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Financial regulation

Navigating the new financial world

There is an unparalleled level of regulatory reform taking place globally across financial services. These reforms aim at reducing global markets systemic risk by making them safer. Regulations involving restructuring banks, increasing tax transparency or strengthening capital requirements, are being drawn up and rolled out. These are complex and in many cases overlap products and regional jurisdictions.

Overview

Introduction to financial regulation

After the 2008 financial crisis, governments across the world were empowered to push for financial reforms designed to provide greater transparency of transactions and reduce risk in order to make financial systems more stable and better regulated, and to make global markets safer. Furthermore, new capital and bank structure rules are intended to strengthen resilience to any future financial crises and to provide greater consumer protection.

HSBC is committed to implementing the resulting regulations and raise the level of awareness of the reforms among our clients. We see change arising in four key areas:

Market structure

New rules are aimed at increasing transparency and reducing risk in the derivatives market. This currently impacts, for example, the US through the Dodd–Frank Wall Street Reform and Consumer Protection Act (DFA), and the European Union (EU) through the European Markets and Infrastructure Regulation (EMIR), with other jurisdictions in Asia Pacific and Latin America implementing similar reforms. Specific Trade Reporting legislation has also been put in place in a number of regions. Additionally, the EU has produced a number of other reforms aimed at curtailing market abuse, including the Alternative Investment Fund Managers Directive (AIFMD), UCITS V, Market Abuse Directive (MAD), and the Markets in Financial Instruments Directive (MiFID II). The Central Securities Depositaries Regulation (CSDR) - incorporating the T+2 settlement initiative - aims to harmonise practices and improve the safety of CSDs in Europe.

Bank structure

These structural reforms are being addressed through the introduction of new regulations designed to protect customers and taxpayers. The US Dodd-Frank Act Volcker Rule will prohibit proprietary trading and investments in certain private equity funds and hedge funds. UK banking reform proposes the 'ring-fencing' of retail banking, while the recommendations of the Liikanen Commission form the basis of similar structural reform for EU banks (based on certain thresholds).

Tax transparency

This was a key agenda item at the G8 summit held in June 2013, demonstrating how seriously governments are taking tax transparency. A new global standard between tax authorities was agreed. In the US, the Foreign Account Tax Compliance Act (FATCA) has been passed to prevent US persons (individuals and entities) from using companies and financial structures outside the US to avoid US taxation. Other regions are also in the process of enacting similar measures to address tax avoidance. Amongst these are the OECD's Common Reporting Standard for the Automatic Exchange of Financial Information (CRS), and the UK Crown Dependencies and Overseas Territories (UKCD and OT) Regulations.

Capital and liquidity

The Basel III accord strengthens bank capital requirements and increases bank liquidity reserves, and has been implemented in a number of countries, including Hong Kong. In the EU, the regulatory standard is being implemented through the Capital Requirements Directive (CRD) IV.

Many of our clients have already been impacted by these changes, such as being required, to agree on new documentation or provide classification information. HSBC expects the practical impacts of these rules to increase and would urge clients to be prepared. There are also less visible implications of the new rules such as financial institutions being required to share more data with regulators globally.

HSBC is committed to adhere to the high standards needed to support the new regulatory landscape.

1. Market structure

Establish regulation for derivatives to improve transparency and reduce risk.

  • EMIR, AIFMD, UCITS V, MAD and MiFID in the European Economic Area
  • The Dodd-Frank Act Title VII in the US
  • Specific Trade Reporting legislation
  • HKMA reform in Hong Kong
  • Similar reforms in the other countries in Asia and Latin America
  • Most of these regulations have an
    extra-territorial impact

2. Bank structure

Structural reforms designed to address new regulations to protect customers and taxpayers..

  • The Dodd-Frank Act Volcker Rule in the US
  • Structural reform of banking in the UK
  • Structural reform of banking in the European Union

3. Tax transparency

The exchange of information between tax authorities and the cooperation of financial institutions with their requests (through client classification and reporting) to address tax avoidance.

  • The Foreign Account Tax Compliance Act (FATCA) is the implementation of the G20 commitment by the United States, and impacts globally
  • The UK and EU are in the process of enacting similar measures to address tax avoidance. Amongst these are the OECD’s Common Reporting Standard for the Automatic Exchange of Financial Information (CRS), and the UK Crown Dependencies and Overseas Territories (UKCD and OT) Regulations

4. Capital and liquidity

Strengthen bank capital requirements and increase bank liquidity reserves to drive down systemic risk.

  • Basel III accord is already implemented in a number of countries, including Hong-Kong
  • In Europe, Capital Requirements Directive (CRD) IV implements Basel III requirements

Last updated: 26 July 2016

Market structure

The European Markets and Infrastructure Regulation (EMIR) in Europe

The European Markets and Infrastructure Regulation (EMIR) is a European Union law that aims to reduce the risks posed to the financial system by derivatives transactions in the following three main ways:

  1. Reporting of derivatives trades to an authorised trade repository
  2. Clearing derivatives trades above a certain threshold: and
  3. Mitigating the risks associated with derivatives trades by, for example, reconciling portfolios periodically and agreeing dispute resolution procedures between counterparties

EMIR impacts market participants in the EEA (European Economic Area) and market participants outside of the EEA trading with an EEA counterparty. This is one of the largest regulatory projects ever undertaken in Europe.

Learn more about EMIR

The Dodd-Frank Act Title VII in the US

The Dodd Frank Wall Street Reform and Consumer Protection Act (DFA) came into force on 21 July 2010. The legislation was enacted to reduce systemic risk, increase transparency, and promote market integrity within the financial system. In particular, Title VII mandates technical changes to the OTC derivatives market. Title VI introduces changes to Bank Holding Company (BHC) regulation.

Although the Dodd-Frank reform regulates the United States market, it has an impact on market participants outside of the United States.

Learn more about Dodd-Frank Act

HKMA mandatory clearing and reporting

To meet international standards, the Hong Kong Monetary Authority worked with the Securities and Futures Commission and other stakeholders to develop a regulatory regime for OTC derivatives markets under the Securities and Futures Ordinance (SFO), including mandatory requirements for reporting specified OTC derivatives transactions to the Hong Kong Trade Repository or ‘HKTR’ (established under the HKMA’s Central Moneymarkets Unit ‘CMU’) and clearing specified transactions at designated Central Counterparties (CCPs).

The Hong Kong Trade Repository will also provide services for trade matching and confirmation.

Learn more about HKMA reform

The Alternative Investment Funds Directive (AIFMD)

The European Union’s AIFMD creates standardised and transparent governance and an operational framework for Alternative Investment Funds Managers (AIFMs) and the fund ranges they manage. The key benefit of AIFMD is the ability to raise assets and potentially streamline non-retail fund ranges across all of Europe on a harmonised basis for the first time.

AIFM obligations are broad based, covering requirements pertaining to Regulatory Authorisation, Capital Adequacy, Manager Remuneration, Conduct of Business Procedures, Conflicts of Interest Policies, Comprehensive Transparent Reporting to Investors and Regulators and new Marketing Provisions.

Learn more about the AIFMD

Undertakings for Collective Investment in Transferable Securities (UCITS) V

The European Commission's (EC) proposed amendments to the original UCITS rules (UCITS V) are designed to continue to ensure the safety of investors and the integrity of the market. In particular, the proposal will aim to ensure that the UCITS brand remains trustworthy by ensuring that the depositary's (the asset-keeping entity) duties and liability are clear and uniform across the EU.

On 25 February 2014, the European Parliament and Council backed the European Commission’s proposal to strengthen the rules for UCITS. On 23 July 2014, the EU formally adopted the Directive, which was then published in the Official Journal on 28 August and subsequently came into force on 17 September 2014.

Learn more about UCITS V

The Market Abuse Directive (MAD)

As part of its work to make financial markets sounder and more transparent, the European Securities and Markets Authority (ESMA) oversaw the implementation of the original Market Abuse Directive (MAD) in 2005, which resulted in an EU-wide market abuse regime and a framework for establishing a proper flow of information to the market. It is designed to improve confidence in the integrity of the integrated European market and encourage greater cross-border cooperation.

ESMA followed this up in 2011, with proposed revised legislation (with amendments in 2012) to better tackle market abuse.

Market Abuse Regulation (MAR) and Criminal Sanctions for Market Abuse Directive (CSMAD), together MAD II, came into force on 3 July 2016. CSMAD complements MAR by requiring Member States to impose criminal sanctions for market abuse offences and introduce corporate criminal liability for firms in respect of market abuse committed by employees.

Learn more about the Market Abuse Directive

The Markets in Financial Instruments Directive (MiFID II)

In October 2011, the European Commission tabled proposals to revise the Markets in Financial Instruments Directive (MiFID II) with the aim of making financial markets more efficient, resilient and transparent, and to strengthen the protection of investors. On 14 January 2014, an agreement in principle was reached by the European Parliament and the Council on updated rules for MiFID II.

The MiFID II reform means that organised trading of financial instruments must shift to multilateral and regulated trading platforms or be subject to transparency requirements where traded over-the-counter (OTC). Strict transparency rules will ensure that dark trading of shares and other equity instruments which undermine efficient and fair price formation will no longer be allowed.

MiFID II applies to MiFID firms, i.e. those Financial Services businesses undertaking MiFID Business anywhere in the European Economic Area (‘the EEA’). It will affect all participants in the EU’s financial markets, whether they are based in the EU or elsewhere, including providers of asset management and custodial services.

Learn more about MiFID II

Similar market reforms in other countries

Legislations similar to EMIR, Dodd-Frank Act Title VII or HKMA reform are taking place, or are shortly being implemented in other countries in Asia and Latin America. We recommend you seek guidance from your legal advisor and consult your local regulator for further information.

Last updated: 26 July 2016

Bank structure

The Volcker Rule

Section 619 of the Dodd-Frank Act is titled 'The Volcker Rule' and forms a key part of the proposal to strengthen the financial system and constrain risk-taking at banking entities. It is a financial reform bill proposed by US Congress that would allow regulators to limit propriety trading and hedge fund ownership by banks.

The Volcker Rule was proposed in October 2011 and narrowly defined a number of permitted activities including market making, hedging, underwriting, facilitating customer positions, trading in US Government Securities, and trading solely outside the US. Thousands of comments were submitted to the major regulators.

The final regulations implementing Section 619 of the Dodd-Frank Act were approved by U.S regulatory agencies on 10th December, 2013, after taking into considerations comments and feedback from the financial industry to the original draft rule. The Rule was required to be implemented by 21 July 2015.

Learn more about Dodd-Frank Volcker rule

EU Banking Reform

On 29 January 2014, the European Commission published its long-awaited proposals for structural reform of EU banks in the form of a draft regulation.

In drafting its proposals, the Commission took into account the “Liikanen” report, as well as existing national rules in some Member States, global thinking on the issue (Financial Stability Board principles) and developments in other jurisdictions.

The draft regulation will ban proprietary trading in financial instruments and commodities and also owning/investing in hedge funds from Jan 2017. Additionally, from July 2018, it will grant supervisors the power and, in certain instances, the obligation to require the transfer of higher-risk trading activities with prescribed rules aimed at ensuring that the separated trading entity is economically, legally and operationally separate from the rest of the banking group.

Learn more about EU banking reform

UK Banking Reform

In December 2013, Royal Assent was granted to the Financial Services (Banking Reform) Act 2013. This Act took into account the recommendations of the UK Government-established Independent Commission on Banking (ICB), set-up in June 2010, under Sir John Vickers, to make recommendations on the structure of the UK banking system, and also of the Parliamentary Commission on Banking Standards (PCBS), which was appointed in July 2012, to report and make recommendations on the professional standards and culture of the UK banking sector following the LIBOR scandal.

The Act gives the UK Government the power to require banks to increase loss absorbing capacity, and requires (by 2019) the separation of retail client deposits (individuals and small businesses) so that they are “ring-fenced” from other (wholesale) banking activities. Additionally, it empowers the UK’s Prudential Regulation Authority (PRA) to hold banks accountable for the way they separate their retail and investment banking activities, including the power to force full separation.

Furthermore, the Act imposes higher standards of conduct on the banking industry as a whole.

Learn more about UK banking reform

Last updated: 26 July 2016

Tax
transparency

The Foreign Account Tax Compliance Act (FATCA)

FATCA is regulatory legislation from the US Treasury and US Internal Revenue Service (IRS) which is designed to encourage enhanced tax compliance and transparency with respect to US persons who may be investing and earning income through financial institutions or entities outside of the US.

In particular, FATCA seeks to prevent US persons from avoiding US taxation on their income and assets.

Partner countries are currently finalising agreements with the IRS to allow financial institutions in those countries to comply fully with FATCA.

HSBC is committed to becoming fully FATCA compliant in all countries where we operate.

Learn more about FATCA

The OECD’s Common Reporting Standards for the Automatic Exchange of Financial Information (CRS)

On 19 March 2014, 44 Organisation for Economic Co-operation and Development (OECD) countries made a joint statement confirming implementation of the Common Reporting Standards (CRS) from 1 January 2016.

Classification of new clients is due to go live on 1 January 2016. Currently in-scope for GBM (x19) are Argentina, Belgium, the Czech Republic, France, Germany, Greece, India, Ireland, Italy, Malta, Mexico, the Netherlands, Poland, South Africa and Spain, as well as the four countries already covered under UKCD and OT. It is expected that the OECD legislation will supersede the UKCD and OT legislation for these countries.

Learn more about OECD's Common Reporting Standards for the Automatic Exchange of Financial Information (CRS)

The UK Crown Dependencies and Overseas Territories (UKCD and OT) Regulations

On 13 March 2014, HMRC published the International Tax Compliance (Crown Dependencies and Gibraltar) Regulations 2014, outlining the obligations of reporting Financial Institutions in relation to the UK agreements with the Isle of Man, Jersey, Guernsey and Gibraltar. The Regulations cover the definition of reporting financial institutions, reportable accounts, identification and reporting obligations, as well as penalties that may be applicable and which came into force on 31 March 2014.

The Crown Dependencies (Isle of Man, Guernsey and Jersey) and the British Overseas Territories (the Cayman Islands, the British Virgin Islands, Bermuda, Anguilla, Turks and Caicos Islands, Montserrat and Gibraltar) have all agreed to enter into automatic tax information exchange agreements with the UK.

HSBC expects that the agreements made under the Automatic Exchange of Information (AEOI) by the UK, the Crown Dependencies and the Overseas Territories will be replaced by the OECD’S Common Reporting Standards (CRS) Agreements from 1 January 2016.

Learn more about the UK Crown Dependencies and Overseas Territories (UKCD and OT) Regulations

Last updated: 8 April 2015

Capital and
liquidity

Basel III

Basel III is a wide-ranging group of reforms developed by the Basel Committee on Banking Supervision to reinforce the regulation, supervision and risk management of the banking industry. They are the third part of the Basel Accord and are designed to combat the deficiencies in financial regulation which emerged during the 2008 financial crisis.

The reforms are designed to:

  • Increase the banking industry’s resilience to the damaging impacts of financial and economic crises
  • Improve risk management and the governance structure of banks
  • Strengthen banks' transparency and disclosures

Basel III was agreed upon by the members of the Basel Committee on Banking Supervision in 2010-2011.

The reforming measures are planned to be implemented between 2013 and 2015.

On 1 April 2013, implementation was extended until 31 March 2018.

The objective of the reforms is to reduce the risk of systemic failure in the banking industry by building greater resilience at an individual bank level.

Learn more about the Basel III standards

CRD IV

In Europe, the Capital Requirements Directive (CRD) IV implements Basel III requirements (January 2014).

The aim of CRD IV is to minimise the negative effects of firms failing by ensuring that firms hold enough financial resources to cover the risk associated with their business.

CRD IV is the fourth amendment of this legislation. Each amendment strengthens the prudential framework for individual institutions and responds to financial stability concerns that arose during the banking crisis.

Learn more about the Capital Requirements Directive (CRD) IV

Last updated: 22 September 2014