Industry Developments

Joint Committee of ESAs Final Report on Use of Big Data by Financial Institutions


On March 15, 2018, the Joint Committee of the European Supervisory Authorities (“ESA“) published its final report, together with a factsheet, on the use of big data by financial institutions (JC/2018/04). The report is available here and the factsheet here.

Chapter 4 of the report contains a feedback statement summarizing the responses received. Among other things, respondents expressed concerns about practices that do not guarantee the accuracy of the data collected and the potential consequences of the increasing level of segmentation of customers enabled by big data. They also warned that consumers may not be fully aware of big data tools being used and that the growing use of big data could increase the risk of harm from cyberattacks.

The ESAs consider that the requirements in sectoral financial legislation and in legislation relating to data protection, cybersecurity and consumer protection mitigate the risks identified by the ESAs. This framework will be further strengthened with the entry into application of several key pieces of legislation in the financial sector and the General Data Protection Regulation ((EU) 2016/679) (“GDPR“). The ESAs intend to monitor the extent to which these requirements contribute to mitigate big data risks.

The ESAs invite financial institutions to develop and implement good practices on the use of big data to promote a fair, transparent and nondiscriminatory treatment of consumers and to ensure that big data strategies are designed in a responsible way and are fully aligned with the interests of consumers. The ESAs suggest an indicative list of arrangements and behaviors concerning:

  • Robust big data processes and algorithms relating to the monitoring of the functioning of big data procedures and methodologies.
  • Consumer protection. Among other things, the ESAs suggest firms should periodically assess whether big data-based products and services are aligned with consumers’ interests.
  • Disclosures on the use of big data, relating to firms’ transparency toward customers concerning the use of big data technologies to process their data.

Second ECB Consultation on New Euro Unsecured Overnight Interest Rate


On March 15, 2018, the European Central Bank (“ECB“) published its second consultation paper on a new euro unsecured overnight interest rate, available here.

The ECB announced in September 2017 that it intended to start providing a euro unsecured overnight interest rate based on data already available to the Eurosystem (that is, the rate will be calculated entirely on transactions in euro that are reported by banks in the ECB’s money market statistical reporting (“MMSR“)). The ECB aims to produce the new rate before 2020 and plans for it to be consistent with the principles on financial benchmarks developed by the International Organization of Securities Commissions (“IOSCO“). The interest rate will complement existing benchmark rates produced by the private sector and will serve as a backstop reference rate.

EU Covered Bonds Framework: Proposed Legislation


On March 12, 2018, and further to its action plan on building a capital markets union (“CMU“), the European Commission published a draft Directive and Regulation on covered bonds in line with its aim to create an integrated EU covered bonds framework.

The Commission’s proposed Directive sets out the conditions that covered bonds must satisfy to be recognized under EU law. It also strengthens investor protection by imposing specific supervisory duties. The proposal for a Directive is complemented by a proposal for a Regulation amending Regulation (EU) No 575/2013 (the “Capital Requirements Regulation“).

SEC Proposes Transaction Fee Pilot for NMS Stocks


On March 14, 2018, the Securities and Exchange Commission (“SEC“) issued a proposed rule that “subject[s] stock exchange transaction fee pricing … to new temporary pricing restrictions across three test groups, and require the exchanges to prepare and publicly post data.” Once published in the Federal Register, the public comment period will last for 60 days. Release. Proposed Rule.

SEC Proposes Targeted Changes to Public Liquidity Risk Management Disclosure


On March 14, 2018, the Securities and Exchange Commission (“SEC“) “proposed amendments to public liquidity-related disclosure requirements for certain open-end investment management companies.” The proposed amendments, and other related actions, were designed to give investors improved information while providing the companies sufficient time to comply. Release. Proposed Rule.

EBA Reports on Basel III Monitoring Exercise as of June 30, 2017

The European Banking Authority (“EBA“) published a report, available here, summarizing the results of the latest EU Basel III monitoring exercise, using data as of June 30, 2017. The report was accompanied by a press release.

The report contains analysis relating to matters such as:

  • Capital ratios
  • Capital shortfalls
  • Impact of phase-in arrangements
  • Composition of capital and risk-weighted assets (“RWAs“)
  • Composition of the leverage ratio exposure measure
  • Liquidity coverage ratio (“LCR“)
  • Net stable funding ratio (“NSFR“)

The report highlights an improved capital position for EU banks, with a total average common equity tier 1 (“CET1“) ratio of 13.8%, an improvement from the 13.4% ratio as on December 31, 2016. Average LCR was 143.1% as of December 31, 2016, as opposed to 139.5% as of December 2016, and the overall average NSFR ratio was 112.3%, up from 112.0% as of December 2016.

The impact of Basel III is monitored semi-annually by the Basel Committee on Banking Supervision (“BCBS“) at a global level and by the EBA at EU level.

ESMA Speech on Measured Approach to FinTech

The European Securities and Markets Authority (“ESMA“) published a speech by ESMA Chair Steven Maijoor on taking a measured approach to Financial Technology (“FinTech“) on February 27, 2018.

Mr. Maijoor explained that there are two strands to ESMA’s measured approach to FinTech. The first strand involves monitoring innovations diligently and intelligently. The second strand is to take action in a measured way (that is, to carefully consider how best to act, weighing risks and benefits in an objective fashion). He goes on to address the following three key areas of FinTech:

Monitoring FinTech by looking at economic function. As ESMA monitors and assesses FinTech developments, it finds it helpful to keep in mind radical changes brought by FinTech and other information technology. ESMA recognises the potential for FinTech to reshape the financial sector. It has already devised a financial innovation scoreboard, with which it performs an initial assessment of financial innovations according to the risks and benefits arising from the functions they perform.

Structural features of FinTech. Understanding how the process of innovation works and taking into account its structural features enables regulators to take a coherent view of FinTech. Mr. Maijoor states that one of the overarching features across different FinTech innovations is the reliance on information technology, and that one innovation often leads to another. In some cases, successful technologies, products or services may emerge from failed innovations. This process of development is known as the “innovation spiral”. Distributed ledger technology is an example of the innovation spiral. Mr. Maijoor also refers to the notion of a “regulatory dialectic”. This is where market participants take into account existing rules and regulations when they innovate. In response, authorities may seek to amend the regulatory framework, which may then prompt further innovation and so on.

Challenges and opportunities for regulators. FinTech is a priority for financial market regulators. Mr. Maijoor refers to the European Commission’s work in this area. Following the Commission’s consultation on FinTech, it published a summary of responses in September 2017. Under the Commission’s proposals, specific new tasks for the European Supervisory Authorities (“ESAs“) (that is the EBA, EIOPA and ESMA) relating to FinTech would include four areas. These relate to pursuing convergence on licensing requirements for FinTech companies, clarifying and updating the supervisory outsourcing frameworks, co-ordinating national technological innovation hubs and work relating to cybersecurity. Mr. Maijoor states that if the Commission’s proposals are adopted, it will provide the ESAs with a clear roadmap to meet the challenges and opportunities arising from FinTech.