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Regulatory Reform in the Asia Pacific: State of Play (September 2015)

Core Content Overview

This document provides an analysis of the ongoing regulatory reform agenda in the Asia Pacific region, focusing on key initiatives and their implications for financial institutions. It outlines the progress made since the 2008 financial crisis and highlights the challenges and opportunities that lie ahead for the region.

Major Regulatory Workstreams

The Financial Stability Board (FSB) has identified several key regulatory workstreams that are shaping the financial services landscape globally and regionally:

1. Building Resilient Financial Institutions

• Basel III Implementation:

  • Basel III has introduced changes to bank capital, liquidity, and leverage requirements.
  • The framework is not yet fully implemented, with ongoing calibration and transition periods.
  • Key components include:
    • Leverage Ratio: Final calibration expected in 2015, with implementation by 2018.
    • Liquidity Coverage Ratio (LCR): Phased in over five years starting from 2015.
    • Net Stable Funding Ratio (NSFR): Finalised in October 2014, scheduled to become mandatory by 2018.
    • Capital Floors: Designed to supplement the leverage ratio, with further details to be determined.

• Asia Pacific Progress:

  • The region has largely implemented Basel III ahead of other major countries.
  • There are variations in timelines, with some jurisdictions expecting full implementation by 2016.

2. Ending Too-Big-to-Fail

• Systemically Important Financial Institutions (SIFIs):

  • The FSB has developed a framework to identify and manage SIFIs, particularly globally important ones (G-SIFIs).
  • G-SIBs (Global Systemically Important Banks) are subject to higher loss absorbency requirements (1%–2.5% of risk-weighted assets) starting in 2016, with full implementation by 2019.
  • Nine globally important insurers (G-SILs) have also been identified.

• Key Initiatives:

  • Total Loss-Absorbing Capacity (TLAC): Finalised before the 2015 G20 Summit, with extended timelines for Chinese banks.
  • Resolution Planning: The FSB is promoting the development of resolution plans ('living wills') for SIFIs.
  • Cross-Border Recognition: Work is ongoing to ensure consistency in resolution actions across jurisdictions.

3. OTC Derivatives Reform

• G20 Commitments:

  • By the end of 2012, all OTC derivatives should be reported to trade repositories, standardised contracts traded on exchanges, and non-centrally cleared contracts subject to higher capital and margin requirements.

• Asia Pacific Implementation Status:

  • Reporting: Most jurisdictions have implemented or are in the process of implementing reporting requirements.
  • Central Clearing: Implementation is patchy, with some countries planning to introduce clearing obligations by 2016.
  • Margin Requirements: Delayed to September 2016, with a five-year phased-in approach.
  • Mandatory Trading: Expected to be introduced in 2016 for certain asset classes.

• Challenges:

  • Extra-territoriality and policy inconsistencies between major markets (US and EU) have delayed implementation.
  • Markets have fragmented due to differing regulatory approaches.

4. Transforming Shadow Banking

• Definition and Risk:

  • Shadow banking refers to credit intermediation outside the regulated banking sector.
  • Concerns exist that risky activities may shift to less regulated parts of the market.

• FSB Initiatives:

  • The FSB has focused on identifying and mitigating risks from shadow banking.
  • Emphasis is placed on assessing the implementation of existing reforms, such as those on money market funds, and data collection to better understand the sector.

5. Conduct and Wholesale Markets

• Conduct as a Key Issue:

  • Poor conduct in the financial system is seen as a systemic risk.
  • The UK has led international efforts in this area, with Asia Pacific regulators aligning with these initiatives.

• Benchmarks Reform:

  • Work has been done on interest rate and foreign exchange benchmarks.
  • Shift from inter-bank offer rates to transaction-based and risk-free rates is expected by 2016.

• Future Workstreams:

  • The UK's Fair and Effective Markets Review (FEMR) has recommended policy actions, including a code of conduct for spot foreign exchange markets and standards for FICC (Fixed Income, Currency, and Commodity) markets.
  • These reforms aim to enhance transparency and reduce systemic risks.

Conclusion

Regulatory reform continues to be a major strategic consideration for financial services firms in the Asia Pacific. While significant progress has been made in implementing Basel III and related reforms, the agenda remains active with the emergence of Basel IV and new initiatives. The region is expected to continue aligning with global standards, though with some flexibility in implementation timelines. The challenges of harmonisation, extra-territoriality, and cross-border coordination remain critical for firms operating in multiple jurisdictions.

Key Information Summary

• Basel III: Ongoing implementation with Basel IV adjustments expected.
• Too-Big-to-Fail: G-SIBs and G-SILs are subject to higher capital and resolution requirements.
• OTC Derivatives: Reporting is largely implemented, but central clearing and mandatory trading remain in progress.
• Shadow Banking: Focus on risk mitigation and data collection.
• Conduct and Wholesale Markets: Increasing emphasis on conduct regulation and benchmark reform.
• Asia Pacific Progress: Generally ahead of other regions in Basel III implementation, but facing challenges in harmonising reforms across jurisdictions.

Regional Implementation Timelines

Endnotes

• The document references multiple FSB and Basel Committee reports and guidelines.
• The term "Basel IV" is not officially used but is increasingly adopted by industry and academia.
• Deloitte's Asia Pacific Centre for Regulatory Strategy provides insights and advice on managing regulatory impacts.