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  • FDIC FIL addendum: Federal banking agencies will not enforce Volcker rule for financial institutions exempt under S.2155

    Agency Rule-Making & Guidance

    On June 4, the FDIC issued FIL-31-2018, which contains an addendum describing legislative changes to Section 13 of the Bank Holding Company Act (Volcker rule) under the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155/P.L. 115-174) that are applicable to FDIC-insured depository institutions with total assets under $10 billion. (See previous InfoBytes coverage on S.2155 here.) Effective immediately, any financial institution that “‘does not have and is not controlled by a company that has (i) more than $10,000,000,000 in total consolidated assets; and (ii) total trading assets and trading liabilities as reported on the most recent applicable regulatory filing filed by the institution, that are more than 5 percent of total consolidated assets’” is exempt from the rule. As result, the federal banking agencies will no longer enforce the Volcker rule for qualifying financial institutions in a manner inconsistent with the statutory amendments to the Volcker rule, and announced plans “to address these statutory amendments outside of the current notice of proposed rulemaking.”

    The federal banking agencies responsible for developing the proposal (the Federal Reserve Board, CFTC, FDIC, OCC, and SEC) also formally announced on June 5 a joint notice and request for public comment on the proposed revisions. Comments will be accepted for 60 days following publication in the Federal Register.

    Visit here for InfoBytes coverage on the federal banking agencies’ proposed revisions to the Volcker rule announced May 30.

    Agency Rule-Making & Guidance FDIC Volcker Rule Federal Reserve CFTC OCC SEC Bank Holding Company Act

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  • Federal Reserve Board issues proposed joint revisions to Volcker rule

    Federal Issues

    On May 30, the Federal Reserve Board (Board) announced proposed revisions designed to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds (the Volcker rule). The proposal, subject to public comment for 60 days after publication in the Federal Register, was developed in coordination with the OCC, FDIC, SEC, and CFTC, and would modify regulations finalized in December 2013 to reduce compliance costs for banks. Two information collections were issued along with the proposal: Information Schedules and Quantitative Measurements Daily Schedule.

    According to a Board memo, the proposed amendments would tailor Volcker rule requirements to better align with a bank’s level of trading activity and risks. The proposal would establish the following three categories based on trading activity: (i) “significant trading assets and liabilities,” which would consist of banks with gross trading assets and liabilities of at least $10 billion, and require a comprehensive compliance program tailored to reflect the Volcker rule’s requirements; (ii) “moderate trading assets and liabilities,” which would include banks with gross trading assets and liabilities of at least $1 billion but less than $10 billion, and impose reduced compliance obligations; and (iii) “limited trading assets and liabilities,” which would include banks with less than $1 billion in gross trading assets and liabilities, and subject them to the lowest level of regulatory compliance.

    In addition, the proposal would, among other changes:

    • provide more clarity by revising the definition of “trading account” to be an account used to buy or sell financial instruments recorded at fair value under commonly used accounting definitions;
    • clarify that banks whose trades do not exceed appropriately developed internal risk limits are engaged in permissible market-making-related activity;
    • streamline the criteria that applies when a bank relies on the hedging exemption from the proprietary trading prohibition, and remove a requirement that a trade “demonstrably reduces or otherwise significantly mitigates” a specific risk;
    • ease the documentation requirement banks face when demonstrating trades are hedges, and eliminate requirements that a bank with only moderate or limited trading activity must develop “a separate internal compliance program for risk-mitigation hedging”;
    • eliminate the 60-day rebuttable presumption for trades;
    • expand the scope of the “liquidity management exclusion” in the Volcker rule to allow banks to use foreign exchange forwards, foreign exchange swaps, and physically settled cross-currency swaps as a part of liquidity management activities;
    • limit the impact of the Volcker rule on foreign banks’ activity outside of the U.S.; and
    • simplify the type of trading activity information that banks will be required to provide to the agencies.

    Federal Reserve Board Chair Jerome Powell noted that after nearly five years of experience applying the Volcker rule, the proposed rule is a way to “allow firms to conduct appropriate activities without undue burden, and without sacrificing safety and soundness.”

    Federal Reserve Board Governor Lael Brainard also commented that “[r]ather than requiring banking institutions to undertake specific quantitative analyses prescribed by the regulators, the proposed revisions would require banking institutions to establish internal risk limits to achieve the principle of not exceeding the reasonably expected near-term demands of customers, subject to supervisory review.”

    Federal Reserve Board Vice Chair of Supervision Randal Quarles stated that while the regulatory relief bill signed into law on May 24 exempts banks with less than $10 billion in total assets from the Volcker rule (see previous InfoBytes coverage here), the “proposed rule, however, would recognize that small asset size is not the only indicator of reduced proprietary trading risk.” Furthermore, the proposed rule is a “best first effort at simplifying and tailoring the Volcker rule” and does not represent the “completion of [the Board’s] work.”

    Federal Issues Federal Reserve Volcker Rule Bank Holding Company Act OCC FDIC SEC CFTC

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  • CFTC, NASAA enter cryptocurrency, fraud information sharing partnership; CFTC releases virtual currency derivative guidance

    Securities

    On May 21, the U.S. Commodity Futures Trading Commission (CFTC) announced it had signed a mutual cooperation agreement with the North American Securities Administrators Association (NASAA) to increase cooperation and information sharing on cryptocurrencies and other potential market fraud. The memorandum of understanding (MOU) is designed to “assist participants in enforcing the Commodity Exchange Act, which state securities regulators and state attorneys general are statutorily authorized to do alongside the CFTC,” leading to the possibility of additional enforcement actions brought under other areas of law. In order to receive the benefits—including investigative leads, whistleblower tips, complaints, and referrals provided to NASAA members by the CFTC—individual jurisdictions will be required to sign the MOU.

    The same day, the CFTC’s Division of Market Oversight and Division of Clearing and Risk (DCR) issued a joint staff advisory providing guidance on several enhancements to which CFTC-registered exchanges and clearinghouses should adhere when listing derivatives contracts based on virtual currencies. The advisory addresses the following five key areas for market participants: (i) “[e]nhanced market surveillance”; (ii) “[c]lose coordination with CFTC staff’; (iii) “[l]arge trader reporting”; (iv) “[o]utreach to member and market participants”; and (v) “Derivatives Clearing Organization risk management and governance.” According to the DCR director, the information provided is intended in part, “to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products . . . [and] to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”

    Securities Fintech CFTC State Regulators Cryptocurrency Virtual Currency MOUs

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  • CFTC Commissioner says FSOC should take lead in future fintech policy regulation

    Fintech

    On May 3, Commodities Futures Trading Commission (CFTC) Commissioner Rostin Behnam emphasized that the Financial Stability Oversight Council (FSOC) should take the lead in evaluating the future of oversight and regulation of the fintech industry. In his keynote address to a financial regulatory conference in Washington, D.C., Behnam highlighted the rise of cryptocurrencies as an example of the need to “identify and craft an appropriate path forward for ensuring that legal issues resulting from these technologies are identifiable and solvable before they cross the horizon.” According to Benham, FSOC, due to its mandate in the Dodd-Frank Act, has the authority to, among other things, convene financial regulators for collaboration and propose policy direction based on input from all stakeholders. Acknowledging the need for all market participants and regulators to be aligned when it comes to fintech regulation, Benham stated that “anything less than decisive action by policymakers in the short term” will lead to uncertainty.

    Fintech CFTC FSOC Virtual Currency Dodd-Frank

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  • CFTC stresses importance of coordinating regulatory requirements with the SEC

    Fintech

    On May 2, the U.S. Commodity Futures Trading Commission (CFTC) reiterated the importance of coordinating and harmonizing regulatory requirements with the SEC. In prepared remarks issued before FIA’s 40th Annual Law and Compliance Conference, CFTC Commissioner Brian Quintenz stated that its internal cryptocurrency enforcement task force will work in cooperation with its SEC counterparts on cases involving virtual currency. “Both agencies’ Divisions of Enforcement have demonstrated their commitment to work closely to prosecute fraud and ensure that differences in product nomenclature do not enable bad actors to slip through jurisdictional cracks,” Quintenz said. The agencies plan to update their existing 10-year-old memorandum of understanding to facilitate the sharing of information related to, among other things, swaps and security-based swaps data, fintech developments, and market events.

    Fintech CFTC SEC Enforcement Cryptocurrency Virtual Currency

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  • District Court recognizes CFTC authority to regulate virtual currency as commodities

    Fintech

    On March 6, the U.S. District Court for the Eastern District of New York granted the CFTC’s request for preliminary injunction against defendants alleged to have misappropriated investor money through a cryptocurrency trading scam, holding that the CFTC has the authority to regulate virtual currency as commodities. The decision additionally defined virtual currency as a “commodity” within the meaning of the Commodity Exchange Act (CEA) and gave the CFTC jurisdiction to pursue fraudulent activities involving virtual currency even if the fraud does not directly involve the sale of futures or derivative contracts. However, the court noted that the “jurisdictional authority of CFTC to regulate virtual currencies as commodities does not preclude other agencies from exercising their regulatory power when virtual currencies function differently than derivative commodities.” Under the terms of the order, the defendants are restrained and enjoined until further order of the court from participating in fraudulent behavior related to the swap or sale of any commodity, and must, among other things, provide the CFTC with access to business records and a written account of financial documents.

    Find continuing InfoBytes coverage on virtual currency oversight here.

    Fintech Virtual Currency Courts CFTC Cryptocurrency Commodity Exchange Act

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  • Basel Committee on Banking Supervision publishes final guidance examining the implications of fintech on the banking industry

    Fintech

    On February 19, the Basel Committee on Banking Supervision (BCBS), the primary global standard setter for the prudential regulation of banks, released its final report, “Sound Practices: Implications of fintech developments for banks and bank supervisors.” The report—issued after BCBS’ consideration of comments received in response to its August 2017 consultative document of the same name (see previous InfoBytes coverage on the August consultative document here)—provides BCBS’ current assessment of how fintech may shape the banking industry in the near term. The report summarizes BCBS’ analysis of historical research, data compiled from surveys of BCBS members’ frameworks and practices, and other industry feedback, and provides several key considerations for banks and bank supervisors in this space.

    The report identifies a common theme across various scenarios: the emergence of fintech may make it increasingly difficult for banks to maintain their existing operating models due to changes in technology and customer expectations. The BCBS stressed that as a result of the “rapidly changing” nature of banks’ risks and activities due to fintech developments, the rules governing these risks may need to evolve. Accordingly, the BCBS recognized that “it should first contribute to a common understanding of risks and opportunities associated with fintech in the banking sector by describing observed practices before engaging in the determination of the need for any defined requirements or technical recommendations.” It further acknowledged that “fintech-related issues cut across various sectors with jurisdiction-specific institutional and supervisory arrangements that remain outside the scope of its bank-specific mandate.”

    Additionally, the current report identifies five forward-looking scenarios describing the potential impact of fintech on banks:

    • “The better bank: modernisation and digitisation of incumbent players”;
    • “The new bank: replacement of incumbents by challenger banks”;
    • “The distributed bank: fragmentation of financial services among specialised fintech firms and incumbent banks”;
    • “The relegated bank: incumbent banks become commoditised service providers and customer relationships are owned by new intermediaries”; and
    • “The disintermediated bank: banks have become irrelevant as customers interact directly with individual financial service providers.”

    With this issuance, revised to reflect the feedback BCBS received on its August consultative paper, BCBS has provided several “sound practices” for banks and bank supervisors to consider, along with its final ten key implications of fintech, as well as ten key considerations. Some notable considerations include:

    • Banks should have appropriate, effective governance structures and risk management processes to address key risks that may arise due to fintech developments, which may include staff development processes to ensure bank personnel are appropriately trained to manage fintech risks, as well as the development of risk management processes compliant with portions of the BCBS’s Principles for sound management of operational risk that relate to fintech developments.
    • Banks should implement effective IT and other risk management processes to address the risks and implications of using new enabling technologies. Bank supervisors should also “enhance safety and soundness by ensuring that banks adopt such risk management processes and control environments.”
    • Bank supervisors should understand the implications of the growing use of third parties, via outsourcing and/or partnerships, and maintain appropriate due diligence processes, which should “set out the responsibilities of each party, agreed service levels and audit rights” when contracting with third-party service providers.
    • Bank supervisors should communicate and coordinate with public authorities responsible for the oversight of fintech-related regulatory functions that are outside the purview of prudential supervision, including safeguarding data privacy, cybersecurity, consumer protection, and complying with anti-money laundering requirements. The recommendation removes the phrase “whether or not the service is provided by a bank or fintech firms,” which was contained in the August consultative document.
    • Bank supervisors should coordinate global cooperation between banking supervisors when fintech firms expand cross-border operations to enhance global safety and soundness by engaging in appropriate supervisory coordination and information-sharing. Recently, on February 19, the U.S. Commodity and Futures Trading Commission and the United Kingdom’s Financial Conduct Authority signed an agreement outlining a commitment to collaborate and support each regulator’s efforts to encourage responsible fintech innovation; monitor development and trends; and obtain more effective and efficient regulation and oversight of the market. (See previous InfoBytes coverage here.)
    • The report stresses the importance of collaboration between bank regulators, specifically in jurisdictions where non-bank unregulated firms are providing services previously conducted by banks. The BCBS further notes that bank supervisors should review existing supervisory frameworks to consider whether potential new innovative business models can evolve in a manner that has appropriate banking oversight but does not unduly hamper innovation.

    Fintech Basel Committee U.K. CFTC

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  • CFTC announces collaboration agreement with U.K. fintech team

    Fintech

    On February 19, the U.S. Commodity and Futures Trading Commission (CFTC) and the United Kingdom’s Financial Conduct Authority (FCA) released the Cooperation Arrangement on Financial Technology Innovation (Agreement). The Agreement outlines a commitment to collaborate and support each regulator’s efforts to encourage responsible fintech innovation; monitor development and trends; and obtain more effective and efficient regulation and oversight of the market. The Agreement specifies how program officials with LabCFTC in the U.S. and FCA Innovate in the U.K. will collaborate to share information, provide regulatory support to fintech businesses, and refer fintech businesses that wish to operate in the other jurisdiction to each other. In the announcement for the Agreement, CFTC Chairman J. Christopher Giancarlo stated, “we believe that by collaborating with the best-in-class FCA FinTech team, the CFTC can contribute to the growing awareness of the critical role of regulators in 21st century digital markets.”

    Fintech CFTC UK

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  • CFTC offers large reward to “pump-and-dump” scheme whistleblowers

    Fintech

    On February 15, the Commodity Futures Trading Commission (CFTC) issued a Consumer Protection Advisory on virtual currency “pump-and-dump” schemes, which offers eligible whistleblowers between 10 and 30 percent of enforcement actions of $1 million or more, which result from the shared information. The notice cautions consumers against falling for the fraudulent “pump-and-dump” schemes, which capitalize on consumers’ fear of missing the potentially lucrative—yet volatile—cryptocurrency market. The advisory warns consumers that many of the perpetrators of these schemes use social media to promote false news reports and create fake urgency for consumers to buy the cryptocurrency immediately. Then, after the price reaches a certain level, the schemers sell their virtual currency and the price begins to fall.

    Fintech Virtual Currency CFTC Bitcoin Cryptocurrency Whistleblower Enforcement

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  • President Trump releases 2019 budget proposal; key areas of reform include appropriation shifts, cybersecurity, and financial crimes

    Federal Issues

    On February 12, the White House released its fiscal 2019 budget request, Efficient, Effective, Accountable, an American Budget (2019 budget proposal), along with Major Savings and Reforms (MSR) and an Appendix. The mission of the President’s budget sets forth priorities, including imposing fiscal responsibility, reducing wasteful spending, and prioritizing effective programs. However, the 2019 budget proposal has little chance of being enacted as written and does not take into account a two-year budget agreement Congress passed that the President signed into law on February 9. Notable takeaways of the 2019 budget are as follows:

    CFPB. Under the MSR’s “Restructure the Consumer Financial Protection Bureau” section, Congress and the current administration would implement a broad restructuring of the Bureau to “prevent actions that unduly burden the financial industry” by restricting its enforcement authority over federal consumer law. Among other things, the proposed budget would cap the Federal Reserve’s (Fed) transfers this year at $485 million (an amount equivalent to its 2015 budget) and eliminate all transfers by 2020, at which point the Bureau’s appropriations process would shift to Congress.

    Commodity Futures Trading Commission (CFTC). As stipulated in the Appendix, the budget proposes legislation, which would authorize the CFTC to collect $31.5 million in user fees to fund certain activities and would bring the Commission’s budget to $281.5 million for 2019. According to the administration, if the authorizing legislation is enacted, it would be “in line with nearly all other Federal financial and banking regulators.”

    Cybersecurity. The 2019 budget proposal requests funding for the Department of Homeland Security (DHS) and the Department of Defense (DOD) to execute efforts to counter cybercrime. The DOD funds would go towards efforts to sustain the Cyber Command’s 133 Cyber Mission Force Teams, which “are on track to be fully operational by the end of 2018.” Furthermore, the administration states it “will improve its ability to identify and combat cybersecurity risks to agencies’ data, systems, and networks.”

    Financial Stability Oversight Council (FSOC). Currently FSOC (which is comprised of the heads of the financial regulatory agencies and monitors risk to the U.S. financial system) and the Office of Financial Research (OFR) (FSOC’s independent research arm) receive funding through fees assessed on certain bank holding companies with assets of at least $50 billion as well as nonbanks supervised by the Fed. However, the 2019 budget proposal would require FSOC and OFR to receive their funding through the normal congressional appropriations process. 

    Flood Insurance. Outlined in the MSR is a budget request that would reduce appropriations for the National Flood Insurance Program's flood hazard mapping program by $78 million. The funding reduction is designed to “preserve resources for [DHS]’s core missions”; however, the administration plans to work to “improve efficiency in the flood mapping program, including incentivizing increased State and local government investments in updating flood maps to inform land use decisions and reduce risk.” Additionally, contained within the Appendix is a proposal for a “means-tested affordability program” that would determine assistance for flood insurance premium payments based on a policyholder's income or ability to repay, rather than a home's location or date of construction.

    Government Sponsored Enterprises. Noted within the MSR, the budget proposes doubling the guarantee fee charged by Fannie Mae and Freddie Mac to loan originators from 0.10 to 0.20 percentage points from 2019 through 2021. The proposal is designed to help “level the playing field for private lenders seeking to compete with the GSEs” and would “generate approximately $26 billion over the 10-year Budget window.” 

    HUD. The 2019 budget proposal eliminates funding for the following: (i) the CHOICE Neighborhoods program (a savings of $138 million),  on the basis that state and local governments should fund strategies for neighborhood revitalization; (ii) the Community Development Block Grant (a savings of $3 billion), over claims that it “has not demonstrated a measurable impact on communities”; (iii) the HOME Investment Partnerships Program (a savings of $950 million); and (iv) the Self-Help and Assisted Homeownership Opportunity Program Account (a savings of $54 million). The budget also proposes reductions to grants provided to the Native American Housing Block Grant and plans to reduce costs across HUD’s rental assistance programs through legislative reforms. Rental assistance programs generally comprise about 80 percent of HUD’s total funding.

    SEC. As stipulated in the MSR, the budget proposes eliminating the SEC’s mandatory reserve fund and would require the SEC to request additional funds through the congressional appropriations process starting in 2020. According to the Appendix, the reserve fund is currently funded by collected registration fees and is not subject to appropriation or apportionment. Under the proposed budget, the registration fees would be deposited in the Treasury’s general fund.

    SIGTARP. As proposed under MSR, the 2019 budget would reduce funding for the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) “commensurate with the wind-down of TARP programs.” According to the proposal, “Congress aligned the sunset of SIGTARP with the length of time that TARP funds or commitments are outstanding,” which, Treasury estimates, will be in 2023. This will mark the final time payments are expected to be made under the Home Affordable Modification Program (HAMP). As previously covered in InfoBytes, SIGTARP delivered a report to Congress last month, which identified unlawful conduct by certain of the 130 financial institutions in TARP’s Making Home Affordable Program as the top threat to TARP and, thus, the agency’s top investigative priority.

    Student Loan Reform. Under the 2019 budget proposal, a single income-driven repayment plan (IDR) would be created that caps monthly payments at 12.5 percent of discretionary income. Furthermore, balances would be forgiven after a specific number of repayment years—15 for undergraduate debt, 30 for graduate. In doing so, the Public Service Loan Forgiveness program and subsidized loans will be eliminated, and reforms will be established to “guarantee that all borrowers in IDR pay an equitable share of their income.” These proposals will only apply to loans originated on or after July 1, 2019, with the exception of loans provided to borrowers in order to finish their “current course of study.”

    Treasury Department. Under the 2019 budget proposal, safeguarding markets and protecting financial data are a top priority for the administration, and $159 million has been requested for Treasury’s Office of Terrorism and Financial Intelligence to “continue its critical work safeguarding the financial system from abuse and combatting other national security threats using non-kinetic economic tools. These additional resources would be used to economically isolate North Korea, complete the Terrorist Financing Targeting Center in Saudi Arabia, and increase sanctions pressure on Iran, including through the implementation of the Countering America’s Adversaries Through Sanctions Act.” The budget also requests a $3 million increase from 2017 to be applied to the Financial Crimes Enforcement Network’s authority to administer the Bank Secrecy Act and its work to prevent the financing of terrorism, money laundering, and other financial crimes.  

    Federal Issues Budget Trump CFPB CFTC FSOC Privacy/Cyber Risk & Data Security Flood Insurance HUD SEC Student Lending Department of Treasury

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