Global Regulatory Brief: Risk and financial stability, March edition
The Global Regulatory Brief provides monthly insights from regulatory bodies on developments within risk and regulation. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Risk and financial stability regulatory developments
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- European Parliament adopts position on the banking package to implement Basel III standards
- Hong Kong delays the implementation of market risk capital rules
- UK considers regulatory reform to the asset management sector
- SEC publishes updated Rulemaking Agenda and 2023 priorities
- Australia prudential regulator outlines policy priorities for 2023
European Parliament adopts position on the banking package to implement Basel III standards
Progress is being made on the upcoming implementation of the remaining Basel III banking standards in the EU with the European Parliament agreeing on January 24 its position on the legislative package containing the Capital Requirements Regulation (CRR) III and Directive (CRD) VI. This legislation is designed to implement the Basel III standards while seeking to bolster the competitiveness of Europe’s banking system. The rules contain provisions relating to the resilience and risk management of banks operating in the EU. Among other things, this legislation will implement the minimum capital requirements that banks must hold against market risk exposures, known as the Fundamental Review of the Trading Book (FRTB).
The rules are set to apply in the EU from January 2025 which aligns with the UK’s proposed go-live date, as confirmed in the proposals published in November 2022. US regulators are still working to further revise the US capital framework to implement and align with this final set of Basel III standards, with a set of proposed rules expected in the near future.
Additionally, Members of the European Parliament (MEPs) have proposed measures to strengthen reporting and disclosure requirements for ESG risk and have tasked the European Banking Authority (EBA) with assessing the merits of a dedicated prudential treatment of such exposures. In relation to cryptoassets, the Parliament is also seeking to require banks to disclose their direct and indirect exposure to cryptoassets and is looking to introduce tough capital requirements for banks with such exposures.
With the Parliament having now reached its negotiating position – and the EU member states already having reached theirs in November last year – negotiations between the EU institutions can now begin. The rules are expected to be finalized later this year with most of the changes applying from early 2025.
Hong Kong delays the implementation of market risk capital rules
The Hong Kong Monetary Authority (HKMA) announced on February 6 an extension to the go-live dates for certain capital standards under the Basel III banking framework. This decision was made in light of the challenging environment that the banking sector currently faces, such as the operational challenges stemming from the Covid-19 pandemic and geopolitical uncertainty.
The standards on market risk and credit valuation adjustment risk will now take effect on January 1, 2024 rather than the July 1, 2023 date and initially this will be for reporting purposes only. The capital treatment will be implemented no earlier than January 1, 2024. The HKMA still intends to complete the rule-drafting process within Q2 2023 to provide banks with more time for their implementation.
UK considers regulatory reform to the asset management sector
The FCA has set out on February 20 proposals to modernize the existing regulatory regime for funds and asset managers and support the UK’s position as an asset management hub. This comes as the UK prepares to revise inherited EU financial services rules. The UK asset management sector is currently regulated for the most part through a patchwork of EU-inherited legislation such as the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, the Alternative Investment Fund Managers Directive (AIFMD), and the Markets in Financial Instruments Directive (MiFID).
The FCA is considering a consolidation of the rules to simplify regulation, changes to the scope of both the retail and professional funds regime and improvements to prospectuses. The paper also includes proposals to reinforce liquidity management best practice and to introduce flexibility to the eligible assets rules. In light of technological developments, the FCA is seeking views on the benefits of ‘fund tokenization’ i.e. the ability to issue a fund’s units or shares to investors as digital tokens. Comments are due by May 22, 2023 and the FCA intends to publish a feedback statement later this year.
SEC publishes updated Rulemaking Agenda and 2023 priorities
The SEC published its Fall 2022 Regulatory Flexibility Agenda, which summarizes the SEC’s planned regulatory actions over the next 12 months. The agenda features 23 items in the proposed rulemaking stage and 29 items in the final rulemaking stage, including those related to human capital management disclosure, climate change disclosure, disclosures by investment advisers and companies about ESG practices, and names rule, among others.
The SEC’s Division of Examinations also published its annual examination priorities to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the US capital markets. A selection of the Division’s 2023 priorities include: new investment adviser and investment company rules; RIAs to private funds; retail investors and working families; environmental, social, and governance; information security and operational resiliency; and emerging technologies and cryptoassets.
Australia prudential regulator outlines policy priorities for 2023
Australia’s banking regulator, the Australian Prudential Regulation Authority (APRA), set out on February 2 its key focus areas to protect financial stability and the interests of bank depositors, insurance policyholders and superannuation members. Specifically, the Australian regulator is looking to ensure that firms have enough financial strength to protect against any emerging financial stresses as well as bolstering operational resilience. Following several years of regulatory change, APRA expects 2023 to be less policy-heavy and this should help firms to focus on embedding existing reforms and respond to the challenging macroeconomic environment. Firms can expect greater supervisory initiatives related to cyber resilience and further capital reforms.
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