to the point: financial regulation | 08/2023

Slaughter and May published A Borrower's Guide to Sustainability-Linked Loan Terms produced for the Association of Corporate Treasurers (ACT). It aims to equip treasurers with an understanding of the parameters of a sustainability-linked loan (SLL) and how the characteristics of such loans are protected in facility documentation. The Guide provides an overview of the Sustainability-Linked Loan Principles (SLLP) and the accompanying SLLP guidance for understanding this financial product and also explains the role of the sustainability coordinator in the SLL process. The Guide builds off the ACT Borrower's Guide to the LMA's Investment Grade Agreements, which includes an introduction to SLLs. See also the LMA's Model Provisions (with additional explanations and commentary) for SLLs as a reference point to explaining the components of SLL terms.

The European Banking Authority (EBA) has made two significant updates:

1. Revision of its roadmap for implementing internal-ratings-based (IRB) model requirements, in which the EBA aims to reduce compliance costs for financial institutions. The EBA is allowing the implementation of IRB repair requirements to be postponed for certain models – Loss Given Default (LGD) and Credit Conversion Factor (CCF) – covering portfolios that are no longer eligible for the revised advanced internal ratings-based approach under Basel III. This postponement aligns with the future Capital Requirements Regulation (CRR 3). During this period, institutions have the option to return to a simpler IRB approach or use the standardised approach for these portfolios. This postponement does not apply to Probability of Default (PD) models or those LGD and CCF models that continue to include exposures under the advanced internal ratings based (AIRB) approach.
2. The EBA also published a final supervisory handbook aimed at providing guidance on the validation function pursuant to Article 185 of CRR. The handbook provides a detailed description of the areas that the validation function should assess, covers various aspects, including the validation framework, model performance assessment, modelling environment (data quality and model implementation assessment), and the relationship between the validation function and other corporate governance functions like the credit risk control unit and internal audit. Additionally, the handbook clarifies how the validation function operates in different contexts, including during the model cycle (initial or ongoing validation), when using external data, when outsourcing validation tasks, and when dealing with data scarcity.

These updates aim to provide better guidance and flexibility for financial institutions in implementing IRB model requirements while reinforcing the role of the validation function in corporate governance.

The Government of the Czech Republic is discussing an amendment to Act No. 240/2013 Coll., on Investment Companies and Investment Funds. The contemplated amendments will be as follows:

1. regulation of unlicensed administrators so that their activities do not circumvent the Investment Companies and Investment Funds Act: the information obligation vis-à-vis investors will be increased; a minimum deposit of EUR 125,000 will be explicitly set for each investor, except if the number of investors in a given entity does not exceed 20 persons, and a sanctioned deletion of persons pursuant to Section 15 of the Investment Companies and Investment Funds Act from the list maintained by the Czech National Bank in the event of a serious or repeated breach of obligations will be introduced;
2. the introduction of the possibility for limited partnerships on investment certificates to create sub-funds;
3. the introduction of the abbreviation "SICAF" for specifically focused funds as this abbreviation is also used worldwide;
4. adjustment of administrative fees to reflect the costs associated with the administrative procedure;
5. clarification of the adaptation of the legal framework in relation to Regulation (EU) 2019/1156 of the European Parliament and of the Council and clarifying the adaptation of the legal framework in relation to the revision of the European Long-Term Investment Funds Regulation (ELTIF).

The EBA launched a public consultation (consultation paper here) on amendments to its Guidelines on the specification and disclosure of systemic importance indicators – the updating of an annex which replicates the data template issued by the Basel Committee on Banking Supervision (BCBS) should be managed on a yearly basis. The EBA's methodology for identifying Global Systemically Important Institutions (G-SIIs) closely mirrors the approach adopted by the BCBS to identify Global Systemically Important Banks (G-SIBs). In January 2023, the BCBS issued a revised data template for the 2023 identification exercise, using data from the end of the 2022 business year. To maintain consistency between the international standards and the EU regulatory framework, the EBA is proposing amendments to its Guidelines to replicate the updated Basel reporting template.

The Financial Analytical Office has published an updated Guideline No. 8 – Copying ID Cards for the Purposes of the AML Act – available here.