Ny Regulering i den Finansielle Sektor - Morgenmøde - Deloitte
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Ny Regulering i den Finansielle Sektor Morgenmøde 28-01-2020
Ny Regulering i den Finansielle Sektor – Morgenmøde
Agenda
❖ Velkommen v. Tony Johansen
❖ Basel III
❖ General updates v. Tom Clifford
❖ CRR 2 / CRD 5 v. Nicola O’Reagan
❖ IBOR – ny guidance fra finanstilsynet v. Torben Winther
❖ Sustainability Regulation v. Nicola O’Reagan & Helena Barton
❖ DAC 6 – EU diriktiv til implementering i dansk ret v. Martin Poulsen
❖ Afrunding v. Tony Johansen
2
Basel III: General update January 2020
Basel III - Overview
The Basel framework has developed over multiple decades, increasing in scope and
sophistication but also complexity during the period
Since its inception in the Basel accord of 1988, the Basel framework on capital regulation has come to be established as the core assessment of soundness
and stability of the banking system. The framework continues to evolve with various revisions in response to the changing circumstance, such as the
2007/08 financial crisis.
Basel III
Basel II
Basel I
Pillar 1 Pillar 2 Pillar 3
Pillar 1 Pillar 2 Pillar 3
Enhanced Enhanced Enhanced
capital and Supervisory risk
Minimum Supervisory Disclosure
Minimum capital capital review and market
liquidity Review and disclosure
requirements for Credit and requirements Evaluation and market
requirements process discipline
Process discipline
Market Risk (SREP)
Eligible Capital
Capital Ratio
Requirements
Capital
+ =
4
Basel III – Implementation into EU law Prudential
requirements
What we can expect
In December 2017, the BCBS reached an agreement on the final Basel III standards. These revisions will be implemented in the EU through CRD5/ CRR2
and CRD6/CRR3. The December 2017 rules aim to restore credibility in the calculation of Risk Weighted Assets making the Standardized Approach more risk
sensitive and constraining the use of internal models.
BCBS December 2017 final revisions In CRR2 In CRR3
Credit Risk
• Revised Standardised Approach for Credit Risk To be adopted
• Constrained Internal Ratings-Based Approach for Credit Risk (limiting the use of advanced IRB
approaches for many low-default portfolios and introducing other constraints)
FRTB Introduced as a Will be introduced as
reporting a binding capital
• Delaying the application of the framework to January 2022 requirement under requirement
• The BCBS published its final rules for the FRTB in January 2019* CRR2
CVA, Operational Risk, Output Floor
• Minimum capital requirements for CVA** (removal of the internally modelled approach and the
introduction of a revised standardised approach)
• Minimum capital requirements for Operational Risk (revised standardised approach to replace To be adopted
the existing standardised and advanced measurement approaches)
• Standardised output floor BCBS (72.5% of the capital produced by the new standardised
approaches, through a five year phased implementation period - 50% in 2022 rising almost linearly to
reach 72.5% in 2027).
Leverage Ratio Leverage ratio G- Revised exposure
SIB buffer will be definition likely to be
• Existing exposure definition introduced under introduced
• Revised exposure definition CRR2
• G-SIB buffer
*These rules will be reflected by the European Commission by way of a Delegated Act under CRD5/CRR2.
** In November 2019 the BCBS consulted on targeted revisions to the CVA framework. These changes may not be in the Commission’s legislative proposal 5
in June 2020, but we expect them to be adopted – potentially through a Delegated Act, or other Level 2 mandates
Basel III – Implementation Timeline
2 years after entry
into force
18 months after entry (28.06.2021)
28.06.2019 into force (28.12.2020) CRR2 general
Entry into force CRD5/BRRD2 application date
• Member State adoption,
publication and
application deadline
CRR2 / CRD5
2021
2024
2023
2019
2020
2022
Including NSFR, SA-CCR,
Leverage Ratio, Large
One year after Three years after
Exposures, IRRBB
adoption of RTS on FRTB IMA
disclosure, Pillar 3
Delegated Act on (est. 28.03.2024*)
revisions
FRTB (est. CRR2
CRR2: 31.12.2019 31.12.2020) CRR2 • Application of FRTB
• Scope, Supervisory CRR2 CRR2 • G-SIB leverage ratio reporting
powers • Commission to • Application of requirement requirements based
CRR2 on internal model
• TLAC requirements adopt Delegated FRTB reporting • Exemption from 01.01.2022 approach
• Provisions on Act modifying requirements CET1 reductions of CRD5
massive disposals of FRTB framework based on prudently valued • Restrictions and
NPLs standardised 30.12.2023
software assets* required actions in
• Own funds approach event of failure to CRD5
requirements for CCP
CRD5 CRD5 meet capital/leverage • Intermediate Parent
exposures
• Provisions on IRRBB ratio buffer Undertaking (IPU)
(28.12.2020)
requirements requirements
• Remuneration
requirements 01.01.2024
• Revisions to BRRD2
Pillar 2 • MREL application date for
framework resolution and non-
resolution entities
Q2 2020 Q2 2022 Q2 2024
CRD6/CRR3 CRD6/CRR3 CRD6/CRR3
Expected European Predicted adoption of Predicted
Commission Proposal legislative package implementation of
legislative package
*This is a contingent timeframe: 12 months after entry into force of CRR2 the EBA is required to submit a regulatory technical standard on the subject, and the exemption will apply 12 months after the entry into force of that RTS, which is
contingent on Commission approving and adopting those standards. This process takes 3-12 months. 6
*Estimated date: FRTB reporting requirements for the IMA are due to apply 3 years after entry into force of RTS on liquidity horizons for the IMA, RTS non-modellable risk-factors in the IMA and RTS on P&L attribution (due to be submitted
by the EBA by 28.03.2020). As above, it is contingent on the Commission adopting those standards, which can take 3-12 months.
Basel III – CRR Level 2 Mandates
• Underpinning much of this implementation work will be a significant
amount of secondary rulemaking that will see the Commission and
European Banking Authority (EBA) draft detailed standards to specify Delegated
Acts
the way in which many of the RRM’s initiatives should be applied.
• These are a mix of binding Regulatory Technical Standards (RTS)
and Implementing Technical Standards (ITS) to be developed by
the EBA, Delegated Acts and Implementing Acts that will come
directly from the Commission, and non-binding EBA Guidelines aimed Guidelines
Implementing
Acts
at clarifying implementation challenges. See Appendix for the full
overview. RRM
• Many of these requirements could have a significant impact on how package
challenging these rules will be for banks to put in place and operate
under.
• With the bulk of the level 2 mandates having deadlines in the next two
years, secondary rulemaking is likely to put resource constraints on EBA Implementing Regulatory
staff. A likely consequence of this is that some of the non-dated Technical
Standards
Technical
Standards
mandates might therefore take a while to materialise.
7
Basel III – Implementation Timeline
2 years after entry
into force
18 months after entry (28.06.2021)
28.06.2019 into force (28.12.2020) CRR2 general
Entry into force CRD5/BRRD2 application date
• Member State adoption,
publication and
application deadline
CRR3 / CRD6
2021
2024
2023
2019
2020
2022
Including NSFR, SA-CCR,
Leverage Ratio, Large
One year after Three years after
Exposures, IRRBB
adoption of RTS on FRTB IMA
disclosure, Pillar 3
Delegated Act on (est. 28.03.2024*)
revisions
FRTB (est. CRR2
CRR2: 31.12.2019 31.12.2020) CRR2 • Application of FRTB
• Scope, Supervisory CRR2 CRR2 • G-SIB leverage ratio reporting
powers • Commission to • Application of requirement requirements based
CRR2 on internal model
• TLAC requirements adopt Delegated FRTB reporting • Exemption from 01.01.2022 approach
• Provisions on Act modifying requirements CET1 reductions of CRD5
massive disposals of FRTB framework based on prudently valued • Restrictions and
NPLs standardised 30.12.2023
software assets* required actions in
• Own funds approach event of failure to CRD5
requirements for CCP
CRD5 CRD5 meet capital/leverage • Intermediate Parent
exposures
• Provisions on IRRBB ratio buffer Undertaking (IPU)
(28.12.2020)
requirements requirements
• Remuneration
requirements 01.01.2024
• Revisions to BRRD2
Pillar 2 • MREL application date for
framework resolution and non-
resolution entities
Q2 2020 Q2 2022 Q2 2024
CRD6/CRR3 CRD6/CRR3 CRD6/CRR3
Expected European Predicted adoption of Predicted
Commission Proposal legislative package implementation of
legislative package
*This is a contingent timeframe: 12 months after entry into force of CRR2 the EBA is required to submit a regulatory technical standard on the subject, and the exemption will apply 12 months after the entry into force of that RTS, which is
contingent on Commission approving and adopting those standards. This process takes 3-12 months. 8
*Estimated date: FRTB reporting requirements for the IMA are due to apply 3 years after entry into force of RTS on liquidity horizons for the IMA, RTS non-modellable risk-factors in the IMA and RTS on P&L attribution (due to be submitted
by the EBA by 28.03.2020). As above, it is contingent on the Commission adopting those standards, which can take 3-12 months.
Basel III – Timing of CRD6/CRR3 implementation
The Commission is due to publish a legislative proposal in Q2 2020. If 2020 2021 2022 2023 2024 2025
proposed at that date, we expect a CRD6/CRR3 legislative package
implementing the finalised Basel III to take a minimum of two years to
Proposal Final rules
negotiate, based on the precedent set by CRR2 and the original CRR in force
negotiations.
2020 2021 2022 2023 2024 2025
Thereafter, CRD6/CRR3 is then likely to take one to two years to implement Final rules Rules apply to EU banks
in the EU. Two years was the standard implementation period included for in force
most components of CRR2.
Based on an optimistic assumption around the speed of EU political
negotiations and Level 2 rulemaking by the EBA before implementation, 2020 2021 2022 2023 2024 2025
this means that the EU is likely to miss the BCBS 1 January 2022
implementation target by one-to-two years.
Proposal Final rules Rules apply to EU banks
in force
This will add cost and complexity for firms which operate across multiple
jurisdictions, with some other jurisdictions set to implement the reforms
BCBS 1 January 2022
on time. implementation target
9
Basel III – Impact of CRD6/CRR3
The EBA’s quantitative impact assessment in response to the Commission’s call for advice projected a significant capital uplift for EU banks (24%
on average), with large banks set to be particularly affected
% change in T1 MRC for EU banks, by bank size
27,2
23,6 24,1 23
% change
11,3
5,5
All banks Large of which: G-SIIs of which: O-SIIs Medium Small
Total capital shortfall vs CET1 shortfall
124.8
124,8 123,8
83
EUR (bn)
83 82,9
EUR (bn)
75,3
48.4
46,8 32.5
41,1
32,2
0,9 0,1 0,1 0
Estimated total capital Estimated shortfall for all Estimated CET1 shortfall Estimated CET1 shortfall
All banks Large of which: G- of which: O- Medium Small shortfall for all EU banks EU banks if profits for all EU banks for all EU banks if profits
SIIs SIIs retained over transition retained over transition
period period
Estimated total capital shortfall Estimated CET1 shortfall
Sources: EBA 2018-Q2 quantitative impact study (QIS) data and EBA calculations. Based on a sample of 189 banks, The NB: above figure calculated using the EBA’s December 2019 report on the assumption that institutions start to retain profits
sample does not include any UK banks from the first date of the phase-in period (i.e.2022). 10Basel III – Key questions with CRD6/CRR3
Timing of Faithfulness of
implementation implementation
European policymakers have repeatedly stated their intention to A direct implementation of the BCBS standards is projected to have a
implement the Basel III revisions on time, but there are growing significant impact on European banks, and some stakeholders advocate
doubts over whether it will be possible for the EU to implement, materially deviating from the internationally agreed framework in order to
or even finalise, the rules before the 1.1.2022 BCBS deadline mitigate against this. Policymakers will face particular pressure to modify
the reforms to take into account EU-specific structural market
characteristics. The calibration of the standardised output floor is at the
centre of these debates
Fragmentation in the EU banking market Pillar 2 trade-offs
Proportionality
It is uncertain whether policymakers will To offset some of the impact on
There is ongoing debate as to use CRD6/CRR3 to attempt to remove banks’ overall capital requirements,
whether it is appropriate for the EU to barriers to consolidation in the EU banking we may see supervisors eventually
apply the full BCBS bank capital market. Attempts to allow home reduce Pillar 2 capital requirements
framework to all banks, or whether a supervisors to waive sub-consolidated where risks become covered by
more proportionate or tiered capital and liquidity requirements for Pillar 1. EU policymakers face
approach to implementation should Eurozone subsidiaries of Eurozone parent industry pressure to clarify and
be pursued entities have failed in the past due to commit to an approach to such a
fierce political opposition trade-off
11Basel III – Banking Association response
If implemented as proposed, Basel III will make capital requirements less risk sensitive
The Copenhagen Economics paper (published in November 2019, on behalf of EBF and EU country banking associations) analyses the impact
of Basel III on the banking sector. The paper concludes that the final Basel III rules are not in line with the three key principles that the G20
provided as guidance for implementation at a global level:
• Support better alignment of risk assessments. EU banks’ internal risk models capture risks reasonably accurately so the output floor
would be expected to widen gaps between probable future losses and capital requirements. Capital requirements will increase the most
for banks with the lowest historical losses.
• Should not lead to a significant increase in capital requirements. EU banks are estimated to see a 24% increase, equivalent to EUR
91 bn. core equity. Additional capital is needed to maintain current rates, up to EUR 300-400 bn.
• Aim for a level playing field at global level. The 24% EU capital ratios increase compares to unchanged average capital requirements
in the US. There is no evidence for the need of a substantial increase in risk weights for the many EU banks that use internal models.
The paper sets out several alternatives for the EBA to Increase in capital requirements with different options of implementation
consider which would have the effect of a lower capital Increase in CET1 requirement
increase:
Mitigating effect from options
• “EBA options” to avoid broad-based increase in capital
1-2 %
requirements - including maintaining the SME supporting 6%
2-4 %
8-9 %
factor, excluding the historical loss component, keeping the
CVA exemptions, including the 2019 revisions to the FRTB 14-18 %
• Recalibration of EU banking system buffers - removal of 24 %
the SRB among others 19 %
23 % 22 %
16 %
• Adjusted treatment of unrated corporates
10–6%
• “Back-stop” approach i.e. output floor should apply as a
separate requirement only including capital buffers from
Overall Removal Unrated Backstop All options
the original Basel III package. increase
EBA options
of the SRB corporates approach included 12Basel III – Implementation considerations
The effort to implement Basel III reforms and IRB within it is similar in magnitude to
the move to Basel II.
Areas of focus will vary according to the maturity of current calculation and reporting infrastructure.
Components of programme with % split of effort
Data & Core Systems Analytical Models Calculations & Reporting Regulatory Engagement
Bank 1 65% 15% 15% 5%
Bank 2 40% 25% 20% 15%
Bank 3 50% 20% 20% 10%
Bank 4 60% 15% 20% 5%
Bank 5 60% 15% 15% 10%
Programme planning Data & Core Systems Analytical Models Calculations & Reporting Regulatory Engagement
• What elements of the • For new Real Estate exposure • Where there are new floors • Do you calculate a • At what point should regulators
programme will class, can you identify (e.g., PD floors, LGD floors), Standardised RWA for all be engaged, and how should
substantially drive the Residential vs Commercial? How will these be implemented in exposures across all portfolios? this engagement be managed?
timeline? What are the would ‘Value at Origination’ data models directly, or will these Where are the gaps and how
• How do you manage regulatory
key dependencies? be sourced for Retail Mortgages? implemented as constraints in much effort will it take to close
discussions to differentiate IRB
the downstream calculation? those gaps? How will
• How will uncertainty • To what extent should approval and Basel III
compliance with the phased-in
over the regulatory investments be made in implementation?
floor be monitored?
divergence in final strategic solutions vs tactical
standards and timing calculations? • Where will the Standardised
be managed? calculations be performed and
results stored for comparison
with IRB outputs?
13Appendix: Basel III – CRR Level 2
Mandates
14Basel III – Timeline of level 2 mandates
Entry into 1 year after 2 years after 3 years after 4 years after 5 years after
force entry into
(27.06.2019)
2020 entry into 2021 entry into
2022 entry into 2023 entry into
2024 force
Q3 Q4 Q1 Q2
force
Q3 Q4 Q1 Q2
force
Q3 Q4 Q1 Q2 force Q3 Q4 Q1 Q2 force Q3 Q4 Q1 Q2
Q4 2019 – Q1 2020 By end-Q1 2020 By end-Q2 2021 By end-Q4 2021 By end-Q4 By end-Q2 By end-Q2 2024
By end-Q2 2020
CRR2: CRR2: By end-Q4 2020 CRR2 CRR2 2022 2023 CRR2
CRR2
• FRTB – Delegated Act • FRTB – RTS on CRR2 • Reporting requirements – • Large exposures – CRR2 CRD5 • FTRB – Guidelines over
• Own funds and eligible liabilities
operationalising liquidity horizons • Prudential consolidation ITS on uniform reporting RTS on criteria for • Large • Guidelines reclassification of a trading
– RTS on exemption from
reporting requirements for the IMA – RTS on conditions in templates for market risk identification of exposures – accompanying book position as a non-trading
reductions of prudently valued
(31.12.19) • FRTB – RTS on which prudential • Reporting requirements – shadow banking RTS on report on book position or vice versa
software assets
• SA-CCR – RTS on non-modellable consolidation can be ITS accompanying report entities connected variable • FRTB – RTS on supervisory
• Liquidity – ITS on liquidity
calculation of risk risk factors in carried out (31.12.20) on cost and benefits of •Large exposures – clients elements of assessment of extensions and
reporting (additional liquidity
position (supervisory IMA • Large exposures – RTS reporting requirements Guidelines specifying remuneration changes to the use of IMA
monitoring metrics)
delta), and mapping • FRTB – RTS on on how to calculate the • FRTB – RTS on definition exceptional • FRTB – RTS on assessment
• Reporting requirements – ITS on
transactions to risk change in value of exposures of emerging market and circumstances under methodology for institutional
uniform reporting templates for
categories portfolio value arising from derivatives advanced economies which exposures limits compliance
SMEs (30.06.2020)
• Capital requirements for and P&L contracts • FRTB – RTS on the may be breached • FRTB – RTS on use of internal
• ITS on reporting for market risk
credit risk – RTS on attribution • Large exposures– residual risk add-on, and •Pillar 2 – Guidelines models for purpose of
and leverage ratio reporting,
conditions that the EBA CRD5 Guidelines clarifying what constitutes an exotic on common calculating own funds
including additional reporting to
is to take into account • Prudential substitution approach underlying procedures and requirements
address SFT leverage ratio
when assessing supervision - • MREL– RTS on indirect • FRTB – RTS on jump-to- methodologies for the • FRTB – RTS on extraordinary
‘window dressing’
appropriateness of LGD Guidelines on funding of liabilities default amounts for SREP and stress circumstances for being
• Large exposures – ITS on
values exposures to instruments and different types of testing (revised) permitted to limit the back
supervisory reporting
• Capital requirements for which authorities permission to reduce instruments CRD5 testing add-on
credit risk – RTS on can apply eligible liabilities • Disclosure – ITS on • Remuneration – • NSFR – Delegated Act
CRD5
exposures secured by systemic risk instruments disclosure of ESG risks Guidelines on data amending list of products and
• Interest rate risk – RTS on
mortgages on buffer • IRRBB – ITS on IRRBB CRD5 collection of high services requiring stable
standardised methodology for
immovable property disclosure requirements • Prudential supervision – earners, and funding
evaluating interest rate risks
• Liquidity – RTS on • Disclosure – ITS on RTS on specification of the benchmarking of
(plus alternative for SMEs)
currencies with indicators of global six supervisory shock remuneration practices
• Interest rate risk – RTS on
constraints on the systemic importance scenarios in order to
supervisory shock scenarios,
availability of liquid BRRD2 calculate changes in the
common modelling and
assets • RTS on ability to use economic value of equity
parametric assumptions and
• Disclosure – ITS on contractual term • Remuneration –
what constitutes a large decline
uniform disclosure determining liability Guidelines on sound
• Prudential Supervision –
formats subject to conversion or remuneration policies and
Guidelines on the application of a
CRD5 write-down proportionality of gender
systemic risk buffer (30.06.2020)
• Guidelines specifying • RTS/ITS defining pay, internal governance No specific date attached:
• Remuneration – RTS on
modalities of cooperation contents of contractual and assessment of the CRR2
identifying staff whose activities
and information term recognising suitability of the members • Large exposures – Implementing Act on definition of an institution for large exposure purposes
have a material impact on firm’s
exchange between resolution stay powers of the MB and KFH • Liquidity reporting – ITS on additional liquidity monitoring metrics (Q1-Q4 2020)
risk profile
authorities (01.01.2020) • ITS on MREL decisions • Disclosure – Guidelines on materiality in relation to disclosure requirements
BRRD2
• MREL - ITS on MREL/TLAC reporting to the EBA • Disclosure – Guidelines on how to apply proprietary and confidentiality in relation to disclosure requirements
reporting • MREL– RTS on • Development of an electronic compliance tool aimed at facilitating institutions’ compliance with the regulation
• MREL - ITS on MREL/TLAC Pillar 3 methodology used to • TLAC – RTS on definition of “sustainable for the income capacity of the institution”
disclosure estimate buffer • Credit risk – Development of risk-weighted exposure amounts of CIUs
requirements CRD5
By end-Q3 2020 •MREL– RTS to further • Requirements for access to the activity of credit institutions – Guidelines on common assessment methodology for gaining
CRR2 specify methods for authorisations for competent authorities
• FRTB – RTS on own funds applying MREL to • Prudential supervision – Guidelines on inclusion of ESG risks in supervisory review and evaluation processes
requirements for market risk for resolution and non-
non-trading book positions resolution entities
subject to FX or commodity risk
• FRTB – Guidelines specifying
criteria for use of data inputs in
risk management model
• FRTB – RTS on a stress scenario
risk measure for non-modellable
risk-factors under the IMA
•FRTB – RTS on estimating default
probabilities and LGD under the NB: analysis of the Level 2 mandates in the package relies on the assumption that the EBA will combine multiplele mandates, which have the same subject matter and deadline,
IMA into consolidated publications. This is therefore subject to change.Basel III – Reviews and reports
• The RRM also contains mandates for a number of reviews and reports, to be published by the Commission and the EBA,
on elements of the EU prudential framework. While these will not affect the implementation of this legislative package, they
will influence the calibration of the EU’s future prudential legislative framework.
CRR2
• Commission to review Member State extensions of the application of national provisions in response to macroprudential or systemic risks every two
years after the first extension
• EBA report on whether a dedicated prudential treatment of exposures related to environmental and/or social objectives would be justified, by 27 June
2025 (may be followed by legislative proposal)
• Commission review of the macroprudential framework by 30 June 2022 and every 5 years thereafter. To be followed by a report to the EP and Council
by 31 December 2022 and every five years thereafter (may be followed by a legislative proposal)
• Commission review of cross-default provisions by 27 June 2022 (may be followed by a legislative proposal)
CRD5
• EBA report to EP, Council and Commission on the treatment of third country branches under national law of Member States by 27 June 2021
• Commission review of Intermediate Parent Undertaking (IPU) requirements by 27 December 2026 and report to EP and Council (may be followed by
legislative proposal)
• Commission review of country-by-country reporting and disclosure requirements by 1 January 2021 and report to the EP and Council by 30 June 2021
(may be followed by legislative proposal)
• EBA report to the Commission, EP and Council on its findings concerning the potential inclusion of ESG risks into the SREP by 27 June 2021
• Commission review and report on the implementation and application of supervisory powers referred to in Article 104(1)(j)-(l) (additional or more
frequent reporting requirements, including reporting on capital and liquidity positions; specific liquidity requirements, including restrictions on
maturity mismatches between assets and liabilities; additional disclosures) by 31 December 2023
© 2019 Deloitte LLP. Private and confidential. Basel III workshop 16IBOR replacement – guidance from the Danish FSA Torben Winther, Partner Financial Risk, January 2020
IBOR replacement overview status and recap
Alternative Reference Rates / Risk Free Rates (RFR)
• LIBOR rates are expected to stop quotation end of 2021
• EURIBOR/EONIA is expected to be phased out simultaneously
• No clear cut-over date for CIBOR and STIBOR
Currency IBOR New RFR Feature
name
USD LIBOR (USD) SOFR O/N – Secured
EUR EURIBOR / EONIA ESTR O/N – Unsecured
GBP LIBOR (GBP) SONIA O/N - Unsecured
CHF LIBOR (GBP) SARON O/N – Secured
SEK STIBOR TBD O/N - Unsecured
DKK* CIBOR TBD O/N - Unsecured
* No official requirement to replace as not deemed ‘critical’ benchmark rate
© 2019 Deloitte LLP. Private and confidential. Basel III workshop 18Approaches from leading European regulators
Dear CEO letter (issued to the Board of Directors)
• UK regulator (FCA) – Sep 2018
• Assessment of key risks
• How are these mitigated
• Who is in charge
• European regulator (ECB) – Jul 2019
• Assessment of key risks
• Detailed plan to mitigate these risks
• Pricing issues between front- and
middle office
• Changes to pricing- and risk models
• Who is in charge
© 2019 Deloitte LLP. Private and confidential. Basel III workshop 19The Danish FSA (‘Finanstilsynet’) is following the example of its peers
Memo released on 21 November 2019
Instruments affected in Denmark
• Derivatives (IRS/CCY)
• Capital Markets issues (FRN’s)
• Lending (Banks and Investors)
• Danish Mortgage Bonds (issuers and investors)
Highlighted risks
• Financial risks
• Changes RFR’s means changes to cashflows
• Timing issues between different instruments
• Operational risks
• Legacy systems’ ability to handle new RFR’s
• Model and pricing risk
• Re-papering
• Conduct risks
• Fallback clauses (can limit re-papering)
• Client interaction
© 2019 Deloitte LLP. Private and confidential. Basel III workshop 20Deloitte’s experience and lessons learned
Key observations
• Financial exposures continue to grow…
Due to
• Insufficient liquidity in Risk Free Rates (RFR) products,
especially term structure rates
• Ineffective industry action
Leading to:
• Risk model changes can be material and regulatory
approval needs to be factored into project timelines
• Operational readiness and compliance requirements
not appropriately identified
• Frontline staff lack of awareness =>
• Conduct risks not appropriately managed, e.g fund
managers reference to a benchmark
In Denmark, above observations are amplified by the
lack of key deadlines for CIBOR replacement
© 2019 Deloitte LLP. Private and confidential. Basel III workshop 21If you want to know more Visit Deloitte’s IBOR reform home page: https://www2.deloitte.com/content/campaigns/uk/ibor/ibor/ibor-reform.html © 2019 Deloitte LLP. Private and confidential. Basel III workshop 22
The evolving regulatory agenda for Sustainable Finance January 2020
The evolving regulatory agenda for Sustainable Finance*
2016 – end-2019: regulators acknowledge climate change as a potential systemic risk
Dec 2017 March 2018 Apr 2019 June 2019 June 2019 Oct 2019 Dec 2019 End 2019
Nov 2016
Network of Sustainable NGFS: First TEG Report Updated Consultation on EU aiming for Delegated Acts on under
Paris
Central Banks Finance Comprehensive on EU Green guidelines on Implementing the conclusion of MiFID 2 on integrating
Agreement:
and Supervisors Action Plan Report: A call Bond non financial Final Basel III negotiations on ESG considerations &
entered into
for Greening the adopted by for action and Standard reporting reforms in the EU Taxonomy Regulation. preferences into
force
Financial System EC Technical (aligning (CRD 6/CRR 3) – investment advice and
(NGFS) launched Supplement to these with including measures Low Carbon portfolio management,
the First Report the TCFD) for integrating ESG Benchmarks and sustainability risks
risks into prudential Regulation enters into and factors, expected to
regulation force be adopted by the EC and
subsequently subject to
Disclosures Regulation scrutiny
enters into force
2016
2017
2019
2018
April 2019 June 2019 June 2019 Sept 2019 Dec 2019
Technical Consultation Opinion on Staff EBA Action
on Draft sustainability Discussion Plan on
advice to the
Guidelines within Paper Sustainable
EC on
on loan Solvency II Protection Finance
integrating
origination (following gap for
sustainability consultation
and natural
risks in IDD paper) catastrophes
monitoring
and Solvency Dec 2019
II Nordic Position Dec 2019
Paper on ESMA report on
Insurance for a short termism
Sustainable and EBA
Society response to call
for advice on
short termism
June 2017 October 2017 Sept 2019
October Jan 2019 Nov 2019 Dec 2019
Final Report Waterproof? An Principles for
2018 Sustainability Consultation: Report ”20 Dec 2019
Taskforce on exploration of Responsible
Energy risks and Integration of Anbefalinger” Klimaforandrin
Climate-related climate-related Banking
transition risk goals in the Climate- from the ger og
Financial risks for the stress test for financial Related Risks Forum for bæredygtig
Disclosure Dutch financial the financial sector into Bank’s Bæredygtig finansiering i
(TCFD) sector system Risk Finans den finansielle
Management sektor
24
(*) Primarily covering EBA and EIOPA regulatory mandatesThe evolving regulatory agenda for Sustainable Finance*
2020+: regulatory initiatives are expected to crystallise at pace across Europe
Apr 2020 By Q2 2020 June 2020 Summer 2020 End 2020 Q1 2021 Mar 2021 Q2 2021 June 2021 From June From Dec
Guide on Consultation CRD 6 /CRR Handbook on Review of Results of Study Disclosures 1st decision Assess the 2022 2022
scenario for the new 3 (expected) climate and NFRD on the development Regulation on criteria for need to Large listed Investment
analysis EU Green environmental of tools and applies an ecolabel adopt a banks firms to
Finance risk mechanisms for for financial legislative required to disclose
Strategy management the integration of services proposal on disclose ESG information
for firms and ESG risks into risk sustainable risks under on ESG risks
supervisory management, corporate CRR2/CRD5 under IFR
authorities business strategies, governance
investment policies
and prudential
supervision
2020
2022
2021
Q2-Q3 2020 By Q3 2020 H2 2020 By June By Dec 2021 2021 2022-2024 2022-2024 By 28 June
June 2020 Possible Discussion
Discussion Six draft Sensitivity 2021 EBA: Reports Final draft 2025
Submit ITS update of paper on
paper on Regulatory analysis for Report on on: RTS on Report under
to EC on relevant classification
management Technical climate risks for inclusion of a) inclusion of pillar 3 ESG CRR2 on
Pillar 3 ESG Guidelines/ne and
of ESG risks Standards sample of ESG activities ESG activities disclosures potential
disclosure w guidelines prudential
into SREP concerning volunteering into SREP for in SREP for dedicated
requirements on treatment of
process disclosure of a banks banks under investment prudential
(following incorporation assets from a
under CRR statement on the CRD5. firms under IFD treatment of
consultation of ESG into sustainability
2/CRD 5 due diligence Guidance on b) whether exposures
paper) risk perspective
policy in respect stress testing dedicated related to
of the adverse prudential management (under CRR 2) ESG
2020
impact of treatment of and objectives
Potential climate
investment assets exposed supervision, (may be
risk sensitivity
decisions on to activities including followed by
analysis for the
sustainability associated stress testing legislative
insurance sector.
indicators and substantially (timing & proposal)
product-specific with ESG nature to be
disclosure. objectives is determined
Q1 2020 November justified under by June
Jan 2020 2020
High Level IFR 2021 report).
‘The green swan UN Climate
Guidelines for By Dec 2020
- Central banking Change
Banks on the Stress Tests for
and financial Conference
application of banks &
stability in the (COP26)
the EU insurers
age of climate
Taxonomy
change 25
(*) Primarily covering EBA and EIOPA regulatory mandatesThe evolving regulatory agenda - Focus on the Banking Sector
Significant regulatory activity over the next few years
EBA Action Plan, published in December 2019, sets out the
objectives of the EBA’s work on sustainable finance over the
coming years.
Includes improving the regulatory framework so that “institutions
can foster their operations in a sustainable manner and introduce
sustainability considerations in institutions’ strategy and risk
management”.
EBA have categorized their mandates (in order of sequential
treatment):
• Strategy and risk management
• Key metrics and disclosure
• Stress testing and scenario analysis; and
• Prudential treatment
Notwithstanding the regulatory timeline, banks are recommended
to pro-actively introduce sustainability considerations into
their strategy and risk management, prioritize the
identification of simple metrics to provide transparency on
climate change related risks as well start using scenario testing
to better explore and understand their exposure to physical and
transition risk
26The evolving regulatory agenda – focus on the insurance sector
Strong focus on practical implementation of the regulatory framework as part of
Solvency II review will continue
EIOPA Opinion on Sustainability and Solvency II, published in September 2019, concluded that Solvency II is able to accommodate
sustainability risks and factors – as it is a risk-based, forward-looking and market-consistent framework
However there are considerable challenges related to managing risks related to climate change, not least the Time
horizon over which risks emerge vs 1-year Solvency horizon, Non-life underwriting period vs emergence of claims
EIOPA recommends that companies start to implement measures linked with climate change-related risks, especially where these
have a substantial impact to their business strategy. The importance of using scenario analysis as part of Pillar II (ORSA) is
highlighted as a result.
In line with the Solvency II review during 2020, EIOPA will engage in for example:
• Analyses regarding the treatment of natural catastrophes and “protection gap”
• Sensitivity analysis exercise for climate-related risks during 2020(*)
View from Nordic insurance associations (including Insurance and Pension Denmark): Position paper on Insurance for a Sustainable
Society, published in December 2019:
• Supports Solvency II as a risk based system that can encompass climate change-related risks
• But highlights the need for clear rules, a good objective taxonomy and high quality data
• Raises the impact of climate change-related risks on the ability to access affordable insurance in the future
• Strongly support the implementation of the TCFD recommendations in the areas of data gathering and reporting as being
fundamental to the assessment and pricing of risk
27
(*) To be carried out in conjunction with 2 Degree Investing InitiativeThe evolving regulatory agenda – developments in Denmark
Supervisory expectations and requirements
DK FSA published a note* covering the potential impact of financial risks due to climate
change and expectations for the financial sector’s preparations to take account of these
risks.
‘
In addition, in the annual “julebrev” DK FSA requires life and non-life insurance Governance / Frameworks
companies to provide by 1 July 2020 a statement from their Board setting out their
considerations and actions on financial risks caused by climate changes.
DK FSA expectations are that financial risks due to climate change are managed in line Strategy and risk appetite
with existing good governance and risk management frameworks. This means, for
example:
• In the absence of common definitions and rules, international frameworks are used for
identifying and assessing risks, such as set out by the TCFD
Risk identification and
• Financial risks due to climate change are considered in the setting of the firm’s risk appetite evaluation
(“øvrige ricisi”)
• Scenario analysis or stress testing of these risks is carried to analyse the short and long term
impact on the business model (physical and transition risks)
• Appropriate processes and controls need to be put place to manage the risks, particularly if the Measurement and monitoring
potential effect is significant
• Additional information needs to be collected on companies that financial institutions finance or
invest in
• For insurance companies, these risks are an integrated part of the ORSA so that the Board can
discuss, challenge and take decisions relating to these risks
• Firms improve the quality of risk assessment and management of financial risks due to climate 28
change, in line with the FSA stepping up its supervisory activities (*) Klimaforandringer og bæredygtig finansiering i den finansielle sektor, December 2019The evolving regulatory agenda – The Task Force on Climate-related Financial
Disclosures (TCFD)
The TCFD Final Report recommended that climate-related risk assessment and disclosures
should focus on four core components:
29The evolving regulatory agenda – The Task Force on Climate-related Financial
Disclosures (TCFD)
Policy and Legal
Resource Efficiency
Technology
Transition Energy Source
Market
Risks Opportunities Products/Services
Reputation
Markets
Acute
Physical Resilience
Assessment of and Response to
Chronic Climate-related
Risks and Opportunities
Financial Impact
Revenues Asset Valuation
Balance
Income Statement
Sheet
Expenditures Cost of Financing
30DAC6 • January 2020
DAC6
Overview
• The EU Council Directive 2018/822 (DAC6) amends the existing Council Directive 2011/16/EU.
• DAC6 imposes the obligation to disclose reportable cross-border arrangements (RCBAs) on EU intermediaries.
• The goal of the implementation of the DAC6 is to provide the tax authorities of EU member states with information to enable them to
Regulations promptly react against harmful tax practices and to close loopholes through enacting legislation or by undertaking adequate risk
assessments and carrying out tax audits.
• Expected minimum fines for financial institutions: 50,000 – 400,000 DKK (depending on turnover) per missed reporting!
• Legislation and implementation will vary across EU countries, so close monitoring is needed if activity in more jurisdictions.
• 21 June 2017: Publication of proposed rules
• 25 May 2018: Adoption by the EU Council
• 5 June 2018: Publication in Official Journal of the EU
• 25 June 2018: Date of entry into force (Note: All RCBAs implemented after that date are in scope for reporting under the DAC6)
Timeline
• 31 December 2019: EU member states to adopt and publish laws, regulations and administrative provisions
• 1 July 2020: Date of application. 30 days reporting deadlines now apply!
• 31 August 2020: Reporting of RCBAs of which the first step is implemented between 25 June 2018 and 1 July 2020
• 31 October 2020: First exchange of information reported between 1 July and 30 September 2020Hallmarks
A. Generic hallmarks
1. Confidentiality
2. Fee fixed by reference to a tax advantage
3. Substantially standardised documentation
Main benefit test
B. Specific hallmarks
1. Acquisition of a loss making company
2. Conversion of income into lower taxed or exempt categories of income (capital, gifts, lower level taxation)
3. Circular transactions
Cross-border arrangements
Reporting obligation
C. Specific hallmarks related to cross-border transactions
1. Deductible cross-border payments between associated enterprises, and
b) i) the tax jurisdiction of the recipient does not impose any tax (or at the rate of almost zero), or
c) the payment in the jurisdiction of the recipient is exempt from tax, or
d) payment benefits from a preferential tax regime in the jurisdiction of the recipient
C. Specific hallmarks related to cross-border transactions
1. Deductible payments between associated enterprises, and
a) the recipient is not resident in any tax jurisdiction, or
b) ii) the jurisdiction of the recipient is included in a list of non-cooperative states
2. Deduction for the same depreciation in more than one jurisdiction
3. Relief from double taxation in respect of the same item of income or capital in more than
one jurisdiction
4. Transfer of assets with material different valuation
D. Specific hallmarks concerning automatic exchange of information and beneficial ownership
E. Specific hallmarks concerning transfer pricing
1. Use of unilateral „safe harbour rules“
2. Transfer of „hard-to-value intangibles“
3. Intragroup transfers that concern more than 50% of the projected annual EBITOverview of the reporting mechanism
The definitions are broad and businesses need to consider who needs to report and which hallmarks may
apply
Cross-border arrangement that falls within at least one of five “hallmarks” that present an
indication of a potential risk of tax avoidance
Any person to whom an RCBA is made
available for implementation, or who is
Reportable cross- ready to implement an RCBA, or who
Intermediary border Relevant taxpayer has implemented the first step of an
arrangement
RCBA
Designs, markets, organises or makes available for In case no EU intermediary is involved
implementation or manages the implementation of (i.e. only non-EU intermediaries or in-
an RCBA (or provides aid, assistance or advice with Associated house arrangements) or is not required
enterprise to perform the reporting the RCBA
respect to such activities)
(due to legal professional privilege), a
From 1 July 2020, reporting must be completed subsidiary reporting obligation exists
within 30 days of the start date of an RCBA. One-off for the relevant taxpayer
reporting by 31 August 2020 in respect of RCBAs
implemented between 25 June 2018 and 30 June
2020
Disclosure of information pertaining to the identity
of intermediaries and relevant taxpayers, together
with details of the RCBA (such as value) and the
“hallmarks” that make the arrangement reportable Tax
Tax authorities
authorities
Information
exchangeImpact for Financial Institutions
Potential double impact for Financial Institutions
Financial
Institution
• A Financial Institution is in scope of DAC6 as an EU Intermediary where it acts
as a promoter or service provider of an RCBA towards relevant EU taxpayers Reportable cross-
Intermediary border Relevant taxpayer
• Focus on services provided. arrangement
• A Financial Institution is in potentially in scope of DAC6 as a relevant taxpayer
Reportable cross- where it implements RCBA’s promoted or provided by advisors, professional
Intermediary border Relevant taxpayer service providers and other Intermediaries
arrangement
• Focus on services received.DAC6 - Example
Hallmark A: Standardised documentation and/or structure
Situation sketch Hallmark
“An arrangement that has substantially standardised documentation and/or structure and is available to
more than one relevant taxpayer without a need to be substantially customised for implementation.”
Subject to main benefit test
Situation
Bank provides an offering to its clients whereby:
• Bank identifies clients that have realised a capital gain over the course of the tax year but are holding
Bank (DK) Client (SE)
securities entailing an unrealised capital loss
• Bank either (a) automatically disposes securities entailing an unrealised capital loss as part of a
discretionary mandate, or (b) advises the client to do so
Year-end disposal of Buying back the securities at
securities entailing unrealised the beginning of the • After year-end, the securities are bought back
capital loss to offset capital following year
gains
What to consider
• Offering must be standardized, i.e. available to multiple clients without a need to be substantially
customised
• Clients must obtain a tax advantage, e.g. by offsetting capital gains against capital losses (only
relevant if the client is taxed on capital gains)
• Only relevant for foreign clientsDAC6 - Example
Corporate Lending
Situation sketch Situation
Bank provides an loan to a client.
Should Bank reasonably be expected to know what loan proceeds will be use for? Probably yes! =
intermediary
Bank may therefore know if loan is part of cross-border arrangement(s) meeting any of the hallmarks. If
so, Bank may have an reporting obligation.
Bank (DK) Client
Use of loan proceeds
What to consider
? • How to collect and evaluate information obtained during lending process from a DAC6 perspective.Practical steps to compliance
IT and systems
• Define reporting ruleset
• Solution to track and report RCBAs
Impact assessment • Internal vs. vendor reporting tool
• Identify potentially affected entities • Interaction with CRM tool and other Governance and
and services/products internal systems controls
• Intermediary vs. relevant taxpayer • Establish governance
view framework
• Map hallmarks to services/products • Define escalation process
• Update new entity/business process • Define and implement
• Decision: implementation vs. controls
discontinuation of services/products • Review implementation
• Interaction with
regulators
Communication and training
• Internal communication plan
• Knowledge management and training
• General communication with clients
Policies and procedures • Client notification about information reported or the
• Define responsibilities fact that they need to report
• Update policies and procedures • Communication with third-party intermediaries,
• Update legal arrangements including reporting coordination
• Drafting of decision trees and rule maps • Update marketing documents
Regulations and guidance
• Monitoring of local regulations and guidance
• Identification of deviations from EU standard
• Lobbying for exclusions
• Adjust implementation and design for local deviationsWho are we? Martin Poulsen Partner, Financial Services Tax Tlf.: +45 30 93 50 40 Email: marpoulsen@deloitte.dk © Deloitte 2019 39
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Deloitte DanmarkTak for i dag Næste event med nyeste opdatering på regulering inden for den finansielle sektor: August/September 2020 Kontakt: Tony Johansen Torben Winther Tom Clifford Nicola O’Reagan Helena Barton Martin Poulsen +45 30 93 46 15 +45 30 93 61 00 +45 30 93 40 31 +45 30 93 42 24 +45 30 93 68 13 +45 30 93 50 40 tjohansen@deloitte.dk twinther@deloitte.dk thclifford@deloitte.dk noreagan@deloitte.dk hbarton@deloitte.dk marpoulsen@deloitte.dk 41
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