The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Risk, capital and financial stability regulatory developments
Recent periods of financial stress and the proliferation of risks across the financial system are fueling the development of regulatory initiatives to strengthen requirements and promote international best practice. From the EU to Korea, the following global developments in risk, capital, and financial stability from the past month stand out:
- International: Financial Stability Board sets out 2024 work program
- EU: European Banking Authority revises reporting requirements for market risk
- Bahrain: Central Bank launches financial market infrastructure oversight framework
- US: Basel III comment period closes
- UK: Prudential Regulation Authority sets out 2024 priorities for insurance sector
- Korea: Financial Services Commission plans improvements to competitiveness of publicly offered funds
- India: Securities and Exchanges Board consults on Alternative Investment Funds framework
FSB sets out 2024 work program
The Financial Stability Board (FSB) published its work program for 2024 that outlines priority areas of work and new initiatives.
In summary: The areas of focus for the FSB over the coming year include:
- Supporting global cooperation on financial stability: The FSB continues to promote financial stability in a rapidly changing macroeconomic environment while vulnerabilities from structural change continue to emerge in areas such as climate change, cyber, and crypto-asset markets.
- Completing resolution reforms: The FSB will continue to promote the full implementation of the Key Attributes of Effective Resolution Regimes for Financial Institutions across all sectors. The focus will be to address lessons learned from the March 2023 banking turmoil, including work on deposit behavior, the role of technology and social media, and interest rate and liquidity risk in the financial system. The FSB will also finalize its proposals for resources and tools to support the resolution of a central counterparty (CCP) and publish the list of insurers subject to the resolution planning standards.
- Non-bank financial intermediation resilience: The FSB will continue to advance its work program for enhancing NBFI resilience by exploring policy options for non-bank financial leverage; enhancing liquidity preparedness of non-bank market participants for margin and collateral calls; and conducting new work on the functioning and resilience of repo markets.
- Enhancing cross-border payments: The FSB will issue recommendations to promote alignment and interoperability in data frameworks related to cross-border payments and develop recommendations to strengthen the consistency of regulation and supervision of banks and non-banks providing cross-border payment services.
- Digital innovation: The FSB will complete work on the financial stability implications of tokenization; prepare a report for the G20 on recent developments in AI and their potential implications for financial stability; and, in its efforts to enhance cyber resilience, design a format for incident reporting exchange (FIRE) to promote greater convergence in financial institutions’ reporting of incidents to financial authorities.
- Climate change: Work this year will include analysis of the relevance of transition plans for financial stability and, for the G20, a stocktake of regulatory and supervisory initiatives related to the identification and assessment of nature-related financial risks. The FSB will also prepare a further progress report on achieving consistent climate-related financial disclosures.
EBA revises reporting requirements for market risk
The European Banking Authority (EBA) published amendments on the reporting requirements for market risk as the implementation of the Fundamental Review of the Trading Book (FRTB) in the EU approaches.
In more detail: The amendments from the EBA revise the information to be reported on the own-funds requirements under the alternative approaches and adds reporting on reclassifications of instruments between the regulatory books.
- The amendments complement the high-level information on the alternative standardized approach (ASA) that has been reported since 2021, with details on the instruments and positions in scope of the ASA, as well as information on the instruments and positions in scope of the alternative internal model approach (AIMA)
- The amendments also introduce a simple template capturing information on the reclassification of instruments between the banking and trading books of an institution
Timeline: The revised reporting requirements, excluding the reporting on reclassifications, are first expected to apply as of the reference date of 31 March 2025.
Central Bank of Bahrain launches Financial Market Infrastructures and Payment Oversight Framework
The Central Bank of Bahrain (CBB) published the Financial Market Infrastructures and Payment Oversight Framework to boost the reliability and resilience of Bahrain’s financial system, including regulation for Critical Service Providers, Open Banking, and Cyber Resilience.
In more detail: These are high-level principles setting out key characteristics of an effective oversight framework for financial market infrastructure that facilitate the clearing, settlement, and recording of monetary and other financial transactions.
Mitigation of risks: The primary focus of the oversight framework is the mitigation of financial risks associated with FMIs and Payment Systems, including:
- Systemic risk: The inability of one or more participants to perform as expected could cause other participants to be unable to meet their obligations when due.
- Legal risk: The risk of the unexpected application of a law or regulation, usually resulting in a loss. Legal risk can also arise if the application of relevant laws and regulations is uncertain.
- Credit risk: The risk that a counterparty, whether a participant or other entity, will be unable to meet its financial obligations fully when due, or at any time in the future.
- Liquidity risk: The risk that a counterparty, whether a participant or other entity, will have insufficient funds to meet its financial obligations as and when expected, although it may be able to do so in the future.
- General business risk: The risks related to the administration and operation of an FMI as a business enterprise, excluding those related to the default of a participant or another entity, such as a settlement bank, global custodian, or another FMI.
- Custody and investment risks: The risk of loss on assets held in custody in the event of a custodian’s (or sub-custodian’s) insolvency, negligence, fraud, poor administration, or inadequate recordkeeping. Investment risk is the risk of loss faced by an FMI when it invests its own or its participants’ resources, such as collateral.
- Operational risk: The risk that deficiencies in information systems or internal processes, human errors, management failures, or disruptions from external events will result in the reduction, deterioration, or breakdown of services provided by an FMI.
Financial Stability Report (FSR): A key component of CBB’s financial sector surveillance framework is the FSR, which is prepared for the CBB management semi-annually, and is also a key tool aimed at informing the public.
US Basel III Endgame comment period closes
The public comment period on the joint notice of proposed rulemaking from the Federal Reserve, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation, closed on January 16, 2024.
Broad pushback expected: Within days, hundreds of comments – ranging from one page, to over three hundred – filled the comment file. Respondents raised a variety of concerns, from issues under the Administrative Procedures Act, which governs “notice and comment” rulemaking, to the potential negative impacts of increasing capital requirements on lending and bank activity.
What next? The Agencies are expected to publish their analysis of an impact study that was conducted for public comment. This is an unusual step, but given the scope and complexity of the proposal, it would seem the Agencies are looking for as much feedback from the public as possible.
UK PRA sets out 2024 priorities for insurance sector
The UK Prudential Regulation Authority (PRA) has written to the CEOs of PRA-regulated insurance firms to set out its supervisory priorities for 2024.
Insurance industry trends: With the projected acceleration of the transfer of liabilities from defined benefit pension schemes to life insurers, the PRA notes the insurance industry is growing in complexity.
Credit risk: The PRA expects firms to understand their credit-risk exposures and that their credit-risk management and internal credit-assessment framework are appropriate.
- Throughout 2024, the PRA will continue to focus on the efficacy of firms’ credit-risk management capabilities as firms aim to continue to invest in a wider range of credit-risk assets
- The PRA will also seek further assurance that firms’ internal credit assessments appropriately reflect the risk profile of their asset holdings and assess their current and forward-looking validation plans and approaches
Liquidity risk: Events such as the Dash for Cash in March 2020 and the Liability-Driven Investment shock in September 2022 led to derivative-driven liquidity strains for some insurers as well as highlighting gaps in insurers’ liquidity-risk frameworks.
- During these events, the PRA sought to receive timely and accurate data on firms’ positions and exposures, and is looking to collect this information on a more consistent and systematic basis in advance of potential future market stresses
- During 2024, the PRA will work to develop liquidity reporting requirements that will provide information on liquidity-risk exposures on a consistent and timely basis
Operational resilience: The PRA expects boards and senior management to actively oversee the delivery of their firm’s operational resilience program.
- By no later than March 2025, firms should be able to demonstrate that they can remain within impact tolerances for all their important business services (IBS)
Ease of exit: The PRA will consult shortly on requirements for insurers to prepare plans for an orderly solvent exit as part of their business-as-usual activities.
Regulatory reform: The PRA is considering the feedback on the technical details of options for regulatory reform, to create the Solvency UK regime. In 2024 it plans to publish final policy statements to ensure the changes to Solvency UK can be completed by the end of the year.
Stress testing: The next stress test for major life insurers will be in 2025 and the PRA will publish an approach document in 2024. Also in 2025, the PRA looks to run the PRA’s first dynamic stress test, involving simulating a sequential set of adverse events over a short period of time, and the PRA will provide more details of this exercise during the first half of this year.
Climate-related financial risk: As firms embed climate risk within their risk-appetite statements, sources of climate risk should be considered across both sides of an insurer’s balance sheet.
FSC plan improvements to competitiveness of publicly offered funds
Korea’s Financial Services Commission (FSC) held meetings with experts and related authorities to discuss ways to improve the competitiveness of the publicly offered funds market.
Wider context: These plans are part of a government policy drive to resolve the “Korea discount”, i.e. the persistent undervaluation of Korean companies in stock markets.
How will the FSC’s plan be implemented?
- First, the plan will boost asset managers’ accountability by requiring them to more regularly conduct evaluations on alternative investment assets and to more accurately advertise fees for exchange-traded funds (ETFs).
- Second, the plan will cut costs and enhance convenience by only allowing publicly offered funds available for trading over-the-counter (OTC) to list on the exchange.
- Third, the plan will upgrade relevant regulatory infrastructure to enhance investor convenience, such as allowing fintech businesses to provide a comparison and recommendation service, and expanding the scope of overseas funds.
Timeline: The proposed measures are expected to go into effect from the first half of 2024, or be submitted to the National Assembly for an amendment process in the second half of 2024.
In summary: Korea’s FSC aims to improve the competitiveness of publicly offered funds by cutting transaction costs, strengthening product marketability, and boosting transaction convenience.
SEBI consults on Alternative Investment Funds framework
The Securities and Exchange Board of India (SEBI) is consulting on a proposal to restore trust and prevent circumvention of the relevant rules for Alternative Investment Funds (AIFs).
Context: The AIF industry in India has grown considerably but compared to other SEBI-registered investment channels, such as Mutual Funds and Portfolio Management Services, AIFs have a relatively light-touch regulatory regime.
International regulatory focus: There are heightened global regulatory concerns around the private equity industry as illustrated by IOSCO’s report on emerging risks in private finance (September 2023) and new rules adopted by the US Securities and Exchange Commission (SEC) for regulation of private fund advisors.
Proposed regulatory approach: SEBI is looking to balance the need to prevent undesirable misuse and obtain the necessary data for monitoring with the importance of ensuring the flexibility of AIFs to carry out legitimate investment activity.
- SEBI proposes to introduce a general obligation on AIFs, managers and their key management personnel to ensure their operations and investments do not facilitate circumvention of regulations administered by any financial regulator.
Looking ahead: The consultation is open for public comments until February 11, 2024.
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