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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European Banking Authority reports on implementation of first phase of banking book heatmap
6 February 2025
The European Banking Authority (EBA) has published a report on the implementation of the first phase of the short/medium term objectives in their interest rate risk in the banking book (IRRBB) heatmap. In the report, the EBA sets out a number of observations and recommendations, including in relation to:- the materiality of non-maturity (NMD) behavioural assumptions and the complexity of their modelling. This includes a non-restrictive list of risk factors impacting NMD repricing behaviour and a toolkit to support supervisors in their analysis of NMD modelling.
- the complementary dimensions to the supervisory outlier test (SOT) on the Net Interest Income (NII) metric. The report discusses the additional dimensions that supervisors could consider for institutions defined as outliers.
- the expected approach to model and project commercial margins of NMD, which are subject to behavioural optionality, in the SOT on NII.
- hedging strategies.
Topic : Prudential Regulation -
Basel Committee on Banking Supervision consults on amendments to principles for the management of credit risk
5 February 2025
The Basel Committee on Banking Supervision (Basel Committee) published a consultative document on updating the principles for the management of credit risk. The principles, first issued in October 2000, provide guidelines for banking supervisory authorities to evaluate banks' credit risk management processes in four key areas: (i) establishing a suitable credit risk environment; (ii) operating under a sound credit-granting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (iv) ensuring adequate controls over credit risk.
The Basel Committee mandated a review of the principles in 2023, to determine if they remain fit for purpose given the developments in global financial markets related credit risks and trends and changes to the supervisory and regulatory landscape over the past 25 years. The review confirmed the ongoing relevance of the credit risk principles but identified certain parts that either have become obsolete, superseded and redundant or are not fully aligned with the current Basel Framework and the Basel Committee's guidance. Therefore, the Basel Committee proposes to make a limited set of technical amendments to align the principles with the current Basel Framework and the latest guidelines. A comparison against the 2000 version has been published alongside the consultation. The consultation is open to comments until 21 March 2025.Topic : Prudential Regulation -
EU joint report on use of countercyclical capital buffer
31 January 2025
The European Central Bank and the European Systemic Risk Board have published a joint report on the use of the positive neutral countercyclical capital buffer (PN CCyB) in the EEA. This approach has gained traction among EEA countries in recent years as a way of increasing resilience over the financial cycle and enhancing financial stability.
The report addresses areas of commonality in the approaches adopted by EEA countries, including:- broad agreement on what a positive neutral approach means and what it is useful for.
- in most jurisdictions, there is no expectation that the PN CCyB will yield higher CCyB requirements at the peak of the cycle when cyclical systemic risks become elevated.
- there is broad consistency in the conditions that would guide authorities' decisions to release the CCyB.
- in most jurisdictions, the introduction of a PN CCyB does not need to be offset by a reduction in other capital requirements.
- clear and transparent communication is a key element in the introduction and use of a PN CCyB.
Topic : Prudential Regulation -
European Commission adopts Delegated Regulation amending Regulatory Technical Standards on the supervisory delta of call and put options mapped to the commodity risk category
January 28, 2025
The European Commission adopted a Delegated Regulation amending Regulatory Technical Standards as regards the specification of the formula for calculating the supervisory delta of call and put options mapped to the commodity risk category. The RTS specify the formula for the purposes of Article 279a(3) of the EU Capital Requirements Regulation in the standardized approach for counterparty credit risk. CRR III expanded the scope of Article 279a(3) to cover commodity risk, which requires amendment to the RTS. The Council of the European Union and the European Parliament will now scrutinize the Delegated Regulation. If neither objects, the Regulation will be published in the Official Journal of the European Union and enter into force 20 days after publication.Topic : Prudential Regulation -
UK Financial Policy Committee response to HM Treasury November 2024 letter on remit and recommendations
January 27, 2025
HM Treasury has published a letter (dated 18 December 2024) from Andrew Bailey, Bank of England Governor, in his role as Chair of the Financial Policy Committee. In the letter, Mr Bailey sets out the response of the FPC to HMT's November 2024 letter on remit and recommendations for the FPC. The letter outlines the work of the FPC to help identify, monitor and address systemic risks to the resilience of the U.K. financial system and examples of work to support the government's economic policy. Included in this work, the FPC: (i) will continue to work in an open and collaborative way with other relevant bodies for the purpose of pursuing its financial stability objective. This includes working closely with the newly formed Financial Market Infrastructure Committee, to jointly discuss innovation in wholesale markets, including systemic stablecoins and tokenized assets; (ii) will continue to monitor the implementation and outcomes of the new critical third parties regime; (iii) plans to publish an assessment of channels of financial stability risks stemming from the adoption of AI and machine learning, as well as its approach to monitoring such risks in a report in H1 2025; (iv) will continue to consider the materiality of nature-related risks for its primary financial stability objective; and (v) will further update the O-SII buffer framework to ensure it is operating as intended.Topic : Prudential Regulation -
UK Prudential Regulation Authority response to HM Treasury November 2024 letter on remit and recommendations
January 27, 2025HM Treasury has published a letter (dated December 18, 2024) from Andrew Bailey, BoE Governor, in his role as Chair of the Prudential Regulation Committee. In the letter, Mr Bailey sets out the response of the PRC to HMT's November 2024 letter on recommendations for the PRC. The letter discusses actions taken by the PRA to advance the secondary competitiveness and growth objective and sets out the work the PRA is taking or planning to take in support of the specific recommendation to the PRC on government economic policy. This work includes planned consultations on: (i) the banking data review. The PRA plans to consult in the summer on reforms resulting from the first phase of the review, which will cover changes to reporting on Counterparty Credit Risk and explore the scope for returns that the PRA can delete outright; and (ii) the Senior Managers & Certification Regime. The PRA plans to consult in the coming months on proposals to increase the efficiency of the regime by providing greater flexibility and clarity to firms and individuals.Topic : Prudential Regulation
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UK Prudential Regulation Authority writes to domestic and international banks on its 2025 supervisory priorities
January 21, 2025
The Prudential Regulation Authority has published a Dear CEO letter outlining its supervisory priorities for 2025 for domestic banks and international banks and large investment firms. The PRA's key areas of focus for 2025 include:- Risk management, governance and controls: firms' senior management, and boards need to ensure that their organizations have robust governance, risk management and controls frameworks in place that are adaptive and resilient, leveraging stress and scenario analyses to inform risk management, strategy and business planning. Firms are expected to have these frameworks in place across businesses, risk and internal audit functions, commensurate with the firm's business model. The PRA also notes that counterparty credit risk will remain an area of focus.
- Data risk: firms must continue to improve their ability to aggregate data to ensure that they have the information necessary to support holistic risk management, robust board decision-making, and accurate regulatory calculations. Throughout 2025 the PRA will continue to assess data accuracy.
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UK Prudential Regulation Authority responds to Government on enhancing sustainable economic growth
January 20, 2025
The Prudential Regulation Authority has published a letter (dated January 15, 2025) from Sam Woods, PRA Deputy Governor and CEO, to the Government setting out the actions the PRA has taken, and will take, with a view to enhancing economic growth. Actions already addressed by the PRA include:- simplifying the prudential regime for small banks;
- proposing further amendments to remuneration requirements to enhance competitiveness; and
- simplifying regulatory data-reporting from banks.
The PRA also considers that broader changes could simplify and rationalize the U.K. regulatory regime in other ways, such as identifying potential overlaps between PRA's governance and disclosure requirements and those of legislation or other regulators. In the PRA's view, rationalizing the U.K. financial services regulators' "have regards" principles could lead to a simplification of the length and complexity of the analysis underpinning new regulations with consequential benefits for the cost of regulatory engagement by firms and efficient use of resources by the PRA. The principles relate to the number of principles regulators are required to "have regard" to and to which they are held to account for when exercising their powers. -
UK Chancellor announces engagement with financial services leaders to bolster growth plans
January 20, 2025
HM Treasury has announced that the Chancellor will increase engagement with financial services leaders to strengthen plans to grow the economy. Over the coming months, the Chancellor plans to host a series of Industry Forums with key sub-sector leaders in banking, insurance, and asset management to elicit views on delivering long-term growth. HMT explains that the Industry Forums, alongside extensive further engagement at official and ministerial levels, will ensure that industry and senior stakeholders are closely involved in the development of the upcoming Financial Services Growth and Competitiveness Strategy so that it tackles the key issues that matter most to the industry. The first meetings of the Industry Forums will run throughout January and February, reconvening ahead of the Government's publication of the Financial Services Growth and Competitiveness Strategy as part of the Industrial Strategy later this year. The Government will continue to work closely with industry following the publication of the Strategy, to ensure that it is implemented effectively. The Strategy, set to be published in the spring, aims to develop policies that foster growth in the financial services sector. -
UK Financial Conduct Authority responds to Government call for regulators to support growth
January 17, 2025
The Financial Conduct Authority has published a letter (dated January 16, 2025) from Nikhil Rathi, FCA Chief Executive, sent to the Government, setting out its work to ensure that it is supporting the Government's U.K. growth mission. The letter responds to Government's December call for regulators to support growth. In the letter, the FCA explains that to achieve the vast reforms, the FCA will need to take greater risks and prioritize resources. The Government's support and acceptance of this approach is required, including an acceptance that there will be failures because it will not be possible to prevent all harm under an approach based on risk-based choices. The FCA emphasizes that this acceptance needs to be shared across all accountability mechanisms, including in Parliament, and states that metrics for "tolerable failures" within the overall system would assist.
The areas addressed in the letter include:- unlocking capital investment and liquidity: in addition to the planned reforms for the wholesale markets, the FCA will fast-track a review of capital requirements for specialized trading firms to improve liquidity;
- accelerating digital innovation to enhance productivity: the FCA makes a number of suggestions on how to do this including introducing a new open banking payment method and developing open finance, the removal of the £100 contactless payment limit to enhance consumer flexibility and level the playing field with digital wallets. The FCA also suggests that government action could help by introducing digital identity authentication, enhancing the quality of the Companies House database to reduce costs for business, and digitalizing court systems to reduce delays;
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UK delays the implementation of Basel 3.1
January 17, 2025
The Prudential Regulation Authority has announced that, in consultation with HM Treasury, it has decided to delay the implementation of Basel 3.1 in the U.K. by one year until January 1, 2027. The PRA explains that it has decided to delay the implementation to allow more time for greater clarity to emerge about implementation plans in the U.S. and to take into account competitiveness and growth considerations. While the PRA now expects to implement on January 1, 2027, it will continue to monitor developments. The transitional periods in the rules will be reduced to ensure the date of full implementation remains on January 1, 2030. The PRA is also immediately pausing until further notice the data collection exercise intended to inform an off-cycle review of firm-specific Pillar 2 capital requirements. Also in light of the delay to implementation, the end-date of the time window to join the Interim Capital Regime, previously set as February 28, 2025, will be moved back. The PRA will provide further information in due course.Topic : Prudential Regulation -
European Banking Authority publishes draft guidelines on ESG scenario analysis
January 16, 2025
The European Banking Authority has published a consultation paper on its draft guidelines on ESG scenario analysis. For institutions using the internal ratings-based approach for calculating the own funds requirements for credit risk, these guidelines are intended to specify the way in which ESG risks, and in particular, physical and transition risks stemming from climate change, are taken into account in the scenarios used for credit risk internal stress testing. They: (i) specify the different uses institutions should make of scenario analysis and propose a progressive and proportionate approach to incorporating scenario analysis into the institution management system; (ii) provide guidance on what is required before undertaking a scenario analysis and more specifically on the criteria for setting scenarios and identifying the transmission channels for translating climate risks into financial risks; and (iii) specify the distinctive features to be taken into account when conducting a climate stress test in addition to the requirements set out in the guidelines on institutions' stress testing and the use of scenarios to help define and adjust the institution's strategy and test the robustness of its business model to a range of plausible futures. These guidelines complement the EBA guidelines on the management of ESG risks, published earlier this month. The EBA will hold a virtual public hearing on the consultation on March 17, 2025, and the deadline for comments is April 16, 2025. The EBA plans for the guidelines to be finalized by the second half of 2025, and apply from January 11, 2026 to institutions other than small and non-complex institutions and, at the latest, from January 11, 2027 for SNCI. -
Financial Stability Board analytical framework and toolkit to assess climate-related vulnerabilities
January 16, 2025
The Financial Stability Board published a report containing a framework and analytical toolkit to assess climate-related vulnerabilities. The report introduces an analytical framework that the FSB will use to trace how physical and transition climate risks can be transmitted and amplified by the global financial system. The framework builds on the existing FSB Financial Stability Surveillance Framework and focuses on assessing climate-related vulnerabilities holistically, particularly from a cross-border and cross-sectoral point of view. The accompanying toolkit to the framework comprises three categories of metrics to monitor climate-related vulnerabilities from a forward-looking perspective. These are: (i) proxies to provide early signals on potential drivers of transition and physical risks; (ii) exposure metrics to gauge the extent of direct and indirect exposures in the real economy and the financial system; and (iii) risk metrics to quantify the impacts for financial institutions and the system as a whole. The FSB notes that while these metrics are already used by some FSB members domestically, various methodological and data challenges need to be overcome for them to be used for global monitoring. The FSB notes that the framework and toolkit are live documents, to be refined as understanding evolves on how climate-related vulnerabilities affect financial stability and as methodological and data issues are resolved. As such, the FSB will continue to develop the framework by operationalizing the toolkit and conducting in-depth analyses of specific climate vulnerabilities that may have global financial stability implications. -
European Banking Authority consults on draft technical standards on the prudential treatment of crypto-assets exposures
January 8, 2025
The European Banking Authority has published a consultation paper on its draft Regulatory Technical Standards on the calculation and aggregation of crypto-exposure values under the Capital Requirements Regulation 3. The RTS specify the technical elements necessary for institutions to calculate and aggregate crypto-asset exposures in relation to the prudential treatment of such exposures. The RTS aim to address implementation aspects and ensure harmonization of the capital requirements on crypto-assets exposures by institutions across the EU.
The draft RTS also further develop the relevant capital treatment for credit risk, counterparty credit risk, market risk and credit valuation adjustment risk for 'asset reference tokens' and 'other' crypto-assets exposures and align, to the extent possible, the capital treatment with the elements specified in the Basel standard on prudential treatment of crypto-asset exposures.
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UK Prudential Regulation Authority finalizes amendments to resolution assessment reporting and disclosure dates
January 7, 2025
The Prudential Regulation Authority has published a policy statement on amendments to resolution assessment reporting and disclosure dates. The statement provides feedback to responses the PRA received to its consultation paper (CP12/24) on the same topic. It also contains the PRA's final policy which provides greater flexibility over the timing of Resolution Assessment report submissions and disclosures by moving from fixed two-year cycles to a periodic basis. The final policy takes effect on January 10, 2025.
The PRA's final policy is reflected in: (i) amendments to the Resolution Assessment Part of the PRA Rulebook, which can be found in Appendix 1 of the statement; and (ii) an updated supervisory statement (SS4/19) on resolution assessment and public disclosure by firms, found in Appendix 2.
Read more.Topic : Prudential Regulation -
European Central Bank issues statement on framework for assessing capital buffers of other systemically important institutions
December 20, 2024
The European Central Bank has published a statement on its framework for assessing capital buffers of other systemically important institutions. In the statement, the ECB announced that it will enhance the floor methodology used to assess capital buffers for O-SIIs so that it also takes into account the systemic importance of O-SIIs for the banking union as a whole. This will lead to a more consistent treatment of O-SIIs across Member States participating in the banking union. The effect of these changes will be that for each O-SII at the highest level of consolidation within the banking union, the O-SII buffer should be no less than the higher of the minimum buffer rates implied by the banking union perspective and the national perspective. Moreover, the enhanced methodology will contribute to deepening financial integration by reducing the current disparity between capital requirements for domestic and cross-border activities within the banking union.
The ECB began using the enhanced floor methodology to assess O-SII buffers notified by national authorities from January 1, 2024, with the enhanced methodology being fully phased in as of January 1, 2028.Topic : Prudential Regulation -
UK authorities consult on operational incident and third-party reporting
December 13, 2024
The Financial Conduct Authority, Prudential Regulation Authority, and the Bank of England have launched consultations on operational incident and third-party reporting. The regulators propose to establish a framework to enhance incident and third-party risk management, strengthen firms' operational resilience and minimize harm. To achieve this, the regulators propose a definition for an operational incident and introduce new material third-party reporting rules. The proposals introduce standardized reporting templates to allow the regulators to collect data which would be used to monitor and respond to potential risks arising from operational incidents and firms' increasing reliance on third parties.
The deadline for comments is March 13, 2025. The FCA intends to publish finalized rules in H2 2025. The PRA and the BoE propose that the implementation date for the proposals will be no earlier than H2 2026. You may like to see our client bulletin, "Operational incident reporting: UK financial regulators propose new rules", which goes into the details of these proposals. -
Final Basel Committee guidelines for counterparty credit risk management
December 11, 2024
The Basel Committee on Banking Supervision has published the final version of its guidelines for counterparty credit risk management, replacing its "Sound Practices for Banks' Interactions with Highly Leveraged Institutions" (originally published in January 1999). The guidelines provide a supervisory response to the significant shortcomings that have been identified in banks' management of CCR, including the lessons learned from recent episodes of non-bank financial intermediary distress.
The guidelines include the need to: (i) conduct comprehensive due diligence both at initial onboarding and on an ongoing basis; (ii) develop a comprehensive credit risk mitigation strategy to manage counterparty exposures effectively; (iii) measure, control and limit CCR using a wide variety of complementary metrics; and (iv) build a strong CCR governance framework. Banks and supervisors are encouraged to take a risk-based and proportional approach in the application of the guidelines. The Basel Committee will continue to monitor implementation of the guidelines on an ongoing basis.Topic : Prudential Regulation -
EMIR 3 Published in the Official Journal of the European Union
December 4, 2024
The EMIR 3 Regulation and Directive have been published in the Official Journal of the European Union and will enter into force on December 24, 2024. The EMIR 3 Regulation amends the European Market Infrastructure Regulation and applies from December 24, 2024, except for the amendments to the calculation of the clearing thresholds for financial counterparties and non-financial counterparties which will only apply once the related technical standards enter into force. The EMIR 3 Directive amends the Directive on Undertakings for the Collective Investment in Transferable Securities, the Capital Requirements Directive and Investment Firm Directive. Member States must transpose the EMIR 3 Directive into national laws and bring those into force by June 25, 2026. This aligns with the implementation date for CRD VI.
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UK Prudential Regulation Authority Publishes Policy Statement on Definition of an Interim Capital Regime Firm
November 29, 2024
The U.K. Prudential Regulation Authority has published its final policy statement and statement of policy relating to the definition of an Interim Capital Regime firm and an ICR consolidation entity. The policy statement explains the means by which ICR-eligible firms can join the ICR. Joining the ICR will enable eligible firms to preserve their current capital requirements from the implementation date (i.e., January 1, 2026) of the Basel 3.1 standards, until the implementation of the permanent Small Domestic Deposit Taker capital regime. The PRA is currently consulting on proposals to revoke the ICR when the SDDT capital regime is implemented.
Read more.Topic : Prudential Regulation -
Bank of England System-Wide Exploratory Scenario Exercise and 2024 Central Counterparty Supervisory Stress Test
November 29, 2024
The Bank of England has published the final report on its system-wide exploratory scenario. The SWES was a 'system-wide' exercise, incorporating a wide range of financial firms and business models, focusing not on the resilience of individual participants, but the impact on important U.K. financial markets.
Through running the SWES, the BoE, working closely with and with the full support of the U.K. Prudential Regulation Authority, Financial Conduct Authority, and the Pensions Regulator, has drawn key financial stability conclusions, including that actions taken by authorities and market participants following recent market shocks have improved gilt market resilience, but further work is required given the other vulnerabilities highlighted by this exercise. The BoE considers that the SWES has proven to be an effective tool to understand system-level vulnerabilities. The BoE, alongside the FCA, will use the experience as a framework for future system-wide analysis and embed it into how market-wide surveillance is conducted. To support this the BoE will invest in its in-house capacity to model system-wide dynamics, supported by continuing engagement with market participants.
The BoE also published the results of its 2024 CCP Supervisory Stress Test. In the core credit stress test, the BoE found that all three U.K. CCPs have adequate pre-funded resources to cover a severe stress scenario and the default of the 'Cover-2' members—the two members whose default generates the greatest depletion of mutualized resources at the CCP. The BoE identified that in some very extreme but plausible scenarios there may be a risk to CCPs, and will follow-up with CCPs to probe how they capture the risks identified by these hypothetical scenarios via their own stress testing. -
Bank of England Amends Approach to Stress Testing UK Banking System
November 29, 2024
The Bank of England has updated its approach to stress testing the U.K. banking system. From 2025 onwards, the BoE will move from an annual to a biennial frequency for its main bank capital stress test. This will be a test of risks related to the financial cycle in which the largest and most systemic U.K. banks participate and will be used to inform the setting of capital buffers for the banking system and individual banks. In the intervening years, the BoE will use stress testing when appropriate to supplement its assessment of the resilience of the banking system to cyclical risks. The BoE will continue to use exploratory exercises as a means of assessing other risks, including structural and emerging risks that are not closely linked to the financial cycle. The scope of firms involved in the tests in intervening years will depend on the risks being assessed. When deciding on the timing of these exercises, the BoE will consider the risk environment and the sequencing and timing of the stress tests described above. The next bank capital stress test will take place in 2025.Topic : Prudential Regulation -
Basel Committee on Banking Supervision Publishes Report on Countercyclical Capital Buffer
November 28, 2024
The Basel Committee on Banking Supervision has published a report on the range of practices in implementing a positive neutral countercyclical capital buffer. The CCyB aims to ensure that banking sector capital requirements take account of the macro-financial environment in which banks operate, in order to increase the resilience of the banking sector and maintain the flow of credit to the real economy during periods of stress. A positive neutral CCyB is a CCyB that is set at a rate above zero at a time when risks are judged to be neither subdued nor elevated. The Basel Committee observes that authorities that have introduced a positive neutral CCyB have found it helpful for banks in their jurisdictions to have buffers of capital in place that can be released in the event of sudden shocks, including those unrelated to the credit cycle, such as the Covid-19 pandemic.
The report builds on prior publications on the same topic by examining the observed range of practices adopted by jurisdictions which have chosen to implement a positive neutral CCyB. It considers the different jurisdictional frameworks for implementing a positive neutral CCyB, describes the various observed approaches to the calibration and operation of the buffer, and discusses reciprocity considerations. The Basel Committee emphasizes that the adoption of a positive neutral CCyB approach is not required, and the report does not seek to discuss or opine on the merits or demerits of a positive neutral CCyB relative to other macroprudential measures or tools. Some jurisdictions may use tools other than the positive neutral CCyB to address similar risks, based on their specific jurisdictional circumstances.Topic : Prudential Regulation -
Basel Committee on Banking Supervision Consults on Hedging of Counterparty Credit Risk Exposures
November 27, 2024
The Basel Committee on Banking Supervision has published a consultation on technical amendments on the hedging of counterparty credit risk exposures. The interpretative issues addressed relate to the circumstance where a bank has a derivative exposure and uses a guarantee or credit default swap to hedge the CCR arising from the derivative counterparty. While the CCR rules include a specific approach for the recognition of collateral, the recognition of guarantees or credit derivatives, such as CDSs, is not explicitly addressed, suggesting that banks may use the substitution approach of the credit risk mitigation framework. To address this inconsistency, the Basel Committee proposes amendments to the credit risk and CCR standards, which aim to better align the treatment of guarantees and credit derivative protection with the treatment of eligible collateral in the CCR framework. The proposed amendments do not affect the need for banks to check whether the requirements in CRE22.81 and CRE40 are met and need to be applied accordingly. Responses may be submitted until January 31, 2025.Topic : Prudential Regulation -
Basel Committee on Banking Supervision Finalizes Various Technical Amendments to the Basel Framework
November 27, 2024
The Basel Committee on Banking Supervision has published a document on the finalization of various technical amendments to the Basel framework. The amendments relate to: (i) the definition of specialized lending in the standardized approach to credit risk (to better align it with the definition in the internal ratings-based approach); and (ii) the curvature charge for Group 2a cryptoassets in the cryptoasset exposure standard to align the treatment with other asset classes. Basel Committee members have agreed to implement the technical amendments set out in this document as soon as practical, within three years at the latest. The technical amendment to SCO60.80 will be implemented as part of the final cryptoasset exposures standard, i.e., from January 1, 2026. The amendments were published for consultation in July and have been finalized as originally proposed.Topic : Prudential Regulation -
UK Regulators Consult on Compensation Reform
November 26, 2024
The U.K. Prudential Regulation Authority and Financial Conduct Authority have published a joint consultation on compensation reform. The consultation paper sets out proposed amendments to the remuneration part of the PRA Rulebook, Supervisory Statement SS2/17 and the FCA's associated non-Handbook Guidance relating to compensation for dual-regulated firms. The proposals complement previous compensation regime changes enhancing proportionality for small firms, and removing the bonus cap.
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HM Treasury Publishes Prudential Regulation of Credit Institutions (Meaning of CRR Rules and Recognised Exchange) (Amendment) Regulations 2024
November 21, 2024
HM Treasury has published the Prudential Regulation of Credit Institutions (Meaning of CRR Rules and Recognised Exchange) (Amendment) Regulations 2024, together with an explanatory memorandum.
The Regulations have two primary purposes: (i) Regulations 2 and 3 make amendments to primary legislation in connection with the revocation of the U.K. Capital Requirements Regulation, which currently forms part of assimilated law on financial services. Regulation 2 amends the definition of "CRR rules" in the Financial Services and Markets Act 2000 to include rules made by the U.K. Prudential Regulation Authority as part of Basel 3.1 implementation to replace CRR provisions revoked under the Financial Services and Market Act 2023. Regulation 3 makes a related amendment to section 5 of the Financial Services Act 2021 to ensure that certain requirements apply to those rules; and (ii) Regulation 4 amends the definition of "recognized exchange" as contained in the CRR. This will support an expansion of investment exchanges that fall within the definition of a "recognized exchange". The Regulations specify that investment exchanges can qualify as a "recognized exchange" if they are: (a) U.K.-based investment exchanges that are considered to be regulated markets; (b) in the register of Recognized Overseas Investment Exchanges, a regime owned by the FCA; or (c) an investment exchange, which meets certain conditions as set out in the PRA's rulebook. For this purpose, the PRA expects to make rules on the proposed "conditions", which will help firms identify a "recognized exchange". The PRA plans to consult on its conditions shortly. The Regulations come into force on November 22, 2024.Topic : Prudential Regulation -
Outcome of Basel Committee on Banking Supervision November 2024 Meeting
November 20, 2024
The Basel Committee on Banking Supervision has set out the outcomes from its meeting on November 19-20, 2024. Key takeaways include:- implementation of Basel III—committee members unanimously reaffirmed their expectation of implementing all aspects of the Basel III framework in full, consistently and as soon as possible;
- non-bank financial intermediation—the BCBS approved a final set of guidelines that seek to address weaknesses in banks' counterparty credit risk management exposed in recent episodes of NBFI distress. The finalized guidelines will be published next month;
- 2023 banking turmoil—an update on the BCBS's work to develop a suite of practical tools to support supervisors in their day-to-day work as part of its efforts to strengthen supervisory effectiveness in light of the lessons learned from last year's banking turmoil will be published in early 2025;
- macroprudential policy—the BCBS will publish a report on existing practices to support jurisdictions that wish to apply positive cycle-neutral rates when risks are judged to be neither subdued nor elevated. The report will be published next month; and
- climate-related financial risks—the BCBS anticipates finalizing its proposed Pillar 3 disclosure framework in H1 2025.
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Financial Stability Board Publishes Letter to G20 Leaders and 2024 Annual Report
November 18, 2024
The Financial Stability Board has published a letter sent to the G20 leaders ahead of their meeting on November 18, 2024, together with the FSB 2024 annual report. The letter warns of ongoing vulnerabilities within the global financial system, illustrated by recent episodes of market turmoil and the failure of several banks and non-banks in recent years. The letter stresses the importance of effective implementation of the FSB's policies, emphasizing that authorities must not only put policies into national laws and regulations, but also build the capacity to operationalize them.
In the annual report, the FSB provides an overview of its work in its key priority areas, which include: (i) addressing lessons from the March 2023 banking turmoil; (ii) enhancing the resilience of non-bank financial intermediation; (iii) addressing financial risks from climate change; (iv) improving cross-border payments; (v) responding to technological innovation; and (vi) enhancing the resolvability of central counterparties. Looking ahead, the FSB will continue to focus on these priority areas and will also place an emphasis on: (a) implementation monitoring of its recommendations on crypto-asset activities and global stablecoin arrangements; (b) further work on resolution reforms; and (c) regular monitoring and progress reports on financial stability issues.
For more information on the issues and developments relating to FinTech, see our blog A&O Shearman on fintech and digital assets. -
UK Prudential Regulation Authority Policy Statement on the April Occasional Consultation Paper
October 31, 2024
The U.K. Prudential Regulation Authority has published a policy statement to its occasional consultation paper (CP6/24). The statement provides feedback to responses the PRA received to the consultation paper, as well as the PRA's final policy, as follows: (i) amendments to the Disclosure (CRR) Part of the PRA Rulebook; (ii) amendments to the Reporting (CRR) Part of the PRA Rulebook; (iii) amendments to the Regulatory Reporting Part of the PRA Rulebook; (iv) amendments to the Glossary of the PRA Rulebook; and (v) the addition of a new Rule 9.5A to the Policyholder Protection Part of the PRA Rulebook (Policyholder Protection).
The statement also provides feedback to responses in relation to a proposal in CP6/24, which was a joint consultation with the FCA (FCA Consultation paper 24/10). It also contains the PRA's and U.K. Financial Conduct Authority's final policy in the form of amendments to Binding Technical Standards (BTS) 2016/2251. The regulators are making consequential amendments to the BTS to ensure they reflect the expected changes to the U.K. version of the European Market Infrastructure Regulation that will be made in the Securitisation (Amendment) Regulations 2024. The implementation date for these amendments is November 4, 2024 with the exception of the amendments to U.K. Commission Delegated Regulation (EU) 2016/2251, which will be effective on November 1, 2024, which is when the final Technical Standards instrument by the PRA and FCA comes into force.Topic : Prudential Regulation -
Delegated Regulation Amending CRR Postponing Application Date of Own Funds Requirement for Market Risk Published in the OJ
October 31, 2024
Commission Delegated Regulation (EU) 2024/2795 amending the EU Capital Requirements Regulation with regard to the date of application of the own funds requirements for market risk has been published in the Official Journal of the European Union. The Delegated Regulation inserts a new Article 520a into the CRR that states, until January 1, 2026, institutions must continue to apply Part Three, Title IV, and the market risk requirements of Articles 430, 430b, 445 and 455 of the CRR. CRR III introduced into the CRR specific disclosure requirements for market risk, tailored to the requirements laid down in the fundamental review of the trading book for the calculation of own funds requirements for market risk. This Delegated Regulation delays the date of application of these provisions to January 1, 2026. For reasons of consistency, the related specific disclosure requirements will also be delayed. The Delegated Regulation will enter into force on November 1, 2024, the day after its publication in the Official Journal, and will apply from January 1, 2025.Topic : Prudential Regulation -
Bank of England Speech on Artificial Intelligence and Financial Stability
October 31, 2024
The Bank of England has published a speech by Sarah Breeden, BoE Deputy Governor, Financial Stability, on AI and financial stability. In the speech, Ms. Breeden explores the novel features of Generative AI, and how financial stability can be upheld whilst harnessing its potential benefits for economic growth.
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European Banking Authority Consults on Draft Regulatory Technical Standards on Structural Foreign Exchange Positions under EU Capital Requirements Regulation
October 24, 2024
The European Banking Authority launched a consultation on draft Regulatory Technical Standards on the treatment of structural foreign exchange positions under Article 104c of the EU Capital Requirements Regulation and on reporting on structural foreign exchange positions. The draft RTS largely retain the provisions of the EBA's 2020 guidelines. The key changes are: (i) the introduction of a clear quantitative threshold for a currency to be considered eligible for the structural FX treatment; (ii) the option for banks to consider only credit risk own funds requirements when determining the position neutralising the sensitivity to the capital ratios, as long as the credit risk own funds requirements are the ones driving the variability of the ratio against FX changes; (iii) clarifications around how institutions should remove the risk position from the own funds requirements for foreign exchange risk; and (iv) provisions relating to institutions' policies on currencies that are particularly illiquid in the market. The changes are not expected to lead to a material capital impact. The consultation also sets out a proposed policy framework for the treatment of structural FX positions. The deadline for comments is February 7, 2025.Topic : Prudential Regulation -
UK Prudential Regulation Authority Consults on Large Exposures Framework
October 18, 2024
The U.K Prudential Regulation Authority began consulting on proposals to amend the prudential framework for large exposures. The proposals include changes to implement the remaining Basel large exposures standards, by: (i) removing the possibility for firms to use internal model methods to calculate exposure values to securities financing transactions; and (ii) introducing a mandatory substitution approach to calculate the effect of the use of credit risk mitigation techniques.
Other changes the PRA is consulting on include: (a) removing the option for firms to exceed LE limits for trading book exposures to third parties; (b) allowing firms to exceed LE limits for trading book exposures to intragroup entities, and simplifying the calculation of the additional capital requirements; (c) allowing firms to apply for higher LE limits to exposures to intragroup entities, and amend the conditions firms need to meet to mitigate the higher concentration risk; (d) removing the exemption from LE limits to firms' exposures to the U.K. deposit guarantee scheme; (e) removing the option for firms to use immovable property as CRM; and (f) removing the stricter requirements on exposures to certain French counterparties.
The deadline for comments is January 17, 2025. The implementation date for the changes would, except for the proposal on SFTs, take effect shortly after publication of the final policy statement. The proposal to remove the possibility for firms to use initial margin methods to calculate exposure values to SFTs would take effect on January 1, 2026. The PRA proposes to offer firms that currently have a modification by consent under rules 2.1 and 2.2 of the Large Exposures Part of the PRA Rulebook a modification by consent to maintain the current position until March 2026.Topic : Prudential Regulation -
UK Prudential Regulation Authority Consults on Restatement of Remainder of UK Capital Requirements Regulation
October 15, 2024
The U.K. Prudential Regulation Authority has published a consultation paper on the restatement of the remaining provisions of the U.K. Capital Requirements Regulation. The consultation paper sets out the PRA's proposals to restate the relevant provisions in the assimilated CRR in the PRA Rulebook and other policy material such as supervisory statements or statements of policy. The PRA also proposes to update the credit ratings mapping tables in some assimilated Technical Standards and to restate them in the PRA Rulebook. The proposals in the consultation consist primarily of the restatement of assimilated law into PRA rules and policy materials without modifications. There are a few instances where the consultation proposes to modify certain areas as part of their restatement. The PRA notes that more substantive proposals relate to proposed changes to the securitization requirements. The deadline for comments is January 15, 2025. -
UK Resolution Authority Consults on Amendments to Approach for Setting MREL
October 15, 2024
The Bank of England has published a consultation paper on amendments to its statement of policy on setting the minimum requirement for own funds and eligible liabilities. The proposals are designed to ensure that the U.K.'s MREL framework: (i) is simplified and consolidated where possible, to make it easier to navigate and implement; (ii) keeps up to date with, and is responsive to, wider developments in financial regulation and markets; (iii) remains aligned with international standards; and (iv) adapts over time to reflect lessons learnt from its implementation.
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Basel Committee on Banking Standards Publishes Progress Report on the 2023 Banking Turmoil and Liquidity Risk
October 11, 2024
The Basel Committee on Banking Standards has published a progress report on the 2023 banking turmoil and liquidity risk. The report, requested by the G20 Brazilian Presidency, provides an update on the Basel Committee's analytical work on liquidity risk dynamics observed during the turmoil, building on the Committee's stocktake report published in October 2023. The report includes updated empirical analysis on a range of liquidity-related issues highlighted by the turmoil, including distressed banks' outflow rates, the materiality of different liquidity risk factors, and the role and use of supervisory monitoring tools. Drawing on the findings of this progress report, the Basel Committee plans to pursue a series of follow-up initiatives related to the turmoil, including: (i) prioritizing work to strengthen supervisory effectiveness and identify issues that could merit additional guidance at a global level; and (ii) pursuing additional follow-up analytical work based on empirical evidence to assess whether specific features of the Basel Framework, such as liquidity risk and interest rate risk in the banking book, performed as intended during the turmoil and assess the need to explore policy options over the medium term. -
HM Treasury Publishes Policy Statement on Treatment of Overseas Investment Exchanges Under UK Capital Requirements Regulation
October 7, 2024
HM Treasury has published a policy statement on the treatment of overseas investment exchanges for the purposes of the U.K. Capital Requirements Regulation. HM Treasury initially proposed to expand the definition of 'recognized exchanges' in the U.K. CRR to include those in the Recognized Overseas Investment Exchange regime and those detailed in the U.K. Prudential Regulation Authority's technical standards that accompany the U.K. CRR definition. Following feedback that these proposals would be insufficient in restoring competitiveness with other jurisdictions (there are 30 exchanges in the ROIE regime compared to the EU's list of 108 exchanges), HM Treasury has amended its proposals. HM Treasury will add the link to the ROIE regime as initially proposed, but rather than refer to the PRA's technical standards, the CRR definition will refer to a set of conditions that will come to be specified in the PRA rulebook for the purpose of identifying recognized exchanges or assets traded on such exchanges. The PRA will therefore formulate new rules for the purposes of identifying recognized exchanges and intends to consult on these as soon as is practicable. Until the rules are made, qualifying exchanges will include those that are domestic U.K. investment exchanges and those in the ROIE regime, once the necessary legislation is made. -
Draft UK Prudential Regulation of Credit Institutions (Meaning of CRR Rules and Recognised Exchange) (Amendment) Regulations 2024 Published
October 7, 2024
The draft U.K. Prudential Regulation of Credit Institutions (Meaning of CRR Rules and Recognised Exchange) (Amendment) Regulations 2024 have been published, together with an explanatory memorandum. The purpose of the Regulations is to ensure that the revocation of the onshored Capital Requirements Regulation under the Financial Services and Markets Act 2023 (which is yet to take effect) will not impact the U.K.'s approach to implementation of Basel 3.1, which has been delegated to the U.K. Prudential Regulation Authority in accordance with the U.K. government's smarter regulatory framework. Regulation 2 amends the definition of "CRR rules" in the Financial Services and Markets Act 2000 to include rules made by the PRA as part of Basel 3.1 implementation to replace CRR provisions revoked under FSMA 2023. This ensures that the FSMA 2000 accountability framework will continue to apply to the PRA's new rules. Regulation 3 makes a related amendment to section 5 of the Financial Services Act 2021 to ensure that certain requirements apply to those rules. Regulation 4 expands the definition of a "recognized exchange" in the CRR so that a wider range of instruments can benefit from preferential capital treatment. It does this by allowing overseas investment exchanges to be brought into the definition. This will include those exchanges on the Recognized Overseas Investment Exchanges register, and eventually it will also include exchanges where they meet conditions set by the PRA, which will be consulted on shortly. The instrument will enter into force the day after the day on which it is made. HM Treasury has published a separate policy statement on the treatment of overseas investment exchanges under CRR. -
UK Financial Policy Committee Publishes Latest Summary and Record
October 2, 2024
The Bank of England has published the record of the Financial Policy Committee meeting on September 19, 2024. Headline judgements and policy actions from the meeting: (i) risks to U.K. financial stability are broadly unchanged since the June 2024, although significant financial market and global vulnerabilities remain; (ii) there was a significant spike in volatility across global financial markets in August. Although short-lived, the FPC notes that the extent of the moves, in response to relatively limited economic news, illustrates the potential for vulnerabilities in market-based finance to amplify shocks; (iii) the U.K. banking system remains in a strong position to support households and businesses, even if economic and financial conditions were substantially worse than expected.
The FPC decided to maintain the U.K. countercyclical capital buffer at its neutral rate of 2% and as part of its annual review of the leverage ratio Direction, the FPC confirmed that the U.K. leverage ratio framework remained appropriate. The FPC's next meeting will be on November 15, and the record will be published on November 29, 2024.Topic : Prudential Regulation -
UK Prudential Regulation Authority Consults on Restatement of UK Capital Requirements Regulation Rulebook Requirements
September 12, 2024
The U.K. Prudential Regulation Authority has published a consultation on its proposals to restate, and in some cases modify, the U.K. Capital Requirements Regulation requirements relating to the definition of own funds in its own rulebook. The PRA rules will replace the existing definition of own funds under CRR, which HM Treasury is proposing to revoke under draft legislation published on September 12, 2024 (discussed above).
The PRA proposes to restate in its rules the vast majority of the current U.K. CRR requirements in this area, with some modifications to ensure their operability in the PRA Rulebook, and to omit some provisions that are not necessary or relevant for U.K. firms. The PRA also proposes to make some minor adjustments to enhance the proportionality or transparency of the PRA's approach covering the following elements of the definition of own funds framework: (i) proportionality in the Pre/Post-Issuance Notification regime; (ii) inclusion of interim profits in Common Equity Tier 1 capital resources; (iii) reduction of Additional Tier 1 and Tier 2 instruments; (iv) clarification of the regulatory capital treatment of non-CET1 shares; (v) a requirement for PRA permission for additional forms of capital reduction; and (vi) permitting the terms governing CET1 instruments to reflect the possibility of (but not commit to) a future capital reduction.
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UK Prudential Regulation Authority Consults on Streamlining Pillar 2A Capital Framework and Capital Communications Process
September 12, 2024
The U.K. Prudential Regulation Authority has published a consultation on streamlining the Pillar 2A capital framework and capital communications process. In addition to PRA-regulated banks, building societies, designated investment firms and PRA-approved or PRA-designated holding companies, the revised rules will also be relevant to Small Domestic Deposit Takers, firms who meet the SDDT criteria and are considering becoming a SDDT and firms that anticipate being subject to the Interim Capital Regime. The deadline for comments is December 12, 2024.
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UK Prudential Regulation Authority Publishes Second Near-Final Policy Statement on Implementation of the Basel 3.1 Standards
September 12, 2024
The U.K. Prudential Regulation Authority has published its second near-final Policy Statement on the implementation of the Basel 3.1 standards. The PRA has decided to move the implementation date by a further six months to January 1, 2026 with a transitional period of 4 years to ensure full implementation by January 1, 2030.
The policy statement provides feedback to responses to the following sections of the PRA's Consultation Paper 16/22: Chapter 3 – credit risk – standardized approach; Chapter 4 – credit risk – internal ratings based approach; Chapter 5 - credit risk mitigation; Chapter 9 - output floor; Chapter 11 - disclosure (Pillar 3); and Chapter 12 - reporting. The statement also contains feedback to responses on the parts of Pillar 2 relating to the Pillar 2A credit risk methodology, use of IRB approach benchmarks, and the interaction with the output floor.
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UK Prudential Regulation Authority Consults on Simplified Capital Regime for Small Domestic Deposit Takers
September 12, 2024
The U.K. Prudential Regulation Authority has published a consultation on its proposed simplified capital regime and additional liquidity simplifications for small domestic deposit takers. This consultation forms the second phase of the PRA's simplified prudential regulation for SDDTs, the PRA having already finalised its requirements in relation to non-capital related prudential regulation, along with the criteria that must be met to be a SDDT. Together with the Phase 1 simplifications, the proposals would create a simpler, more certain and less costly capital regime for SDDTs.
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UK Prudential Regulation Authority Consults on Updates to UK Policy Framework for Capital Buffers
September 12, 2024
The U.K. Prudential Regulation Authority has published a consultation on amendments to the U.K. framework on capital buffers under the Capital Requirements (Capital Buffers and Macro-Prudential Measures) Regulations (CBR), which will be revoked. HM Treasury has published a draft statutory instrument that will restate certain of the CBR provisions. Other provisions under the CBR will be transferred to the PRA's rulebook. The CBR sets out the statutory framework for the Countercyclical Capital Buffer (CCyB), Capital Conservation Buffer (CcoB), Global Systemically Important Institutions (G-SII) buffer, Other Systemically Important Institutions (O-SII) buffer and the Systemic Risk Buffer (SRB).
The PRA's consultation does not propose changes to its policy approach to capital buffers, but rather streamlines some of its policy materials to enhance usability and clarity. The PRA may make further amendments to its proposals depending on the outcome of HM Treasury's proposed changes to the CBR. The PRA proposes to: (i) revoke the U.K. Technical Standards on the methodology for the identification of G-SIIs; (ii) introduce a new Statement of Policy (SoP) setting out the PRA's approach to G-SII identification and buffers, which will replace the aforementioned U.K. Technical Standards and relevant provisions to be revoked in the CBR; (iii) make minor amendments to the PRA's existing Statements of Policy on O-SII designation and O-SII buffer setting to reflect proposed amendments to the CBR; and (iv) make minor consequential amendments to PRA rules that refer directly to the current CBR.
The deadline for responses to the PRA's consultation is December 12, 2024. The PRA proposes that the implementation date for the changes will be Q2 2025. -
HM Treasury Publishes Policy Update on Applying the Financial Services and Markets Act 2000 Model to the UK Capital Requirements Regulations
September 12, 2024
HM Treasury has published a policy update to confirm its legislative approach for applying the "FSMA model" to the assimilated EU capital requirements regime under the U.K. Capital Requirements Regulation and Capital Buffers Regulations. The application of the Financial Services and Markets Act model, which transfers firm-facing rulemaking powers to the regulators, will take place in three stages. HM Treasury will: (i) revoke articles of the U.K. CRR which the U.K. Prudential Regulation Authority will replace with rules in order to implement the Basel 3.1 package; (ii) revoke any U.K. CRR provisions left on the statute book following Basel 3.1 implementation and revoke and restate (with modifications) the CBR; and (iii) publish new legislation to: (a) restate the U.K. CRR equivalence regimes in legislation (with the exception of the Article 142 regime); (b) restate (with certain modifications) key U.K. CRR definitions which are needed to ensure that the overall framework continues to operate as intended; and (c) make any consequential amendments to other parts of the statute book which will be needed once the U.K. CRR has been completely revoked.
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UK Prudential Regulation Authority Thematic Findings of Internal Audit Review of the Credit Risk Management Framework
September 10, 2024
The U.K. Prudential Regulation Authority has sent a letter to lenders' chief risk officers to share the thematic findings from an internal audit review of non-systemic U.K. deposit takers' credit risk management framework. Approximately two-thirds of the findings related to notable breaches of rules around lending. The PRA considers that its observations reinforce the need for some firms to continue to enhance their portfolio management controls and affordability assessments, with consideration of changes in the macroeconomic environment to ensure that new lending is sustainable. The PRA sets out the key improvements that were identified in the following areas (in priority order based on the number of findings): affordability assessment, quality assurance and underwriting process, quality of management information, credit risk appetite, lending policy and collections. The PRA recommends that lenders use the points outlined in the letter as a reference when they next review and assess their credit risk management framework controls and potential areas that might need strengthening.Topic : Prudential Regulation -
UK Prudential Regulation Authority Publishes Direction for Modification by Consent for Leverage Ratio Requirements
September 10, 2024
The U.K. Prudential Regulation Authority has announced that it is reviewing the leverage ratio requirement thresholds and is offering a modification by consent, where certain conditions are met, to disapply the relevant part of the PRA Rulebook until the review is complete. The modification by consent is available to a firm if it: (i) did not meet the criteria set out in 1.1 of the Leverage Ratio – Leverage Ratio – Capital Requirements and Buffers Part of the PRA Rulebook before September 10, 2024; and (ii) expects to meet the criteria after the next accounting reference date or any accounting reference date before December 31, 2025. This modification will cease to have effect at the end of June 30, 2026, however the PRA may revoke the modification earlier, at an appropriate time following the completion of the review.Topic : Prudential Regulation -
Euopean Commission report on the future of European competitiveness
September 10, 2024
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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UK Financial Services and Markets Act 2023 (Commencement No 7) Regulations 2024 Published
September 3, 2024
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.