Global Regulator & Central Bank News Roundup
Volume 38/2023 (October 9 – October 15)
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 AI-powered financial regulatory intelligence platform.
Themes covered in this edition
- Prudential & financial stability
- AML & CFT
- Cyber & operational resilience
- Fintech & ecosystem innovation
- Payments & currency
- Other transversal themes
- Leadership changes
Prudential and financial stability
FSB Releases Detailed Analysis on 2023 Bank Failures and International Resolution Framework Effectiveness
In the wake of the bank failures during Q1 2023, the Financial Stability Board (FSB) has released a report analyzing the effectiveness of the international resolution framework established post-Global Financial Crisis under the Key Attributes of Effective Resolution Regimes for Financial Institutions. This report represents the first major scrutiny of the process, with particular focus on the Credit Suisse case, which marked the most significant failure of a global systemically important bank (G-SIB) since 2008. The failures of Silicon Valley Bank, Signature Bank, and First Republic Bank were also analyzed as important examples of the potential systemic significance and deposit insurance role of non-G-SIBs. In relation to Credit Suisse, the review reaffirmed the overall suitability and practicability of the current resolution framework while highlighting a range of areas for enhancement. These include the necessity for a temporary public sector liquidity backstop as well as the need to address the legal issues identified in the execution of bail-in across borders during resolution planning, to enhance operationalization of certain resolution options such as transfer and sale of business tools alone or in combination with bail-in as well as to develop a deeper understanding of the impact of bail-in on financial markets. As regards the example failures of non-G-SIBs, the FSB identified among other things the need for increased readiness for quick bank runs due to factors like 24/7 payments, mobile banking, and social media use as further attention points. The FSB’s review focused solely on resolution issues, excluding discussions on prudential regulation or ongoing supervision.
IADI Relases Study on Current and Future Challenges in Depositor Reimbursement
The International Association of Deposit Insurers (IADI) has released a new research paper titled “Reimbursing Depositors Now and in the Future: Challenges, Remedies, and Trends.” Based on a survey among IADI members and a range of global reimburse cases, the paper presents an overview of the capability of deposit insurers (DIs) to reimburse depositors promptly, highlighting current and anticipated challenges. The primary role of DIs is to efficiently reimburse depositors, as emphasized by the IADI Core Principle (CP) 15, which states that most insured depositors should be compensated within seven working days. The IADI survey revealed that between 2016-2021, many DIs struggled with this task. In 51% of the studied cases, fewer than 75% of depositors were reimbursed within the seven-day window. The primary challenge, regardless of DI regional origin or mandate, was the poor quality of depositor information files. Other challenges included issues with DI’s IT systems and insufficient access to reliable depositor records. Despite these challenges, the key feature for timely reimbursement was the DI’s ability to manage and modify depositor records, with IT infrastructure being a close second. The recent impacts of Covid-19 measures present additional challenges, especially business continuity concerns. However, DIs are continuously improving, notably in IT systems development, with a significant push towards electronic channels and e-money for quicker reimbursements.
OSFI Initiates Public Discussion on Draft Guidelines to Enhance Financial System Resilience and Security
The Office of the Superintendent of Financial Institutions (OSFI) has launched a public consultation on two draft guidelines designed to strengthen the resilience and security of the financial system. This includes an Integrity and Security Guideline, which outlines expectations for protecting financial institutions from foreign interference. The Guideline sets out the concept of integrity and security in the context of financial institutions, defines their relationship, highlights where these are reflected in the OSFI’s existing guidelines as well as introduces certain new expectations. The second Guideline, the modified Guideline E-21 on Operational Resilience and Operational Risk Management, further advances OSFI’s operational risk management advice with new elements for change management, business continuity, crisis management, and data risk management. A six-week consultation is open for the Integrity and Security Guideline, while a four-month consultation period is in place for the updated Guideline E-21.
AML and CFT
German Finance Ministry Details Plans for Revamped Financial Crime Strategy Following Approval of Draft Financial Crime Combat Act
The German Federal Cabinet has approved the draft Financial Crime Combat Act (FKBG), introducing a revamped strategy to counteract financial crimes, especially money laundering, within the nation. Central to this initiative is the establishment of the Federal Office for Combatting Financial Crime (BBF). This office aims to integrate various elements like the Financial Intelligence Unit (FIU), criminal investigations, and money laundering supervision, creating a cohesive approach and addressing previous inefficiencies. Notably, by 2025, the Sanctions Enforcement Agency (ZfS) will also be assimilated into the BBF. Focus under the BBF will be on money laundering, which will be underpinned by a supporting legal framework and the necessary resource capacity. In pursuing its work, the BBF’s Investigation Center for Money Laundering (EZG) will adopt the “Follow the Money” principle, under which it will focus on suspicious financial flows to uncover underlying crimes and trace these crimes back to their orchestrators. Under plans under the revised approach include among other things the adoption of digital technology to enable data-centric investigations and a strong emphasis on the collaboration with other agencies.
SEC Announces Reforms to Beneficial Ownership Reporting Regulations for Improved Market Transparency
The Securities and Exchange Commission (SEC) has announced the adoption of changes to its rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 including Regulation 13D-G.. These rules require investors with a beneficial ownership of more than 5 percent of a covered class of equity securities to publicly file either a Schedule 13D or a Schedule 13G, depending on the nature of the investor. Among other things under the amended rules, the deadline for initial Schedule 13D filings is reduced from ten to five business days while the period for filing amendments is lowered to two business days. The updates further specify the scope of Schedule 13D’s disclosure requirements with respect to derivative securities, clarifying that “that a person is required to disclose interests in all derivative securities (including cash-settled derivative securities) that use the issuer’s equity security as a reference security”. Finally, to enable enhanced analysis, the amendments also set forth that filings must be made using a structured, machine-readable data language.
Cyber and operational resilience
Austria FMA Releases Inaugural Blackout Maturity Level Assessment Report for Insurance Industry
The Austria Financial Market Authority (FMA) has released its inaugural “Blackout Maturity Level Assessment” for the insurance sector. The assessment covered three dimensions – (1) preparedness, (2) management and reaction, and (3) restart and resumption – as well as also evaluated the extent to which insurance products cover claims from a blackout. Overall, insurers demonstrated a solid maturity across all three dimensions. Specifically, nearly half (48%) of firms surveyed adhere to the highest level of requirements, while 6% scored at the low end. Across all assessment areas, the category “Ensuring orderly business”, which addresses criteria including inter alia information to insurance policyholders in the run-up to a blackout, measures in the event of a premium being delayed as a result of a blackout, as well as the provision of services in the event of a blackout and the process for resuming and prioritizing services directly after a blackout, received the lowest score at 1.9 out of the 3-point scale. In relation to blackout insurance coverage, the assessment further found that while half of the existing policies cover certain types of blackout damage, there are no specialized products covering specific blackout-related damages, such as interruption of business and/or legal protection, currently available in the market nor immediately planned to be introduced.
Fintech and ecosystem innovation
EIOPA Sets Out Three-Year Digital Strategy
The European Insurance and Occupational Pensions Authority (EIOPA) has outlined its three-year overarching strategy to guide the digitalization of the insurance and pensions sectors, including the national competent authorities (NCAs) and EIOPA itself. The strategy has three main priorities – aligning innovation with the interests of consumers, taking into account digital ethics and financial inclusion; strengthening the sustainability and resilience of all insurance market players; and augmenting the supervisory capabilities of EIOPA and NCAs using technological innovation while maintaining efficient prudential and conduct supervision. In applying this strategy, EIOPA will maintain a technology-neutral approach, prioritizing consumer interests and adaptability to technological advancements, without diminishing its mission. EIOPA’s duties will span from tracking developments, encouraging innovation to the digitalization of NCAs and executing its own digital transformation. The strategy was published on 12th October 2023.
ESMA Reports on EU DeFi Market Risks and Introduces Classification Method for Smart Contracts
The European Securities and Markets Authority (ESMA) has released two articles concerning decentralised finance (DeFi). The first article examines the developments and risks of DeFi in the EU. It points out significant risks to investor protection due to the speculative nature of many DeFi schemes and their operational and security vulnerabilities. Although DeFi has grown notably in recent years, it remains small in scale, with the Total Value Locked in DeFi protocols amounting to USD 45bn by the end of June 2023, accounting for less than 4% of the total crypto-assets market capitalisation. Despite its size, its distinctive features have introduced new challenges related to market manipulation. The second article presents a methodology for categorizing smart contracts, utilizing their source code and topic modelling. This approach helps in understanding the evolution of smart contract deployments over time, providing deeper insights into DeFi and the associated risks. ESMA has identified five main smart contract categories and has tracked their prevalence over time. There’s a marked difference between the initial surge in smart contract deployment during 2017-2018 and the subsequent wave from 2021-2023. This change indicates a shift towards more intricate and interconnected protocols that define the DeFi landscape.
OSC Publishes Discussion on AI Applications in Ontario’s Capital Markets
The Ontario Securities Commission (OSC), in collaboration with Ernst & Young, has published a report exploring the applications and implications of artificial intelligence (AI) in Ontario’s capital markets. At the center of the study is the discussion of AI use cases in capital markets, segmented into use cases for efficiency improvement, revenue generation and risk management, along with a snapshot of the current AI adoption in Ontario’s capital markets. This is complemented by an assessment of AI value drivers as well as perspectives on the challenges associated with AI adoption. Grant Vingoe, the OSC’s current CEO, emphasized the importance of collaboration among regulators, market participants, and innovators in managing the transformative potential of AI. Beyond the report the OSC also , through its new platform, OSC IdeaHub, the OSC invites capital market participants to share their insights into the effects of AI on the market.
Payments and currency
FSB Releases Progress Reports on G20 Cross-Border Payments Targets
The Financial Stability Board (FSB) has released its first annual report on Key Performance Indicators (KPIs) for achieving targets in cross-border payments, along with a consolidated progress report under the G20 cross-border payments roadmap. The inaugural KPI report, which encompasses KPIs for three market segments – wholesale, retail and remittances – and was prepared with data up to the end of March 2023, indicates the need for significant progress across all three segments. Among other things, findings show that user experiences, including payment speed and costs, differ across regions, with lower income regions frequently particularly falling short of targets. Data also shows that in retail, foreign exchange (FX) costs are the predominant cost component(with the extent varying by region and use case) while in remittances, other fees surpass FX costs.
Bank of Canada Designates Visa, Mastercard and Interac’s Payment Systems As Prominent Payment Systems
Bank of Canada Governor Tiff Macklem has formally designated Visa Inc.’s VisaNet, Mastercard International Inc.’s Global Clearing Management System and Single Message System, and Interac Corp.’s Inter-Member Network as prominant payment systems under the Payment Clearing and Settlement Act, as of October 16, 2023. These systems are relied on by numerous Canadian citizens and businesses, with Visa and Mastercard credit card dealings and Interac® debit card transactions, amounting to approximately $1 trillion in the Canadian economy annually and accounting for a majority of point-of-sale transactions. Due to the extensive transaction volume and the substantial impact these systems have on the retail payments landscape, any disruption or failure could negatively affect economic activity and potentially result in a loss of trust in the payment system. The new designation places these systems under formal oversight from the Bank of Canada, necessitating compliance with the Bank’s risk management standards. Relative to regular payment services providers that are supervised by the Bank of Canada under the Retail Payments Activities Act, prominent payment systems are required to comply with a wider set of criteria.
FSB Reports Significant Progress in Climate-related Disclosures, Highlights Key Findings from Final TCFD Assessment
The Financial Stability Board (FSB) has published its annual progress report on climate-related disclosures, noting significant advancements made over the past year. The report emphasizes the substantial global progress in integrating the International Sustainability Standards Board (ISSB) Standards. The FSB further acknowledged the work of the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA) in combating “greenwashing” through reliable sustainability-related information. The FSB’s report also encompasses the key insights from the Task Force on Climate-related Financial Disclosures (TCFD) latest status report on the state of climate-related financial disclosures by companies. Insights from the study show a continued growing trend of companies disclosing TCFD-aligned information. Data from the fiscal year 2022 indicates that companies typically reported in accordance with 5.3 out of the 11 recommended TCFD disclosures, marking an increase from an average of 3.2 in 2020. The report underlines that 97 of the 100 largest global companies have pledged support for the TCFD, with 58% of public companies disclosing in line with at least five of the 11 recommended disclosures in 2022, rising from 18% in 2020. Yet, only 4% disclosed all 11.This year’s report marked the TCFD’s final report. As of 2024, the ISSB will be taking on the task of monitoring progress to aid in the adoption of IFRS S1 and IFRS S2.
EBA Report Suggests Enhancing Pillar 1 Framework to Incorporate Environmental and Social Risks
The European Banking Authority (EBA) has released a new report addressing the role of environmental and social risks in the prudential framework of credit institutions and investment firms. In light of the impact of environmental and social risks on entities’ risk profile, the new report puts forth risk-based enhancements to the risk categories of the Pillar 1 framework. These include targeted short-term actions over a three-year horizon, to be addressed as part of the implementation of the revised Capital Requirements Regulation and Capital Requirements Directive. Notably, these include inter alia the incorporation of environmental risks in stress tests under the internal ratings-based (IRB) approach and the internal model approaches (IMA). The EBA also advocates for environmental and social considerations in external credit assessments by credit rating agencies, the inclusion of environmental and social factors as part of due diligence requirements and valuation of immovable property collateral and the design of environment-related concentration risk metrics as part of supervisory reporting. From a longer-term standpoint, the report discusses options for potential revisions to the Pillar 1 framework to accommodate for environmental and social risks. These revisions under consideration include the possible use of scenario analyses, the role of transition plans, and amendments to the IRB supervisory formula and the standardised approach (SA) for credit risk to reflect environmental risks. Complementary to these recommendations, the report also clarifies the EBA’s stance against introducing a green supporting factor or a brown penalising factor due to complexities in design, calibration, and interaction with the existing Pillar 1 structure.
Other transversal themes
G20 Finance Ministers and Central Bank Governors Adopt Communique with Focus on Strengthening MDBs and Advancing the Global Crypto Asset Policy Agenda
The G20 Finance Ministers and Central Bank Governors (FMCBGs), at their final meeting in Marrakesh, Morocco, have adopted the G20 FMCBG Communique. Among the critical themes in the Communique, the FMCBG have endorsed the Report of the G20 Independent Expert Group on strengthening multi-lateral development banks (MDBS) with a particular focus on aspects such as private capital mobilization, strengthening of MDBs’ financial capacity and capital adequacy as well as the need for enhanced collaboration. The Communique also endorsed the recently published FSB-IMF Synthesis Paper on crypto assets as G20 Roadmap on Crypto Assets, calling for “swift and coordinated implementation […], including implementation of policy frameworks; outreach beyond G20
jurisdictions; global coordination, cooperation and information sharing; and addressing data gaps”. In addition to these central themes, the communique also reflects outcomes from the G20 Finance Track workstreams that were completed post July FMCBG meeting and the G20 New Delhi Summit.
ESMA Releases Supervisory Briefing on Circuit Breaker Calibration
The European Securities and Markets Authority (ESMA) has published a supervisory briefing on the calibration of circuit breakers implemented by trading venues (TVs). The briefing aims to ensure the effectiveness of these circuit breakers’ execution and enhance uniformity in calibration methodology across the national competent authorities (NCAs). This comes in the wake of recent instances of volatility in the commodity derivatives and equity markets due to geopolitical events, such as the Russian military action against Ukraine, and the flash crash of May 2022. Going forward, the NCAs will supervise the TVs’ compliance with the guidelines provided in the briefing, aiming to improve circuit breaker calibration and manage market volatility more effectively.
Aruba Appointed as CFATF Chair for Next Term
Aruba has been appointed as the chair of the Caribbean Financial Action Task Force for the 2023-2024 term. The chairmanship will be assumed by Angelo Brete, the director of the Aruba Financial Intelligence Unit. Aruba will host the first CFATF Plenary under its leadership in November.
Bank of the Republic of Burundi Announces New Governor
Edouard Normand Bigendako has been appointed as the new Governor of the Bank of the Republic of Burundi. Bigendako, who previously servied as the Managing Director of the National Bank for Economic Development since August 2022, succeeds the outgoing Governor Dieudonné Murengerantwari.