CUBE RegNews: 3rd April

Eva Dauberton

Eva Dauberton

News Editor

ESMA consults on possible amendments to the Credit Rating Agencies regulatory framework 

The European Securities and Markets Authority (ESMA) has issued a consultation paper on proposed amendments to Commission Delegated Regulation (EU) No 447/2012 and Annex I of the Credit Rating Agencies (CRA) Regulation. 


The primary goal of these proposals is to improve the incorporation of environmental, social, and governance (ESG) factors in credit rating methodologies and their subsequent disclosure to the public. Additionally, the aim is to enhance transparency and credibility in the credit rating process. 

 

Some context 

The CRA Regulation outlines specific requirements to prevent conflicts of interest, ensure high-quality methodologies and corporate governance, and provide transparency to investors and the market. However, Annex I of the CRA Regulation does not explicitly address the integration of ESG factors in credit rating methodologies or the disclosure of their consideration in credit rating press releases. 


While ESMA believes CRAs should already be integrating ESG factors in their methodologies, where applicable, and disclosing them in credit rating press releases, they suggest that the regulatory framework should be revised to explicitly state this requirement. This revision would ensure consistency in the application of these principles by all CRAs. 

 

Key takeaways  

The proposals aim to systematically document the relevance of ESG factors within credit rating methodologies, improve disclosures on the relevance of ESG factors in credit ratings and rating outlooks, and ensure a more robust and transparent credit rating process through the consistent application of methodologies. 


The revisions include: 


  • Adding an explicit reference to the identification of ESG factors within credit rating methodologies. 
  • Integrating the provisions of Section 5.2 of ESMA’s Guidelines on Disclosure, which pertain to the disclosure of ESG considerations, into the CRA Regulation. 


These changes will complement the extensive sustainable finance regulatory package proposed by the European Commission (EC). 

 

Next Steps  

The deadline for the submission of responses is 21 June 2024. ESMA will consider all feedback received and submit its technical advice to the EC by end of December 2024. 

 

Click here to read the full RegInsight on CUBE’s RegPlatform  

 

EIOPA launches 2024 stress test 

The European Insurance and Occupational Pensions Authority (EIOPA) has announced the launch of its 2024 stress test. It will include 48 undertakings from 20 member states, covering over 75% of the EEA market in terms of total assets. 


Participating undertakings will be given until mid-August 2024 to calculate their results based on the prescribed scenario and submit them to their respective national supervisor. 


Next steps  

Following the submission, EIOPA will conduct a quality assurance process to validate the results, which is expected to conclude by the end of October 2024. The outcome of the 2024 Stress Test will be published in December in two forms: a report based on aggregated data and the publication of individual results relating to a subset of capital-based indicators, subject to the consent of the relevant entity. 


Click here to read the full RegInsight on CUBE’s RegPlatform  

 

CFTC fines ANZ $500,000 for breaching supervision obligations 

The Commodity Futures Trading Commission (CFTC) has imposed a $500,000 fine on Australia and New Zealand Banking Group Ltd. (ANZ) for breaching its supervision obligations and failing to ensure the effectiveness of its spoofing surveillance tool. 


The CFTC recognized ANZ’s significant cooperation and efforts to rectify the issue, resulting in a reduced penalty. To conduct the investigation, the CFTC also collaborated with the Australian Securities and Investments Commission and the Hong Kong Securities and Futures Commission.  


What happened? 

The problem arose when ANZ’s surveillance tool, used to detect spoofing activity by its traders, failed to properly monitor futures data from a specific vendor. Consequently, numerous orders were not promptly assessed for spoofing, and ANZ did not receive a substantial number of surveillance alerts that should have been generated during that period. 


Click here to read the full RegInsight on CUBE’s RegPlatform  


April consultations deadlines 

Below is a selection of the most important regulatory deadlines for the UK, US, EU, Singapore, Australia, and Hong Kong in April 2024. 


UK 


PRA CP27/23 – The Prudential Regulation Authority’s approach to policy: Deadline 8 April 2024 

This consultation paper sets out the approach that the Prudential Regulation Authority’s (PRA) proposes to take to policy under the regulatory framework as amended by the Financial Services and Markets Act (FSMA) 2023. It builds on Discussion Paper (DP) 4/22 The Prudential Regulation Authority’s future approach to policy – and is relevant to all PRA-regulated firms. 


PRA CP28/23 – Leverage ratio treatment of omnibus account reserves and minor amendments to the leverage ratio framework: Deadline 8 April 2024 

This consultation sets out the PRA's proposals to: introduce new rules to exclude reserves held on omnibus accounts from the leverage ratio, subject to specific conditions, and to add related material to supervisory statement (SS) 45/15 – The UK leverage ratio framework; make minor amendments to SS45/15 to ensure clarity and consistency with PRA rules on other parts of the leverage ratio framework; and make minor amendments to the leverage ratio disclosure and reporting instructions to provide clarification of the PRA’s expectations and ensure consistency with PRA rules. 


PRA CP2/24 – Solvent exit planning for insurers: Deadline 26 April 2024 

This consultation  outlines the PRA's proposals for PRA-regulated insurers to prepare for an orderly ‘solvent exit’ as part of business-as-usual (BAU) activities and to be able to execute a solvent exit if needed.  


The proposals in this consultation would, if implemented, add a new Preparations for Solvent Exit Part to the PRA Rulebook and introduce a new supervisory statement (SS) (Appendix 2) applicable to those insurers that are in scope of the proposed new rules. 


The proposals in this consultation include: new rules and expectations that firms must prepare for a solvent exit as part of their BAU activities and that firms must document those preparations in a Solvent Exit Analysis (SEA); and and new expectations, which would apply only if solvent exit became a reasonable prospect for a firm, on how firms should: (a) prepare a detailed Solvent Exit Execution Plan (SEEP), and (b) monitor and manage a solvent exit. 


PRA CP3/24 – The Prudential Regulation Authority’s approach to rule permissions and waivers: Deadline 30 April 2024 

This consultation  sets out the PRA's proposal for a new statement of policy (SoP) that will set out the PRA’s approach to rule permissions made under section 138BA of the Financial Services and Markets Act (FSMA) 2023. 


FCA CP24/2 – Our enforcement guide and publicising enforcement investigations–a new approach: Deadline 16 April 2024  

This consultation  proposes a new approach to dealing with enforcement actions including publicly announcing that the FCA has opened an enforcement investigation, including the identity of the subject of the investigation, and publishing updates on the investigation, if the regulator consider that it is in the public interest to do so. It also proposes following a new public interest framework to inform the FCA's decision-making, applying the framework to the fact, content and timing of each announcement. 


The Payment Services (Amendment) Regulations 2024 – Policy note and near-final version of legislation to slow down payments processing: Deadline 12 April 2024  

The government's draft legislation to allow payment service providers to delay outbound payments processing when there are reasonable grounds to suspect fraud or dishonesty and more time is needed to contact the customer or relevant third parties. 


FCA GC24/1 – Proposed amendments to FG21/4 Guidance for insolvency practitioners on how to approach regulated firms: Deadline 12 April 2024  

In 2021, the FCA published FG21/4: Guidance for insolvency practitioners on how to approach regulated firms. Since then, there have been changes in the legal framework affecting firm failure, changes in the regulatory framework and changes in the UK economic climate.  Given this the FCA believes that while the guidance remains relevant it would benefit from updating. The regulator has also had feedback that, in some areas of the guidance, it could improve clarity or provide more information.    


US 


OCC consultation on business combinations under the Bank Merger Act: Deadline 15 April 2024 

The Office of the Comptroller of the Currency (OCC) is inviting comment on a proposed rule to increase the transparency of the standards that apply to the agency's review of business combinations involving national banks and Federal savings associations. In particular, the proposed rule would amend the procedures and would add, as an appendix, a policy statement that summarises the principles the OCC uses when it reviews proposed bank merger transactions under the Bank Merger Act. 


FiNCEN consultation on anti-money laundering/countering the financing of terrorism program and suspicious activity report filing requirements for registered investment advisers and exempt reporting advisers: Deadline 15 April 2024 

The Financial Crimes Enforcement Network (FinCEN) is issuing this notice of proposed rulemaking (NPRM) to include certain investment advisers in the definition of “financial institution” under the Bank Secrecy Act (BSA), prescribe minimum standards for anti-money laundering/countering the financing of terrorism (AML/CFT) programs to be established by covered investment advisers, require covered investment advisers to report suspicious activity to FinCEN pursuant to the BSA, and make several other related changes to FinCEN regulations.  


FiNCEN consultation on anti-money laundering regulations for residential real estate transfers: Deadline 16 April 2024 

FinCEN is issuing a proposed rule to require certain persons involved in real estate closings and settlements to submit reports and keep records on identified non-financed transfers of residential real property to specified legal entities and trusts on a nationwide basis. 


CFTC consultation on requirements for Designated Contract Markets (DCMs) and Swap Execution Facilities (SEFs) regarding governance and the mitigation of conflicts of interest impacting market regulation functions: Deadline 22 April 2024 

The proposed rules from the Commodity Futures Trading Commission (CFTC) would establish for DCMs and SEFs certain minimum fitness standards under DCM Core Principle 15 (Governance Fitness Standards) and SEF Core Principle 2 (Compliance with Rules), as well as rules for identifying, managing, and resolving conflicts of interest, and structural governance requirements to ensure that SEF and DCM governing bodies adequately incorporate an independent perspective under DCM Core Principle 16 (Conflicts of Interest) and SEF Core Principle 12 (Conflicts of Interest). 


CFTC consultation on foreign boards of trade: Deadline 22 April 2024 

These proposed amendments would permit a foreign board of trade (FBOT) registered with the CFTC to provide direct access to its electronic trading and order matching system to an identified member or other participant located in the United States and registered with the CFTC as an introducing broker for submission of customer orders to the FBOT’s trading system for execution. 


Europe 


EBA consultation on Regulatory Technical Standards (RTS) on prudent valuation: Deadline 16 April 2024 

Commission Delegated Regulation (EU) 2016/101 has been in force since February 2016 to determine additional valuation adjustments and ensured a degree of convergence in an area, where a very wide range of practices existed. The regulation set out, for the first time, a common harmonised methodology for the valuation of fair valued assets for prudential purposes. Given that the prudent valuation framework has been in force for some time, the European Banking Authority (EBA) recently reviewed its implementation, noting that differences still exist even though a degree of convergence has been achieved. Consequently, this consultation paper proposes amendments to the currently applicable regulation, to address targeted implementation issues that have emerged during its application. 


EBA consultation on draft guidelines on the management of ESG risks: Deadline 18 April 2024 

The EBA has launched a public consultation on draft Guidelines on the management of Environmental, Social and Governance (ESG) risks. The draft Guidelines set out requirements for institutions for the identification, measurement, management and monitoring of ESG risks, including through plans aimed at addressing the risks arising from the transition towards an EU climate-neutral economy. 


ESMA consultation on the draft guidelines on reverse solicitation under the Markets in Crypto Assets Regulation (MiCA): Deadline 29 April 2024 

In this consultation, the European Securities and Markets Authority (ESMA) is seeking input on proposed guidance to clearly define the conditions of application of the reverse solicitation exemption and the supervision practices that National Competent Authorities (NCAs) may take to prevent its circumvention. Under MiCA, third-country firms can only provide crypto-asset services or activities in cases where such services are initiated exclusively by a client or through the reverse solicitation exemption. This exemption is narrowly framed and should be treated as an exception. The guidelines aim to clarify the conditions of applying the reverse solicitation exemption and the practices that NCAs can use to prevent its circumvention.   


ESMA consultation on the draft guidelines on the conditions and criteria for the qualification of cryptoassets as financial instruments: Deadline 29 April 2024 

In this consultation, ESMA is seeing input on conditions and criteria for the classification of crypto-assets as financial instruments. Due to the different approaches to the national transposition of MiFID across Member States, there is no commonly adopted application of the definition of ‘financial instrument’ under MiFID in the EU. With the implementation of MiCA, practical consequences may emerge regarding the classification of crypto-assets as financial instruments. The guidelines aim to provide guidance on the qualification of crypto-assets as financial instruments that national competent authorities and market participants should consider.  


EBA consultation on Implementing Technical Standards (ITS) on public disclosures by institutions of the information on operational risk: Deadline 30 April 2024 

The objective of this paper is to consult on the draft ITS amending the Commission Implementing Regulation (EU) 2021/637 to implement the disclosure requirements coming from the introduction of the new regulatory framework for operational risk in Article 434a of Regulation (EU) No 575/2013 (the CRR). 


Australia 


Annual Superannuation Performance Test – design options: Deadline 19 April 2024 

The purpose of this paper is to canvass a range of options for reforming the Annual Superannuation Performance Test, should the government decide to do so in the future. In considering improvements to the performance test, the government is focused on ensuring the test holds trustees to account for delivering the best financial outcomes for members. 


Buy Now Pay Later regulatory reforms: Deadline 9 April 2024 

Following a consultation at the end of 2022 into a new buy now pay later (BNPL) regulatory framework, the Australian government has issued new draft BNPL legislation. The proposed new law is intended to apply to BNPL contracts and arrangements and will also be able to capture other classes of LCCC in the future (such as wage advances). The new draft legislation amends the National Consumer Credit Protection Act 2009 and the National Consumer Credit Protection Regulations 2010 to bring BNPL into the existing regulatory framework for other credit products.  


APRA Financial Accountability Regime - regulator rules and transitional rules: Deadline 19 April 2024 

The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) propose to amend the Financial Accountability Regime Act (Information for register) Regulator Rules 2024 (Regulator rules) to include a list of key functions for insurance and superannuation entities.  


Better targeted superannuation concessions: draft regulations: Deadline 26 April 2024 

The government is consulting on the Treasury Laws Amendment (Measures for Future Instruments) Instrument 2023: Better Targeted Superannuation Concessions (draft regulations), to support implementation of changes to superannuation tax concessions announced in the 2023‑24 Budget. 


Singapore 


MAS proposed notice on prevention of money laundering and countering the financing of terrorism for organised market operators formed or incorporated in Singapore: Deadline 29 April 2024 

This consultation sets out the Monetary Authority of Singapore’s (MAS) proposal to introduce a Notice to Approved Exchanges and Recognised Market Operators formed or incorporated in Singapore, to perform anti-money laundering and countering the financing of terrorism checks. 


Hong Kong 


FSTB legislative proposals to regulate over-the-counter trading of virtual assets: Deadline 12 April 2024 

This consultation issued by the Financial Services and the Treasury Bureau (FSTB) seeks views on legislative proposals to regulate over-the-counter trading of virtual assets through the introduction of a licensing regime for providers of virtual asset over the counter services under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. 



 

FINRA discussion on cyber threats landscape  

 

In a recent episode of the Financial Industry Regulatory Authority (FINRA) Unscripted podcast, Bryan Smith, the new Senior Vice President of FINRA’s Complex Investigations and Intelligence (CII) team, and Brita Bayatmakou, Vice President of the Cyber and Analytics Unit within CII, talked about the world of CII and the constantly changing cyber threat landscape. They shared insights on what firms should consider and do in response to the latest trends. 

 

Cybersecurity is still a major concern for US regulators. They are not only updating regulations to address the current landscape but also providing support to firms in this area. For example, the FINRA annual 2024 regulatory oversight report, published in January, covers observations and effective practices in cybersecurity. In addition, the US Department of the Treasury published a report in March on how the financial sector manages cybersecurity risks related to Artificial Intelligence (AI). 

 

CII’s Mission  

During the discussion, Smith and Bayatmakou shared important insights about the work carried out by CII. According to Bayatmakou, CII’s primary aim is to enhance FINRA’s expertise in the fields of cybersecurity, cyber-enabled fraud, and cryptoassets. They employ advanced data analytics and modelling techniques to analyse emerging threats in the securities industry, bringing specialised skills to address complex threats and fraud. 

CII also establishes relationships with stakeholders by publishing alerts and advisories in various formats. They actively engage with industry professionals and law enforcement through in-person and virtual roundtables and working groups. Additionally, CII collaborates with the FBI to conduct quarterly regional cyber threat briefings, demonstrating a strong cooperative effort between agencies. 

 

Cyber incident reporting: a vital step in tackling cyber threats  

One important point raised was that firms may hesitate to report cyber incidents to FINRA. Bayatmakou emphasised the significance of reporting, stressing that the goal is not to re-victimise anyone. He highlighted the importance of collective action in tackling cyber threats. 

Smith added that reporting incidents holds value for firms, as they can gain valuable information from law enforcement or FINRA about threats they may not otherwise be aware of. FINRA can assist firms in the initial stages by identifying other areas that cybercriminals may target and sharing this information with the FBI to help firms navigate the situation. 

 

Trends in cybersecurity threats 

When it comes to areas of caution, both Smith and Bayatmakou pointed out the targeting of third-party or supply chain risks within industries, as well as the increasing prevalence of ransomware attacks and the use of cryptocurrency by cybercriminals. 

 

Tips for compliance and risk management teams 

In conclusion, compliance and risk management professionals were provided with some valuable tips to consider. Both Smith and Bayatmakou strongly advised firms to focus on “getting the fundamentals right.”. 

Bayatmakou explained that this entails becoming familiar with their IT partners, firm policies and procedures, as well as identifying reliable sources for information. They also suggested testing employees’ knowledge, knowing the right questions to ask third-party vendors, and adopting a comprehensive approach to cybersecurity by gathering information from various sources such as US Cybersecurity and Infrastructure Security Agency (CISA)’s cybersecurity alerts, FBI alerts, and publications from third-party vendors. 


Smith also emphasised the importance of functionality and collaborating with IT to assess potential network threats. He also acknowledged that, while it’s impossible to protect everything, firms should prioritise identifying what is crucial to their organisation. 


Finally, he stressed the need to expect attacks and have a plan in place for how to respond when they occur.  


Click here to read the full RegInsight on CUBE’s RegPlatform  


US Federal Reserve Michelle Bowman discusses M&A in the banking sector 

In a speech given at the Federal Reserve Bank of Kansas City Workshop on the Future of Banking, Federal Reserve Governor Michelle Bowman discussed the regulatory and supervisory reform agenda particularly in regard to merger and acquisition (M&A). 


The purpose of the workshop was to consider the future of banking and the forces that will shape it and Bowman began by noting that the “long shadow” of the 2023 banking failures continues to be a driving force for regulatory and supervisory reforms. Bowman noted that in the past, the regulatory reform agenda and less visible changes to the supervisory process affected banks of all sizes, presenting challenges due to the sheer volume of changes. Bank management, especially in smaller institutions, struggled to review and comment on regulatory updates, reallocate resources for compliance, and find qualified staff. Additionally, they had to adapt to varying supervisory standards and expectations. But she questioned whether the broad-based and insufficiently focused reform agenda has become a growing source of risk to the banking system.” 


Regulatory approvals 

Bowman noted some regulatory dynamics in the banking system, such as capital requirements, liquidity reform, and revisions to the Community Reinvestment Act, along with challenges like increased supervision and competition from non-banks. These dynamics influence the size and activities of banks and affect the broader financial system. Policy decisions within these reforms shape the risk tolerance of regulators and the role of banks in the economy, affecting incentives for mergers, competition, and activity migration to non-banks. Bowman said it is crucial to assess whether these policies align effectively and understand their consequences. 


De novo bank formation 

Bowman commented on the decline in the number of banks in the US, noting her concerns, as indicated by ongoing trends such as "charter strip" acquisitions and the shift of activities out of the banking system. Despite the evolving banking industry, de novo bank formation has remained stagnant due to various factors, including regulatory hurdles, lengthy approval processes, and uncertainties surrounding business models. 


She suggested that this absence of new banks could lead to challenges such as reduced availability of credit, lack of financial services in underserved markets, and further migration of banking activities beyond regulatory oversight. 


Bank mergers and acquisitions 

The meat of her speech was the consideration of M&A within the sector. Bowman said the evolving approach to bank M&A by regulators is becoming increasingly concerning, as it significantly influences the long-term health and viability of banks and the broader banking system. While M&A transactions play a vital role in allowing banks to thrive in a dynamic environment and facilitating transitions in bank ownership, the current regulatory framework faces scrutiny for its effectiveness and transparency. 


Reforms to the M&A process are actively being discussed on the regulatory agenda, with various federal banking regulators proposing or describing new policy approaches. These discussions highlight the need to reassess the fairness, transparency, and consistency of the regulatory review process. Central to this reassessment is the identification of shortcomings in the current process and the effectiveness of proposed reforms in addressing these issues. 


One of the key concerns raised is the perception that the regulatory approval process for M&A transactions has become overly lenient, with a lack of application denials being misconstrued as a sign of insufficient rigour. However, this view fails to recognise the significant investments and risks involved in the M&A process. 


Bowman noted that delays in the regulatory approval process can have detrimental effects on both acquiring institutions and targets, leading to increased operational risk, expenses, and reputational damage. Furthermore, uncertainties surrounding the standards for application review can exacerbate delays and deter potential merger transactions. 


Recent proposals for M&A reform include changes to evaluation standards and the convenience and needs analysis, which could impact banks' ability to receive regulatory approval and manage their businesses effectively. Additionally, concerns have been raised about the influence of regulators on the M&A process, particularly when demands are not grounded in statutory requirements or safety and soundness considerations. 


Addressing these concerns requires a balanced approach that improves the speed and consistency of regulatory decision-making while ensuring that conditions imposed during the approval process align with existing regulations and statutes. Public input and feedback on proposed reforms are crucial for enhancing the effectiveness and fairness of the M&A process and preserving the integrity of the banking system. 


In concluding, Bowman said policymakers hold sway over the banking system's future, impacting bank formations, mergers, and regulation but that she remains concerned that some regulatory actions may undermine the long-term viability of some banks. Nevertheless, “regulation, supervision, and ongoing reform efforts can help to positively influence a banking system that will effectively and efficiently serve communities of all sizes, consumers, businesses, and the broader US economy long into the future”. 


Click here to read the full RegInsight on CUBE’s RegPlatform