Saturday 6th February 2016
NEWS TICKER: Friday, February 5th: According to Reuters, Venezuela's central bank has begun negotiations with Deutsche Bank AG to carry out gold swaps to improve the liquidity of its foreign reserves as it faces debt payments of some $9.5bn this year. Around 64% of Venezuela's $15.4bn reserves are held in gold bars, which in this fluid market impedes the central bank's ability to mobilise hard currency for imports or debt service. We called the central bank to confirm the story, but press spokesmen would not comment - The Hong Kong Monetary Authority (HKMA) says official foreign currency reserves stood at $357bn (equivalent to seven times the currency in circulation or 48% of Hong Kong M3) as at the end of January, down compared with reserve assets of $358.8bn in December. There were no unsettled foreign exchange contracts at month end (end-December: $0.1bn) - BNP Paribas today set out plans to cut investment banking costs by 12% by 2019 to bolster profitability and reassure investors about the quality of its capital buffers. The bank is the latest in a line of leading financial institutions, including Credit Suisse, Barclays and Deutsche Bank which look to be moving away from capital intensive activities. BNP Paribas has been selling non-core assets and cutting back on operations including oil and gas financing for the last few years as it looks to achieve a target of 10% return on equity. Last year the bank announced a €900m write-down on its BNL unit in Italy, which pushed down Q4 net income down 51.7% to €665m - Johannesburg Stock Exchange (JSE)-listed tech company, Huge Group, will move its listing from the Alternative Exchange (AltX) to the JSE main board on March 1st - Moody's says it has assigned Aaa backed senior unsecured local-currency ratings to a drawdown under export credit provider Oesterreichische Kontrollbank's (OKB) (P)Aaa-rated backed senior unsecured MTN program. The outlook is negative in line with the negative outlook assigned to the Aaa ratings of the Republic of Austria, which guarantees OKB’s liabilities under the Austrian Export Financing Guarantees Act – As the first phase of talks between Greece and its creditors draws to an end, International Monetary Fund chief Christine Lagarde stressed to journalists in Greece that debt relief is as important as the reforms that creditors are demanding, notably of the pension system. "I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side." Greece's pension system must become sustainable irrespective of any debt relief that creditors may decide to provide, Lagarde said, adding that 10% of gross domestic product into financing the pension system, compared to an average of 2.5% in the EU, is not sustainable. She called for "short-term measures that will make it sustainable in the long term,” but did not outline what those measures might be. According to Eurobank in Athens, IMF mission heads reportedly met this morning with the Minister of Labour, Social Insurance and Social Solidarity, Georgios Katrougalos, before the team is scheduled to leave Athens today. According to the local press, it appears that differences exist between the Greek government and official creditors on the planned overhaul of the social security pension system. Provided that things go as planned, the heads are reportedly expected to return by mid-February with a view to completing the review by month end, or at worst early March. In its Winter 2016 Economic Forecast published yesterday, the European Commission revised higher Greece’s GDP growth forecast for 2015 and 2016 to 0.0% and -0.7%, respectively, from -1.4% and 1.-3% previously - Fitch says that The Bank of Italy's (BoI) recent designation of three banks as 'other systemically important institutions' (O-SIIs) has no impact on its ratings of the relevant mortgage covered bond (Obbligazioni Bancarie Garantite or OBG) programmes. Last month, BoI identified UniCredit, Intesa Sanpaolo. and Banca Monte dei Paschi di Siena as Italian O-SIIs. Banco Popolare and Mediobanca have not been designated O-SIIs. This status is the equivalent of domestic systemically important bank status under EU legislation. Fitch rates two OBG programmes issued by UC and one issued by BMPS, which incorporates a one-notch Issuer Default Rating (IDR) uplift above the banks' IDRs. The uplift can be assigned if covered bonds are exempt from bail-in, as is the case with OBG programmes under Italy's resolution regime and in this instance takes account of the issuers' importance in the Italian banking sector – Meantime, according to local press reports, Italian hotel group Bauer and special opportunity fund Blue Skye Investment Group report they have completed the rescheduling and refinancing of Bauer’s €110m debt through the issue of new bonds and the sale of non-core assets, such as the farming business Aziende Agricole Bennati, whose sale has already been agreed, the Palladio Hotel & Spa and a luxury residence Villa F in Venice’s Giudecca island – Meantime, Russian coal and steel producer Mechel has also agreed a restructuring of its debt with credits after two intense years of talks. The mining company, is controlled by businessman Igor Zyuzin - Asian markets had a mixed day, coming under pressure. Dollar strengthening worries investors in Asia; from today’s trading it looks like dollar weakening does as well. Actually, that’s not the issue, the dollar has appreciated steadily over the last year as buyers anticipated Fed tightening; but it has hurt US exports and that has contributed to investor nervousness over the past few weeks, which is why everyone is hanging on today’s The nonfarm payrolls report, a bellwether of change – good or bad in the American economic outlook. Back to Asia. The Nikkei 225 ended the day at 16819.15, down 225.40 points, or 1.32%; and as the stock market fell the yen continued to strengthen. The Nikkei has shed 5.85% this week. The dollar-yen pair fell to the 116-handle, at 116.82 in afternoon trade; earlier this week, the pair was trading above 120. It is a hard lesson for the central bank, whose efforts to take the heat out of the yen by introducing negative interest rates has done nothing of the sort. Australia's ASX 200 closed down 4.15 points, or 0.08% after something of a mixed week. The index closed at 4976.20, with the financial sector taking most of the heat today, with the sector down 0.7%. In contrast, energy and materials sectors finished in positive territory, buoyed by gains in commodities. The Hang Seng Index closed at 19288.17, up 105.08 points (or 0.55%) while the Shanghai Composite was down 0.61%. down 17.07 points to 2763.95. The Shenzhen composite dropped 20.36 points (1.15%) to 1750.70, while the Kospi rose marginally by 0.08% to 1917.79. Today is the last day of trading on the Chinese exchanges for a week.

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Twin peaks: the fire walk of UK market regulation?

Monday, 05 March 2012
Twin peaks: the fire walk of UK market regulation? Those who were keen followers of the 1990s cult television series Twin Peaks and its prequel film, Twin Peaks: Fire Walk With Me may have experienced some concern at hearing recently in a speech by the Financial Services Authority's (FSA’s) chief executive officer, Hector Sants, that the regulator would very shortly start adopting a ‘Twin Peaks’ model of regulation.  However, rather than a drama concerning the murder of a teenage girl, which explored the gulf between the veneer of small-town respectability and the seedier layers of life lurking beneath it, this is the continuing drama of the progress of the UK’s regulatory reform programme, though it is also laced with some underlying seediness, mystery and double-think, all thrown in for good measure. Charlotte Hill, partner and head of the financial services and regulation practice at law firm Stephenson Harwood, gives a sprightly, sometimes humorous run through the implications of change, positing that it might all be too complicated for it’s own good. http://www.ftseglobalmarkets.com/media/k2/items/cache/3fc2270e36abb53621f286382276e85e_XL.jpg

Those who were keen followers of the 1990s cult television series Twin Peaks and its prequel film, Twin Peaks: Fire Walk With Me may have experienced some concern at hearing recently in a speech by the Financial Services Authority's (FSA’s) chief executive officer, Hector Sants, that the regulator would very shortly start adopting a ‘Twin Peaks’ model of regulation.  However, rather than a drama concerning the murder of a teenage girl, which explored the gulf between the veneer of small-town respectability and the seedier layers of life lurking beneath it, this is the continuing drama of the progress of the UK’s regulatory reform programme, though it is also laced with some underlying seediness, mystery and double-think, all thrown in for good measure. Charlotte Hill, partner and head of the financial services and regulation practice at law firm Stephenson Harwood, gives a sprightly, sometimes humorous run through the implications of change, positing that it might all be too complicated for it’s own good.

The financial crisis and recession caused the FSA, the United King-dom’s financial markets reg-ulator, to be criticised for being too costly and ineffective in its approach to regulation, resulting in a complete reform of the UK's regulatory structure.

Right now the UK financial markets are governed by a tripartite system of regulation, with regulatory responsibility being shared between the Bank of England (BoE), the FSA and HM Treasury. However it looks as if this system has now had its day and change is afoot. There is much optimism that this time around, all will be well and the shortcomings of the previous system will be addressed and a new dawn is breaking.



The old structures will be replaced with an all-new, all-improved, shiny new system, where responsibility for regulation will be shared between, em ... three new regulatory bodies! These are the Financial Policy Committee (FPC), which will sit in the BoE and take responsibility for the macro-prudential regulation of the UK financial system; the Prudential Regulation Authority (PRA), which will sit as an independent subsidiary of the BoE and take responsibility for the micro-prudential regulation of financial institutions of systemic importance, such as banks and building societies; and the Financial Conduct Authority (FCA), which will inherit the majority of the FSA’s current regulatory functions and be responsible for the conduct of business regulation of all firms currently regulated by the FSA. This will include those firms that will be dual-regulated, authorised and subject to prudential regulation by the PRA.  

In two speeches on February 6th and 7th this year, Hector Sants announced what he termed a "major milestone" in the progress of the regulatory reform programme, namely, the introduction of a "Twin Peaks" model of regulation, which would be operating within the FSA from April 2nd 2012. From this date, two regulatory models (the Twin Peaks) will operate within the FSA in preparation for those models becoming separate regulatory entities early in 2013. One peak is earmarked for prudential regulation and the other for conduct regulation. So, banks, building societies, insurers and major investment firms will have two separate groups of supervisors: one focussing on prudential issues and the other on conduct.

Whilst the FSA could not completely replicate the new approach envisaged by the Financial Services Bill at this stage, the Twin Peaks model will ensure that the transition to the new regulatory structure early in 2013 (termed, in true superb FSA-speak, the "cutover") would be "seamless".  

Not only are there the two independent groups of supervisors for banks, insurers and major investment firm but also, all other firms (that is, those which are not dual-regulated) will be supervised entirely by the conduct supervisors. These separate groups of supervisors will make their own separate judgements, and against different objectives. This is an important distinction, as we are told that they will be "pursing different goals". Up to now, there has been little clarity on what all this means, but the approach is summarised in another piece of fluent FSA-speak: "independent but coordinated decision making"––an approach that will be "stressed to staff". The thrust of this appears to be a policy of sometimes working together, but sometimes not, whilst somehow managing to share all data collected from companies.  Although no detail is given, "greater clarity" apparently has been given to the objectives of the two supervisory groups. No information is given on what this "clarity" entails.

Those still reeling from the spectre of two separate sets of supervisors will exit screaming at the intelligence that the existing ARROW risk mitigation programme will be split between the Twin Peaks. The Financial Services Authority (FSA) is a risk-based regulator and ARROW is the framework it uses to make risk-based regulation operational. ARROW stands for the Advanced, Risk-Responsive Operating Framework and covers firm specific (vertical supervision), thematic (those involving several firms or relating to the market as a whole; the FSA terms this ‘horizontal’ work) and internal risks (these are operational risks that might impact the FSA).

ARROW will be split between those actions which are relevant to the conduct supervisory group's objectives and those that relate to the objectives of the prudential group. What is worse is that this is only just around the corner. From April 2nd 2012 onwards, the two separate supervisory units will run their own risk mitigation programmes and firms will have "two separate sets of mitigating actions to address".  

The two supervisory teams will assess risk separately, against their own separate objectives (and of course, firms do not as yet know what these are). Any firm currently preparing for an ARROW visit, or anticipating one later in the year will not be delighted by the knowledge that each group may well ask apparently similar questions, but that the purpose will be different.  

Conclusions drawn from the ARROW process will be coordinated with "a single pack of documentation" being presented to the firm's board––but this will have "two separate sections". However, there will not be a consolidated list of required actions arising from the ARROW visit.

Doubling up on visits
The meaning seems to be that you will still have an ARROW visit (at least, for the lifetime of the current FSA), but this will in fact be two visits. When the visit is over, the FSA will provide one, consolidated pack of documentation summarising the conclusions of the assessment. However this will be divided into two, with two separate sets of actions, to each of which firms are required to give "equal focus". So, you are indeed seeing double––your one ARROW visit has suddenly become two. Anyone who has been through the current ARROW process well knows the enormous amount of preparatory work that is necessary and the stress of the increasingly demanding interviews, so it is hardly welcome news that the amount of work involved is about to be doubled.

Firms will be required to make "behavioural changes", so that the new approach works "to the benefit of society" as a whole. In line with this, firms must comply with supervisory judgements "willingly" and "proactively"; in other words, not challenge FSA judgements, but take it like lambs. Firms must align their goals with those of their supervisors and (again) "with society as a whole". So, now companies have "the best interests of society" to contend with, along with everything else.

Unsurprisingly, no steer is given as to what these might be, or which society the regulator may have in mind. Rather puzzlingly, a further feature of this new world is that firms must "recognise that there are times when both firms and the regulator will make judgements which in hindsight are found to be wrong".  Sounds sinister!  What does this mean exactly?  

Perhaps the killer punch comes in an apparently throwaway line that is not elaborated further that firms must "recognise that this new approach will require greater resources and expertise and thus costs more than the old reactive model". Double the trouble, it seems, means double the cost. More fees and a greater cost of regulation at a time when companies are feeling the pinch of uncertain markets and falling revenues and buckling under the weight of around thirty-five (at last count) separate new legislative measures from Europe.

There is much still to be done and in his speeches, Sants provided a shopping list of the issues still to be addressed within the next twelve months, any one of which would be enough to keep an army of regulators busy for a good deal longer than this. They include amendments to the threshold conditions; the designing of a new "operating platform" for the FCA and the PRA; designing a new supervisory framework to replace ARROW; finalising the new Memorandum of Understanding detailing how the FCA and the PRA will coordinate their activities; splitting the Rulebook between the PRA and the FCA; and training (and presumably, recruiting) staff.

The next twelve months are likely to be extremely lively, as the FSA wrestles with operating within the Twin Peaks framework and labours with the complexity and volume of the issues still to be addressed.  Firms once again will be obliged to wrestle with major operational changes due to regulatory upheaval. Twin Peaks looks like being only the beginning of the fire walk.

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