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Key Regulatory Topics: Weekly Update 8 - 14 July 2022

Amongst the flurry of publications usual for this time of year are a number of publications considering the risks inherent in crypto-markets and the drive to “same risk, same regulation” principles and the need for international cooperation. In the UK, we have seen further steps towards the future financial regulation with a joint PRA/FCA consultation on proposals to amend the UK RTS for risk-mitigation techniques for un-cleared OTC derivative contracts. In the EU, ESMA is consulting on proposal to update the MiFID II product governance guidelines, including in relation to the specification of any sustainability-related objectives a product is compatible with. The SRB has also published its first assessment of resolvability of banks in the Banking Union.

Capital markets

Please see the Financial Crime section for: (i) the OJ publication of Commission Implementing Regulation (EU) 2022/1210 laying down ITS on the format of insider lists and their updates under MAR; and (ii) a Delegated Regulation adopted by the EC with regard to RTS setting out contractual templates for liquidity contracts for shares of SME growth market issuers under MAR.

ESMA public statement on prospectus supervision amid EU sanctions over Ukraine’s invasion

On 8 July, ESMA published a public statement on prospectus supervision in the context of EU sanctions connected to Russia’s invasion of Ukraine. The public statement alerts stakeholders to the EC’s FAQs, in particular in response to queries whether there is sufficient legal basis to refuse the approval of a prospectus if there are prohibited relationships under EU sanctions or if infringements of EU sanctions are suspected during the prospectus scrutiny and approval process undertaken by National Competent Authorities (NCAs). The EC explains that infringements of EU sanctions can constitute sufficient legal basis for an NCA to refuse the approval of a prospectus. Issuers submitting a prospectus to an NCA should note that they may receive questions and/or requests for additional documentation from NCAs concerning the areas and parties identified by EU sanctions. These questions or requests for additional information may occur when the prospectus is first submitted or at any time during the scrutiny and approval process. ESMA will continue to monitor closely developments concerning EU sanctions and will continue to work with supervisors to discuss questions arising from this situation. Any relevant further information will be communicated where necessary.

Press release


EP agrees position on proposed Revised Consumer Credit Directive

On 12 July, the EP announced that it has agreed a position on the legislative proposal for a Directive on consumer credits to revise and replace the current CCD. The EP highlights aspects of its mandate including: (i) the Directive should cover credit agreements of up to €150,000, with the upper limit to be determined by the relevant national authorities. Member states will also be able to apply limited changes to the obligations in the case of small value loans of up to €200, loans granted interest-free and without other charges, or loans that have to be repaid within three months and with minor charges; (ii) further requirements to assess the creditworthiness of people taking out a loan before it is granted should be included, including requiring information on a consumer’s current obligations or cost of living expenses. In order to assess the creditworthiness of consumers with little or no credit history, other information can be taken into consideration, such as from non-banking lenders, telecommunication providers and utilities. However, data from social media and health data should not be taken into account and the right to be forgotten should be respected. The EBA should develop guidelines detailing how creditors and providers of crowdfunding credit services perform this creditworthiness assessment; (iii) consumers should always be able to obtain standard information, which is clear, with the essential information viewable, even on a phone screen. They should also be reminded that they have the right to withdraw from the credit agreement or the agreement for the provision of crowdfunding credit services without giving any reason within a period of 14 calendar days; (iv) credit advertising should contain, in all cases, a clear and prominent warning that borrowing money costs money, and it should not incite over-indebted consumers to seek credit or suggest that success or social achievement can be acquired thanks to credit agreements; and (v) Overdraft facilities and credit overrunning should be regulated. The EP will now commence trialogue negotiations with the Council and the EC.

Press release

EP amendments

FCA SME collections and recoveries review

On 12 July, the FCA published the findings of its multi-firm review into retail banks and their collections and recoveries. During the review, the FCA found repeated instances of poor customer outcomes and failures to treat customers fairly. The key drivers include: (i) gaps in policies and procedures; (ii) staff training that did not adequately cover conduct requirements; (iii) manual interventions within systems which appeared to make delivering fair customer outcomes more difficult; (iv) absence of outcomes testing or quality assurance that considered whether customers had received fair outcomes from the end-to-end treatment they received; (v) poor record keeping, such that firms could not provide complete customer files and it was not possible to determine if the customer had received a fair outcome based on the records; and (vi) instances of customers providing information indicating characteristics of vulnerability that were not considered or suitably responded to. In response, the FCA has sent a ‘Dear Chair’ letter to all firms with an SME customer base. The FCA asks the Board of such firms to carefully consider the contents of the letter and this review and take the necessary steps to seek assurance that their business complies with the FCA’s expectations. Where Boards are or become aware that the firm does not have this assurance, the FCA expects firms to respond to the letter in a timely manner outlining the plan to fix any issues preventing them from meeting the expectations.



Financial crime and sanctions

Implementing Regulation on format of insider lists and their updates under MAR

On 14 July, Commission Implementing Regulation (EU) 2022/1210 laying down ITS for the application of MAR with regard to the format of insider lists and their updates was published in the OJ. The Implementing Regulation reflects the amendments made to MAR by the Prospectus Regulation, which introduced less stringent requirements for issuers whose financial instrument are admitted to trading on an SME growth market by limiting the persons listed to those who, due to the nature of their function or position within the issuer, have regular access to inside information. Member States may require SME growth market issuers nonetheless to apply the full MAR list, however the Implementing Regulation provides a less administratively burdensome format of the list, limiting the content to what is strictly necessary to identify the relevant individuals. SME growth market issuers are also exempted from the requirement for issuers to keep the insider list in an electronic format, as long as the completeness, confidentiality and integrity of the information is ensured. The Implementing Regulation compiles the formats of all insider lists referred to in MAR in one legal act, repealing Implementing Regulation 2016/347. It enters into force on 3 August, 20 days after its publication in the OJ.

Implementing Regulation

EC adopts RTS setting out contractual template for liquidity contracts for shares of SME growth market issuers under MAR

On 13 July, the EC adopted a Delegated Regulation with regard to RTS setting out a contractual template for liquidity contracts for the shares of issuers whose financial instruments are admitted to trading on an SME growth market under MAR. The RTS sets out the requirements that parties to a liquidity contract should comply with in order to make sure that such persons are not engaging in market manipulation. In particular, the contractual template sets out the requirements to comply with the criteria established in Article 13(2) of MAR with which the parties to a liquidity contract concerning shares of an issuer listed on an SME GM should comply in order to be covered by the safe harbour pursuant to article 13 MAR. The main areas covered by the RTS are the liquidity account, limits on resources, independence of the liquidity provider, trading of the liquidity provider, obligations of the liquidity provider, fees structures and remuneration, and transparency. The Council and the EP will now scrutinise the Delegated Regulation.

Delegated Regulation and Annex

ECB speech on digital technology and fighting financial crime

On 13 July, the ECB published a speech by Elizabeth McCaul, Supervisory Board Member on digital technology and financial crime. Ms McCaul emphasises that technology is neither a panacea nor a poison, but a tool that can serve multiple purposes. Any technology solution needs to be buttressed by three pillars: an appropriate regulatory framework, sufficient supervisory oversight and a deep understanding by users, banks and supervisors alike, not only of the potential but also the limitations and risks of new technologies. Ms McCaul highlights specific challenges in digital finance, including: (i) some companies, in particular digital platforms or mixed activity groups may not be fully captured by the regulatory framework and thus fall outside the scope of the AMLD; (ii) experience has shown that certain new entrants have an insufficient understanding of their AML/CFT obligations and suffer from structural weaknesses in their customer due diligence and know-your-customer frameworks; and (iii) there are AML/CFT challenges inherent to the business models of some new entrants such as new payment processing methods and the provision of cryptoasset services. Ms McCaul discusses how technology can help address these and other challenges such as machine learning tools based on AI being used to detect unusual transactions or to identify patterns of potential criminal activity in networks of funds and entities. Many banks are already also using AI: for credit scoring, algorithmic trading, robo-advice or chatbots. When it is used well, it is subject to strong governance, risk management, and first line internal controls that have strong quality assurance components. Ms McCaul strongly welcomes the EU’s approach to develop a regulatory framework to provide harmonised rules on trustworthy AI. Ms McCaul notes that there are also benefits to be gained for supervisors through the use of SupTech. AI do not just offer substantial efficiency gains but also improve risk identification processes through technology such as natural language processing.


NCA/OFSI red alert on financial sanctions evasion typologies by Russian elites and enablers

On 12 July, the NCA and OFSI issued a red alert to provide information from law enforcement and the legal and financial services sectors on some of the common techniques designated persons (DPs) and their UK enablers are suspected to be using to evade financial sanctions in the context of the Russian invasion of Ukraine. The note provides information and guidance on the relevant sanctions evasion offences, evasion methods, how the UK is responding to the threat and indicators suspected of being used to evade sanctions. It sets out recommendations for the industry including that: (i) arms-length transactions need to be documented and should not be taken at face value by firms. Firms are advised to seek guidance from OFSI if they have any doubt; (ii) a failure to undertake appropriate due diligence, for example wilful blindness in relation to source of funds or wealth checks, should be considered a red flag for complicity and both breach and/or circumvention offences; (iii) firms should assess complex corporate structures carefully as a component of their enhanced due diligence for high-risk clients, querying the commercial justification for such structures. All UK persons worldwide are required to comply owing to the extra-territorial application of the Sanctions & Money Laundering Act 2018; and (iv) where firms are presented with documentation that purports to present a change in ownership by a company linked to a DP, it is important not only to conduct enhanced due diligence, but to follow up with the relevant competent authority (OFSI in the UK) to understand if firms have reason to believe that ownership has not been transferred appropriately.

Press release

Red alert

FCA letter on its responsibilities regarding financial sanctions

On 12 July, the Treasury Committee published a response from the FCA to questions regarding its financial sanctions responsibilities in the context of recent developments. Key points include that the FCA: (i) has not been made aware of material deficiencies in firms' sanctions systems and controls. It has generally found that boards and executive teams of affected firms have sought to be proactive in ensuring sanctions compliance and seeking clarity where needed. However, the recent sanctions are unparalleled in volume, were introduced in a short period and are wide in scope. Having given firms a reasonable period to respond to the sanctions, and having set out its expectations, the FCA has now increased its assessment work on sanctions controls to pro-actively test compliance. If issues are identified through this work, it will liaise with OFSI and other government partners as appropriate; (ii) has identified some issues in relation to the effectiveness of firms' customer sanctions screening processes, at onboarding and on an ongoing basis, with some weaknesses also found in firms' approach to real time payment screening. The FCA will look at this in more detail and test the steps that firms are taking to meet their obligations in this area; (iii) has regularly shared information on specific suspected breaches cases with OFSI. The FCA requests all regulated firms to also notify the FCA when they make submissions to OFSI in respect of suspected breaches, the identification of designated persons or asset freezes; and (iv) is in the process of assessing firms' sanction controls, which will involve on-site reviews. The FCA has developed a new analytics-based tool, which objectively tests how effective firms are at identifying sanctioned parties using test data the FCA generates.



Please see the Financial Crime section for a speech by Elizabeth McCaul, ECB Supervisory Board Member on digital technology and financial crime.

CPMI and IOSCO final guidance on application of Principles for FMIs to stablecoin arrangements

On 13 July, the CPMI and IOSCO finalised their guidance on the application of the Principles for Financial Market Infrastructures (PFMI) to systemically important stablecoin arrangements (SAs), including the entities integral to such arrangements. The guidance highlights that the transfer function of an SA is comparable to the transfer function performed by other types of FMI. As a result, an SA that performs this transfer function is considered an FMI for the purpose of applying the PFMI and, if determined by relevant authorities to be systemically important, the SA as a whole would be expected to observe all relevant principles in the PFMI. SAs may present some notable and novel features as compared with existing FMIs. These notable features relate to: (i) the potential use of settlement assets that are neither central bank money nor commercial bank money and carry additional financial risk; (ii) the interdependencies between multiple SA functions; (iii) the degree of decentralisation of operations and/or governance; and (iv) a potentially large-scale deployment of emerging technologies such as DLT. Given these features, the guidance elaborates aspects related to: governance, framework for the comprehensive management of risks, settlement finality and money settlements. The guidance also provides considerations to assist authorities in determining whether a stablecoin arrangement is systemically important. The guidance emphasises that in order to address these broader challenges in a holistic manner, the regulation, supervision and oversight of stablecoin arrangements alone may not be sufficient and will need to be complemented by other private or public sector efforts such as improvements in existing payment infrastructures and exploration or development of central bank digital currency. There is also a need for global cooperation.

Press release


Treasury Committee inquiry into cryptoassets

On 13 July, the Treasury Committee launched an inquiry into cryptoassets, calling for views in relation to: (i) the extent cryptoassets are likely to replace traditional currencies; (ii) the opportunities and risks the introduction of a BoE Digital Currency would bring; (iii) the impact of cryptoassets on social inclusion; (iv) whether the Government and regulators are suitably equipped to grasp the opportunities presented by cryptoassets, whilst at the same time mitigating against the risks; (v) the opportunities and risks the use of cryptoassets, including Non-Fungible Tokens, poses for individuals, the economy, and the workings of both the public and private sectors; (vi) DLT use cases in the financial services sector; (vii) whether the regulatory measures introduced by the Government, for instance around advertising and money laundering, have been effective in increasing consumer protection; (viii) whether the Government is striking the right balance between providing adequate protection for consumers and businesses, while not stifling innovation; (ix) whether regulation benefits cryptoasset start-ups by improving consumer trust and resilience; and (x) the environmental and resource intensity of using cryptoasset technology. The deadline for comments is 12 September.

Press release


BoE speech on lessons from recent instability in crypto-markets

On 12 July, the BoE published a speech by Jon Cunliffe, BoE Deputy Governor, Financial Stability, on four lessons to be learnt from the recent instability in crypto-markets: (i) technology does not remove all underlying financial risks, it can only change how the risks are managed and distributed. These risks include: (a) financial assets with no intrinsic value are inherently volatile, very vulnerable to sentiment and prone to collapse; (b) there needs to be a commonly accepted settlement asset or means of transaction, which has a stable value under stress. If confidence breaks down in the settlement asset, stress can be transmitted extremely quickly through the system; (c) leverage, which can greatly amplify losses when asset prices move against investors, driving fire sales of assets and self-reinforcing downward price spirals; and (d) risks that arise from weak governance, the lack of transparency and understanding of investor rights; (ii) regulators should continue and accelerate their work. Given the speed of growth and the growing connections with conventional finance, crypto-markets could pose a systemic risk relatively quickly. Mr Cunliffe highlights that this is not limited to speculative cryptoassets, but crypto-technology as a whole; (iii) future regulation should be designed on the principle of ‘same risk, same regulation’ and by same regulation Mr Cunliffe means same regulatory outcome, or same risk mitigation. Where this is not possible the activities should not proceed; and (iv) appropriate regulation will support innovation. More crypto instability will not, in the end, help the deployment and adoption of these technologies and the reaping of the benefits that they may offer. 


FSB statement on international regulation and supervision of cryptoasset activities

On 11 July, the FSB issued a statement on international regulation and supervision of cryptoasset activities. Highlights include: (i) cryptoassets, including stablecoins, are fast-evolving – the recent turmoil in cryptoasset markets highlights their intrinsic volatility, structural vulnerabilities and the issue of their increasing interconnectedness with the traditional financial system. An effective regulatory framework must ensure that cryptoasset activities posing risks similar to traditional financial activities are subject to the same regulatory outcomes, while taking account of novel features of cryptoassets and harnessing potential benefits of the technology behind them; (ii) cryptoassets and markets must be subject to effective regulation and oversight, commensurate to the risks they pose, both at the domestic and international level; (iii) stablecoins should be captured by robust regulations and supervision by relevant authorities if they are to be adopted as a widely used means of payment or otherwise play an important role in the financial system; and (iv) the FSB will report to the G20 in October on regulatory and supervisory approaches to stablecoins and other cryptoassets. The FSB will submit public consultation reports on: (a) the review of its high-level recommendations for the regulation, supervision and oversight of “global stablecoin” arrangements, including how existing frameworks may be extended to close gaps and implement the high-level recommendations; and (b) recommendations for promoting international consistency of regulatory and supervisory approaches to other cryptoassets and cryptoasset markets and strengthening international cooperation and coordination.


CPMI, BIS Innovation Hub, IMF and World Bank on CBDC interoperability and cross-border usage

On 11 July, the CPMI, the BIS Innovation Hub, the IMF and the World Bank published a joint report on the options for access to and interoperability of CBDCs for cross-border payments. As central banks have varying motivations for exploring or developing CBDCs, they are likely to adopt different CBDC designs and cross-border arrangements. In this light, the report identifies and analyses different options for foreign access to CBDCs and their interoperability that could improve cross-border payments, including how they can interconnect with non-CBDC payment arrangements. The report assesses these options based on five criteria: (i) do no harm, (ii) enhancing efficiency, (iii) increasing resilience, (iv) assuring coexistence and interoperability with non-CBDC systems, and (v) enhancing financial inclusion. The report concludes that there is no "one size fits all" model for access to and interoperability of CBDCs. Accordingly, the report serves as a tool for central banks to assess how to best leverage CBDCs to enhance cross-border payments in the context of their own objectives. The report considers that even jurisdictions not planning to issue a CBDC ought to be involved in this work as they will still be part of this new potential cross-border payments landscape. The report presents three ways to achieve interoperability: (a) compatibility - individual CBDC systems using common standards, such that the operational burden on payment service providers for participating in multiple systems is reduced; (b) interlinking - establishing a set of contractual agreements, technical links, standards, and operational components between CBDC systems allowing participants to transact with each other without participating in the same system. CBDCs could be interlinked via different models – a single access point, bilateral link or “hub and spoke” model; and (c) a single system - an arrangement that uses a single common technical infrastructure hosting multiple CBDCs. Other considerations that are relevant to the design of cross-border CBDC solutions include ensuring compliance with AML/CFT rules while safeguarding privacy and promoting competition. International cooperation and coordination are needed in the early stages of CBDC design to avoid any unintended barriers at a later stage. Any system must be built with the flexibility to adapt both to a changing world and the different CBDC designs likely to be chosen by central banks.

Press release


ESMA consults on guidelines on how to apply for permission to operate a DLT market infrastructure

On 11 July, ESMA began consulting on guidelines to establish standard forms, formats and templates to apply for permission to operate a DLT market infrastructure under the Regulation on a pilot regime for market infrastructures based on DLT (DLTR). Under the DLTR, market infrastructures can request limited exemptions from specific requirements in MiFID II and CSDR, provided they comply with the conditions attached to those exemptions and compensatory measures requested by the relevant NCA. The guidelines set out the minimum instructions that NCAs should provide to market participants and how applicants should provide the requested information. The deadline for comments is 9 September. ESMA intends to finalise the guidelines ahead of the application date of the DLTR on 23 March 2023.


Fund regulation

FCA update on disclosure requirements for EEA UCITS in the TPR and TMPR

On 14 July, the FCA update its webpage on rules applicable to firms and fund operators in the temporary permissions regime (TPR) adding a new section on the disclosure requirements that apply to EEA UCITS in the TPR and temporary marketing permissions regime (TMPR). In the UK, the exemption from the requirement for EEA UCITS to produce a PRIIPs KID lasts until 31 December 2026. The FCA confirms that this exemption applies to both EEA UCITS recognised under s272 FSMA and those recognised under TMPR. This means, when being marketed to retail investors in the UK, EEA UCITS that are recognised under either s.272 FSMA or the TMPR must produce a UCITS KIID. The FCA also notes that the TMPR is due to end on 31 December 2025. The FCA is engaging with HMT on the disclosure requirements that would apply in the event of an equivalence decision under the Overseas Funds Regime.


ESMA report on penalties and measures imposed under UCITS Directive and AIFMD in 2021

On 8 July, ESMA published its annual reports on the penalties and measures imposed under AIFMD and the UCITS Directive for 2021. ESMA notes that broadly, the data gathered under the annual sanction reports published so far keeps evidencing that the sanctioning powers are not equally used among NCAs and, besides a few NCAs, the number and amount of sanctions issued at national level remains relatively low. ESMA will continue to promote further convergence in the use of sanctioning powers by NCAs across the EU.

AIFMD report

UCITS Directive report

Markets and markets infrastructure

Please see the FinTech Section for ESMA’s consultation on guidelines to establish standard forms, formats and templates to apply for permission to operate a DLT market infrastructure under the Regulation on a pilot regime for market infrastructures based on DLT.

EC adopts Implementing Regulation on ITS harmonising format of information report under MiFID II

On 14 July, the EC adopted an Implementing Regulation laying down ITS on the format in which branches of third-country firms and competent authorities have to report the information referred to in Article 41(3) and (4) of MiFID II, alongside an Annex. According to Article 41(3) of MiFID II, branches of third-country firms that have been authorised in accordance with Article 41(1) of that Directive are to report to the competent authority of the Member State where that authorisation was granted, on an annual basis, the information laid down in that Article 41(3). The Implementing Regulation includes rules on the format of the information as well as a timeframe of when that information is to be provided to competent authorities. This Implementing Regulation will enter into force twenty days after its publication in the OJ.

Implementing Regulation


EC adopts thirteen Delegated and Implementing Regulations under Crowdfunding Regulation

On 13 July, the EC adopted the following Delegated Regulations supplementing the Crowdfunding Regulation with regard to RTS: (i) on individual portfolio management of loans by crowdfunding service providers, specifying the elements of the method to assess credit risk, the information on each individual portfolio to be disclosed to investors, and the policies and procedures required in relation to contingency funds, in accordance with Article 6; (ii) specifying requirements and arrangements for the application for authorisation as a crowdfunding service provider, under Article 12; (iii) specifying conflicts of interest requirements for crowdfunding service providers, produced under Article 8(7); (iv) specifying the methodology for calculating default rates of loans offered on a crowdfunding platform, produced under Article 20(3); (v) specifying the measures and procedures for crowdfunding service providers' business continuity plan, produced under Article 12(16); (vi) for the key investment information sheet together with an Annex, produced under Article 23(16); (vii) specifying the requirements, standard formats and procedures for complaint handling, together with an Annex, produced under Article 7(5); (viii) specifying the entry knowledge test and the simulation of the ability to bear loss for prospective non-sophisticated investors in crowdfunding projects, together with an Annex, produced under Article 28(5) of the ECSPR; and (ix) for the exchange of information between competent authorities in relation to investigation, supervision and enforcement activities in relation to European crowdfunding service providers for business, produced under Article 31(8). The EC also adopted four Implementing Regulations laying down ITS for the application of the Crowdfunding Regulation with regard to: (a) data standards and formats, templates and procedures for reporting information on projects funded through crowdfunding platforms, together with an Annex, produced under Article 16(3); (b) standard forms, templates and procedures for the co-operation and exchange of information between competent authorities concerning European crowdfunding service providers for business, together with an Annex, produced under Article 31(9); (c) the standard forms, templates and procedures for the notifications of national marketing requirements applicable to crowdfunding service providers by competent authorities to ESMA, together with an Annex, produced under Article 28(5); and (d) standard forms, templates and procedures for the co-operation and exchange of information between competent authorities and ESMA in relation to European crowdfunding service providers for business, together with an Annex, produced under Article 32(4). All of the Regulations will come into force on the 20th day following their publication in the OJ. The Council and the EP will now scrutinise the Delegated Regulations.

DR (i)

DR (ii)

DR (iii)

DR (iv)

DR (v)

DR (vi)

DR (vii) and Annex

DR (viii) and Annex

DR (ix)

IR (a) and Annex

IR (b) and Annex

IR (c) and Annex

IR (d) and Annex

ESMA speech on key trends in cleared derivatives

On 13 July, ESMA published a speech by Klaus Löber, Chair of ESMA's CCP supervisory committee on key trends in cleared derivatives. Mr Löber discusses the lessons to be learnt for CCPs, the broader clearing ecosystem and for supervisors from the recent period of instability due to the Covid-19 pandemic and Russia’s invasion of Ukraine. He notes that at this stage, ESMA has not identified major weaknesses, although some CCPs are reviewing their margin models and their list of eligible collateral. Highlights include: (i) CCP membership due diligence will be the topic of ESMA’s 2022 Peer Review; (ii) ESMA will interact with NCAs, on a CCP-by-CCP basis, to further strengthen the use of concentration add-ons to cover concentrations risks, where needed, including in commodity markets. Concentration risks will be the topic of the 2023/2024 CCP Peer Review, including risks in relation to commodity derivatives and emission certificates; (iii) ESMA will undertake further analysis to enhance the identification of indirect participants responsible for a signification proportion of transactions and the identification of material dependencies between direct and indirect participants that may affect the CCP; (iv) ESMA will work closely with the ESRB and SSM in the analysis of the dependencies and interconnectedness of CCPs, clearing members and clients in the commodities market, but also on clearing members and CCPs being part of the same legal entity; (v) ESMA has begun developing an enhanced crisis management framework that could be used by the CCP supervisory committee to support crisis preparedness; and (vi) the committee intend to build a structured framework for stress-testing based on a multi-year plan to progressively challenge untested dimensions of CCP resilience. Building on the results of the 4th CCP stress test, ESMA’s CCP stress-testing framework will progressively expand to other emerging risks such as cyber threats and more complex and multi-faceted risks linked to climate change.


ESRB letter on data quality issues and risks for financial stability

On 13 July, the ESRB published a letter (dated 12 July) sent to the EC concerning persistently poor data quality and the risks this poses for financial instability. The letter contains proposals to address these issues and at the same time to strengthen the supervisory framework for central clearing in the EU and increase the attractiveness of EU clearing. The ESRB suggests that some of its proposals may be taken into consideration by the EC in the context of the targeted EMIR review, while others more generally encompass the scope of other reporting frameworks as well, such as the SFTR and Public Quantitative Disclosure data. The proposals include: (i) extending reconciliation requirements to centrally cleared transactions; (ii) the appointment of a responsible reporting officer; (iii) expanding the scope of reporting, such as to include default fund contributions in EMIR data and extending the reporting obligation to financial and non-financial subsidiaries of EU groups; (iv) requiring a quick aggregative-level check on submissions; (v) developing a reporting handbook to provide more clarity on the reporting specifics. This reporting handbook could be introduced via Level 3 legislation; and (vi) remove any barrier to machine-readable/automated reporting.


EC adopts Delegated Regulation extending transitional period for crowdfunding services under national law

On 12 July, the EC adopted a Delegated Regulation extending the transitional period for continuing to provide crowdfunding services in accordance with national law as referred to in Article 48(1) of the Crowdfunding Regulation. The EC proposes to extend the transitional period for crowdfunding services provided in accordance with national law (i.e. authorised before 10 November 2021), by one year until 10 November 2023. The Crowdfunding Regulation does not allow further extensions after 10 November 2023, and crowdfunding service providers that have not received authorisation by this date will have to put operations on hold until such authorisation is granted. The proposed Regulation shall enter into force the day following its publication in the OJ and apply from 11 November. The Council and the EP will now scrutinise the Delegated Regulation.

Delegated Regulation

ESMA corrects double volume cap results

On 12 July, ESMA updated the double volume cap (DVC) results following a data correction submitted by a reporting entity. This data correction impacts the results for five ISINs for which the suspension had been erroneously revoked from 12 July. The suspension of the five ISINs are expected to be resumed from 18 July and end on the suspension end dates provided in ESMA’s update.


Joint PRA and FCA consultation on margin requirements for non-centrally cleared derivatives

On 12 July, the PRA and the FCA launched a joint consultation on proposals to amend the UK onshored version of Commission Delegated Regulation (EU) 2016/2251 (BTS 2016/2251), which contains the RTS for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty and supplements UK EMIR. Without action, temporary eligibility of EEA UCITS as collateral would expire on 31 December and the current BTS do not provide a transition period for firms who, in certain circumstances, would require an immediate application of the margin requirements. The proposals are to: (i) expand the list of eligible collateral when exchanging initial margin to include some third-country funds (including EEA UCITS) provided certain criteria are met; (ii) introduce a six-month fall-back transitional provision in certain circumstances where the margin rules would otherwise apply to firms immediately to allow firms to establish margin arrangements; and (iii) amend the definition of CCPs to correctly refer to their regulatory status. The deadline for comments is 12 October. The PRA and FCA will then submit the updated BTS 2016/2251 to HMT for approval. The proposed changes would be effective on publication of the final BTS.


PRA draft instrument

FCA draft instrument

Third ESMA statement on implementation of LEI requirements for third-country issuers under SFTR

On 12 July, ESMA issued a third statement on the implementation of Legal Entity Identifier (LEI) requirements for third-country issuers under the SFTR reporting regime. ESMA acknowledges the potential reporting implementation issue with respect to SFTs entered into by EU investors for securities of third-country issuers. In particular, in third-country jurisdictions LEIs are not widely mandated beyond dealers of derivatives, therefore a significant number of issuers still do not have an LEI. Neither ESMA nor NCAs possess any formal power to dis-apply a directly applicable EU legal text. Therefore, any change to the application of the EU rules would need to be implemented through EU legislation. ESMA expects that counterparties, as well as the other entities participating in SFTs that lend, borrow or use as collateral securities issued by third-country entities that do not have an LEI, liaise with those issuers with a view to ensuring that they are aware of the requirements under SFTR. ESMA invites the entities that take part in SFTs reportable under SFTR to make use of the relevant solutions put in place by the Global LEI Foundation to facilitate LEI coverage such as the use of LEI validation agents. ESMA expects that trade repositories would not reject SFT reports of securities without a third-country issuer LEI that are lent, borrowed or provided as collateral in an SFT. However, this does not in any way affect the mandatory reporting of the LEI in all other cases where it is prescribed by the regulation, including the identification of third-country entities taking part in a SFT. ESMA expects NCAs to continue not prioritising their supervisory actions in relation to reporting of LEIs of third-country issuers. ESMA and the NCAs will continue to closely monitor: (i) the evolution of the issuance of LEI for third-country issuers; (ii) the population of the field “LEI of the issuer” for third-country entities; and (iii) the structural evolution of the SFT markets in the EU, in order to assess on an on-going basis the developments regarding the use of LEI of third-country issuers. ESMA will give advance notice of at least six months regarding its position on the reporting of LEI for third-country issuers ahead of the date of application of this requirement in the SFTR validation rules. 

Press release


ESMA explains classification of third-country counterparties in weekly position reports

On 12 July, ESMA published an opinion to clarify the classification of third-country counterparties in weekly position reports under MiFID II. To improve the quality and consistency of these reports, ESMA considers that financial entities holding positions in commodity derivatives or emission allowances or derivatives thereof should be categorised in a consistent manner irrespective of their geographical location. Third-country financial entities should be categorised according to the nature of their main business in the same way as they would be categorised if they were established in the EU and subject to EU law. NCAs should ensure that trading venues reflect the amended classification in the weekly reports at the latest 3 months after the publication of ESMA’s opinion, that is by 12 October.

Press release


ARRC guide to support transition of legacy USD LIBOR cash products

On 12 July, the Alternative Reference Rates Committee (ARRC) published the LIBOR Legacy Playbook, a guide describing the existing broad frameworks to support the transition of legacy USD LIBOR cash products. The guide aims to provide tools and resources, including a compilation of best practice recommendations and reference materials, to assist market participants in ensuring that the transition from USD LIBOR is operationally successful. The guide lays out steps including: (i) conducting a thorough assessment of the fallbacks that are embedded (either contractually or through legislation) in every USD LIBOR contract; (ii) remediating those contracts where feasible to reference SOFR before June 30, 2023 in order to minimize the operational challenges that will arise in transitioning the large number of contracts that currently reference USD LIBOR; (iii) adopting plans to communicate each contract’s fallback with the affected parties for those USD LIBOR contracts that remain; and (iv) making sure sufficient resources are allocated to ensure that these rate changes are successfully put into effect.

Press release


ESMA consults on amendments to cash penalty process for cleared transactions under CSDR

On 11 July, ESMA began consulting on an amendment to the cash penalty process for cleared transactions under CSDR. ESMA seeks to simplify the process of collection and distribution of cash penalties for settlement fails relating to cleared transactions. ESMA’s proposal consists in removing the separate process established in Article 19 of the Delegated Regulation (EU) 2018/1229 for the collection and distribution of the cash penalties in relation to settlement fails on cleared transactions and letting the CSDs run the entire process of collection and distribution of penalties. Currently, CCPs are responsible for the collection and distribution of cash penalties for settlement fails on cleared transactions. The deadline for comments is by 9 September. ESMA intends to publish a final report including an amending RTS to be submitted to the EC by Q4 2022.

Press release


ESMA consults on draft RTS on clearing and derivatives trading obligations

On 11 July, ESMA began consulting on extending the scope of the clearing obligation (CO) and derivatives trading obligation (DTO), in the context of the benchmark transition in the interest rate derivative market. This is the second set of RTS, which complement the first that entered into force on 18 May. Specifically, for the CO it proposes to: (i) introduce the overnight index swaps (OIS) class referencing TONA (JPY); (ii) expand the maturities in scope of the CO for the OIS class referencing SOFR (USD); and (iii) for the DTO to introduce certain classes of OIS referencing €STR (EUR), which have shown a substantial increase in liquidity over the last months. The deadline for comments is 30 September. ESMA intends to finalise the draft RTS by the end of the year, which will then be submitted to the EC for endorsement.

Press release


IOSCO report on operational resilience of trading venues and market intermediaries during pandemic

On 11 July, IOSCO reported on the impact of the Covid-19 pandemic on the operations of trading venues and market intermediaries.  The report concludes that these regulated entities largely proved operationally resilient and continued to serve their clients and the broader economy during the pandemic, despite unprecedented challenges. The pandemic also increased cyber security risks, accelerated the use of existing, new and emerging technologies and disrupted some outsourcing arrangements. The findings suggest the existing IOSCO operational resilience principles, recommendations and guidance, which provide the core structure for regulated entities and regulators when considering operational resilience have worked well. However, the report sets out some observations for firms, including: (i) operational resilience means more than just technological solutions; it also depends on the regulated entity’s processes, premises and personnel; (ii) firms should consider dependencies and interconnectivity before and after a disruption to adequately assess potential risks and changes to controls, especially for service providers and off-shore services; (iii) firms should review, update and test business continuity plans to ensure they reflect lessons learned from the pandemic, such as the prolonged nature of the crisis and its impact on multiple locations, as well as the implication of remote/hybrid working and the importance of communication channels between regulators, key authorities, regulated entities and third-party service providers to help understand any impacts on operational resilience; (iv) an effective governance framework facilitates and supports operational resilience during novel or unexpected situations; (v) compliance and supervisory processes with greater automation and less dependence on physical documents and manual processes may better accommodate a remote workforce; and (vi) decentralised and remote work may increase the importance of monitoring processes to help ensure information security and prevent cyber-attacks. IOSCO notes that these lessons are likely to be useful to address the impact of new scenarios such as the ongoing conflict in Ukraine.

Press release


ESMA on third-country CCPs’ applications for recognition

On 8 July, ESMA announced an update for third-country CCPs (TC-CCPs) whose applications for recognition under EMIR were suspended until 28 June: (i) pending recognition decisions – as regards TC-CCPs which are established in jurisdictions for which the EC has recently adopted equivalence decisions, i.e. Chile, China, Indonesia, Israel and Malaysia, ESMA has started processing their applications for recognition and will adopt decisions granting recognition once the relevant recognition conditions are met. The recognition procedure in EMIR includes the signing of an MoU with the relevant third-country competent authorities and the relevant EU NCAs and EU authorities. ESMA states that it will do its utmost to expedite the process; and (ii) refusal of recognition – for TC-CCPs which are established in jurisdictions for which the EC did not adopt equivalence decisions by 28 June, i.e. Argentina, Colombia, Russia, Taiwan, Thailand and Turkey, ESMA will start the process for refusing recognition. Should the EC adopt the relevant equivalence decision in the future, a TC-CCP, whose application was originally refused, can re-apply for recognition to ESMA. Until ESMA has taken a decision on granting or refusing a recognition under EMIR, a TC-CCP, who had applied under the EMIR transition provisions, and currently provides clearing services in a Member State under national law, may continue to provide clearing services in that Member State.

Press release


ESMA report on sanctions and measures imposed under MIFID II in 2021

On 8 July, ESMA reported on the sanctions and measures imposed under MIFID II in 2021. While NCAs’ activity on imposing sanctions and measures under MiFID II has decreased compared to 2020, both the number of Member States where sanctions and measures were applied and the total amount of imposed administrative fines have increased in 2021. ESMA notes that there are still some differences in the identification of sanctions and measures for the purpose of the reporting to ESMA, and the distinction among them. The information reported to ESMA and included in this report will inform ESMA’s ongoing work aimed at fostering supervisory convergence in the application of the MiFID II framework and contribute to ESMA’s goal to develop an EU outcome-focused supervisory and enforcement culture.


ESMA consults on RTS on recognition under BMR

On 8 July, ESMA began consulting on amendments to the RTS on the form and content of an application for recognition under the BMR. ESMA aims to: (i) align the information provided in a recognition application with the changes introduced to the BMR in the ESAs Review, with the transfer of supervisory responsibilities over third country recognised administrators to ESMA as of January 2022; and (ii) ensure that the application includes all relevant information to enable ESMA to assess whether the applicant has established all the necessary arrangements to fulfil the BMR’s requirements. The deadline for comments is 9 September. ESMA expects to submit the draft technical standards to the EC for endorsement in Q4 2022.

Press release


ESMA consults on MiFID II product governance guidelines following common supervisory action

On 8 July, ESMA published the results of its common supervisory action (CSA) with NCAs on the application of MiFID II product governance rules. Areas of improvement highlighted by ESMA include: (i) while firms generally define a target market for the products they manufacture and/or distribute in accordance with the guidelines, in some cases the definition appears to be approached as a formalistic exercise as it is done at an insufficiently granular level and with the use of unclearly defined terms. The definition does not always translate into a compatible distribution strategy; (ii) a lack of convergence has emerged on how firms perform a scenario analysis as required under Article 9(10) of the MiFID II Delegated Directive and it is sometimes unclear how these scenarios are actually used by firms for the product’s target market identification; (iii) the performance of charging structure analysis as required under Article 9(12) of the MiFID II Delegated Directive.  For example, manufacturers’ procedures insufficiently describe how a product’s cost structure is evaluated to ensure compatibility with the product’s target market; (iv) infrequent product reviews with inadequate scope to verify if the financial instrument remains consistent with the needs, characteristics and objectives of the target market; and (v) insufficient information exchange between manufacturers and distributors. ESMA has therefore decided to review its guidelines on the MiFID II product governance requirements to address the most relevant areas where a lack of convergence has emerged and to complement the guidelines with relevant examples of good practices that emerged from the CSA. The review also aims to align the guidelines to the revised MiFID II Delegated Directive on the topic of sustainable finance and to the revised MiFID II in the context of the Commission’s Capital Markets Recovery Package. The main proposals in the draft guidelines relate to: (a) the specification of any sustainability-related objectives a product is compatible with; (b) the practice of identifying a target market per cluster of products instead of per individual product (“clustering approach”); (c)  the determination of a compatible distribution strategy where a distributor considers that a more complex product can be distributed under non-advised sales; and (e) the periodic review of products, including the application of the proportionality principle. The deadline for comments is 7 October. ESMA expects to publish a final report in Q1 2023.

Statement on CSA

Press release


Payment services and payment systems

CPMI report on role of APIs in interlinking payment systems

On 8 July, the CPMI published a report setting out a framework for interlinking payment systems for cross-border payments and discussing the role of application programming interfaces (APIs). The CPMI states that there are numerous benefits to interlinking arrangements: enhancing cross-border payments by shortening transaction chains, supporting the harmonisation of data formats and facilitating data exchanges through the use of dedicated applications, as well as by reducing funding costs, limiting redundant compliance checks, and increasing competition in the provision of cross-border payment services. Depending on the design of the interlinked systems as well as the interlinking arrangement, cross-border settlement risk could also be reduced. Interlinking may face challenges and risks that need careful consideration and planning by operators and authorities considering such arrangements. Challenges include strategic and political factors, possible high start-up costs, divergent legal, regulatory and oversight frameworks, misaligned access criteria, differences in service level requirements, and operational risk management. These challenges and risks need to be carefully considered before establishing an interlinking arrangement and on an ongoing basis once the arrangement is in operation. This report provides a framework to help payment system operators and authorities understand and evaluate the benefits, challenges and risks of interlinking arrangements. It also provides an overview of important trends in interlinking arrangements and adoption of APIs by payment systems, drawing on recent CPMI surveys.


Prudential regulation

FSB letter to G20 on Covid-19 exit strategies, cryptoassets and the climate roadmap 

On 13 July, the FSB published a letter sent to G20 finance leaders and central bank governors providing an update on a number of areas of its recent work ahead of their 15-16 July summit, including: (i) exit strategies and addressing scarring effects from Covid-19 – recent economic and financial developments have made it more challenging for policy makers to support a strong, equitable and inclusive recovery from Covid-19. Policies to contain economic scarring from the pandemic will therefore be an important contributor to financial resilience and sustainable economic growth. Exit strategies need to reflect specific domestic economic conditions and avoid excessive financial market reactions, which may limit the scope to engineer a fully synchronised exit across jurisdictions. The FSB will deliver a final report on exit strategies in November; (ii) cryptoassets – recent turmoil highlights the importance of advancing the ongoing work to address the risks posed by cryptoassets. This turmoil brings into sharp focus their intrinsic volatility, structural vulnerabilities and the issue of their increasing interconnectedness with the traditional financial system. The FSB will deliver a consultative report on its review of the FSB High-Level Recommendations for ‘global stablecoins’ and a consultative report with recommendations on regulatory and supervisory approaches to other crypto-assets in October; (iii) the FSB’s climate roadmap – the FSB will publish: (a) its joint work with the NGFS on climate scenarios in November; (b) the final version of its report on supervisory and regulatory approaches to climate change in October; and (c) a report on the progress by the ISSB in developing the global minimum baseline disclosures standards as well as by individual jurisdictions and firms in improving climate disclosures, in October.


BoE speech on capital and liquidity buffers

On 14 July, the PRA published a speech by Victoria Saporta, PRA Executive Director, Prudential Policy, on capital and liquidity buffers. Ms Saporta refers to evidence suggesting that banks may be overly reluctant to use their capital and liquidity buffers when facing pressures.  The fear of breaching regulatory thresholds played a crucial role in affecting banks’ behaviours during the pandemic. Firms which entered the pandemic with low capital headrooms, were more likely to constrain lending, although capital releases implemented by authorities, such as Countercyclical Capital Buffers (CCyB) cuts, did support lending, even for firms that were not close to breaching their non-releasable buffers. The impediments to usability of non-releasable buffers indicate that it is desirable to have a larger portion of releasable buffers to mitigate the impact of deep recessions. Ms Saporta suggests making the Capital Conservation Buffer (CCoB) releasable to supplement shortfalls in the CCyB if the shock occurs at a time when the CCyB has not been sufficiently built up, without forcing jurisdictions to run with inefficiently high levels of CCyB that might be rarely necessary.  Ms Saporta emphasises the need to couple this with an effective capital conservation mechanism to prevent the released capital from being distributed inappropriately and ensure that firms would be able to rebuild the buffer in the future. The current tool, known in the UK as Maximum Distributable Amounts (MDAs), cannot serve this function because it does not apply to the portion of released capital. In terms of liquidity buffers, the results of the BoE’s liquidity biennial exploratory scenario suggest that banks would be unwilling to allow their liquidity coverage ratio (LCR) to fall below the 100% level, even in a severe stress event. Instead, banks would take defensive actions, including reducing lending to households and businesses. These results, together with the experience from the Covid-19 pandemic, suggest that there is a liquid asset usability issue that needs to be addressed. Ms Saporta considers bank’s reluctance stems from: a fear of the regulatory response, an adverse market reaction and uncertainty of the severity or duration of the shock. Ms Saporta considers that the lack of a hard minimum in the liquidity buffer framework may contribute to uncertainty around how much HQLA it is acceptable to draw down in times of stress, making the 100% LCR the primary focus. One solution discussed by Ms Saporta is the potential releasability of LCR in stress, through a counter-cyclical liquidity buffer that could operate in a similar vein with the CCyB. But while the principle may be similar, in practice there may be bespoke challenges to releasing liquidity standards via the LCR and in some stresses releasing the LCR may not be the right policy.


BCBS assessment of EU large exposures framework and net stable funding ratio standard

On 12 July, the BCBS published Regulatory Consistency Assessment Programme (RCAP) reports on the EU's implementation of the Net Stable Funding Ratio (NSFR) and large exposures (LEX) framework under the Basel framework. Overall, as of end-March 2022, the NSFR and LEX regulations in the EU were assessed as largely compliant with the Basel standards. This is one notch below the highest overall grade. Three of the four components of the Basel NSFR standard (scope, minimum requirements and application issues; available stable funding; and disclosure requirements) are assessed as compliant. The remaining component, required stable funding (RSF), is assessed as largely compliant. The BCBS noted that the RSF factors for certain types of transaction would be adjusted in aligning the EU regulations with the Basel NSFR standard by June 2025, which should be subject to review in a future RCAP assessment. The three components of the Basel LEX standard (scope and definitions; minimum requirements and transitional arrangements; and value of exposures) are assessed as compliant, largely compliant and compliant, respectively. The BCBS found a potentially material finding related to the limit applicable to trading book exposures, as the EU regulations allow for the LEX limit to be exceeded up to 600% of a bank’s Tier 1 capital. The BCBS noted that the EC has proposed an amendment to the current provisions on the possibility of using own volatility estimates via the deletion of the corresponding provisions in the CRR, which should be subject to review in a future RCAP assessment.



Recovery and resolution

EP update on progress of ‘Daisy chain’ proposal 

On 13 July, the EP updated its procedure file on the proposed Regulation as regards the prudential treatment of global systemically important institution groups with multiple point of entry resolution strategy and a methodology for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities (MREL), or ‘Daisy Chain’ proposal, to indicate that a vote in plenary has been scheduled on 13 September.

Procedure webpage

First SRB resolvability assessment

On 13 July, the SRB published its assessment of bank resolvability in the Banking Union, for the first time. The resolvability assessment and ‘heat-map’ for 2021 shows that banks have made significant progress in the SRB’s priority areas. The assessment is based on the information available to the SRB up until the end of September 2021. It is benchmarked against the phase-in of the Expectations for Banks (EfB), to be completed by the end of 2023. Overall, sound progress has been made on the resolution capabilities that the SRB prioritised in 2020-2021, with largest banks (globally systemic important institutions and top tier banks) the most advanced category. Banks have significantly improved their ability to absorb losses and recapitalise in the case of failure. This concerns, for all banks, the steady build-up of their Minimum Requirement for Own Funds and Eligible Liabilities (MREL) capacity, crucial to execute any bail-in strategy. Most banks already meet the final MREL target to be complied with at the end of the transition period, on 1 January 2024 and the shortfall has more than halved in two years. Progress has also been observed in the areas of governance, loss absorption and bail-in execution, operational continuity, access to financial market infrastructures and communication planning. Areas for improvement relate mainly to those parts of the EfB that have been earmarked for implementation in 2022 and 2023. Progress is needed by all banks on the swift mobilisation of liquidity and collateral in resolution, the further automation of the management information systems for the purposes of valuation and resolution as well as the further operationalisation of restructuring and separation capabilities post-resolution. The SRB intends to publish the updated resolvability assessment annually. The priorities for the 2022 assessment remain the same, while those for the 2023 assessment will be communicated to banks in Q3 2022. They will include finalising the work on liquidity and other remaining capabilities, as well as ensuring full compliance with the final MREL targets.

Press release

Resolvability assessment  

Regulatory reform post Brexit

Please see the Markets and Market Infrastructures section for a joint consultation between the FCA and the PRA on proposals to amend the UK onshored version of Commission Delegated Regulation (EU) 2016/2251 (BTS 2016/2251).

Please see the Fund Regulation section for an update from the FCA on disclosure requirements for EEA UCITS in the temporary permissions regime and temporary marketing permissions regime (TMPR).

Please see our website for a post on the draft Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022, which extend the temporary recognition of EU "simple, transparent and standardised" (STS) securitisations in the UK until the end of 2024.

Sustainable finance

Please see the Prudential Regulation section for a letter sent by the FSB to the G20, ahead of their 15-16 July summit, on a number of areas of the FSB’s recent work including the climate roadmap.

Please see the Other Developments section for an FCA speech on how the UK will regulate for the future, which includes reference to the potential extension of the FCA’s remit to cover ESG data and ratings providers. 

FSB report on progress in addressing financial risks from climate change

On 14 July, the FSB published its first annual progress report on its Roadmap for addressing climate-related financial risks. The report takes stock of progress by standard-setting bodies and other international organisations on the actions coordinated through the Roadmap, outlines areas for further attention, and provides updates where needed to the detailed Roadmap actions. The FSB highlights that progress has been made across all four blocks of the Roadmap: (i) firm-level disclosures – a milestone has been the publication by the newly established International Sustainability Standards Board (ISSB) of two Exposure Drafts, on climate and general sustainability-related disclosure standards. There is also a growing recognition of the importance of global assurance standards to drive reliability of disclosures; (ii) data – a priority is to further coordinate the establishment of common metrics for financial risks, including forward-looking metrics. It is also important to establish data repositories that provide open access to data in a consistent form; (iii) vulnerabilities analysis – monitoring has continued using the tools currently available and there has been further development of conceptual frameworks and scenario analysis; and (iv) regulatory and supervisory practices and tools – completed initiatives include supervisory risk management expectations and supervisory guidance covering the banking, insurance and asset management sectors. Financial authorities should continue to embed the supervision of climate-related risks into overall supervisory frameworks, including the further development of the use of climate scenario analysis and stress testing exercises.

Press release


EU Platform on Sustainable Finance requests feedback on draft report on minimum safeguards

On 11 July, the EU Platform on Sustainable Finance invited feedback on its draft report on minimum safeguards (MS) under the Taxonomy Regulation Articles 3 and 18. The report identifies four core topics for which compliance with minimum safeguards should be defined: human rights, including workers’ rights, bribery/corruption, taxation and fair competition. As regulation of human rights due diligence and sustainability reporting is not yet finalised, the Platform notes that there remains some uncertainty surrounding their implementation. The report therefore: (i) builds the requirements for MS compliance on the international standards referenced in Article 18 - especially on the six steps of the UNGPs/ OECD guidelines; (ii) points to upcoming regulations and disclosure requirements that build on these standards; (iii) provides independent sources of information on particular aspects of their implementation for external performance checks; and (iv) illustrates potential non-compliance with minimum safeguards, with the help of examples. Specifically, the report recommends that firms consider as a sign of non-compliance with MS: (a) inadequate or non-existent corporate due diligence processes on human rights, including labour rights, bribery, taxation, and fair competition; (b) final conviction of companies in court in respect of any of these topics; (c) a lack of collaboration with a National Contact Point (NCP) and an assessment of noncompliance with OECD guidelines by an OECD NCP; and (d) non-response to allegations by the Business and Human Rights Resource Centre. The report also gives advice on project finance, SME financing, and green bonds and advises how to assess sub-sovereign compliance with MS. The deadline for comments is 22 August. The Platform intends to prepare the final report in Q3 2022 to be submitted to the EC.

Draft report

Call for feedback

BoE speech on risks banks face from climate change

On 11 July, the BoE published a speech by Anil Kashyap, member of the FPC on the risks banks face from climate change. Mr Kashyap describes some of the key findings from the BoE’s Climate Biennial Exploratory Scenario (CBES), the results of which the BoE published in May. In response to the issues the findings highlighted, he sets out questions that management boards of financial services firms need to consider, including: (i) how much extrapolation are firms undertaking due to missing data and how can these gaps be filled in? Improving data is essential in mitigating the large uncertainty in modelling these risks; (ii) what third parties are firms reliant on and what are the key assumptions/features of their models? Mr Kashyap notes that outsourcing some of this work is likely to be required for the coming years and that it is therefore essential to properly evaluate the quality of these third parties’ models; (iii) what quality are the firm’s current models? The BoE will share best practices from the CBES with participants and other firms that find it valuable; (iv) what are the key assumptions firms are making about the trajectory of climate policy and physical risk and its impact? Are the assumptions associated with the risk management of different credit books internally consistent? If scenario analysis is not internally consistent, Mr Kashyap considers it a sign that the modelling capabilities are incomplete; and (v) if other banks are expecting to carry out the same strategic changes to their businesses, would the firm’s planned response to climate risk still be workable?


ECB climate risk stress test 2022

On 8 July, the ECB published the results of its 2022 climate risk stress test, which found that banks in the Banking Union do not yet sufficiently incorporate climate risk into their stress-testing frameworks and internal models, despite some progress made since 2020. Findings include: (i) around 60% of banks do not yet have a climate risk stress-testing framework. Banks currently fall short of best practices, according to which they should establish climate stress-testing capabilities, that include several climate risk transmission channels (e.g. market and credit risks) and portfolios (e.g. corporate and mortgage); (ii) almost two-thirds of banks’ income from non-financial corporate customers stems from greenhouse gas-intensive industries. In many cases, banks’ “financed emissions” come from a small number of large counterparties, which increases their exposure to transition risks. Banks often rely on proxies to estimate their exposure to emission-intensive sectors and need to step up their customer engagement to obtain more accurate data and insights into their clients’ transition plans; (iii) physical risk has a heterogeneous impact across EU banks. Banks’ vulnerability to a drought and heat scenario is highly dependent on sectoral activities and the geographical location of their exposures. The impact of this risk materialises through a decrease in sectoral productivity, e.g. in agriculture and construction activities, and an increase in loan losses in the affected areas. Similarly, in the flood risk scenario, real estate collateral and underlying mortgages and corporate loans are expected to suffer, particularly in the most affected locations. The results show that an orderly green transition translates into lower losses than disorderly or no policy action. However, banks barely differentiate between various long-term scenarios as they lack robust strategies, other than the tendency to reduce exposures from the most polluting sectors and to support lower-carbon-emitting businesses. Banks must consider direct and indirect transmission channels in their strategic long-term plans. The results will feed into the Supervisory Review and Evaluation Process from a qualitative point of view but there will be no direct impact on capital through the Pillar 2 guidance this year. All participating banks have received individual feedback and are expected to take action accordingly, in line with the set of best practices that the ECB will publish in Q4.

Press release




Other developments

FCA speech on the future of UK regulation

On 14 July, the FCA published a speech by Nikhil Rathi, FCA Chief Executive, on how the UK will regulate for the future. Amongst other projects highlighted by Mr Rathi, the FCA is: (i) redesigning its operational platform so that it can better adapt and collaborate, to address the threats, mitigate the shocks, and embrace opportunities. It is investing in data and tech platforms to improve how it uses analytics and insights to support decision-making. This investment also enables the FCA to scan over 100,000 websites a day for fraud; (ii) examining what potential systemic risks are posed by the financial services sector relying upon the resilience of services provided by a small number of critical third parties – including cloud providers - and will soon publish a joint discussion paper with the BoE setting out potential new measures; and (iii) working with HMT as it considers extending the FCA’s remit to cover ESG data and ratings providers. In the meantime, the FCA will support industry to develop and follow a Voluntary Code of Conduct informed by IOSCO’s recommendations.  


FSSC updated guidance on measuring inclusion in the financial services sector

On 14 July, the UK Financial Services Skills Commission (FSSC) updated its inclusion measurement guide. The guide aims to assist financial services firms in measuring inclusion by developing data metrics and analysis. The FSSC has: (i) revised the survey questionnaire based on Financial Services Culture Board’s cognitive testing insights; (ii) added a question on stereotyping; and (iii) updated the list of demographic characteristics which firms can use to strengthen their internal metrics. The aim is that through the updated guide, firms will be able to gain a more in-depth picture of inclusion across their workforce, identifying areas for development and improvement.


ESAs’ sub-committee on digital operational resilience

On 8 July, the ESAs published the mandate for the sub-committee on digital operational resilience. The Committee’s primary objective is to assist the ESAs in fulfilling their policy mandates under DORA. The Committee shall: (i) contribute to, and coordinate where needed, the ESAs’ input to any aspects of the EU regulatory process relating to digital operational resilience, including developing technical advice, draft technical standards, guidelines and recommendations where mandated by the EC or by legislation, in particular by DORA; (ii)  conduct preparatory work for the gradual development of an effective Union-level coordinated response in the event of a cross-border major cyber incident or related threat that could have a systemic impact on the Union’s financial sector, as envisaged by the ESRB’s December 2021 recommendation on a pan-European systemic cyber incident coordination framework for relevant authorities; and (iii) coordinate the monitoring of digital operational resilience practices and threats, ensure cross-sectoral coordination and exchange of information with a view to promoting the safety and soundness of markets and convergence of regulatory and supervisory practice. The mandate came into effect on 1 July.


Ashley Alder appointed as new FCA Chair

On 8 July, Ashley Alder was announced as the new FCA Chair, taking up the role from January 2023 for a five-year term. Mr Alder is currently CEO of the Securities and Futures Commission in Hong Kong. He also chairs the IOSCO Board and sits on the FSB’s Plenary and Steering Committee.

Press release