Eva Dauberton
News Editor
UK Government update on UK Sustainability Reporting Standards implementation
The UK Government has released an update on its plan to establish the UK Sustainability Reporting Standards (UK SRS) framework.
Some context
In June 2023, the International Sustainability Standards Board (ISSB) introduced the IFRS Sustainability Disclosure Standards (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures).These standards aim to set a high-quality global baseline for sustainability-related disclosures focused on investors.
- IFRS S1: General Requirements for Disclosure of Sustainability-Related Financial Information outlines disclosure requirements allowing companies to communicate sustainability-related risks and opportunities over the short, medium, and long term. It is based on the TCFD recommendations and requires industry-specific information.
- IFRS S2: Climate-Related Disclosures: specifies climate-related disclosure requirements for companies, building on IFRS S1 and integrating the TCFD recommendations.
In its Mobilising Green Investment: 2023 Green Finance Strategy, the UK government proposed a framework to evaluate the suitability of IFRS S1 and IFRS S2 for UK adoption. If endorsed, this would create the first two UK Sustainability Reporting Standards (SRS) based on IFRS S1 and IFRS S2.
Key updates
- The UK government has established two committees, an independent Technical Advisory Committee (TAC) and a Policy and Implementation Committee (PIC), to assist with the assessment and endorsement of IFRS S1 and S2, as well as any implementation of the resulting UK SRS.
- The UK government aims to make endorsement decisions on the first two standards by Q1 2025, and these standards will form part of a wider Sustainability Disclosure Reporting framework led by HM Treasury.
- Once the assessment process is complete and subject to an affirmative endorsement decision, the Financial Conduct Authority (FCA) will be able to use the UK’s standards to introduce requirements for UK-listed companies to report sustainability-related information to their investors, subject to a consultation process.
- Subject to an affirmative endorsement decision, the government will also decide on disclosure requirements against the endorsed standards for UK companies that do not fall within the FCA’s regulatory perimeter. That decision will consider several factors, including costs for reporting companies and benefits for investors who may wish to use this information.
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FCA releases quarterly consultation paper no. 44
The Financial Conduct Authority (FCA) has released its quarterly consultation paper No. 44 (CP24/11), detailing proposed miscellaneous amendments to the Handbook.
The paper includes the following proposals:
- Introduction of criminal background checks on owners and controllers at the Authorisation gateway.
- Amendments to SUP following guidance consultation on prudential assessment of acquisitions and increases in control.
- Changes to retail conduct rules reflecting amendments made by the Treasury to the UK MiFID delegated regulation (impacting COBS and the Glossary).
- A change to the application of the UCITS concentration rules with deletion of COLL 5.2.30R(1)(c) and clarification in COLL 5.2.29R(3).
- Removal from the Handbook of certain EU withdrawal related provisions that have expired and renaming certain terms.
- Consequential amendment to UK Credit Rating Agencies Regulation to implement Securitisation Regulations 2024.
- Removing references to LTIFs and the LTIF Regulation.
- Regarding UK MiFIR, extension of transitional transparency regime for bonds and derivatives pending the introduction of a new transparency framework in 2025.
The deadline for feedback is 12 August 2024.
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ESMA releases consultation on liquidity management tools under revised AIFMD and UCITS Directives
The European Securities and Markets Authority (ESMA) has released a consultation on draft guidelines and regulatory technical standards (RTS) on liquidity management tools (LMTs) under the revised Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive.
Some context
Directive (EU) 2024/9273, which amends the AIFMD and UCITS Directives, was published in the Official Journal on 25 March 2024. This Directive modifies the AIFMD and UCITS Directives in the areas of LMTs, supervisory reporting, and depositaries. It also amends the AIFMD in relation to loan-originating alternative investment funds.
The new Directive introduces a harmonised framework for LMTs, enabling AIFMs and UCITS to manage market stress and liquidity issues coherently and effectively while safeguarding investor protection.
To this end, it sets out a list of LMTs from which AIFMs and UCITS managers are required to select at least two after assessing the suitability of those tools in relation to the pursued investment strategy, the liquidity profile, and the redemption policy of the fund (for AIFs, only in the case these are open-ended). Money Market Funds (MMFs) may decide to select only one LMT.
AIFMs and UCITS must also implement detailed policies and procedures for the activation and deactivation of any selected LMT, as well as operational and administrative arrangements for the use of such tools. The selection of the LMTs and the detailed policies and procedures for their activation and deactivation should be communicated to the competent authorities of the home Member State of the AIFM and UCITS.
Key takeaways
In the draft RTS, ESMA defines the constituting elements of each LMT, such as calculation methodologies and activation mechanisms.
The draft RTS do not address the conditions under which the LMTs selected by fund managers should be activated.
In the draft Guidelines on LMTs of UCITS and open-ended AIFs, ESMA provides guidance on how managers should select and calibrate LMTs based on their investment strategy, liquidity profile, and fund redemption policy.
It should be noted that the list of LMTs and their definitions are identical in the AIFMD and the UCITS Directive. Since the empowerments are identical in both, ESMA is issuing a single CP for both sets of draft RTS, but ultimately, ESMA will issue two different sets of draft RTS because the empowerments stem from two different sectoral legislations.
Next Steps
ESMA welcomes responses to the consultations by 8 October. ESMA will deliver the final RTS and guidelines by 16 April 2025.
ESMA will consult on the draft RTS to determine the requirements with which loan-originating AIFs are to comply to maintain an open-ended structure separately at a later stage.
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ESMA consults on reporting requirements and governance expectations for certain entities
The European Securities and Markets Authority (ESMA) has issued two consultations targeted at benchmark administrators (BMAs), credit rating agencies (CRAs), and three categories of market transparency infrastructures (securitisation repositories under SECR, trade repositories under EMIR/SFTR, and data reporting service providers under MiFiR). The focus is on the supervisory expectations for management bodies and guidelines for submitting periodic information to ESMA.
Supervisory expectations
The consultation paper outlines ESMA’s supervisory expectations regarding good governance practices, including the role, functioning, and effectiveness of the management bodies of the entities supervised by ESMA. Its purpose is to provide all of ESMA’s supervised entities with a common reference point for ESMA’s expectations concerning governance arrangements, with an emphasis on the management body.
Draft guidelines
The draft guidelines specify the information ESMA expects to receive, as well as the timeline for supervised entities to provide the required information. The objectives are to ensure a standardised approach to periodic reporting, increase the consistency and usability of reported information, establish proportionate reporting based on the risk profile of the supervised entity, and reduce the reporting burden by adjusting reporting frequencies according to a risk-based supervisory approach.
Next steps
The deadline for feedback is 18 October 2024, and ESMA aims to publish a final report in Q1 2025.
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EBA consults on criteria to assess the materiality of CVA risk exposures arising from securities financing transactions
The European Banking Authority (EBA) has released a consultation paper on the draft Regulatory Technical Standards (RTS) for the credit valuation adjustment (CVA) risk of securities financing transactions (SFTs) under amended Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR).
Some context
The CRR, as amended by Regulation (EU) 2024/1623 (CRR3), implements a revised framework for the determination of the own funds requirements for CVA risk. Article 382(2) of the CRR requires an institution to include in the calculation of the own funds requirements for CVA risk SFTs that are fair-valued under the accounting framework applicable to the institution where the institution’s CVA risk exposures arising from those transactions are material.
The CRR mandates the EBA to develop a draft RTS that specifies the conditions and criteria institutions must use to assess the materiality of CVA risk exposures arising from fair-valued SFTs, as well as the frequency of that assessment.
Key takeaways
The draft RTS propose using a quantitative threshold approach to determine the materiality of CVA risk exposures arising from fair-valued SFTs. They also set out a ratio that quantifies the amount of CVA risk arising from fair-valued SFTs relative to the CVA risk of transactions within the scope of own funds requirements for CVA risk.
The draft RTS also propose conducting the assessment on a quarterly basis to align with institutions’ regular calculation and reporting cycle for own funds requirements.
Next steps
The deadline for feedback is 8 October 2024.
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EBA releases ESEP for 2025 and reports on implementation of 2023 priorities
The European Banking Authority (EBA) has released the European Supervisory Examination Programme (ESEP) for 2025, outlining the main areas of focus for enhanced supervisory attention across the European Union. The EBA has also published its annual report on the convergence of supervisory practices for 2023.
Some context
The ESEP serves as a tool to fulfil the EBA’s supervisory convergence mandate, particularly in the context of the supervisory review process.
It provides competent authorities with a unified set of priorities for implementation and complements their core prudential supervisory activities. However, it does not seek to create an all-encompassing supervisory examination programme. Instead, it is intended for competent authorities to develop such programmes considering the ESEP, the structure and specific vulnerabilities of the banking system under their jurisdiction, and the individual characteristics of the banks or banking groups they oversee, including relevant cross-border considerations.
Key takeaways
In the annual report, the EBA confirms that most competent authorities adequately included the key topics identified for supervisory attention in 2023. However, there is still a disparity in the implementation of risk areas, such as ESG and data aggregation capabilities in the supervisory processes. Regarding the convergence of supervisory practices in the context of Pillar 2 and liquidity measures, the analysis shows that there is still room for further consistency in the identification and treatment of risks covered by Pillar 2 requirements across the EU. Finally, the EBA’s monitoring of supervisory colleges has confirmed that the annual college cycle is functioning well.
The following topics have been identified as crucial for 2025:
- Testing and adjusting to increasing economic and financial uncertainties, informed by a series of intertwined dynamics that intensify volatility in global markets and drive structural changes in the geopolitical landscape, impacting risks attached to financial activities.
- Digital challenges, in particular ICT risk management and building operational resilience towards the digital transformation, informed by the general increase of ICT/cyber risk, the upcoming implementation of the DORA framework for all EU financial entities, and the persisting challenges in the design and execution of banks’ digital transformation strategies.
- Transitioning towards Basel III and the EU banking package implementation by ensuring institutions’ information systems and capital planning are able to support the revised prudential metrics and corresponding robustness.
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APRA finalises revised IRRBB requirements
The Australian Prudential Regulation Authority (APRA) has announced the final revisions to its framework for Interest Rate Risk in the Banking Book (IRRBB) requirements for authorised deposit-taking institutions (ADIs).
The update is reflected in:
- Prudential Standard APS 117: Capital Adequacy: Interest Rate Risk in the Banking Book (APS 117)
- Reporting Standard ARS 117.0: IRRBB Repricing Analysis Collection (ARS 117.0)
- Reporting Standard ARS 117.1: IRRBB Capital Charge Collection (ARS 117.1)
Accompanying the final revised prudential and reporting standards are the final revised practice guides.
For smaller ADIs, the changes principally reaffirm existing risk management requirements. For larger ADIs, the revisions reduce the volatility over time and variation between ADIs in the calculation of the IRRBB capital charge and are calibrated to not result in a material increase in capital for the industry as a whole.
Next steps
While the final revised APS 117 and APG 117 will not be effective until 1 October 2025, it is considered prudent for ADIs to have regard to these revisions and guidance in their ongoing management of IRRBB.
To note: The current APS 117 is due to sunset on 1 April 2025. APRA proposes to leave the current APS 117 unchanged at this stage and remake it so that it will continue to apply after 1 April 2025 until the final revised APS 117 is effective on 1 October 2025. APRA invites feedback on the remake of the current APS 117 by 9 August 2024.
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OSFI provides clarification on assurance guidelines for financial institutions
The Office of the Superintendent of Financial Institutions (OSFI) of Canada has provided clarification on the guideline for Assurance on Capital, Leverage, and Liquidity Returns in light of the adoption the Basel III reforms and International Financial Reporting Standard (IRFS) 17.
Some context
This guideline outlines OSFI’s assurance expectations for capital, leverage, and liquidity returns. It aims to guide external auditors and institutions in their work on regulatory returns, as well as enhance and align these expectations across all federally regulated financial institutions (FRFIs).
Key takeaways
Considering the adoption of Basel III reforms and International Financial Reporting Standard 17 in fiscal 2023, OSFI has updated and harmonised assurance expectations for banks and insurers. For banks, the scope now includes liquidity metrics in addition to capital and leverage metrics. For insurers, the scope now includes an internal audit opinion, management attestation, and an external audit opinion.
The clarifications from OSFI align with the current guidelines and address:
- External audit opinion expectations
- Senior management attestation expectations
- Internal audit opinion expectations
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