September Global Regulatory Brief: Risk, capital and financial stability

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 asset ownership in Japan to pension reform in the UK, the following regulatory developments in risk, capital and financial stability from the past month stand out: 

• EU: EBA publish no-action letter and technical clarifications on FRTB
• UK: Bank of England publishes analysis of market-based finance debt
• Oman: FSA announce Capital Market Incentives program 
• UK: FCA consults on new pension framework 
• Japan: Government finalizes asset owner principles
• US: CFTC staff extends Brexit-related no-action positions

EBA publishes no-action letter and technical clarifications on FRTB

The European Banking Authority published a no-action letter and further technical clarifications following the EU Commission’s decision to postpone the application of the market risk element of the Basel III implementation – the Fundamental Review of the Trading Book (FRTB) – by one-year until January 2026.

In summary: Specifically, the no-action letter addresses the boundary between the banking book and the trading book. The EBA has also shared considerations on technical questions and issues arising from the decision to postpone.

In more detail: In its no-action letter, the EBA recommends that competent authorities should not prioritize any supervisory or enforcement action in relation to the amendments to the provisions setting the boundary between the banking and trading books, or those defining internal risk transfers between books.

• The EBA takes the view that the front-loaded application of the revised provisions on the boundary and internal risk transfers, compared to the rest of the FRTB framework, which is not yet implemented in the EU for capital purposes, would subject institutions to an operationally complex, fragmented and costly two-step implementation.
• The EBA provides some clarity on technical issues such as determining market contributed to the floored RWEA, structural FX positions, ‘main risk driver’ approach for the calculation of the market risk thresholds, own funds requirements, disclosures, reporting, and the ‘prudential boundary’ approach of the operational risk framework.
• The EBA also provides clarity on the supervisory benchmarking exercise.

Closely related: The EBA also published final draft technical standards on market risk, including details on the profit and loss attribution test and that institutions are able to identify how far they rely on a third-party vendor for the purpose of assessing the modellability of a risk factor.

Bank of England publishes analysis of market based finance debt

The Bank of England has published detailed data-driven analysis on UK corporates’ use of market-based finance debt.

Important context: This analysis comes as the Bank of England continues to examine the rise of private markets from a financial stability and systemic risk perspective.

Methodology: With nearly all of the £425 billion net increase in UK corporate debt since the 2007-8 crisis coming from market-based finance (MBF), the BoE has constructed a new bottom-up issuance level data set to examine this market.

• The totality of this data set comprised of around 10,000 deals sourced from different types of MBF debt including bonds, syndicated loans and private credit.
• This data set also comprised of a number of parameters such as deal date, tenor and issuance purpose.
• It contains information on what the issuers say they intend to use the finance for.

Key findings: This data set suggests that syndicated loans and bonds make up over 75% of aggregate corporate MBF debt, with the rest split between leveraged loans, private credit and commercial paper. Other key findings include:

• Companies tend to say they are issuing bonds for operational purposes (eg staff salaries and pensions) and refinancing of debt, while they raise private credit largely for acquisitions and disposals activities.
• Companies raise syndicated loans for a variety of reasons including investment (mostly not through leveraged loans), operational purposes, refinancing, and for acquisitions and disposals activities (mostly through leveraged loans).
• Over the next five years, around 50% of UK corporates’ MBF debt stock is set to mature, of which around a quarter (24%) was issued for operational purposes and refinancing, and just over 10% for investments, and for acquisitions and disposals respectively.
• Certain debt, such as debt raised for operational and refinancing purposes is more likely to require regular refinancing. If companies are unable or unwilling to refinance this debt at market prices, they may take defensive actions such as reducing investment or employment, impacting the real economy.

Oman FSA announces details of the capital market incentives program

The Financial Services Authority (FSA) of Oman published details for its Capital Market Incentives Program, which offers a package of incentives to support Oman’s economic development, in line with its Vision 2040. 

In summary: The program aims to increase the liquidity and size of Oman’s capital market (MSX), by encouraging private companies to become listed. 

• Incentives include tax savings, additional regulatory guidance and support and reductions on listing and regulatory fees. 
• Once officially implemented, the program will run for 5 years. 

Three key paths: The program will focus on three key paths: 

1. Converting family and private companies with a market value over RO 10 million into public joint stock companies, 
2. Creating a submarket within the MSX for smaller companies valued over RO 500,000, and
3. Encouraging limited liability companies to become closed joint stock companies. 

Looking ahead: These measures are intended to support Oman’s transition from a frontier to emerging market and boost domestic and international investment.

FCA consults on new pension framework

The UK Financial Conduct Authority (FCA) is seeking feedback on the framework for the defined contribution pension schemes it regulates as part of a broader effort to deliver better outcomes for pension savers in the UK.

Context to UK pension reform: The FCA, the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR) aim to implement a joint framework for workplace defined contribution schemes.

• The joint framework would be used by pension providers and those making decisions on behalf of savers to provide greater transparency over how schemes are performing.
• Schemes will be compared on public metrics that demonstrate value – not just costs and charges, but also investment performance and service quality. 
• Schemes would, once the final framework is decided, be publicly rated red, amber or green.
• Poorly performing schemes will be required to improve or ultimately protect savers by transferring them to better schemes.

FCA proposals – in more detail: The FCA is proposing that firms produce a machine readable ‘flat file’ that contains the raw data they will be publishing. The framework has four elements: 

• Requires the consistent measurement and public disclosure of investment performance, costs and service quality by firms for all such arrangements against metrics we believe allow VFM to be assessed effectively
• Enables those overseeing and challenging an arrangement’s value – Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) for contract-based schemes – to assess performance against other arrangements and requires them to do so on a consistent and objective basis
• Requires public disclosure of assessment outcomes including a ‘red, amber, green’ (RAG) VFM rating for each arrangement
• Requires firms to take specified actions where an arrangement has been assessed as not VFM (red or amber)

Asset allocation: Alongside a new framework for value for money, the FCA are proposing greater disclosure about types of assets that schemes are investing in as well as measures to enable greater transparency on geographic asset allocation. 

• These disclosures are intended to highlight whether an arrangement has any allocation to illiquid or UK based investments and what impact this has had on performance.
• Focusing on value rather than costs will enable providers to invest in assets which could deliver greater long-term returns but have higher management costs, such as infrastructure or venture capital.

Next steps: The consultation runs until October 17, 2024 and the Government has recently announced its intention to bring forward primary legislation which will contain measures to apply the framework to trust-based schemes.

Japan finalizes asset owner principles

The Japan Cabinet Secretariat published the finalized Asset Owner Principles, which set out common principles for asset owners’ investment, governance and risk management practices. 

Important context: This is part of the Japanese government’s efforts to establish Japan as a leading asset management hub.

Background: Asset owners include public pension schemes, mutual aid associations, corporate pension schemes, insurance companies, educational corporations who manage financial assets. 

• The Asset Owner Principles are not mandatory, and are based on a “comply or explain” regime – entities should either comply with these principles or explain the reasons in cases where they do not comply. 
• The Cabinet Secretariat will publish a list of asset owners who have declared acceptance of the Principles.

In detail: The 5 core principles are –

1. Asset owners should take into account the best interests of beneficiaries by determining the purpose of investing, and then set investment targets and policies based on the purpose through an appropriate process, taking into account the economic and financial situation. The purpose of investing, targets, and policies should be reviewed as appropriate in response to changes in situations.
2. Asset owners need to make decisions based on their expert knowledge, in pursuing the best interests of beneficiaries. They should develop an appropriate structure, by securing talents with sufficient knowledge and experience, in order to realize the investment purpose and policies set forth by Principle 1. They should make such a structure function properly, and consider using external knowledge and outsourcing when needed to receive and enhance expert knowledge.
3. Asset owners should choose investment methods appropriately to achieve the investment targets, based on the investment policies, from the viewpoint of the interests of beneficiaries, not those of themselves or third parties. Asset owners should appropriately manage risks, including by diversifying the investment portfolio. In particular, when they entrust investment to other entities such as financial institutions, the asset owners should select the optimal investment trustee while managing conflicts of interest. The choice of the investment trustee should be reviewed periodically.
4. Asset owners should provide information on the status of asset management (“visualization”) and engage in dialogues with stakeholders, in order to fulfil accountability to stakeholders.
5. Asset owners should give consideration to the sustainable growth of investee companies by conducting stewardship activities by themselves or through the investment trustee, in order to achieve the investment targets for beneficiaries.

Looking ahead: The Cabinet Secretariat and relevant Ministries and Agencies will review the principles appropriately and consider revising them as necessary, taking into account social circumstances and other factors.

CFTC staff extends Brexit-related no-action positions

Staff at the Commodities Futures Trading Commission (CFTC) have extended their previously granted no-action positions related to the United Kingdom’s (“UK”) exit from the European Union (“EU”) referred to as “Brexit”. Staff have also made amendments to add and remove certain firms from scope of the letter.

The Details: Since 2019, CFTC staff have taken certain no-action positions to maintain UK firms’ regulatory relief that applied to EU firms at the time of Brexit. Such positions are intended to provide the Commission and UK regulators additional time to finalize UK-specific recommendations. 

Specifically, the staff continue to take no-action positions regarding:

• Failure by a specified swap dealer to comply with Commission regulation(s) that are found to be comparable in an EU Comparability Determination if it instead complies with the UK laws and regulations incorporated pursuant to the EU(W)A subject in the same manner;
• Failure by a specified MTF or OTF authorized within the UK to register with the Commission as a swap execution facility;
• Trade execution requirements of a counterparty under CEA section 2(h)(8), if such counterparty executes a swap that is subject to such trade execution requirement on an Eligible UK Facility. 

Looking ahead: The extended no-action positions will expire upon the earlier of either: (i) the effective date of any comparability determination issued by the Commission for the UK to the extent such determination encompasses the subject matter of the EU Comparability Determinations; or (ii) December 31, 2026.

View the additional regulatory briefs from this month:

• Trading and markets
• Green finance
• Digital finance

Sign up to receive these updates in your inbox first.

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.