CUBE RegNews: 15th March

Greg Kilminster

Greg Kilminster

Head of Product - Content

Ensuring banks are resilient to climate and environmental risk: ECB speech

In a speech at the 331st European Banking Federation Executive Committee meeting, Frank Elderson, Member of the Executive Board of the European Central Bank (ECB) and Vice-Chair of the Supervisory Board of the ECB, addressed the issue of climate-related and environmental (C&E) risks facing the banking sector. 


Elderson acknowledged the significant progress made in understanding and integrating these risks into banks’ operations since discussions began in 2019. He also stressed the importance of ongoing dialogue between supervisors and banks to address challenges and share best practices. 


Elderson highlighted the increasing materialisation of climate risks, citing the alarming trend of extreme weather events and their economic impact. He explained how climate risks intersect with traditional banking risks, affecting credit, liquidity, market, reputational, and operational risk categories. Elderson warned that current climate projections suggest a trajectory far exceeding the 1.5 to 2 degrees Celsius target, necessitating urgent action to manage risks effectively. 


The speech emphasised the critical role of internal capacity-building within banks to assess and manage C&E risks. Elderson noted the need for diverse expertise at the board level and awareness among all employees about the implications of climate and nature crises on their roles. He encouraged banks to invest in robust frameworks and resources to address these risks comprehensively. 


Elderson provided some insight into the current state of C&E risk management within supervised banks, highlighting both progress and areas needing improvement. While acknowledging advancements in strategy and governance, he noted deficiencies in some banks’ materiality assessments, leading to supervisory interventions. 


The speech outlined implementation challenges and offered examples of good practices to overcome them, noting, for example, one bank which has implemented “a classification system using a heatmap to identify and monitor which clients are most exposed to nature risk drivers, such as biodiversity loss, water stress and pollution”. Elderson discussed quantifying transition risks, managing climate-related litigation, and addressing nature-related risks, emphasising the importance of integrating these considerations into banks’ risk management frameworks. 


Looking ahead to 2024, Elderson emphasised the importance of achieving full alignment with supervisory expectations, including robust disclosures and transition planning. He warned of upcoming regulatory requirements, including Pillar 3 disclosures on environmental, social and governance risks and the revised Capital Requirements Directive both of which require C&E disclosure when fully implemented. 


Ederson subsequently noted the importance of preparing for this new regulation, adding that banks “should include concrete intermediate milestones between now and 2050. Banks should also develop key performance indicators that allow their management bodies to monitor and address any risks arising from possible misalignment with their transition path. Some banks under our supervision are already actively using transition planning tools to assess the alignment of their portfolios with the Paris Agreement. Now we expect all banks, not just a few frontrunners, to do so”. 


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JP Morgan Chase fined $350 million for trade surveillance failings  

In joint action between the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, JPMorgan Chase & Co has been fined $348.2 for deficiencies in its trade surveillance program. 


The OCC fined the bank $250 million and issued a cease and deist notice requiring the bank to improve its systems and prevent unsafe or unsound practices. The OCC consent order notes that the bank failed to establish adequate governance over trading venues on which it is active and that its trade surveillance program has operated with gaps in venue coverage and without adequate data controls required to maintain an effective program. 


The Federal Reserve fined the bank $98,167,980, noting further that the bank “failed at various points in time to adequately surveil certain trading and order activity throughout the Firm’s Corporate and Investment Bank on at least 30 global trading venues”. 


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CFTC fines binary options entity $200 million for fraud

The US District Court for the Western District of Texas has issued a final judgment against Jonathan Cartu, Leeav Peretz, Nati Peretz, and Blue Moon Investments Inc for their involvement in a fraudulent binary options scheme. The defendants were found guilty of offering illegal, off-exchange binary options and perpetrating fraud in connection with these activities. 


Binary options are a type of financial option where the payoff is either a fixed amount of some asset or nothing at all. They are called “binary” because there can be only two outcomes: you either make a predetermined profit or lose the investment amount entirely. 


The court’s ruling, which concludes a case initiated by the Commodity Futures Trading Commission (CFTC) in September 2020, imposes significant sanctions on the defendants. They must pay $204,622,580 in monetary penalties, including $51,155,645 in disgorgement and a civil penalty of $153,466,935. Additionally, the court has issued a permanent injunction prohibiting the defendants from engaging in any conduct that violates the Commodity Exchange Act (CEA) and bans them from registering with the CFTC or trading on any registered entity. 


The case dates back to approximately September 2015, when the defendants began offering illegal, off-exchange binary options through an internet platform they operated. According to the court’s findings, the defendants not only misled customers about the risks associated with binary options but also manipulated trade outcomes to ensure customer losses and generate profits for themselves. Through this deceptive scheme, they fraudulently obtained over $51 million from customers in the United States. 


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Phase 2 of e-HKD pilot launched by Hong Kong Monetary Authority

The Hong Kong Monetary Authority (HKMA) has announced the launch of Phase 2 of the e-Hong Kong Dollar (e-HKD) Pilot Programme, which will delve deeper into selected issues from Phase 1 and consider where an e-HKD could add unique value, namely programmability, tokenisation and atomic settlement. 


The HKMA is committed to furthering its understanding of central bank digital currencies (CBDCs), particularly through research on the e-HKD and is actively engaged in various research projects, conducted in collaboration with the CBDC Expert Group, focusing on programmability, privacy, and interoperability. Insights gained from both phases of the e-HKD Pilot Programme and research conducted by the CBDC Expert Group will inform the HKMA’s study on the potential implementation of an e-HKD. 


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