EU & UK Reg Round Up: 10/10/2024
European Banking Authority
EBA published its final guidelines on how token holders should be redeemed in the event of an issuer related crisis - 9 October 2024
These Guidelines, part of the Markets in Crypto-Assets Regulation (MiCAR), are directed towards competent authorities and apply to issuers of asset-referenced tokens (ARTs) and e-money tokens (EMTs). They provide a framework for redemption planning in ongoing operations, addressing the liquidation strategies for reserves, outlining critical activities, and detailing how redemption claims and processes should be handled. The Guidelines also describe the circumstances that may prompt regulatory authorities to trigger these plans. Following a public consultation, the EBA made amendments for clearer guidance and flexibility, especially regarding the liquidation of asset reserves.
EBA report highlights the impact of the full implementation of Basel III reform on tier one capital needs for EU banks - 4 October 2024
This report also considers the additional requirements under the EU's Capital Requirements Regulation (CRR3), including Pillar 2 requirements and EU-specific capital buffers. According to the report, the minimum required capital impact has further decreased compared to the previous reference date of December 2022. The shortfall in Tier 1 capital is minimal, with a total capital shortfall estimated at EUR 5.1 billion. For the EU banking sector, the capital needed to meet Basel III reforms amounts to just EUR 0.9 billion in Tier 1 capital, a figure that can be easily raised before full implementation. The report also includes a comparative analysis, highlighting the differences between the baseline Basel III proposals and the EU's adjustments within CRR3. The results show that European banks' minimum Tier 1 capital requirements will increase by 7.8% by 2033, with the output floor and operational risk being the primary contributing factors. For large and internationally active banks, this increase rises to 8.6%, while global systemically important institutions (G-SIIs) will see a 12.2% increase, and Group 2 banks a 3.6% rise.
EBA report on credit insurance eligibility from a request from the European Commission - 3 October 2024
The report reexamines the role of credit insurance as a credit risk mitigation (CRM) technique in light of the Basel III framework changes. The EBA had previously concluded in its March 2020 Opinion that credit insurance did not warrant preferential treatment based on the data and policy arguments available at that time. This new report continues to align with that stance, noting that credit insurance provides dual recourse to banks—meaning banks have recourse to both the obligor and the credit insurer in the event of default. However, this feature is also present in other unfunded credit protection (UFCP) products like guarantees, ensuring that credit insurance is not unfairly disadvantaged. As a result, the EBA concludes that there is insufficient evidence to deviate from the Basel framework or to warrant specific adjustments for credit insurers. This ensures a level-playing field for credit insurers and other financial products offering similar features.
European Securities and Markets Authority
ESMA has published a public statement on accounting for carbon allowances in financial statements - 8 October 2024
ESMA assesses the different accounting approaches used by European listed issuers concerning compliance market carbon allowances, specifically emission allowances, rights, and permits under systems like the EU Emissions Trading System. The statement highlights International Financial Reporting Standards (IFRS) commonly applied to account for carbon allowances and offers disclosure recommendations. ESMA aims to enhance transparency and provide more useful decision-making information for stakeholders by promoting clarity in financial reporting on both compliance and voluntary market carbon allowances.
The ESAs (EBA, EIOPA, and ESMA) have published their Work Programme for 2025 - 7 October 2024
The programme emphasizes the importance of cross-sectoral collaboration to address risks, promote sustainability within the EU financial system, and enhance the digital resilience of financial entities. In 2025, the ESAs will prioritize regulatory consistency, comprehensive risk assessment, and consumer and investor protection. Joint efforts will include providing additional guidance on sustainability disclosures, advancing digital operational resilience by overseeing third-party ICT providers, and coordinating responses to significant ICT incidents in line with the Digital Operational Resilience Act (DORA). The ESAs will also continue to monitor financial conglomerates, enhance cooperation among national innovation facilitators to support the growth of innovative solutions in finance, and address cross-sectoral issues, including those related to retail financial services, investment products, and securitization.
ESMA have launched two consultations under the MiFID Review - 3 October 2024
The consultations will focus on transaction reporting and order book data as part of the Markets in Financial Instruments Regulation (MiFIR) Review. ESMA is gathering feedback on proposed amendments to the regulatory technical standards (RTS) governing the reporting of transactions and the management of data related to financial instrument orders. These amendments aim to improve the quality and consistency of data reporting across the board, making it easier for stakeholders to access and use the information while simplifying and harmonizing the reporting process. Additionally, the revised standards are expected to alleviate the reporting burden for market participants who are subject to various reporting regimes. ESMA is particularly interested in hearing from market participants, trading venues, investment firms, and national competent authorities (NCAs) as part of this consultation process.
Bank of England
The BoE published Statistical Notice 2024/127 - October 2024
The Bank of England (BoE) Levy has been officially classified by the Office for National Statistics (ONS) as "other taxes on production." This classification, effective from the levy’s inception, applies to institutions that are liable to pay the BoE Levy. These institutions are now advised to report their levy payments on Form PL under taxes payable (specifically PL16 / PL.01.01.01 R1600 C0010) on an accrual basis. The BoE Levy operates on an annual cycle starting from 1st March, and institutions are notified of their charges in July after the first quarter reporting cycle. While the ideal practice is to begin accruing the levy from Q1 reporting, institutions are now being instructed to start accruals from Q2 to mitigate the impact on Q1 reporting. For PL reporting, the levy should be apportioned from Q2 until Q1 of the following year. For the 2024/25 levy year, institutions are required to resubmit their Form PL Q2 2024 submissions to include the BoE Levy accrual. Additionally, the ONS clarified that the FMI and PRA Levies are classified as fees for financial services paid by eligible financial corporations and should be recorded under fees and commissions payable (PL6 / PL.01.01.01 R1060 C0010). Updates to the PL Guidelines will follow to incorporate this guidance.
BoE conducts SIMEX 24 to test the UK financial sector’s resilience to a major operational disruption - 2 October 2024
The Bank of England, in collaboration with UK Finance and other financial authorities, including HM Treasury and the Financial Conduct Authority, has conducted its latest market-wide simulation exercise, SIMEX 24. This exercise aimed to test the UK financial sector's preparedness for a significant infrastructure failure that would necessitate a complete shutdown and restart of operations. Developed by the Cross Market Operational Resilience Group (CMORG), established by the Bank of England in 2015, SIMEX is part of a continuous effort to enhance the financial sector's response capabilities to various challenging scenarios, many of which are outlined in the UK Government's National Risk Register. The exercise is integral to strengthening the operational resilience of the financial sector and ensuring that robust collective response tools are in place to handle disruptive events. This initiative supports the goals of financial authorities and firms to maintain a stable financial system that the public can rely on.
A new era of risk-free rates begins following LIBOR’s conclusion - 1 October 2024
As of September 30, 2024, the remaining synthetic LIBOR settings were published for the final time, marking the end of LIBOR as all 35 settings have permanently ceased. The transition from LIBOR, once referenced in approximately $400 trillion of financial contracts, aimed to create safer and more stable financial markets. UK regulators, along with international counterparts and market participants, have collaborated over the past decade to shift towards risk-free rates (RFRs) grounded in robust data. Synthetic LIBOR served as a temporary solution, allowing firms additional time to transition outstanding legacy LIBOR-linked contracts to alternative RFRs, facilitating an orderly cessation. Market participants are urged to use the most reliable rates for their respective currencies, such as SONIA for GBP and SOFR for USD. They should also exercise caution in using term risk-free reference rates, like term SONIA and term SOFR, ensuring that usage aligns with best practice guidance. With LIBOR's transition finalized, the Bank, FCA, and Working Group emphasize that credit sensitive rates (CSRs) should not arise as successor rates. The Financial Policy Committee (FPC) supports this stance, stating that CSRs are neither robust nor suitable for widespread use as benchmarks. Notably, USD CSRs could reintroduce many financial stability risks previously associated with LIBOR.