CUBE RegNews: 14th November

A selected summary of key developments for regulated financial institutions

Greg Kilminster

Greg Kilminster

Head of Product - Content

HKMA Chief executive speech on banking sector landscape

Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, delivered a keynote speech during the Bloomberg Global Regulatory Forum on 31 October 2023. In his speech, he discussed the market developments affecting the banking sector and the regulatory approach of HKMA in response to these developments.

Yue stressed that HKMA is actively involved in international policy forums and noted that Asia plays a crucial role in international standard-setting and policymaking, given the region’s growing economic and intellectual contributions.

He highlighted key market developments such as virtual assets and sustainable finance and emphasised the importance of establishing a robust regulatory framework. He pointed out that regulation and market development are complementary and can “feed into each other in a virtuous cycle.”

Yue also highlighted the success of Hong Kong and Mainland China’s product offerings, facilitated by “one country, two systems.”

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New appointments to the AFCA board

The Australian Financial Complaints Authority (AFCA) has announced the appointment of two new industry directors, Raylene Bellottie and Yien Hong, effective from 1 January 2024. They will replace the current board members Claire Mackay and Andrew Fairley AM, who joined the AFCA board in May 2018 and July 2018, respectively.

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Fed vice-chair discusses supervision and regulatory proposals

In a speech given at the Committee on Banking, Housing, and Urban Affairs on 14 November 2023, Michael S Barr, Vice Chair for Supervision Board of Governors of the Federal Reserve System, discussed the current conditions in the banking sector and upcoming improvements in supervision and regulatory framework. He highlighted that while the banking system is currently stable and strong, we should acknowledge the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank that occurred earlier this year.

To address identified vulnerabilities and adapt to changing conditions, Barr emphasised the need for the Federal Reserve to intensify supervision at the right pace, addressing material risks presented by the current economic environment and the rapid pace of innovation.

This included:

  • conducting targeted reviews at banks exhibiting higher interest rate and liquidity risk profiles;
  • providing focused training and outreach on supervisory expectations about these risks;
  • monitoring for potential credit deterioration, particularly within the consumer and CRE lending segments; and
  • implementing a new novel bank supervision program to improve oversight of banks engaged in non-traditional financial technology-related activities.

Barr emphasised the significance of ongoing reforms to ensure a robust regulatory framework for resilience., highlighting the following:

  • The proposal for reformation of the capital requirement framework, published in July 2023, introducing a standardised, risk-based measure of credit risk, operational risk, and more detailed methods for measuring market risk.
  • The long-term debt proposal issued in August 2023 which intends to extend the long-term debt and resolution planning requirements to more large banks.
  • The recently finalised rule issued in October 2023 implementing the Community Reinvestment Act (CRA), supporting minority depository institutions and community development financial institutions, along with adapting the rule to mobile and online banking.

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Gensler touches on reforms in treasury markets

In a recent speech at the Securities Industry and Financial Markets Association Securities and Exchange Commission (SEC) chair Gary Gensler provided a comprehensive overview of the current state of the Treasury markets and outlined some key initiatives and reforms. 

The speech outlined four key initiatives aimed at addressing challenges in the Treasury markets: 

Registration of dealers: 

  • Proposed SEC rules to define and register government securities dealers, extending regulatory oversight to market participants acting as de facto market makers. 

Registration of trading platforms: 

  • Proposed rules requiring platforms providing marketplaces for Treasuries to register as broker-dealers and comply with Regulation ATS, addressing regulatory gaps. 

Central clearing: 

  • Proposed rules to enhance central clearing, addressing historical recommendations and broadening the scope of transactions required to be brought into central clearing. The proposal would also would require clearinghouses to ensure that their members clear all of their repo transactions, both sides of any cash trades executed on an IDB platform, and certain additional cash transactions. 

Data collection: 

  • Gensler reminded the audience that in May 2023, the SEC finalised a rule requiring large hedge fund and private equity fund advisers to make current reports on certain events to the Commission; that in July the SEC adopted rules with regard to money markets, including amendments to Form N-MFP that will provide more granular information about money market fund activity, and that there is a current joint consultation with the CFTC regarding Form PF updates. 

Gensler hinted at more change to come noting: “we can’t stop our focus on reforms to bring greater efficiency and resiliency to the highly consequential Treasury markets. I’m encouraged by the multi-agency collaboration to reform these markets for the 2020s.” 

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SFC issues IPO circular

The Securities and Futures Commission (SFC) has issued a circular to licenced corporations (LCs) regarding the prudent management of risks associated with providing initial public offering (IPO) subscription services, especially in light of the upcoming launch of the Fast Interface for New Issuance (FINI) by Hong Kong Exchanges and Clearing Limited HKEX on 22 November 2023. 

The key points of the circular are as follows 

FINI launch and pre-funding modification: 

  • HKEX will launch FINI to streamline and digitalise the IPO settlement process. 
  • Modification to the pre-funding mechanism for public offer tranches will occur under FINI. 

Prudent risk management and controls: 

  • LCs are reminded to exercise prudent risk management when offering IPO subscription and financing services. 
  • Effective measures should be implemented to prevent improper risk-taking activities, such as accepting large subscription orders without sufficient upfront deposits or providing excessive IPO financing. 

Prudent credit risk management: 

  • Ensure clients have sufficient financial resources for IPO settlement. 
  • Implement upfront subscription deposit requirements where appropriate. 
  • Formulate a prudent credit policy, set credit limits, and justify deviations with written risk assessments. 

Liquidity risk management: 

  • Secure sufficient cash or credit facilities for IPO settlement. 
  • Ensure house money or credit facilities cover clients whose allotted shares exceed subscription deposits. 
  • Safeguard clients’ subscription deposits in segregated bank accounts. 

Financial risk management: 

  • Avoid excessive bank borrowings and financing beyond the firm’s capacity. 
  • Properly account for assets and liabilities in the IPO subscription cycle. 
  • Assess the impact of IPO financing on liquid capital position per Securities and Futures (Financial Resources) Rules (FRR). 

Responsibility of senior management: 

  • Senior management of LCs bear primary responsibility for proper risk management. 
  • Implementation of risk management policies and control procedures is crucial. 

Click here to read the full RegInsight on CUBE’s RegPlatform