Global Risk Regulator - June 2021
- Fed says CBDC could complement cash and will publish discussion paper during the summer
- Climate change could influence bank capital levels warns OCC
- UK allowed to apply for CPTPP membership
- Global standard setters make renewed push to end Libor’s reign
- FASB proposes broadening hedge accounting rules
- WFE defends exchanges’ data charging practices
Crypto emerges from the shadows: The promise of profits and efficiency gains is seeing cryptocurrencies and their supporting blockchains being steadily drawn out from the shadows and into as yet largely unfinished regulatory parameters.
'A note published by SEBA Bank in April tracked global crypto regulatory developments. It found that more than 100 jurisdictions and at least 15 supranational bodies have taken formal steps to regulate cryptofinance products and processes. The report said that currently Switzerland, Liechtenstein and Singapore offer the greatest certainty around crypto. While the EU is developing its Markets in Crypto-Asset regulation (MiCA), Germany and France have been reducing regulatory uncertainty around crypto, with the former seen by some participants as ahead of the UK in this area. China, South Korea, Laos, Burundi and Qatar have simply prohibited some or all cryptofinance products and processes. The US, meanwhile, is muddling through reflecting its complex patchwork of federal and state regulators. SEBA said crypto investors and entrepreneurs are tending to gravitate towards the jurisdictions offering the highest levels of certainty, hence the development of ‘Crypto Valley’ spanning Swiss cantons between Zug and Liechtenstein.'
Delayed CRR II poses risks of capital penalties for underprepared firms: The EU’s updated Capital Requirements Regulation is going live at the end of June, imposing stricter standards on banks and asset managers. Experts warn financial services firms of tough penalties for non-compliance.
'The UK is also mulling its approach to counterparty risk. Basel’s original calibration of SA-CCR has been amended in the US, and the EU has committed to reviewing its calibration. Banks have proposed that the PRA should adopt the same approach to prevent an adverse impact on UK competitiveness. In terms of market risk, in the EU’s version of CRR II there is no date specified for when the FRTB becomes a binding RWA requirement. Clarity is needed as to when the UK’s intentions on when the FRTB becomes binding. Moving to the SA-CCR for derivative exposure calculation, the inclusion of collateral in large exposure limits for sovereign exposures and increased constraints on intra-group exposures all represent significant constraints on large exposure limits in the UK. The PRA has proposed to reverse the changes to the treatment of software assets enacted by the EU in December; some believe there is merit in the UK diverging from the Basel Committee to maintain its competitive position with the EU and US. In support of the rollout of the CRR II and to collect the associated data, the Bank of England has published a draft of its banking taxonomy, data point model dictionary, annotated templates and validation rules.'
Futures law reform to bolster China’s capital markets: Recently announced changes to China’s futures laws will have a profound impact on the country’s financial sector and are another step towards the internationalisation of the renminbi.
'Close-out netting is pivotal to derivatives trading, and is used to determine final obligations in the event of a default. Once a counterparty defaults, its remaining contractual obligations are terminated, and its total positions are combined into a single positive or negative figure. For this process to function properly requires that close-out netting takes precedence over existing bankruptcy laws. Without this precept, administrators could cherry-pick individual transactions, resulting in lack of certainty over creditors’ payments and their timeline for receiving the cash. The use of close-out netting is not unknown in China: when Baoshang Bank became the first Chinese lender in two decades to have its assets seized by regulators in August 2020, its liabilities were netted off before bankruptcy proceedings went ahead. This was done at the discretion of China’s banking regulators. However, the proposed futures law bakes the principle of close-out netting into Chinese legislation, providing certainty for counterparties, according to Li Lixia, section chief of the China Banking and Insurance Regulatory Commission’s law and regulation department.'
Banks look beyond digitisation post-pandemic: For banks, the COVID-19 pandemic compressed years-worth of digitisation into mere months, raising the possibility of introducing new technologies such as artificial intelligence through to real-time regulatory reporting.
'“At a large-scale industrial level, we need to implement a clear AI and data roadmap, in order to understand where the pools of data are, which are the most important for us,” says Claire Calmejane, chief innovation officer at Société Générale, adding that this data can be combined with external data to drive new insights for the bank and its clients. “Today we have about 80 different user cases for AI and 250 for data and AI,” says Ms Calmejane. She explains that these initiatives range from automating certain aspects of advisory services and pricing through to improving response times to client enquiries. Société Générale uses chatbots for some retail services in the French market, which Ms Calmejane explains involves processing some 15,000 conversations a day and has earned a 98% satisfaction rate by users. Automation, digitisation and AI are used extensively by the bank to meet know your customer (KYC) regulatory requirements and to make the process more efficient. Essentially, this involves documents being digitised so software can extract the necessary information, which then becomes part of the workflow. Similar technologies and processes are used for extracting critical information from legal documents.'
South Africa beds down bank resolution plans following slow progress: South Africa is catching up with its post-financial crisis obligations with a series of reforms that have been in the works for years as it learns from the experience of other jurisdictions.
'Moreover, the anticipated resolution regime has knocked banks’ ratings to some degree. In November, Fitch Ratings downgraded South Africa’s top five banks’ support ratings (SRs) to 4 from 3 and revised their support rating floors (SFRs) down to B+ from BB- due to the sovereign’s “reduced ability to provide support, in case of need, due to a weakening fiscal position”. The accompanying analyst note cited South Africa’s adoption of bank resolution legislation in a foreseeable timeframe, including the introduction of a new class of bail-in eligible securities. It said: “Once the resolution framework is enacted and implemented, Fitch expects to downgrade the SRs to 5 and revise the SRFs to ‘no floor’ for all banks. This reflects the agency’s view that, notwithstanding the banks’ systemic importance, the South African authorities’ propensity to support the banking system will no longer be certain.” For now, banks are waiting for the Financial Sector Laws Amendment Bill of 2020 to be passed by the parliament, after which they will receive more detail on the exact standards they will have to comply with.'