Regulatory Frameworks and Market Conduct
Regulatory frameworks and market conduct tests the layer above the transaction: capital and liquidity rules, conduct of business, and benchmark reform.
Prudential basics
Basel III sets minimum CET1 at 4.5%, Tier 1 at 6% and total capital at 8%, plus a 2.5% capital conservation buffer. The leverage ratio is 3%. Liquidity: LCR at least 100% over a 30-day stress, NSFR at least 100% over a one-year horizon. The Basel III output floor caps modelled RWAs at 72.5% of the standardised result.
Conduct
MiFID II: best execution (a process obligation, not a promise of the best price), conflicts of interest, inducements, transaction reporting. MAR prohibits insider dealing and market manipulation. Benchmarks: LIBOR panels ceased - sterling, euro, Swiss franc and yen at end-2021, the USD panels on 30 June 2023 - replaced by SOFR, SONIA, €STR and TONA. PSD2 and its successors mandate strong customer authentication and open banking access.
Worked example
A 2019 loan pays 3M USD LIBOR. Its fallback is the rate offered by three reference banks. After 30 June 2023 neither limb works: LIBOR is not published and the fallback is itself LIBOR-based. The contractual waterfall applies first - typically a hardwired fallback to CME Term SOFR plus a credit adjustment spread of roughly 26 bp for the three-month tenor. Only where a contract has no workable fallback does the US Adjustable Interest Rate (LIBOR) Act supply a statutory replacement.
Traps
- Treating best execution as a guarantee of the best price.
- Mixing up LCR (short, stock-based) with NSFR (structural, one year).
- Assuming synthetic LIBOR covers all currencies - it was a limited GBP construct for tough legacy contracts.
- Forgetting that conduct rules follow cross-border distribution, not just the booking centre.