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Financial Regulatory Developments Focus
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The following posts provide a snapshot of selected UK, EU and global wholesale financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates. 

  • UK Public Offers and Admissions to Trading Regulations Published
    03/06/2024

    On January 29, 2024, the Public Offers and Admissions to Trading Regulations 2024 (SI 2024/105) were published. The Regulations implement the new Public Offers and Admission to Trading Regime, part of the new designated activities regime, and revise the existing prospectus regime inherited from the EU that currently sits in the U.K. Prospectus Regulation. The designated activities regime (DAR) is a new U.K. concept to give the Financial Conduct Authority rulemaking powers over financial sector activities, such as public offers and listing, which are not necessarily carried out by regulated firms such as banks (we discussed the DAR in our client note, "A Boost For UK Financial Services"). The new Regulations introduce a general prohibition on public offers of securities, coupled with a collection of exceptions from this prohibition. Many of the existing exemptions in the U.K. Prospectus Regulation, such as offers solely to qualified investors and offers made to fewer than 150 persons, are retained. Certain provisions, such as those establishing the new designated activities and provisions enabling the FCA to make rules, came into force on January 30, 2024. Most of the other provisions will enter into force once the U.K. Prospectus Regulation is revoked using powers under the Financial Services and Markets Act 2023. The FCA has engaged with stakeholders regarding many of the changes that will be housed in its rulebook in the future. It is expected to publish a consultation paper in Summer 2024 on its detailed proposals.

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  • UK Fifth Commencement Regulations Under the Financial Services and Markets Act 2023 Published
    03/04/2024

    The Fifth Commencement Regulations - the Financial Services and Markets Act 2023 (Commencement No. 5) Regulations 2024 (SI 2024/250)- under the Financial Services and Markets Act 2023 were made on February 29, 2024. One of the major reforms in the Financial Services and Markets Act 2023 related to regulatory accountability, especially of the Financial Conduct Authority and Prudential Regulation Authority. The Fifth Commencement Regulations now provide, among other things, for the coming into effect of certain provisions relating to the accountability of the Payment Systems Regulator, including:
    • Starting March 1, 2024, a requirement on the PSR to take certain steps in advance of taking an action where there is a material risk such action would be incompatible with the U.K.'s international trade obligations.
    • Starting August 1, 2024, requirements for the PSR's consultations, requiring the PSR to keep general requirements under review, HM Treasury's powers to require the PSR to impose a requirement for a specified activity or for specific firms, detailing the cost-benefit analysis obligations and panel appointment statements of policy.
    • Starting January 1, 2025, the remaining provisions on the PSR's accountability that are not already in force.
  • UK Securitisation Regulations Published
    03/04/2024

    The Securitisation Regulations 2024 (SI 2024/102) were made on January 29, 2024, and will come into force for the most part when the Securitisation Regulation 2017 is revoked. This is part of HM Treasury's Smarter Regulatory Framework. The Securitisation Regulations 2024 designate, under the incoming designated activities regime, certain securitization activities when undertaken by a firm in the U.K. These are:
    1. Acting as originator, sponsor, original lender or securitisation special purpose entity in a securitization.
    2. Selling a securitization position to a U.K. retail client.

    The Securitisation Regulations 2024 introduce a new definition of "institutional investor," removing non-U.K. Alternative Investment Fund Managers that market or manage AIFs in the U.K. from due diligence requirements.

    In addition, the Securitisation Regulations 2024 repeal detailed legislative firm-facing requirements. These requirements will be moved to the regulator rulebooks. Both the Prudential Regulation Authority and the Financial Conduct Authority consulted last year on their proposed approach and rules, and are expected to publish their final rules in Q2 this year.
  • EU Eases EMIR 3 Clearing Mandate
    02/19/2024

    The Council of the European Union and European Parliament have reached provisional political agreement on the latest revisions to the European Market Infrastructure Regulation, publishing on February 14, 2024, the agreed text of the EMIR 3 Regulation and EMIR 3 Directive. The controversial mandate for EU counterparties to hold "active accounts" at EU CCPs for all products, and to use such accounts for some products, has been substantially watered down from the European Commission's December 2022 proposal (we discussed the Commission's proposals in our client note, "Clearing in the EU After EMIR 3").

    According to the final draft text, in-scope counterparties for the new "active account" requirement will be required to open and maintain accounts with EU CCPs and clear some transactions through EU CCPs for in-scope products. However, the Commission's (and some member states') ambitious and misguided attempt to force market relocations into Europe seem to have faltered. Even the largest EU derivatives traders (with EUR 6 billion + of open positions) need only clear a minimum of five (5) trades per annum for sub-categories each of the in-scope categories of products. In-scope products are interest rate derivatives denominated in euro and Polish zloty; and Short-Term Interest Rate Derivatives (STIR) denominated in euro. It had previously been proposed for CDS denominated in euro to be included, but this product is no longer in scope. 

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  • UK Data Reporting Services Regulations 2024 Published
    02/19/2024

    On January 29, 2024, the Data Reporting Services Regulations 2024 (SI 2024/107) were made. The Data Reporting Services Regulations 2024 will enter into force on the same day that the Data Reporting Services Regulations 2017 are revoked, which is April 5, 2024, according to the Financial Services and Markets Act 2023 (Commencement No. 4 and Transitional and Saving Provisions) (Amendment) Regulations 2023. The Data Reporting Services Regulations 2024 will replace the Data Reporting Services Regulations 2017, restating with modifications some of the 2017 content.

    The Financial Services and Markets Act 2023 granted the FCA power to make rules for data reporting service providers (DRSPs), of which there are three types- Approved Publication Arrangements, Approved Reporting Mechanisms and Consolidated Tape Providers. DRSPs generally facilitate compliance by investment firms of their regulatory reporting obligations, ensuring that market data is accessible and supporting effective price formation and best execution.

    The Data Reporting Services Regulations 2024 set the regulatory perimeter of the U.K.'s regime for DRSPs, set out the authorization regime for providing a data reporting service, and restate the FCA's supervisory and enforcement powers. The FCA is also given powers to run a tender process to select U.K. CTPs for a particular asset class. No CTP is yet established in the U.K. or the EU. The FCA published its final framework for a consolidated tape for bonds in December 2023, and the tender process for the bond CTP will progress through 2024.
    ATTORNEYS: Thomas DoneganSandy Collins
    TOPIC : MiFID II
  • European Securities and Markets Authority Consults on Guidelines on Reverse Solicitation and Cryptoassets as Financial Instruments under the EU Markets in Crypto Assets Regulation
    02/08/2024

    The European Securities and Markets Authority has published two consultation papers on proposed guidelines under the EU Markets in Crypto Assets Regulation, one on reverse solicitation and the other on the classification of crypto-assets as financial instruments. Responses to the consultation papers should be submitted by April 29, 2024. ESMA plans to publish final reports on each of the guidelines by the end of 2024 at the latest.

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  • UK Prudential Regulation Authority Publishes Review of Bank Ring-Fencing Rules
    02/08/2024

    The U.K. Prudential Regulation Authority has published a Review of the PRA ring-fencing rules for U.K. banks. The ring-fencing regime came into force in 2019 and the PRA is required to review the rules it has made under the regime every five years. This is the PRA's first such review. The PRA found that most rules have performed satisfactorily and are generally well understood by industry. Some areas for improvement include:
    • Better aligning the rules relating to the provision of services to ring-fenced banks from non-ring-fenced parts of a group with other PRA rules on operational continuity in resolution and operational resilience.
    • Reducing the frequency with which banks must review their internal policies on arm's length transactions.
    • Potentially extending the duration of modifications to rules relating to governance arrangements for individual RFBs, where needed.
    • Removing the requirement for RFBs to deliver annual regulatory reports on certain tax exposures, given the immateriality of the amounts reported so far.

    The PRA plans to consult on potential changes to its rules after more detailed analysis.

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  • Amendments Proposed to Global Standard for Banks’ Exposures to Crypto-Assets
    01/25/2024

    Following publication of the final bank prudential requirements for exposures to crypto-assets, the Basel Committee on Banking Supervision is consulting on proposed amendments to the requirements for exposures to stablecoins. The consultation closes on March 28, 2024. The Basel Committee does not state whether these proposals, if they proceed, would need to be implemented by January 1, 2025, which is the implementation date for the final standard for banks' exposures to crypto-assets.

    The Basel Committee's final requirements for exposures to crypto-assets apply different prudential approaches depending on whether a crypto-asset meets certain conditions. Crypto-assets that meet all of the conditions are referred to as "Group 1 crypto-assets&" and, within that group, stablecoins fall within Group 1b. The Basel Committee is proposing changes to the requirements that determine whether a bank can include a stablecoin exposure in the Group 1b category. First, the Committee is proposing changes to the composition of reserve assets of stablecoins that will enhance the asset quality criteria for reserve assets under the redemption risk test and provide additional safeguards for reserve assets. Secondly, the Committee proposes that banks should be required to perform due diligence, at the point of acquisition and regularly thereafter, that provides the bank with an adequate understanding of the stabilization mechanism and its effectiveness. Statistical tests will be required as part of the due diligence. A regulator would be capable of overriding a bank's categorization of its exposure on the basis of those test results.

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  • UK Seeks to Enhance Resolution Regime for Small Banks Following SVB Failure
    01/18/2024

    HM Treasury has launched a consultation that sets out proposals for enhancing the Special Resolution Regime by introducing a new means for the Bank of England, as the U.K. resolution authority, to use stabilization powers to manage the failure of a smaller bank. The proposal arises from the lessons learned from the failure of SVB, which resulted in its U.K. subsidiary, SVB UK, becoming unviable. SVB UK was transferred to HSBC using the resolution powers of the Bank of England.

    The government does not intend to remove the Bank Insolvency procedure from the SRR. However, it is believed that the SRR could be enhanced to better manage the failure of smaller banks which are not identified as systemically important but which may be collectively impacted so as to create a systemic risk for the U.K. financial markets.

    Instead of insolvency, the current regime allows for a failing bank to be transferred to a bridge bank or a private owner. However, there is concern about the potential risk to taxpayers as the bank may need to be recapitalized. HM Treasury is proposing that the Bank of England should be permitted to use funds provided by the banking sector to cover the costs linked to a resolution, including those related to recapitalizing and operating the failed bank. The funds would be levied on the banking sector.

    Responses to the consultation may be submitted until March 7, 2024. The government will issue its response once it has analyzed feedback to the proposals and, if appropriate, legislate to bring the proposals into effect. If the proposal proceeds, changes will also be made to the Special Resolution Regime Code of Practice.
  • Fourth Commencement Regulations Under Financial Services and Markets Act 2023 Published
    01/18/2024

    The Fourth Commencement Regulations - the Financial Services and Markets Act 2023 (Commencement No. 4 and Transitional and Saving Provisions) (Amendment) Regulations 2023 - under the Financial Services and Markets Act 2023 were made on December 14, 2023. The Fourth Commencement Regulations provide, among other things, for:
    • The repeal of HM Treasury’s obligation to review legislation in various financial services legislation, including but not limited to, the Short Selling Regulation, the Securitization Regulation, the Alternative Investment Fund Managers Regulations and the U.K. version of the European Market Infrastructure Regulation. These repeals took effect on December 15, 2023.
    • The revocation from April 5, 2024 of the Data Reporting Services Regulations 2017 and related implementing legislation such as (i) the provisions in the onshored Markets in Financial Instruments Regulations that provide HM Treasury and the regulators with powers to specify further detail relating to data reporting services; and (ii) the provisions in the MiFIR Delegated Regulation on the provision of data on reasonable commercial basis. The revocation of these provisions on this date aligns with HM Treasury's aim of the draft Data Reporting Services Regulations 2023 entering into force on April 5, 2024. The draft Data Reporting Services Regulations 2023 will replace the Data Reporting Services Regulations 2017, restating with modifications some of the 2017 content. The FCA has confirmed the final framework for a consolidated tape for bonds, which will also enter into force on April 5, 2024.

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  • UK Financial Conduct Authority Publishes Rule Review Framework
    01/16/2024

    The U.K. Financial Conduct Authority has published its Rule Review Framework, setting out how it will set, measure and monitor the outcomes of its Handbook rules. The Rule Review Framework was mandated under the Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services). The FSM Act 2023 transferred responsibility for making detailed rules to the U.K.'s regulators, significantly increasing their powers. To ensure proper oversight of the use of those powers, the FSM Act 2023 provides for an enhanced regulatory accountability framework, which includes requiring the FCA (and the Prudential Regulation Authority, which consulted on its proposed in 2023) to keep their rules under review and publish a statement of policy on how they conduct those reviews.

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  • HM Treasury Publishes Special Resolution Regime Code of Practice for Central Counterparties
    01/16/2024

    HM Treasury has published the Central Counterparties Special Resolution Regime Code of Practice, setting out guidance on the operation of the expanded resolution regime for CCPs established under the Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services). The FSM Act 2023 replicates some, but not all, aspects of the EU's CCP Recovery and Resolution Regulation (which came into effect post-Brexit), granting powers to the Bank of England, as the U.K. resolution authority, to safely resolve a CCP. The expanded U.K. regime came into effect on December 31, 2023 (by virtue of The Financial Services and Markets Act 2023 (Commencement No. 4 and Transitional and Saving Provisions) (Amendment) Regulations 2023), applying to any resolution that commences from that date. The Code applies to the Bank of England as well as HM Treasury, the Prudential Regulation Authority and the Financial Conduct Authority (all of which have roles in the operation of the special resolution regime).

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  • UK Legislates to Implement the Digital Securities Sandbox
    01/12/2024

    Legislation implementing the U.K.'s first digital sandbox – the Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023 – came into force on January 8, 2024. The DSS Regulations enable the Digital Securities Sandbox to be established. The regulators are expected to consult soon on the proposed application process and rule changes.

    U.K. recognized investment exchanges, recognized central securities depositories and investment firms that are licensed to operate a multilateral trading facility or organised trading facility, as well as any other U.K. firms identified by the Financial Conduct Authority or Prudential Regulation Authority, may participate in the FMI sandbox as a "sandbox entrant". Sandbox arrangements carried out by a sandbox entrant must relate to either the activity of operating a trading venue or carrying on maintenance, notary or settlement functions in relation to in-scope instruments, or be ancillary to those activities. In addition to the ability of the primary sandbox entrant to carry out those activities within the sandbox, the following classes of firms may participate in FMI sandbox arrangements: firms using the services provided by the sandbox entrant; firms providing services to the sandbox entrant or its users; and firms carrying on activities or providing services in connection with an in-scope instrument used in connection with the FMI sandbox arrangements. By including this third class of firms, firms would be allowed to provide services that are ancillary or complementary to trading and settlement activities, such as clearing, within the sandbox.

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  • Payment Systems Regulator Publishes New Rules for Mandatory Reimbursement of Authorized Push Payment Scams
    01/11/2024

    The Payment Systems Regulator has published its Final Policy Statement on its new regime for fighting authorized push payment scams. The Financial Services and Markets Act 2023 (discussed in our client note, “A Boost for UK Financial Services”) imposed a new obligation on the PSR to require payment service providers to reimburse consumers when a payment is executed over the Faster Payments Scheme and the payment was executed following fraud or dishonesty.

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  • UK Conduct Authority Sets Out Detailed Changes to Listing Rules
    01/11/2024

    The U.K. Financial Conduct Authority is consulting on detailed proposals to reform its listing rules which are focused on a single listing segment, a more disclosure-based regime and changes to the sponsor regime. The FCA is proceeding with its original proposal to introduce a single listing segment, which it put forward in its consultation last year, discussed in our client note, "FCA Moves Ahead with a Single Equity Listing Category". Taking into account feedback to its consultation, the FCA sets out how the proposed 'commercial companies' equity share listings framework would work, including eligibility, significant and related party transactions, dual/multiple class share structures and sponsors. The 'commercial companies' category would replace the existing 'premium' and 'standard' listing segments. The FCA also describes details of the other listing segments changes it is proposing to make.

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  • International Organization of Securities Commissions Publishes Recommendations on Decentralized Finance
    01/10/2024

    Following its consultation in 2023, the International Organization of Securities Commissions published its Policy Recommendations for Decentralized Finance on December 19, 2023. The nine recommendations are intended to promote consistency of global regulatory frameworks for DeFi in the interests of market integrity and investor protection.

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  • International Organization of Securities Commissions Publishes Recommendations for Crypto and Digital Assets Markets
    01/08/2024
    Following its consultation in 2023, the International Organization of Securities Commissions published its Policy Recommendations for Crypto and Digital Asset Markets on November 16, 2023. The 18 recommendations are intended to promote consistency of regulatory frameworks for cryptoasset service providers. The recommendations apply to both cryptoassets and stablecoins, although regulators are encouraged to consider any particular issues posed by stablecoin arrangements when applying the recommendations.

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  • UK Conduct Regulator Consults on Bond and Derivatives Markets Transparency Requirements
    01/08/2024

    The U.K. Financial Conduct Authority has opened a consultation on proposals for improving transparency for bond and derivatives markets. Following the Wholesale Markets Review, the Financial Services and Markets Act 2023 grants powers to the FCA to make rules which will replace the current pre-trade and post-trade disclosure rules for bonds, structured finance products, emission allowances and derivatives set out in the U.K. Markets in Financial Instruments Regulation. The FCA's rules must ensure efficient price formation and the fair evaluation of financial assets. This consultation sets out the FCA's proposed approach to those rules. Responses to the FCA's consultation may be submitted until March 6, 2024.

    The FCA is proposing that trading venues and investment firms dealing OTC will be subject to minimum harmonized transparency requirements for sovereign bonds, corporate bonds and certain derivatives subject to the clearing obligation. For these financial instruments, there will be large in scale thresholds. Pre-transparency waivers will be available for orders above the threshold and deferrals for post-trade requirements. For other financial instruments, the FCA is proposing to set the standards and criteria to which trading venues should refer in order to meet the FCA's transparency expectations. Investment firms dealing in other financial instruments will not be required to report their transactions to the public.

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    ATTORNEYS: Thomas DoneganSandy Collins
    TOPIC : MiFID II
  • UK Finalizes Framework for Consolidated Tape for Bonds
    01/08/2024

    Following its consultation last year, the U.K. Financial Conduct Authority has published its final framework for a consolidated tape for bonds. MiFID II introduced requirements for a CT for transactions in equity and non-equity instruments. It requires a consolidated tape provider to collect post-trade information published by trading venues and approved publication arrangements and to consolidate this into a continuous live data stream made available to the public. No consolidated tape has yet been set up in either the U.K. or the EU. The Financial Services and Markets Act 2023 gave the FCA rule-making powers for Data Reporting Service Providers, enabling it to set a framework for the development of a CT.

    The FCA's policy statement sets out its rules and guidance on the bond CT, which are due to come into force on April 5, 2024, which is the anticipated date that the draft Data Reporting Services Regulations 2023 are expected to enter into force, subject to Parliamentary process. The DRSRs 2023 will replace the Data Reporting Services Regulations 2017, restating with modifications some of the 2017 content. The tender process for the bond CTP will kick-off in 2024.

    The FCA's final policy is set out in a paper that also gives the FCA's response to feedback on a CT for equities and sets out proposals on payments to data providers by the bond CTP and forms for a Data Reporting Service Provider, adapted to reflect the DRSRs 2023 and the FCA's Handbook amendments. Responses to the FCA's proposals may be submitted until February 9, 2024. The FCA is aiming to finalize those rules and forms for April 5, 2024 too.
    ATTORNEYS: Thomas DoneganSandy Collins
    TOPIC : MiFID II
  • UK Extends Transitional Period for Third-Country Benchmarks
    01/08/2024

    The Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023 were enacted on December 19, 2023. The Regulations amend two pieces of legislation that are set to be repealed by the Financial Services and Markets Act 2023, both of which are subject to a transitional period until that repeal takes place. HM Treasury is able to amend the legislation during the transitional period to ensure that it remains up to date.

    The Regulations amend the U.K. Capital Requirements Regulation to reintroduce the inadvertently removed "discount factor" that reduces the amount of capital that small- and medium-sized firms must hold for their trading and derivative activities. The amendment took effect on December 20, 2023. This move is in line with the approach of other leading jurisdictions and aligns with the government's policy to enhance the competitiveness of the U.K. markets. It also accords with the Prudential Regulation Authority's introduction of a simpler prudential regime for Small Domestic Deposit Takers.

    The Regulations also amend the U.K. Benchmarks Regulation to extend the transitional period for third-country benchmarks from the end of 2025 to the end of 2030. This change is in line with HM Treasury’s policy announced in November 2023. The extension took effect on January 1, 2024.
  • UK Consultation on the Emissions Trading Scheme’s Free Allocation Methodology
    01/08/2024

    The U.K. Emissions Trading Scheme Authority has launched a consultation on its approach to free allocations. The ETS is proposing options to amend the free allocation methodology, focusing on its approach to accounting for activity levels, benchmarking and the manner in which carbon leakage risk is assessed. Carbon leakage occurs when production and associated emissions are transferred from one country to another by a business in order to benefit from lower carbon pricing and climate regulation in other jurisdictions. The free allocation policy is intended to reduce a firm's exposure to the carbon price in the U.K.

    Responses to this consultation may be submitted until March 11, 2024. A government response is expected to be published in 2024, with changes implemented in the lead up to the next free allocation period in 2026. The ETS Authority is also consulting on changes to the U.K. ETS markets policy.
  • UK Consultation on Revisions to Emissions Trading Scheme Markets Policy
    01/08/2024

    The U.K. Emissions Trading Scheme Authority has launched a second consultation on the review of the ETS markets policy. Feedback to the first consultation has been taken into account to prepare the proposals discussed in this second consultation. Responses to this second consultation may be submitted until March 11, 2024. The ETS Authority is also consulting on changes to the U.K. ETS free allocation framework.

    The ETS Authority identifies the most significant risks to effective market functioning and proposes various policy options to address those risks as well as how individual market stability policies could address market risks while minimizing intervention and disruption in the market. The ETS Authority is proposing to: (i) introduce a quantity-triggered Supply Adjustment Mechanism to mitigate the risk of demand shift with long-term market impacts; (ii) retain a re-designed Auction Reserve Price, as well as possible additional mechanisms, to alleviate the risk of sudden, significant and sustained price decreases; and (iii) retain the Cost Containment Mechanism to mitigate against sudden, significant and sustained price increases, including whether to maintain the use of discretion to act upon the trigger or whether some automation could be introduced.
  • UK Statutory Instrument Made to Ensure Legislation Remains Consistent with Latest Repeals
    01/08/2024

    The Financial Services and Markets Act 2023 (Consequential Amendments) Regulations 2023 make consequential amendments to various pieces of legislation arising from the repeal by the Financial Services and Markets Act 2023 of certain retained EU financial services laws. The Regulations took effect on January 1, 2024. The Financial Services and Markets Act 2023 (Commencement No. 1) Regulations 2023 provided for the repeal of 98 statutory instruments on August 29, 2023, and further revocations from January 1, 2024, including the European Long-Term Investment Funds Regulation (and related SI and tertiary legislation) and a provision from the Capital Requirements Regulation so as to allow the Bank of England more flexibility to set internal Minimum Requirements for Own Funds and Eligible Liabilities for U.K. subsidiaries of non-U.K. global systemically important banks. These latest Regulations make consequential amendments to ensure that legislation remains consistent with the January 2024 repeals.

    Consequential amendments are also made to account for the removal of the double volume cap from the U.K.'s Markets in Financial Instruments regime. The DVC limited the level of dark trading to a certain proportion of total trading in an equity. Instead, the Financial Conduct Authority must monitor trading and has new powers to direct that transparency waivers should be suspended if the ongoing use of the waiver would impact market integrity. In addition, consequential amendments are made following the Electronic Money, Payment Card Interchange Fee and Payment Services (Amendment) Regulations 2023 which amended payments-related REUL.
  • UK Finalizes Amendments to Financial Promotions Regime High-Net-Worth and Sophisticated Investors Exemptions
    01/08/2024

    The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023 implements the governments' policy to reform the high-net-worth and sophisticated investor exemptions under the financial promotions regime. The changes are brought in to mitigate the misuse of the exemptions by some firms marketing inappropriate products to ordinary retail customers and to update certain aspects that were introduced about 20 years ago. The Treasury Select Committee's report on the failure of London Capital & Finance recommended that the exemptions be rethought to ensure greater consumer protection.

    The Financial Services and Markets Act 2000 restricts the communication of an "invitation or inducement to engage in investment activity" either in the U.K. or in a way that could have an effect in the U.K., such that these can be made only by regulated firms, subject to certain exemptions. The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 provides for exemptions from the restriction, including exemptions for financial promotions of unlisted companies to be made to high-net-worth individuals and self-certified sophisticated investors. The Order makes several changes to the FPO exemptions, including increasing the financial thresholds for high-net-worth individuals, amending the eligibility criteria for the self-certified sophisticated investor exemption and requiring businesses to provide details of themselves in communications made in reliance on the exemptions.

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  • Bank of England Publishes Policy Statement on Implementation of Basel 3.1 Standards
    01/03/2024

    The Bank of England has published a Policy Statement on the Implementation of the Basel 3.1 standards in the U.K., taking account of responses to its Consultation Paper 16/22 published in November 2022. The Basel 3.1 changes introduce the as yet unimplemented Basel reforms to banks' regulatory capital frameworks, intended to restore credibility in the calculation of risk-weighted assets and improve the comparability of banks' capital ratios.

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  • UK Government Signs Agreement with Switzerland on Mutual Recognition for Wholesale Financial Services
    01/03/2024

    The U.K. Government has signed the Berne Financial Services Agreement with Switzerland, confirming mutual recognition of aspects of the financial services regulatory and supervisory regimes in each jurisdiction. The Agreement permits specified financial services providers in one jurisdiction to supply specified services to wholesale or sophisticated clients in the other jurisdiction in various sectors (including asset management, banking, investment services activities and insurance) on the basis of deference, domestic law or other arrangements.

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  • Retained EU Law and EU Interpretive Principles Revoked from UK Statute Book
    01/03/2024

    The Retained EU Law (Revocation and Reform) Act 2023 (Consequential Amendment) Regulations 2023 (with related Explanatory Memorandum) came into force on January 1, 2024, clarifying that certain changes provided for under the Retained EU Law (Revocation and Reform) Act 2023 have come into effect.

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  • UK Prudential Regulator's Rules for Small Banks Coming at Start of 2024
    12/22/2023

    The U.K. Prudential Regulation Authority has published a policy statement and rules for implementing the Strong and Simple Framework. The framework is intended to simplify the prudential regulation of non-systemic banks and building societies that are not internationally active, reducing costs for firms, but maintaining their resilience. Up until now, the regulatory approach has broadly applied the same requirements to all banks and building societies, irrespective of their size and activities. Certain prudential rules are simplified for smaller banks and building societies, but to a lesser extent than in some other jurisdictions.

    The policy statement sets out the scope criteria, liquidity and disclosure requirements, and confirms certain timings. The PRA has decided to rename Simpler-regime Firms to Small Domestic Deposit Takers (SDDTs), and Simpler-regime consolidation entities to SDDT consolidation entities. The rules providing for eligible firms to become SDDTs, definitions and disclosure requirements take effect on January 1, 2024. The other rules covered by the policy statement will apply from July 1, 2024. The PRA will consult in Q2 2024 on amending the Pillar 2 and buffer requirements for SDDTs.

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  • UK Legislates on Differentiating Risk of Domestic Politically Exposed Persons
    12/22/2023

    The Money Laundering and Terrorist Financing (Amendment) Regulations 2023, which amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (known as the MLRs), come into force on January 10, 2024. The Financial Services and Markets Act 2023 imposed on HM Treasury a duty to use its powers under the Sanctions and Anti-Money Laundering Act 2018 to amend the MLR customer due diligence measures required where a customer is a domestic (U.K.) politically exposed person (i.e., a PEP entrusted with prominent public functions by the U.K. government, as opposed to a foreign government). The Amendment Regulations fulfil that obligation, providing that unless there are other enhanced risk factors, the due diligence measures applicable to a domestic PEP are reduced compared to those applicable to a non-domestic PEP. The change follows concerns by many members of Parliament that banks and other financial institutions were imposing overly burdensome requirements for information and, in some instances, denying accounts to U.K. politicians and their family members, and also follows the furore over the de-banking by NatWest Bank of the prominent U.K. politician Nigel Farage, which led to the resignation of its CEO.

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  • HM Treasury Confirms Equivalence of US Commodity Futures Trading Commission Regime for Central Counterparties
    12/18/2023

    A U.K. statutory instrument has been published specifying that the US Commodity Futures Trading Commission regime for central counterparties is equivalent to the U.K. regime (which is set out under the U.K. European Market Infrastructure Regulation). The new SI — The Central Counterparties (Equivalence) (United States of America) (Commodity Futures Trading Commission) Regulations 2023 (with accompanying explanatory note) — will take effect from December 28, 2023. The CFTC equivalence decision will only apply to CCPs that are registered with the CFTC and have either been classified as systemically important by the CFTC or otherwise voluntarily comply with the CFTC requirements for systemically important CCPs.

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  • New UK Retail Disclosure Framework for Consumer Composite Investments
    12/13/2023

    Following its July response to its consultation, HM Treasury has published a draft of the statutory instrument that will implement the U.K.'s revised retail disclosure framework. The draft Consumer Composite Investments (Designated Activities) Regulations 2024 will replace the existing onshored Packaged Retail and Insurance-Based Investment Products Regulation which contains rules on disclosures for complex retail investment and insurance products. The PRIIPs Regulation is often cited as an example sine qua non of poorly conceived, poorly drafted, ill-thought through EU legislation with unintended consequences. In particular, it is aimed at packaged retail products, such as FTSE-trackers and insurance-wrapped investments, but was drafted so as to impose onerous and unnecessary disclosure rules on bonds and other standardized securities, effectively foreclosing retail activity in a broad range of "vanilla" investments in the EU (and, when it was in the EU, the U.K.), as well as largely frustrating the EU's "capital markets union" project. These issues are discussed in our client note, "PRIIPS and Capital Markets Transactions: A Better Way Forward?". Replacing the PRIIPs Regulation was therefore identified as a post-Brexit U.K. priority under HM Treasury's Smarter Regulatory Framework. The new rules will allow for a revised U.K. retail disclosure regime that is applicable only to more complex products, suitable to the U.K.'s capital markets and encourages informed retail investor participation in those markets.

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  • HM Treasury Confirms Approach to Digital Securities Sandbox
    12/12/2023

    Following its consultation earlier this year, HM Treasury has published a response to its consultation on the Digital Securities Sandbox, confirming that it will mostly adopt the approach consulted on to establish the DSS. The DSS, which will be the first sandbox to be established using new powers granted by the U.K. Financial Services and Markets Act 2023, is intended to facilitate the use of digital assets in financial markets. The DSS is designed to allow firms to: (i) establish and operate FMIs using digital asset technology; and (ii) perform the activities of central securities depositories and trading venues in relation to existing security classes.

    HM Treasury intends to lay before Parliament draft legislation to implement the DSS, which will be run by the Financial Conduct Authority and the Bank of England. The regulators will be consulting soon on their proposed approaches to the DSS, including the application process and proposed rule changes.

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  • First Commencement Regulations under UK's REUL Act Published
    12/12/2023

    The Retained EU Law (Revocation and Reform) Act 2023 (Commencement No. 1) Regulations 2023 were made on December 12, 2023. These Regulations brought into force from January 1, 2024, provisions of the Retained EU Law (Revocation and Reform) Act to the effect that:
    • From January 1, 2024, the legislation set out in Schedule 1 of the REUL Act 2023 is revoked. The revocation of financial services legislation is being implemented under the Financial Services and Markets Act 2023
    • All remaining references to “retained EU law” (and related terms) are replaced with the term "assimilated law" (or a similar term). Assimilated law is U.K. law that was previously retained EU law or "REUL". The REUL Act provides that from January 1, 2024, REUL (and related terms) will be known as assimilated law.
    • References to the recognition of EU rights that were retained under the European Union (Withdrawal) Act 2018 are removed. The REUL Act repealed the principle of the supremacy of EU law from January 1, 2024, meaning there is no supremacy for assimilated law over other pieces of U.K. statute.
    • References to general principles of EU law (established by the Court of Justice of the European Union) are removed.
  • UK Regulators Propose Rules for Supervising Critical Third Parties
    12/12/2023

    Following feedback to their July discussion paper, the U.K. regulators—the Bank of England, Prudential Regulation Authority and Financial Conduct Authority—have launched a joint consultation proposing rules and regulatory expectations for critical third parties. This follows concerns that the financial sector relies heavily on unregulated service providers, particularly in the IT sector, for critical infrastructure whose failure could cause systemic issues or customer issues. The Financial Services and Markets Act 2023 gave HM Treasury powers to designate an entity as a "critical third party" if its failure would pose financial stability or confidence risk to the U.K. and the regulators will have new direct powers over third parties that provide critical services to authorized firms, their service providers and financial market infrastructures. The regulators' rules would only apply to the services provided by a CTP to one of those firms. Responses to the consultation may be submitted until March 15, 2024.

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  • UK Regulator Consults on Proposed Reforms to the Commodity Derivatives Regulatory Framework
    12/08/2023

    The U.K. Financial Conduct Authority has launched a consultation on proposals for reforming the commodity derivatives regulatory framework, which covers position limits, the exemptions from those limits, position management controls, the reporting regime and the ancillary activities test. Responses to the consultation may be submitted until February 16, 2024.

    The Financial Services and Markets Act 2023 has already made several reforms to the U.K.'s commodity derivatives regulatory regime. The MiFID II requirement for commodities position limits to be applied to all exchange-traded contracts and over-the-counter, or non-venue traded ("OTC"), contracts that are economically equivalent to exchange-traded commodity derivatives was revoked. Instead, the FCA will decide the scope of the commodity derivates to which position limits will apply. In addition, the powers for setting position controls were transferred from the FCA to the operators of trading venues. This contrasts with the EU approach, where position limits are not just set by the regulators, but actually in formulae in legislation, which have proven ill-thought-through and problematic for numerous markets. The FCA has retained the power to set position limits if certain conditions are satisfied, and has new rulemaking powers to establish how trading venues should set and apply position limits and what position management controls they should operate. Generally, the reversion of position limit controls to exchanges as self-regulatory organisations reflects the U.K.'s status quo ante, i.e., prior to MiFID II.

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  • UK Future of Payments Review Report Published
    11/29/2023

    HM Treasury has published the Future of Payments Review report, setting out the Review's recommendations for HM Treasury, the regulators and industry that aim to improve the U.K.'s existing payments landscape for consumers. The report follows the July 2023 call for evidence. The main recommendation is for the government to develop a National Payments Vision and Strategy, which will provide high-level guidance on priorities and define guiding principles on safety, simplification, coordination, responsiveness, inclusivity and accountability.

    The Review makes several other recommendations.

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  • UK Acts to Extend Transitional Period for Third-Country Benchmarks
    11/29/2023

    HM Treasury has published a policy paper and draft legislation for extending the transitional period for third-country benchmarks under the U.K. Benchmarks Regulation. The transitional period will be extended from the end of 2025 to the end of 2030.

    The U.K. Benchmarks Regulation provides that no financial instruments and financial contracts in the U.K. may start to reference a benchmark provided by a third-country benchmark administrator unless that benchmark administrator has approval through equivalence, recognition or endorsement. However, the applicability of these provisions to third-country benchmark providers has been extended numerous times. The government will consider whether the third-country benchmarks regime should be revised as part of the Smarter Regulatory Framework. The extension to 2030 is intended to provide certainty to market participants while that assessment and related work is carried out. The draft legislation is intended to come into force on January 1, 2024.

    In October this year, the EU extended to the end of 2025 the transitional period for third-country benchmarks under the EU Benchmarks Regulation.
  • HM Treasury Seeks Views on Clearing Exemption for Pension Schemes
    11/29/2023

    U.K. EMIR (the onshored European Market Infrastructure Regulation) generally requires the clearing at a central counterparty of all interest rate swaps and credit default swaps. As announced earlier this year, HM Treasury has launched a review of an applicable exemption for pension funds, with the publication of a call for evidence. Currently, pension schemes meeting certain requirements are exempt from the clearing obligation for a temporary period. The exemption was included in EMIR due to the difficulty that pension funds would find in funding margin calls; nominally, to provide CCPs with time to develop solutions for the transfer of non-cash collateral by pension schemes to meet variation margin calls. CCPs require highly liquid collateral, mostly cash, as variation margin, but pension schemes are not set up to hold large amounts of cash and would have to amend their business model at high costs to do so. In June, the Pension Fund Clearing Obligation Exemption and Intragroup Transaction Transitional Clearing and Risk-Management Obligation Exemptions (Extension and Amendment) Regulations 2023 extended the temporary exemption for pension schemes to June 18, 2025.

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  • UK Draft Short Selling Regulations Published
    11/29/2023

    The U.K. government has published a draft version of the Short Selling Regulations 2024. The draft SSR 2024 will replace the existing U.K. Short Selling Regulation, which was onshored from the EU and which is being repealed under the Financial Services and Markets Act 2023. Alongside the draft legislation, HM Treasury has published a Policy Note, which sets out the final policy following the consultations on the short selling regime and on the regulation of sovereign debt and credit default swaps. The response to the first consultation was published in July this year, and the response to the second consultation was published in November 2023.

    The draft SSR 2024 provides that the following are designated activities under the Financial Services and Markets Act 2000 (and so fall under the Financial Conduct Authority's remit whenever any regulated or unregulated person carries them out):
    1. Entering into a short sale of a share.
    2. Entering into a transaction which creates or relates to a financial instrument other than a share, where an effect of the transaction is to confer a financial advantage on the person entering into that transaction in the event of a decrease in the price or value of a share.
    In line with the government’s policy of placing the more detailed firm-facing requirements in the regulator’s rulebooks, the draft SSR 2024 grants the FCA power to make designated activity rules relating to the above designated activities.

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  • Bank of England Proposes Regulatory Regime for Systemic Payment Systems Using Stablecoins
    11/27/2023

    The Bank of England has published a discussion paper on its proposed approach to developing a regulatory regime for systemic payment systems using stablecoins and related service providers. The BoE’s paper follows the government’s recent Policy Paper on Plans for the Regulation of Fiat-backed Stablecoins which confirmed that these types of stablecoins will be brought into the U.K. regulatory perimeter.

    This is part of HM Treasury’s plan to regulate cryptoassets, focusing first on fiat-backed stablecoins. The BoE will be responsible for the financial stability of systemic payment systems using stablecoins. The Financial Conduct Authority will supervise non-systemic fiat backed stablecoins for prudential and conduct of business purposes, and systemic fiat-backed stablecoins for conduct purposes only, and has published a discussion paper alongside the BoE's discussion paper. Responses to both discussion papers may be submitted until February 6, 2024. The Prudential Regulation Authority will supervise banks' activities in tokenized deposits. The PRA has written to banks stating that any business in fiat-backed stablecoins will, among other things, need to be conducted from a separate legal entity under branding that is different to the bank' branding. The Payment Systems Regulator will supervise the competition aspects relating to systemic payment systems using fiat backed stablecoins.

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  • UK Prudential Regulator Sets Out Expectations for Banks Innovating in Digital Money
    11/27/2023

    The U.K. Prudential Regulation Authority has published a Dear CEO letter, addressed to CEOs of banks, setting out its expectations of banks (deposit-takers) regarding the risks that arise from innovations in digital money and money-like instruments available to retail customers. The letter focuses on innovations in the use of deposits (and tokenized deposits), e-money and regulated stablecoins used for payment (which are being brought into the regulatory perimeter).

    The PRA sets out how banks are expected to limit contagion arising from confusion regarding the different protections available to retail holders of bank deposits, e-money and regulated stablecoins. Where a bank or its group want to issue e-money or regulated stablecoins, that activity should be carried out from an insolvency-remote entity that is separate to the bank, with different branding from the bank to ensure that any failure of the e-money or stablecoin issuer would not impact the bank and the continuity of its deposit-taking services. The PRA also expects any tokenized deposit-taking to be undertaken in a way that ensures protection under the Financial Services Compensation Scheme. An e-money or stablecoin issuer that decides to accept traditional deposits would first need to establish a separate entity to obtain permission to operate as a bank.

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  • UK Conduct Authority Consults on Regulating Fiat-Backed Stablecoins
    11/27/2023

    The U.K. Financial Conduct Authority has published a discussion paper regarding potential future proposals for regulating fiat-backed stablecoins, including when used as a means of payment. The FCA's paper follows the government's recent Policy Paper on Plans for the Regulation of Fiat-backed Stablecoins, which confirmed that changes to legislation would bring these types of stablecoins into the U.K. regulatory perimeter. This is part of HM Treasury's plan to regulate cryptoassets, focusing first on fiat-backed stablecoins.

    The FCA will supervise non-systemic fiat-backed stablecoins for prudential and conduct of business purposes, and systemic fiat-backed stablecoins for conduct purposes only. The Bank of England is responsible for the financial stability of systemic payment systems using fiat-backed stablecoins and has published a discussion paper alongside the FCA's discussion paper. Responses to both discussion papers may be submitted until February 6, 2024. The Prudential Regulation Authority will supervise banks' activities in tokenized deposits. The PRA has written to banks stating that any business in fiat-backed stablecoins will, among other things, need to be conducted from a separate legal entity under branding that is different to the banks' branding. The Payment Systems Regulator will supervise the competition aspects relating to systemic payment systems that use fiat-backed stablecoins.

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  • HM Treasury Publishes Consultation Response on Financial Promotions Regime High Net Worth and Sophisticated Investors Exemptions
    11/08/2023

    HM Treasury has published a consultation response and draft statutory instrument on reforms to the high net worth and sophisticated investor exemptions under the financial promotions regime. The Financial Services and Markets Act 2023 (which we discuss in our client note, "A Boost for UK Financial Services") made amendments to the Financial Promotion Restriction, banning authorized firms from approving the financial promotions of unauthorized firms unless they have received approval from the FCA to have the prohibition removed in whole or in part. The gateway will apply from February 7, 2024. However, the restriction does not apply where exemptions exist, such as those for high net worth or sophisticated investors.

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  • HM Treasury Publishes Response to Cryptoasset Regulatory Regime Consultation
    11/03/2023

    HM Treasury has published a response to its consultation on cryptoasset regulation, setting out its final proposals for the U.K.'s cryptoasset regulatory regime. The U.K. plans to make cryptoassets a new category of "specified investment" under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and regulate certain activities conducted in relation to them. Under the new regime:
    • Firms conducting relevant activities and offering their services in or to the U.K. by way of business would need to apply for authorization by the U.K. Financial Conduct Authority. The relevant activities are: issuing or admitting cryptoassets to trading; operating cryptoasset trading venues; dealing as principal or arranging deals in cryptoassets; operating a cryptoasset lending platform; and safeguarding or safeguarding and administering cryptoassets (or arranging the same). Overseas firms offering their services into the U.K. may need to obtain FCA permission (although HM Treasury envisages equivalence/deference-type arrangements in the future and is considering alternative approaches to full authorization in the interim).
    • Firms that are already authorized to conduct other activities will need to apply for a Variation of Permission if they wish to conduct regulated cryptoasset activities.
    • Authorization under the new regime will not be automatically granted to cryptoasset firms registered with the U.K. Financial Conduct Authority for money laundering purposes, although the FCA will consider applicants' regulatory history when determining authorization applications.

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  • HM Treasury Publishes Plan for Regulation of Fiat-backed Stablecoins
    11/03/2023

    HM Treasury has published a Policy Paper on Plans for the Regulation of Fiat-backed Stablecoins, setting out the next steps for the implementation of stablecoin regulation in the U.K. Fiat-backed stablecoins are (under HM Treasury's proposed definition) those which seek or purport to maintain a stable value by reference to a fiat currency, and hold that currency, in whole or in part, as backing.

    The Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services) empowers HM Treasury to bring certain activities related to the use of "digital settlement assets" (which may include fiat-backed stablecoins), within the regulatory perimeter and to establish a regime for the supervision of stablecoin issuers. DSAs are defined broadly under the FSM Act as digital assets that can be used for payment, can be transferred, stored or traded electronically and use technology (e.g., distributed ledger technology) to record or store data. HM Treasury plans to bring certain activities related to fiat-backed stablecoins within the scope of regulation ahead of other types of cryptoasset, due to their potential to become a widespread means of retail payment.

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  • HM Treasury Publishes Response to Consultation on Managing Failure of Systemic Digital Settlement Asset Firms
    11/03/2023

    HM Treasury has published a response to its consultation on managing the failure of systemic digital settlement asset firms. DSAs are defined broadly under the Financial Services and Markets Act 2023 as digital assets that can be used for payment, can be transferred, stored or traded electronically and use technology (e.g., distributed ledger technology) to record or store data. The FSM Act (discussed in our client note, A Boost for UK Financial Services) granted HM Treasury powers to supervise certain activities related to DSAs. This included the power to apply the Financial Market Infrastructure Special Administration Regime to systemic DSA firms (other than banks, which are covered by existing regulatory frameworks).

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  • EU Proposes Reducing Scope of the EU Benchmark Regulation
    11/01/2023

    The European Commission has published a legislative proposal for reducing the scope of the EU Benchmark Regulation. The EU BMR provides the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks.

    The Commission's proposal, designed to ease the burdensome requirements for smaller benchmark administrators, is to change the scope of the BMR by removing the requirement for non-significant benchmark administrators to obtain authorization or registration (EU administrators) or endorsement or recognition (third-country administrators). This will mean that the requirements for governance and control of administrators would no longer apply to these benchmark administrators.

    The approval and governance requirements would continue to apply to significant benchmark administrators, critical benchmark administrators and, irrespective of significance, to administrators of the EU Paris-aligned Benchmark or EU Climate Transition Benchmarks.

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  • UK Regulators Confirm Bonus Cap Being Scrapped
    11/01/2023

    The U.K. Prudential Regulation Authority and Financial Conduct Authority have published a joint policy statement confirming the "bonus cap" will be removed. Banks are subject to compensation requirements for staff who have a material impact on the bank's risk profile, and there is a cap on the ratio of variable to fixed compensation for identified staff – known as the bonus cap.

    The changes are relevant to banks, building societies, and PRA-designated investment firms, including third-country branches that are subject to the Remuneration Part of the PRA Rulebook and to the FCA Remuneration Code for dual-regulated firms. The amendments will take effect from October 31, 2023, applying to a firm's performance year which is ongoing on that date, and to future performance years. Firms have flexibility as to when to make changes to compensation structures.

    In their policy statement, the regulators remind firms of the existing rules that will continue to apply to a firm's compensation structure to ensure prudent risk-taking, such as the requirements that all variable compensation must be subject to risk adjustment and that the fixed and variable components of total remuneration must be appropriately balanced. The regulators have added guidance on how firms can set an appropriate ratio between the fixed and variable components.
  • EU Extends Use of Third-Country Benchmarks Until End 2025
    11/01/2023

    A Commission Delegated Regulation extending the transitional period laid down for third-country benchmarks has been published in the Official Journal of the European Union.

    The EU Benchmark Regulation limits the use by EU supervised entities of benchmarks provided by third-country benchmark administrators. Under transitional provisions, no financial instruments and financial contracts in the EU may start to reference a benchmark provided by a third-country administrator on or after December 31, 2023 (extended in 2022 from January 1, 2021), unless the benchmark and administrator are included in the register maintained by the European Securities and Markets Authority following an equivalence decision by the European Commission, or recognition or endorsement by a national regulator. However, a benchmark provided by a third-country administrator that is already being referenced in financial instruments and financial contracts in the EU on January 1, 2024, may continue to be referenced in those contracts and financial instruments.

    The Delegated Regulation, which takes effect on October 26, 2023, extends the transitional date from December 31, 2023 to December 31, 2025. The transitional provision does not apply to any EU benchmark whose administrators relocate to a third country during the transitional period.
  • Basel Committee Report on 2023 Banking Turmoil
    10/20/2023

    The Basel Committee on Banking Supervision published a press release in early October in which it announced:
    • That it would consult on disclosure frameworks for climate-related financial risks (in November 2023) and banks' cryptoasset exposures (soon).
    • The publication of its report on the banking turmoil of 2023, which assesses the causes of the turmoil, the regulatory and supervisory responses, and the initial lessons learnt. The Basel Committee states that it will be undertaking some follow-up work, including prioritizing work to bolster supervisory effectiveness globally and assessing whether any aspects of the Basel Framework did not function as intended during the turmoil.
    • That by mid-2024 it would publish a report on developments in the digitalisation of finance and their implications for banks and supervisors.
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