Greg Kilminster
Head of Product - Content
ECB Frank Elderson speech: embedding a strong data culture in supervision
In a speech at the Data Innovation for the Future of Regulation conference, Frank Elderson, Member of the Executive Board of the European Central Bank (ECB) and Vice-Chair of its Supervisory Board, discussed the necessity of embedding a robust data culture within banking supervision and articulated the ECB’s strategy for leveraging data and technology to enhance regulatory oversight and ensure the stability of the financial system.
The data revolution in supervision
Elderson opened by highlighting the unprecedented scale of data generation, citing projections that global data volume will reach 181 zettabytes by 2025, a staggering increase from just two zettabytes in 2010. This explosion of data necessitates a shift in how supervisory bodies approach their work. Traditional manual methods of data analysis are becoming obsolete, making the integration of technology an imperative rather than a choice.
The ECB’s approach, encapsulated in its new Digital Strategy for 2024-2028, aims to integrate data-driven solutions seamlessly into the supervisory process. This strategy includes the development of supervisory technology (suptech) tools designed to enhance efficiency and improve risk identification.
Suptech tools: revolutionising supervision
One of the key elements of the ECB's strategy is the concept of "supervision at your fingertips", which aims to provide supervisors with easy access to critical information through user-friendly digital tools. Over the past three years, the ECB has collaborated with national supervisors to develop more than a dozen suptech tools, now utilised by over 3,500 supervisors across Europe.
Elderson cited as a good example the Athena platform, an AI-driven tool that assists supervisors in extracting and comparing information from diverse sources, such as bank documents, supervisory reports, and external data. This tool, akin to ChatGPT, enhances the quality of supervisory work by identifying patterns and extracting key insights efficiently.
Elderson emphasised, however, that despite the growing reliance on AI and other technologies, human judgment remains central to supervisory decisions. While AI can streamline routine tasks and enhance data analysis, the ultimate responsibility for decision-making lies with human supervisors.
Addressing the risks of new technologies
Elderson acknowledged the potential risks associated with new technologies, particularly generative AI. To mitigate these risks, the ECB ensures that tools like Athena operate in secure environments tailored to supervisory needs, thereby maintaining data confidentiality and security.
He also stressed the importance of not allowing fear of new technologies to hinder progress. Embracing innovation is essential for unlocking the potential of data and technology to improve supervisory practices and enhance the resilience of the financial system.
International cooperation and knowledge sharing
Elderson highlighted the importance of international cooperation in advancing data-driven supervision. The ECB has strengthened its collaboration with global partners, including the Bank of England and the Financial Conduct Authority (FCA), to share knowledge and develop suptech tools.
This collaborative approach is crucial as supervisory bodies worldwide face similar challenges. By exchanging good practices and use cases, supervisors can collectively harness the potential of data and innovative tools, preparing for any technological risks that may arise.
Elderson concluded by reiterating the critical role of a strong data culture in delivering high-quality, efficient, and effective supervision. As the financial landscape continues to evolve, the integration of data and technology will be pivotal in maintaining the stability and integrity of the banking system. The ECB’s proactive approach to embedding data innovation within its supervisory framework serves as a model for other regulatory bodies aiming to navigate the complexities of the digital age.
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FATF fifth report on virtual asset compliance
The Financial Action Task Force (FATF) has reported slow global progress in regulating virtual assets (VAs) and virtual asset service providers (VASPs) under its anti-money laundering and counter-terrorist financing (AML/CFT) standards. Despite the introduction of a comprehensive Roadmap in February 2023 to enhance the implementation of these standards, the latest findings indicate only marginal improvements in compliance among member jurisdictions.
Slow progress
According to the FATF's fifth targeted review, some jurisdictions have made strides in establishing AML/CFT regulations for VASPs, but the overall global implementation remains inadequate. Of the 130 mutual evaluations and follow-up reports reviewed, 75% of jurisdictions were found to be only partially or not compliant with Recommendation 15 (R.15), which is designed to mitigate the risks associated with virtual assets. This figure remains unchanged from the previous year.
A significant concern highlighted by the report is the lack of virtual asset risk assessments, with 29% of jurisdictions yet to conduct any form of risk assessment. Furthermore, 27% of respondents have not decided on regulatory frameworks for the VASP sector. Among those that have, 60% permit VASPs, while 14% opt for partial or explicit prohibitions, though effective enforcement of these prohibitions remains challenging.
Travel rule shortcomings
Implementation of the Travel Rule, a critical component for ensuring transparency in virtual asset transactions, is also lagging. Nearly one-third of jurisdictions have not enacted legislation to enforce this rule, and among those that have, supervision and enforcement actions are notably insufficient.
The FATF report notes the continued misuse of virtual assets by illicit actors, including terrorist groups and entities involved in weapons proliferation. North Korea, in particular, is identified as a significant threat, utilising sophisticated methods to launder stolen virtual assets.
Recommendations
To address these shortcomings, the FATF has outlined several recommendations for both the public and private sectors. Jurisdictions are urged to conduct thorough risk assessments, implement robust regulatory frameworks, and ensure effective enforcement of existing regulations. The private sector, particularly VASPs, is encouraged to enhance their compliance tools and adopt comprehensive risk mitigation measures.
The FATF plans to continue its outreach and support efforts, particularly focusing on jurisdictions with significant VASP activity and lower regulatory capacity. The status of global compliance will be reassessed and updated in 2025.
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FATF publishes corruption review
The Financial Action Task Force (FATF) has published a new report, Horizontal Review of Gatekeepers’ Technical Compliance Related to Corruption, to assess the current state of play and identify areas that FATF members must prioritise for further improvement in dealing with corruption.
The report notes that over half of FATF members scored above 80%, but adds that seven members, representing over half of the world's GDP, scored below 50%. Despite perceptions that the legal profession is less regulated, the review found similar compliance levels across all gatekeeper sectors.
The review also noted that key FATF Recommendations, such as customer due diligence, internal controls, and risk-based supervision, are not being met at the same level as other obligations, underscoring the urgent need for improvement among lagging FATF members.
The report notes that those members lagging behind must urgently ensure that gatekeepers are adequately covered in line with the FATF’s longstanding Recommendations. “FATF members should work with the sectors, industry associations, and civil society to ensure that these critical sectors – lawyers, accountants, trust and company service providers, and real estate professionals – are subject to all necessary preventive measures, that they are informed and assisted in implementing these measures, supervised and made more resilient against attempts to exploit them for illicit financial purposes, and that complicit enablers are investigated and held accountable.”
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BCBS consults on principles for managing third-party risk
The Basel Committee on Banking Supervision (BCBS) has released a consultation paper outlining principles for effectively managing third-party risk in the banking industry.
The 12 principles aim to establish a common foundation for banks and supervisors to manage the risks associated with these arrangements. Principles 1 to 9 provide banks with guidance on how to effectively manage third-party risks, while principles 10 to 12 offer guidance to prudential supervisors.
The principles maintain a neutral stance towards specific technologies to ensure relevance across a wide range of technologies. Therefore, they can be applied to emerging trends, such as artificial intelligence, machine learning, and blockchain technology, even though these trends are not explicitly mentioned.
The deadline for feedback is 9 October 2024.
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BIS launches project insight to enhance global value chain monitoring
The Bank for International Settlements (BIS) has announced the launch of Project Insight, a collaborative initiative aimed at improving the monitoring of global value chains (GVCs).
This project will use both structured and unstructured granular data, along with big data analytics tools, to create a comprehensive GVC monitor. The monitor will support central banks, policymakers, and international organisations in tracking critical developments in GVCs and assessing their economic and financial impacts. It will also explore the application of artificial intelligence, machine learning and network analysis to extract meaningful insights for the public sector.
The project involves several organisations, including the BIS Innovation Hub’s Hong Kong Centre, the BIS Monetary and Economic Department, the Hong Kong Monetary Authority, the International Monetary Fund, the World Trade Organisation, the Asian Development Bank, the Organisation for Economic Co-operation and Development, the United Nations, and DIW Berlin (German Institute for Economic Research). Throughout the project, they will also work with the private sector.
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ESMA releases findings of fifth CCP stress test
The European Securities and Markets Authority (ESMA) has released the findings of its fifth stress test for central counterparties (CCPs) conducted under the European Markets Infrastructure Regulation (EMIR).
Some context
The fifth CCP stress test exercise assessed the credit, concentration, and liquidity risks that CCPs face and examined the clearing ecosystem. For the first time, it also assessed CCPs’ exposure to climate risk.16 CCPs were included in the exercise, comprising two UK CCPs qualifying as Tier 2 CCPs and all authorised EU CCPs.
Key takeaways
- CCPs have robust lines of defence to withstand significant market shocks in combination with the default of the two clearing member groups with the largest exposures.
- CCPs are also resilient to substantial liquidity stress events, while CCPs’ clearing, and investment activities play a key role in the results.
- Some gaps persist in the coverage of concentration risk across CCPs and across asset classes, notably for commodity derivative positions.
- For climate risk, CCPs’ exposures depend on whether the markets they clear are directly exposed to transition risk, such as commodities and energy. The majority of sampled CCPs have started to integrate climate risk into their stress testing framework.
- The ecosystem analysis provided insights into the CCPs’ and clearing members’ resources and showed that the total amount of required margin increased by 56% compared to the last exercise.
Next steps
In line with the EMIR mandate, ESMA will issue the necessary recommendations where the assessments expose shortcomings in the resilience of one or more CCPs.
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ESMA issues consultations on CSDR refit
The European Securities and Markets Authority (ESMA) has issued consultations on various aspects of the Central Securities Depositories Regulation (CSDR) refit. The proposed rules cover the information that European central securities depositories (CSDs) need to provide to their national competent authorities (NCAs) for review and evaluation, the information to be notified to ESMA by third-country CSDs, and the scope of settlement discipline.
Key takeaways
The draft rules are set out in three separate consultation papers, covering:
- Draft regulatory technical standards (RTS) on the information notified by third-country CSDs: ESMA proposes simplifying the information that needs to be notified, thereby reducing the reporting burden.
- Draft technical standards on the review and evaluation process of EU CSDs: ESMA proposed standardising the information shared by CSDs regarding their cross-border activities and the risks evaluated by the relevant authorities.
- Technical Advice on the Scope of CSDR Settlement Discipline: ESMA’s proposals address the underlying causes of settlement failures that are not attributed to the transaction participants, as well as the circumstances under which certain operations are not considered as trading.
Next Steps
The deadline for feedback is 9 September 2024.
ESMA plans to submit the final reports to the European Commission in the first quarter of 2025. Consultations on other aspects of CSRD will be conducted in the upcoming months.
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EBA publishes technical package for version 3.5 of its reporting framework
The European Banking Authority (EBA) has released a technical package for version 3.5 of its reporting framework. This package contains standard specifications, including validation rules, the Data Point Model (DPM), and the XBRL taxonomies to support the following reporting requirements:
- Amendments to the technical standards for specific reporting requirements for the Fundamental Review of the Trading Book (FRTB)
- Diversity benchmarking guidelines
- Cross-sectoral technical standards on standard templates for the register of information related to contractual arrangements on the use of ICT services provided by third-party ICT service providers under the Digital Operational Resilience Act (DORA)
- Amendments to the reporting and disclosure technical standards on minimum requirements for own funds and eligible liabilities and total loss-absorbing capacity (MREL/TLAC), following the final changes introduced by the legislators in the level 1 text.
This technical package also includes a version of the data dictionary contents in the new DPM2.0 format (for informational purposes only) and adopts the new XBRL architecture.
Next steps
The FRTB reporting is applicable only from the date the FRTB framework is applied, following the Commission’s announcement on 18 June of its intention to postpone the application of the FRTB by a year (to 1 January 2026).
The DORA reporting on CTPPs has been developed based on the final draft technical standards published and submitted to the Commission in January 2024. The EBA will reflect in subsequent releases any amendments to the technical standards during their adoption by the Commission that impact the technical package.
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