On 8 January 2014, the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) published a consultation paper on “Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions” (NBNI G-SIFIs). The consultation period closes on 7 April 2014. Continue reading
On 11 November 2013, the Financial Stability Board (FSB) published an updated list of global systemically important banks (G-SIBs) using end-2012 data.
The Basel Committee on Banking Supervision (BCBS) has also separately published the denominators used to calculate G-SIB scores and the Cut-off score and bucket thresholds that were used to allocate G-SIBs to particular buckets. The denominators are to be updated annually, while the cut-off score and bucket thresholds will remain fixed until November 2017, the date when the first three year review of the G-SIB assessment methodology is due to completed. Continue reading
On 25 October 2013, the Financial Stability Board (FSB) published a list of:
- responses to its 12 August 2013 consultation on the Application of the Key Attributes of Effective Resolution Regimes to non-bank financial institutions; and
- responses to its 12 August 2013 consultation on Information sharing for resolution purposes.
On 28 August 2013, the Financial Stability Board (FSB) published a press release announcing the launch of a proposed Assessment Methodology for the Key Attributes of Effective Resolution Regimes for Financial Institutions. The Key Attributes of Effective Resolution Regimes for Financial Institutions (‘the Key Attributes’) were endorsed by G20 Leaders at the Cannes Summit in November 2011 as the international standard for resolution regimes. The Key Attributes sets out the core elements that the FSB considers to be necessary for an effective resolution regime.
The FSB developed the draft methodology to facilitate the objective and consistent assessment of a jurisdiction’s compliance with the Key Attributes and to assist jurisdictions in the implementation of legislative reforms. The methodology proposes a set of assessment criteria for each Key Attribute and includes examples and explanatory notes to guide their interpretation. The FSB welcomes comments on the draft methodology by 31 October 2013.
On 12 August 2013, the Financial Stability Board published a consultation document regarding the “Application of the Key Attributes of Effective Resolution Regimes to Non-Bank Financial Institutions”, inviting comments by 15 October 2013.
The consultation document proposes draft guidance on how the Key Attributes should be implemented with respect to systemically important non-bank financial institutions. It deals with three main areas:
- The resolution of financial market infrastructure (FMI) and systemically important FMI participants;
- Resolution of insurers; and
- Client asset protection in resolution.
The proposed rules are, to a large extent, little more than the formalisation of existing thought and best practice regarding the resolution of non-bank financial institutions. However, this does not detract from the value of the document. Indeed, it highlights the practical challenge that institutions which are subject to the rules will face in providing the data necessary to facilitate the implementation of resolution measures by regulators.
Both FMIs and insurers will be required to maintain information systems and controls that can promptly produce, both in normal times and during resolution, all data needed for the purposes of timely resolution planning and resolution. In the case of FMIs, this will include:
- Information on direct and indirect stakeholders, such as owners, settlement agents, liquidity providers, linked FMIs and custodians;
- Exposures to each FMI participant (both gross and net);
- Information on the current status of obligations of FMI participants (e.g. whether they have fulfilled their obligations to make default fund contributions);
- FMI participant collateral information, such as:
- holding arrangements; and
- rehypothecation rights; and
- netting arrangements.
Insurers will also be required to generate data regarding:
- sources of funding;
- asset quality and concentration levels; and
- derivatives portfolios.
In addition, any entity holding client money, must have the ability to generate a wide variety of data that would facilitate its speedy return in a resolution scenario. That data must be in a format understandable by an external party such as a resolution authority or an administrator and includes information on:
- the amount, nature and ownership status of client assets held by the firm (directly or indirectly);
- the identity of clients;
- the location of client assets;
- the identity of all relevant depositories;
- the terms and conditions on which client assets are held;
- the applicable type of segregation (e.g. “omnibus” or “individual”);
- the effects of the segregation on client ownership rights;
- applicable client asset protections (particularly where client assets are held in a foreign jurisdictions);
- any waiver, modification or opting out by a client of the client asset protection regime;
- the ownership rights of clients and any potential limitations to those rights;
- the existence and exercise of rehypothecation rights; and
- outstanding loans of client securities arranged by the firm as agent, including details of:
- contract terms; and
- collateral received.
If the experience of banks is anything to go by, the capture, analysis, delivery and updating of this type of data is a significant undertaking. The FSB is clearly laying out its intentions and the direction of travel on this issue. As such, non-bank financial institutions would do well to start analysing their capabilities in these areas, with a view to upgrading their data architectures where necessary.
Here is a link to an article in today’s FT explaining that, following the FSB guidance issued on 16 July 2013 (see this blog post for more detail), banks seem likely to be given more ‘choice’ between single point of entry and multiple point of entry. This seems to represent a subtle shift away from the previous consensus that had been developing within regulatory circles regarding the benefits of single point of entry over multiple point of entry. However, the quid pro quo is that banks will have to implement potentially wide-ranging changes in order to make their business models more consistent with their chosen resolution mechanism.
On 18 July 2013, the Financial Stability Board (FSB) published a press release endorsing the assessment methodology and policy measures published by the International Association of Insurance Supervisors (IAIS) discussed below, and naming the first nine globally systemically important Insurers (G-SIIs). The list will be published each November, starting in 2014 and initially comprises:
- Allianz SE;
- American International Group, Inc.;
- Assicurazioni Generali S.p.A.;
- Aviva plc;
- Axa S.A.;
- MetLife, Inc.;
- Ping An Insurance (Group) Company of China, Ltd.;
- Prudential Financial, Inc.; and
- Prudential plc.
On the same date the IAIS announced that it had published:
- a G-SII Initial Assessment Methodology;
- G-SII specific policy measures, and
- an overall G-SII framework for macroprudential policy and surveillance.
G-SII Initial Assessment Methodology
The methodology (which has already been criticised as being “opaque and arbitrary” on account of the fact that it contains no quantitative cut-off point for G-SII designation, preventing firms from knowing what actions would help them remain below the G-SII threshold) is designed to assess the systemic importance of insurers, using year-end 2011 data collected from selected insurers in 2012 and employing a three-step process involving:
- the collection of data;
- a methodical assessment based on five weighted categories and 20 indicators;
- non-traditional insurance and non-insurance (NTNI) activities (45% weighting);
- interconnectedness (40% weighting);
- substitutability (5% weighting);
- size (5% weighting); and
- global activity (5% weighting); and
- a supervisory judgment and validation process.
G-SII Policy Measures
The IAIS policy framework for G-SIIs is three-pronged, consisting of:
These measures entail the development of Systemic Risk Management Plans, enhanced liquidity planning and management and the granting of direct powers over holding companies to group-wide supervisors. There is also a reasonably detailed discussion of:
- the nature of traditional insurance versus NTNI activities; and
- effective separation of NTNI business.
Traditional versus NTNI Insurance
Traditional Insurance is broadly characterised by insured events which are accidental in nature, random in occurrence and subject to the law of large numbers. In contrast, NTNI broadly includes activities that are more financially complex than traditional insurance, where liabilities are significantly correlated with financial market outcomes (such as stock prices, and the economic business cycle) and have financial features such as leverage, liquidity or maturity transformation, imperfect transfer of credit risks, (i.e.“shadow banking”), credit guarantees or minimum financial guarantees.
Effective separation of NTNI
Whether NTNI activities are effectively separated goes to the heart of G-SII resolvability and the amount of Higher Loss Absorption (HLA) to be applied to a G-SII. The following conditions are relevant in this determination:
- Self-sufficiency: an effectively separated entity will be able to operate without the support of parent or affiliates;
- Operational independence of management;
- Regulated status: the effective separation of NTNI activities must not result in a non-regulated financial entity;
- Arm’s length dealings: any intragroup transactions or commitments with the separated NTNI entities must be executed “at arm’s length”; and
- Reputation risk: the risk that a parent or affiliate provides financial support to an entity even though there is no legal obligation to do so must be limited.
The IAIS’s proposals for the effective resolution of G-SIIs are based on the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions but takes account of the specificities of insurance. This entails the establishment of Crisis Management Groups, the development of recovery and resolution plans (RRPs), the conduct of resolvability assessments, and the adoption of institution-specific cross-border cooperation agreements.
Higher Loss Absorption Capacity
G-SIIs will be required to have HLA capacity. This may only be met by “highest quality capital”, being permanent capital that is fully available to cover losses of the insurer at all times on a going-concern and a wind-up basis. In applying this requirement a distinction may be made based upon whether a firm’s NTNI activities have been effectively separated from traditional insurance business. HLA may be targeted at the entities where systemically important actives are located and also take account of whether group supervisors have authority over any non-regulated financial subsidiaries.
Report on Macroprudential Policy and Surveillance in Insurance
In addition to the microprudential supervision measures constituting the G-SII Policy Measures, the IAIS also released a framework for implementing macroprudential policy and surveillance (MPS) in the insurance sector, designed to maintain financial stability. Its focus is on enhancing the supervisory capacity to identify, assess and mitigate macro-financial vulnerabilities that could lead to severe and wide-spread financial risk. Over time, the MPS framework will be refined through the issuance of guidance on the practical application of IAIS Insurance Core Principles, and the development of a toolkit and data template regarding early warning risk measures.
Key implementation dates are as detailed below:
|Implementation of enhanced supervision for G-SIIs||
|FSB to designate the initial cohort of G-SIIs based on the IAIS methodology||
|For designated G-SIIs, implementation commences of resolution planning and resolvability assessment requirements||
|IAIS to prepare a workplan to develop a comprehensive, group-wide supervisory and regulatory framework for internationally active insurance groups (IAIGs)||
|Finalisation of IAIG framework||
|Systemic Risk Management Plan (SRMP) to be completed||
|Crisis management groups (CMGs) to be established for initial set of G-SIIs||
|G-SII designation of major reinsurers||
|IAIS to develop straightforward, backstop capital requirements to apply to all group activities, including non-insurance subsidiaries||
|CMGs to develop and agree RRPs, including liquidity risk management plans for initial set of G-SIIs||
|IAIS to develop implementation details for HLA that will apply to designated G-SIIs starting from 2019||
|Implementation of SRMPs to be assessed||
|FSB to designate the set of G-SIIs, based on the IAIS methodology and 2016 data, for which the HLA policy measure will apply, with implementation beginning in 2019||
|HLA requirements to apply to those G-SIIs identified in November 2017||