to the point: financial regulation | 06/2024

• The ESMA, EBA and EIOPA together published a joint Opinion on the Sustainable Finance Disclosure Regulation (SFDR), recommending improvements for a coherent sustainable finance framework that supports the green transition and enhances consumer protection. The key proposals include:
  • Simplified product categories: Introduce two voluntary product categories, "sustainable" and "transition", with clear objectives and criteria to reduce greenwashing and help consumers understand product purposes;
  • Sustainability indicator: Consider introducing an indicator to grade financial products like investment funds, life insurance and pension products;
  • Disclosures: Improve disclosures for products outside the two categories to further reduce greenwashing;
  • Definitions and presentations: Enhance the definition of sustainable investments and simplify disclosure presentations for investors;
  • Scope and impact: Provide technical suggestions on the scope of the SFDR and improve disclosures on the negative impacts of investments on people and the environment; and
  • Consumer testing: Emphasise the need for consumer testing before implementing any policy proposals, such as categorisation systems and indicators.

• The EBA has published its final draft Regulatory Technical Standards (RTS) that clarify the extraordinary circumstances under which institutions can continue using internal models for market risk and disregard certain overshootings as per the Fundamental Review of the Trading Book (FRTB) framework. According to the Capital Requirements Regulation (CRR), competent authorities may allow institutions to deviate from certain internal model requirements or apply a less stringent version of those requirements during extraordinary circumstances. The RTS define the conditions and indicators the EBA will use to determine the occurrence of extraordinary circumstances. The EBA is responsible for issuing an opinion on whether such extraordinary circumstances have occurred, thereby guiding competent authorities on permitting these derogations.

• The EBA has published its final draft Regulatory Technical Standards (RTS) on assessing the materiality of extensions and changes to new market risk internal models, in line with the Fundamental Review of the Trading Book (FRTB) rules. It marks the completion of the EBA's roadmap on market and counterparty credit risk approaches initiated on 27 June 2019. These RTS, developed under the Capital Requirements Regulation (CRR), distinguish between material and non-material extensions and changes under the internal models approach (IMA). Material changes require approval from competent authorities, while non-material changes must be notified to competent authorities four weeks in advance, either with additional or basic information. The RTS establish both qualitative and quantitative conditions for categorising extensions and changes. Quantitative conditions assess the impact on IMA own funds requirements and relevant FRTB IMA components (Expected Shortfall, Stress Scenario Risk Measure and Default Risk Charge) before and after the changes. Additionally, the RTS provide guiding principles for categorisation, implementation and documentation requirements.

• The ESMA and EBA together published joint guidelines on the suitability of management body members and shareholders of issuers of asset-referenced tokens (ARTs) and crypto-asset service providers (CASPs) under the Markets in Crypto Assets Regulation (MiCAR), which aim to enhance transparency, security and regulation in the crypto-assets market and are part of a broader governance initiative. They cover criteria to assess the knowledge, skills, experience, reputation, honesty and integrity of management body members, ensuring they can commit sufficient time to their duties, thereby promoting robust governance and trust in the financial system. Additionally, the guidelines provide a methodology to assess the suitability of shareholders or members with direct or indirect qualifying holdings in supervised entities, ensuring these individuals do not negatively influence the management of the entities. These measures are essential for maintaining confidence and integrity in the crypto-assets market, supporting its development under MiCAR regulations.

• The EBA issued a package of technical standards and guidelines under MiCAR, focusing on reporting, liquidity stress testing and supervisory colleges. This package, completing the EBA's delivery of technical standards under MiCAR, includes:
• Final draft Regulatory Technical Standards (RTS) on the use of asset-referenced tokens (ARTs) and electronic money tokens (EMTs) denominated in non-EU currencies as a means of exchange. These RTS provide methodologies for estimating transaction numbers and values to monitor risks to monetary policy and sovereignty;
• Final draft Implementing Technical Standards (ITS) on reporting obligations for issuers of ARTs and EMTs denominated in a non-EU currency, and crypto-asset service providers (CASPs), including templates and instructions for compliance and significance assessment of tokens. These ITS will aid in general supervisory reporting and ensure compliance with MiCAR thresholds;
• Guidelines on liquidity stress testing outline risks and common reference parameters for stress test scenarios, enabling supervisors to strengthen liquidity requirements based on test outcomes;
• Final draft RTS on supervisory colleges specify conditions for deeming certain entities as "most relevant" and ARTs or EMTs as "used at large scale", determining supervisory college composition and functioning;

• The EBA issued a package of technical standards and guidelines under MiCAR on prudential matters, particularly on own funds, liquidity requirements, and recovery plans:
• Final draft regulatory technical standards (RTS) for adjusting own funds requirements and stress testing programmes for issuers of ARTs and EMTs, specifying criteria for risk assessment, procedures for increasing own funds and stress-testing requirements;
• Final draft RTS on procedures and timeframes for issuers to adjust own funds to 3 % of the average reserve of assets for significant ARTs or EMTs. The timeframe for implementation plans is set at 25 working days, with a maximum compliance period of six months;
• Final draft RTS specifying liquidity requirements for the reserve of assets, setting minimum percentages according to daily and weekly maturities, as well as minimum diversification of bank deposits and ensuring minimum over-collateralisation;
• Final draft RTS on highly liquid financial instruments, defining eligible assets and concentration limits, and ensuring correlation between these instruments and referenced assets;
• Final draft RTS on liquidity management policies and procedures, detailing processes for managing liquidity risk, including contingency plans and stress testing; and
• Guidelines on recovery plans, outlining the format and content requirements for recovery plans, incorporating feedback to enhance clarity and specificity, especially regarding disclosure plans and reserve of assets requirements.

• The EBA has published three regulatory products under MiCAR focusing on governance, conflicts of interest and remuneration, aiming to create a transparent, secure and well-regulated crypto-assets market. These are:
• Guidelines on Governance Arrangements, specifying the governance provisions for issuers of asset-referenced tokens (ARTs), detailing the tasks, responsibilities and organisation of management bodies, and the management of risks;
• Final Draft Regulatory Technical Standards (RTS) on Remuneration Policy, outlining the governance of remuneration policies for issuers of significant ARTs and e-money tokens (EMTs), ensuring that these policies promote sound risk management and do not incentivise lowering risk standards; and
• Final Draft RTS on Conflicts of Interest, which require issuers of ARTs to implement effective policies and procedures to identify, prevent, manage and disclose conflicts of interest, with particular attention to conflicts related to the reserve of assets and group structures.

• The EBA has amended its Guidelines on arrears and foreclosure to align with recent changes to the Mortgage Credit Directive (MCD). Following the revision of Article 28(1) of the MCD, the EBA determined that its Guidelines should not repeat, amend or contradict Level 1 legislation requirements. Consequently, Guideline 4 on the "resolution process" has been removed from the EBA Guidelines, as its content is now incorporated into binding Union Law. The overall requirements of the MCD and EBA Guidelines remain unchanged. The original EBA Guidelines on arrears and foreclosure, issued in 2015, supported the transposition of Article 28 of Directive 2014/17/EU on credit agreements for residential property (MCD). The guidelines became applicable alongside the MCD on 21 March 2016. The Credit Servicers Directive (CSD), which came into force in December 2021, amended Article 28(1) of the MCD by incorporating the content of Guideline 4 almost verbatim.

• The EBA issued its final draft amending Regulatory Technical Standards (RTS) on the standardised approach for counterparty credit risk (SA-CCR) as part of the new roadmap on the Banking Package. The amendments to the Capital Requirements Regulation have expanded the EBA's mandate to specify the formula for calculating the supervisory delta of options under the SA-CCR framework, now including commodity options compatible with negative commodity prices in addition to the existing interest rate options compatible with negative interest rates. The amended RTS now include:
• Formula for Supervisory Delta, specifying the formulas for calculating the supervisory delta of call and put options in both the interest rate and commodity risk categories, ensuring compatibility with negative rates and prices;
• Risk Driver Identification, methods for identifying transactions with single or multiple material risk drivers and determining the most material risk driver; and
• Position Determination, methods for determining whether a transaction is a long or short position in the primary or most material risk driver within the given risk category.

• The Advocate General focused on the role of the Bank Guarantee Fund (BGF), which performs the functions of restructuring authority, deposit guarantor and bank curator. He pointed out that the lack of national legislation ensuring the operational independence of the BGF and the avoidance of conflicts of interest obliges the national court to assess whether the organisational structure of the BGF meets these requirements. If it does not, the decision on compulsory restructuring may be deemed to have been issued in breach of the law, which would open the way for borrowers to seek compensation from the State Treasury. The opinion of the Advocate General is only the first step in a process, followed by a CJEU ruling and judgments of national courts.

• The Financial Stability Committee (FSC) has adopted a resolution on setting the countercyclical buffer rate for banks, which aims to strengthen the resilience of the banking sector. The amount of the buffer was set at 1 % after 12 months and 2 % after 24 months following the announcement of the regulation by the Minister of Finance. The recommendation is based on the countercyclical buffer application strategy adopted in March 2024. This buffer is aimed at mitigating cyclical fluctuations in credit in the economy and strengthening the capital base of banks, especially during periods of credit growth.

• The Polish Ministry of Justice is preparing a draft franking law to facilitate the conclusion of settlements in cases of loans in Swiss francs and to streamline court proceedings. The draft provides for the creation of a model franking settlement approved by the courts, which is expected to help relieve court congestion, particularly in the Warsaw Regional Court. To date, around 94,000 settlements have been reached between banks and borrowers, and the Ministry wants to promote this form of dispute resolution as an alternative to lengthy court processes. Court departments will be strengthened with additional staff, digitisation of files, and a new database of EU case law. The Ministry is working in consultation with various public institutions to unify actions for consumers and banks. Banks support this project, seeing it as a way to solve the problem of franking credits more quickly and fairly by converting them to zloty credits.

• To frame it in a wider context, the ordinance is meant to play into the Financial Supervisory Authority's (FSA) 2023 – 2026 Strategy for the Capital Markets Development. The following are among the most prominent rules and amendments to the current state of play with both local and cross-border business outreach:
• SMEs – Broadening the definition of institutional investors to include professional clients under MiFID to further facilitate SMEs' access to financing from this category of investors
• Asset Managers (AIFs and UCITS):
  • alignment with general corporate law requirements to end arbitrary interpretation of the rules;
  • changes to the set up and compliance with internal working procedures meant to simplify and provide more flexibility during the authorisation process for undertakings for collective investments (UCIs);
  • clarifications on cross-border investments by local UCIs in financial instruments traded on a multilateral trading system operating in a Member State;
  • additional rules on prudential assessment of the shareholders of AIFMs or self-managed AIFs with qualifying holdings;
  • changes to the rules on cross-border management of AIFs.
• Issuers:
  • mandate to the FSA to approve prospectuses issued by local (public administration) authorities for public offerings / admissions to trading on a regulated market of debt instruments;
  • mandate to the FSA to decide on whether to suspend the obligation to launch a mandatory takeover bid in exceptional circumstances (i.e. preventive attachment, insolvency, litigations, reorganisations, etc.);
  • clarification of the definition of the term "group" in the context of the obligation to publish the remuneration report;
  • national implementing measures with respect to Regulation (EU) 2023/2631 on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds.
• MiFID regulated entities:
  • prolongation of the statutory term for prudential assessment of qualified holding acquisitions in an investment firm from 60 days to six months;
  • clarification of the split of powers and responsibilities between the FSA and the National Bank of Romania with respect to investment services and activities concerning instruments under its remit;
  • clarifications on the type of assets an investment firm that is not licensed to carry out trading on its own account is able to invest in using own funds;
  • changes to the rules concerning the marketing / advertising of investment firms through persons other than own staff / tied agents and on a non-professional basis.
• Other notable changes:
  • regulatory framework on prevention of false advertising and aggressive communication techniques by entities not registered with the FSA;
  • multiple changes to the regime applicable to local AIFs (transfer of units, limits on capital returns and share buybacks, statutory withdrawal rights for shareholders, requalification to a different category, temporary derogations from investment limits, etc.);
  • changes to the sanctions and penalties regime applicable to selected categories of financial institutions;
  • changes to the framework on investor compensation schemes.

While most provisions of the ordinance have already entered into force, the national implementing provisions with respect to Regulation (EU) 2023/2631 on European Green Bonds are set to apply as of 21 December 2024.