Ny Regulering i den Finansielle Sektor

Morgenmøde

28-01-2020

22

❖ Velkommen v. Tony Johansen

❖ Basel III

❖ General updates v. Tom Clifford

❖ CRR 2 / CRD 5 v. Nicola O’Reagan

❖ IBOR – ny guidance fra finanstilsynet v. Torben Winther

❖ Sustainability Regulation v. Nicola O’Reagan & Helena Barton

❖ DAC 6 – EU diriktiv til implementering i dansk ret v. Martin Poulsen

❖ Afrunding v. Tony Johansen

Ny Regulering i den Finansielle Sektor – Morgenmøde

Agenda

Basel III: General update

January 2020

4

Basel III - Overview

The Basel framework has developed over multiple decades, increasing in scope and sophistication but also complexity during the periodSince its inception in the Basel accord of 1988, the Basel framework on capital regulation has come to be established as the core assessment of soundnessand stability of the banking system. The framework continues to evolve with various revisions in response to the changing circumstance, such as the2007/08 financial crisis.

Basel I

Minimum capital requirements for Credit and

Market Risk

Basel II

Pillar 1

Minimum capital

requirements

Pillar 2

Supervisory reviewprocess

Pillar 3

Disclosureand market discipline

Basel III

Pillar 1

Enhanced capital and

liquidity requirements

Pillar 2

Enhanced Supervisory Review and Evaluation Process (SREP)

Pillar 3

Enhancedrisk

disclosureand market discipline

Eli

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Cap

ital

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+

Cap

ital

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=

5

Basel III – Implementation into EU law

What we can expect

*These rules will be reflected by the European Commission by way of a Delegated Act under CRD5/CRR2.

Credit Risk

• Revised Standardised Approach for Credit Risk• Constrained Internal Ratings-Based Approach for Credit Risk (limiting the use of advanced IRB

approaches for many low-default portfolios and introducing other constraints)

CVA, Operational Risk, Output Floor

• Minimum capital requirements for CVA** (removal of the internally modelled approach and the

introduction of a revised standardised approach)

• Minimum capital requirements for Operational Risk (revised standardised approach to replace

the existing standardised and advanced measurement approaches)

• Standardised output floor BCBS (72.5% of the capital produced by the new standardised

approaches, through a five year phased implementation period - 50% in 2022 rising almost linearly to reach 72.5% in 2027).

FRTB

• Delaying the application of the framework to January 2022• The BCBS published its final rules for the FRTB in January 2019*

BCBS December 2017 final revisions

Leverage Ratio

• Existing exposure definition • Revised exposure definition • G-SIB buffer

Introduced as a reporting

requirement under CRR2

Leverage ratio G-SIB buffer will be introduced under

CRR2

In CRR2 In CRR3

Will be introduced as a binding capital

requirement

To be adopted

Revised exposure definition likely to be

introduced

To be adopted

In December 2017, the BCBS reached an agreement on the final Basel III standards. These revisions will be implemented in the EU through CRD5/ CRR2 and CRD6/CRR3. The December 2017 rules aim to restore credibility in the calculation of Risk Weighted Assets making the Standardized Approach more risk sensitive and constraining the use of internal models.

Prudential requirements

** In November 2019 the BCBS consulted on targeted revisions to the CVA framework. These changes may not be in the Commission’s legislative proposal in June 2020, but we expect them to be adopted – potentially through a Delegated Act, or other Level 2 mandates

6

Basel III – Implementation Timeline

28.06.2019Entry into force

Three years after RTS on FRTB IMA (est. 28.03.2024*)

CRR2• Application of FRTB

reporting requirements based on internal model approach

18 months after entry into force (28.12.2020)CRD5/BRRD2• Member State adoption,

publication and application deadline

CRR2• G-SIB leverage ratio

requirement

01.01.2022

CRD5• Restrictions and

required actions in event of failure to meet capital/leverage ratio buffer requirements

20

19

20

20

20

21

20

22

20

23

20

24

CRR2: • Scope, Supervisory

powers• TLAC requirements• Provisions on

massive disposals of NPLs

• Own funds requirements for CCP exposures

2 years after entry into force (28.06.2021)CRR2 general

application date

Including NSFR, SA-CCR, Leverage Ratio, Large Exposures, IRRBB disclosure, Pillar 3 revisions

CRR2• Exemption from

CET1 reductions of prudently valued software assets*

CRD5• Provisions on IRRBB

*This is a contingent timeframe: 12 months after entry into force of CRR2 the EBA is required to submit a regulatory technical standard on the subject, and the exemption will apply 12 months after the entry into force of that RTS, which is contingent on Commission approving and adopting those standards. This process takes 3-12 months.

01.01.2024BRRD2• MREL application date for

resolution and non-resolution entities

31.12.2019CRR2• Commission to

adopt Delegated Act modifying FRTB framework

One year after adoption of Delegated Act on FRTB (est. 31.12.2020)

CRR2• Application of

FRTB reporting requirements based on standardised approach

30.12.2023CRD5• Intermediate Parent

Undertaking (IPU) requirements

Q2 2020CRD6/CRR3Expected European Commission Proposal

Q2 2022CRD6/CRR3Predicted adoption of legislative package

Q2 2024CRD6/CRR3Predicted implementation of legislative package

*Estimated date: FRTB reporting requirements for the IMA are due to apply 3 years after entry into force of RTS on liquidity horizons for the IMA, RTS non-modellable risk-factors in the IMA and RTS on P&L attribution (due to be submitted by the EBA by 28.03.2020). As above, it is contingent on the Commission adopting those standards, which can take 3-12 months.

CRD5 (28.12.2020)• Remuneration

requirements• Revisions to

Pillar 2 framework

CRR2 / CRD5

7

Basel III – CRR Level 2 Mandates

• Underpinning much of this implementation work will be a significant amount of secondary rulemaking that will see the Commission and European Banking Authority (EBA) draft detailed standards to specify the way in which many of the RRM’s initiatives should be applied.

• These are a mix of binding Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) to be developed by the EBA, Delegated Acts and Implementing Acts that will come directly from the Commission, and non-binding EBA Guidelines aimed at clarifying implementation challenges. See Appendix for the full overview.

• Many of these requirements could have a significant impact on how challenging these rules will be for banks to put in place and operate under.

• With the bulk of the level 2 mandates having deadlines in the next two years, secondary rulemaking is likely to put resource constraints on EBA staff. A likely consequence of this is that some of the non-dated mandates might therefore take a while to materialise.

RRM package

Delegated Acts

Implementing Acts

Regulatory Technical Standards

Implementing Technical Standards

Guidelines

8

Basel III – Implementation Timeline

28.06.2019Entry into force

Three years after RTS on FRTB IMA (est. 28.03.2024*)

CRR2• Application of FRTB

reporting requirements based on internal model approach

18 months after entry into force (28.12.2020)CRD5/BRRD2• Member State adoption,

publication and application deadline

CRR2• G-SIB leverage ratio

requirement

01.01.2022

CRD5• Restrictions and

required actions in event of failure to meet capital/leverage ratio buffer requirements

20

19

20

20

20

21

20

22

20

23

20

24

CRR2: • Scope, Supervisory

powers• TLAC requirements• Provisions on

massive disposals of NPLs

• Own funds requirements for CCP exposures

2 years after entry into force (28.06.2021)CRR2 general

application date

Including NSFR, SA-CCR, Leverage Ratio, Large Exposures, IRRBB disclosure, Pillar 3 revisions

CRR2• Exemption from

CET1 reductions of prudently valued software assets*

CRD5• Provisions on IRRBB

*This is a contingent timeframe: 12 months after entry into force of CRR2 the EBA is required to submit a regulatory technical standard on the subject, and the exemption will apply 12 months after the entry into force of that RTS, which is contingent on Commission approving and adopting those standards. This process takes 3-12 months.

01.01.2024BRRD2• MREL application date for

resolution and non-resolution entities

31.12.2019CRR2• Commission to

adopt Delegated Act modifying FRTB framework

One year after adoption of Delegated Act on FRTB (est. 31.12.2020)

CRR2• Application of

FRTB reporting requirements based on standardised approach

30.12.2023CRD5• Intermediate Parent

Undertaking (IPU) requirements

Q2 2020CRD6/CRR3Expected European Commission Proposal

Q2 2022CRD6/CRR3Predicted adoption of legislative package

Q2 2024CRD6/CRR3Predicted implementation of legislative package

*Estimated date: FRTB reporting requirements for the IMA are due to apply 3 years after entry into force of RTS on liquidity horizons for the IMA, RTS non-modellable risk-factors in the IMA and RTS on P&L attribution (due to be submitted by the EBA by 28.03.2020). As above, it is contingent on the Commission adopting those standards, which can take 3-12 months.

CRD5 (28.12.2020)• Remuneration

requirements• Revisions to

Pillar 2 framework

CRR3 / CRD6

9

Basel III – Timing of CRD6/CRR3 implementation

The Commission is due to publish a legislative proposal in Q2 2020. If proposed at that date, we expect a CRD6/CRR3 legislative package implementing the finalised Basel III to take a minimum of two years to negotiate, based on the precedent set by CRR2 and the original CRR negotiations.

Thereafter, CRD6/CRR3 is then likely to take one to two years to implement in the EU. Two years was the standard implementation period included for most components of CRR2.

2020 2021 2022 2023 2024 2025

2020 2021 2022 2023 2024 2025

Based on an optimistic assumption around the speed of EU political negotiations and Level 2 rulemaking by the EBA before implementation, this means that the EU is likely to miss the BCBS 1 January 2022 implementation target by one-to-two years.

This will add cost and complexity for firms which operate across multiple jurisdictions, with some other jurisdictions set to implement the reforms

on time.

2020 2021 2022 2023 2024 2025

Proposal Final rules in force

Final rules in force

Rules apply to EU banks

Proposal Final rules in force

Rules apply to EU banks

BCBS 1 January 2022 implementation target

10

Basel III – Impact of CRD6/CRR3

The EBA’s quantitative impact assessment in response to the Commission’s call for advice projected a significant capital uplift for EU banks (24% on average), with large banks set to be particularly affected

NB: above figure calculated using the EBA’s December 2019 report on the assumption that institutions start to retain profits from the first date of the phase-in period (i.e.2022).

Sources: EBA 2018-Q2 quantitative impact study (QIS) data and EBA calculations. Based on a sample of 189 banks, The sample does not include any UK banks

124,8 123,8

75,3

41,1

0,9 0,1

83 82,9

46,8

32,2

0,1 0

All banks Large of which: G-

SIIs

of which: O-

SIIs

Medium Small

EU

R (

bn)

Total capital shortfall vs CET1 shortfall

Estimated total capital shortfall Estimated CET1 shortfall

124.8

48.4

83

32.5

Estimated total capitalshortfall for all EU banks

Estimated shortfall for allEU banks if profits

retained over transitionperiod

Estimated CET1 shortfallfor all EU banks

Estimated CET1 shortfallfor all EU banks if profitsretained over transition

period

EU

R (

bn)

23,6 24,127,2

23

11,3

5,5

All banks Large of which: G-SIIs of which: O-SIIs Medium Small

% c

han

ge

% change in T1 MRC for EU banks, by bank size

11

Basel III – Key questions with CRD6/CRR3

Timing of implementation

Faithfulness of implementation

European policymakers have repeatedly stated their intention to implement the Basel III revisions on time, but there are growing doubts over whether it will be possible for the EU to implement, or even finalise, the rules before the 1.1.2022 BCBS deadline

A direct implementation of the BCBS standards is projected to have a significant impact on European banks, and some stakeholders advocate materially deviating from the internationally agreed framework in order to mitigate against this. Policymakers will face particular pressure to modify the reforms to take into account EU-specific structural market characteristics. The calibration of the standardised output floor is at the centre of these debates

Proportionality Fragmentation in the EU banking market Pillar 2 trade-offs

To offset some of the impact on banks’ overall capital requirements, we may see supervisors eventually reduce Pillar 2 capital requirements where risks become covered by Pillar 1. EU policymakers face industry pressure to clarify and commit to an approach to such a trade-off

There is ongoing debate as to whether it is appropriate for the EU to apply the full BCBS bank capital framework to all banks, or whether a more proportionate or tiered approach to implementation should be pursued

It is uncertain whether policymakers will use CRD6/CRR3 to attempt to remove barriers to consolidation in the EU banking market. Attempts to allow home supervisors to waive sub-consolidated capital and liquidity requirements for Eurozone subsidiaries of Eurozone parent entities have failed in the past due to fierce political opposition

12

Basel III – Banking Association response

If implemented as proposed, Basel III will make capital requirements less risk sensitive

The Copenhagen Economics paper (published in November 2019, on behalf of EBF and EU country banking associations) analyses the impact of Basel III on the banking sector. The paper concludes that the final Basel III rules are not in line with the three key principles that the G20 provided as guidance for implementation at a global level:

• Support better alignment of risk assessments. EU banks’ internal risk models capture risks reasonably accurately so the output floor would be expected to widen gaps between probable future losses and capital requirements. Capital requirements will increase the most for banks with the lowest historical losses.

• Should not lead to a significant increase in capital requirements. EU banks are estimated to see a 24% increase, equivalent to EUR 91 bn. core equity. Additional capital is needed to maintain current rates, up to EUR 300-400 bn.

• Aim for a level playing field at global level. The 24% EU capital ratios increase compares to unchanged average capital requirements in the US. There is no evidence for the need of a substantial increase in risk weights for the many EU banks that use internal models.

The paper sets out several alternatives for the EBA to consider which would have the effect of a lower capital increase:

• “EBA options” to avoid broad-based increase in capital requirements - including maintaining the SME supporting factor, excluding the historical loss component, keeping the CVA exemptions, including the 2019 revisions to the FRTB

• Recalibration of EU banking system buffers - removal of the SRB among others

• Adjusted treatment of unrated corporates

• “Back-stop” approach i.e. output floor should apply as a separate requirement only including capital buffers from the original Basel III package.

24 %

14-18 %

8-9 %

2-4 %1-2 %

6 %

19 %23 % 22 %

16 %

10–6%

EBA optionsOverall increase

Removal of the SRB

Unratedcorporates

Backstop approach

All options included

Increase in capital requirements with different options of implementation

Increase in CET1 requirement

Mitigating effect from options

13

Basel III – Implementation considerations

The effort to implement Basel III reforms and IRB within it is similar in magnitude to the move to Basel II.

Areas of focus will vary according to the maturity of current calculation and reporting infrastructure.

Components of programme with % split of effort

Data & Core Systems Analytical Models Calculations & Reporting Regulatory Engagement

Bank 1 65% 15% 15% 5%

Bank 2 40% 25% 20% 15%

Bank 3 50% 20% 20% 10%

Bank 4 60% 15% 20% 5%

Bank 5 60% 15% 15% 10%

• Where there are new floors (e.g., PD floors, LGD floors), will these be implemented in models directly, or will these implemented as constraints in the downstream calculation?

• Do you calculate a Standardised RWA for all exposures across all portfolios? Where are the gaps and how much effort will it take to close those gaps? How will compliance with the phased-in floor be monitored?

• Where will the Standardised calculations be performed and results stored for comparison with IRB outputs?

Programme planning

• What elements of the programme will substantially drive the timeline? What are the key dependencies?

• How will uncertainty over the regulatory divergence in final standards and timing be managed?

• At what point should regulators be engaged, and how should this engagement be managed?

• How do you manage regulatory discussions to differentiate IRB approval and Basel III implementation?

• For new Real Estate exposure class, can you identify Residential vs Commercial? How would ‘Value at Origination’ data be sourced for Retail Mortgages?

• To what extent should investments be made in strategic solutions vs tactical calculations?

Data & Core Systems Analytical Models Calculations & Reporting Regulatory Engagement

14

Appendix: Basel III – CRR Level 2 Mandates

3 years after entry into

force2021

4 years after entry into

force

1 year after entry into

force2020

2 years after entry into

force

5 years after entry into

force

Entry into force

(27.06.2019)20232022 2024

Q4 2019 – Q1 2020CRR2:•FRTB – Delegated Act operationalising

reporting requirements (31.12.19)•SA-CCR – RTS on calculation of risk position (supervisory

delta), and mapping transactions to risk categories•Capital requirements for credit risk – RTS on

conditions that the EBA is to take into account when assessing appropriateness of LGD

values•Capital requirements for credit risk – RTS on exposures secured by mortgages on

immovable property•Liquidity – RTS on currencies with constraints on the availability of liquid

assets•Disclosure – ITS on uniform disclosure formats

CRD5

•Guidelines specifying modalities of cooperation and information exchange between authorities (01.01.2020)

By end-Q2 2021CRR2•Reporting requirements –ITS on uniform reporting

templates for market risk•Reporting requirements –ITS accompanying report on cost and benefits of reporting requirements

•FRTB – RTS on definition of emerging market and advanced economies•FRTB – RTS on the residual risk add-on, and

what constitutes an exotic underlying•FRTB – RTS on jump-to-default amounts for

different types of instruments•Disclosure – ITS on disclosure of ESG risks

CRD5

•Prudential supervision –RTS on specification of the six supervisory shock scenarios in order to calculate changes in the

economic value of equity•Remuneration –Guidelines on sound remuneration policies and proportionality of gender

pay, internal governance and assessment of the suitability of the members of the MB and KFH

By end-Q2 2024CRR2•FTRB – Guidelines over reclassification of a trading

book position as a non-trading book position or vice versa•FRTB – RTS on supervisory assessment of extensions and changes to the use of IMA

•FRTB – RTS on assessment methodology for institutional compliance• FRTB – RTS on use of internal models for purpose of

calculating own funds requirements•FRTB – RTS on extraordinary circumstances for being

permitted to limit the back testing add-on •NSFR – Delegated Act amending list of products and services requiring stable

funding

By end-Q1 2020CRR2:•FRTB – RTS on liquidity horizons

for the IMA •FRTB – RTS on non-modellable risk factors in IMA

•FRTB – RTS on change in portfolio value and P&L attribution

CRD5•Prudential supervision -Guidelines on

exposures to which authorities can apply systemic risk buffer

By end-Q4 2020CRR2•Prudential consolidation

– RTS on conditions in which prudential consolidation can be carried out (31.12.20) •Large exposures – RTS

on how to calculate the value of exposures arising from derivatives contracts•Large exposures–

Guidelines clarifying substitution approach•MREL– RTS on indirect funding of liabilities

instruments and permission to reduce eligible liabilities instruments•IRRBB – ITS on IRRBB

disclosure requirements• Disclosure – ITS on indicators of global systemic importance

BRRD2

•RTS on ability to use contractual term determining liability subject to conversion or write-down

•RTS/ITS defining contents of contractual term recognising resolution stay powers•ITS on MREL decisions

reporting to the EBA•MREL– RTS on methodology used to estimate buffer

requirements•MREL– RTS to further specify methods for applying MREL to resolution and non-

resolution entities

No specific date attached:CRR2•Large exposures – Implementing Act on definition of an institution for large exposure purposes•Liquidity reporting – ITS on additional liquidity monitoring metrics (Q1-Q4 2020)

• Disclosure – Guidelines on materiality in relation to disclosure requirements• Disclosure – Guidelines on how to apply proprietary and confidentiality in relation to disclosure requirements• Development of an electronic compliance tool aimed at facilitating institutions’ compliance with the regulation• TLAC – RTS on definition of “sustainable for the income capacity of the institution”• Credit risk – Development of risk-weighted exposure amounts of CIUs

CRD5• Requirements for access to the activity of credit institutions – Guidelines on common assessment methodology for gaining authorisations for competent authorities•Prudential supervision – Guidelines on inclusion of ESG risks in supervisory review and evaluation processes

By end-Q2 2023CRD5 • Guidelines

accompanying report on variable elements of remuneration

NB: analysis of the Level 2 mandates in the package relies on the assumption that the EBA will combine multiplele mandates, which have the same subject matter and deadline, into consolidated publications. This is therefore subject to change.

Q3 Q4 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q1 Q2

By end-Q4 2021CRR2• Large exposures –RTS on criteria for

identification of shadow banking entities•Large exposures –Guidelines specifying

exceptional circumstances under which exposures limits may be breached•Pillar 2 – Guidelines

on common procedures and methodologies for the SREP and stress

testing (revised)CRD5 • Remuneration –Guidelines on data collection of high

earners, and benchmarking of remuneration practices

By end-Q4 2022CRR2 • Large

exposures –RTS on connected clients

By end-Q2 2020CRR2•Own funds and eligible liabilities – RTS on exemption from

reductions of prudently valued software assets•Liquidity – ITS on liquidity reporting (additional liquidity monitoring metrics)

•Reporting requirements – ITS on uniform reporting templates for SMEs (30.06.2020)•ITS on reporting for market risk and leverage ratio reporting,

including additional reporting to address SFT leverage ratio ‘window dressing’•Large exposures – ITS on

supervisory reporting

CRD5•Interest rate risk – RTS on standardised methodology for

evaluating interest rate risks (plus alternative for SMEs)•Interest rate risk – RTS on supervisory shock scenarios, common modelling and

parametric assumptions and what constitutes a large decline•Prudential Supervision –Guidelines on the application of a systemic risk buffer (30.06.2020)

•Remuneration – RTS on identifying staff whose activities have a material impact on firm’s risk profile

BRRD2

•MREL - ITS on MREL/TLAC reporting•MREL - ITS on MREL/TLAC Pillar 3 disclosure

By end-Q3 2020CRR2•FRTB – RTS on own funds requirements for market risk for

non-trading book positions subject to FX or commodity risk•FRTB – Guidelines specifying criteria for use of data inputs in risk management model

•FRTB – RTS on a stress scenario risk measure for non-modellablerisk-factors under the IMA•FRTB – RTS on estimating default probabilities and LGD under the

IMA

Basel III – Timeline of level 2 mandates

Basel III workshop© 2019 Deloitte LLP. Private and confidential. 16

Basel III – Reviews and reports

• The RRM also contains mandates for a number of reviews and reports, to be published by the Commission and the EBA, on elements of the EU prudential framework. While these will not affect the implementation of this legislative package, they will influence the calibration of the EU’s future prudential legislative framework.

CRR2• Commission to review Member State extensions of the application of national provisions in response to macroprudential or systemic risks every two

years after the first extension• EBA report on whether a dedicated prudential treatment of exposures related to environmental and/or social objectives would be justified, by 27 June

2025 (may be followed by legislative proposal)• Commission review of the macroprudential framework by 30 June 2022 and every 5 years thereafter. To be followed by a report to the EP and Council

by 31 December 2022 and every five years thereafter (may be followed by a legislative proposal)• Commission review of cross-default provisions by 27 June 2022 (may be followed by a legislative proposal)

CRD5• EBA report to EP, Council and Commission on the treatment of third country branches under national law of Member States by 27 June 2021• Commission review of Intermediate Parent Undertaking (IPU) requirements by 27 December 2026 and report to EP and Council (may be followed by

legislative proposal)• Commission review of country-by-country reporting and disclosure requirements by 1 January 2021 and report to the EP and Council by 30 June 2021

(may be followed by legislative proposal)• EBA report to the Commission, EP and Council on its findings concerning the potential inclusion of ESG risks into the SREP by 27 June 2021• Commission review and report on the implementation and application of supervisory powers referred to in Article 104(1)(j)-(l) (additional or more

frequent reporting requirements, including reporting on capital and liquidity positions; specific liquidity requirements, including restrictions on maturity mismatches between assets and liabilities; additional disclosures) by 31 December 2023

IBOR replacement – guidance from the Danish FSA

Torben Winther, Partner Financial Risk,

January 2020

Basel III workshop© 2019 Deloitte LLP. Private and confidential. 18

IBOR replacement overview status and recap

Alternative Reference Rates / Risk Free Rates (RFR)

Currency IBOR New RFR name

Feature

USD LIBOR (USD) SOFR O/N – Secured

EUR EURIBOR / EONIA ESTR O/N – Unsecured

GBP LIBOR (GBP) SONIA O/N - Unsecured

CHF LIBOR (GBP) SARON O/N – Secured

SEK STIBOR TBD O/N - Unsecured

DKK* CIBOR TBD O/N - Unsecured

* No official requirement to replace as not deemed ‘critical’ benchmark rate

• LIBOR rates are expected to stop quotation end of 2021

• EURIBOR/EONIA is expected to be phased out simultaneously

• No clear cut-over date for CIBOR and STIBOR

Basel III workshop© 2019 Deloitte LLP. Private and confidential. 19

Approaches from leading European regulators

Dear CEO letter (issued to the Board of Directors)

• UK regulator (FCA) – Sep 2018

• Assessment of key risks

• How are these mitigated

• Who is in charge

• European regulator (ECB) – Jul 2019

• Assessment of key risks

• Detailed plan to mitigate these risks

• Pricing issues between front- andmiddle office

• Changes to pricing- and risk models

• Who is in charge

Basel III workshop© 2019 Deloitte LLP. Private and confidential. 20

The Danish FSA (‘Finanstilsynet’) is following the example of its peers

Instruments affected in Denmark

• Derivatives (IRS/CCY)

• Capital Markets issues (FRN’s)

• Lending (Banks and Investors)

• Danish Mortgage Bonds (issuers and investors)

Highlighted risks

• Financial risks

• Changes RFR’s means changes to cashflows

• Timing issues between different instruments

• Operational risks

• Legacy systems’ ability to handle new RFR’s

• Model and pricing risk

• Re-papering

• Conduct risks

• Fallback clauses (can limit re-papering)

• Client interaction

Memo released on 21 November 2019

Basel III workshop© 2019 Deloitte LLP. Private and confidential. 21

Deloitte’s experience and lessons learned

Key observations

• Financial exposures continue to grow…

Due to

• Insufficient liquidity in Risk Free Rates (RFR) products, especially term structure rates

• Ineffective industry action

Leading to:

• Risk model changes can be material and regulatory approval needs to be factored into project timelines

• Operational readiness and compliance requirements not appropriately identified

• Frontline staff lack of awareness =>

• Conduct risks not appropriately managed, e.g fund managers reference to a benchmark

In Denmark, above observations are amplified by the lack of key deadlines for CIBOR replacement

Basel III workshop© 2019 Deloitte LLP. Private and confidential. 22

If you want to know more

Visit Deloitte’s IBOR reform home page:

https://www2.deloitte.com/content/campaigns/uk/ibor/ibor/ibor-reform.html

The evolving regulatory agenda for Sustainable FinanceJanuary 2020

24

The evolving regulatory agenda for Sustainable Finance*2

01

6

Apr 2019NGFS: First Comprehensive Report: A call for action and Technical Supplement to the First Report

March 2018Sustainable Finance Action Plan adopted by EC

Jan 2019Sustainability risks and goals in the financial sector

Sept 2019Principles for Responsible Banking

June 2019TEG Report on EU Green Bond Standard

June 2019Consultation on Draft Guidelines on loan origination and monitoring

June 2019Opinion on sustainability within Solvency II (following consultation paper)

June 2019Updated guidelines on non financial reporting (aligning these with the TCFD)

Nov 2019Consultation: Integration of Climate-Related Risks into Bank’s Risk Management

Dec 2019Nordic Position Paper on Insurance for a Sustainable Society

Dec 2019Report ”20 Anbefalinger” from the Forum for Bæredygtig Finans

Dec 2019EBA Action Plan on Sustainable Finance

End 2019Delegated Acts on under MiFID 2 on integrating ESG considerations & preferences into investment advice and portfolio management, and sustainability risks and factors, expected to be adopted by the EC and subsequently subject to scrutiny

2016 – end-2019: regulators acknowledge climate change as a potential systemic risk

April 2019

Technical

advice to the

EC on

integrating

sustainability

risks in IDD

and Solvency

II

Nov 2016Paris Agreement: entered into force

June 2017Final ReportTaskforce on Climate-related Financial Disclosure (TCFD)

20

17

Dec 2017Network of Central Banks and Supervisors for Greening the Financial System (NGFS) launched

October 2017Waterproof? An exploration of climate-related risks for the Dutch financial sector

October 2018Energy transition risk stress test for the financial system

20

18

20

19

Oct 2019Consultation on Implementing the Final Basel III reforms in the EU (CRD 6/CRR 3) –including measures for integrating ESG risks into prudential regulation

Dec 2019EU aiming for conclusion of negotiations on Taxonomy Regulation.

Low Carbon Benchmarks Regulation enters into force

Disclosures Regulation enters into force

Dec 2019ESMA report on short termism and EBA response to call for advice on short termism

Dec 2019Klimaforandringer og bæredygtig finansiering i den finansielle sektor

Sept 2019Staff Discussion Paper Protection gap for natural catastrophes

(*) Primarily covering EBA and EIOPA regulatory mandates

25

The evolving regulatory agenda for Sustainable Finance*2

02

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Q1 2020 High Level Guidelines for Banks on the application of the EU Taxonomy

By Q2 2020Consultation for the new EU Green Finance Strategy

Apr 2020 Guide on scenario analysis

Summer 2020 Handbook on climate and environmental risk management for firms and supervisory authorities

June 2020 CRD 6 /CRR 3 (expected)

June 2020Submit ITS to EC on Pillar 3 ESG disclosure requirements (following consultation paper)

Q2-Q3 2020Discussion paper on management of ESG risks into SREP process under CRR 2/CRD 5

H2 2020 Sensitivity analysis for climate risks for sample of volunteering banks

End 2020 Review of NFRD

By Dec 2020Stress Tests for banks & insurers

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Q1 2021 Results of Study on the development of tools and mechanisms for the integration of ESG risks into risk management, business strategies, investment policies and prudential supervision

Mar 2021 Disclosures Regulation applies

Q2 2021 1st decision on criteria for an ecolabel for financial services

By June 2021 Report on inclusion of ESG activities into SREP for banks under CRD5. Guidance on stress testing

By Dec 2021EBA: Reports on:a) inclusion of ESG activities in SREP for investment firms under IFD b) whether dedicated prudential treatment of assets exposed to activities associated substantially with ESG objectives is justified under IFR

2021 Final draft RTS on pillar 3 ESG disclosures

June 2021 Assess the need to adopt a legislative proposal on sustainable corporate governance

From June 2022 Large listed banks required to disclose ESG risks under CRR2/CRD5

From Dec 2022Investment firms to disclose information on ESG risks under IFR

By 28 June 2025 Report under CRR2 on potential dedicated prudential treatment of exposures related to ESG objectives (may be followed by legislative proposal)

2022-2024Possible update of relevant Guidelines/new guidelines on incorporation of ESG into risk management and supervision, including stress testing (timing & nature to be determined by June 2021 report).

2022-2024Discussion paper on classification and prudential treatment of assets from a sustainability perspective (under CRR 2)

2020+: regulatory initiatives are expected to crystallise at pace across Europe

2020Potential climate risk sensitivity analysis for the insurance sector.

By Q3 2020 Six draft Regulatory Technical Standards concerning disclosure of a statement on the due diligence policy in respect of the adverse impact of investment decisions on sustainability indicators and product-specific disclosure.

(*) Primarily covering EBA and EIOPA regulatory mandates

November 2020UN Climate Change Conference (COP26)

Jan 2020‘The green swan - Central banking and financial stability in the age of climate change

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Significant regulatory activity over the next few years

The evolving regulatory agenda - Focus on the Banking Sector

EBA Action Plan, published in December 2019, sets out the objectives of the EBA’s work on sustainable finance over the coming years.

Includes improving the regulatory framework so that “institutions can foster their operations in a sustainable manner and introduce sustainability considerations in institutions’ strategy and risk management”.

EBA have categorized their mandates (in order of sequential treatment):

• Strategy and risk management• Key metrics and disclosure• Stress testing and scenario analysis; and• Prudential treatment

Notwithstanding the regulatory timeline, banks are recommended to pro-actively introduce sustainability considerations into their strategy and risk management, prioritize the identification of simple metrics to provide transparency on climate change related risks as well start using scenario testingto better explore and understand their exposure to physical and transition risk

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Strong focus on practical implementation of the regulatory framework as part of Solvency II review will continue

(*) To be carried out in conjunction with 2 Degree Investing Initiative

The evolving regulatory agenda – focus on the insurance sector

EIOPA Opinion on Sustainability and Solvency II, published in September 2019, concluded that Solvency II is able to accommodate sustainability risks and factors – as it is a risk-based, forward-looking and market-consistent framework

However there are considerable challenges related to managing risks related to climate change, not least the Time horizon over which risks emerge vs 1-year Solvency horizon, Non-life underwriting period vs emergence of claims

EIOPA recommends that companies start to implement measures linked with climate change-related risks, especially where these have a substantial impact to their business strategy. The importance of using scenario analysis as part of Pillar II (ORSA) is highlighted as a result.

In line with the Solvency II review during 2020, EIOPA will engage in for example:• Analyses regarding the treatment of natural catastrophes and “protection gap”• Sensitivity analysis exercise for climate-related risks during 2020(*)

View from Nordic insurance associations (including Insurance and Pension Denmark): Position paper on Insurance for a SustainableSociety, published in December 2019:• Supports Solvency II as a risk based system that can encompass climate change-related risks• But highlights the need for clear rules, a good objective taxonomy and high quality data• Raises the impact of climate change-related risks on the ability to access affordable insurance in the future • Strongly support the implementation of the TCFD recommendations in the areas of data gathering and reporting as being

fundamental to the assessment and pricing of risk

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DK FSA published a note* covering the potential impact of financial risks due to climate change and expectations for the financial sector’s preparations to take account of these risks.‘In addition, in the annual “julebrev” DK FSA requires life and non-life insurance companies to provide by 1 July 2020 a statement from their Board setting out their considerations and actions on financial risks caused by climate changes.

DK FSA expectations are that financial risks due to climate change are managed in line with existing good governance and risk management frameworks. This means, for example:

• In the absence of common definitions and rules, international frameworks are used for identifying and assessing risks, such as set out by the TCFD

• Financial risks due to climate change are considered in the setting of the firm’s risk appetite (“øvrige ricisi”)

• Scenario analysis or stress testing of these risks is carried to analyse the short and long term impact on the business model (physical and transition risks)

• Appropriate processes and controls need to be put place to manage the risks, particularly if the potential effect is significant

• Additional information needs to be collected on companies that financial institutions finance or invest in

• For insurance companies, these risks are an integrated part of the ORSA so that the Board can discuss, challenge and take decisions relating to these risks

• Firms improve the quality of risk assessment and management of financial risks due to climate change, in line with the FSA stepping up its supervisory activities

The evolving regulatory agenda – developments in Denmark

Supervisory expectations and requirements

Governance / Frameworks

Strategy and risk appetite

Risk identification and

evaluation

Measurement and monitoring

(*) Klimaforandringer og bæredygtig finansiering i den finansielle sektor, December 2019

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The evolving regulatory agenda – The Task Force on Climate-related Financial Disclosures (TCFD)

The TCFD Final Report recommended that climate-related risk assessment and disclosures should focus on four core components:

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The evolving regulatory agenda – The Task Force on Climate-related Financial Disclosures (TCFD)

Revenues

Expenditures Cost of Financing

Asset Valuation

Risks

Chronic

Acute

Policy and Legal

Technology

Market

Reputation

Resource Efficiency

Energy Source

Products/Services

Markets

Resilience

Opportunities

Physical

Income StatementBalance Sheet

Transition

Financial Impact

Assessment of and Response to Climate-related

Risks and Opportunities

DAC6

• January 2020

• 21 June 2017: Publication of proposed rules

• 25 May 2018: Adoption by the EU Council

• 5 June 2018: Publication in Official Journal of the EU

• 25 June 2018: Date of entry into force (Note: All RCBAs implemented after that date are in scope for reporting under the DAC6)

• 31 December 2019: EU member states to adopt and publish laws, regulations and administrative provisions

• 1 July 2020: Date of application. 30 days reporting deadlines now apply!

• 31 August 2020: Reporting of RCBAs of which the first step is implemented between 25 June 2018 and 1 July 2020

• 31 October 2020: First exchange of information reported between 1 July and 30 September 2020

DAC6

• The EU Council Directive 2018/822 (DAC6) amends the existing Council Directive 2011/16/EU.

• DAC6 imposes the obligation to disclose reportable cross-border arrangements (RCBAs) on EU intermediaries.

• The goal of the implementation of the DAC6 is to provide the tax authorities of EU member states with information to enable them to promptly react against harmful tax practices and to close loopholes through enacting legislation or by undertaking adequate riskassessments and carrying out tax audits.

• Expected minimum fines for financial institutions: 50,000 – 400,000 DKK (depending on turnover) per missed reporting!

• Legislation and implementation will vary across EU countries, so close monitoring is needed if activity in more jurisdictions.

Regulations

Timeline

Overview

Cro

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A. Generic hallmarks1. Confidentiality2. Fee fixed by reference to a tax advantage 3. Substantially standardised documentation

B. Specific hallmarks1. Acquisition of a loss making company2. Conversion of income into lower taxed or exempt categories of income (capital, gifts, lower level taxation)3. Circular transactions

C. Specific hallmarks related to cross-border transactions1. Deductible cross-border payments between associated enterprises, and

b) i) the tax jurisdiction of the recipient does not impose any tax (or at the rate of almost zero), or c) the payment in the jurisdiction of the recipient is exempt from tax, ord) payment benefits from a preferential tax regime in the jurisdiction of the recipient

D. Specific hallmarks concerning automatic exchange of information and beneficial ownership

E. Specific hallmarks concerning transfer pricing1. Use of unilateral „safe harbour rules“2. Transfer of „hard-to-value intangibles“3. Intragroup transfers that concern more than 50% of the projected annual EBIT

C. Specific hallmarks related to cross-border transactions1. Deductible payments between associated enterprises, and

a) the recipient is not resident in any tax jurisdiction, orb) ii) the jurisdiction of the recipient is included in a list of non-cooperative states

2. Deduction for the same depreciation in more than one jurisdiction3. Relief from double taxation in respect of the same item of income or capital in more than

one jurisdiction4. Transfer of assets with material different valuation

Rep

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Hallmarks

Overview of the reporting mechanism

The definitions are broad and businesses need to consider who needs to report and which hallmarks may apply

Intermediary

Associated enterprise

Relevant taxpayer

Tax authorities

Reportable cross-border

arrangement

Tax authorities

Information exchange

Designs, markets, organises or makes available for implementation or manages the implementation of an RCBA (or provides aid, assistance or advice with respect to such activities)

From 1 July 2020, reporting must be completed within 30 days of the start date of an RCBA. One-off reporting by 31 August 2020 in respect of RCBAs implemented between 25 June 2018 and 30 June 2020

Disclosure of information pertaining to the identity of intermediaries and relevant taxpayers, together with details of the RCBA (such as value) and the “hallmarks” that make the arrangement reportable

Cross-border arrangement that falls within at least one of five “hallmarks” that present an indication of a potential risk of tax avoidance

Any person to whom an RCBA is made available for implementation, or who is ready to implement an RCBA, or who has implemented the first step of an RCBA

In case no EU intermediary is involved (i.e. only non-EU intermediaries or in-house arrangements) or is not required to perform the reporting the RCBA (due to legal professional privilege), a subsidiary reporting obligation exists for the relevant taxpayer

Impact for Financial Institutions

Potential double impact for Financial Institutions

• A Financial Institution is in scope of DAC6 as an EU Intermediary where it acts as a promoter or service provider of an RCBA towards relevant EU taxpayers

• Focus on services provided.

• A Financial Institution is in potentially in scope of DAC6 as a relevant taxpayer where it implements RCBA’s promoted or provided by advisors, professional service providers and other Intermediaries

• Focus on services received.

Financial

Institution

Intermediary Relevant taxpayerReportable cross-

border arrangement

Intermediary Relevant taxpayerReportable cross-

border arrangement

Situation sketch

DAC6 - Example

Hallmark A: Standardised documentation and/or structure

What to consider

• Offering must be standardized, i.e. available to multiple clients without a need to be substantially

customised

• Clients must obtain a tax advantage, e.g. by offsetting capital gains against capital losses (only

relevant if the client is taxed on capital gains)

• Only relevant for foreign clients

Situation

Bank provides an offering to its clients whereby:

• Bank identifies clients that have realised a capital gain over the course of the tax year but are holding

securities entailing an unrealised capital loss

• Bank either (a) automatically disposes securities entailing an unrealised capital loss as part of a

discretionary mandate, or (b) advises the client to do so

• After year-end, the securities are bought back

Hallmark

“An arrangement that has substantially standardised documentation and/or structure and is available to

more than one relevant taxpayer without a need to be substantially customised for implementation.”

Subject to main benefit test

Bank (DK) Client (SE)

Year-end disposal of securities entailing unrealised

capital loss to offset capital gains

Buying back the securities at the beginning of the

following year

Situation sketch

DAC6 - Example

Corporate Lending

What to consider

• How to collect and evaluate information obtained during lending process from a DAC6 perspective.

Situation

Bank provides an loan to a client.

Should Bank reasonably be expected to know what loan proceeds will be use for? Probably yes! =

intermediary

Bank may therefore know if loan is part of cross-border arrangement(s) meeting any of the hallmarks. If

so, Bank may have an reporting obligation.

Bank (DK) Client

Use of loan proceeds

?

Practical steps to compliance

Impact assessment

• Identify potentially affected entities and services/products

• Intermediary vs. relevant taxpayer view

• Map hallmarks to services/products

• Update new entity/business process

• Decision: implementation vs. discontinuation of services/products

Governance and controls

• Establish governance framework

• Define escalation process

• Define and implement controls

• Review implementation

• Interaction with regulators

Communication and training

• Internal communication plan

• Knowledge management and training

• General communication with clients

• Client notification about information reported or the fact that they need to report

• Communication with third-party intermediaries, including reporting coordination

• Update marketing documents

Policies and procedures

• Define responsibilities

• Update policies and procedures

• Update legal arrangements

• Drafting of decision trees and rule maps

IT and systems

• Define reporting ruleset

• Solution to track and report RCBAs

• Internal vs. vendor reporting tool

• Interaction with CRM tool and other internal systems

Regulations and guidance

• Monitoring of local regulations and guidance

• Identification of deviations from EU standard

• Lobbying for exclusions

• Adjust implementation and design for local deviations

39© Deloitte 2019

Martin Poulsen

Partner, Financial Services Tax

Tlf.: +45 30 93 50 40

Email: marpoulsen@deloitte.dk

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Tak for i dag

Næste event med nyeste opdatering på regulering inden for den

finansielle sektor: August/September 2020

Kontakt:

Tony Johansen+45 30 93 46 15 tjohansen@deloitte.dk

Torben Winther+45 30 93 61 00 twinther@deloitte.dk

Nicola O’Reagan+45 30 93 42 24noreagan@deloitte.dk

Tom Clifford+45 30 93 40 31thclifford@deloitte.dk

Helena Barton+45 30 93 68 13hbarton@deloitte.dk

Martin Poulsen+45 30 93 50 40marpoulsen@deloitte.dk

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