Greg Kilminster
Head of Product - Content
PRA releases PS7/24 on Securitisation Regulation
The Prudential Regulation Authority (PRA) has released a policy statement (PS) on 7/24 that provides feedback on responses received to the consultation paper (CP) 15/23 – Securitisation: General requirements. The PS also includes the PRA’s final policy, which consists of:
- A new Securitisation Part of the PRA Rulebook, along with consequential amendments to the Liquidity Coverage Ratio (CRR) Part and the Non-Performing Exposures Securitisation (CRR) Part of the PRA Rulebook.
- An updated PRA supervisory statement (SS) 10/18 – Securitisation: General requirements and capital framework.
Some context
CP15/23 proposed rules to replace assimilated EU law requirements in:
- Provisions of the Securitisation Regulation for which the PRA has supervisory responsibility.
- The related Risk Retention Technical Standards.
- The related Disclosure Technical Standards.
The PRA’s proposed approach was to largely preserve the relevant requirements in the Securitisation Regulation, the Risk Retention Technical Standards, and the Disclosure Technical Standards when transferring them into PRA rules. However, the PRA proposed targeted changes to these requirements to address known existing issues.
The PRA also consulted on a draft Statement of Policy (SoP) - Permission for resecuritisations, indicating that the PRA would usually envisage using section 138BA of the Financial Services and Markets Act 2000 (FSMA) to grant permissions for resecuritisations only in circumstances broadly similar to those in which the PRA could grant permissions for resecuritisations under the Securitisation Regulation.
CP15/23 was published broadly in parallel with the Financial Conduct Authority (FCA) CP23/17 – Rules relating to Securitisation on replacing relevant firm-facing provisions in the Securitisation Regulation and related technical standards with FCA rules.
Key takeaways
The PRA made some adjustments to the policy package consulted on in CP15/23, of which the below are the most material:
- Allowing for a 6-months period between publication of this PS and the implementation date for the new rules and revised SS10/18.
- Adding transitional provisions for pre-transfer securitisations to largely preserve their treatment under the Securitisation Regulation and related technical standards.
- Better aligning PRA and FCA rule drafting.
- Clarifying the meaning of ‘before pricing’ in the due diligence and transparency requirements.
- Adjustments to the due diligence requirements for secondary market investors in relation to what disclosures are made by manufacturers.
- Clarifying that it is possible for a UK institutional investor to delegate its due diligence to another investor, which is not an ‘institutional investor’ as defined for purposes of the Securitisation Part of the PRA Rulebook, in which case the UK institutional investor retains the responsibility for compliance with the due diligence requirements.
- Clarifying that firms may comply, as before, with the transparency requirements by disclosing data only in aggregated or anonymised form (or in relation to underlying documentation, as a summary) in circumstances where UK law relating to confidentiality and/or processing of personal data or any confidentiality obligation relating to customer, original lender or debtor information do not allow more ‘granular’ disclosures.
- Clarifying the prohibition on hedging of the material net interest required to be retained under the risk retention requirements.
- Clarifying that there is no need for risk retention in relation to securitisations of own liabilities (e.g. own issued covered bonds).
- Not proceeding with the draft SoP – Permission for resecuritisations.
Next steps
The changes resulting from this PS will come into force on 1 November 2024, subject to the revocation of the Securitisation Regulation and related technical standards.
The commencement order has not been made to revoke the Securitisation Regulation and related technical standards. HMT anticipates making this commencement order later this year once the draft Securitisation (Amendment) Regulations 2024 have been approved by Parliament. The PRA will delay or revoke these rules if the commencement order is not made.
The FCA and PRA expect to consult on further changes to their securitisation rules in Q4 2024/Q1 2025, although timings may change.
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FCA and PRA issue FCA CP24/10 and PRA CP6/24
The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have released a joint consultation paper (CP) to present proposals that incorporate the modifications brought about by the Securitisation (Amendment) Regulations 2024 and the UK prudential requirements for credit institutions and investment firms (UK CRR). The CP also includes a new rule on Financial Services Compensation Scheme (FSCS) eligibility.
Key takeaways
The CP includes the following:
- PRA proposals to make minor amendments to PRA rules and to add a new rule to the Policyholder Protection Part of the PRA Rulebook.
- PRA and FCA proposals to amend technical standards relating to risk mitigation techniques for over-the-counter (OTC) derivative contracts not cleared by a central counterparty.
Specifically, the CP is divided into five chapters, which include:
- Chapter 2: Consequential Amendments as a result of the Revocation of Article 92b UK CRR, which focuses on institutions that were subject to Article 92b, i.e. material subsidiaries of non-UK G-SIIs and are not resolution entities (Article 92b firms).
- Chapter 3: Proposals for firms subject to CRR requirements and all UK Solvency II firms. This chapter includes minor updates to regulatory reporting, reporting & glossary.
- Chapter 4: Proposals for policyholders, the FSCS, trustees of occupational pension schemes, and insurance firms. This chapter includes proposals on FSCS eligibility, bulk purchase annuities, and small business test.
- Chapter 5: Proposals impacting banks, building societies, and PRA-designated investment firms falling under the margin requirements under UK EMIR. These changes are also relevant to all FCA solo-regulated entities and non-financial counterparties in scope of the margin requirements under UK EMIR. This chapter includes consequential amendments to the regulatory technical standards for risk-mitigation techniques for over-the-counter (OTC) derivative contracts not cleared by a central counterparty, the Binding Technical Standards (BTS) 2016/2251.
Next steps
The PRA proposes that changes in Chapters 2, 3, and 4 would be implemented by the end of 2024. The PRA and FCA propose that the implementation date for the changes in Chapter 5 would be 1 November 2024, subject to HMT making the commencement order revoking the Securitisation Regulation.
This consultation closes on 30 May 2024.
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CFTC approves new rules for large trader reporting regulations
The Commodity Futures Trading Commission (CFTC) has approved the adoption of final regulations aimed at enhancing large trader reporting requirements for futures and options. The regulations mandate futures commission merchants, clearing members, foreign brokers, and select reporting markets (collectively referred to as reporting firms) to provide position data pertaining to major futures and options traders directly to the Commission. The new regulation will modernise certain technical aspects of the reporting requirements, clarify aspects of the reporting requirements and instructions and will transition the reporting format to the Financial Information eXchange Markup Language (FIXML).
One dissenting view, that of Commissioner Caroline D Pham was made. Pham disagrees with the new regulations because:
- Of concerns regarding fair notice and due process for future regulatory changes. Pham said that despite revisions intended to alleviate these concerns, they remain unsatisfied because there were no associated revisions to the rule text.
- Of concern over the decision to delegate authority to an office that no longer exists at the CFTC, particularly when it may have significant financial implications for firms.
Despite her dissent, Pham acknowledges support for most of the rule amendments, which will become effective 60 days after publication in the Federal Register with a two-year implementation period.
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Basel Committee consultation on guidelines for counterparty credit risk management
The Basel Committee on Banking Supervision has issued a consultation on guidelines for counterparty credit risk management (CCR). The proposed guidelines include key practices critical to resolving long-standing industry weaknesses in CCR, including the need to:
- Conduct thorough due diligence when onboarding and regularly afterward to understand risks and respond quickly to changing counterparty risks.
- Develop a comprehensive strategy to mitigate credit risk, using strong contractual terms and risk-sensitive margining.
- Measure, control, and limit CCR using diverse metrics that cover all significant risks, portfolios, and counterparties.
- Establish a robust governance framework for CCR, involving skilled staff with a deep understanding of the bank's risk culture, clear risk management processes, and integrated reporting for decision-making.
The guidelines will replace the Committee's Sound practices for banks' interactions with highly leveraged institutions published in January 1999.
The consultation is open until 28 August 2024.
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MAS lifts DBS Bank’s non-essential activities pause
The Monetary Authority of Singapore (MAS) has announced that the pause imposed on DBS Bank Ltd (“DBS Bank”) from 1 November 2023 to 30 April 2024 will not be extended.
Some context
In November 2023, MAS implemented a six-month pause on non-essential IT changes for DBS Bank to ensure a focus on restoring the resilience of its digital banking services. During this period, DBS Bank was prohibited from acquiring new business ventures or reducing the size of its branch and ATM networks in Singapore. These actions were taken due to repeated and prolonged disruptions to DBS’ banking services. Additionally, MAS applied a multiplier of 1.8 times to DBS Bank’s risk-weighted assets for operational risk following the March and May 2023 incidents.
Key takeaways
According to the announcement, DBS Bank will continue its remediation efforts, including simplifying and strengthening its systems architecture. MAS will closely monitor DBS Bank’s progress on the remaining deliverables and the effectiveness of the implemented measures. The multiplier of 1.8 times to DBS Bank’s risk-weighted assets will be retained until MAS is satisfied with DBS Bank’s ability to maintain service availability, reliability, and effectively handle any disruptions.
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EIOPA report on the level of digitalisation in the European insurance sector
The European Insurance and Occupational Pensions Authority (EIOPA) has published a report examining the level of digitalisation across the European insurance sector.
The report reveals a diverse landscape of practices within the market, indicating significant variations in the digital readiness of individual insurers. It also highlights the increasing impact of digitalisation on the design, development, and distribution of (re)insurance products and services in the EU. The accompanying press release to the report notes, however, that the adoption of innovative digital solutions also brings disruption and challenges, necessitating adjustments and advancements in regulation and supervision.
Key findings from the report include:
- Varied levels of digitalisation among European insurers, with many still in early stages.
- Digital-only distribution channels are trailing behind physical or hybrid channels, particularly evident in life insurance where consumers prefer in-person interactions.
- Anticipated rise in the use of chatbots, driven by the emergence of generative AI.
- Increasing engagement of insurers on social media platforms for customer interaction and marketing campaigns.
- Growing reliance on BigTech firms for cloud storage services.
- Current use of artificial intelligence is predominantly in non-life insurance, with expectations for significant future expansion.
- Limited adoption of emerging technologies such as the Internet of Things, blockchain, and parametric insurance.
- Growth in the cyber insurance market, despite existing exclusions for certain risks.
- Challenges in acquiring adequate talent and skills for successful digital transformation.
EIOPA states that the report will help in evaluating the risks and benefits of digitalisation, shaping future regulatory measures, enhancing supervisory convergence, and ensuring stakeholders can harness digitalisation's benefits while safeguarding financial stability and customer interests.
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ESAs publish Spring 2024 Joint Committee update
The ESAs (European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority) have released their Spring 2024 Joint Committee update on the risks and vulnerabilities present in the EU financial system. This report covers a cross-sectoral outlook, market developments, prudential and liquidity positions, as well as growing threats, including those related to cyber resilience and cryptocurrencies.
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PSR issues framework for reviewing generally applicable requirements
The Payment Systems Regulator (PSR) has released its framework for reviewing generally applicable requirements. This framework outlines how the PSR will monitor and assess any requirements that need to be met in order to comply with the Financial Services and Markets Act 2023 (FSMA 2023). This review framework is a final document that follows the consultation paper (CP) 23/11.
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