In December 2012, the Federal Reserve published a notice of proposed rulemaking (NPR) describing how the Enhanced Prudential Standards (EPS) under the Dodd-Frank Act would be applied to foreign banking organizations (FBOs). The NPR is the most significant regulatory development for FBOs since the passage of the International Banking Act of 1978 which introduced the principle of national treatment for FBOs.
The NPR compels larger FBOs with material US operations to establish an Intermediate Holding Company (IHC) for virtually all of their US subsidiaries, essentially ending the Federal Reserve’s willingness to rely solely on the parent company for financial support of an FBO’s US operations. US capital, liquidity and other regulatory mandates will have to be met in the US. US branches and agencies of FBOs would remain outside of the IHC structure but would nevertheless have to comply with enhanced liquidity requirements.
While some adjustments to the NPR are possible before the rule is finalized, we believe substantial change is unlikely, particularly with regard to the requirements related to establishing an IHC and those related to capital and liquidity. Governor Daniel Tarullo – who first unveiled the proposal in a speech last year – continues to signal strong support for the core tenets of the proposal despite foreign governments, trade associations and individual institutions registering their deep objections. We expect the final EPS rule to be issued by the end of this year, which would apply to both US and FBO institutions.
We have found that the biggest immediate challenge FBOs face in conforming to the NPR is in developing the capability to aggregate risk data across multiple platforms. We are seeing that the more institutions delay in making the necessary upgrades, the fewer (and significantly less flexible) options they have, especially with the expected July 2015 effective date now less than two years away.
With similar data aggregation expectations arising in other regulatory areas, such as stress testing and resolution planning, FBOs now have the opportunity to gain efficiencies by undertaking multiple data aggregation efforts simultaneously.
As a reality check, the top 30 US banks have been working to meet their CCAR obligations since 2009. Many still have not finished. The hard truth is that effective data aggregation takes two to three years.
This Financial Services Regulatory Brief describes the approach taken by the CFTC in its final guidance and extension of relief, and provides context and perspective for global dealers as they press forward under the clarified regime.