Greg Kilminster
Head of Product - Content
ESAs publish first final set of rules under DORA
The three European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) have released the first batch of final draft technical standards under the Digital Operational Resilience Act (DORA) which will apply in full from January 2025.
Under DORA, the ESAs are mandated to jointly develop a range of policy instruments in two batches. The joint final draft technical standards published today comprise three Regulatory Technical Standards (RTS) and one Implementing Technical Standard (ITS):
- RTS on ICT risk management framework and on simplified ICT risk management framework
- RTS on criteria for the classification of ICT-related incidents;
- RTS to specify the policy on ICT services supporting critical or essential functions provided by ICT third-party service providers (TPPs)
- ITS to establish the templates for the register of information.
The final draft technical standards have been submitted to the European Commission, who will now start working on their review with the objective to adopt these first standards in the coming months.
The consultations on the second batch of policy mandates are still open and close on 4 March 2024. This second batch comprises the following:
- RTS and ITS on content, timelines and templates on incident reporting
- GL on aggregated costs and losses from major incidents
- RTS on subcontracting of critical or important functions
- RTS on oversight harmonisation
- GL on oversight cooperation between ESAs and competent authorities
- RTS on threat-led penetration testing (TLPT)
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European Data Protection Board releases report on DPOs
The European Data Protection Board (EDPB) has published a report on the results of its second coordinated enforcement action. This action focused on the appointment and role of Data Protection Officers (DPOs), which is a requirement under GDPR.
The report analyses the challenges that DPOs encounter and provides recommendations for organisations, DPOs, and data protection authorities (DPAs) to improve DPOs’ independence and ensure they have the necessary resources to perform their duties.
The report calls on DPAs to increase awareness-raising activities, information sharing, and enforcement actions, among other things. Additionally, the report urges organisations to ensure that DPOs have enough time, opportunities, and resources to stay informed about the latest developments and keep their knowledge up to date.
The next report will centre around the implementation of the right of access by data controllers.
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CFPB proposes rule extending consumer protections to overdraft loans
The Consumer Financial Protection Bureau (CFPB) has published a proposed rule mandating large banks to apply consumer protections, including interest rate disclosures, to overdraft loans.
The proposal would update regulatory exceptions for overdraft credit, included in regulations E and Z, ensuring that extensions of overdraft credit adhere to consumer protections required of similarly situated products, unless the overdraft fee is a small amount that only recovers applicable costs and losses.
This proposal would make it easier for consumers to compare credit products and provide substantive protections that apply to other consumer credit. It is part of a wider effort by the CFPB to crack down on junk fees and promote competition in the consumer financial product marketplace.
Comments on the proposed rule must be submitted by 1 April 2024.
Click here to read the full RegInsight on CUBE’s RegPlatform
ISDA launches sustainability-linked derivatives clause library
The International Swaps and Derivatives Association (ISDA) has recently launched a clause library for sustainability-linked derivatives (SLDs). The purpose of this library is to provide greater standardisation for market participants during negotiations of SLD transactions with counterparties.
SLDs are a type of derivatives structure that embeds a sustainability-linked cashflow. They utilise key performance indicators (KPIs) to monitor compliance with environmental, social, and governance (ESG) targets.
The clause library provides standard-form drafting options, including:
- provisions outlining what evidence of sustainability performance must be delivered and when;
- mechanisms to adjust cashflows depending on whether relevant ESG targets have been met; and,
- options available to counterparties following disruption and review events.
The clause library is available through the ISDA MyLibrary platform. This platform allows users to read and navigate the various provisions in a digital format with search functionality and comparability tools.
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The path forward for bank capital reform: speech by Michelle Bowman
In a speech at the US Chamber of Commerce, Federal Reserve Governor Michelle Bowman discussed proposed changes to bank capital rules in the US.
She began by noting the consultation period had expired for the proposed Basel capital requirements to all banks with over $100 billion in assets and that the number of comments necessitated the need for regulators to carefully consider the way forward for this proposal, particularly “we should consider tradeoffs in addressing scope, calibration, and tailoring. And we should appropriately adjust the excessive calibrations and eliminate regulatory overreach in the proposed rule.”
Capital policy considerations
Bowman then delved into the fundamental role of capital in the US banking system, noting its significance in promoting safe and sound operations and supporting confidence in the financial system. She noted that capital is not without costs, highlighting the ongoing expenses incurred by banks and the direct impact on the cost and availability of financial services and indeed where banks locate. Hence Bowman suggests that policy makers need to consider three things when proposing changes:
- the benefit of increased safety from higher capital levels, with the direct costs to banks, and the downstream effects on consumers, businesses, and the broader economy;
- the broader regulatory landscape and how changes to capital regulations may complement, overlap, or conflict with other regulatory requirements; and
- the broader implications for the structure of the U.S. financial system and for financial stability.
Bowman then covered two of the most critical shortcomings of the capital requirements proposal.
Calibration
Bowman highlighted concerns about the calibration of the proposed reforms, emphasising potential substantial costs. Federal Reserve staff estimate a 20% increase in total risk-weighted assets for affected bank holding companies.
Public concerns focus on calibration’s impact on various industries, including farmers, small-business owners, and others. These concerns, driven by the scale of the proposed capital increase, highlight potential higher costs, limited services, and increased concentration in financial providers. Bowman stressed the need for policymakers to address these calibration issues, considering international comparability and competitive disadvantages, and called for the development of a consensus-driven target for aggregate capital levels to ensure safety, soundness, and international consistency.
Tailoring
Bowman then addressed the role of tailoring in bank capital reform efforts. Despite the success of the current risk-based, tailored approach, recent regulatory reform discussions have challenged the effectiveness of tailoring. She rejected the notion that removing tailoring is a productive regulatory approach, highlighting the existing capital framework’s ability to support appropriate requirements based on firm characteristics.
In her opinion, the failure to apply tailoring in the proposed reforms is a fundamental flaw. She illustrated the current capital requirements as a slope, with different levels kicking in based on size and complexity. Contrarily, the Basel proposal appears as a single step, with broad capital requirements activating at the $100 billion threshold. Bowman emphasised the importance of maintaining tailoring in areas like liquidity regulation and long-term debt requirements to avoid unintended distortions in the banking landscape.
She urged a granular examination of banks subject to different elements of capital requirements, such as market-risk and credit valuation adjustment (CVA) requirements, credit and operational risk requirements, and the treatment of accumulated other comprehensive income (AOCI). Bowman also advocated for a tailored approach to reduce unnecessary burden and costs while enhancing the overall effectiveness of the capital framework.
Bowman then highlighted the need to:
- recognise the benefits of diversification,
- refine the calibration of the market risk capital rule, and address redundancy or “over-calibration.”
- better align risk weights and credit risk; and
- look beyond Basel III
In concluding, Bowman noted that differences between policy makers were not insurmountable obstacles and that both the consultation comments and findings from a data collection exercise from October 2023, which she believes will be released shortly, should ensure that the impact of the proposal is properly assessed and should help in shaping the next iteration of the proposal: “whether that be in the form of a re-proposal or significantly revised final rule”.
Click here to read the full RegInsight on CUBE’s RegPlatform