Barclays 2014 Annual Report Download - page 123

barclays.com/annualreport Barclays PLC Annual Report 2014 I 121
In the US, the Dodd-Frank Act also mandates that many types of
derivatives that were previously traded in the over-the-counter markets
must be traded on an exchange or swap execution facility and must be
centrally cleared through a regulated clearing house. In addition,
participants in these markets are now made subject to Commodity
Futures Trading Commission (CFTC) and Securities and Exchange
Commission (SEC) regulation and oversight.
It is possible that other additional regulations, and the related expenses
and requirements, will increase the cost of and restrict participation in
the derivative markets, thereby increasing the costs of engaging in
hedging or other transactions and reducing liquidity and the use of the
derivative markets.
Changes in regulation of the derivative markets could adversely affect
the business of the Group and its affiliates in these markets and could
make it more difficult and expensive to conduct hedging and trading
activities, which could in turn reduce the demand for swap dealer and
similar services of the Group and its subsidiaries. In addition, as a result
of these increased costs, the new regulation of the derivative markets
may also result in the Group deciding to reduce its activity in these
markets.
d) Structural reform and bank recovery and resolution
A number of jurisdictions have enacted or are considering legislation
and rulemaking that could have a significant impact on the structure,
business risk and management of the Group and of the financial
services industry more generally. Detailed information on the provisions
set out below can be found in Regulatory Developments paragraphs in
the section on Supervision and Regulation.
Key developments that are relevant to the Group include:
Q The UK Financial Services (Banking Reform) Act 2013 (the Banking
Reform Act), gives UK authorities the power to implement key
recommendations of the Independent Commission on Banking,
including the separation of the UK and EEA retail banking activities of
the largest UK banks into a legally, operationally and economically
separate and independent entity (so-called ‘ring fencing’). It is
expected that banks will have to comply with these ring-fencing
requirements from January 2019;
Q The European Commission structural reform proposals of January
2014 (which are still in discussion) for a directive to implement
recommendations of the EU High Level Expert Group Review (the
Liikanen Review). The directive would apply to EU globally significant
financial institutions;
Q Implementation of the requirement to create a US intermediate
holding company (IHC) structure to hold its US banking and
non-banking subsidiaries, including Barclays Capital Inc., the Group’s
US broker-dealer subsidiary. The IHC will generally be subject to
supervision and regulation, including as to regulatory capital and
stress testing, by the Federal Reserve Bank (FRB) as if it were a US
bank holding company of comparable size. The Group will be
required to form its IHC by 1 July 2016. The IHC will be subject to the
US generally applicable minimum leverage capital requirement
(which is different than to Basel III international leverage ratio,
including to the extent that the generally applicable US leverage ratio
does not include off-balance sheet exposures) starting 1 January
2018. The Group continues to evaluate the implications of the FRB’s
IHC final rules (issued in February 2014) for the Group. Nevertheless,
the Group currently believes that, in the aggregate, the final rules
(and, in particular, the leverage requirements in the final rules that
will be applicable to the IHC in 2018) are likely to increase the
operational costs and capital requirements and/or require changes
to the business mix of the Group’s US operations, which ultimately
may have an adverse effect on the Group’s overall result of
operations; and
Q Implementation of the so-called ‘Volcker Rule’ under the Dodd-Frank
Act. The Volcker Rule, once fully effective, will prohibit banking
entities, including Barclays PLC, Barclays Bank PLC and their various
subsidiaries and affiliates from undertaking certain ‘proprietary
trading’ activities and will limit the sponsorship of, and investment in,
private equity funds and hedge funds, in each case broadly defined,
by such entities. The rules will also require the Group to develop
an extensive compliance and monitoring programme (both inside
and outside of the US), subject to various executive officer
attestation requirements, addressing proprietary trading and
covered fund activities, and the Group therefore expects
compliance costs to increase. The final rule is highly complex and
its full impact will not be known with certainty until market practices
and structures develop under it. Subject entities are generally
required to be in compliance with the prohibition on proprietary
trading and the requirement to develop an extensive compliance
programme by July 2015 (with certain provisions subject to possible
extensions).
These laws and regulations and the way in which they are interpreted
and implemented by regulators may have a number of significant
consequences, including changes to the legal entity structure of the
Group, changes to how and where capital and funding is raised and
deployed within the Group, increased requirements for loss-absorbing
capacity within the Group and/or at the level of certain legal entities or
sub-groups within the Group and potential modifications to the
business mix and model (including potential exit of certain business
activities). These and other regulatory changes and the resulting
actions taken to address such regulatory changes, may have an adverse
impact on the Group’s profitability, operating flexibility, flexibility of
deployment of capital and funding, return on equity, ability to pay
dividends and/or financial condition. It is not yet possible to predict the
detail of such legislation or regulatory rulemaking or the ultimate
consequences to the Group which could be material.
e) Regulatory action in the event of a bank failure
The UK Banking Act 2009, as amended (the Banking Act) provides for a
regime to allow the Bank of England (or, in certain circumstances, HM
Treasury) to resolve failing banks in the UK. Under the Banking Act,
these authorities are given powers to make share transfer orders and
property transfer orders. Following the Banking Reform Act the
authorities will also have at their disposal a statutory bail-in power. This
bail-in power, when it is made available to the UK resolution authority,
will enable it to recapitalise a failed institution by allocating losses to its
shareholders and unsecured creditors. The bail-in power will enable the
UK resolution authority to cancel liabilities or modify the terms of
contracts for the purposes of reducing or deferring the liabilities of the
bank under resolution and the power to convert liabilities into another
form (e.g. shares). In addition to the bail-in power, the powers granted
to the relevant UK resolution authority under the Banking Act include
the power to: (i) direct the sale of the relevant financial institution or
the whole or part of its business on commercial terms without
requiring the consent of the shareholders or complying with the
procedural requirements that would otherwise apply; (ii) transfer all or
part of the business of the relevant financial institution to a ‘bridge
bank’ (a publicly controlled entity); and (iii) transfer the impaired or
problem assets of the relevant financial institution to an asset
management vehicle to allow them to be managed over time. The EU
Bank Recovery and Resolution Directive (BRRD) contains provisions
similar to the Banking Act on a European level, many of which augment
and increase the powers available to regulators in the event of a bank
failure. Further, parallel developments at international level may result
in increased risks for banks, for example the Financial Stability Board
(FSB) proposals for harmonising key principles for TLAC globally.
If these powers were to be exercised (or there is an increased risk of
exercise) in respect of the Group or any entity within the Group such
exercise could result in a material adverse effect on the rights or
interests of shareholders and creditors including holders of debt
securities and/or could have a material adverse effect on the market
price of shares and other securities issued by the Group. Such effects
could include losses of shareholdings/associated rights including by
the dilution of percentage ownership of the Group’s share capital, and
may result in creditors, including debt holders, losing all or a part of
their investment in the Group’s securities that could be subject to such
powers.
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