Navigating “Year Two”: Regulatory landscape and challenges for foreign banks and their IHCs

After the July 1, 2016 compliance deadline for foreign banking organizations (FBOs) to establish US intermediate holding companies (IHCs) and implement the enhanced prudential standards,1 we noted that, although the effective date marked a key milestone on the journey toward effective compliance, the “long road to operationalizing run-the-bank (RtB) functions has just begun.”2 Heading into Year Two, FBOs with their US IHCs and broader combined US operations (CUSO) contend with the reality that there is a significant road yet to be traveled in a regulatory environment focused on local/jurisdictional implementation that challenges the global model.

Four key focus areas underpinning the supervisory strategy

Although FBOs have made notable progress leading up to and after last year’s “go-live” date under Regulation YY, they continue to face substantial challenges across aspects of the Federal Reserve Board’s (FRB) four key supervisory focus areas:

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A new ratings framework aligned to regulatory reform priorities

On August 3, 2017, the Federal Reserve Board (Fed) released a notice of proposed rulemaking that would establish a new rating system for large financial institutions (LFIs). Specifically, the new rating system would apply to bank holding companies (BHCs) and non-insurance, non-commercial savings and loan holding companies (SLHCs) with more than $50 billion in total assets, as well as intermediate holding companies (IHCs) of foreign banking organizations.

The proposal includes a new rating scale under which component ratings would be assigned for:

  1. Capital planning and positions,
  2. Liquidity risk management and positions, and
  3. Governance and controls.

In essence, the Fed is revamping its rating system for LFIs to catch up with the Fed’s post-crisis heightened supervisory expectations and approach to LFI supervision.  The Fed proposes to assign initial ratings under the new rating system during 2018.

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FSOC issues update on potential systemic risks in asset management

100 dollar bill

On April 18, 2016, the Financial Stability Oversight Council (FSOC or the Council) issued an update1 on its review of potential systemic risks arising from asset management products and activities.

The FSOC’s review—including its December 2014 notice seeking public comment on asset management-related issues—has focused on five areas:  liquidity and redemption, leverage, operational risk, securities lending, and resolvability and transition planning.

In conducting its analysis, the FSOC utilized publicly available data, confidential data reported on the Securities and Exchange Commission’s (SEC) Form PF, input from member agencies with supervisory authority, academic studies, and submissions in response to the request for public comment.

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Fed FAQs for FBOs

The Securities and Exchange Commission Reforms Money Market Rules

On June 26, 2014, the Federal Reserve (Fed) published answers to a list of frequently asked questions (FAQs) from foreign banking organizations (FBOs) that face enhanced prudential standards — including formation of an intermediate holding company (IHC) for non-branch U.S. operations and submission of an Implementation Plan. Many of the questions were generated from a town hall meeting the Fed conducted in May 2014 to help selected FBOs understand the planning requirements and timing associated with the enhanced standards.

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The Securities and Exchange Commission Reforms Money Market Rules

The Securities and Exchange Commission Reforms Money Market Rules

On July 23, 2014, the Securities and Exchange Commission (SEC) adopted amendments to the rules that govern money market mutual funds. The amendments strive to preserve the key benefits of money market funds while reducing the risks associated with investor runs. However, for mutual funds – and their business partners – the revised rules will likely require significant reforms to their structures and operations.

Key provisions that will challenge the current operating model include: a floating net asset value (NAV) decimalized to a basis point; the definition of ‘Retail Funds” as those with procedures to limit investors to “natural persons; and the introduction of gates and liquidity fees.

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Dodd-Frank Four Years Later

Dodd-Frank Four Years Later

The fourth anniversary of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is a perfect opportunity to reflect on the progress that has been made since the Act’s passage in 2010 and to look forward to the required regulations that have to be implemented. The law was a direct response to the financial downturn, and was specifically designed to prevent a similar crisis from happening again. So how are things going so far?

Overall, it’s a mixed bag. Considerable progress toward implementation and reform has been made in some areas, while others are just getting warmed up.

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