Financial regulation

There is an unparalleled level of regulatory reform taking place globally across financial services. These reforms aim at reducing global markets systemic risk by making them safer. Regulations involving restructuring banks, increasing tax transparency or strengthening capital requirements, are being drawn up and rolled out. These are complex and in many cases overlap products and regional jurisdictions.

Introduction to financial regulation

After the 2008 financial crisis, governments across the world were empowered to push for financial reforms designed to provide greater transparency of transactions and reduce risk in order to make financial systems more stable and better regulated, and to make global markets safer. Furthermore, new capital and bank structure rules are intended to strengthen resilience to any future financial crises and to provide greater consumer protection.

HSBC is committed to implementing the resulting regulations and raise the level of awareness of the reforms among our clients.

Several regulations require financial institutions such as HSBC to publically disclose specific information. These disclosures contribute to increased transparency in financial markets and help market participants make informed decisions.

The aim of the Alternative Investment Funds Directive (AIFMD), agreed on 8 June 2011, was to establish common requirements governing the authorisation, operations and supervision of AIFMs in order to provide a coherent approach to the related risks and their impact on investors and markets in the European Union.

Since 1 September 2016, new initial margin (IM) and variation margin (VM) requirements for non-centrally cleared over-the-counter (OTC) derivatives have been introduced and applied to jurisdictions globally.

These new margin rules originate from a global policy framework and timetable that was published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS-IOSCO). They seek to reduce systemic risk in the non-centrally cleared OTC derivatives markets by ensuring appropriate collateral is available to offset losses caused by the default of a counterparty.

Following the 2008 financial crisis, the European Commission decided that national Central Securities Depositories (CSDs), in their position as key institutions performing the vital post-trade process of securities settlement, as well as maintaining records of securities accounts and transactions, needed to harmonise their practices and improve the safety and efficiency of transaction settlement.

The European Commission proposed in July 2010 a comprehensive review of the Directive on Deposit Guarantee Schemes (DGS) aimed at harmonising and simplifying the Directive in order to improve protection of deposits, maintain depositor confidence, and strengthen the safety net.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) was enacted to reduce systemic risk, increase transparency, and promote market integrity within the financial system. In particular, Title VII mandates major structural reform to the Over-The-Counter (OTC) derivatives market.

The objective of the Volcker Rule is to stop all proprietary trading (which is defined quite broadly) by commercial banks (such as HSBC) i.e. to cease any risky trading by banking institutions that has no benefit to its customers. It also seeks to prevent the requirements being by-passed by ownership/investment in hedge funds or private equity funds.

The European Markets and Infrastructure Regulation (EMIR) is a European Union law that aims to reduce the risks posed to the financial system by derivatives transactions in the following three main ways: reporting of derivatives trades to an authorised trade repository; clearing derivatives trades if entities' derivative trading exceeds certain thresholds; and mitigating the risks associated with derivatives trades by, for example, exchanging margin, reconciling portfolios periodically and agreeing dispute resolution procedures between counterparties.

The FICC Markets Standards Board (“FMSB”) was established in 2015 as a private sector response to the Conduct problems revealed in global wholesale Fixed Income Currencies and Commodities (“FICC”) markets after the financial crisis. FMSB’s purpose is to help raise standards of conduct in global wholesale markets and thereby make those markets more transparent, fair and effective.

In 2011 and 2012, the HKMA and Securities and Futures Commission (SFC) consulted the market on a proposed regulatory regime for the Over-The-Counter (OTC) derivatives market. To comply with strict international standards, the new regulatory regime focused heavily on the OTC derivatives markets, including reporting of specified OTC derivatives transactions to the Hong Kong Trade Repository (HKTR), clearing of specified transactions at designated Central Counterparties and margining of non-cleared derivatives.

Interest rate benchmarks including, among others, the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR), the Euro Overnight Index Average (EONIA) and certain other Interbank Offered Rates (IBORs) are being reformed. These reforms are expected to cause some interest rate benchmarks to either perform differently to the way that they do currently or to disappear. This may impact the HSBC products and services you currently use and those we may provide in the future.

The EU's revised Markets in Financial Instruments Directive (MiFID) and Markets in Financial Instruments Regulation (together MiFID II) came into effect on 3 January 2018. MiFID II seeks to make financial markets in Europe more resilient, transparent and investor-friendly and is part of a number of measures enacted in response to the financial crisis. These include the European Markets Infrastructure Regulation (EMIR), which seeks to make the EU's OTC derivative market safer, and the Securities Transactions Regulation (SFTR) which seeks to regulate the EU's shadow-banking sector.

The Qualified Financial Contract ("QFC") Resolution Stay Regulations ("US QFC Stay Rules") are designed to improve the resolvability and resilience of US global systemically important organizations ("G-SIBs") and the US operations of foreign G-SIBs by mitigating the risk of destabilizing closeouts of QFCs upon an event of a G-SIBs insolvency.

The EU has introduced the Securities Financing Transaction Regulation (SFTR) to increase transparency in the Securities Finance markets following policies introduced by the Financial Stability Board in the wake of the Financial Crisis. Although the EU is the first to implement rules in this space, other regulatory bodies are expected to follow.

The Financial Services (Banking Reform) Act of 2013 is a UK Government proposal aiming to impose higher standards of conduct on the UK’s banks. It also looks to improve their loss-absorbing capacity and outlines plans for the “ring-fencing" of retail and wholesale banking activities.