Your weekly summary of key regulatory updates in an objective bite-size format, drawing on official news and press releases from 400+ financial services regulators, central banks as well as global and regional standard setters
At a glance - Highlights by topic
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BCBS publishes first holistic impact evaluation of Basel reforms on bank resilience and systemic risk European Banking Authority issues guidelines on banks’ overall recovery capacity for consultation U.S. federal agencies release results from resolution plan review BIS Innovation Hub launches project Sela to test a cyber-secure retail CBDC architecture FINMA releases final updated circular on banks’ operational risk and resilience European Banking Authority issues new ML/TF guidelines to address de-risking U.S. FinCEN publishes notice of proposed rulemaking regarding access to beneficial ownership information OECD adopts revised consumer protection principles Hong Kong SFC announces plan to launch new investor identification regime in March 2023 U.S. SEC issues for consultation proposed regulation on best execution UK FCA releases discussion paper for the design of a new retail disclosure regime Founder and former CEO of FTX Sam Bankman-Fried arrested and charged with fraud and extensive other wrongdoing Group of Central Bank Governors and Heads of Supervision endorse bank prudential standard for cryptoassets UK joint regulatory oversight committee sets out details on its vision for the future of open banking and the design of the new open banking entity Canadian Securities Administrators reinforce expectations towards crypto trading platforms NY DFS publishes guidance for banks regarding approval for virtual currency-related activities IAIS publishes information paper on insurance fintech trends BIS publishes new working papers on bigtech regulation and DeFi U.S. Fed releases note on stablecoins Argentina CNV pushes for regulation of crypto advertisements BIS FSI report explores suptech uptake among insurance supervisors National Bank of Kazahkstan publishes report on the results of the second phase of its digital tenge project International Sustainability Standards Board announces temporary reliefs in relation to Scope 3 GHG emission disclosures EIOPA publishes results from inaugural climate stress test EBA publishes sustainable finance roadmap Swedish FSA sets out strategy to prevent greenwashing Japan FSA publishes final code of conduct for ESG evaluation and data providers Malaysia SC share inaugural version of its sustainable and responsible investment taxonomy UK FCA announces new Board ESG advisory committee IAIS reports slight upward trend in insurers’ systemic risk scores in 2022 Global Insurance Market Report FSB issues update report on the financial benchmark transition
Prudential & financial stability
BCBS publishes first holistic impact evaluation of Basel reforms on bank resilience and systemic risk
The Basel Committee on Banking Supervision (BCBS) has issued its first holistic evaluation of how the Basel III reforms that were introduced following the Global Financial Crisis have affected bank resilience and systemic risk. The evaluation, which covers the period up to 2019, draws on bank-level data collected by the BCBS since 2011, enriched with market and macroeconomic data. It evidences that the overall resilience of the banking sector has increased as a result of the implementation of Basel III, with greater improvements visible for institutions that were more heavily affected by the reforms. It also testifies that the improved resilience did not come at the expenses of banks’ cost of capital, with the report showing that banks in compliance with the Basel III requirements were able to lower their costs of debt and equity. The report also concludes that there is no material evidence of negative side effects of the from the reforms, yet acknowledges that the reforms have introduced additional layers of complexity.
European Banking Authority issues guidelines on banks’ overall recovery capacity for consultation
The European Banking Authority (EBA) has released for consultation its proposed guidelines on the so-called overall recovery capacity (ORC) in recovery planning, intended to reflect an institution’s capability to restore its financial position through the implementation of recovery options after a crisis situation has materialized. Purpose of the guidelines is to provide a coherent framework and foster harmonization in practices for the determination of the ORC. To that end, the guidelines provide guidance to institutions on the steps for establishing a reliable ORC framework as well as guidance to competent authorities for the assessment of institutions’ ORC from a quantitative and qualitative perspective.
The Federal Reserve Board and the Federal Deposit Insurance Corporation have announced the results of their review of resolution plans for 71 domestic and foreign banking organizations. Other than select deficiencies in the resolution plan submissions by Credit Suisse AG and BNP Paribas, no shortcomings were identified in the review. Further guidance is planned to be issued to aid large banks in evolving their plans.
Cyber & operational resilience
BIS Innovation Hub launches project Sela to test a cyber-secure retail CBDC architecture
The Bank for International Settlement Innovation Hub Hong Kong Centre, in collaboration with the Hong Kong Monetary Authority and the Bank of Israel, has formally launched the project Sela. Scope of the new project is to assess the cyber security and technical feasibility of a two-tier retail CBDC that is designed to allow intermediaries, such as commercial banks, payment service providers and financial technology firms, to provide CBDC services without any related financial exposure on their balance sheets. The project is based on the premise that such an architecture offers several benefits such as expanding eligibility to intermediaries beyond financial institutions and, as a result, broadened access for end users, while however potentially increasing cyber vulnerability. Against this backdrop, the project will explore whether cyber threats will increase with the number of “exposure-less” intermediaries and whether the addition of “exposure-less” intermediaries could, by design, lead to a more robust, distributed and resilient system as data are obfuscated and distributed among a wider set of providers, providing redundancy and removing single points of attack.
FINMA has released its final updated circular on banks’ operational risk and resilience. The circular, which was adapted to reflect new technological developments as well as integrate the Basel Committee’s principles on operational resilience, sets out requirements with respect to banks’ operational risk management (incl. ICT, cyber critical data and business continuity management), management of operational resilience as well as the continuation of critical services during resolution and recovery of systemically important banks. It will become effective as of January 2024.
AML & CFT
European Banking Authority issues new ML/TF guidelines to address de-risking
The European Banking Authority (EBA) has issued for consultation two new money laundering and terrorist financing (ML/TF) guidelines to address the challenge of de-risking. The first guideline is an addition to its existing ML/TF risk factor guidelines that elaborates on how non-profit organizations are organized and equips financial institutions with guidance on how to manage the associated ML/TF risks instead of denying these organizations access to financial services. The second guideline addresses access to financial services including provisions to ensure that access to individuals and organisations to at least basic financial products and services to participate in modern economic and social life is granted. This addresses among other things situations where customers, including the most vulnerable customer segments, have legitimate reasons to be unable to provide traditional forms of identity documentation, and the steps that financial institutions should take when considering whether to refuse or terminate a business relationship.
U.S. FinCEN publishes notice of proposed rulemaking regarding access to beneficial ownership information
The U.S. Financial Crime Enforcement Network (FinCEN) has issued a notice of proposed rulemaking in relation to access and protection of beneficial ownership information. The proposed rule specifies that access to beneficial ownership information would be limited to (1) federal agencies engaged in national security, intelligence, or law enforcement activities, (2) state, local, and Tribal law enforcement agencies with court authorization, (3) financial institutions with customer due diligence requirements and regulators supervising them for compliance with such requirements, (4) foreign law enforcement agencies, prosecutors, judges, and other agencies that meet specific criteria, as well as (5) Treasury officers and employees under certain circumstances. It furthermore defines the security and confidentiality standards that must be upheld for the protection of the information.
Market conduct & consumer protection
OECD adopts revised consumer protection principles
OECD Governments have formally adopted the revised G20/OECD High-Level Principles on Financial Consumer Protection. The adoption follows a comprehensive review and consultation process and the previous endorsement by G20 Leaders at the Bali Summit in mid-November. The Principles, which were initially adopted by the OECD in 2012, set out the elements of an effective and comprehensive financial consumer protection framework. The revised framework now consists of twelve Principles including two new Principles on “access and inclusion” and “quality financial products”, respectively, as well as three new cross-cutting themes on digitalization, sustainable finance and financial well-being. Additionally, lessons learned from the response to the COVID-19 pandemic were incorporated into the Principles.
Hong Kong SFC announces plan to launch new investor identification regime in March 2023
Following extensive consultation, the Hong Kong Securities and Futures Commission (SFC) has announced that it will launch its new investor identification regime for the securities market in Hong Kong in the second half of March 2023. Under the regime, regulated intermediaries are required to assign a so-called broker-to-client assigned number, a unique identification code, to clients who have placed or propose to place an on-exchange or off-exchange order in securities listed and/or traded on the trading system of the Stock Exchange of Hong Kong as well as tag the number to their clients’ securities orders. Furthermore, intermediaries must submit clients’ identification to a central data repository maintained by the Exchange as well as implement relevant data privacy and security measures to safeguard the data. The regime is being introduced to enable enhanced market surveillance and reduce compliance costs and efforts by making it easier to retrieve client information in the event of suspicious trading activities.
U.S. SEC issues for consultation proposed regulation on best execution
The U.S. Securities and Exchange Commission has issued for consultation a new proposed regulatory framework for best execution. Under the proposed framework, broker-dealers would be required to establish, maintain and enforce written policies and procedures that among other things address how broker-dealers will comply with the best execution standard, how they will determine the best market and make routing or execution decisions for customer orders as well as how they will address aspects such as conflicted transactions with retail customers. The regulation would also mandate a periodic review in at least quarterly intervals of the execution quality along with an annual review of their best execution policies and procedures through a transparently documented process including reporting of the results to the board of directors or equivalent governance fora.
The UK Financial Conduct Authority has released a new discussion paper to gather views on the design of a new fit-for-purpose retail consumer disclosure regime, which will replace the Packaged Retail and Insurance-based Investment Products regulation and the Undertaking for Collective Investment in Transferable Securities disclosure requirements once revoked. The discussion paper seeks input on options for the delivery, presentation and content of retail disclosures.
Fintech & ecosystem innovation
Founder and former CEO of FTX Sam Bankman-Fried arrested and charged with fraud and extensive other wrongdoing
On Monday, December 12, founder and former CEO of FTX was arrested in the Bahamas after the United States filed criminal charges against him and made a formal request for his extradition. Subsequently, on December 13, formal complaints and indictment were filed in the Southern District of New York by the U.S. Securities and Exchange Commission (SEC), the U.S. CFTC as well as on behalf of the United States.
Both the and through their respective complaints allege that Bankman-Fried materially misrepresented FTX to investors and “orchestrated a years-long fraud”, alleging among other things that: he diverted and commingled customer funds with Alameda funds; he misappropriated customer funds for own operations and activities including luxury real estate purchases, political contributions and high-risk, illiquid digital asset industry investments; he afforded special treatment to Alameda on the FTX platform including by providing an essentially unlimited line of credit and by embedding certain features into the FTX code that favored Alameda and allowed it to execute transactions even in the absence of sufficient funds as well as that he concealed from investors the undisclosed risk that resulted from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens. The includes eight charges including several counts of wire fraud and commodity securities fraud as well as conspiracy to commit money laundering.
Commenting on the arrest, U.S. SEC Chair Gary Gensler said: "We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto.” As part of the complaints filed, both the SEC and the CFTC are seeking restitution, disgorgement and civil monetary penalties in addition to other injunctions that would prohibit Bankman-Fried, among other things, from any further trading as well as bar him as an officer and director. According to reports, the prison time if all charges were successful would amount to 115 years.
The arrest came just a day(s) before Bankman-Fried was scheduled to testify before the U.S. House Committee on Financial Services (see prepared remarks ) as well as the U.S. Senate Committee on Banking, Housing, and Urban Affairs. In his own before the Financial Services Committee, new FTX CEO John J. Ray III stressed the substantial governance and control shortcomings and failures, highlighting the following key deficiencies: The use of computer infrastructure that gave individuals in senior management access to systems that stored customer assets, without security controls to prevent them from redirecting those assets The storing of certain private keys to access hundreds of millions of dollars in crypto assets without effective security controls or encryption The ability of Alameda, the crypto hedge fund within the FTX Group, to borrow funds held at FTX.com to be utilized for its own trading or investments without any effective limit The commingling of assets The lack of complete documentation for transactions involving nearly 500 investments made with FTX Group funds and assets The absence of audited or reliable financial statements The lack of personnel in financial and risk management functions, which are typically present in any company close to the size of FTX Group The absence of independent governance throughout the FTX Group
Group of Central Bank Governors and Heads of Supervision endorse bank prudential standard for cryptoassets
The Basel Committee on Banking Supervision’s oversight body, the Group of Central Bank Governors and Heads of Supervision, have formally endorsed the proposed bank prudential standard for cryptoasset exposures. The endorsement comes after two rounds of consultation.
Under the final standard, which is consistent with the prior proposals, cryptoassets are classified into two main groups for the purpose of their prudential treatment. Group 1 cryptoassets include tokenised traditional assets and cryptoassets with effective stabilisation mechanisms (stablecoins) while Group 2 cryptoassets include the higher-risk unbacked crypto-assets and stablecoins with ineffective stabilization mechanisms. Group 1 cryptoassets will be subject to at least equivalent risk-based capital requirements based on the risk weights of underlying exposures as set out in the existing Basel capital framework as well as to an add-on to risk-weighted assets to cover infrastructure risk. Group 2 cryptoassets, in turn, are subject to a conservative capital treatment with a 1250% risk weight as a baseline with the standard however providing for the option of hedging to be recognized in accordance to defined hedging recognition criteria.
Besides the endorsement, the Committee also noted in the press release that it will continue its engagement with other standard-setting bodies and the Financial Stability Board towards a harmonized global regulatory treatment of stablecoins.
UK joint regulatory oversight committee sets out details on its vision for the future of open banking and the design of the new open banking entity
The UK joint regulatory oversight committee, co-chaired by the Financial Conduct Authority and the Payment System Regulator, has in a new statement shared further details on the vision for the future of open banking along with initial details on the design of the future open banking entity. Accordingly, focus under the new vision is on three priorities including (1) unlocking the potential of open banking payments to support competition and innovation, (2) adopting a model that is scalable for future data sharing propositions, and (3) establishing a sustainable footing for the ongoing development of the open banking ecosystem.
In relation to the new open banking implementation entity, the committee indicated that its work currently focuses on the design of the entity’s structure, governance and funding as well as the scoping of its responsibilities. As regards the latter, it is planned for the entity to assume responsibility in three key areas including (1) enabling the development of new open banking product and service propositions, (2) providing and maintaining the technical infrastructure, critical services and relevant technical standards for open banking, and (3) ensuring compatibility with the activities of other key actors in the ecosystem.
Further details on both vision and entity design will be shared during Q1 2023.
Canadian Securities Administrators reinforce expectations towards crypto trading platforms
The Canadian Securities Administrators (CSA) have issued a new statement to reinforce and expand the expectations towards crypto trading platforms that operate in Canada. The statement follows earlier communication August as part of which the CSA introduced the requirement for crypto trading platforms to provide a pre-registration undertaking to their principal regulator in order to be able to continue operations in Canada while undergoing the formal application process. In filing the undertakings, the platforms agree to abide by the terms and conditions that support investor protection. Among other things, these address requirements in relation to the management of conflicts, advertising, client investment limits, risk disclosure and the custody of crypto assets. In the wake of the recent market developments, the CSA is further expanding these terms and conditions to include (1) the requirement to hold Canadian clients’ assets with an appropriate custodian and segregate these assets from the platform’s proprietary business, as well as (2) a prohibition on offering margin or leverage for any Canadian client. Custodians will be deemed qualified if they are regulated by a financial regulator in Canada, the U.S., or a similar jurisdiction with a supervisory regime for conduct and financial regulation.
As part of the announcement, the CSA also reiterated that it is actively monitoring the evolution of stablecoins and clarified its position that stablecoins or stablecoin arrangements may constitute securities and/or derivatives and that crypto trading platforms are prohibited from permitting Canadian clients to trade, or obtain exposure to, any crypto asset that is itself a security and/or a derivative
NY DFS publishes guidance for banks regarding approval for virtual currency-related activities
The New York State Department of Financial Services has published new guidance for banks seeking to engage in virtual currency-related activities. Under the guidance, banking organizations must obtain prior approval before commencing virtual currency related activity including in cases where parts of the activities will be performed by a third party. The guidelines set out that as part of the approval process, banking organizations are required to submit six types of information that the Department will consider in arriving at a decision. These include details on the business plan, risk management, corporate governance and oversight, consumer protection, financial information as well as a legal and regulatory analysis including the permissibility of the proposed activity under relevant laws and regulations and key legal risks. If deemed necessary, the Department has the right imposer supervisory requirements. The guidance applies to all New York regulated banking organizations, as well as branches and agencies of foreign banking organizations licensed by the Department.
The International Association for Insurance Supervisors has published an information paper providing a deep dive assessment into three Fintech sub-domains: (1) Use of application programming interfaces and open data; (2) distributed ledger technologies and blockchain; (3) safe, fair and ethical adoption of artificial intelligence and machine learning and the use and governance of data. The assessment summarizes key trends in these in these areas and the associated risks and opportunities.
The Bank for International Settlements has published two new working papers focused on bigtech and decentralized finance. Titled “Regulating big tech”, the first paper discusses the conditions that make digital platform markets prone to tipping and makes the case for regulation at the international level to address the problems of digital markets. The second paper provides an overview of cryptocurrencies and decentralized including an assessment of benefits and challenges, a comparison with the traditional financial intermediation and some consideration of the regulatory challenges and possible regulatory approaches.
A new U.S. Federal Reserve Board note provides an overview of the general lifecycle of stablecoins from their issuance to their redemption complete with a deep dive on stabilization mechanisms.