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:
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.
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).
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
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