Benchmarks, NSFR and the Senior Managers Regime

The week on, September 29–October 5, 2017

Europe’s Eonia dilemma: As Europe finally begins a formal search for a new risk-free rate for swaps, it is unclear whether Eonia will survive, and what will replace it

Basel seeks NSFR fix for derivatives: Possible fixes under consultation don’t go far enough, say banks

Seniority complex: buy side balks at costs of SMR extension: Expansion of scheme will bring 47,000 firms in scope; compliance and recruitment costs set to rise


COMMENTARY: Taking responsibility

The UK’s Senior Managers Regime (SMR) is one of the most ambitious regulatory responses to the 2008 financial crisis, aiming to address the culture and conduct failures at the root of the crisis and of many subsequent operational risk losses. Originally, it covered only the largest firms, but the Financial Conduct Authority now plans to extend it to all 47,000 entities the regulator oversees.

The banking industry and its lobbyists are voicing concerns about the cost of compliance, the slowing of decision making by newly cautious executives, and increased difficulty in recruiting senior managers. All these phenomena exist, and none of these concerns are unexpected; the point of the SMR was to make “business as usual” impossible for the financial sector, because the hubris involved in “business as usual” had turned out to be disastrous. Executives needed to be made cautious, compliance to become more rigorous, and senior managers to take more responsibility for their actions. The extra costs need to be weighed against the hundreds of billions that poor conduct has cost the financial industry and the world.

Even so, it is striking that a proposed SMR rule “that would have placed the onus on senior managers to demonstrate they had taken all reasonable steps to prevent a contravention occurring” was regarded as a controversial one, lobbied against vigorously and eventually overturned. In the aftermath of any disaster in any other industry – a sunken ship, a chemical spill, an industrial accident – the first question will be “did you take all reasonable steps to prevent this from happening?”, and heaven help the person who replies “no”. Only the financial sector considers even asking the question to be an unjustifiable imposition.

The effectiveness of the expanded SMR will be challenging to measure, but there are already signs it has had a beneficial effect on the larger firms it covers, with anecdotal reports of falling numbers of risk limit breaches. The ultimate aim will be an improvement in culture and a fall in conduct losses, though it will be difficult to trace this back to the SMR – banks will no doubt argue they would have improved matters by themselves without needing the burden of additional regulations. But a key test will be the first enforcement actions. The FCA will have to choose its targets carefully to reassure banks compliance is both possible and practical. Ironically, the “all reasonable steps” rule may have been rejected, but it remains the only workable standard on which to base SMR enforcement.


Initial margin held at US futures commission merchants declined from $162 billion to $138 billion between January and August across house and customer accounts. Customer margin alone held at FCMs has shrunk from $132 billion to $110 billion, or 17%.


“Is this the UK and US ganging up? Is it the fact that… the Anglo-Saxons are going to have their way and get away with light-touch regulation again?” – Kay Swinburne, European Parliament

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