Barclays 2014 Annual Report Download - page 222

220 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Supervision and regulation
Risk review
The consolidated IHC will be subject to a number of additional
supervisory and prudential requirements, including: (i) FRB
regulatory capital requirements and leverage limits; (ii) mandatory
stress testing of capital levels by the FRB, and submission of a capital
plan to the FRB; (iii) supervisory approval of, and limitations on,
capital distributions by the IHC to Barclays Bank PLC; (iv) additional
substantive liquidity requirements, including requirements to
conduct monthly internal liquidity stress tests for the IHC (and also,
separately, for Barclays Bank PLC’s US branch network), and to
maintain a 30-day buffer of highly liquid assets; (v) other liquidity
risk management requirements, including compliance with liquidity
risk management standards established by the FRB, and
maintenance of an independent function to review and evaluate
regularly the adequacy and effectiveness of the liquidity risk
management practices of Barclays’ combined US operations; and (vi)
overall risk management requirements, including a US risk
committee and a US chief risk officer.
Q Restrictions on proprietary trading and fund-related activities: In
December 2013, the relevant US regulatory agencies, including the
FRB, the FDIC, the SEC, and the CFTC, finalised the rule implementing
the requirements of Section 619 of the DFA – the so-called ‘Volcker
Rule’. 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 (but will allow activities such as underwriting,
market making and risk-mitigation hedging) and will limit the
sponsorship of, and investment in, private equity funds (including
non-conforming real estate and credit funds) and hedge funds, in
each case broadly defined, by such entities. These restrictions are
subject to certain exceptions and exemptions, including those listed
above as well as exemptions applicable to transactions and
investments occurring solely outside of the United States. The rule
will also require Barclays to develop an extensive compliance and
monitoring programme (both inside and outside of the United
States), subject to various executive officer attestation requirements,
addressing proprietary trading and covered fund activities, and it is
therefore expected that compliance costs will 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 program by July 2015 (with certain provisions
subject to possible extensions). More specifically, in December 2014,
the FRB extended the compliance period through July 2016 for
investments in and relationships with covered funds that were in
place prior to 31 December 2013, and indicated that it intends to
further extend the compliance period through July 2017.
Q Resolution plans: The DFA requires bank holding companies with
total consolidated assets of $50bn or more to submit to the FRB and
the FDIC, and regularly update, a plan for a ‘rapid and orderly’
resolution to be used if the bank holding company or any of its
material subsidiaries experiences material financial distress or failure.
Non-US banking organisations that are treated as bank holding
companies under US law, such as Barclays, are required to submit
such plans with respect to their US operations if they have more than
$50bn in US non-bank assets. As required, Barclays submitted its
most recent annual US resolution plan to the US regulators on 1 July
2014.
Q Regulation of derivatives markets: Among the changes mandated by
the DFA is a requirement that many types of derivatives that used to
be traded in the over-the counter markets be traded on an exchange
or swap execution facility and centrally cleared through a regulated
clearing house. In addition, many participants in these markets are
required to register with the CFTC as ‘swap dealers’ or ‘major swap
participants’ and/or with the SEC as ‘security-based swap dealers’ or
‘major security-based swap participants’ and be subject to CFTC and
SEC regulation and oversight. Barclays Bank PLC has registered as a
swap dealer. Entities required to register are subject to business
conduct, record-keeping and reporting requirements and will be
subject to capital and margin requirements. In addition, the CFTC,
pursuant to the DFA, has proposed rules on position limits on
derivatives on physical commodities. Once adopted and
implemented, these rules will limit the size of positions that can be
held by an entity, or a group of entities under common ownership or
control, in futures and over-the-counter derivatives, subject to
certain exemptions. These rules could restrict trading activity,
reducing trading opportunities and market liquidity, and potentially
increasing the cost of hedging transactions and the volatility of the
relevant markets. It is also possible that registration, execution,
clearing and compliance requirements as well as other additional
regulations (certain of which still are not final), 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. Barclays Bank PLC and its
subsidiaries and affiliates may be exposed to these effects whether or
not these subsidiaries are required to register in the capacities
described. The new regulation of the derivative markets could
adversely affect the business of Barclays Bank PLC and its affiliates in
these markets and could make it more difficult and expensive to
conduct hedging and trading activities.
Q Risk retention requirements for securitisations: The US federal
banking agencies were required by the DFA to develop rules whereby,
subject to certain exceptions, any sponsor of an asset-backed
security (ABS) transaction must retain, generally, not less than five
percent of the credit risk of any asset that the sponsor, through the
issuance of ABS, transfers, sells or conveys to a third party. The rule
was adopted in October 2014, and becomes effective one year after
publication in the federal register for residential mortgage-backed
securitisations and two years after publication for all other
securitisation types. It is largely in line with expectations, but will
have some impact on the participation by the Group’s US operations
in such transactions.
Q Consumer Financial Protection Bureau (CFPB): The CFPB’s mission is
to protect consumers of financial products including credit card and
deposit customers. The CFPB has the authority to examine and take
enforcement action against any US bank with over $10bn in total
assets, such as Barclays Bank Delaware, with respect to its
compliance with Federal laws and regulations regarding the provision
of consumer financial services, and with respect to ‘unfair, deceptive
or abusive acts and practices.’ The CFPB has initiated several
high-profile public actions against financial companies, including
major credit card issuers. Settlements of those actions have included
monetary penalties, customer remediation requirements, and
commitments to modify business practices.
Q Liquidity Coverage Ratio in the US: During 2014, the US Federal bank
regulatory agencies, including the FRB, issued final rules
implementing the U.S. Liquidity Coverage Ratio that are generally
consistent with the Basel Committee’s framework, but with certain
modifications, which include accelerated transitional provisions and
more stringent requirements related to both the range of assets that
qualify as high-quality liquid assets, and expected cash outflow
assumptions for certain types of funding. While the US Liquidity
Coverage Ratio does not currently apply to Barclays or the IHC, the
FRB has indicated it is considering applying the US Liquidity
Coverage Ratio to the IHC in the future.