anticipation of business-friendly deregulation and tax reform, but bank executives have since tempered their expectations and, at least among the big banks, quieted calls for broad reform.
As we anticipated last November, the Trump Administration largely departed from the anti-bank populism espoused during the campaign and quickly moved on to more traditional … Read more
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. 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
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 September 13, 2016, the New York State Department of Financial Services (DFS) proposed a broad set of cybersecurity regulations for banks, insurers, and other financial institutions. The proposal is largely consistent with existing guidance (e.g., under the NIST Cybersecurity Framework or the FFIEC IT Handbook), but it goes further in some ways.
The proposed rule is the result of DFS’ focus on cybersecurity over the past several years, in which DFS conducted three industry surveys, held cybersecurity discussions with various financial institutions, and issued a letter to US regulators asking for feedback on potential cyber-specific requirements.… 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