Barclays 2015 Annual Report Download - page 214

212 I Barclays PLC Annual Report 2015 home.barclays/annualreport
Risk review
The European Market Infrastructure Regulation (EMIR) has introduced
requirements designed to improve transparency and reduce the risks
associated with the derivatives market, some of which 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
(this requirement is already in force); implement risk management
standards for all bilateral over-the-counter derivatives trades that are not
cleared by a central counterparty (this requirement is also partly in force,
but requirements relating to the mandatory provision of margin are to be
phased in from 2016); and clear, through a central counterparty,
over-the-counter derivatives, but only where those derivatives are
subject to a mandatory clearing obligation. The obligation to clear
derivatives will only apply to certain counterparties and specified types
of derivative. EMIR has potential operational and financial impacts on the
Group, including by imposing collateral requirements.
CRD IV aims to complement EMIR by applying higher capital
requirements for bilateral, uncleared over-the-counter derivative trades.
Lower capital requirements for cleared derivatives 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).
Amendments to the Markets in Financial Instruments Directive (known
as MiFID II) came into force in July 2014. These amendments 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. While the final implementation date of MiFID II remains subject
to discussions between various European bodies, member states will not
have to apply the provisions of MiFID II until 3 January 2017 at the
earliest, although recent communications by several European bodies
has suggested that this date might be delayed by 12 months. Many of
the provisions of MiFID II and its accompanying regulation will be
implemented by means of technical standards to be drafted by ESMA.
While ESMA has published its final report in respect of some of these
technical standards, the impacts on the Group will not be clear until all
of the relevant technical standards have been finalised and adopted.
Regulation in the UK
Recent developments in banking law and regulation in the UK have been
dominated by legislation designed to ring-fence the retail and SME
deposit-taking business of large banks. The content and the impact of
this legislation are outlined above. The Banking Reform Act put in place a
framework for this ring-fencing and secondary legislation passed in 2014
elaborated on the operation and application of the ring-fence. Ring-
fencing rules have been consulted on by the PRA and the FCA and it is
expected that final rules will be published during the first half of 2016
which will further determine how ring-fenced banks will be permitted to
operate.
In addition to, and complementing a EU-wide stress testing exercise
conducted on a sample of EU banks by the EBA, and in response to
recommendations from the FPC, the BoE conducted a variant of the
EU-wide stress test in 2014. The ‘UK variant’ test explored particular UK
macroeconomic vulnerabilities facing the UK banking system. Key
parameters of the test – including the design of the UK elements of the
stress scenario – were designed by the BoE and approved by the FPC
and the PRA. The BoE published key elements of its 2014 stress test in
March 2015 and the results of its 2015 stress test on 1 December 2015.
The FPC determined that no macroprudential actions on bank capital
were required in response to the results of either test.
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 or matters of conduct. The PRA has
implemented the European capital regime under CRD IV in the UK and
has required banks to meet a 4.5% Pillar 1 CET1 requirement since
1 January 2015, which is up from 4% in 2014. The PRA has expected
Barclays, in common with six other major UK banks and building
societies, to meet a 7% CET1 ratio at the level of the consolidated Group
since 1 January 2016.
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.
On 1 April 2014 the FCA took over the regulation of consumer credit in
the UK. This has led to a regulatory regime for consumer credit which is
considerably more intensive and intrusive than was the case when
consumer credit was regulated by the Office of Fair Trading.
In 2014 the PRA and the FCA consulted on new accountability
mechanisms for individuals working in banks, including the introduction
of a new ‘Senior Managers Regime’ (aimed at a limited number of
individuals with senior management responsibilities within a firm) and a
‘Certification Regime’ (aimed at assessing and monitoring the fitness
and propriety of a wider range of employees who could pose a risk of
significant harm to the firm or any of its customers). This represents the
implementation of recommendations made by the Parliamentary
Committee on Banking Standards in this area. The FCA and PRA have
published final rules on most aspects of the Senior Managers Regime
and the regime will enter into force on 7 March 2016.
Resolution of UK banking groups
The Banking Act 2009 (the Banking Act) provides a regime to allow the
BoE (or, in certain circumstances, HM Treasury) to resolve failing banks
in the UK, in consultation with the PRA and HM Treasury as appropriate.
Under the Banking Act the BoE is given powers to: (i) make share
transfer instruments pursuant to which all or some of the securities
issued by a UK bank may be transferred to a commercial purchaser; (ii)
the power to transfer all or some of the property, rights and liabilities of a
UK bank to a commercial purchaser or a ‘bridge bank’, which is a
company wholly owned by the BoE; 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. In
addition, under the Banking Act, HM Treasury is given the power to take
a bank into temporary public ownership by making one or more share
transfer orders in which the transferee is a nominee of HM Treasury or a
company wholly owned by HM Treasury. A share transfer instrument or
share transfer order can extend to a wide range of securities including
shares and bonds issued by a UK bank (including Barclays Bank PLC) or
its holding company (Barclays PLC) and warrants for such shares and
bonds. Certain of these powers also extend to companies within the
same group as a UK bank.
Supervision and regulation