FSB publishes recommendations on compensation data reporting to address potential misconduct risk

23 November 2018

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Ref no: 47/2018

The Financial Stability Board (FSB) today published its finalised Recommendations for national supervisors: Reporting on the use of compensation tools to address potential misconduct risk. The recommendations complement the FSB’s the Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices by setting out the types of data that can support improved monitoring by supervisory authorities on the use of compensation tools to address misconduct risk in significant financial institutions.

The Recommendations are directed to the relevant national supervisory authorities for firms in all financial sectors. They build on national supervisory work and existing international efforts including Basel Committee Pillar III disclosures on compensation. They will help supervisors understand whether governance and risk management processes at financial institutions:

  • Appropriately include conduct considerations in the design of their compensation and incentive systems, including the setting of individual goals, ex ante performance measurement mechanisms and ex post compensation adjustments;

  • Support the effective use of compensation tools in combination with other performance management tools to help promote good conduct or to remediate misconduct;

  • Promote wider risk management goals, including for conduct issues, consistent with the firm’s strategy and risk tolerance; and

  • Support the effective identification of emerging misconduct risks and appropriate review of incentive systems and compensation decisions in response to conduct incidents to ensure alignment of incentives, risk and reward.

In recent years, supervisors and firms have directed significant attention to improving compensation governance and risk adjustment practices. They have focused more intensively on the impact compensation and related performance management mechanisms can have on incentives, and the role they can play in addressing misconduct risks, by providing both ex ante incentives for good conduct and ex post adjustment mechanisms that support appropriate accountability when misconduct occurs.

The Recommendations form part of the FSB’s action plan address misconduct risk, which also includes a toolkit for firms and supervisors for strengthening governance frameworks to mitigate misconduct risk.

The FSB today also published an overview of responses to its public consultation on the Recommendations launched in May. The overview summarises the issues raised in the public consultation and sets out the main changes that have been made to the Recommendations to address these comments.

Notes to editors

The FSB’s 2015 Workplan on Measures to Reduce Misconduct Risk promoted incentives for good behaviour through:

The most recent update on progress under the overall Workplan on Measures to Reduce Misconduct Risk was delivered to the Hamburg G20 Summit in July 2017.

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 Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Recommendations for national supervisors: Reporting on the use of compensation tools to address potential misconduct risk: Overview of responses to the consultation

22 November 2018 | PDF full text (225 KB)

On 7 May 2018, the FSB published a consultative document on Recommendations for consistent national reporting of data on the use of compensation tools to address misconduct risk (“Recommendations”). The FSB received 11 responses from associations representing supervisors, banks, a research foundation, trade associations and a trade union.

This note summarises the main points from the responses, including to the specific questions set out in the consultation and provides an overview of the response to those comments, including changes made to the Recommendations.

Evaluation of the effects of financial regulatory reforms on infrastructure finance

20 November 2018 | PDF full text (3 MB)

The evaluation is among the first under the FSB framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms, and forms part of a broader FSB examination of the effects of reforms on financial intermediation. It focuses on infrastructure finance that is provided in the form of corporate and project debt financing (loans and bonds), for which the financial regulatory reforms are of immediate relevance.

The report concludes that the effect of the G20 reforms on infrastructure finance has been of a second order relative to factors such as the macro-financial environment, government policy and institutional factors. In particular, for the reforms that have been largely implemented and are most relevant for this evaluation – namely, the initial Basel III capital and liquidity requirements (agreed in 2010) and over-the-counter derivatives reforms – the analysis does not identify material negative effects on the provision and cost of infrastructure finance to date.

The evaluation further finds that:

  • The overall amount of infrastructure finance has grown in recent years after a temporary drop during the financial crisis. Market-based finance – mainly project and particularly corporate bond issuance as well as non-bank financing – has accounted for most of the growth in advanced economies in recent years.

  • Lending spreads for infrastructure finance have returned to lower levels in recent years following a spike during the crisis, but remain above pre-crisis levels.

  • There are some key differences in the provision of infrastructure finance in emerging market and developing economies (EMDEs) compared to advanced economies. EMDEs tend to rely more on bank loans, have a higher proportion of cross-border financing, and use local currency less for financing purposes.

  • The reforms have contributed to shorter average maturities of infrastructure loans by global systemically important banks. This effect is not necessarily unintended, given that reducing banks’ maturity mismatch was one of the objectives of the reforms.

  • While not analysing the ex post effects of reforms on financial resilience, the evaluation has found no results to suggest that the wider benefits to the financial system from enhanced resilience – as estimated at an aggregate level in ex ante impact assessment studies – do not apply in the narrower context of infrastructure finance.

The analysis points to some substitution in recent years of bank financing by market-based financing in advanced economies, and the G20 banking reforms may have been one of the drivers for this rebalancing.

Evaluation of the effects of financial regulatory reforms on infrastructure finance: Overview of responses to the consultation

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On 18 July 2018, the FSB published a consultative document on the Evaluation of the effects of financial regulatory reforms on infrastructure finance. The FSB received responses to the public consultation from banks, insurers, development banks and industry associations. Respondents generally welcomed the consultative document, noting the importance of this evaluation given the contribution of infrastructure finance to economic growth.

This document summarises the issues raised in the public consultation and sets out the main changes that have been made to the evaluation report in order to address them.

FSB report finds that effects of G20 financial reforms on infrastructure finance are of a second order relative to other factors

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Ref no: 46/2018

The Financial Stability Board (FSB) published today its final report on the Evaluation of the effects of financial regulatory reforms on infrastructure finance, following public consultation earlier this year.

The evaluation is among the first under the FSB framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms, and forms part of a broader FSB examination of the effects of reforms on financial intermediation. It focuses on infrastructure finance that is provided in the form of corporate and project debt financing (loans and bonds), for which the financial regulatory reforms are of most immediate relevance.

The report concludes that the effect of the G20 reforms on infrastructure finance has been of a second order relative to factors such as the macro-financial environment, government policy and institutional factors. In particular, for the reforms that have been largely implemented and are most relevant for this evaluation – namely, the initial Basel III capital and liquidity requirements (agreed in 2010) and over-the-counter derivatives reforms – the analysis does not identify material negative effects on the provision and cost of infrastructure finance to date.

The evaluation further finds that:

  • The overall amount of infrastructure finance has grown in recent years after a temporary drop during the financial crisis. Market-based finance – mainly project and particularly corporate bond issuance as well as non-bank financing – has accounted for most of the growth in advanced economies in recent years.

  • Lending spreads for infrastructure finance have returned to lower levels in recent years following a spike during the crisis, but remain above pre-crisis levels.

  • There are some key differences in the provision of infrastructure finance in emerging market and developing economies (EMDEs) compared to advanced economies. EMDEs tend to rely more on bank loans, have a higher proportion of cross-border financing, and use local currency less for financing purposes.

  • The reforms have contributed to shorter average maturities of infrastructure loans by global systemically important banks. This effect is not necessarily unintended, given that reducing banks’ maturity mismatch was one of the objectives of the reforms.

  • While not analysing the ex post effects of reforms on financial resilience, the evaluation has found no results to suggest that the wider benefits to the financial system from enhanced resilience – as estimated at an aggregate level in ex ante impact assessment studies – do not apply in the narrower context of infrastructure finance.

  • The analysis points to some substitution in recent years of bank financing by market-based financing in advanced economies, and the G20 banking reforms may have been one of the drivers for this rebalancing.

The FSB also published today an overview of responses to the public consultation, which summarises the issues raised in the public consultation and sets out the main changes that have been made in the evaluation report to address them. 

Notes to editors

The FSB published in July 2017 a Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms that guides analysis of whether the reforms are achieving their intended outcomes, and help identify material unintended consequences that may have to be addressed, without compromising on the objectives of the reforms. The framework provides the basis for dynamic implementation, and ensures that reforms remain fit for purpose amidst changing circumstances.

The report published today forms part of the evaluation of the G20 financial regulatory reforms on financial intermediation. The second part of the evaluation examines the effects of reforms on the financing of small and medium-sized enterprises and will be delivered to the G20 during the Japanese G20 Presidency in 2019. The FSB will also undertake an evaluation on the effects to date of reforms to end too-big-to-fail; that evaluation will be launched in early 2019 and completed in 2020.

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 65 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Trade reporting legal barriers: Follow-up of 2015 peer review recommendations

19 November 2018 | PDF full text (584 KB)

Trade reporting data provides important information for authorities as they seek to assess risks in OTC derivatives markets. However, where barriers to the full reporting of trade data and to authorities’ access to this information exist, this reduces the usefulness of this data. This document reports on FSB member jurisdictions have taken to address legal barriers to reporting and accessing trade data sets identified in a 2015 peer review. Four of these recommendations included implementation dates in 2018, while the other two did not have specific implementation dates. The progress report finds:

  • Barriers to full trade reporting: All but three of the FSB’s member jurisdictions have removed or addressed barriers to full trade reporting.

  • Masking Five FSB member jurisdictions allow masking of counterparty identifiers for some transactions. As reported by jurisdictions, the percentage of masked trades is relatively low, typically 5% or under, with several under 1%.

  • Regulators’ access to trade repository data: In twelve jurisdictions, changes have been made or are underway to address or remove barriers to access to trade repository data by foreign authorities and/or non-primary domestic authorities, including legal barriers which have only very recently been removed.

A number of supplementary recommendations have been made by the FSB. The FSB will continue to monitor implementation.

OTC Derivatives Market Reforms: Thirteenth Progress Report on Implementation

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This report provides an update on the progress made across the G20’s over-the-counter (OTC) derivatives reform agenda. This includes trade reporting of OTC derivatives; central clearing and, where appropriate, exchange or electronic platform trading of standardised OTC derivatives; and higher capital and minimum margin requirements for non-centrally cleared derivatives.

Overall, good progress continued to be made across the G20’s reform agenda including work to assess whether the implemented reforms meet the intended objectives. The report concludes that:

  • Trade reporting: Twenty-one out of 24 FSB member jurisdictions have comprehensive trade reporting requirements in force, up by two since end-June 2017. Authorities are using trade repository data for a wide range of tasks, and incorporating it in their published work. Work continues internationally, including on data harmonisation.

  • Central clearing: Eighteen member jurisdictions now have in force comprehensive standards/criteria for determining when standardised OTC derivatives should be centrally cleared, and two more jurisdictions adopted mandatory clearing requirements during the reporting period.

  • Margin requirements for non-centrally cleared derivative (NCCDs): Sixteen jurisdictions have implemented comprehensive margin requirements for NCCDs, an increase of two. Estimated collateralisation rates have risen since end-2016.

  • Higher capital requirements for NCCDs: Interim higher capital requirements for non-centrally cleared derivatives are in force in 23 of the 24 member jurisdictions, unchanged over the reporting period. However, the number of jurisdictions that have implemented the final standardised approach for counterparty credit risk and capital requirements for bank exposures to central counterparties is much lower. Having regard to the 1 January 2017 recommended implementation date, jurisdictions are urged to implement those requirements without further delay.

  • Platform trading: Thirteen jurisdictions have in force comprehensive assessment standards or criteria for determining when products should be platform traded. New determinations entered into force for specific derivatives products to be executed on organised trading platforms in six jurisdictions. Transparency of information about OTC derivatives transactions has increased since end-2016.

  • Cross border coordination and issues: Jurisdictions reported continuing progress, both in establishing broad legal powers to exercise deference with regard to foreign jurisdictions’ regimes, but more particularly with regard to exercising those powers in particular cases. Notably, the EU and US (Commodity Futures Trading Commission (CFTC)) recognised each other’s regulatory regime for trading venues, while Australia, Japan and the US (CFTC) recognised one or more jurisdictions for the purposes of their margin requirements.

FSB publishes reports on implementation of OTC derivatives reforms and removal of legal barriers

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Ref no: 45/2018

The FSB today published the following two reports:

  • setting out progress on reforms to over-the-counter (OTC) derivatives markets1 and

  • reporting on FSB member jurisdictions’ actions to remove legal barriers relating to OTC derivatives trade reporting.

OTC Derivatives Market Reforms: Progress Report on Implementation

Overall, good progress continues to be made across the G20’s OTC derivatives reform agenda in the period from end-June 2017, including work to assess whether the implemented reforms meet the intended objectives. The report concludes that:

  • Trade reporting: Twenty-one out of 24 FSB member jurisdictions have comprehensive trade reporting requirements in force, up by two since end-June 2017. Authorities are using trade repository data for a wide range of tasks, and incorporating it in their published work. Work continues internationally, including on data harmonisation.

  • Central clearing: Eighteen member jurisdictions now have in force comprehensive standards/criteria for determining when standardised OTC derivatives should be centrally cleared, and two more jurisdictions adopted mandatory clearing requirements during the reporting period.

  • Margin requirements for non-centrally cleared derivative (NCCDs): Sixteen jurisdictions have implemented comprehensive margin requirements for NCCDs, an increase of two. Estimated collateralisation rates have risen since end-2016.

  • Higher capital requirements for NCCDs: Interim higher capital requirements for non-centrally cleared derivatives are in force in 23 of the 24 member jurisdictions, unchanged over the reporting period. However, the number of jurisdictions that have implemented the final standardised approach for counterparty credit risk and capital requirements for bank exposures to central counterparties is much lower. Having regard to the 1 January 2017 recommended implementation date, jurisdictions are urged to implement those requirements without further delay.

  • Platform trading: Thirteen jurisdictions have in force comprehensive assessment standards or criteria for determining when products should be platform traded. New determinations entered into force for specific derivatives products to be executed on organised trading platforms in six jurisdictions. Transparency of information about OTC derivatives transactions has increased since end-2016.

  • Cross-border coordination and issues: Jurisdictions reported continuing progress, both in establishing broad legal powers to exercise deference with regard to foreign jurisdictions’ regimes, but more particularly with regard to exercising those powers in particular cases. Notably, the EU and US (Commodity Futures Trading Commission (CFTC)) recognised each other’s regulatory regime for trading venues, while Australia, Japan and the US (CFTC) recognised one or more jurisdictions for the purposes of their margin requirements.

Trade reporting legal barriers: Follow-up of 2015 peer review recommendations

Trade reporting data provides important information for authorities as they seek to assess risks in OTC derivatives markets. However, where barriers to the full reporting of trade data and to authorities’ access to this information exist, this reduces the usefulness of this data. This document reports on actions FSB member jurisdictions have taken to address legal barriers to reporting and accessing trade data identified in a 2015 peer review. Four of these recommendations included implementation dates in 2018, while the other two did not have specific implementation dates. The progress report finds:

  • Barriers to full trade reporting: All but three of the FSB’s member jurisdictions have removed or addressed barriers to full trade reporting.

  • Masking: Five FSB member jurisdictions allow masking of counterparty identifiers for some transactions. As reported by jurisdictions, the percentage of masked trades is relatively low, typically 5% or under, with several under 1%.

  • Regulators’ access to trade repository data: In twelve jurisdictions, changes have been made or are underway to address or remove barriers to access to trade repository data by foreign authorities and/or non-primary domestic authorities, including legal barriers which have only very recently been removed.

A number of supplementary recommendations have been made by the FSB. The FSB will continue to monitor implementation.

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 Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

  1. These reforms are: trade reporting of OTC derivatives; central clearing and, where appropriate, exchange or electronic platform trading of standardised OTC derivatives; and higher capital and minimum margin requirements for non-centrally cleared derivatives. [←]

Incentives to centrally clear over-the-counter (OTC) derivatives

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This final report from the FSB, the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) examines the effects of G20 financial regulatory reforms on the incentives to centrally clear over-the-counter (OTC) derivatives.

The central clearing of standardised OTC derivatives is a pillar of the G20 Leaders’ commitments to reform OTC derivatives markets in response to the financial crisis. A number of post-crisis reforms are, directly or indirectly, relevant to incentives to centrally clear. A large majority of the relevant international standards have been agreed upon and are being implemented. This evaluation is one of the first using the FSB framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms.

The report concludes that the reforms – particularly capital requirements, clearing mandates and margin requirements for non-centrally cleared derivatives – are achieving their goals of promoting central clearing, especially for the most systemic market participants. This is consistent with the goal of reducing complexity and improving transparency and standardisation in the OTC derivatives markets. Beyond the systemic core of the derivatives network of CCPs, dealers/clearing service providers and larger, more active clients, the incentives are less strong.

The report identifies reform areas that may merit consideration by the relevant standard-setting bodies (SSBs). The findings from the report will inform relevant SSBs regarding any subsequent policy efforts and potential adjustments, bearing in mind the original objectives of the reforms. This does not imply a scaling back of those reforms or an undermining of members’ commitment to implement them.

An earlier version of this report was subject to public consultation and responses to the consultation have informed the final report. An overview of responses to the public consultation, which summarises the issues raised in the public consultation launched in August and sets out the main changes that have been made to the report, can be found here.

Evaluation of incentives to centrally clear OTC derivatives: Overview of responses to the consultation

| PDF full text (200 KB)

The FSB, the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a consultative document on incentives to centrally clear over-the-counter (OTC) derivatives on 7 August 2018. A total of 40 responses were received, including from banks, central counterparties, asset managers and industry associations.

This note summarises the comments made in the public consultation and sets out the main changes that have been made in  report to address them.