U.S. Financial Industry Developments
SEC OCIE Examinations Announces 2018 Examination Priorities
On February 7, the Securities and Exchange Commission's ("SEC") Office of Compliance Inspections and Examinations ("OCIE") announced its 2018 examination priorities. OCIE publishes its exam priorities annually "to improve compliance, prevent fraud, monitor risk, and inform policy."
According to the Press Release publishing the examination priorities, "of particular interest this year will be matters involving critical market infrastructure, duties to retail investors, and developments in cryptocurrency, initial coin offerings, and secondary market trading." Orrick believes that the focus on "developments in cryptocurrency, initial coin offerings, and secondary trading market" is significant.
OCIE's examination priorities were broken down into five categories.
Compliance and Risks in Critical Market Infrastructure – OCIE will continue to examine entities that provide services critical to the proper functioning of capital markets. OCIE will conduct examinations of these firms which include, among others, clearing agencies, national securities exchanges, and transfer agents, focusing on certain aspects of their operations and compliance with recently effective rules.
Retail Investors, Including Seniors and Those Saving for Retirement – Protecting Main Street investors continues to be a priority in 2018. OCIE will focus examinations on the disclosure and calculation of fees, expenses, and other charges investors pay, the supervision of representatives selling products and services to investors, and the execution of customer orders in fixed income securities. OCIE will continue to monitor the growth of cryptocurrencies and initial coin offerings and examine registrants involved in their offer and sale to ensure that investors receive adequate disclosures about the risks associated with these investments.
FINRA and MSRB – OCIE will continue its oversight of FINRA by focusing examinations on FINRA's operations and regulatory programs and the quality of FINRA's examinations of broker-dealers and municipal advisors. OCIE will also examine MSRB to evaluate the effectiveness of select operations and internal policies, procedures, and controls.
Cybersecurity – Each of OCIE's examination programs will prioritize cybersecurity with an emphasis on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.
Anti-Money Laundering Programs – Examiners will review for compliance with applicable anti-money laundering requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations.
Of course, the published priorities for 2018 are not exhaustive and additional priorities may be added in light of market conditions or as OCIE identifies emerging risks and trends.
Please click here to view a complete Orrick Alert on the topic.
Agencies Seek Comment on Proposed Amendments to Swap Margin Rule
On February 5, five federal agencies (the Farm Credit Administration, FDIC, Federal Housing Finance Agency, Federal Reserve and Office of the Comptroller of the Currency) proposed to amend swap margin requirements to conform with recent rule changes that impose new restrictions on certain qualified financial contracts of systemically important banking organizations. Under the proposed amendments, legacy swaps entered into before the applicable compliance date would not become subject to the margin requirements if they are amended solely to comply with the requirements of the qualified financial contract rules. Press Release. Proposed Rule.
European Financial Industry Developments
EC Notices on Consequences of Brexit on Banking and Finance Sectors
The European Commission ("EC") published a new webpage (which can be found here) which contains notices setting out the consequences that the UK withdrawal from the EU will have on banking and finance rules.
The notices relate to a number of areas including: markets in financial instruments, banking and payment services, post-trade financial services, asset management, credit rating agencies, insurance and reinsurance and, statutory audit.
Each note sets out the consequences of EU rules no longer applying to the UK in the above areas, if the UK becomes a third party. That could happen from March 30, 2019, when all EU primary and secondary law will cease to apply to the UK unless a ratified withdrawal agreement establishes another date.
ESMA 2018 Regulatory Work Program
On February 8, the European Securities and Markets Authority ("ESMA") published its 2018 regulatory work program, which provides a detailed breakdown of the individual work streams outlined in the 2018 work program. The areas covered in the regulatory work program include the following initiatives: European Social Entrepreneurship Funds (EuSEF) Regulation, European Venture Capital Funds (EuVECA) Regulation, EMIR, MiFID II, Market Abuse Regulation (MAR), Securities Financing Transactions Regulation (SFTR) and Proposed Regulation establishing a framework for the recovery and resolution of central counterparties (CCPs).
The 2018 regulatory work program can be found here.
ESMA Updates MiFID II Q&As on Transparency Topics
On February 7, the European Securities and Markets Authority ("ESMA") published an updated version of its questions and answers (Q&As) on transparent topics under MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014). The Q&As were last updated in December 2017.
The two new Q&As are in relation to pre-trade transparency waivers.
ESMA Updates Q&As on Benchmark Regulation
On February 5, the European Securities and Markets Authority ("ESMA") published an updated version of its Q&As on the implementation of the Regulation on indices used in financial instruments and financial contracts or to measure the performance of investment funds (Regulation (EU) 2016/1011) (Benchmarks Regulation or BMR). The Q&As were first published in July 2017 and were last updated in December 2017.
The two new Q&As relate to commodity benchmarks (how the threshold in the exemption under Article 2(2)(g) of the BMR should be calculated – Q&A 4.4) and the definition of a benchmark and investment funds (what types of investment funds are considered to be using an index for the purpose of "tracking the return of [an] index" - Q&A 5.3).
Rating Agency Developments
On February 5, DBRS updated its criteria for rating Marine Container Securitizations. Release.
On February 7, DBRS updated its criteria for rating and monitoring Asset-Backed Commercial Paper. Release.
