ARTICLE
9 January 2025

Regulatory Monitoring: EU Version

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A&O Shearman

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The FSB has set out the outcomes of its Plenary that met on 3 and 4 December. Points of interest include: (i) climate-related financial risks...
European Union Finance and Banking

1. Bank regulation

1.1 PRUDENTIAL REGULATION

a) Genera

(i) International

FSB: Plenary December 2024

Status: Final

The FSB has set out the outcomes of its Plenary that met on 3 and 4 December. Points of interest include: (i) climate-related financial risks – the Plenary discussed progress in the four areas of the roadmap for addressing climate-related financial risks as well as EMDE-specific climate vulnerabilities and ways to help address those vulnerabilities. The FSB will issue its next report on progress with the roadmap in mid-2025; (ii) non-bank financial intermediation (NBFI) – the FSB will shortly publish its final policy recommendations on measures to enhance liquidity preparedness of non-bank market participants for margin and collateral calls and will be launching a consultation on proposed policy recommendations to monitor and address financial stability risks from NBFI leverage. The Plenary agreed to steps for how to overcome data issues that are hampering efforts to further improve the ability of authorities to effectively assess vulnerabilities stemming from the non-bank sector and to calibrate appropriate policies; (iii) 2025 work programme – the FSB agreed the work programme and confirmed the extension of Klaas Knot's term as FSB Chair until 1 July 2025. The finalised work programme will be published in early 2025.

Date of publication: 04/12/2024

b) Solvency/Own funds issues

(i) EU

EBA: Final draft RTS on the exemption from residual risk add-on own funds requirements for a certain type of hedges under Article 325u(4a) CRR II

Status: Final

The EBA has published final draft RTS on the conditions for determining whether an instrument attracting residual risk acts as a hedge. The RTS are part of the Phase 1 deliverables of the EBA roadmap on the implementation of the EU banking package in the area of market risk. The EU Banking Package introduces a provision in the residual risk add-on (RRAO) framework allowing the exemption from the RRAO charge for those instruments bearing residual risks that are, in turn, used to hedge instruments bearing residual risks. These RTS specify when an instrument qualifies as a hedge for the purpose of the exemption and when not.

The EBA will submit the final draft RTS to the EC for endorsement, after which they will be subject to scrutiny by the EP and the Council. If neither object, the Delegated Regulation containing the RTS will be published in the OJ.

Date of publication: 17/12/2024

EBA: Consultation on draft RTS amending Delegated Regulation (EU) No 529/2014 supplementing the CRR with regard to RTS for assessing the materiality of extensions and changes of the IRBA

Status: Consultation

Deadline for the submission of comments: 10/03/2024

The EBA has launched a public consultation on its draft RTS clarifying and enhancing the conditions for assessing material model changes (MMC) and extensions following a review of the related Delegated Regulation. This review aimed to align the existing RTS with the amendments brought in by the CRR 3, and to introduce amendments to enhance the supervisory effectiveness of the approval process for model changes.

Date of publication: 09/12/2024

EBA: Final draft RTS on long and short positions for the thresholds calculation in market and counterparty credit risk

Status: Final

The EBA has finalised its draft RTS on the method for identifying the main risk driver of a position and for determining whether a transaction represents a long or a short position under Article 94(1) CRR, as amended by CRR3. The proposed general method to identify the main risk drivers hinges on sensitivities defined under the market risk standardised approach or on add-ons defined under the standardised approach for counterparty credit risk (SA-CCR). For the determination of the direction of the positions, the methodology is aligned with the one set out in the RTS on SA-CCR. A simplified method has also been included, covering relatively simple instruments, such as fixed-rate bonds, floating-rate notes, stocks, forwards, futures, simple swaps and plain vanilla options.

The EBA will submit the final draft RTS to the EC for endorsement, after which they will be subject to scrutiny by the EP and the Council before being published in the OJ.

Date of publication: 06/12/2024

c) Securitisation

(i) EU

ESMA: Feedback on review of securitisation disclosure templates

Status: Fina

ESMA has published a feedback statement summarising the responses it received to its consultation on the securitization disclosure templates under the Securitisation Regulation. The publication provides a detailed analysis of stakeholder feedback on the costs and benefits of revising the existing disclosure framework, in line with the four potential implementation options proposed in the CP.

Overall, respondents acknowledge the need for further improvements to the securitisation transparency regime but recommend postponing the template review due to concerns about its timeline in relation to a broader SECR review. In their responses stakeholders asked ESMA to prioritise short-term solutions that address the most pressing industry challenges, such as regulatory compliance costs, and the need for a simplified template for private securitisations.

Date of publication: 20/12/2024

d) Risk management/SREP/Pillar 2/Outsourcing/NPL

(i) EU

ECB: SREP results 2024 and supervisory priorities 2025-2027

Status: Final

The ECB has published the results of its Supervisory Review and Evaluation Process (SREP) for 2024 and its supervisory priorities for 2025-27. The SREP found that ECB-supervised euro area banks had strong capital and liquidity positions and remained resilient in 2024. The average overall SREP score remained stable at 2.6. Geopolitical risks (e.g., the conflict in the Middle East, the Russia-Ukraine war and US/China tensions over Taiwan) persist and are often not priced in on financial markets until they materialise, meaning the ECB is prioritising strengthening resilience to geopolitical shocks. The ECB also calls for heightened vigilance due to the weakening macroeconomic outlook and structural changes in the economy.

The ECB's supervisory priorities for 2025-27 include: (i) banks should strengthen their ability to withstand immediate macro-financial threats and severe geopolitical shocks; (ii) banks should remedy persistent material shortcomings in an effective and timely manner; and (iii) banks should strengthen their digitalisation strategies and tackle emerging challenges stemming from the use of new technologies. Each priority targets a specific set of vulnerabilities in the banking sector, referred to as "prioritised vulnerabilities", for which the ECB has a set of strategic objectives and developed work programmes.

Date of publication: 17/12/2024

Directive (EU) 2024/2994 amending the UCITS Directive, CRD and IFD as regards the treatment of concentration risk arising from exposures towards CCPs and of counterparty risk in centrally cleared derivative transactions

Status: Published in the OJ

Date of entry into force: 24/12/2024

Date of application: 25/06/2026

The EMIR 3 Directive has been published in the OJ. For more information, please see section 4.1 below.

Date of publication: 04/12/2024

(ii) Internationa

BCBS: Final Guidelines for counterparty credit risk management

Status: Final

The BCBS has published the final version of its Guidelines for counterparty credit risk (CCR) management, replacing its 'Sound Practices for Banks' Interactions with Highly Leveraged Institutions' (originally published in January 1999). The Guidelines provide a supervisory response to the significant shortcomings that have been identified in banks' management of CCR, including the lessons learned from recent episodes of non-bank financial intermediary (NBFI) distress. The Guidelines include the need to: (i) conduct comprehensive due diligence both at initial onboarding and on an ongoing basis; (ii) develop a comprehensive credit risk mitigation strategy to manage counterparty exposures effectively; (iii) measure, control and limit CCR using a wide variety of complementary metrics; and (iv) build a strong CCR governance framework. Banks and supervisors are encouraged to take a risk-based and proportional approach in the application of the Guidelines. The BCBS will continue to monitor implementation of the Guidelines on an ongoing basis.

Date of publication: 11/12/2024

e) Cyber security

(i) EU

ESAs: Report on key findings from the 2024 dry run exercise on reporting registers of information under DORA

Status: Final

The ESAs have published a summary report with the key findings from the 2024 Dry Run exercise on reporting the registers of information under DORA. The quality of data observed in the registers submitted by almost 1,000 financial entities across the EU was in line with the ESAs' expectations, considering the 'best effort' nature of the exercise. The ESAs are confident that the objective of having registers of sufficient quality in 2025 that would allow for the designation of critical third-party service providers is not out of reach, subject to some additional efforts from the industry. The ESAs advise that all industry stakeholders carefully consider the report and all supporting materials to aid in preparing to report the registers in 2025.

Date of publication: 17/12/2024

ESAs: Joint statement urging financial entities to ensure timely compliance with DORA

Status: Final

The ESAs have published a joint statement on the application of DORA. The ESAs emphasise that as DORA does not provide for a transitional period, it is important for financial entities to adopt a robust, structured approach in order to meet their obligations in a timely manner. DORA, and the technical standards and Guidelines supplementing it, applies from 17 January 2025. Financial entities are expected to identify and address in a timely manner gaps between their internal setups and the DORA requirements. Financial entities should also prepare for the new reporting obligations. In particular, financial entities need to have their registers of ICT third-party providers' contractual arrangements available for competent authorities early in 2025, as the latter will have to report them to the ESAs by 30 April 2025. The ESAs note that competent authorities will supervise compliance with the DORA requirements in a risk-based manner considering the risk profile, size, complexity and scale of financial entities. The ESAs invite ICT third-party service providers, which consider they may meet the criticality criteria published in May, to assess their operational setup against DORA requirements. The first designation of critical third-party service providers is expected to take place in H2, 2025.

Date of publication: 04/12/2024

Commission Implementing Regulation (EU) 2024/2956 laying down ITS for the application of DORA with regard to standard templates for the register of information

Status: Published in the OJ

Date of entry into force: 22/12/2024

The Commission Implementing Regulation 2024/2956 laying down ITS for the application of DORA with regard to standard templates for the register of information, has been published in the OJ. Under Article 28(3) of DORA, as part of their ICT risk management framework, financial entities must maintain and update at entity level, and at subconsolidated and consolidated levels, a register of information for all contractual arrangements on the use of ICT services provided by ICT third-party service providers. These ITS set out the standard templates for the register of information.

The EC had rejected the ESA's draft ITS in September on the basis that financial entities should have the choice of using either EU unique identifiers (EUIDs) or legal entity identifiers (LEIs). The ESAs published an opinion in October

setting out their concerns for introducing the EUID as an identifier for these purposes. Nonetheless, the Implementing Regulation refers to financial entities using a valid and active LEI or EUID.

Date of publication: 02/12/2024

Council of the EU: Adoption of new laws to strengthen cyber security capacities in the EU

Status: Adopted by the Council of the EU

The Council of the EU has adopted two new laws aimed at strengthening the EU's solidarity and capacity to detect, prepare for and respond to cybersecurity threats and incidents: (i) the Cyber Solidarity Act; and (ii) the Cybersecurity Act. They mainly aim to: (i) support detection and awareness of significant or large-scale cybersecurity threats and incidents; (ii) bolster preparedness and protect critical entities and essential services, such as hospital and public utilities; (iii) strengthen solidarity at EU level, concerted crisis management and response capabilities across member states; and (iv) contribute to ensuring a safe and secure digital landscape for citizens and businesses.

Date of publication: 02/12/2024

f) Supervisory reporting

(i) EU

Commission Implementing Regulation (EU) 2024/3117 laying down ITS for the application of the CRR with regard to supervisory reporting of institutions and repealing Commission Implementing Regulation (EU) 2021/451

Status: Published in the OJ

Date of entry into force: 28/12/2024

Date of application: 28/06/2025

The Commission Implementing Regulation (EU) 2024/3117 laying down ITS for the application of the CRR with regard to supervisory reporting of institutions and repealing Commission Implementing Regulation (EU) 2021/451 has been published in the OJ. This document aims to implement the changes necessary to keep the supervisory reporting framework relevant and meaningful and aligned with CRR III, which implements the latest Basel III reforms. The ITS update the EBA supervisory reporting framework by including new or amended CRR III requirements on the output floor, credit risk, market risk, CVA risk, leverage ratio and on the transitional treatment of exposures to crypto-assets. They will allow supervisors to have sufficient comparable information to monitor compliance by institutions with CRR III requirements, thus further promoting enhanced and consistent supervision. On operational risk, these ITS also include some minimum reporting requirements.

Date of publication: 27/12/2024

EBA: Technical package for the 4.0 reporting framework

Status: Final

The EBA has published the final technical package for version 4.0 of its reporting framework, which will apply as of the first half of 2025. The package marks the transition to the new Data Point Model (DPM) semantic glossary and introduces the enhanced capabilities of the DPM 2.0 model. It provides the standard specifications that include the validation rules, the DPM and the XBRL taxonomies to support the following reporting obligations: (i) reporting of information by issuers of asset-referenced tokens (ARTs) and electronic money tokens (EMTs); (ii) new Implementing Technical Standards (ITS) amending the supervisory reporting framework (COREP templates) to implement the most immediate changes driven by the EU Banking Package (Capital Requirements Regulation - CRR3 and Capital Requirements Directive -CRDVI) published on 19 June in the Official Journal; (iii) minor amendments to reporting obligations by class 2 investment firms (COREP templates), in alignment with the CRR3/CRDVI changes; and (iv) updated requirements for the registers of information under the Digital Operational Resilience Act (DORA) following the adoption by the EU Commission of the Commission Implementing Regulation (EU) 2024/2956 with regard to standard templates for the register of information.

Date of publication: 19/12/2024

g) Disclosure

(i) EU

Commission Implementing Regulation (EU) 2024/3172 laying down ITS for the application of the CRR with regard to public disclosures by institutions of the information referred to in Part Eight, Titles II and III CRR, and repealing Commission Implementing Regulation (EU) 2021/637

Status: Published in the OJ

Date of entry into force: 20/01/2025

Date of publication: 01/01/2025

The Commission Implementing Regulation (EU) 2024/3172 laying down ITS for the application of the CRR with regard to public disclosures by institutions of the information referred to in Part Eight, Titles II and III CRR, and repealing Commission Implementing Regulation (EU) 2021/637 has been publihsed in the OJ. It implements the CRR III prudential disclosures by including new requirements on output floor, credit risk, market risk, CVA risk, operational risk and a transitional disclosure on exposures to crypto-assets. The Implementing Regulation aims to provide institutions with a comprehensive integrated set of uniform disclosure formats. The repeal of the Implementing Regulation (EU) 2021/637 is intended to make the technical standards more user-friendly for institutions.

Date of publication: 31/12/2024

1.2 RECOVERY AND RESOLUTION

(i) EU

EBA: Response on the treatment of some legacy instruments of Banque Fédérative du Crédit Mutuel

Status: Final

The EBA has published a response to a letter from a law firm regarding the intention of Banque Fédérative du Crédit Mutuel (BFCM), based in France, to keep some legary instruments in its balance sheet without any regulatory value.

It has determined that, while the instruments have been rightfully disqualified from all layers of capital and eligible liabilities under applicable grandfathering provisions, they still rank pari passu with fully eligible own funds instruments, creating undue complexity within the balance sheet of the issuer and raising concerns in terms of ranking. Therefore, it is the EBA's view that BFCM should target the redemption of these instruments.

In addition, the EBA recalls that the options contained in its Opinion on legacy instruments were meant for institutions to explore how to dispose of remaining legacy instruments to clean their capital structure and ensure a clear subordination ranking within and between regulatory stacks, while preventing unnecessary complexity. Keeping legacy instruments in the balance sheet was considered to be a last resort option, in cases where the other options provided in the Opinion were not available for institutions. In this regard, it has always been the EBA's expectation that legacy instruments should be phased out.

Date of publication: 20/12/2024

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