Greg Kilminster
Head of Product - Content
ESMA finalises T+1 proposals
The European Securities and Markets Authority (ESMA) has published its Final Report assessing the implications of transitioning the European Union's (EU) settlement cycle to T+1. The proposed move aims to enhance settlement efficiency, align with global jurisdictions, and support EU financial integration objectives. ESMA has recommended 11 October 2027 as the optimal date for this transition, provided it is coordinated across all relevant financial instruments.
Some context
Settlement cycles determine the time between trade execution and final settlement. In the EU, the current T+2 cycle means transactions are settled two business days after the trade date. The global trend towards shorter settlement cycles, including T+1 in the US and Canada by 2024, has prompted the EU to consider a similar move. ESMA’s mandate under the Central Securities Depositories Regulation (CSDR) required it to evaluate the potential benefits, costs, and risks of this shift.
During the past year, ESMA conducted extensive consultations with market participants, including a call for evidence, industry workshops, and feedback from stakeholders such as the European Central Bank (ECB) and the Market Infrastructure and Payments Committee (MIPC).
Key takeaways
- Benefits of T+1: ESMA identified several advantages of moving to T+1, including reduced counterparty risk, lower margin requirements, and alignment with global markets. These benefits are expected to contribute to greater market integration and support the EU’s Savings and Investment Union goals.
- Challenges and costs: Transitioning to T+1 will require significant changes to the legal framework, particularly amendments to the CSDR and the settlement discipline regime. Market participants will need to invest in modernising and harmonising post-trade systems to achieve the necessary operational readiness.
- Timing and governance: ESMA recommends a coordinated migration across all instruments on 11 October 2027 to minimise disruption. A governance structure involving ESMA, the European Commission, and the ECB will be essential to oversee the transition.
- Stakeholder input: The Final Report reflects input from 81 respondents to ESMA’s call for evidence and other industry consultations. Stakeholders broadly supported the move but emphasised the need for regulatory clarity and sufficient preparation time.
Next steps
ESMA will continue collaborating with the European Commission and the ECB to revise rules on settlement efficiency and establish governance structures for the T+1 transition. The report will also inform the European Parliament and Council ahead of the 17 January 2025 deadline mandated under the CSDR.
With the target date set, financial market participants are expected to begin preparations to ensure a smooth transition, including investments in harmonisation and operational enhancements to meet the demands of a T+1 environment.
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EU financial system resilient to climate transition risks, stress test shows
The European Supervisory Authorities (ESAs), alongside the European Central Bank (ECB), have published the results of the "Fit-for-55" climate scenario analysis, revealing that transition risks from climate policy changes alone are unlikely to destabilise the EU financial system. However, when combined with macroeconomic shocks, these risks could amplify financial losses and disrupt institutions, underscoring the importance of coordinated policy measures and comprehensive climate risk integration by financial firms.
Some context
The analysis was conducted at the European Commission’s request as part of the Fit-for-55 package, which aims to reduce EU emissions by 55% by 2030 and achieve climate neutrality by 2050. This package includes measures such as the EU emissions trading system and sector-specific targets to align EU legislation with green transition goals. The ESAs and ECB assessed the resilience of banks, insurers, occupational pension funds, and investment funds under three scenarios, measuring both direct and systemic effects of transition and macroeconomic shocks over an eight-year horizon.
The scenarios included a baseline reflecting expected transition costs, an adverse “Run-on-Brown” scenario with investor divestment from carbon-intensive firms, and a second adverse scenario combining this with broader macro-financial stress.
Key takeaways
- Loss projections: Under the baseline scenario, first-round losses were limited to 5.2%-6.7% of initial exposures across sectors. Losses escalated under the “Run-on-Brown” scenario, with first-round impacts reaching up to 15.8% in some cases. The second adverse scenario, combining transition and macroeconomic risks, caused losses of up to 21.5% in individual sectors.
- Sectoral impacts: Investment funds faced the largest proportional losses, with second-round losses reaching 25% under adverse conditions. Banks, insurers, and pension funds showed varying degrees of vulnerability but benefited from mitigating factors such as income, liabilities, and cash holdings.
- Uncertainty and limitations: The exercise highlighted significant uncertainty in modelling climate-related risks, stemming from novel methodologies and data challenges. Nonetheless, the results emphasised the need for harmonised approaches to climate risk assessment.
- Policy implications: The findings point to the necessity for financial institutions to integrate climate risks comprehensively into their strategies and for policymakers to ensure sufficient resources for the green transition while minimising financial instability risks.
Next steps
The results of this exercise will guide future work by the European Commission, ESAs, and ECB in refining policy measures and strengthening the financial sector’s resilience to climate risks. While the findings do not prescribe specific prudential requirements, they serve as a foundation for further action to align financial practices with the Fit-for-55 objectives and support the EU's broader climate goals.
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Federal Reserve’s Michael Barr provides insights on banking progress
In a testimony to the Committee on Financial Services, US House of Representatives, Michael S Barr, Vice Chair for Supervision at the Federal Reserve, provided an update on the state of the US banking system. He discussed the resilience of the sector, ongoing supervisory efforts, and key regulatory initiatives. His testimony, accompanied by the Federal Reserve’s semi-annual Supervision and Regulation Report, highlighted significant improvements in banking conditions, emerging risks, and forthcoming regulatory changes.
Banking conditions
Barr began by reassuring lawmakers that the banking system remains sound and resilient. He noted that banks continue to report capital and liquidity ratios above minimum regulatory levels. “Capital ratios have increased this year, building on the capital increases from the year before,” he explained. This improvement positions banks to better weather potential losses. Barr also cited this year’s stress test results, which demonstrated that large banks have sufficient capital to meet regulatory requirements and continue operations under a highly stressful scenario.
Liquidity conditions were also described as stable, with deposits and liquid assets on bank balance sheets remaining steady. Notably, the share of uninsured deposits has decreased to levels last seen in 2019. However, Barr acknowledged emerging concerns, particularly the rising delinquency rates in certain commercial real estate loans, including those backed by office spaces in major cities and, more recently, multifamily housing. Delinquency rates for some consumer loans have also increased, prompting banks to raise their loan loss provisions.
Supervision
Barr highlighted the Federal Reserve’s ongoing work to enhance its supervisory practices. He emphasised that supervisors must adapt to the evolving risks faced by banks, ensuring that supervision keeps pace with the growing size and complexity of financial institutions. “We continue to make progress on improving the speed, force, and agility of supervision,” he said. This includes focusing on risks identified in previous stresses within the banking system and deploying timely supervisory actions.
In line with these efforts, Barr pointed to the Federal Reserve’s initiatives to improve its response to emerging risks, stressing that “supervisors must be prepared to take timely action as risks build up” and should identify new and different patterns of risk. He also outlined efforts to better integrate forward-looking risk analysis into supervisory frameworks, ensuring that banks are adequately prepared for future challenges.
Regulation
Turning to regulatory updates, Barr addressed two key proposals that were open for comment last summer: the Basel III Endgame proposal and the adjustment of capital surcharges for the largest, most complex banks. He explained that the Federal Reserve had received extensive feedback on these proposals and, in response, had made adjustments to better align with the concerns raised.
Barr also discussed a proposal requiring large banks to issue and maintain a minimum amount of long-term debt. While feedback on this proposal is still under review, Barr assured the Committee that it remains under consideration. He reiterated that these regulatory efforts are aimed at improving the resilience of the financial system, ensuring that banks are equipped to handle potential funding shocks.
“We look forward to continued collaboration with the FDIC and OCC,” Barr stated, highlighting the joint efforts among regulatory bodies to strengthen the financial system’s resilience and the flow of credit throughout the economic cycle.
Barr concluded by emphasising the Federal Reserve’s ongoing commitment to improving financial system stability. He noted that regulatory agencies would continue to refine their proposals based on public feedback and further analysis. “We will continue to seek an approach that helps to ensure financial system resilience and supports the flow of credit to households and businesses through the economic cycle,” Barr said.
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Bank of England consults on new rules for financial market infrastructures
The Bank of England has published a consultation on introducing a proposed framework of fundamental rules aimed at enhancing the financial and operational resilience of financial market infrastructures (FMIs). These entities, including central counterparties (CCPs), central securities depositories (CSDs), recognised payment service operators (RPSOs), and specified service providers (SSPs), are integral to the stability of the UK’s financial system.
The Fundamental Rules for financial market infrastructures consultation aims to increase the resilience of FMIs through providing a clear and transparent articulation of the desired outcomes of the Bank’s policy framework. The Bank emphasised its dual objectives: maintaining financial stability while fostering innovation within the financial ecosystem. The consultation closes on 19 February 2025.
Key proposals
The rules are designed to clarify supervisory expectations, ensuring FMIs:
- Conduct business with integrity, skill, and prudence.
- Maintain adequate financial and operational resilience.
- Manage risks effectively, including those posed to the broader financial system.
- Cooperate openly with regulators and prepare for orderly resolution if needed.
By addressing potential gaps in the existing regulatory framework, the Bank aims to mitigate systemic risks, particularly during market stress. The proposals extend to systemic stablecoins, reflecting their growing significance.
Implementation and response
The Bank’s consultation on Fundamental Rules is open until 19 February 2025. The Bank proposes a six-month implementation period following the finalisation of the rules. It invites feedback on their scope, application, and potential impact, especially regarding equality and innovation.
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SRA warns firms over "inadequate" AML risk assessments
In its 2023/24 anti-money laundering (AML) report, the UK’s Solicitors Regulation Authority (SRA) has highlighted the rising risk of regulatory action for firms failing to meet their AML and financial sanctions obligations. The report, based on increased inspections and desk-based reviews, points to recurring compliance issues and provides practical guidance to help firms strengthen their defences.
Increased regulatory scrutiny
The SRA doubled its engagement with firms in the past year, conducting 254 inspections and 258 desk-based reviews between April 2023 and April 2024. This heightened activity has significantly increased the likelihood of firms being audited.
Of the firms reviewed, 77% were found to be fully or partially compliant with their obligations. Obviously, 23% were identified as non-compliant, leading to corrective or enforcement action. This included:
- 44 fines totalling £556,832.
- Two findings and warnings issued.
- One condition placed on a firm’s authorisation.
- Four referrals to the Solicitors Disciplinary Tribunal (SDT).
The SDT issued two fines amounting to £511,900 and imposed employment controls on one individual. Two cases were dismissed or not upheld.
Common compliance failings
The SRA identified several recurring AML breaches among non-compliant firms, including failures to:
- Conduct client or matter risk assessments.
- Maintain a compliant firm-wide risk assessment.
- Implement adequate AML policies, controls, and procedures.
- Train staff effectively.
- Verify clients properly at the outset.
- Monitor transactions and assess ongoing risks.
- Carry out source of funds checks.
In October 2024, the SRA published a thematic review on AML training, cautioning firms against treating compliance training as a “tick-box exercise” and stressing the importance of tailored, role-specific programmes.
Steps to strengthen compliance
The SRA recommends firms take proactive measures to improve their AML frameworks, including:
- Ensuring staff are knowledgeable about AML regulations and data protection
- Maintaining detailed records of training materials, sessions, and assessments for inspection purposes
- Regularly updating training logs and adopting the ROLE framework:
- Relatable: Tailor training to specific roles and risks within the firm.
- Ongoing: Provide regular updates rather than one-off training.
- Leadership-driven: Ensure senior management leads by example.
- Engaging: Use interactive methods and real-life scenarios to reinforce learning.
A thematic review on source of funds obligations is expected in the near future, providing further insights to support firms in meeting these requirements.
Next steps
To minimise the risk of regulatory action, firms are urged to access resources available through the SRA’s anti-money laundering hub. These include guidance on conducting client and matter risk assessments, meeting customer due diligence requirements, and fulfilling source of funds obligations.
As the SRA notes, a robust risk-based approach to compliance and a clear focus on detailed evidence are critical. Firms are encouraged to ask themselves, “does it make sense?” when reviewing their due diligence efforts to ensure compliance.
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