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Practice note

Briefing Note

MiFID II: implications for Commodity Derivatives

Commodity dealers are subject to important changes under MiFID II regulation. This has far-reaching implications for both commodity trading market participants and for the market as a whole. Exemptions for commodity derivative dealers are being removed and more firms will be regulated under MiFID II, many for the first time. ESMA, the European supervisor and regulator, is empowered to enforce new position limits on market participants (read: forcibly close out positions) in exceptional circumstances. Trading firms will report their positions daily to the market operator, who will report positions daily to ESMA. ESMA will publicly disclose an overview of the positions held on contracts. The 3rd January 2017 implementation date of MiFID II may seem a long way off, but for the many firms who fall under the expanding scope of MiFID II, there is a great deal of work to do. Necessary plans need to be put in place now and there will be little regulatory sympathy for those who have not prepared.

IFRS9

Briefing Note

BCBS's view on the new impairment model under IFRS9

On 2 February 2015, the Basel Committee on Banking Supervision (“BCBS”) issued a Consultative Paper setting forth guidelines for a robust and consistent implementation of the new Expected Credit Loss (ECL) accounting framework across all jurisdictions. The guidance outlines supervisory expectations for ECL accounting in the form of 11 principles that are consistent with the applicable accounting standards established by the IASB and other standard setters. Comments from the industry are expected by 30 April 2015.

Practice note

Briefing Note

Interest Rate Risk in the Banking Book 2015 QIS

In June 2013, the European Banking Authority launched a consultation paper on amendments and additions to the earlier CEBS Guidelines on interest rate risk arising from non-trading activities (IRRBB) published in 2006. The main objectives of the proposed changes were to improve the management of IRRBB risks and to push for the convergence of supervisory practices under the Pillar 2 assessment process. Furthermore, this update will provide more detailed technical guidance for both institutions and supervisors on various aspects of the management and the assessment of interest rate risk in the banking book. The adjusted EBA guidelines first released in 2013 should have been published by the end of 2014. However, since then the Basel Task Force on Interest Rate (TFIR) has not yet reached consensus on draft Pillar1 versus Pillar2 guidelines. The momentum for IRRBB has slowed down somewhat, the Basel/EBA/FSB QIS exercise for it is now expected for the summer of 2015.

Risk & Compliance

Briefing Note

Prudent Valuation: aligning valuation standards across risk and accounting

On 23 January 2015, the EBA published its revised final draft Regulatory Technical Standards (RTS) laying out the requirements related to prudent valuation adjustments of fair valued positions. These standards will be part of the EU Single Rulebook in banking aimed at enhancing regulatory harmonisation.

Practice note

Briefing Note

Fundamental Review of the Trading Book: Current Developments

The recent financial crisis revealed material weaknesses in the regulatory capital framework for trading activities. Capital allocated to absorb trading losses displayed high volatility. As an initial rapid response to the apparent undercapitalisation of market risk, the Basel Committee on Banking Supervision introduced a range of framework revisions in July 2009, including stressed calibrations and capital for credit risks. This package, often referred to as “Basel 2.5”, was believed to be a necessary but not fully sufficient update to the capital requirements.

This Briefing Note provides a summary of the key proposals. The Committee is expected to issue a third (and final) Consultative Document by early 2015.

Banking System Solidity

Briefing Note

Capital adequacy, cost of the risk and profitability: during a crisis, a real puzzle for Banks

Source: Avantage Reply Observatory
Following the burst of the real estate bubble on the US sub-prime lending market and following the bankruptcy of Lehman Brothers, the worst economic crisis since 80 years has now passed through, and in some cases overcome, different stages, both from a real and from a financial point of view. In such a context, the banking industry is still facing several and complex challenges.

Practice note

Briefing Note

Leverage Ratio: An Update on Regulatory Developments

On 5 March 2014, the European Banking Authority (“EBA”) issued a report, which provides a policy analysis of aligning the current CRR1 definition of the leverage ratio exposure measure to the aforementioned Basel III standard. Later that month, the European Commission hosted a Public Hearing discussing the Commission’s forthcoming Delegated Act amending the capital measure and the total exposure measure of the leverage ratio. This Briefing Note presents an overview of regulatory developments to date, highlighting areas that banks should carefully monitor to ensure they can address impending regulatory requirements in a timely fashion.

Practice note

Briefing Note

Proposed European Regulation on the Reporting and Transparency of Securities Financing Transactions

On 29 January 2014, the European Commission (“EC”) published the Proposal for a Regulation of the European Parliament and of the Council on reporting and transparency of Securities Financing Transactions (“SFTs”). The proposal has the objective of improving the transparency of SFT transactions, including securities lending and repos, and restricting rehypothecation practices.

Practice note

Briefing Note

Making Sense of Conduct Risk

As the FCA approaches its first birthday, this paper sets out Avantage Reply’s observations on its approach to date, how firms have responded to the challenge and what can now be considered best practice. In addition it sets out some questions that firms should be asking themselves to ensure that their approach towards Conduct Risk is fit for purpose.