HSBC 2010 Annual Report Download - page 94

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Challenges and uncertainties > Macro-prudential and regulatory // Credit risk > Credit risk management
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Transaction Tax (‘FTT’) applied to a specified
range of financial transactions. An IMF report
for the G20 in 2010 saw merit in an FAT but
did not recommend an FTT as it was felt not to
address the key issues within the G20 mandate
and might have unintended economic and
regulatory consequences. In its Seoul 2010
communique the G20 did not promote any
one approach for adoption. Both the European
Commission and the UK Government are
considering an FAT, which the former believes
can work at EU level. The EU also sees merit in
an FTT but, recognising the dependency on an
international consensus, will continue to work
within the G20 for its adoption.
• The ‘Volcker Rule’: under the Dodd-Frank Act,
banking organisations with operations in the US
face limits on their ability to sponsor or invest in
private equity or hedge funds and are prohibited
from engaging in certain types of ‘proprietary
trading’ in the US, subject to a number of
exceptions allowing an entity significant leeway
to engage in client-serving trading, such as
market-making and underwriting, and risk-
mitigating hedging activities. The ultimate
impact of these restrictions will depend on how
US regulators implement them in rulemaking.
• Derivatives and central counterparties
regulation: as agreed by the G20, the authorities
are seeking to reduce systemic risk and volatility
relating to derivatives trading. In the US, the
Dodd-Frank Act provides for an extensive
regulatory framework for over the counter
(‘OTC’) derivatives. In addition to the
mandatory clearing, exchange trading and
reporting of certain swaps and security-based
swaps, it also requires the registration of swap
dealers and major swap participants, making
them subject to capital, margin, business
conduct and record-keeping regulations. In
September 2010, the EU Commission presented
proposals, currently in negotiation, for all
standardised OTC derivatives to be reported to
trade repositories and centrally cleared by the
end of 2012. The proposal disincentivises
derivative contracts which are not eligible for
central clearing by proposing higher capital
requirements. Exemptions for foreign exchange
swaps and forwards are currently being
considered.
• Markets in financial instruments: the European
Commission is conducting a major Review of
the Markets in Financial Instruments Directive,
potentially to extend its scope beyond equities to
other asset classes including bonds, exchange-
traded funds and other equity-like and non-
equity instruments, and to promote their trading
on exchanges and other markets that will be
subject to regulation. It also proposes giving
additional power to regulators to ban trading in
products that are eligible to be cleared but for
which no clearing solution is currently available.
• The UK Independent Commission on Banking:
this Commission was established to examine
issues of banking activity and competition,
including the potential impact on financial
markets of a number of options to separate the
retail and wholesale activities of universal
banks. Responses to the opening consultation
have been published and the Commission
intends to publish an interim report in April
2011, with further consultation prior to a final
report in September 2011. The UK Government
is not bound to adopt the Commission’s
recommendations.
• Recovery and resolution plans: such plans are
considered a key element in improving the
ability of regulators to rescue (or ‘resolve’)
firms when they get into difficulties without
putting taxpayer monies at risk. Studies and
pilots have been initiated by various official
bodies on the resolution of financial firms and
the international coordination of such exercises;
the UK authorities have been at the forefront of
work to develop approaches to this subject. The
EU has consulted on a new framework for crisis
management, including so-called ‘bail-in’
creditor write-down resolution. Legislative
proposals are expected mid-2011. In the US,
the Dodd-Frank Act established the Orderly
Liquidation Authority which will ultimately
provide a bank-like receivership process for
large financial companies; resolution plans
will be required of large financial institutions
and rules for ‘early remediation’ will be
forthcoming. There is currently no consistent
approach and a number of key areas need to
be addressed, including an international legal
framework for addressing competing creditor
claims and the application of collateral.
Restructuring of regulatory bodies
In addition to the significant volume of new
regulation emanating from the Basel Committee and
others, the landscape of financial sector regulation
itself in a number of major Western countries is
undergoing significant change, presenting its own
challenges to the industry and its implementation of
proposed reforms.