Category Archives: Finance

CRD V: Proposals for bank intermediate EU parent undertakings – retaliation to US measures?

On 23 November 2016, the European Commission (EC) outlined proposals to amend the Capital Requirements Regulation (EU/575/2013) (CRR) and the Capital Requirements Directive (2013/36/EU) (CRD) (and together referred to as CRD IV).  These proposals are likely to form part of the next version of these measures i.e. CRD V.  Links to the proposals are here (CRR) and here (CRD).

One proposed CRD V measure is a requirement for non-EU banking groups (including US groups) operating in the EU to consolidate their subsidiaries under a single “Intermediate Parent Undertaking (IPU)” in the EU, which will need to be separately authorised and capitalised.  I discuss this and similar measures introduced by the US for non-US banking groups operating there.  I also consider the impact of the proposals in relation to Brexit.

EC Proposals

The EC proposals would see a new Article 21b added into CRD to cover IPUs, which would stipulate that:

  1. if a third country group (i.e. a non-EU group) has two or more institutions (i.e. banks or investment firm subsidiaries) in the EU, it must have an EU-based IPU above them;
  2. such an IPU must be separately authorised and be subject to EU capital requirements or be an existing bank or investment firm authorised under CRR;
  3. there must be a single IPU for all subsidiaries that are part of the same group; and
  4. the threshold for this requirement to apply would be if: (a) the total value of assets in the EU (both subsidiaries and branches) of the non-EU group is at least Euro 30 billion; or (b) the third country group is a non-EU G-SII (i.e. global systemically important institution or bank – see list maintained by the FSB).

These proposals would require non-EU banking groups to hold EU bank and broker-dealer (investment firm) subsidiaries through a single EU-based IPU that would be subject to capital, liquidity, leverage and other prudential standards on a consolidated basis.

The IPU requirement may have been added late into the draft CRD V proposals and it seems to have been included without following the usual discussion and impact assessment process for such measures.  It has been suggested that this is a retaliatory action to similar measures introduced by the US (discussed below).  It is possible that EU Member States will decide to alter or even drop this measure before CRD V is adopted into law.

Possible Effect of the EC Proposals on US Banking Groups

Due to strict limitations on transactions between a US Federal Deposit Insurance Corporation (FDIC)-insured bank (and its subsidiaries – the “bank chain”) on the one hand and its bank holding company parent and sister companies (the “non-bank chain”) on the other, the large US bank holding companies operate their US broker-dealer subsidiaries as sister companies of their FDIC-insured banks and often do the same with their non-US broker-dealer subsidiaries.

Such large US bank holding companies operate in the EU through branch offices of their FDIC-insured banks as well as through locally-incorporated bank subsidiaries of those banks and separate (non-bank chain) broker-dealer subsidiaries.

To comply with the EC poposals on IPUs, a US bank holding company would need to transfer its EU bank subsidiaries so that they and the EU broker-dealer subsidiaries become indirect subsidiaries of the parent bank holding company via a single EU IPU. Doing so, could severely limit transactions between the US FDIC-insured bank including its EU branch offices and the EU bank subsidiaries (as well as the other EU subsidiaries) of the US bank holding company.

All this is likely to mean that US banking groups may have to totally rethink their existing holding structures in Europe – they may already be doing so due to Brexit (see below).

US Intermediate Holding Company Rule

Title 12 of the US Code of Federal Regulations (12 CFR Part 252.153) introduced a similar rule in March 2014 requiring  that any foreign banking organisation with US non-branch assets (i.e. subsidiaries) of USD 50 billion or more must establish a US intermediate holding company (US IHC) or designate an existing subsidiary as such.

As you can see, the US IHC rule has a much higher threshold (USD 50 billion) than that of the corresponding EC proposal (Euro 30 billion) and the US threshold only considers assets of subsidiaries, whereas the EC proposal also counts branch assets.

The US IHC rule was viewed as addressing the capital position of large US broker-dealer subsidiaries of non-US banking groups because such subsidiaries were not otherwise subject to US prudential banking regulations including on risk and leverage.  In the EU however, broker-dealer (investment firm) subsidiaries of US banking groups are currently subject to Basel-based prudential requirements.


The EC may or may not have had Brexit in mind when it came up with this proposed IPU measure.  Post-Brexit, depending on any negotiated arrangements, the UK will be outside the EU and thus, on the face of it, UK banking groups will be in the same boat as other non-EU groups with regard to the CRD V proposals and may need to establish IPUs in the EU to hold their EU subsidiaries.  Some UK and non-EU banking groups that are not G-SIIs may review the scope of their activities in the EU in light of these requirements.

Also, from the point of view of US and other non-EU banking groups who currently operate in Europe out of the UK, the need for a separately capitalised holding company in Frankfurt or Luxembourg, for example, could make London a less attractive headquarters for European operations.  Given that most banking groups are currently looking at their structures in light of Brexit, the EC proposals on IPUs will add a further layer of complexity to these considerations.

Next Steps and Conclusion

The EC intends that the CRD V proposals will apply two years after the legislative text is finalised. This would take us well into 2019 at the earliest and therefore, the IPU measure is unlikely to be applicable when the UK leaves the EU – assuming that the UK invokes Article 50 of the Lisbon Treaty in early 2017 and leaves the EU in the two year period provided.

The EC proposal for IPUs will probably be welcomed by European banking groups that have found themselves on an uneven playing field with US rivals.  However, most banking groups are reluctant to hold multiple pools of capital around the world, overseen by different regulators, which they see as less efficient than a centrally managed capital pool regulated by their home bank regulatory authority.

Whether or not the EC proposals on IPUs are adopted into law as they are currently drafted, there does seem to be a growing regulatory trend towards a fragmentation in financial rules, as key jurisdictions like the EU and the US seek to assert control and seem comfortable taking tit-for-tat action even at the risk of duplicating or complicating internationally-settled regulatory measures.




Brexit: we don’t know what we don’t know

A lot has been written and speculated about how Brexit will play out so I thought I’d write something about what we don’t know.  I’ve avoided using the adjectives hard or soft and the focus of this piece is primarily on the financial services market.

1 – We don’t know PM Theresa May’s plans.

This is not necessarily a bad thing. It would be unusual for a deal negotiating team at a bank, corporation or law firm to give and take briefings about how they are negotiating a particular deal with all their colleagues.

2 – We don’t know who is going to scrutinise the Brexit negotiations.

To me, planning for and negotiating to exit the EU is akin to planning for a battle and as John Travolta’s character in Broken Arrow so eloquently put it, “[Battle] is a highly fluid situation. You plan on your contingencies, and I have. You keep your initiative, and I will. One thing you don’t do is share command.” Decisive planning and leadership is probably more important than a negotiation by general consensus.  Theresa May’s term in office will be characterised by one thing – how she leads the UK through Brexit.

3 – We don’t know if the City of London will keep passporting rights after Brexit.

People argue that much depends on the UK keeping the passporting rights currently available under EU single market legislation such as the Markets in Financial Instruments Directive (MiFID), Alternative Investment Fund Managers Directive (AIFMD) or Insurance Mediation Directive (IMD), which enable cross-border financial services regulated in the UK to be provided into EU member states. This is probably true.

However, the reverse proposition also needs to be considered: many EU (or EEA) firms also passport in to access the UK market – a developed global financial services market with a deep pool of capital and the second highest GDP in Europe after Germany.  Wouldn’t these firms want the EU to keep these rights?  According to figures from the Financial Conduct Authority (FCA), there are over 8,000 firms passporting into the UK (especially investment firms and insurance companies).

4 – We don’t know if London will lose its position as the leading global forex trading hub.

London’s share of global forex trading fell from 41% to 37% according to the last triennial survey conducted by the Bank for International Settlements (BIS) in 2016.  This market share may be under further threat post-Brexit with some currency trading (e.g. the Euro) moving out of London.  However, London’s global share far outweighs second-placed New York (19%) and the combined share of Frankfurt and Paris (4.5%).

5 – We don’t know what the future holds for the UK outside the EU.

If the UK leaves the EU and there isn’t any negotiated access to the EU single market then, assuming there is no dramatic change in current laws or regulations post-Brexit, the UK could be viewed as a country that has an equivalent financial services regime to the EU.  There is a list of countries (e.g. Australia, the USA and Singapore) that the EU deems equivalent in relation to their regulation of banks, investment firms and exchanges.  The UK could be part of such a grouping in the future and thereby gain market access to the EU.

6 – We don’t know how upcoming elections in France and Germany will affect the EU landscape.

Brexit is above all a political move.  Elections in 2017 in France (April – May) and Germany (September) will have some bearing on who is at the table negotiating Brexit or what cards they have in their hands.

7 – We don’t know how far the Pound will fall.

In the wake of the Brexit vote, we saw the Pound dramatically and then steadily fall from close to $1.50 to $1.22 (midday 12 January 2017).  It doesn’t seem that long ago when the Pound was $2 (September 2007).  How much further will it fall?  Prices that depend on imports will go up but, at the same time, UK exports will become more competitive globally and this may help create jobs.  Has the UK managed to devalue its currency by the back door?



Regulatory Enforcement Update

(1) The European Commission said in a press release on 4 February 2015 that it fined UK brokerLawEnforcement ICAP €14.9 million for having breached EU anti-trust rules by facilitating several cartels in the sector of Yen (JPY) interest rate derivatives (YIRD).  The anti-competitive conduct concerned discussions between traders of various participating banks on certain JPY LIBOR submissions.

(2) Alex Hope (7 years’ imprisonment) and co-defendant Raj Von Badlo (2 years’ imprisonment) were sentenced following their conviction for defrauding investors and operating an unauthorised collective investment scheme, which was closed by the FCA in April 2012.  Over 100 investors gave Hope over £5.5 million to purportedly trade in forex markets although most of it was not traded and instead diverted to fund his lifestyle.  Von Badlo promoted Hope’s scheme to many investors.

(3) Meanwhile, the City of London Police announced on 5 February 2015 that they had concluded there is not sufficient evidence to progress a criminal investigation of payday lender Wonga.  The main allegations against Wonga were that it had deceived its customers by sending letters falsely purporting to be from lawyers with the aim of recovering their outstanding debts.

Swiss Franc Forex Losses: what action is the FCA taking?



On 15 January 2015 Switzerland’s central bank the Swiss National Bank (SNB) sent shockwaves through the financial markets by announcing an end to their informal policy of pegging the Swiss franc (CHF) to the Euro (EUR) at 1 EUR = 1.20 CHF, which has been in place since the SNB’s September 2011 policy announcement.  In a very short time following the 15 January announcement, the Euro fell against the CHF by about 40% as the CHF rose sharply (see chart).

This large movement in the CHF, a widely used currency by traders across the world, caused many banks, hedge funds and forex brokers such as Citigroup, Deutsche Bank, Denmark’s Saxo Bank, Discovery Capital Management, Comac Capital, FXCM (which took a $300m bailout), IG Group, CMC Markets, Swissquote, Oanda and Interactive Brokers to announce losses and has even caused some like UK forex broker Alpari to go into administration under English law in the UK (similar to Chapter 11 bankruptcy in the USA) after an unsuccessful attempt to sell the brokerage and New Zealand’s Global Brokers (trading as Excel Markets) was forced announce it would not be able to resume business.  Many of these losses are due to margin calls that the clients of these financial firms are unable to meet, leaving in many cases, the firm to be left to bear the trading losses.

The UK’s Financial Conduct Authority (FCA) as regulator has sent letters to about 90 brokers in the London market, which is the largest forex trading market in the world.  It is understood that the FCA letter asks for an update on how the firm’s trading position may impact its balance sheet as a result of the CHF/Euro movement.

Separately, it is understood that the FCA is conducting a thematic review into the whole market of retail forex trading.  Although there are very few details available at present, it has been reported in the Financial Times that the FCA is conducting a review of 40 banks, brokers and asset managers, including providers of contracts-for-difference in this space.  The FCA, like its French counterpart Autorité des Marchés Financiers (AMF) are concerned that forex trading has led to very high percentage (over 85%) of retail forex investors making loss-making trades.

Beyond LIBOR: UK to extend manipulation offence to 7 more benchmarks

The LIBOR fixing scandal led to the establishment of a new regime and regulation governing how the benchmark LIBOR (London Inter-Bank Offered Rate) is calculated and administered and an offence of benchmark manipulation under the Financial Services Act 2012  that is punishable by up to 7 years’ imprisonment.

On 22 December 2014, the UK’s HM Treasury published the government’s response to their September 2014 consultation on extending this new regulatory regime to these seven other benchmarks:

  • WM/Reuters’ FX benchmark rates (WMR) – the main global forex benchmark
  • Sterling Overnight Index Average (SONIA) & Repurchase Overnight Index Average (RONIA) –  reference rates for unsecured Sterling overnight funding administered by WMBA
  • ISDAFix – principal benchmark for swap rates and spreads for interest rate swaps administered by ICE
  • ICE Brent Index – the crude oil futures benchmark
  • LBMA Gold Price (currently London Gold Fix whose administration is being taken over by ICE in early 2015)
  • LBMA Silver Price (administered by CME Group and Reuters)

HM Treasury intends to lay draft legislation before Parliament in early in 2015 so that changes can be debated and the new legislation can commence on 1 April 2015.

Alongside these measures, the UK’s Financial Conduct Authority (FCA) as the regulator with oversight of the benchmark regime, has launched a consultation on how it proposes to regulate the various firms administering these benchmarks.  This outlines the FCA’s proposed changes to the Market Conduct sourcebook (MAR) and the Supervision manual (SUP) of the FCA Handbook.  The consultation is open until 30 January 2015.

It is expected that this regulatory regime may in the future be modified or superseded by the EU’s Benchmark Regulation that is currently being debated by the European Council but it is not expected to be in place in the near future.

The Future of Financial Reform – Mark Carney Speech (Key Points)

In a recent speech delivered in Singapore, Bank of England Governor Mark Carney in his capacity as Chair of the Financial Stability Board (FSB) outlined his vision of the future of financial reform.

For those who may not have been in Singapore to listen or had the chance to thumb through the entire twenty-eight pages of this interesting and wide-ranging speech (complete with five pages of charts & stats), some of the key points are summarised below.

Key Points:

  • the G20 / FSB reform agenda post-2008 resulted in a global financial system that is safer with more capital and liquidity, simpler having removed many complexities and fairer by ending “too big to fail” and the absence of moral hazard;
  • to maximise its potential the global financial system needs to be diverse (market and bank finance), trusted by society and remain a system open to all nations with trust between countries;
  • Carney highlights that capital requirements for banks are much higher (at least 7 times pre-crisis standards);
  • there are agreements to take forward proposals on total loss absorbing capacity (TLAC) for globally systemic banks, which if they fail, will also be resolved without recourse to the taxpayer;
  • highlights the passage by Parliament of the UK’s stronger regulatory framework to give regulators more tools to hold senior managers to account and the remuneration code on payment of bank bonuses – deferral for a minimum of 3 years and exposed to clawback for up to 7;
  • interconnections created by derivatives are being reduced and made more transparent, there are requirements to centrally clear derivative trades rather than the complex web of bilateral deals and trade reporting and margining requirements are being strengthened;
  • as memory of the crisis of 2008 fades, it will be even more important to maintain the reform agenda and explain its benefits;
  • financial reform alone could raise G20 GDP by more than 2% by reducing the economic costs of the financial crisis.

Memorable Quote: “Reform should stop only when industry and society are content and finance justifiably proud.”