Greg Kilminster
Head of Product - Content
OFSI review
The UK’s the Office of Financial Sanctions Implementation (OFSI) has published its annual review for 2023.
The review notes a number of key developments including:
- heavily restricting Russia’s access to the UK financial system;
- sanctioning all of Russia’s major banks and prohibiting new investment;
- Sanctioning seven individuals in the first wave of coordinated action against international cyber crime; and
- investigation of 473 suspected breaches of financial sanctions (excluding oil price cap and counter-terrorism breaches), a significant increase on the 147 cases recorded in 2021-2022.
Elsewhere the report notes that more than £21 billion in frozen assets across five named sanctioned states (Libya, Russia, Belarus, Syria and Iran with £6.5 million of that total being frozen in ‘other’ states.
Looking ahead, the report notes that the provisions of the Economic Crime and Corporate Transparency Bill offers will further clarify OFSI’s civil monetary penalty powers. OFSI also aims to collaborate with the Home Office and other government departments to impose mandatory reporting obligations on designated persons under Russia and Belarus regimes. This includes disclosing assets transparently to the UK government, going beyond current reporting requirements.
In response to the Economic Crime Plan 2, OFSI plans actions to combat kleptocracy and reduce sanctions evasion. This will involve partnering with the public and private sectors, enforcing the cap on Russian oil prices, and adopting a proactive enforcement model. OFSI also aims to enhance its information monitoring and intelligence capabilities, work with strategic partners, and set standards of best practice in sanctions implementation.
Throughout 2023-24, OFSI will engage with priority industries, such as financial services, fintech/crypto, legal, accountancy, property, high-value dealers, and NGOs. It will also expand international engagement by collaborating with the US Office of Foreign Assets Control (OFAC) and strengthening relationships with EU and G7 partners.
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PRA and FCA issue joint policy statement on margin requirements for non-centrally cleared derivatives
The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have issued a joint policy statement (PS) regarding margin requirements for non-centrally cleared derivatives. The PS (PRA PS18/23 and FCA PS23/19) provides feedback on responses to a previous joint consultation paper, outlines amendments to Binding Technical Standards (BTS) 2016/2251, and the approach to pre-approval of bilateral initial margin models.
The changes include:
An extension of the temporary exemption from the UK bilateral margining requirements in Article 38 of BTS 2016/2251 for single-stock equity and index options. This exemption will be extended from 4 January 2024 until 4 January 2026 to allow the PRA and FCA to gather the necessary evidence to create a permanent regime.
There will be no supervisory pre-approval requirement at this stage for using initial margin models.
This policy statement is relevant to PRA-authorised banks, building societies, and PRA-designated investment firms that fall within the scope of the margin requirements under the European Market Infrastructure Regulation (UK EMIR). In addition, this PS is relevant to all FCA solo-regulated entities and non-financial counterparties, who also fall within the scope of the margin requirements under UK EMIR.
The amendments to the BTS will become effective on 18 December 2023, when the final technical standards instrument by the PRA and FCA come into force.
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FSB analyses impact of bank failures on global financial stability
The Financial Stability Board (FSB) has published a report that reviews the bank failures of 2023 and analyses the impact of the actions taken by international authorities in the resolution framework. The report focuses on the cases of bank distress and the approaches taken by authorities to tackle it. It highlights the strengths and challenges in the application of the resolution framework in different crisis cases. The report also identifies significant issues that need to be addressed, such as the importance of an effective public sector liquidity backstop and the readiness of banks to access it as a last resort.
Regarding future work, the report emphasises FSB’s goal to develop, issue, and maintain global standards and guidance for banks. This will involve continuing work on specific technical and cross-border issues of bail-in, such as cross-border recognition, stakeholder information needs for the execution of bail-in, and preparing for compliance with applicable securities laws and exchange requirements. The report also suggests assessing the challenges arising from the use of technologies that may affect the speed and timing of bank runs, such as social media, mobile banking, and fast payments, for resolution execution. It identifies potential ways through which resolution authorities can address and mitigate these challenges, including communications strategies.
Overall, this report is a valuable resource for banks, as it provides insight into regulators’ intervention in financial stability and resilience currently and further work that might impact firms in the future.
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ASIC publishes latest market integrity update
The Australian Securities & Investments Commission (ASIC) has published its latest market integrity update which summarises the regulator’s activity during the previous few weeks. The update includes the following articles:
- Intervening to protect retail investors from high-risk offers and business practices.
- ANZ to pay $900,000 penalty for continuous disclosure failure.
- Instinet to pay $670,500 penalty over ‘set and forget’ compliance culture.
- Henry Eng Chye Heng pleads guilty to market manipulation.
- On the lookout for EOCY ‘window dressing’.
- Derivative trade repositories update.
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FINRA December fines summary
The Financial Industry Regulatory Authority (FINRA) has published its latest disciplinary summary for December 2023 covering a range of enforcement actions. Amongst the firms fined for violations are Fidelity Brokerage Services, HSBC Securities and Odeon Capital Group. The briefing also details the numerous individuals fined or barred by the regulator.
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New SRI label certification requirements to come into effect in 2024
The French government has updated the criteria for funds to receive the Socially Responsible Investing (SRI) label certification. The SRI label is a standard for financial products distributed in France and is awarded through a strict process conducted by an independent body. This body ensures that the fund complies with the label’s specifications.
The recent update includes new requirements across the six pillars. These changes will come into effect on 1 March 2024. Here’s a high-level review of the additions and transitional arrangements:
Adverse impact and sustainability risks
Firms must now consider adverse impact and sustainability risks when setting fund objectives and assessing portfolio performance monitoring (Pillar I and VI).
ESG indicators and notations
Firms must consider the choice of fund indicators against new criteria. The methodologies must also include additional considerations such as controversies, potential bias, and consistency with the Paris Accord when drawing transition plans. The methodologies should be reviewed at least every two years (Pillar I and II).
Added disclosures
Firms should now add the weight of each dimension (E, S, and G) in portfolio disclosures. The management company is now also required to disclose on its website the last report on the voting policy and related internal control performed (Pillar III, IV).
Enhanced controls
There is an emphasis on firms’ performance and disclosure of internal controls around various processes. External auditors must also review certain aspects periodically (Pillar IV, V, II).
Transitional arrangements
For funds applying for the first labelling: The initial labelling is suspended until 1 March 2024. During this period, applications for eligibility may be made, but audits cannot be carried out.
For certifications in progress: The audit may be finalised according to the previous requirements if the contract with the certifier has already been formalised, and the certificate will be issued within three months.
For funds already labelled: Funds already labelled will benefit from a transitional period until 1 January 2025.
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CFTC approves new rules
The Commodity Futures Trading Commission has approved two new rules both with comment periods into the New Year and which are summarised below.
Operational resilience framework for futures commission merchants, swap dealers, and major swap participants
This new rule requires futures commission merchants, swap dealers, and major swap participants to establish and maintain an Operational Resilience Framework.
The framework would help firms identify, monitor, manage, and assess risks related to:
- Information and technology security
- Third-party relationships
- Emergencies or other significant disruptions
The framework would have three main components:
- An information and technology security program
- A third-party relationship program
- A business continuity and disaster recovery plan
The rule would also require firms to:
- Have strong governance procedures in place
- Train employees on operational resilience risks
- Test their plans regularly
- Keep records of their compliance efforts
- Notify the CFTC and customers or counterparties of certain events
The CFTC is also proposing guidance on how firms can manage risks from third-party relationships.
The CFTC is accepting public comment on the proposed rule until 2 March 2024.
Protection of clearing member funds held by derivatives clearing organisations
This new rule aims to protect clearing member funds and assets in the event a derivatives clearing organisation (DCO) goes bankrupt. The key points are as follows.
Protecting funds
- Segregation of funds: Clearing member funds must be kept separate from the DCO’s own funds and held in a dedicated depository. This ensures they cannot be used to cover the DCO’s debts in bankruptcy.
- Depository acknowledgement: The depository holding the funds must acknowledge in writing that they belong to clearing members, not the DCO. This strengthens ownership claims in case of bankruptcy.
Foreign central banks
- Permitted Use: DCOs can hold customer and clearing member funds at foreign central banks. This provides additional security and diversification options.
- Requirements: Strict conditions must be met for using foreign central banks, including transparency, accessibility, and legal protection for the funds.
Daily reconciliation
- Mandatory calculation: DCOs must calculate and reconcile the amount of funds owed to customers and clearing members every day.
- Accuracy and transparency: This ensures discrepancies are identified and addressed promptly, promoting trust and confidence in the system.
- These proposed regulations aim to address a critical risk in the derivatives market: ensuring financial stability and protecting participants even if a DCO fails. By segregating funds, establishing clear ownership, and promoting transparency, the CFTC seeks to strengthen the resilience of the system and safeguard the interests of clearing members and their customers.
The CFTC is accepting public comment on the proposed rule until 16 February 2024.
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HKMA Dear CEO letter outlines lessons from banking crisis
The Hong Kong Monetary Authority has written to all its authorised institutions (AIs) to reiterate lessons learnt from the banking crisis in March 2023.
The letter summarises findings from the HKMA’s review of the crisis and confirms that “robust risk governance remains the backbone of safe and sound banking”. It also stresses that the requirements outlined in the letter are not new and already exist in current HKMA guidance.
The key points include:
Risk governance:
The board of directors and senior management are accountable for an institution’s safety and soundness. AIs should establish an agile risk governance framework, promptly address any inadequacies, actively learn from incidents or issues faced by peers, and respond proactively to supervisory observations.
Interest rate risk management
AIs are urged to proactively manage Interest Rate Risk in the Banking Book (IRRBB) despite generally low exposures. Recommendations include effective use of early warning triggers, adoption of interest rate shock scenarios, and building the ability to reposition the balance sheet promptly.
For AIs using behavioural models to measure IRRBB, the models should be conceptually sound and prudently calibrated. A robust framework, including customer segmentation and regular reviews, is advised.
Regarding investment in debt securities, AIs must be transparent in disclosing fair value changes, particularly for holdings classified as fair value through profit and loss (FVPL) or fair value through other comprehensive income (FVOCI). During uncertainty, AIs with significant holdings of debt securities held to maturity (HTM) should monitor unrealized losses and consider disclosing CARs adjusted for these losses.
Liquidity risk management
AIs should carefully manage deposit concentration risks by analysing deposit composition across various dimensions and implementing controls to contain liquidity risk.
Contingency funding management policies and procedures should be in place, regularly reviewed, and tested with real transactions to ensure operational readiness for swift access to funding during liquidity stress.
The impact of growing digitalisation on depositor behaviour should be assessed, and measures should be adopted to monitor and mitigate liquidity risks arising from digitalisation.
Social media monitoring frameworks are essential to address reputation risks, with a clear specification of coverage, keywords, and frequency. AIs should develop potential responses to various scenarios arising from social media impact.
AIs holding High-Quality Liquid Assets (HQLA), particularly Held to maturity (HTM) debt securities, should be cautious of the risk implications. A safeguard is recommended by limiting the proportion of HQLA held in the form of HTM debt securities to avoid excessive concentration.
The letter concludes by reminding AIs they are advised to review their risk governance framework and relevant risk management systems, addressing potential weaknesses in line with the outlined supervisory expectations. The HKMA is reviewing submission deadlines for relevant returns and surveys to facilitate timely monitoring of AIs’ positions in these risk areas, with industry consultation on proposed revisions anticipated.
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ESMA releases consultation on draft guidelines for sustainability information enforcement
The European Securities and Markets Authority (ESMA) has released a consultation on Draft Guidelines on Enforcement of Sustainability Information (GLESI). This draft is primarily based on the existing Guidelines on Enforcement of Financial Information (GLEFI) that ESMA has had in place since 2014.
The GLEFI guidelines provide a framework for the enforcement process, including how to select the issuers whose information should be examined, how to examine that information, and how to determine which enforcement action to apply in case of an infringement. The guidelines also specify how national competent authorities should internally organise the enforcement task and how national competent authorities and ESMA should jointly ensure European coordination of the enforcement work.
In light of the changes to the EU rules on reporting of sustainability matters, ESMA believes that enforcement of sustainability information by national competent authorities plays an important role in ensuring a consistent supervisory approach. As such, in preparing the GLESI, ESMA aims to align it as closely as possible with the GLEFI to ensure that the enforcement of sustainability information is consistent with the enforcement of financial information and contributes to bringing sustainability information on par with financial information.
ESMA acknowledges in the consultation that the requirements of the sustainability information framework are newer than those of the financial reporting framework, and there may be a learning curve for all parties in the first years of reporting. ESMA also recognises that this may be particularly true for those issuers preparing sustainability information for the very first time and that enforcers may play a role in accompanying issuers in the implementation process.
ESMA will review and consider all comments received by 15 March 2024.
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