Posts by: Kevin Wong

European Parliament Adopts EMIR Refit Regulation

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The European Parliament published a press release on June 12, 2018 announcing that it has voted in plenary to adopt the proposed Regulation amending EMIR (the Regulation on OTC derivatives, central counterparties (“CCPs“) and trade repositories) (Regulation 648/2012) (EMIR Refit Regulation).

The proposed Regulation will simplify clearing rules for small and non-financial counterparties and provide a temporary exemption for pension scheme arrangements from the mandatory clearing of derivatives.

The Parliament’s Committee on Economic and Monetary Affairs published its report on the proposed Regulation on May 25, 2018. It voted to adopt the report on May 16, 2018.

The next step is for the proposed Regulation to be considered by the Council of the EU and the European Commission, which is due to happen in July 2018.

FSB Speech on Effective Global Resolution Schemes

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The Financial Stability Board (“FSB“) published a speech by Dietrich Domanski, FSB Secretary General, on effective global resolution schemes on June 12, 2018.

The speech covers matters including the following:

  • Funding in resolution. In November 2017, the FSB consulted on guidance on the development of a plan for funding in resolution. Many respondents welcomed the focus on firm capabilities and the operational aspects of a funding strategy.

With regard to both consultations, the FSB intends to reflect suggestions for changes in the final guidance, which it expects to publish in the coming weeks.

  • Bail-in execution. Also in November 2017, the FSB consulted on guidance to assist authorities in making global systemically important bank (“G-SIB“) bail-in resolution strategies operational. Generally, respondents expressed support for the guidance and its focus on the operational aspects of a bail-in.
  • Monitoring and evaluation. The FSB has started work on a thematic peer review of resolution regimes. A report on the peer review will be published in early 2019. The FSB also plans to evaluate the effects of the reforms aimed at ending “too-big-to-fail”. The key objective of the evaluation is to assess whether reforms have accomplished their objective, or whether there are any unintended consequences that may call for adjustments in regulation.
  • Open issues in implementation. Although the publication of the above two guidance papers will assist authorities and firms in their work to operationalise resolution plans, they do not consider many of the details that will need to be worked through at a jurisdictional level, taking into account local legal and regulatory frameworks. These details will need to be considered as part of resolution planning to ensure that resolution strategies can be credibly and feasibly implemented.

The FSB is also carrying out work on two other aspects of authorities’ resolution planning work. It is comparing approaches in FSB jurisdictions to the public disclosure of information on resolution planning and resolvability. It is also looking at trading book wind-down. The wind-down of trading book activity may form part of a restructuring plan for a firm in resolution. The FSB expects to report its findings later in 2018.

EBA Opinion and Draft Guidelines on Implementation of Delegated Regulation Setting Out RTS on SCA and CSC Under PSD2

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On June 13, 2018, the European Banking Association (“EBA“) published a consultation paper (EBA/CP/2018/09) on draft guidelines on the conditions to be met to benefit from an exemption from contingency measures under Article 33(6) of Delegated Regulation (EU) 2018/389, which sets out regulatory technical standards (“RTS“) on strong customer authentication (“SCA“) and common and secure communication (“CSC“) under the revised Payment Services Directive ((EU) 2015/2366) (“PSD2“).

Alongside the consultation paper, the EBA has published an opinion (EBA-Op-2018-04) on implementation of the RTS on SCA and CSC. Both the draft guidelines and the opinion are designed to clarify a number of issues identified by market participants relating to the RTS on SCA and CSC, which will apply from 14 September 2019.

The draft guidelines propose a pragmatic and consistent approach to the four conditions that an account servicing payment service provider (“ASPSP“) must meet if it wishes to benefit from an exemption from the fallback option envisaged under Article 33(6) of the Delegated Regulation. The EBA considers that the draft guidelines provide clarity for all parties involved (that is, ASPSPs, national competent authorities (“NCAs“) and the EBA) on the information to be considered to determine whether an exemption request meets the Article 33(6) conditions. In particular, the guidelines will enable NCAs to carry out a quick assessment of exemption requests, especially during the time when the bulk of these requests are received.

The EBA plans to hold a public hearing to discuss the draft guidelines on 25 July 2018. Comments can be made on the draft guidelines until 13 August 2018.

The opinion focuses on implementation of the RTS. It sets out the EBA’s views in “pressing” areas identified by the market and NCAs, including on exemptions to SCA, consent, the scope of data sharing, and requirements for application programming interfaces (“APIs“) and dedicated interfaces to take into account. Although the opinion is addressed to NCAs, given the supervisory expectations it is conveying, the EBA advises it should prove useful for PSPs, among others.

In the opinion, the EBA explains that it will provide further clarification on interpretation of the RTS on SCA and CSC through its online interactive single rulebook and Q&A tool. The tool will be extended to PSD2-related queries by the end of June 2018.

New Pre-Application Process for Significant Institutions to Use Before Submitting Formal Internal Model Requests to ECB

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The European Central Bank (“ECB“) published a letter on June 13, 2018 (dated June 7, 2018) relating to internal model requests by significant institutions.

It appears that the letter has been sent to the boards of significant institutions that the ECB supervises under the single supervisory mechanism (“SSM“).

The ECB explains the set of documents and processes that firms are invited to use when communicating any applications for initial internal model approvals, material model changes and extensions, reversions to less sophisticated approaches, and modifications to the scope of assets for which permanent partial use of the standardised approach is permitted. The letter also contains links to the set of documents to be used when communicating any non-material model changes or extensions.

Firms are invited to follow a pre-application process, which aims to increase the efficiency of the assessment of internal model requests. The letter provides detail on the scope, process and timeline for the pre-application process.

The ECB believes that significant institutions that follow the pre-application process will benefit from a more certain and transparent time plan.

Participation in the pre-application process is not a legal requirement, but information that firms provide in the pre-application is key to enabling the ECB to efficiently plan its assessment of internal model requests. If firms do not use this process, the ECB can only carry out its preparation once it has received the formal application. The ECB also points out that the level of information requested after submission of the formal application is at least equivalent to that foreseen in the pre-application process.

Significant institutions are invited to follow the pre-application process for applications from 1 July 2018 onwards, using the forms referred to in the letter. The ECB advises that the pre-application process may be updated and enhanced in the light of post-implementation experience, and changes in the applicable legal framework.

For communicating non-material model changes, institutions are asked to start using the forms referred to as of 1 July 2018.

Separately, the ECB is consulting on a guide to internal models under the SSM.

ECB Revised Assessment Methodology For Payment Systems

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The European Central Bank (“ECB“) published a revised assessment methodology for payment systems on June 15, 2018.

The principles for financial market infrastructures (“PFMIs“) developed by the Committee on Payments and Market Infrastructures (“CPMI“) and the Technical Committee of the International Organization of Securities Commissions (“IOSCO“) were adopted in June 2013 as a basis for the conduct of Eurosystem oversight in relation to all types of financial market infrastructures (“FMIs“). For payment systems, the PFMIs are implemented through the ECB Regulation on oversight requirements for systemically important payment systems (Regulation 795/2014) (SIPS Regulation) and the revised oversight framework for retail payment systems.

The updated assessment methodology covers the requirements introduced by the Revised SIPS Regulation, which entered into force in December 2017. It also references the Eurosystem’s cyber resilience oversight expectations, which are based on the CPMI-IOSCO guidance on cyber resilience for financial market infrastructures published in June 2016.

The ECB previously updated the assessment methodology in February 2016.

EC Publishes “New Deal for Consumers” Package

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The European Commission (“EC“) has published its “New Deal for Consumers” package. The package comprises 16 documents, some yet to be published.

The initiative is composed of two proposals for Directives:

A proposal for a Directive on better enforcement and modernisation of EU consumer protection rules (2018/0090 (COD)). This will amend the Unfair Contract Terms Directive (93/13/EEC), the Consumer Price Indications Directive (98/6/EC), the Unfair Commercial Practices Directive (2005/29/EC) and the Consumer Rights Directive (2011/83/EU). This proposal’s aim is to ensure better enforcement and to modernise EU consumer protection rules, in particular in the light of digital developments.

A proposal for a Directive on representative actions for the protection of the collective interests of consumers (2018/0089 (COD)), dealing with representative actions for the protection of the collective interests of consumers, and repealing the Injunctions Directive (2009/22/EC). This proposal’s aim is to improve the tools for stopping illegal practices and facilitating redress for consumers whose rights have been infringed.

The main themes are improved enforcement measures, better protection for online consumers, and EU harmonisation:

  • The proposals will, among other things, empower qualified entities to launch representative actions on behalf of consumers and introduce stronger sanctioning powers for member state consumer authorities.
  • There will be greater online protection for consumers in the form of new disclosure rules concerning the identity of traders and the existence of paid advertisements. In addition, consumers will have similar rights in respect of “free” digital services as they do in respect of paid services, such as information rights and the right to cancel within 14 days. (The latter measures are directed at digital services for which consumers provide their personal data, but do not pay with money, such as cloud storage services, social media or email accounts.)
  • The new regime will also deal with the practice of offering products of differing quality but in the same format within different member states.

The next step is for the Commission’s proposals to be discussed by the European Parliament and the Council.

Notice of Entry into Force of EU-US Bilateral Agreement on Insurance and Reinsurance Prudential Measures Published in OJ

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A notice confirming the entry into force of the bilateral agreement between the EU and the US on insurance and reinsurance measures was published in the Official Journal of the EU (“OJ“) on April 9, 2018.

The notice states that the US and the EU have notified each other of the completion of the procedures necessary for the entry into force of the agreement. The agreement entered into force on 4 April 2018, under Article 8 of the agreement (which provides that the agreement will enter into full force seven days after the EU and the US exchange written notifications certifying that they have completed their respective internal requirements and procedures, or on such other date as they may agree).

The EU and the US announced the signing of the agreement in September 2017 and the final text of the agreement was published in the OJ in October 2017. A decision of the Council of the EU approving the agreement was published in the OJ on April 6, 2018.

ECB Consults on Cyber Resilience Oversight Expectations for FMIs

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The European Central Bank (“ECB“) published for consultation a draft version of the cyber resilience oversight expectations (“CROE“) for financial market infrastructures (“FMIs“) on April 10, 2018.

The CROE are based on guidance on cyber resilience for FMIs that was published by the Committee on Payments and Market Infrastructures (“CPMI“) and the International Organization of Securities Commissions (“IOSCO“) in June 2016. The 2016 guidance was immediately applicable and the CROE form part of the oversight of the guidance, setting out assessment criteria for supervisors to use.

The CROE also provides FMIs in the euro area with steps on how to implement the guidance and enhance their cyber resilience.

In line with the guidance, the CROE covers five primary risk management categories:

(i).   Governance.

(ii).  Identification.

(iii). Protection.

(iv). Detection.

(v).  Response and recovery.

It also covers three overarching components which relate to testing, situational awareness, and learning and evolving.

The CROE use a maturity model that provides supervisors and FMIs with a benchmark against which they can evaluate FMIs’ current level of cyber resilience, measure progression and establish priority areas for improvement.

The webpage for the consultation invites FMIs and other interested parties to provide their input on the draft CROE. The deadline for responses is June 5, 2018.

The ECB provided an overview of the Eurosystem cyber resilience strategy for FMIs in a speech in November 2017.

ECB Speech on Risk Appetite Frameworks

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The European Central Bank (“ECB“) published a speech, “Risk appetite frameworks: good progress but still room for improvement“, given by Daniele Nouy, ECB Supervisory Board Chair, at the International Conference on Banks’ Risk Appetite Frameworks on April 10, 2018.

In her speech, Ms. Nouy explains that a bank’s risk appetite framework includes the policies, processes, limits, controls and systems it puts in place to define, communicate and monitor how much risk it is willing to take on. Supervisors expect risk appetite frameworks to be comprehensive, effectively governed, consistently used and fully integrated into strategic decision-making.

Ms. Nouy acknowledges that banks’ risk appetite frameworks are now better structured and subject to clearer governance. Most banks have clarified the role of the relevant stakeholders involved in the risk appetite framework and many banks’ internal auditors have reviewed the effectiveness of risk appetite frameworks.

However, she highlights four areas in which banks need to improve:

  • Banks need to improve how they embed risk appetite frameworks in their strategic processes. They need to take a holistic approach to risk culture and risk management and to align risk modifiers and key performance indicators with their risk appetite frameworks. The board must challenge the senior management and ensure that each strategic decision is based on a sound risk analysis.
  • Risk appetite frameworks still do not cover enough risks, particularly non-financial risks (such as compliance and reputational risks, IT risks, legal risks and conduct risks).
  • The governance of risk appetite frameworks must be improved. Boards and banks’ risk functions need to play a larger role in defining and reviewing risk appetite frameworks
  • Risk appetite limits need to be set and used comprehensively. Banks need to break these limits down to business lines, entities and countries and need to work on how they calculate and apply limits.

Ms. Nouy previously stated that banks’ progress had been too slow in relation to risk management frameworks in a speech in March 2018.

The ECB identified risk management as one its supervisory priorities for the single supervisory mechanism (“SSM“) for 2018.

Joint Committee of ESAs Report on Risks and Vulnerabilities in EU Financial System

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The Joint Committee of the European Supervisory Authorities (“ESAs“) (that is, the EBA, EIOPA and ESMA) published its spring 2018 report (JC 2018 07) on risks and vulnerabilities in the EU financial system on April 12, 2018.

The Joint Committee identifies the following as the main risks to the EU financial system:

  • Brexit. Uncertainties around the terms of the UK’s withdrawal from the EU could expose the EU27 and the UK to economic and financial instability and weaken market confidence, particularly if negotiations end in a disorderly way. The lack of a conclusive agreement on the withdrawal terms could affect the legal framework for financial services and the continuity of financial contracts, and create operational challenges.
  • Cyber risks. These risks threaten data integrity and business continuity and are particularly dangerous because of possible multiplier effects leading to further business risks such as supply chain risk and reputational risk. Similarly, risks related to virtual currencies and crypto-assets have recently materialised.

The Joint Committee published a report in March 2017 noting that the growing use of big data could increase the risk of harm from cyber attacks.

  • Asset repricing. The risks related to valuations and repricing of risk premiums could reduce profitability and asset quality across sectors. Asset quality in the banking sector has recently improved and volumes of non-performing loans (“NPLs“) disposals are increasing. However, the amount of NPLs on banks’ balance sheets remains high, which needs to be addressed by banks and supervisors.

The Joint Committee’s spring 2017 report on risks and vulnerabilities in the EU financial system warned that the banking sector was being affected by high levels of NPLs.

  • Climate change and the transition to a lower carbon economy. This raises concerns about the sustainability of investments across large parts of the financial sector. Climate change can affect asset quality through different transmission channels, which could in turn affect the solvency position of financial institutions.

In the light of the risks identified, the Joint Committee recommends a series of policy actions by the ESAs, national competent authorities and financial institutions. These recommended actions are set out in the report.

The Joint Committee previously reported on risks and vulnerabilities in the EU financial system in September 2017.