Barclays 2013 Annual Report Download - page 235

securitisation framework. The results of this work are expected in 2014.
In conjunction with the International Organization of Securities
Commissions, the BCBS issued enhanced standards for margin
requirements for non-centrally cleared derivatives in September. The
BCBS also issued risk management guidelines related to anti-money
laundering and terrorist financing in January 2014. These and other
developments may further increase the capital required by the Group to
transact affected business and/or affect the ability of the Group to
undertake certain transactions.
European Union
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) will
have responsibility for the supervision of the most significant Eurozone
credit institutions, financial holding companies or mixed financial
holding companies. 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. Following the passage of the regulation granting the
ECB responsibility for banking supervision in the Eurozone in
September 2013, it is expected that the single supervisory mechanism
will become operational in autumn 2014.
Notwithstanding the new responsibilities of the ECB, the European
Banking Authority (EBA) which came into being on 1 January 2011,
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 3 and (from 2016) the capital surcharge for systemic institutions
have been implemented in the EU by the CRD. The CRD entered into
force on 1 January 2014. Much of the 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. An assessment of the likely impact of the capital, leverage and
liquidity requirements of CRD and CRR as interpreted by the PRA can
be found in the analysis of funding risk in relation to capital and to
liquidity (pages 199 to 207 in relation to capital and leverage and
pages 208 to 224 in relation to liquidity).
A significant addition to the EU legislative framework for financial
institutions is a directive establishing a framework for the recovery and
resolution of credit institutions and investment firms. This Directive is
intended to implement many of the requirements of the FSB’s ‘Key
Attributes of Effective Resolution Regimes for Financial Institutions’,
and political agreement on it was reached by the European Parliament
and Council in December 2013, although it has yet to complete the
legislative process. The directive would give resolution authorities
powers to intervene in and resolve a financial institution that is no
longer viable, including through the transfers of business and 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 may affect the rights of
senior unsecured creditors subject to any bail-in in the event of a
resolution of a failing bank. It also stipulates that firms would need a
minimum percentage of liabilities in a form that allows them to be
subject to bail-in. The proposal also requires the development of
recovery and resolution plans at group and firm-level. The proposal
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: the proposal envisages
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. The proposal is to be implemented by 1 January 2015,
with the exception of the bail-in powers which must be implemented
by 1 January 2016.
A proposal to amend the Directive on Deposit Guarantee Schemes is
also being considered. The draft directive envisages that national
schemes should be pre-funded, with a fund 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. An agreement between
Council and Parliament remains to be finalised, but would envisage a
fund of 0.8% of covered deposits to be built up over 10 years.
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, among 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 yet to be
considered by the European Parliament and by the Council. Their
impact, if they are adopted, remains to be determined.
The European Market Infrastructure Regulation (EMIR) introduces new
requirements to improve transparency and reduce the risks associated
with the derivatives market. These requirements come into force
progressively through 2013 and 2014. 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. Lower capital requirements for
cleared trades are only available if the central counterparty is
recognised as a ‘qualifying central counterparty’ which has been
authorised or recognised under EMIR (in accordance with binding
technical standards).
Proposals to amend the Markets in Financial Instruments Directive
(known as MiFID II) were agreed in January 2014. These amendments
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