HSBC 2015 Annual Report Download - page 114

Report of the Directors: Risk (continued)
Top and emerging risks
HSBC HOLDINGS PLC
112
• those arising from the Markets in Financial Instruments
Regulation/Directive (‘MiFID II’), which includes
mandatory trading of derivatives on organised venues,
enhanced transparency and reporting requirements,
controls on high frequency and algorithmic trading,
changes to the use of dealing commissions and potential
future restrictions on the ability of non-EU Group
companies to provide certain services to EU based clients.
Aspects of MiFID II also further enhance protections for
investors in line with many regulators’ focus on the wider
conduct of business and delivery of fair outcomes for
customers;
• changes aimed at promoting effective competition in the
interests of consumers, including investigations ordered
by the UK Competition and Markets Authority and work
to increase competition more generally;
• the recommendations arising out of the Final Report
on the Fair and Effective Financial Markets Review
undertaken by the Bank of England, which include
changes to market conduct rules and forward looking
supervision in the operation of wholesale financial
markets in the UK;
• continued focus in the UK and elsewhere on matters
relating to management accountability, institutional
culture, employee conduct and increased obligations
on market abuse and whistleblowing. In the UK, this
includes implementing the individual accountability
regime and wider recommendations made by the
Parliamentary Commission on Banking Standards and
the activities of the Banking Standards Board;
• the Basel Committee on Banking Supervision (‘Basel
Committee’) initiatives to enhance the risk sensitivity and
robustness of the standardised approaches, to minimise
reliance on internal models, and to incorporate capital
floors in the Basel capital framework;
• the implementation of the Capital Requirements Directive
(‘CRD IV’), notably the UK application of the capital
framework and its interaction with Pillar 2;
• proposals from the Financial Stability Board for global
systemically important banks (‘G-SIB’s) to hold minimum
levels of capital and debt as total loss absorbing
capacity (‘TLAC’), together with the Bank of England’s
consultation on UK implementation of MREL (for further
details, see ‘Capital’ on page 239);
• requirements flowing from arrangements for the
resolution strategy of the Group and its individual
operating entities, which may have different effects
in different countries; and
• the continued risk of further changes to regulation
relating to taxes affecting financial service providers,
including financial transaction taxes and ongoing
implementation of initiatives to share tax information
such as the Common Reporting Standard introduced
by the Organisation for Economic Co-operation and
Development (‘OECD’).
Potential impact on HSBC
• Proposed changes in and/or the implementation of
regulations including mandatory central clearing of OTC
derivatives, EMIR, ring-fencing and similar requirements,
MiFID II, the Volcker Rule, recovery and resolution plans,
tax information sharing initiatives and findings from
competition orientated enquiries and investigations may
affect the manner in which we conduct our activities and
how the Group is structured.
• Requirements for higher levels of capital or TLAC may
increase the funding costs for the Group and reduce our
return on equity.
• Mandatory central clearing of OTC derivatives also brings
new risks to HSBC in its role as a clearing member, as we
will be required to underwrite losses incurred by central
clearing counterparties from the default of other clearing
members and their clients. Hence central clearing brings
with it a new element of interconnectedness between
clearing members and clients which we believe may
increase rather than reduce our exposure to systemic risk.
• Increased regulatory scrutiny of conduct of business
and management accountability may affect the industry
in areas such as employee recruitment and retention,
product pricing and profitability in both retail and
wholesale markets. HSBC’s businesses may be affected by
these developments.
• These measures have the potential to increase our cost
of doing business and curtail the types of business we
can carry out, which may adversely affect future
profitability.
Mitigating actions
• We are engaged closely with governments and regulators
in the countries in which we operate to help ensure that
the new requirements are considered properly and can
be implemented in an effective manner.
• We have enhanced our governance around central
clearing counterparties and appointed specialists to
manage the associated liquidity and collateral risks.
• We continue to enhance and strengthen governance and
resourcing more generally around regulatory change
management and the implementation of required
measures to actively address this ongoing and significant
agenda of regulatory change.
Regulatory focus on conduct of business and
financial crime
Financial service providers are at risk of regulatory sanctions
or fines related to conduct of business and financial crime.
The incidence of regulatory proceedings against financial
service firms has become more common-place and may
increase in frequency due to increased media attention and
higher expectations from prosecutors and the public, with a
consequent increase also in civil litigation arising from or
relating to issues which are subject to regulatory
investigation, sanction or fine.
Regulators in the UK and other countries have continued
to increase their focus on conduct matters relating to fair