In this week's newsletter, we provide a snapshot of the principal US, European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructure providers, asset managers and corporates.
Bank Prudential Regulation & Regulatory Capital
Federal Reserve Board Announces Three New Reference Rates for Overnight Repo Transactions
On December 8, 2017, the Board of Governors of the Federal Reserve System announced final plans for the production of three new reference rates regarding overnight repurchase transactions of Treasury Securities. The rates will be produced by the Federal Reserve Bank of New York, in consultation with the US Office of Financial Research. The three rates—Tri-Party General Collateral Rate, Broad General Collateral Rate and Secured Overnight Financing Rate (SOFR)—are based on transaction-level data from segments of the repurchase market, and were the subject of an August 30, 2017 Federal Reserve Board request for public comment. The three interest rates will be constructed to reflect the cost of short-term secured borrowing in highly liquid and robust markets and each rate will be calculated as a volume-weighted median of transacted rates. The FRBNY intends to begin publishing these rates in the second quarter of 2018. The Federal Reserve Board also noted that although the Alternative Reference Rates Committee selected (in June 2017) SOFR as its recommended alternative to US Dollar LIBOR, the details of the transition from US Dollar LIBOR are outside the scope of the request for comment and this announcement.
The Federal Reserve Board press release and corresponding notice is available at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20171208a.htm.
US Banking Agencies Support Conclusion of Reforms to International Capital Standards
On December 7, 2017, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation announced their joint support for the finalization by the Basel Committee of the "Basel III" agreement on bank capital standards, which were formulated initially in response to the financial crisis. The revised international standards will take effect in January 2022 and will be phased in over five years. The agencies announced that they will be considering how to best implement these standards in the United States, and that all proposed changes will be effected through the procedures of standard notice-and-comment rulemaking.
The Federal Reserve Board press release discussing the joint-agency announcement is available at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20171207b.htm, the FDIC press release discussing the joint-agency announcement is available at: https://www.fdic.gov/news/news/press/2017/pr17094.html and the OCC press release discussing the joint-agency announcement is available at: https://www.occ.treas.gov/news-issuances/news-releases/2017/nr-ia-2017-147.html.
Federal Reserve Board Requests Comment on Package of Proposals that Would Increase the Transparency of Its Stress Testing Program
On December 7, 2017, the Federal Reserve Board announced a suite of proposals intended to increase the transparency of its stress testing program. One key aspect of the proposals is intended to increase transparency in the modeling used by the Federal Reserve Board to estimate hypothetical losses in its stress testing, including in the Comprehensive Capital Analysis and Review (CCAR). Specifically, the Federal Reserve Board will make available certain information available to the public that has previously not been released: (i) a range of loss rates, estimated using the Federal Reserve Board's models, for loans held by CCAR firms; (ii) portfolios of hypothetical loans with loss rates estimated by the Federal Reserve Board's models; and (iii) more detailed descriptions of the Federal Reserve Board's models, such as certain equations and key variables that influence the results of those models. The Federal Reserve Board is also seeking comments on a proposed "Stress Testing Policy Statement" that would increase transparency around the development, implementation and validation of models used by the Federal Reserve Board in its CCAR and Dodd-Frank Act Stress Test (DFAST) processes. Finally, the Federal Reserve Board proposed modifications to its framework regarding annual hypothetical economic scenarios. Specifically, the proposal will clarify when the Federal Reserve Board may make changes to certain factors used in the framework, including changes to the unemployment rate and house price index.
The Federal Reserve press release announcing the proposals is available at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20171207a.htm.
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