04 October 2024
Schoenherr publication
czech republic
austria
to the point: financial regulation | 09/2024
Welcome to our to the point newsletter. Every month, we are looking back at the most relevant developments in the area of financial regulation in the CEE region.
In this edition, you will get a mix of updates:
- The LMA issued an article announcing that on 27 September 2024, the Federal Reserve Bank of New York launched the Reference Rate Use Committee (RRUC), marking an important step in the post-LIBOR transition era. The RRUC is a newly formed group of private market participants tasked with supporting the integrity, efficiency and resilience of interest rate benchmarks across financial markets. Its primary focus is to address significant issues surrounding reference rates in the post-LIBOR environment. It will monitor how the use of these rates is evolving and assess any changes in the underlying markets that support them. The committee aims to promote best practices for the use of reference rates, aligned with recommendations made by the Alternative Reference Rates Committee (ARRC), which played a central role in guiding the transition from LIBOR to alternative benchmarks like the Secured Overnight Financing Rate (SOFR). As the financial industry fully transitions away from LIBOR, the RRUC will be a vital platform for addressing emerging challenges and ensuring that reference rates are used appropriately and effectively. It will also serve as a conduit for developing guidelines and frameworks to help market participants navigate the evolving landscape of interest rate benchmarks.
- On 5 September 2024, the FCA issued a final reminder about the imminent cessation of synthetic US dollar (USD) LIBOR, confirming there will be no further extensions beyond the end of September 2024 deadline. The remaining synthetic USD LIBOR settings will permanently cease after their final publication on 30 September 2024. This announcement follows a joint letter released in July 2024 by the FCA and the Asia Pacific Loan Market Association (APLMA), urging all market participants to accelerate their preparations for the post-LIBOR environment. As the transition deadline nears, the LMA reminds all entities involved in financial markets to take several key actions to ensure readiness. First, they should review any remaining exposures that still rely on synthetic USD LIBOR, ensuring these contracts are accounted for. Second, participants need to examine the fallback provisions within contracts, which dictate the alternative rates that will apply once synthetic USD LIBOR is discontinued, preventing any ambiguity or potential disputes. Third, it is crucial to assess the processes and consent levels required to amend interest rate provisions in contracts. Finally, organisations should explore the timing of available options, including the possibility of resetting interest rates on 30 September 2024, to ensure a smooth transition and avoid complications post-LIBOR.
- The EIOPA has published updated technical documentation for calculating risk-free interest rate (RFR) term structures, which will take effect on 1 January 2025, as this documentation is essential for calculating technical provisions for insurance and reinsurance obligations under the Solvency II A key change is that the EIOPA will no longer provide technical information for 11 non-EEA currencies, including the Brazilian real (BRL), Chilean peso (CLP), Indian rupee (INR), South Korean won (KRW), Malaysian ringgit (MYR), Mexican peso (MXN), New Zealand dollar (NZD), Singapore dollar (SGD), South African rand (ZAR), Thai baht (THB) and Turkish lira (TRY). This decision stems from an assessment according to Article 5.2 of the RFR Technical Documentation, which concluded that these currencies are not significant for the EU insurance sector. As a result, these currencies will no longer be supported for RFR calculations starting from 2025.
- The Chamber of Deputies has discussed the draft of the Digital Finance Act in the second reading. The draft primarily modifies the categorisation of offences as well as the powers of the Czech National Bank, which will license providers of services related to crypto-assets, supervise compliance with the established obligations, and address possible violations. The Act implements European Union regulations in the field of digital finance, namely DORA and MiCA.
- The Government is now discussing the Draft Decree amending Decree No. 267/2020 Coll., on the reporting of data by the investment fund manager and administrator of an investment fund and a foreign investment fund to the Czech National Bank, which was prepared in connection with the amendment to Act No. 240/2013 Coll., on Investment Companies and Funds. The amendment responds primarily to the changes for asset managers set out in Section 15(1) of the Act. In addition to alignment with the amendment to the Act, it also addresses technical shortcomings in reporting to the European Securities and Markets Authority (ESMA), where the reporting will depend on the type of licence and not on the limit being exceeded. The amendment includes two main changes. The first is the introduction of national reporting for asset managers, specifically the obligation to provide an auditor's certificate on the number of investors, which is a new national requirement in relation to Section 15(6) and (7) of the Act. The second change is a modification of the ESMA's interpretation of the requirements, clarifying that the statements depend on the asset manager's licence rather than the actual exceeding of the applicable limit.
- The Czech National Bank (CNB) has decided to join the European standard TIBER-EU, which focuses on advanced penetration testing of cyber resilience, in preparation for the implementation of DORA. TIBER-EU (Threat Intelligence-based Ethical Red Teaming) is a framework developed by the European Central Bank (ECB) to test the cyber resilience of financial entities. Its purpose is to simulate real-life cyberattacks, allowing critical systems of financial institutions to be tested under realistic conditions. The tests are based on analyses of actual cyberthreats and are conducted using a "red team" that mimics the tactics of real attackers. For the CNB, this means access to the latest cybersecurity techniques and methods, which will enable it to improve its supervision of financial entities in the Czech Republic. This move is crucial for banks and other financial institutions, as the CNB will ensure that all relevant entities will be required to regularly undergo advanced penetration testing, at least once every three years. These tests will be carried out in normal operation on key systems, leading to enhanced digital resilience. This will require banks to prepare for increased pressure on cybersecurity and regular testing, enhancing their awareness of current threats and their ability to counter them.
- The Financial Analytical Office (FAO) has updated Guideline No. 9 on client screening. The guideline is addressed to all obliged persons under the Czech AML Act, i.e. not only credit and financial institutions, and is available here. The most significant changes concern the "No Client Screening" measure and enhanced client screening, which provide obliged persons (banks, insurance companies and other financial institutions) as well as the FAO with better tools to effectively manage risk. The introduction of the "No Client Screning" measure allows obliged persons to refrain from screening clients where doing so could alert the client and potentially compromise an ongoing investigation into a suspicious transaction. This measure is enshrined in Section 9b of the AML Act and can be applied in two ways. The first option is for the obliged person itself to decide not to carry out the screening if it suspects money laundering or terrorist financing and there is a risk that the screening could tip off the client. The obliged person must then notify the FAO of this situation without delay and provide detailed information on why it has not carried out the screening. Alternatively, the FAO will instruct the person not to carry out the screening if doing so could compromise the investigation. The instruction may be given by telephone, but it must be subsequently documented, and the obliged person must follow the FAO's instructions exactly. Both options place a strong emphasis on documentation and the ability to retrospectively reconstruct whether the procedure was conducted correctly and in accordance with the law. Another key change is the updating of the client's enhanced screening measures. This is not a separate institute but a specific addition to standard client identification and screening. Obliged persons must apply enhanced screening for clients from high-risk countries where there is an increased risk of money laundering or terrorist financing. In applying enhanced screening, emphasis is placed on so-called ex-ante screening, i.e. obtaining information on transactions before they take place. Obliged persons should obtain details about the purpose of the transactions, the recipient, and the amounts in advance. If the transactions are consistent with the client's expected behaviour, it is not necessary to apply enhanced screening to each transaction. Ex-post screening is then carried out after the transactions have been executed to ensure that the transactions executed are consistent with the information obtained about the client and do not contain any irregularities.
- The Austrian Financial Market Authority (FMA) declared on 2 October 2024 that it will comply with the ESMA's Guidelines on funds' names using ESG or sustainability-related terms and will adopt the same in its supervisory practice as of 21 November 2024. From then on, it will check whether new funds that use sustainability-related terms in their name are indeed allocating 80 % of their investments to meet environmental and/or social characteristics or sustainable investment objectives. The ESAM guidelines also provide for certain exclusion criteria. Depending on the ESG-related term in the fund name, investments in companies from certain sectors such as coal, oil, gas and emission-intensive power generation, controversial weapons, tobacco and companies that do not comply with specific principles of good governance are excluded. According to the FMA, the guidelines are expected to affect more than 200 funds with over EUR 40bln in assets under management in Austria. However, existing funds have a grace period until 21 May 2025 to make any required changes.
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