financial regulation monthly breakfast seminar€¦ · • new thresholds for eps: • all banks...
Post on 10-Aug-2020
5 Views
Preview:
TRANSCRIPT
Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in France, Italy, Singapore, and the United Kingdom and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in South Korea as a Foreign
Legal Consultant Office. Latham & Watkins works in cooperation with the Law Office of Salman M. Al-Sudairi in the Kingdom of Saudi Arabia. © Copyright 2018 Latham & Watkins. All Rights Reserved.
13 June 2018
Financial Regulation Monthly Breakfast Seminar
The US regulatory reform agenda
Select US Commodity Futures Trading Commission Developments
Contractual continuity post Brexit
The recent ESMA Q&A on MiFID RTS 27
The FCA’s paper on unilateral variation clauses and the Consumer Rights Act
The FCA’s recent case against a senior manager
1
Overview
The US regulatory reform agendaAlan Avery and Courtenay Myers Lima
• Background & History
• Passed by Senate on March 16; Passed by House on May 22; signed by
President Trump on May 24
• Key Areas Addressed:
• Regulatory relief for large banks (“tailoring” of Dodd-Frank Act)
• Regulatory relief for community banks
• Mortgage lending and other real estate-related provisions
• Consumer, military servicemember / veteran, and student borrower protections
• Miscellaneous changes to Federal securities laws
3
Economic Growth, Regulatory Relief, and Consumer Protection Act
Regulatory Relief for Large Banks
• Raises asset-size thresholds for Dodd-Frank “enhanced prudential
standards”, or EPS, regulatory regime, which includes:
• Resolution plans (“living wills”)
• Liquidity requirements
• Risk management standards (including risk committee and CRO requirements)
• Risk-based capital and leverage requirements
• Stress tests and capital planning requirements
• Counterparty limits
• Financial stability requirements
• US intermediate holding company requirements for non-US banks
4
Economic Growth, Regulatory Relief, and Consumer Protection Act (cont.)
• Current threshold for most of these requirements is $50 billion
• New thresholds for EPS:
• All banks and bank holding companies (BHCs) below $100 billion are exempt
• Regulatory discretion to apply EPS to banks/BHCs with assets between $100
billion and $250 billion
• Banks/BHCs with assets of $250 billion or above (or designated as a G-SIB) are
automatically subject to EPS
5
Economic Growth, Regulatory Relief, and Consumer Protection Act (cont.)
Background & History of the Volcker Rule
• Enacted in 2010 as part of the Dodd-Frank Act; Effective July 21, 2012
• Implementing regulations issued December 10, 2013; Effective April 1,
2014
• Conformance period ended for most activities on July 21, 2015
• Inter-agency rulemaking and interpretation involving 5 federal agencies:
• Federal Reserve
• OCC
• FDIC
• SEC
• CFTC
6
Volcker 2.0 Proposal
• Applies to any “banking entity”
• Any U.S. FDIC-insured bank
• Any US BHC or any other company that controls a U.S. insured bank
• Any non-U.S. bank with a branch or agency in the U.S.
• Any affiliate or subsidiary of any of these entities
• Two basic prohibitions:
• Proprietary trading
• Covered fund-related activities
• Acquiring or retaining an “ownership interest” in a covered fund
• Sponsoring a covered fund
• Certain transactions with a related covered fund
7
Volcker 2.0 Proposal (cont.)
• On June 5, the 5 agencies jointly released for public comment a proposal
to “simplify and tailor” compliance requirements under the Volcker Rule
regulations
• Significant changes proposed for proprietary trading prohibition
• Only a few minor changes proposed for covered fund-related provisions
• The joint proposal solicits comments on virtually all aspects of the rule
8
Volcker 2.0 Proposal (cont.)
• New 3-tiered compliance framework based on level of trading activity
proposed:
• Significant trading assets and liabilities: > $10 billion (measured on a global basis
for U.S. entities; for non-U.S. entities, measured with respect to U.S. operations)
• Subject to the most stringent compliance requirements
• Moderate trading assets and liabilities: Not in the other two categories
• Subject to less stringent compliance requirements
• Limited trading assets and liabilities: < $1 billion (measured on a global basis for
U.S. and non-U.S. entities)
• Rebuttable presumption of compliance
• CEO attestation would apply only apply to entities with significant trading
assets and liabilities and moderate trading assets and liabilities
9
Volcker 2.0 Proposal (cont.)
Significant proposed changes to the proprietary trading provisions include:
• Changes to definition of “trading account”
• Replaces the intent-based “purpose” test and the controversial 60-day rebuttable
presumption with a new “accounting” test
• Provides a presumption of compliance for trading profits/losses of $25 million or
less for the preceding 90 days
• Market risk capital test and entity test remain largely unchanged
• Expansion of the liquidity management exclusion
10
Volcker 2.0 Proposal (cont.)
• Underwriting exemption and market making exemptions amended to
simplify RENTD requirements
• Changes to the risk-mitigating hedging exemption to simplify compliance
requirements
• “Trading outside the United States” (TOTUS) exemptions for non-U.S.
banks would be broadened by removing several conditions
11
Volcker 2.0 Proposal (cont.)
Significant proposed changes to the covered fund-related provisions include:
• No changes to the definition of “covered fund”, but comments requested
on a number of important aspects of the definition and exclusions
• Codification of the agencies’ FAQ 13, which provides that the “solely
outside the United States” (SOTUS) exemption for non-U.S. banks is
available for investment in third-party covered funds as long as the non-
U.S. bank is not involved in marketing to U.S. residents
• Removal of the U.S. financing restriction under the SOTUS exemption
• Removal of the aggregate 3% limit and the capital deduction for
“ownership interests” in third-party covered funds acquired under the
underwriting and market-making exemptions
• Modest expansion of risk-mitigating hedging exemption for covered fund
“ownership interests”12
Volcker 2.0 Proposal (cont.)
• Proposed by the SEC on April 18, 2018
• Would require a broker-dealer and natural persons who are associated
persons of a broker-dealer to act in the best interest of a retail customer
when making a recommendation of any securities transaction or
investment strategy involving securities to a retail customer
• Retail includes personal, family, household purposes
• Best interest obligation not specifically defined, but encompasses three
separate obligations:
• Disclosure obligation
• Care obligation
• Conflict of interest obligation
13
Regulation Best Interest – Overview
• Broker-dealers already subject to rules and requirements that apply when
they make a recommendation to a customer, e.g., broker-dealers have
duty of fair dealing which requires broker-dealer to make “suitable”
recommendations
• In 2011, SEC published a study which made certain recommendations to
enhance retail customer protections and reduce confusion as to the
standards of conduct that apply when firms provide personalized
investment advice
• SEC has observed instances of retail customers who use the services of
broker-dealers and investment advisers and are not aware of the
differences in regulatory status of these entities
• Best interest proposal intended to eliminate uncertainty and clarify the
standards of conduct applicable to broker-dealers and investment advisers14
Purpose of Best Interest Proposal
• Added complexity to existing regulatory framework
• Lack of clarity on key terms
• “Best interest” not specifically defined
• What constitutes a “recommendation”?
• What is personal, family, or household purposes? Would a family office be
caught?
• Scope of Obligation
• Broader than existing suitability requirements
• Inclusion of non-natural persons
15
Industry Concerns
Select US Commodity Futures Trading Commission (“CFTC”) Developments
Yvette Valdez
CFTC Commissioner (Now Chairman) Giancarlo’s
Dissent:
“The Supplemental [Proposal] would strip owners of
intellectual property of due process of law.…The
[Supplemental Proposal] gives unchecked power to the
CFTC [and] is unlike any other rule proposal that I have
seen in my time of service. What should be a step
forward by the [CFTC] in its mission to oversee
[21st] century digital markets is squandered by its
giant stumble backwards in undoing Americans’
legal and Constitutional rights.”
17
CFTC Regulation Automated Trading (“Reg. AT”)
“[T]he prior administration’s massively
over-reaching and highly concerning
‘source code repository’ proposal is
D-E-A-D.”
CFTC Regulation Automated Trading (“Reg. AT”) (continued)
18
• Requirement to maintain source code + make
it available for inspection
• Source code provided to CFTC only via
enhanced special call or subpoena
• Algorithmic Trading controls apply to AT
Persons
• Expanded to Electronic Trading and
Algorithmic Trading controls applicable
to AT Persons, FCMs + DCMs
• CFTC registrants (i.e., swap dealers, futures commission merchants (“FCMs”), commodity pool operators (“CPOs”),
commodity trading advisors (“CTAs”) & introducing brokers (“IBs”))
• New CFTC Registrant Category of Floor Traders = persons engaged in proprietary Algorithmic Trading through Direct
Electronic Access (“DEA”)
• Volume threshold of daily trading volume = 20,000 contracts/day over 6-month period
• Apply to AT Persons, FCMs + designated
contract markets (“DCMs”)
• Set at the level of each AT Person or market
participant
• Apply to AT Person OR FCM + DCM
• Greater flexibility in setting of levels
• Annual compliance report and annual
certification requirement for AT
Persons
• Annual certification of compliance
by AT Persons (incl. FCMs), with
review + evaluation of compliance
by DCM
Pre-Trade Risk
Controls
Algorithmic
Trading Risk
Controls
Reporting and
Recordkeeping
Source Code
Repository
AT Person
Absent further action by the CFTC in 2018:
• The phase-in period will end on 31 December 2019
• Non-swap dealers would begin counting their swap dealing activity
beginning on January 1, 2019 with the lower US$3B swap dealer
registration threshold in mind
De Minimis Exception to Swap Dealer Registration:
• Swap dealing activity must not exceed US$3B aggregate gross notional amount
threshold (measured over the prior 12-month period)
• Phase-in de minimis threshold of US$8B through 31 December 2017 under
CFTC rules
Swap Dealer Registration De Minimis Threshold
19
04 June 2018
CFTC approves proposal to permanently set swap dealer de minimis threshold at US$8B
Contractual continuity post BrexitThomas Vogel
• Remember "Nothing is agreed until everything is agreed"
• Solution for contract continuity still to be found
• Ending 31 December 2020
• EU law continues to apply and UK courts to have regard to CJEU
• In principle, UK financial institutions maintain access to EU markets
through existing passporting rights will be preserved until the end of the
transition period
• HM Treasury and FCA have announced their intention to create a
temporary permissions regime for EU investment firms
21
Draft Withdrawal Agreement
• “Legacy” derivatives contracts
• Exercising embedded options
• Rolling open positions
• Potential consequences
• Criminal liability “carrying on business without authorisation”
• Express contractual provisions e.g. Illegality/force majeure under ISDA Master
• Civil law consequences; unenforceability (illegality in place of performance or
under foreign governing law)
• Structural mitigation
• Novate to a regulatory compliant entity within the EU (but consent requirements
and tax implications)
• Other solutions
• EU’s approach to solutions: unnecessary; undesirable to interfere in
private contractual rights22
Derivatives
• Current Position
• Currently governed by Rome I (for contractual obligations), which gives effect to
the parties’ choice of governing law
• Rome II governs non-contractual obligations
• During the transition period
• Rome I and Rome II will continue to apply
• Post transition period
• UK government intends to incorporate Rome I and Rome II rules into UK domestic
law
• Remaining EU member states will continue to apply these rules (as currently)
23
Choice of law
• Current position
• Recast Brussels Regulation applies
• During the transition period
• Recast Brussels Regulation applies where proceedings were commenced or the
jurisdiction agreement was entered into before the end of the transition period
• Post the transition period
• Uncertain – but hopeful that an alternative arrangement replacing / reproducing the
Recast Brussels Regulation will be agreed
• Alternatively fall back to common law – which typically enforces jurisdiction clauses
• Also Hague Convention – UK can unilaterally accede - which enforces exclusive
jurisdiction clauses
24
Jurisdiction
• Current position
• Recast Brussels Regulation applies – EU judgments are enforceable across the
EU
• During the transition period
• Recast Brussels Regulation will apply where judgment is given before the end of
the transition period
• After the transition period
• Uncertain – but hopeful that an alternative arrangement replacing / reproducing the
Recast Brussels Regulation will be agreed
• Hague Convention – where a court is given exclusive jurisdiction, other states must
recognise and enforce the judgment of the chosen court
• Domestic regime – additional procedural steps before a foreign judgment is
recognised
25
Enforcement
The recent ESMA Q&A on MiFID RTS 27
Rob Moulton
• RTS 27 applies to trading venues, systematic internalisers, and “other
liquidity providers”
• (Less onerous) RTS 28 applies to firms that use RTS 27 liquidity providers
• ESMA says this phrase
• Is broad (?)
• Includes a firm that regularly and consistently provides liquidity
• Example of CFD provider regularly quoting two way
• May mean some re-assessing or re-justification of pre-MiFID II analysis
27
ESMA Q&A on RTS 27
The FCA’s paper on unilateral variation clauses and the Consumer Rights Act
Rob Moulton
• Focusing on narrow technical arguments to justify a contract term that may
be unfair risks future challenge
• Test of fairness involves taking into account consumers’ legitimate
interests in the context of inequality of bargaining power – test based on
the meaning of the words, not use of the power
• Terms are unfair if, contrary to the requirement of good faith, they cause a
significant imbalance in the parties’ rights and obligations to the detriment
of the consumer (therefore, fairness test has two key elements – good
faith and significant imbalance)
• “It is of fundamental importance…whether the contracts sets out in
transparent fashion the reason for and method of the variation…and,
secondly, whether consumers have the right to terminate the contract”
29
FCA’s view of variation terms
• Does the variation term achieve a legitimate objective?
• Is the power to vary no wider than is reasonably necessary to achieve that
legitimate objective?
• Will it be possible to verify whether or not the reasons have arisen?
• Can a variation be in favour of the customer (e.g. price decreases as well
as increases)?
• Are the reasons clearly expressed?
30
Factors FCA takes into account
• Will the customer understand the consequences?
• What notice of variation must be given?
• Can the customer terminate?
• Does the term strike a fair balance between the legitimate interests of the
firm and the legitimate interests of the consumer?
• Senior manager awareness – “we expect firms to allocate appropriately
responsibility for ensuring that consumer contracts are fair and
transparent”
31
Factors FCA takes into account
Jes Staley - Final NoticeAndrea Monks
• Breach of ICR2: requirement to act with due skill, care and diligence
• Conflict of interest
• Independence of Group Compliance
• Confidence in the whistleblowing policy
• Key Points
• CEOs are held to a higher standard
• Even CEOs need to consult
• The importance of whistleblowers as a resource for regulators
• Compliance must maintain control
• The horizon for FCA’s approach to SMCR?
• Level 2 seriousness
• No aggravating factors
• No addition for deterrence 33
Jes Staley - Final Notice
Questions?
top related