Solvent Wind-down of Derivatives and Trading Portfolios: Discussion Paper for Public Consultation

3 June 2019 | PDF full text (320 KB)

This discussion paper sets out considerations related to the solvent wind-down of the derivative portfolio activities of a G-SIB that may be relevant for authorities and firms for both recovery and resolution planning.

Many G-SIBs have large derivative and trading portfolios, including in some cases with illiquid or exotic positions. A disorderly close-out of these portfolios can potentially propagate substantial risks to financial stability. Given the global presence of some G-SIBs and the cross-border nature of many of these portfolios (including the intra-group transactions arising from firms’ booking models), such financial stability risks could spread across borders.

This discussion paper considers the capabilities G-SIBs should be able to meet to support the preparation and execution of a solvent-wind down plan, the evaluation of firm capabilities and issues that home and host supervisors need to consider.

Responses to the discussion paper should be sent to [email protected] by Friday 2 August. Consultation responses will determine whether the development of guidance would be useful. Responses to the consultation will be published on the FSB’s website unless respondents expressly request otherwise.

 

Public Disclosure of Resolution Planning and Resolvability: Discussion Paper for Public Consultation

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The FSB’s discussion paper explores how general and firm-specific disclosures on resolution planning and resolvability could be further enhanced, focusing mainly on disclosures of resolution planning for G-SIBs. However, many of the disclosure approaches discussed are also relevant for domestic systemically important banks and other firms subject to a resolution planning requirement.

Transparency with respect to resolution planning and resolvability is a necessary element of the FSB and G20 policy framework for addressing the moral hazard risk posed by systemically important financial institutions.

Responses to the discussion paper should be sent to [email protected] by Friday 2 August. Consultation responses will determine whether the development of guidance would be useful. Responses to the consultation will be published on the FSB’s website unless respondents expressly request otherwise.

 

FSB publicly consults on resolution-related disclosures and on the operationalisation of bank recovery and resolution

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Ref no: 18/2019

The Financial Stability Board (FSB) today published for public consultation two discussion papers that consider measures to improve the resolvability of global systemically important banks (G-SIBs).

Following the global financial crisis the FSB has led international efforts to address the risk that major financial institutions are too-big-to-fail. The adoption of the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions as the international standard for recovery and resolution of financial institutions and its implementation across FSB jurisdictions are core to this initiative.

Effective resolution rests on the credibility of authorities’ and firms’ resolution planning and operational readiness for handling a resolution. The FSB’s discussion papers focus on resolution-related public disclosures that strengthen the credibility of resolution planning; and on measures to ensure the effective operationalisation of a solvent-wind down of derivatives portfolios as recovery or resolution measure.

Public Disclosure of Resolution Planning and Resolvability

Transparency with respect to resolution planning and resolvability should help promote the credibility of the FSB and G20 policy framework for addressing the moral hazard risk posed by systemically important financial institutions.

The FSB’s discussion paper explores how general and firm-specific disclosures on resolution planning and resolvability could be further enhanced, focusing mainly on disclosures of resolution planning for G-SIBs. However, many of the disclosure approaches discussed are also relevant for domestic systemically important banks and other firms subject to a resolution planning requirement.

Solvent Wind-down of Derivatives and Trading Portfolios

Many G-SIBs have large derivative and trading portfolios, including in some cases with illiquid or exotic positions. A disorderly close-out of these portfolios can potentially propagate substantial risks to financial stability. Given the global presence of some G-SIBs and the cross-border nature of many of these portfolios (including the intra-group transactions arising from firms’ booking models) such financial stability risks could spread across borders.

This discussion paper sets out considerations related to the solvent wind-down of the derivative and trading book activities of a G-SIB that may be relevant for authorities and firms for both recovery and resolution planning.

Responses to the discussion papers should be sent to [email protected] by Friday 2 August. Consultation responses will be considered to determine whether the development of further guidance would be useful. Responses to the consultation will be published on the FSB’s website unless respondents expressly request otherwise.

Notes to editors

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President, De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

The FSB is also currently seeking feedback from stakeholders as part of its evaluation on the effects of the too-big-to-fail reforms that were agreed by the G20 in the aftermath of the global financial crisis.

FSB reports on work underway to address crypto-asset risks

31 May 2019

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Ref no: 17/2019

The Financial Stability Board (FSB) today published a report on crypto-assets, which considers work underway, regulatory approaches and potential gaps. The report is being delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Fukuoka on 8-9 June.

International organisations1 are working on a number of fronts, directly addressing issues arising from crypto-assets. As described in the report, they are mainly focused on investor protection, market integrity, anti-money laundering, bank exposures and financial stability monitoring. They are monitoring and analysing developments in these markets, setting supervisory expectations for firms and clarifying how international standards apply to crypto-assets.

The report notes that gaps may arise in cases where such assets are outside the perimeter of market regulators and payment system oversight. To some extent, this may reflect the nature of crypto-assets, which may have been designed to function outside established regulatory frameworks. Gaps may also arise from the absence of international standards or recommendations.

Assessing the significance of potential gaps is challenging, given the rapidly evolving nature of the crypto-asset ecosystem and related risks. A forward-looking approach to monitoring crypto-assets can help provide a basis for identifying potential gaps and areas that should be prioritised or focused on.

The report concludes with a recommendation that the G20 keep the topic of regulatory approaches and potential gaps, including the question of whether more coordination is needed, under review.

Notes to editors

The FSB published its framework for monitoring of financial stability implications of crypto-assets in October 2018 and last reported to the G20 on the work of the international organisations in July 2018.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President, De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

  1. The report covers the work of the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO), the Financial Action Task Force (FATF), the Organisation for Economic Co-operation and Development (OECD), and the FSB. [←]

Crypto-assets: Work underway, regulatory approaches and potential gaps

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This report on crypto-assets considers work underway, regulatory approaches and potential gaps. The report was delivered to G20 Finance Ministers and Central Bank Governors ahead of their meetings in Fukuoka on 8-9 June.

The report gives an update on work by the Basel Committee on Banking Supervision, Committee on Payments and Market Infrastructures, International Organization of Securities Commissions, Financial Action Task Force, Organisation for Economic Co-operation and Development and the FSB. These international organisations are working on a number of fronts, directly addressing issues arising from crypto-assets. They are mainly focused on investor protection, market integrity, anti-money laundering, bank exposures and financial stability monitoring. They are monitoring and analysing developments in these markets; setting supervisory expectations for firms; and clarifying how international standards apply to crypto-assets.

The report notes that gaps may arise in cases where such assets are outside the perimeter of market regulators and payment system oversight. To some extent, this may reflect the nature of crypto-assets, which may have been designed to function outside established regulatory frameworks. Gaps may also arise from the absence of international standards or recommendations.

Assessing the significance of potential gaps is challenging, given the rapidly evolving nature of the crypto-asset ecosystem and related risks. A forward-looking approach to monitoring crypto-assets can help provide a basis for identifying potential gaps and areas that should be prioritised or focused on.

The report concludes with the recommendation that the G20 keep the topic of regulatory approaches and potential gaps, including the question of whether more coordination is needed, under review.

FSB publishes updates on work to assess and address correspondent banking declines

29 May 2019

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Ref no: 16/2019

The Financial Stability Board (FSB) today published two reports as part of its work:

  • a progress report on the implementation of its action plan to assess and address the decline in correspondent banking relationships; and
  • a report on progress on implementing the FSB’s recommendations on remittance service providers’ access to banking services.

Addressing the decline in correspondent banking relationships: Progress report

The decline in the number of correspondent banking relationships remains a source of concern for the international community, as the number of active correspondent banks declined by 3.4% in 2018, bringing the cumulative decline since 2011 to 19.3%. Concentration increased, as fewer correspondent banks are handling payments. Access to correspondent banking relationships remains a critical issue in some regions and jurisdictions. The Committee on Payments and Market and Infrastructures (CPMI) on 27 May published the full set of data on the latest developments on the number of correspondent banking relationships.

With the international components of the FSB-coordinated action plan largely in place, attention has turned to monitoring of implementation:

  • There is growing evidence of the concrete implementation of regulatory clarifications by national authorities, following the guidance provided by the Financial Action Task Force and the Basel Committee on Banking Supervision.
  • To support domestic capacity building in jurisdictions that are home to affected respondent banks, official sector technical assistance still requires ongoing coordination. Industry initiatives to support capacity building are gaining traction, especially the additional guidance developed by the Wolfsberg Group to implement their Correspondent Banking Due Diligence Questionnaire.
  • The technical measures recommended by CPMI to improve the efficiency of due diligence procedures and reduce compliance costs are now generally available for use, but their concrete implementation still requires continued focus by industry and the official sector, such as the use of the Legal Entity Identifier in payment messages and practical steps to support effective information sharing.

Should the situation deteriorate further, the FSB, the relevant standard-setting bodies and other stakeholders including international organisations and the private sector would consider whether further actions should be taken to address the issue.

Remittance service providers’ access to banking services: Monitoring of the FSB’s recommendations

The reduction in correspondent banking relationships has had a significant impact on remittance service providers’ ability to access banking services, particularly acute in those developing countries where remittance flows are a key source of funds for households.

The report assesses implementation of the FSB’s March 2018 recommendations to address problems that remittance service providers have accessing banking services. The report finds that, while positive steps have been taken in a number of areas, further work by national authorities, international organisations, remittance firms and banks is needed.

Jurisdictions have adopted or implemented a number of good practices and procedures to improve their supervisory frameworks for remittance firms and enhance coordination; authorities are responding to and accommodating innovative technology approaches in their regulatory frameworks; and significant technical assistance is being directed at the issue both at a global level and directly to affected jurisdictions.

Dialogue between remittance firms, banks and authorities responsible for supervision of the remittance sector has been useful, but has not led to tangible next steps. In order to make further progress, it is important to have a common understanding of issues facing remittance firms in their access to banking services and banks’ expectations concerning remittance firms’ anti-money laundering compliance.

The remittance report will be delivered to the G20 Finance Ministers and Central Bank Governors meeting in Fukuoka on 8-9 June.

Alexander Karrer, Chair of the FSB’s Correspondent Banking Coordination Group and Deputy State Secretary at the Swiss Federal Department of Finance, said: “The data shows that concentration in correspondent banking is increasing further, with countries and banks relying on fewer correspondent banks. We will continue to monitor the data and to coordinate the effective implementation of the agreed action plan to clarify regulatory expectations, provide technical assistance and make due diligence more effective. We stand ready to adopt further measures as necessary, as we did last year for remittance firms’ access to banking services, to preserve the smooth processing of cross-border payments.”

Notes to editors

The FSB launched its four-point action plan in November 2015 to assess and address the decline in correspondent banking. The plan covers:

  1. Further examining the dimensions and implications of the issue;
  2. Clarifying regulatory expectations, including guidance from FATF and BCBS;
  3. Domestic capacity-building in jurisdictions that are home to affected respondent banks; and
  4. Strengthening tools for due diligence in correspondent banks.

The FSB’s March 2018 recommendations to address problems that remittance service providers have accessing banking services cover:

  1. Promoting dialogue and communication between the banking and remittance sectors;
  2. International standards and oversight of the remittance sector;
  3. The use of innovation in the remittance sector and its possible role in enabling RSPs greater access to banking services; and
  4. Technical assistance on remittance-related topics.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President, De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Remittance service providers’ access to banking services: Monitoring of the FSB’s recommendations

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The reduction in correspondent banking relationships has had a significant impact on remittance service providers’ (RSPs’) ability to access banking services, a trend which his particularly acute in those developing countries where remittance flows are a key source of funds for households.

The report assesses implementation of the FSB’s March 2018 recommendations to address problems that remittance service providers’ (RSPs) have accessing banking services. The report concludes that while positive steps have been taken in a number of areas, further work by national authorities, international organisations, RSPs and banks is needed. Jurisdictions have adopted or implemented a number of good practices and procedures to improve their RSP supervisory frameworks and enhance coordination; authorities are responding to and accommodating innovative technology approaches in their regulatory frameworks; and significant technical assistance is being directed at the issue both at a global level and directly to affected jurisdictions.

Dialogue between RSPs, banks and authorities responsible for supervision of the remittance sector has been useful, but has not led to tangible next steps. In order to make further progress, it is important to have a common understanding of issues facing RSPs in their access to banking services and banks’ expectations concerning RSPs’ anti-money laundering compliance.

The FSB also published a progress report on implementation of the FSB’s correspondent banking action plan.

This report will be delivered to the G20 Finance Ministers and Central Bank Governors meeting in Fukuoka from 8-9 June.

FSB action plan to assess and address the decline in correspondent banking: Progress report

| PDF full text (480 KB)

The decline in the number of correspondent banking relationships remains a source of concern for the international community, as the number of active correspondent banks declined by 3.4% in 2018, although this represents a slight slowing of the rate of decline compared to 2017. This decline affected the vast majority of jurisdictions and all three major currencies in 2018, although it was more pronounced for USD (-5.9%) compared to EUR (-4.6%) and GBP (-3%). Concentration increased, as fewer banks are handling more payments. A comprehensive data set was published by the Committee on Markets and Payment Infrastructures (CPMI) on 27 May, based on SWIFT data.

With the international components of the FSB coordinated action plan largely in place, attention has turned to monitoring of implementation:

  • There is growing evidence of the concrete implementation of regulatory clarifications by national authorities, following the guidance provided by the Financial Action Task Force and the Basel Committee on Banking Supervision.

  • To support domestic capacity building in jurisdictions that are home to affected respondent banks, official sector technical assistance still requires ongoing coordination. Industry initiatives are gaining traction in that field, especially the additional guidance developed by the Wolfsberg Group to implement their Correspondent Banking Due Diligence Questionnaire.

  • The technical measures recommended by CPMI to improve the efficiency of due diligence procedures and reduce compliance costs are now generally available for use, but their concrete implementation still requires continued focus by industry and the official sector, such as the use of the Legal Entity Identifier in payment messages and practical steps to support effective information sharing.

The FSB also published a monitoring report which assesses implementation of its March 2018 recommendations to address problems with remittance services providers’ access to banking services.

FSB publishes peer review of implementation of the Legal Entity Identifier

28 May 2019

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Ref no: 15/2019

The Financial Stability Board (FSB) published today a Thematic Review on Implementation of the Legal Entity Identifier (LEI). The LEI is a 20-character, alpha-numeric code that was introduced following the financial crisis to be adopted globally, to uniquely identify legally distinct entities that engage in financial transactions.

Since its endorsement by the G20 in 2012, the Global LEI System has been successfully brought into operation, with over 1.4 million entities uniquely identified by an LEI in more than 200 countries. Most FSB jurisdictions have implemented rules mandating LEI use in at least one area. Adoption has been most successful when the LEI has been mandated by regulators as part of an international standard-setting effort or across multiple market segments. Widespread coverage has already been achieved in over-the-counter (OTC) derivatives and securities markets. In these areas, the LEI has come the closest to meeting the G20’s objective to “encourage global adoption of the LEI to support authorities and market participants in identifying and managing financial risks”.

The regulatory uses of the LEI are multiple and the benefits can be substantial. The LEI standardises identification of legal entities at the global level, to support the management and analysis of large datasets. Implementation of the LEI enhances regulators’ surveillance by tracking market abuse across institutions, products and jurisdictions. The LEI can also assist regulators’ and market participants’ aggregation and more flexible retrieval of granular data on entities from multiple sources, as well as the analysis of counterparty risks, interconnectedness and complex group structures. Many in the financial industry are supportive of the LEI, citing substantial existing and potential benefits stemming from its use.

Notwithstanding this progress, the LEI has far to go to meet the G20’s objective. Coverage is too low outside securities and derivatives markets to effectively support new industry or regulatory uses, or to reach a tipping point where voluntary take-up by market participants would suffice to propel further adoption. LEI adoption also remains uneven across jurisdictions, with coverage concentrated in Canada, the EU and the United States. More efforts should be made both at national and international levels to promote LEI adoption and enhance the benefits to authorities and market participants from its use by addressing identified obstacles. These obstacles include the current business model, which does not clearly align the current benefits and costs of LEI use for participants; a lack of LEI coverage for so-called ‘Level 2’ (relationship) data; and insufficient links with other (in particular, business registry) identifiers.  

The report sets out four sets of recommendations to address the issues identified in the peer review and promote broader LEI adoption. The recommendations are addressed to FSB member jurisdictions, the FSB, relevant standard-setting bodies and international organisations, the LEI Regulatory Oversight Committee and the Global LEI Foundation.

Lesetja Kganyago, Governor of the South African Reserve Bank and Chair of the FSB’s Standing Committee on Standards Implementation (SCSI) that oversaw the preparation of the peer review, said “The LEI has a valuable role to play in helping with the effective assessment of risks in the global financial system. The peer review reaffirms the FSB’s commitment to a broader use of LEIs globally in order to meet the G20’s objective.”

Amir Zaidi, Director of the Division of Market Oversight at the US Commodity Futures Trading Commission (CFTC) and Chair of the peer review team, said “Implementation of the peer review recommendations will provide a firm basis to expand LEI adoption and realise fully the benefits from its use for both authorities and market participants.”

Notes to editors

The FSB began a regular programme of peer reviews in 2010, consisting of thematic reviews and country reviews. The objectives of thematic reviews are: to encourage consistent cross-country and cross-sector implementation; to evaluate (where possible) the extent to which standards and policies have had their intended results; and to identify gaps and weaknesses in reviewed areas and to make recommendations for potential follow-up (including through the development of new standards) by FSB members. The objectives and guidelines for the conduct of these reviews are set out in the Handbook for Peer Reviews.

The peer review is the fifteenth thematic review conducted by the FSB. This report describes the findings of this review, including the key elements of the discussion in the FSB SCSI. The draft report was prepared by a team of experts drawn from FSB member and other institutions and led by Amir Zaidi, Director of the Division of Market Oversight at the US CFTC.

The financial crisis showed the difficulty of identifying counterparties to financial transactions across borders with accuracy and speed. To address this problem, in 2011 the G20 supported the creation of an LEI and called on the FSB to take the lead in helping coordinate work among the regulatory community to prepare recommendations for the appropriate governance framework for the Global LEI System. At the June 2012 Los Cabos Summit, the G20 Leaders endorsed the FSB report, A Global Legal Entity Identifier for Financial Markets. Since then, the FSB has continued to support the implementation of the LEI.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President, De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Thematic Review on Implementation of the Legal Entity Identifier

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This report sets out the conclusions from a peer review of the implementation of the Legal Entity Identifier (LEI). Since its endorsement by the G20 in 2012, the Global LEI System has been successfully brought into operation, with over 1.4 million entities uniquely identified by an LEI in more than 200 countries. Most FSB jurisdictions have implemented rules mandating LEI use in at least one area. Adoption has been most successful when the LEI has been mandated by regulators as part of an international standard-setting effort or across multiple market segments. Widespread coverage has already been achieved in over-the-counter (OTC) derivatives and securities markets. In these areas, the LEI has come the closest to meeting the G20’s objective to “encourage global adoption of the LEI to support authorities and market participants in identifying and managing financial risks”.

The regulatory uses of the LEI are multiple and the benefits can be substantial. The LEI standardises identification of legal entities at the global level, to support the management and analysis of large datasets. Its implementation enhances regulators’ surveillance by tracking market abuse across institutions, products and jurisdictions. The LEI can also assist regulators’ and market participants’ aggregation and more flexible retrieval of granular data on entities from multiple sources, as well as the analysis of counterparty risks, interconnectedness and complex group structures. Many in the financial industry are supportive of the LEI, citing substantial existing and potential benefits from its use.

Notwithstanding this progress, the LEI has far to go to meet the G20’s objective. Coverage is too low outside securities and derivatives markets to encourage new industry or regulatory uses, or to reach a tipping point where voluntary take-up by market participants would suffice to propel further adoption. LEI adoption also remains uneven across jurisdictions, with coverage concentrated in Canada, the EU and the United States. More efforts should be made both at national and international levels to promote LEI adoption and enhance the benefits to authorities and market participants from its use by addressing identified obstacles.

The report sets out four sets of recommendations to address the issues identified in the peer review and promote broader LEI adoption. The recommendations are targeted at FSB member jurisdictions, the FSB, relevant standard-setting bodies and international organisations, the LEI Regulatory Oversight Committee and the Global LEI Foundation.