Barclays 2013 Annual Report Download - page 236

Risk review
Supervision and regulation continued
take the form of a directive and a regulation and 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. Changes to the MiFID regime include the introduction
of a new type of trading venue (the organised trading facility), to
capture non-equity trading that falls outside the current regime.
Investor protections have been strengthened, and new curbs imposed
on high frequency and commodity trading. Pre- and post-trade
transparency has been increased, and a new regime for third country
firms introduced. The changes also include new requirements for
non-discriminatory access to trading venues, central counterparties,
and benchmarks, and harmonised supervisory powers and sanctions
across the EU. Implementation is not expected until late 2016 and
many of the provisions of MiFID II and its accompanying regulation will
be implemented by means of technical standards to be drafted by
ESMA. Some of the impacts on the Group will not be clear until these
technical standards have been adopted.
United Kingdom
Developments in the UK have been dominated by the Financial Services
Banking Reform Act 2013. The content and the impact of this
legislation are discussed above. Secondary legislation and rule-making
to implement both the Act and the recommendations of the
Parliamentary Commission on Banking Standards will is anticipated
through 2014.
As noted above, the FPC has a significant influence on prudential
requirements. During 2013, the FPC continued to recommend that the
PRA should seek to ensure that UK banks hold greater levels of capital.
In particular, the FPC recommended that the PRA should apply higher
capital requirements to any major bank or building society with
concentrated exposure to vulnerable assets, where there were valuation
uncertainties or where banks were highly leveraged relating to trading
activities. This resulted in the PRA on 20 June 2013 requiring two firms,
including Barclays, to submit plans to increase the Core Equity Tier 1
leverage ratio to 3% by end June 2014 after adjustment for prospective
credit and conduct losses. Also responding to an FPC recommendation,
the Bank of England and PRA are also developing an approach to
annual stress testing of the UK banking system and the individual
institutions within it. The first such exercise is planned for 2014.
Both the PRA and the FCA have continued to develop and apply a more
assertive approach to supervision and the application of existing
standards. This may include application of standards that either
anticipate or go beyond requirements established by global or EU
standards, whether in relation to capital, leverage and liquidity,
resolvability and resolution of matters of conduct. In December 2013,
the PRA published its requirements to implement the new European
capital regime, clarifying key policy issues that affect the minimum
level of Common Equity Tier 1 (CET1) capital which banks need to
maintain. The PRA will require banks to meet a 4% Pillar 1 CET1
requirement in 2014, rising to 4.5% from 1 January 2015. Similarly,
during the same period the required Pillar 1 Tier 1 capital ratio will be
5.5%, rising to 6% from 1 January 2015 onwards. The PRA will require
UK banks to bring CET1 in line with the end-point definition from 1
January 2014 rather than benefiting from transitional arrangements.
Additionally, the PRA will expect eight major UK banks and building
societies including Barclays, to meet a 7% CET1 capital ratio and a 3%
Tier 1 leverage ratio – after taking into account adjustments to
risk-weighted assets and CET1 capital deemed necessary by the PRA
– from 1 January 2014, except where – as in the case for Barclays – the
PRA has agreed a plan with the firm to meet the standards over a
longer time frame. Barclays has agreed with the PRA that it will meet
this requirement by end-June 2014 at the latest. Details of Barclays
leverage calculation are set out on pages 205 and 206.
The FCA has retained an approach to enforcement based on credible
deterrence that has continued to see significant growth in the size of
regulatory fines. The FCA has focused strongly on conduct risk and on
customer outcomes and will continue to do so. This has included a
focus on the design and operation of products, the behaviour of
customers and the operation of markets. This may impact both the
incidence of conduct costs and increase the cost of remediation. The
Retail Distribution Review entered into force on 1 January 2013 and the
Mortgage Market Review will apply from 26 April 2014. These conduct
initiatives will affect the economics of investment advice and home
finance provision respectively.
United States
The DFA became law in July 2010. Although many of the DFA rules
have been adopted and implemented, a number of rules have not yet
been adopted, or have been adopted but not fully implemented. In
addition, the rules that have been adopted and implemented have, for
the most part, only recently become effective and their impact, in many
cases, cannot yet be fully evaluated. Therefore, the full scale of the
DFA’s impact on the Group continues to remain unclear. 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 a significant effect on the Group,
including:
 Structural Reform: On 18 February 2014, the FRB issued final rules
implementing various enhanced prudential standards under Section
165 of the DFA applicable to certain foreign banking organisations
and their US operations (i.e. branches, agencies, and subsidiaries),
including Barclays.
The final rules’ specific requirements depend on the amount of
assets of the foreign banking organisation both inside and outside
the United States. Because its total US and non-US assets exceed
$50bn, Barclays would be subject to the most stringent requirements
of the final rules, including 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 would be subject to
supervision and regulation, including as to regulatory capital and
stress testing as described below, by the FRB as if it were a US bank
holding company of comparable size. 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 certain separate
requirements.
Under the final rules, the consolidated IHC would be subject to a
number of additional supervisory and prudential requirements, such
as: (i) subject to certain limited exceptions, FRB regulatory capital
requirements and leverage limits that are the same as those
applicable to US banking organisations of comparable size; (ii)
mandatory company-run and supervisory stress testing of capital
levels 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 for Barclays Bank PLC’s US branch
network, separately), and to maintain in the US a 30-day buffer of
highly liquid assets for the IHC (the branch liquidity buffer is set at 14
days); (v) other liquidity risk management requirements, including
compliance with liquidity risk management standards established by
the FRB and maintenance of an independent review function to
review and evaluate regularly the adequacy and effectiveness of the
liquidity risk management practices of Barclays’ combined US
operations; (vi) overall risk management requirements, including a
US risk committee and a US chief risk officer; and (vii) a potential
15:1 debt-to-equity limit applicable to the IHC in the event of the
occurrence of a designation by the U.S. Financial Stability Oversight
Council under Section 165(j) of the DFA that the foreign banking
organisation poses a grave threat to the systemic stability of the
United States and the debt-to-equity limit is necessary to mitigate
such risk.
The effective date of the final rule is 1 June 2014, although
compliance with most of its requirements will be phased-in between
2015 and 2018. More particularly, (i) Barclays will not be required to
form its IHC until 1 July 2016, (ii) the IHC will not be subject to the US
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234 Barclays PLC Annual Report 2013