CCAR: Reaching the summit

The Federal Reserve (“Fed”) released the results of its Comprehensive Capital Analysis and Review (CCAR) for 2017 on June 28.  Key Facts:

  • For the first time in CCAR’s seven-year history, the Fed did not object to any of the capital plans or capital distributions.
  • One firm, Capital One, was required to resubmit its capital plan to address certain capital planning process weaknesses.
  • The aggregate quantitative results were very similar to last year’s test, with all 34 firms exceeding required minimums.
  • Two firms, American Express and Capital One, adjusted their original requested capital distributions taking advantage of a so called “mulligan” to fine tune their capital levels.

The prior week’s release of the Dodd-Frank Act Stress Test (DFAST) results provided more detailed information on the Fed’s stress test.  Compared to CCAR, those results exclude buybacks and capital issuances and hold past common dividends constant.

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2017 Dodd-Frank Act Stress Test (DFAST): Our take

The Federal Reserve (“Fed”) released the results of its Dodd-Frank Act Stress Tests (DFAST)1 that measure the potential impact of adverse or severely adverse economic conditions on the performance and condition of the 34 banks subject to the rule.  These results will be followed on June 28, 2017 by the Fed’s conclusions regarding the adequacy of bank capital plans as evaluated through the Comprehensive Capital Analysis and Review (CCAR).

Key takeaways for the severely adverse scenario results include:

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SWIFT Customer Security Program: Implementation considerations

The 2016 Bangladesh Bank cyber-attack and multiple other cyber events connected to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) have brought renewed attention to the effectiveness of SWIFT security and fraud controls.

SWIFT’s Customer Security Program (CSP)1 is a set of core security standards intended to help mitigate specific cybersecurity risks that SWIFT clients face due to the cyber threat landscape.  The CSP, which is based on three objectives, eight strategic security principles, and a common set of 27 security controls (16 mandatory and 11 advisory), is aimed at reducing these fraud and cyber incidents. All SWIFT customers must comply with the mandatory controls under the CSP and provide a detailed annual attestation with respect to their compliance, the first of which is due in December 2017.

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Getting started with RegTech

As financial services firms look for ways to harness the power of risk & regulatory technologies (RegTech), one of the first questions that comes to mind is where to start. Different parts of the business present very different challenges and opportunities, and the activity areas you choose to focus on can have a big impact on the results. Here are some tips for getting started:

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FRB finalizes public disclosure requirement for LCR

Introduction

On December 19, 2016, the Federal Reserve Board (FRB) finalized a rule requiring covered institutions to publicly disclose their Liquidity Coverage Ratio (LCR), including quantitative and qualitative information underlying the LCR.1 Relative to the proposal, the final rule did not revise the reporting frequency or quantitative data requirements.   However, it did amend the qualitative information requirements.

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The new fiduciary standard is set to begin on June 9. Are you ready?

On Tuesday, April 4, 2017, the Department of Labor finalized a delay to the applicability date of the Fiduciary Rule until June 9, 2017

Introduction

Following President Trump’s February 3, 2017 memorandum (the “Presidential Memorandum”)1 directing the Department of Labor (DOL) to prepare an “updated economic and legal analysis concerning the likely impact” of its “Conflict of Interest Rule” on fiduciary investment advice (the “Rule”) and related prohibited transaction exemptions (PTEs), the DOL finalized a delay to the initial applicability date of the Rule until June 9, 2017.2

The DOL also delayed the initial applicability date of the Best Interest Contract (BIC) Exemption, the Class Exemption for Principal Transactions, and amendments to other previously granted exemptions until June 9, 2017.  The applicability date of the Impartial Conduct Standards in these exemptions is extended until June 9, 2017, while compliance with other conditions for transactions covered by these exemptions (e.g., specific disclosures and representations of fiduciary compliance in written communications with investors) is not required until January 1, 2018.3

In addition, the DOL delayed the initial applicability of amendments to PTE 84-24 for certain insurance companies and agents until January 1, 2018 (other than the Impartial Conduct Standards, which will be applicable on June 9, 2017).

The DOL argued that these extensions are necessary to enable it to examine whether the Rule may adversely affect the ability of Americans to gain access to retirement information and financial advice, and to prepare the updated economic and legal analysis pursuant to the Presidential Memorandum.  The extensions will also allow the DOL to “consider possible changes with respect to the Rule and PTEs based on new evidence or analysis developed pursuant to the examination.”4

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FRB, FDIC issue resolution planning guidance, one-year extension to four FBOs; Issue evaluation of 16 US BHC resolution plans

On March 24, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC)1 (collectively, the “agencies”) issued guidance to four foreign banking organizations (FBOs) for their next resolution planning submissions (the “2018 Guidance”) and announced credibility determinations for 16 resolution plans submitted by US bank holding companies (BHCs) in 2015.2

Notably, the agencies extended—from July 1, 2017 to July 1, 2018—the date by which the FBOs must submit their next resolution plans, but did not release credibility determinations for the FBOs’ 2015 resolution plans.

The agencies did not identify deficiencies in any of the plans submitted by the 16 US BHCs, but did identify shortcomings in one of the plans.

For a more detailed analysis of the credibility determinations for the resolution plans submitted by the 16 US BHCs, please click here.

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RegTech: Evolution or revolution?

Digital technology is having a big impact on risk management and regulatory compliance in financial services. And it’s not just hype. By harnessing the power of risk & regulatory technologies (RegTech)—which includes innovations such as artificial intelligence, advanced analytics, and robotic process automation—financial services firms are boosting their risk management and compliance capabilities and quality while dramatically reducing the required time, cost, and effort.

RegTech might not sound particularly new or revolutionary – after all, financial services firms have been using technology to automate their processes for decades, right? However, the level of sophistication that is possible today—as well as the resulting impact and benefits—is much greater than in the past.

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President Trump signs executive order on reorganizing the executive branch

Considerations regarding the reorganization of the financial regulatory agencies

Introduction

On March 13, 2017, President Trump issued an executive order1 intended to “improve the efficiency, effectiveness, and accountability” of the executive branch by directing Mick Mulvaney, Director of the Office of Management and Budget (OMB), to propose a plan to “reorganize governmental functions and eliminate unnecessary agencies, components of agencies, and agency programs.”

Specifically, the order directs the head of each agency to submit to the OMB, within six months of the order, a plan to reorganize the agency, if appropriate.  In addition, it directs the OMB to seek public comment on a proposed plan and, within six months after the end of the comment deadline, submit the plan to President Trump for review.

Notably, the order uses the definition of “agency” under 5 U.S.C. 551 (i.e., the definition under the Administrative Procedure Act), which covers independent agencies, including the Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Consumer Financial Protection Bureau (CFPB).  Accordingly, it appears that these agencies will be subject to the order.

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Department of Labor issues proposal to delay Fiduciary Rule

On Thursday, March 2, 2017, the Department of Labor published a proposal that would delay the Fiduciary Rule by 60 days; comments will be accepted until March 17, 2017

Introduction

On February 3, 2017, President Donald J. Trump issued a memorandum (the “Presidential Memorandum”) directing the Department of Labor (DOL) to examine its “Conflict of Interest Rule” on fiduciary investment advice (the “Rule”) and related prohibited transaction exemptions (PTEs) to “determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.”1 The Presidential Memorandum also raised concerns that the Rule “may not be consistent with the policies of [the] Administration.”

The Presidential Memorandum did not directly delay or order a delay in the Rule’s initial April 10, 2017 applicability date, but directed the DOL to prepare an “updated economic and legal analysis concerning the likely impact” of the Rule.

If the DOL makes an affirmative determination pursuant to these considerations or if it concludes for any other reason that the Rule is inconsistent with the priorities outlined in the Presidential Memorandum, it is directed to publish a proposed rule to rescind or revise the Rule, as appropriate and consistent with law.

On March 2, 2017, the DOL published in the Federal Register a proposed rule that would extend the applicability date of the Rule and PTEs for 60 days (i.e., until June 9, 2017) to allow the DOL to “address questions of law and policy.”2

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