Global Regulator & Central Bank News Roundup

Volume 34/2023 (September 4 – September 10)

 

Your weekly summary of key regulatory updates in an objective bite-size format, drawing on official news and press releases from 700+ financial services regulators, central banks as well as global and regional standard setters. For more current updates, visit Regxplora, Regxelerator’s end-to-end automated and generative AI-powered financial regulatory intelligence platform. Sign up here to receive the roundup via email.
 


Themes covered in this edition
 

 


Prudential & financial stability
 
FSB NBFI Annual Report to G20 Highlights Persistent Vulnerability to Liquidity Strains in Non-Bank Financial Sectors

The Financial Stability Board (FSB) has issued its annual progress report to the G20 on the resilience of non-bank financial intermediation (NBFI). The report focuses on key amplifiers of liquidity stress in relation to NBFIs and draws attention to policy work underway by the FSB and other standard-setting bodies with a view to reducing excessive spikes in liquidity demand by addressing the vulnerabilities that contribute to those spikes as well as by mitigating their impact on financial stability. Key policy initiatives are targeted at (1) mitigating structural liquidity mismatches in open-ended funds by strengthening liquidity management of these fund mangers and (2) enhancing margining practices. Additionally, the FSB has prioritized financial stability risks resulting from high leverage within the NBFI sector as an area of policy focus, with the supporting key analysis shared in a separate deep dive report. The report examines the leverage trends in the NBFI sector across FSB jurisdictions and points towards significant leverage in certain areas, notably hedge funds. To address the identified vulnerabilities as well as overcome current data constraint that limit full visibility into issues related to NBFI leverage, the report suggests several policy initiatives including (1) closing notable data gaps by considering trade repository data, enhancing reporting mandates for highly-leveraged non-banks, and broadening disclosure norms, (2) regulating excessive leverage by refining haircuts and margins for derivatives and securities financing, as well as (3) reducing the risks of high NBFI leverage by considering improved risk management for prime brokers and bolstering liquidity readiness for non-bank investors.

 

ESRB Proposes Policy Changes to Tackle Systemic Risks in Corporate Debt and Real Estate Investment Fund

The European Systemic Risk Board (ESRB) has published an issues note with proposed policy options to address risks prevalent in investment funds with exposures to corporate debt and real estate. The ESRB suggests amending some policy instruments within the current framework, including realigning fund redemption terms with investment strategies, using anti-dilution liquidity management tools, and boosting preparations for potential cash needs. In addition, the ESRB also suggests the development of new tools to boost resilience of the investment funds and overall financial system stability, such a liquidity bucketing approach and an ex-ante policy instrument aimed at mitigating the build-up of liquidity risk. The insights detailed in the issues note will also guide the Financial Stability Board’s consultation on strategies to tackle vulnerabilities arising from liquidity mismatches in open-ended funds.

 

FDIC Internal Review Reveals Oversight Lapses and Market Vulnerabilities Leading to 2023 Collapse of First Republic Bank

The Federal Deposit Insurance Corporation (FDIC) has released an internal review, conducted by Chief Risk Officer Marshall Gentry, examining the agency’s supervision of First Republic Bank from 2018 until its collapse in May 2023. The review, requested by FDIC Chairman Martin J. Gruenberg, cites the loss of market and depositor confidence, stemming from the failures of Silicon Valley Bank and Signature Bank in March 2023, as the primary cause of First Republic Bank’s failure. The review further suggests that the bank’s business model and management strategies left it vulnerable to these shifts in the marketplace, and criticizes the bank for insufficiently mitigating interest rate risk. While the report acknowledges that the FDIC carried out its supervisory duties, it admits that the agency could have been more forward-looking regarding potential issues arising from rising interest rates and should have encouraged the bank to implement stronger strategies against these risks. The report points out eight areas for further improvement in FDIC’s supervisory process. First Republic Bank was officially closed by the California Department of Financial Protection and Innovation on May 1, 2023, with FDIC appointed as receiver. JPMorgan Chase Bank, National Association, Columbus, Ohio, has assumed all deposits and a majority of the assets of First Republic Bank.

 


AML & CFT
 
IMF Provides Comprehensive Analysis and Recommendations for Anti-Money Laundering Strategies across Nordic-Baltic Region in New Report

The IMF has published a new technical report addressing anti-money laundering risks and mitigation in the Nordic-Baltic region. Titled “Nordic-Baltic Technical Assistance Project: Financial Flows Analysis, AML/CFT Supervision, and Financial Stability, the report, which was developed in cooperation with Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden, provides a comprehensive analysis of cross-border money laundering threats and vulnerabilities across the region and assess the efficacy of current AML/CFT supervisory tools. As part of the project, the IMF employed machine learning at both country-specific and regional levels to comprehend cross-border money laundering risks, as well as the capability of AML and terrorist financing supervisors to counteract them. The also encompassed an exploration of quantifying the influence of money laundering shocks on financial stability. The report proposes an array of future measures including; continuous surveillance of cross-border transactions, shared regional data on macroeconomic trends, and enhanced identification of countries posing money laundering threats to the region. Additionally, the report advocates for strengthening AML/CFT risk-based supervision via the collection of cross-border data, investments in advanced data analytic tools, and coordinated supervisory action for the highest risk banks. Participating authorities welcomed the report and expressed their commitment to further strengthen their AML/CFT frameworks in line with the proposed recommendations.

 

UK’s Financial Conduct Authority to Review Treatment of Domestic Politically Exposed Persons by Financial Firms

The Financial Conduct Authority (FCA) has initiated a review on the treatment of domestic Politically Exposed Persons (PEPs) by financial services firms. This review will scrutinize the firms’ procedures for handling UK-based PEPs. Key aspects under consideration include: the application of the PEP definition to individuals, risk assessments conducted on PEPs and their close connections, application of enhanced due diligence and continuous monitoring measures, account management decisions for PEPs, communication strategies with PEP clientele, and the periodic re-evaluation of PEP-related controls. Findings from the review will be reported by June 2024.

 


Conduct & consumer protection
 
Swedish Riksbank Highlights Interconnected Risks and Unaddressed Financial Threats of Buy Now Pay Later in New Memo

The Swedish Riksbank, under the leadership of its Financial Stability Department, has released a new staff memo addressing risks related to Buy Now Pay Later (BNPL). The memo is a part of a series by the Riksbank’s staff, designed to provide advanced analyses on relevant issues while remaining free of policy conclusions and individual standpoints. Sweden currently has the world’s highest share of BNPL payments in e-commerce. The new memo examines in greater detail the potential financial stability implications of the growing adoption of BNPL with focus on three specific aspects: (1) the impact of BNPL on e-commerce payments, (2) the risks associated with the business model for BNPL and (3) the potential risks to the financial system as a whole should there be contagion effects from the failure of one of the BNPL providers. As part of the analysis of risks to the financial system, the authors highlight that BNPL providers’ high interconnectedness poses potential risks to the financial system. This is primarily due to their parallel business models, funding strategies, and similar customer segment exposure. Specifically, BNPL providers’ funding is majorly based on deposits that are guaranteed by deposit insurance schemes both in Sweden and outside Sweden, with deposits from households accounting for at least 65% of their assets, compared to 44% in the case of major Swedish banks.. This dependence on a single funding source becomes a potential weakness if investor confidence is affected, whereby a shift in confidence in one BNPL provider could adversely influence the confidence in others, amplifying the risk of a bank run where depositors quickly withdraw their money from the BNPL providers.

 

UK’s Financial Conduct Authority to Review Treatment of Domestic Politically Exposed Persons by Financial Firms

The Financial Conduct Authority (FCA) has initiated a review on the treatment of domestic Politically Exposed Persons (PEPs) by financial services firms. This review will scrutinize the firms’ procedures for handling UK-based PEPs. Key aspects under consideration include: the application of the PEP definition to individuals, risk assessments conducted on PEPs and their close connections, application of enhanced due diligence and continuous monitoring measures, account management decisions for PEPs, communication strategies with PEP clientele, and the periodic re-evaluation of PEP-related controls. Findings from the review will be reported by June 2024.

 


Fintech & ecosystem innovation
 

IOSCO Proposes Nine Policy Recommendations for Decentralised Finance Sector

The International Organization of Securities Commissions (IOSCO), a global standard setter for securities markets, has initiated a global approach to address risks within the Decentralized Finance (DeFi) space. IOSCO has issued nine policy recommendations for consultation with the aim of maintaining market integrity and investor protection. These recommendations span six areas: understanding DeFi arrangements and structures, achieving common standards of regulatory outcomes, identifying and managing key risks, enforcing applicable laws, and promoting cross-border cooperation. IOSCO Board Chair Jean-Paul Servais and Fintech Task Force Chair Tuang Lee Lim underscored the need for consistent regulatory frameworks and the identification of responsible entities within DeFi for investor protection and market integrity. IOSCO anticipates finalising its DeFi recommendations by the end of 2023, aiming to create a congruous and global policy framework for digital assets. The public consultation on the policy recommendations remains open until 19 October 2023.

 

IMF and FSB Release Synthesis Paper on the Policy Response to Crypto-Assets

The Financial Stability Board (FSB) and the International Monetary Fund (IMF) have released a joint report proposing a holistic policy and regulatory response to the activities of crypto-assets. On the basis of an assessment of the key implications of crypto-assets on macroeconomic stability, financial stability and other critical areas such as legal, financial and market integrity, as well as environmental risks, the report synthesizes the corresponding policy recommendations by the IMF and FSB, including the FSB’s recently finalized recommendations for the regulation, supervision and oversight of crypto-asset markets and activities and “global stablecoin arrangements”, while also underscoring the importance of adopting the Financial Action Task Force (FATF) anti-money laundering and counter-terrorist financing (AML/CFT) standards to bolster financial integrity and deter criminal activities in the crypto sector. The report concludes with a roadmap, jointly developed by the FSB And IMF with relevant international organisations and standard-setting bodies, to guide the effective implementation of the various recommendations and standards. Among other things, it covers currently planned and ongoing work to build institutional capacity beyond G20 jurisdictions as well as efforts to enhance global coordination, cooperation, and information sharing and to address data gaps necessary to understand the rapidly changing crypto-asset ecosystem. Access the report summary here.

 

World Federation of Exchanges Releases First Phase of Crypto Market Analysis

The World Federation of Exchanges has released the initial part of a research project that examines engagement of exchanges in crypto market trends. Drawing on a survey conducted among its members in 2022, it seeks to establish greater transparency of the benefits, risks and challenges of crypto market infrastructures and their functioning. Besides providing an overview of centralized and decentralized crypto trading platform models and the implications of the model on liquidity provision, price discovery and custody arrangements, the report provides an overview of crypto-related developments at exchanges including how the demand for crypto services is shifting and the manner in which regulated exchanges are adapting to these technological shifts. Additionally, it presents a snapshot of the regulatory landscape.
Among other things, survey results indicate a rapidly evolving environment where regulated exchanges are actively catering to the rising demand for crypto-related products and services. Almost 50% of the respondents are already providing crypto-associated offerings, predominantly derivatives, financial tokens, and indexes. Due to the absence of consistent regulatory standards, many crypto exchanges have however been operating with limited regulatory oversight. The authors stress that the risks that are posed by such unregulated crypto-trading platforms are amplified as a result of these platforms frequently engaging in activities that would either be prohibited or heavily monitored in a traditional market environment.

 

New BIS Working Paper Explores gingado, an Open-Source Machine Learning Library with Focus on Economics and Finance

The Bank for International Settlements (BIS) has released a new working paper that introduces gingado, an open-source machine learning library specifically designed for economics and finance, developed by Douglas Kiarelly Godoy de Araujo. Araujo recognizes the potential of machine learning (ML) in economic research and the challenges faced by economists, such as difficulties in selecting the optimal algorithm and model parameters. gingado is intended to address these issues through the following five main capabilities: (1) automatic acquisition of hundreds of time series from official statistical sources, (2) automatic benchmark models based on random forests, that are adaptable according to the users’ needs, (3) flexible simulation of large, multidimensional panel data inclusive of linear and non-linear causal relationships, (4) facilitation of model documentation based on ML best practices, and (5) auxiliary utilities for time series data analysis.

 

UK’s FCA Specifies Expectations Ahead of the Implementation of the Stricter Marketing Regulations for Cryptoassets in October

Ahead of the coming into force of the stricter regulations for the marketing of cryptoassets, the FCA in a new statement has further set clarified its expectations. The new rules, which will come into effect as of October 8 and apply to cryptoasset firms marketing their products and services to UK consumers regardless of their geographical location, mandate that marketing must be ‘clear, fair and not misleading’, labelled with prominent risk warnings and must not inappropriately incentivise people to invest. To support preparations, the FCA has shared examples of good and poor practices. The examples stem from a series of meetings by the FCA with various regulated cryptoasset firms to understand their level of preparation vis-à-vis the new rules. Practices reviewed and summarized cover (1) the scope of the regime (i.e. communication channels, territorial scope of the regime and promotions made by firms in a global group structure,
brand advertising, (2) planning for implementation activities (i.e. oversight and responsibility, planning and timetable, contingency planning) and (3) the intended approach to implementation along the key requirements under the new rules. In relation to select aspects of the new rules, firms have the option to apply to the FCA for an extended implementation timeline until January 2024.

 

CFPB Report Explores Big Tech’s Influence on Mobile Payment Functionality and Possible Impediments to Open Banking in the U.S.

The U.S. Consumer Financial Protection Bureau has released a new issue spotlight that examines the influence of bigtech firms on mobile payments, notably tap-to-pay functionalities. The spotlight discusses observed trends in the adoption of tap-to-pay and draws attention to the impact that bigtech firms’ policy choices in relation to tap-to-pay on consumer choices as well as innovation and the evolution of open and decentralized banking at large. Specifically, the study finds that tap-to-pay usage in the U.S. has seen significant growth, with transactions nearing $300 billion across Apple Pay, Samsung Pay, and Google Pay. Analysts project a 150% growth in such transactions by 2028. As of 2021, Google Pay had 25 million users, Samsung Pay had 16.3 million, while an estimated 130 million people in the U.S. used iPhones monthly, with three-fourths activating Apple Pay. In April 2023, around 55.8 million people made in-store payments using Apple Pay, representing nearly half of iOS users. Apple’s iOS devices currently restrict third-party payment apps from accessing the NFC technology required for tap-to-pay. This restriction prevents the direct integration of tap-to-pay into other payment apps like PayPal and Venmo, making Apple Pay the sole contactless payment option on iOS. Conversely, Android doesn’t limit third-party access to its NFC chip, although this might change. Such restrictions on tap-to-pay can limit consumer options and stifle innovation, hindering the development of an open banking ecosystem, the CFPB stresses.

 


Payments & currency
 

BIS and RBI Announce G20 TechSprint 2023 Winners for Transformative Cross-Border Payment Solutions

The Bank for International Settlements (BIS) and the Reserve Bank of India (RBI) announced the winners of the G20 TechSprint 2023 challenge. The contest called for the development of innovative solutions to enhance cross-border payments, and sought solutions to decrease illicit finance risk, augment liquidity for emerging market and developing economy currencies in these payments, and facilitate multilateral cross-border Central Bank Digital Currency (CBDC) platforms. The winners, from a pool of 21 international teams, included Secretarium Ltd, Millicent Labs and Knox Networks. Secretarium Ltd developed a solution for transaction monitoring and securing anonymity and privacy, while Millicent Labs developed a decentralised exchange for CBDCs to optimise liquidity and reduce volatility risk, and Knox Networks exhibited a multilateral CBDC solution based on File-Based Digital Assets.

 

Central Bank of Kenya Boosts Mobile Money Transaction and Wallet Limits to Promote Digital Payments and Aid Financial Inclusion

The Central Bank of Kenya (CBK) has announced an increase in mobile money transaction limits, along with the size of mobile money wallets. This is to support not only customers but also businesses, institutions, and government agencies in making larger digital payments, thereby enhancing the ease of mobile money services in the country. Since 2020, CBK and other financial institutions have seen a significant increase in the volume and value of mobile transactions, the number of active users, and services supporting business payments including pay bill and till numbers. This is largely due to the previous increase in transaction limits and wallet size. To further support this growth, CBK has approved new daily mobile money wallet limits from Ksh. 300,000 to Ksh. 500,000, and transaction limits from Ksh. 150,000 to Ksh. 250,000. These changes were implemented on August 15, 2023 by PSPs offering mobile money wallets. The new limits will apply for all transactions using mobile money infrastructure, including inter-partner transactions. As part of the change, PSPs are to implement risk mitigation measures against money laundering, fraud, and other risks.

 

National Bank of Georgia Amplifies Partnership with Bank for International Settlements via mBridge and Aurum Projects on Central Bank Digital Currencies

The National Bank of Georgia is set to increase its collaboration with the Bank for International Settlements (BIS) through participation in the mBridge and Aurum projects coordinated by the BIS Innovation Hub (BISIH) Hong Kong Centre. The mBridge project, which the National Bank will take part in as an observer, focuses on cross-border payments using distributed ledger technology (DLT) as a platform for multiple central banks to exchange their respective central bank digital currencies (multi-CBDCs). Project Aurum, on the other hand, involves the study and development of technology prototypes related to retail CBDC and CBDC-backed stablecoins. Participation in these initiatives provides the National Bank with an opportunity to leverage the experiences of other jurisdictions in the realm of CBDC, test its own CBDC technology, and benefits from resources offered by the BIS Innovation Hub to central banks.

 

Central Bank of The Bahamas Shares Update on SandDollar adoption

The Central Bank of The Bahamas in a new statement has shared further details on the progress in advancing the adoption of its digital currency, the SandDollar. As of August 2023, the Central Bank reports $1,076,064.05 of SandDollars in circulation with 9 digital wallet providers in place (of which 7 are active) and a number of 113,358 consumer wallets and 1,687 merchant wallets. To continue to drive adoption of the digital currency, the Bank continues to actively implement several initiatives. These include continued outreach activities with focus on specific locations as well as the expansion of the SandDollar rebate program. In parallel, the Central Bank has further invested in technical enhancements to the SandDollar mobile wallet, which involve the addition of a number of self-service tools and features to improve user satisfaction. These efforts notwithstanding, adoption has been impacted by shifting trends in mobile payments. Specifically, a significant reduction in Government transfer payments has led to wallet top-ups going decreasing by approximately 80%, to an estimated $8.7 million during H1 2023. Additionally, both person-to-person and person-to-business transactions fell each by close to 20% compared to the same period in the previous year.

 

Central Bank of Brazil Launches Report to Discussing the Evolution of its Instant Payment System Pix

On the occasion of its upcoming 3-year anniversary of its instant payment system Pix, the Central Bank of Brazil has launched a The Central Bank of Brazil has released a dedicated report that provides perspectives on the operations of the payment system and key achievements to date. Since Pix launched, the service allowed 71.5 million people to begin using electronic transactions, accounting for over a third of electronic payments by Q4 2022 and significantly reducing cash transactions. The report, titled “Pix Management Report – Conception and first years of operation” among other things provides an overview of the system’s design, its evolution over the period since inception, detailed statistics on its adoption as well as an outlook on the forthcoming agenda including further planned enhancements. One of the significant updates set to be introduced next year is Automatic Pix, which will streamline payment of recurring bills, such as school expenses.

 


ESG
 

NGFS Releases Beta Version of Conceptual Framework for Nature-Related Financial Risks at Paris Launch Event

The Network for Greening the Financial System (NGFS) has released the beta version of its Conceptual Framework for nature-related financial risks. The new Framework, which forms part of the NGFS’s ongoing initiative to mainstream the assessment of nature-related risks, is designed to provide a science-based understanding and standard terminology for nature-related financial risks, assisting central banks and financial supervisors in comprehending and addressing these risks. The primary objective of the Framework is to define nature-related financial risks and related concepts that are needed for a high-level understanding of these risk and offer central banks and supervisors a systematic approach to identify sources of physical and transition risks and assess economic as well as other risks to, from and within the financial system. The report accompanying the Framework also sets out next steps to be taken by the NGFS Taskforce, including addressing modelling and data gaps as well as employing emerging datasets to support the alignment of policies on environmental sustainability and inform the assessment of nature-related financial risks. The Framework’s release occurred in Paris at a significant event attended by over 200 NGFS Members, Observers, stakeholders, and private sector representatives. Notable speakers included François Villeroy de Galhau from the Banque de France and Klaas Knot from the Financial Stability Board, among others.

 

ECB Climate Stress Test Emphasizes Speedy Transition to Green Economy as Key to Financial Resilience for Households, Firms and Banks

The European Central Bank (ECB) has released the findings from its second economy-wide climate stress test. The results indicate that a rapid green transition is the optimal route to a net-zero economy for euro area firms, households, and banks, reducing medium-term costs and risks. ECB Vice-President Luis de Guindos emphasized the necessity for swifter policies to achieve the Paris Agreement goals, warning that a slower pace will increase economic and financial risks.
The stress test evaluated three transition scenarios: (1) An “accelerated transition” that quickly implements green policies, achieving emission reductions by 2030, (2) a “late-push transition” that maintains the current trajectory until 2026, then intensifies to meet 2030 emission reduction targets, and (3) a “delayed transition” which starts in 2026 but fails to align with the 2030 Paris Agreement goals. Findings reveal that firms and households benefit significantly from a rapid transition. Faster transitions initially demand higher investment but reduce financial risks in the medium-term. In the accelerated scenario, green investment by euro area firms reaches €2 trillion by 2025. Banks face higher credit risks when transitions are delayed and investments are rapidly implemented later at escalated costs. Moreover, any further delay in transitioning escalates long-term costs and risks, with severe impacts on the economy and the financial sector. This recent test builds on the ECB’s earlier assessments and is part of its ongoing commitment to understanding climate-related risks. Access the report summary here.

 

Swedish Authority to Probe Fund Managers Over EU Sustainability Regulations Compliance, Greenwashing Risks Amid Rising Demand for Sustainable Investment

The Swedish Financial Supervisory Authority (FI) is set to conduct an in-depth analysis of fund managers’ compliance with new European Union (EU) regulations on sustainability risks and related disclosures. This move is part of the European Securities and Markets Authority’s (ESMA) aim to build a consensus among supervisory authorities in all EU member states. The review will focus particularly on risks of greenwashing and will seek to examine how fund management companies and alternative investment fund managers (AIFMs) adhere to new sustainability rules. Seven fund managers have been selected for the first part of this two-part analysis. This initiative is in response to growing consumer demand for sustainable investment options and the need for accurate, relevant, and comparable sustainability information.

 


Leadership changes
 

The CEO of the Swiss Financial Market Supervisory Authority (FINMA), Urban Angehrn, is set to resign from his position by the end of September 2023. The board has appointed Deputy CEO, Birgit Rutishauser, as the interim CEO from 1 October 2023 and begun the process of filling the position permanently.