Working Group on Sterling Risk-Free Reference Rates letters to European Commission, BCBS, PRA and FCA on regulatory barriers to transition from LIBOR
On 23 October 2019, the Bank of England (BoE) updated its webpage on the transition to sterling risk-free rates (RFRs) from the London Interbank Offered Rate (LIBOR) to announce that the Working Group on Sterling Risk-Free Reference Rates had written to European Commission, the Basel Committee on Banking Supervision (BCBS), the PRA and the FCA on regulatory barriers to transition.
In the letters, the Working Group identifies regulatory barriers that it considers are likely to impede the adoption of the Sterling Overnight Index Average (SONIA).
The BoE has published the letters sent by the Working Group (all dated 23 October 2019):
- Letter to European Commission. The letter contains details of specific regulatory barriers in EU regulatory frameworks relating to arising from banking and insurance prudential regulation and from markets and conduct regulation.
- Letter to BCBS. The letter identifies issues in the Basel prudential framework relating to model change assessments, client end-user impacts and contractual terms that the Working Group considers could act as a barrier to the adoption of RFRs.
- Letter to PRA. The letter identifies issues in the banking prudential framework that the Working Group considers could act as a barrier to the adoption of RFRs. The letter covers similar issues as the letter to the BCBS, with the addition of UK-related issues such as the ring-fencing regime and the minimum requirement for own funds and eligible liabilities (MREL).
- Letter to FCA. The letter identifies regulatory issues that could be a barrier to the adoption of SONIA, including legacy contracts, EMIR and MiFIR requirements relating to derivatives, permissions to enter into regulated mortgage contracts (RMCs) and conduct risk.
In each of the letters, the Working Group requests that the authorities take specific actions that it considers necessary to ensure a smooth transition from LIBOR to SONIA, ahead of the expected cessation of LIBOR at the end of 2021.
The Working Group sent a letter to EIOPA in July 2019 raising concerns on regulatory barriers to the transition from interbank offered rates (IBORs).
Working group on euro RFRs’ communication toolkit
The ECB’s working group on euro risk-free rates has published a communication toolkit comprising:
- Frequently asked questions. This document includes questions and answers about €STR, the working group and its governance, issues arising from the transition from EONIA to €STR, fallback rate provisions for EONIA and EURIBOR and the development of term rates based on €STR.
- A set of slides covering what is happening in relation to interbank offered rates and the new risk-free rates, the role of the working group on euro risk-free rates, the transition from EONIA to €STR, fallback rate provisions for EURIBOR, action to be taken by market participants and international developments and timeline.
- A checklist on how to navigate the transition from EONIA to €STR.
The working group has published these resources with a view to market participants using them in their own communication and education efforts.
House of Commons European Scrutiny Committee queries government’s position on equivalence in financial services sector post-Brexit
On 22 October 2019, the House of Commons European Scrutiny Committee published its first report of session 2019/20, which includes consideration of the UK’s access to the EU financial services markets after Brexit.
The committee refers to the European Commission’s recent review of EU law on equivalence. It notes that barriers to the UK obtaining and maintaining equivalence are being raised because Brexit means substantial volumes of financial services into the EU could take place outside the scope of EU law if the UK were to obtain equivalence. Recent amendments to EU financial services legislation have already been adopted to make equivalence for the UK in certain areas more difficult.
Given the economic importance of the financial services industry, and the volume of its exports likely to be affected by Brexit, the committee is disappointed with the “paucity” of the recent explanatory memorandum on equivalence submitted by the Economic Secretary to the Treasury. It fails to make even the most cursory attempt to place the EU’s approach in a more concrete post-Brexit context, or confirm whether the section of the political declaration on the future UK-EU relationship on using equivalence for financial services still has the government’s support under the new prime minister.
The committee is aware that the government withdrew UK officials from EU meetings as of 1 September 2019 specifically to allow them to focus on the future EU relationship, including in the area of financial services. As a result, it expects significant work to have already been carried out to identify the areas in which equivalence may be sought from the EU in the future, and what the consequences of that would be for the UK’s regulatory autonomy.
The committee asks the Economic Secretary to clarify, by 31 October 2019, if the government is seeking any changes to the sections of the political declaration related to financial services. He is also asked to confirm if the government is considering seeking equivalence under EU law post-Brexit and, if so, which specific pieces of EU legislation equivalence is being prioritised under. In anticipation of the response, the committee cleared the Commission’s equivalence review from scrutiny. It also drew these developments to the attention of the House of Commons Treasury Committee in the context of its inquiry into the future of the UK’s financial services.
FATF issues public statement on DPRK and Iran
On 18 October 2019, the Financial Action Task Force (FATF) issued a public statement to call on its members and other jurisdictions to apply counter-measures to protect the international financial system from the ongoing and substantial money laundering and financing of terrorism (ML/FT) risks. The specific risks apply to the Democratic Peoples’ Republic of Korea (DPRK) and Iran.
The FATF remains concerned by the Democratic Peoples’ Republic of Korea’s failure to address the significant deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threats they pose to the integrity of the international financial system. The FATF urges the DPRK to immediately and meaningfully address its AML/CFT deficiencies. Further, the FATF has serious concerns with the threat posed by the DPRK’s illicit activities related to the proliferation of weapons of mass destruction (WMDs) and its financing. The FATF urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with the DPRK, including DPRK companies, financial institutions, and those acting on their behalf, and to adopt all measures to facilitate targeted financial sanctions.
In June 2016, the FATF welcomed Iran’s high-level political commitment to address its strategic AML/CFT deficiencies and its decision to seek technical assistance in the implementation of the Action Plan. In October 2019, the FATF noted that there are still items not completed and Iran should fully address:
- Adequately criminalizing terrorist financing, including by removing the exemption for designated groups “attempting to end foreign occupation, colonialism and racism”.
- Identifying and freezing terrorist assets in line with the relevant United Nations Security Council resolutions.
- Ensuring an adequate and enforceable customer due diligence regime.
- Clarifying that the submission of suspicious transaction reports (STRs) for attempted TF-related transactions are covered under Iran’s legal framework.
- Demonstrating how authorities are identifying and sanctioning unlicensed money/value transfer service providers.
- Ratifying and implementing the Palermo and TF Conventions, and clarifying the capability to provide mutual legal assistance.
- Ensuring that financial institutions verify that wire transfers contain complete originator and beneficiary information.
The FATF urges all jurisdictions to continue to advise their financial institutions to apply enhanced due diligence with respect to business relationships and transactions with natural and legal persons from Iran, consistent with FATF Recommendations.
Updated HM Treasury advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions
On 22 October 2019, HM Treasury published an updated advisory notice identifying jurisdictions which are to be regarded as higher risk for money laundering and terrorist financing controls. The notice follows the publication by the Financial Action Task Force (FATF) of statements identifying jurisdictions with strategic deficiencies in their anti-money laundering (AML) and counter-terrorist financing (CTF) regimes. The FATF statements were published on 18 October 2019.
HM Treasury advice, following that of the FATF is that the Democratic People’s Republic of Korea should now be considered a high-risk country and firms should apply counter measures and enhanced due diligence measures in accordance with the risks. Iran is to be considered as high-risk and firms should apply enhanced due diligence measures in accordance with the risks, and any other measures as specified by the FATF that have a similar effect in mitigating risks.
The Bahamas, Botswana, Cambodia, Ghana, Iceland, Mongolia, Pakistan, Panama, Syria, Trinidad and Tobago, Yemen and Zimbabwe require firms to take appropriate actions to minimise the associated risks, which may include enhanced due diligence measures in high risk situations.
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