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Living Wills – SIFIs and Resolution after the Cannes Summit

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Living Wills – SIFIs and Resolution after the Cannes Summit 5

At the G20 Summit in Cannes in early November, a raft of critical papers from the Financial Stability Board (FSB) were endorsed, setting out not only the policy for addressing the “too-big-to-fail” issues posed by Systemically Important Financial Institutions (SIFIs), but also naming the first 29 groups of Global SIFIs (“G-SIFIs“). In this article, Rosali Pretorius and Emma Radmore of SNR Denton look at the G20 conclusions and the current thinking of the UK and US authorities.
The Cannes Summit and the FSB Recommendations

Living Wills – SIFIs and Resolution after the Cannes Summit 6The FSB package of policy measures will include:

  • An international standard to be a point of reference for national resolution regimes: setting out responsibilities, instruments and powers that all national resolution regimes should have;
  • Requirements for resolvability assessments, recovery and resolution plans (RRPs) and cross-border cooperation agreements specific to individual G-SIFIs: this should prepare home and host authorities better for dealing with crises and cooperating during them;
  • Requirements that all global systemically important banks (G-SIBs) hold loss-absorption capacity above Basel III standards: this will rise from 1 to 2.5% risk-weighted assets; and
  • More intensive and effective supervision.

FSB intends to use the Basel Committee on Banking Supervision (Basel) methodology to review and update a list of G-SIFIs each November. FSB and Basel will work to extend the framework to all SIFIs, and the International Association of Insurance Supervisors should complete its methodology for identifying globally systemic insurers by the June 2012 G20 Summit. The 29 groups named now must meet the requirements on resolution by the end of 2012. Banks that are identified as G-SIFIs in 2014 will have to meet the new loss absorbency requirements and supervisory expectations by 2016. FSB also intends to put in place a peer assessment programme to ensure proper implementation. The initial list of G-SIFIs includes entities headquartered in several jurisdictions, including the US, UK, rest of Europe and Asia Pacific.

Before FSB finalised its plans, however, the UK and the US had already both moved quickly to require recovery and resolution plans to resolve UK SIFIs and US SIFIs. In the UK and in the US, these plans are often referred to as “Living Wills”. This article looks at the UK proposals, distinguishing key differences between the planned UK and US regimes.

Living Wills in the UK

The Banking Act 2009 created a Special Resolution Regime (“SRR”) giving the Financial Services Authority (the “FSA”), the Bank of England and the UK Treasury various tools for resolving failed deposit-taking financial institutions.  However, the UK authorities require detailed knowledge and understanding of a financial institution’s business to exercise the SRR tools and enable the orderly resolution of a failed financial institution without relying on taxpayer support.  In February 2011, a special administration regime was introduced for investment firms.  This was initiated for the first time when MF Global UK entered the process. Using powers under the Financial Services Act 2010, FSA published proposals for certain financial services firms to prepare and maintain RRPs and, in addition, for firms holding client money and assets to develop client asset resolution plans (“CASS RP”) to promote swift return of clients’ money and custody assets (“CMA”) should they fail.  Some firms will have to prepare RRPs and CASS RRPs; smaller firms with CMA only CASS RRPs.

In the US, the Dodd Frank Act created the framework for Resolution Plans for SIFIs, and this is bolstered by rules of the Federal Deposit Insurance Corporation.

Who is covered?

The RRP requirements will apply to:
 

  • All FSA-authorised banks and building societies regardless of size, including UK incorporated subsidiaries of overseas banks.
  • Significant investment firms authorised by FSA, specifically full scope BIPRU 730k investment firms (firms with authority to deal on own account) with assets exceeding £15 billion.

The CASS RP requirement will apply to all firms subject to the FSA’s client asset custody rules and investment business client money rules.  So some banks and significant investment firms may not need to also prepare a CASS RP. The FSA is not calling for RRPs from UK branches of overseas entities, partly because the SRR tools are unavailable to resolve branches of overseas banks.

Living Wills – SIFIs and Resolution after the Cannes Summit 7In contrast, under the US plans, US SIFIs subject to resolution planning requirements will include:
 

  • US bank holding companies with at least USD50 billion in consolidated assets;
  • US branches and agencies of international banks, where the consolidated worldwide assets of the international bank is at least USD50 billion; and
  • Any nonbank financial company designated as a SIFI by the FSOC
  • US insured depository institutions with at least US$50 billion in assets must also file Living Wills

 
What should the RRP include?

Recovery Plans

The purpose of a Recovery Plan is to enable firms to plan how they would try to recover from severely adverse conditions that could cause their failure.  Firms are responsible for preparing their Recovery Plans which are subject to FSA review and require updating yearly.  A key aspect is deciding when the firm will carry out its Recovery Plan.  Firms will be required to develop their own unambiguous triggers.

Resolution Planning

The purpose of Resolution Planning is to provide a strategy to resolve a failed firm or group in a manner that minimises the impact on financial stability without needing to resort to taxpayer support.  The UK authorities are responsible for preparing a Resolution Plan, which must allow decisions and actions to be taken and performed in a short space of time (for example, over a ‘resolution weekend’).  However, firms must provide a Resolution Pack to FSA, which is regularly updated to reflect any material developments in a firm’s business.  The Resolution Pack must include:
 

  • Details of significant entities in the group and the key structural and operational issues relevant to separating significant legal entities. 
  • Critical Function Contingency Analysis (“CFCA”) covering separation and / or ‘controlled wind-down’ for each critical role of the firm. 
  • Plans to overcome any barriers to resolution which the UK authorities consider unacceptable.  

CASS Resolution Pack

This aims to reduce the wider economic cost of an in-scope firm failure.   It ensures that information and records that would help an insolvency practitioner or resolution authority return client money and custody assets to clients more quickly, will be accessible to the insolvency practitioner or resolution authority after the firm’s failure.  

While the content of US Living Wills is to be very detailed, they are resolution plans, and do not also include recovery plans.

Where next for the RRP?

The consultation period has just closed. FSA will publish final rules in the first quarter of 2012.  Certain rules will come into effect during the first quarter of 2012, but FSA will also provide transitional rules so firms will have until June 2012 to prepare their first RRPs. Large banks, though, have taken part in FSA’s pilot exercise already. FSA should take account of the developments at the Cannes Summit when finalising its rules, but as with other reforms agreed at G20 level, the UK and US are pressing ahead of the game.

Rosali Pretorius is a Partner and Emma Radmore is a Senior Associate at SNR Denton UK LLP

© 2011 SNR Denton. SNR Denton is the collective trade name for an international legal practice.  SNR Denton UK LLP is a limited liability partnership registered in England and Wales under no. OC322045. Regulated by the Solicitors Regulation Authority. A list of its members is open for inspection at its registered office: One Fleet Place, London EC4M 7WS.
Any reference to a “partner” means a partner, member, consultant or employee with equivalent standing and qualifications in one of SNR Denton’s affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Attorney Advertising. Please see snrdenton.com for Legal Notices. Rosali Pretorius (Partner) and Emma Radmore (Senior Associate and Professional Support Lawyer) are members of SNR Denton’s London Financial Markets and Regulation practice.  Contact them on +44 (0)20 7246 7000 ([email protected] or [email protected]).  

 

Investing

Is It The Right Time To Invest In Gold?

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Is It The Right Time To Invest In Gold? 8

By Zoe Lyons, Hatton Garden Metals

The current climate is one of uncertainty, so it can be difficult to know what to do with your money, particularly investments. When faced with the decision on what to do with your savings, there are a number of options, but one investment which many have opted for over the years is gold buying.

Purchasing gold can be a great investment. Although the price of which can fluctuate just like anything else, the value of gold has generally tended to increase at a good rate and many prefer it over other saving options. With bank interest rates currently at a low and discussions of negative interest rates, many are opting to purchase gold as a way to earn money on their savings.

So is gold buying right for you? We take a look at some commonly asked questions when it comes to purchasing gold.

Why Should I Buy Gold?

Buying gold is often seen as a good investment due to value increases, so you may be able to make a profit from selling it on if the price of gold increases after you have purchased. The price can fluctuate, so profit is not guaranteed and is based on a number of factors. Looking back over previous years since the 1970s, the value of gold has prospered compared to other investment types, albeit with some dips in value at certain points over the past 50 years.

Buying gold also allows you full control as you are the owner. So you can choose if and when you want to sell.

Buying Gold Vs ETFs

When looking at investment opportunities, you may consider ETFs. An ETF is an Exchange Rated Fund, which when purchased is similar to buying stocks and shares. They can be a good investment, but is it more beneficial than purchasing gold?

When purchasing physical gold you will need to consider where to store it. This can incur charges, whereas with an ETF there is no need for storage, but an ETF can come with admin charges and investment management costs. When you choose to sell an ETF, you may also be required to pay a commission, which are often small amounts, but can add up if you are an active trader. There is also less control with an ETF as the price of which can change and is based on the company’s actions.

Gold Bars Vs Gold Coins

If you do choose to purchase gold, you will be faced with the option of whether to buy gold coins or gold bars. Although similar, they have varying benefits.

  • Gold Coins

The purchase of gold coins are often favoured by those who appreciate the historic value of the coin. Many people collect coins, so an investor may be inclined to pay more if they are a keen collector of such. Many may also pay more for gold coins based on their rarity. These factors can affect the price you pay or sell at, meaning the value of gold coins is not solely deemed by the live price of gold, so you may receive a higher price, dependent on the investor. This allows the price of gold coins to be more fluid than gold bars.

  • Gold Bars
Zoe Lyons

Zoe Lyons

Gold bars are not seen as a collectors item and don’t tend to have historical attachments. Because of this, the price is not influenced by these factors and is based on the weight, purity and the live price of gold at the time of selling or purchasing. This allows for a more accurate estimate of the price of your gold bars.

Where Should I Store Gold?

One of the most frequently asked questions when it comes to gold buying is storage. If you do choose to purchase gold, you will need to consider storage. Just like anything else of a high value, it needs to be stored securely. Simply keeping gold stored at home could be risky. When kept in your property, if not stored in the correct conditions, it is more susceptible to damp and corroding. There is also the possibility that your home insurance does not cover your gold, so if you are burgled, you could lose your investment. Because of this, it is wise to protect your gold with proper secure storage. Look for companies that offer storage abilities that are covered by insurance and be sure to do your research on pricing and look for cost effective storage as the fees incurred can soon add up. You may also want to look for a company that allows you quick and easy access to your gold to ensure you can buy and sell with ease.

Should I Invest In Silver Too?

Although gold is often a more popular investment option, many choose to purchase silver alongside it. The price of silver tends to be much more volatile than the price of gold, for this reason, many see gold as a safer choice. The price of silver will still have an intrinsic value but may be more worthwhile for those looking into long term investment options due to its VAT charges.

Negative Interest Rates

Although it is not a current practice, there has been recent talk of banks in the UK potentially introducing negative interest rates. If a savings account has a negative interest rate, this could mean you are charged for keeping money in the bank. If introduced, this could mean savers lose out. Instead of receiving interest on your savings, you may be charged a rate for keeping your money in the bank.

Could purchasing gold be a better option for your savings? Possibly, but this will depend on how much you have saved and the rates of the negative interest (if they are introduced). They may be minimal, but if you have a large amount in a savings account, this could add up to an expensive charge. If you choose to use your savings to buy gold, you may make a profit upon selling, but you will need to consider costs of storage as well as the chances of the price decreasing in the future.

So, is it the right time to invest in gold? It’s a very popular question. Hopefully the above will give you a bit more insight into gold investing and how it may work for you, but with any investment, there is never a guarantee that it will generate profit, so take careful considerations when diversifying your portfolio.

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Private public investment is more inter-dependant than ever

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Private public investment is more inter-dependant than ever 9

By Konstantin Sidorov, CEO and Founder of London Technology Club

Today, one thing unites the majority of governments around the world: their fiscal position is destitute. COVID 19 has seen an extraordinary, forced expansion in public sector expenditure, which has come just as the world was getting back on its feet following the Global Financial Crisis. The financial strains are already showing and will become more apparent as we move through the pandemic into social and economic recovery.

If you want to understand the impact that the re-focusing of public sector spending is having, then there is no better example than the space economy. In the US and Europe, we are becoming increasingly reliant on the space rockets and space launch companies pioneered by private investors and entrepreneurs.

NASA, that powerhouse and flag bearer for American national pride, is having to partner with the private sector in order to fulfil their missions. Private investors, the likes of Elon Musk, and Jeff Bezos alongside smart use of new technologies have brought the economics of space down and the excitement around what’s possible up. With it comes a whole satellite manufacturing, launch and servicing industry growing to $271bn in revenues in 2019. Of the total revenues in the space economy ($366bn in 2019), government space budgets made up $95bn of that.

Commercial entities, being patiently built and backed by private capital willing to dig deep and progress their own missions has helped fuel the space economy. Many are realising now just how crucial space is for the future of a country’s protection, position in the world and prosperity. In China, India and Russia we still see significant public sector expenditure in space projects as an agent for military and economic expansion. The role of private investors in plugging major gaps in public sector funds and national pride in Western economies is therefore increasingly important.

Private and public investment must be seen as a partnership. We should not forget that Elon Musk’s SpaceX survived from the brink of collapse only because of a ten-figure NASA contract awarded at the last minute. Musk, since then, has looked for public infrastructure contracts to fuel his companies, the likes of The Boring Company winning the contract to build a downtown-to-airport loop, a  government program for high-speed transport in Chicago. Musk proves his products and services work and then secures lucrative government contracts in order to quickly scale which in turn leads to transforming whole industries.

It’s not just space infrastructure where we see this redefinition of the role of public and private finance. The Chinese have invested at least US$160 billion in infrastructure projects as part of the Belt and Road Initiative, creating roads, ports, energy infrastructure and providing aid to foreign governments to create the most ambitious infrastructure project the world has yet seen.

Konstantin Sidorov

Konstantin Sidorov

For Western countries, access to that scale of public finance is not fiscally-possible, a new solution is needed and just as the space race has been redefined by private capital, so will the development of new industries, infrastructure and the reinvigorating of economies facing structural change that has been accelerated by COVID.

Private capital has the huge advantage of being driven by conviction and competence. It can cost-effectively be deployed, fast and targeted with a laser-like focus by entrepreneurs who know exactly what they want to achieve. Private capital, currently, is also in abundance.

In a world which is providing slim returns across multiple traditional asset classes, private capital is being stockpiled and is waiting for the opportunity to be invested for growth. We need private investors to have the confidence to deploy their capital to fuel the system once again.

This new world, post COVID, won’t see public capital replaced. Its role is likely to focus more heavily on health, welfare and critical infrastructure. However private investors will step in where gaps appear. Ten years ago, the scale and ambition of private space companies would have been greeted with snorts of derision and looks of disbelief. Today governments embrace the private capital, and regard the companies that have deployed it as systemically important national assets.

As we look to the future, huge macro trends emerge that demand significant investment: the aging population, the threat of pandemic, the drive to create a sustainable economy and lifestyle, the need to decarbonise, the digital revolution. The list goes on.

Public finance cannot hope to provide the finance and pioneer the bold thinking and accept the risks required to find new solutions that drive us forward in a world of change. That role goes to the private investor and private capital.

For the investors themselves the opportunities are immense, and for society as a whole they are just as big. As we look forward public and private sector needs to embrace private capital. Rather than fearing private investors as locusts who strip organisations and opportunities of profit then fly away, a narrative that gained traction after the last great economic crash. This time we need to see private capital as agents for positive transformation. Private-public partnerships fuelling each other.

Private money is already building rockets that send people and payloads into space, but that isn’t the final frontier for entrepreneurial investors or the societies and economies that benefit from their boldness.

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What should I invest and How do I invest

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What should I invest and How do I invest 10

By Imogen Clarke, The Fry Group

With all the uncertainty that has arisen from 2020, with lockdown threatening businesses and the warning of a second wave, the topic of investments has taken on new meaning. Nowadays, more people are concerned with what makes for a good investment, or, if you’re a novice, how to best invest.

For instance, you might be unsure about the reliability of the company you’re looking to invest in, as well as the long-term prospects of your investment.

If you are unsure of your investments, then it is best to seek advice from financial experts like The Fry Group, who deal with tax, wealth and estate planning. They will see that you have a strong financial plan in place to help meet your objectives. They will develop a strategy that is built around your needs and asses any risks that could hinder your plans.

There are some things you’ll need to consider for your strategy; for instance, are you looking to make investments that are more of a risk and will take longer to come to fruition? Or, alternatively, are you wanting a faster approach that will result in a steady income? Whether or not you decide to play it safe all depends on your current financial situation and whether you have the means to take more of a risk. Do you have any other debts that take precedence over your future plans? Is your investment strategy realistic?

With the aid of a specialist – or investment manager – you can design an investment concept that works for you and your goals, and start to build a regular income from your investments. There are four main areas when it comes to assets (groups of investments) that you can consider:

  • Equities
  • Bonds
  • Alternatives
  • Cash

Your investment manager will test the risks associated with your investment, and if it proves to be a positive investment choice, then you will be able to invest more over time.

So, how do you decide where to invest?

According to The Fry Group, ESG investing (Environmental, Social and Governance) is a good option for investors looking to support businesses that meet their similar ethics.

The main areas of ESG investing include:

  • Environmental challenges (climate change, pollution, etc)
  • Social issues (human rights, labour standards, child labour, etc)
  • Governance considerations relating to company management

According to The Fry Group, “Many investors choose to consider ESG investing in order to ensure any investment decisions reflect personal beliefs and values. As a result, they choose to support companies who are making informed, responsible decisions which take into account their wider societal and global impact. In this way investors can achieve peace of mind that their investments are creating a positive effect.”

ESG investing is also more relevant now than ever, as more businesses are looking to present themselves as an environmentally conscious corporation that recognises the values of their consumers.

As The Fry Group puts it, “In the past, ESG investing has been seen as a niche investment approach, for a relatively small number of people with specific requirements. This has changed significantly in recent years, with a growing awareness of environmental issues such as climate change and an increasing understanding of social issues and human rights. As a result, many people are increasingly interested in reflecting their opinions and lifestyle choices through the way they invest.”

So, if you want your investments to pave the way for your personal values and reflect your own morals, then this is the route to go down. But how does it all work?

There are four areas of ESG investing:

  • Responsible ownership and engagement: when companies are encouraged to make necessary improvements.
  • Avoidance or negative screening: whereby businesses are ‘graded’ based on how ethical their business practices are and are avoided altogether if their methods are not approved.
  • Positive screening strategies:when companies meet the ESG goals and are approved for investments.
  • Impact investment strategies: the purpose of this is to use investment capital for positive social results such as renewable energy.

You will need to take into account your own personal objectives as well as the objectives that meet the ESG investment criteria. And, in terms of financial performance, ESG investing can be hugely beneficial. Those who opt for ESG investing perform a more in-depth analysis into long-term and future trends that affect industries, meaning that they are better prepared for changes in consumer values when they arise. And, with all the unpredictability that this year has offered us so far, isn’t it better to do the research and have all angles covered?

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