Eva Dauberton
News Editor
FCA and PRA release quarterly mortgage lending statistics
The Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) have jointly published the quarterly mortgage lending statistics. The commentary does not include recommendations, but it does provide data from Q2 2022 that firms might find useful.
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FINRA podcast dives into newly implemented amendments to Margin Rule 4210
During a recent podcast hosted by the Financial Industry Regulatory Authority (FINRA), David Aman and James Barry, Senior Advisor and Director of Credit Regulation at FINRA’s Office of Financial and Operational Risk Policy, along with Mike MacPherson, a Senior Advisor with FINRA Member Supervision’s Risk monitoring team, engaged in an insightful discussion about the newly implemented amendments to FINRA’s Margin Rule 4210 on Covered Agency Transactions. They discussed the purpose of the rule, its impact on firms, and the considerations firms need to keep in mind to ensure compliance.
To provide some context, FINRA rule 4210 primarily sets maintenance margin requirements for all securities positions and transactions. The recently effective amendments underwent a refinement process that lasted nearly seven years. The SEC approved the final amendments on 27 July 2023, and the rule came into effect on 22 May 2024.
The amendments include:
- The elimination of the two per cent maintenance margin requirement for Covered Agency Transactions by non-exempt accounts.
- The option for broker-dealers to take a capital charge instead of collecting margin for excess net mark-to-market losses.
- Revisions aimed at streamlining and clarifying the rule language.
The podcast shed some light on the implications of these changes for the industry.
Key takeaways
The participants in the podcast provided helpful insight on the now effective rule, a valuable add-on to FINRA FAQs initially published in January. They acknowledged that many questions remain despite the rule being in the works for almost a decade.
The participants also discussed the reasons behind the amendments and the risks they aim to address. They shared a timeline of how the amendments came about, starting from their initial publication in 2016.
One interesting clarification included ways firms can establish whether they are in scope, mentioning, "The key term for determining whether you’re subject to this rule is the term ‘counterparty’.”
They further emphasised that firms cannot ignore the rule, even if they don’t have margin customers, as it applies to their obligations.
They provided pointers on the parties responsible for compliance, acknowledging, again, that it is “not a completely straightforward question,” and the possibility of requesting additional time or an extension to collect margin under certain circumstances.
Regarding the latter, they mentioned that firms that are not normally corresponding clearers but firms acting on their own behalf may not be familiar with filing extensions of time. Member firms that have not previously filed extensions and don’t have anyone within their organisation who is permitted to file an extension of time may also struggle.
Given that various components of this new rule apply to different areas of a firm, the participants reiterated that FINRA is available to assist. They provided an email address (coveredagencymargin@finra.org), mentioned that materials can be found on finra.org/margin, and encouraged firms to contact their Super Account Administrator (SAA).
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OCC issues updated "Retail Nondeposit Investment Products" booklet
The Office of the Comptroller of the Currency (OCC) has issued version 2.0 of the “Retail Nondeposit Investment Products” booklet of the Comptroller’s Handbook. The updated booklet replaces version 1.0, which was issued in January 2015.
Some context
The “Retail Nondeposit Investment Products” booklet discusses the risks and risk management practices related to the recommendation or sale of nondeposit investment products to retail customers. It also provides examiners with a framework for evaluating a bank’s retail non-deposit investment product program.
Key takeaways
As part of the changes, the updated booklet:
- Incorporates significant regulatory changes from the US Securities and Exchange Commission’s (SEC) Regulation Best Interest that may affect banks' securities activities.
- Reflects OCC and interagency issuances published or rescinded since January 2015
- Offers further clarity on sound risk management practices and guidance to examiners.
- Includes minor updates for general clarity.
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OSFI on effective risk governance: where to focus effort
In a speech in Toronto, Ben Gully, the Deputy Superintendent of the Canadian Office of the Superintendent of Financial Institution’s (OSFI) Supervision Sector, discussed the crucial role of effective risk governance within financial institutions and considered where best to focus efforts. His address reminded boards of the need to remain vigilant amidst an increasingly uncertain risk environment.
Reassessing risk governance post-financial crisis
Gully began by reflecting on the progress made in risk governance since the global financial crisis. He said that significant enhancements in transparency, accountability, and regulatory oversight had been achieved since the crisis, but added that recent incidents, such as the collapse of Archegos Capital Management and several financial institution failures in 2023, have prompted a rethink about some of these enhancements and their achievements. Gully emphasised that thee OSFI recognises the central role of boards in maintaining effective risk governance and achieving prudent outcomes.
He turned to three key questions:
- What are the key changes in the risk environment post GFC?
- What are the enduring attributes of an effective board from a prudential perspective?
- Where should boards focus their limited time and efforts?
Shifting risk environment
Gully outlined the changes in the risk environment since the financial crisis. Financial institutions and their boards have become more adept at managing traditional financial risks, including credit, market, and liquidity risks. Enhanced risk management frameworks and a greater focus on organisational culture have been instrumental in this regard. However, new and overlapping risks have emerged, driven by factors such as climate change, digitalisation, demographic shifts, populism, and geopolitical tensions.
He stressed the importance of distinguishing between “risk” and “uncertainty.” While post-crisis reforms addressed measurable and predictable risks with specific management responses, uncertainty involves uncontrollable and unpredictable outcomes. Effective risk governance in such an environment requires adaptability, continuous improvement, and robust scenario analysis.
Enduring attributes of effective boards
Gully provided a helpful “top ten” enduring attributes of effective boards:
- Understanding responsibilities: Effective boards focus on strategy, risk management, and succession planning, rather than day-to-day operations.
- Asking the right questions: They challenge management on strategy and risk issues, holding them accountable for their decisions.
- Guarding against complacency: Identifying weaknesses even during strong financial performance is vital to prevent complacency.
- Avoiding over-reliance on experts: Boards need diverse expertise to challenge subject matter experts appropriately.
- Negating the halo effect: Effective boards critically assess management and peers, avoiding biases from positive impressions or relationships.
- Creating safe and brave spaces: Boards should encourage trust and candid discussions, fostering thought leadership and effective challenges.
- Promoting continuous improvement: An agile mindset and proactive risk management are key to staying ahead of emerging risks.
- Acting on concerns: Boards must respond constructively and swiftly to issues raised by control functions and regulators.
- Being honest with regulators: Open, sceptical communication with regulators is essential for effective oversight.
- Regular self-assessments: Addressing underperformance or skill gaps through periodic assessments is crucial.
These attributes, Gully noted, help boards navigate risk and uncertainty, setting the tone for management in preparing for the future.
Focusing limited time and effort
Gully moved on to identify three key areas where boards should focus their efforts:
- Accountability for risk owners: Clear accountability is critical for prudent risk-taking. Business leaders should own and understand their risk and compliance obligations, avoiding reliance on oversight functions to address gaps. He added that senior management responsibility and individual accountability are key drivers of effective risk management.
- Nurturing culture risk management: A sound culture aligned with risk appetite is fundamental. Compensation structures should incentivise appropriate risk behaviours. Gully noted though that direct accountability and personal consequences within governance structures may be necessary to reinforce this.
- Scaling for complexity: Boards must tailor their oversight to the institution’s size and complexity. Smaller institutions might need to focus on achieving outcomes with limited resources, while larger institutions must manage integration across various units. Clarity on priorities and risks is essential for effective oversight.
In concluding, Gully stressed that there is no time for complacency in effective risk governance. Boards must continuously refresh their approach to address rising uncertainty. This involves moving from static definitions of strength to a mindset of adaptability and resilience. Success, he emphasised, is measured by long-term resilience, not short-term gains.
Click here to read the full RegInsight on CUBE’s RegPlatform