US
Federal Reserve Board of Governors Issues Federal Register (2024-05322) FINAL Rule Regarding Financial Market Utilities (FMUs)
The Board of Governors of the Federal Reserve System published a final rule amending the requirements relating to operational risk management in the Board’s Regulation HH, which applies to certain financial market utilities (FMUs) that have been designated as systemically important FMUs by the Financial Stability Oversight Council (FSOC) under the Dodd-Frank Act. The amendments update, refine, and add specificity in Regulation HH to reflect changes in the operational risk, technology, and regulatory landscape in which designated FMUs operate. The final rule is effective beginning 4/15/2024.
Canada
Office of the Superintendent of Financial Institutions (C-OSFI) Issued Guidelines on Residential Mortgage Risk Management
The C-OSFI issued a regulatory guidelines notice, effective immediately to all Federally Regulated Financial Institutions (FRFIs), reinforcing the requirements on residential mortgage risk management practices to address the risk environment for real estate secured lending by reinforcing expectations around portfolio management practices, as well as creating robust monitoring systems to support early detection, and management of vulnerable accounts and portfolio segments, including residential mortgage underwriting. An independent loan review function will enable the assessment of credit risk management processes, helping to identify vulnerable accounts/portfolio segments.
Global
Bank of International Settlements (BIS) Basel Committee Publishes Paper on Decentralized Finance (DeFi) Leverage/Lending Platforms
The Basel Committee issued a paper on Decentralized Finance (DeFi) Leverage/Lending Platforms, where borrowers’ collateralized loans are similar to repurchase agreements/securities lending. The study analyzes trade-by-trade data on major DeFi lending platforms to construct a daily time series of individual borrower assets and debts at the wallet level: lending protocols are governed by predefined algorithms to enable automatic loans and allowing user leverage. Asset-to-equity ratio at wallet level in major platforms found leverage typically from 1.4 to 1.9, with the largest, most active users exhibiting higher leverage than others, which increases debt close to being liquidated.
The Bank of International Settlements (BIS) Basel Committee Issues Consultation Report on Global Systemically Important Banks (G-SIB) Framework
The Basel Committee issued a report, “Banks’ Window-Dressing of the G-SIB Framework: Causal Evidence from a Quantitative Impact Study Analyzed Framework for Global Systemically Important Banks”. Window-dressing is bank market activity that contracts around period-end dates. The findings of the ten -year study indicated that lowering G-SIB capital requirements are significant, with regulatory arbitrage seeking to temporarily reduce banks’ footprint around public disclosure of G-SIB scores. The solution is to require banks to disclose the G-SIB indicators based on average values over the reporting year, proposing an implementation date of 1/1/2027, with comments due by 6/7/2024.