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Regulation

SA-CCR

The Basel Committee's final standard on The standardised approach for measuring counterparty credit risk exposures includes a comprehensive, non-modelled approach for measuring counterparty credit risk associated with OTC derivatives, exchange-traded derivatives, and long settlement transactions. The new standardised approach (SA-CCR) replaces both the Current Exposure Method (CEM) and the Standardised Method (SM) in the capital adequacy framework. In addition, the IMM shortcut method will be eliminated from the framework once the SA-CCR takes effect, which is scheduled for 1 January 2017.  

The Committee's objective in undertaking this work was to develop a risk sensitive methodology that appropriately differentiates between margined and unmargined trades, and provides more meaningful recognition of netting benefits than either of the existing non-modelled approaches. The SA-CCR limits the need for discretion by national authorities, minimises the use of banks' internal estimates, and avoids undue complexity by drawing upon prudential approaches already available in the capital framework. It has been calibrated to reflect the level of volatilities observed over the recent stress period, while also giving regard to incentives for centralised clearing of derivative transactions.

Find out more: Bank for International Settlements (BIS)

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Volcker Rule

The regulation named after Paul Volcker, former Federal Reserve Chairman, the Volcker Rule is part of the Dodd-Frank Wall Street Reform. It prohibits banks from engaging in proprietary trading, sponsoring, acquiring of retaining an ownership interest in a private equity or hedge fund, subject to exceptions. 

Definition from CFTC.gov

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MiFID

A directive that aims to integrate the European Union's financial markets and to increase the amount of cross border investment orders. The MiFID plans to implement new measures, such as pre- and post-trade transparency requirements and capital requirements that firms must hold. The directive officially took effect on November 1st, 2007. But it is now being comprehensively revised to improve the functioning of financial markets in light of the financial crisis and to strengthen investor protection. We expect the changes to take effect towards the end of 2016. It will be known as MiFID II.

What will firms need to do?

Firms will need to start planning for the changes ahead of the finalisation of the EU implementing legislation and the subsequent changes we make to our Handbook and the Treasury makes to financial services legislation. MiFID II is a wide-ranging piece of legislation and, depending on business model, could affect a wide range of a firm’s functions – from client services to IT and HR systems.

Definition from Investopedia and the Financial Conduct Authority

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IFRS 13 - Fair Value Measurement

IFRS 13, which is effective from 1 January 2013, defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. IFRS 13 does not determine when an asset, a liability or an entity's own equity instrument is measured at fair value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another IFRS requires or permits the item to be measured at fair value (with limited exceptions).

The fair value measurement project was part of the Memorandum of Understanding between the IASB and the US national standard-setter, the Financial Accounting Standards Board (FASB). Our joint work resulted in IFRSs and US generally accepted accounting principles (GAAP) having the same definition and meaning of fair value and the same disclosure requirements about fair value measurements.

Before IFRS 13 was issued, the requirements for measuring fair value and for disclosing information about fair values were dispersed across many standards and in many cases those standards did not articulate a clear measurement or disclosure objective. The Board developed IFRS 13.

  • to reduce complexity and improve consistency in the application of fair value measurement principles by having a single set of requirements for all fair value measurements;
  • to communicate the measurement objective more clearly by clarifying the definition of fair value;
  • to improve transparency by enhancing disclosures about fair value measurements; and
  • to increase the convergence of IFRSs and US GAAP.

IFRS 13 is to be applied prospectively and, although its application is only mandatory from 1 January 2013, entities may choose to apply IFRS 13 earlier.

Find out more about the development and specifics of IFRS 13 at IFRS

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Basel Committee

"Basel III" is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.

Proposed Changes

  • The quality, consistency and transparency of capital base will be raised
  • The risk coverage of the capital framework will be strengthened
  • Introduce a leverage ratio as a supplementary measure to the Basel ll risk-based framework
  • Introduce a series of measures to promote the buildup of capital buffers in good times that can be drawn upon in periods of stress
  • Introduce a global minimum liquidity standard for internationally active banks that includes a 30-day liquidity coverage ration requirement underpinned by a longer-term structural liquidity ration called the Net Stable Funding Ratio

Basel III is part of the Committee's continuous effort to enhance the banking regulatory framework. It builds on the International Convergence of Capital Measurement and Capital Standards document (Basel II).

Find out more about the Basel Committee's response to the financial crisis

European Market Infrastructure Regulation (EMIR)

The European Commission is the EU's executive body. It proposes and enforces legislation and represents and upholds the interests of Europe as a whole. Find out how it is structured and how to work for the Commission. This page also provides access to documents, statistics and opinion polls

On 15 September 2010, the European Commission published its final proposal for a Regulation of the European Parliament and of the Council (also widely known as European Market Infrastructure Regulation – EMIR), which sets out to increase stability within OTC derivative markets.  The Regulation introduces; a reporting obligation for OTC derivatives; a clearing obligation for eligible OTC derivatives; measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives; common rules for central counterparties (CCPs) and for trade repositories; and rules on the establishment of interoperability between CCPs.  The Commissions proposal is now under negotiation in the EU Council and Parliament.

Find out more about the legislative proposals set out by the European Commission

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd–Frank Wall Street Reform and Consumer Protection Act is a product of the financial regulatory reform agenda.

The aim of the legislation is:

  • To promote the financial stability of the United States by improving accountability and transparency in the financial system,
  • To end "too big to fail"
  • To protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes’

Dodd Frank Reform Summary

FASB (Financial Accounting Standards Board)

The Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting that govern the preparation of financial reports by nongovernmental entities. Those standards are officially recognized as authoritative by the Securities and Exchange Commission (SEC) (Financial Reporting Release No. 1, Section 101, and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979). Such standards are important to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible, concise, and understandable financial information.

Statements of Financial Accounting Standards No. 157, Fair Value Measurements, commonly known as "FAS 157", is an accounting standard issued in September 2006 by the Financial Accounting Standards Board (FASB) which became effective for entities with fiscal years beginning after November 15, 2007

FAS Statement 157 includes the following:

  • Clarity on the definition of fair value
  • A fair value hierarchy used to classify the source of information used in fair value measurements (i.e., market-based or non-market based);
  • Expanded disclosure requirements for assets and liabilities measured at fair value; and
  • A modification of the long-standing accounting presumption that a measurement date-specific transaction price of an asset or liability equals its same measurement date-specific fair value.
  • Clarification that changes in credit risk (both that of the counterparty and the company's own credit rating) must be included in the valuation.

Summary of Statement No.157

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