ARTICLE
9 January 2025

Regulatory Monitoring Newsletter, December 2024

AO
A&O Shearman

Contributor

A&O Shearman was formed in 2024 via the merger of two historic firms, Allen & Overy and Shearman & Sterling. With nearly 4,000 lawyers globally, we are equally fluent in English law, U.S. law and the laws of the world’s most dynamic markets. This combination creates a new kind of law firm, one built to achieve unparalleled outcomes for our clients on their most complex, multijurisdictional matters – everywhere in the world. A firm that advises at the forefront of the forces changing the current of global business and that is unrivalled in its global strength. Our clients benefit from the collective experience of teams who work with many of the world’s most influential companies and institutions, and have a history of precedent-setting innovations. Together our lawyers advise more than a third of NYSE-listed businesses, a fifth of the NASDAQ and a notable proportion of the London Stock Exchange, the Euronext, Euronext Paris and the Tokyo and Hong Kong Stock Exchanges.
ECB in focus is our blog dedicated to the banking supervisory activities of the European Central Bank (ECB).
European Union Finance and Banking

ECB in focus

ECB in focus is our blog dedicated to the banking supervisory activities of the European Central Bank (ECB). We report on key developments in European banking regulation led by the ECB as part of the Single Supervisory Mechanism (SSM).

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1. Bank regulation

1.1 PRUDENTIAL REGULATION

a) General

(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) Germany

BaFin: Consultation 12/2024 regarding a Circular on securitisation (Konsultation 12/2024 über ein Rundschreiben zur Verbriefung)

Status: Consultation

Deadline for the submission of comments: 30/12/2024

Bafin has launched a consultation regarding a Circular on securitisation, specifying the criteria for simple, transparent and standardised (STS) balance sheet securitisation. The Circular also aims to implement modified Guidelines for asset-backed commercial paper (ABCP) and non-ABCP securitisations. With the circular, BaFin is adopting the EBA Guidelines on the STS criteria for on-balance-sheet securitisations into its administrative practice.

The circular is expected to apply from 15 January 2025.

Date of publication: 10/12/2024

(ii) EU

ESMA: Feedback on review of securitisation disclosure templates

Status: Final

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) Germany

BaFin: Protocol of the 19. meeting of the expert committee on interest rate risks in the investment book (Protokoll der 19. Sitzung des Fachgremiums Zinsänderungsrisiko im Anlagebuch)

Status: Final

BaFin has published the protocol of the 19. meeting of the expert committee on interest rate risks in the investment book. The committee has been discussing the implementation of of the 8. update to the revised minimum requirements for risk management (MaRisk-Novelle), with regard to the IRRBB (Interest rate risk in the banking book) and the CSRBB (Credit Spread Risk in the Banking Book).

Date of publication: 17/12/2024

(ii) 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

(iii) International

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 riskbased 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

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