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Regulatory Update: November 2019


By Barrie C. Ingman  |  November 5, 2019

Each month, FactSet's Regulatory team offers a rundown of the most important developments in compliance and regulatory news. Read on to see which stories dominated the conversation last month.



International Platform on Sustainable Finance Launched 

The EU and relevant authorities from Argentina, Canada, Chile, China, India, Kenya, and Morocco have launched the International Platform on Sustainable Finance (IPSF) to facilitate and co-ordinate efforts in meeting Paris Agreement commitments to build low-carbon, sustainable infrastructure.

Since, the IPSF states, these global initiatives cannot best be achieved through jurisdictions acting in isolation and further, since public sector funding alone will be insufficient to meet the trillions of dollars of funding required, the IPSF has been established to seek ways to channel private investment and capital towards funding sustainable infrastructure projects through initiatives such as unified capital markets environmental, social and governance (ESG) standards, taxonomies, disclosures and labels. More specifically, the objectives of the IPSF are set out in a Joint Statement, and are summarized as follows:

  • The exchange and dissemination of information to promote ESG best practices.
  • The comparison of initiatives, and the identification of barriers and opportunities to help scale up ESG based finance.
  • The enhancement of international coordination on environmentally sustainable finance issues and, where appropriate, alignment of initiatives and approaches between willing members.

Membership of the IPSF is open to all public authorities responsible for developing environmentally sustainable finance that are willing to promote international cooperation and, where appropriate, coordinate in the ESG arena.


Federal Reserve Provides Final Support for Volcker Rule Roll-Back

The Volcker Rule, which prohibits banks from proprietary trading and specified business with private equity and hedge funds (‘covered funds’) is to be significantly watered-down following endorsement of new measures by the U.S. Federal Reserve (The Fed) on 8 October 2019.

The Fed endorsement follows those of the Office of the Comptroller Currency (here), the Federal Deposit Insurance Corporation (here), the Securities & Exchange Commission (here) and the Commodity Futures Trading Commission (here).

In a nutshell, these controversial measures liberalize Volcker Rule proprietary trading restrictions, simplify associated compliance requirements and clarify or modify certain exemptions in relation to covered funds. Notably, the new definition of ‘trading account’ reduces, by up to a half, the number of financial instruments subject to proprietary trading restrictions.

The new rules will shortly be published in the Federal Register and will become effective on January 1, 2020, with a compliance date of January 1, 2021. Proposals for further changes to the covered funds rules are set to be published in due course.

SEC Capital, Margin & Segregation Rules for Swap Markets Become Effective

In accordance with Dodd Frank (and pursuant to the Securities Exchange Act of 1934), the SEC has introduced a Final Rule governing capital, margin, and segregation requirements for security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs), which became effective on 21 October 2019. The Compliance date for the rule will be 18 months following the later of the effective date of upcoming final rules establishing recordkeeping and reporting requirements for SBSDs and MSBSPs or the effective date of upcoming final rules addressing the cross-border application of certain security-based swap requirements.

The rules establish margin requirements, segregation requirements and notification requirements with respect to segregation in relation to swaps, together with an increase in the minimum net capital requirements for broker-dealers authorized to use internal models to compute net capital (ANC broker-dealers). The Rule also prescribes certain capital and segregation requirements for broker-dealers that are not SBSDs to the extent they engage in swap activity.

The SEC is also making substituted compliance available for capital and margin requirements under Section 15F of the Exchange Act and rules thereunder and adopting a further rule specifying when a foreign SBSD or MSBSP need not comply with Section 3E Exchange Act segregation requirements.

SEC Expands ‘Testing the Waters’ Rule

On September 26, 2019, the SEC announced an expansion of the application of ‘testing-the-waters’ accommodations under a new SEC Rule 163B, which currently applies to emerging growth companies (EGCs) but under the new rules will apply to all issuers seeking to raise funds in the capital markets through a registered public offering.

In general, Section 5 of the Securities Act of 1933 prohibits market soundings with potential investors prior to the filing of a registration statement and a subsequent SEC effectiveness declaration. However, the 2012 JOBS Act inserted subsection (d) into Section 5 of the 33 Act, which permits EGCs to undertake market soundings with potential investors prior to the filing of a registration statement and subsequent to an SEC declaration, so that they may gauge potential interest from investors in a new securities-offering. This accommodation will now apply to all issuers under Rule 163B.

The market soundings are restricted to communications with those ‘reasonably believed’ to be Qualified Institutional Buyers (QIBs) or Institutional Accredited Investors (IAIs). The rule will become effective 60 days after publication in the Federal Register.


EU ESG Benchmark Report Published

On 30 September 2019, the EU Technical Expert Group on Sustainable Finance issued a Final Report on climate benchmarks and environmental, social and governance (ESG) benchmark disclosures to prevent greenwashing. The Report recommends a set of minimum technical requirements for the methodology of the EU Climate Transition Benchmarks (EU CTBS) and EU Paris-Aligned Benchmarks (EU PABS).

The Report will be used in the formulation of Commission Delegated Acts to the Proposed Regulation ‘on Low Carbon Benchmarks and Positive Carbon Impact Benchmarks’. The proposed Regulation is due to be published by the end of 2019 and the Delegated Acts are due to be adopted by mid-2020.

New Process Proposed Following Rejection of Commission’s Controversial AML/ CFT Blacklist

In March 2019, the EU Commission’s controversial blacklist of countries identified as presenting high AML/CFT risks, which included Saudi Arabia and four U.S. overseas territories, was roundly impugned. The initial list was dropped, with the EU Council asking the Commission to come back with a more ‘transparent’ process that gave blacklisted countries a right to be heard and incentives to improve their arrangements – and presumably to expunge strategic and political allies from the record.

On 10 October 2019, the EU Council published a Commission Non Paper, dated 1 October 2019, which sets out a refined methodology for identifying high-risk third countries pursuant to Article 9 of AMLD 4. The proposed methodology requires:

(i) Financial Action Task Force (FATF) listed third countries to be listed by the EU ‘in principle’. The Commission will then assess countries that have been FATF de-listed to see whether the FATF Action Plans are sufficiently comprehensive for an EU delisting, and ‘top up’ the existing FATF Action Plan where necessary with EU-specific measures. Non-FATF listed third countries that may present a risk should be flagged by the Commission/Member States with the FATF before considering an autonomous EU listing.

(ii) The engagement process with third countries should start with a consultation on preliminary findings, followed by drafting country-specific “EU benchmarks” to address concerns identified before finally seeking commitments to implement specific corrective measures within 12 months before a listing is considered.

(iii) Member State experts will be consulted at every stage of the process including Member State law enforcement authorities, intelligence services and Financial Intelligence Units.

ESA Joint Committee Issues Opinion on AML/CFT Risks

On 4 October 2019, and pursuant to Article 6(5) of AMLD 4, the Joint Committee of European Supervisory Authorities (ESAs) published their official Opinion on money laundering and terrorist financing risks across the EU financial sector. Within the Opinion is an interactive tool that allows firms to quickly access the risks set out in the Opinion.

The Opinion identifies weaknesses in terrorist financing transaction monitoring together with limited information flows between firms, law enforcement agencies and supervisors. The ESAs also point to concerns over adequate supervision of the high volume of firms relocating to EU Member States from the UK in anticipation of Brexit.

Weaknesses are also identified in firms’ internal controls, especially in relation to transaction monitoring, suspicious transaction reporting and customer due diligence and there is a concern that rather than employing effective due diligence measures, firms are simply rejecting or closing down business relationships, pushing illicit flows into less transparent channels. This elevates virtual currencies and FinTech as risk areas and Fintech and RegTech are expressly identified as areas that firms must acknowledge and adapt to.

The ESAs also point to a systemic risk associated with poor reviews of existing firm processes and note that many firm control frameworks are inadequate to the risks posed and fail to tackle emerging risks.

ESAs Promote Consistent Application of PRIIPs to Bonds

On 24 October 2019, the European Supervisory Authorities issued a Supervisory Statement geared towards promoting a consistent application of the Regulation for Packaged Retail and Insurance-based Investment Products (PRIIPs) to bonds, following uncertainty surrounding the scope of the PRIIPs Regulation.

In the Statement, the ESAs recommend that EU co-legislators introduce amendments to the Regulation in order to specify more precisely which instruments fall within the scope of the Regulation and further recommend expressly clarifying the application of the Regulation to packaged and wrapped products. The Statement concludes with a table of bond types and features, setting out which are captured by the PRIIPs Regulation.

Spotlight on Securitizations: New Rules, Proposed New Rules, and a Discussion Paper Published

On 16 October 2019, pursuant to Article 7 of the EU Securitisation Regulation, the European Commission adopted Regulatory Technical Standards (RTS), in the form of a Regulation, specifying the details of securitisations that need to be disclosed to originators, sponsors and securitisation special purpose entities (SSPEs). The Annexes to the RTS contain the reporting templates and are published in a separate document that contains 222 pages of tables and fields. The RTS is by and large similar to the original draft version with no fields added or removed. Reporting is on a quarterly basis except in the case of asset-backed commercial paper, which has a monthly reporting cycle.

The RTS follows ESMA’s Opinion on amendments to the draft RTS, which was supplemented by 15 reporting templates, XML schema for the templates, technical reporting instructions and validation rules (see here) that were published in July 2019 together with an updated Q&A.

The EU Parliament and Council now have 3 months to object to the RTS, but this is not anticipated. The RTS will become effective 20 days after publication in the Official Journal. Realistically, they can be expected to enter into force from February 2020.

In a separate development, the European Banking Authority (EBA) has published an Opinion on the regulatory treatment of securitisations of non-performing exposures (NPE). The EBA considers that the slowing pace of NPE reduction by credit institutions is having deleterious consequences and that the slump is attributable to specific market pressures and legal impediments to the transfer of NPEs by banks to non-banks.  In response, the EBA’s Opinion recommends liberalizing the legal impediments and specifically freeing up securitisations to facilitate NPE reduction, thereby strengthening financial stability within the banking sector and freeing up capital for lending to the wider economy.

The EBA consider that the significant causative role played by legal constraints in the deleterious characteristics identified within the sector merit prompt action in the form of recommended modifications to the EU securitization framework as set out in the Opinion.

Finally, the EBA has also recently published a Discussion Paper on proposals in relation to synthetic securitizations, which were originally excluded from the ‘Simple, Transparent and Standardized’ (STS) securitisation regime under the Securitisation Regulation. The Discussion Paper analyses the pros and cons for an STS synthetic securitisation, and proposes criteria when labelling synthetic securitisations as ‘STS', including those applied to traditional STS securitisations together with synthetic-specific requirements such as ‘those on mitigating counterparty credit risk, including on eligible protection contracts, counterparties and collateral; those addressing various structural features of the securitisation transaction; and those ensuring that the framework only targets balance sheet synthetic securitisation’. The deadline for submission of comments is 25 November 2019.


FSC Announce New Financial Benchmarks Regulatory Framework

On October 31, 2019, South Korea’s Financial Services Commission (FSC) issued a Press Release announcing passage of new legislation by the National Assembly—proposed by the FSC in June 2018—regulating financial benchmarks. The framework for benchmarks will take effect in November, 2020, and is part of a global reform movement. The new law’s main features track to the IOSCO Principles for Financial Benchmarks, and were necessitated, in part, by the extra-territorial effects of the EU Benchmarks Regulation (BMR).

ASIC and AFM Publish a Warning About Warnings

In the spirit of publishing at the “frontier” of public policy debate, on 14th October 2019, the Australian Securities and Investment Commission (ASIC) and the Dutch Authority for Financial Markets (AFM) published a joint Report on the efficacy of risk disclosures for financial products. The report covers substantial, global analysis on the outcomes from the deployment of disclosures and concludes that disclosure requirements have been an over-used tool in the regulatory toolkit, too frequently utilized without regard to empiricism. The Report suggests that alternative regulatory tools—focused on product design, governance and distribution—should be used more.

KYC Journey

Barrie C. Ingman

Regulatory Advisor




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