Key Regulatory Topics: Weekly Update 21–27 February 2020
27 February 2020
Our weekly update on key regulatory topics affecting the financial services sector.
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Please see our Markets and Markets Infrastructure section for an update on HMT’s draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2020, which reflect amendments made by EMIR 2.2.
The UK Government’s approach to negotiations for the future relationship with the EU
On 27 February, HMT published its policy paper on the UK’s approach to negotiations for the future relationship with the EU. HMT draws on, inter alia, the: (i) manifesto on the basis of which the Government won the 12 December 2019 general election and the Prime Minister’s speech in Greenwich on 3 February, which both illustrate a vision of a relationship based on friendly cooperation between sovereign equals, respecting one another’s legal autonomy; and (ii) UK / EU Political Declaration of 17 October, emphasising that a Comprehensive Free Trade Agreement (CFTA) should be at the core of the future relationship. The government will work hard to agree arrangements on these lines. However, if it is not possible to negotiate a satisfactory outcome, then the trading relationship with the EU will rest on the 2019 Withdrawal Agreement and will look similar to Australia's. The Government will not extend the transition period. The Government intends to invite contributions about the economic implications of the future relationship from stakeholders via a public consultation, which will begin later this spring. HMT also published a webpage, stating that the Government is seeking the type of agreement which the EU has already concluded in recent years with Canada and other friendly countries. Their proposal draws on previous EU agreements such as the Comprehensive Economic Trade Agreement, the EU/Japan Economic Partnership Agreement and the EU/South Korea Free Trade Agreement (FTA). It is consistent with the Political Declaration, specifically the aim of concluding a ‘zero tariffs, zero quotas’ FTA.
HMT Policy Paper
EC on the current status of the EU’s relationship with the UK
On 26 February, the EC published a speech by Michel Barnier (head of task force for relations with the UK) in regard to the current status of the EU’s relationship with the UK. Although the EU’s deals with Canada or other countries provide reference points, each agreement needs to be tailored. The EU are ready to offer the UK ‘super-preferential' access to its markets. Though, this is not something the EU can do without firm guarantees that the UK will respect a level playing field and avoid unfair competitive advantages. Thus, the EU ask that the EU and the UK lay down a number of rules together, building on their current high standards in specific areas: (i) state aid; (ii) environmental protection and the fight against climate change; (iii) social and labour rights; and (iv) taxation issues. In regard to financial services, Mr Barnier stresses that equivalences will never be global nor permanent, and will remain unilateral decisions and will not be subject to joint management with the UK.
European Council authorises the opening of negotiations with the UK for a new partnership agreement
On 25 February, the European Council adopted a decision, authorising the EU to open negotiations with the UK for a new partnership agreement. The decision draws on, inter alia: (i) the guidelines of 23 March 2018, where the European Council restated the EU's determination to have a close partnership with the UK; (ii) the Political Declaration which sets out the framework for the future relationship; and (iii) Article 184 of the Withdrawal Agreement which provides that both parties are to take necessary steps to negotiate the agreements governing their future relationship referred to in the Political Declaration.
The International Capital Market Association (ICMA) give guidance on the transition to risk-free rates (RFRs) in the international bond market
On 27 February, ICMA published its guide on the transition to RFRs in the international bond market. This gives guidance on: (i) the need to transition to RFRs; (ii) new RFR-linked floating rate notes; (iii) the differences between LIBOR and RFRs; (iv) RFR bond market conventions; (v) use of term rates; (vi) fallbacks in IBOR bonds; (vii) legacy LIBOR bonds; (viii) spread adjustment; (ix) EU Benchmarks Regulation and regulatory issues in the UK; (x) ICMA documentation; and (xi) next steps/key priorities. The key issues on which ICMA is focused in the transition from IBORs to alternative near RFRs in the international bond market are: (a) floating rate notes; (b) covered bonds; (c) capital securities; (d) securitisations; and (e) structured products. ICMA will continue to participate in the Working Group on Sterling Risk-Free Reference Rates, the Working Group on Euro Risk-Free Rates and the National Working Group on Swiss Franc Reference Rates.
Please see our Markets and Markets Infrastructure section for an update on the PRA’s policy statement which makes corrections and updates references in regard to the Senior Managers & Certification Regime (SM&CR), as well as for an update on the FMSB’s 2019 annual report.
Please see our Consumer/Retail section for an update on The Lending Standards Board’s (LSB’s) recommendations on the Access to Banking Standard.
Please see our Other Developments section for an update on a motion for an EP resolution on the Banking Union annual report 2019, which discusses customers’ rights in the context of NPL transactions, banking fees and product costs.
EC test retail investors’ preferred option within the Key Information Document (KID) under the Packaged Retail and Insurance-based Investment Products (PRIIPs) framework
On 27 February, the EC published its final report on consumer testing services, detailing retail investors’ preferred option regarding performance scenarios and past performance information within the KID under the PRIIPs framework. The EC will carry out consumer testing on the proposed options for three different types of PRIIPs (investment funds, structured product and IBIPs). The general objective is to test the effectiveness of different contents and formats of presenting information on past performance and potential future performance (performance scenarios) of PRIIPs. The EC, in cooperation with the ESAs, have proposed different options for the presentation of performance scenarios within the PRIIPs KID. The specific objectives are represented by: (i) testing whether alternative presentations of potential future performance are better understood by the retail investor than the existing format of the PRIIPs KID; (ii) testing how information on past performance should be shown; and (iii) testing whether these alternative presentations have an impact on the ability of the retail investor to compare between different PRIIPs.
The Lending Standards Board’s (LSB’s) recommendations on the Access to Banking Standard
On 24 February, the LSB published a summary report on the Access to Banking Standard. Although overall compliance with the Standard is satisfactory, the LSB have identified a number of instances of non-adherence. The LSB recommend that: (i) firms ensure that they have robust internal oversight programmes; (ii) firms ensure that branch staff are supported with appropriate and timely training; (iii) the details of impact assessments (IA) and how customers and stakeholders can access copies of these are included within closure notice letters as well as other communications; and (iv) there should be a consistent minimum approach in respect of providing impacted customers with information about where to access support after closure of a branch, such as making IA available online for a set period. Good practice includes: (a) taking a broader view of the impact of a proposed change and considering local conditions; (b) highlighting that further information will be published during the notice period as well as providing timescales for such publications within initial communications; (c) maintaining a presence in the community after the closure of a branch; and (d) the use of materials such as branch posters. The LSB has committed to developing industry guidance, with first proposals due in Spring.
HM Treasury (HMT) and the Department for Digital, Culture, Media & Sport (DCMS) intend to expand the dormant assets scheme
On 21 February, HMT and the DCMS published a consultation paper on expanding the dormant assets scheme beyond bank and building society accounts. The government intends to expand the scheme to: (i) dormant insurance policy proceeds; (ii) dormant share proceeds; (iii) dormant unit proceeds; (iv) dormant investment asset distributions and proceeds; and (v) other dormant security distributions. This presents an opportunity to unlock substantial sums of unclaimed assets for good causes while maintaining and improving consumer protection. To achieve this, both primary legislation and amendments to relevant industry rules are required. The legislative framework for an expanded scheme will need to set out a number of measures, including: (a) definitions of the assets that could be transferred to an authorised reclaim fund (ARF); (b) definitions of dormancy with respect to each of those assets; (c) definitions of eligible participants, including required characteristics; (d) the termination of a participant’s liability to repay customers the amount transferred and creation of a liability on the ARF to repay it; (e) how an ARF can deal with and distribute dormant asset funds; (f) the functioning of the alternative scheme for smaller banks and building societies; (g) a requirement for participants to retain certain data following the transfer of an asset into the scheme; and (h) other consumer protections. HMT and the DCMS confirm that: (1) the definition of dormancy for bank and building society accounts will remain the same; (2) the ways in which dormant assets funding can be distributed, allocated and directed will be unchanged; (3) participants will continue to act as agents of an ARF; and (4) the alternative scheme for smaller banks and building society accounts will be maintained. The deadline for comments is 16 April.
Please see our Other Developments section for an update on a motion for an EP resolution on the Banking Union annual report 2019, which provides discussion on anti-money laundering (AML) and combating the financing of terrorism (CFT).
Please see our Investigations Insight Blog for an update on Part State-owned enterprises and Politically Exposed Persons (PEPs). A recent UK Court of Appeal decision has provided guidance on the meaning of ‘State-owned enterprise’ (on which there was a surprising lack of any previous authority) and PEPs. Please see our Investigations Insight Blog for an update on financial reporting and auditors under the spotlight in Australia. The Australian Securities and Investments Commission (ASIC) has released a review of financial reports from the period ending 30 June 2019. This review, together with ASIC’s recent enforcement update and audit inspection report, highlights one of ASIC’s key priorities – to engage in high deterrence value enforcement actions against corporations and auditors to ensure that financial statements give an accurate and fair view of a company’s financial position.
Financial Markets Law Committee (FMLC) seeks to clarify trusts registration under the Fifth Money Laundering Directive (MLD5)
On 25 February, the FMLC published its response to HMT and HMRC in regard to their joint consultation paper on the trusts registration aspects of transposing MLD5. As it is unclear whether certain trusts may fall within the scope of the proposed registration requirement, the FMLC seeks to clarify this and recommends that bespoke exemptions are drafted for the following types of trusts given their systemic importance: (i) trusts created for the purpose of managing systemic and other risks in the financial markets infrastructure (FMI) context; (ii) BoE as "security trustee”; and (iii) trusts in support of the FMI settlement and accounting arrangements. Exemptions for these FMI trusts could be addressed by a suitably targeted systemic protection or FMI exemption. Although the consultation does not specifically address the question of legal entity identifiers ("LEIs"), the FMLC emphasises the importance of LEIs in the context of the expansion of the anti-money laundering regulatory regime to cover virtual currencies. The use of LEIs as part of disclosure requirements for firms offering cryptoasset exchange services and custodian wallet service providers could contribute significantly to transparency. A requirement to utilise LEIs would help investors identify token issuers without the need for intermediaries, therefore protecting against fraud.
HMT advise on money laundering and terrorist financing controls in higher risk jurisdictions
On 24 February, HMT published its advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions. In regard to the Democratic People's Republic of Korea (DPRK) and Iran, HMT advise to consider them as high risk and apply counter measures and enhanced due diligence measures in accordance with the risks. Albania, The Bahamas, Barbados, Botswana, Cambodia, Ghana, Iceland, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Pakistan, Panama, Syria, Uganda, Yemen and Zimbabwe are listed as countries for which appropriate actions should be taken to minimise the associated risks and these actions may include enhanced due diligence in high-risk situations. The DPRK, Iran, Myanmur, Nicaragua, Syria, Yemen and Zimbabwe are subject to financial sanctions measures, requiring firms to take additional measures. As it has significantly improved its AML/CTF regime, Trinidad and Tobago is no longer subject to the Financial Action Task Force’s (FATF's) increased monitoring process.
Please see our Financial Crime section for an update on the FMLC’s response to HMT and HMRC in regard to their joint consultation on the trusts registration aspects of transposing MLD5, which discusses the importance of legal entity identifiers (LEIs) in the context of the expansion of the anti-money laundering regulatory regime to cover virtual currencies.
EC begin digital finance strategy
On 26 February, the EC published that it is working on a strategy for digital finance, to ensure that the EU can make the most of FinTech and compete globally. The strategy will be presented in Q3 of this year. To feed into the strategy, the EC wants to get the advice and opinions of consumers, companies and national authorities. To obtain this feedback, a public consultation will be launched from March to May. The Commission is inviting views on some of the key political and ethical questions raised by digital finance, and how the EU should address them. A series of events in key FinTech cities in the EU will be organised as well as a closing conference in Brussels, in order to exchange the best practices applied in local ecosystems and to learn about the challenges that they are facing, particularly when seeking to expand beyond their national borders. A hackathon will be organised in parallel to the consultation, which will bring together engineers and policymakers to generate digital solutions that could benefit EU FinTech.
Markets and markets infrastructure
Please see our Markets and Markets Infrastructure section for an update on the ECB’s speech on stepping up coordination on risks in central clearing.
Basel Committee support benchmark rate reforms
On 27 February, the Basel Committee published a newsletter on their support of benchmark rate reforms, as this will strengthen the robustness and reliability of existing inter-bank offered rates (IBORs) and promote the development of alternative reference rates. It is critically important that banks consider the effects of benchmark rate reforms on their businesses, and should maintain a close dialogue with their supervisory authorities regarding their plans and transition progress. In cases where banks continue to use IBORs, the Basel Committee encourages them to include in their contracts robust fallback language that determines how the replacement of a discontinued reference rate would be handled. The Committee welcomes the work of accounting standard setters to develop guidance that will address the accounting effects on financial reporting from the transition to the alternative reference rates. The Committee clarifies that under the Basel Framework, amendments to capital instruments pursued solely for the purpose of implementing benchmark rate reforms will not result in them being treated as new instruments for the purpose of assessing the minimum maturity and call date requirements or affect their eligibility for transitional arrangements of Basel III. Banks that are required to submit model changes for approval should discuss their submission plans with their supervisory authorities. During the course of this year, banks should expect greater supervisory scrutiny of their preparations and contingency planning.
FCA’s expectations of firms for the transition away from LIBOR
On 27 February, the FCA published a letter to CEOs of UK regulated asset management firms on its expectations in regard to the transition away from LIBOR. The FCA reminds CEOs of the need to accelerate efforts to ensure that firms are prepared for LIBOR cessation by the end of 2021. All asset management firms should assume LIBOR will cease after December 2021. If firms offer products or services that are exposed to or dependent on LIBOR, they should consider whether their products and services will meet the needs of clients and perform in the manner expected after 2021. Where firms issue new products with LIBOR exposure beyond 2021, they may need to pay attention to whether such products comply with product governance rules. Firms should ensure all operational processes are prepared for the transition to alternative rates. If firms retain material exposures to or dependencies on LIBOR, they should be undertaking transition activities and they should establish a proportionate transition plan agreed by their governing body (’the Board’). The Board should have oversight of the transition process, and seek support and challenge from second and third lines of defence. Senior managers need to be aware of the risks of LIBOR transition, and firms must be clear about who is accountable for managing each aspect of the transition where appropriate. Transition plans should include appropriate milestones across all relevant business functions. When making changes to product documents, firms should consider which obligations may be triggered. To avoid the risks of LIBOR transition whilst investing on clients’ behalf in instruments which reference LIBOR, firms can invest in instruments that already reference alternative rates or have fall-back provisions. Alternatively, they can convert outstanding instruments to alternative rates or add in fall-back provisions. Any conflicts of interest arising from LIBOR transition must be mitigated.
The International Securities Lending Association (ISLA) update SFTR report modeller
On 26 February, ISLA announced that it updated its SFTR report modeller. It has been modified to include all of the latest changes to the Regulatory Technical Standards (RTS) released by the European Securities Market Association (ESMA) in January 2020, and represents the current Level III standard for SBL transactions and collateral reporting. It now also contains repo fields required to support structured finance trades, supporting all reportable products under ISLA’s governance.
International Swaps and Derivatives Association (ISDA) on industry best practices for EMIR reporting
On 26 February, ISDA published a matrix developed jointly with the EFAMA, EVIA, FIA, BVI, GFXD and IA on industry best practices for EMIR reporting. It has been established based on the EMIR validation table published by ESMA which contains the Regulatory Technical Standards (RTS), the Implementation Technical Standards (ITS) and validation rules. The intention is for these EMIR Reporting Best Practices to be widely accepted as standard market practice which complements the EMIR reporting RTS and ITS. The EMIR reporting best practices cover 87 data points across 61 reporting fields, including both over-the-counter and exchange-traded derivatives, and were developed to improve the accuracy and efficiency of trade reporting and to reduce compliance costs. The best practices may be updated periodically.
ISDA Press Release
BoE turbo-charge sterling LIBOR transition
On 26 February, the BoE published a speech by Andrew Hauser (executive director) on turbo-charging sterling LIBOR transition, discussing why 2020 is the year for action and what the BoE is doing to aid the transition. Mr Hauser announces two new initiatives: (i) the BoE is intending to publish a compounded SONIA index from July to help market participants construct compounded SONIA rates in an easy and consistent way; and (ii) a new policy on LIBOR-linked collateral that it lends against. The SONIA-linked index will allow market participants to calculate a wide range of compounded SONIA rates for longer-than-overnight products more easily, reducing uncertainty and increasing flexibility. The BoE has published a discussion paper which includes illustrative calculations based on SONIA data, to show how the proposed compounding products could work. The new policy on LIBOR-linked collateral composes of two key elements: (1) from Q3, the BoE will progressively increase the haircuts on LIBOR-linked collateral pre-positioned with it, giving firms the time they need to replace the collateral with risk free rate alternatives whilst ensuring borrowing capacity is maintained and public funds are protected; and (2) in line with the Working Group’s Q3 target for no new term LIBOR loan issuance, any LIBOR linked collateral issued after October will be ineligible for use at the BoE. Mr Hauser addresses the progress made so far in sterling markets. Details of the haircut add-ons are provided in a market notice. The haircut add-on will be 10 percentage points from 1 October 2020, 40 percentage points from 1 June 2021 and 100 percentage points from 31 December 2021. For derivatives instruments, SONIA usage still needs to be higher, thus the BoE and FCA have strongly encouraged market makers to use SONIA as the standard reference rate for sterling interest rate swaps from 2 March. For cash instruments and lending, a substantial scaling up is required to meet the market’s target of no new issuance of term LIBOR-linked cash instruments after Q3. Thus, a new market-led ‘Loans Enablers’ taskforce has been established under the Working Group to identify and deliver incremental tools in four main areas: (a) conventions; (b) infrastructure; (c) documentation; and (d) communications.
BoE Market Notice
ECB on stepping up coordination in central clearing between banks and central counterparties (CCPs)
On 26 February, the ECB published a speech by Fabio Panetta (member of the Executive Board) on stepping up coordination on risks in central clearing from the second conference on CCP risk management. The large payment flows between CCPs and their participants mean that inadequate financial risk management of CCPs could transmit serious financial strains to institutions that are Eurosystem monetary policy counterparties, as well as to interconnected payment systems and repo markets. Robust arrangements for cross-border cooperation among authorities (which is not yet at the level it should be) are an overarching ECB priority with a view to ensuring central clearing robustness. Also, effective coordination between banks and CCPs is a prerequisite for safe and efficient central clearing. Current shortcomings in coordination reflect two main weaknesses: (i) diverging interests of banks and CCPs; and (ii) knowledge gaps which aggravate diverging interests. Action is necessary to improve these problems, including: (a) improving the institutional setting for information sharing and coordination among CCPs, banks and public authorities; (b) increasing the role of the private sector such as forming a private sector-led standing forum for dialogue between the main industry associations of CCPs and banks; (c) for individual CCPs, moving beyond the purely administrative preparation of cooperation in stress events; and (d) regulatory action to address, inter alia, the diverging interests around the allocation of losses in CCP recovery and resolution.
FMSB seeks to identify global market vulnerabilities and best market practices
On 25 February, the FMSB published its 2019 annual report, setting out its strategy for the period to 2021. The strategy advances four strategic goals, these being to: (i) identify global market vulnerabilities, particularly where there is a regulatory void or an unregulated area; (ii) develop best market practice; (iii) drive global adherence; and (iv) develop consistent approaches to market practices. Through a phased approach to identifying and prioritising emerging vulnerabilities using horizon scanning, the FMSB will identify priorities to set a medium-term workplan, producing standards on specific topics. The systemic horizon scan, which considers asset class, activity and behavioural dimensions, is likely to identify emerging and on-going vulnerabilities including the role and use of technology in wholesale markets. As the financial services sector prepares for LIBOR transition, a post-Brexit world and the further electronification of European fixed income trading, it is important that the FMSB identifies best practices that result in more transparent, fair and effective markets. To achieve this, the FMSB is undertaking the following work: (a) two standards on large trades, and sharing of new issue information; (b) two statements of good practice on algorithmic trading, and trading platforms; and (c) finalising the statement of good practice on auctions published in December 2019. An emerging workstream of the FMSB’s is on the replacement of IBOR with near risk-free rates. In 2020, the FMSB will be starting work on three initiatives to improve the delivery of FMSB Standards and Statements of Good Practice, specifically by: (1) considering the creation of a consolidated, integrated text of its materials; (2) developing new methods of distribution; and (3) preparing for the periodic reviews of Standards. The FMSB also seek to assess whether FMSB Standards and Statements of Good Practice are having a practical impact on day-to-day business in wholesale FICC markets, as well as exploring how member firms are adhering to FMSB Standards.
FCA changes its notification process for net short positions
On 24 February, the FCA announced its amended process for submitting notifications in regard to net short positions under the Short Selling Regulation. To be able to submit a short selling notification to the FCA on behalf of a position holder (whether a firm or an individual), the person making the notification (the reporting person) must be registered with the FCA. A personal ESS account must be created and one of the following Position Holder registration types must be submitted: (i) new position holder firm; (ii) existing position holder; or (iii) new position holder individual. For all registration types, an authorisation letter is required to be uploaded on the ESS portal. For registration of a new position holder firm, a certificate of incorporation of the firm is required. For registering a new individual position holder, a copy of the position holder’s driving license or passport must be provided. If there is more than one reporting person for a position holder, each reporting person must complete the registration process.
ISDA consult again on pre-cessation fallbacks in derivatives and summarise responses to previous consultation
On 24 February, ISDA published another consultation on whether to add a pre-cessation trigger (‘pre-cessation fallback provisions’) to the permanent cessation fallbacks that it is implementing for LIBOR in its standard documentation, given additional information in the market since its May 2019 consultation on pre-cessation issues last year. The deadline for comments is March 25. A majority of respondents (71.9%) to that consultation stated that generally they would not want to continue referencing LIBOR in derivatives contracts, following a public statement by a regulator that such IBOR was no longer representative. A smaller majority of respondents (64%) replied that generally they would not be content to continue referencing an unrepresentative covered IBOR in legacy contracts. Generally, the respondents to the Pre-Cessation Consultation broadly desired a uniform transition to fallback rates across products and currencies. However, the respondents expressed a wide variety of views regarding whether and how to implement a pre-cessation trigger for covered IBORs, related to non-representativeness for derivatives, falling into four categories: (i) those who supported adding a pre-cessation trigger to the permanent cessation triggers in the “hard wired” amendment to the 2006 ISDA Definitions but did not specifically address a preference regarding optionality or flexibility (14.6%); (ii) those who also supported adding the trigger but opposed the publication of a protocol with optionality or flexibility (26.97%); (iii) those who supported the use of a pre-cessation trigger and supported implementation with optionality and flexibility (22.5%); and (iv) those who opposed the use of a pre-cessation trigger (28.1%).
ISDA Report summarising responses to May 2019 consultation
Draft Brexit SI reflects amendments made by EMIR 2.2
On 24 February, HMT published a draft version of The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2020. The Regulations make amendments to primary legislation, existing regulations made under section 8 of the European Union (Withdrawal) Act 2018 (EUWA) and the EMIR regulation. These amendments take account of the fact that the EMIR regulation has been amended by Regulation 2019/2099 (EMIR 2.2). In particular, the draft SI fixes deficiencies inregard to: (i) the transfer of functions from ESMA and the EC to the BoE and HMT; (ii) tiering; (iii) on-going supervision; (iv) location policy; (v) delegated acts; (vi) recognition powers during the transition period; (vii) relevant rulebook and binding technical standard changes; and (viii) stakeholders. HMT plans to lay the instrument before Parliament in the Spring.
ICMA recommendations on reporting repo transactions under the SFTR
On 24 February, the ICMA published a guide for its recommendations on reporting under the SFTR for repo transactions, specifically on: (i) the scope of reporting obligations; (ii) back-loading; (iii) the Unique Transaction Identifier and Market Identifier Code; (iv) counterparty data; (v) loan data fields; (vi) collateral data fields; (vii) reporting special transactions; (viii) reporting central counterparty (CCP) cleared repos; (ix) reporting life-cycle events; (x) reporting re-use of collateral; and (xi) commodity repos. The guide applies to repurchase transactions as well as buy/sell-backs and will be updated occasionally to reflect: (a) additional guidance from ESMA and National Competent Authorities; or (b) changes in the market consensus in relation to specific questions and market practice. The guide is supplemented by a suite of sample reports and an overview of repo life-cycle event reporting.
ICMA Suite of sample reports
ICMA Overview of repo life-cycle
PRA confirms final policies on LIBOR and the Senior Managers & Certification Regime (SM&CR)
On 24 February, the PRA published a policy statement, setting out its responses to feedback received on some of the proposals in its October 2019 occasional paper (CP25/19). This provides the final policies relating to chapters two and three. In chapter two, the PRA removed references to LIBOR in: (i) the supervisory statement for supervising building societies' treasury and lending activities (SS20/15); and (ii) the statement of policy on the PRA’s methodologies for setting Pillar 2 capital (SoP). In chapter three, the PRA has made corrections and has updated references in: (a) the supervisory statement for strengthening individual accountability in banking (SS28/15); and (b) the supervisory statement for strengthening individual accountability in insurance (SS35/15). The policy took effect when it was published. The PRA will keep the policy under review to assess whether any alterations will be required as a result of changes in the UK regulatory framework at the end of the transition period.
Payment services and payment systems
Please see our Markets and Markets Infrastructure section for an update on the ECB’s speech on stepping up coordination on risks in central clearing, which discusses large payment flows between CCPs and their participants, as well as interconnected payment systems.
Extension of interim funding for scam victim compensation
On 27 February, UK finance announced that the interim funding arrangement to pay compensation to victims of authorised push payment (APP) scams in situations where both the customer and their bank have met the standards expected of them under the APP scams voluntary Code is being extended to 31 December. This allows more time for regulators, government and industry to deliver a long-term, sustainable funding arrangement. Read more
ECB seeks feedback on amendments to the Regulation on payments statistics
On 27 February, the ECB published a draft Regulation amending the Regulation on payments statistics. As noted in their announcement of a consultation on this draft regulation, it introduces reporting requirements for information on innovative payment services and channels, payment schemes, and fraudulent payment transactions. Collecting this information will enable the ECB to perform its catalyst and oversight roles in the areas of retail payments and payment systems more effectively. In addition, more detailed and frequent statistical information on card payments will help to enhance the ECB’s understanding of cross-border trade and economic developments. The regulation has been reviewed with the aim of keeping the ECB’s statistics fit for purpose. The review also takes into account an assessment of the relative merits of new requirements against the potential costs to reporting agents. The ECB will hold a public hearing on 23 March. The deadline for comments is 9 April. The outcome of the consultation will be taken into account when finalising the draft Regulation. Draft regulation Press release announcing consultation
Please see our Sustainable Finance section for an update of the launch of the COP26 agenda for discussion of a macroprudential stress test to assess climate-related risks.
Please see our Other Developments section for an update on a motion for an EP resolution on the Banking Union annual report 2019, which discusses the development of a macroprudential toolkit.
Basel Committee on reviewing vulnerabilities and emerging risks, advancing supervisory initiatives and promoting Basel III implementation
On 27 February, the Basel Committee on Banking Supervision met to review the risks impacting the banking system, to advance a range of supervisory initiatives as well as to promote the implementation of Basel III. The Committee has consulted with members and stakeholders on its future priorities, its structure and its processes, and it aims to finalise its review in the course of the year. The Committee discussed the financial stability implications of the coronavirus outbreak (Covid-19) for the banking system and exchanged information on the business continuity measures that banks and authorities have put in place. The Committee encourages banks and supervisors to remain vigilant in light of the evolving situation and notes the importance of effective cross-border information sharing and cooperation. In regard to vulnerabilities associated with leveraged loans and collateralised loan obligations (CLOs), banks have the largest direct exposures to these markets among financial participants. In regard to the Task Force on Climate-related Financial Risks, a summary of a stocktake of members’ current initivatives will be published in March. In terms of the task force’s workplan and future deliverables include: (i) a set of analytical reports on climate-related financial risks including a literature review; and (ii) the development of effective supervisory practices. As part of its ongoing Regulatory Consistency Assessment Programme, the Committee approved the reports assessing the implementation of the Net Stable Funding Ratio and Large Exposures standards in Hong Kong SAR, Indonesia and Singapore, which will be published in March. The Committee will publish: (a) a consultation paper aimed at strengthening the operational resilience of banks in March; and (b) a report on members' experience in using the countercyclical capital buffer in due course.
European Systemic Risk Board (ESRB) on the macroprudential implications of level 2 and 3 financial instruments
On 25 February, the ESRB published a report on the macroprudential implications of financial instruments measured at fair value, specifically those classified as level 2 and 3 instruments for accounting purposes. The ESRB identifies three main areas where such financial instruments can affect financial stability through both a capital and a transparency channel, these being: (i) incorrect valuations, especially given the significant degree of discretion that exists when allocating financial instruments to levels 2 and 3; (ii) times of stress, in which level 2 and 3 instruments may become less liquid; and (iii) whether risks stemming from the instruments are appropriately reflected in capital requirements. The ESRB go onto state that the Fundamental Review of the Trading Book (FRTB) represents a significant improvement in the way that market risk is considered in banks’ regulatory capital requirements and that it should be promptly implemented in the EU, so that capital requirements better reflect the underlying market risk. The analysis in the report points to significant heterogeneity across banks as regards the relative importance of level 2 and 3 assets and liabilities. Thus, auditors, accounting enforcers and macroprudential supervisors should make full use of their mandates and their efforts should be aimed at: (a) ensuring that banks treat similar instruments in a similar manner, and that uncertainty in valuations are adequately reflected; (b) conducting more detailed assessments of the prudential valuation framework for banks; (c) understanding the performance of banks’ valuation models in the presence of market stress; and (d) understanding how disclosures relating to financial instruments classified in level 2 and 3 under IFRS 13 are put in practice and ensuring that the disclosure requirements are adhered to.
Recovery and resolution
Please see our Markets and Markets Infrastructure section for an update on the ECB’s aim to step up coordination in central clearing between banks and central counterparties.
Please see our Other Developments section for an update on a motion for an EP resolution on the Banking Union annual report 2019, which discusses sustainable finance and climate-related risks.
ISLA Council for Sustainable Finance (ICSF) principles for sustainable securities lending
On 27 February, the ICSF published guidance on their principles for sustainable securities lending, aiming to introduce wide-ranging solutions for sustainable securities lending. The principles are divided into: (i) alignment, in particular with global and regional mandatory and voluntary mechanisms; (ii) transparency, for instance by supplying accurate information on its sustainable securities lending activities; (iii) tax, for example requiring that securities lending programmes align with the beneficial owner’s tax policy and that beneficial owners maintain a clear withholding tax matrix; (iv) voting, in that voting rights cannot be exercised by the beneficial owner if the underlying security has been lent to someone else and parties should be able to recall and/or restrict securities for a certain period from the lending programme; (v) collateral, stressing that the primary purpose of the collateral in securities lending is to mitigate counterparts risk; (vi) short selling, as it is part of the essential market mechanism that facilitates price discovery and liquidity; (vii) stakeholder involvement, to reinforce the collective understanding of sustainable securities lending; and (viii) innovation. ISLA also announced that as part of the ICSF’s launch, ISLA will be holding a roundtable event in Brussels over the coming months, inviting representatives from across the institutional investor community to understand the group’s broader strategy and objectives. Their primary objective is to trigger a series of changes throughout the industry, so as to shift the broader securities lending market onto a sustainable pathway. The ICSF invites stakeholders to participate in a survey on sustainable finance and securities lending, which will be used to inform discussions at the event.
ISLA Press Release
Launch of the COP 26 agenda to support the economy’s transition to net zero carbon
On 27 February, the BoE announced the launch of the COP 26 agenda to help private finance support the economy’s transition to net zero carbon. The objective is that every professional financial decision will need to take climate change into account. To achieve net zero, every company, bank, insurer and investor will need to adjust their business models for a low carbon world. The BoE also published Mark Carney’s (governor of the BoE and finance adviser to the Prime Minister for COP26) speech at the launch event, setting out that the BoE will work with the private sector to put in place essential frameworks. Determining who’s ready for the transition requires: (i) disclosure of climate financial risk; (ii) climate risk management to be transformed; and (iii) investing for a net-zero world to go mainstream. The BoE encourage the private sector to: (a) contribute to the review of the current task force on climate-related financial disclosures (TCFD) framework; (b) commit to reporting a full set of TCFD disclosures in the 2021/22 reporting round; (c) demand TCFD-consistent disclosures from borrowers and portfolio companies; (d) help share climate stress testing frameworks; (e) start building capability internally; (f) share knowledge and expertise; (g) run stress tests in other jurisdictions; and (h) embed assessment of climate risks into financial stability analysis. Furthermore, providers of capital could measure and disclose the: (1) percentage of assets that comply with TCFD disclosure; (2) percentage of assets that are net zero-aligned; (3) progress on transition as assessed against industry-specific pathways; and (4) degree warning potential of the portfolio. Companies, banks, insurers, pensions funds and investors will increasingly be expected to develop and disclose their transition plans. In their strategy, the BoE highlight their areas of focus in reaching the goal of taking climate change into account for every financial decision, these being reporting, risk management, return, MDBs/DFIs, and innovative finance. ECB President Christine Lagarde also gave a speech at the launch, discussing that preparatory work is under way for a macroprudential stress test to assess climate-related risks, with the first results expected by the end of the year. The stress test will draw on granular information and focus on 90 significant institutions across the euro area. At some stage, it will model the effects of dynamic interactions.
BoE press release
BoE speech by Mark Carney
ECB speech by Christine Lagarde
ECB launch the Cyber Information and Intelligence Sharing Initiative (CIISI-EU)
On 27 February, the ECB published a speech by Fabio Panetta (member of the executive board) from the fourth meeting of the Euro Cyber Resilience Board (ECRB) for pan-European Financial Infrastructures. Mr Panetta announces the ECB’s launch of the CIISI-EU which will contribute to protecting the European economy and security. This initiative supports the ECB’s aim of catalysing joint initiatives to develop effective market solutions. Members will create a trusted community where they will meet to discuss cyber security threats and share related intelligence and best practices. The ECRB members will receive bi-annual threat reports informing them of strategic issues pertinent to their businesses. Cyber risk is a danger which has the potential to trigger a systemic crisis. Mr Panetta praises the ECB’s significant progress thus far, drawing on, inter alia: (i) the cyber resilience oversight expectations (CROE) published by the ECB in 2018 which are now being followed by financial infrastructure operators across Europe and gaining global traction; (ii) the European Framework for Threat Intelligence-based Ethical Red Teaming (TIBER-EU) being increasingly adopted across Member States; and (iii) setting up the ECRB itself as a forum for strategic discussions on cyber resilience.
Motion for an EP resolution on the Banking Union annual report 2019
On 26 February, the Committee on Economic and Monetary Affairs (ECON) published a report setting out a motion for an EP resolution on the Banking Union annual report 2019. ECON voted to adopt the report on 18 February. The report covers, inter alia, the following: (i) general considerations, for example calling for further discussions on the creation of a European safe asset, based on an evaluation to be performed by the Commission of the sovereign bond-backed securities (SBBS) proposal and stressing the importance of completing the Capital Markets Union; (ii) supervision; (iii) resolution, calling on the SRB to complete the process of establishing resolution plans and analyse if all relevant banks hold sufficient MREL; (iv) deposit insurance; (v) sustainable finance, ESG criteria and climate-related risks; (vi) anti-money laundering (AML), specifically welcoming the agreement on the exchange of information between the ECB and the authorities responsible for AML and combating the financing of terrorism (CFT), as well as stressing that for AML/CFT efforts to be effective, competent authorities and financial institutions must act in a coordinated manner; and (vii) customers’ rights in the context of NPL transactions, banking fees and product costs. For supervision, the report calls on the EC to evaluate the credit rating agencies market, and calls for supervisory and resolution authorities to vigorously enforce the newly introduced BRRD provisions on consumer protection. It also calls for coordinated action to mitigate systemic risk from considerable interconnectedness between the non-bank financial sector and the ‘traditional’ banking sector through establishing a macroprudential toolkit. As the current supervisory framework focuses primarily on credit risk exposures, the report urges for adequate measures to enhance asset quality review, and welcomes the inclusion of level 2 and level 3 instruments in the scope of the 2018 stress tests. The report has been tabled for the Parliament’s plenary session to be held from 9 to 12 March.