Barclays 2014 Annual Report Download - page 218

216 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Supervision and regulation
Risk review
Also in November 2014 Barclays adhered to a protocol which was
developed by the International Swaps and Derivatives Association
(ISDA) in coordination with the FSB to support cross-border resolution
and reduce systemic risk. By adhering to this protocol Barclays is able,
in ISDA Master Agreements and related credit support agreements
entered into with other adherents, to opt in to different resolution
regimes such that cross-default and direct default rights that would
otherwise arise under the terms of such agreements would be stayed
temporarily (and in some circumstances overridden) on the resolution
of one of the parties.
European Union developments
The EU continues to develop its regulatory structure in response to the
financial and Eurozone crises. At the December 2012 meeting of EU
Finance Ministers it was agreed to establish a single supervisory
mechanism within the Eurozone. The European Central Bank (ECB) has
had responsibility for the supervision of the most significant credit
institutions, financial holding companies or mixed financial holding
companies within the Eurozone since November 2014. The ECB may
extend its supervision to institutions of significant relevance that have
established subsidiaries in more than one participating member state
and with significant cross-border assets or liabilities.
Notwithstanding the new responsibilities of the ECB, the European
Banking Authority (EBA), along with the other European Supervisory
Authorities, remains charged with the development of a single
rulebook for the EU as a whole and with enhancing co-operation
between national supervisory authorities. The European Securities
Markets Authority (ESMA) has a similar role in relation to the capital
markets and to banks and other firms doing investment and capital
markets business. The progressive reduction of national discretion on
the part of national regulatory authorities within the EU may lead to the
elimination of prudential arrangements that have been agreed with
those authorities. This may serve to increase or decrease the amount of
capital and other resources that the Group is required to hold. The
overall effect is not clear and may only become evident over a number
of years. The EBA and ESMA each have the power to mediate between
and override national authorities under certain circumstances.
Responsibility for day to day supervision remains with national
authorities and for banks, like the Group, that are incorporated in
countries that will not participate in the single supervisory mechanism,
is expected to remain so.
Basel III and (from 2016) the capital surcharge for systemic institutions
have been implemented in the EU by CRD IV. The provisions of CRD IV
either entered into force automatically on, or had to be implemented in
member states by, 1 January 2014. Much of the ongoing
implementation is expected to be done through binding technical
standards being developed by the EBA, that are intended to ensure a
harmonised application of rules through the EU which are still largely in
the process of being developed and adopted.
A significant addition to the EU legislative framework for financial
institutions has been the Bank Recovery and Resolution Directive
(BRRD) which establishes a framework for the recovery and resolution
of EU credit institutions and investment firms. The BRRD is intended to
implement many of the requirements of the FSB’s “Key Attributes of
Effective Resolution Regimes for Financial Institutions”. The BRRD was
formally passed into EU law in April 2014. All of the provisions of the
BRRD had to be implemented in the law of EU Member States by
1 January 2015 except for those relating to bail-in which will have to be
implemented in Member States by 1 January 2016.
As implemented, the BRRD gives resolution authorities powers to
intervene in and resolve a financial institution that is no longer viable,
including through the transfers of business and, when implemented in
relevant member states, creditor financed recapitalisation (bail-in
within resolution) that allocates losses to shareholders and unsecured
and uninsured creditors in their order of seniority, at a regulator
determined point of non-viability that may precede insolvency. The
concept of bail-in will affect the rights of senior unsecured creditors
subject to any bail-in in the event of a resolution of a failing bank.
The BRRD also stipulates that firms will need a minimum percentage of
liabilities in a form that allows them to be subject to bail-in (which will
have to be co-ordinated with the FSB’s TLAC proposals mentioned
above). The BRRD also requires the development of recovery and
resolution plans at group and firm level. The BRRD sets out a
harmonised set of resolution tools across the EU, including the power
to impose a temporary stay on the rights of creditors to terminate,
accelerate or close out contracts. There are also significant funding
implications for financial institutions, which include the establishment
of pre-funded resolution funds of 1% of covered deposits to be built up
over 10 years, although the proposal also envisages that national
deposit guarantee schemes may be able to fulfil this function (see
directly below).
The Directive on Deposit Guarantee Schemes was recast and replaced
by a new directive which has been in force since July 2014. The directive
provides that national deposit guarantee schemes should be pre-
funded, with the funds to be raised over a number of years. This would
be a significant change for UK banks where levies are currently raised
as needed after failure. The funds of national deposit guarantee
scheme are to total 0.8% of the covered deposits of its members by the
date 10 years after the entry into force of the recast directive.
In relation to both resolution funds and the funds required by the
Directive on Deposit Guarantee Schemes, there may be scope for the
UK to use the Bank Levy to meet pre-funding obligations, although
whether this will happen and the manner in which this might operate
remains unclear.
In October 2012, a group of experts set up by the European
Commission to consider possible reform of the structure of the EU
banking sector presented its report. Among other things, the group
recommended the mandatory separation of proprietary trading and
other high-risk trading activities from other banking activities. The
European Commission issued proposals to implement these
recommendations in January 2014. These proposals would apply to
G-SIFIs and envisage, amongst other things: (i) a ban on proprietary
trading in financial instruments and commodities; (ii) giving
supervisors the power and, in certain instances, the obligation to
require the transfer of other trading activities deemed to be “high risk”
to separate legal trading entities within the group; and (iii) rules on the
economic, legal, governance, and operational links between the
separated trading entity and the rest of the banking group.
Contemporaneously, the European Commission also adopted proposals
to enhance the transparency of shadow banking, especially in relation
to securities financing transactions. These proposals have still yet to be
considered formally by the European Parliament and by the Council.
Their impact, if they are adopted, remains to be determined.
The European Market Infrastructure Regulation (EMIR) has introduced
new requirements to improve transparency and reduce the risks
associated with the derivatives market. These requirements have come
into force progressively through 2013 and 2014, although some
requirements are still to be brought in. When it is fully in 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 specified details of every derivative contract that
they enter to a trade repository; implement new risk management
standards 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.
Lower capital requirements for cleared trades are only available if the
central counterparty through which the trade is cleared is recognised
as a ‘qualifying central counterparty’ which has been authorised or
recognised under EMIR (in accordance with binding technical
standards).