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
With financial instability in the headlines, the regulatory focus on the ‘non-bank sector’ is growing with the Bank of England launching its first exploratory exercise to understand the financial stability implications of market-based finance. Singapore has finalized its implementation timeline for the Basel III banking reforms and Hong Kong is consulting on the credit risk and output floor elements of its Basel III implementation. The US has amended its bond underwriting requirements to remove references to credit ratings and replace them with quantitative credit risk measures. Switzerland has approved changes to its insurance rules in a bid to improve the competitiveness of its insurance sector. Finally, the role of the retail investor is increasingly in the spotlight for regulators, as underlined by the launch of the EU’s retail investment strategy.
Bank of England begins first exploratory exercise to understand market-based finance
The Bank of England has launched its first system-wide exploratory scenario (SWES) exercise to improve understanding of bank and non-bank financial institution (NBFI) behavior in stressed financial market conditions. The BoE is particularly interested in how these behaviors might intersect with wider financial stability by amplifying shocks across financial markets. The SWES will cover a sample of large banks, insurers, central counterparties, and a range of funds including pension funds, hedge funds and traditional asset managers. The role of NBFIs is under closer regulatory scrutiny as the size of the sector grows and recent events such as the March 2020 ‘dash for cash’ and the September 2022 UK gilt market turmoil demonstrate vulnerabilities in the market-based finance sector. The BoE will focus on the key transmission channels such as firms’ liquidity needs under market stress. Participants will be asked to evaluate the impact of a severe but plausible stress to global financial markets and set out their expected response. A report will be published in 2024 setting out system-wide and aggregated findings and any conclusions relating to financial stability.
The launch of the SWES closely follows a speech given by the Executive Director for Financial Stability Strategy and Risk at the Bank of England (BoE) Sarah Breeden in which she outlined the importance of pension fund resilience for financial stability. She confirmed that the Financial Policy Committee (FPC) is looking to build steady state resilience in LDI funds by requiring LDI funds to be resilient to a yield shock of, at a minimum, around 250 basis points to ensure risks to financial stability are reduced. She also spoke about the wider non-bank sector and underlined that any future non-bank framework should capture both systemic and idiosyncratic risk.
MAS finalizes implementation timelines for Basel III reforms
The Monetary Authority of Singapore (MAS) has finalized the implementation timeline for the final Basel III reforms in Singapore. Starting from 1 July 2024, all of the final Basel reforms will be effective in Singapore, except the revised market risk framework and CVA (credit valuation adjustment) standards. For the revised market risk and CVA standards, supervisory reporting requirements will take effect from 1 July 2024 and the capital adequacy and disclosure requirements requirement will take effect from 1 January 2025. Transitional arrangements for the output floor will begin on 1 July 2024 and reach full phase-in by 1 January 2029.
SEC adopts amendments to remove references to credit ratings from Regulation M
The SEC adopted rule changes to remove and replace references to credit ratings from existing exceptions provided in Rule 101 and Rule 102 of Regulation M, a set of rules that prohibits activities that could artificially influence the market for an offered security. The final rules will become effective 60 days after the adoption release is published in the Federal Register.
EU sets out retail investment strategy
The European Commission published its Retail Investment Strategy (RIS) which aims to empower retail investor participation in European capital markets. The RIS contains a range of measures that aim to improve the provision and standardization of information, increase transparency around investing costs, ensure that retail clients receive, at least annually, a clear view of their investment performance, and address potential conflicts of interest by banning inducements for “execution-only” sales. The publication follows years of analysis and consultation regarding key retail investor issues such as disclosure, advice, inducements and suitability.
The package contains revisions to a range of existing legislation such as the Markets in Financial Instruments Directive (MiFID II), the Insurance Distribution Directive (IDD), the Undertaking for Collective Investment in Transferable Securities (UCITS) Directive, the Alternative Investment Fund Managers Directive (AIFMD), and the taking-up and pursuit of the business of Insurance and Reinsurance Directive (Solvency II), as well as revisions to the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. The proposals will now be subject to the legislative process in the European Parliament and Council before becoming binding law.
Relatedly, ESMA has called for legislative action to prevent undue costs in funds. In a statement to the EU Commission, ESMA calls for changes to the UCITS Directive and the AIFMD, to harmonize the notion of undue costs across Member States and better prevent investors being charged with undue costs and ensuring appropriate compensation.
SEC proposes rule amendments and new rules to improve risk management and resilience of covered clearing agencies
The SEC proposed rule changes that would improve the resilience and recovery and wind-down planning of covered clearing agencies. The proposal would amend the existing rules regarding intraday margin and the use of substantive inputs to a covered clearing agency’s risk-based margin system and add a new rule to establish requirements for the contents of a covered clearing agency’s recovery and wind-down plan. The public comment period will remain open for 60 days following publication of the proposed release on the SEC website or 30 days after publication in the Federal Register, whichever period is longer.
HKMA consult on credit risk and output floor under Basel III
The Hong Kong Monetary Authority (HKMA) has issued proposed amendments for consultation to the revised credit risk framework and output floor as part of Hong Kong’s implementation of the Basel III banking standards. The consultation is open until July 14, 2023.
Alternative Reference Rates Committee (ARRC) issues statement before the US Dollar LIBOR panels end and releases May 25, 2023 meeting readout
Before the US Dollar LIBOR panel ceases at end-June 2023, the ARRC urged market participants with LIBOR exposures to complete their transition efforts now, and to draw upon the numerous resources and tools made available over the past several years to facilitate the transition.
ARRC also released its May 2023 meeting readout. Topics discussed at the meeting included momentum toward SFOR-transition-related progress and issues, and use of DTCC’s LIBOR Communication Tool.
Swiss Federal Council strengthens Switzerland as a location for insurance
The Swiss Federal Council has approved amendments to the Insurance Oversight Ordinance (IOO) with regard to private insurance companies and the Insurance Oversight Act (IOA). These revisions are designed to strengthen the protection of insured persons and to improve the competitiveness and vibrancy of Switzerland’s insurance market. In particular, small insurance companies stand to benefit from relaxed supervisory rules if they comply with minimum requirements. The right to restructure has been improved to strengthen customer protection. The Swiss Solvency Test (SST) is used to assess an insurance company’s capitalization and is now anchored at an appropriate level in the IOO. The revised IOO and IOA will take effect from January 1, 2024 and there are transitional periods in various areas.
How we can help
Bloomberg’s Public Policy and Regulatory team brings you insight and analysis on policy developments to help navigate the complex and fast changing global regulatory landscape. To discuss regulatory solutions, please get in touch with our specialists or read more insights from our Regulatory team.
View the additional regulatory briefs from this month:
Sign up to receive these updates in your inbox first.
Events
Bloomberg Products and Solutions
Everything your firm needs to navigate a rapidly changing landscape.