Looking Ahead: European Developments
Click below to read more insights about the priorities for the incoming EU Commissioner for Financial Services.
BANKS - GOVERNANCE AND RISK CULTURE
The consultation by the European Central Bank (ECB) on its new draft Guide on governance and risk culture closes on 16 October 2024. The new guide would replace the ECB’s 2016 SSM supervisory statement on governance and risk appetite, and aims to give banks a roadmap to a more effective internal governance and risk culture. It sets out expectations regarding how management bodies and committees should be composed and function, sets out the roles and responsibilities of the internal control functions, emphasises the importance of risk culture and outlines expectations regarding banks’ risk appetite frameworks.
BANKS – INTERNAL MODELS
The consultation paper from the European Banking Authority (EBA) amending the implementing technical standards (ITS) on the joint decision process for internal model authorisation under the Capital Requirements Regulation (CRR) closes for feedback on 16 October 2024. The revised ITS are part of the first phase of the EBA roadmap for implementing the EU Banking Package.
BANKS - RESOLUTION
The EBA’s public consultation on draft ITS which would overhaul its resolution planning reporting framework closes on 30 October 2024.
Announced on 30 July 2024, the draft ITS are designed to ensure that resolution authorities have the data they need with a view to improving the usability of the reporting framework and enhancing a consistent monitoring of resolution planning. The EBA is proposing that the submission deadline for reporting be brought forward from 30 April to 31 March, that there would be an extension of the scope of entities for which data is collected, and that there would be an expansion of the information requested on some topics, in particular organisational structure, granular liability data, critical functions, financial markets infrastructures data, critical services and critical information systems.
After the consultation period ends, the EBA plans to submit the final draft ITS to the European Commission by March 2025.
BANKS – SECURITIES FINANCING TRANSACTIONS
The EBA’s consultation on draft regulatory technical standards (RTS) specifying the conditions and the criteria to assess whether the credit valuation adjustment (CVA) risk exposures arising from fair-valued securities financing transactions (SFTs) are material, as well as the frequency of that assessment, closes on 8 October 2024. The consultation was launched on 8 July 2024.
The draft RTS suggest a quantitative threshold approach to determining the materiality of CVA risk exposures arising from fair-valued SFTs. The draft RTS 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 propose that the assessment take place on a quarterly basis.
BANKS – SOUND MANAGEMENT OF THIRD-PARTY RISK
The Basel Committee on Banking Supervision’s consultation on principles for the sound management of third-party risk in the banking sector closes on 9 October 2024. The principles aim to address the increasing reliance by banks on third-party service providers in light of ongoing digitalisation and the rapid growth in FinTech. The principles are intended to replace the principles in the 2005 Joint Forum Paper on outsourcing in financial services as they relate to the banking sector.
ESMA - REPORTING REQUIREMENTS AND GOVERNANCE EXPECTATIONS FOR SOME SUPERVISED ENTITIES
ESMA’s July 2024 consultations on proposed guidance for some of its supervised entities close for feedback on 18 October 2024. The consultations are aimed at benchmark administrators, credit rating agencies, securitisation repositories under the EU Securitisation Regulation, trade repositories under EMIR/SFTR, and data reporting service providers under MiFIR.
The Consultation Paper for Guidelines on the submission of periodic information to ESMA sets out the information that ESMA expects to receive and a timeline for supervised entities to provide the required information. The Consultation Paper for Guidelines on supervisory expectations for the management body sets out ESMA’s supervisory expectations in relation to good practice in governance arrangements, such as on the role, operation, and effectiveness of the management bodies of the entities supervised by ESMA. The proposed guidance is also aimed at future supervised entities. This consultation paper also seeks input feedback from systemically important third country central counterparties. ESMA plans to publish a final report in Q1 2025.
INSURANCE – EIOPA CONSULTATIONS
EIOPA’s public consultation on the future implementation of the new proportionality framework under Solvency II closes on 25 October 2024. The consultation covers the methodology for classifying insurance undertakings as small and non-complex (who would benefit from proportionality measures) and the conditions for granting similar proportionality measures to insurers that don’t by default fall into the small and non-complex category. EIOPA plans to submit its final advice to the Commission by 31 January 2025.
EIOPA’s consultation (in response to a request for technical advice from the Commission) on the capital requirement treatment of insurers’ direct exposures to qualified central counterparties (CCPs) within the standard formula closes on 23 October 2024. The consultation notes that EEA (re)insurers have (until recently) only used central clearing facilities indirectly as clients for their derivatives transactions. While Solvency II prescribes a specific treatment for those indirect arrangements, direct exposures to CCPs haven’t been accounted for and as a result would be treated as bilateral exposure, resulting in higher capital requirements. While EIOPA isn’t aware of any EEA (re)insurers with traditional direct exposures to CCPs (as this may fall foul of national laws in some cases), clearing houses’ access models have evolved and EIOPA’s consultation looks at those access models and their implications on the risk exposures, liquidity needs and risk assessment calculations of (re)insurers and proposes various policy options. EIOPA plans to submit the final advice to the Commission by 31 January 2025.
INSURANCE – IAIS CONSULTATIONS
The consultation by the International Association of Insurance Supervisors (IAIS) on a draft application paper on operational resilience objectives (which wouldn’t impose new requirements, but instead aims to clarify the application of existing supervisory materials) closes on 11 October 2024. The IAIS signalled that this is the first phase of a two-part consultation. The second phase will involve the development of a draft toolkit to support the objectives by setting out relevant supervisory practices and will be the subject of a consultation in H1 2025. Once that’s complete, both phases will be integrated into a single application paper.
The IAIS has extended the deadline for responses to its fourth consultation on climate risk supervisory guidance to 28 October 2024.
INSURANCE – PROFESSIONAL INDEMNITY INSURANCE
Commission Delegated Regulation (EU) 2024/896 applies from 9 October 2024. It contains RTS under the Insurance Distribution Directive amending the base euro amounts for professional indemnity insurance and for financial capacity of insurance and reinsurance intermediaries.
See the ‘Irish Developments’ section of this Horizon Scanner: Finance for details of related Irish regulations.
MICA – REGULATORY COOPERATION
Commission Implementing Regulation (EU) 2024/2494 will come into force on 15 October 2024. It sets out ITS for standard forms, templates and procedures for the co-operation and exchange of information between competent authorities and the EBA and ESMA (reflecting a mandate under Article 96(3) of the markets in crypto-assets regulation (MiCA)).
MICA – REPORTING REQUIREMENTS
The EBA’s consultation on draft guidelines on reporting requirements to assist competent authorities and the EBA in performing their duties under MiCA closes on 15 October 2024. Issuers of asset-referenced tokens (ARTs) and certain e-money tokens (EMTs) must report specific information under Article 22 of MiCA. The EBA’s position is that this data won’t be enough to enable the EBA and competent authorities to discharge their supervisory tasks and the significance assessment tasks under MiCA. The EBA has identified data gaps, and the guidelines that are the subject of this consultation specify common templates and instructions for issuers to provide the EBA and competent authorities with the necessary information to cover these gaps. The draft guidelines also include common templates and instructions that issuers should use to collect the data they need from the relevant crypto-asset service providers.
MICA – CLASSIFICATION OF CRYPTO-ASSETS
The consultation by the European Supervisory Authorities (EBA, EIOPA, ESMA) on guidelines under MiCA establishing templates for explanations and legal opinions regarding the classification of crypto-assets along with a standardised test to foster a common approach to classification closes on 12 October 2024. The draft guidelines propose a standardised test, together with templates for explanations and legal opinions that provide descriptions of the regulatory classification of crypto-assets in the following scenarios:
- ARTs: The white paper for the issuance of ARTs, which contains comprehensive information about the crypto asset, must be accompanied by a legal opinion that explains the classification of the crypto asset – in particular, the fact it isn’t an EMT nor a crypto-asset that could be considered excluded from the scope of MiCA.
- Crypto-assets that aren’t ARTs or EMTs under MiCA: The white paper for the crypto-asset must be accompanied by an explanation of the classification of the crypto asset – in particular, the fact it is not an EMT, ART or crypto-asset excluded from the scope of MiCA.
MIFID – EXECUTION
ESMA’s consultation on draft RTS setting out the criteria for how investment firms establish and assess the effectiveness of their order execution policies closes on 16 October 2024. Through that consultation, ESMA sought feedback on the establishment of an investment firm’s order execution policy (including the classification of financial instruments in which firms execute client orders and the initial selection of venues for the order execution policy); the firm’s procedures for monitoring and regularly assessing the effectiveness of its order execution arrangements and order execution policy; the firm’s execution of client orders through own account dealing; and how a firm should deal with client instructions.
MIFID – MIFIR REVIEW
The remaining three aspects of ESMA’s third consultation package under the MiFIR / MiFID II review close on 15 October 2024. The third consultation package has focused on equity transparency, volume caps, circuit breakers, systematic internaliser notifications, equity consolidated tape providers, and post-trade transparency flags for non-equity instruments. The remaining aspects of the consultation which will close this month relate to:
- Volume cap (changes to RTS 3): Transition from a double volume cap to a single volume cap, adjustments to reporting requirements, and provisions for the new volume cap rules effective from 29 September 2025.
- Circuit breakers (changes to RTS 7): New requirements on circuit breakers and amendments due to DORA framework. Establishing static and dynamic circuit breakers, guidelines for calibration, and public disclosure requirements for trading venues.
- Systematic internaliser (SI) notification (new ITS): A standardised template for notifying national competent authorities when firms meet the SI definition and requirements for updating notifications.
ESMA’s final report on the above three mandates is expected to be provided to the Commission in March 2025.
PAYMENTS
The EBA’s public consultation on draft ITS for uniform reporting templates in relation to the level of charges for credit transfers and share of rejected transactions under SEPA Regulation closes on 31 October 2024 (Consultation Paper with Annex I (reporting templates) and Annex II (instructions for PSPs)). The aim of these templates is to standardise reporting from payment service providers (PSPs) to their national competent authorities.
The consultation proposes that PSPs report the level of charges for regular credit transfers and instant credit transfers with breakdowns by type of transfer (domestic / cross-border), type of payment service users, type of payment initiation channels, and the party subject to the charge. The consultation also proposes that PSPs report charges for payment accounts, as well as the share of instant transfers, both domestic and cross-border, that were rejected due to the application of EU-wide restrictive measures.
In a preparatory statement addressed to the PSPs, which accompanied the consultation paper, the EBA emphasised that PSPs are expected to record and store information on the level of charges for credit transfers and payment accounts, and numbers of rejected transactions, to comply with future reporting requirements under the revised SEPA Regulation.
SECURITISATION
The consultation by the Commission on the Level 1 text of the EU Securitisation Regulation, and related matters, is imminent, and is expected to run for around 8 weeks. Focus areas are expected to be the definition of securitisation, the due diligence requirements in Article 5, and the transparency requirements in Article 7. Questions relating to both the bank prudential framework and the Solvency II Directive are also expected to feature. The Commission’s preparations for the consultation have been informed by the Article 44 report that the European Supervisory Authorities are preparing, but that report is unlikely to be published until after the Commission’s consultation has been launched. Output from the Commission’s upcoming consultation is likely to be published late Q1 / early Q2 2025, and output from ESMA’s December 2023 consultation on Level 2 disclosure templates is still awaited. Keep an eye out for our insights on the Commission’s consultation when it is published later this month.