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Being better informedFS regulatory, accounting and audit bulletin
PwC FS Risk and Regulation Centre of Excellence
April 2015
In this month’s edition:
Basel Committee and IOSCO announce nine monthdelay on margin requirements for non-centrallycleared derivatives
IOSCO and FSB consult on systemically importantnon-bank non-insurance firms
PRA publishes number of Solvency II final rules
FCA releases Business Plan for 2015/16
Analysis of the new senior managers regime andEBA consultation on CRD IV remunerationguidelines
FS regulatory, accounting and audit bulletin – April 2015 PwC 1
Welcome to this edition of “Beingbetter informed”, our monthly FSregulatory, accounting and auditbulletin, which aims to keep you up tospeed with significant developmentsand their implications across all thefinancial services sectors.
Spring has finally sprung, and we saw the
regulators reinvigorating their efforts
during March. The ESAs had a particularly
busy month. ESMA finalised draft technical
standards on the assessment of acquisitions
and increases in qualifying holdings in
MiFID investment firms. The EBA
consulted on exposures to shadow banking.
EIOPA published its end 2014 risk
dashboard. But their ongoing work may be
subject to some delays because the ESAs
have more restricted budgets to work with
than they hoped for. So ESMA has extended
some of its deadlines and the EBA has
dropped the 2015 EU-wide banking stress
test.
But regulatory delays aren’t confined to
Europe. The Basel Committee and IOSCO
announced a nine-month delay (to
September 2016) in implementing margin
requirements for non-centrally cleared
derivative contracts, which will be welcome
news for some firms. The regulators stated
that they are working with the industry, in
particular ISDA, to agree new margin
calculation models that will comply with
their principles.
While the rest of the world was delaying
action and dealing with shrinking budgets,
the UK added a new regulator on 1 April -
the Payment Systems Regulator (PSR) - for
the £75 trillion payment systems industry.
The PSR got off to a quick start. The week
before its official launch, it detailed its plans
for the new regulatory framework for
payment systems, released its indicative
work policy programme, and launched two
market reviews, on the supply of indirect
access to payment systems and looking at
the ownership and competitiveness of
infrastructure provision.
The PRA helped insurers towards
implementing Solvency II for 1 January
2016 by issuing a number of final rules and
supervisory statements (17 at the last count)
along with three new supporting webpages.
Clearly the PRA is currently devoting a lot of
effort to Solvency II and will be expecting
the same from firms.
The FCA was also busy establishing itself for
a new financial year, publishing its business
plan and proposing its regulated fees and
levies for 2015/16. The business plan is an
important document to gauge where the
FCA will focus its supervisory efforts and
what sectors might be hardest hit. See our
blogs analysing the impact on asset
managers, insurers and pension providers
and consumer credit firms for more
information.
Another big focus for FCA, PRA, banks and
insurers over the next year will be
implementing the new senior managers
regime. Both regulators issued more
information on the new regime in March,
including a roadmap to implementation.
See our feature article for the latest
proposals, when it will hit and who is
caught.
Regulatory scrutiny of financial services
sector compensation and remuneration
remains a hot topic. The international and
regional rules that govern remuneration
have evolved rapidly over the past few years.
We explore the latest approach of the EU
regulators in this month’s second feature
article, looking at the EBA’s recent
consultation on new remuneration
guidelines and how this could change
existing pay practices. In particular, this
change could have a substantial impact on
smaller banks as well as asset managers of
all sizes.
Hope you are all enjoying the lovely spring
weather!
Laura Cox
FS Risk and Regulation Centre of Excellence
020 7212 1579
laura.cox@uk.pwc.com
@LauraCoxPwC
Executive summary
Executive summary Individual
accountability takes
More firms caught by
bonus cap?
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 2
How to read this bulletin?
Review the Table of Contents therelevant Sector sections to identify thenews of interest. We recommend yougo directly to the topic/article ofinterest by clicking in the active links
within the table of contents.
ContentsExecutive summary 1
Individual accountability takes shape 3
More firms caught by bonus cap? 6
Cross sector announcements 8
Banking and capital markets 12
Asset management 15
Insurance 17
Monthly calendar 20
Glossary 25
Contacts 30
Executive summary Individual
accountability takes
More firms caught by
bonus cap?
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 3
Since the FCA and PRA consulted on the
new Senior Managers and Certification
regimes (SM&CR) in July 2014, there has
been much speculation on the final
structure and implementation timetable.
During March the regulators jointly issued a
number of important stepping stones to the
final regime, namely a roadmap and
refinements to the final rules. This
information makes the scope of impending
changes far clearer for banks, building
societies, credit unions and PRA-designated
investment firms.
The FCA also underlined the significance it
places on individual accountability in its
business plan on 24 March 2015. The FCA
identified five priorities; this year giving
equal billing to ‘protecting consumers’
(which is a regulatory statutory objective)
the regulator also cited ‘individual
accountability’. This approach covers a
broad scope of individual accountability,
including not only the SM&CR but also
whistleblowing, remuneration and
incentives. But the presence of this key
pillar in its approach sets a new tone.
Key changes to the regimesBoth the FCA and PRA published near final
and final rules on parts of the regime. The
FCA published Strengthening
accountability in banking: a new
regulatory framework for individuals on 16
March 2015, and the PRA published
PS3/15: Strengthening individual
accountability in banking and insurance –
responses to CP14/14 and CP26/14 on 23
March 2015. These publications build on the
disapplication of the Senior Manager (SM)
regime to ‘standard NEDs’ which the FCA
and PRA consulted on in February.
Both the FCA and PRA have made a number
of changes to the scope and application of
the SM&CR in the final rules. Specific roles
now included as a SM Function (SMF)
include:
a wider financial crime SMF, for an
individual with overall responsibility for
the firm’s policies and procedures for
countering financial crime (in addition
to the MLRO)
an individual responsible for developing
and overseeing the firm’s remuneration
policies and practices and for the firm’s
CASS compliance (previously CF10a)
for large firms, the person responsible
for stress testing.
While these additional roles superficially
appear to tweak the regime, they may pose
new challenges. Currently a CF10a typically
sits in an operational role, but under the SM
regime the new CASS SMF may have to be
held by a more senior board or executive
board committee member.
The PRA has simplified the approach for
smaller firms. Previous proposals exempted
credit unions from the full weight of the
regime. The PRA now plan to apply a more
proportionate regime for firms with less
than £250 million in gross assets. Credit
unions will continue to be exempt, but other
small firms (such as challenger entities) will
now be partially exempt.
Joint and role-specificprescribed responsibilitiesThe PCBS called for the regulators to
achieve absolute clarity for individual
function ownership. But the PRA hasn’t
entirely followed that approach. It now
intends to allow two individuals to share a
prescribed responsibility (PR). The PRA
makes the distinction that where a firm
allocates a PR to more than one SM, each
individual will be deemed wholly
responsible for the entire PR. In the event of
a breach, each SM would then have an
opportunity to explain how the shared PR
was discharged in practice when trying to
demonstrate that he or she took reasonable
steps to avoid the breach.
Also, firms in scope of the retail ring-fence
will also be subject to a ring-fenced bank
(RFP) PR. Each and every SM in the ring-
fenced bank with responsibility for an area
covered by the ring-fencing requirements
would be allocated the RFB PR, in addition
Individual accountability takes shape
Executive summary Individual
accountability takes
More firms caught by
bonus cap?
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 4
to their core SM PRs. The PRA wants to
‘underscore’ its expectations in this area.
The PRA also signposts the specific PRs that
must be allocated to NEDs, rather than
executive board members.
Certification regime andconduct rulesBoth the FCA and PRA intend to apply the
certification regime (CR) and conduct rules
as previously consulted. But they are
considering how to apply the CR to
wholesale firms. The regulators have
identified that some traders are neither
caught by the ‘material risk taker’ (MTR)
definition nor the qualification
requirements even though those individuals
have scope to cause ‘significant harm’ to the
firm. The FCA and PRA are considering this
issue further and may consult to formally
increase the scope of the CR during spring
2015. Also, the final rules will allow
uncertified individuals to cover a certified
role in exceptional circumstances for four
weeks (increased from two weeks).
Application to branchesThe FCA and PRA published Strengthening
accountability in banking: UK branches of
foreign banks on 16 March 2015. HMT
confirmed in a written statement on 3
March 2015 that new regime would apply to
both EEA and non-EEA branches.
EEA branchesThe PRA is limited in its ability to apply
requirements to incoming EEA-branches
because they are subject to home country
requirements. But the FCA has more
flexibility (as branches are subject to host
state conduct rules). It is planning to
require EEA branches to appoint:
a senior manager to the MLRO function
a tailored ‘EEA Branch Senior Manager’
function to cover each individual
responsible for the management and
conduct of certain regulated activities of
the branch.
The FCA intends to apply the CR to MTRs
and to individuals whose roles require a
qualification (or where the UK equivalent of
that role would require a qualification). The
FCA is planning to limit the certification
functions so that they apply only in relation
to the branch activity, and only when the
individual is based in the UK. But the final
scope is still subject to the ongoing
consultation on wholesale traders and the
regulators are likely to align these
requirements.
The FCA will apply the conduct rules to the
extent that they comply with EU legislation.
Conduct rules for staff who are not SMs will
only apply to individuals based in the UK,
although this territorial limitation will not
apply to SMs.
Non-EEA branchesFor incoming non-EEA branches, the
regime will be a hybrid between the scope of
the EEA branch regime and the full-UK
bank regime.
Non-EEA branches must have:
at least one SMF as the ‘Head of
Overseas Branch’ held by the individual
performing the function akin to branch
CEO
any other individuals with direct
management or decision making
responsibilities over the branch’s UK-
regulated activities will hold the SMF of
‘Group Entity Senior Manager’
an Overseas Branch Senior Manager
(OBSM) function which will capture
senior individuals (except the Head of
Overseas Branch) with responsibility for
a business area, activity or management
function of the branch, and who will
typically report to the Head of Overseas
Branch, but only in relation to their
responsibilities in the UK branch.
a MLRO
a SM responsible for Compliance
Oversight.
In larger complex branches, the PRA would
also expect the firm to have dedicated
individuals performing certain executive
SMFs such as a CFO, CRO and Head of
Internal Audit.
The PRA and FCA have created a bespoke
list of 13 PRs which must be allocated
amongst individuals in the firm who hold
SMFs. All SMs will need to be pre-approved,
will operate under a reverse burden of proof
although not with equivalent criminal
sanctions and will have a Statement of
Responsibility. The Statement of
Responsibility will formally set out an
individual’s role and responsibilities, the
division for those sharing a PR and will map
to the firm’s Responsibilities Map.
The scope of the CR for branches will be
aligned to the scope for UK firms, for
individuals who have are MRTs or who have
a qualification, but the scope may be
restricted to the branch activity. Individuals
with line management responsibility for
other individuals who fall in the CR may
also be caught, regardless of whether they
are based in the UK or abroad, in relation to
the firm’s activities for UK clients. The PRA
conduct rules will apply to all SM&CR
individuals, while the FCA will apply its
conduct rules to all branch staff, except
individuals with specific ancillary roles.
TimelineFirms now have three dates to focus on. By
8 February 2016, each firm must identify
all of its SMs and CRs, and notify the
regulators of any individuals who are being
grandfathered into SMFs. We expect the
regulators to finalise their work on fitting
other wholesale traders into the CR soon.
The broad regime then comes into force on
7 March 2016. At that point firms will
have one year to transition their certified
individuals into the CR (through a one cycle
of an annual appraisal process) by 7 March
2017.
Executive summary Individual
accountability takes
More firms caught by
bonus cap?
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 5
SMs’ responsibilities, including the reverse
burden of proof and criminal sanctions, take
effect from 7 March 2016, along with the
broad requirements of the regime such as
the Responsibility Map and individual
Statements of Responsibility.
Getting implementationrightFirms are still considering the full
implications of the regimes, with both
operational and more strategic issues to
address. The impact on the recruitment and
retention of talented individuals for the
senior roles, including NEDs remains a
concern for many firms, as does the
potential implications of a two-tier NED
structure. Firms are also concerned at the
potential for NEDs to stray into executive
functions and actions as they look for
information about and reassurance as to the
scope of their roles and responsibilities.
The potential for slower action as
individuals look for additional evidence to
ensure they are comfortable with decisions
being made is also a challenge, as is the
jurisdictional complexity of dealing with an
overseas parent and their influence over UK
governance and operations.
But with the broad scope of the regimes and
timeline now clear, firms are beginning the
first stages of their implementation plans.
Many firms have created first drafts of their
Responsibilities Maps, working across HR,
Legal and Compliance functions to tackle
questions of scope, or interaction with other
MRT remuneration obligations.
Firms must then consider testing their draft
plans. Testing the robustness of the map
against scenarios allows firms to consider
whether the allocation of responsibilities
stands up to non-standard events and is
truly fit for purpose.
Firms need also consider the wider CR and
conduct rules. The breadth of scope and
nuance of an individual firm makes a one-
size-fits-all solution difficult, with some
firms focusing on governance arrangements
for wholesale transactions, and others
considering the cultural impacts of the
conduct rules – and how best to make the
obligations ‘real’ for the large population of
staff caught by the conduct rules.
Whatever your approach, the effort required
to implement the regime should not be
underestimated. As firms analyse the
different elements of the regime, the
breadth of work – and limited timescales –
becomes clear. Firms cannot afford to miss
the February 2016 deadline to grandfather
SMs, and may need to amend existing roles
and structures in advance of that date.
Further, when firms give wider
consideration of the CR and conduct
regimes, the sheer size of the task at hand
becomes clear. Acting now will be critical to
a firm’s success.
Executive summary Individual
accountability takes
More firms caught by
bonus cap?
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 6
The level of European remuneration has
been a hot topic for politicians and
regulators since the onset of the financial
crisis. The latest development to impact
banks and MiFID investment firms came
when CRD IV was implemented in January
2014. CRD IV requires firms to apply
remuneration requirements to staff whose
activities can have a material impact on its
risk profile (usually known as ‘material risk
takers’ staff).
Further, CRD IV introduced a cap on the
amount of bonus an individual could receive
(linked to their fixed salary). National
regulators have allowed smaller banks and
asset managers to continue applying
remuneration rules applicable under CRD
III, arguing proportionality These set out
rules on when and how bonuses are paid but
crucially don’t limit the amount.
But this is set to change. In March the EBA
released its consultation on the proposed
guidelines for ‘sound remuneration policies’
across the EU. If agreed (and the EBA has
said it plans to finalise the guidelines in the
second half of 2015), the guidelines will
replace those set out by the EBA’s
predecessor (CEBS) in December 2010.
What might change?Proportionality
The EBA’s draft guidelines focus most
attention on the idea of proportionality and
how it is applied. The EBA notes that in its
view (with which, it confirms, the EC has
already agreed) the concept of
proportionality for variable remuneration is
“neutralised” by CRD IV and that it is not
possible under CRD IV to waive the variable
remuneration requirements.
Instead the EBA argues that the rules could
only be applied proportionally to very small
and non-complex firms that do not
extensively rely on variable remuneration,
or where material risk takers receive a low
amount of variable remuneration. This
means more firms should be brought into
scope of the full CRD IV variable
remuneration rules relating to the bonus
cap, deferral requirements, payment in
instruments and the application of malus
and clawback.
Deferral
The guidelines suggest that it is appropriate
to retain variable remuneration paid in
instruments for a year. Typically (e.g. in the
UK) regulators have required only a 6
month holding period. The guidelines also
propose further requirements for
individuals on the management body or in a
firm’s senior management group through
either increasing the retention period of
upfront awards to that of the deferral period
or by increasing the percentage of deferred
pay that is paid in instruments. Further if
these individuals work in significant CRD IV
firms then the deferral period would also be
increased (5 years vesting no faster than pro
rata).
Instruments
The EBA does not propose a prescriptive list
on the use of alternative capital and debt
instruments. Instead the power remains
with firms which can use instruments where
they have already issued such instruments
in significant amounts to make awards
practical.
Allowances
The EBA has not changed its views on fixed
allowances, still viewing them as part of an
individual’s fixed rather than variable pay.
It has also expanded its definitions of fixed
pay and variable pay in the guidelines,
partly to align with its views on fixed
allowances. The EBA also confirms (as per
AIFMD) that carried-interest plans do not
form part of variable remuneration where
payments do not represent a pro rata return
on an investment.
Long-term incentive plans (LTIPs)
The new guidance here could be significant
for firms operating LTIPs since the EBA
suggests performance-based LTIPs will be
counted towards variable remuneration
(and so an individual’s bonus cap) in the
year the LTIP vests rather than the year it is
awarded. This may mean firms need to
change existing programmes for LTIPs
More firms caught by bonus cap?
Executive summary Individual
accountability takes
More firms caught by
bonus cap?
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 7
which focus on share awards with forward-
looking performance conditions since these
will be difficult to value at vesting point.
What’s next?As these are guidelines that the EBA is
consulting on, regulators will eventually
need to either comply with them or explain
why they are choosing not to comply. Given
the chance of regulatory arbitrage if some
countries choose not to comply and the
political focus on bonuses it seems unlikely
that any regulator will choose not to comply.
Certainly regulators have always complied
with similar remuneration guidelines
previously.
The EBA is holding a public hearing on the
consultation on 4 May 2015 and the
consultation closes on 4 June 2015.
What does this mean forfirms?The remuneration rules faced by CRD IV
firms are already very complicated with
different rules for how bonuses are paid,
how much is paid and when bonuses are
paid. These guidelines add another layer of
complexity in certain areas.
All firms caught by CRD IV should be
concerned by the direction of these new
proposals. Clearly the EBA’s interpretation
of how the proportionality principle can be
applied in the case of CRD IV will impact a
large number of European firms and may
force firms or individuals to move outside
the EU to escape the ongoing bonus focus.
For some firms (particularly MiFID
investment firms) it may mean
reconsidering what activities the firm
carries out and whether it needs existing
permissions. Narrowing activities could
affect the bottom line but also could allow a
firm to operate under CRD III rather than
CRD IV (as is allowed by the FCA in the
UK). Such a change would negate the
impact of the changes the EBA proposes
here. We have a number of clients that are
considering such business changes.
The formalisation of the earlier EBA
opinion on allowances may be no surprise,
but will impact many. The extension of the
guidance relating to the definition of fixed
and variable pay, and in particular the
specific criteria for mapping all
remuneration components into either fixed
or variable pay, could have an impact on all
firms; we think that many questions remain,
though, around some of the definitions
included in the proposals, for example
concerning the treatment of some types of
expatriate allowance.
The other notable changes in the proposed
guidance include clarification that the
appropriate period to meet requirements for
the retention of variable remuneration paid
in instruments should be one year, rather
than the six months currently applied in the
UK. And firms that run long-term incentive
schemes could be affected by proposals
which suggest that performance-based LTIP
awards will be counted towards the bonus
cap in the year of vesting rather than in the
year of award. This could mean that many
LTIP schemes will have to be looked at
carefully and may well have wider
implications for bank’s pay models.
Executive summary Individual
accountability takes
More firms caught by
bonus cap?
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 8
In this section:
Regulation 8
Capital and liquidity 8
CRAs 8
Financial stability 8
Market infrastructure 9
MiFID II 9
Other regulatory 10
Securities and derivatives 10
Accounting 11
IFRS 11
Regulation
Capital and liquidityRedefining fixed overheads
On 24 March 2015, a new Delegated
Regulation amending an existing
Delegated Regulation as regards own
funds requirements for firms based on fixed
overheards was published in the Official
Journal.
For most asset managers and certain other
types of investment firms, capital
requirements are determined as the
equivalent of three months fixed
expenditure. This Delegated Regulation
introduces a new list of items of variable
expenditure that must be subtracted from
the total expenditure figure to arrive at the
fixed expenditure cost for CRD IV
investment firms (IFPRU firms in UK).
Some asset managers had expressed
concern that the list of variable expenditure
items in the new definition is more
restrictive than under the old rule which will
lead to a higher final figure for fixed
overheads (and therefore capital
requirements) than was previously the case.
The new definition came into effect on 13
April 2015. It is relevant for calculating
capital requirements, COREP reporting and
applications for authorisation as an IFPRU
firm from that date. BIPRU firms and firms
applying for authorisation as a BIPRU firm
are not affected by this change.
CRAsIOSCO amends CRA code of conduct
On 24 March 2015, IOSCO published
amendments to its CRA code of conduct.
IOSCO aims to:
ensure CRAs are independent and avoid
conflicts of interest
improve the transparency and timeliness
of credit ratings disclosures
improve communication with market
participants
strengthen treatment of confidential
information.
The amendments support the wider
international push to hold CRAs to a level of
accountability commensurate with their role
in the financial system. CRAs have widely
adopted previous versions of the code of
conduct and we expect them to adopt this
updated version in due course.
Keeping ESMA informed on CRAs
ESMA published its Final report -
guidelines on periodic information to be
submitted to ESMA by CRAs (dated 19
March 2015) on 23 March 2015. Registered
CRAs are already required to submit
information to ESMA in response to CESR
2010 guidance on the enforcement practices
and activities conducted under the CRA
Regulation. ESMA's new guidelines update
(and replace) the CESR guidance on the
nature and timing of information that CRAs
must submit.
In future CRAs must submit:
quarterly information on financial
revenues and costs, staff changes (such
as turnover or promotions) and details
on internal complaints submitted to
compliance
half-yearly information on board
minutes (which includes independent
NED opinions), and dispute or court
proceedings, any potential or actual
non-compliance with CRA Regulation
requirements and remedial steps to
comply and organisational charts.
The guidelines must now be translated into
the EU's official languages. CRAs will then
have two months to comply or explain why
they are not complying.
Financial stabilityWho's systemically important?
The FSB and IOSCO published a second
Consultative document on assessment
methodologies for identifying non-bank
non-insurer (NBNI) G-SIFIs on 4 March
2015. A similar methodology already exists
for banks (G-SIBs) and insurers (G-SIIs).
Cross sector announcements
Executive summary Individual
accountability takes
More firms caught by
bonus cap?
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 9
The FSB and IOSCO propose methodologies
to identify NBNIs (finance companies,
market intermediaries, asset managers and
investment funds) whose distress or
disorderly failure, because of their size,
complexity and market interconnectedness,
could lead to larger financial instability.
Because most NBNIs are primarily
regulated from a conduct perspective,
IOSCO and FSB propose a universal set of
methodological principles to address the
data and information gaps that currently
exist around systemic risk.
NBNI G-SIFIs have different forms of legal
entities and come from various industries.
Their business models and risk dynamics
also vary, so the proposed methodology
combines cross-sector risk factors along
with sector-specific criteria. The basic
impact factors include:
size
interconnectedness
substitutability
complexity
cross-jurisdictional activities.
One notable difference between the initially
proposed methodology and the current
version is that leverage is now a bigger
consideration for determining whether
investment funds meet the size criteria
thresholds.
The consultation closes on 29 May 2015.
FSB and IOSCO aim to finalise the
assessment methodologies by the end of
2015. Then they will seek to identify the
consequences of being classified as a NBNI
G-SIFI, such as requiring additional capital
or other measures. Finally IOSCO and FSB
will identify which firms and investment
funds should be identified as NBNI G-SIFIs.
Market infrastructureCCPs get stressed
On 11 March 2015, IOSCO and the
Committee on Payments and Market
Infrastructures announced that they will be
stress testing CCPs. Noting the important
role CCPs play in the global financial
system, IOSCO and the CPMI plan to check
that CCPs have the financial resources to
manage both credit and liquidity risk, which
entails incorporating a number of extreme
but plausible scenarios.
Results of the stress tests are expected later
in 2015.
FSB wants FX progress report
In his capacity as FSB Chair, Mark Carney
wrote to the Chairman of the London
Foreign Exchange Joint Standing
Committee on 20 March 2015.
Carney requested the Committee's support
in reporting on market participant's
progress in implementing the FSB's
recommendations on FX benchmarks,
published on 30 September 2014. The
Committee must report on the status of its
members as at 30 June 2015, and provide
this report to the FSB no later than 31 July
2015.
Supervising automated trading
ESMA published the findings of a Peer
Review on Automated Trading Guidelines
on 18 March 2015. It reviewed the
supervision of automated trading across 30
national competent authorities, though
focused on the 12 authorities supervising
platforms with the most significant
automated trading volumes.
ESMA assessed how regulators have
implemented its Guidelines on Automated
Trading, published in 2012. The majority of
authorities have implemented the
guidelines into their supervisory approaches
and therefore the level of supervision of
automated trading activity has increased.
ESMA also highlighted a number of
challenges in supervising automated
trading, particularly because the speed and
complexity of high frequency trading
increases the need for supervisors to
improve their IT expertise. It also suggested
that supervisors should have an appropriate
level of engagement with trading platforms,
and that on-site inspections should be used
to ensure trading platforms are sufficiently
challenged.
MiFID IIThe appropriateness of complexity
On 24 March 2015, ESMA published Draft
guidelines on complex debt instruments
and structured deposits. Firms may only
provide execution-only services to clients,
without performing a MiFID
appropriateness test, when dealing in non-
complex instruments. MiFID II has
significantly reduced the number of
instruments which can be defined as non-
complex. ESMA is required to provide
further clarity on which debt instruments
and structured deposits should be
considered complex.
Debt instruments are complex if they embed
a derivative or incorporate a structure which
makes it difficult for the client to
understand the risk of the product. Debt
instruments which fit this description
include asset backed securities, perpetual
bonds and subordinated debt instruments.
Structured deposits are now within the
scope of MiFID II investment products,
though deposits linked solely to interest
rates are excluded. ESMA identifies which
structured deposits:
incorporate a structure which makes it
difficult for the client to understand the
risk and return such as more than one
variable affecting the return received or
where a complex relationship exists
between the relevant variable and return
make it difficult for the client to
understand the cost of exiting before the
term has finished such as an exit penalty
which is not a fixed sum or percentage of
the original investment.
Structured products meeting these criteria
will be considered complex under MiFID II.
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The consultation closes on 15 June 2015
and ESMA expects to publish the final
guidelines in Q4 2015.
Updated MiFID RTS to correct error
ESMA published its Final report - draft
RTS under MiFID on the assessment of
acquisitions and increases in qualifying
holdings in investment firms on 27 March
2015. These RTS were required as a result of
an amendment introduced to MiFID by the
Omnibus I Directive. However, a reference
error in that Directive required a
corrigendum to be adopted, and the RTS
submitted to the EC in December 2013 to be
amended, before they could be endorsed.
In the revised version, ESMA has also
introduced a new Article 6 to the RTS
looking at information on the persons that
will effectively direct the business of the
target entity. MiFID II contains identical
empowerments to the requirements
introduced by the Omnibus I Directive, so
these RTS once adopted, will apply both
under the MiFID and the MiFID II regimes.
Other regulatoryRegulation out, growth in?
Lord Hill, Financial Services Commissioner,
spoke on 17 March 2015 about a number of
"reality checks" needed by politicians and
the financial services industry to move the
EU away from the financial crisis towards
growth. Hill believes we have now moved on
from needing to develop new regulation to
cope with yesterday's problems. So the EC
will consider what can be done to promote
jobs and growth. This will include
examining whether the regulation
implemented to respond to the financial
crisis achieves what it set out to do and
whether it does this through imposing the
minimum of burdens on firms.
But Hill recognises that there are some new
risks that have emerged more recently so he
called for a swift conclusion to the
outstanding proposals on MMFs,
benchmarks and bank structural reform. He
also confirmed plans to release a new
proposal by the autumn to develop a
resolution regime for non-bank financial
institutions - in particular CCPs, which now
take on much of the risk under EMIR.
Finally Hill moved on to his pet project, the
CMU. He believes this will drive growth and
create jobs by recreating a thriving
securitisation market in the EU and by
increasing funding from across financial
services into infrastructure and SMEs. As
part of this Hill noted that the review into
the success of CRR will focus on whether the
rules imposed on banks are appropriate to
meet the long-term financing requirements
that their clients need.
Lessening disclosure to protect secrets
ESMA published its Call for evidence - the
extension of the disclosure requirements to
private and bilateral transactions for
Structured Finance Instruments (SFIs) on
20 March 2015. Issuers, originators and
sponsors of SFIs must publicly disclose
certain information under the CRA
Regulation, allowing investors to assess the
creditworthiness of the transaction.
But these requirements are not adapted for
different types of SFI transaction. ESMA
recognises that for private and bilateral
transactions in SFIs it might be prudent for
less information to be disclosed, e.g. to
protect the issuer's trade secrets. Adequate
disclosure needs to be achieved to meet the
CRA Regulation's objective of providing
investors with enough information. So
ESMA calls for input on how to:
define private and bilateral transactions
in SFIs and establish whether different
disclosure requirements should be
established for each type of transaction
assess whether the disclosure
requirements should be copied across
identically for private and bilateral
transactions or whether they should be
amended.
The call for evidence closes on 20 May
2015.
Securities and derivativesBilateral margin delayed until 2016
BCBS and IOSCO announced a nine month
delay to the globally agreed implementation
date for non-centrally cleared margin when
they published the amended Margin
Requirements for Non-centrally Cleared
Derivatives on 18 March 2015. The new
schedule delays implementation of both
initial margin (IM) and variation margin
(VM) requirements from 1 December 2015
to 1 September 2016. The full phase-in
schedule for IM has been adjusted
accordingly in the BCBS/IOSCO margin
standards.
BCBS and IOSCO state that they are
working with the industry to agree new IM
calculation models that will comply with the
BCBS/IOSCO principles. EU rule makers
are expected to amend the draft EMIR rules
for non-centrally cleared margin to align
them to the international schedule.
Updated EMIR Q&A
ESMA published the 12th update to its Q&A
on EMIR on 31 March 2015. The update
includes new questions on:
the status of sovereign wealth funds
under EMIR
outsourced assets under the Article 89
pension scheme exemption
frontloading and the intragroup
exemption to the clearing obligation
third country contracts
CCP authorisation
variation margin.
The questions and answers provide
guidance for regulators and firms to help
interpret various technical aspects of EMIR.
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Accounting
IFRSNew revenue standard discussionscontinue
The IASB has published notes from its
meeting with the FASB on 18 March 2015,
to discuss the following implementation
issues related to the new revenue standard:
practical expedients upon transition—
contract modifications and completed
contracts
sales tax presentation: gross versus net
non-cash consideration
collectability considerations
principal versus agent considerations.
Both boards agreed to propose a new
practical expedient to provide relief from
evaluating contract modifications prior to
the date of initial application of the
standard. The boards also agreed to propose
other practical expedients and clarifications
to the standard, although they were not fully
aligned on their approach. The IASB plans
to include the agreed-upon changes in a
package of proposed amendments it expects
to issue later this year.
See In Transition ‘FASB and IASB decide on
additional changes to revenue standard’ for
our overview of the implementation issues
discussed and the tentative decisions
reached.
Proposed amendments to statement ofcash flows
The IASB issued Investor perspective:
Helping Investors Better Understand Cash
Flow on 23 March 2015. This paper looks at
the merits of proposed amendments to IAS
7,'Statement of cash flows', to provide more
information about changes in debt.
New leases standard project update
The IASB published a project update
‘Leases: Practical implications of the new
Leases Standard’ on 16 March 2015. It
outlines the likely practical effects of the
new leases standard, which will require
companies to bring leases onto the balance
sheet, as well as providing details on the
similarities and differences between the
IASB’s requirements and those of the US
FASB.
New IFRSs for 2015
Our In depth guide ‘New IFRSs for
2015’outlines the new IFRS standards and
interpretations that come into effect for
2015 year ends. The IASB has issued three
new standards: IFRS 9 ‘Financial
instruments’, IFRS 14 ‘Regulatory deferral
accounts’, IFRS 15 ‘Revenue from contracts
with customers’.
The IASB has also made a few narrow scope
amendments to existing standards effective
for 1 July 2014, that have been endorsed by
the EU as effective on or after 1 January
2015, and various other amendments that
are still subject to endorsement.
Reminder of Listing Rule disclosures
The FCA’s Listing Rules (Listing Regime
Enhancements) Instrument 2014 require
premium listed companies to make certain
disclosures ranging from related party
transactions to certain long-term incentive
schemes (as well as new disclosures for
companies with controlling shareholders) in
one place in the annual report, or to provide
a cross-reference table.
Our In brief guide ‘Profit forecasts and
unaudited financial information –
reminder of Listing Rule disclosure
requirements’ considers how firms have
implemented these requirements and issues
encountered re disclosures relating to profit
forecasts and unaudited financial
information.
Impairment of financial assets – Q & A
The IASB published the complete version of
IFRS 9 ‘Financial instruments’ in July 2014.
This replaces most of the guidance in IAS 39
and contains a new impairment model
which will result in earlier recognition of
impairment losses.
Our In depth guide ‘A look at current
financial reporting issues IFRS 9:
Impairment of financial assets – Questions
and answers’ includes our views on some of
the most common issues that have been
raised by preparers and reviewers of
financial statements as part of
implementation of the new standard in
relation to impairment.
Impairment of non-financial assets
Following our In brief guide ‘Top 5 tips for
impairment reviews of non-financial
assets’ published in January 2015, we have
published an In depth guide: ‘A look at
current financial reporting issues:
Impairment of non-financial assets –
Expanding on the top 5 tips for impairment
testing. This considers in more detail the
five key areas of focus when completing
impairment review for non-financial assets.
Capitalisation of borrowing costs
Our In depth guide ‘A look at current
financial reporting issues: IAS 23 -
Capitalisation of borrowing costs considers
the practical implementation of IAS 23 in
areas of uncertainty including specific
versus general borrowings, when to start
capitalisation, total borrowing costs eligible
for capitalisation, and whether foreign
exchange differences should be capitalised.
IFRS 8 ‘Operating segments’
Our In depth guide ‘A look at current
financial reporting issues: A fresh look at
IFRS 8, ‘Operating segments’ explains why
segment reporting is important, the key
requirements of IFRS 8, ‘Operating
segments’, and discusses practical issues
that have evolved over time including
disclosure requirements that are often
overlooked or misunderstood.
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In this section:
Regulation 12
Capital and liquidity 12
Other regulatory 13
Recovery and resolution 13
Reporting 14
Regulation
Capital and liquidityNo EBA stress tests in 2015
The EBA confirmed that it will not perform
bank stress tests in 2015 in a letter to the
EP, EC and Council on 2 March 2015.
Instead it plans to run a transparency
exercise in line with its 2013 exercise to
provide detailed data on EU banks' balance
sheets and portfolios, and to prepare for the
next stress test in 2016.
The EBA decided not to run 2015 stress
tests because it feels comfortable with
banks' capital raising following on from the
2014 comprehensive review. It also
acknowledged the burden that the
comprehensive review imposed on banks
last year.
Basel III FAQs
On 11 March 2015, the Basel Committee
published an updated list of FAQs for banks
participating in the Basel III monitoring
exercise.
A sample of banks complete a questionnaire
on the impact of Basel III and submit it to
the Basel Committee twice a year. The FAQ
document lists those questions that banks
most frequently raise when completing the
questionnaire. The questions cover the full
range of Basel III initiatives but there is a
particularly high volume of questions and
answers on liquidity and the NSFR.
Approving market risk model changes
The EC published a new Delegated
Regulation amending an existing
Delegated Regulation as regards RTS for
assessing the materiality of extensions and
changes of internal approaches when
calculating own funds requirements for
market risks on 4 March 2015.
The Delegated Regulation sets out certain
qualitative tests for determining whether or
not a change or extension to a market risk
model is 'material' and therefore requires
prior regulatory approval. Any amendment
that would cause a significant change in
capital requirements is likely to require
regulatory approval.
An annex to the Delegated Regulation sets
out quantitative thresholds to help firms
determine whether or not a change or
extension is material. Firms won't need
approval for non-material model changes.
But they will still have to notify national
regulators in a prescribed format set out in
the delegated act, and provide supporting
documentation.
The Delegated Regulation should be
published in the Official Journal shortly. It
will then form part of the single rulebook on
prudential regulation.
Banking and capital markets
Mark JamesPartner, Jersey office+44 (0) 1534 838304mark.james@je.pwc.com
James de VeulleDirector, Jersey office+44 (0) 1534 838375james.de.veulle@je.pwc.com
Nick VermeulenPartner, Guernsey office+44 (0) 14 81 752089nick.vermeulen@gg.pwc.com
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Limiting exposure to the shadows
The EBA launched a consultation on draft
guidelines on limits on exposures to
shadow banking activities which carry out
banking activities outside a regulated
framework under the CRR on 19 March
2015. The EBA seeks comments on its
definition of shadow banking entities which
focuses on those firms carrying out credit
intermediation activities outside the scope
of prudential requirements. In this
definition, the EBA incorporates the four
features of credit intermediation identified
by the FSB:
maturity transformation - borrowing
short and lending/investing on longer
timescales
liquidity transformation - using cash-
like liabilities to buy less liquid assets
leverage
credit risk transfer.
The EBA proposes that all investment funds
would fall into the scope of the definition of
shadow banking entities, except non-MMF
UCITS. Despite the security of the UCITS
brand, the EBA believes that the systemic
risks posed by MMFs have not been
adequately addressed through existing
regulation.
Most banks would be subject to the
principal approach, requiring them to set
tailored exposure limits for both individual
shadow banking entities and aggregated
exposures. Under the principal approach,
individual exposure limits would
incorporate an understanding of the
regulatory status, financial situation,
portfolio composition and credit
assessments of the shadow banking
institution.
The consultation closes for comments on
19 June 2015.
Other regulatoryRisk dashboard showing higher capital
On 16 March 2015 the EBA published its
Risk Dashboard Q4 2014 which
summarises the main risks and
vulnerabilities in the EU banking sector,
based on the evolution of key risk indicators
from 55 banks. The dashboard confirms the
positive trend of EU banks' capital
positions, with the CET1 ratio reaching
12.1% per cent in Q3 2014 compared to
11.8% in Q2. This is the highest level since
2009 and was driven by an increase in
retained earnings and capital issuances that
outpaced a more modest growth of RWAs. It
also reveals the levels of non-performing
loans to be stable, but still generally very
high, despite divergences across banks. As a
result the EBA stresses the need for
continuous monitoring of credit quality,
accompanied by consistent transparency of
banks' exposures.
Profitability levels remain volatile and
predominantly at low levels throughout the
sector. Returns continue to be subdued.
Profitability dispersion across banks and
jurisdictions is material, but continues to
narrow. The dashboard also shows that
balance sheets' structures continue to shift
towards less indebtedness with the loan-to-
deposit ratio at an all-time low of 109.3 per
cent. Similarly, the share of customer
deposit to total liabilities is at 49.2 per cent,
a record high for the available data.
Recovery and resolutionEBA consults on financial contractsrecords
On 6 March 2015, the EBA published a
consultation paper on draft RTS for a
minimum set of the information on
financial contracts that should be
contained in the detailed records of a bank
or other relevant entity and the
circumstances in which the requirement to
maintain records should be imposed.
Resolution authorities can temporarily
suspend a party's termination rights to a
contract with an institution which is under
resolution under the BRRD. To support this
power, resolution authorities may require a
bank or other relevant entity to maintain
detailed records of its financial contracts.
The EBA proposes that banks and other
relevant entities which are likely to be
subject to resolution actions (as determined
by their resolution plans) collect the
information in advance. They will then need
to make this information available to the
resolution authorities upon request.
Conversely, banks and other relevant
entities that are likely to be placed into an
insolvency procedure (rather than
resolution) are not automatically subject to
the requirement to maintain detailed
records of financial contracts. This is
intended to ensure proportionality. The
EBA specifies a minimum list of
information that should be contained in the
records of financial contracts to strike a
balance between the need to achieve an
appropriate level of convergence in record-
keeping, while allowing competent
authorities and resolution authorities to
impose additional requirements.
Where possible, the EBA uses the same
language and structure as that in the EMIR
RTS for reporting data to trade repositories
to ensure consistency between different
regulatory requirements and reduce the
reporting burden.
The consultation closes on 6 June 2015.
EBA finalises technical advice
On 6 March 2015 the EBA published three
technical advice papers under BRRD on:
critical functions and core business
lines
deferral of extraordinary ex-post
contributions
the circumstances when exclusions
from the bail-in tool are necessary.
The technical advice on critical functions
and core business lines reflects the FSB’s
“Guidance on Identification of Critical
Functions and Critical Shared Services”. It
also reflects its own benchmarking exercise
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reviewing the recovery plans of 27 European
cross-border banking groups (published in
conjunction with the technical advice as
“Comparative report on the approach to
determining critical functions and core
business lines in recovery plans”).
The comparative report illustrates the
preferred assessment criteria used by banks
to determine critical functions and core
business lines and the most common set of
indicators to support this assessment. The
EBA suggests that banks should review the
report to identify best practice and their
positioning in relation to peers so as to
ensure that their recovery plans correctly
assess critical functions and core business
lines.
Under BRRD all EU banks shall contribute
towards resolution funds in their member
states by annual ex-ante contributions and,
if such ex-ante contributions are
insufficient, by extraordinary ex-post
contributions. A resolution authority may
defer the payment of an ex-post
contribution by an individual bank for so
long as such payment would jeopardise the
bank’s liquidity or solvency. The second
technical advice aims to specify the meaning
of the likelihood that a payment would
“jeopardise” a bank’s financial condition
and the circumstances in which this could
lead to a deferral. The EBA recommends
that resolution authorities analyse the
impact on solvency and liquidity of a bank
before allowing deferral of ex-post
contributions and that this should only be
permitted in exceptional cases.
Finally the third piece of technical advice
looks at when the bail-in tool might not be
applied. The EBA suggests that use of the
exclusion should be limited to the minimum
necessary to achieve the objective which
justifies the exclusion.
The technical advice is now with the EC to
approve and adopt into BRRD delegated
acts.
Constructing reorganisation plans
The EBA published Draft RTS and
guidelines on Business Reorganisation
Plans under BRRD on 9 March 2015. The
EBA specifies the minimum elements to be
included in the business reorganisation plan
which is required when the competent and
resolution authority applies the bail-in tool.
The EBA requires the reorganisation plan to
set out the cause of failure, how failures will
be corrected and show that the organisation
can operate viably in the long-term. The
reorganisation strategy should rely on
prudent assumptions and the relevant
market and macro-economic situation. It
should also include projections on the
financial performance of the institution
during the reorganisation period with
relevant milestones and indicators for a
base-case, as well as best and worst case
scenarios.
The EBA requires the competent and
resolution authorities to assess the
credibility of the plan and its assumptions
in addition to the appropriateness of the
strategy and measures. The authorities also
need to ensure the plan is consistent with
other policy objectives.
The consultation closes on 9 June 2015.
ReportingMore regulatory reporting inEurozone
The ECB published Feedback statement:
Responses to the public consultation on the
draft ECB Regulation on reporting of
supervisory financial information on 26
March 2015. The Governing Council of the
ECB adopted the ECB Regulation on 17
March 2015 and it was published in the
Official Journal on 31 March 2015 (entering
into force on 1 April 2015).
CRD IV introduced FINREP, the European
regulatory reporting of financial
information. Current FINREP reporting is
restricted to consolidated reporting by
groups that prepare their financial
statements under IFRS. The ECB is
extending FINREP reporting to include
consolidated reporting by non-IFRS
reporting banking groups, to solo reporting
by subsidiaries incorporated in the
Eurozone of both non-IFRS and IFRS
reporting banking groups and Eurozone
branches of non-Eurozone banking groups.
This includes Eurozone subsidiaries and
branches of the non-Eurozone banking
groups, such as Eurozone subsidiaries and
branches of UK and US banking groups.
The extent of reporting is tiered ranging
from, 'Full FINREP' reporting for
consolidated reporting by banking groups
supervised directly by ECB termed as
'significant' to 'Supervisory financial
reporting data points' for subsidiaries and
branches deemed 'less significant' and with
total assets less than €3bn.
The first reporting date for significant
groups is 31 December 2015 and for less
significant groups is 30 June 2017.
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In this section:
Regulation 15
Alternative investments 15
Retail products 16
Regulation
Alternative investmentsUpdated AIFMD Q&As
ESMA updated Q&As - application of the
AIFMD on 26 March 2015, setting out new
and updated Q&As on:
non-EU AIF reporting - frequency is
determined by AIFMs aggregating all
AIFs marketed in the EU, rather than in
each Member State
currency hedging - should be reported in
the AIF's base currency
stress tests - non-EU AIFMs should
report stress tests results only where
local national private placement regimes
require stress tests to be conducted
launching new AIFs - new notifications
are not required to regulators when
launching an additional AIF in a
Member State
leverage calculations - cash held in an
AIF's base currency should be excluded
from gross method calculations
own fund requirements - investments in
other AIFs under the same AIFM when
calculating additional own fund initial
capital requirements should be excluded
but not when calculating professional
indemnity insurance requirements.
AIFMs and associated service providers
should review the updated Q&As.
Regulators sharing AIFMDinformation
On 27 March 2015 the Commission
Delegated Regulation on the information to
be provided by competent authorities to
ESMA under AIFMD was published in the
Official Journal. Member State regulators
must provide information to ESMA on:
the use of the EU marketing passport by
AIFs
non-EU AIFs and non-EU AIFMs
making use of any local private
placement rules.
The Delegated Regulation sets out the exact
data requirements on national regulators
and comes into force on 16 April 2015.
Widening CIS exemptions
On 19 March 2015, Parliament published
The Financial Services and Markets Act
2000 (Collective Investment Schemes)
(Amendment) Order 2015. The Order
corrects a mistake in the original FSMA
(CIS) Order by replacing "refusing" with
Asset management
John LuffPartner, Guernsey office+44 (0) 1481 752121john.luff@gg.pwc.com
Mike ByrneDirector, Jersey office+44 (0) 1534 838278Michael.j.byrne@je.pwc.com
Adam GulleySenior Manager, Jersey+44 (0) 1534 8382390adam.gulley@je.pwc.com
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"reducing" in relation to EIS. Social
investment schemes are exempted from
being considered as a CIS under section 235
of FSMA. To qualify as exempt a social
investment scheme must:
invest only in shares or debentures that
comply with the social investment
scheme requirements set out in the
Income Tax Act 2007
allow each participant in the scheme to
be entitled to a part of the scheme
property but ensure they only able to
withdraw from the scheme after seven
years
participants must invest at least
£2,000.
The Order came into force on 13 April 2015.
Retail productsUpdated KIID Q&As
ESMA published updated Q&As - key
investor information documents (KIIDs)
for UCITS on 26 March 2015. ESMA
confirmed that where two UCITS merge and
the receiving UCITS is newly established,
the KIID can use the past performance
information of the other UCITS - if the
receiving UCITS' regulator believes the
merger does not impact the past
performance information.
If the investment strategy of the continuing
UCITS is different from the merging UCITS
then the UCITS' regulator may not believe it
is appropriate to show past performance
information for the merging UCITS as the
continuing fund will be investing
differently.
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In this section:
Regulation 17
Solvency II 17
Conduct 19
EU update 19
Accounting 19
Regulation
Solvency II‘Set 1’ of implementing regulationspublished
Three Solvency II implementing regulations
were published in the Official Journal on 20
March 2015, and came into force on 21
March 2015:
Approval of an internal model
The process to reach a joint decision on
the application to use a group internal
model
The procedures for supervisory
approval to establish special purpose
vehicles (SPVs), for the cooperation and
exchange of information between
supervisory authorities regarding SPVs
as well as to set out formats and
templates for information to be
reported by SPVs
A further three Solvency II implementing
regulations were published in the Official
Journal on 25 March 2015, coming into
force on 26 March 2015:
The supervisory approval procedure to
use undertaking-specific parameters
The procedures to be used for granting
supervisory approval for the use of
ancillary own-fund items
The procedures to be followed for the
supervisory approval of the application
of a matching adjustment
These implementing regulations are based
on drafts EIOPA submitted to the EC in
October 2014.
Supervisors exchanging information
EIOPA published a Proposal for ITS on the
procedures and templates for the
submission of information to the group
supervisor as well as the exchange of
information between supervisory
authorities on 27 March 2015. This draft
ITS deals with how supervisors in a
supervisory college exchange information
between themselves. Firms may be
impacted if supervisors need to share new
information they do not currently collect.
The consultation closes on 22 May 2015.
EIOPA plans to send this ITS to the EC by
30 June 2015 for final endorsement.
Further to this, members of EIOPA’s Board
of Supervisors and EIOPA’s Chair, Gabriel
Bernardino, signed coordination
arrangements for all colleges of supervisors
of insurance groups with internal models on
Insurance
Evelyn BradyPartner, Guernsey office+44 (0) 1481 752013evelyn.brady@gg.pwc.com
Adrian PeacegoodDirector, Guernsey office+44 (0) 1481 752013adrian.peacegood@gg.pwc.com
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27 March 2015. These arrangements lay the
basis for future cooperation within colleges
including their decision making procedures.
Progress on internal model pre-applications
EIOPA published its Progress Report on the
Follow-up to the Peer Reviews on Pre-
application for Internal Models on 20
March 2015. It concludes that the vast
majority of recommendations for assessing
internal models in the Solvency II pre-
application process have already been
followed-up and the remainder should be
implemented by mid-2015.
EIOPA reviews Solvency II equivalence
EIOPA published its Final Report on full
equivalence assessment of Bermuda, Final
Report on full equivalence assessment of
Japan and Final Report on full equivalence
assessment of Switzerland on 11 March
2015. Under Solvency II the EC may
determine whether the solvency regime of a
third country is equivalent to Solvency II in
three areas – reinsurance activities where
the insurer is based in a third country, third
country insurers part of an EEA group and
EEA insurers with non-EEA parents.
EIOPA concludes that:
Bermuda meets the criteria for
equivalence in respect of commercial
insurer in all three areas with a number
of caveats. EIOPA’s assessment relates
specifically to the supervision of
commercial insurers in Bermuda, and
not to captives.
Japan meets the criteria for equivalence
for reinsurance activities with a number
of caveats.
Switzerland meets the criteria for
equivalence in all three areas with a
number of caveats. These caveats would
be mainly addressed by a pending
revision of the Insurance Supervisory
Ordinance (ISO) assuming the current
draft is implemented and enters into
force in 2015.
The final reports are largely unchanged
from those consulted on in December 2014.
The equivalence assessment of Bermuda has
been updated for future developments and
limited changes have been made to the
assessment of the Japanese supervisory
system. The equivalence assessment of the
Swiss supervisory system has remained
unchanged.
Deteriorating financial conditions
EIOPA published its Final Report on the
advice to the EC in response to the call for
advice on recovery plan, finance scheme
and supervisory powers in deteriorating
financial conditions on 28 March 2015.
Under Solvency II, if a firm fails to comply
with their SCR they have to submit a
realistic recovery plan to their supervisor
within two months. Similarly, if they fail to
comply with their Minimum Capital
Requirement (MCR) they have a month in
which to submit a short term realistic
finance scheme to their supervisor and they
are allowed a maximum of three months to
comply with the MCR.
EIOPA’s advice to the EC:
describes the information companies
must submit when they do not comply
with the SCR or MCR
suggests companies should submit a
combined recovery plan and finance
scheme when companies fail to comply
with both the SCR and MCR at once
highlights the criteria for the
supervisory approval of the submitted
recovery plan or finance scheme
provides a list of some measures
supervisors can take if a company’s
solvency position deteriorates further
describes the circumstances to be taken
into account by supervisors when
deciding on the measures to be adopted.
The draft RTS should now be reviewed and
adopted by the EC in due course.
Infrastructure investments by insurers
Following the EC’s request for technical
advice in February 2015, EIOPA published a
discussion paper on infrastructure
investments by insurers on 27 March 2015.
EIOPA is exploring both the possibility of
introducing a specific standard formula
treatment for infrastructure investments
and also how partial internal models could
be used in the context of investing in
infrastructure projects. The discussion
paper sets out initial ideas on the following
topics:
defining infrastructure investments that
offer predictable long-term cash-flows
and whose risks can be properly
identified, managed and monitored by
insurers
possible criteria for this new class of
long-term lower risk infrastructure
assets covering issues such as
standardisation and transparency
prudentially sound treatment of the
identified investments within a risk
based supervisory system, focusing on
their specific risk profile
effectiveness of the current Solvency II
risk management requirements in
ensuring that the risks of this complex
and, for insurers, relatively new asset
class, are properly managed.
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FS regulatory, accounting and audit bulletin – April 2015 PwC 19
The discussion paper closes to comments on
26 April 2015.
Credit quality under Solvency II
The Joint Committee of the ESAs published
a Joint Consultation Paper on Draft ITS on
the allocation of credit assessments of
External Credit Assessment Institutions
(ECAIs) to an objective scale of credit
quality steps under Solvency II on 6 March
2015. The draft ITS contains a mapping of
ECAI’s credit ratings to Solvency II’s Credit
Quality Steps. This mapping is useful for
calculating Solvency II capital requirements
under the Standard Formula and aids risk
management of EU insurers.
The consultation closed on 10 April 2015.
ConductRegulating insurance conduct
On 12 March Katja Wurtz, EIOPA's head of
Cross-Sectoral and Consumer Protection
Unit, spoke about The future of European
market conduct regulation. She described
three issues which she believes will have an
important impact on the next period of
conduct regulation:
Regulators will use 'smart regulation' in
the future by taking more account of real
consumer behaviour.
The importance of effective product
oversight and governance, with firms
taking a holistic approach, looking at the
entire life cycle of products, covering
product design and testing, the
identification of target markets and
suitability assessments, the choice of
distributors, the setting up of
remuneration, commissions and other
incentives so as to ensure customer
interests are put foremost.
The effect of digitalisation and how it
will change how products are developed
and distributed to the public.
EU updateDeteriorating financial conditions
EIOPA published its Final Report on CP-14-
062 on the advice to the EC in response to
the call for advice on recovery plan, finance
scheme and supervisory powers in
deteriorating financial conditions on 28
March 2015. This report includes feedback
from the consultation process, which ended
on 18 February 2015, and EIOPA's advice on
regulatory technical standards for EC
adoption.
Under Solvency II, if a firm fails to comply
with their Solvency Capital Requirement
(SCR) they have to submit a realistic
recovery plan to their supervisor within two
months. Similarly, if they fail to comply with
their Minimum Capital Requirement (MCR)
they have a month in which to submit a
short term realistic finance scheme to their
supervisor and they are allowed a maximum
of three months to comply with the MCR.
EIOPA's advice to the EC:
describes the information required from
companies when they do not comply
with the SCR or MCR
advocates the submission of a combined
recovery plan and finance scheme when
companies fail to comply with both the
SCR and MCR at once
highlights the criteria for the
supervisory approval of the submitted
recovery plan or finance scheme
provides a list of some measures
supervisors can take if a company's
solvency position deteriorates further
describes the circumstances to be taken
into account by supervisors when
deciding on the measures to be adopted.
March risk assessment
EIOPA published its Risk Dashboard for
March 2015 based on Q4 2014 data on 20
March 2015. EIOPA concludes that the risk
environment facing the insurance sector
remains challenging. The risk of
interlinkages and imbalances has increased
since the previous quarter - EIOPA believes
that increased derivative holdings are likely
due to increased exchange rate movements.
Accounting
Insurance Contracts project update
The IASB published Investor Perspectives -
February 2015 on 3 March 2015 to update
investors on the progress of its insurance
contracts project and proposals to address
the only remaining issue to be resolved, the
pattern of profit recognition for
participating contracts. The IASB met on 19
March 2015 to continue discussions on
participating contracts and specifically
discussed whether the contractual service
margin (‘CSM’) should be adjusted for the
insurer’s share of investment returns, scope,
how interest expense should be recognised
and how the CSM should be allocated in
profit or loss. The Board did not make any
decisions. See our Insurance alert ‘IASB
education session on 19 March 2015’ for
details.
The IASB published a Project update:
Insurance Contracts without Participation
Features on 16 March 2015. This paper
gives an overview of the IASB’s tentative
decisions on the general model that would
apply to insurance contracts without
participation features, and its reasons for
reaching those decisions.
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Cross sector
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Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 20
Open consultations
Closing datefor responses
Paper Institution
26/04/15 Discussion paper on infrastructure investments by insurers EIOPA
27/04/15 Consultation paper – draft RTS on prudential requirements for central securities depositories under the CSDR EBA
30/04/15 Consultative document – guidance on accounting for expected credit losses BaselCommittee
05/05/15 Discussion paper – future of the IRB approach EBA
13/05/15 Green paper – building a CMU EC
13/05/15 Consultation document – review of the Prospectus Directive EC
13/05/15 Consultation document – an EU framework for simple, transparent and standardised securitisation EC
20/05/15 Call for evidence: the extension of the disclosure requirements to private and bilateral transactions for structured financeinstruments
ESMA
22/05/15 Consultation paper on the draft ITS on the procedures and templates for the submission of information to the group supervisor aswell as the exchange of information between supervisory authorities
EIOPA
29/05/15 Assessment methodologies for identifying non-bank non-insurer global systemically important financial institutions FSB andIOSCO
Monthly calendar
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Banking and capital
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Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 21
Closing datefor responses
Paper Institution
04/06/15 Consultation paper – draft guidelines on sound remuneration policies under CRD IV and the CRR EBA
06/06/15 Consultation report – market intermediary business continuity and recovery planning IOSCO
06/06/15 Consultation report – mechanisms for trading venues to effectively manage electronic trading risks and plans for businesscontinuity
IOSCO
06/06/15 Consultation paper – draft RTS on a minimum set of the information on financial contracts that should be contained in thedetailed records and the circumstances in which the requirement should be imposed under the BRRD
EBA
09/06/15 Consultation paper – draft RTS and guidelines on business reorganisation plans under BRRD EBA
15/06/15 Consultation paper – draft guidelines on complex debt instruments and structured deposits ESMA
19/06/15 Consultation paper – draft guidelines on limits on exposures to shadow banking entities which may carry out banking activitiesoutside a regulated framework under the CRR
EBA
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Cross sector
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Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 22
Forthcoming publications in 2015
Date Topic Type Institution
Consumer protection
Q3 2015 Calculation of contributions to DGSs Guidelines EBA
Financial crime, security and market abuse
Q2 2015 Draft MAR technical standards Technical standards ESMA
TBD 2015 Advice to Commission on Benchmark legislation Advice ESMA
Prudential
Q1 2015 Update on ITS on reporting of the leverage ratio Technical standards EBA
Q2 2015 LGD floors for mortgage lending Consultation EBA
Q2 2015 RTS on PD estimation Technical standards EBA
Q4 2015 Report on NSFR methodologies Report EBA
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Cross sector
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Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 23
Date Topic Type Institution
Securities and markets
Q1 2015 Implementing acts on third country equivalence decisions on exposuresto third country investment firms, clearing houses and exchanges treatedas exposures to an institution
Advice EBA
Q2 2015 Consultation Paper on MAR guidelines Consultation paper ESMA
Q2 2015 Technical advice to the Commission on the review of EMIR Technical advice ESMA
Q2 2015 MiFID/MiFIR Draft Regulatory Technical Standards Technical standards ESMA
Q2 2015 Draft technical standards on CSDR Technical standards ESMA
Q4 2015 MiFID/MiFIR Draft Implementing Technical Standards Technical standards ESMA
Q4 2015 Securities Financing Transactions Regulation Discussion or ConsultationPaper on technical standards
Consultation or technical standards ESMA
Products and investments
Q3 2015 Advice on the application of the passport to third-country AIFMs andAIFs
Advice ESMA
TBD 2015 Undertakings For The Collective Investment of Transferable Securities V Technical advice ESMA
TBD 2015 RTS on format and content of disclosures in KID for PRIPs Technical standards ESMA
Recovery and resolution
Q2 2015 Advice on the criteria for determining the number of years by which theinitial period for the build up of the SRF may be extended
Advice EBA
Executive summary Individual
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Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 24
Date Topic Type Institution
Q2 2015 Partial transfer safeguards Advice EBA
Q3 2015 Notification requirements Technical standards EBA
Q3 2015 RTS on Contractual Bail in Technical standards EBA
Solvency II
TBD 2015 Solvency II Level 3 measures Level 3 text EIOPA
Supervision, governance and reporting
Q4 2015 Assessment of national SREP approaches Report EBA
Main sources: ESMA 2015 work programme; EIOPA 2015 work programme; EBA 2015 work programme; EC 2015 work programme; FCA policy development updates
Executive summary Individual accountability
takes
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 25
2EMD The Second E-money Directive 2009/110/EC
ABC Anti-Bribery and Corruption
ABI Association of British Insurers
ABS Asset Backed Security
AIF Alternative Investment Fund
AIFM Alternative Investment Fund Manager
AIFMD Alternative Investment Fund Managers Directive 2011/61/EU
AIMA Alternative Investment Management Association
AML Anti-Money Laundering
AML3 3rd Anti-Money Laundering Directive 2005/60/EC
AQR Asset Quality Review
ASB UK Accounting Standards Board
Banking ReformAct (2013)
Financial Services (Banking Reform) Act 2013
Basel Committee Basel Committee of Banking Supervision (of the BIS)
Basel II Basel II: International Convergence of Capital Measurement andCapital Standards: a Revised Framework
Basel III Basel III: International Regulatory Framework for Banks
BBA British Bankers’ Association
BCR Basic capital requirement (for insurers)
BIBA British Insurance Brokers Association
BIS Bank for International Settlements
BoE Bank of England
BRRD Bank Recovery and Resolution Directive
CASS Client Assets sourcebook
CCD Consumer Credit Directive 2008/48/EC
CCPs Central Counterparties
CDS Credit Default Swaps
CEBS Committee of European Banking Supervisors (predecessor of EBA)
CET1 Core Equity Tier 1
CESR Committee of European Securities Regulators (predecessor ofESMA)
Co-legislators Ordinary procedure for adopting EU law requires agreementbetween the Council and the European Parliament (who are the ‘co-legislators’)
CFT Counter Financing of Terrorism
CFTC Commodities Futures Trading Commission (US)
CGFS Committee on the Global Financial System (of the BIS)
CIS Collective Investment Schemes
Glossary
Executive summary Individual accountability
takes
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 26
CMA Competition and Markets Authority
CMU Capital markets union
CoCos Contingent convertible securities
Council Generic term representing all ten configurations of the Council of theEuropean Union
CRA1 Regulation on Credit Rating Agencies (EC) No 1060/2009
CRA2 Regulation amending the Credit Rating Agencies Regulation (EU)No 513/2011
CRA3 proposal to amend the Credit Rating Agencies Regulation anddirectives related to credit rating agencies COM(2011) 746 final
CRAs Credit Rating Agencies
CRD ‘Capital Requirements Directive’: collectively refers to Directive2006/48/EC and Directive 2006/49/EC
CRD II Amending Directive 2009/111/EC
CRD III Amending Directive 2010/76/EU
CRD IV Capital Requirements Directive 2013/36/EU
CRR Regulation (EU) No 575/2013 on prudential requirements for creditinstitutions and investment firms
CTF Counter Terrorist Financing
DFBIS Department for Business, Innovation and Skills
DG MARKT Internal Market and Services Directorate General of the EuropeanCommission
Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act (US)
D-SIBs Domestic Systemically Important Banks
EBA European Banking Authority
EC European Commission
ECB European Central Bank
ECJ European Court of Justice
ECOFIN Economic and Financial Affairs Council (configuration of theCouncil of the European Union dealing with financial and fiscal andcompetition issues)
ECON Economic and Monetary Affairs Committee of the EuropeanParliament
EEA European Economic Area
EEC European Economic Community
EIOPA European Insurance and Occupations Pension Authority
EMIR Regulation on OTC Derivatives, Central Counterparties and TradeRepositories (EC) No 648/2012
EP European Parliament
ESA European Supervisory Authority (i.e. generic term for EBA, EIOPAand ESMA)
ESCB European System of Central Banks
ESMA European Securities and Markets Authority
ESRB European Systemic Risk Board
Executive summary Individual accountability
takes
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 27
EU European Union
EURIBOR Euro Interbank Offered Rate
Eurosystem System of central banks in the euro area, including the ECB
FASB Financial Accounting Standards Board (US)
FATCA Foreign Account Tax Compliance Act (US)
FATF Financial Action Task Force
FC Financial counterparty under EMIR
FCA Financial Conduct Authority
FDIC Federal Deposit Insurance Corporation (US)
FiCOD Financial Conglomerates Directive 2002/87/EC
FiCOD1 Amending Directive 2011/89/EU of 16 November 2011
FiCOD2 Proposal to overhaul the financial conglomerates regime (expected2013)
FMI Financial Market Infrastructure
FOS Financial Ombudsman Service
FPC Financial Policy Committee
FRC Financial Reporting Council
FSA Financial Services Authority
FSB Financial Stability Board
FS Act 2012 Financial Services Act 2012
FSCS Financial Services Compensation Scheme
FSI Financial Stability Institute (of the BIS)
FSMA Financial Services and Markets Act 2000
FSOC Financial Stability Oversight Council
FTT Financial Transaction Tax
G30 Group of 30
GAAP Generally Accepted Accounting Principles
G-SIBs Global Systemically Important Banks
G-SIFIs Global Systemically Important Financial Institutions
G-SIIs Global Systemically Important Institutions
HMRC Her Majesty’s Revenue & Customs
HMT Her Majesty’s Treasury
IAIS International Association of Insurance Supervisors
IASB International Accounting Standards Board
ICAS Individual Capital Adequacy Standards
ICB Independent Commission on Banking
ICOBS Insurance: Conduct of Business Sourcebook
IFRS International Financial Reporting Standards
IMA Investment Management Association
IMAP Internal Model Approval Process
Executive summary Individual accountability
takes
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 28
IMD Insurance Mediation Directive 2002/92/EC
IMD2 Proposal for a Directive on insurance mediation (recast) COM(2012)360/2
IMF International Monetary Fund
IORP Institutions for Occupational Retirement Provision Directive2003/43/EC
IOSCO International Organisations of Securities Commissions
ISDA International Swaps and Derivatives Association
ITS Implementing Technical Standards
JCESA Joint Committee of the European Supervisory Authorities
JMLSG Joint Money Laundering Steering Committee
JURI Legal Affairs Committee of the European Parliament
LCR Liquidity coverage ratio
LEI Legal Entity Identifier
LIBOR London Interbank Offered Rate
MA Matching Adjustment
MAD Market Abuse Directive 2003/6/EC
MAD II Proposed Directive on Criminal Sanctions for Insider Dealing andMarket Manipulation (COM(2011)654 final)
MAR Proposed Regulation on Market Abuse (EC) (recast) (COM(2011) 651final)
MCD Mortgage Credit Directive
Member States countries which are members of the European Union
MiFID Markets in Financial Instruments Directive 2004/39/EC
MiFID II Proposed Markets in Financial Instruments Directive (recast)(COM(2011) 656 final)
MiFIR Proposed Markets in Financial Instruments Regulation (EC)(COM(2011) 652 final)
MMF Money Market Fund
MMR Mortgage Market Review
MREL Minimum requirements for own funds and eligible liabilities
MTF Multilateral Trading Facility
MoJ Ministry of Justice
MoU Memorandum of Understanding
NAV Net Asset Value
NBNI G-SIFI Non-bank non-insurer global systemically important financialinstitution
NFC Non-financial counterparty under EMIR
NFC+ Non-financial counterparty over the EMIR clearing threshold
NFC- Non-financial counterparty below the EMIR clearing threshold
NSFR Net stable funding ratio
OECD Organisation for Economic Cooperation and Development
Official Journal Official Journal of the European Union
Executive summary Individual accountability
takes
Cross sector
announcements
Banking and capital
markets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin – April 2015 PwC 29
OFT Office of Fair Trading
Omnibus II Second Directive amending existing legislation to reflect LisbonTreaty and new supervisory infrastructure (COM(2011) 0008 final)– amends the Prospectus Directive (Directive 2003/71/EC) andSolvency II (Directive 2009/138/EC)
ORSA Own Risk Solvency Assessment
OTC Over-The-Counter
p2p Peer to Peer
PERG Perimeter Guidance Manual
PRA Prudential Regulation Authority
Presidency Member State which takes the leadership for negotiations in theCouncil: rotates on 6 monthly basis
PRIIPsRegulation
Proposal for a Regulation on key information documents forinvestment and insurance-based products COM(2012) 352/3
PSR Payment Systems Regulator
QIS Quantitative Impact Study
RDR Retail Distribution Review
RFB Ring Fenced Bank
RRPs Recovery and Resolution Plans
RTS Regulatory Technical Standards
RWA Risk-weighted assets
SCR Solvency Capital Requirement (under Solvency II)
SEC Securities and Exchange Commission (US)
SFT Securities financing transactions
SFD Settlement Finality Directive 98/26/EC
SFO Serious Fraud Office
SIPP Self-invested personal pension scheme
SM&CR Senior managers and certification regime
SOCA Serious Organised Crime Agency
Solvency II Directive 2009/138/EC
SSM Single Supervisory Mechanism
SSR Short Selling Regulation EU 236/2012
T2S TARGET2-Securities
TLAC Total Loss Absorbing Capacity
TR Trade Repository
TSC Treasury Select Committee
UCITS Undertakings for Collective Investments in Transferable Securities
XBRL eXtensible Business Reporting Language
Executive summary Individual
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150409-123124-JN-OS
Laura Cox020 7212 1579laura.cox@uk.pwc.com@LauraCoxPwC
Asset Management Banking & Capital Markets Insurance Local regulations & AML
John Luff
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john.luff@gg.pwc.com
Mark James
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mark.james@je.pwc.com
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