BEING BETTER INFORMED - FS REGULATORY, ACCOUNTING AND AUDIT BULLETIN - PWC
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Financial Services Risk and Regulation
Being better informed
FS regulatory, accounting and audit bulletin
PwC FS Risk and Regulation Centre of Excellence
October 2015
In this edition:
• Capital markets 2020: Will they change for good?
• Strengthening of South Africa’s SIFI resolution regime
• Agreement on activities, establishment and operation
of EIB’s regional office in South Africa
• IOSCO report on good practice in the use of CRAs
• FATF to assess de-risking
• NCA – Temporary suspension of the Affordability
Assessment Regulations
• Capital requirements with which managers of CISs in
participation bonds must comply
• Draft Taxation Laws Amendment Bill, 2015
www.pwc.co.za/beingbetterinformed
Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
Executive summary
In August, National Treasury issued At the global level, there’s certainly industry, which either as a ‘participant’ in
the long awaited discussion document still a lot happening from a regulatory or a ‘user’ of capital markets is critical to
‘Strengthening South Africa’s Resolution perspective – including both prudential your actions today and to your plans for
Framework for Financial Institutions‘ and conduct regulation – and global FS the future.
which follows on the G20 commitment to firms will no doubt have their hands full
develop a framework to deal with large working out how different regulatory We hope you will continue to find our
and important financial institutions, in initiatives (with lots of acronyms) apply latest edition of Being Better Informed
Irwin Lim Ah Tock particular systemically important financial to them. But it’s not just the regulators to be an insightful read. Any thoughts or
Banking and Capital institutions (SIFIs).The paper introduces a who will be busy in the coming months. comments you may have on how we can
Markets – Regulatory range of key considerations relevant to the Global FS firms, particularly in the UK, continue to enhance the publication are
Practice Leader South African financial services industry, will be expediting their implementation welcomed.
including addressing critical areas such as programmes for big topics like Solvency
deposit insurance and proposing locating II and MiFID II, while Financial Conduct
the functions of the ‘resolution authority’ Authority firms will be preparing recovery
within the SARB. plans. Many banks globally will continue
to be working out how and to what
Welcome to the third edition of “Being At the same time, the SARB has entered extent the LCR impacts them, while
better informed”, our quarterly FS into a key agreement with South global insurers focus on tackling the rules
regulatory, accounting and audit Africa’s BRICS counterparts and signed proposed by the Prudential Regulation
bulletin, which aims to keep you up to a Memorandum of Understanding on Authority in the Bank of England in
Renminbi Clearing Arrangements in South relation to implementation proposals for Irwin Lim Ah Tock
speed with significant developments and
Africa for the purpose of implementing non-Solvency II firms. Banking and Capital Markets
their implications across all financial
the Contingent Reserve Arrangement Regulatory Practice Leader
services sectors.
first discussed at the 2014 BRICS summit. Our feature this quarter profiles a key PwC South Africa
The last quarter has been characterised Similarly, the FSB have had a busy quarter, piece of global PwC thought leadership
by significant regulatory and legislative having issued Board Notice 18 to the that seeks to provide insight into a
activity, both at the global and domestic Collective Investment Schemes Control Act fundamental question – “are capital
level. which sets out the capital requirements markets participants and users prepared
managers of collective investment schemes and capable to reimagine the future,
(CISs) in participation bonds must comply innovate and compete against this
with, and together with National Treasury, still unfolding backdrop?” Capital
signing a declaration for the regulation of Markets: 2020 provides our insights and
hedge funds (HFs) in South Africa. understanding into the future of the
Being better informed – October 2015 PwC • 2Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
Contents
How to read this bulletin? Executive summary 2 Insurance and investment management 14
Review the Table of Contents in the relevant
Sector sections to identify the news of Feature Article – Capital Markets 2020 4 Taxation 18
interest. We recommend you go directly to
the topic/article of interest by clicking on the Cross-sector regulations 6 Accounting updates 20
active links within the table of contents.
Banking 9 Glossary 23
Being better informed – October 2015 PwC • 3Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
Capital markets 2020: Will they change for good?
Summarised by Rivaan Roopnarain
on global capital markets for funding, risk to meet the more stringent risk and
The future of capital markets is a Capital Markets 2020
management and transactional banking capital requirements while maintaining
Will it change for good?
subject of increasing focus since the services. Furthermore, other stakeholders acceptable levels of profitability. Users
2008 financial crisis. The vitality of such as policymakers and regulators also of capital markets face a number of their
capital markets is critical if the world is need to develop the right balance between own challenges – from finding yield in a
to return to an environment conducive investor and system protection and the period of pervasively low interest rates to
of sustainable economic growth. To be need for markets to function freely and adhering to complex regulations that they
most beneficial, capital markets must efficiently in order to support economic had not been subject to before. Meanwhile,
be able to function freely, rewarding Are capital markets participants and users prepared and capable to reimagine the future, innovate
and compete against this still unfolding backdrop?
growth. incumbent and emergent financial market
strong performers and penalising www.pwc.com/banking
utilities (FMUs) are finding their places
those who are unable to deploy capital As global interconnectivity and ubiquitous within the new capital market landscape
effectively. Looking forward to 2020, http://www.pwc.com/gx/en/banking- access to financial markets increase, we and need to reach sufficient economies of
capital markets will play an increasingly capital-markets/capital-markets-2020/ see a world where well-functioning, deep scale to operate effectively over the long
important role in providing everything index.jhtml capital markets are needed more than term. This point of view is consistent with
from financing to the world’s most ever. Industry leaders must address the that of our surveyed executives, whose
innovative companies to generating the continually changing market forces and top challenges were found to range from
investment returns needed to support Our survey of top capital market prove that they can operate within this increasing client profitability (36%)
an ageing population in the developed executives clearly demonstrates that new equilibrium, which includes justifying and attracting and retaining talented
world. leaders believe it is important to have a their social utility. employees (33%), to adapting to new
better understanding and a more clearly
technologies (33%).
articulated vision of their place in the
capital market industry in 2020 than they
Today’s challenges
Complying with growing and changing
do today. We wholeheartedly agree – this The challenges for capital market players regulations remains a significant
is an area of strong interest not only for are vast and include pressures from clients, challenge, as reported by 19% of
the ‘participants’ (i.e. investment banks, stakeholders and regulators. Despite executives. Capital market participants are
broker-dealers, financial market utilities this difficult environment, though, 84% still struggling to get ahead of regulation
and the like), but also for the ‘users’ of surveyed executives indicated that and to develop a proactive stance with
(i.e. private equity firms, pension funds, they feel somewhat or fully prepared their regulators. The bottom line is that
hedge funds, other non-bank financial for the challenges within the industry, regulatory developments are profoundly
intermediaries and corporates), who rely although many players are struggling changing operations, markets and cost
Being better informed – October 2015 PwC • 4Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
structures. So who benefits? Our survey The future landscape Top five scenarios survey participants saw as being most likely to occur
participants believe that global banks
will benefit the most from proactively
addressing these changes – likely due to
their ability to leverage scale to manage
The demands of the new capital market
equilibrium will require businesses to
transform. Technology and straight-
1 st A crippling global cyber attack
the cost and complexity. Responses through processing (STP) are rapidly
suggest also that smaller banks (such
as community and regional banks, and
morphing from being expensive
challenges to becoming critical-to-success
components that create client value
2 nd
New regulation restricting ability to
generate profitable business
credit unions) and broker-dealers will be
3
threatened the most. and enable efficiency. Meanwhile, both
Loss of market share to non-traditional
non-traditional players and regional
rd players
Executives are highly concerned about the broker-dealers (many of whom have little
threat posed by shadow banking players legacy infrastructure) are challenging the
such as crowd funders and peer-to-peer
lenders. Seventy per cent believe they pose
a moderate to severe threat to traditional
established order by supplying capital and
becoming leaders in product innovation.
To ensure that capital markets in 2020
4 th
A large macro idiosyncratic risk that
hurts global economics
are able to function efficiently and freely
5
banks, 20% believe they present
to provide financing to corporations and High inflation due to central bank
innovative partnership opportunities and
the remaining 10% believe that non- returns to investors, both participants and th policies
traditional players only pose a threat to users will need to take on a leadership Source:PwC Capital Markets 2020 Survey
those with inferior technologies. Our role within the capital market ecosystem.
survey participants see this threat coming Being reactive to regulators, public opinion
from disparate areas within the industry’s and market idiosyncrasies is no longer an
ecosystem (i.e. distribution channels, option.
payments and asset management/
brokerage systems). Finally, 16% of We believe that the winners in 2020
industry players believe that this shadow and beyond need to relentlessly execute
banking world may expand beyond its against today’s imperatives; they must
current 25% market share of financial radically innovate; and they have to
assets, while two-thirds of executives transform in order to meet the client
expect that shadow banking assets will and industry needs of the future.
show flat to moderate growth by 2020.
Being better informed – October 2015 PwC • 5Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
Cross-sector regulations
In this section: South Africa against international best practice; On 24 July 2015, Government Notice
640 was issued by the Department of
• The governance and administrative
South Africa Strengthening of South Africa’s SIFI features of the bill (objectives, scope,
International Relations and Co-operation.
resolution regime This notice sets out an agreement reached
International regulations roles of the South African Reserve Bank
between the South African government
(SARB) etc.) and the resolution process;
The National Treasury issued the and the European Investment Bank (EIB)
and
much awaited discussion document regarding the activities, establishment
‘Strengthening South Africa’s Resolution • Areas of alignment with existing and operation of the EIB’s regional office
Framework for Financial Institutions‘ legislation. in South Africa. The EIB is the financing
on 13 August 2015. This paper follows institution of the European Union (EU)
Some of the key points in the paper
on the G20 commitment to develop a and is the only bank owned by, and
include the designation of the SARB as the
framework and standards to deal with representing the interests of, the EU’s
resolution authority; the requirement that
large and important financial institutions, member states.
all SIFIs (banks and non-banks) should
in particular systemically important
have a recovery and resolution plan; an
financial institutions (SIFIs). While various A framework agreement for financial co-
agreement in principle to introduce a
initiatives such as Basel III are focused operation between the Republic of South
deposit guarantee scheme in South Africa
on ending the ‘too big to fail’ (TBTF) Africa and the EIB has been in place since
giving preferential treatment to qualifying
debate, there remains a possibility that June 2000. In it, provisions are laid down
depositors (mainly retail, and small and
these institutions may indeed fail. The to ensure certain rights and privileges for
medium-sized enterprises (SMEs)) –
paper therefore sets out proposals for the EIB and its officials and employees.
currently, no distinction is made between
strengthening South Africa’s resolution The current agreement formalises a range
depositors and unsecured creditors; and
regime so that if a financial institution of operational, legal and administrative
the removal of curatorship provisions in
should indeed fail, it can be managed in functions relating to the EIB’s physical
the Banks Act and their incorporation in
a way that mitigates the impact thereof presence and legal standing within South
the Resolution Bill.
on South Africa’s financial stability while Africa. In particular, the agreement
minimising the macroeconomic costs. seeks to further strengthen and develop
Comments are invited from the public.
Discussion points in the paper include the relations and co-operation between South
following: Agreement on activities, Africa and the EIB through additional
establishment and operation of EIB’s terms concerning the privileges and
• The rationale behind resolution immunities of the EIB and its personnel, in
regional office in South Africa
legislation; particular those assigned to carry out tasks
• Gaps identified when benchmarking Rivaan Roopnarain in the country.
South Africa’s current framework
Being better informed – October 2015 PwC • 6Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
The EIB has been financing investment methodology, parameters and basis FATF is going to: IFPRU 730K firms, subject to simplified
projects in South Africa since 1995, and underlying the assessment for the credit obligations under the Bank Recovery and
the current agreement is expected to rating awarded. • clarify the relationship between its Resolution Directive (BRRD).
further facilitate investment relations with standards on correspondent banking
• Where external credit ratings are used,
the entity. According to its website, the EIB (FATF Recommendation 13) and other The template provides a format to aid
a downgrade should not automatically
is the largest multilateral borrower and intermediated relationships with with the initial development of a recovery
trigger the immediate sale of an asset.
lender by volume in the EU, and provides standards on customer due diligence plan. But given the high-profile nature
finance and expertise for investment • Firms should disclose to investors their (FATF Recommendation 10) and wire and complexity of the requirements, it
projects which contribute to furthering policies with regard to external credit transfers (FATF Recommendation 16); is still important for firms to ensure they
its policy objectives. Since 2004, the EIB ratings when assessing the credit quality dedicate sufficient focus and attention to
• consult with regulators and the private
has supported development and economic of their counterparties or collateral. the recovery planning process. This will
sector to inform its work;
activity in South Africa with loans and Asset managers should not rely solely mean establishing an appropriate recovery
equity investment worth over EUR 2.5 on external credit ratings and should • consider the efforts of supranational and resolution planning (RRP) governance
billion. In South Africa, the EIB acts upon consider alternative quality parameters organisations on account closure and framework, selecting adequate options
mandates entrusted to it by the European as well. correspondent banking, including the and designing effective triggers tailored to
Council. These mandates cover the EIB’s Committee on Payments and Market their business model, size, complexity and
The report is addressed to national
activities in relation to both private and Infrastructures (CPMI), the Union of risk profile.
regulators, asset managers and investors.
public sector operations. Arab Banks, the International Monetary
IOSCO accepts that credit ratings are
Fund (IMF) and the Basel Committee on The requirements for firms subject to
useful and at times necessary benchmarks
Banking Supervision (BCBS); and both general and simplified obligations
International regulations for asset managers and investors. It also
are broadly similar, and the FCA expects
appreciates the fact that there is no • develop guidance on the risk-based
all firms in scope to follow the technical
IOSCO report on good practice in the satisfactory alternative. approach to money or value transfer
standards and guidelines issued by the
use of CRAs services.
European Banking Authority (EBA) which
FATF to assess de-risking FATF has reminded financial institutions complement the BRRD.
On 8 June 2015, the International
that a risk-based approach to de-risking
Organisation of Securities Commissions The press release of the Financial Action
is a fundamental requirement of its The rules came into force on 19 January
(IOSCO) published Good practices on Task Force (FATF) on 26 June 2015,
standards. This statement comes three 2015, with the exception of the rules
reducing reliance on CRAs [credit rating Drivers for ‘de-risking’ go beyond anti-
months after the Financial Conduct on contractual recognition of bail-in,
agencies] in asset management. The report money laundering / terrorist financing,
Authority (FCA) warned banks that which will come into force on 1 January
highlights the following good practices: outlines the work it intends undertaking
wholesale de-risking was not a legal or 2016. The first submission deadline is
on evidencing the causes, scale and impact
regulatory requirement of any domestic or 31 December 2015 for the largest firms
• Firms should be able to make their own of de-risking by financial institutions. This
international standards. that are required to apply simplified
determinations on the credit quality of a follows after FATF received intelligence
obligations.
financial instrument before investing in that financial institutions are terminating
Recovery planning
and holding it. or restricting relationships with categories
of customers in situations beyond anti- Conduct
• When firms use external ratings, they Recovery plan template for FCA firms
money laundering (AML) and counter-
should be able to understand the IOSCO backs greater transparency
terrorist financing. On 27 August 2015, the FCA published
Being better informed – October 2015 a suggested recovery plan template for PwC • 7Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
IOSCO published Post-Trade Transparency Market infrastructure ESMA considers EMIR clearing IOSCO guidance on UTIs
in the Credit Default Swaps Market: Final member margin
Report on 7 August 2015. This followed ESMA recommends procyclicality IOSCO consulted on harmonisation of the
on a survey conducted among market margin On 27 August 2015, ESMA published a UTI (unique trade identifier) on 19 August
participants and observers on the use of discussion paper, Review of Article 26 of 2015. IOSCO supports international
publicly available post-trade data and On 13 August 2015, the European RTS No 153/2013 with respect to client transaction reporting initiatives that form
the perceived impact of such data on the Securities and Markets Authority accounts, that deals with EMIR clearing part of wider OTC derivatives reform. In
market. In this report, it analyses the (ESMA) published recommendations member margin standards. ESMA is looking at the elements of effective UTIs,
survey results in combination with its own to the European Commission (EC) on exploring whether it would be appropriate IOSCO focused on traceability challenges
quantitative analysis of the US, where strengthening the role of European Market to shorten the time horizon for the around linking related UTIs (such as with
mandatory post-trade transparency in Infrastructure Regulation (EMIR) margin liquidation period of non-OTC (over the package transactions, where separate UTIs
certain credit default swap (CDS) markets requirements in addressing procyclicality. counter) derivatives from two days to one are assigned to the different components
is now in effect. All authorised central counterparties day. This change would align EU standards of the transaction).
(CCPs) have implemented measures to with the US approach for the purposes of
It found that the introduction of the mitigate procyclical effects, but ESMA CCP equivalence. Following the consultation, IOSCO laid
transparency regime has not had a wants to amend EMIR to require: out a number of approaches to linking
substantial effect on market risk exposure CCPs are required to collect margin by UTIs that have been generated over the
or market activity for credit default swaps. • regular testing of procyclical metrics both the EU and US so that they have lifecycle of a transaction. It concluded
The report also cites a study performed that takes into account the interaction sufficient resources to manage their that approaches which accommodate
by the Federal Reserve Bank of New York between risk factors and credit/business exposure during the period between new transactions that consist of the
when disclosure was voluntary. That cycles, specificities of product offerings the clearing a member’s default and the consolidation of a number of previous
study found that dealers do not typically and risk management policies; liquidation of that member’s positions. transactions, such as with portfolio
hedge large transactions by trading in the While the EU requires CCPs to collect compression, are more likely to be
opposite direction on the same product • that CCPs make public (or at least share successful.
with clearing members) the entire net margin for non-OTC instruments
type on the same day or the day after a that is sufficient to cover at least a two-
trade is executed. history of margin parameter revisions, IOSCO went on to outline when life
along with the justifications for the day exposure window, the US approach
of having only a one-day minimum cycle events would require a new UTI
After considering the potential costs and changes; and when they would not. It observed
benefits, IOSCO suggests that it would be potentially leads to enhanced CCP stability,
• that procyclical impacts be taken into because the US rules also require that that changes in any counterparty should
valuable to make the price and volume be considered a new transaction with a
account when setting and revising margin must be collected on a gross basis
of individual CDS transactions publicly separate UTI; however, revaluations, end-
acceptable collateral and haircuts; and (rather than a net basis). ESMA’s paper
available. It also recommends increasing of-life events (such as early termination)
post-trade transparency in the global • enhancements to the rigour of available seeks stakeholder feedback to inform its
assessment of whether it should adopt an and contractually determined changes to
corporate bond and structured finance procyclical treatment options, for notional amounts should not trigger the
product markets, given the positive impact example mandating that buffers are approach more in line with that of the US.
need for a new UTI.
on transaction costs. exhausted when margins increase.
The comments period closed on 30
ESMA is of the opinion that the above September 2015. The consultation closed for comments on
In the EU, the transparency regime forms 30 September 2015.
will minimise the potential for harmful Reporting
part of MiFID II, which will come into
procyclical dynamics.
effect on 3 January 2017.
Being better informed – October 2015 PwC • 8Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
Banking
South Africa Payments In February 2012, FATF released a revised Relevance
version of its International Standards
SARB Directive 1 of 2015: Conduct on Combating Money Laundering and All banks and clearing system participants
NCA – Temporary suspension of the
within the National Payment System Financing of Terrorism and Proliferation are required to comply with the SARB’s
Affordability Assessment Regulations
in respect of the Financial Action (FATF recommendations). These directive and the corresponding FATF
Task Force Recommendations for standards apply to ‘wire transfers’, or recommendations. Failure to do so is an
Ryno Swart
Electronic Funds Transfers electronic funds transfers (EFTs 1), as they offence in terms of the NPS Act.
In our previous issue, we discussed the are known in South Africa. The SARB
new affordability guidelines under the Carmen Maisenbacher supports the recommendations of the Banks and clearing system participants
National Credit Act, which were published FATF and is collaborating with the drafters must ensure that the appropriate
and became effective immediately on of the Financial Intelligence Centre Act, information is retained for all qualifying
Background and purpose
13 March 2015. In our article, we raised 2001 (FICA) to ensure South Africa’s transfers. This will increase administrative,
concerns that credit providers would With the rise of terrorism in recent compliance with the applicable FATF operational and reporting requirements.
most likely not have the flexibility in years, it has been necessary for financial recommendations and any supporting
their systems and processes to respond to institutions to implement measures to guidelines. The key points of the International
the required changes immediately. This combat the financing of terrorism and Standards on Combating Money
view was also widely echoed across the prevent money laundering practices. The SARB has directed that any bank or Laundering and the Financing of
industry. clearing system participant that originates, Terrorism and Proliferation – The FATF
Within South Africa, the SARB has the facilitates or enables an EFT, as well as Recommendations – as published in
On 21 August, the Minister of Trade responsibility to monitor and regulate all the beneficiary of the payment, must February 2012 are discussed below.
and Industry issued a suspension of the payment, clearing and settlement systems, implement procedures to ensure that
Affordability Assessment Regulations utilising the provisions of the National all requirements relating to the FATF
for six months. The extension provides Payment System (NPS) Act. The NPS recommendations (refer to key points 1
EFTs are originated by banks and clearing system
welcome temporary reprieve for credit covers the payment process as a whole, below), FICA and relevant payment participants or their customers. They are processed
providers. However, in our experience, from payer to beneficiary, and includes clearing house agreements are met.A and forwarded, often through an intermediary
the six months that credit providers have all mechanisms, systems and procedures declaration of such compliance, prepared bank or clearing system participant, to credit
had to become compliant may still not involved in effecting payments and by the chief executive officer (CEO) and the beneficiary account, utilising computerised
be sufficient to implement system-driven systems.
facilitating the exchange of value between an AML compliance officer with the
solutions, and manual processes will likely parties. assistance of the internal audit function,
be required as a temporary workaround. must be submitted to the NPS department
of the SARB by no later than 31 March on
an annual basis.
Being better informed – October 2015 PwC • 9Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
Financial institutions must ensure that Further details can be found in Annexure A Outsourcing service providers are in place and the value
they retain the following information: of the SARB directive. of the exposure to each service provider.
Reporting requirements relating
• They must retain accurate originator to material outsourced service The return will include service providers
Conclusion
and beneficiary information relating to providers and critical third-party such as Eskom and Telkom, over whom
the EFT throughout the payment chain This directive has been implemented by service providers (Directive 8/2015) banks have no control. It will also include
process. This information is required the SARB with a view to preventing, and industry service providers such as SBV and
for all transfers and payments, except detecting, the movement of terrorist and Ryno Swart BankServ.
for credit or debit card transactions, illegal criminal funds. By ensuring that
settlements from one financial basic information about the originator In recent years, there has been a
ICAAP
institution to another, and certain and beneficiary of an EFT is immediately substantial increase in the outsourcing
transfers below an adopted threshold. available, it makes it possible to investigate of certain operations by local banks.
Expectations of the SARB with respect
any suspicious or unusual activity, after Outsourcing exposes a bank to risk,
• They must retain the name, account to ICAAP process and document
which prohibited transactions can be creating the need for supervisors to
number, address or identity number (Guidance Note 4/2015)
reported and frozen in accordance with assess and evaluate how well the bank is
of the originator, as well as the name,
the United Nations Security Council’s managing and mitigating this risk. Stephen Owuyo
account number or unique transaction
reference number of the beneficiary. resolutions.
In addition, concentration of outsourcing GN4/2015 was issued on 2 August 2015
Financial institutions must ensure that within the banking sector to specific with the aim of setting out the high-level
they retain the following information: These transfers contain information regarding the service providers could result in mutual or requirements for an internal capital
originator, the beneficiary and the value of the common exposure to operational risk or adequacy assessment process (ICAAP),
• They must retain accurate originator payment. EFTs can be either domestic or cross- potential vulnerability across the banking as well as the responsibilities of the
border.
and beneficiary information relating to sector. Bank Supervision Department (BSD)
the EFT throughout the payment chain and of banks. While the principles in the
The ability to trace all wire transfers, In order to effectively monitor and manage
process. This information is required Guidance Note are aligned to those in
or EFTs, should go a long way towards this risk, starting from 30 June 2015 the
for all transfers and payments, except Basel III and these are therefore not new
making terrorist financing more difficult SARB requires banks to submit an annual
for credit or debit card transactions, requirements, the Appendix provides a
for criminals, and should help ensure that return providing specified information on
settlements from one financial convenient format for banks to follow in
suspicious and illegal financing activities material outsourcing arrangements and
institution to another, and certain drafting their ICAAP documents. Intended
are detected and subsequently terminated. third-party service providers.
transfers below an adopted threshold. as a guide to drafters of the ICAAP
• They must retain the name, account http://www.gov.za/sites/www.gov.za/ document, the format should make the
The return will highlight, amongst other review process for both the BSD and the
number, address or identity number files/38894_gon538.pdf things, who the material service providers banks more effective and efficient. It is,
of the originator, as well as the name,
are, why they are classified as material, however, not intended to be exhaustive,
account number or unique transaction
the nature of the services they provide, nor is it a substitute for the full content of
reference number of the beneficiary.
whether contingency plans or alternative the regulations.
Being better informed – October 2015 PwC • 10Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
Liquidity • The amount that can be drawn down • In volatile markets, such as banks trade between South Africa and China.
will be limited to the lesser of the value are currently facing, the fair value of
Provision of a committed liquidity of collateral (after required haircuts) collateral could vary quite significantly. In light of China’s status as South Africa’s
facility by the SARB (Guidance Note and the facility granted. This could, in turn, affect the value of largest export trading partner, a clearing
5/2015) available facilities. centre in South Africa that caters to
• Where assets pledged have been
renminbi-denominated transactions will
transferred to a separate special • The creation of SPIs and additional
Ryno Swart facilitate the clearing of transactions in the
purpose institution (SPI), the ‘look- administrative and reporting Chinese currency, with parties to cross-
The Basel III framework introduced through principle’ will apply for requirements will result in additional border transactions between South Africa
requirements for banks to maintain a the purposes of calculating capital costs to banks. and China benefiting from easier, and
minimum liquidity coverage ratio (LCR) requirements relating to credit risk, and
potentially cheaper, trading conditions.
in order to provide sufficient high-quality these assets have to be classified and
liquid assets (HQLAs) to survive a month- risk-weighted as if they were still on the Other regulation
In addition, ‘the memorandum of
long significant stress scenario. The bank’s balance sheet.
The South African Reserve Bank understanding signifies another important
SARB has approved the provision of a • Banks will have to report on assets milestone reached in the continuous joint
committed liquidity facility (CLF) to local and People’s Bank of China sign a
included in the SPI on a quarterly basis. memorandum of understanding on effort to build capabilities in the South
banks to assist them in meeting the LCR African financial markets to better serve
requirements. • Banks will pay a commitment fee on a renminbi clearing arrangements in
South Africa bilateral trade‚ investment and financial
sliding scale, based on the size of the
flows between China and South Africa.’
Although previous guidance has been facility, and interest will be charged on
drawn balances at the SARB’s repo rate Rivaan Roopnarain
issued in this regard, Guidance Note
plus 100 basis points. SARB signs inter-central bank
5/2015 aims to address some of the In July 2015, the SARB and the People’s agreement with BRICS counterparts
uncertainty that has been identified Although the CLFs provide important Bank of China announced the signing of a
around CLFs and to provide updated support to banks in meeting Basel III LCR memorandum of understanding regarding Rivaan Roopnarain
information on acceptable collateral and requirements, we believe the banks will the clearing and settlement of the Chinese
other related requirements. still face some challenges, including: currency, the renminbi, in South Africa. In July 2015, the SARB announced the
According to the press release issued by signing of a multilateral inter-central bank
The Guidance Note covers the following • It will be difficult for banks to forecast the SARB, the two central banks agreed agreement among the central banks of
key provisions: their HQLA requirements accurately to co-ordinate and co-operate on the Brazil, Russia, India, China and South
a year in advance when applying for supervision, oversight and clearing of Africa (BRICS). The agreement was
• CLFs will be capped at 40% of total the facilities. This could lead to their renminbi in South Africa and to exchange designed for the purpose of implementing
forecast required HQLA. requesting insufficient facilities, or information in order to facilitate the the contingent reserve arrangement which
• Banks have to apply annually for a excessive facilities with resultant higher improvement and development of bilateral was announced in July 2014 at the BRICS
CLF for the following year, based on facility fees. summit in Brazil, and effectively provides
estimated HQLA requirements.
Being better informed – October 2015 PwC • 11Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
a framework for the provision of liquidity The inter-central bank agreement is • Moving the IRRBB assessment from its The Basel Committee acknowledged
to BRICS countries through currency swap the first multilateral financial safety net current home in the subjective Pillar that excessive disclosure can lead to
arrangements in terms of the contingent arrangement which South Africa has 2 framework to a more prescriptive undesirable market effects but has
reserve arrangement treaty agreed to by entered into following the bilateral swap calculation that would be part of Pillar nevertheless decided to proceed with the
member countries at the BRICS summit. arrangement that was signed with China 1; or new disclosure requirements.
in April 2015
• Leaving the IRRBB component in Pillar
With the ratification by all BRICS countries Bringing proportionality to CRD IV
2, but making it more prescriptive.
of the contingent reserve arrangement
treaty, which was the precursor to the International regulations Once finalised, the new Basel IRRBB policy On 19 August 2015, EBA announced that
finalisation of the inter-central bank will apply to ‘large internationally active it intends to conduct further analysis on
agreement, the contingent reserve Capital and liquidity banks’. National regulators will be able to the NSFR and leverage ratio, as requested
arrangement, with an initial size of extend the new treatment to smaller banks by the EC. Specifically, it will focus on
US$100 billion, becomes effective. Basel Committee targets interest rate if they wish. proportionality for banks with different
risk business models and potential future
The purpose of the contingent reserve The consultation closed on 11 September reporting requirements. It will also
The Basel Committee published a
arrangement is to assist individual BRICS 2015. cover the scope of application and how
consultation paper on assessing interest
countries to: calibrating the two requirements will
rate risk in the banking book (IRRBB) on 8
NSFR disclosure templates impact markets.
June 2015.
• mitigate short-term liquidity pressures;
The Basel Committee published a set of The EBA is mandated to produce a report
• promote and facilitate additional co- The Basel Committee points out that banks
net stable funding ratio (NSFR) disclosure on the NSFR by the end of 2015 and
operation between BRICS countries; are more vulnerable to interest rate risk
templates on 22 June 2015. another on the leverage ratio by October
and now, because interest rates have been very
2016. It expects to complete the leverage
low for several years and are likely to rise
• strengthen the global financial safety National regulators must incorporate the ratio report by July 2016.
at some point in the future. Also, the Basel
net. new disclosure templates into their rules
Committee wants to limit opportunities
and require internationally active banks to Reverse stress testing in ICAAP
In effect, the existence of the contingent for arbitrage by requiring a broadly similar
complete and publish them annually from
reserve arrangement also provides treatment of interest rate risk in the
2018 onwards. The new disclosure process The Prudential Regulation Authority
valuable insurance to the BRICS countries, banking book and the trading book.
will ultimately be aligned with the existing (PRA) added reverse stress testing to the
increasing their resilience to financial
Pillar 3 disclosures. Regulators can ICAAP and the supervisory review and
and economic shocks and, in so doing, The paper proposes two approaches to
extend their application to smaller and/or evaluation process (SREP) through the
adding to investor confidence in their assessing IRRBB and invites comments
domestic banks if they wish. issuance of SS31/15 on 3 August 2015.
economies through increasing access to from the industry on each:
SS31/15 replaces SS5/13 and SS6/13 –
financial resources in the event of actual or
stress testing, scenario analysis and capital
potential balance of payments pressures.
planning – and applies to credit institution
and investment (CRD IV) firms.
Being better informed – October 2015 PwC • 12Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
Firms in scope of Chapter 14 of the PRA’s The PRA suggests that firms may wish to August 2015 in respect of its June 2015
internal capital adequacy assessment use reverse stress testing as a starting point monitoring exercise:
(ICAA) rulebook must carry out reverse for recovery plan scenarios.
stress testing, including testing their • Updated instructions for more recent
business plan to the point where the FAQs on measuring counterparty credit reporting templates;
market loses confidence in a firm (i.e. risk • A qualitative questionnaire covering
counterparties are unwilling to transact
interest rate risk in the banking book;
and/or shareholders refuse to provide On 19 August 2015, the Basel Committee
and
further capital). published Basel III: the standardised
approach for measuring counterparty • The closed-form questions to be used in
The PRA states: credit risk exposures: frequently asked a quantitative impact assessment when
questions. The FAQs relate to the carrying out a fundamental review of
• It may request that firms quantify standardised approach for measuring the trading book.
what level of financial resource they counterparty credit risk (SA-CCR), which
The changes to the December 2013
consider will place it in a business is replacing the current exposure method
versions of the reporting templates
failure situation, should the adverse and the standardised method, and cover:
cover the NSFR worksheet as well as
circumstances they have identified
worksheets on large exposures, exposures
materialise. • the general formula
to sovereigns, operational risk and
• The test should take into account • the PFE add-on interest rate risk in the banking book.
the sources of risks identified as per Worksheets for a quantitative impact
• specific derivatives, and
GENPRU 1.2.30R(2) (which is required assessment during the fundamental review
by Rule 15.2 of ICAA). • miscellaneous edits. of the trading book, the review of the
Also, the Basel Committee has made a standardised approach to credit risk and
• The test should be tailored to the
technical amendment to the SA-CCR TLAC have been removed.
nature, size and complexity of a firm’s
business. framework which applies where the
perimeters of the margin agreement and
• The test should consider scenarios
the netting set differ, particularly where
that include the failure of one or more
one margin agreement covers multiple
counterparties or a significant market
netting sets.
disruption due to the failure of a major
market participant.
Update on Basel III monitoring
• Any changes to the firm’s business plan
should be documented in the results The Basel Committee released the
referred to in rule 15.4 ICAA. following updated documents on 26
Being better informed – October 2015 PwC • 13Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
Insurance and investment management
South Africa investments schemes (PBCIS) industry The new regulation allows for the This could result in operational and
in South Africa is a niche market which establishment of two types of HFs: one for reputational risk for the relevant HFs as
Collective investment currently has four registered CISs (one retail investors and the other for qualified well as their managers.
of which is in the process of being investors. Retail hedge funds (RHFs) will
terminated). be regulated more strictly than qualified Draft default regulations on
investor hedge funds (QIHFs). retirement funding
Capital requirements with which The capital to be maintained by a manager
managers of CISs in participation of a PBCIS must be calculated in relation As of 1 April 2015, the HF industry has had Julanie Basson and Neil Gerryts
bonds must comply to the financial statements as prepared in to comply with the regulations as set out
terms of International Financial Reporting in Collective Investment Scheme Controls Members of modern-day defined
Julanie Basson, Bruce Otto, Rikus Bouwer Standards (IFRS) in the manner as set Act, Act No. 45 of 2002 (CISCA) as contribution retirement funds are faced
and Shiraz Hassim out in BN 138. The regulatory capital prescribed by the Minister of Finance. All with several important decisions related to
requirement consists of eligible capital HFs that were unregulated as of 31 March their retirement savings:
On 17 July 2015 (effective date), the FSB (share capital, non-distributable reserves, 2015 had to apply to be registered under
issued Board Notice (BN) 138 https://www. retained income etc.) less any adjustments CISCA by no later than 30 September • How much to contribute to the
fsb.co.za/Departments/cis/Documents/ for non-liquid items (as defined in BN 2015. retirement fund;
Board%20Notice%20138%20of%202015. 138 – intangible assets, guarantees, net
pdf (Collective Investment Schemes • How to invest these savings;
deferred tax assets etc.) less any required Funds that had not submitted registration
Control Act: Capital requirements with capital (as defined in BN 138 – 13 weeks’ documentation to the FSB by 30 • What to do with the benefits when
which managers of collective investment annual fixed expenditure plus R1m September 2015 and that have continued changing employment; and
schemes (CISs) in participation bonds seed capital per fund (reduced for each operating HFs after this date without
must comply). • How to invest their savings at retirement
portfolio exceeding a net asset value of authorisation have been doing so in in order to provide an adequate lifetime
R10m)). contravention of the regulation, and will pension.
A participation mortgage bond scheme as a consequence be subject to regulatory
is one where a licensed scheme accepts Impact on South African hedge funds and enforcement action by the FSB. Often, though, people lack the necessary
money from investors and lends it to not registered under CISCA financial expertise to make these life-
institutions or individuals in order to One example of possible enforcement changing decisions, as can be seen from
develop property. A mortgage bond is On 6 March 2015, the National Treasury action highlighted is the issuance of a the low preservation rate when employees
registered over the property, making the and the Financial Services Board (FSB) suspension of trade notice, effectively change jobs. As a result, on 22 July 2015,
property the security for the loan. released a signed declaration for the making it impossible for funds to take in the National Treasury published the long-
regulation of hedge funds (HFs) in South any new investors or for current investors awaited draft regulations on defaults. The
The participation bond collective Africa. to disinvest from impacted funds. aims of default options include:
Being better informed – October 2015 PwC • 14Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
• Encouraging members to make option that is appropriate for them based international debates around the systemic should be disclosed to investors.
appropriate financial decisions by on their circumstances. risk posed by asset management. While he • Performance fees – There should
offering default options that are suitable highlighted some of the concerns, he also be a local regulatory regime setting
for their circumstances; observed that the EU has implemented standards for the calculation and
International regulations mitigating regulatory requirements
• Reducing the charges in the retirement disclosure to investors of performance
around liquidity, leverage and re-used fees.
fund system by removing performance Asset management collateral risks, especially for UCITS funds.
fees and exit penalties on default • Disclosure – The manner in which
Market-based finance: SMA chair discusses Maijoor went on to caution that regulation
options; and fees are disclosed should be easily
CMU and asset management systemic risk should always take into account the
• Improving confidence in the retirement differences between the banking and asset understandable by investors. It can be
system by ensuring that the default management sectors. provided via electronic media, as long
On 1 June 2015, Steven Maijoor, ESMA
options are appropriate for the intended as investors can request hard copies.
chair, gave a speech outlining the key role
membership and increasing the that asset management has played, and Retail products: Standardising • Transaction costs – Regulators should
transparency of the options in terms of will continue to play, in integrating the define which activities are included in
operation and costs.
CIS fees
EU’s financial system as part of the EC’s transaction costs, and this information
The regulations will require funds proposed Capital Markets Union (CMU). IOSCO published Consultation report should be disclosed to investors.
(including retirement annuity funds) to: He cited undertakings for the collective on elements of international regulatory
• Hard and soft commissions –
investment in transferable securities standards on fees and expenses of
Transactions should only be entered
• Set up default investment portfolios; (UCITS) as a model, observing the investment funds on 25 June 2015. The
into if they benefit the fund and not to
importance of the management company organisation originally issued fees and
• Create in-fund preservation options and generate order flow or commission, and
passport and the facilitation of cross- expenses recommendations in 2004 and is
accept transfers into the fund in respect regulators should consider providing
border fund mergers and master-feeder now updating them. It notes the number
of active members. This effectively guidance on the services and activities
structures. But he argued that the CMU of investment fund regulatory and market
means members who leave a fund will, that commissions can and cannot pay
could be used as an opportunity to make developments in the period which may
by default, keep their benefits in that for, while operators should implement
the following changes, which he believes need to be reflected, including more
fund (earning investment returns) procedures aimed at avoiding conflicts
would strengthen asset management’s disclosures and low interest rates.
unless they decide to transfer it to the of interests in their dealing activities.
contributions even further:
fund of their new employer or take the • Investing in other funds – The
benefit in cash; and IOSCO focuses on key areas where new
• Limit member state discretion as to gold recommendations could be made: management fees of both funds should
• Provide default annuity options for plating; be disclosed to investors.
members at retirement. • Types of fees permitted – Regulators • Changes to a fund – Investors should be
• Introduce increased uniformity around
The draft regulations also specify the costs and fees, instead of simple could specify the fees that can be taken given suitable notice before the change
requirements of these default options. disclosure requirements; and out of a fund’s property, new fees should takes effect.
only be charged after approval by the
• Create uniform requirements around responsible entity (such as the executive
While members may still exercise their
fund lending. board of the operator or a regulator)
own decisions, the defaults will provide an
In addition, Maijoor touched on the and the scope of fees taken from funds
Being better informed – October 2015 PwC • 15Executive summary Feature article – Cross-sector Banking Insurance and Taxation Accounting updates Glossary Contacts
Capital markets regulations investment
2020: Will they management
change for good?
Supervision: IOSCO zones in on asset on OTC retail-leveraged products and the The IAIS plans to adopt the final ICPs in buckets to have;
management functioning of the Credit Determinations November 2015. • Choice of HLA formulas (to specify the
Committee and CDS auction processes of exposure) and how much emphasis
On 17 June 2015, IOSCO released IOSCO: the International Swaps and Derivatives G-SIIs holding more capital should be placed on non–traditional
Meeting the Challenges of a New Financial Association (ISDA). insurance (NT) and NI activities; and
World, covering developments arising The IAIS published Consultation on Higher
from its annual conference in London. Finally, the Board agreed to consider Loss Absorbency (HLA) requirements • Calibration of outcomes (to specify the
It has decided that a full review of asset what work IOSCO should undertake to for G-SIIs on 25 June 2015. The FSB size of the factors) and what extent the
management activities and products in further strengthen the current global defines G-SIIs as insurers ‘of such impact of the HLA is to have on G-SIIs,
the global financial context should be the framework to address misconduct by firms size, market importance, and global both on average and in particular.
immediate focus of international efforts and individuals in retail and wholesale interconnectedness that their distress or The IAIS does not expect the HLA-required
to identify potential systemic risks and markets. failure would cause significant dislocation capital to be more than 20% of the sum of
vulnerabilities. It thinks this review should in the global financial system and adverse the BCR and uplift for the average G-SII.
take precedence over further work on Regulation economic consequences across a range of The HLA capacity requirements are to be
methodologies for the identification of countries’. The IAIS is developing a capital met by the highest-quality capital. The
systemically important asset managers. IAIS revises insurance core requirement for G-SIIs made up of a basic HLA is due to be endorsed by the G20 in
principles capital requirement (BCR) plus an uplift November 2015, for implementation from
At the conference, the IOSCO Board (presently estimated at 33% of BCR) plus January 2019.
discussed its strategic direction through The International Association of Insurance HLA, split between insurance and non-
2020, which will be implemented via 43 Supervisors (IAIS) published Consultation insurance (NI) elements. It developed the See our Hot Topic G-SII – a new era
initiatives covering priority areas such as: on Revision of Insurance Core Principles BCR and HLA principles in 2014 and has of global insurance regulation for
on 17 June 2015. It first developed the now published several options of a draft background information.
• Research and risk identification insurance core principles (ICPs) as a HLA for consultation.
global framework for the regulation
• Standard setting and developing
and supervision of the insurance sector
Conduct in inclusive insurance
The IAIS is not focusing on specific
guidance
in 2011. It is consulting on some minor
market
formulas for the HLA in this consultation,
• Implementation monitoring clarifications and amendments to its ICPs but is instead concerned with risk The IAIS published Draft issues on conduct
following a 2014 self-assessment and peer sensitivity, robustness and simplicity. It of business [COB] in inclusive insurance
• Capacity building
review, with the intention of aligning proposes that the HLA capital requirement on 19 June 2015. It defines inclusive
• Co-operation and information them with corresponding FSB and Basel for both insurance and NI will be insurance as ‘all insurance products
exchange, and Committee principles and standards. It has calculated by multiplying an exposure by aimed at the excluded or underserved
also strengthened its approach to group- a factor. It has identified three main areas market. In developing countries, the bulk
• Collaboration and engagement with
wide supervision and amended various for consultation: of the population often classify as un- or
other international organisations.
key definitions related to governance and underserved.’ It considers the difference
IOSCO also dedicated time during the group supervision. • Bucketing (to specify which factor to between the inclusive insurance market
conference to discuss proposals for work apply to which G-SII) and how many
Being better informed – October 2015 PwC • 16You can also read
