The European Commission has published a report on the future of European competitiveness, prepared by Mario Draghi, former President of the European Central Bank. The report aims to set out a new industrial strategy for Europe to overcome barriers to the EU's competitive strength. It sets out priority proposals in the short and medium term in key strategic sectors. For financial regulation, the report focuses on the completion of the Capital Markets Union and the Banking Union.

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The Financial Services and Markets Act 2023 (Commencement No 7) Regulations 2024 (SI 2024/891) have been made. The Regulations revoke certain instruments listed in the Financial Services and Markets Act 2023 relating to securitization, specifically: (i) the Securitisation Regulations 2018; (ii) provisions of the retained EU Securitisation Regulation that have not already been revoked; and (iii) the retained instruments that amended or supplemented the Securitisation Regulation and Capital Requirements Regulation. These instruments are to be revoked so that the new U.K. securitization framework, established under the Securitisation Regulations 2024 can come into force on November 1, 2024 as provided for by the Securitisation (Amendment) Regulations 2024.

The European Banking Authority has published its final amendments to the Regulatory Technical Standards on the market risk framework, also known as the Fundamental Review of the Trading Book. The EU Capital Requirements Regulation III introduced a number of changes to the FRTB, as implemented in the EU via CRR II, and consequently mandated the EBA to review its RTS in areas where the underlying CRR legal basis has been amended, namely on the treatment of foreign-exchange and commodity risk in the banking book, the profit and loss attribution test, and the risk factor modellability assessment. The EBA's RTS therefore amend the following: (i) Commission Delegated Regulation (EU) 2022/2059, which sets out the details on the profit and loss attribution test. The amending RTS remove the aggregation formula for computing the total own funds requirements for market risk for an institution using the alternative internal model approach as this formula has been now introduced in the CRR III; (ii) Commission Delegated Regulation (EU) 2022/2060, which relates to the risk factors' modellability assessment. The amending RTS ensure that institutions are able to identify how far they rely on a third-party vendor for the purpose of assessing the modellability of a risk factor; and (iii) Commission Delegated Regulation (EU) 2023/1577, which relates to the treatment of foreign exchange and commodity risk in the non-trading book. The amending RTS ensure that translation risk is duly captured by institutions. The EBA will submit the final draft RTS to the European Commission for endorsement.

The European Banking Authority has published a no-action letter in response to the European Commission's postponement of the application of the revised market risk framework, also known as the Fundamental Review of the Trading Book. In the no-action letter, the EBA recommends that competent authorities should not prioritize any supervisory or enforcement action relating to the amendments to the provisions setting the boundary between the banking and trading books, or those defining internal risk transfers between books. The EBA also clarifies that the points it made in its separate no-action letter on the same topic issued in 2023 should remain applicable. The EBA considers that the front-loaded application of the revised provisions on the boundary and internal risk transfers, compared to the rest of the FRTB framework, would subject institutions to an operationally complex, fragmented, and costly two-step implementation. There are also no jurisdictions at the global level that envisage such a two-step implementation of the FRTB framework. This means that a front-loaded application of the boundary provisions would lead to global institutions being subject to very different regulatory requirements depending on where the risk management is performed, leading to a fragmentation of the regulatory framework. In a separate document, the EBA shares some considerations on technical questions and implementation issues arising from the postponement, that were deemed material and relevant with a view to achieving a harmonised implementation of the market risk framework across institutions during the postponement period. The EBA also provides clarity on the supervisory benchmarking exercise. The EBA considers that a legislative proposal to provide the necessary legal certainty should be introduced by the European Commission, under an accelerated adoption procedure by the European Parliament and the Council of the European Union, if possible.

The European Banking Authority has published its final draft Implementing Technical Standards amending the Implementing Regulation on the benchmarking of credit risk, market risk, and IFRS9 models for the 2025 exercise. The EU Capital Requirements Directive requires competent authorities to conduct an annual assessment of the quality of internal approaches used for the calculation of own funds requirements. To assist competent authorities in this assessment, the EBA calculates and distributes benchmark values to competent authorities that allows a comparison of individual institutions' risk parameters. These benchmark values are based on data submitted by institutions as laid out in Commission Implementing Regulation (EU) 2016/2070 which specifies the benchmarking portfolios, templates and definitions to be used as part of the annual benchmarking exercises. Proposed changes for the 2025 benchmarking exercise include the expansion to all asset classes of the alternative standardised approach validation portfolios. Only minor changes are proposed in relation to credit risk. The EBA notes that the templates based on the alternative internal model approach have not been implemented because of the postponed implementation of the Fundamental Review of the Trading Book in the EU. The EBA has submitted the draft ITS to the European Commission for endorsement.

The Prudential Regulation Authority has published a policy statement on the leverage ratio treatment of omnibus account reserves and minor amendments to the leverage ratio framework. PRA rules require firms to exclude from the leverage ratio any claims on central banks matched by liabilities in the same currency and of identical or longer maturity. The PRA explains that a new model of reserves holding has emerged where the reserves of several firms are co-mingled in a single account held at the central bank—known as an "omnibus" account. Therefore, the PRA is:

• introducing new rules to apply the exclusion consistently across reserves held on omnibus accounts as well as traditionally-held reserves, with the exclusion of the former subject to specific additional conditions; and
• making minor amendments to SS45/15 and the leverage ratio disclosure and reporting instructions to provide clarification about the PRA's expectations and ensure consistency with PRA rules.

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The U.K. Prudential Regulation Authority has published a policy statement on its approach to rule permissions and waivers. The policy statement provides feedback to responses the PRA received to CP3/24 published in January. Appendix 1 contains the four responses received to the consultation paper and Appendix 2 contains the PRA's final statement of policy on the same topic. The statement of policy sets out the PRA's approach to the granting of rule permissions under section 138BA of the Financial Services and Markets Act 2000, as inserted by FSMA 2023. The PRA explains that following the responses it received to its consultation it has made two amendments to the statement of policy: (i) what the PRA generally expects to include in a subject specific statement of policy; and (ii) that there may be exceptional circumstances where it may be appropriate to grant a s138BA FSMA permission for which it has not set out criteria despite the s138A FSMA statutory tests not being met. The PRA expects these changes to be beneficial to persons subject to PRA rules by making its policy on s138BA FSMA permissions clearer and more transparent. The statement of policy takes immediate effect on publication of this policy statement.

The European Commission has adopted a Delegated Regulation amending the EU Capital Requirements Regulation with regard to the date of application of the own funds requirements for market risk. In addition, alongside the Delegated Regulation, the Commission has published a related Q&A document. Article 461a of the CRR, as amended by CRR III, requires the Commission to monitor the international implementation of the Basel III Fundamental Review of the Trading Book standards across jurisdictions and includes an empowerment to adopt delegated acts to ensure an international level playing field, if there are significant deviations in implementation by third countries.

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The Financial Stability Board has published a progress report to the G20 on enhancing the resilience of non-bank financial intermediation. The aim of policies by the FSB to enhance NBFI resilience has been to reduce excessive spikes in the demand for liquidity, enhance the resilience of liquidity supply in stress, and enhance risk monitoring and the preparedness of authorities and market participants. The report sets out the recent and ongoing work by the FSB, in collaboration with standard-setting bodies, to enhance the resilience of the NBFI sector. The FSB notes that the design and implementation of NBFI policies continues to advance, albeit at an uneven pace across jurisdictions. The report includes a table which provides an overview of the FSB's medium-term NBFI work program. The report concludes by outlining further work to assess and address systemic risk in NBFI that the FSB, in collaboration with the standard-setting bodies, will carry out. The work is structured in three main areas: (i) in-depth assessment and ongoing monitoring of vulnerabilities in NBFI; (ii) the development of policies to enhance NBFI resilience; and (iii) the monitoring of the implementation and assessment of the effects of NBFI reforms. The FSB explains that this work will help it to determine whether collectively the reforms have sufficiently addressed systemic risk in NBFI, including whether to develop additional tools for use by authorities.

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The Basel Committee on Banking Standards has published its final disclosure framework for banks' crypto-asset exposures and targeted amendments to its standard for banks exposures to crypto-assets to tighten the criteria for certain stablecoins to receive a preferential regulatory treatment. The final disclosure framework, which is based on the disclosure requirements in the final prudential standard on banks' crypto-asset exposures, includes a standardized table and templates covering banks' crypto-asset exposures. These require banks to disclose qualitative information on their crypto-asset-related activities and quantitative information on the capital and liquidity requirements for their crypto-asset exposures. The targeted amendments to the crypto-asset prudential standard aim to further promote a consistent understanding of the standard, particularly regarding the criteria for stablecoins to receive a preferential "Group 1b" regulatory treatment. Various other technical amendments clarify other aspects of the standard. Both standards have an implementation date of January 1, 2026.

The European Central Bank has published a report defining bank digitalization assessment criteria and collection of sound practices. Understanding bank digitalisation and the management of related risks is a key priority of the ECB and the criteria are intended to assess how banks shape, steer and implement their digitalisation strategies, focusing closely on risk identification and mitigation. The criteria and sound practices are grouped into three areas: (i) business model; (ii) governance; and (iii) risk management.

The report also outlines the sound practices the ECB has observed in the digital context. The ECB found that banks demonstrating sound practices assess both the opportunities and risks related to their digital strategy, based on a granular assessment of their business environment. The most advanced digital strategies are those embedded in business or IT strategies, translated into digital initiatives driven by business use cases and technological developments which are then consistently evaluated for efficacy during the execution phase. While most banks have adopted digital solutions to transform their back and front office operations, many have not defined sufficiently granular KPIs, including those assessing the impact of their digital strategies on profit and loss. This means they cannot determine the effectiveness of their strategies and whether they have met their objectives. The ECB states that it will expand the focus of its supervisory work to include reviewing the use of specific technologies more broadly, including the deployment of artificial intelligence and related business use cases.

The Basel Committee on Banking Standards has published a consultation on principles for the sound management of third-party risk in the banking sector. The principles address banks' increasing reliance on third-party service providers due to the ongoing digitalization and rapid growth in financial technology, establishing a common baseline for banks and supervisors for the risk management of these arrangements. The consultation consists of 12 high-level principles offering guidance to banks and supervisors on effectively managing and supervising risks from third-party arrangements. The principles introduce the concept of a third-party life cycle and emphasise overarching concepts such as criticality and proportionality. They also address supply chain risk and concentration risk and highlight the importance of supervisory coordination and dialogue across sectors and borders.

While primarily directed at large internationally active banks and their prudential supervisors, the principles also offer benefits to smaller banks and authorities in all jurisdictions. They establish a common baseline for banks and supervisors for the risk management of third parties, while providing the necessary flexibility to accommodate evolving practices and regulatory frameworks across jurisdictions. The deadline for comments is October 9, 2024.

The European Banking Authority has published a consultation paper on draft regulatory technical standards to specify the conditions and the criteria to assess whether the credit valuation adjustment risk exposures arising from fair-valued securities financing transactions are material, as well as the frequency of that assessment. The draft RTS support the revised framework for the determination of own funds requirements for CVA risk introduced under CRR 3, which provides that firms should include SFTs in the calculation where the SFTs are fair valued and the firm's CVA risk exposures arising from those transactions are material. The concept of materiality set out in the draft RTS will therefore determine whether fair-valued securities financing transactions can be exempted from own funds requirements for CVA risk. The draft RTS included in this consultation paper propose to employ a quantitative approach for the determination of the materiality of such CVA risk exposures. In particular, they propose to perform the assessment on the basis of a ratio that quantifies the amount of CVA risk arising from fair valued SFTs relative to the CVA risk of transactions in scope of the own funds requirements for CVA risk. The draft RTS propose to conduct this assessment on a quarterly basis, to ensure consistency with the regular calculation and reporting cycle of own funds requirements by institutions. Comments may be submitted until October 8, 2024.

The European Systemic Risk Board has published a report on its second assessment of implementing actions taken by EU Member State bodies responsible for setting the countercyclical buffer rate, following the ESRB's Recommendation on setting countercyclical buffer rates. The report assesses compliance with the Recommendation, which is addressed to the designated EU Member State bodies, as well as the European Central Bank. The report concludes that the overall level of compliance remains high, with all addressees graded as either fully or largely compliant, and that the deficiencies in compliance identified are not sufficiently material to diminish the efficiency of macro-prudential policies or the single market. The next ESRB follow-up assessment is expected to take place in three years' time, starting from the last reporting deadline.

The European Commission has adopted the Commission Implementing Regulation amending the Implementing Technical Standards laid down in Commission Implementing Regulation (EU) 2016/1799 as regards the mapping tables specifying the correspondence between the credit risk assessments of external credit assessment institutions and the credit quality steps set out in the EU Capital Requirements Regulation. The mappings need to be updated as: (i) the quantitative and qualitative factors underpinning the credit assessments of some mappings have changed due to the additional quantitative information collected and the qualitative developments registered by some ECAIs; and (ii) some ECAIs have extended their credit assessments to new market segments, resulting in new rating scales and new credit rating types. The Implementing Regulation will enter into force 20 days after it is published in the Official Journal of the European Union.

The European Banking Authority has published its final draft regulatory technical standards on the conditions and indicators that the EBA shall use to determine whether extraordinary circumstances have occurred for the purposes of Articles 325az(5) and 325bf(6) of the EU Capital Requirements Regulation. Under the CRR, national regulators may permit institutions to soften or waive the application of certain requirements for the use of internal models in accordance with the Fundamental Review of the Trading Book, under extraordinary circumstances. The draft RTS establish a high-level framework for identifying the occurrence of extraordinary circumstances, setting out conditions that need to be met and indicators that could support the identification of extraordinary circumstances. More specifically, they set out that only a situation of cross-border financial market stress, or a regime shift, can qualify as a situation of extraordinary circumstances, and only subject to the additional condition that this stress or regime shift impacts the validity or suitability of the results of the back-testing or the profit and loss attribution test. The draft RTS will be submitted to the European Commission for endorsement following which they will be subject to scrutiny by the European Parliament and the Council of the European Union before being published in the Official Journal of the European Union. The draft RTS will apply from 20 days after their entry into force.

The U.K. Financial Policy Committee has published the financial policy summary and record of the FPC meeting on June 11, 2024, as well as its June financial stability report. The FPC considers the overall risk environment to be broadly unchanged from Q1. Markets continue to price mostly for a benign central case outlook, and some risk premia have tightened even further, despite the global risk environment facing several challenges. Some of these challenges have become more concerning and proximate.

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The European Banking Authority has published an updated report on the monitoring of Additional Tier 1, Tier 2 and total loss absorbing capacity as well as the minimum requirement for own funds and eligible liabilities instruments of EU institutions. The update provides new guidance on the prudential valuation of non-CET1 instruments and on other aspects related to the terms and conditions of the issuances. The report builds upon the 2023 update with substantial amendments made.

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The European Banking Authority has finalized its draft implementing technical standards on public disclosures by institutions that implement the changes in the Pillar 3 disclosure framework introduced by the third Capital Requirements Regulation, which stem from the latest Basel III reforms. The ITS implement the CRR III prudential disclosure requirements by including new requirements on output floor, credit risk, market risk, credit valuation adjustment risk, operational risk, and a transitional disclosure on exposures to crypto-assets. In addition, they aim to provide institutions with a comprehensive, integrated set of uniform disclosure formats. The ITS repeal the Commission Implementing Regulation (EU) 2021/637 on public disclosures, with a view to enabling the EBA to comply with its mandate to develop IT solutions, making the technical standards more user-friendly for institutions. Later in 2024, the EBA will complement these ITS with the CRR III disclosure requirements that are not directly linked to Basel III implementation, in particular the extension of the disclosure requirements on environmental, social and governance risks to all institutions in accordance with the proportionality principle, and new disclosure requirements on shadow banking.

The European Banking Authority has finalized its draft regulatory technical standards on the conditions for assessing the materiality of model extensions and changes to the use of alternative internal models and changes to the subset of the modellable risk factors referred to in Article 325bc under Article 325az(8)(a) of the EU Capital Requirements Regulation. The final draft RTS differentiate between material extensions and changes under the internal models approach, to be approved by national regulators, and non-material extensions and changes, to be notified to national regulators four weeks in advance. This last category is further divided into two subcategories: extensions and changes notified with additional information, and extensions and changes with basic information. For the categorization of extensions and changes to the relevant categories and subcategories, the final draft RTS set out a combination of qualitative and quantitative conditions. In particular, the quantitative conditions aim at assessing the effect of the extension or change on the IMA own funds requirements and on the relevant components of the Fundamental Review of the Trading Book IMA, before and after the planned extension or change. The final draft RTS also include guiding principles that institutions should follow in the categorization process, provisions on the implementation of extensions and changes, and documentation requirements. With the submission of these final draft RTS to the Commission for endorsement, the EBA completes its roadmap on market and counterparty credit risk approaches published on June 27, 2019.

The EU has published the final legislation implementing revisions to the EU Capital Requirements Regulation and Capital Requirements Directive (commonly referred to as the EU banking package) in the Official Journal of the European Union, namely:

• a Regulation amending the EU Capital Requirements Regulation regarding requirements for credit risk, credit valuation adjustment risk, operational risk, market risk, and the output floor ((EU) 2024/1623) (CRR III). The Regulation enters into force on July 9, 2024, 20 days after publication in the Official Journal of the European Union. CRR III will apply from January 1, 2025, with the exception of certain specified points of Article 1, which will apply from July 9, 2024; and
• a Directive amending the EU Capital Requirements Directive regarding supervisory powers, sanctions, third-country branches, and environmental, social and governance risks ((EU) 2024/1619) (CRD VI). The Directive enters into force on July 9, 2024, 20 days after publication in the Official Journal of the European Union. Member states are required to adopt and publish the laws, regulations, and administrative provisions necessary to comply with CRD VI by January 10, 2026, and to apply those measures from January 11, 2026, with the exception of Article 1(9) and (13), which shall apply from January 11, 2027. A further exception provides for measures necessary to comply with the amendments set out in Article 1(13) regarding Article 48k and 48l of CRD, which shall apply from January 11, 2026, and Article 1(9) regarding Article 21c(5) of CRD, which shall apply from July 11, 2026.

Mairead McGuinness, European Commissioner for Financial Services, Financial Stability and Capital Markets Union, made a speech discussing the importance of continuing to make progress on the Banking Union and CMU. Topics on the Commission's agenda to continue development include analyzing the EU securitization market. The European Commission will launch a public consultation in the autumn on how to make the market more attractive to issuers and investors. Ms. McGuinness also announces a delay to the date of application of the Basel Comittee on Banking Supervision's Fundamental Review of the Trading Book market risk reforms by one year, until January 1, 2026. Ms. McGuinness explains that it is now clear there will be a delay in the U.S. in implementing the reforms and therefore a delay in the EU is necessary to ensure a global level playing field. The delay will be adopted by way of a delegated act, which will take a minimum of three months.

Commission Delegated Regulation (EU) 2024/1728 has been published in the Official Journal of the European Union, supplementing the EU Capital Requirements Regulation with regard to regulatory technical standards specifying in which circumstances the conditions for identifying groups of connected clients are met. The definition of a group of connected clients in the CRR makes it possible to identify two or more natural or legal persons who are so closely linked by idiosyncratic risk factors that it is prudent to treat them as a single risk. Consequently, the purpose of the RTS is to set out clear circumstances where interconnections between clients by means of a control relationship and/or an economic dependency relationship lead to a single risk and thus a requirement to group those clients. The Delegated Regulation enters into force on July 8, 20 days after publication in the Official Journal of the European Union.

Commission Delegated Regulation (EU) 2024/1085 has been published in the Official Journal of the European Union, supplementing the EU Capital RequirementsRegulation with regard to regulatory technical standards on the assessment methodology under which national regulators verify an institution's compliance with the requirements to use internal models for market risk. The RTS identify all elements that are to be assessed by the national regulator when granting the approval to use an internal model approach to compute the own funds requirements for market risk. They are constituted by three main chapters: (i) assessment of qualitative requirements; (ii) assessment of the internal risk-measurement model used to compute the expected shortfall measure and the stress scenario risk measure; and (iii) assessment of the internal default risk model used to compute the additional own funds requirement for default risk. The Delegated Regulation enters into force on July 7, 2024, 20 days after publication in the Official Journal of the European Union, with the exception of Article 18(1)(a), regarding the environmental risk, Article 18(1)(c)(vii) and Article 18(2)(b)(v), which will apply from January 1, 2025; and Article 21(1)(b), which will apply from January 1, 2026.

Commission Implementing Regulation 2024/1618 amending Implementing Regulation (EU) 2021/763, laying down implementing technical standards on supervisory reporting and public disclosure of MREL and TLAC, has been published in the Official Journal of the European Union. The amending ITS were created in response to changes to the EU Capital Requirements Regulation as well as to clarify requirements in response to the Single Rulebook Q&A process. In particular, the amending ITS adjust the templates and reporting instructions to reflect: (i) the requirement to deduct investments in eligible liabilities instruments of entities belonging to the same resolution group ("daisy chain" framework); (ii) the prior permission regime for buying back eligible liabilities instruments issued by the reporting entities and groups; and (iii) other minor updates to the ITS and the accompanying technical package to address some identified issues. The amending ITS will enter into force on June 27, 2024, and will apply from December 27, 2024.

The European Banking Authority has opened a consultation on a package of draft regulatory technical standards that aim to standardize the collection and the record of operational risk losses and to provide clarity on the exemptions for the calculation of the annual operational risk loss and on the adjustments to the loss data set that banks must perform in case of merged or acquired entities or activities. The package consists of:

• Draft RTS on establishing a risk taxonomy on operational risk, which provide a list of operational risk event types, categories, and attributes that institutions must use when recording operational risk loss events in line with the current framework and the international standards.
• Draft RTS on the conditions under which it would be unduly burdensome for an institution to calculate the annual operational risk loss. In such cases, the draft RTS allow for a temporary waiver from the requirement to calculate the annual operational risk loss.
• Draft RTS on the adjustments to an institution's loss data set following the inclusion of losses from merged or acquired entities or activities, which provide indications on the currency and the risk taxonomy to be used when incorporating the loss data set of merged entities or activities.

The deadline for comments is September 6, 2024. The EBA intends to finalize the draft RTS by the end of 2024.

The Prudential Regulation Authority has published a modification by consent of Rule 4.1 of the Resolution Assessment Part of the PRA Rulebook. The PRA explains that, as with previous general elections, it will be following the Cabinet Office's election guidance, which includes limiting communications activities until after the election. In line with this approach, the Bank of England and PRA have chosen to delay publication of the second Resolvability Assessment Framework assessment of the major U.K. banks to early August. The publication of the BoE's assessment was due by June 14, 2024, alongside firms' own public disclosures (as required by Rule 4.1 of the Resolution Assessment Part of the PRA Rulebook). As such, the PRA is offering a modification by consent to delay the deadline for firms to publish their RAF disclosures from the second Friday in June, to the second Friday in August at the latest. Each firm that wishes to take advantage of this modification should consider the terms of the direction.

The European Banking Authority and European Securities and Markets Authority have published a joint discussion paper on the potential review of the investment firms' prudential framework. The discussion paper aims at gathering early stakeholder feedback to inform the response to the European Commission's call for advice.

The EBA notes that it is of the overall opinion that the current framework reaches the original general objectives, providing a robust and risk-sensitive prudential framework tailored to the size, activities and complexity of investment firms regulated under the Markets in Financial Instruments package. Nonetheless, it notes that market participants and supervisors highlighted a number of issues or areas of potential improvements of the prudential framework that may lead to changes to either the Investment Firm Regulation and Investment Firm Directive or to the related delegated regulations.

Among other things, the discussion paper considers: (i) the implications of the adoption of the new EU Banking package (known as CRD VI and CRR III) concerning the trading book, the fundamental review of the trading book and credit valuation adjustments; (ii) prudential consolidation and a possible extension to crowdfunding and crypto-asset service providers; (iii) aspects related to compensation, including the scope of application, compensation policies, the requirements on variable remuneration, and their oversight, disclosure, and transparency; (iv) the treatment of firms currently non-prudentially regulated and active in commodity markets; (v) the categorization of investment firms; and (vi) reviewing the existing K‐factors to cover risks currently only addressed under the Pillar 2 framework or as possible alternatives to existing K-factors.

The deadline for comments is September 3, 2024. The EBA and ESMA plan to publish a final report by December 2024.

The European Central Bank has opened a consultation on a draft guide on outsourcing cloud services to cloud service providers. The guide aims to clarify both the ECB's understanding of related legal requirements, including those under the EU's Digital Operational Resilience Act and the Capital Requirement Directive, and its expectations for the banks it supervises. The guide sets out detailed supervisory expectations, drawing on risks and best practices observed in the context of ongoing supervision and dedicated on-site inspections. It covers topics including: (i) the governance of cloud services; (ii) the availability and resilience of cloud services; (iii) ICT security, data confidentiality and integrity; (iv) exit strategy and termination rights; and (v) oversight monitoring and internal audits. The deadline for comments is July 15, 2024.

Following publication of the final bank prudential requirements for exposures to crypto-assets, the Basel Committee on Banking Supervision is consulting on proposed amendments to the requirements for exposures to stablecoins. The consultation closes on March 28, 2024. The Basel Committee does not state whether these proposals, if they proceed, would need to be implemented by January 1, 2025, which is the implementation date for the final standard for banks' exposures to crypto-assets.

The Basel Committee's final requirements for exposures to crypto-assets apply different prudential approaches depending on whether a crypto-asset meets certain conditions. Crypto-assets that meet all of the conditions are referred to as "Group 1 crypto-assets" and, within that group, stablecoins fall within Group 1b. The Basel Committee is proposing changes to the requirements that determine whether a bank can include a stablecoin exposure in the Group 1b category. First, the Committee is proposing changes to the composition of reserve assets of stablecoins that will enhance the asset quality criteria for reserve assets under the redemption risk test and provide additional safeguards for reserve assets. Secondly, the Committee proposes that banks should be required to perform due diligence, at the point of acquisition and regularly thereafter, that provides the bank with an adequate understanding of the stabilization mechanism and its effectiveness. Statistical tests will be required as part of the due diligence. A regulator would be capable of overriding a bank's categorization of its exposure on the basis of those test results.

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The Fourth Commencement Regulations - the Financial Services and Markets Act 2023 (Commencement No. 4 and Transitional and Saving Provisions) (Amendment) Regulations 2023 - under the Financial Services and Markets Act 2023 were made on December 14, 2023. 

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The Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023 were enacted on December 19, 2023. The Regulations amend two pieces of legislation that are set to be repealed by the Financial Services and Markets Act 2023, both of which are subject to a transitional period until that repeal takes place. HM Treasury is able to amend the legislation during the transitional period to ensure that it remains up to date.

The Regulations amend the U.K. Capital Requirements Regulation to reintroduce the inadvertently removed "discount factor" that reduces the amount of capital that small- and medium-sized firms must hold for their trading and derivative activities. The amendment took effect on December 20, 2023. This move is in line with the approach of other leading jurisdictions and aligns with the government's policy to enhance the competitiveness of the U.K. markets. It also accords with the Prudential Regulation Authority's introduction of a simpler prudential regime for Small Domestic Deposit Takers.

The Regulations also amend the U.K. Benchmarks Regulation to extend the transitional period for third-country benchmarks from the end of 2025 to the end of 2030. This change is in line with HM Treasury’s policy announced in November 2023. The extension took effect on January 1, 2024.

The Financial Services and Markets Act 2023 (Consequential Amendments) Regulations 2023 make consequential amendments to various pieces of legislation arising from the repeal by the Financial Services and Markets Act 2023 of certain retained EU financial services laws. The Regulations took effect on January 1, 2024. The Financial Services and Markets Act 2023 (Commencement No. 1) Regulations 2023 provided for the repeal of 98 statutory instruments on August 29, 2023, and further revocations from January 1, 2024, including the European Long-Term Investment Funds Regulation (and related SI and tertiary legislation) and a provision from the Capital Requirements Regulation so as to allow the Bank of England more flexibility to set internal Minimum Requirements for Own Funds and Eligible Liabilities for U.K. subsidiaries of non-U.K. global systemically important banks. These latest Regulations make consequential amendments to ensure that legislation remains consistent with the January 2024 repeals.

Consequential amendments are also made to account for the removal of the double volume cap from the U.K.'s Markets in Financial Instruments regime. The DVC limited the level of dark trading to a certain proportion of total trading in an equity. Instead, the Financial Conduct Authority must monitor trading and has new powers to direct that transparency waivers should be suspended if the ongoing use of the waiver would impact market integrity. In addition, consequential amendments are made following the Electronic Money, Payment Card Interchange Fee and Payment Services (Amendment) Regulations 2023 which amended payments-related REUL.

The Bank of England has published a Policy Statement on the Implementation of the Basel 3.1 standards in the U.K., taking account of responses to its Consultation Paper 16/22 published in November 2022. The Basel 3.1 changes introduce the as yet unimplemented Basel reforms to banks' regulatory capital frameworks, intended to restore credibility in the calculation of risk-weighted assets and improve the comparability of banks' capital ratios.

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The U.K. Prudential Regulation Authority has published a policy statement and rules for implementing the Strong and Simple Framework. The framework is intended to simplify the prudential regulation of non-systemic banks and building societies that are not internationally active, reducing costs for firms, but maintaining their resilience. Up until now, the regulatory approach has broadly applied the same requirements to all banks and building societies, irrespective of their size and activities. Certain prudential rules are simplified for smaller banks and building societies, but to a lesser extent than in some other jurisdictions.

The policy statement sets out the scope criteria, liquidity and disclosure requirements, and confirms certain timings. The PRA has decided to rename Simpler-regime Firms to Small Domestic Deposit Takers (SDDTs), and Simpler-regime consolidation entities to SDDT consolidation entities. The rules providing for eligible firms to become SDDTs, definitions and disclosure requirements take effect on January 1, 2024. The other rules covered by the policy statement will apply from July 1, 2024. The PRA will consult in Q2 2024 on amending the Pillar 2 and buffer requirements for SDDTs.

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The U.K. Prudential Regulation Authority has published a Dear CEO letter, addressed to CEOs of banks, setting out its expectations of banks (deposit-takers) regarding the risks that arise from innovations in digital money and money-like instruments available to retail customers. The letter focuses on innovations in the use of deposits (and tokenized deposits), e-money and regulated stablecoins used for payment (which are being brought into the regulatory perimeter).

The PRA sets out how banks are expected to limit contagion arising from confusion regarding the different protections available to retail holders of bank deposits, e-money and regulated stablecoins. Where a bank or its group want to issue e-money or regulated stablecoins, that activity should be carried out from an insolvency-remote entity that is separate to the bank, with different branding from the bank to ensure that any failure of the e-money or stablecoin issuer would not impact the bank and the continuity of its deposit-taking services. The PRA also expects any tokenized deposit-taking to be undertaken in a way that ensures protection under the Financial Services Compensation Scheme. An e-money or stablecoin issuer that decides to accept traditional deposits would first need to establish a separate entity to obtain permission to operate as a bank.

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The Basel Committee on Banking Supervision published a press release in early October in which it announced:

• That it would consult on disclosure frameworks for climate-related financial risks (in November 2023) and banks' cryptoasset exposures (soon).
• The publication of its report on the banking turmoil of 2023, which assesses the causes of the turmoil, the regulatory and supervisory responses, and the initial lessons learnt. The Basel Committee states that it will be undertaking some follow-up work, including prioritizing work to bolster supervisory effectiveness globally and assessing whether any aspects of the Basel Framework did not function as intended during the turmoil.
• That by mid-2024 it would publish a report on developments in the digitalisation of finance and their implications for banks and supervisors.

The Financial Services and Markets Act 2023 (Commencement No. 2 and Transitional Provisions) Regulations 2023, made on August 22, 2023, bring into force certain provisions of the Financial Services and Markets Act 2023 and create a number of transitional regimes. We discuss the FSM Act in our client note, "A Boost for U.K. Financial Services: The U.K. Financial Services and Markets Act 2023."

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The Basel Committee on Banking Supervision has published its final bank prudential requirements for exposures to crypto-assets. The Basel Committee consulted on these requirements in 2021 and 2022 and has now set the minimum standards based on the principle of "same risk, same activity, same treatment." These standards will be implemented by January 1, 2025. The Basel Committee has maintained the different prudential approaches depending on whether a crypto-asset meets certain conditions. Crypto-assets that meet all of the conditions are referred to as "Group 1 crypto-assets" and are generally tokenized crypto-assets and stablecoins. Group 2 crypto-assets are all other crypto-assets, which are deemed to present additional and higher risks than Group 1 crypto-assets. The capital requirements for Group 1 crypto-assets will be based on the risk weights for exposures under the existing Basel framework. Exposures to Group 2 crypto-assets will attract a higher capital charge.

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Following its consultation last year, the Basel Committee on Banking Supervision has launched a second consultation on bank prudential requirements for exposures to crypto-assets. The first consultation set out a preliminary proposal for the prudential treatment of crypto-assets, based on feedback to the 2019 discussion paper and other input from stakeholders. This second consultation proposes revisions to the initial proposals based on the feedback received and sets out proposed minimum standards based on the principle of "same risk, same activity, same treatment". Responses to the consultation may be submitted until September 30, 2022. The Basel Committee intends to publish final standards before the year-end; standards may be stricter than those presented in this consultation if feedback indicates any deficiencies.

The Basel Committee is maintaining its approach of adopting different prudential treatments depending on whether a crypto-asset meets certain conditions. Crypto-assets that meet all of the conditions are referred to as Group 1 crypto-assets and will be subject to the existing Basel framework. Group 2 crypto-assets are those that do not meet the conditions and are therefore deemed to present additional and higher risks than Group 1 crypto-assets. Group 2 crypto-assets will be subject to an adapted prudential regime, with netting and a 100% capital charge. Group 1 and Group 2 crypto-assets could be tokenized crypto-assets and stablecoins; Group 2 could also include unbacked crypto-assets.

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The House of Commons Treasury Committee has published a report on the Future of Financial Services Regulation setting out its view on the priorities for regulatory change in the U.K. now that the U.K. has left the EU. The report considers some of HM Treasury's proposals in the Future Regulatory Framework Review and presents its related recommendations. It also makes specific recommendations for the Financial Conduct Authority and the Prudential Regulation Authority.

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The European Banking Authority has published a report on the EU non-bank lending sector i.e., the growing number of financial intermediaries operating outside the EU financial services regulatory perimeter, including BigTech firms (e..g, Meta, Amazon and Google) and FinTech firms, which develop innovative technology for financial services.

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The European Banking Authority has published a discussion paper on whether, and how, environmental risks should be incorporated into the EU prudential frameworks for EU credit institutions and investment firms. The feedback received will help the EBA to determine (in accordance with its mandates under the EU Capital Requirements Regulation and EU Investment Firm Regulation) whether the EU should introduce specific prudential treatment for certain exposures and assets that are substantially linked to environmental and/or social objectives and impacts. Responses should be submitted by August 2, 2022.

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The U.K. Prudential Regulation Authority has opened a consultation in which it proposes introducing a definition of a "Simpler-regime Firm". This is the PRA's first step in developing a strong and simple prudential framework for non-systemic banks and building societies that are not internationally active following the 2021 discussion paper and feedback paper. Responses to the consultation may be submitted until July 22, 2022. The PRA wants to create a graduated framework for U.K. prudential supervision with simpler rules applying to the smallest firms. The applicable rules would increase in sophistication as the size and complexity of firms increased.

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The European Commission has launched a targeted consultation on a possible digital euro. The EU is considering introducing a digital euro for retail payments, which would be available alongside cash. A decision has not yet been made. The European Central Bank, responsible for the design and implementation of the digital euro, launched a project in July 2021 to get ready for the potential issuance of a digital euro. The introduction of a digital euro would require an EU regulation based on a proposal by the European Commission and agreed through the co-legislative process. Legislative changes would also be needed for existing legislation (e.g., under the revised Payment Services Directive). Central banks from non-euro area Member States also envisage issuing digital currencies.

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The European Banking Authority has published final draft Implementing Technical Standards on Pillar 3 prudential disclosures of environmental, social and governance risks under the EU Capital Requirements Regulation. The ITS specify the type and format of information to be published in accordance with the new CRR requirements on disclosure of prudential information on ESG risks.

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The U.K. Prudential Regulation Authority has published a feedback statement to the discussion paper published earlier this year in which it proposed introducing a "strong and simple" prudential framework for non-systemic banks and building societies that are not internationally active. The discussion paper concerned the possibility of introducing a graduated framework for U.K. prudential supervision with simple rules applying to the smallest firms. The applicable rules would increase in sophistication as the size and complexity of firms increased. The PRA discussed the possible approaches to identifying firms that would be in scope of the first threshold by looking at, for example, their activities, cross-border business and risk exposures. The introduction of such a framework would represent a major policy change for the U.K.

The feedback statement summarizes the responses to the discussion paper and sets out broad themes emerging. Overall, respondents were supportive of the idea to introduce a strong and simple framework, although concerns were expressed about the number of layers that the framework would involve. The PRA would welcome any comments on the feedback statement. Further consultations on the potential framework will follow in 2022 and/or 2023.

Following its call for evidence earlier this year, HM Treasury has published its report on the review of the U.K. Securitization Regulation. HM Treasury was required to conduct a review of the functioning of the Regulation and report to Parliament on its findings by January 2022. The Securitization Regulation provides the criteria for identifying which securitizations will be designated as "simple, transparent and standardized" (STS) securitizations, a system to monitor the application of those criteria as well as common requirements on risk retention, due diligence and disclosure. Related provisions under the Capital Requirements Regulation set out the regulatory treatment of exposures to securitizations that are deemed to be STS securitizations.

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The European Commission has published three legislative proposals to amend the EU Capital Requirements Regulation and the EU Capital Requirements Directive, referred to as the Banking Package 2021. The proposals are subject to consultation, responses to which may be submitted until January 14, 2022.

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The European Supervisory Authorities (the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority) have published a new final report and draft Regulatory Technical Standards on disclosures to be made under the EU Sustainable Finance Disclosure Regulation. The EU SFDR was published in December 2019 and the majority of its provisions have applied since March 10, 2021.

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