FSB and standard-setting bodies publish final report on effects of reforms on incentives to centrally clear over-the-counter derivatives

19 November 2018

The Financial Stability Board (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 today their final report on Incentives to centrally clear over-the-counter (OTC) derivatives.

The central clearing of standardised OTC derivatives is a pillar of the G20 Leaders’ commitment to reform OTC derivatives markets in response to the global financial crisis. A number of post-crisis reforms are, directly or indirectly, relevant to incentives to centrally clear. The report by the Derivatives Assessment Team (DAT) evaluates how these reforms interact and how they could affect incentives.

The findings of this evaluation report will inform relevant standard-setting bodies and, if warranted, could provide a basis for fine-tuning post-crisis reforms, 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.

The report, one of the first two evaluations under the FSB framework for the post-implementation evaluation of the effects of G20 financial regulatory reforms, confirms the findings of the consultative document that:

  • The changes observed in OTC derivatives markets are consistent with the G20 Leaders’ objective of promoting central clearing as part of mitigating systemic risk and making derivatives markets safer.

  • The relevant post-crisis reforms, in particular the capital, margin and clearing reforms, taken together, appear to create an overall incentive, at least for dealers and larger and more active clients, to centrally clear OTC derivatives.

  • Non-regulatory factors, such as market liquidity, counterparty credit risk management and netting efficiencies, are also important and can interact with regulatory factors to affect incentives to centrally clear.

  • Some categories of clients have less strong incentives to use central clearing, and may have a lower degree of access to central clearing.

  • The provision of client clearing services is concentrated in a relatively small number of bank-affiliated clearing firms and this concentration may have implications for financial stability.

  • Some aspects of regulatory reform may not incentivise provision of client clearing services.

The analysis suggests that, overall, the reforms 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 central counterparties (CCPs), dealers/clearing service providers and larger, more active clients, the incentives are less strong.

The DAT’s work suggests that the treatment of initial margin in the leverage ratio can be a disincentive for banks to offer or expand client clearing services. Bearing in mind the original objectives of the reform, additional analysis would be useful to further assess these effects.

In this regard, the Basel Committee on Banking Supervision issued on 18 October a public consultation setting out options for adjusting, or not, the leverage ratio treatment of client cleared derivatives.

The report also discusses the effects of clearing mandates and margin requirements for non-centrally cleared derivatives (particularly initial margin) in supporting incentives to centrally clear; and the treatment of client cleared trades in the framework for global systemically important banks.

The final responsibility for deciding whether and how to amend a particular standard or policy remains with the body that is responsible for issuing that standard or policy.

The BCBS, CPMI, FSB and IOSCO today also published an overview of responses to the consultation on this evaluation, which summarises the issues raised in the public consultation launched in August and sets out the main changes that have been made in the report to address them. The individual responses to the public consultation are available on the FSB website.

Notes to editors

The five areas of post-crisis reforms to OTC derivatives markets agreed by the G20 are: trade reporting of OTC derivatives; central clearing of standardised OTC derivatives; exchange or electronic platform trading, where appropriate, of standardised OTC derivatives; higher capital requirements for non-centrally cleared derivatives; and initial and variation margin requirements for non-centrally cleared derivatives.

An earlier assessment of incentives to centrally clear OTC derivatives was published in 2014. In July 2017, the FSB published the Chairs’ Report on the Implementation of the Joint Workplan for Strengthening the Resilience, Recovery and Resolvability of Central Counterparties, which noted that a Derivatives Assessment Team would be convened to undertake a review of the incentives for central clearing arising from the interaction of post-crisis reforms, to be completed by end-2018. As part of that workplan, the FSB has also recently published a discussion paper for public consultation on the financial resources to support CCP resolution and the treatment of equity in resolution.

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 helps 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 evaluation on the effects of reforms on incentives to centrally clear OTC derivatives is one of the first evaluations under the Framework. The other initial evaluation under the Framework examines the effects of the G20 regulatory reforms on financial intermediation, covering the financing of infrastructure investment (to be published in the coming days) and of small and medium-sized enterprises (to be published in 2019). The FSB will also undertake an evaluation on the effects to date of reforms to end too-big-to-fail, which will be launched in early 2019 and completed in 2020.

Press enquiries BIS (CPMI/BCBS):

+41 61 280 8188

[email protected]

Press enquiries FSB:

+41 61 280 8138

[email protected]

Press enquiries IOSCO:

+ 34 91 787 0419

[email protected]

 

 

 

FSB publishes progress report on measures to address the decline in correspondent banking and updated data

16 November 2018

Press enquiries:
+41 61 280 8138
[email protected]
Ref no: 43/2018

The Financial Stability Board (FSB) today published two reports on its work to assess and address the decline in correspondent banking relationships: (1) updated data on trends in correspondent banking relationships using data provided by SWIFT as of end-2017 and (2) a progress report on the FSB’s four-point action plan to assess and address the decline in correspondent banking that will be delivered to the G20 Summit.

The decline in the number of correspondent banking relationships in many countries around the world remains a source of concern for the international community because, in affected jurisdictions, it may impact the ability to send and receive international payments, or drive some payment flows underground, with potential adverse consequences on growth, financial inclusion and international trade. While impacts to the stability and integrity of the global financial system have not been identified, concerns remain at the national and regional level.

Alexander Karrer, Chair of the FSB’s Correspondent Banking Coordination Group and Deputy State Secretary at the Swiss Federal Department of Finance, said: “The international components of the FSB’s action plan are now largely in place. To be effective, these need to be implemented in practice by national authorities and banks. Despite the actions that have been taken, data from SWIFT shows that the decline in the number of active correspondents continued in 2017, affecting almost all regions. Payments were still flowing, but were concentrated in a smaller number of banks and in the most active corridors.”

FSB Correspondent banking data report – Update

The FSB correspondent banking data report shows that the decline in the number of active correspondents, as measured by the flow of SWIFT payment messages, continued in 2017, with a year-on-year reduction of 4.1%. All continents or sub-continents saw a decline in the number of active correspondents in 2017, with the rate of decline ranging between 5.2% and 6.7%, except in Northern America where it was 2.9%. From January 2011 to end-2017, the number of active correspondents declined globally by 15.5%.

The number of active corridors (defined as country pairs that processed at least one transaction) also declined in 2017, by 2.4%, and from January 2011 the data shows a decline of 7.3%.

Small economies with a Gross Domestic Product (GDP) of less than USD 10 billion have seen a stronger decline in the number of foreign counterparties per local banks (-23.4%), compared with economies with a GDP of between USD 10 billion and 1 trillion (approximately -18%) and economies with a GDP of above USD 1 trillion (-8.4%). The decline in small economies has not affected, on average, the total volume and value of payment messages they received; these have increased more for small economies compared to the larger economies.

Progress report

The progress report highlights the further actions taken to implement the FSB’s four-point action plan on correspondent banking since the FSB’s March 2018 update. These include:

  • Strengthening tools for due diligence by correspondent banks – The report notes the commitment of large banks to implement the Wolfsberg Group Correspondent Banking Due Diligence Questionnaire by end-2019. The FSB continues to encourage the industry to use the questionnaire to achieve greater efficiencies and improved standardisation in Know Your Customer utilities. Another important technical step is the recommendation by SWIFT to start the migration to the new ISO 20022 message format in correspondent banking in November 2021, which will support enhanced transparency, including through the use of the Legal Entity Identifier (LEI) for the unambiguous identification of originators and beneficiaries of cross-border payments. The recently launched FSB peer review on LEI implementation will help to identify and address any remaining obstacle to the effective use of the LEI in that field.

  • Clarifying regulatory expectations – The Financial Action Task Force (FATF) and Basel Committee on Banking Supervision (BCBS) have conducted surveys of their memberships to assess the transmission and traction of their guidance on correspondent banking. While there generally has been a high level of dissemination of the guidance, some national authorities may need to do more.

  • Domestic capacity building – The FSB recently held a workshop, involving both public and private sector participants, on the coordination and prioritisation of capacity development, including to strengthen domestic compliance with Anti-Money Laundering and Countering the Finance of Terrorism Public standards. The FSB is also exploring with the World Trade Organization, International Finance Corporation and multilateral development banks how solutions developed to address the reduction in correspondent banking relationships might also be used in the context of trade finance.

With the international components of the correspondent banking action plan largely in place, the FSB’s focus is now turning to monitoring, through its membership, of implementation and of developments. Access to correspondent banking relationships remains a critical issue in some regions and jurisdictions. 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.

The FSB, FATF, Global Partnership for Financial Inclusion (GPFI), IMF and World Bank are also monitoring the take-up of the FSB’s March 2018 recommendations on remittance service providers’ access to banking services and will report to the G20 in June 2019 on actions taken.

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 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.

FSB action plan to assess and address the decline in correspondent banking: Progress report to G20 Summit of November 2018

| PDF full text (426 KB)

This progress report provides an update on the implementation of the FSB’s four-point action plan to assess and address the decline in correspondent banking.

A decline in the number of correspondent banking relationships remains a source of concern for the international community because, in affected jurisdictions, it may impact the ability to send and receive international payments, or drive some payment flows underground, with potential adverse consequences on growth, financial inclusion and international trade. While impacts to the stability and integrity of the global financial system have not been identified, concerns remain at the national and regional level.

The progress report highlights actions taken to implement the FSB’s four-point action plan on correspondent banking since the FSB’s March 2018 progress report. These include:

  • Strengthening tools for due diligence by correspondent banks – To support the measures that could help improve the efficiency of due diligence procedures, reduce compliance costs and help address perceived uncertainty, the FSB, Basel Committee on Banking Supervision (BCBS) and Committee on Payments and Market Infrastructures (CPMI) organised a workshop to discuss the use of Know Your Customer utilities for correspondent banking due diligence, the quality of payment messages and the use of the Legal Entity Identifier in correspondent banking.

    Other technical solutions addressing or offsetting the reduced availability of correspondent banking are also being considered, including how technological innovations, such as big data and machine learning, might be usefully applied in generating and analysing information and facilitating due diligence processes.

  • Clarifying regulatory expectations – The Financial Action Task Force (FATF) and BCBS have conducted surveys of their memberships to assess the transmission and traction of their guidance on correspondent banking. While there generally has been a high level of dissemination of the guidance, some national authorities may need to do more.

  • Domestic capacity building – The FSB recently convened a workshop that included representation from the private sector, on the coordination and prioritisation of capacity development to strengthen domestic Anti-Money Laundering and Countering the Finance of Terrorism Public supervision. The FSB has also committed to explore how solutions developed to address the reduction in correspondent banking relationships might also be used in the context of trade finance and, in this context, has discussed with the World Trade Organization, International Finance Corporation and Multilateral Development Banks technical assistance that these organisations provide to private sector banks on trade finance.

With the international components of the correspondent banking action plan largely in place, the steps listed above illustrate that the FSB’s focus is now turning to monitoring of implementation and of developments. Monitoring be undertaken by the FSB’s membership, and in particular the BCBS, CPMI, FATF, Global Partnership for Financial Inclusion, International Monetary Fund and World Bank.

FSB Correspondent Banking Data Report – Update

| PDF full text (3 MB)

A decline in the number of correspondent banking relationships remains a source of concern for the international community because, in affected jurisdictions, it may impact the ability to send and receive international payments, or drive some payment flows underground, with potential adverse consequences on growth, financial inclusion and international trade. While impacts to the stability and integrity of the global financial system have not been identified, concerns remain at the national and regional level.

The report – based upon year-end 2017 data from SWIFT – shows that the decline in the number of active correspondents, as measured by the flow of messages, continued in 2017, with a year-on-year reduction of 4.1%. All continents or sub-continents saw a decline in the number of active correspondents in 2017, with the rate of decline ranging between 5.2% and 6.7%, except in Northern America where it was 2.9%. From January 2011 to end-2017, the number of active correspondents declined by 15.5% and active corridors by 7.3%. The number of active corridors (defined as country pairs that processed at least one transaction) also declined in 2017, by 2.4%, and from January 2011 the data shows a decline of 7.3%.

Small economies with a Gross Domestic Product (GDP) of less than USD 10 billion have seen a stronger decline in the ratio of foreign counterparties to local banks (-23.4%), compared economies with a GDP of between USD 10 billion and USD 1 trillion (approximately -18%) and economies with a GDP of above USD 1 trillion (-8.4%). The decline in small economies has not affected, on average, the volume and value of messages they received; these have increased more for small economies compared to the larger economies.

FSB publishes 2018 G-SIB list

Press enquiries:
+41 61 280 8138
[email protected]
Ref no: 42/2018

The Financial Stability Board (FSB) today published the 2018 list of global systemically important banks (G-SIBs) using end-2017 data and an assessment methodology designed by the Basel Committee on Banking Supervision (BCBS). 

One bank (Groupe BPCE) has been added to the list and two banks (Nordea and Royal Bank of Scotland) have been removed from the list and therefore the overall number of G-SIBs decreases from 30 to 29.

FSB member authorities apply the following requirements to G-SIBs:

  • Higher capital buffer: The G-SIBs are allocated to buckets corresponding to of higher capital buffers that national authorities require banks to hold in accordance with international standards. Compared with the 2017 list of G-SIBs, two banks have moved to a lower bucket: Bank of America has moved from bucket 3 to bucket 2 and China Construction Bank has moved from bucket 2 to bucket 1.

  • Total Loss-Absorbing Capacity (TLAC): G-SIBs are required by national authorities to meet the TLAC standard, alongside regulatory capital requirements set out in the Basel III framework. The TLAC standard will be phased in from 1 January 2019 for G-SIBs identified in the 2015 list (provided that they continue to be designated as G-SIBs thereafter).

  • Resolvability: These include group-wide resolution planning and regular resolvability assessments. The resolvability of each G-SIB is also reviewed in a high-level FSB Resolvability Assessment Process (RAP) by senior regulators within the firms’ Crisis Management Groups.

  • Higher supervisory expectations: These include heightened supervisory expectations for risk management functions, risk data aggregation capabilities, risk governance and internal controls.

BCBS today published updated denominators used to calculate banks’ scores and the values of the underlying twelve indicators for each bank in the assessment sample. The BCBS also published the thresholds used to allocate the G-SIBs to buckets, as well as updated links to public disclosures of all banks in the sample.

A new list of G-SIBs will next be published in November 2019.

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.

2018 list of global systemically important banks (G-SIBs)

| PDF full text (177 KB)

The 2018 list of global systemically important banks (G-SIBs) uses end-2017 data and an assessment methodology designed by the Basel Committee on Banking Supervision (BCBS). 

One bank (Groupe BPCE) has been added to the list and two banks (Nordea and Royal Bank of Scotland) have been removed from the list and therefore the overall number of G-SIBs decreased from 30 to 29.

 

Financial resources to support CCP resolution and the treatment of CCP equity in resolution

15 November 2018 | PDF full text (504 KB)

This discussion paper seeks comment on financial resources to support central counterparty (CCP) resolution and the treatment of equity in CCP resolution. It builds on the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes) and FSB Guidance on Central Counterparty Resolution and Resolution Planning.

Centrally clearing standardised over-the-counter (OTC) derivatives is a pillar of the G20 Leaders’ commitment to reform OTC derivatives markets in response to the global financial crisis. CCPs’ criticality to the overall safety and soundness of the financial system means that authorities must take steps to ensure that CCPs do not themselves become a source of systemic risk and that any CCP can be successfully resolved without resort to a government bailout.

The FSB has concluded that further guidance on the necessary financial resources should be developed in an evidence-based way including by drawing on the practical experience gained from resolution planning by relevant authorities and Crisis Management Groups.

To inform this process, the FSB has, in consultation with the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions, developed a discussion paper that sets out considerations that may be relevant to evaluating whether existing financial resources and tools are adequate to implement resolution strategies for individual CCPs; and considerations that could guide authorities in developing possible approaches to the treatment of CCP equity in resolution.

The FSB welcomes comments on this discussion paper. Responses should be sent to [email protected] by 1 February 2019. Responses will be published on the FSB’s website unless respondents expressly request otherwise.

FSB 2018 Resolution Report: “Keeping the pressure up“

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This report updates on progress in implementing the framework and policy measures to enhance the resolvability of systemically important financial institutions and sets out the priorities for the FSB’s resolution work going forward. The report finds that jurisdictions have undertaken substantial reforms to mitigate the “too-big-to-fail” (TBTF) problem. Implementation is most advanced in the banking sector where most home and key host jurisdictions of global systemically important banks (G-SIBs) have introduced resolution regimes that are broadly aligned with the FSB’s Key attributes of effective resolution regimes for financial institutions and have launched their resolution planning for G-SIBs. However, for insurance companies and central counterparties (CCPs) progress is less advanced. The report concludes that it is important to keep the pressure up, on firms to continue strengthening their resolvability and complete the build-out of the necessary capabilities, and on authorities and lawmakers to complete and fully implement the necessary reforms.

Starting early next year, the FSB is going to evaluate the effects of the TBTF reforms in order to determine whether they are achieving their objectives and whether they have had any material unintended consequences. The evaluation will be completed in 2020.

FSB publishes 2018 Resolution Report and publicly consults on financial resources to support CCP resolution

Press enquiries:
+41 61 280 8138
[email protected]
Ref no: 41/2018

The Financial Stability Board (FSB) published today its 2018 Resolution Report and is also launching for public consultation a discussion paper on financial resources to support central counterparty (CCP) resolution and on the treatment of CCP equity in resolution.

2018 Resolution Report

The report updates on progress in implementing the framework and policy measures to enhance the resolvability of systemically important financial institutions and sets out the priorities for the FSB’s resolution work going forward. The report finds that jurisdictions have undertaken substantial reforms to mitigate the “too-big-to-fail” (TBTF) problem. Implementation is most advanced in the banking sector where most home and key host jurisdictions of global systemically important banks (G-SIBs) have introduced resolution regimes that are broadly aligned with the FSB’s Key attributes of effective resolution regimes for financial institutions and have launched their resolution planning for G-SIBs. However, for insurance companies and CCPs progress is less advanced. The report concludes that it is important to keep the pressure up, on firms to continue strengthening their resolvability and complete the build-out of the necessary capabilities, and on authorities and lawmakers to complete and fully implement the necessary reforms.

Starting early next year, the FSB is going to evaluate the effects of the TBTF reforms in order to determine whether they are achieving their objectives and whether they have had any material unintended consequences. The evaluation will be completed in 2020.

Discussion paper on financial resources to support CCP resolution and the treatment of CCP equity in resolution

The FSB also invites comments on its discussion paper on CCP financial resources and the treatment of CCP equity in resolution. Centrally clearing standardised over-the-counter (OTC) derivatives is a pillar of the G20 Leaders’ commitment to reform OTC derivatives markets in response to the global financial crisis. CCPs’ criticality to the overall safety and soundness of the financial system means that authorities must take steps to ensure that CCPs do not themselves become a source of systemic risk and that any CCP can be successfully resolved without resort to a government bailout. The FSB has concluded that further guidance on the necessary financial resources should be developed in an evidence-based way, including by drawing on the practical experience gained from resolution planning by relevant authorities and Crisis Management Groups. To inform this process, the FSB discussion paper sets out considerations that may be relevant to evaluating whether existing financial resources and tools are adequate to implement resolution strategies for individual CCPs; and considerations that could guide authorities in developing possible approaches to the treatment of CCP equity in resolution.

The discussion paper will be delivered to the G20 Leaders’ Summit in Buenos Aires later this month.

The FSB welcomes comments on this discussion paper. Responses should be sent to [email protected] by 1 February 2019. Responses will be published on the FSB’s website unless respondents expressly request otherwise.

Speaking about today’s releases, Mark Branson, Chair of the FSB Resolution Steering Group and Chief Executive Officer of the Swiss Financial Market Supervisory Authority FINMA, said: “Despite the very substantial progress in improving banks’ resolvability, the ‘steady state’ for resolution plans has not yet been reached. Important legal, technical and operational challenges remain. And more work is needed to develop effective resolution regimes for insurers and central counterparties. As part of this work the FSB is today releasing a consultation paper on how to evaluate the financial preparedness of CCPs for resolution. The subsequent guidance will form an important part of efforts to allow for the effective resolution of CCPs.”

Notes to editors

The FSB Resolution Steering Group leads the FSB’s work on resolution regimes, resolution planning, and resolvability assessments for all sectors and developed the Key Attributes of Effective Resolution Regimes for Financial Institutions.

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.

Release of IAIS proposed holistic framework for the assessment and mitigation of systemic risk in the insurance sector and implications for the identification of G-SIIs and for G-SII policy measures

14 November 2018 | PDF full text (165 KB)

This communication updates on the FSB’s decision, in consultation with the International Association of Insurance Supervisors (IAIS) and national authorities, not to engage in an identification of G-SIIs in 2018. This decision was taken in light of the progress by the IAIS in developing a holistic framework for the assessment and mitigation of systemic risk in the insurance sector.