managing upstream risk - pwcthis edition of managing upstream risk provides updates on the key...

Issue 18July 2015

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ManagingUpstream RiskRegulatory Reform Review: An Asian perspective

1. Editorial 4

Banking Updates 6 2.1 Financial Stability 2.2 Capital requirements/Basel III 2.3 Recovery and Resolution Plans 2.4 CRD IV/CRR 2.5 Shadow Banking 2.6 Islamic Banking 2.7 AML/CFT 2.8 Emerging Markets

2. Financial Markets 16 3.1 OTC Derivatives 3.2 Other updates

3. Insurance 22

4. Asset Management 26

5. Bibliography 28

6. Contact Our Experts 32

7. Glossary 33

Contents

4 Regulatory Reform Review | Editorial

This edition of Managing Upstream Risk provides updates on the key global regulatory developments in Q2 2015. Key themes we see are the liberalisation of the Chinese financial landscape, and further proposals on the development of a local recovery and resolution framework, echoing similar moves globally.

| Regulatory Reform Review 5Editorial

011. Editorial

Liberalisation of the Chinese financial landscape

The past few months have seen considerable changes in the Chinese financial landscape. First, the Shanghai-Hong Kong Stock Connect scheme has taken off, following initial teething issues. The scheme, which allows investors in both Hong Kong and Shanghai to purchase shares listed in the Hong Kong Stock Exchange and Shanghai Stock Exchange, experienced full trading quotas for the first time in April, prompting regulators to announce the possible expansion of trading quotas in the coming months.

In June, China also announced that it was opening up its bank card clearing markets to foreign companies. Such a move will see big foreign players like Visa and Mastercard enter the Chinese market, ending the near monopoly enjoyed by China UnionPay, and boosting the Chinese bank card clearing industry through competition.

Hong Kong and China also signed off on a mutual fund recognition scheme in July, allowing funds domiciled in either Hong Kong or Mainland China to be marketed and distributed in both areas with an initial quota of RMB 300bn on both sides, another major breakthrough on access with regards to both fund markets.

In another landmark move, the People’s Bank of China announced the liberalisation of the domestic bond markets, granting full access of the 25 trillion yuan interbank bond market to overseas central banks and financial institutions and allowing for the internationalization of the Chinese yuan, as the bonds backing the currency will become more freely tradable internationally.

Proposed enhancements to resolution regime for Financial Institutions in Singapore

MAS has made several moves to strengthen the local recovery and resolution framework, following similar moves by regulators overseas. In line with global developments surrounding recovery and resolution regimes, MAS has further refined its proposal in the areas of recovery and resolution planning, temporary stays and suspensions, bail-in powers, creditor safeguards and resolution funding.

One of the key aspects of the proposal will be the requirement for financial institutions that have been notified by MAS to formulate Recovery and Resolution Plans (RRPs), adopt measures to address deficiencies in the RRPs and to remove impediments to the implementation of the RRPs. Such requirements will be applied to systemically important FIs, or those that maintain critical functions, with the failure to discharge this responsibility considered an offence.

MAS is also proposing to introduce statutory powers for temporary stays on early termination rights of counterparties to financial contracts entered with an FI. The stay is proposed to be imposed on a discretionary basis, with an intended duration of two business days as a rule. However, MAS also proposes the flexibility to specify a longer duration.

The full suite of proposed policy changes will be effected primarily through amendments to the MAS Act, supported by the necessary Regulations.

6 Regulatory Reform Review |

Regulatory Updates

| Regulatory Reform Review 7Banking Updates

02

2.1 Financial Stability

MAS publishes framework for Domestic Systematically Important Banks (D-SIBs) in Singapore1

Singapore, 30 Apr 2015

MAS has published a framework for identifying and supervising D-SIBs in Singapore, and also the inaugural list of D-SIBs. D-SIBs are banks assessed to have a significant impact on the stability and proper functioning of the local financial system and of the broader economy. The assessment of whether a bank is a D-SIB will be done annually, with their systemic importance based on their size, interconnectedness, substitutability and complexity.

D-SIBs will be subjected to additional supervisory measures. Banks with a significant retail presence in Singapore will be required to locally incorporate their retail operations, and locally incorporated D-SIBs will need to meet higher capital requirements – a minimum Common Equity Tier 1 (CET1) capital adequacy ratio (CAR) of 6.5%, Tier 1 CAR of 8% and Total CAR of 10%, compared with the Basel III minimum requirements of 4.5%, 6% and 8% respectively

MAS has designated DBS Bank, Oversea-Chinese Banking Corporation, United Overseas Bank, Citibank, Malayan Banking Berhad, Standard Chartered Bank and the Hongkong Shanghai Banking Corporation as D-SIBs.

2. Banking Updates

JCESAs: Escalated main risks to stability of EU financial market2

Europe, 5 May 2015

In September 2014, the ESA released a report highlighting risks to the EU financial system. The ESA has found that in the past six months, the risks have further intensified, as the financial sector continues to be affected by low investment demand, economic uncertainty in the Eurozone and its neighbouring countries, a global economic slow-down and a low-interest rate environment.

BIS: Regulatory change and monetary policy (CGFS Publications No 54)3

Global, 20 May 2015

BIS has released a report assessing the combined impact of key new regulations on monetary policy, with sources extending from central bank case studies to structured interviews with private sector markets. The report argues that the likely impact of the new financial regulations on financial institutions and markets should have only limited and manageable effects on monetary policy operations and transmission. Hence, it further argues that central banks should be able to make adjustments within their existing policy frameworks and in ways that preserve policy effectiveness.

1 MAS, “MAS’ framework for impact and risk assessment of financial institutions”, 30 Apr 20152 ESAs, “JCESAs: Main risks to EU financial market stability have intensified”. 5 May 20153 BIS, “BIS: Regulatory change and monetary policy (CGFS Publications No 54)”. 20 May 2015

8 Regulatory Reform Review | Banking Updates

02

A Thematic Review on Supervisory Frameworks and Approaches for Systemically Important Banks have been published by FSB4

Global, 26 May 2015

A peer review with regards to jurisdictions’ supervisory frameworks for systemically important banks found that significant steps were taken by national authorities to improve supervisory effectiveness but there was still room for improvement in several areas.

ECB releases financial stability review5

Europe, 28 May 2015

The ECB has identified several main threats to the financial stability in the Eurozone in its financial stability review; (1) slow economic growth coupled with an increase in asset prices and volatility, (2) the rapid growth of shadow banking sector, and (3) lowered profits for banks and insurers facing challenging operating environments.

2.2 Capital requirements/Basel III

IOSCO advises on sound practices for assessing credit risk for large intermediaries6

Global, 7 May 2015

IOSCO has proposed a set of 13 sound practices that will help in assessing credit risk. It is hoped that these practices will encourage large intermediaries to reduce overreliance on credit rating agencies. While credit rating agency ratings offer investors an efficient way to label the risks associated with lending or borrowing facilities, mechanistic reliance on such ratings can exacerbate fallout on financial markets in the event of a global financial crisis.

Basel Committee consults on interest rate risk in the banking book7

Global, 8 June 2015

BIS published a consultation to address risk management, capital treatment and supervision of interest rates in the banking book. It aims to ensure banks have sufficient capital to cover potential losses from interest rate exposures, and to limit capital arbitrage between trading and banking books, as well as between banking book portfolios.

Comments to the proposal are due by 11 September 2015 and it presents two options for tackling the capital treatment of interest rate risk in the banking book: (1) minimum Capital Requirements and (2) an enhanced pillar 2 approach.

4 FSB, “FSB publishes Thematic Review on Supervisory Frameworks and Approaches for Systemically Important Banks” 26 May 20155 ECB, “ECB: Growing financial risk appetite within a gradual economic recovery – Financial Stability Review” 28 May 20156 IOSCO (International Organization of Securities Commissions), 7 May 20157 BIS, “Basel Committee consults on interest rate risk in the banking book” 8 June 2015


02

India’s Bank Governor says banks are sufficiently capitalised8

India, 26 Jun 2015

Deputy Governor of the Reserve Bank of India, R Gandhi, has said that India’s state-owned banks are presently adequately capitalised, although he also mentioned that the banks would need additional money to comply with global adequacy norms in the future. He also added that if banks were capitalised well in advance, it would give them a lot of confidence.

2.3 Recovery and Resolution Plans

MAS launches consultation paper for proposed resolution regime for FIs in Singapore9

Singapore, 23 Jun 2015

MAS is proposing to enhance the resolution regime for FIs in Singapore, by strengthening its powers to resolve distressed financial institutions, while maintaining the continuity of economic functions for such FIs. In line with global developments surrounding recovery and resolution regimes, MAS has further refined its proposal in the areas of recovery and resolution planning, temporary stays and suspensions, bail-in powers, creditor safeguards and resolution funding.

Guidelines on use of early intervention measure triggers published by EBA10

Europe, 8 May 2015

Final Guidelines regarding the use of early intervention measures have been published by the EBA. The guidelines aim to promote the convergence of supervisory practices in relation to the application of early intervention measures as provided for in the Bank Recovery and Resolution Directive (BRRD). The guidelines establish a link between the ongoing supervision led by the Competent Authorities according to the Capital Requirements Directive, and the early intervention power set out in the BRRD.

8 The Economic Times, “india Central Bank official says banks sufficiently capitalised”, 26 Jun 20159 MAS, “Proposed Enhancements to Resolution Regime for Financial Institutions in Singapore”, 23 Jun 201510 EBA, “EBA publishes its final Guidelines on triggers for the use of early intervention measures” 8 May 2015


02

Final Guidance on recovery indicators issued by EBA11

Europe, 6 May 2015

The final guidelines on indicators for recovery and resolution plans of credit institutions and investment firms have been published by EBA. These consist of the required list of qualitative and quantitative indicators that should be included in institutions’ recovery plans and will function as triggers as prescribed by the BRRD.

Final guidance on implementation of resolution tools issued by EBA12

Europe, 20 May 2015

EBA has issued three sets of guidelines, stemming from BRRD to give detailed guidance to EU Resolution Authorities to make resolution decisions. It is hoped that doing so will foster convergence on resolution matters.

EBA consults on the valuation of derivatives in resolution13

Europe, 13 May 2015

EBA launched a public consultation on its draft Regulatory Technical Standards (RTS) defining the valuation of derivative liabilities for the bail-in in resolution under BRRD. The draft provides resolution authorities with a methodology for valuation of derivative liabilities under credit institutions, and ensures that the control brought in by the new bail-in tool will extend to these liabilities

EBA issues technical advice regarding contributions to the Single Resolution Fund14

Europe, 10 June 2015

EBA has issued technical advice on the criteria and principles used to determine the standard level of contributions by participating banks of EU member states to the Single Resolution Fund. This common fund will be used in the implementation of the Banking Union. The technical advice from EBA will inform a delegated act to be adopted by the Commission on the beginning period for contributions to the Single Resolution Fund.

ISDA: European Bank Recovery and Resolution Directive Implementation Monitor15

Global, 18 June 2015

ISDA has launched the BRRD Implementation Monitor to keep track of the status of implementation of BRRD currently ongoing in all EU member states. It focuses on the derivatives-specific provisions and is updated regularly to show the progress status in each jurisdiction.

11 EBA, “EBA issues final guidance on recovery indicators” 6 May 201512 EBA, “EBA issues final guidance on implementation of resolution tools” 20 may 201513 EBA, “EBA consults on the valuation of derivatives in resolution” 13 May 201514 EBA, “EBA issues technical advice to the Commission on contributions to the Single Resolution Fund” 10 June 201515 ISDA, “ISDA: European Bank Recovery and Resolution Directive Implementation Monitor” 18 June 2015


02

2.4 CRD IV/CRR

Amended technical standards on leverage ratio disclosure and reporting issued by EBA16

Europe, 15 June 2015

EBA has issued updated Implementing Technical Standards (“ITS”) on disclosure and supervisory reporting of EU institutions’ leverage ratio. Following the Commission’s adoption of the Delegated Act on the Leverage Ratio on 10 October 2014, the updated ITS include changes to update disclosures of leverage ratio and reporting framework so as to provide institutions with standardized templates and instructions.

2.5 Shadow Banking

Information on new developments in virtual currency investment wanted by ESMA17

Europe, 22 Apr 2015

ESMA has decided to open investigation into the use of virtual currencies after an observation period of 6 months on virtual currency investments. This was made in an effort to understand how they can affect investment markets, trading infrastructure and settling securities transactions. The call for evidence is open until 21 July 2015

16 EBA, “EBA issues amended technical standards on leverage ratio disclosure and reporting” 15 June 201517 ESMA, “ESMA is seeking information on new developments in virtual currency investment.” 22 April 2015


02

2.6 Islamic Finance

IFSB launches Core Principles for Islamic Finance Regulation18

Malaysia, 20 Apr 2015

The Islamic Financial Services Board has published Core Principles for Islamic Finance Regulation, aimed at providing guidance to Islamic banks for meeting Basel III requirements. The Core Principles were based on addressing specificities of Islamic Finance that were not adequately addressed by the Basel Core Principles, and deal with the regulation and supervision of Islamic Banking.

IFSB publishes Islamic Finance Stability Report19

Malaysia, 20 May 2015

IFSB has published its Islamic Finance Stability Report for 2015. Among areas covered in the report are updates and developments in Islamic banking, the Islamic capital market and takaful, as well as emerging issues in Islamic finance.

Bank Negara to address uneven Islamic finance practices20

Malaysia, 3 Jun 2015

Bank Negara Malaysia is creating a set of 11 standards as practical guidance for the Islamic finance industry, after finalising operating standards for all major Islamic finance contracts. It aims to release these standards by end of this year, aiming to address inconsistencies in the use of Islamic contracts. The new guidelines will complement existing shariah guidelines issued by Bank Negara.

Indonesia unveils 5 year roadmap for Islamic finance21

Indonesia, 11 Jun 2015

Otoritas Jasa Keuangan (OJK), Indonesia’s capital market regulator has published a five-year strategy for the Islamic finance Industry. OJK has charted a roadmap of extensive agendas ranging from reducing fees on Syariah-compliant products to developing education and training programmes. The moves are aimed at encouraging the growth of Indonesia’s Islamic finance markets, where growth lags behind peers like Malaysia and Saudi Arabia.

18 IFSB, “Core Principles for Islamic Financial Regulation”, 20 Apr 201519 IFSB, “The IFSB launches its third edition of the Islamic Financial Services Industry Stability Report 2015 in Kazakhstan” 20 May 201520 The Business Times, “ New Malaysia guidance to tackle uneven Islamic finance practices” 3 Jun 201521 Reuters. “Indonesia looks to new roadmap for Islamic finance boost”. 10 June 2015


02

2.7 AML/CFT

OECD promotes fight against offshore tax evasion on an international level22

Global, 5 Jun 2015

Australia, Canada, Chile, Costa Rica, India, Indonesia and New Zealand have joined the Multilateral Competent Authority Agreement (MCAA), a multilateral agreement to automatically exchange financial account information, in an effort to tighten the loop on offshore tax evasion. These new additions take the number jurisdictions under the MCAA up to 61. To date, 94 jurisdictions have committed to implement the Standard, agreeing to launch the first automatic information exchanges in 2017 or 2018.

Indonesia considers tax amnesty for financial crimes23

Indonesia, 24 June 2015

Indonesia’s tax office is considering an amnesty for financial crimes, aimed at bringing back overseas funds from tax offenders. In return for a 10-15% tax on assets brought back to Indonesia, financial crime perpetrators would receive immunity from criminal prosecution. The plan is still under review and has not been discussed with the Singapore authorities.

Indian banks now cross-checking KYC scores with credit bureaus24

India, 14 Jul 2015

Indians banks and financial institutions have started using credit bureaus to ascertain identity, as part of KYC procedure. This move comes as a result of rising fraud incidents at banks, resulting in increasing caution for lenders. Amongst other things, banks now check if addresses and birth dates provided are consistent for loan applications across banking products, to help weed out violations of KYC or AML norms.

2.8 Emerging Markets

IOSCO: Emerging market regulators looking for deeper and more flexible capital markets25

Spain, 29 Apr 2015

Issues on maintaining market resilience and accelerating sustainable growth and development of emerging markets were addressed by IOSCO’s Growth and Emerging Markets Committee after its three-day annual meeting and conference. The Committee held a roundtable dialogue with leading global industry players and international organisations to discuss current risks and vulnerabilities in global capital markets, and how such risks should be addressed by capital markets regulators.

22 OECD, “OECD: Strengthening the international community’s fight against offshore tax evasion”. 5 Jun 201523 Reuters, “Indonesia considers tax amnesty for financial crimes: tax office head.” 24 June 2015.24 Business Standard, “Banks to start cross-checking KYC scores, too.” 14 Jul 201525 IOSCO, “IOSCO: Emerging market regulators aim for deeper and more resilient capital markets” 29 Apr 2015


02

China opens bank card clearing market26

China, 1 Jun 2015

China has opened its bank card clearing market, with foreign companies able to establish booths in China and apply to the People’s Bank of China for bank card clearing licenses. This move is set to see big foreign players like Visa and Mastercard enter the Chinese market, ending the near monopoly enjoyed by China UnionPay. This move is expected to boost the Chinese bank card clearing industry through competition.

IOSCO publishes report on SME financing through capital markets27

Global, 9 Jul 2015

IOSCO has published a report providing recommendations for regulators to facilitate capital raising by small and medium sized enterprises in emerging markets. The report identifies the challenges SMEs face in accessing market-based financing, and also some of the successful measures implemented by regulators and other policymakers to assist SMEs in tapping capital markets.

China releases new regulations on internet financing28

China, 18 Jul 2015

The People’s Bank of China and has released a set of regulations to promote the healthy development of internet financing in China, prompted by the recent stock market crash. Amongst other things, it is hoped that these new regulations will encourage responsible innovation in the internet financing scene in China, with the sector having grown wildly after being given encouragement to develop internet financing platforms and new products and services. However, the Bank also recognises that the healthy development of internet financing in China will require clearer guidelines on supervisory regulation, and also consumer protection.

To protect consumers, the guidelines specify that client funds can only be parked at established banks, and that online financing platforms have to better disclose risks to customers. The central bank, CBRC and CSRC will also be supervising different forms of online transactions.

26 CCTV, “China opens bank card clearing market”, 1 Jun 201527 IOSCO, “IOSCO publishes report on SME financing through capital markets.” 09 Jul 201528 CSRC, “人民银行等十部门发布《关于促进互联网金融健康发展的指导意见》”, 18 Jul 2015


02

16 Regulatory Reform Review | Financial Markets

03 3. Financial Markets

3.1 OTC Derivatives

Update on reporting and record keeping rules for OTC derivative by HK SFC29

Hong Kong, 15 May 2015

HKMA and HK SFC have released revised rules on reporting and record keeping for OTC derivatives in their consultation paper, with the following highlights

• Daily valuation reporting: The

requirement to submit daily valuation reports will be deferred to a later stage after additional consultation and discussion with market participants.

• Jurisdictions for masking relief: The previously proposed list of 18 jurisdictions for masking relief will remain unchanged.

• Markets and clearing houses to be prescribed: A further 15 operations will be added to the list of markets and clearing houses to be prescribed in view of market feedback. Products traded on and cleared through these operations will not be regarded as OTC derivatives and will fall outside the new regime.

• Definition of affiliate: The term “affiliate” will be amended to expressly exclude collective investment schemes (ie, funds). This will better reflect the policy intention not to include the reporting obligation of fund managers in the current phase.

• Record keeping obligations: Records will have to be readily accessible, but they will not be required to be readily searchable and identifiable by reference to a particular transaction and counterparty. Also it will no longer be a requirement to keep records which evidence communications and instructions that result in the transaction being executed.

SIMM Licensing Program announced by ISDA30

Global, 2 Jun 2015

ISDA has introduced a new standard initial margin model, ISDA SIMM, to allow consistent regulatory governance and oversight. The new model is used to calculate margin requirements on uncleared swaps and will aid licensed counterparties in reducing the potential for disputes by permitting timely and transparent dispute resolution.

MAS publishes consultation paper on strengthening OTC derivatives market31


MAS has published a consultation paper on measures to strengthen the OTC derivatives market. MAS has proposed that intermediaries dealing in OTC derivatives will have to meet prescribed capital and business conduct requirements, including putting into place risk management policies and controls to safeguard customer

29 HK SFC, “SFC: Update on reporting and record keeping rules for OTC derivatives” 15 May 201530 ISDA, “ISDA announces SIMM Licensing Program” 2 Jun 201531 MAS, “Policy Consultation on Regulatory Framework for Intermediaries Dealing in OTC Derivative Contracts, Execution-Related

Advice, and Marketing of Collective Investment Scheme”, 3 Jun 2015

| Regulatory Reform Review 17Financial Markets

03

assets. Further proposals include the introduction of risk mitigation requirements for intermediaries dealing in non-centrally cleared OTC derivatives.

MAS also proposes to exempt Trading

Representatives from the Financial Advisers Act, if they provide financial advice that is incidental to their execution services. Also, in recognition of the time-sensitive nature of trades, MAS has proposed to allow financial advisers to transact in Collective Investment Schemes (CIS) on behalf of customers if an investment recommendation on CIS has been accepted by the customer. The consultation closed on 3 July 2015.

MAS publishes consultation on mandatory clearing of derivative contracts32

Singapore, 1 Jul 2015

MAS has published a consultation to assess which derivative contracts should be subject to mandatory clearance, as central clearing will mitigate the counterparty credit risks inherent in OTC derivatives trades.

As part of the consultation, MAS proposes that Singapore-dollar and US-dollar interest rate swaps are subject to central clearing as these are the most widely traded interest rate derivatives in Singapore. This will apply only to banks that book in excess of $20 billion worth of derivatives contracts, on a gross notional outstanding basis, and such entities will have a choice to clear

through domestic or foreign Central Counterparties (CCPs) that are regulated by MAS. The consultation closes on 31 July 2015.

3.2 Other updates

Hanoi chosen for Vietnam Stock Exchange Location33

Vietnam, 15 Apr 2015

Vietnam’s Ministry of Finance has submitted to the central government plans to merge Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) to form Vietnam Stock Exchange (VSE) by end of this year. VSE will be located in Hanoi.

Launch of Taiwan-Singapore stock trading link34

Taiwan, 24 Apr 2015

A stock-trading link between Taiwan and Singapore has been launched on 1 July, following the launch of Shanghai-Hong Kong Stock Connect link in November 2014. This will be Taiwan’s first ever cross-border trading link. Trading of stocks, warrants and other products listed on the Singapore Exchange will be made directly available to Taiwan brokers instead of being routed through Singapore brokers and the reverse applies for Singapore brokers. This move will reduce costs for investors, which is hoped to increase investments from investors in both countries.

32 MAS, “MAS consults on proposed regulations for mandatory clearing of OTC derivatives”, 1 Jul 201533 Vietnam Net, “Vietnam Stock Exchange to be located in Hanoi” 15 Apr 201534 Asiaone, “Taiwan to launch stock trading link with Singapore.” 29 Apr 2015


03

Stock manipulation and insider trading targeted by Chinese regulator35

China, 25 Apr 2015

CSRC has announced that it has started clamping down on illegal trading activity. A special enforcement action has been launched targeting five types of illegal activity namely; (1) financial fraud involving the mergers and acquisitions of listed companies, (2) stock price manipulation using capital or information advantages, (3) insider trading on share transfer platform for unlisted companies, (4) trading on the basis of non-public information by employees of securities firms and (5) futures market manipulation.

FIA Global issues recommendations on central clearing risks36

Global, 28 Apr 2015

FIA Global has issued a number of key recommendations for addressing central counterparty (CCP) risk. The recommendations cover three broad areas

• Enhancing clearing members and clients’ abilities to assess CCP risk through consistent and transparent risk disclosures,

• Ensuring continuity through clearly defined loss allocation tools and ensuring limited participant liability to avoid assumption of uncontrollable CCP Risk

• Enhancing CCP governance to reduce conflicts of interest, manage risk assumption and improve risk controls and management oversight

The recommendations are aimed to help clearing members and clients better assess and manage CCP risk.

35 CSRC, “证监会组织开展“2015证监法网专项执法行动” 25 Apr 201536 FIA, “FIA Global issues recommendations on central clearing risks” 28 Apr 2015


03

HKMA: Consultation Conclusions on improvements to the Deposit Protection Scheme Released37


HKMA has released the conclusions to their Dec 2014 proposals on improvements to the Deposit Protection Scheme, aimed at achieving faster payouts to increase banking stability.

The relevant proposals include:

• adopting a gross payout approach to determine compensation (i.e. a depositor will be compensated an amount up to the DPS protection limit, without setting off the depositor’s liabilities against his/her deposits owed to the same bank);

• providing more certainty to determine the quantification date used for compensation calculation; and

• enabling the use of electronic communication channels by the Hong Kong Deposit Protection Board (HKDPB), in addition to the conventional paper-form communications, to notify depositors of the compensation arrangements, in case the DPS is triggered.

The HK Government is now drafting a bill to amend the Deposit Protection Scheme Ordinance, with a view to introducing it into the Legislative Council later this year.

BIS looking to set single set of conduct standards for global foreign exchange38

Global, 11 May 2015

Two policy groups under the BIS, the economic Consultative Committee and the Global Economy Meeting, have met to formalize a standard code of conduct for players in the global foreign exchange markets. This development comes on the back of various scandals that have rocked the foreign exchange markets in previous years with regards to currency manipulation. There are hopes by foreign exchange market participants that having a single global standardised set of conduct standards will lead to better regulation of foreign exchange markets.

Handbook on Securities Statistics published by BIS/ECB/IMF39

Global, 12 May 2015

A joint guide on conceptual advice and guidance on harmonising international securities statistics was released by the BIS, the ECB and the IMF on 12 May. The importance of this guide was accentuated by the G-20 Data Gaps Initiative after the global financial crisis.

37 HKMA, “HKMA: Consultation Conclusions on Enhancements to the Deposit Protection Scheme Released” 8 May 201538 BIS, “Economic Consultative Committee statement on FX market best practices” 11 May 201539 ECB, “BIS, ECB and IMF publish the Handbook on Security Statistics” 12 May 201540 HK SFC, “SFC: Intermediaries reminded full compliance with Know Your Client and account opening procedures” 12 May 2015


03

HK SFC reminds intermediaries of the importance of full compliance regarding Know Your Client and account opening procedures40


HK SFC has issued a circular to remind intermediaries of the importance of complying with Know Your Client (KYC) and account opening procedures requirements under the code of conduct. This reminder came about as licensed corporations were found to have certain deficiencies and unsatisfactory practices during supervisory reviews of the KYC and account opening process.

HK SFC strengthens regulatory regime for alternative liquidity pools41

Hong Kong, 15 May 2015 The HK SFC has released consultation

conclusions on proposals to enhance and unify the regulatory regime for alternative liquidity pools (ALPs). Alternative liquidity pools, more commonly known as dark pools, are alternative trading systems that are not accessible to public investors and so named due to a lack of transparency about their trades.

Among the highlights of the new regime are: (1) individual investors will not be allowed to use ALPs, (2) client facilitation orders will be treated as proprietary

orders, which will have a lower execution priority in ALPs than agency orders; and (3) there will be no mandatory “opt-in” requirement before client orders can be routed to ALPs -- ALP operators should permit their clients to opt out of having their orders transacted in ALPs.

Mutual Fund Recognition Scheme between Mainland China and Hong Kong signed by HK SFC and CSRC42


HK SFC and CSRC have signed a mutual fund recognition scheme, allowing funds domiciled in either Hong Kong or Mainland China to be marketed and distributed in both areas with an initial quota of RMB 300bn on both sides. The scheme launched on 1 July, and it is a major breakthrough on access with regards to both fund markets.

Report on credible deterrence approaches in securities market regulation published by IOSCO43

Global, 17 June 2015

IOSCO has released a report aimed at identifying key factors to deter misconduct in international securities and investment markets. The report states deterrence is possible when the risks of misconduct exceed the perceived rewards, and when non-compliant attitudes and behaviours are discouraged.

40 HK SFC, “SFC: Intermediaries reminded full compliance with Know Your Client and account opening procedures” 12 May 201541 HK SFC, “SFC enhances regime to regulate alternative liquidity pools” 15 May 201542 HK SFC, “SFC and CSRC sign agreement on Mainland-Hong Kong Mutual Recognition of Funds” 22 May 201543 IOSCO, “IOSCO publishes report on credible deterrence approaches in securities market regulation” 17 June 2015


03

FMC-SEBI merger likely to be by September44

India, 23 Jun 2015

SEBI said today that they expect to complete the merger with commodities regulator FMC by end September. During a SEBI board meeting, the current progress and gaps in the FMC-SEBI merger were discussed. The merger is expected to streamline regulations and curb speculation in the commodities market, although trading costs are likely to increase for commodity market investors as broker registration fees will be passed on to clients.

MAS refines proposals to strengthen the REITs market45

Singapore, 2 Jul 2015

MAS has refined its proposals to strengthen the REITs market, in response to industry feedback, and will implement these key measures to accord REIT unitholders better protection and greater accountability while providing REIT Managers with increased operational flexibility. The three key measures are (i) strengthening corporate governance standards, (ii) increasing the transparency of the fee structure for REITs, and (iii) allowing greater operational flexibility, by increasing the development limit of a REIT from 10% to 25%, and the leverage limit imposed on a REIT will be increased from 35% to 45% of the REIT’s total assets, although the option for a REIT with a credit rating to leverage up to 60% will be removed.

China opens up bond markets46

China, 20 Jul 2015

In a landmark move, the People’s Bank of China has announced the liberalization of its domestic bond markets, with full access of the 25 trillion yuan interbank bond market now granted to overseas central banks, sovereign wealth funds and international financial institutions. This move is expected to further encourage central banks and other investors to increase their exposure to the Chinese government bond market, as the depth of the market is increased in the long term, reducing volatility. Liberalizing the bond market also further allows for the internationalization of the Chinese yuan, as the bonds backing the currency will become more freely tradable internationally.

44 The Economic Times “FMC to merge with SEBI by September, says UK Sinha” 23 Jun 201545 MAS, “MAS responses to consultation feedback on strengthening the REITs market” 2 Jul 201546 Straits Times, “In landmark move, China opens up interbank bond market”, 20 Jul 2015


03

| Regulatory Reform Review 23Insurance

044. Insurance

IRDAI further amends new norms for corporate agents47

India, 29 May 2015

IRDAI has amended their draft guidelines for corporate agents. Under the amended guidelines, banks are no longer required to sell policies of at least two insurers of each category – life, general and health, instead they may choose between one to three insurance partners. Currently, some banks act as corporate agents and only sell policies of one insurer each in life, general or health insurance. Banks with promoted insurance ventures would not want to sell products promoted by their competitors as it would affect their brand equity.

This comes as part of moves to encourage banks to become insurance brokers, although such a move has not succeeded. Banks are reluctant to become insurance brokers due to the higher risks involved as opposed to being corporate agents. To overcome this reluctance, IRDAI is also proposing allowing corporate agents to only sell products exclusively designed for the corporate agency channel, with only brokers able to sell a full suite of insurance products. The deadline for comments on the draft regulations closed on 4 June 2015.

Tightened registration norms proposed by IRDAI 48

India, 11 May 2015

IRDAI has proposed tightened norms for registration of insurance companies, having released a draft regulation to seek details of promoter’s voting rights, products to be sold, financial performance projections and areas insurers would operate in. Most significantly, new insurance companies being registered will need to comply with the requirement of being “Indian-owned and controlled”, although no guidance has been further given on what this might mean. The deadline for comments and suggestions on the proposed tightened norms closed on 8 June 2015.

Major risks to financial stability updated by EIOPA49

Europe, 1 Jun 2015

EIOPA has published its Financial Stability Report May 2015, and it has noted that the risks identified in the previous December 2014 report remain unchanged. A weak macroeconomic environment, protracted low interest rates and increased credit risks continue to affect the reinsurance and occupational pension sectors of the European Economic Area.

47 IRDAI, “Insurance Regulatory and Development Authority of India (Registration of Corporate Agent) Regulations, 2015”, 29 May 201548 IRDAI, “IRDAI (Registration of Indian Insurance Companies) (Seventh Amendment) Regulations, 2015” 11 May 201549 EIOPA, “EIOPA updates on the major risks to financial stability” 1 Jun 2015

24 Regulatory Reform Review | Insurance

04

MAS reviews Accident and Health regulatory framework50

Singapore, 12 May 2015

MAS is conducting a review of the regulatory framework for Accident and Health (“A&H”) insurance, following the recommendations of the Medishield Life Review Committee. Amongst the proposals are additional disclosure requirements for Integrated Shield Plans, including whether policies are Medisave-approved or payable, and an extension to the free-look period beyond the current period of 14 days. The consultation closed on 12 June 2015.

MAS proposes enhanced disclosure requirements for Investment-Linked Policies51


MAS has proposed enhanced disclosure requirements for Investment-Linked Policies (ILPs), recognising the complexity of ILPs, and how existing disclosure documents might still be insufficient to help retail investors understand such products. As such, MAS has proposed to implement enhanced disclosure of fees and charges in a new Product Highlights Sheet, with the different layers of charges in ILPs disclosed individually. Some other proposed changes are monthly statements for ILPs with minimal insurance cover.

50 MAS, “Review of Accident and Health Regulatory Framework”, 12 May 201551 MAS, “Proposed Enhancements to Disclosure Requirements for Sale of Investment-Linked Policies”, 26 Jun 2015

| Regulatory Reform Review 25Asset Management

26 Regulatory Reform Review | Asset Management

05 5. Asset Management

MAS reclassifies investment funds for retail investors52

Singapore, 29 Apr 2015

A wider range of investment funds have been made available for retail investors, following industry feedback given to MAS. MAS has reclassified some investment funds that make limited use of derivatives as Excluded Investment Products (EIPs), meaning that retail investors can now buy such products without the need to be assessed on their investment knowledge or experience. Previously, all investment funds that used derivatives were classified as Specified Investment Products (SIPs), which required enhanced safeguards for their sale.

IOSCO publishes good practices on reducing reliance on CRAs in Asset Management (Final Report)53

Global, 8 Jun 2015

IOSCO’s has published a set of 8 good practices in their final report published on 8 June. The report highlights the need for asset managers to have the appropriate expertise for managing the credit risks associated with their investment decisions. To that effect, the practices were rolled out to help in the reduction of over-reliance on external credit ratings in the asset management industry, which could lead to forced asset sales in the event of rating downgrades.

FSB and IOSCO publish public responses to the second consultative Document on NBNI G-SIFI Assessment Methodologies54

Global, 12 Jun 2015

FSB and IOSCO have published their responses to the second consultation paper on the revised methodologies for designating investment funds and asset managers as global systemically important institutions, taking into account feedback from industry professionals and bodies.

52 MAS, “Easier access to simpler funds for retail investors”, 29 Apr 201553 IOSCO, “IOSCO publishes good practices on reducing reliance on CRAs in Asset Management (Final report)” 8 Jun 201554 FSB, “FSB and IOSCO publish Public Responses to the Second Consultative Document on NBNI G-SIFI Assessment

Methodologies” 12 Jun 2015

| Regulatory Reform Review 27Asset Management

28 BibliographyRegulatory Reform Review |

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6. Bibliography

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MAS (Monetary Authority of Singapore). “MAS proposes guidelines to use plain English in prospectuses”. 05 Feb 2015. MAS website, http://www.mas.gov.sg/News-and-Publications/Media-Releases/2015/MAS-Proposes-Guidelines-to-Use-Plain-English-in-Prospectuses.aspx, accessed April 2015

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32 Regulatory Reform Review | Contact Our Experts

Mark Jansen

Singapore Outsourcing and Asia Pacific FATCA Leader+65 6236 [email protected]

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Singapore Regulations Leader+65 6236 [email protected]

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Treasury and Commodities Leader+65 6236 [email protected]

Karen Loon

Banking and Capital Markets Leader+65 6236 [email protected]

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Financial Services Leader+65 6236 [email protected]

Billy Bennett

Singapore Insurance Leader+65 6236 [email protected]

Regulatory Reform Review by PwC Singapore

The Experts

Chris Matten

Banking and Capital Markets Advisory Leader+65 6236 [email protected]

Dominic Nixon

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Justin Ong

Singapore and Asia Pacific Asset Management Leader+65 6236 [email protected]

7. Contact Our Experts

| Regulatory Reform Review 33Glossary33 Regulatory Reform Review |

8. GlossaryABS Association of Banks in SingaporeACGA Asian Corporate Governance AssociationACGS ASEAN Corporate Governance ScorecardADI Authorised deposit-taking InstitutionsAEOI Automatic Exchange of InformationAI Authorised InstitutionsAIFMD Alternative Investment Fund Manager’s DirectiveAML Anti-Money LaunderingAML/CTF Anti-Money Laundering/Counter-Terrorism FinancingASIC Australian Securities and Investments CommissionASX Australian Stock ExchangeATS Alternative Trading SystemsBCBS Basel Committee on Banking SupervisionBIR Bureau of Internal Revenue BIS Bank for International SettlementsBNM Bank Negara MalaysiaBSP Bangko Sentral ng Pilipinas CCP Central Clearing PartyCDD Customer Due DiligenceCET 1 Common Equity Tier 1CIS Collective Investment SchemesCMDTF Capital Markets Development TaskforceCPSS Committee on Payment and Settlement SystemsCRDIV Capital Requirements Directive IVCROs Chief Risk OfficersCVA Credit Valuation AdjustmentDDP Designated Depository Participants DIM Dim Sum BondsDNC Do Not CallEBA European Banking AuthorityEC European CommissionEDP Excessive Deficit ProcedureEIBOR Emirates Interbank Offered RateEMC Emerging Markets Committee EMIR European Market Infrastructure RegulationEOI Exchange of Tax InformationESMA European Securities and Markets AuthorityEU European UnionFA Financial AdvisorFAIR Financial Advisory Industry ReviewFATCA Foreign Account Tax Compliance ActFATF Financial Action Task ForceFBOs Foreign Banking OrganizationsFCA Financial Conduct AuthorityFDI Foreign Direct InvestmentFDIC Federal Deposit Insurance CorporationFII Foreign Institutional Investor FinCen Financial Crimes Enforcement NetworkFINRA Financial Industry Regulatory AuthorityFIs Financial InstitutionsFMA Financial Markets AuthorityFMCB Financial Markets Conduct BillFMIs Financial Market InfrastructuresFPC Financial Policy CommitteeFPI Foreign Portfolio Investor FSA Financial Services AuthorityFSB Financial Stability Board

34 Regulatory Reform Review | Glossary

06FSTB Financial Services and Treasury BureauFTT Foreign Transaction TaxGSEs Government-Sponsored EnterpriseHFT High Frequency TradesHMRC HM Revenue & CustomsHQA High Quality AssestsICBC Industrial and Commercial Bank of ChinaICD Institute of Corporate Directors IIF Institute of International FinanceIDB Inter-Dealer BrokerIFSB Islamic Financial Services BoardIGA Inter-Governmental AgreementsIMF International Monetary FundIOSCO International Organization of Securities CommissionsIRS Internal Revenue ServiceIRDA Insurance Regulatory and Development AuthorityISDA International Swaps and Derivatives AssociationITS Implementing Technical StandardsJFSA Japan Financial Services AuthorityKRX Korea ExchangeKYC Know Your CustomerLCR Liquidity Coverage RatioLDP Low-Default PortfoliosLFTR Licensed Foreign Trade Repository LIBOR London Interbank Offered RateLTR Licensed Trade Repository MAS Monetary Authority of SingaporeMiFID II/ MiFIR Markets in Financial Instrument DirectiveMMF Money Market FundsMOU Memorandum of UnderstandingNAV Net Asset ValueNFC Non-Financial CompanyNFFE National Federation of Federal EmployeesNFSP Non-Financial specified personNOFHC Non-Operative Financial Holding CompanyOECD Organisation for Economic Co-operation and DevelopmentOFT Office of Fair TradingOTC Over-the-CounterOTF Organised Trading Facility PBC People’s Bank of ChinaPDPA Personal Data Protection ActPDPC Personal Data Protection CommissionPEPs Politically Exposed PersonsPLC Public Listed Company POS Point of SalePRA Prudential Regulatory AuthorityQFI Qualified Foreign Investor RBI Reserve Bank of IndiaRFMC Regime for Fund Management CompaniesRMB RenminbiRWAs Risk Weighted AssetsSEBI Securities and Exchange Board of IndiaSEC Securities and Exchange CommissionSEHK Hong Kong Exchanges and Clearing LimitedSFC Securities & Futures Commission of Hong KongSFTs Securities Financing TransactionsSGX Singapore Stock ExchangeSIDD Separately Identifiable Department or DivisionTRC Tax Residency CertificateTRM Technology Risk Management UK United KingdomUN United NationsUS United StatesWFE World Federation ExchangeWMS Wealth Management Services

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