The following posts provide a snapshot of selected UK, EU and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
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UK Regulator Finalizes Payment Optionality Rules
July 26, 2024
The Financial Conduct Authority has published a policy statement and final rules that introduce payment optionality for research and trading commissions. The unbundling of research costs from execution commissions has been a controversial topic since the requirements were introduced in 2018 by the second Markets in Financial Instruments Directive. It is widely accepted that these measures have led to a substantial decline in research coverage, in particular for small and medium sized companies. Both the U.K. and the EU had tried a quick fix for the issue by introducing an exemption for SME research, however, that did not improve the research market. The unbundling of research and trading commissions also caused major challenges for U.S. broker-dealers who have had to either register under the Advisers Act or take complex operational steps in order to continue providing research to European investment companies. Following the Investment Research Review, the FCA consulted earlier this year on its proposals for introducing payment optionality and, taking account of feedback, has adjusted the details of some of the guardrails that will apply where firms opt to apply joint payments.
Read more.Topic : MiFID II -
Final Technical Standards on Subcontracting ICT Services Under the EU Digital Operational Resilience Act
July 26, 2024
The European Supervisory Authorities have published a final report on draft regulatory technical standards to specify the elements that a financial entity needs to determine and assess when subcontracting ICT services supporting critical or important functions as mandated by Article 30(5) of the Digital Operational Resilience Act. The draft RTS set out requirements when the use of subcontracted ICT services supporting critical or important functions or material parts thereof by ICT third-party service providers is permitted by financial entities and set out the conditions applying to such subcontracting. In particular, the draft RTS require financial entities to assess the risks associated with subcontracting during the precontractual phase, which includes the due diligence process.
The draft RTS also set out requirements regarding the implementation, monitoring, and management of contractual arrangements regarding the subcontracting conditions for the use of ICT services supporting critical or important functions or material parts thereof ensuring that financial entities are able to monitor the entire ICT subcontracting chain of ICT services supporting critical or important functions. The ESAs will now submit the draft RTS to the European Commission for adoption.Topic : Operational Resilience -
UK Prudential Regulation Authority Policy Statement on its Approach to Rule Permissions and Waivers
July 25, 2024
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. -
European Commission Adopts Delegated Regulation Amending EU Capital Requirements Regulation Postponing Application Date of Own Funds Requirement for Market Risk
July 24, 2024
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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European Securities and Markets Authority Opinion on the Functioning of the Sustainable Finance Framework
July 24, 2024
The European Securities and Markets Authority has published an Opinion on the sustainable finance regulatory framework, setting out possible long-term improvements. ESMA acknowledges that while the EU sustainable finance framework is already well developed and includes safeguards against greenwashing, it does believe that, in the longer-term, the framework could further evolve to facilitate investors' access to sustainable investments and support the effective functioning of the sustainable investment value chain. The opinion builds on ESMA's progress report on greenwashing and the joint opinion of the European Supervisory Authorities on the review of the EU Sustainable Finance Disclosure Regulation. The opinion also represents the last component of ESMA's reply to the Commission's request for input related to greenwashing, next to the final report on greenwashing.
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Financial Conduct Authority Policy Statement on Rules for Access to Cash
July 24, 2024
The Financial Conduct Authority has published a policy statement on the final rules and guidance for a new regulatory regime to support access to cash for the consumers and businesses that rely on it, along with a research note setting out empirical analysis of characteristics associated with cash reliance in the U.K. The policy statement also summarizes the responses the FCA received to its December consultation paper (CP23/29). Overall, most respondents supported the need for a new regulatory regime to protect access to cash. However, on certain issues, there were diverging views between consumer groups and different industry respondents, and the FCA received some challenge on specific rules.
In response to the feedback, the FCA has made changes to the rules it consulted on, including extending the period for banks and building societies to carry out cash access assessments and giving local communities more time to make their case. Firms will also be able to review the provision of identified cash services after two years. In addition, the FCA is providing an eight-week implementation period between publishing the policy statement and the new regime coming into force on September 18, 2024. This is designed to give designated entities time to familiarize themselves with the rules and establish the necessary processes to comply with them.
Read more.Topic : Consumer Protection -
EU Statement on Transition of OTC-Transactions to New Post-Trade Transparency Regime
July 22, 2024
The European Securities and Markets Authority has published a public statement on the transition to the new regime for post-trade transparency of OTC-transactions in light of the revised Markets in Financial Instruments Regulation. According to Article 21a of MiFIR II, Designated Publishing Entities, when they are party to a transaction, are responsible for making the transaction public through an approved publication arrangement. MiFIR II requires ESMA to establish by September 29, 2024, a public register of all Designated Publishing Entities, specifying their identity and the classes of financial instruments for which they act as Designated Publishing Entities. MiFIR II does not provide for a transitional provision for the application of the Designated Publishing Entities regime for post-trade transparency.
Considering the need to ensure an orderly transition to the Designated Publishing Entities regime, ESMA and national competent authorities have agreed on a two-step approach: (i) ESMA starts publishing the Designated Publishing Entities register on September 29, 2024; and (ii) the new Designated Publishing Entities regime for post-trade transparency becomes fully operational on February 3, 2025. Therefore, ESMA expects that as of February 3, 2025, registered Designated Publishing Entities, which are party to a transaction, will make the transaction public through an APA. At the same time, ESMA expects that the current approach relying on systematic internalisers to make transactions public through an APA should stop applying as of this date.
Read more.Topic : MiFID II -
Financial Stability Board Progress Report on Enhancing Resilience of Non-Bank Financial Intermediation
July 22, 2024
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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UK Regulator Provides Guidance on Operational Impact of Overseas Funds Applying for Recognition
July 19, 2024
The Financial Conduct Authority has updated its webpage on the overseas funds regime providing guidance on the operational impact for operators of funds in the temporary marketing permissions regime. The FCA explains that for operators of funds in the TMPR that make an application to be recognized in the U.K. under the OFR, it is important for the fund population data at the beginning of the landing slot window to be accurate and stable. The FCA requests operators not to make any changes to the fund population data during the allotted landing slot and to plan accordingly.
Read more.Topic : Funds -
European Commission Adopts Delegated Regulation Under ELTIF Regulation
July 19, 2024
The European Commission has adopted a Delegated Regulation supplementing the European Long-Term Investment Funds Regulation with regard to regulatory technical standards specifying when derivatives will be used solely for hedging the risks inherent to other investments of the ELTIF, the requirements for an ELTIF's redemption policy and liquidity management tools, the circumstances for the matching of transfer requests of units or shares of the ELTIF, certain criteria for the disposal of ELTIF assets, and certain elements of the costs disclosure.
Among other things, the adopted legislation sets out the:- circumstances in which the use of financial derivative instruments for hedging purposes is considered as solely serving the purpose of hedging the risks inherent to the investments of the ELTIF;
- circumstances in which the life of an ELTIF is to be considered compatible with the life cycles of each of its individual assets;
- criteria to be used by the ELTIF managers to determine the minimum holding period referred to in Article 18(2), first subparagraph, point (a), of the ELTIF Regulation;
- minimum content requirements to the full or partial matching of transfer requests of units or shares of the ELTIF by existing and new investors where an ELTIF provides for that possibility under Article 19(2a) of the ELTIF Regulation; and
- criteria for the assessment of the market for potential buyers.
Topic : Funds -
Bank Resolution (Recapitalisation) Bill 2024-25
July 18, 2024
Following the King' Speech, the Bank Resolution (Recapitalisation) Bill 2025-25 has been introduced to Parliament. The Bill intends to avoid additional upfront financial costs for the financial services sector, by relying on the existing Financial Services Compensation Scheme funding system where industry is only levied to pay for the costs of failure after the event. Specifically, it: (i) expands the statutory functions of the FSCS, requiring it to provide funds to the Bank of England upon request which could be used to meet certain costs arising from the use of the resolution regime to manage the failure of a bank, building society or PRA-authorized investment firm; (ii) allows for the FSCS to use its levy-raising powers to recover any funds provided to the BoE after a failure event through imposing levies on the banking sector; (iii) extends the BoE's ability, through explicit provision, to require the issuance of shares in connection with a resolution, to facilitate the BoE's use of the funds provided by the FSCS to meet a failing bank's recapitalization costs; and (iv) makes a number of minor and consequential amendments to legislation to support the measures outlined above and ensure FSCS funds can be used effectively in a resolution.Topic : Recovery & Resolution -
Payment Systems Regulator Proposes Guidance for Supporting Identification of APP Scams and Civil Disputes
July 18, 2024
The Payment Systems Regulator has opened a consultation on draft guidance to support payment service providers in their assessment of whether an authorized push payment scam claim raised by a consumer is not reimbursable under the reimbursement requirement because it is a private civil dispute. Private civil disputes are not reimbursable under the mandatory reimbursement requirement. They most often involve situations where the consumer has not received good or services, or they are defective in some way, and there is no indication of an intent to defraud on the part of the alleged scammer. The APP reimbursement requirement, which applies from October 7, 2024, obliges PSPs to reimburse consumers when a payment is executed over the Faster Payments Scheme and the payment was executed following fraud or dishonesty.
The PSR's draft guidance sets out a proposed non-exhaustive set of factors a PSP should consider in its assessment, including: (i) the communication and relationship between the consumer and the alleged scammer; (ii) the trading status of the alleged scammer; (iii) the alleged scammer's capability to deliver the goods or services; and (iv) the extent to which the alleged scammer deceived the consumer as to the intended purpose of the payment. The guidance will apply to claims for payments made via Faster Payments and CHAPS.
The PSR expects sending PSPs to take a proportionate approach to validating claims based on the relative complexity and value of the fraud. PSPs are not expected to undertake complex or resource intensive investigations for simple APP fraud claims. Responses to the consultation may be submitted until August 8, 2024.Topic : Payment Services -
International Stocktake of Regulatory and Supervisory Initiatives on Nature-Related Financial Risks
July 18, 2024
The Financial Stability Board has published a stocktake of its member financial authorities' initiatives related to the identification and assessment of nature-related financial risks. The stocktake, which will be delivered to the July 25-26 meeting of G20 Finance Ministers and Central Bank Governors, describes both supervisory and regulatory initiatives, and also central banks' and supervisors' analytical work on whether and how nature degradation, including loss of biodiversity, is a financial risk.
The findings include:- Financial authorities are at different stages of evaluating the relevance of biodiversity loss and other nature-related risks as a financial risk, with approaches varying, in part due to differing mandates.
- Financial authorities categorize nature-related risks into the same two types of risks typically used in climate-related financial risk analysis: physical and transition risks. However, analytical work faces major data and modelling challenges. Authorities' work to date indicates that financial institutions face large exposures to physical risk via their investments and financing activities, but that analytical work needs to be further developed to better translate estimates of financial exposures into measures of risk. Authorities recognize the strong connections between climate risk and nature, and that more needs to be done to develop a more holistic approach that considers interdependencies between climate- and nature-related financial risks.
Read more.Topic : Climate & Sustainable Finance -
UK Financial Conduct Authority Consults on Amendments to Guidance on Treatment of Domestic PEPs
July 18, 2024
The Financial Conduct Authority has published the findings of its multi-firm review into the treatment of Politically Exposed Persons and launched a consultation on proposed amendments to its related guidance. The review was required under the Financial Services and Markets Act 2023, following concerns from U.K. Parliamentarians that firms were not effectively applying the FCA's guidance. The FCA found that most firms in its review did not subject PEPs to excessive or disproportionate checks and none would deny them an account based on their status. However the FCA has identified areas for improvement and has called on firms to, among other things: (i) ensure their definition of a PEP, family member or close associate is tightened and in line with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (known as the MLRs) and the FCA's guidance; (ii) review the status of PEPs and their associates promptly once they leave public office; (iii) communicate to PEPs effectively and in line with the Consumer Duty, explaining the reasons for their actions where possible; (iv) effectively consider the actual level of risk posed by the customer, and ensure that information requests are proportionate to those risks; and (v) improve the training offered to staff who deal with PEPs. The FCA has provided detailed feedback to the firms that were reviewed and in a small number of cases, has instigated an independent and more detailed review of firms' practices.
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UK Financial Conduct Authority Policy Statement on Implementing the Overseas Funds Regime
July 17, 2024
The Financial Conduct Authority has published a policy statement on its implementation of the Overseas Funds Regime. The OFR will be a new gateway through which certain collective investment schemes, domiciled in jurisdictions deemed to be equivalent by the Government, will be able to market to U.K. retail investors upon recognition by the FCA. The final policy sets out (i) the information that OFR fund operators will need to submit as part of the recognition process; (ii) ongoing change notification requirements for OFR funds; (iii) disclosure requirements for OFR funds to inform investors about compensation and dispute resolution schemes; and (iv) procedures for suspending and revoking recognition of an OFR fund or censuring its operator or depositary.
Following consultation feedback to CP23/26, the FCA has made changes to the final policy, including: (a) removing the proposed 30-day period between notifying the FCA of changes to OFR funds and when those changes could take effect in the U.K.; (b) providing further explanation and clarification as to which categories of changes should be notified; (c) including guidance relating to additional information in disclosures for fund prospectus' and point of sale information; and (d) clarified which U.K. fund prospectus requirements apply to OFR funds. The final rules will come into force on July 31, 2024. The OFR gateway is expected to open later this year. The FCA advises operators with funds currently in the Temporary Permissions Regime to check their landing slot on the FCA website for details of when they can apply for OFR recognition.Topic : Funds -
Basel Committee Finalizes Standards for Banks' Crypto-Asset Exposures
July 17, 2024
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. -
King's Speech 2024
July 17, 2024
The King's speech to Parliament sets out the new government's legislative program. The government has published background briefing notes relating to the King's Speech, providing a summary of the legislation to be brought forward. The Bills announced, in relation to financial services, include:- A Bank Resolution (Recapitalisation) Bill, which would aim to enhance the U.K.'s resolution regime, providing the Bank of England with a more flexible toolkit to respond to the failure of small banks. The Bill would expand the statutory function of the Financial Services Compensation Scheme to provide funds to the BoE upon request, to be used where necessary to support the resolution of a failing bank. The FSCS would then recover the funds provided by charging levies on the banking sector, similar to the current arrangements for funding depositor pay-outs in insolvency. Credit unions will not be in scope of this levy. The BoE will also be provided with the power to require a bank in resolution to issue new shares, facilitating the use of FSCS funds to meet a failing bank's recapitalization costs.
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European Supervisory Authorities Finalize Second Set of Technical Standards and Guidelines Under Digital Operational Resilience Act
July 17, 2024
The European Supervisory Authorities have published the final reports for the second collection of policy materials under the Digital Operational Resilience Act. These are the:- ​Final report on draft regulatory technical standards and implementing technical standards on the content, format, templates and timelines for reporting major ICT-related incidents and significant cyber threats under Article 20 DORA.
- Final report on draft RTS on the harmonization of conditions enabling the conduct of the oversight activities under Article 41(1)(c) DORA.
- Final report on draft RTS on the harmonization of conditions enabling the conduct of the oversight activities under Article 41(1)(a), (b) and (d) of DORA.
- Final report on draft RTS specifying elements related to threat-led penetration tests under Article 26(11) DORA.
- Final report on joint guidelines on the estimation of aggregated annual costs and losses caused by major ICT-related incidents under Article 11(11) DORA.
Topic : Operational Resilience -
EU Consultation on Firms' Order Execution Policies Under MiFID Review
July 16, 2024
The European Securities and Markets Authority has opened a consultation on proposed draft regulatory technical standards specifying the criteria for establishing and assessing the effectiveness of investment firms' order execution policies, accounting for whether the orders are executed on behalf of retail or professional clients. These proposals arise out of the MiFID Review, and the resulting changes to the Markets in Financial Instruments Regulation and Directive, which were published in March. We discuss these in our bulletin, "MiFID II: the EU's latest adaptations." The MiFID II best execution requirements oblige investment firms to obtain the best possible result for their clients when executing client orders, and require execution venues and investment firms to make data relating to the quality of execution of transactions publicly available.
Read more.Topic : MiFID II -
Financial Stability Board Consults on Recommendations to Enhance Cross-Border Payments
July 16, 2024
The Financial Stability Board has launched two consultations: the first on proposed recommendations to promote greater alignment in data frameworks related to cross-border payments, and the second on consistency in the regulation and supervision of bank and non-bank payment service providers. First, in relation to data frameworks, the FSB's recommendations aim to address identified frictions that pose significant challenges to improving the cost, speed, transparency, and accessibility of cross-border payments, while maintaining their safety and security and upholding the objective of protecting the privacy of individuals. These frictions include the misalignment of data in payments that interferes with the smooth processing of cross-border payments, restrictions on data sharing that impede the ability to safely process cross-border payments, and increased costs due to data storage and handling requirements. To take forward these recommendations in a coordinated manner and to identify emerging issues that should be addressed, the FSB proposes the establishment of a forum comprised of public-sector stakeholders covering payments, AML/CFT, sanctions, and data privacy and protection.
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UK Regulators Issue Call for Information on 'Big Tech' and Digital Wallets
July 15, 201
The Payment Systems Regulator and the Financial Conduct Authority have launched a joint call for information on "big tech" and digital wallets. With the increasing use by consumers of digital wallets provided by big tech firms, the regulators are concerned about the potential risks arising from big tech business models, but are aware also of the opportunities for enhanced payment experiences through the use of digital wallets. The regulators are looking to gather focused information and evidence on issues including:- the range of benefits that digital wallets bring for service users;
- whether there are any features in the supply of digital wallets that mean payments don't work as well as they could for consumers and/or businesses;
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UK Policy Statement on APP Scams Reimbursement Compliance and Monitoring
July 12, 2024
The Payment Systems Regulator has published its policy statement on compliance and monitoring of the authorized push payment scam reimbursement requirement. As the operator of Faster Payments, Pay.UK is responsible for monitoring all directed payment service providers' compliance with the APP reimbursement rules. Where necessary, and where it has the powers to do so, it will take action to manage compliance.
The PSR's policy statement confirms the requirement for directed PSPs to register with Pay.UK by August 20, 2024. This is one way that PSPs will identify themselves as in-scope of the policy to Pay.UK and will help facilitate a shared FPS Reimbursement Directory. This directory will enable PSPs to find one another's contact details so that they can meet the requirements in the FPS reimbursement rules and related policy, and communicate in respect of FPS APP scam claims received. The PSR sets out the data under reporting standard A that sending PSPs in-scope of the policy are required to retain and report to Pay.UK monthly in respect of transactions they have sent, to enable it to effectively monitor compliance with the FPS reimbursement rules. In addition, the PSR states the reasonable limits it is placing on Pay.UK in respect of the use and disclosure of the compliance data it receives. Finally, the PSR set out its approach to requiring PSPs to inform consumers of their rights under the policy.
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Financial Markets Standards Board Consults on Transparency Draft Standard for Sharing of Standard Settlement Instructions
July 12, 2024
The Financial Markets Standards Board has commenced consulting on a transparency draft of a standard for sharing of standards settlement instructions. The standards settlement instructions specify the "where" of delivery/settlement after the execution of any financial transaction. The most significant cause of fails at the settlement stage, after lack of inventory, is incorrect or missing standards settlement instructions. The FSMB is proposing the standard to mitigate increased inefficiency risks as jurisdictions move to T+1 settlement. The standard aims to increase the adoption of electronic solutions that allow for standardization and pre-authentication of settlement instructions, and which facilitate "straight-through-processing" to improve efficiency of standards settlement instructions management by recipient counterparties and reduce settlement fails through incorrect standards settlement instructions. Where such electronic solutions are not legally or operationally feasible, the standard incorporates templates for manual sharing of standards settlement instructions which incorporate an industry-standard taxonomy (based on ISO 20022), which should minimize ambiguity. The proposal is structured in two main parts: (i) the standard, which sets out core principles for the channels, processes, and governance around sharing of standards settlement instructions; and (ii) standardized templates, based on industry-standard taxonomy, for use in residual cases where standards settlement instructions are sent manually. The deadline for comments is October 18, 2024.Topic : MiFID II -
EU Artificial Intelligence Act Published
July 12, 2024
Regulation (EU) 2024/1689 laying down harmonized rules on AI (known as the AI Act) has been published in the Official Journal of the European Union. It aims to protect fundamental rights, democracy, the rule of law, and environmental sustainability from high-risk AI, while boosting innovation and establishing Europe as a leader in the field. The AI Act defines four main players in the AI sector—deployers, providers, importers, and distributors—and establishes obligations for AI systems based on their potential risks and level of impact. The AI Act will enter force on August 1, 2024. Most provisions will apply from August 2, 2026, but some rules will apply earlier: (i) prohibited AI systems will be banned from February 2, 2025; and (ii) penalties and the rules on general-purpose AI models will apply from August 2, 2025.Topic : Artificial Intelliegence -
European Central Bank Report on Bank Digitalization Assessment Criteria
July 11, 2024
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. -
Financial Conduct Authority Publishes Final UK Listing Rules
July 11, 2024
The Financial Conduct Authority has published a policy statement on the primary markets effectiveness review. The statement summarizes the main feedback from the responses to CP23/31 on the proposed reforms and sets out the final U.K. listing rules. The final rules are broadly as consulted on in CP23/31, with certain amendments that are described in the policy statement. They aim to encourage prospective issuers to choose a U.K. listing by streamlining the rules and removing the 'premium' and 'standard' listing segments in favour of a new commercial companies' category for equity shares. The new rules also remove the need for votes on significant or related party transactions and offer flexibility around enhanced voting rights. The changes are designed to remove frictions to growth once companies are listed, while continuing to place an emphasis on disclosure so that investors can make properly informed investment decisions. The new rules will come into force on July 29, 2024, when the current Listing Rules sourcebook will cease to have effect and will be replaced by the new Listing Rules sourcebook. The rules will also appear in the FCA Handbook on that date.
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European Securities and Markets Authority Consults on MiFID II Review Changes
July 10, 2024
The European Securities and Markets Authority has published a consultation paper on equity transparency, the volume cap, circuit breakers, Systematic Internalisers, the equity consolidated tape provider, and flags for non-equity transparency. The consultation aims to increase transparency and system resilience in financial markets, reducing reporting burden and promoting convergence in the supervisory approach. This package includes:- amendments to rules on the liquidity assessment for equity instruments, on equity transparency and on the volume cap;
- a draft of the new ITS on Systematic Internalisers;
- a section on the equity CTP in relation to the input/output data, to ensure full alignment between the transparency requirements and the CTP specifications;
- a section on flags to be used in the post-trade transparency reports for non-equity instruments which was missing in the previous consultation; and
- new rules specifying organizational requirements of trading venues, adding new provisions on circuit breakers and with targeted amendments to adapt to the Digital Operational Resilience Act framework.
Topic : MiFID II -
European Securities and Markets Authority Issues Public Statement on Use of Collateral by Non-Financial Counterparties Acting as Clearing Members
July 10, 2024
The European Securities and Markets Authority has published a public statement on deprioritizing supervisory actions linked to the eligibility of uncollateralised public guarantees, public bank guarantees, and commercial bank guarantees for Non-Financial Counterparties acting as clearing members, pending the entry into force of the latest revisions to the European Market Infrastructure Regulation, known as EMIR 3. We discuss EMIR 3, which is anticipated to enter into force in Q4 2024, in our note "EMIR 3 and Clearing in the EU".
Read more.Topic : Derivatives -
Basel Committee Consults on Principles for the Sound Management of Third-Party Risk
July 9, 2024
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. -
EU Consultation on Rules to Recalibrate and Further Clarify the Framework Under CSDR Refit
July 9, 2024
The European Securities and Markets Authority has published three consultation papers on different aspects of the Central Securities Depositories Regulation Refit. The proposed rules relate to the information to be provided by EU the Central Securities Depositories to their national competent authorities for the review and evaluation process, the information to be notified to ESMA by third-country CSDs, and the scope of settlement discipline.
The draft rules are set out in three separate consultation papers, covering:- The review and evaluation process of EU CSDs, suggesting a harmonization of the information to be shared by CSDs on their cross-border activities and the risks to be considered by the relevant authorities for the purpose of feeding the overall assessment of the competent authorities.
- Third-country CSDs, where ESMA is proposing to streamline the information to be notified, aiming for an accurate understanding of the provision of notary, central maintenance and settlement services in the Union, limiting the reporting burden.
- The scope of settlement discipline, covering ESMA's proposals on the underlying cause of settlement fails that are considered as not attributable to the participants in the transaction, and the circumstances in which operations are not considered as trading.
The deadline for comments is September 9, 2024. Following the consultation, the responses will be assessed to finalize the proposals, before submission to the European Commission in Q1 2025. ESMA states that other consultations about other aspects of CSDR will follow in the coming months.Topic : Financial Market Infrastructure -
European Banking Authority Consults on Draft Technical Standards on Credit Valuation Adjustment Risk
July 8, 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. -
European Securities and Markets Authority Consults on Liquidity Management Tools for Funds
July 8, 2024
The European Securities and Markets Authority has published for consultation draft regulatory technical standards and guidelines relating to liquidity management tools under the Alternative Investment Fund Managers Directive and the Undertakings for the Collective Investment in Transferable Securities Directive. The draft RTS will apply to Alternative Investment Fund Managers managing open-ended the Alternative Investment Funds and UCITS. In the draft RTS ESMA defines the constituting elements of each LMT, such as calculation methodologies and activation mechanisms.
ESMA is also consulting on guidelines on LMTs of UCITS and open-ended AIFs, which provide guidance on how managers should select and calibrate LMTs in the light of their investment strategy, their liquidity profile and the redemption policy of the fund.
The draft RTS and guidelines are designed to promote convergent application of the Directives for both UCITS and open-ended AIFs and ensure that EU fund managers are better equipped to manage the liquidity of their funds, in preparation for market stress situations. They also intend to clarify the functioning of specific LMTs, such as the use of side pockets, a practice that currently varies significantly across the EU. The deadline for comments is October 8, 2024. ESMA aims to deliver the final RTS and guidelines by April 16, 2025.Topic : Funds -
EU Proposals on Supervisory Expectations for Management Bodies of Firms Directly Supervised by ESMA
July 8, 2024
The European Securities and Markets Authority has published a consultation paper on supervisory expectations for the management bodies of firms directly supervised by ESMA, namely credit rating agencies, benchmark administrators of EU critical benchmarks and third-country recognized benchmarks, third-country Tier 2 (i.e., systemically important) CCPs, data reporting service providers, securitisation repositories and trade repositories. The consultation paper sets out ESMA's supervisory expectations in relation to good practice in governance arrangements, such as on the role, operation, and effectiveness of the management bodies of these entities. The expectations set out in this consultation paper are intended to provide all of ESMA's supervised entities with the same reference point for ESMA's expectations regarding governance arrangements. ESMA believes that the publication of these expectations will ensure that all ESMA supervised entities are equally aware of ESMA's expectations in this area. It will also increase transparency for any potential applicant or future supervised entities as to what ESMA expects in this area.
The deadline for comments is October 18, 2024. ESMA will consider the feedback it receives to the consultation with a view to finalising its supervisory expectations in Q1 2025.Topic : Financial Market Infrastructure -
Corporate Sustainability Due Diligence Directive Published
July 5, 2024
The Corporate Sustainability Due Diligence Directive (Directive (EU) 2024/1760) has been published in the Official Journal of the European Union. The Directive aims to ensure that companies operating in the EU internal market contribute to sustainable development and the sustainability transition by identifying, preventing and mitigating actual or potential adverse human rights and environmental impacts connected with companies' operations, the operations of their subsidiaries and of their business partners in their chain of activities. CSDDD imposes obligations upon large EU and non-EU companies which meet certain conditions on turnover and employee thresholds.
The CSDDD will enter into force on July 25, 2024, and member states have until July 26, 2026 to transpose it into national law. Application will then be on a staggered basis, starting from July 26, 2027, for the largest companies. -
UK Financial Conduct Authority Sets Overseas Funds Regime Landing Slots for Funds
July 5, 2024
The Financial Conduct Authority has published information regarding landing slots under the incoming overseas funds regime for firms currently operating under the temporary marketing permissions regime. The landing slots specify the dates when overseas funds operating under the TMPR can apply for 'recognised scheme' status under the OFR. The OFR is a new gateway introduced as part of the U.K.'s post-Brexit reforms, granting access to the U.K. market for certain categories of investment funds.
Read more.Topic : Funds -
EU Final Report on Guidelines on Enforcement of Sustainability Information
July 5, 2024
The European Securities and Markets Authority has published a final report on the guidelines on enforcement of sustainability information and a public statement on the first application of the European Sustainability Reporting Standards. The documents aim to support the consistent application and supervision of sustainability reporting requirements introduced under the EU Corporate Sustainability Reporting Directive.
The Guidelines were mandated under the EU Transparency Directive as amended by CSRD and are designed to build convergence on supervisory practices on sustainability reporting. ESMA has aimed to align them with the existing Guidelines on Enforcement of Financial Information, to ensure that enforcement of sustainability information is consistent with enforcement of financial information and is held to be on a par with such information.
The Standards specify the information that firms subject to the EU Accounting Directive, as amended by CSRD, should report in accordance with sustainability reporting requirements. Through the public statement on the first-time application of the Standards, ESMA intends to support large issuers with the implementation of these new reporting requirements. ESMA will continue to monitor the sustainability reporting practices in 2025 as well as the application of the Guidelines. ESMA will translate the Guidelines into all EU languages and make these translations available on its website. In addition, ESMA will release in Q4 recommendations on the sustainability statements of listed companies in its public statement on the 2024 European Common Enforcement Priorities.Topic : Climate & Sustainable Finance -
European Commission Report on EU Whistleblowing Directive
July 3, 2024
The European Commission has published a report on the implementation and application of the EU Whistleblowing Directive. The Directive aims to guarantee a high level of balanced and effective protection for persons who report information on breaches of EU law in key policy areas where such breaches may cause harm to the public interest.
Read more. -
European Systemic Risk Board Assessment of Implementation of its Recommendation on Guidance for Setting Countercyclical Buffer Rates
July 3, 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. -
Network for Greening the Financial System Reports on Nature-Related Risks
July 2, 2024
The Network for Greening the Financial System has published two complementary reports on nature-related risks. The first report is the final version of the Conceptual Framework for nature-related financial risks, which aims to guide policies and action by central banks and financial supervisors. The aim of the framework is to create a common science-based understanding of, and language for, nature-related financial risks among NGFS members that provides greater clarity on the meaning of key concepts and the way these interrelate. The report includes two illustrative cases, which demonstrate how this framework can be applied in practice. The NGFS encourages central banks and supervisors to identify, assess and, where relevant, act on material economic and financial risks stemming from dependencies and impacts on nature and their nexus with climate change. The second report outlines the key emerging trends related to nature-related litigation, including cases concerning biodiversity loss, deforestation, ocean degradation, carbon sinks and plastic pollution. This report argues that nature-related legal actions will likely evolve and grow, taking inspiration from successful climate-related litigation cases, and benefiting from an increasing awareness of the nature crisis. The NGFS considers that, in the coming years, two key categories of nature-related litigation might be expected to develop in particular: (i) an increase in the number of rights-based nature cases against states and public entities; and (ii) an increase in the number of cases based on corporate responsibility. The NGFS encourages central banks, supervisors and financial institutions to closely monitor developments in nature-related litigation.Topic : Climate & Sustainable Finance -
European Commission Adopts Implementing Regulation Amending Implementing Technical Standards on Mapping Credit Assessments of External Credit Assessment Institutions under the EU Capital Requirements Regulation
July 1, 2024
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. -
UK Financial Conduct Authority Update on Notification of Use of Investment Labels Under Sustainability Disclosure Requirements Regime
July 1, 2024
The U.K. Financial Conduct Authority has provided an update on how firms should notify the FCA when they are using an investment label under the sustainability disclosure requirements and investment labelling regime. Firms must notify the FCA when using an investment label through the form available on Connect. The labels can be displayed from July 31, 2024 and firms must meet the naming and market EU rules from December 2, 2024. The FCA notes that it does not approve labels, but firms are still required to notify it when they use, revise or stop using a label. The FCA provides the specific steps for notification in relation to four scenarios: (i) an authorized fund that the fund manager considers meets the criteria for a label without the need for changes to the pre-contractual disclosures; (ii) an authorized fund that the fund manager considers requires changes to the pre-contractual disclosures to meet the label criteria; (iii) a new fund that the fund manager considers will meet the label criteria; and (iv) an in-scope unauthorized alternative investment fund looking to use an investment label.Topic : Climate & Sustainable Finance