FINTECH

ESMA and EBA letter to the European Commission on crypto-assets work

On 20 August, ESMA and the EBA published a letter sent to the Commission on crypto-assets. The letter was sent in response to the Commission’s letter dated 19 July which identified issues in ESMA and the EBA’s January report on crypto-assets and initial coin offerings, and confirmed that they agree that further work must progress urgently. ESMA and the EBA have a number of work streams underway and are continuously monitoring market developments. Furthermore, they are engaging with the FSB, BCBS, FATF and CPMI-IOSCO with the intention of informing a common approach at international level, for example on matters including the prudential treatment of banks’ exposures to crypto-assets and the regulatory treatment of crypto-asset exchanges and trading platforms. At the EU level, ESMA and the EBA confirmed that they intend to launch a new stocktaking exercise of national regimes applicable to crypto-assets, including specific questions relating to the regulatory treatment of stablecoins.

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MARKETS AND MARKETS INFRASTRUCTURE

Report by the working group on euro risk-free rates on the impact of the transition from EONIA to the €STR on cash and derivatives products

On 19 August, the ECB’s working group on euro risk-free rates published a report on the impact that the transition from EONIA to €STR will have on cash and derivative products. Market participants will have to prepare extensively for this benchmark rate change by adapting IT systems, among other things, and reviewing current documentation, processes and procedures, product structures as well as terms of application. The report analyses the implications of the transition and provides market participants with recommendations on how to smoothen the transition. The recommendations are primarily from an operational and valuation standpoint, and may be broken down into two groups: (i) recommendations for dealing with the change in EONIA’s publication time resulting from the planned recalibration of EONIA as the €STR plus a fixed spread of 8.5 basis points as at 2 October; and (ii) recommendations for the transition from EONIA (recalibrated as the €STR between 2 October and 3 January 2022, when the publication of EONIA will cease.

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FMLC letter to HMT regarding review of EMIR Regulations

On 19 August, the FMLC published a letter sent to HMT regarding its review of the Financial Services and Markets Act 2000( Over the Counter Derivatives, Central Counterparties and Trade Repositories) regulations 2013 (EMIR Regulations). In October 2016, the FMLC published a report on issues of legal complexity arising in the context of proprietary claims to collateral under Part VII of the Companies Act 1989. In the report, the FMLC drew attention to various legal uncertainties which could arise in the context of the default management process of a CCP, including, among other things: (i) the protection for CCPs without actual notice of third party interests; (ii) the use of client trust acknowledgement letters; and (iii) the exercise of termination rights by clients. To address such uncertainties, the FMLC made recommendations with suggested amendments which received considerable support from market participants. As such, the FMLC urges HMT to take matters raised in its 2016 report into consideration when conducting its review of the Regulations.

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PAYMENT SERVICES AND PAYMENT SYSTEMS 

FCA Dear CEO letter on requirements for strong customer authentication in card-not-present ecommerce transactions

On 20 August, the FCA published a Dear CEO letter on requirements for strong customer authentication (SCA) under PSD2. From 14 September, the PSRs 2017 require all payment service providers (PSPs) to apply SCA where a payment service user initiates an electronic payment transaction. However, in response to industry concerns about readiness to apply SCA to e-commerce transactions, and to minimise the potential disruption to consumers and merchants, the EBA accepts that the FCA and other NCAs may give some PSPs extra time to implement these requirements. At the FCA's request, UK Finance worked to coordinate an agreed industry plan to implement SCA for card-not-present transactions for e-commerce as soon as practicable. The FCA has reviewed the plan and welcomes the industry's commitment to a timely, co-ordinated and collaborative approach. The FCA is not able to alter the September legal deadline for complying with the SCA requirements, however, to support the orderly transition to SCA and avoid a negative impact on consumers and merchants, the FCA will not take enforcement action against PSPs simply because they do not meet the SCA requirements from 14 September in areas covered by the plan. This decision is limited to the application of SCA to card-not-present e-commerce transactions, and only applies to firms who can demonstrate that they have taken the necessary steps to comply with the plan to deliver SCA by 14 March 2021.

FCA Dear CEO letter

UK Finance agreed industry plan 

ECB Decision on oversight of systemically important payment systems published in OJ 

On 16 August, Decision (EU) 2019/1349 of the ECB on the procedure and conditions for exercise by a competent authority of certain powers in relation to oversight of systemically important payment systems (SIPS) (ECB/2019/25) was published in the OJ. The Decision outlines how competent authorities may exercise their powers under Article 21 of ECB Regulation 795/2014 on oversight requirements for SIPS, which gives competent authorities information-gathering and investigatory powers in respect of SIPS operators. The Decision will enter into force on 5 September (20 days after publication in the OJ).

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PRUDENTIAL REGULATION 

ECB communication on supervisory coverage expectations for NPEs 

On 22 August, the ECB announced that it has revised its supervisory expectations for prudential provisioning of non-performing exposures (NPEs) (or non-performing loans (NPLs)). The ECB has decided to make the revisions in light of Regulation (EU) 2019/630 amending the CRR in relation to minimum loss coverage for NPLs, which entered into force on 26 April. The following changes have been made to the supervisory expectations communicated in the addendum: (i) the scope of the ECB’s supervisory expectations for new NPEs will be limited to NPEs arising from loans originated before 26 April, which are not subject to Pillar 1 NPE treatment. NPEs arising from loans originated from 26 April onwards will be subject to Pillar 1 treatment, with the ECB paying close attention to the risks arising from them; and (ii) the relevant prudential provisioning time frames, the progressive path to full implementation and the split of secured exposures, as well as the treatment of NPEs guaranteed or insured by an official export credit agency, have been aligned with Pillar 1 treatment of NPEs set out in Regulation (EU) 2019/630.

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Pillar 2 capital: Updates to the framework – final rules delayed 

On 20 August, following comments from firms and other industry participants on Consultation Paper 5/19 Pillar 2 capital: Updates to the framework (CP5/19), the PRA confirmed that the final policy has been delayed and instead of being published on 1 October will now be published by the end of October. CP5/19 was published on 13 March and the PRA proposed to update the Pillar 2 capital framework to reflect continued refinements and developments in setting the PRA buffer (also referred to as Pillar 2B). Since the PRA published its approach to setting the PRA buffer, the BoE’s approach to stress testing has evolved. There have been changes to the stress testing hurdle rate and the way microprudential and macroprudential buffers interact. This in turn has implications for the way that the PRA buffer is calculated. The PRA has also proposed to clarify its approach to assessing weaknesses in risk management and governance, explain the process for updating the benchmarks used to calculate the Pillar 2A requirement for credit risk and correct some minor drafting errors that have been identified in previous publications.

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