Our May edition looks at the gaps in Brexit contingency planning, the price of culture change, the latest fluff and bluff around eurozone clearing moves, whether the Dodd Frank dump is imminent – and whether or not FRTB / Basel IV deadlines are really realistic.
Have Your Brexit Contingency Plans Ready!
Deep concerns about the robustness of Brexit contingency plans have led the Bank of England’s Prudential Regulation Authority (PRA) to write to the UK’s leading financial institutions urging them to devise a plan for all eventualities, including the most adverse outcomes.
With hard Brexit becoming increasingly inevitable, the PRA expects firms to plan for a variety of potential scenarios. While they note that many firms are well-advanced in their planning and have engaged closely with the PRA as part of that process, their current assessment is that the level of planning is uneven across firms and plans may not be being sufficiently tested against the most adverse potential outcomes.
- These institutions have until 14 July to submit their contingency plans.
“This was not a punishment or a Brexit bill, I can’t understand why here and there I hear mentions of punishment regarding the exit bill, the Brexit bill. That is not the case. Commitments have been made and these commitments have to be honoured, these responsibilities have to be honoured.”
He also insisted that the EU would not be asking the UK to sign a blank cheque.
“There was never any question of asking the UK to give us a blank cheque. That would not be serious. All we are asking for is for accounts to be cleared, for the honouring of commitments which the UK has entered into”.
£250bn price tag: not enough for culture change in banking
“While fines and sanctions have roles in deterring misconduct, they will not, on their own, bring about the cultural change we need. We must move from an excessive reliance on punitive, ex post fines of firms to greater emphasis on more compelling ex ante incentives for individuals, and ultimately a more solid grounding in improved firm culture.”
He cited the economic impact of fines with global misconduct costs reaching £250bn:
- This money could have been used to support £3.9trn in lending to households and businesses.
Lots of fluff is just enough to bluff
The FT has reported that the EU is set to mandate legislatively that euro-denominated clearing can only in the Eurozone.
London hosts up to three-quarters of euro-denominated clearing, approximately £850bn daily, however just recently German MEP Manfred Weber went on record to say it is “not thinkable” that the UK could continue to handle euro-denominated business post Brexit.
A draft communique on the upcoming European Markets Infrastructure Regulation II (EMIR II) seen by the FT ahead of its official publication supports “more centralisation of supervision”. It notes that Britain’s exit will have a “significant impact” on oversight arrangements because it will play an outsized role in capital markets beyond the EU’s regulatory regime.
For non-EU operators “specific arrangements based on objective criteria will be necessary to ensure that, where Central Clearing Counterparties (CCPs) play a key systemic role for EU financial markets . . . they are subject to safeguards provided by the EU legal framework,” the paper states. “This includes, where necessary, direct supervision at EU level and/or location requirements.”
- But this does not read like a strict mandate for euro-denominated clearing to be relocated to the Eurozone – and so I call the FT’s bluff in this piece with Luke Clancy from Risk.
Naturally the European Commission needs to be seen to be doing something and so all this fluff will probably make into the preamble of the legislative text with “oversight arrangements” amounting to additional reporting requirements for non-EU based CCPs. The draft legislative text is expected late June.
Equivalence is not a blank cheque
Agreed. But I suspect this consensus has not been reached by like thinking?
Valdis Dombrovskis, European Commissioner for financial stability, financial services and Capital Markets Union, gave a speech on challenges for EU financial services policy at the European business conference.
On the issue of equivalence, he said that the EU intends to continue to make active use of the equivalence model. However, he noted that “equivalence is not a right for all third countries and it is not a blank cheque whereby the EU will give up control over key systemic risks to its financial stability”
Once again there is talk about equivalence as if it were a robust and clearly defined model. Commissioner Dombrovskis comments suggest that the UK will be in a mad dash for this be-all and end-all stamp of approval, when the reality is third country equivalence is both patchy and ambiguous.
- Post Brexit, the overall aim of financial institutions will not be to get equivalence and be done, but rather to obtain a bespoke deal, based on mutual recognition and regulatory cooperation, allowing for mutual market access and delivering the same, or comparable, levels of access rights to those currently available.
US plans are underway to ‘do a big number on Dodd Frank’
Following President Trump’s January pledge to do a big number on Dodd-Frank, calling the legislation a “disaster” and adding that “it’s almost impossible now to start a small business and it’s virtually impossible to expand your existing business”, House Financial Services Committee Chairman Jeb Hensarling has chipped in with a similarly dour tone.
The plain-speaking chairman stated that “The bottom line is Dodd-Frank has failed”
This comes ahead of a Committee hearing on his Financial CHOICE Act, a bill intended to dismantle the Dodd Frank Act, overhauling post-crisis regulation.
Importantly, despite wishful thinking from some on this side of the pond, the overhaul is unlikely to remove the often punitive and always burdensome extraterritorial impact of Dodd Frank for non-US banks.
What the bill will do is:
- adjust the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), the bank stress testing procedures; and
- repeal the Orderly Liquidation Authority, which allows the federal government to step in if a bank is near collapse, to provide a backstop to ensure failure does not spread to the rest of financial system. Hensarling said this means the bank, not taxpayers, would be on the hook to pay for the bail out.
BCBS – over and over, expecting different results …
Findings from the twelfth progress report on adoption of Basel III standards show that the US has yet to draft and adopt Basel Committee on Banking Supervision (BCBS) Basel III reforms on capital requirements for equity investments in funds, the standardised approach for measuring counterparty credit risk and capital requirements for central clearing counterparties (CCPs). These rules were due to come into effect by January 2017.
The EU implemented the Basel reforms via the Capital Requirements Regulation (CCR)/ Directive (CRD IV) between January 2015 and January 2017. The reform was, however, originally proposed in 2009 and due to come into effect from 1 January 2014. It therefore comes as no surprise that a Bloomberg survey revealed that around 40% of banks would struggle to meet a 2019 implementation deadline for the latest round of Basel reforms Fundamental Review of the Trading Book (FRTB) – aka Basel IV.
- The only surprise comes from the BCBS itself (who have yet to finalise FRTB rules) and it’s insistence on this insane 2019 deadline.