EU & UK Reg Round Up: 28/01/2025
European Banking Authority
EBA publishes an Opinion on the interaction between the output floor and Pillar 2 requirements - 21 January 2025
The European Banking Authority (EBA) has issued an Opinion addressing the interaction between the output floor and Pillar 2 Requirements (P2R) under the Capital Requirements Directive (CRD). The EBA clarifies that P2R should not increase due to an institution becoming bound by the output floor and warns against double counting risks already covered by the floor’s effects. The Opinion outlines a temporary calculation method for P2R based on unfloored total risk exposure amounts (TREA) when an institution first becomes subject to the output floor. Competent authorities are urged to assess double counting only for P2R add-ons related to regulatory model deficiencies and to mitigate undue arithmetic effects from the output floor in their methodologies. This guidance will inform the EBA’s comprehensive review of the Supervisory Review and Evaluation Process (SREP) Guidelines, focusing on clarifying the interactions between capital stacks and the evolution of TREA.
The EBA launches its 2025 EU-wide stress test - 20 January 2025
The European Banking Authority (EBA) has launched its 2025 EU-wide stress test to evaluate the resilience of EU banks under baseline and adverse macroeconomic scenarios over a three-year period (2025-2027). Covering a sample of 64 banks, representing 75% of the banking assets in the EU and Norway, the exercise provides insights into the sector's ability to withstand severe economic shocks. The adverse scenario assumes a hypothetical escalation in geopolitical tensions, leading to a cumulative GDP decline of 6.3% by 2027, alongside significant shocks to private consumption, investments, and trade. This scenario also forecasts an EU unemployment increase of 6.1 percentage points above the baseline by 2027 and inflation spikes of 5.0% in 2025 and 3.5% in 2026. Key objectives of the stress test include assessing banks' solvency in adverse conditions, determining their capacity to support the economy during stress, and fostering transparency through granular, comparable, and bank-specific data. Results of the stress test will be published in August 2025.
ESAs publish study on feasibility of further centralisation of major ICT-related incident reporting by financial entities - 17 January 2025
The European Supervisory Authorities (EBA, EIOPA, and ESMA) have released a report examining the feasibility of further centralising the reporting of major ICT-related incidents by financial entities under the Digital Operational Resilience Act (DORA). The study, conducted in accordance with Article 21 of DORA, evaluates three models for enhancing reporting practices: a baseline model, a model with enhanced data sharing arrangements, and a fully centralised model. The report highlights potential cost reductions, efficiency improvements, and effectiveness gains associated with each model, with a focus on reducing the reporting burden and improving cross-sector supervisory practices. This joint analysis forms part of the ESAs’ efforts to streamline operational resilience requirements across the financial sector.
The EBA consults on Guidelines on ESG scenario analysis - 16 January 2025
The European Banking Authority (EBA) has launched a public consultation on its draft Guidelines on Environmental, Social, and Governance (ESG) scenario analysis. These Guidelines outline expectations for institutions to adopt forward-looking approaches, leveraging scenario analysis to assess the resilience of their financial and business models to adverse ESG factors. They are intended to complement the EBA’s earlier Guidelines on the management of ESG risks, published on 9 January 2025. The consultation is open until 16 April 2025. The Guidelines address the significant challenges posed by climate change, environmental degradation, and social issues, which impact the financial sector by influencing institutions’ risk profiles and business models, particularly through transition and physical risk drivers. To ensure institutions' safety and soundness over various time horizons, the Guidelines propose principles for developing frameworks to test financial resilience, capital, and liquidity against ESG-related shocks. They also emphasize scenario analysis for assessing business model viability under various scenarios, including achieving climate neutrality in the EU by 2050.
European Securities and Markets Authority
DPE regime starts 3 February, SI data publication ends - 24 January 2025
ESMA announced that the new Designated Publishing Entities (DPE) regime for OTC trade reporting will start on 3 February 2025, replacing the current Systematic Internalisers (SI) reporting framework. DPEs will handle transaction reporting via Approved Publication Arrangements (APAs), with ESMA providing a public register of DPEs. The SI regime ends on 1 February 2025, and ESMA has discontinued quarterly SI data publications to reduce administrative burdens. Firms can still opt into the SI regime voluntarily.
New governance for T+1 settlement transition - 22 January 2025
ESMA, the European Commission, and the ECB have launched a governance structure to oversee the EU’s transition to a T+1 settlement cycle.
Key elements include:
- Industry Committee: Led by Giovanni Sabatini, with senior market representatives addressing sector-specific adaptations.
- Technical Workstreams: Focused on trading, clearing, settlement, and regulatory updates.
- Coordination Committee: Chaired by ESMA, ensuring alignment between authorities and the industry.
The transition aims to improve efficiency, align with global markets, and shorten settlement from T+2 to T+1. Legislative changes are under consideration.
ESAs study on centralisation of ICT incident reporting - 17 January 2025
The EBA, EIOPA, and ESMA (ESAs) published a report on the feasibility of centralising the reporting of major ICT-related incidents by financial entities under the Digital Operational Resilience Act (DORA).
The report evaluates three models:
- Baseline model
- Enhanced data sharing model
- Fully centralised model
It considers the potential benefits, including cost reductions and increased efficiency in cross-sector supervision.
Bank of England
PRA delays Basel 3.1 implementation - 17 January 2025
The Prudential Regulation Authority (PRA), in consultation with HM Treasury, has announced a delay to the implementation of Basel 3.1 in the UK, moving the date to 1 January 2027. This decision allows for more time to clarify the US implementation timeline. Basel 3.1, which aims to improve risk measurement and capital ratio consistency across banks, was originally set to begin in January 2026. However, given uncertainties in the US and other considerations, the PRA decided to extend the timeline. Transitional periods for the rules will remain until 1 January 2030. Additionally, the PRA has paused its firm data collection exercise, originally due by 31 March 2025, and extended the deadline for joining the Interim Capital Regime beyond 28 February 2025.
Bank of England and CFTC lead report on initial margin transparency - 15 January 2025
The Bank of England and the Commodity Futures Trading Commission (CFTC) have co-chaired international work addressing margin practices in centrally cleared markets, stemming from the March 2020 market turmoil. A final report, “Transparency and Responsiveness of Initial Margin in Centrally Cleared Markets,” was published by the Basel Committee, Bank for International Settlements’ CPMI, and IOSCO, outlining policy proposals aimed at increasing market resilience. The report emphasizes improving transparency on initial margin models and enhancing governance around margin setting. Key proposals include better disclosure and the use of margin simulation tools to help participants understand future margin requirements. These findings build on prior work in 2022 on margin practices and aim to reduce vulnerabilities in financial markets, improving their stability. The report's completion follows extensive international collaboration, and the Bank of England and CFTC are committed to supporting these global reforms.