Includes developments in relation to: Solvency II; Climate-related financial risks; CRR; APP scams; and LIBOR

Click on the headings below to access each sections

General

Issue 1136 / 18 November 2021

HEADLINES

  1. Financial Conduct Authority
    1. Pre-paid funeral plans - FCA publishes Dear CEO letter - 12 November 2021

Financial Conduct Authority

Pre-paid funeral plans - FCA publishes Dear CEO letter - 12 November 2021

The FCA has published a ‘Dear CEO’ Letter from Matt Brewis, Director of Insurance & Conduct Specialists, to pre-paid funeral plan providers on its forthcoming regulation of this market. The letter states that if funeral plan providers (or intermediaries) are not authorised or exempt by 29 July 2022 they must stop distributing and/or administering funeral plans as this will become a regulated activity as at that date. The letter highlights that to continue a regulated activity without authorisation is a criminal offence.

‘Dear CEO’ Letter from FCA Director of Insurance & Conduct Specialists, Matt Brewis

Beyond Brexit

Issue 1136 / 18 November 2021

HEADLINES

  1. HM Treasury
    1. Solvency II - HM Treasury publishes draft Regulations and explanatory guidance - 15 November 2021

HM Treasury

Solvency II - HM Treasury publishes draft Regulations and explanatory guidance - 15 November 2021

HM Treasury has published a draft of The Solvency II (Group Supervision) (Amendment) Regulations 2021 (the Regulations), together with an explanatory memorandum. The Regulations amend regulations 24, 25, 26 and 28 of the Solvency II Regulations 2015 (SI 2015/575), which originally transposed the Solvency II Directive (2009/138/EC) (Solvency II) in the UK, to address deficiencies from the UK’s exit from the EU. The Regulations are made under the power in section 8 of the European Union (Withdrawal) Act 2018.

The Regulations allow the PRA to continue to disapply, in certain circumstances, all relevant insurance group supervision requirements relating to UK insurance groups whose parents are overseen by supervisory authorities in equivalent third countries. The PRA may only disapply group supervisor requirements if: (i) compliance by the insurance group with relevant requirements would be unduly burdensome; and (ii) the determination would not adversely affect the advancement of any of the PRA’s objectives.

Without this instrument, existing waivers granted by the PRA in accordance with European Insurance and Occupational Pensions Authority (EIOPA) guidelines prior to the UK’s exit from the EU would expire on 31 March 2022, when the transitional relief granted by the PRA ends (pursuant to Part 7 of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 (SI 2019/632)).

HM Treasury engaged extensively with the PRA during the instrument’s drafting. No consultation will be undertaken.

The Regulations will come into force on 24 January 2022.

Draft Statutory Instrument: The Solvency 2 (Group Supervision) (Amendment) Regulations 2021

Explanatory memorandum

Webpage

Banking and Finance

Issue 1136 / 18 November 2021

HEADLINES

  1. Committee on Payments and Market Infrastructures
    1. Real-time gross settlement systems - CPMI publishes Consultative Report - 18 November 2021
  2. Basel Committee on Banking Supervision
    1. Climate-related financial risks - Basel Committee publishes Consultation Paper - 16 November 2021
  3. European Commission
    1. European Payment Institutions Federation - Commissioner McGuinness delivers speech at annual conference - 16 November 2021
  4. Official Journal of the European Union
    1. CRR - Commission Implementing Regulation on mapping tables published in OJ - 17 November 2021
  5. European Banking Authority
    1. ESEP and EREP - EBA publishes two programmes - 12 November 2021
    2. NSFR – EBA publishes report on the functioning of precious metals markets - 17 November 2021
    3. PSD2 - European Commission publishes call for advice - 18 November 2021
  6. European Central Bank
    1. Securitisation Regulation - ECB consults on draft Guide on securitisation transaction notification - 15 November 2021
  7. Bank of England
    1. FPC O-SII buffer framework - Bank of England publishes Consultation Paper - 15 November 2021
  8. Prudential Regulation Authority
    1. Domestic liquidity sub-groups - PRA publishes PolicyStatement - 15 November 2021
    2. CRR - PRA publishes webpage - 16 November 2021
  9. Financial Conduct Authority
  10. Payment Systems Regulator
    1. APP scams - PSR publishes Consultation Paper - 18 November 2021
  11. Competition and Markets Authority
    1. SME Banking Undertakings - CMA publishes letter to Danske Bank - 12 November 2021

Committee on Payments and Market Infrastructures

Real-time gross settlement systems - CPMI publishes Consultative Report - 18 November 2021

The Committee on Payments and Market Infrastructures (CPMI) has published a Consultative Report on extending and aligning payment system operating hours for cross-border payments.

The Consultative Report focuses on the operating hours of real-time gross settlement (RTGS) systems, which are considered key to enhancing cross-border payments. It explains that an extension of RTGS operating hours across jurisdictions could help address current obstacles, increasing the speed of cross-border payments and reducing both liquidity costs and settlement risks.

The Consultative Report sets out three potential improvements (‘end states’), based on an analysis of 62 RTGS systems worldwide:

  • end state 1: increase operating hours on current operating days, to help close daily gaps in RTGS operating hours, primarily on standard working days as most jurisdictions’ RTGS systems are closed on weekends and public holidays;
  • end state 2: extend operations to additional days on which many RTGS systems do not currently operate, to close the gaps created by holidays and weekends; and
  • end state 3: extend operating hours to 24/7, to largely remove frictions for cross-border payments arising from gaps in opening times.

The deadline for comments is 14 January 2022.

CPMI Consultative Report: Extending and aligning payment system operating hours for cross-border payments

Webpage

Press release

Basel Committee on Banking Supervision

Climate-related financial risks - Basel Committee publishes Consultation Paper - 16 November 2021

The Basel Committee on Banking Supervision (Basel Committee) has published a Consultation Paper (BCBS530) on principles for the effective management and supervision of climate-related financial risks. The proposed principles seek to provide a common baseline for internationally active banks and prudential supervisors, while maintaining sufficient flexibility given the degree of heterogeneity and evolving practices in this area.

The Consultation Paper sets out 18 high-level principles. Principles 1 to 12 provide banks with guidance on effective management of climate-related financial risks. Principles 13 to 18 provide guidance to prudential supervisors. The principles focus on areas including: (i) corporate governance; (ii) internal control frameworks; (iii) capital and liquidity adequacy; (iv) risk management processes; and (v) management monitoring and reporting.

The Basel Committee intends to monitor implementation of the principles across member jurisdictions to promote a common understanding of expectations, support the development of harmonised practices and facilitate implementation as soon as possible.

The consultation closes on 16 February 2022.

BCBS Consultation: Principles for the effective management and supervision of climate-related financial risks

Webpage

Press release

European Commission

European Payment Institutions Federation - Commissioner McGuinness delivers speech at annual conference - 16 November 2021

The European Commission has published the keynote speech given by the European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, Mairead McGuinness, at the European Payment Institutions Federation Annual Conference.

The speech considered developments in the EU payments market and covered a number of areas, including:

  • review of the Payment Services Directive 2 (PSD2): the Commission’s ongoing review of PSD2 is considering a number of issues, including the scope of the Directive, how well Open Banking is working and how to move to Open Finance. The European Banking Authority (EBA) will input into the review by way of a call for advice (see the item below in this section) and the Commission will launch a consultation in early 2022, on which it will report by the end of 2022;
  • central bank digital currencies and the digital euro: the European Central Bank (ECB) has launched an investigation phase into a digital euro and the Commission is working closely with it on the possible impact and ‘far-reaching’ implications for the financial system;
  • instant payments: the Commission wants to see full take up of instant payments across EU member states and for these to become the norm across the EU – currently two thirds of payment service providers are set up to offer and receive instant payments. The Commission’s 2020 review identified four ‘major’ roadblocks to full take up: critical mass; consumer protection; pricing; and sanctions screening. The Commission will deliver an initiative on instant payments in 2022 and will take all necessary action to accelerate the rollout of instant payments, including legislation; and
  • Settlement Finality Directive (SFD) and Digital Markets Act: the Commission is considering extending the scope of the SFD to e-money and payment institutions. It is using the Digital Markets Act to address the restrictions on the use of near field communications technology in mobile wallets.

Keynote speech: European Payment Institutions Federation Annual Conference

Official Journal of the European Union

CRR - Commission Implementing Regulation on mapping tables published in OJ - 17 November 2021

Commission Implementing Regulation (EU) 2021/2005 (the Regulation) has been published in the Official Journal of the European Union (OJ). The Regulation lays down implementing technical standards amending Commission Implementing Regulation (EU) 2016/1799 in relation to the mapping tables specifying the correspondence between the credit risk assessments of external credit assessment institutions (ECAIs) and the credit quality steps set out in the Capital Requirements Regulation ((EU) 575/2013). The Regulation was made under Article 136(1) of the CRR.

The Regulation is based on draft Implementing Technical Standards (ITS) that the Joint Committee of the European Supervisory Authorities submitted to the European Commission in June 2021. It amends Commission Implementing Regulation (EU) 2016/1799 to account for:

  • changes in the quantitative and qualitative factors underpinning the credit assessments of some mappings;
  • some ECAIs extending their credit assessments to new market segments, resulting in new rating scales and new credit rating types;
  • two credit rating agencies being registered in accordance with Articles 14 to 18 of the Credit Rating Agency Regulation ((EC) 1060/2009) and two ECAIs being deregistered; and
  • one registered ECAI amending the symbols used to denote the rating categories of its rating scales.

The Regulation will enter into force on 7 December 2021.

Commission Implementing Regulation (EU) 2021/2005 laying down implementing technical standards amending Implementing Regulation (EU) 2016/1799 as regards the mapping tables specifying the correspondence between the credit risk assessments of external credit assessment institutions and the credit quality steps set out in Regulation (EU) 575/2013 of the European Parliament and of the Council 

European Banking Authority

ESEP and EREP - EBA publishes two programmes - 12 November 2021

The European Banking Authority (EBA) has published its 2022 European Supervisory Examination Programme (ESEP) for prudential supervisors (EBA/REP/2021/33), together with its first European Resolution Examination Programme (EREP) for resolution authorities (EBA/REP/2021/32), also for 2022. The ESEP and EREP are part of a coordinated initiative to enhance convergence in Europe. Previously, the key priorities for prudential supervisors were put forward by the EBA in its annual Convergence Report. The ESEP and EREP replace this method as stand-alone programmes.

In its ESEP, the EBA has identified five key topics for prudential supervisors to consider when selecting their 2022 supervisory priorities: (i) the impact of COVID-19 on asset quality and adequate provisioning; (ii) information and communication technology (ICT) security and outsourcing risks, and risk data aggregation; (iii) digital transformation and the regulation of fintech firms; (iv) environmental, social and governance (ESG) risk; and (v) anti-money laundering and counter-terrorism financing (AML/CFT). Supervisory colleges are expected to implement these topics through the sharing and discussion of relevant supervisory assessments and outcomes.

In its EREP, the EBA has set out three key topics for resolution authorities to consider when selecting their 2022 priorities: (i) how shortfalls in relation to the minimum requirement for own funds and eligible liabilities (MREL) are being addressed; (ii) the development of management information systems for valuation in resolution; and (iii) preparations for managing liquidity needs in resolution. Resolution colleges are expected to consider these topics.

The EBA will follow up on how the ESEP and EREP key topics should be embedded in national competent authorities’ priorities for 2022 and reflected in their activities throughout the year.

2022 European Supervisory Examination Programme (ESEP) for Prudential Supervisors

ESEP press release

EBA 2022 – European Resolution Examination Programme (EREP)

EREP press release

NSFR – EBA publishes report on the functioning of precious metals markets - 17 November 2021

The EBA has published a report on the impact of the net stable funding ratio (NSFR) on the functioning of precious metals markets.

The EBA published the report in line with the mandate in Article 510(11) of the Capital Requirements Regulation II ((EU) 2019/876) (CRR II) as it amends Article 510 of the Capital Requirements Regulation (EU) 575/2013 (CRR). The report assesses whether it would be justified to reduce the required stable funding factor for assets used for providing clearing and settlement services or assets used for providing financing transactions in relation to precious metals.

The report draws on information collected by the Basel Committee on Banking Supervision and the EBA under the quantitative impact study (QIS) project. It highlights that banks started to comply with the new liquidity requirements well in advance of their entry into force. During the period 2011–2019, banks analysed in the QIS project cleared the shortfall of stable funding needed to comply with the NSFR. In the same period, based on the information publicly available from the website of the London Bullion Market Association, there is no evidence that this adjustment had an impact on precious metals markets.

Based on the EBA QIS and COREP data, the amount of physically traded commodities reported by the banks was found to be negligible when compared with market volumes. Also, the requirement for stable funding generated by these assets is limited in comparison with the total amount of required stable funding; a reduction of the weighting factor assigned to these assets would have limited impact on the banks; and, in particular, it would not make the NSFR less stringent.

EBA report on the impact of the NSFR on the functioning of the precious metals market under the mandate in Article 510(11) of Regulation (EU) 2019/876

Press release

PSD2 - European Commission publishes call for advice - 18 November 2021

The European Commission has published a letter addressed to the EBA seeking advice in relation to the Payment Services Directive (EU) 2015/2366 (PSD2). The Commission requests the EBA to gather evidence on the application and impact of PSD2, including the benefits, challenges and areas where amendments may be appropriate. Specific areas on which the Commission seeks advice include:

  • the scope, and definitions in, PSD2;
  • licensing of payment institutions (PIs) and supervision of payment service supervisors;
  • transparency conditions and information requirements;
  • strong customer authentication;
  • access to and use of payment accounts data in relation to payment initiation services and account information services;
  • access to payment systems and accounts maintained with credit institutions; and
  • enforcement of PSD2 requirements.

The Commission intends to use the EBA’s advice to inform a report reviewing PSD2 that it is required to give to the European Parliament, the Council of the EU, the European Central Bank and the European Economic and Social Committee. This report may be accompanied by legislative proposals if appropriate.

The Commission has set a deadline of 30 June 2022 for the EBA to deliver its advice.

Letter from the Commission to the EBA

Call for advice

European Central Bank

Securitisation Regulation - ECB consults on draft Guide on securitisation transaction notification - 15 November 2021

The European Central Bank (ECB) has published for consultation a draft Guide (the Guide) for banks on the notification of securitisation transactions. The Guide sets out the notification practices that significant institutions (SIs) acting as originators or sponsors of securitisation transactions are advised to follow in order to provide the ECB with the information required to comply with the risk retention, transparency and resecuritisation requirements under Articles 6 to 8 of the Securitisation Regulation (2017/2402/EU).

The ECB recommends that SIs follow the Guide on all securitisation transactions originating after 1 April 2022. The Guide will be updated periodically to reflect developments in the regulation and supervision of securitisations.

The ECB highlights that the Guide is non-binding and instead serves as a basis for supervisory dialogue.

The ECB consultation closes on 5 January 2022.

ECB Guide on the notification of securitisation transactions: Articles 6 to 8 of the Securitisation Regulation

Webpage

Press release

Bank of England

FPC O-SII buffer framework - Bank of England publishes Consultation Paper - 15 November 2021

The Bank of England (the Bank) has published a Consultation Paper on amendments to the Financial Policy Committee’s (FPC’s) framework for the other systemically important institutions (O-SII) buffer. Under the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014 (SI 2014/894), the FPC must have a framework for the O-SII buffer and review this framework at least every second year.

Following the FPC’s Q3 2021 review, the consultation proposes to:

  • change the metric used to determine the O-SII buffer rates from total assets to the UK leverage exposure measure; and
  • recalibrate the thresholds used to determine O-SII buffer rates to prevent an overall tightening or loosening of the framework relative to its pre-Covid-19 level.

If adopted, the changes would not take effect until after the PRA’s December 2022 review of O-SII buffer rates. Rates set in 2023 would apply from January 2025.

The consultation closes on 15 February 2022.

Consultation paper: Amendments to the FPC’s framework for the O-SII buffer

Prudential Regulation Authority

Domestic liquidity sub-groups - PRA publishes Policy Statement - 15 November 2021

The PRA has published a Policy Statement (PS26/21) on Domestic Liquidity Sub-Groups (DL sub-groups). PS26/21 provides feedback to responses to Consultation Paper CP19/21 on DL sub-groups and contains the PRA’s final policy. The purpose of the rules on DL sub-groups is to ensure that liquidity requirements are sufficiently prudent and proportionate when applied at the level of a DL sub-group.

PS26/21 is relevant to PRA-authorised banks, PRA-designated investment firms, and building societies. It is also relevant to UK financial or mixed financial holding companies that are immediate parent undertakings of firms that may be included in a DL sub-group. It is not relevant to credit unions.

When certain conditions are met, the Capital Requirements Regulation (CRR) allows the PRA to waive the application of liquidity requirements at the level of an individual firm to permit a firm to form a DL sub-group. Where a permission is granted, PRA requirements apply at the level of a DL sub-group on the basis of the consolidated situation of its members, rather than applying to member firms individually. HM Treasury will revoke this provision from 1 January 2022.

PS26/21 confirms that the PRA will implement its rules, as consulted on, to:

  • permit the inclusion in a DL sub-group of firms that are subsidiaries of a common intermediate UK qualifying parent undertaking that is not a bank or a PRA-designated investment firm (sibling DL sub-group); and
  • revise the conditions under which a firm would qualify for a DL sub-group permission and revise the factors that the PRA will take into account when considering DL sub-group permission applications.

In response to consultation feedback, the PRA has made several changes to the draft Statement of Policy published alongside CP5/21 (on the implementation of the Basel standards) to provide greater clarity on the PRA’s expectations in certain areas and enhance the proportionality of the PRA’s approach. These amendments clarify:

  • the information to be provided to demonstrate compliance with the conditions covering the governance arrangements of a DL sub-group; and
  • the circumstances in which a solo regulatory return for the Liquidity Coverage Ratio (LCR) and/or Net Stable Funding Ratio (NSFR) should be submitted with a DL sub-group.

The PRA expects firms to apply formally for LCR and NSFR DL sub-group permissions that are currently in force, or would enter into force, before 1 January 2022. All applications will be assessed under the final revised framework, with permissions taking effect from 1 January 2022.

A list of the PS26/21 appendices can be found on the webpage.

The policy changes will come into effect on 1 January 2022 to coincide with HM Treasury’s revocation of the relevant parts of the UK Capital Requirements Regulation.

Policy statement: Domestic Liquidity Sub-Groups (PS26/21)

Webpage

CRR - PRA publishes webpage - 16 November 2021

The PRA has published a webpage containing a table listing revoked UK Capital Requirements Regulation provisions and their corresponding PRA rules, as it is required to do under the Financial Services Act 2021.

Under the Act, HM Treasury has the power to revoke existing prudential regulation contained in the UK CRR. The PRA is able to make rules that relate to these revoked matters and the standards developed by the Basel Committee on Banking Supervision (Basel Committee). The PRA is required to publish information detailing whether, and if so, how, its rules correspond to a UK CRR provision revoked by HM Treasury. This information is provided on the PRA’s webpage.

PRA Website: CRR rules corresponding to revoked onshore provisions

Financial Conduct Authority

Debt packagers - FCA publishes Consultation Paper - 17 November 2021

The FCA has published a Consultation Paper (CP21/30) containing proposals to prohibit debt packager referral fees to protect consumers. The proposals aim to reduce the risk that consumers receive non-compliant debt advice that is biased towards debt solutions which may not meet their needs, but would generate referral fees for the debt advice firm.

The prohibition follows the FCA’s concerns, set out in 2018 and 2020, on the quality of advice provided by debt packagers and its further concerns identified through recent supervision work that some debt packager firms:

  • appear to have manipulated consumers’ income and expenditure to meet the criteria for an Individual Voluntary Arrangement (IVA) or Protected Trust Deed (PTD);
  • used persuasive language to promote these products to consumers without fully explaining the risks involved; and
  • provided advice that did not accurately reflect conversations with consumers or information that consumers had given.

The FCA’s proposal is intended to remove the conflict of interest present in the debt packager business model and thereby reduce the risk of harm to consumers. If introduced, the FCA will monitor the impact on debt packagers, including the number that: (i) leave the market; and (ii) modify their business model.

The consultation closes on 22 December 2021. Subject to consultation feedback, the FCA indicates the new rules could come into force in April 2022.

FCA Consultation Paper: Debt packagers: proposals for new rules (CP21/30)

Webpage

Press release

Payment Systems Regulator

APP scams - PSR publishes Consultation Paper - 18 November 2021

The Payment Systems Regulator (PSR) has published a Consultation Paper (CP21/10) setting out its plans to stop authorised push payment (APP) scams and protect people who fall victim to them. The Consultation Paper follows the PSR’s February 2021 call for views on the proposed measures (CP21/3), which have since been developed further.

The PSR proposes to:

  • require the 12 largest payment service providers (PSPs) in the 12 largest banking groups in Great Britain, and the two largest banks in Northern Ireland outside those banking groups, to publish data on: (i) their performance relating to APP scams; (ii) reimbursement levels for victims; and (iii) to which PSPs their fraud payments have been sent;
  • support and require industry to improve intelligence sharing; and
  • make reimbursement for scam victims mandatory, in line with future legislative changes as announced by HM Treasury.

The Consultation Paper also notes the value in voluntary action by PSPs to improve outcomes for customers. The PSR will facilitate the coordination of industry coming together to solve this issue and will work alongside other regulators to co-ordinate actions tackling APP fraud. It is also considering further measures, including how to appropriately balance liability between sending and receiving PSPs.

The consultation closes on 14 January 2022. The PSR aims to set out its policy position and accompanying action on this matter by H1 2022.

PSR Consultation Paper: Authorised push payment (APP) scams (CP21/10)

Webpage

Press release

Competition and Markets Authority

SME Banking Undertakings - CMA publishes letter to Danske Bank - 12 November 2021

The Competition and Markets Authority (CMA) has published a letter to Danske Bank (a trading name of Northern Bank Limited) (DB) in relation to its breach of the Small and Medium-sized Enterprises Banking Undertakings 2002 (the SME Banking Undertakings), together with DB’s Action Plan to prevent further breaches.

The breach was in relation to the prohibition of bundling loans (where business account is made a condition of receiving a loan) under the SME Banking Undertakings. From 4 May 2020 to 31 March 2021, DB informed customers they needed to set up a business current account in order to apply for a bounceback loan bounce back loan under the government’s Bounceback Loan Scheme. This resulted in just over 200 SME customers opening business current accounts in order to receive such a loan. DB notified the CMA of the breach on 30 April 2021, following the CMA’s announcement on 30 March 2021 of an earlier breach by DB.

DB wrote to all affected customers offering refunds of business account charges and fees, and indicating that they could switch to a fee-free loan servicing account. DB paid out over £9,000 in compensation, bringing the compensation for both breaches to approximately £26,000. The CMA indicates that it worked with DB on the bank’s Action Plan, which includes measures such as staff training and an independent audit of its compliance controls and practices.

In view of the challenges presented by the COVID-19 pandemic, and the actions taken by DB to rectify the breach and prevent further breaches, the CMA has concluded that no formal enforcement action is required at present.

CMA Letter to Danske Bank: Breach of the SME Banking Undertakings

Danske Bank's Action Plan

Webpage

Securities and Markets

Issue 1136 / 18 November 2021

HEADLINES

  1. International Organization of Securities Commissions
    1. Commodity derivatives markets - IOSCO publishes Consultation Report on regulation and supervision - 15 November 2021
  2. European Securities and Markets Authority
    1. LIBOR - ESMA publishes letter to European Commission - 16 November 2021
    2. LIBOR - ESMA publishes Final Report - 18 November 2021
    3. CCP Recovery and Resolution Regulation - ESMA publishes six ConsultationPapers - 18 November 2021
  3. UK Parliament
    1. Critical Benchmarks (References and Administrators’ Liability) Bill - House of Lords publishes updated explanatory notes - 17 November 2021
  4. Financial Conduct Authority
    1. Market Conduct - FCA publishes Primary Market Bulletin No. 36 and Primary Market Technical Note- 15 November 2021
    2. Market conduct - FCA publishes Market Watch issue 68 - 16 November 2021
    3. LIBOR - FCA publishes statement on legacy use of synthetic LIBOR rates and no new use of US dollar LIBOR, together with draft Notices and Feedback Statement FS21/11 - 16 November 2021
  5. Financial Conduct Authority and Financial Reporting Council
    1. Structured reporting - FCA and FRC publish joint Dear CEO letter - 16 November

International Organization of Securities Commissions

Commodity derivatives markets - IOSCO publishes Consultation Report on regulation and supervision - 15 November 2021

The International Organization of Securities Commissions (IOSCO) has published a Consultation Report on revising its principles for the regulation and supervision of commodity derivatives markets (CR05/21). The principles were first published in 2011 and aim to ensure that such markets facilitate price discovery and hedging, while remaining free from manipulation and abusive practices.

The updated principles reflect developments including new regulatory reforms, the growing reliance on electronic trading and data, emerging new technologies and products, and unexpected disruptions beyond market dynamics. IOSCO has also considered the importance of mitigating the impacts of unexpected external events, such as spikes in oil prices or COVID-19, on commodity derivatives markets.

IOSCO is seeking feedback on whether the revised principles reflect the changes, trends and activities in the commodity derivatives markets since 2011.

The consultation closes on 17 January 2022.

Consultation report: Principles for the Regulation and Supervision of Commodity Derivatives Markets

Press release

European Securities and Markets Authority

LIBOR - ESMA publishes letter to European Commission - 16 November 2021

The European Securities and Markets Authority (ESMA) has published a letter from the Working Group on Euro risk-free rates (RFRWG) to the European Commission, dated 15 November, regarding the potential designation of statutory replacement rates for the sterling London Inter-Bank Offered Rate (GBP LIBOR) and the Japanese yen London Inter-Bank Offered Rate (JPY LIBOR). The letter follows the outcome of the Task Force discussion on ‘tough legacy’ contracts (those for which active transition or inclusion of fallbacks will not be possible by the end of 2021). The Task Force was convened following a RFRWG meeting held on 1 July 2021.

The letter follows the UK authorities’ announcement that they will mandate the ICE Benchmark Administration (IBA) to continue publishing GBP LIBOR and JYP LIBOR beyond the end of 2021 under a revised ‘synthetic’ methodology. These rates will have limited publication to one year, with an annual review for synthetic GBP LIBOR for up to ten years.

The letter indicates the Task Force’s view, which is supported by the RFRWG, that the EU’s approach to tough legacy contracts should align with that taken by the UK and it should adopt specific legislation to provide legal certainty in relation to contracts linked to synthetic LIBOR. The Task Force acknowledges that this approach will create challenges within the legal framework of the EU Benchmark Regulation ((EU) 2016/1011) (BMR) but will provide a consistent approach for all tough legacy contracts.

The letter requests consideration of the Task Force’s proposal by, and welcomes further discussion on it with, the Commission.

Letter from the Chairman of the EUR Risk Free Rates Working Group to the European Commission

LIBOR - ESMA publishes Final Report - 18 November 2021

ESMA has published a Final Report (ESMA70-156-4953) on draft Regulatory Technical Standards (RTS) on clearing and derivative trading obligations in anticipation of the transition from the Euro Overnight Index Average (EONIA) and the London Inter-Bank Offered Rate (LIBOR) to new Risk-Free Rates (RFRs). The draft RTS amend the RTS on the clearing obligation and the derivative trading obligation that ESMA developed under Article 5(2) of the European Market Infrastructure Regulation ((EU) 648/2012) (EMIR) on over-the-counter (OTC) derivatives, central counterparties and trade repositories, and under Article 32 of the Markets in Financial Instruments Regulation ((EU) 600/2014) (MiFIR).

The Final Report follows ESMA’s Consultation Paper (ESMA70-156-4236), published in July 2021, and proposes three amendments:

  • removal of the interest rate derivatives classes referencing GBP and USD LIBOR from both the clearing obligation and derivative trading obligation;
  • removal of the interest rate derivatives classes referencing the Euro Overnight Index Average (EONIA) and JYP LIBOR from the clearing obligation; and
  • introduction of interest rates derivatives classes referencing the Euro Short Term Rate (€STER), the Sterling Overnight Index Average (SONIA) and the Secured Overnight Financing Rate (SOFR) to the clearing obligation.

ESMA will continue to monitor benchmark transition in the OTC interest rate derivatives market and indicates it may need to review the scope of the clearing obligation and/or the derivatives trading obligation in the future.

The draft RTS have been submitted to the European Commission for endorsement in the form of Commission Delegated Regulations. Following a non-objection review by the European Parliament and Council of the EU, they will enter into force after publication in the Official Journal of the European Union. ESMA’s proposal is for the changes to apply from 3 January 2022, or 20 days after publication, whichever is the latest.

ESMA Final Report: On draft RTS on the clearing and derivative trading obligations in view of the benchmark transition to risk free rates (ESMA70-156-4953)

Press release

CCP Recovery and Resolution Regulation - ESMA publishes six Consultation Papers - 18 November 2021

ESMA has published six Consultation Papers reflecting mandates introduced by the Regulation on the recovery and resolution of central counterparties (CCPs) ((EU) 2021/23) (CCP Recovery and Resolution Regulation or CCPRRR).

Four of the Consultation Papers contain draft Regulatory Technical Standards (RTS), and two contain draft Guidelines. They are intended to be a step towards ensuring consistency across EU CCP resolution regimes in line with the highest international standards.

The Consultation Papers on draft RTS cover the areas of:

  • resolution colleges;
  • the valuation of CCPs’ assets and liabilities in resolution;
  • the safeguards for clients and indirect clients; and    
  • the content of resolution plans.        

The Consultation Papers on the draft Guidelines cover the areas of:

  • the valuation in termination of contracts; and
  • the application of the circumstances under which a CCP is deemed to be failing or likely to fail.

The closing date for responses is 24 January 2022. ESMA will organise a public hearing before then, with registrations opening in December 2021. ESMA aims to publish the final reports by Q2 2022.

ESMA consultation on draft RTS: resolution colleges (ESMA70-151-3428)

ESMA consultation on draft RTS: content of CCP resolution plans (ESMA91-372-1469)

ESMA consultation on draft RTS: valuations (ESMA70-151-3384)

ESMA consultation on draft RTS: safeguards for clients and indirect clients (ESMA70-151-3239)

ESMA consultation on draft Guidelines: applications of the circumstances under which a CCP is deemed to be failing or likely to fail (ESMA91-372-1495)

ESMA consultation on draft Guidelines: methodology for position allocation tool valuation (ESMA70-151-3396)

Press release

UK Parliament

Critical Benchmarks (References and Administrators’ Liability) Bill - House of Lords publishes updated explanatory notes - 17 November 2021

The House of Lords has published an updated version of the explanatory notes to the Critical Benchmarks (References and Administrators’ Liability) Bill (the Bill). The Bill was introduced to the House of Lords and had its first reading on 9 September 2021.

The explanatory notes now include an additional section relating to fast-track legislation. The section states that the government intends to ask Parliament to expedite the parliamentary progress of the Bill, in order for it to obtain Royal Assent before the end of 2021. At this point, the FCA will exercise its powers under the UK Benchmarks Regulation (UK BMR) to provide for the continuity of certain LIBOR contracts which rely on a synthetic methodology.

The Bill addresses the residual risk of legal uncertainty in relation to such contracts and grants immunity from claims for damages to the administrator of a critical benchmark that is designated as unrepresentative under Article 23A of UK BMR, where the administrator acts in accordance with specific requirements imposed upon it by the FCA.

Explanatory notes: Critical Benchmarks (References and Administrators’ Liability) Bill

Financial Conduct Authority

Market Conduct - FCA publishes Primary Market Bulletin No. 36 and Primary Market Technical Note - 15 November 2021

The FCA has published its Primary Market Bulletin No. 36. which sets out information on the FCA's disclosure expectations and supervisory strategy in relation to the Task Force on Climate-related Financial Disclosures (TCFD) aligned climate-related disclosure requirements for premium listed commercial companies in Listing Rule 9.8.6R(8) and, subject to the making of final rules, for certain standard listed companies in the proposed new Listing Rule 14.3.27R.

Guidance relating to the FCA's disclosure expectations relating to these requirements is set out in a new technical note (Primary Markets/TN/802.1 TCFD aligned disclosure requirements for listed companies) in respect of which the FCA is seeking feedback. The technical note includes, among other things, details of the FCA's expectations where a listed company has not included climate-related financial disclosures consistent with all TCFD recommendations and recommended disclosures in either its annual financial report or in another document.

FCA Primary Market Bulletin No. 36

FCA Primary Market Technical Note: TCFD aligned climate-related disclosure requirements for listed companies

Market conduct - FCA publishes Market Watch issue 68 - 16 November 2021

The FCA has published issue 68 of Market Watch, its newsletter on market conduct and transaction reporting issues. The new issue focuses on web-based trading platforms and highlights the FCA’s concerns regarding gaps in users’ surveillance of web-based platform activity. It covers matters on monitoring gaps in fixed income and rates markets, including:

  • market abuse surveillance: the FCA is concerned that users of web-based platforms may not be able to monitor all of their orders to detect potential market abuse, in line with Article 16(2) of the UK Market Abuse Regulation (UK MAR);
  • data challenges: most users report initial challenges in obtaining useable data in a format suitable for surveillance;
  • compliance awareness: there is disparity in the knowledge of users’ compliance and/or surveillance teams, with many failing to ensure that order and trade data are captured for surveillance purposes. The FCA also highlights disparity in the steps users take where they have identified a gap in data capture;
  • market abuse risk assessments: assessments often fail to include business entered on web-based platforms, particularly orders which are deleted or otherwise do not result in a trade;
  • record keeping: users failing to capture all trade and order data will not be meeting Article 25(1) of UK Markets in Financial Instruments Regulation (UK MiFIR), which requires investment firms to keep data relating to all orders and transactions for five years. Failure to capture and record this data may also affect the FCA’s ability to monitor the market;
  • onboarding governance: the FCA has observed firms using web-based trading platforms before completing formal new business procedures. Formal procedures and good governance for onboarding new platforms will allow firms to capture and monitor all relevant trade and order data;
  • firm rationales for failings: the FCA will continue to observe firms using questionable rationales to justify potential failings to meet their obligations under UK MAR. Where the PRA has not published enforcement action on particular failings, firms should not assume the PRA will not take appropriate enforcement action; and
  • operators of web-based platforms: operators of trading venues are reminded of their obligations to undertake effective monitoring to prevent, identify and report potential market abuse, and of their order data recording obligations under Article 25 of UK MiFIR.

The FCA will also continue to visit firms and venues to assess their suspicious transaction and order reporting (STOR) frameworks.

Newsletter: Market Watch 68

LIBOR - FCA publishes statement on legacy use of synthetic LIBOR rates and no new use of US dollar LIBOR, together with draft Notices and Feedback Statement FS21/11 - 16 November 2021

The FCA has confirmed in a statement that it will allow the temporary use of the one, three and six-month sterling and Japanese yen London Inter-Bank Offered Rate (LIBOR) rates on a ‘synthetic’ basis in all legacy LIBOR contracts, other than cleared derivatives, that have not been changed at or ahead of the end of 31 December 2021. The FCA’s permission will be for one year from 1 January 2022 with power to extend it for up to 10 years. The regulator has also confirmed that the use of USD LIBOR will not be allowed in most new contracts written after 31 December 2021. This follows the FCA’s consultation on these proposals (CP21/29), which closed on 20 October 2021.

CP21/29 also confirmed that the FCA will require ICE Benchmark Administration (IBA) to continue publication of the same sterling and Japanese LIBOR rate settings using a synthetic methodology for the duration of 2022, under its powers in Article 23D(2) of the UK Benchmarks Regulation (UK BMR). The FCA consulted on this point, and the synthetic methodology, in its Consultation Paper CP21/19, which it proposed should be the forward-looking term version of the relevant risk-free rates, Sterling Overnight Indexed Average (SONIA) and Tenge Overnight Index Average (TONIA), plus the International Swaps and Derivatives Association (ISDA) credit spread adjustment.

The regulator has now published Feedback Statement FS 21/11, which confirms large-scale support for these proposals. In response to consultation feedback, it has made one change to its proposed approach: adjusting its proposed methodology for each of the three Japanese yen LIBOR settings to account for day count differences between Japanese yen LIBOR and Tokyo Term Risk Free Rate (TORF).

Alongside FS21/11, the FCA has published:

  • a draft notice under Article 21A of the UK BMR, confirming that the use of USD LIBOR will not be allowed in most new contracts written after 31 December 2021;
  • a draft notice under Article 23C of the UK BMR, setting out permitted legacy use of LIBOR by supervised entities;
  • a notice under Annex IV of the UK BMR of proposed modifications to the UK BMR and its relevant delegated regulations;
  • a press release, stating that the FCA has notified lenders who are replacing LIBOR with an alternative rate in their contracts that they must treat customers fairly; and
  • an updated Q&A, setting out information for borrowers on mortgage interest rates and LIBOR.

FCA statement on legacy use of synthetic LIBOR rates and no new use of US dollar LIBOR

Webpage

LIBOR Notice: Article 21A Benchmarks Regulation

LIBOR Notice: Article 23C Benchmarks Regulation

LIBOR Notice: Annex 4 Benchmarks Regulation

Feedback statement: Article 23D BMR Decision for 6 sterling and yen LIBOR versions (FS21/11)

Feedback statement (FS21/11) webpage

Updated Q&A: Mortgage interest rates and LIBOR: information for borrowers

Financial Conduct Authority and Financial Reporting Council

Structured reporting - FCA and FRC publish joint Dear CEO letter - 16 November

The FCA and the Financial Reporting Council (FRC) have published a joint ‘Dear CEO’ Letter from Clare Cole, FCA Director of Market Oversight, and Mark Babington, FRC Executive Director of Regulatory Standards.

The letter highlights the requirements for certain companies to produce their 2021 annual financial reports in a structured XHTML web browser format, under the Disclosure Guidance and Transparency Rule (DTR) 4.1.14R. It also sets out the FCA and FRC’s expectations on quality, which include that:

  • issuers are expected to devote the same level of care and attention to the annual financial report in XHTML as they do to its production in PDF or printed form;
  • issuers are strongly encouraged to take advantage of the opportunity to file in the new electronic format voluntarily to help ensure that they are familiar with the requirements and the submission process before the requirements become mandatory. Issuers that have already filed their annual financial reports in a non-structured format may file a structured version separately, and at a later date, but must ensure that the underlying information within the reports is identical; and
  • issuers may want to consider the key issues identified in the FRC’s review of filings by issuers who have filed in the new format voluntarily in advance of the effective date of the new rules.

The FRC and the FCA will consider jointly the quality and usability of the reports in the first year of mandatory adoption, and a follow-up to the FRC review of best practices will be published in 2022. The letter makes clear than both bodies will consider further actions if their expectations on quality are not met.

‘Dear CEO’ Letter from FCA Director of Market Oversight, Clare Cole, and FRC Executive Director of Regulatory Standards, Mark Babington

Press release

See the Banking and Finance section for an item on the notification of securitisation transactions.

Asset Management

Issue 1136 / 18 November 2021

HEADLINES

  1. European Securities and Markets Authority and the European Banking Authority
    1. IFD - SREP - ESMA and EBA publish joint Consultation Paper - 18 November 2021
  2. European Banking Authority
    1. IFR - Pillar 2 requirements - EBA publishes Consultation Paper on draft RTS - 18 November 2021

European Securities and Markets Authority and the European Banking Authority

IFD - SREP - ESMA and EBA publish joint Consultation Paper - 18 November 2021

The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) have published a joint Consultation Paper (EBA/CP/2021/35 / ESMA35-36-2418) on draft guidelines for common procedures and methodologies for the supervisory review and evaluation process (SREP) under the Investment Firms Directive ((EU) 2019/2034) (IFD).

The draft SREP guidelines set out the process and criteria for the main SREP elements: business models; governance arrangements and firm-wide controls; risks to and adequacy of capital; and liquidity risk and adequacy. The guidelines also cover the proportionate application of a scoring system depending on a firm’s nature, size and activities; the monitoring of key indicators; cross-border application; and the use of supervisory measures.

The consultation will close on 18 February 2022 and a public hearing will be held on 18 January 2022.

ESMA / EBA Consultation Paper (EBA/CP/2021/35 / ESMA35-36-2418)

Webpage

ESMA press release

EBA press release

European Banking Authority

IFR - Pillar 2 requirements - EBA publishes Consultation Paper on draft RTS - 18 November 2021

The European Banking Authority (EBA) has published a Consultation Paper (EBA/CP/2021/34) relating to draft Regulatory Technical Standards (RTS) on the additional own funds requirements (Pillar 2 add-ons) under the Investment Firms Regulation ((EU) 2019/2033) (IFR).

The draft RTS relate to how national competent authorities (NCAs) should measure risk to capital for investment firms where those risks are not covered, or are not covered sufficiently, by parts three or four of the IFR. The draft RTS set out detailed guidance on specific indicative metrics that can be used for measuring these risks, including in relation to materiality and adequacy of capital.

The consultation closes on 18 February 2022 and a public hearing will be held on 18 January 2022.

EBA Consultation Paper EBA/CP/2021/34         

Webpage

Press release

Insurance

Issue 1136 / 18 November 2021

HEADLINES

  1. International Association of Insurance Supervisors
    1. Diversity, equity and inclusion - IAIS publishes statement - 16 November 2021
    2. Liquidity metrics - IAIS publishes Consultation Document - 18 November 2021
  2. European Commission
    1. Solvency II - European Commission publishes Implementing Regulation for calculating technical provisions and basic own funds - 12 November 2021

International Association of Insurance Supervisors

Diversity, equity and inclusion - IAIS publishes statement - 16 November 2021

The International Association of Insurance Supervisors (IAIS) has published a statement on ‘Diversity, Equity and Inclusion’ (DEI) in insurance supervision. This mirrors several strategic themes identified by the IAIS in its Strategic Plan 2020-2024.

The statement highlights the growing acknowledgment that advancing DEI within insurers’ organisations and business models supports sound prudential and consumer outcomes, and sustainability objectives.

The statement notes that DEI is particularly relevant to conduct and culture, as well as financial inclusion, sustainable economic development and technological innovation. The IAIS will deepen and strengthen its work relating to these themes through:

  • exploratory work on the insurance sector’s effects and steps taken by supervisors in support of DEI objectives, including via engagement with stakeholders;
  • incorporating relevant DEI aspects into ongoing IAIS projects and activities, in particular those related to corporate governance, culture and conduct; and
  • exploring opportunities to cooperate with other international organisations and partners to encourage supervisory dialogue and the sharing of good practices.

IAIS Statement: The importance of Diversity, Equity and Inclusion (DE&I) considerations in insurance supervision

Liquidity metrics - IAIS publishes Consultation Document - 18 November 2021

The IAIS has published a Consultation Document on Phase 2 of the development of liquidity metrics.

The IAIS split the development of liquidity metrics into two phases. Phase 1 (2020-21) focused on the development of an Insurance Liquidity Ratio (ILR) which uses an exposure approach (EA), as an ancillary indicator for the monitoring of liquidity risk. Phase 2 (2021-22) follows the November 2020 Phase 1 interim public consultation, and focuses on two approaches that the IAIS has developed to monitor liquidity risk: (i) the company projection approach; and (ii) the exposure approach including the ILR.

The liquidity metrics will assist the IAIS in monitoring the global insurance industry’s liquidity risk and its assessment of insurers’ liquidity exposure as part of its General Monitoring Exercise (GME) – a key element of the IAIS’ holistic framework for the assessment and mitigation of systemic risk in the global insurance sector. The liquidity metrics highlight potential vulnerabilities, risk drivers and trends of insurers and the insurance sector. The liquidity metrics are not intended to be a binding regulatory requirement, and are simply a monitoring tool.

The IAIS plans to finalise Phase 2 in 2022 and, as part of this, publish a report by November 2022. The IAIS notes it may decide to continue the liquidity metrics project to refine the calibration of the company projection approach / exposure approach beyond 2022.

The deadline for feedback is 23 January 2022 and a public background session will be held via webinar on 30 November 2021.

IAIS Consultation Paper: On the Development of Liquidity Metrics: Phase 2

Webpage

Press release

European Commission

Solvency II - European Commission publishes Implementing Regulation for calculating technical provisions and basic own funds - 12 November 2021

The European Commission has published Commission Implementing Regulation (EU) 2021/1964 under the Solvency II Directive (2009/138/EC) (Solvency II).

The Regulation applies to the calculation of technical provisions and basic own funds with reference dates between 30 September 2021 to 20 December 2021. It aims to ensure uniform conditions for these calculations across insurance and reinsurance firms, which the Commission highlights is important for prudential reasons. The technical information covers: relevant risk-free-rate term structures; fundamental spreads for the calculation of the matching adjustment; and volatility adjustment for each relevant national insurance market.  

The Regulation will enter into force on the day following its publication in the Official Journal of the European Union.

Commission Implementing Regulation (EU) 2021/1964

Enforcement

Issue 1136 / 18 November 2021

HEADLINES

  1. Financial Conduct Authority
    1. AML - FCA fines Sunrise Brokers LLP - 12 November 2021

Financial Conduct Authority

AML - FCA fines Sunrise Brokers LLP - 12 November 2021

The FCA has issued a final notice to interdealer broker Sunrise Brokers LLP (Sunrise) fining it £642,000 for failings in relation to its anti-money laundering systems and controls, which led to the risk of it being used to facilitate fraudulent trading and money laundering in relation to cum-ex trading. Cum-ex trading is share trading carried out just before the last cum-dividend date. In certain jurisdictions this can allow a party to claim a tax rebate on withholding tax to which it is not entitled.

The FCA found that between February and November 2015, Sunrise breached:

  • FCA Principle 3 as it had inadequate systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by four authorised entities known as the Solo Group; and
  • FCA Principle 2 as it did not exercise due skill, care and diligence in applying its anti-money laundering policies and procedures. It failed to properly assess, monitor and mitigate the risk of financial crime in relation to the Solo Group’s clients and the purported trading.

The FCA found that the Solo Group’s trading was characterised by a pattern of extremely high value OTC equity trading, back-to-back securities lending and forward transactions involving EU equities, on or around the last cum-dividend date. Following the purported cum-dividend trading that took place on designated dates, the same trades were subsequently reversed over several days or weeks to neutralise the apparent shareholding positions. The trading appears to have been carried out to allow the arranging of withholding tax (WHT) reclaim schemes in Denmark and Belgium.

During the relevant period, on behalf of the Solo Group clients Sunrise executed purported over the counter (OTC) equity cum-dividend trades to the value of approximately £25.4 billion in Danish equities and £11.2 billion in Belgian equities. It received commission of £466,652.

The FCA states that this is the second case concerning cum-ex trading, with both cases involving the Solo Group. The first case was against Sapien Capital Limited, previously covered in this Bulletin.

Final Notice: Sunrise Brokers LLP

Press Release