reuters summit - Thomson Reuters

REUTERS SUMMIT
23 MAY, 2016
Reuters Financial Regulation Summit
REUTERS/Michaela Rehle
FINANCIAL REGULATION SUMMIT 2016
EU watchdog lauds insurer moves to adapt business models
By Jonathan Gould and Huw Jones
I
nsurers are making progress in
adjusting their business models
to account for low interest rates
and the complex new risk-capital
regime called Solvency II that took
effect at the start of the year, the EU's
top insurance regulator said.
Insurers have also been diversifying
their investment portfolios to obtain
greater returns, while avoiding an
alarming increase in the degree of
risk, Gabriel Bernardino, chairman of
the European Insurance and
Occupational Pensions Authority
(EIOPA), told Reuters in an interview.
"We see an evolution; changing
business models is more and more a
part of discussions in the boards of
companies," Bernardino said, adding
that dividend policies were a concern
at some insurers where these models
were under stress.
The Solvency II rules, which came into
force on Jan. 1, require insurers to
overhaul the way they assess risks on
their books and measure the capital
required to cover obligations to policy
holders often decades in the future.
They are also forcing a revamp of life
insurance products in many countries
where policies included high
guaranteed interest rates to
customers. More changes are needed,
Bernardino said.
"There is urgency, especially for
pockets of life insurance businesses
based on hard guarantees," he said.
"I'm more confident this year than last
on the pace of change but does that
mean everybody is already there?
No."
BIG SHIFTS
European insurers were moving at
different speeds and the market will
see big shifts in the coming five years,
he said.
"We need to see more simple, more
standardized products, and value for
money for consumers," he said.
EIOPA is carefully monitoring the
implementation of Solvency II in face
of low interest rates, but there have
been no surprises on insurers' capital
positions, he said.
Investor worries about insurers
possibly needing to raise capital to
meet Solvency II requirements hit
stocks of some Dutch companies last
year, prompting Delta Lloyd into a
650 million euro ($728 million) rights
issue in March.
Insurer Aegon on Monday said it was
selling 3 billion pounds ($4.4 billion)
of annuity liabilities to Britain's Legal
& General Group, a move analysts
said was probably driven by Aegon's
desire to improve its solvency ratio.
The logo of Europe's biggest insurer Allianz SE is seen on the company tower at La Defense business and financial district in Courbevoie
near Paris, France, March 2, 2016. REUTERS/Jacky Naegelen
FINANCIAL REGULATION SUMMIT 2016
Bernardino said analysts and
investors must understand that there
is no "magic number" for the
regulatory Solvency Capital
Requirement (SCR), which varies
depending on the risk sensitivity of an
insurer's business model to interest
rates, insurance or credit risks.
"The ones with more sensitivity will
need to have more leeway on capital if
they don't want to be close to the
SCR," he said.
"You can't say that just because some
companies have the same number,
they have the same level of risk," he
added.
NEGATIVE RATES
Some big insurers such as
Allianz have reported Solvency II
ratios at 200 percent or more of the
SCR, underpinning expectations for
big dividends or share buybacks.
Bernardino said dividend policies
were a concern mainly for insurers
with stressed business models that
needed to build resilience against
volatile market conditions.
"Overall, what I've seen on dividends
and share buybacks, well, that is
normal capital management; it is not
for supervisors to get involved with
those elements, provided that
companies have a robust solvency
position," Bernardino said.
Negative interest rates are
exacerbating investment headaches
for insurers, who in turn were now
searching for assets with better
returns than long-dated bonds, but
this has not led to a dramatic increase
in risk in investment portfolios.
"We don't see herd behaviour. I
welcome more diversification in
investment portfolios. Diversification
is something that always pays off at
the end of the day," Bernardino said.
($1 = 0.8933 euros)
Need clarity on EU pensions deficit hit to stability: watchdog
By Jonathan Gould and Carolyn Cohn
G
reater clarity is urgently
needed on the extent of
underfunding of corporate
pensions in Europe and the
potential impact this could have on
financial stability, a top EU financial
regulator said.
"Everybody is much more aware of the
vulnerabilities now," Gabriel
Bernardino, chairman of the
European Insurance and
Occupational Pensions Authority
(EIOPA), said in an interview in
Frankfurt for the Reuters Financial
Regulation Summit.
Negative interest rates are dragging
down investment returns and raising
concerns about the ability of
companies' defined benefit pension
programmes to pay what they
promised to future retirees,
Bernardino said.
The problems facing pension funds
are similar to those at life insurers
who offered long-term guaranteed
interest rate policies, but Europe's
pensions market rules are more
fragmented, with big differences
between countries.
Germany's financial watchdog warned
this month that some of that country's
pension funds may soon be unable on
their own to fully meet their
obligations, and the funds were
suffering more than insurers from low
interest rates.
"It is an urgent issue but I would not
want to characterize it as a bigger or
smaller one than the insurance
sector," EIOPA's Bernardino said
when asked if Germany's situation
applied more broadly.
EIOPA released the results of its first
stress test for pension funds earlier
this year, showing that even before it
applied hypothetical shock scenarios,
liabilities exceeded assets by about
428 billion euros ($480 billion) or 24
percent of total liabilities.
That deficit ballooned to 773 billion
euros under a severe adverse market
scenario including a fall in asset
prices and interest rates, as well as an
increase in inflation rates.
Many companies in Britain and other
countries are closing defined benefit
schemes already to new employees,
and pensions can complicate plans
for strategic realignments, such as at
steelmakers Tata and ThyssenKrupp.
While pensions deficits might be a
slow-burn problem, complacency was
not an option, Bernardino said.
"We think the commitments in the
defined benefit plans in Europe
should be valued according to a more
realistic basis and that this should be
transparent both to companies and
employees, to help foster a proper
dialogue on the sustainability of these
"It is an urgent issue but I
would not want to
characterize it as a bigger or
smaller one than the
insurance sector," - Gabriel
Bernardino, chairman of the
European Insurance and
Occupational Pensions Authority
promises," he said.
"We need timely adjustments, not just
'kicking the can down the road'," he
said.
EIOPA's next pensions stress tests,
due in 2017, will look more closely at
pension plan sponsors and the impact
of their actions more broadly.
"Fact is, there are only two solutions:
either sponsors put in more money, or
you reduce the pension benefits," he
said.
"If they (sponsors) have to add more
to their funds, this could have
implications for the economy and
financial stability," Bernardino said.
Financially weak companies in low
growth economies might find it
especially hard to stump up the cash
needed to fill their pensions coffers,
but both EIOPA and national
supervisors needed better
information on the scope of the
problem before seeking remedies.
"We need clarity before solvency,"
Bernardino said.
FINANCIAL REGULATION SUMMIT 2016
A Bitcoin (virtual currency) paper wallet with QR codes and a coin are seen in an illustration picture taken at La Maison du Bitcoin in Paris,
France, May 27, 2015. REUTERS/Benoit Tessier/File Photo
Blockchain sends banking regulators back to basics
By Huw Jones and Michelle Price
T
he 'fintech' sector hoping to
revolutionize finance with
the adoption of blockchain,
or distributed
ledger technology, is
forcing global financial regulators to
start looking at whether they need to
change the rules governing markets
and banking.
Regulators are now asking whether
the blockchain computing process,
which underpins the digital currency
bitcoin, will have an impact on how
they protect consumers and keep the
financial system stable if something
goes wrong, the Reuters Financial
Regulation Summit heard this week.
Using cryptographic algorithms
including digital signatures,
blockchain keeps track of and verifies
transactions, adding new transactions
in blocks to the chain of all previous
transactions.
This electronic ledger can be shared
across a network but records of the
transactions already verified cannot
be tampered with or revised.
The technology is now being
promoted as a potentially "disruptive"
force that could reduce the role of
banks in making payments and
change the way trades in financial
instruments are cleared and settled,
affecting market transactions worth
trillions of dollars annually.
"How does it affect not only things we
care about but built the (regulatory)
regime around ?" Andrew Bailey,
deputy governor of the Bank of
England and Britain's top banking
regulator said.
"As regulators we need to be
managing the change without killing
it," he said.
International regulatory body the
Financial Stability Board, has already
been working on a study to determine
whether innovations like blockchain
pose any sort of threat to the stability
of the financial system and what risks
need addressing.
The findings, yet to be published, are
keenly awaited by the sector as they
will have a bearing on any new
national rules.
Much of the concern boils down to
what is genuinely new, and how
financial markets might change,
along with the roles of banks.
"One of the issues that will emerge is
broadly how to define a bank," said
Stefan Ingves, chairman of the Basel
Committee of the world's banking
regulators.
"If you decide to draw a line between
what you define as a bank and
everybody else, what does that do to
the structure of the banking sector?
That is likely to be quite a hot topic for
many years to come," said Ingves,
who is also governor of Sweden's
central bank.
IS FINTECH SYSTEMIC?
So far regulators have been largely
hands off given the tiny sums fintech
FINANCIAL REGULATION SUMMIT 2016
development investment represents
compared with the billions of dollars
invested by mainstream banking in
their payments and IT systems.
Consultant EY said UK fintech
investment totalled 524 million
pounds ($765 million) in 2015,
compared with 1.4 billion pounds in
New York, 3.6 billion pounds in
California, 388 million pounds in
Germany, and 198 million pounds in
Australia. But politicians in countries
with major financial centres like
Britain, Singapore and the United
States also don't want them falling
behind in adopting new technology to
secure jobs and tax revenues.
And any problems on the way could
be a catalyst for regulatory change,
though the U.S. Treasury stopped
short of proposing new rules after
irregularities surrounding $22 million
in loans at peer-to-peer lender
Lending Club Corp this month.
Meanwhile China, which is investing
heavily in fintech has been grappling
with a series of peer-to-peer lending
scams that have seen investors
defrauded of billions of dollars.
"The more we can help key decisionmakers and regulators just simply
even understand what's being
developed, it's going to be hugely
important as they can provide the
appropriate measures to make sure
we don't have systemic risk issues,"
said Alex Scandurra, chief executive of
Stone & Chalk, the Australian fintech
development hub in Sydney.
"Taking China out of the picture, I'd
laugh at anyone who says fintech is
posing right now any material risk in
any market," Scandurra said.
The widespread use of blockchain in
trade finance or clearing and settling
trades is typically viewed as being five
to 10 years away from mainstream
adoption.
But if blockchain takes off, applying
existing anti-money laundering,
securities trading and consumer
protection rules may be all that's
needed for now, regulators said.
"We should wait and see what uses
the market is contemplating and
whether that sort of use would imply
the emergence of new risks," said
Adam Farkas, executive director of
the EU's European Banking Authority.
Steven Maijoor, chairman of the EU's
European Securities and Markets
Authority said blockchain may offer
quicker and cheaper settlement of
trades but may pose risks concerning
privacy and governance. ESMA will
publish a discussion paper next
month. "We need to be prepared in
case blockchain is successful. It's
important enough to look into it, but
that's still very far away from saying
this will be a new development,"
Maijoor said.
Steven Maijoor, Chair of the European Securities and Markets Authority, attends a policy dialogue during the Asian Financial Forum in
Hong Kong, China January 18, 2016. REUTERS/Bobby Yip
FINANCIAL REGULATION SUMMIT 2016
European Union flags are reflected in a window at the headquarters of the European Central Bank in Frankfurt, Germany, April 21, 2016.
REUTERS/Ralph Orlowski
EU's smaller banks may skip "bail-in" requirements: Koenig
By Francesco Guarascio and Huw Jones
S
maller euro zone banks may
not need to hold bonds that
can be wiped out to plug
losses in a crisis, the head of
the body responsible for resolving
failed banks told Reuters.
Elke Koenig, chair of the Single
Resolution Board (SRB), also warned
in an interview about the effect of low
interest rates on banks and backed
curbs on their holdings of sovereign
debt.
The SRB is responsible for deciding
how much debt, known as MREL, the
euro zone's main banks must hold on
top of their capital buffers.
This debt can be "bailed in" or written
down if the bank gets into trouble to
avoid taxpayers footing the bill.
"When you consider we are setting
MREL for the largest institutions in
the banking union, it's fairly safe to
state that MREL of not less than 8
percent is probably the rule, it could
even be beyond," Koenig told the
Reuters Regulation Summit.
On Wednesday, Reuters reported that
draft legislation from the European
Union's executive Commission on
MREL will contain no minimum
amount.
But the MREL requirement for smaller
banks could be below 8 percent
because if they got into trouble, they
could be closed down quickly and the
deposits transferred to another
lender, she said.
"If you come to the conclusion that a
bank, if it fails, goes under a normal
insolvency procedure like in other
industries, then the argument for
MREL is getting very limited or
disappearing because you would just
unwind the institution," Koenig said.
She said she would "personally sign
up" to the Bank of England approach
which sets out three "buckets" for
determining how much MREL a bank
should hold. In the first bucket, banks
with fewer than 40,000 accounts and
that can be shut under normal
insolvency rules won't have to hold
MREL.
Koenig said some banks under SRB
supervision might be small enough to
require only very limited amounts of
MREL or none at all, a move that
could reduce risks for shareholders
and bondholders of smaller lenders.
Last year hundreds of people in Italy
lost their savings when retail
bondholders' holdings were used to
help bail out four small lenders. That
led to calls for new bail-in rules to be
adjusted so they did not inflict such
large losses on ordinary retail
investors.
In setting up the appropriate MREL
FINANCIAL REGULATION SUMMIT 2016
for each bank under its remit, the SRB
is also looking at the quality of banks'
assets to be sure that a bail-in can
take place quickly when required.
For this purpose banks should hold a
certain amount of junior debt, such as
riskier bonds, that is easier to wipe
out in case of resolution.
"You can expect us to request a
certain amount of MREL to be
subordinated," Koenig said, stressing
that "it must not be the entire amount
and will depend on the individual
institution."
BREXIT AND OTHER RISKS
In drawing up precautionary plans for
possibly winding down some 140
lenders under its watch, the SRB is
considering risks to banks' activities
and profitability. One of these risks is
low interest rates, Koenig said. The
risks linked to a possible British vote
to leave the EU are not currently
taken into account, but may become
an issue after the June 23 referendum.
"I would not think this is a very
specific topic for now for us," Koenig
said.
Another risk facing euro zone banks in
some member states is excessive
exposure to sovereign debt of their
own country, which is currently
considered risk-free and subject to no
holding limits. There was no such
thing as a "risk-free asset," Koenig
said. EU finance ministers, under
pressure from Germany, are
discussing options to limit banks'
exposures to public debt or increase
its cost. "To consider risk in sovereign
bonds is acknowledging economic
reality," Koenig said, supporting the
bolder option of setting caps on
sovereign holdings.
"Concentration limits could be by far
more powerful," as a tool to reduce
sovereign risk, she said. Some euro
zone countries, including Italy and
France, oppose such limits, fearing
negative consequences on their
banks' balance sheets and for bond
markets. Koenig usually refrains from
talking about specific countries and
banks, but did not shun comments on
Italy's newly-established Atlas fund Atlante in Italian -, an initiative
mostly funded by domestic private
banks to bail out weaker Italian
lenders and avert a wider crisis in the
euro zone's fourth-largest banking
sector.
"The Atlante fund, as it is
accumulating private money from
very diverse sources, is and can be a
good first step in a solution," Koenig
said.
The fund has become the majority
owner of Banca Popolare di
Vicenza immediately after its
establishment, a move that the SRB
will monitor, Koenig said.
Brexit would damage EU capital markets union: watchdog
By Huw Jones
A
British exit from the
European Union would
damage the bloc's plans for
a capital markets union
(CMU) designed to channel more cash
into the economy, a leading EU
regulator told the Reuters Regulation
Summit on Wednesday.
Britain votes on June 23 on whether to
remain a member of the EU, but as
the region's biggest financial centre,
London is expected to play a central
role in the CMU and be one of its
biggest beneficiaries.
The CMU seeks to enhance the ability
of markets to raise funds for
companies, such as by reviving
securitisation or asset-backed market,
and thereby reduce the region's heavy
reliance on bank funding.
"The capital markets union and the
single market is all about size,"
Steven Maijoor, chairman of the
European Securities and Markets
Authority (ESMA), told the summit.
"From that perspective, it's extremely
important that the UK remains and
contributes to the capital markets
union and the single market," Maijoor
A car sticker with a logo encouraging people to leave the EU is seen on a car, in
Llandudno, Wales, February 27, 2016. REUTERS/Phil Noble
said.
"If the biggest capital market of the
EU would not be part anymore of that
CMU, obviously that would be
detrimental and be a negative impact
on the CMU, both for the UK as for the
remaining financial markets," Maijoor
said.
On Monday, Bank of England Deputy
Governor Andrew Bailey told the
summit that London had no "Godgiven" right to remain a top
international financial centre if Britain
left the EU.
Supporters of Brexit have said that
London would remain a major
financial centre outside the bloc.
Maijoor also said securities regulators
FINANCIAL REGULATION SUMMIT 2016
were holding talks about how to
prepare for a potential British exit.
"We are looking at what's happening
in financial markets in the run up to
the referendum, and this includes
looking into currency markets, which
have been affected," Maijoor said.
Supervisors are watching how sterling
is being affected by opinion polls, he
said.
Sterling hit a 2-1/2 week high against
the euro on Wednesday after a poll
showed support for Britain to stay in
the EU had risen to its highest in three
months.
"We are also doing scenario planning,
how could this impact securities
markets, and we are discussing this
with my board members," Maijoor
said. Adam Farkas, executive director
of the European Banking Authority,
ESMA's counterpart for the banking
sector, told the summit the
referendum was also being discussed
by its members.
"What we are looking at is what the
different outcomes would mean for
integrity of the single market in
banking in Europe," Farkas said.
"We try to provide a platform, a table
for the EU supervisors to discuss how
they are preparing and how they are
trying to ensure that banks are
prepared for any eventuality. There is
no sense of panic or complacency."
The European Banking Authority is
based in London and would have to
relocate if Britain voted to leave the
EU.
Basel says sovereign debt bank capital change could take
By Huw Jones
F
orcing banks to hold capital
against holdings of their own
government's debt would
take years to agree and
implement, a top international
regulator told the Reuters Regulation
Summit.
Some policymakers have criticised
global banking rules that treat banks'
sovereign debt holdings as "risk free",
meaning no capital is needed to
insure against default.
A sharp deterioration in Greek, Irish,
Portuguese and Spanish government
bonds during the euro zone debt crisis
showed that "risk free" sovereign debt
can feed a "doom loop" to drag down
lenders, critics have said.
The rules were written by the Basel
Committee of banking supervisors
from the world's main financial
centres, which is studying whether
changes are needed.
The issue is politically sensitive in the
euro zone as banks in countries where
public coffers are under strain could
switch to holding debt of healthier
countries to ease the capital burden.
"If it works out according to plan, we
will put out a paper in one form or
another for consultation towards the
end of the year," Basel Committee
Chairman Stefan Ingves told the
Reuters summit.
The consultation would take several
months, followed by reflection, he
said.
The HSBC building (2nd R) is seen in the Canary Wharf business district of London
November 13, 2009. REUTERS/Luke MacGregor
Basel is already implementing several
major reforms between now and
2019, many of which are being
phased in gradually to give banks
time to adjust.
"It's hard to tell, but if you use these
other projects as examples then
implementing any changes to the
global rules for how to treat sovereign
exposures would take a number of
years," said Ingves, who is also
governor of Sweden's central bank.
"First you need to get agreement on
what to do and that takes quite a lot
of work. Then you need to agree on
definitions and reporting, and then
you actually have to agree on when to
implement things and that usually
takes a while," Ingves said.
The Group of 20 economies (G20),
which applies Basel's rules, agreed
earlier this year that further Basel
reforms should not significantly add
to banks' capital burden.
EU financial services chief Jonathan
Hill has said he won't propose
changes to the bloc's bank capital
rules on "risk-free" sovereign debt
until there is agreement in Basel.
Instead, EU states may limit how
much sovereign debt banks can hold
as an interim measure.
Bank of England Deputy Governor
Andrew Bailey told the Reuters
Summit he expects the risk-free rule
to be changed, but over time.
"My best guess is that over time a
regime change will occur. For the
moment we have tools to manage it
at the domestic level. It's not going to
move that quickly," Bailey said.
FINANCIAL REGULATION SUMMIT 2016
OCC warns U.S. banks exposed to 'froth' in apartment
By Lisa Lambert and Carmel Crimmins
C
redit risk is growing in U.S.
commercial real estate with
some banks exposed to
"froth" in the apartment
market in New York, Boston,
Washington D.C. and San Francisco, a
top U.S. banking regulator said on
Monday.
The Office of the Comptroller of the
Currency (OCC), which supervises
large national banks, wants lenders to
tighten up loan terms to property
developers and it recently reissued its
guidance on how banks should
approach commercial real estate
lending.
"That was meant to flag the issue for
the banks so they can take corrective
action now on their own before going
through any type of examination
cycle," Comptroller Thomas Curry told
the Reuters Financial Regulation
Summit in Washington D.C.
"The actual loan terms and covenants
are weakening," he said. He added
that he did not expect the market to
go into free fall despite rising
vacancies and overbuilding in some
cities.
"We are keeping a watchful eye. We
don't necessarily expect to have the
bottom fall out as it did in other areas
during the recession," Curry said.
The OCC took banks to task about
their energy loans after noticing an
uptick in lending to oil and gas firms
two years ago. Curry said he hopes
that a twice-yearly review of their
portfolios, due to be published in the
coming months, will show that they
have tightened up terms.
Under pressure from the OCC and
falling energy prices, U.S. banks have
cut loans to oil and gas producers and
hiked their provisions for potential
losses from souring credits.
Banks have also cut back on loans to
highly indebted companies, known as
leveraged lending, after a regulatory
crackdown in recent years. But there
has been an increase in bank loans to
nonbank institutions such as hedge
The geometric VIA W57 residential project along the Hudson River is seen in the
Manhattan borough of New York City, November 22, 2015. REUTERS/Rickey Rogers
funds, insurers, mortgage originators
and investment banks, which then use
the funds for direct lending or
securitization.
Curry said the OCC wanted to
examine the links between banks and
non-bank lenders, often referred to as
"shadow banks".
"And that's really something that as
part of our on-site bank examination
process we're looking to get behind at
individual banks: what's actually
happening," he said.
LET'S TALK ABOUT FINTECH
Curry has been vocal about the need
for regulators to embrace the growing
financial-technology sector, ranging
from online lending to digital
currencies.
The OCC oversees the national bank
chartering system so it theoretically
has the power to designate fintech
firms as banks and bring them into
the federal regulatory regime.
Curry said he was open to the
possibility.
"Internally we want to be open to
rethinking things that we've
reflexively said 'No' to or maybe made
it so highly conditional it was an
effective 'No'," he said.
"The message we're trying to give is...
we're open to working through those
things. We're not guaranteeing the
result, but we're ready to talk and to
think."
A big part of the fintech world - socalled marketplace lenders which sell
their consumer and small business
loans on to investors - has been
rattled this month by the resignation
of the founder and chief executive of
Lending Club Corp over alterations to
the wording of some of the company's
loans. Some institutional investors, a
key source of funding, have become
wary of buying loans.
Curry said the episode showed the
benefit of marketplace lenders, once
known as peer to peer lenders,
teaming up with traditional banks.
"If you have secure and reliable
sources of funding and you have a
capital base to absorb potential credit
losses you don't have that type of
volatility," he said.
"I would only speculate that, you
know, partnerships or other types of
relationships with traditional banking
organizations may make more sense
from a strategic standpoint."
FINANCIAL REGULATION SUMMIT 2016
BlackRock sees defies for investors, boards on cyber risks
By Michelle Price
I
nvestors are facing major
challenges in assessing cyber
security risks because companies
are wary of disclosing breaches
fearing they could make them more
vulnerable, according to
BlackRock's head of investment
stewardship for Asia Pacific.
Over the past two years the world's
largest asset manager has stepped up
pressure on companies to ensure they
have robust procedures in place for
managing cyber risks, but it is tough
to engage boards on this sensitive
issue, Pru Bennett told the Reuters
Financial Regulation Summit.
"Disclosure is a challenge for
companies on cyber security. It could
attract attention.
We’re not pushing for disclosure, but
who has responsibility and where in
the board does the accountability lie.
The most important thing is to keep
up to date.
"It’s a real challenge for boards,
there’s no question about it, and it's a
challenge for us as well in engaging
with boards on the issue."
The global financial system is still
reeling nearly two months after a stillunidentified group was able to use
malware to hack the SWIFT bank
messaging network and steal $81
million from the Bangladesh central
bank.
The February heist prompted Mary Jo
White, chair of the U.S. Securities and
Exchange Commission, to warn on
Wednesday that cyber security is the
biggest risk facing the financial
system.
Bennett said cyber security had
become a corporate governance
concern for investors and that boards
needed to ensure companies have
controls in place to keep on top of the
risks.
"I'm not saying every board has to
have a cyber expert, but if you’ve got
competent people who understand
the issues, can listen to an expert,
assimilate that information, and
make decisions accordingly, that’s
what we want on the board," Bennett
told the summit in Hong Kong.
In many Asian markets, issuers are
required to provide only minimal
information on their board members,
but BlackRock has been pushing for
greater disclosure on board members'
experience and skill sets.
Bennett suggested that listing rules
in the region should be changed to
require companies to provide this
extra information.
"I think that is a fairly simple and
quite unobjectionable change."
People wearing balaclavas are silhouetted as they pose with a laptops in front of a screen projected with the word 'cyber crime' and binary
code, in this picture illustration taken in Zenica October 29, 2014. REUTERS/Dado Ruvic
FINANCIAL REGULATION SUMMIT 2016
U.S. Commodity Futures Trading Commission Chair Timothy Massad is interviewed at the Reuters Financial Regulation Summit in
Washington, US May 19, 2016. REUTERS/Gary Cameron
Futures regulator targets cyber security, automated trading
By Lisa Lambert
T
he U.S. Commodity Futures
Trading Commission plans to
finalize rules on cyber
security, automated trading
and position limits this year, as it
tidies up final requirements related to
the Dodd-Frank financial reform law,
its chairman said on Thursday.
The CFTC has been examining the
thoroughness of cyber security at
exchanges and other entities it
oversees, and uncovered unspecified
deficiencies at some, said Chairman
Timothy Massad at the Reuters
Financial Regulation Summit.
It is encouraging boards of directors
to scrutinize technology practices and
policies more closely, he added.
"Cyber is the biggest threat facing
financial markets today," he said,
echoing comments earlier in the week
from Securities and Exchange
Commission Chair Mary Jo White.
Cyber security has become an
increasingly pressing issue for a wide
range of entities in recent years. Big
banks, retailers and payment
processors have battled breaches or
attempted breaches into customer
data. A few months ago, a Los
Angeles hospital said it paid hackers
$17,000 in ransom to regain control of
its computer systems.
Even regulators grapple with cyber
incursions, as evidenced by the recent
heist involving the Federal Reserve
Bank of New York and Bangladesh's
central bank.
The CFTC has been monitoring its
own systems for cyber threats,
Massad said, noting the agency
received one of the top ratings for its
security practices from a government
monitor.
Technology can present other risks in
the form of automated trading, which
represents 60 to 70 percent of the
markets the CFTC regulates, Massad
said.
The commission proposed a rule in
November requiring some proprietary
traders to register with it and setting
standards for algorithmic trading
systems. It hopes to have the rule
finalized by year end, he said.
Massad also said the CFTC has
focused on catching bad actors who
try to "spoof" markets by putting in
bids for trades they intend to cancel.
Its several enforcement cases on
spoofing have acted as a deterrent,
but the agency is still monitoring
markets closely for similar activity, he
said.
The commission also aims to finish
work on limiting the positions that
traders can hold in commodity
markets as a way to head off oil and
gas hedging abuse.
In February, the process hit a bump
when an industry-led panel told the
commission the limits would only hurt
investors. With oil prices slowly
recovering from recent historic lows,
the urgency to approve the limits may
be easing, as well, but the CFTC
remains committed to addressing
excessive speculation and market
manipulation, Massad said.
DEFENDING DODD-FRANK
The CFTC has spent almost six years
writing and implementing new
financial regulations stemming from
Dodd-Frank, including the creation of
clearinghouses for the now-$181
trillion derivatives market. Massad
was asked what he thought of
comments by politicians who want
the law dismantled.
In short, Massad said, that idea does
not make sense.
"So, we're going to go back to the
bilateral opaque dark world of swaps
without central clearing?" he asked.
"We're going to, what, bring back the
Office of Thrift Supervision? Are we
going to lower deposit insurance back
down to $100,000? Are we going to
eliminate the orderly liquidation
authority so the federal government
can bail out institutions? I mean,
come on. If you go through the
specifics, it doesn't make any sense."
FINANCIAL REGULATION SUMMIT 2016
SEC says cyber security biggest risk to financial system
By Lisa Lambert and Suzanne Barlyn
C
yber security is the biggest
risk facing the financial
system, the chair of the U.S.
Securities and Exchange
Commission (SEC) said on Tuesday, in
one of the frankest assessments yet of
the threat to Wall Street from digital
attacks.
Banks around the world have been
rattled by a $81 million cyber theft
from the Bangladesh central bank
that was funneled through SWIFT, a
member-owned industry cooperative
that handles the bulk of cross-border
payment instructions between banks.
The SEC, which regulates securities
markets, has found some major
exchanges, dark pools and clearing
houses did not have cyber policies in
place that matched the sort of risks
they faced, SEC Chair Mary Jo White
told the Reuters Financial Regulation
Summit in Washington D.C.
"What we found, as a general matter
so far, is a lot of preparedness, a lot of
awareness but also their policies and
procedures are not tailored to their
particular risks," she said.
"As we go out there now, we are
pointing that out."
White said SEC examiners were very
pro-active about doing sweeps of
broker-dealers and investment
advisers to assess their defenses
against a cyber attack.
"We can't do enough in this sector,"
she said.
Cyber security experts said her
remarks represented the SEC’s
strongest warning to date of the
threat posed by hackers.
A former member of the World Bank’s
security team, Tom Kellermann, who
is now chief executive of the
investment firm Strategic Cyber
Ventures LLC, called it "a historic
recognition of the systemic risk facing
Wall Street."
BROKEN WINDOWS
Under White, a former federal
prosecutor, the SEC introduced an
initiative called "broken windows"
designed to crack down on small
violations of SEC rules to deter
traders and others from larger
transgressions.
But critics have questioned whether
the initiative, similar to one used by
former New York City Mayor Rudy
Giuliani in his crackdown on crime in
the city, is an effective use of the
agency’s limited resources.
The policy has been applied to
instances of “rampant noncompliance” involving serious,
significant rules, White said, noting
that she considers the initiative a
huge success.
For example, the SEC brought three
groups of cases in a key area, the
prohibition against short selling
Swift code bank logo is displayed on an iPhone 6s on top of Euro banknotes in this picture
illustration made in Zenica, Bosnia and Herzegovina. REUTERS/Dado Ruvic/File Photo
ahead of an IPO by individuals who
then participated in the IPO, since
2013, she said. Each year, there have
been fewer cases, with the most
recent number at around 12, White
said.
GAAP VS. NON-GAAP
Also on Tuesday, the SEC released
guidance about how certain
accounting practices could potentially
mislead investors that White called
"consequential."
Companies are increasingly using non
-Generally Accepted Accounting
Principles, or non-GAAP, to report
earnings, permitting them to back out
certain expenses from earnings
figures, such as non-cash costs. But
critics say the practice can also
mislead investors by creating a rosier
picture of a company’s profits.
The SEC’s current rules allow
companies to report with figures that
do not comply with GAAP, as long as
certain conditions are met and White
said the guidance spells out those
conditions, such as a requirement
that “the GAAP measure has to be of
equal or greater prominence than non
-GAAP."
Non-GAAP "is not supposed to
supplant GAAP and obviously not
obscure GAAP," she said.
She declined to say if the
SEC is considering enforcement
actions against companies that
might be misleading investors with
non-GAAP, but noted the SEC
would not hesitate to bring one
if it uncovered an “actionable
violation.” For months now, the SEC
has only had three commissioners,
down from its full complement of five,
and the U.S. Congress has stalled on
confirming two nominees.
"We're really functioning on all
cylinders," White said, ticking off a list
of projects the commission has
recently completed.
She added that, to comply with rules
on meetings and disclosures,
commissioners typically meet one-onone. "If there are only three of you, it's
shorter-circuited to some degree,"
she said. "There are some
advantages, too."
FINANCIAL REGULATION SUMMIT 2016
U.S. watchdog probes financial regulatory structure
By Lauren Tara LaCapra and Lisa Lambert
A
federal watchdog agency is
examining whether
financial regulators are
doing enough to collaborate
and share information to prevent
another economic crisis, a senior
agency official told Reuters on
Wednesday.
As part of its investigation, the U.S.
Government Accountability Office is
considering whether some regulators
ought to be merged to function
better, Orice Williams Brown,
managing director of financial
markets and community investment
at the GAO, told the Reuters Financial
Regulation Summit in Washington.
The GAO, a nonpartisan investigative
arm of Congress, does not have
subpoena or regulatory powers, but
its studies can be influential.
"July will be, I think, six years out from
Dodd-Frank and there are still real
questions about the regulatory
structure and if we have fully
addressed some of the blind spots,"
she said. For instance, Brown noted
that regulators like the Securities and
Exchange Commission and the
Commodity Futures Trading
Commission have overlapping duties
regulating certain markets while the
Office of the Comptroller of the
Currency and the Federal Deposit
Insurance Corporation have
overlapping duties with depository
institutions. In some cases, an
investment product can cut across
multiple regulators' jurisdictions, but
is analyzed by each through a narrow
lens, she said.
Multiple regulators overseeing the
same thing can be beneficial if they
act as backstops to one another and
provide different viewpoints, Brown
said. But it becomes a risk when they
do not share information or take
responsibility to act. In particular, the
Financial Stability Oversight Council
has a systemic risk committee whose
members can be limited in the type of
information they are able to share
with others.
"That just raises real questions," she
said. "If there is something going on
The Managing Director (Financial Markets and Community Investment) of the U.S.
Government Accountability Office Orice Williams Brown is interviewed at the Reuters
Financial Regulation Summit in Washington, U.S. May 18, 2016. REUTERS/Gary Cameron
in some particular segment of the
market, is that information then being
shared broadly enough to know if it's
a more pervasive issue?"
Brown also noted that the Office of
Financial Research and a special
research division of the Federal
Reserve are at times analyzing the
same topic without appropriate
coordination. And while the Office of
Financial Research may spot serious
systemic risks, it has no authority to
act. Instead, it refers its findings to
regulators in hopes they will prevent a
calamity.
"It's as if you get an email...and it's
been addressed to five people and
everybody assumes that somebody
else is going to respond," she said.
Separately, the GAO has expanded an
investigation into whether the Federal
Reserve has been too soft on Wall
Street banks. The GAO has decided to
also examine whether the FDIC and
OCC have fallen victim to "regulatory
capture," a form of government
failure, which will be released
separately. Reuters first reported on
the investigation in March.
UPCOMING REPORTS
The GAO's investigative work focuses
on how public funds are used. Some
of its ongoing research projects are
required by law, but many others
come at the request of prominent
lawmakers.
Brown detailed a wide range of topics
the agency is investigating.
This summer, it expects to publish a
report on regulatory stress tests of big
banks, and another on how the
government has used fines collected
from banks related to the mortgage
crisis. In the fall, it will release a
follow-up investigation into the SEC's
personnel management practices,
something it also examined in 2013.
Next year the GAO will release a
report on a requirement that banks
own stock of local Federal Reserve
banks, which in turn pay dividends to
owners. It is also investigating the
structure of the U.S. housing finance
system, including the federal
government's ongoing
conservatorship of Fannie Mae and
Freddie Mac. Other reports will
examine whether the Federal
Reserve's role in payments systems
presents a conflict of interest, how the
Office of Financial Research is using
its resources, and the reduction of
banking services along the Southwest
border, Brown said. Reports will also
examine the decision by regulators to
limit the scope of derivatives rules,
and a Fed regulation that limits
transactions in certain savings and
money-market accounts to six per
month that is poorly understood by
consumers, Brown added.
FINANCIAL REGULATION SUMMIT 2016
Credit risks persist, especially in energy: U.S. monitor
By Lisa Lambert and Lauren Tara LaCapra
C
redit risks continue to mount
in the U.S. financial system,
even in the energy sector
which recently saw some
improvement, the head of the agency
focused on the country's financial
stability said on Wednesday.
In December, the Office of Financial
Research said high rates of borrowing
by businesses had elevated credit risk
to a level possibly hazardous to the
U.S. financial system's health.
Five months later, the office's director,
Richard Berner told the Reuters
Financial Regulation Summit in
Washington they "have mounted a
little bit" since then.
"The fundamentals are still that
growth is very slow in many parts of
the world and companies particularly non-financial corporates
here and in some emerging markets have taken on more risk," he said.
Berner added that typical recovery
rates for defaulted debt "are in the
neighborhood of 30 to 50 percent"
but "we saw them come down a lot in
the first quarter."
That could possibly shock investors
expecting to recoup money when
loans go sour.
The energy sector remains a credit
risk, too, despite rising oil prices.
Companies may still not generate the
income needed to service high levels
of debt they took on in recent years.
"The cash flows that they now can
expect are better than when oil was,
you know, 25 bucks for a short period
of time, so that's a lot better," he said.
"But the fact is that the debt didn't go
away."
Banks that lend to energy producers
have mostly managed for risks, he
added. "Have they managed for them
sufficiently? I think you'd have to look
bank by bank," Berner said. "The
important point is that the bulk of
those loans weren't made by banks.
They were made in the securities
markets, in the capital markets."
U.S. crude oil prices have recovered
from a 12 year low around $26 a
barrel last December to nearly $50
this week.
SECURITIES LENDING REPORT
DUE
The Office of Financial Research,
created by the Dodd-Frank Wall
Street reform law of 2010, will soon
release a report on securities lending,
Berner said, adding current gaps in
data "prevent us from making a
reasoned and analytical assessment
of where the risks might."
It is also looking at whether clearing
houses for swaps could create
"contagion risk," he said.
Regulators are working toward stress
testing central counterparties along
the same lines as banks, which much
show how they could withstand
hypothetical situations without
government assistance.
Debate revolves around whether
"stress tests should be uniform" or
"tailored to the bespoke kinds of
risks" in individual clearing houses, he
said. "The answer is both."
A general view shows the Philadelphia Energy Solutions petroleum refinery in Philadelphia, Pennsylvania. REUTERS/Tom Mihalek
FINANCIAL REGULATION SUMMIT 2016
Hong Kong regulator to begin review of data privacy laws
By Michelle Price
H
ong Kong will begin a
review of its data privacy
rules over the next 18
months, with a view to
potentially updating them in line with
technological developments and
changes in European regulation, the
territory's privacy regulator said.
Hong Kong's data privacy legislation
was drawn-up nearly 20 years ago
and based at the time on European
Union law, but recent changes to the
EU framework and a technologydriven explosion in personal data may
mean the current rules need to
change, Stephen Wong Kai-yi, Privacy
Commissioner for Personal Data, told
the Reuters Financial Regulation
Summit on Friday.
"Now you have all these
developments we'd like to study the
impact this might bring to our current
legislation."
The EU began an overhaul of its data
privacy rules in 2012 to give citizens
greater control over their personal
data, and to simplify the rules for
businesses. The new EU new regime is
due to come into full effect in 2018.
"It's not just a matter [of] protecting
individuals, we would like to protect
the interests of commercial
enterprises," said Wong, adding that
the regulator would propose
legislative changes if appropriate.
Hong Kong's data privacy laws are
relatively strict, but a review of the
regime would help to account for
changes in technology and
developments in international data
privacy law that have occurred since
they were last tweaked in 2012.
Recent enforcement actions brought
last year by the Office of the Privacy
Commissioner for Personal Data,
most notably against Hong Kong
corporate governance activist David
Webb, have prompted concerns that
the law is being used to restrict media
freedom in the territory. Speaking at
the summit, Wong denied that this
case could have adverse implications
for media freedoms. He said it had
"no impact at all on the right to
republish or to express a view" and
that the law provided certain
exemptions for media outlets.
"But I would like to stress that there is
a misconception that the use of
personal data from the public domain
is free for all other sorts of uses, but
that is not true," he said.
HKEX considering broader rules on reverse takeovers
By Elzio Barreto and Michelle Price
H
ong Kong's stock exchange
may implement stricter
rules to prevent companies
sidestepping scrutiny of
reverse takeovers (RTOs) and
backdoor listings as part of a broad
review of listing rules in the city, a top
bourse official said.
Exchange officials have held talks
with market regulator Securities and
Futures Commission and started
discussions within its own listing
committee on the issue, David
Graham, chief regulatory officer and
head of listing at the Hong Kong
Exchanges & Clearing Ltd (HKEX),
told the Reuters Financial Regulation
Summit on Thursday. Proposed
changes could be put for
consideration with market
participants later this year, although
no time table has been set. HKEX
published revised rules in 2014 and
2015 to make it harder for companies
to find an easy way to list through
local shell companies with large asset
injections or large cash injections. But
RTOs become harder to track when
they're done in smaller increments
over a longer period of time, Graham
said. "We're looking at, going
forward...whether we draft a broader
anti-avoidance provision, which would
give us the tools to try and capture
those types of activities as well," said
Graham. The HKEX is also looking to
toughen its stance on companies with
long trading suspensions, he added.
Only 54 out of nearly 1,900
companies listed on the main board
and the Growth Enterprise Market
(GEM) of the exchange have had their
trading suspended for three months
or longer, but such suspensions
impact the market's quality, Graham
said. While previously the exchange
would give those companies "quite a
bit of latitude" with the timing to start
a delisting process, that may be about
to change. "What we're going to
consider, recognising this is an issue
in the market, is we will take a more
robust approach, which means we're
going to more readily press the button
to start a delisting process than we
have historically," Graham said.
As part of a review of the GEM board,
the exchange may look at eligibility
requirements for listings, including
A flag displaying the logo of the Hong
Kong Exchanges and Clearing Limited
flies beside a Chinese national flag in
Hong Kong. REUTERS/Bobby Yip
increasing the minimum number of
independent shareholders or
requiring companies to also sell
shares in a retail tranche during initial
public offerings, Graham said.
Other potential changes could also
involve rules for companies looking to
shift their listing from the GEM to the
main board.
FINANCIAL REGULATION SUMMIT 2016
Commercial buildings are seen at the financial Central district in Hong Kong August 17, 2010. REUTERS/Bobby Yip
New rules and codes to boost Asian corporate governance
By Michelle Price
A
sia has seen vast
improvement in corporate
governance over the past
two years as regulators and
securities exchanges tighten rules to
boost company performance, raise
investor confidence and guard their
reputations.
Markets including Hong Kong, Japan,
Singapore, South Korea, Taiwan and
Thailand have been getting tough on
rogue firms and introducing
stewardship codes to encourage
engagement between companies and
investors, exchange chiefs and
investors told a Reuters Financial
Regulation Summit.
Hong Kong and Singapore, two of the
region's largest financial centres, for
instance have tightened listing and
takeover requirements, and have
stepped up enforcement after
instances of erratic price movements
sparked fear of manipulation in both
markets.
Currently under discussion are
stringent new rules on longsuspended companies and backdoor
listings, and a review of Hong Kong's
Growth Enterprise Market, David
Graham, chief regulatory officer and
head of listing at Hong Kong
Exchanges and Clearing Ltd (HKEX),
told the summit on Thursday.
"In the last 18 months we've been
much more focused on listed
company activity. We are looking to
make sure we have quality companies
and we have a quality regulatory
system," said Graham.
Singapore Exchange Ltd (SGX), which
was criticized for its handling of a
penny stocks scandal in 2013, has
stepped-up scrutiny of companies on
its market and is reviewing their
compliance with the state's corporate
governance code. Results are
expected in coming weeks, its chief
regulatory officer said at the summit.
"All these are long-term measures
designed to improve the quality of the
market," Tan Boon Gin said.
Several markets are also falling in line
with international standards on
stewardship, with Hong Kong and
Japan introducing codes to encourage
investors to engage more actively with
companies. Regulators in South
Korea, Taiwan and Thailand are
drafting similar codes.
Pru Bennett, head of investment
stewardship for BlackRock Inc in Asia,
said these codes were starting to
make a difference, especially in Japan
where companies wanting to engage
with the world's largest asset
manager have grown to 300 per year
from 100 over the past two years.
"Japan is definitely changing and
making progress," Seth Fischer, chief
investment officer at Hong Kongbased activist hedge fund Oasis
Management told the summit on
Friday, saying it had become far
easier to secure meetings and engage
with company management. "The
tone of meetings we are having is
different, and they are taking action."
To be sure, many markets in the
region still have a long way to go
before they fall in line with corporate
governance standards in London or
New York. While activist investors
have been upping campaigns in Asia,
BlackRock's Bennett said traditional
institutional shareholders also had to
"step up" and engage more with
company boards to explain why they
require more disclosures and how
they use such information in valuation
models.
"Institutional shareholders have a
responsibility to contribute to that
culture of change and not just rely on
the regulators," she said.
FINANCIAL REGULATION SUMMIT 2016
SGX seeks timely disclosure from cos. under market scrutiny
By Anshuman Daga and Saeed Azhar
S
ingapore wants listed
companies that are the
target of anonymous
research reports or shortsellers to quickly disclose information
in order to address investor concerns,
a senior official of the Singapore
Exchange (SGX) said.
Home to about 770 listed companies,
Singapore has seen some high-profile
firms pressured by short sellers who
have questioned their accounts,
triggering a fall in their share prices.
Last year, Noble Group was thrust in
the spotlight after Iceberg Group
alleged it was inflating its assets by
billions of dollars, a claim that Noble
rejected. And earlier, Olam
International was attacked by Muddy
Waters but it stood by its accounts.
"The main issue that we have is the
shock and awe impact of the shortselling report that we need to
mitigate quickly," Tan Boon Gin,
SGX's chief regulatory officer, told the
Reuters Financial Regulation Summit
on Thursday.
SGX has already signalled to
companies that if they do not have
enough time to respond to such
reports, they should call a trading halt
to give themselves time to respond to
the allegations, said Tan, without
naming any firm.
"If the allegations are extremely wideranging then we are prepared to
consider an extended trading halt in
order for (the company) to have a
fulsome response to the allegations."
Unlike other major financial markets,
SGX runs the bourse and is also the
main stock market regulator. It is in
turn regulated by the central bank,
the Monetary Authority of Singapore.
The exchange, which has faced
criticism for its handling of a penny
stocks scandal in 2013, has taken
several steps in a bid to shore up
investor confidence after trading
volume plunged. SGX introduced
circuit breakers, imposed a minimum
trading price of S$0.20 to dampen
excessive speculative trading, set up
independent groups to vet listings
and strengthened its enforcement
"If the allegations are
extremely wide-ranging then
we are prepared to consider
an extended trading halt in
order for (the company) to
have a fulsome response to
the allegations." - Tan Boon
Gin, SGX's chief regulatory officer
actions. "All these are long term
measures designed to improve the
quality of the market," said Tan, who
had a 10-year stint investigating
securities cases at Singapore's white
collar crime unit and the central bank,
before joining the SGX in June.
"What we want to see is confidence in
the listings, which is why everything
that we have done so far is to increase
trust and confidence in the quality of
listings." While SGX has built up a
fast-growing derivatives business, it is
struggling to attract new listings, with
Hong Kong Exchanges &
Clearing grabbing the lion's share of
the region's big-ticket listings.
An office worker walks past a logo of the Singapore Stock Exchange (SGX) outside its premises in the financial district of Singapore April
23, 2014. REUTERS/Edgar Su
FINANCIAL REGULATION SUMMIT 2016
A bell used for official ceremonies hangs from a wall inside the Australian Securities Exchange in Sydney, March 17. REUTERS/David Gray
Australia watchdog to publish fintech "sandbox" proposal in June
By Swati Pandey and Michelle Price
A
ustralia's securities
regulator is set to publish a
proposal next month to
allow financial technology
companies to start operating without
a full license, one of the agency's top
executives said on Wednesday.
The potential new rules would create
a controlled environment, or
"sandbox", to allow start-ups to
launch in the market with restricted
authorisation before being granted a
full license, Cathie Armour, a
commissioner at the Australian
Securities and Investment
Commission (ASIC), told the Reuters
Financial Regulation Summit.
"We are going to issue a public
consultation on some potential
adjustments to the regulatory
framework which might be of
particular help to fintech businesses.
They'll obviously have regulations
imposed on them but, potentially, for
a limited period of time, some aspects
of regulation will not be imposed just
to allow experimentation."
ASIC is exploring how it could use
waivers and no-action notices to
implement the sandbox framework,
which ASIC hopes to get up and
running by the end of the year, said
Armour.
ASIC has been drafting the proposal
in consultation with fintech experts,
including Alex Scandurra, CEO of
Sydney fintech hub Stone & Chalk.
"We are exploring the opportunity to
create a sandbox that allows startups to validate, rapidly prototype and
engage with various customer groups
prior to having to engage in a formal
licensing process," Scandurra told the
summit.
Many fintech business models do not
easily fit into the existing licensebased financial regulatory framework
operated in many countries, making it
tough for start-ups to become
established and sparking calls for
regulators to provide more clarity on
the rules for fintech services.
The U.K. Financial Conduct Authority
(FCA) said last year it would launch a
regulatory "sandbox" for fintech firms
to create a safe space in which
authorised firms can experiment to
validate their business models.
Under that programme, which opened
to applicants last week, fintech firms
which meet certain FCA criteria will be
granted "restricted authorisation" by
the FCA to test their ideas without
fear of prosecution if they break the
FCA's rules.
"We've looked at what the FCA's
proposal is and we're looking to do
something much more far-reaching,"
said Scandurra. Australia wants to
develop Sydney as a fintech hub
similar to Silicon Valley and has
announced tax breaks for early-stage
investments as well as a visa scheme
for entrepreneurs to attract talent.
FINANCIAL REGULATION SUMMIT 2016
Australia regulator says in advanced stages of rate-rigging probe
By Swati Pandey and Michelle Price
A
ustralia's markets watchdog
is in the advanced stages of
an investigation into the
fixing of benchmark interest
rates in which it has already hauled
two of the country's major banks to
the courts, a top official said on
Wednesday.
The Australian Securities &
Investments Commission (ASIC)
launched two separate court actions
against ANZ Banking Group and
Westpac Banking Corp earlier this
year for allegedly fixing the bank bill
swap reference rate (BBSW), an
allegation both banks have rejected.
"We are in advanced stages of our
investigation in relation to the other
organisations that we were looking at
but we haven't formed any
conclusions at this stage," ASIC
commissioner Cathie Armour told the
Reuters Financial Regulation Summit.
"We are very keen to complete this
process and come to a conclusive
view on the outstanding
investigations," she said, but did not
give a timeframe for the investigation
to be completed.
The BBSW is the primary interest rate
benchmark used in Australian
financial markets to price home loans,
credit cards and other financial
products worth trillions of dollars.
ASIC, which is Australia's corporate,
markets and financial services
regulator, will also publish a report by
July on equity research independence
and will seek industry feedback
before introducing definitive
guidance, Armour told the summit
held at the Reuters office in Sydney.
The regulator is looking to eliminate
the conflicts of interest that can
emerge when analysts or, the bank
they work for, participate in deals
involving companies they cover.
"The plan is to get some feedback on
what we've found and think about
whether we need to introduce some
more definitive guidance."
Late last year, ASIC asked UBS
Australia's securities arm to take
remedial steps at its Australian
research house following an
investigation into its control and
compliance practices.
The investigation was triggered by
allegations that UBS, who was
advising the partial sale of an
electricity network in the country's
biggest ever privatisation, removed
negative parts of a supposedly
independent analyst report after the
state's government ordered it to do so.
UBS had declined to comment at the
time.
Regulators in United States and
Europe have tightened the screws on
equity research over the past decade,
amid fears analysts had been
pressurised to provide favourable
research in order to win business.
The Australian Securities & Investments Commission commissioner Cathie Armour speaks during an interview . REUTERS/David Gray
FINANCIAL REGULATION SUMMIT 2016
Market surveillance a constant challenge: FINRA
By Chuck Mikolajczak
S
urveillance of markets for
illegal trading practices has
become more difficult as
technology evolves and
manipulation strategies can stay one
step ahead of regulators, according to
an executive at Wall Street's selffunded watchdog.
Tom Gira, executive vice president for
market regulation at the Financial
Industry Regulatory Authority (FINRA)
said at the Reuters Financial
Regulation Summit on Tuesday he
worries that as the agency discovers
problematic trading patterns, bad
apples in the market may adjust their
strategies to stay a step ahead.
Gira also said he wants to obtain
futures trading data so the agency
can engage in more cross-product
investigations.
"I worry what we find there is going to
be the tip of the iceberg," he said.
With the recent release of the first
monthly report cards to member firms
that deal with market manipulation,
FINRA hopes to better shine a
spotlight on and discourage illegal
practices such as spoofing, or
layering.
Spoofing involves faking orders for a
security to deceive the market by
creating the illusion of demand.
The report cards are based on the
watchdog's "cross-market" program,
which monitors trades across stock
exchanges. Gira told Reuters
reporters that trading patterns
unusual enough to trigger an alert to
regulators make up as much as 1
percent of trades, and FINRA
monitored some 50 billion trades a
day.
"We’ve found people are getting more
sophisticated, there is sort of a cat
and mouse game where the firms can
get picked off with multiple
strategies," Gira said.
FINRA is also starting to compile
what it terms "cross-product
patterns" comparing trading across
different investment products, such as
equities and options.
That data could point to cases of
using a layering technique to
advantage the option and interfere
with the price in that market.
Gira also said he hopes the hotly
debated proposal to let U.S. stock
exchanges delay order responses by
less than a millisecond, paving the
way for "Flash Boys" heroes IEX
Group to become an exchange, moves
forward next month, "in the interest
of allowing innovation to continue to
exist," echoing earlier comments from
FINRA head Robert Ketchum.
IEX says it slows orders by 350
millionths of a second to prevent
predatory traders using high-speed
technology from picking up on
trading signals and electronically
front-running investors' orders, a
practice termed latency arbitrage.
Author Michael Lewis chronicled IEX's
efforts in his book, "Flash Boys: A
Wall Street Revolt."
The proposal has drawn criticism
from industry participants and market
operators, including the head of
Nasdaq Inc, who said approval of the
interpretation would greatly
complicate the market and that
exchanges would respond by creating
thousands of new ways to execute
orders.
A ruling on the proposal is expected
in mid-June.
A sign for the Financial Industry Regulatory Authority (FINRA) is seen outside the offices in New York's financial district July 22, 2015.
REUTERS/Brendan McDermid
FINANCIAL REGULATION SUMMIT 2016
Asset managers do not need new liquidity safeguards
By Huw Jones
A
sset managers do not need
new safeguards at this point
to cope with a decline in
liquidity that has
contributed to sharp swings in bond
markets, a senior European Union
regulator said.
Steven Maijoor, chairman of the
European Union's European Securities
and Markets Authority (ESMA), said
the structure of bond markets had
changed due to technology advances,
lower levels of activity by banks and
the increased presence of asset
managers.
"Yes, liquidity has changed. To say
this now requires another policy, that
is too early to say," he told the
Reuters Financial Regulation Summit
on Wednesday.
His view contrasts with central
bankers who want to bring in new
rules for asset managers to safeguard
financial stability.
A drop in liquidity in U.S. Treasuries
and German government bonds, for
example, has made it harder for asset
managers to sell bonds when they
need to.
As a result, central bankers have
called for new rules on liquidity
management and leverage at asset
managers.
The Financial Stability Board (FSB),
which coordinates regulation for the
Group of 20 economies (G20) and is
headed by Bank of England Governor
Mark Carney, will make global policy
recommendations by September. FSB
recommendations are not legally
binding. Markets regulators are less
eager to jump in. Maijoor is just back
from a meeting in Peru of IOSCO, the
global umbrella body for securities
regulators, which discussed bond
market liquidity and asset managers.
Last year, IOSCO, an FSB member,
scuppered FSB plans to deem asset
managers "systemic" and therefore
face tougher scrutiny, saying funds do
not pose the same risks as banks.
"It's too early to say that we need to
change redemption mechanisms or
the liquidity management tools at
investment funds," Maijoor said.
EU-regulated mutual funds have a
"Yes, liquidity has changed.
To say this now requires
another policy, that is too
early to say," - Steven Maijoor,
chairman of the European Union's
European Securities and Markets
Authority
good track record in managing
liquidity, and it was too early to
reform the EU's new regime for
alternative investments like hedge
funds, Maijoor said.
"What we should do is collect more
data on asset managers in the EU ...
to get a better understanding of what
they are doing before (we take) the
next step and say this should be
regulated differently," Maijoor said.
He predicted that this sort of debate
between central bankers and markets
watchdogs over regulation policy will
happen more often. "Maybe the way
you look at stability issues in banking
is not the right template for looking
into stability issues in the securities
market," Maijoor said.
For more stories:
>> EU in quandary over rules to encourage smaller banks
>> Conduct message not getting through at UK banks: BoE's Bailey
>> London's future as finance hub at risk outside EU: BoE's Bailey
>> Canada regulator pushes back on tougher capital demands
>> India central bank to keep reviewing banks' asset quality
Compiled by the Publishing Team in Bengaluru.
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