SEC Reopens comment period for proposed amendments to Exchange Act Rule 3b-16
The Securities and Exchange Commission (SEC) has re-opened the comment period for its proposed change to Rule 3b-16 of the Exchange Act.
Rule 3b-16 defines some of the terms under the Exchange Act’s definition of “exchange”. The original consultation of January 2022 proposed expanding the definition of “exchange” to encompass the types of platforms used today by market participants to facilitate trading in a variety of instruments.
The SEC received many comments in response to the proposed rulemaking, including requests for information on how the proposed rules would apply to trading systems for crypto asset securities and trading systems that use distributed ledger or blockchain technology, which are often characterized as decentralized finance (DeFi). In response to these comments, the SEC is re-opening the consultation to provide additional analysis on the potential effects of the proposed amendments on these types of systems and is requesting further information and public comment on aspects of the proposed rules.
CFTC and BoE strengthen ties on cross-border counterparties
The Bank of England (BoE) and the Commodity Futures Trading Commission (CFTC) have announced a strengthening of their commitment to close cooperation and mutual understandings on the supervision of cross-border central counterparties (CCPs). The press release notes the longstanding relationship of cooperation and mutual understanding with respect to the supervision and oversight of cross-border CCPs, and highlights the importance of deference in regulation and supervision where appropriate. Following the UK’s withdrawal from the European Union (EU), the BoE has responsibility for recognizing and supervising non-UK CCPs (incoming CCPs) intending to provide clearing services to clearing members or trading venues established in the UK, subject to HM Treasury making regulations determining that the home regime is equivalent to the UK’s regime.
The regulatory challenges faced by new banks
SEC Governor Michelle W Bowman, in a speech entitled Consequences of Fewer Banks in the US Banking System delivered at the Wharton Financial Regulation Conference, spoke about three areas of focus for De Novo bank formation:
One significant challenge is the application process, which can be lengthy, complex, and involve multiple regulatory agencies. Uncertainties around the timeline for approval can make it difficult to attract qualified personnel and raise sufficient capital. After any approval, de novo banks are subject to heightened standards and limits for at least three years.
Bowman suggests that while some regulatory barriers are appropriate, policymakers should support regulatory and supervisory policies that encourage prudent and appropriate de novo bank formation.
Efficiency in regulation and supervision
With regard to up-front capitalization requirements, Bowman suggests policymakers should consider whether a phased approach that takes into account the early performance of de novo banks may be more appropriate. This might allow these banks to adjust their capitalization levels as they grow and develop a track record of safe and sound operations. She noted that regulatory obligations tend to fall most heavily on small banks, including community banks and de novos, and suggested policymakers should consider how to minimize regulatory burden on these institutions without compromising safety and soundness. Streamlining regulations and reducing unnecessary compliance requirements could help reduce the barriers to entry for de novo banks and support competition in the banking industry.
Transparency in expectations and regulatory support
Bowman said the lack of de novo banks and the trend towards bank consolidation has been a concern for some time. To encourage new bank formation, it is necessary, she argues, to not only deliver a regulatory message that supports de novo activity, but also to have a regulatory tone that supports it. The banking agencies have made progress in clarifying regulatory expectations and providing opportunities for feedback earlier in the process, but more can be done.
Referencing the approach adopted by the New Bank Start-up Unit initiative in the UK, Bowman suggests that adopting some features of this initiative could inform process improvements in the United States, such as focusing on the broader timeline of de novo formation, having multiple regulators with distinct, complementary assessment objectives, emphasizing proportionality in requirements, and preparing for recovery, resolvability, and a solvent wind-down of operations.
Bowman concludes: “In my view, right-sizing regulatory requirements, improving transparency, and supporting regulatory approaches that support new banks are important tools to promote healthy competition and reduce unintended consequences.”
ECB speech on diverse and effective boards in a changing and competitive landscape
Elizabeth McCaul, Member of the Supervisory Board of the European Central Bank (ECB), spoke about the importance of strong governance and comprehensive risk management being at the heart of ECB supervisory priorities. McCaul noted that internal governance and risk management continue to be a cause of concern for the ECB, despite the progress made in recent years, with one major concern being the effectiveness of management bodies in terms of their composition, collective suitability and oversight role.
As well as stressing the need for diversity at board level, McCaul also highlighted the lack of IT expertise at board level and the potential risks this exposed banks to: “short-term risks, such as cyber risks, but also longer-term strategic risks which can ensue from a lack of investment in IT infrastructures or overreliance on service providers without a tested exit plan in place.” Hence the importance of the forthcoming Digital Operational Resilience Act, which will come into force in 2025 and enshrine training requirements for the boards in EU law.
Hong Kong SFC speech on VATPs and DeFi regulation
In a speech in Hong Kong. Keith Choy Interim Head, Intermediaries at the Hong Kong Securities and Futures Commission (SFC) spoke about two topics at the intersection of Web3 and securities regulation – the SFC’s regulatory stance and policy initiatives in relation to centralized virtual asset trading platforms (VATPs) and decentralized finance (DeFi).
Choy reminded the audience that the SFC is looking to implement a new licensing regime covering centralized VATPs which enable trading in non-security tokens. This new regime comes into effect on 1 June 2023, after which all centralized VATPs operating in Hong Kong, regardless of whether they offer trading in securities tokens or non-securities tokens, must be licensed by the SFC. This new regulatory regime will be “a robust regime for centralized VATPs which is fit for purpose and strikes the appropriate balance between investor protection and support for innovation”.
Choy further reminded the audience that “the SFC views DeFi activities through the same existing regulatory framework that applies to the financial activities we regulate. As such, as long as a DeFi activity falls within the scope of the Securities and Futures Ordinance (SFO), it would be subject to the same regulatory requirements applicable to a traditional finance activity, under the “same business, same risk, same rule” approach… The person operating or performing such activity would be subject to our licensing requirements and be regulated by the SFC.”
A selected summary of key developments for regulated financial institutions
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