to the point: financial regulation | 02/2024

The Council and the European Parliament have reached a provisional agreement on a proposal (see above) for a regulation aimed at enhancing transparency and integrity in ESG rating activities, which seeks to bolster investor confidence in sustainable products by ensuring the reliability and comparability of ESG ratings. The key points are:

1. authorisation and supervision of ESG rating providers by ESMA, along with enhanced transparency requirements regarding methodologies and sources of information;
2. clarification of the scope and exclusions of ESG ratings under the regulation, as well as the territorial scope regarding operations within the EU;
3. disclosure requirements for financial market participants and advisers utilising ESG ratings in their marketing communications, including information on methodologies;
4. establishment of a temporary registration regime for small ESG rating providers, subject to proportionate supervisory fees and compliance with transparency and organisational principles; and
5. introduction of a separation of business principle to manage conflicts of interest, with certain exemptions and measures to address conflicts in consulting, audit and credit rating activities.

Pending final approval by both the Council and the Parliament, the regulation is poised to usher in a new era of transparency, accountability and trust in ESG rating activities within the EU financial markets. Once adopted, the regulation is expected to take effect 18 months thereafter, marking a pivotal step towards a more sustainable and resilient financial ecosystem.

Several associations of the financial sector, including the EFAMA, EBF, Insurance Europe, ESBG, AIMA, AFME, and the European Association of Cooperative Banks, have jointly issued a letter urging the European Commission to enhance coordination in implementing new rules for the SFDR. The ESAs recently released draft RTS addressing Principle Adverse Impact (PAI) indicators and technical aspects of SFDR. However, the European Commission is concurrently conducting a broader review of SFDR. The lack of coordination between these efforts poses risks to investor confidence and the reliability of sustainable disclosure standards. The associations emphasise the importance of aligning these reviews to ensure legal certainty and effective lawmaking, avoiding duplication of efforts. They urge the European Commission to delay the adoption of the proposed RTS measures by the ESAs and to reconsider SFDR changes comprehensively. Additionally, they advocate for appropriate grandfathering measures and a one-year implementation period post-publication of any SFDR changes. Given that PAI reporting under SFDR began recently and that various interconnected regulatory initiatives are still being developed, making premature changes to recently implemented standards is deemed counterproductive. Instead, the associations recommend further feedback collection on current requirements and a consolidation of data infrastructure between different regulations to ensure effective implementation and value creation for investors.

The Council has adopted a new directive aimed at improving European capital markets and bolstering investor protection in the EU, modifying the alternative investment fund managers directive (AIFMD) governing various alternative investment funds, as well as the framework for plain-vanilla EU retail investment funds known as undertakings for collective investment in transferable securities (UCITS). The directive will be published in the EU's official journal and become effective 20 days later. Member States have 24 months to transpose the rules into national legislation. Key aspects of the directive include:

1. enhancing liquidity management tools to help fund managers cope with financial turbulence;
2. establishing an EU framework for loan-originating funds with measures to mitigate financial stability risks and ensure investor protection;
3. strengthening rules for delegation by investment managers to third parties under reinforced supervision;
4. improving data sharing and cooperation between authorities; and
5. implementing measures to identify undue costs and prevent misleading fund names to safeguard investors.

The Council has approved amendments to the MiFIR and amendments to the MiFID II to enhance market data transparency, aiming to provide investors with better access to essential trading information and bolster the global competitiveness of the EU's capital markets. The key changes include:

1. establishment of EU-level consolidated tapes to centralise trading data from various platforms, facilitating easier access to real-time transaction information for investors;
2. implementation of a general ban on "payment for order flow" (PFOF), with limited exemptions for Member States where PFOF already existed, subject to phase-out by 30 June 2026; and
3. introduction of new regulations concerning commodity derivatives.

The ESMA has issued a Public Statement aimed at providing clarity to market participants regarding their reporting obligations under Regulatory Technical Standard 28 (RTS28), pending the full application of the revised rules under MiFID II. The ESMA has advised National Competent Authorities (NCAs) not to prioritise supervisory actions against investment firms regarding the periodic RTS28 reporting requirement from 13 February 2024, until MiFID II has been completely transposed into national legislation across all Member States. As part of the revised MiFID II/MiFIR framework, investment firms are no longer mandated to annually report detailed information on trading venues and execution quality through RTS 28 reports.

Like the EU Parliament, the EU Council has adopted a Regulation facilitating instant payments in euro within the EU and EEA countries, aiming to enhance the strategic autonomy of the European economic and financial sector. This regulation enables consumers and businesses to make transfers within ten seconds, even outside of traditional business hours and across EU Member States. The key points of the regulation include:

1. requirement for payment service providers to offer instant payment services in euro, with charges not exceeding those for standard credit transfers;
2. transition periods for implementation, shorter in the euro area and longer in non-euro areas;
3. access to payment systems for payment and e-money institutions, subject to safeguards to mitigate additional risks; and
4. mandatory verification of beneficiary IBAN and name matching to prevent mistakes or fraud.

The ECB has released its final revised Guide to internal models, following a thorough public consultation process that concluded in September 2023. This updated Guide covers various aspects, including general topics, credit risk, market risk and counterparty credit risk. Based on feedback received from 20 respondents with a total of 625 comments, the ECB has provided further clarity on the Guide, emphasising the importance of public consultations in refining regulatory frameworks. The feedback statement published by the ECB offers an overview of the comments received and the ECB's evaluation of these comments. The Guide outlines the rules that banks must adhere to when utilising internal models, with supervisors ensuring compliance. Internal models enable banks to calculate risk-weighted assets, reflecting the risks present in their portfolios and serving as the basis for regulatory requirements. Key revisions in the Guide include guidance on integrating material climate-related and environmental risks into models, and procedures for reverting to the standardised approach for risk-weighted asset calculation. Specifically addressing credit risk, the Guide facilitates a common definition of default and a consistent treatment of "massive disposals" of non-performing loans. The update on market risk elaborates on measuring default risk in trading book positions, while also providing clarifications on counterparty credit risk. The revised Guide, along with the feedback statement and industry comments, is available on the ECB's banking supervision website, ensuring transparency and accessibility of regulatory guidelines.

The EBA has released a technical package for version 3.4 of its reporting framework, which includes standard specifications comprising validation rules, the Data Point Model (DPM) and XBRL taxonomies. These components support amendments to reporting and disclosure technical standards on minimum requirements for own funds and eligible liabilities, total loss-absorbing capacity (MREL/TLAC) and minor corrections to the technical package on interest rate risk in the banking book (IRRBB). Additionally, the DPM Query Tool has been updated to align with the current release.

The EIOPA has released its first set of shocked risk-free interest rate term structures (RFR). These term structures are designed to calculate the "option-adjusted" duration of technical provisions, as outlined in the Guidelines for reporting for financial stability purposes (S.38.01.11 - Duration of technical provisions). The purpose of introducing shocked RFR is to ensure consistent calculation of the option-adjusted duration. The EIOPA plans to update and publish these term structures biannually on its website, with the next update scheduled for July 2024. It is important to note that while reporting the option-adjusted duration is optional, insurance undertakings and groups are advised to consider reporting this metric, especially if there is significant optionality embedded in their technical provisions.

The EIOPA has unveiled its first Risk Dashboard on Institutions for occupational retirement provisions (IORPs), providing a comprehensive overview of the main risks and vulnerabilities within the IORP sector across the European Economic Area (EEA), encompassing both defined contributions (DC) and defined benefits (DB) schemes. Developed in collaboration with National Competent Authorities, the Risk Dashboard aims to:

1. systematically monitor and assess risks within the IORP sector from a macroprudential perspective; and
2. analyse potential vulnerabilities in IORPs' financial positions and their implications for EEA-wide financial stability.

The initial findings indicate that IORPs face heightened exposure to market and asset return risks, largely due to ongoing volatility in bond markets. Macro risks are deemed moderate, with positive trends in forecasted inflation counteracted by subdued GDP growth projections. Liquidity risks, while also moderate, are on the rise, driven by developments in derivative positions. Overall, most risk categories are currently assessed at a medium level, with credit risks and digitalisation / cyber risks expected to increase over the next 12 months. The dashboard, based on the latest reporting data up to the third quarter of 2023 and supplemented with external data up to the end of December 2023, will be updated quarterly to provide ongoing insights into the evolving risk landscape within the IORP sector.

The government is discussing a draft AML decree submitted in connection with the amendment to Act No. 253/2008 Coll. (AML Act). The amendment to the AML Act aims to implement the measures contained in the Action Plan to the Report on the Second Round of the National Risk Assessment on Money Laundering and Terrorist Financing, to eliminate selected shortcomings identified by the Moneyval Committee of the Council of Europe.

On Friday, 23 February 2024, a draft law on cryptocurrencies was tabled by the Minister of Finance. The draft was created with a view to ensuring the application of Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on cryptocurrency markets and amending Regulations, commonly referred to as the "MiCA Regulation". One of the most important provisions in the proposed law is to give the Financial Supervision Commission the role of controller of the crypto-asset market. Issuers of cryptocurrency-linked tokens, e-money tokens and providers of crypto-related services will be required to report information from their activities. According to the draft bill, the cryptocurrency market in Poland will be strictly regulated by the Polish Financial Supervision Authority (KNF), including criminal law provisions concerning entities related to this market.