Key Regulatory Topics: Weekly Update 18 - 23 Dec 2020
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Our weekly update on key regulatory topics affecting the financial services sector.
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Brexit
Please see the other sections for product specific updates relating to Brexit.
Please see our Brexit financial services webpage which contains, amongst other things, tables detailing Brexit statutory instruments, equivalence decisions, EEA transitional regimes and UK regulators publications.
FCA finalises temporary transitional power (TTP) directions, related guidance and onshoring instruments
On 22 December, the FCA published final versions of its TTP directions, related guidance and onshoring instruments that will apply at the end of the year. This includes the final transitional direction for the share trading obligation (STO) and the final prudential transitional direction. This follows the FCA’s quarterly consultation paper 20/18, and the FCA states that the final instruments are largely unchanged from the versions consulted on. The FCA has also published the final instruments making amendments to the onshored binding technical standards (BTS), specifically the: (i) Technical Standards (Capital Requirements Directive and Regulation) (EU Exit) (No 2) Instrument 2020 (FCA 2020/88) – this revokes the FCA Technical Standards (Capital Requirements Directive and Regulation) (EU Exit) Instrument 2019; and (ii) Technical Standards (Miscellaneous Amendments) (No 2) (EU Exit) Instrument 2020 (FCA 2020/89).
Main Transitional Directions Annex A
Main Transitional Directions Annex B
Main Transitional Directions Explanatory Note
Final Transitional Direction for the STO and Explanatory Note
Final Prudential Transitional Direction
PRA and BoE amendments to rules and onshored binding technical standards (BTS)
On 18 December, the PRA and the BoE published a joint policy statement (PS27/20) on amendments to their rules and to onshored BTS, as well as the use of temporary transitional powers relating to the end of the Brexit transition period. The policy statement provides feedback to consultation Paper (CP) 13/20 ‘UK withdrawal from the EU: Changes before the end of the transition period’ and CP18/19 ‘UK withdrawal from the EU: Changes following extension of Article 50’. It also contains the BoE’s and PRA’s final and near final instruments. The PRA intends to publish the final versions of its transitional direction (and related guidance documents) and the PRA Rulebook (EU Exit) Instrument once it has made its final rules implementing CRD V on 28 December 2020. The transitional directions and EU Exit instruments will all come into force on IP completion day (11pm on 31 December 2020). The updated PRA Rulebook (EU Exit) Instrument will also largely come into force on IP completion day, although certain revisions to the Regulatory Reporting Part will come into force on 1 April 2021. All the non-binding materials will become applicable on IP completion day.
Conduct
IOSCO report on helping regulators address retail market conduct risks during stress events
On 22 December, IOSCO published a report which examines common retail misconduct risks that have arisen in the financial services industry during the pandemic and sets out measures to assist authorities in responding to the unprecedented and challenging environment. The report, prepared by IOSCO´s Retail Market Conduct Task Force (RMCTF), shares preliminary findings and observations of IOSCO member experiences and identifies the common drivers of firm and retail investor behaviour, which together create increased opportunities for potential misconduct in periods of stress. Drawing on case studies from IOSCO members, the report also describes the measures that IOSCO members have used to mitigate these risks and derives lessons from their experiences. The report describes how the Covid-19 crisis impacted firm and retail investor behaviour. IOSCO findings indicate that extreme price volatility during March-April and the growing pressure of Covid-19 on firms’ profitability may have resulted in increased offerings of riskier products and retail investor flow into such products. IOSCO notes that the Covid-19 experience highlights that retail investor vulnerability may take many forms and vulnerable investors may be more susceptible to financial exploitation during periods of market stress. IOSCO suggests a number of measures that regulators can take in responding to the challenges created by the Covid-19 pandemic. These measures include: (i) proactive monitoring of investor behaviour and offerings targeting vulnerable investors; (ii) supervisory scrutiny of certain firm behaviour which may flag potential misconduct; (iii) regulatory communication during periods of stress; (iv) monitoring of return to normal and taking effective enforcement action; (v) leveraging on experience from periods of stress to enhance regulatory requirements and approaches; (vi) cross-border cooperation and regulatory coordination; and (vii) addressing risks emerging from remote working and social distancing requirements.
FCA and PRA updates on end of temporary arrangements for SM&CR – Covid-19
On 18 December, the FCA updated its statements setting out: (i) its expectations to help firms using appointed representative arrangements apply the approved persons regime during the Covid-19 pandemic; and (ii) on the impact of Covid-19 on the SM&CR, setting out its expectations of solo-regulated firms. The FCA explains in both statements that as firms have adapted to the impact of the pandemic over the past few months, its expectation is that firms’ application of these rules returns to normal. It notes that firms should be aware that some of the previously available provisions will end on 7 January 2021 and that the relevant modifications by consent will end after 30 April 2021. For appointed representative arrangements: (a) the modification by consent to the 12 week rule for temporary arrangements for controlled functions is still available, however a firm cannot consent to the modification after 30 April 2021 and all modifications consented to before then will come to an end on that date; and (b) after 7 January 2021 and only in relation to temporary arrangements made after this date, the FCA expects firms to notify it under Form D. Regarding solo-regulated firms and the SM&CR, the FCA: (1) states that firms will need to submit updated Statements of Responsibilities (SoRs) from 7 January 2021, but only if changes are made after this date; and (2) reiterates the end of the modification by consent to the 12 week rule for temporary arrangements. The FCA has also updated its joint statement with the PRA, on the impact of Covid-19 on the SM&CR, setting out their expectations of dual-regulated firms: (A) SoRs will need to be submitted from 7 January 2021 as normal using Form J; (B) the FCA and PRA have found no evidence that the rule allowing individuals to perform senior management functions (SMFs) without approval for up to 12 weeks does not provide sufficient flexibility for dual-regulated firms due to coronavirus, and therefore do not intend to introduce measures; and (C) from 7 January 2021, dual-regulated firms may no longer reallocate SMFs’ prescribed responsibilities, under the 12 week rule, to unapproved SMFs and any that have been should be reallocated prior to this date.
Statement on SM&CR and solo-regulated firms.
Statement on appointed representatives’ arrangements
Joint statement on SM&CR and dual-regulated firms
Covid-19
Please see the other sections for product specific updates relating to Covid-19.
EBA updates report on the implementation of selected Covid-19 policies
On 21 December, the EBA published an updated report on the implementation of selected Covid-19 policies. The implementation report includes questions and answers brought to the attention of the supervisory community on the guidelines on legislative and non-legislative moratoria on loan repayments (GL on moratoria) – this is accompanied by a summary overview of the general payment moratoria in place in the EU in relation to the implementation of the GL on Covid-19 reporting and disclosure. The report also includes considerations of criteria that institutions should adopt with regard to operational risk in the context of Covid-19, enriched with respect to the previously published version to address questions raised in the meantime by institutions and supervisors. The common criteria provided in the report aim to reduce possible inconsistencies in the calculation of capital requirements and supervisory reporting related to operational risk. The report also provides clarifications on: (i) the likely identification of a Covid-19-triggered downturn period and its incorporation into downturn loss given default (LGD) estimation; and (ii) the treatment of the Covid-19 public guarantee schemes as a form of credit risk mitigation under the advanced internal ratings-based (A-IRB) approach.
Financial crime
ESMA annual report on the application of accepted market practices (AMPs) in accordance with MAR
On 22 December, ESMA published its annual report on the application of AMPs in accordance with MAR. The report covers the second semester of 2019 and the first semester of this year, including the last outstanding AMP established under the Market Abuse Directive, terminated over the reporting period. ESMA states that for the first time since MAR entered into force, there are no longer outstanding accepted market practices in Europe operating under the Market Abuse Directive (MAD). The report provides: (i) a general description of the legislative framework concerning the adoption of accepted market practices under MAR and of the ESMA Opinion on points for convergence in relation to MAR accepted market practices on liquidity contracts; (ii) information about the accepted market practices established in the EU both under MAD and MAR; and (iii) information on the legal status of MAD and MAR, as well as data on their application in practice. The report will be submitted to the EC.
ESMA third annual report on the administrative and criminal sanctions and other administrative measures issued under MAR
On 21 December, ESMA published its third annual report on the administrative and criminal sanctions and other administrative measures issued under MAR in 2019. Specifically, the report covers information on: (i) background and relevant regulatory framework for reporting on MAR administrative and criminal sanctions and other administrative measures; (ii) sanctions and measures imposed; (iii) guidance for interpretation of penalties and measures reported; and (iv) sanctions imposed by national competent authorities (NCAs) – in particular, overviews of the administrative sanctions and measures imposed in 2019.
Fintech
International Organization of Securities Commissions (IOSCO) report on the education of retail investors regarding risks of cryptoassets
On 22 December, IOSCO published a report on the education of retail investors regarding risks of cryptoassets. The report describes methods that regulators can use to provide educational material to retail investors on the risks of investing in cryptoassets and offers four areas of guidance covering the following activities: (i) developing educational content about cryptoassets; (ii) informing the public about unlicensed or fraudulent firms; (iii) using a variety of communication channels to inform investors; and (iv) forming partnerships to develop and disseminate educational materials. An Appendix to the report provides examples of IOSCO members’ use of different investor activities and initiatives regarding cryptoassets.
Hoc European Scrutiny Committee (ESC) report on EU’s MiCA and DLT Pilot
On 18 December, the House of Commons ESC published its 33rd report of the 2019-21 session, reporting on, amongst other things the EC’s legislative proposals for a draft Regulation on markets in crypto-assets (MiCA) and for a regulatory sandbox for DLT (DLT Pilot). The Committee notes that in an explanatory memorandum submitted to them by the Economic Secretary to the Treasury, the UK Government consider that EC’s proposals will have no direct implications for UK-based firms or consumers insofar as their UK business is concerned” and “there is no direct link to the UK’s future relationship with the EU” in financial services. However, the Committee has concerns for implications on the UK market, explaining that: (i) with the lack of any equivalence regime currently in the proposals, UK-based crypto-asset issuers and UK-based crypto-asset service providers may need to establish a legal entity or registered office in an EU member state; and (ii) should the market for stablecoins grow sufficiently large to have a potential impact on financial stability, the EU’s approach to mitigating any such risks could also impact on the UK given the interdependencies that exist between the UK and EU’s financial systems. The Committee states that it will be interesting to compare the compatibility between the EC’s proposals and the UK’s, on which the Government intends to consult before the end of this year.
Fund regulation
IOSCO industry survey on Exchange-Traded Funds (ETFs)
On 22 December, IOSCO published an industry survey on ETFs. To help inform its findings and policy analysis for its upcoming report to the IOSCO Board, IOSCO’s Committee 5 on Investment Management is asking Asset Managers and Liquidity Providers / Market-Makers to complete a voluntary survey. The purpose of the questionnaire is to support IOSCO’s project by enhancing its understanding of certain aspects of ETFs, including during the market volatility in March/April and, in particular, issues related to fixed-income ETFs. IOSCO will consider the questionnaire responses when formulating any potential guidance regarding ETFs in the future. The deadline for responses is 1 March 2021.
ESMA terms of reference of the Operational Working Group (OWG) of the Investment Management Standing Committee (IMSC)
On 22 December, ESMA published the terms of reference (dated 26 October) of the OWG of the IMSC. ESMA states that the main objective of the OWG is to promote common supervisory approaches and practices across Member States by enhancing mutual understanding, thereby improving convergence across the EU – when conducting this work, the OWG shall endeavour to ensure investor protection and promote stable, orderly and efficient financial markets. ESMA notes that the main areas of focus will be issues related to collective investment management activity. The terms of reference lists out the main tasks assigned to the OWG: (i) share supervisory knowledge and experiences on queries relating to the practical application of EU legislation in the area of investment management; (ii) support exchange of supervisory knowledge and experiences on real supervisory cases and practical supervisory issues; (iii) identify areas of divergence in supervisory practices or approaches, where further harmonisation might be necessary; (iv) support convergent implementation of recent or upcoming EU legislation and ESMA guidance into supervisory practices; (v) facilitate the organisation of ESMA supervisory workshops in the area of investment management and follow-up discussions on supervisory issues; (vi) develop ESMA supervisory briefings and similar operational documents aiming to ensure convergence in the way national supervisors approach relevant supervisory issues in practice; and (vii) operationalise Common Supervisory Action (CSA) and similar ESMA exercises on supervisory actions with a view to ensuring effectiveness and supervisory convergence.
Markets and markets infrastructure
European Central Securities Depositories Association (ECSDA) updates CSDR Settlement Fails Penalties Framework
On 22 December, the ECSDA published the updated version of its CSDR Settlement Fails Penalties Framework. The document highlights the changes that have been made since the previous document, as well as some pending assumptions, in the following sections: (i) reference data required for penalty calculations; (ii) exceptional situations where the cash penalties should not be applied; (iii) CSD participant insolvency; (iv) CSD participant late or non-payment (excluding insolvency); (v) penalties amounts reporting – illustrative examples; (vi) penalties reference data rules and recommendations; and (vii) other documents and references.
ESMA updates Q&As on the implementation of investor protection topics under MiFID II/MiFIR
On 22 December, ESMA published updated Q&As on the implementation of investor protection topics under MiFID II/MiFIR. The update includes a new Q&A on ‘Information on costs and charges’ that aims to give guidance on how firms can present ex-post costs and charges information to clients in a fair, clear and not misleading manner. In particular, the information should be presented: (i) through a standalone document (which could still be sent together with other periodic documents to clients); or (ii) within a document of wider content, provided that it is given the necessary prominence to allow clients to find it easily.
EC adopts Delegated Regulations on risk management and clearing obligation under EMIR
On 21 December, the EC adopted two Delegated Regulations under EMIR. Firstly, the EC adopted a Delegated Regulation that amends technical standards laid down in Delegated Regulation (EU) 2016/2251 as regards to the timing of when certain risk management procedures will start to apply for the purpose of the exchange of collateral. The amendments relate to the treatment of physically settled foreign exchange (‘FX’) forward and swap contracts, intragroup contracts, equity option contracts and the implementation of the initial margin requirements. The proposed amendments extend the current exemptions envisaged in the existing Delegated Regulation for a fixed period of time, ensuring the smooth functioning of the market and a level playing field between counterparties established in the EU. The Delegated Regulation also addresses the treatment of OTC derivative contracts novated from a counterparty established in the UK to a counterparty established in a member state as a consequence of Brexit. Secondly, the EC adopted a Delegated Regulation that amends regulatory technical standards (RTS) laid down in Delegated Regulations (EU) 2015/2205, (EU) 2016/592 and (EU) 2016/1178 as regards the date at which the clearing obligation takes effect for certain types of contracts. Under Article 4(2) of EMIR, intragroup transactions may be exempted from the clearing obligation. The amendments in the adopted Delegated Regulation propose to extend the exemption for intragroup transactions in order to allow more time for the EC to adopt the necessary equivalence decisions – the EC notes that it would be detrimental to EU firms and economically unjustified to let this exemption expire abruptly. Furthermore, the EC explains that after the UK exits the transition period, counterparties established in the UK will no longer be able to provide certain so-called “life-cycle events” in the EU under the EU Single market rules. To address this, counterparties to these transactions might choose to novate their contracts to entities established and authorised in the EU – however, the new contracts resulting from these novations might be subject to a clearing obligation that was not applicable at the time the original contracts were entered into. Thus, the proposed amendments address this disincentive to transfer contracts to firms established in the EU by extending the current exemptions envisaged in the three existing Delegated Regulations for a fixed period of time.
Delegated Regulation – Risk Management
Delegated Regulation – Clearing Obligation
ESMA updates Q&As on the implementation of EMIR
On 21 December, ESMA published updated Q&As on the implementation of EMIR. The update contains a new Q&A on the status under EMIR of derivative contracts that were executed in a regulated market in the UK, if the market becomes a third country market not considered to be equivalent to a regulated market. The update also amends Q&As on the reporting to trade repositories (TRs) transaction scenarios as well as the scope of reporting under exchange-traded derivative (ETD) reporting questions – these amendments clarify the reporting technique for derivatives executed on a third-country venue and cleared on the same day.
ESMA updates guidelines on reporting under SFTR
On 21 December, ESMA published an updated version of its guidelines on reporting under Articles 4 and 12 of the SFTR. The updated document shows corrections, additions and deletions in tracked changes. The following sections contain amendments: (i) general principles – determining the number of reportable securities financing transactions (SFTs) and action types; (ii) counterparty data; (iii) loan data; (iv) collateral data; and (v) operational arrangements for data access.
ESMA consults on MiFID II/MiFIR review report on algorithmic trading
On 18 December, ESMA published a consultation paper which adopts a holistic approach to algorithmic trading under MiFID II and reviews all related provisions together with the aim of having the current framework operating more efficiently. The consultation: (i) presents an overall approach towards algorithmic trading and high frequency trading and in particular the authorisation regime attached to these types of market participants, together with some quantitative analysis; (ii) discusses the organisational requirements for investment firms that engage in algorithmic trading, including high-frequency traders; (iii) focusses on the organisational requirements for trading venues that enable algorithmic trading on their systems; and (iv) addresses the other provisions that aim at better framing the activity of algorithmic and high-frequency traders such as tick sizes and market making, while also discussing new issues which have recently emerged on EU markets and are very closely linked to algorithmic trading, such as the deployment of mechanisms called speedbumps and the sequence of trade confirmation to individual participants by trading venues versus the public disclosure of such transactions. ESMA will consider the feedback it receives to this consultation and expects to publish a final report and submit it to the EC by July 2021. The deadline for comments is 12 March 2021.
The Working Group on Sterling Risk-Free Reference Rates paper on credit adjustment spread methods for active transition of GBP LIBOR referencing loans
On 18 December, the Working Group on Sterling Risk-Free Reference Rates published a paper addressed to lenders, borrowers and investors who are considering how to approach the differences between GBP LIBOR and SONIA when considering active transition mechanisms in, or actively amending, GBP LIBOR referencing loans (including multi-currency loans containing a GBP LIBOR option). The paper aims to facilitate consideration of the key methodologies emerging in the loan market, and how these compare to the approaches taken in the bond and derivatives markets. The Working Group encourages market participants: (i) to review the options available and decide on an appropriate approach; and (ii) who are going through the process of transition, where practicable and appropriate, to publicly disclose the fact of execution of transactions referencing SONIA (together with any disclosable information around the transition mechanisms, to the extent that it is not considered confidential or competitively sensitive).
EC adopts Delegated Regulation on liquidity thresholds and trade percentiles used to determine the size specific to the instrument (SSTI) applicable to non-equity instruments under MiFIR
On 18 December, the EC adopted a Delegated Regulation establishing regulatory technical standards (RTS) amending Delegated Regulation (EU) 2017/583 (RTS 2) as regards adjustment of liquidity thresholds and trade percentiles used to determine the SSTI applicable to certain non-equity instruments under MiFIR. RTS 2 introduced a phased approach to both the methodology to calculate the liquidity of bonds and, in respect of pre-trade transparency, the SSTI of non-equity instruments, including bonds. Under this approach, ESMA assesses annually, for four years, if a move to another, more strict, phase is warranted. Currently stage S1 is active. ESMA submitted its first annual assessment and recommends to move to phase two in order to make progress towards a more transparent trading environment for bonds. Thus, the EC states that the Delegated Regulation aims to achieve a move to phase two with regard to: (i) the liquidity assessment of bonds – the move means that the average daily number of trades (ADNT) will be decreased from 15 to 10, resulting in an expected increase of liquid bonds of around 50%; and (ii) the SSTI – the move will increase the threshold above which a pre-trade transparency waiver is available, which would primarily affect sovereign and covered bonds. If neither the Council nor the EP object to the Delegated Regulation, it will be published in the OJ and will enter into force on the 20th day following its publication.
Agency for the Co-operation of Energy Regulators (ACER) updates open letter on Brexit and implications on the registration of market participants and data collection under the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT)
On 18 December, ACER updated its open letter on Brexit and the implications on the registration of market participants and data collection under REMIT. The purpose of the letter is to give guidance to national regulatory authorities and to inform market participants and the wider market about the views of ACER with regard to certain repercussions on the implementation of REMIT after the end of the transition period. ACER states that in light of Article 9(1) of REMIT, market participants established or resident in the UK, or market participants from third countries currently registered in the UK, who wish to enter into transactions or place orders to trade in the EU’s wholesale energy markets after the end of the transition period will need to be registered with a national regulatory authority of another EU27 Member State where they are predominantly active (referred to as re-registration) – the same applies to market participants established or resident in the UK who are obliged to report lifecycle events to transactions entered into until 31 December. ACER confirms that the approval process of the UK market participants’ re-registration will commence on 4 January 2021. The letter also states that market participants will be able to continue reporting new orders placed and transactions concluded this year with their UK ACER code until 4 January 2021 – once re-registered with an EU27 national regulatory authority, they will receive a new ACER code for the reporting of records of transactions entered into and orders to trade placed as of 1 January 2021. ACER refers to ESMA’s public statement of 1 October on the impact of Brexit on the application of MiFID II/MiFIR, which also describes the application of the MiFID II “C(6) carve-out” with reference to the notion of a wholesale energy product according to Article 2(4) of REMIT; to complement ESMA’s assessment, ACER states that where UK electricity or natural gas would continue to be traded on a spot trading platform in the EU after the end of the transition period, derivatives relating to UK electricity or natural gas would continue to qualify as wholesale energy products under Article 2(4) of REMIT. ACER clarifies that such wholesale energy products would no longer be reportable to ACER as of 1 January 2021.
Delegated Regulation amending RTS on CCP colleges under EMIR published in OJ
On 18 December, Commission Delegated Regulation (EU) 2020/2145, amending Delegated Regulation (EU) No 876/2013 supplementing Regulation (EU) No 648/2012 of the EP and of the Council as regards changes to the composition, functioning and management of colleges for CCPs, was published in the OJ. The amendments reflect changes to Article 18(1) of EMIR introduced by EMIR 2.2, which attributes new responsibilities to CCP colleges, including for outsourcing arrangements. The Delegated Regulation will enter into force and apply on 7 January 2021 (20 days after its publication in the OJ).
FCA update on short selling bans and reporting
On 18 December, the FCA published an updated version of its statement on short selling bans and reporting. The FCA refers to ESMA’s renewal of its decision to temporarily amend the threshold for notifying net short positions to competent authorities under the Short Selling Regulation (SSR) from 0.2% of issued share capital to 0.1%. The FCA explains that for the UK, this decision will apply from 19 December 2020 until the end of the transition period and therefore firms should continue reporting to the FCA at this threshold until the end of the transition period. The FCA reminds firms that details on notifications of net short positons after the end of the transition period can be found on the related webpage, including an update relating to the Treasury announcement that they intend to lay a Statutory Instrument in early January to amend the threshold notification under Article 5(2) of the SSR from 0.2% to 0.1% of the issued share capital of an issuer.
BCBS and CPMI letter on managing FX settlement risk and the Global FX Code
On 18 December, BIS published a joint letter from BCBS and the Committee on Payments and Market Infrastructures (CPMI) to supervisors, banks and other participants on managing FX settlement risk. The letter encourages bank supervisors, banks and other participants in the FX market to follow the expectations set out in the 2013 BCBS Supervisory Guidance on managing FX settlement risk (BCBS guidance) and the Global FX Code (Principles 35 and 50). The letter explains that the 2019 BIS Triennial FX survey (Triennial) shows that FX settlement risk remains significant, with related analysis suggesting a fall in recent years in the proportion of trades with payment-versus-payment (PvP) protection, which eliminates principal risk. In response, BCBS and CPMI: (i) have agreed an action plan involving concerted supervisory action, supplemented with education and improved data and analysis; and (ii) welcome the Global FX Committee’s plans to strengthen the guidance on FX settlement risk in its Global FX Code, and to collect data to monitor FX settlement risk on a regular basis.
ESRB recommendation on restriction of distributions and summary of 40th regular meeting – Covid-19
On 18 December, the ESRB summarised the discussions held in the 40th regular meeting of its General Board on the impact of Covid-19 on the EU’s economy and the financial system. The ESRB: (i) welcomed the EC’s initiatives and emphasised that tackling non-performing loans should be high on the agenda of all authorities; (ii) highlighted priority issues for national support measures such as: (a) avoiding cliff effects while phasing out measures; (b) targeting fiscal measures at solvency support to viable firms; (c) monitoring private debt sustainability; (d) preparing for a scenario with increased distress in the corporate sector; and (e) enhancing financial institutions’ balance sheet transparency; (iii) highlights an Advisory Scientific Committee insight into corporate insolvencies in the context of the pandemic, to be published in early 2021; and (iv) decided to revise and extend its recommendation on restriction of distributions. The revised recommendation is in line with the decisions taken in parallel by the EBA, ECB and EIOPA. Previously the General Board included CCPs within the scope of its recommendation. However, ESMA's CCP stress test exercise confirmed the overall operational resilience of EU CCPs to common shocks and multiple defaults for credit, liquidity and concentration stress risks. Considering the effectiveness of the measures deployed by CCPs to mitigate operational risk, the General Board decided that it is no longer necessary to include CCPs within the scope of the recommendation. The recommendation will apply until 30 September 2021.
Prudential regulation
FCA outlines approach to interpreting reporting and disclosure requirements under the CRD and CRR binding technical standards (BTS)
On 22 December, the FCA has published guidance on the approach that it expects firms to take when interpreting EU-based references found in reporting and disclosure templates and associated instructions in the CRD and CRR BTS after IP completion day. The FCA further sets out approaches for certain specific issues and cases, which take precedence over the general approach. The FCA states that the guidance is aligned with the approach that the PRA has taken with respect to the CRD and CRR BTS containing reporting and disclosure templates and instructions.
Delegated Regulation as regards the deduction of software assets from Common Equity Tier 1 items under CRR published in OJ
On 22 December, Delegated Regulation (EU) 2020/2176, which amends Delegated Regulation (EU) 241/2014 as regards the deduction of software assets from Common Equity Tier 1 items under the CRR, was published in the OJ. The Delegated Regulation inserts Article 13a to Delegated Regulation (EU) 241/2014, setting out regulatory technical standards (RTS) specifying the application of the deductions of software assets that are classified as intangible assets for accounting purposes under Article 36(1)(b) of the CRR. The Delegated Regulation entered into force on 23 December (the day after its publication in the OJ).
EBA proposes appropriate methodology to calibrate Other Systemically Important Institutions (O-SIIs) buffer rates
On 22 December, the EBA published a report which recommends an EU-wide floor methodology to be introduced in the EU framework, ideally by 2022, to calibrate buffer rates of O-SIIs, in the context of the comprehensive review of the buffer framework and according to technical specifications laid down in the report. The EBA states that the proposed methodology included in the report aims at strengthening the stability of the banking sector and avoiding the under-calibration of O-SII capital buffer rates, while allowing the relevant authorities to consider national banking sector specificities. The proposed methodology will inform the EC’s further legislative initiatives that could shape the introduction of such an EU-wide floor. The EBA states that EU co-legislators could issue a legal mandate for the EBA covering both the identification and calibration process – this single mandate would contribute to increasing harmonised macroprudential supervisory practices in the EU. The EBA notes that with the proposed floor methodology, all EU institutions identified as O-SII will be assigned a non-zero percent buffer rate – national authorities will still retain the ability to set higher O-SII buffer rates than the prescribed floor and are encouraged to do so where deemed appropriate. Once implemented, the EBA suggests a first reassessment of the floor methodology after two years of implementation. The EBA emphasises that the recommendations included in the report should be seen as a preparatory step to inform EU co-legislators in view of legislative initiatives to design and operationalise an EU-wide methodology for the calibration of O-SII buffer rates. The EBA also published a user-friendly data visualisation tool that will allow stakeholders to better understand and navigate the charts, tables and most of the country-level data contributing to the findings and conclusions included in the report.
HOC Treasury Committee letter on upcoming statutory reviews – ring-fencing and proprietary trading activities
On 22 December, the HOC Treasury Committee published a letter from John Glen (Economic Secretary to the Treasury) to Mel Stride (Treasury Committee Chair) in relation to the appointment of the panel chair for the upcoming statutory reviews of both the ring-fencing regime legislation and banks’ proprietary trading activities. Mr John Glen states that ring-fencing is a key post-crisis structural reform to the UK banking sector – it is designed to increase the stability of the UK’s financial system by separating core retail banking services from banks’ investment activities. The letter states that the legislation that implemented the ring-fencing regime requires: (i) HMT to appoint an independent panel by 1 January 2021 to review the regime; and (ii) that an independent panel reviews firms’ proprietary trading activities, on which the PRA recently published a report. Given the close relation between the ring-fencing objectives and proprietary trading activity, Mr John Glen intends for one panel of six members, including a chair, to conduct both reviews.
The letter states that the panel will be independent of HMT, and the chair of the panel will have a unique opportunity to review a major piece of domestic banking reform – Mr John Glen intends to appoint Keith Skeoch, outgoing CEO of Standard Life Aberdeen, to the chair position of the panel and is considering further candidates for the remaining panel member appointments.
EC adopts Implementing Regulation on implementing technical standards (ITS) on supervisory reporting under CRR
On 21 December, the EC published the adopted text of an Implementing Regulation on the ITS on supervisory reporting of institutions under the CRR. The text reflects: (i) additional reporting requirements introduced by CRR II, including new requirements on counterparty credit risk and the net stable funding ratio (NSFR); (ii) changes to existing areas of reporting, including own funds, credit risk, large exposures, the leverage ratio and global systemically important institution (G-SII) indicators; and (iii) amendments to the CRR made by Regulation (EU) 2019/630, which established a prudential backstop for non-performing loans (NPLs)). The EC states that institutions should start supervisory reporting for the end of second quarter of 2021. However, reporting for the leverage ratio buffer should start from January 2023 as the application of the leverage buffer requirements was postponed to January 2023 by Regulation (EU) 2020/873. The Implementing Regulation will enter into force on the day following that of its publication in the OJ and it will apply from 28 June 2021, with the exception of the requirements for reporting on the leverage ratio buffer requirement for institutions identified as G-SIIs, which will apply from 1 January 2023. Articles 9 and 10, which contain reporting requirements for groups that consist only of investment firms, will cease to apply on 26 June 2026.
Recovery and resolution
EBA second report on the application of simplified obligations and waivers under the BRRD across the EU
On 22 December, the EBA published its second report on the application of simplified obligations and waivers under the BRRD across the EU. The report presents the results of the EBA monitoring on how competent and resolution authorities have applied the principle of proportionality for recovery and resolution planning in their respective jurisdictions, and describes the current level of convergence in this area. The EBA observed an increase in a number of authorities applying simplified obligations for less significant banks, especially for resolution planning purposes. The EBA states that there was a higher convergence when assessing which institutions are eligible for simplified obligations – however, significant divergences remained in determining reduced requirements for institutions benefiting from simplified regimes where the regulatory framework does not provide detailed guidance. Furthermore, the report highlights that: (i) the vast majority of competent and resolution authorities have used their discretion to grant simplified obligations by introducing less strict requirements for some credit institutions and investment firms; (ii) just a few EU authorities granted waivers to credit institutions as this is allowed only in those jurisdictions with specific regulatory frameworks for institutional protection schemes (IPS) and credit institutions affiliated to central bodies; (iii) a significantly improved level of harmonisation in the simplified obligations eligibility assessment methodologies applied by competent and resolution authorities compared to 2017; and (iv) the EBA observed significant differences in the determination by the authorities of the reduced level of BRRD requirements for recovery and resolution plans – divergent practices have been applied in relation to all possible areas in which such reductions could be introduced by the authorities.
SRB communication on permission regime on reduction of eligible liabilities
On 18 December, the SRB published a communication on its permission regime on the reduction of eligible assets. The SRB aims to (i) inform institutions under the SRB’s direct remit of two regulatory changes that require the SRB to adapt its current permission regime procedure for calling, redeeming, repaying or repurchasing eligible liabilities instruments ahead of their maturity; and (ii) to explain to institutions how the transition to the updated procedure will work. The first regulatory change is the application of Regulation (EU) 2019/877 (SRMR2), starting on 28 December with new MREL eligibility criteria applying to liabilities that qualify for MREL. The regulation expands the scope of liabilities subject to the permission regime to all MREL eligible liabilities. The second is the EBA’s forthcoming draft RTS under the revised CRR specifying the process for prior permission, including information requirements for permission applications and the time frame for resolution authorities to assess applications. The SRB underlines the importance of building up and maintaining an adequate MREL stock. If institutions have a MREL shortfall on 1 January 2022, the consequences of breaching the intermediate MREL targets range from the application of MREL maximum distributable amount restrictions to the measures set out in Article 12j of SRMR2 for MREL breaches.
PRA policy statement on transposing the BRRD
On 21 December, the PRA published a PS on transposing the BRRD. This contains feedback to responses made on the PRA’s consultation paper (CP) 18/20 which set out proposals to reflect the UK’s transposition of BRRD II, specifically amendments to the: (i) Contractual Recognition of Bail-in (CROB) Part of the PRA Rulebook (Appendix 1); and (ii) Stay in Resolution (Stays) Part of the PRA Rulebook (Appendix 2). HMT’s statutory instrument for BRRD II (the SI) was made on 2 December in order to deliver the transposition of BRRD II. The SI results in changes to primary legislation that will affect the existing PRA regime for CROB and Stays. The PRA states that most elements of the SI that are relevant to the CROB and Stays Rules will for the most part come into force on 28 December, but will subsequently cease to have effect from Implementation Period (IP) completion day (this process is referred to as sunsetting). The PRA received one response to the CP, specifically requesting clarification regarding the PRA’s proposal to amend the definition of ‘crisis management measure’ in the Stays Part. The PRA has decided to publish its final policy as consulted upon. In the CP, the PRA addressed the possibility of a firm submitting an impracticability notification to the BoE under the SI impracticability notification process, in the period from 28 December until IP completion day – the PRA confirms a notification submitted during these four days will automatically lapse on IP completion day if not acted upon by the BoE during that period. The temporary suspension of CROB 2.1 to 2.3 will be effective from 28 December until IP completion day. The existing CROB Part in its entirety, with minor amendments, will be effective on IP completion day. The temporary amendment to the Stays Part will be effective from 28 December until IP completion day, and the existing Stays Part will be reinstated on IP completion day. The policy that is set out in the PS and that will come into effect at the end of the transition period (on IP completion day) will need to be amended under the EU (Withdrawal) Act 2018 (EUWA) – these changes will be made separately by the PRA Rulebook (EU Exit) Instrument 2020.
BoE MREL approach review and extension of MREL and resolvability deadlines for mid-tier banks
On 18 December, the BoE announced extensions for mid-tier banks to comply with deadlines relating to the minimum requirement for own funds and eligible liabilities (MREL) and the resolvability assessment framework (RAF). The BoE explains that the extensions will allow the BoE to engage with stakeholders on the issues outlined in its discussion paper, also published, as the first part of the MREL Review. The BoE extended the deadline for ‘mid-tier banks’ to comply with their end-state MRELs to 1 January 2023, unless they are already subject to a later deadline. This replaces indicative end-state MREL compliance dates falling before that date that the BoE had previously communicated. Before this date, mid-tier banks are expected to continue to comply with their interim external and internal MRELs, as set in the BoE's June 2018 statement of policy on setting MREL or as otherwise communicated to them by the BoE. All other MREL deadlines and MRELs applicable to all other institutions remain unchanged. The BoE reminds firms that it intends to exercise its discretion with respect to the transition time firms are given to meet higher MRELs. Firms not currently subject to a leverage-based capital requirement, but which subsequently become subject to one, will be given at least 36 months after that requirement takes effect to meet any higher MREL resulting from it. Regarding resolvability assessment frameworks, the deadline for mid-tier banks to implement the BoE's June 2019 statement of policy on its approach to assessing resolvability and to achieve the three resolvability outcomes has also been extended to 1 January 2023. RAF deadlines for major UK banks and building societies are unchanged by this announcement. In the discussion paper, the BoE is seeking views in relation to: (i) the purpose of MREL in the context of the development of effective resolution regimes; (ii) the potential impact on the statutory special resolution objectives of a hypothetical mid-tier bank failure in a scenario where insufficient MREL resources are available for an orderly resolution, and the bank is required to enter an insolvency procedure; (iii) banks’ experience in issuing liabilities to meet their MRELs; (iv) the potential interactions of the MREL regime with other regulatory developments; (v) the provision of a transition period of at least three years; and (vi) the BoE's definition of transactional accounts for the purposes of its indicative resolution thresholds. The deadline for responses is 18 March 2021. They will form the basis of a consultation paper that the BoE expects to publish in summer 2021.
Sustainable finance
FCA policy statement introduces rule to enhance climate-related disclosures
On 21 December, the FCA published a PS, final rule and guidance promoting better climate-related financial disclosures for UK premium listed commercial companies. The FCA has introduced a new rule in Listing Rule (LR) 9.8 requiring that commercial companies with a UK premium listing (including sovereign-controlled commercial companies) include a statement in their annual financial report setting out: (i) whether they have made disclosures consistent with the TCFD’s recommendations and recommended disclosures in their annual financial report; (ii) where they have not made disclosures consistent with some or all of the TCFD’s recommendations and/or recommended disclosures, an explanation of why, and a description of any steps they are taking or plan to take to be able to make consistent disclosures in the future – including relevant timeframes for being able to make those disclosures; (iii) where they have included some, or all, of their disclosures in a document other than their annual financial report, an explanation of why; and (iv) where in their annual financial report (or other relevant document) the various disclosures can be found. The rule is accompanied by guidance to help listed companies determine whether their disclosures are consistent with the TCFD’s recommendations and recommended disclosures. The guidance will also clarify the limited circumstances in which we would expect in-scope companies to explain rather than disclose. The rule will apply for accounting periods beginning on or after 1 January 2021, meaning the first annual financial reports subject to the rule would then be published in spring 2022. The PS contains a technical note clarifying existing disclosure obligations in EU legislation and its Handbook – issuers may, in the FCA’s view, already be required to make disclosures on climate-related and other ESG matters under particular provisions of the LR, Disclosure Guidance and Transparency Rules (DTR), MAR and the Prospectus Regulation, in certain circumstances. The FCA aims to publish further consultation papers to extend the application of TCFD disclosures in early 2021.
Other developments
ESMA guidelines on outsourcing to cloud service providers
On 18 December, ESMA published a final report on its guidelines on outsourcing to cloud service providers. ESMA states that the purpose of the guidelines is to help firms identify, address and monitor the risks that may arise from their cloud outsourcing arrangements and to support a convergent approach to the supervision of cloud outsourcing arrangements across competent authorities in the EU. The report provides an overview of the feedback received through the responses to ESMA’s consultation on the proposed draft Guidelines which closed on 1 September and explains how ESMA took the feedback that it received into account. It also contains the final set of Guidelines on outsourcing to cloud service providers. The Guidelines will be translated in the official EU languages and published on ESMA’s website – the publication of the translations will trigger a two month period during which national competent authorities (NCAs) must notify ESMA whether they comply or intend to comply with the guidelines.