“Yesterday’s logic” BoE speech at UK Finance
In a speech at UK Finance, Nathanaël Benjamin, Executive Director for Authorizations, Regulatory Technology, and International Supervision at the Bank of England, covered three areas of concern in the financial industry: private equity and private credit markets, repo matched books, and structured equity derivatives and autocallables. In each, Benjamin emphasized the need for caution and careful evaluation of risks.
Regarding private equity and private credit markets, Benjamin warned about the potential impact of a breakdown in consensus on credit markets. With rising interest rates and a shift towards illiquid private equity and private credit financing, there is a risk of firms underestimating their exposure to underlying counterparties and connected collateral. He urged firms to monitor closely private asset financing and consider the hidden risks they may face.
Benjamin next addressed repo matched books. While these transactions are often considered low risk due to the use of high-quality collateral, extreme volatility in sovereign debt markets can still occur. He noted the need for firms to be prepared for historically unimaginable volatility and to ensure they have adequate financial and operational resources to manage collateral flows and associated risks. It is important for firms to understand how their counterparties use and are exposed to supposedly safe assets and transactions to anticipate and prepare for market dynamics.
The third area addressed was structured equity derivatives and autocallables. Benjamin noted that if equity indices trend higher and global rates reach their peak, these products may become attractive to investors. However, managing large and complex global books of these products can be challenging. He suggested that firms closely examine consolidated markets and the rotation of books from single-name underliers to index-referenced products. Firms should also evaluate their business models against potential vulnerabilities and consider the broader impact a breakdown in consensus could have on various asset classes.
The second part of the speech focused on commodities and their relationship to climate change. He highlighted the potential changes in commodities markets driven by the energy transition and the increasing demand for materials used in clean energy production. The scale of this demand shift could have significant geopolitical, economic, and financial implications. Hence banks should proactively identify connections between climate change risks and their balance sheets, as risks can manifest in unpredictable ways through complex supply chains.
For banks with commodities exposure, providing commodity hedges to corporate clients can present additional risks. Firms must carefully manage margin and ensure the cost of hedging reflects the true economic risk. Conversations with commodities counterparties should happen early and gradually to provide liquidity to the sector in an orderly manner.
Finally, the speaker discusses the impact of the new macro environment on the business models of international banks. While rising interest rates benefit retail and commercial banks, investment banks and wholesale firms face greater exposure to market volatility and macroeconomic shocks. Benjamin suggested that scale becomes increasingly important for these firms to withstand and benefit from volatility. Technological advancements and digitalization make it challenging for smaller firms to achieve scale, allowing niche specialists and non-bank intermediaries to disrupt traditional banking lines. He warned against pursuing opportunities that are not aligned with a bank’s DNA and emphasized the importance of maintaining operational resilience before venturing into new products or markets.
FCA welcomes new ESG code of conduct
The Financial Conduct Authority has welcomed the International Regulatory Strategy Group’s (IRSG) consultation on a new code of conduct for ESG data and ratings providers.
The proposed new Code of Conduct aims to foster a trusted, efficient and transparent market, by introducing clear standards for ESG ratings and data products providers and clarifying how such providers can interact with wider market participants. It is structured around four key outcomes:
- Good governance
- Systems and controls
- Management of conflicts
The consultation period closes on 5th October.
Compliance and risk guidance from Agnes Koh, Chief Risk Officer, SGX Group
In an interesting speech at the Enterprise Risk Management Congress Singapore, Agnes Koh outlined her S.A.F.E. model, applicable to global risk and compliance teams.
S: Scan and survey. “It is crucial” said Koh “that organizations make it part of their enterprise risk management process to constantly scan the environment. In doing so, it’s helpful to be sensitive to ever changing economic, regulatory, political, technological, business and as COVID has taught us, medical developments. Key risk reviews should not be limited to a once-a-year event but be adjusted whenever new conditions emerge. Risk is not static so risk management professionals also shouldn’t be static in how we scan and survey.”
A: Action. Being prepared and responding to risks and adverse events. Koh suggests that companies should be able to switch quickly to a crisis-response mode and recommends developing crisis-preparedness capabilities for relevant areas within the organization. She also highlights the importance of crisis playbooks, crisis exercises, and involving senior management and the board in crisis preparedness.
F: Frame of mind. Koh stressed the importance of cultivating a strong risk culture within an organization. She shared an experience where testing the business continuity plans revealed shortcomings, which led to improvements and better preparedness for the COVID-19 pandemic. Building a risk culture requires senior leaders to communicate the importance of risk management and integrate it into the company’s strategy. Koh also mentioned the concept of AIM (Accountability, Innovation, and Making a Difference) as a framework to promote a common language and align senior management and staff.
E: Everything is connected. Think with a 360 degree mind. Black swan events are situations we don’t know . When they emerge, they will require this “everything is connected” point of view.
Koh concluded by stating that risk management is not just about prevention but also about understanding and weighing risks against outcomes. She encourages risk managers to engage in regular dialog with the business to gain broader perspectives on risk drivers and their impact on business plans.
FCA reminds firms of crypto promotions requirements—and consequences of ignoring them
The Financial Conduct Authority has written to cryptoasset firms, including those based overseas, reminding them of the forthcoming regime that will bring qualifying cryptoassets within scope of the financial promotion regime.
From 8th October, there will be four routes to lawfully communicate cryptoasset promotions to UK consumers:
- The promotion is communicated by an authorized person.
- The promotion is made by an unauthorized person but approved by an authorized person.
- The promotion is communicated by a cryptoasset business registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).
- The promotion otherwise complies with the conditions of an exemption in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“the Financial Promotion Order).
The letter stresses that “Promotions that are not made using one of these routes will be in breach of section 21 of the Financial Services and Markets Act 2000 (FSMA), which is a criminal offense punishable by up to 2 years imprisonment, an unlimited fine, or both. We will take robust action against persons illegally promoting to UK consumers.”
MAS consults on digital payments and payment service regs
The Monetary Authority of Singapore (MAS) has issued two new consultation papers (CP) addressing payments.
CP 007 on Proposed Amendments to the Payment Services Regulations sets out proposed amendments to the Payment Services Regulations 2019 to implement key segregation and custody requirements for digital payment token services under the Payment Services Act 2019. The CP further sets out the proposed amendments relating to customers’ moneys; the proposed amendments relating to customers’ assets; and the implementation approach for the proposed amendments.
CP 008 on Proposed Measures on Market Integrity in Digital Payment Token (DPT) Services sets out proposed regulatory measures for licensed and exempt payment service providers that carry on a business of providing a digital payment token service under the Payment Services Act 2019, as well as prohibitions against unfair trading practices that are generally applicable to all market participants, to address market integrity risks in DPT services. The CP further sets out the proposed regulatory measures for a digital payment token service providers to address market integrity risks; the proposed prohibitions against unfair trading practices; and the implementation approach for the proposals.
Both consultations end on 3rd August.
ASIC publishes latest InFocus newsletter
The Australian Securities and Investments Commission (ASIC) has published its lates InFocus newsletter for July 2023. InFocus provides ASIC-related news and information on companies and business names.
This month it covers discuss fee indexation, local agent responsibilities, new transactions in the Regulatory Portal coming and more
- Fee indexation – new fees now apply
- Are you the local agent for a registered foreign company?
- Reminder – New transactions coming to the ASIC Regulatory Portal
- ASIC Annual Forum 2023 – Navigating Disruption
- ASIC Cyber pulse survey
- Is your small business tax time ready?
- NAIDOC week small business webinars
FCA CP on establishing a consolidated tape
The FInancial Conduct Authority is consulting on establishing a Consolidated Tape (CT) in the UK. A CT collates market data, such as prices and volumes associated with trades in a financial market into a single source. It aims to provide a comprehensive picture of transactions in a specific asset class, bringing together trades executed on trading venues as well as those arranged over-the-counter (OTC).
CP 23/15 sets out the FCA’s proposed framework for a CT for bonds, which was identified by the Wholesale Markets Review (WMR) of 2022 as being a priority.
The CP is relevant to:
trading venues which admit to trading or trade bonds
- Approved Publication Arrangements who publish trade reports for bonds that are traded on a trading venue;
- Approved Reporting Mechanisms who send transaction reports to the FCA on behalf of investment firms; and
- firms interested in bidding to be a CT provider.
A selected summary of key developments for regulated financial institutions
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