EU regulatory outlook 2023
This article was written by Christian Benson and Laura Formisano, EU Regulatory Affairs Specialists at Bloomberg. It appeared first on the Bloomberg Terminal. Read the full report at Global Regulatory Forum 2022: Forging a resilient recovery.
Europe’s ambitious agenda for financial services policy had to quickly adapt to the Russian invasion of Ukraine, bringing an end to decades of peace on the continent and creating fresh disruption to global markets. Nonetheless, the war and its economic fallout have heightened the importance of key European policy objectives, such as strategic autonomy, the green energy transition, and overcoming regulatory fragmentation. Alongside the continuing geopolitical and macroeconomic uncertainty, 2023 promises to be an important year for European financial regulation as the policy-making process intensifies and key regulatory changes begin to take effect.
Market structure
There has been considerable activity over 2022 on legislation to reform European financial market structure, which aims to position Europe as a more globally competitive capital market. Over the course of 2023, many of these initiatives are expected to be finalized into law.
European lawmakers have been busy reviewing the landmark rules for trading and investment in Europe, the Markets in Financial Instruments Regulation and Directive (MiFIR/D). While the final text of the MiFIR review remains some way off, the rule changes are broadly designed to simplify the existing transparency regime in the EU for non-equities, establish a consolidated tape regime for bonds and equities, and enhance the role of the European Securities and Markets Authority (ESMA) when it comes to setting market data standards. The political agreement on the MiFIR review is expected to be ready by mid to late 2023, with many of the provisions to apply from 2024-25 onward.
Alongside the MiFIR review as part of the broader Capital Markets Union (CMU) initiative, the proposals for a European Single Access Point (ESAP) are set to be finalized next year. This is designed to introduce an EU-wide platform that provides seamless access to public company information, similar to the EDGAR system in the US.
Rule changes for the regulatory reporting of derivatives are also set to feature prominently in the regulatory planning for many market participants in 2023 under another landmark post-crisis EU legislation, the European Market Infrastructure Regulation (EMIR). The much-anticipated technical standards for reporting under the EMIR Refit were finally published into EU law this October, marking the countdown to the go-live in April 2024. In the interim, ESMA is expected to issue further guidance to address longstanding concerns over derivatives reporting data quality.
In parallel, recently announced proposals for a series of changes to EMIR to implement the EU’s clearing strategy and shift euro-clearing activity from London to Europe will be the subject of debate among European legislators, preparing the way for “EMIR 3.0”.
Digital finance
As technological innovation continues to define the contours of financial services, European policymakers are keen to get on the front foot and set standards. The idea is not only to mitigate risks and protect consumers but also to provide the necessary regulatory confidence and clarity for industry to invest and innovate in new technologies.
On Artificial Intelligence (AI), EU policymakers look set to finalize a comprehensive framework to establish legal certainty and foster innovation by approximately mid-2023. Similarly, the EU hopes to become a standard-setter on cybersecurity through the Cyber Resiliency Act, which will be debated next year.
The turbulence throughout 2022 in the crypto markets has underlined the need for greater regulatory clarity and supervision. The EU is widely perceived to be a “first mover” in its work to build a comprehensive crypto regulatory framework and the bloc could well set global standards for other jurisdictions to follow. The recent downfall of FTX is likely to increase momentum for globally consistent regulation.
A political deal was reached in summer of 2022 on the Markets in Crypto-Assets (MiCA) legislation, which is designed to bring crypto-related assets, issuers, and service providers under a comprehensive regulatory framework, and introduce requirements on stablecoin issuers. The final MiCA text is expected to formally become law over the coming months with provisions beginning to take effect in the first half of 2024, after a one-year implementation period.
Operational risk management is high on the regulatory agenda and rules to implement the Digital Operational Resilience Act (DORA) were formally published in early January 2023 and will begin to apply from January 2025. Detailed technical rules are to be developed in the coming months, ahead of the the go-live date. DORA will set out an operational risk management framework for regulated financial entities and will create a new oversight regime for third-party technology service providers deemed ‘critical’.
Green agenda
The sustainable finance regulatory agenda continues to be a major priority for firms and regulators alike. Moreover, Russia’s invasion of Ukraine has pushed energy security to the top of the European policy agenda and reinvigorated the need to find energy alternatives to Russian gas and accelerate the green transition.
Following considerable controversy and debate, this summer EU lawmakers approved the inclusion of some gas and nuclear activities as transitional activities in the EU’s Taxonomy framework. These changes will start to apply from January 2023. The EU continues to take lead on implementing mandatory sustainability and climate disclosures, with reporting under the Corporate Sustainability Reporting Directive (CSRD) set to begin in 2024 for larger companies, while non-EU and smaller companies will have more time.
EU lawmakers have also developed and finalized the detailed rules under the Sustainable Finance Disclosure Regulation (SFDR), which apply from January 2023. These specify the granular requirements for product-level disclosures around principal adverse impacts (PAIs) and Taxonomy alignment of Article 8 and 9 funds under the SFDR regime. In the same vein, lawmakers are close to approving proposals for a European Green Bond Standard (EU GBS) that will introduce requirements for any issuer that uses the label “European green bond”.
The EU institutions are thus getting close to putting in place the key building blocks of the sustainable finance strategy, a comprehensive policy agenda launched in 2018 to channel capital into the climate transition. Since its launch, the EU has become a leading regulatory voice globally on sustainable finance policy.
Financial stability and prudential regulation
The Russian invasion of Ukraine handed the EU’s banking, fund, and insurance regulators another challenge, just as Europe was beginning its recovery from the pandemic. Nonetheless, 2022 has seen important progress in the effort to refresh Europe’s prudential rulebook for bank capital, insurance, and investment funds.
As one of the first global jurisdictions to kickstart the process of implementing the Basel III banking standards, the EU co-legislators are expected to reach a final agreement on the revised Capital Requirements Regulation (CRR) by mid-2023. The expectation is that many of the provisions, including the capital element of the Fundamental Review of the Trading Book (FRTB), will apply from January 2025 and will closely follow the Basel standards.
Furthermore, a revised set of rules for Europe’s insurance market are also expected to come into focus next year, as the co-legislators seek to sign off on changes to the Solvency II legislation. These reforms are designed to reduce administrative burdens on insurers and mandate the European Insurance and Occupational Pensions Authority (EIOPA) to define consistent guidelines.
Finally, global regulators continue to monitor the market’s transition away from LIBOR. In conjunction with US authorities, the EU will continue to push market participants to move onto alternative rates as the cessation of all remaining USD LIBOR rates comes into view in June 2023.
Read the full report, Global Regulatory Forum 2022: Forging a resilient recovery, covering key developments across UK, EU, USA & APAC markets, including digital finance, the green agenda, and financial stability.