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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FSB highlights further growth of the NBFI sector during 2021 in annual trend and risk report EIOPA addresses inflation-related issues from a prudential perspective in new supervisory statement European Council agrees position for the establishment of a recovery and resolution framework for the insurance sector Canadian Securities Administrators publish results from inaugural systemic risk survey Japan FSA shares details from the seventh edition of its industry-wide cyber exercise Delta Wall VII ESMA proposes new tools to assess the operational resilience of financial entities Central Bank of the UAE issues new AML/CFT guidance for the insurance sector U.S. FinCEN publishes trend data on Russian oligarch’s financial activities HM Treasury releases AML/CFT supervision report for the period 2020-2022 U.S. progresses in FTX case with charges against Caroline Ellison and Gary Wang for defrauding investors France AMF introduces changes to its Digital Asset Service Provider regime Arab Monetary Fund’ releases new guidance note on the adoption of smart contracts and their legal enforceability Tunisia’s Financial Market Council consults on crowdfunding rules Central Bank of Cyprus launches Innovation Hub Federal Reserve Bank of Boston and MIT announce conclusion of its CBDC Project Hamilton Global leaders reach landmark agreement at COP15 Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group enters into collaboration with CDP IFRS announces inaugural membership of the Sustainability Standards Advisory Forum Japan FSA consults on amendments to its supervisory guidelines for investment management firms to incorporate ESG-related expectations
Prudential & financial stability
FSB highlights further growth of the NBFI sector during 2021 in annual trend and risk report
The Financial Stability Board (FSB) has released its annual trends and risks report on non-bank financial intermediation, summarizing the key developments in 2021 based on data in financial intermediation representing 29 jurisdictions and ~80% of global GDP. Data shows that the NBFI sector grew by 8.9% in 2021 to reach USD 239 trillion in assets while its share relative to total financial assets remained stable at 49%, slightly below the all-time high of 50% in 2019. Growth of the sector was predominantly driven by investment funds owing to a combination of flows and evaluation effects. The so-called narrow measure of the NBFI sector that focuses on entities that are involved in credit intermediation activities that could pose bank-like financial stability risks underwent a further increase and accounted for 28.3% of total NBFI assts and 14.1% of total global financial assets.
EIOPA addresses inflation-related issues from a prudential perspective in new supervisory statement
The European Insurance and Occupational Pensions Authority (EIOPA) has published a new supervisory statement that outlines considerations for insurance undertakings when taking into account the impact of inflation from a prudential perspective as part of Solvency II calculations. Focus of EIOPA’s guidance is on the impact in three areas: (1) technical provisions, (2) investments, and (3) solvency capital requirements. As for (1) EIOPA recommends undertakings to review inflation-related assumptions underlying their technical provisions. Likewise, in relation to (2) investments, the statement suggests that undertakings that rely on alternative valuation methods for investments exposed to inflation should assess whether the valuation methods and/or its parameters should be adjusted considering the current inflation level.
As regards (3) capital requirements, the statement highlights the potential need to adjust inflation-related parameters of internal models while noting that undertakings using the standard formula should evaluate whether the capital calculation does not significantly deviate from their risk profile. Beyond these considerations, EIOPA also called on undertakings to review the impact of inflation in other areas such as risk management and stress testing.
European Council agrees position for the establishment of a recovery and resolution framework for the insurance sector The European Council has announced that it has agreed on the general approach and core elements of the new Insurance Recovery and Resolution Directive. The Directive, which was originally proposed in September 2021 as part of the EU’s Solvency II review, is intended to harmonise national laws on recovery and resolution planning of insurance and reinsurance undertakings. Under the proposal, EU member states would be required to put in place insurance resolution authorities as well as strengthen cross-border cooperation. Following the agreement, the proposal will as a next step in the new year be subject to discussions with the European Parliament.
Canadian Securities Administrators publish results from inaugural systemic risk survey
The Canadian Securities Administrators (CSA) have released the key findings from its first annual systemic risk survey. Carried out under the leadership of the CSA’s Systemic Risk Committee, the survey draws on responses from over 600 Canadian portfolio managers and investment dealers between October and November 2022. Survey feedback highlights that more than 60% respondents are somewhat or very concerned about the stability of the Canadian financial system, whereby 40% expressed that their concern had increased vis-à-vis one year ago. Of the portfolio of risks, respondents rated rising interest rates, household debt, housing market, geopolitical tensions and cyber risks as having the highest potential impact on Canada’s financial stability.
Cyber & operational resilience
Japan FSA shares details from the seventh edition of its industry-wide cyber exercise Delta Wall VII
The Japan Financial Services Agency (FSA) has shared the details of its seventh industry-wide cybersecurity exercise “Delta Wall VII” for the financial sector, which it completed in October. This year’s exercise involved 160 financial institutions with participation from IT divisions, business lines, public relations departments and senior management. Featured scenarios were tailored to sub-industries and included for instance the scenario of an outflow of cryptoassets due to information leakage for cryptoassets exchange service providers and the halt of operation systems due to malfunctions in network equipment for securities firms and certain other providers. Designed to strengthen the industry’s response to cyber incidents, Delta Wall is a broad-based exercise and aims to evaluate financial institutions’ investigation of an attack, their responses including from a technical perspective and with respect to customer relations, as well as their efforts to continue services and responses for restoration. As part of the exercise, participants must undertake an ex-post evaluation of their actions and decisions as well as submit a self-analysis report regarding items they were unable to properly respond to. Results and lessons learned from the exercise are shared with the entire industry.
The European Securities & Markets Authority (ESMA) has published an article that introduces a new toolkit for assessing the operational resilience of financial entities that provide time-critical services such as CCPs, trading venues or payment and settlement systems. The article proposes three specific tools: (1) reliability indicators that draw on historical data on incidents and outages to establish a baseline view of entities’ operational resilience; (2) scenario analysis of third-party dependencies at entity-level; and (3) system-wide analysis of critical third-party providers.
AML & CFT
Central Bank of the UAE issues new AML/CFT guidance for the insurance sector
The Central Bank of the UAE has released new AML/CFT guidance addressed to the firms operating in the insurance sector including (re)insurance, agents and brokers. The guidelines detail the expectations for AML/CFT compliance as set out in the Central Bank’s legal and regulatory framework. This includes a depiction of the money laundering and terrorist financing risks relevant to the insurance sector and a description of the main elements of an effective risk mitigation program, addressing among other things requirements in relation to the risk assessment, customer due diligence, (suspicious) transaction monitoring and reporting, governance and training as well as third-party reliance and outsourcing. As part of its annex, the guidance also provides a set of specific red flag indicators for the UAE life insurance sector.
U.S. FinCEN publishes trend data on Russian oligarch’s financial activities
The U.S. Financial Crimes Enforcement Network (FinCEN) has released trend data on financial activity of Russian oligarchs based on over 450 suspicious activity reports filed between March 2022 and October 2022 covering tens of billions of USD in suspicious transactions. According to FinCEN, the data indicates that Russian oligarchs moved or transferred funds and assets around the time of the Russian invasion of Ukraine in February 2022. Several oligarchs also transferred beneficial ownership of their companies, trusts, or accounts to their children, other family members, or close business associates as well as purchased high-value goods or property such as jewelry, art, and property or real estate in other countries in the time leading up to the invasion. In addition to these trends, potential sanctions evasion activity was identified in more than 280 of the reports.
The HM Treasury has released its AML/CFT supervision report for the period 2020-2022. The report consolidates key data and information on AML/CFT supervisory and enforcement activity including those carried out by the Financial Conduct Authority for the financial sector.
Fintech & ecosystem innovation
U.S. progresses in FTX case with charges against Caroline Ellison and Gary Wang for defrauding investors
Further to the charges raised against founder and former FTX CEO Sam Bankman-Fried, the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice, represented by the U.S. Attorney for the Southern District of New York, have proceeded to levy charges against Caroline Ellison, the former CEO of Alameda Research, and Zixiao (Gary) Wang, the former Chief Technology Officer of FTX Trading Ltd. (FTX), for their roles in the FTX fraud scheme. Consistent with the indictment against Bankman-Fried, the both individuals with wire fraud, conspiracy to commit wire fraud, as well as conspiracy to commit commodities and securities fraud, and conspiracy to commit money laundering. The SEC complaint, in turn, states that both Ellison and Wang were active participants in the fraud scheme. Among other things, it is alleged that Ellison, at the direction of Bankman-Fried, manipulated the price of FTT, which resulted in the value of collateral on Alameda’s balance sheet to be overstated, while Wang altered FTX’s software code to allow Alameda to divert FTX customer funds and subsequently misappropriate them for Alameda’s trading activities.
As part of the announcements by the Attorney and the SEC, it was also revealed that both Ellison and Wang are cooperating with authorities in the investigations and have already plead guilty to the charges.
Meanwhile, Sam Bankman-Fried agreed to be extradited from the Bahamas and was released on bail following a U.S. court hearing. Investigations into other entities and persons remain underway, the SEC added in its statement. His next hearing has been set for early January.
France AMF introduces changes to its Digital Asset Service Provider regime
The French Autorité des Marchés Financiers (AMF) has introduced several amendments to its regulations governing digital asset service providers as depicted in its instruction “DOC-2019-23: Rules applicable to digital asset service providers”. As part of the amendments, the AMF is clarifying its expectations for the good repute and competence of managers primary shareholders of these providers. To that end, it has introduced changes in relation to the documents that must be submitted by providers as well as the analysis framework used by the AMF for verifying the good repute and competence. In addition, the AMF is also reinforcing its expectations in relation to marketing and communication by specifying that promotional communication should be clear and not misleading as well as include prominent risk warnings for consumers.
The Arab Monetary Fund’s regional Fintech Working Group has released a new guidance note on the adoption of smart contracts and their legal enforceability in the Arab countries. The note discusses opportunities and risks of smart contracts as well as elaborates on the regulatory requirements needed to govern smart contract-based activities and the inherent challenges in doing so.
Tunisia’s Financial Market Council has commenced a consultation into its proposed crowdfunding rules. Among other things, the new rules specify the details of the application and approval process for crowdfunding platform operators, set out detailed requirements that crowdfunding operators must fulfill on an ongoing basis and clarify the conditions for participation in the platform. The rules follow from the existing law and regulations on crowdfunding, established in 2020 and earlier in 2022, respectively.
The Central Bank of Cyprus has announced the launch of an Innovation Hub that will serve as a new vehicle to foster communication and engagement with fintech firms as well as through which the Central Bank will provide non-binding guidance on requests, including the provision of information and guidance on actions required for the licensing of innovative fintech products or services.
Payments & currency
Federal Reserve Bank of Boston and MIT announce conclusion of its CBDC Project Hamilton
The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT) have announced that their joint Project Hamilton into the technical feasibility of a potential CBDC has been successfully completed. The announcement comes after concluding Phase 1 of the Project in February this year with the release of the OpenCBDC software, a core processing engine for a theoretical high-performance and resilient CBDC that was developed as an open-source research software, along with an accompanying whitepaper. As announced then, Phase 2 of the Project was focused on exploring new functionality including related to auditability and programmability with a view to determine how this would impact performance, scalability, and security. Additional papers on the project’s key findings are planned to be released in the near future.
Global leaders reach landmark agreement at COP15
The 15th UN Biodiversity Conference (COP15) in Montreal, Canada, concluded with the adoption of a landmark agreement. Under the “Kunming-Montreal Global Biodiversity Framework” global leaders agreed on a set of for action by 2030 and 2050 to help protect and restore nature. Among the eight targets aimed at reducing threats to biodiversity are the agreement to restore 30% of degraded ecosystems globally by 2030; to ensure and enable that by 2030 at least 30% of terrestrial, inland water, and of coastal and marine areas are effectively conserved and managed; to reduce pollution risks and negative impacts of pollution from all sources by 2030 to levels that are not harmful to biodiversity and ecosystem functions; and to minimize the impact of climate change and ocean acidification on biodiversity. Parties also agreed to mobilize at least USD 200 billion of finance for biodiversity per year by 2030.
Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group enters into collaboration with CDP
Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group has announced that it is collaborating with CDP, the international non-profit organisation that operates the global environmental disclosure system for companies. Core objectives under the collaboration include (1) improving climate and environmental disclosure as well as data availability and accessibility in Hong Kong, (2) supporting capacity building and upskilling, and (3) facilitating data flows to provide financial institutions with better data resources to assess climate and environmental related risks, and supporting the real sector in the transition towards carbon neutrality. Furthermore, the Steering Group and the CDP jointly developed a new climate and environmental risk questionnaire for non-listed firms and SMEs, designed to aid these organizations in their sustainability reporting processes and raise their sustainability visibility to lenders, investors and supply chain clients so to better access sustainability financing.
IFRS announces inaugural membership of the Sustainability Standards Advisory Forum
The IFRS has announced the appointment of representatives from thirteen jurisdictions as inaugural member of its new Sustainability Standards Advisory Forum. The Sustainability Standards Advisory Forum was formed to provide technical advice to the International Sustainability Standards Board (ISSB) to support its development of a comprehensive global baseline of sustainability-related disclosure for capital markets and help streamline the engagement with jurisdictional and regional bodies. Representatives from Brazil, Canada, China, India, Japan, Mexico, Saudi Arabia, South Korea, Switzerland and the UK will be joined by individuals from bodies representing Africa, the European Union and Latin America. The inaugural members have been nominated based on their technical expertise in sustainability reporting and understanding of the jurisdictional or regional approach to sustainability reporting they are representing.
The Japan Financial Services Agency has published for consultation proposed amendments to its supervisory guidelines for investment management businesses to incorporate new expectations in relation to asset management companies managing ESG investment trusts.
Kevan Cowan has commenced his role as new Chairman of the Ontario Securities Commission, succeeding Heather Zordel.
MoU signed between the HM Treasury and the Ministry of Finance of the Kingdom of Saudi Arabia in order to strengthen bilateral financial services cooperation, enhance cross-border trade in financial services as well as promote financial stability and deepen cooperation on priority issues including green finance.
MoU signed between the Central Bank of Uruguay and the National Securities Commission of Argentina regarding mutual cooperation, consultations and exchange of financial information.
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