Global Regulatory Brief: Risk, capital and financial stability, September edition

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

As the risks to global financial markets intensify and take on new forms, regulators are demanding more transparency and disclosure from a greater range of market players. From Australia to Japan, the following global developments in risk, capital, and financial stability stand out:  

• US SEC enhances the regulation of private fund advisers
• Australia sets out plans to strengthen bank financial stability standards
• Hong Kong provides update to Basel III implementation timeline
• Japan to evaluate banks’ commercial property exposure and boost asset management 
• FSB consults on money market funds reforms
• EU to simplify penalty mechanisms for settlement fails 
• UK FCA concludes assessment of its review into fund value 
• EU Parliament adopts position on the review of the Solvency II insurance rules

US SEC enhances the regulation of private fund advisers

The Securities and Exchange Commission (SEC) adopted new rules and rule amendments to enhance the regulation of private fund advisers and update the existing compliance rule that applies to all investment advisers. 

• The new rules and amendments are designed to protect private fund investors by increasing transparency, competition, and efficiency in the private funds market. 

What you need to know: The final rules will require private fund advisers registered with the Commission to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance. The final rules will also require a private fund adviser to obtain and distribute to investors an annual financial statement audit of each private fund it advises and in connection with an adviser-led secondary transaction, a fairness or valuation opinion. 

• The final rules will also prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors.
• The final rules will also restrict certain other private fund adviser activity that is contrary to the public interest and the protection of investors.

Australia sets out plans to strengthen bank financial stability standards

The Australian Prudential Regulation Authority (APRA) has written to all authorized deposit-taking institutions (ADIs) to update them on policy priorities for the banking industry in light of recent international banking stresses.

What has happened: APRA has outlined its key policy priorities for the remainder of 2023 as the following:

• Liquidity: APRA will consult on targeted changes focused on the treatment of liquid assets for ADIs on the minimum liquidity holdings approach. Consequently, APRA will move the comprehensive review of these liquidity rules to 2024.
• Interest rate risk: APRA will take additional time to finalize the prudential standards relating to interest rate risk in the banking book. The revised standard will be released in late 2023 and its effective date will be moved back to ensure sufficient implementation time for ADIs. 
• Additional Tier 1 (AT1): The Council of Financial Regulators (CFR) has underlined the importance that crisis management tools, including AT1, should operate as intended given recent events in the US and Switzerland. APRA will issue a Discussion Paper to explore options for, and seek feedback from stakeholders on, improving the effectiveness of AT1 capital in Australia, ahead of potential consultation in 2024. 
• Capital framework updates: Industry have raised a number of issues for consideration by APRA during the implementation of the capital reforms earlier this year. APRA will consult on minor updates to the bank capital framework in relation to these issues.

What’s next: In addition to the actions above, APRA intends to consult on crypto-assets and market risk in 2024.  

Hong Kong provides update to Basel III implementation timeline

The Hong Kong Monetary Authority (HKMA) has updated its schedule for implementing the Basel III final reform package to account for the latest implementation timetables of other major jurisdictions.

What is happening: The implementation will start from a date no earlier than July 1, 2024 and will cover the revised standards on credit risk, operational risk and output floor as a minimum regulatory requirement, and the revised standards on market risk and CVA risk as a reporting-only requirement. 

• The revised market risk and CVA risk standards will take effect as a minimum regulatory requirement on a date no earlier than January 1, 2025;

Next steps: The updated schedule will be subject to the legislative process for rule-making. The current priority is to complete the draft rules in order to provide the industry with sufficient time to ready their systems for implementation. To this end, the HKMA are working towards releasing the final set of rules by October 2023 for statutory consultation. 

Japan to evaluate banks’ commercial property exposure and boost asset management

Japan’s Financial Services Agency (FSA) released its annual policy guidance and announced plans to review major banks’ exposure to overseas commercial real estate. 

Overview: Reflecting global alertness to troubles in the sector, Japan’s FSA is assessing the loans made in commercial real estate. This has become a major area of focus given the rapid rise in interest rates. 

Closely related: The FSA also said in its outlook that it will increase efforts to boost the competitiveness of asset managers and pension funds.

• This comes as Prime Minister Fumio Kishida has designated asset management as strategically important as a means of converting household savings into investments.

EU to simplify penalty mechanisms for settlement fails

Technical amendments to the Central Securities Depositories Regulation (CSDR) have been published in the Official Journal of the EU and are intended to simplify the penalty mechanism for settlement fails relating to cleared transactions submitted by central counterparties (CCPs). 

What’s the impact: The amendments aim to facilitate the calculation and distribution of cash penalties for cleared transaction settlement failures while reducing the risks and costs involved.

• Specifically, the amendments remove the separate process for settlement discipline and put CSDs in charge of the entire process of collection and distribution of penalties. 
• The revisions also specify that in the event of imbalanced positions in respect of cleared transactions, CCPs may allocate the remaining penalties’ amount, credit or debit to their clearing members. 

Important context: These changes come under the existing legal framework for CSDR but it is important to note that the CSDR framework itself is set to change. Under reforms recently agreed, preconditions will be introduced so that mandatory buy-ins are only imposed as a last resort.  

Next steps: To provide firms time to implement the adjustments, the new rules will apply from September 2, 2024 and will not apply to settlement fails that begin before this date. 

FSB consults on money market funds reforms

The Financial Stability Board (FSB) is seeking feedback as part of its review on money market fund (MMF) reforms to take stock of the progress made by FSB member jurisdictions in assessing and addressing MMF vulnerabilities. 

What you need to know: The FSB is looking for feedback on how MMF vulnerabilities differ across jurisdictions depending on factors such as MMF structure, investor composition, or asset profile, and challenges faced by the industry in implementing MMF vulnerabilities. 

Next steps: Feedback is open until September 8, 2023 and the peer review report is expected to be published by end-2023. 

FCA concludes assessment of its review into fund value

The UK Financial Conduct Authority (FCA) has published the results of its review into fund managers’ value assessments. 

What they found: The FCA found that many firms have fully integrated considerations on assessment of value into their processes while also identifying areas for improvement. 

• The review found examples of good practice such as moving investors to clean share classes with no trail commission or cutting funds’ fees, as well as significant differences between good and poor practice in how fund managers assess their funds’ performance. 
• Further, the FCA considers that firms put too much emphasis on comparable market rates to justify their fees, rather than conducting an assessment using the full range of value assessment considerations. 

The big picture: This latest review represents an improvement on the findings from the FCA’s 2017 Asset Management Market Study that concluded the lack of price competition in the fund sector had resulted in uncompetitive outcomes for investors. Since then, the FCA has worked with the industry to instill greater emphasis on assessment of value to drive improvements for investors. 

Closely related: The recent introduction of the Consumer Duty has further underlined the FCA’s expectations that firms deliver fair value for retail consumers.       

EU Parliament adopts position on the review of the Solvency II insurance rules

The EU Parliament’s Committee on Economic and Monetary Affairs (ECON Committee) has published a report on amendments to Europe’s flagship insurance regulation, Solvency II.

What’s happened: The report represents a series of amendments to the EU Commission’s review of the EU insurance rules known as Solvency II. 

• The review aims to provide incentives for insurers to scale up their long-term investment, improve the resilience of the insurance sector, and introduce some relief for certain smaller insurance companies.  

What next: Now that both the European Parliament and Council have reached their negotiating position on the Solvency II review, final negotiations (‘trilogues’) will begin later this year to agree the binding legislation.  

View the additional regulatory briefs from this month:

• Trading and markets
• Green finance
• Digital finance

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