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 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.
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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. -
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. -
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.
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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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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 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. -
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. -
European Banking Authority Publishes Final Draft Regulatory Technical Standards on Market Risk Framework
August 13, 2024
The European Banking Authority has published its final amendments to the Regulatory Technical Standards on the market risk framework, also known as the Fundamental Review of the Trading Book. The EU Capital Requirements Regulation III introduced a number of changes to the FRTB, as implemented in the EU via CRR II, and consequently mandated the EBA to review its RTS in areas where the underlying CRR legal basis has been amended, namely on the treatment of foreign-exchange and commodity risk in the banking book, the profit and loss attribution test, and the risk factor modellability assessment. The EBA's RTS therefore amend the following: (i) Commission Delegated Regulation (EU) 2022/2059, which sets out the details on the profit and loss attribution test. The amending RTS remove the aggregation formula for computing the total own funds requirements for market risk for an institution using the alternative internal model approach as this formula has been now introduced in the CRR III; (ii) Commission Delegated Regulation (EU) 2022/2060, which relates to the risk factors' modellability assessment. The amending RTS ensure that institutions are able to identify how far they rely on a third-party vendor for the purpose of assessing the modellability of a risk factor; and (iii) Commission Delegated Regulation (EU) 2023/1577, which relates to the treatment of foreign exchange and commodity risk in the non-trading book. The amending RTS ensure that translation risk is duly captured by institutions. The EBA will submit the final draft RTS to the European Commission for endorsement. -
European Banking Authority Responds to European Commission's Delegated Act Postponing Application of Market Risk Framework
August 12, 2024
The European Banking Authority has published a no-action letter in response to the European Commission's postponement of the application of the revised market risk framework, also known as the Fundamental Review of the Trading Book. In the no-action letter, the EBA recommends that competent authorities should not prioritize any supervisory or enforcement action relating to the amendments to the provisions setting the boundary between the banking and trading books, or those defining internal risk transfers between books. The EBA also clarifies that the points it made in its separate no-action letter on the same topic issued in 2023 should remain applicable. The EBA considers that the front-loaded application of the revised provisions on the boundary and internal risk transfers, compared to the rest of the FRTB framework, would subject institutions to an operationally complex, fragmented, and costly two-step implementation. There are also no jurisdictions at the global level that envisage such a two-step implementation of the FRTB framework. This means that a front-loaded application of the boundary provisions would lead to global institutions being subject to very different regulatory requirements depending on where the risk management is performed, leading to a fragmentation of the regulatory framework. In a separate document, the EBA shares some considerations on technical questions and implementation issues arising from the postponement, that were deemed material and relevant with a view to achieving a harmonised implementation of the market risk framework across institutions during the postponement period. The EBA also provides clarity on the supervisory benchmarking exercise. The EBA considers that a legislative proposal to provide the necessary legal certainty should be introduced by the European Commission, under an accelerated adoption procedure by the European Parliament and the Council of the European Union, if possible. -
European Banking Authority Amends Implementing Technical Standards Specifying the Data Collection for the 2025 Benchmarking Exercise
August 9, 2024
The European Banking Authority has published its final draft Implementing Technical Standards amending the Implementing Regulation on the benchmarking of credit risk, market risk, and IFRS9 models for the 2025 exercise. The EU Capital Requirements Directive requires competent authorities to conduct an annual assessment of the quality of internal approaches used for the calculation of own funds requirements. To assist competent authorities in this assessment, the EBA calculates and distributes benchmark values to competent authorities that allows a comparison of individual institutions' risk parameters. These benchmark values are based on data submitted by institutions as laid out in Commission Implementing Regulation (EU) 2016/2070 which specifies the benchmarking portfolios, templates and definitions to be used as part of the annual benchmarking exercises. Proposed changes for the 2025 benchmarking exercise include the expansion to all asset classes of the alternative standardised approach validation portfolios. Only minor changes are proposed in relation to credit risk. The EBA notes that the templates based on the alternative internal model approach have not been implemented because of the postponed implementation of the Fundamental Review of the Trading Book in the EU. The EBA has submitted the draft ITS to the European Commission for endorsement. -
UK Prudential Regulation Authority Publishes Policy Statement on Leverage Ratio Treatment of Omnibus Account Reserves
July 29, 2024
The Prudential Regulation Authority has published a policy statement on the leverage ratio treatment of omnibus account reserves and minor amendments to the leverage ratio framework. PRA rules require firms to exclude from the leverage ratio any claims on central banks matched by liabilities in the same currency and of identical or longer maturity. The PRA explains that a new model of reserves holding has emerged where the reserves of several firms are co-mingled in a single account held at the central bank—known as an "omnibus" account. Therefore, the PRA is:- introducing new rules to apply the exclusion consistently across reserves held on omnibus accounts as well as traditionally-held reserves, with the exclusion of the former subject to specific additional conditions; and
- making minor amendments to SS45/15 and the leverage ratio disclosure and reporting instructions to provide clarification about the PRA's expectations and ensure consistency with PRA rules.
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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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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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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. -
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. -
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. -
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 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. -
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. -
European Banking Authority Publishes Final Draft Regulatory Technical Standards on Extraordinary Circumstances for Continuing the Use of Internal Models for Market Risk
June 28, 2024
The European Banking Authority has published its final draft regulatory technical standards on the conditions and indicators that the EBA shall use to determine whether extraordinary circumstances have occurred for the purposes of Articles 325az(5) and 325bf(6) of the EU Capital Requirements Regulation. Under the CRR, national regulators may permit institutions to soften or waive the application of certain requirements for the use of internal models in accordance with the Fundamental Review of the Trading Book, under extraordinary circumstances. The draft RTS establish a high-level framework for identifying the occurrence of extraordinary circumstances, setting out conditions that need to be met and indicators that could support the identification of extraordinary circumstances. More specifically, they set out that only a situation of cross-border financial market stress, or a regime shift, can qualify as a situation of extraordinary circumstances, and only subject to the additional condition that this stress or regime shift impacts the validity or suitability of the results of the back-testing or the profit and loss attribution test. The draft RTS will be submitted to the European Commission for endorsement following which they will be subject to scrutiny by the European Parliament and the Council of the European Union before being published in the Official Journal of the European Union. The draft RTS will apply from 20 days after their entry into force.