Key Regulatory Topics: Weekly Update 9 – 15 September 2022
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It has been a week of quiet reflection in the UK as the country prepares for the State Funeral of Her Majesty Queen Elizabeth II on Monday 19 September. Monday 19 September will be a national bank holiday across the United Kingdom and UK Finance has collated the announcements concerning operational arrangements of FMI in the UK following the declaration of the bank holiday.
Markets and Markets Infrastructure
FMI operational arrangements on the bank holiday for the Queen’s State Funeral
On 12 September, the BoE published a Market Notice on the changes to operational arrangements on the bank holiday for the Queen’s State Funeral on 19 September: (i) sterling payment systems – CHAPS and RTGS will be closed; (ii) sterling operations – operations undertaken by the BoE in sterling markets will follow market convention for bank holidays; this includes settlement and maturity processes – the Sterling Monetary Framework (SMF), including all liquidity facilities, will not be in operation. Due to the revised timing of the Monetary Policy Committee’s September meeting, the current Maintenance Period – i.e. the period over which interest is calculated on reserves balances – will now end on 21 September; and (iii) foreign exchange operations – foreign currency market operations undertaken by the BoE on its own account or as agent for HMT that are affected by the bank holiday will settle in accordance with the modified following business day convention. UK Finance has also published an update collating announcements from FMIs: (a) CLS, EUI (CREST), ICE Futures Europe have announced that they will be running their standard bank holiday arrangements; (b) the first ring trading session at the LME will not take place, however the markets themselves will remain open; (c) the London Stock Exchange on exchange markets will be closed.
EC financial system workstreams to tackle energy crisis
On 14 September, the EC provided an update on the measures it is working on regarding the financial system in the context of tackling the energy crisis. Amid the sharp rise in gas and electricity prices, energy companies have been required to post correspondingly increasing amounts of cash collateral to CCPs as margin calls have risen in line with prices. To address the resulting liquidity stress, the EC has invited: (i) ESMA to consider appropriate amendments to Delegated Regulation (EU) No 153/2013 by 22 September, such as broadening the list of eligible collateral and the conditions under which bank guarantees could be accepted as collateral; (ii) the EBA, in cooperation with ESMA and the SSM, to assess how banks currently provide collateral transformation services and report with proposals by 29 September; (iii) ESMA and the EBA to consider improvements to the transparency and predictability of initial margin models vis-à-vis clients and the modalities under which a CCP can call intraday margins, as well as to explore whether such intraday calls should be replicated for non-financial counterparties, e.g. energy firms; and (iv) ESMA to assess the appropriateness of increasing the clearing threshold for commodities and other derivatives to €4bn. To address the pricing of gas imports, the EC is working on a complementary transactions-based price benchmark that more accurately reflects the market for gas imports, including on EU gas imports. The aim is not to phase-out futures markets for “entry-paid” gas but to provide market participants with an alternative reference price that reflects the supply and demand dynamics of international gas markets. To address circuit breakers on trading venues, the EC has requested that ESMA: (a) report by 29 September on why circuit breakers have not been triggered in the course of the current energy crisis, and to explore whether the rules on circuit breakers need to be aligned across the EU; and (b) report with proposals by 17 October with regards to a more harmonised approach to “limit pricing”.
Payment Services and Payment Systems
Please see the Regulatory Reform Post Brexit section for a proposed amendment to the FSM Bill which would bring the non-interest-bearing elements of buy-now-pay-later lending and similar services under the regulatory ambit of the FCA.
CPMI requests feedback on ISO 20022 harmonisation requirements
On 9 September, the CPMI provided an update on a workstream of the G20 cross-border payments programme focused on the harmonisation of ISO 20022 for enhancing cross-border payments. This includes highlights from a stocktake of global ISO 20022 adoption by payment system operators. A joint CPMI and SWIFT Payments Market Practice Group taskforce is currently working on defining the harmonised requirements for the use of ISO 20022. The CPMI is planning for the ISO 20022 harmonisation requirements to identify a core message set and define the minimum requirements for a data model. The harmonisation requirements would complement the existing usage guidelines by providing high-level requirements to be adopted by all usage guidelines. The proposed 2025 introduction of the requirements would align with the removal by SWIFT, of the ability to send cross-border MT payment messages over its network. CPMI emphasises that in order to be successful, the adoption of the CPMI ISO 20022 harmonisation requirements will need a global community effort. The article outlines and requests feedback on preliminary high-level harmonisation requirements. The deadline for comments is 21 October. CPMI intends to issue a formal consultation paper at the end of 2022 on the full details of the proposed harmonisation requirements.
Prudential Regulation
EP adopts Daisy Chain proposal at first reading
On 13 September, the EP voted in plenary to adopt its first reading position on the EC’s legislative proposal for a Regulation making targeted amendments to the CRR relating to total loss absorbing capacity (TLAC) and the minimum requirement for own funds and eligible liabilities (MREL). The next step is for the Council to adopt the proposal. The Regulation will enter into force and apply 20 days after it is published in the OJ.
GHOS reaffirms expectation to implement Basel III in full and update on BCBS work priorities
On 13 September, BCBS’ oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), reiterated its expectations of a full and timely implementation of Basel III, in order to provide a regulatory level playing field for internationally active banks. More than two thirds of jurisdictions plan to implement all, or the majority of, the standards in 2023/2024, with the remaining jurisdictions planning to implement Basel III in 2025. There are only a limited set of technical standards that are particularly subject to an implementation delay. GHOS also reviewed the BCBS’ work on: (i) climate-related financial risks - GHOS reaffirmed the scope of the work and endorsed the holistic approach to developing and assessing potential measures related to disclosure, supervision and/or regulation; and (ii) cryptoassets – GHOS reiterated the importance of designing a robust and prudent regulatory framework for banks' exposures to cryptoassets that promotes responsible innovation while preserving financial stability. The GHOS tasked BCBS with finalising this framework around 2022 year-end.
ESAs warn or rising risks amid a deteriorating economic outlook
On 12 September, the ESAs published the Autumn 2022 joint risk report. The report highlights that the recovery associated with the receding pandemic has slowed as a result of the Russian aggression in Ukraine. It has contributed to high inflation and is damaging the economic outlook, which led to increased financial market risks across the board. Policy rates are being raised in response and the resulting higher financing costs and lower economic growth may put pressure on the government, and on corporate and household debt refinancing. It will likely also have negative impact on the credit quality of financial institution loan portfolios. Financial institutions are faced with increased operational challenges associated with heightened cyber risks and the implementation of sanctions against Russia. The financial system has to date been resilient despite the increasing political and economic uncertainty. In light of this, the ESAs advise NCAs, financial institutions and market participants to: (i) prepare for a deterioration in asset quality in the financial sector and monitor developments including in assets that benefitted from temporary measures related to the pandemic and those that are particularly vulnerable to a deteriorating economic environment, to inflation as well as to high energy and commodity prices; (ii) monitor the impact of further increases in policy rates and of potential sudden increases in risk premia on financial institutions and market participants; (iii) monitor the impact of inflation risks; (iv) monitor risks to retail investors, in particular with regard to products where consumers may not fully realise the extent of the risks involved, such as crypto-assets; and (v) manage environmental risks and cyber risks to address threats to information security and business continuity.
Recovery and Resolution
FSB survey on framework for information from FMI intermediaries to support resolution planning
On 14 September, the FSB launched a survey to gather feedback on its framework for information from FMI intermediaries to support resolution planning. The framework aims to help FMI intermediaries better understand which information clients and their resolution authorities may need from them in the run-up to, and during, a firm’s resolution by providing an overview of the baseline information that is potentially relevant for clients and resolution authorities, which they and FMI intermediaries can then discuss, as needed, in their bilateral engagement. This survey aims to gather stakeholders’ feedback on the framework, from the perspective of FMI service providers, as well as firms subject to a resolution planning requirement and bank resolution authorities (as users of FMI service providers’ responses). The deadline for comments is 9 October.
Regulatory Reform Post Brexit
Please see our third bulletin on the Financial Services and Markets Bill (FSM Bill), focusing on the Designated Activities Regime. The Designated Activities Regime is intended to maintain the purview of the FCA over certain activities, products and conduct that are currently regulated by retained EU law but that are not regulated activities under the existing Financial Services and Markets Act 2000 (FSMA). It forms part of the government’s overall policy objective to establish a comprehensive FSMA model for financial services regulation. This briefing discusses that FSMA model, how the Designated Activities Regime will work, what it will be used for and what it could be used for, before signposting what firms should do now.
FSM Bill amendment proposes regulating BNPL services
On 9 September, an Amendment Paper to the FSM Bill was published, listing amendments tabled to the bill. One amendment is included, which proposes to bring the non-interest-bearing elements of buy-now-pay-later (BNPL) lending and similar services under the regulatory ambit of the FCA within 28 days of the FSM Bill being passed. These regulations would include ensuring that relevant consumers have access to the FOS, are subject to credit checks and are protected by Section 75 of the CCA.