Ongoing Regulatory Challenges Continue to Reshape the Treasury Horizon | August 2015
New regulatory, compliance and risk dynamics require vigilance/action for today’s industry practitioners.
The ongoing regulatory focus around transaction banking continues to be one of strengthening liquidity and transaction oversight. The resulting – and evolving – regulatory mandates and compliance directives are culminating to create a risk environment that is altering many fundamental aspects of doing business around the globe. For corporate and institutional treasurers to stay on top of the changes, vigilance remains key. Keeping abreast of the developments to ensure internal policies meet new and impending requirements is one part of the equation. Just as importantly, understanding how the changes are set to impact financial providers can help businesses adjust and develop strategies as needed to achieve their goals for growth.
The increased regulatory focus highlights both quantitative and qualitative liquidity standards, both for the U.S. domestic market and globally, and by varying measures in response to the 2008 financial crisis. A sampling of some of the potentially most impactful of these currently set to affect aspects of the treasury marketplace are highlighted below.
In the U.S., banks must manage compliance with new Dodd-Frank, Basel II, and Basel III capital requirements, which are combined in the July 2013 revised capital rules.
To prepare for Basel III’s more stringent capital adequacy requirements, European banks are cutting costs and investments to preserve capital. Liquidity could also become an issue in the future. The ECB is providing low-cost liquidity to banks but, with the redefinition of assets that can be given a 100 percent weighting as being liquid assets, European banks could ultimately find themselves competing aggressively for increased retail deposits to meet the new liquidity ratios.
The LCR is intended to promote the short-term resilience of banking organizations, absorb shocks from financial and economic stress, and improve the measurement and management of liquidity risk. To achieve these goals, the LCR requires a company to hold enough “high quality liquid assets” (HQLA) to meet net cash outflows over a stressed 30-day period. The LCR rules specify which types of assets count as HQLA (e.g., cash and U.S. Treasuries) and how to calculate cash outflows (e.g., deposit run-offs) and inflows (e.g., receipt of loan payments).
In the U.S., the final LCR applies to the largest banking organizations with $250 billion or more in total assets, or $10 billion or more in on-balance sheet foreign exposure, and to insured depository institutions with $10 billion or more in total assets that are subsidiaries of such companies. A less stringent, “modified” LCR applies to banking organizations with less than $250 billion but $50 billion or more in total assets. Banking organizations covered by the final LCR rule (for the U.S. phase-in period) must meet 80 percent of the standard beginning in 2015, 90 percent in 2016, and 100 percent in 2017.
The final U.S. LCR rule mitigates many of the LCR concerns for custody and trust banks. The proposed U.S. LCR rule did not appropriately recognize stable and low risk sources of deposit funding from custody and other servicing relationships. The final rule allows a wider range of client deposits, such as cash from mutual funds and certain correspondent banking relationships, to receive LCR credit. As a result, banks may hold less HQLA against these deposits and place them into higher yielding assets. Other types of client deposits, such as cash from hedge funds and private equity funds, continue to be expensive from an LCR perspective.
For retail, universal, and broker-dealer banking organizations, the final rule improves the treatment of certain retail funding, retail brokered deposits, collateralized deposits (e.g., for public sector and corporate trust deposits), committed facilities to special purpose entities that do not issue securities or commercial paper, and assets held in segregated accounts in accordance with regulatory requirements for the protection of client trading assets.
The Federal Reserve, Financial Stability Board, and other regulators also are increasingly focused on the more general liquidity risks of short-term wholesale funding, asset fire sales, and matched books. The LCR addresses some of these risks by increasing the liquidity charge on committed credit and liquidity facilities and securities financing transactions (SFTs), but the LCR only applies to SFTs that mature within 30 days. As a result, regulators are developing other measures to address the liquidity risks of short-term wholesale funding and SFT financing, including a net stable funding ratio, heightened capital surcharge for firms that rely heavily on short-term wholesale funding and minimum margin and haircut requirements for SFTs. These requirements could increase costs for broker-dealer banking organizations and other banks that fund or service these arrangements.
Increased scrutiny around Anti-Money Laundering (AML) measures have created a new operating environment for both financial institutions and large U.S. and multinational corporations across many industry segments, including energy, media/telecom, manufacturing, automotive, transportation and logistics, real estate, insurance, healthcare and more.
Although it has always been standard practice for financial institutions to be aware of who they are doing business with, the U.S. Patriot Act has made these requirements even more essential. Passed in October 2001, this law requires all financial institutions to make sure they have AML programs in place to help prevent potential terrorism financing. Since the law was passed, adherence to KYC has been highly scrutinized by the U.S. government.
Financial institutions are required to perform due diligence with comprehensive background checks designed to help ensure their clients are who they say they are and are not participating in any illegal activity or terrorism. Strict transaction monitoring procedures are also required to uphold KYC directives.
For businesses that access the financial markets, understanding what your financial partners require with respect to KYC will help to facilitate the account opening process, on-boarding new services and aid the effective and efficient movement of transactions through the financial systems. Companies need to be sure they have effective programs in place to comply with increased efforts to monitor these risks – businesses that fail to develop such plans may face severe sanctions for their lack of oversight. The scrutiny pertains not only to financial institutions and corporations managing cash transactions, but also to individual managers within companies who can face penalties for violations of the Bank Secrecy Act, AML and regulatory requirements. Overseas accounts are also highly scrutinized for AML compliance.
As these changes aim to impact the marketplace to varying degrees, financial providers and their clients are homing in on three main areas of heightened focus to accommodate the changes, including:
For corporations and institutions, these areas of heightened focus may lead to impacts across the operation, such as the following:
Risk, regulation and cost control continue to be the key drivers among client needs for solutions that are at once flexible and scalable. This is a challenging and ever more complex environment for everyone, and clients continue to look to us to help them transform their business models, notably around risk mitigation, collateral, transparency, compliance and distribution.
BNY Mellon Treasury Services tools available to help organizations handle the new requirements include:
Intraday reporting and analytic tools available on TreasuryEdge®, our electronic banking portal, include:
BNY Mellon provides options for clients to meet expanding foreign currency service needs, enabling them to:
The service offers corporations:
The new regulatory market is dissolving the boundaries between businesses and their traditional areas of expertise. To navigate the guidelines for compliance, today businesses want broader, more multi-faceted solutions that comply with the new regulatory mandates and are delivered in a more seamless fashion. As a result, they are asking us to do more for them. Specifically, this translates into helping to develop strategies to successfully navigate these areas and build successful programs to achieve their specific goals via solutions such as those outlined above.
Contact your BNY Mellon representatives to discuss these industry trends and what you can do to help your organization plan for the opportunities that reside in a transformed marketplace.
This content is part of BNY Mellon’s Focus on Regulation Readiness, a dedicated section on bnymellon.com that showcases trending, timely and relevant regulatory and policy related content. BNY Mellon understands the new regulatory realities and has the expertise to help you keep pace, maintain compliance and get ahead.
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