IOSCO: policy measures to protect investors of OTC leveraged products

News

Set 20 2018

The Board of the International Organization of Securities Commissions (IOSCO) today issued a final report providing measures for securities regulators to consider when addressing the risks arising from the marketing and sale of OTC leveraged products to retail investors.

Simultaneously, the Board issued a public statement on the risks of binary options and the response of regulators for mitigating the risks and harm to retail investors transacting in these products. The Report on Retail OTC Leveraged Products includes three complementary toolkits containing measures aimed at increasing the protection of retail investors who are offered OTC leveraged products, often on a cross-border basis. The report covers the marketing and sale of rolling-spot forex contracts, contracts for differences (CFDs) and binary options.

The toolkits set out guidance for regulators on:
• Policy measures that can help to address the risks arising from the marketing and sale of OTC leveraged products by intermediaries;
• Educating investors about the risks of OTC leveraged products and the firms offering them;
• Enforcement approaches and practices to mitigate the risks posed by unlicensed firms offering the products

Retail investors typically use these products to speculate on the short-term price movements in a given financial underlying. Typically, the products are offered through online trading platforms often through aggressive or misleading marketing campaigns. Most retail investors trading in these complex products lose money.

The measures in the three toolkits draw largely on IOSCO members’ experiences and practices. The report also includes various policy, educational and enforcement initiatives that IOSCO members have taken to specifically address unauthorized cross-border and online offerings of OTC leveraged products.

The initiatives are intended to serve as useful guidance to IOSCO members as they consider their approaches to address the risks arising from the marketing and sale of OTC leveraged products to retail investors. The policy, enforcement and educational measures included in the report are complementary and should be seen as part of a holistic approach to addressing the risks of the relevant products.

Report on Retail OTC Leveraged Products (PDF)

EBA: increased appetite for client deposits and market-based funding

News

Set 20 2018
The European Banking Authority (EBA) published today two reports on EU banks’ funding plans and asset encumbrance respectively. The reports aim to provide important information for EU supervisors to assess the sustainability of banks’ main sources of funding. The results of the assessment show that banks plan to match the asset side increase in the forecast years by a growth in client deposits as well as market based funding.

159 banks submitted their plans for funding over a forecast period of 3 years (2018 to 2020). According to the plans, total assets are projected to grow, on average, by 6.2% by 2020. The main drivers for asset growth are loans to households and to non-financial corporates.

Over the forecast period, banks expect to increase client deposits and long-term debt funding while short-term debt and repo funding are expected to fall. The projected data shows a concentration of debt securities issuances in 2019 and 2020. Most likely, these issuances are driven by the conjunction of the maturities of central bank funding and the nearing timeline for G-SIBs to comply with the total loss absorption capacity requirements (TLAC) and the progress in the implementation of the minimum requirements for eligible liabilities (MREL).

Data also shows that the spread between interest rates for client deposits and for loans to clients declined in 2017 and most banks expect the spread to decline even further in 2018. On the cost of funding, banks seem optimistic as they assume their costs of long-term market-based funding in 2018 will remain at 2017 levels. Amid higher competition and a fading support by central banks, the evolution of banks’ interest spread and market-based funding costs should be closely monitored, in particular for those banks that are under pressure to increase profitability or without access to market-based funding at reasonable rates.

The asset encumbrance report shows that in December 2017 the overall weighted average asset encumbrance ratio stood at 27.9%, compared to 26.6% in 2016. The modest increase of the encumbrance ratio is not an issue of immediate concern in the funding structure of EU banks, as it is mostly driven by a reduced volume of total assets as opposed to an increase in encumbered assets. The report shows a wide dispersion across institutions and countries, which is consistent with what was observed in the previous report.

Besides repos, covered bonds and over-the-counter derivatives are among the main source of asset encumbrance. Banks in countries that were more affected by the sovereign debt crisis still have high levels but have shown a decrease in the volume of encumbrance, which could reflect a general improvement in the funding situation in these countries.

Latest report from the Basel Committee

News

Set 20 2018

The Basel Committee on Banking Supervision met in Basel on 19-20 September to discuss a range of policy and supervisory issues, and to take stock of its members’ implementation of post-crisis reforms. Particularly, the Committee discussed:

  • the results of the annual assessment exercise for global systemically important banks (G-SIBs). These were approved by the Committee and will be submitted to the Financial Stability Board before it publishes the 2018 list of G-SIBs. The Committee also agreed to publish the high-level indicator values of all the banks that are part of the G-SIB assessment exercise;
  • progress on revising the market risk framework. The Committee expects to finalise these revisions around the end of the year;
  • banks’ responses to regulatory change, including potential arbitrage transactions. The Committee will publish a newsletter on leverage ratio window-dressing behaviour, whereby banks adjust their balance sheets around regulatory reporting dates to influence reported leverage ratios. The Committee will consider Pillar 1 (minimum capital requirements) and Pillar 3 (disclosure) measures to prevent this behaviour. The Committee also agreed to clarify the treatment of “settled-to-market” derivatives in the Committee’s liquidity standards and has published a response to frequently asked questions on this topic; and
  • the outcome of its review of the impact of the leverage ratio on client clearing. It also discussed an associated joint consultation paper by the Committee, Financial Stability Board, Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions on the effects of post-crisis reforms on incentives to centrally clear over-the-counter derivatives, consistent with the G20 Leaders’ commitments to reform OTC derivatives markets. The Committee agreed to publish a consultation paper next month to seek the views of stakeholders as to whether the exposure measure should be revised and, if so, on targeted revision options.

The Committee also agreed to publish a revised version of its Principles on Stress Testing, following the consultation paper published in December 2017. The revised principles will be published next month.

The Committee exchanged views on emerging conjunctural and structural risks. Part of this discussion focused on banks’ exposures to crypto-assets and the risks such assets may pose. The Committee agreed on further work on this topic that will inform its views on banks’ crypto-asset exposures.

Committee members reiterated their expectation of full, timely and consistent implementation of the Basel III standards for internationally-active banks. As part of the Regulatory Consistency Assessment Programme, the Committee assessed Saudi Arabia’s implementation of the Net Stable Funding Ratio and large exposures standard as “compliant”; the reports will be published soon.

Il termometro dei mercati finanziari (14 settembre 2018)
a cura di Emilio Barucci e Daniele Marazzina

Termometro

Set 16 2018
Il termometro dei mercati finanziari (14 settembre 2018) a cura di Emilio Barucci e Daniele Marazzina

L’iniziativa di Finriskalert.it “Il termometro dei mercati finanziari” vuole presentare un indicatore settimanale sul grado di turbolenza/tensione dei mercati finanziari, con particolare attenzione all’Italia.

Significato degli indicatori

  • Rendimento borsa italiana: rendimento settimanale dell’indice della borsa italiana FTSEMIB;
  • Volatilità implicita borsa italiana: volatilità implicita calcolata considerando le opzioni at-the-money sul FTSEMIB a 3 mesi;
  • Future borsa italiana: valore del future sul FTSEMIB;
  • CDS principali banche 10Ysub: CDS medio delle obbligazioni subordinate a 10 anni delle principali banche italiane (Unicredit, Intesa San Paolo, MPS, Banco BPM);
  • Tasso di interesse ITA 2Y: tasso di interesse costruito sulla curva dei BTP con scadenza a due anni;
  • Spread ITA 10Y/2Y : differenza del tasso di interesse dei BTP a 10 anni e a 2 anni;
  • Rendimento borsa europea: rendimento settimanale dell’indice delle borse europee Eurostoxx;
  • Volatilità implicita borsa europea: volatilità implicita calcolata sulle opzioni at-the-money sull’indice Eurostoxx a scadenza 3 mesi;
  • Rendimento borsa ITA/Europa: differenza tra il rendimento settimanale della borsa italiana e quello delle borse europee, calcolato sugli indici FTSEMIB e Eurostoxx;
  • Spread ITA/GER: differenza tra i tassi di interesse italiani e tedeschi a 10 anni;
  • Spread EU/GER: differenza media tra i tassi di interesse dei principali paesi europei (Francia, Belgio, Spagna, Italia, Olanda) e quelli tedeschi a 10 anni;
  • Euro/dollaro: tasso di cambio euro/dollaro;
  • Spread US/GER 10Y: spread tra i tassi di interesse degli Stati Uniti e quelli tedeschi con scadenza 10 anni;
  • Prezzo Oro: quotazione dell’oro (in USD)
  • Spread 10Y/2Y Euro Swap Curve: differenza del tasso della curva EURO ZONE IRS 3M a 10Y e 2Y;
  • Euribor 6M: tasso euribor a 6 mesi.

I colori sono assegnati in un’ottica VaR: se il valore riportato è superiore (inferiore) al quantile al 15%, il colore utilizzato è l’arancione. Se il valore riportato è superiore (inferiore) al quantile al 5% il colore utilizzato è il rosso. La banda (verso l’alto o verso il basso) viene selezionata, a seconda dell’indicatore, nella direzione dell’instabilità del mercato. I quantili vengono ricostruiti prendendo la serie storica di un anno di osservazioni: ad esempio, un valore in una casella rossa significa che appartiene al 5% dei valori meno positivi riscontrati nell’ultimo anno. Per le prime tre voci della sezione “Politica Monetaria”, le bande per definire il colore sono simmetriche (valori in positivo e in negativo). I dati riportati provengono dal database Thomson Reuters. Infine, la tendenza mostra la dinamica in atto e viene rappresentata dalle frecce: ↑,↓, ↔  indicano rispettivamente miglioramento, peggioramento, stabilità.

Disclaimer: Le informazioni contenute in questa pagina sono esclusivamente a scopo informativo e per uso personale. Le informazioni possono essere modificate da finriskalert.it in qualsiasi momento e senza preavviso. Finriskalert.it non può fornire alcuna garanzia in merito all’affidabilità, completezza, esattezza ed attualità dei dati riportati e, pertanto, non assume alcuna responsabilità per qualsiasi danno legato all’uso, proprio o improprio delle informazioni contenute in questa pagina. I contenuti presenti in questa pagina non devono in alcun modo essere intesi come consigli finanziari, economici, giuridici, fiscali o di altra natura e nessuna decisione d’investimento o qualsiasi altra decisione deve essere presa unicamente sulla base di questi dati.

WEF: blockchain technology can fill the trade finance gap

News

Set 14 2018

The World Economic Forum (WEF) and Bain & Company conducted a joint research indicating that, by deploying blockchain, global businesses can generate an extra $1 trillion in trade finance that would otherwise be missed out on.

According to an Asian Development Bank calculation, the global trade finance gap is currently at $1.5 trillion and is estimated to grow to $2.4 trillion by 2025. The research further explains that this issue largely arises from limited access to credit and loans for SMEs that are looking to expand their businesses.

This joint initiative of the Supply Chain and Transport industries and the System Initiative on Shaping the Future of International Trade and Investment of the WEF. It provides a first look at the narrow topic of trade and supply chain finance, including a snapshot of the status of technological developments. Concrete examples indicate that the technologies could narrow the current trade finance gap of $1.5 trillion, representing roughly 10% of global merchandise trade volumes.

Blockchain is able to fill in much of this gap in global trade finance by easing financing for small- and medium-sized enterprises (SMEs) in emerging markets. International trade and global value chains have been critical for both the wealth of nations and the reduction of geopolitical tensions.

Yet, still more remains to be done. Archaic processes pose a significant obstacle for small and medium-sized enterprises (SMEs) and trade with emerging markets. Transforming paper-based documentation into electronic formats and applying smart tools and technologies help to reduce trade barriers and improve processing times at borders, particularly for small businesses and companies in higher risk developing countries.

The researchers further added that a blockchain-based trade finance system would be particularly beneficial to Asian economies as they account for 7 percent ($105 billion) of the trade finance gap, with 75 percent of the global document-based transactions across supply chains.

 

WEF – A New Age for Trade and Supply Chain Finance (PDF)

 

ESMA: high level of diversity in national markets for structured credit products

News

Set 14 2018

The European Securities and Markets Authority (ESMA) has carried out a study of the EU market in structured retail products, from an investor protection perspective.

The research breaks down the EU market geographically into national retail markets and found a high degree of heterogeneity in the types of product sold.

The report identified that although a wide array of different structured products are available to retail investors across the EU, each national market is concentrated around a small number of common types, namely capital protection products, yield enhancement products and participation products.

The analysis was carried out both at an EU-wide level and also specifically in the French, German and Italian retail markets, and suggests that the search for yield has been a common driver of several changes in the distribution of product types.

Structured products sold to retail investors in the EU are a significant vehicle for household savings. Certain features of the products – notably their complexity and the level and transparency of costs to investors – warrant a closer examination of the market from the perspective of investor protection.
Breaking down the EU market geographically into national retail markets reveals a very high degree of heterogeneity in the types of product sold, although among the vast array of different structured products available to retail investors each market is concentrated around a small number of common types.

Changes in typical product characteristics are not uniform across national markets. Analysis both at an EU-wide level and in the French, German and Italian retail markets suggests, however, that the search for yield has been a common driver of several changes observed in the distribution of product types.

ESMA: reports on trend risk and vulnerabilities (PDF)

EU finance ministers and the Single Resolution Fund

News

Set 14 2018

The euro area finance ministers, meeting on 7 September,  exchanged views with Roberto Gualtieri, Chair of the European Parliament’s Committee on Economic and Monetary Affairs, on the euro area’s economic outlook and challenges. They also discussed euro area Member States’ ability to allocate resources efficiently in labour and product markets, and heard a presentation by Christopher Antoniou Pissarides, Professor of Economics at the London School of Economics and Nobel Prize laureate, about the impact of artificial intelligence and automation on labour markets.

EU finance ministers discussed issues related to the common backstop to the Single Resolution Fund (SRF), as well as the implications on financial stability of increasing interest rates. They exchanged views on crypto-assets, particularly initial coin offerings, which they believe have the potential to emerge as a viable form of alternative financing, provided they can be properly regulated.

The Single Resolution Fund (SRF) has been established by Regulation (EU) No 806/2014 (SRM Regulation). Where necessary, the SRF may be used to ensure the efficient application of resolution tools and the exercise of the resolution powers conferred to the SRB by the SRM Regulation. It is composed of contributions from credit institutions and certain investment firms in the 19 participating Member States within the Banking Union.

The SRF ensures that the financial industry, as a whole, finances the stabilisation of the financial system. It will be gradually built up during the first eight years (2016-2023) and shall reach the target level of at least 1% of the amount of covered deposits of all credit institutions within the Banking Union by 31 December 2023.

Within the resolution scheme, the SRF may be used only to the extent necessary to ensure the effective application of the resolution tools, as last resort, in particular:

  • To guarantee the assets or the liabilities of the institution under resolution;
  • To make loans to or to purchase assets of the institution under resolution;
  • To make contributions to a bridge institution and an asset management vehicle;
  • To make a contribution to the institution under resolution in lieu of the write-down or conversion of liabilities of certain creditors under specific conditions;
  • To pay compensation to shareholders or creditors who incurred greater losses than under normal insolvency proceedings.

The SRF shall not be used to absorb the losses of an institution or to recapitalise an institution. In exceptional circumstances, where an eligible liability or class of liabilities is excluded or partially excluded from the write-down or conversion powers, a contribution from the SRF may be made to the institution under resolution under two key conditions, namely:

  • Bail-in of at least 8%: losses totalling not less than 8% of the total liabilities including own funds of the institution under resolution have already been absorbed by shareholders after counting for incurred losses, the holders of relevant capital instruments and other eligible liabilities through write-down, conversion or otherwise;
  • Contribution from the SRF of maximum 5%: the SRF contribution does not exceed 5% of the total liabilities including own funds of the institution under resolution.

Furthermore, the Intergovernmental Agreement (IGA) acknowledges that situations may exist where the means available in the Single Resolution Fund (Fund) are not sufficient to undertake a particular resolution action, and where the ex-post contributions that should be raised in order to cover the necessary additional amounts are not immediately accessible.

In December 2013, ECOFIN Ministers agreed to put in place a system by which bridge financing would be available as a last resort. The arrangements for the transitional period should be operational by the time the Fund was established.

On 8 December 2015, ECOFIN Ministers endorsed a harmonised Loan Facility Agreement (LFA). ECOFIN ministers emphasised that as of 2016, each Member State participating in the SRM (MS) will enter into the harmonised LFA with the Single Resolution Board (SRB) in order to provide a national individual credit line to the SRB to back its national compartment following resolution cases. In the meantime, 19 out of 19 MS have signed an LFA.

Bank of England: Bank Rate maintained at 0.75%

News

Set 13 2018

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment.  At its meeting ending on 12 September 2018, the MPC voted unanimously to maintain Bank Rate at 0.75%.

The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion.  The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

In the MPC’s most recent economic projections, set out in the August Inflation Report, GDP was expected to grow by around 1¾% per year on average over the forecast period, conditioned on the gently rising path of Bank Rate implied by market yields at that time.  Although modest by historical standards, the projected pace of GDP growth was slightly faster than the diminished rate of supply growth, which averaged around 1½% per year.  With a very limited degree of slack remaining, a small margin of excess demand was therefore projected to emerge by late 2019 and build thereafter, feeding through into higher growth in domestic costs than has been seen over recent years.  The contribution of external cost pressures, which has accounted for above-target inflation since the beginning of 2017, was projected to ease over the forecast period.  Taking these influences together, and conditioned on the gently rising path of Bank Rate, CPI inflation remained slightly above 2% through most of the forecast period, reaching the target in the third year.

Recent news in UK macroeconomic data has been limited and the MPC’s August projections appear to be broadly on track.  UK GDP grew by 0.4% in 2018 Q2 and by 0.6% in the three months to July.  The UK labour market has continued to tighten, with the unemployment rate falling to 4.0% and the number of vacancies rising further.  Regular pay growth has risen further to around 3% on a year earlier.  CPI inflation was 2.5% in July.

The global economy still appears to be growing at above-trend rates, although recent developments are likely to have increased downside risks around global growth to some degree.  In emerging market economies, indicators of growth have continued to soften and financial conditions have tightened further, in some cases markedly.  Recent announcements of further protectionist measures by the United States and China, if implemented, could have a somewhat more negative impact on global growth than was anticipated at the time of the August Report.

The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.  Since the Committee’s previous meeting, there have been indications, most prominently in financial markets, of greater uncertainty about future developments in the withdrawal process.

The Committee judges that, were the economy to continue to develop broadly in line with the August Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.  As before, these projections were conditioned on the expectation of a smooth adjustment to the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union.  At this meeting, the Committee judged that the current stance of monetary policy remained appropriate.  Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

RegTech – Trading & Market Transformation
a cura di Deloitte Italia

Articolo

Set 13 2018
RegTech – Trading & Market Transformation a cura di Deloitte Italia

The financial system is undergoing a more and more important, pervasive and disrupting technological evolution.

Most of the financial market players are evolving their business models into a FinTech direction, leveraging on the more efficient, independent and flexible technology which is able to learn through an iterative process of self-learning and error correction.

Following the recent 2008 financial crisis, the Supervisory Controls on behalf of Regulators have become more pervasive, detailed and intransigent, recording cumulative penalties for ca. $ 200 bn since 2008 because of the failures to regulatory requirement compliance (Douglas, Janos, & Ross, 2016).

The fear of a new light supervision over banking activities along with a worsening of the financial markets health have suggested an enlarged scope of regulatory requirements and greater reporting effort, data disclosure and data quality processes.

RegTech addresses these needs by introducing in a cost-effective and simple way, a new technology that is able to offer flexibility in data and report’s production, automation in terms of data quality, improvement in data management for analysis and inspections purposes (e.g. cognitive learning applied to RAF).

However, RegTech implies significant changes in compliance approach for banking institutions and consequently, it places new challenges to Regulators’ infrastructural capabilities. Supervisors are involved in this disrupting process, they have to acquire technological and analytical tools able to process and analyze an increasing amount of data requested.

 

RegTech: an evolving framework

Regulatory developments in action

New regulations, introduced as a consequence of the recent financial crisis, have increased controls of financial institutions both in terms of banking prudential capitalization (minimum capital requirement for operational, credit and market risks under Basel III, FRTB) and data disclosure for Regulators and customers (MiFID II, PSD 2).

The rationale behind these changes is to determine a homogeneous capitalization scheme among all banks in order to provide Supervisor with the chance to compare and efficiently aggregate banking risks and to achieve an overall picture of the banking system.

In this context, the standard models, as well as tests under stressed conditions, will become mandatory for all banks (including those that use internal models and therefore necessarily adapted to their needs) and represent the regulatory floor to RWA. For this purpose, a set of widespread exercises (EBA Stress Tests) and inspections (TRIM) have been set up.

In this fast evolving framework, banking institutions are experiencing an inevitable growth of the burden of analysis, reporting and public disclosure of their status towards Supervisors, resulting in greater economic expenditures and IT architecture developments

Digitalization: FinTech transformation in the FSI industry

In order to grasp the new opportunities available on the market, Financial Industry is progressively increasing the use of technology in various areas at different levels where it is involved, for example payment service, digital banking and lending.

These new technologies applied to the financial world is now called FinTech. Different sub-sectors of Financial Industry can benefit from the development and application of this new science such as:

  • Artificial Intelligence
  • Blockchain
  • Cyber Security
  • BigData

RegTech Information

The RegTech has been identified, for the first time, by FCA (Financial Conduct Authority) (Imogen, Gray, & Gavin, 2016) as “a subset of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities”. It addresses both the need of banking institutions to produce, as fast as possible, reports for regulatory requests and the creation of a new framework between Regulator and financial institution, driven by collaboration and mutual efficiency.

RegTech is becoming the tool to obtain a greater sharing of information between the parties, by reducing the time spent to produce and verify data and by performing jointly analyses, both current and prospective through mutual skills.

 

Implications for banking institutions

RegTech will allow institutions to develop a new way of communicating their data to the control authorities and to the whole financial system by exploiting a more efficient Risk Management and an advanced Compliance management.

Digital Compliance

The RegTech Council (Groenfeldt, 2018) has estimated that, on average, the banking institutions spend 4% of their revenues in activities related to compliance regulation and, by 2022; this quote will increase by around 10%. In this area, the transition to an advanced and digital management of compliance would bring around 5% of cost-savings. Concerning the new regulations introduced for trading and post trading areas, the RegTech would help managing the huge amount of data referred to transactions, KPI, market data and personal data related to customer profiling.

Particularly, a Thomson Reuters survey (Reuters, s.d.), has estimated that, in the 2017, the process of information checking of new users lasted around 26 days. The cost of Customer Due Diligence for the intermediaries is on average around $40 million per year. This is due to the inefficiencies of the actual processes, to the increase of FTE required as result of the increasing controls defined by Regulators and to the loss incurred by the stop of customer profiling practices, which are extremely slow and complex.

Risk Management 2.0

In the last few years, the role of the Risk Management has significantly changed from a static supervision of Front Office activities to a dynamic and integrated framework involving all Bank’s divisions.

However, the evolution of Risk Management not only goes through a change in its approach but also through a substantial IT architecture revolution.

The main habit is creating a fully integrated risk ecosystem able to feed itself from many banking systems, performing checks and regular data monitoring through cognitive learning.

The change of position from an independent risk management to a completely centralized one allows obtaining advantages as:

  • cost reduction ensuring a unique architecture;
  • greater flexibility in its updating / evolution;
  • reduction of the effort (FTE) for the intra system reconciliation;
  • greater uniformity in the compliance checks;
  • standardization of information sources for all disclosures maintaining consistency.

Nowadays, considering the status of the RegTech area, populated by many start-ups and differentiated solutions without a consolidate best practice, there are some barriers to its completed implementation:

  • preference in financial industry for business investments rather than innovation;
  • the needed investments cannot rest on previous investments in Compliance;
  • continuous changes about the regulatory requirements still ongoing;
  • challenges for the RegTech start-ups to interface with the IT structures, potentially not adequate for the ongoing system.

Implications for the Regulators

Financial System increasingly focuses its attention on the supervisory authorities by requiring them a costs reduction/complexity in the face of a greater quality of the controls put in place.

If on one hand, the institutions try to apply FinTech’s innovations to their own disclosure activity, on the other hand, it is advisable that the Regulators invest in similar technological innovations in order to manage a considerable amount of required data through new regulations.

The potential benefits are:

  • creation of preventive compliance system developed to anticipate any breach
  • performing real-time analysis and checks rather than only historical ones
  • possibility to carry out more complete analysis on a wider data panel and not only on aggregations already provided without the underlying details
  • implementing simple tools to increase the information level against a reduction of the overall effort (eg. fingerprint for the access to the trading platforms).

All of this also brings benefits to the entire financial system:

  • defining framework at national level but especially at international level so as to reduce progressively the potential arbitrages between markets
  • increasing the flexibility (both on banking institutions and Regulators) to analyze different sets of data by avoiding development costs and the related implementation time as result of these changes
  • making compliance architecture an useful analysis tool to monitor impacts of new regulation through an ad-hoc scenario analysis.

Conclusions

RegTech represents one of the most important challenges of the financial system, which is able to modify structurally the global financial markets.

Despite the entry barriers to the use of technology in a regulatory environment, the banking institutions will necessarily have to evolve their way to relate with Regulators by making the process less costly and more efficient and at the same time by maintaining their competitiveness on the market.

With regard to this, the approach suggested by the literature is to acquire pilot or “sandbox” cases in order to adopt gradually an innovative process without causing potentially negative impacts.

Particularly, the institutions need this application in the trading field where the new regulations require a remarkable quantity of data and computational speed not manually sustainable.

In addition, the Supervisory Authority is willing to avoid the situation where it has the needed information for supervisory purposes but it is not able to analyze them promptly and correctly. For this purpose, the Supervisory Authority are slightly more static because they are still stuck on the old paradigm and on the review of the main regulations.

 

Alberto Capizzano – Director Deloitte Consulting

Silvia Manera – Manager Deloitte Consulting

Bibliography

Douglas, W. A., Janos, N. B., & Ross, P. B. (2016, October 1). FinTech, RegTech and the Reconceptualization of Financial Regulation. Northwestern Journal of International Law & Business, Forthcoming, p. 51.

Groenfeldt, T. (2018, 04 4). Understanding MiFID II’s 30,000 Pages Of Regulation Requires RegTech. Forbes, p. 1.

Imogen, G., Gray, J., & Gavin, P. (2016). FCA outlines approach to RegTech. Fintech, United Kingdom, 1.

R.T. (s.d.). KYC onboarding still a pain point for financial institutions: https://blogs.thomsonreuters.com/financial-risk/risk-management-and-compliance/kyc-onboarding-still-a-pain-point-for-financial-institutions/

 

European Banking Union: an enabling environment for pan-European banks

News

Set 08 2018

Peter Praet, Member of the Executive Board of the ECB, at the Eurofi Financial Forum 2018, enlightened the importance of the Banking Union as the final objective of financial integration.

The European Union has now have a single supervisor and a single resolution authority, and banks are subject to the same European rulebook. The Banking Union contributes to providing effective mechanisms for cross-border risk-sharing and broadening the sources of funding within a country, thereby promoting macroeconomic stability and growth.

Mr Praet followed by listing the major obstacles hindering the fungibility of capital and liquidity of banking groups. Very often, these obstacles relate to regulatory fragmentation and ring-fencing of national markets. Further harmonisation would help to address many of the issues, while appropriate prudential safeguards can be put in place to address possible financial stability concerns by national authorities.

First, a number of national options and discretions are hindering the practical application of cross-border liquidity waivers within the Union. While such waivers are explicitly allowed by the CRR, and already contain prudential safeguards, so far the ECB has received almost no application for their use from the banks it supervises. An important reason for this lack of applications is the existence of national large exposure limits on intragroup exposures in several European countries. These limits prevent institutions in these countries from transferring liquidity within the group in a flexible manner and thus represent practical obstacles to the use of liquidity waivers. Effectively, they are hindering the free flow of liquidity in the Banking Union and should be harmonised further.

Second, the proposal to have cross-border capital waivers within the EU was not taken forward in the on-going review of the CRR, which is a missed opportunity. Such waivers would be consistent with the establishment of the SSM and the Banking Union and help to support the free flow of capital across the Union. On the one hand, it is understandable that some national authorities are concerned about the possible financial stability implications of the proposal. On the other hand, such concerns could be addressed by making the waivers subject to additional prudential safeguards, and by putting in place appropriate transition arrangements that account for the planned further progress on the Banking Union.

Third, the major progress we have made in our Banking Union needs to be recognised also in the international regulatory framework. For example, the G-SIB framework currently penalises cross-border transactions within the Banking Union by attaching a higher systemic risk score to banks with more of such transactions. This goes against the very rationale of the Banking Union, as it reduces the incentives for cross-border transactions and risk diversification. The international regulatory framework should recognise the progress that has been made in the Banking Union and exclude intra Banking Union positions from the cross-jurisdictional indicators in the G-SIB methodology.

Fourth, there are also some resolution related aspects that warrant further consideration. In particular, the allocation of internal MREL has turned out to be an area of tension between national jurisdictions. Jurisdictions with a foreign bank subsidiary prefer to have a high pre-positioning of internal MREL to ensure an orderly resolution of its local subsidiary. However, this implies a certain degree of ring-fencing to the detriment of the foreign parent bank. The compromise reached by Member States in the Council only allows that internal MREL is waived if the resolution entity and the subsidiary are located in the same Member State, neglecting the fact that we have achieved so much in terms of joint supervision and resolution among euro area countries. To account for this progress, internal MREL waivers on a cross-border basis in the Banking Union should be allowed as this would contribute to continuous cross-border banking, e.g. by generating efficiency gains and promoting further integration. Therefore, it should also be possible to use guarantees to replace internal MREL and allow for more flexibility in the allocation of resources within the Banking Union. Of course, to install confidence it will be important to have adequate safeguards in place, including that there is no legal or practical impediments to the provision of support by the parent to the subsidiary, in particular when the resolution action is taken.