Barclays 2012 Annual Report Download - page 196

The European Market Infrastructure Regulation (EMIR) introduces new
requirements to improve transparency and reduce the risks associated
with the derivatives market. When it enters fully into force, EMIR will
require entities that enter into any form of derivative contract, including
interest rate, foreign exchange, equity, credit and commodity
derivatives, to: report every derivative contract that they enter to a
trade repository; implement new risk management standards,
including operational processes and margining, for all bilateral
over-the-counter derivatives trades that are not cleared by a central
counterparty; and clear, through a central counterparty, over-the-
counter derivatives that are subject to a mandatory clearing obligation.
EMIR has potential operational and financial impacts on the Group,
including collateral requirements. However, not all the implementing
regulation is available and it is not possible at this stage to determine
the full impact.
Proposals to amend the Markets in Financial Instruments Directive
continue to be debated. This will affect many of the investment
markets in which the Group operates and the instruments in which it
trades, and how it transacts with market counterparties and other
customers. These proposals are currently going through the legislative
process and the overall impact on the Group is not yet clear.
United Kingdom
Following the passage of the Financial Services Act 2012 which
amended the structure of regulation and supervision in the UK as
described above, the Government is proposing legislation to take
forward the proposals of the Independent Commission on Banking
(ICB).
On 4 February 2013, the UK Government introduced the Financial
Services (Banking Reform) Bill to the House of Commons. The Bill
would give the UK authorities the powers to implement the key
recommendations of the ICB by requiring, amongst other things: (i) the
separation of the UK and EEA retail banking activities of a UK bank in a
legally distinct, operationally separate and economically independent
entity within the same group (ring fencing) and (ii) the increase of the
loss-absorbing capacity of ring-fenced banks and UK headquartered
global systemically important banks to levels higher than the Basel 3
guidelines. The Bill would also give depositors protected under the
Financial Services Compensation Scheme preference if a bank enters
insolvency. At the same time, the Government announced that it will be
bringing forward amendments to the Bill to establish a reserve power
allowing the regulator, with approval from the Government, to enforce
full separation under certain circumstances. The Bill consists in large
part of enabling provisions, with much of the detail expected to be
contained in secondary legislation. The Government is expected to
publish the draft secondary legislation later this year. The Government
intends that primary and secondary legislation will be in place by the
end of this Parliament (May 2015) and that UK banks will be required to
be compliant by 1 January 2019.
The Parliamentary Commission on Banking Standards was formed in
July 2012. The Commission is appointed by both Houses of Parliament
to consider and report on:
 professional standards and culture of the UK banking sector, taking
account of regulatory and competition investigations into the LIBOR
rate-setting process; and
 lessons to be learned about corporate governance, transparency and
conflicts of interest, and their implications for regulation and for
Government policy and to make recommendations for legislative and
other action.
The recommendations of the Commission are expected in March 2013
and are likely to influence UK Government policy and legislative
proposals, possibly through amendment to the Banking Reform Bill and
its accompanying secondary legislation which will be under debate
through much of 2013.
While the new regulatory structure takes effect on 1 April 2013, the UK
has sought to ‘shadow’ the new regime to the extent possible without
the support of the necessary legislation. The Bank of England has
operated an Interim FPC and the FSA, has since 1 April 2012 been
operating in two distinct and largely autonomous business units
covering prudential and conduct matters respectively. The FPC has
recommended that the FSA should seek to ensure that UK banks hold
greater levels of capital as a means of balancing financial stability with
the desirability of lending to the real economy. Both business units of
the FSA have continued to develop and apply a more intrusive and
assertive approach to supervision and its policy of credible deterrence
in relation to enforcement that has continued to see significant growth
in the size of regulatory fines. In anticipation of international
agreement, the FSA has established and implemented capital and
liquidity requirements that are substantially increased from pre-crisis
levels, and has, together with the Bank of England, proceeded to
establish Recovery and Resolution Planning requirements. In keeping
with the requirements of the FSB, the Group submitted its Recovery
and Resolution Plan by 30 June 2012. The Retail Distribution Review
entered into force on 1 January 2013 and the Mortgage Market Review
will apply from 26 April 2014. These will affect the economics of
investment advice and home finance provision respectively. The FSA,
following consultation, has also begun to take a more interventionist
approach to the design of financial products and to the governance
processes around product design. This approach will be carried
through into the FCA from 1 April 2013.
United States
The DFA became law in July 2010. The full scale of the DFA’s impact on
the Group remains unclear because the rules required to implement
many of the provisions of DFA continue to be subject to rulemaking
and will take effect over several years. In addition, market practices and
structures may change in response to the requirements of the DFA in
ways that are difficult to predict but that could impact Barclays
business. Nonetheless, certain provisions of the DFA are particularly
likely to have an effect on the Group, including:
 Systemic risk: The DFA created the Financial Stability Oversight
Council (FSOC) and empowered it to make recommendations to the
FRB to apply heightened supervisory requirements and prudential
standards applicable to ‘systematically important’ entities and
activities and to work with all primary financial regulatory agencies to
establish regulations, as necessary, to address financial stability
concerns. In December 2012, the FRB issued proposed rules that, if
adopted, would implement the enhanced prudential standards and
early remediation requirements in the DFA with respect to foreign
banking organisations, such as Barclays, and other foreign financial
companies designated by the FSOC as systemically important.
Previously, the FRB had issued proposed rules to implement such
standards and requirements with respect to US bank holding
companies with over $50bn in consolidated assets and other
US financial companies designated by the FSOC as systemically
important. The proposed rules for foreign banking organisations are
broadly consistent with the approach taken in the FRB’s proposed
rules applicable to such US companies.
The specific requirements applicable to foreign banking organisations
under the proposed rules depend on the level of assets of the foreign
banking organisation both inside and outside the United States and
could significantly increase the regulatory costs to such
organisations of operating in the United States, particularly in relation
to non-bank operations. Based on its total US and non-US assets,
Barclays would be subject to the most stringent requirements of the
proposed rules: Barclays would be required to create a US
intermediate holding company (IHC) structure to hold its US banking
and non-banking subsidiaries, and the IHC would be subject to
supervision and regulation by the FRB. While the operations and
assets of Barclays Bank PLC’s US branches would not be required to
be held in the IHC, the branches would be subject to separate
requirements.
barclays.com/annualreport194 I Barclays PLC Annual Report 2012
Risk review
Supervision and regulation continued