Statement from BIS on crypto assets 19 March 2019
Statement on crypto-assets
The past few years have seen a growth in crypto-assets. While the crypto-asset market remains small relative to that of the global financial system, and banks currently have very limited direct exposures, the Committee is of the view that the continued growth of crypto-asset trading platforms and new financial products related to crypto-assets has the potential to raise financial stability concerns and increase risks faced by banks.
While crypto-assets are at times referred to as "crypto-currencies", the Committee is of the view that such assets do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value. Crypto-assets are not legal tender, and are not backed by any government or public authority.
Through this newsletter, the Basel Committee is setting out its prudential expectations related to banks' exposures to crypto-assets and related services, for those jurisdictions that do not prohibit such exposures and services.
Crypto-assets have exhibited a high degree of volatility and are considered an immature asset class given the lack of standardisation and constant evolution. They present a number of risks for banks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and terrorist financing risk; and legal and reputation risks. Accordingly, the Committee expects that if a bank is authorised and decides to acquire crypto-asset exposures or provide related services, the following should be adopted at a minimum:
Due diligence: Before acquiring exposures to crypto-assets or providing related services, a bank should conduct comprehensive analyses of the risks noted above. The bank should ensure that it has the relevant and requisite technical expertise to adequately assess the risks stemming from crypto-assets.
Governance and risk management: The bank should have a clear and robust risk management framework that is appropriate for the risks of its crypto-asset exposures and related services. Given the anonymity and limited regulatory oversight of many crypto-assets, a bank's risk management framework for crypto-assets should be fully integrated into the overall risk management processes, including those related to anti-money laundering and combating the financing of terrorism and the evasion of sanctions, and heightened fraud monitoring. Given the risk associated with such exposures and services, banks are expected to implement risk management processes that are consistent with the high degree of risk of crypto-assets. Its relevant senior management functions are expected to be involved in overseeing the risk assessment framework. Board and senior management should be provided with timely and relevant information related to the bank's crypto-asset risk profile. An assessment of the risks described above related to direct and indirect crypto-asset exposures and other services should be incorporated into the bank's internal capital and liquidity adequacy assessment processes.
Disclosure: A bank should publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations.
Supervisory dialogue: The bank should inform its supervisory authority of actual and planned crypto-asset exposure or activity in a timely manner and provide assurance that it has fully assessed the permissibility of the activity and the risks associated with the intended exposures and services, and how it has mitigated these risks.
The Committee continues to monitor developments in crypto-assets, including banks' direct and indirect exposures to such assets. The Committee will in due course clarify the prudential treatment of such exposures to appropriately reflect the high degree of risk of crypto-assets. It is coordinating its work with other global standard setting bodies and the Financial Stability Board.
Cryptocurrency 6/2/19. You CAN take it with you!
https://www.independent.co.uk/life-style/gadgets-and-tech/news/bitcoin-exchange-quadrigacx-password-cryptocurrency-scam-a8763676.html
It seems that if you do not unlock your bitcoin account before you go you have, in effect, taken your capital with you!
This must be a major blow for the "imaginary" currency, as it must be a major blow to confidence in what has become a very worrisome market. Even the banks must be fuming, as, because it is not in any bank, they do not get to keep hold of the "dormant" (more like extinct!) account - which would have earned them money, even if eventually passed over to "good causes".
Would you leave all your passwords with your kith and kin? Even so, there is no explicit procedure for a relation of the account holder to claim the account.
It appears a bitcoin account can die with its holder.
Watch this space!
Cryptocurrency 31/12/17
Good to see the Bank of England is taking a sensible approach to cryptocurrency and using the blockchain technology for a sterling-backed model for its digital currency. This should have everything that the Bitcoin and others lack - a measurable supporting baseline (Sterling), trackable and verifiable transactions, and hedging mechanisms (via Sterling, or other currency, futures).
I suspect that this will end the speculative nature of Bitcoin, (with its potential for hiding the proceeds of crime and money laundering) and develop its nature as a fully secure electronic/digital currency, moveable around the world via the internet.
It is right that the BoE has taken its time and waited until the Blockchain technology has been tested for its robustness before launching its own facility.
Cryptocurrency 22/12/17.
First sign of a dip already! Might this be because the new futures contracts add transparency to the market and are bring out the short sellers? But, what is the hedge of the short seller?
Cryptocurrency 17 Dec 2017
I have noticed of late many "junk" emails appearing all offering ways to get into this "high performing market" with "guaranteed profits". I have been involved in derivative and exotic markets for many years, and have never seen such a bandwagon effect. That drive from the "junk market bring is a sure sign to me that this is a very dangerous market, especially at this stage of its existence.
Cryptocurrency 8 Dec 2017
Now we are seeing the direction of travel. Current reports are focussing on "Initial Coin Offerings" (ICOs) which are raising money for companies - but, isn't that what IPOs used to do?
Will regulators accept that quasi-shares are being offered without controls, without an exchange, without any reference as to how "share/coin" value will relate to the company balance sheet?
We are entering a regulatory, and trading, minefield. We all know the way IPO's in "fringe" markets behaved through the 80s and beyond - will there be another "Vancouver Exchange" to trade "penny Crypto-coins"?
CryptoCurrency/Bitcoin Regulation 6 Dec 2017
It is about time, but what will we regulate? There are no custodians to verify what is held by whom; the valuation structure is more complex than any of the derivative structures which contributed to the 2007/8 melt down, and is locked behind complex computer paradigms - the elusive Block Chain; we cannot even say in which country the positions are held, and, finally, there is no underlying asset which may form any residual value.
My own view on this is that we are lining up to see the next "dot com" bubble burst......or is it just the next big Ponzi scheme, with the last ones in left holding the baby (the multi-billion $ baby!)?
Market Abuse Directive
The FCA has fined a trader for breach of the Market Abuse Directive. Details can be seen here: https://www.fca.org.uk/publication/final-notices/paul-axel-walter-2017.pdf
The activity of a Bank of America Merrill Lynch trader was deemed to be market abuse by creating a false and misleading impression as to supply and demand in the market. What surprised me in the FCA report of the case, was that the FCA did not find Mr Walter knew his conduct amounted to market abuse, but considered he was negligent in not realising this.
What has happened to Regulatory Training - and in particular, training in the Market Abuse Directive?
Training in compliance with all Market Directives is essential. This lapse, which has been attributed to a lack of knowledge as much as a breach of rules, is a surprising admission that traders are not being trained properly.
Are YOUR traders fully trained in the requirements of all Directives as they apply to their activity? - If not, you might expect a visit from the FCA!
GAP Insurance - Is this the next PPI?
April 2017.
I recently listened to a sales pitch for GAP insurance. I was in a car showroom (where most of these policies are sold to the public) observing a sale of a car. The salesman started correctly by saying the showroom was answerable to the FCA (he made no personal claim to be registered!) and that they were aware of the need to "treat customers fairly". Then he went on to present a batch of "add-ons" which included GAP, but most of which covered cosmetic enhancement of the car and would be of no interest to the FCA.
Point 1. He was using the FCA protection as a catch all for everything they sold!
But, then he went on to GAP and how it was essential to protect your asset. At this point, I must add, he was selling a 3 year old car. He went into a spiel about how much a car might lose in value over its first 5 years, and how an insurance company would evaluate the worth of a write-off car by its book value at the time of the claim, and drew a (very rough) graph of a line falling at 45 degrees between Y1 and Y5, indicating how much you could lose, with a confident assessment as to how a premium of £360 a year would alleviate that.
There was never a correlation made between the second hand sale price and the book value of the car at that time (which the insurance company would take). There was also no reference to the steep fall in value in the first 3 years, and then a slowing down.
Point 2. He was presenting what looked like a scientific analysis, but which was merely a seat of the pants (and incorrect) guess of how much GAP was worth.
He made no reference to the fact that the buyer was a cash buyer (mentioned right at the start of the conversation) and that GAP was originally conceived as a way to protect potential shortfall between the book value of a written-off car and the liability to repay outstanding finance at that time. He also appeared to claim that the GAP insurance refund would be paid, without question, to return the full initial cost of the car.
Point 3. He was selling a "bet" that in the event of the car being written off in the next 3 years all costs of the initial purchase would be covered by the insurance company. He gave no warning as to how claims are not certain to be paid in full, or that the insurance company might not even look at GAP on a car that had no finance outstanding, or that the 'cost' of a second hand car may not relate to the insurance 'book value' at that time
In this short assessment of a real situation I have looked only at some elements that would constitute a mis-sale. But looking closer, there are a whole raft of areas where this insurance product sold at the point of sale by, possibly, an unqualified and only slightly trained individual would give the buyer problems which had not been fully or properly explained.
Sellers of this kind of product need to be aware that they are selling a regulated product, they need to know the difference between selling a regulated product and an unregulated one, and separate the two. They should have, if it is appropriate to sell this product at all, a professional, technical presentation to display, with all warnings appropriately flagged, and available to be taken away and studied.
Finally, in my view, they should not even offer this product for anything other than a new car (or similar asset) which is being financed at the time of purchase.
"GAP" is "PPI" under another name - and the problems are still there!
Contracts for Difference (CFD)
The FCA today (6 December 2016) announced
that it is proposing stricter rules for firms selling ‘contract for difference’
(CFD) products to retail customers to improve standards across the sector and
ensure consumers are appropriately protected.
This is important as
CFDs carry leverage risk, and need fast response time. However, a CFD
is one of the more simple derivatives, and so care should be take not
to exclude customers from this market unnecessarily. What is important to
establish is that customers are fully informed, well advised and able to enter
into transactions without delay.
What has been missing from
the CFD "broker" service is a full and workable advisory
service, whereby customers are able to take advice on executions, on market
activity, and on underlying share research. That is, a private client needs a
named private client advisor who understands the client’s risk profile, and,
based on that, is able and qualified to give guidance and monitoring on a CFD portfolio at all stages
- and, of course, is mandated to have liability for that advice and a commitment to
"Treat Customers Fairly" when it comes to executions.
The Senior Managers and Certification Regime (SMCR)
"Firms must take ownership of the regime and embrace the opportunities it presents" Tracy McDermott, former CEO, FCA
"We should have nothing to fear from high standards" Martin Wheatley, former CEO, FCA
"With great power comes great responsibility" (Uncle Ben to Spiderman)
Thanks to Anthony Browne of BBA for reminding us of that last quote. It is very apt when looking at the requirements of the SMCR. For the larger institutions the regime begins on Monday 7 March 2016, with other institutions being phased into the regime over the following 12 months. PRA and FCA require all financial institutions to review their senior staff in a "Fit and Proper" test, and certify (with annual reviews) to FCA that they have done so - and then Senior staff must take full responsibility for the actions of all staff, with special reference to a "Significant Harm Function"(SHF).
Are you ready? Do you know what is required? Do you need help in SYSC review or in creating a training regime?
Find out more, our contact details are keenan.regulatory@btinternet.com
MiFID II - it's on its way
Do
you need an update to help you prepare for MiFID II? Call KRC (See contact
page)
MiFID
II will be an important extension of MiFID, and it is essential that trading
firms understand the changes planned. When MiFID II is introduced, firms will be
expected to be fully prepared and to have adapted systems to comply with the new framework
of regulation
It is essential that key senior executives are
informed on the changes coming to the regulatory framework across Europe,
understand the changes required, are able to commence work on change, and are
able to bring their firms to a state of readiness for MiFID II.
KRC
can help you prepare with a training course or briefing that will look at the key elements of MiFID II, including:
Commodity Derivatives
The revisions to MiFID
are adapting some elements of the existing directive and introducing a new
regime of position limits and position reporting. Key details of these
provisions will be determined through ‘Level 2’ implementing measures.
Firms trading commodity
derivatives who are not currently authorised under MiFID will need to examine
whether they can continue to remain exempt from authorisation. Trading venues
and members of trading venues (and their clients) will need to consider how the
implications of the regime of position limits and position reporting.
Transparency
The existing pre and
post trade transparency regime in MIFID applies only to shares admitted to
trading on a regulated market. That regime is being revised and a regime will
be applied to non-equities. The details of the equity and non-equity
transparency regimes will be determined through ‘Level 2’ implementing
measures.
Trading venues will need
to implement the rule and systems changes necessary to comply with the
transparency requirements. Members of trading venues will have to
consider what impact the revised transparency regime will have on their trading
activities.
High frequency trading
The revised MiFID will
introduce specific provisions designed to ensure that high frequency trading
(HFT) does not have an adverse effect on market quality or integrity. The
details of the provisions will be determined through ‘Level 2’ implementing
measures.
They have implications
both for members of trading venues and for the venues themselves. They will
require systems changes and, for firms, enhanced governance of HFT activities.
Market structure
The revisions to market
structure are designed to produce comprehensive regulation of secondary trading
that is fair, efficient and safe. Detail of these provisions will be set out in
Level 2 implementing measures.
Firms currently
operating multilateral trading systems will need to decide how they fit into
the new trading landscape. This will include firms whose systems are not
currently regulated as a trading venue, and firms operating MTFs which involve
discretionary and non-discretionary trading processes. Firms currently
operating bilateral trading systems will need to consider whether their
activity will lead to them becoming SIs. Market participants will need to
consider the impact of the two trading obligations on their trading activity.
Organisational requirements
The revised MiFID will
introduce expanded requirements in respect of the management of firms, explicit
organisational and conduct requirements relating to product governance
arrangements and a prohibition on title transfer collateral agreements
involving retail clients.
All investment firms
will be affected by the provisions relating to management bodies and will need
to consider how their existing governance arrangements match up to them. Most
investment firms will be affected by the product governance and remuneration
requirements and will need to review their existing arrangements in these
areas.
Trade reporting
The provisions in the
revised legislation on trade reporting are designed to resolve problems with
the quality and availability of data that have been observed since the original
directive was introduced. Level 2 implementing measures will provide more
detail on how these provisions will work.
Firms who are currently
offering consolidated data services will need to decide whether or not to
become authorised under the CTP regime. TDMs will need to decide whether
they wish to become APAs and investment firms will need to decide of those
firms who become APAs which they want to use to publish their transactions.
Conduct of business rules
The revised legislation
seeks to enhance the levels of protection granted to different categories of
clients. A lot of the detail of the provisions will be provided in Level 2
implementing measures.
The main impact of the
new restrictions on inducements is likely to be on portfolio managers, who are
not currently subject to the RDR unless they offer advisory services. Firms
offering execution-only services will need to review their offerings in the
light of the changed list of products that can be sold on an execution-only
basis. Brokers will also need to develop the systems to publish information on
the execution venues they use.
Transaction reporting
The scope of the
transaction reporting obligation is being extended, the scope of the reports is
being introduced.
Investment firms who execute transactions will need to
review their transactions to understand whether they will need to report a
wider range of transactions than they currently do and how, if necessary, to
report the wider range of information required.
A Definition of misselling from the web:
"The ethically questionable practice of a salesperson misrepresenting or misleading an investor about the characteristics of a product or service. In an effort to make a sale to a potential customer, a financial products salesperson could leave out certain information or describe a financial product as something the investor urgently needs, even though sound financial judgment would come to the opposite conclusion." Read more: http://www.investopedia.com/terms/m/misselling.asp#ixzz2BBA5IOHDAre salespeople (or advisers, or relationship managers) trained to match client with suitable (and appropriate) products - or do they just sell what they are told to sell to clients on the bank's client list?
Think about it.
The CO did not do anything wrong, per se, but did not investigate wrong-doing by dealers. The FSA says:
