Financial Services Risk and Regulation

Transcription

1 Financial Services Risk and Regulation Regulatory Updates Newsletter April

2 Contents Executive Summary PwC 2

3 Executive Summary Emily Lam PwC HK FS Risk and Regulation Welcome to our financial services and regulation update. With this newsletter, we will keep you up to speed with significant regulatory developments from the financial services industry. March and April were busy months for the regulators as they brought forward a variety of important regulatory updates, including the BC s standard minimum capital requirement revision for market, further guidance on Banking (Capital) Rules (BCR), consultation conclusion on, and enhancement of over-the-counter (OTC) derivatives regime, among others. We have summarised the key updates for you in this newsletter. Acknowledging the need for further refinement of the minimum capital requirement for market, the BC has released a consultation document. This consultation proposes revisions to several elements of the standardised approach to make it more credible for the internal models approach. The SFC has been active too. The regulator published the consultation conclusions on along with further consultation on offline requirements for complex products. The guidelines aim to provide direction on the design and operation of online platforms. Moreover, the SFC recently issued a joint consultation paper with the HKMA to align Hong Kong with global OTC derivatives standards and further enhance the regulatory regime of OTC derivatives in Hong Kong. For more details of these rules and regulations, please refer to the following sections in this publication. Following the HKMA s responses to the industry during the consultations, the HKMA has released a set of Q&As on the revised securitization framework under the BCR to provide additional guidance on the implementation of the framework. Emily Lam FS Risk and Regulation emily.lam@hk.pwc.com PwC 3

4 the minimum capital Proposals to improve the standard The treatment of non-linear financial instruments such as options. and Heads of Supervision (GHOS), has extended the deadline to the implementation to 1 st January Brian Yiu brian.ky.yiu@hk.pwc.com The BC recently released a consultative document on proposed changes to the standard minimum capital. Based on the feedback received from banks after the implementation of the previously published standard, the BC recognises the need for revisions in the standardised approach to make it more credible for the internal models approach. Therefore, the BC has proposed revisions to the following elements of the approach: The document also includes other proposed changes to the following aspects of the standard: Revisions to the assessment process to determine whether a bank's internal management models appropriately reflect the s of individual trading desks; Clarifications of the requirements for identification of factors that are eligible for internal modelling; and Moreover, the BC also updated two frequently asked questions (FAQs) on market capital requirements, and the Basel III standardised approach for measuring counterparty credit exposures. The Committee is looking to receive comments on all aspects of this consultative document and the proposed standards text by 20 th June The approach to determine foreign exchange (FX) pairs that are liquid and hence, subject to lower weights; Clarifications of the scope of exposures that are subject to market capital requirements. The correlation scenarios applied in the standardised approach calculation; and Additionally, in response to the ongoing challenges with the implementation of the market standard, the BC s oversight body, the Group of Governors PwC 4

5 Implementation guidance on securitization framework under Banking (Capital) Rules (BCR) Brian Yiu Revised questions and answers (Q&A) published Subsequent to the HKMA s responses to the industry during the consultations conducted on the implementation of the revised securitization framework in Hong Kong, the HKMA has published a set of Q&As on the revised securitisation framework under the BCR. The Q&As were based on existing materials with modifications to align with the amendments made to Part 7 of the BCR and to clarify HKMA s policy intent with respect to specific issues. In particular, new guidance is provided on the notification requirement and the assessment of significant credit transfer for the purpose of obtaining capital relief for the underlying exposures of a securitization transaction under the BCR. Some of the topics included in the newly revised Q&A are: Definition of securitization transaction Recognition of Credit Risk Transfer under securitization transaction Determining implicit support for the purpose of section 234 of the BCR Classification of underlying exposures of a securitization transaction Calculation of credit enhancement Recording of gain-on-sale Recognition of External Credit Assessment Institutions PwC 5

6 Feedback from Reviews of Authorised Institutions Sanctions Screening Systems Ho Kee Fu Effectiveness and efficiency requires further attention The HKMA released a circular which shares key observations and good practices that have been identified in the recent thematic review of the financial of AIs. The review showed that while examined screening in general are performing within industry benchmarks, there are some issues and good practices with respect to the effectiveness and efficiency of the, which need additional attention by AIs. Details of the findings, with examples of good practices and areas for improvement, are set out in the Annex of the circular. To understand and optimise the performance of screening and processes, AIs are expected to: Consider adopting the good practices, where appropriate, and conduct a gap analysis at a minimum; and Put in place, if not already, regular system testing that provides robust reporting and quality assurance to senior management about meeting the regulatory expectations set out in the Annex. The HKMA will collect information from all AIs in the third quarter of 2018 on individual action plans. Moreover, it will consider conducting further reviews on relevant data and results on AIs in due course, following a -based approach. The HKMA has also listed out specific regulatory expectations in the circular which are summarised below. 1. AIs senior management should consider the of sanctions breaches and determine the appropriate level of sanctions screening to manage the for the AI 2. New, or upgrades to existing need to be thoroughly tested and tuned prior to deployment, with sufficient levels of reporting and oversight 3. Ongoing monitoring, tuning and testing should be conducted on all aspects of, lists and processes on a regular and frequent basis 4. AIs are expected to have a clear and demonstrable understanding of the system filters utilised in their screening technology, and to employ / equip staff with the right skills and knowledge to support the deployment of effective sanctions screening 5. AIs are expected to conduct ongoing tuning of system filters to reduce the level of false positives without compromising effectiveness Please contact us to understand how PwC can assist in assessing the effectiveness of your Sanctions Screening Systems. PwC 6

7 Helen Li Ho Kee Fu The SFC concludes consultation on online platforms and further consults on offline requirements for complex products In May 2017, the SFC issued a Consultation Paper on the Proposed Guidelines on Online Distribution and Advisory Platforms. Recently, the SFC has released the consultation conclusions. The guidelines give the industry a tailored direction on the design and operation of. Below are some of the key takeaways from the consultation conclusion. Non-complex and -complex products It is the platform operator s responsibility to determine whether a product to be sold on its platform is complex with regards to the factors and examples of non-complex and complex products set out in the Guidelines. Ensuring suitability in the sale of complex products online The SFC will adopt the proposal to require platform operators to ensure suitability in the sale of complex products online. For complex products, which are also derivative products traded on an exchange in Hong Kong or in a specified jurisdiction where there has been no solicitation or recommendation, a Platform Operator is not required to comply with the requirement to ensure suitability for transactions in such products executed on an exchange. However, it must still comply with the requirements under the Code of Conduct. The revised Guidelines is set out in the Appendix of the consultation conclusion. The Guidelines will become effective 12 months from the gazettal of the Guidelines. Further Consultation In addition, the SFC is conducting a further consultation on adopting the additional measures applicable to online sales of complex products to offline sales of such products. This aim is to align the amendments to the Code of Conduct with the regulatory requirements for both online and offline sales, and ensure a level playing field. PwC 7

8 Over-the-Counter (OTC) Derivatives Regime Michael Footman Director Aligning Hong Kong with global standards Following the implementation of the second phase of mandatory reporting of OTC derivatives transactions in July 2017 as well as to further enhance the regulatory regime of OTC derivatives in Hong Kong, the HKMA and the SFC recently issued a joint consultation paper. To align Hong Kong with global standards, the consultation includes a proposal to mandate the usage of the Legal Entity Identifier (LEI), a 20-digit unique alphanumeric identity (ID), for entities in a financial transaction to meet reporting obligation. According to the proposed guidelines, every entity contained in a transaction report would be required to submit their LEI to the Hong Kong Trade Repository (HKTR). factors set in the clearing determination process, the HKMA and the SFC propose expanding the product scope to include certain standardised Australian Dollar interest rate swaps. Lastly, as a stepping stone towards the possible introduction of a platform trading obligation, the HKMA and the SFC propose adopting a trading determination process for considering which products are appropriate for platform trading obligation in Hong Kong. Specific factors are stated in the consultation paper. In addition, on the basis of information received from the HKTR along with PwC 8

9 Henri Arslanian Consulting Director Halt and unwind An initial coin offering (ICO) issuer has halted its ICO to the Hong Kong public and agreed to unwind ICO transactions for Hong Kong investors by returning them the relevant tokens. This was the result of the regulatory action by the SFC over concerns that the issuer had engaged in potential unauthorised promotional activities and unlicensed regulated activities. The SFC reminds parties engaging in ICO activities to seek legal or other professional advice if they are in doubt about the relevant legal and regulatory requirements. In addition, investors are prompted to exercise caution before participating in ICO. In the SFC s view, the issuer had promoted an ICO to sell digital tokens to investors through its website accessible by the Hong Kong public, with the pitch that the ICO proceeds would be used to fund the development of a mobile application. Moreover, holders of the tokens would be eligible to redeem equity shares of the issuer. Under the circumstances, the SFC considers such arrangement may constitute a Collective Investment Scheme (CIS). PwC 9

10 Regulators set to nhance OTC Derivatives Regime AI Authorised Institutions ICO Initial Coin Offering AML Anti-Money Laundering IFRS International Financial Reporting Standard BC Basel Committee IOSCO International Organization of Securities Commission BCBS Basel Committee on Banking Supervision IR-1 Interest Rate Risk Management CFT Counter-Financing of Terrorism IRR Interest Rate Risk CG-1 Corporate Governance of Locally Incorporated Authorized Institutions IRRBB Interest Rate Risk in the Banking Book FinTech Financial Technology LC Licensed Corporation FMCC Fund Manager Code of Conduct MAS Monetary Authority of Singapore FI Financial Institutions MoU Memorandum of Understanding FSB Financial Stability Board RO Responsible Officer HKMA The Hong Kong Monetary Authority RE-1 Recovery Planning IA The Insurance Authority SFC The Securities and Futures Commission IAF Internal Audit Function SFO Securities and Futures Ordinance IC-1 Risk Management Framework SPM Supervisory Policy Manual IC-2 Internal Audit Function At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. HK C1 PwC 10