Bloomberg regulatory specialists assess the outlook for 2023 in global financial regulation, covering key developments across market structure, digital finance, the green agenda and financial stability.
Contents
UK regulatory outlook 2023 >>
EU regulatory outlook 2023 >>
USA regulatory outlook 2023 >>
APAC regulatory outlook 2023 >>
This article was written by Christian Benson, UK Regulatory Affairs Specialist at Bloomberg.
Regulatory divergence is fast becoming a reality as policymakers embark on a substantial review of financial services regulation following the UK’s exit from the EU. As the newly appointed Chancellor Jeremy Hunt seeks to reassure international markets, attract new business, and set global standards, it is clear that financial services and the City of London will play an important role in the post-Brexit and post-pandemic reform agenda for the UK.
With London being a major global financial center, the UK government is aiming to implement a series of reforms that makes UK financial regulation more agile and responsive to new developments, making UK market structure more competitive.
To this end, the Financial Services and Markets Bill (FSMB) tabled last summer represents a landmark piece of legislation that recognizes the technological and industry developments of the last two decades as well as the reality of the UK’s departure from the EU. The bill contains a wide range of provisions relating to the future structure and organization of UK financial services regulation. Further, it includes the legal mechanism which will allow the government to gradually transform the UK rulebook away from a patchwork of inherited EU laws and supplementing temporary rules into a more streamlined rulebook. The Bill is expected to pass into law in spring 2023 at the earliest, setting the stage for a new era of independent UK financial policy-making.
The FSMB significantly empowers the UK’s financial regulators and will facilitate the work already underway under the Wholesale Markets Review (WMR) to simplify the UK's rulebook and create a regime tailored more specifically to UK markets. Broadly, this will seek to facilitate the emergence of consolidated tapes and re-calibrate the MiFID II transparency regime to make it less complex and more sensitive to differences between asset classes.
Wholesale market data costs will also represent an important stream of work for the Financial Conduct Authority (FCA) next year, which will be scrutinizing the market closely.
Most recently, HM Treasury unveiled a substantial package of financial reforms last December, dubbed the 'Edinburgh Reforms', that contain over 30 regulatory measures relating topics as varied as retail disclosure, the consolidated tape regime, investment research, and the ringfencing regime. The package is intended to reinforce London’s position as a global finance center and more detailed proposals and final rules are expected throughout the course of 2023.
To improve transparency and reduce the risks in derivatives markets, UK regulators continue to work toward the implementation of additional under the European Market Infrastructure Regulation (EMIR). Following consultation on rule changes to align UK derivatives reporting with international guidance and provide clarity to counterparties, UK regulators are expected to soon issue a policy statement with rules expected to take effect in late 2024.
Outside the EU, the UK is looking to capitalize on its newfound regulatory flexibility to ensure it can get on the front foot by encouraging innovative new technologies through well-calibrated, proportionate regulation.
For instance, Artificial intelligence (AI) is a relatively new and far-reaching technology, the application of which can be encouraged through well-crafted regulation. The UK’s financial regulators have set out their thinking on the potential benefits and risks of AI in financial services in a discussion paper, and this will inform the development of the regulatory framework for AI in the UK financial services industry throughout 2023 and beyond.
With the FCA chairing one of the two IOSCO workstreams on digital assets, momentum is building for the development of a more structured and comprehensive approach to demonstrate international regulatory leadership and build industry confidence. The FSMB is being amended to bring crypto within the regulatory perimeter, and HM Treasury is set to soon consult on proposals for a comprehensive regulatory regime for crypto.
Four years on from the implementation of the EU’s General Data Protection Regulation (GDPR), the UK Government is looking to review its current alignment with GDPR in terms of its data protection rulebook. With the UK Government expected to soon consult on these proposals, it remains to be seen how radical a departure from the EU the UK government will take.
Finally, as concern with the increasing financial services industry reliance on non-regulated third parties grows among regulators globally, the UK financial regulators are exploring how best to assess and strengthen the resilience of services provided by critical third parties and reduce the risk of systemic disruption. Formal draft rules will be published once the FSMB becomes law, which is expected to be this spring.
As the race to net zero intensifies, the UK has high ambitions to be a global champion for the sustainable finance policy agenda and is working towards being the world’s first net zero financial center.
In response to the growing number of investment products marketed as ‘green’ or ‘sustainable’, the FCA has issued a draft package of measures to protect consumers and improve trust in sustainable investment products as part of the UK’s Sustainability Disclosure Requirements (SDR) regime. The measures include, among other things, sustainable investment product labels, restrictions on the use of certain sustainability-related terms, and consumer-facing disclosures. The proposals are meant to complement and build on the FCA’s existing requirements for asset managers and asset owners to make disclosures in line with the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations.
Ahead of further announcements from the UK Government on the UK Taxonomy framework, the UK’s Green Technical Advisory Group - an independent group tasked with providing non-binding advice to the UK Government - delivered the first set of its recommendations on the development of a UK Taxonomy. The recommendations focus on issues such as the technical screening criteria, international interoperability, and Do No Significant Harm principle. With global firms representing a significant proportion of the UK financial services sector, there will be particular attention on how best to navigate potential future Taxonomy divergence between the UK and other jurisdictions.
Finally, the Bank of England and Prudential Regulation Authority (PRA) have also made strides to integrate climate change considerations into the existing supervisory and policy arrangements. The PRA is expected to set out its views on whether changes to the regulatory capital regimes or their application, are required to address climate risks.
The focus of global regulators on banks and other market participants' ability to meet unusual liquidity demands and withstand financial stress has been put into sharp relief in the UK by turmoil in gilt and currency markets in September 2022. As the underlying macroeconomic uncertainty shows no sign of receding in 2023, regulators will continue to watch closely for fragilities in the global financial system, which may erupt into periods of stress.
In the meantime, work continues on long-standing reforms to improve banking resilience. A key priority for both UK regulators and the banking sector is the forthcoming implementation of the Basel III standards. The Prudential Regulation Authority (PRA) has recently published proposals to implement the remaining elements of Basel III (or Basel 3.1 as the PRA refers to them) for the January 2025 deadline. For the market risk element, firms that want to implement the internal models approach (IMA) are expected to submit pre-application materials by January 2024, (i.e., at least 12 months in advance of the implementation date).
Reform of the UK’s insurance sector rules has garnered significant political and media interest in recent months, and further details of Solvency II reform were announced as part of the Chancellor’s fiscal statement in November. The reforms are designed to release investment into the economy by allowing insurers to direct more capital into areas such as infrastructure and climate transition projects. 2023 will see the UK Government and PRA work closely to develop the relevant technical framework for UK insurance market reform.
Under the UK Benchmarks Regulation (BMR) the FCA has required the LIBOR administrator to continue to issue certain settings on a synthetic basis, as synthetic LIBOR use has been granted to certain legacy contracts that need more time to transition. The FCA is now looking to determine the best way forward to wind down synthetic LIBOR in the UK and has consulted on whether certain settings can end in an orderly fashion by the start of Q2 2023.
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This article was written by Christian Benson and Laura Formisano, EU Regulatory Affairs Specialists at Bloomberg.
Europe’s ambitious agenda for financial services policy had to quickly adapt to the Russian invasion of Ukraine, bringing an end to decades of peace on the continent and creating fresh disruption to global markets. Nonetheless, the war and its economic fallout have heightened the importance of key European policy objectives, such as strategic autonomy, the green energy transition, and overcoming regulatory fragmentation. Alongside the continuing geopolitical and macroeconomic uncertainty, 2023 promises to be an important year for European financial regulation as the policy-making process intensifies and key regulatory changes begin to take effect.
There has been considerable activity over 2022 on legislation to reform European financial market structure, which aims to position Europe as a more globally competitive capital market. Over the course of 2023, many of these initiatives are expected to be finalized into law.
European lawmakers have been busy reviewing the landmark rules for trading and investment in Europe, the Markets in Financial Instruments Regulation and Directive (MiFIR/D). While the final text of the MiFIR review remains some way off, the rule changes are broadly designed to simplify the existing transparency regime in the EU for non-equities, establish a consolidated tape regime for bonds and equities, and enhance the role of the European Securities and Markets Authority (ESMA) when it comes to setting market data standards. The political agreement on the MiFIR review is expected to be ready by mid to late 2023, with many of the provisions to apply from 2024-25 onward.
Alongside the MiFIR review as part of the broader Capital Markets Union (CMU) initiative, the proposals for a European Single Access Point (ESAP) are set to be finalized next year. This is designed to introduce an EU-wide platform that provides seamless access to public company information, similar to the EDGAR system in the US.
Rule changes for the regulatory reporting of derivatives are also set to feature prominently in the regulatory planning for many market participants in 2023 under another landmark post-crisis EU legislation, the European Market Infrastructure Regulation (EMIR). The much-anticipated technical standards for reporting under the EMIR Refit were finally published into EU law this October, marking the countdown to the go-live in April 2024. In the interim, ESMA is expected to issue further guidance to address longstanding concerns over derivatives reporting data quality.
In parallel, recently announced proposals for a series of changes to EMIR to implement the EU’s clearing strategy and shift euro-clearing activity from London to Europe will be the subject of debate among European legislators, preparing the way for “EMIR 3.0”.
As technological innovation continues to define the contours of financial services, European policymakers are keen to get on the front foot and set standards. The idea is not only to mitigate risks and protect consumers but also to provide the necessary regulatory confidence and clarity for industry to invest and innovate in new technologies.
On Artificial Intelligence (AI), EU policymakers look set to finalize a comprehensive framework to establish legal certainty and foster innovation by approximately mid-2023. Similarly, the EU hopes to become a standard-setter on cybersecurity through the Cyber Resiliency Act, which will be debated next year.
The turbulence throughout 2022 in the crypto markets has underlined the need for greater regulatory clarity and supervision. The EU is widely perceived to be a “first mover” in its work to build a comprehensive crypto regulatory framework and the bloc could well set global standards for other jurisdictions to follow. The recent downfall of FTX is likely to increase momentum for globally consistent regulation.
A political deal was reached in summer of 2022 on the Markets in Crypto-Assets (MiCA) legislation, which is designed to bring crypto-related assets, issuers, and service providers under a comprehensive regulatory framework, and introduce requirements on stablecoin issuers. The final MiCA text is expected to formally become law over the coming months with provisions beginning to take effect in the first half of 2024, after a one-year implementation period.
Operational risk management is high on the regulatory agenda and rules to implement the Digital Operational Resilience Act (DORA) were formally published in early January 2023 and will begin to apply from January 2025. Detailed technical rules are to be developed in the coming months, ahead of the the go-live date. DORA will set out an operational risk management framework for regulated financial entities and will create a new oversight regime for third-party technology service providers deemed ‘critical’.
The sustainable finance regulatory agenda continues to be a major priority for firms and regulators alike. Moreover, Russia’s invasion of Ukraine has pushed energy security to the top of the European policy agenda and reinvigorated the need to find energy alternatives to Russian gas and accelerate the green transition.
Following considerable controversy and debate, this summer EU lawmakers approved the inclusion of some gas and nuclear activities as transitional activities in the EU’s Taxonomy framework. These changes will start to apply from January 2023. The EU continues to take lead on implementing mandatory sustainability and climate disclosures, with reporting under the Corporate Sustainability Reporting Directive (CSRD) set to begin in 2024 for larger companies, while non-EU and smaller companies will have more time.
EU lawmakers have also developed and finalized the detailed rules under the Sustainable Finance Disclosure Regulation (SFDR), which apply from January 2023. These will specify the granular requirements for product-level disclosures around principal adverse impacts (PAIs) and Taxonomy alignment of Article 8 and 9 funds under the SFDR regime. In the same vein, lawmakers are close to approving proposals for a European Green Bond Standard (EU GBS) that will introduce requirements for any issuer that uses the label “European green bond”.
The EU institutions are thus getting close to putting in place the key building blocks of the sustainable finance strategy, a comprehensive policy agenda launched in 2018 to channel capital into the climate transition. Since its launch, the EU has become a leading regulatory voice globally on sustainable finance policy.
The Russian invasion of Ukraine handed the EU’s banking, fund, and insurance regulators another challenge, just as Europe was beginning its recovery from the pandemic. Nonetheless, 2022 has seen important progress in the effort to refresh Europe’s prudential rulebook for bank capital, insurance, and investment funds.
As one of the first global jurisdictions to kickstart the process of implementing the Basel III banking standards, the EU co-legislators are expected to reach a final agreement on the revised Capital Requirements Regulation (CRR) by mid-2023. The expectation is that many of the provisions, including the capital element of the Fundamental Review of the Trading Book (FRTB), will apply from January 2025 and will closely follow the Basel standards.
Furthermore, a revised set of rules for Europe’s insurance market are also expected to come into focus next year, as the co-legislators seek to sign off on changes to the Solvency II legislation. These reforms are designed to reduce administrative burdens on insurers and mandate the European Insurance and Occupational Pensions Authority (EIOPA) to define consistent guidelines.
Finally, global regulators continue to monitor the market’s transition away from LIBOR. In conjunction with US authorities, the EU will continue to push market participants to move onto alternative rates as the cessation of all remaining USD LIBOR rates comes into view in June 2023.
This article was written by William Troost, Joseph Alicata, and Sora Lee, US Regulatory Affairs Specialists at Bloomberg.
The Securities and Exchange Commission (SEC) is pursuing an agenda that is set to reshape US market structure and impose profound changes in how equities and fixed-income securities are traded.
The SEC’s fixed-income market structure agenda includes a number of measures to increase pre-trade and post-trade transparency, revisions to the registration and regulation of fixed-income trading platforms, and measures to increase resiliency in the markets and among market participants.
The equity market structure agenda will be equally ambitious and will focus on enhancing the experience of the retail investor. The SEC is also focused on payment for order flow arrangements, exchange rebates, and related access fees.
Finally, the Commission is overseeing the implementation of a package of rules designed to modernize the collection and dissemination of core equity market data. The amendments would expand the content of core data and implement new oversight and governance provisions related to the collection and dissemination of core market data. If these reforms are fully implemented as envisioned, core market data will be disseminated through a decentralized consolidation model that will feature competing consolidators replacing the current centralized model. Much work needs to be done to fully implement the final rules. The market will be watching closely in the coming months as the SEC will need to make a number of key decisions.
Regulators, both individually and collectively through the Financial Stability Oversight Council (FSOC), have called for legislative intervention to provide clarity to the market and additional authority to regulators to address and effectively respond to the novel issues presented by digital assets. Recent developments have highlighted the risks to investors and consumers, and the potential for disruption to the traditional financial system, in the absence of a clear and robust regulatory framework.
Numerous digital asset-focused bills were introduced in 2022. These have largely focused on providing clarity to the ‘security vs. commodity’ debate and providing a robust oversight framework covering stablecoins. The sudden collapse of FTX in November 2022 could serve as a galvanizing event for Congressional action with more robust consumer protection provisions, particularly the segregation of customer funds.
In 2022, regulators significantly increased the number and scope of crypto-related enforcement actions. This trend is likely to continue into 2023, bolstered by the crumbling of FTX. In the absence of comprehensive legislation, enforcement and litigation will continue to define the regulatory landscape. This approach has brought accusations of regulation by enforcement and raised jurisdictional issues between regulators and has failed to provide additional clarity to the "commodity vs. security" debate.
Addressing climate change and managing climate-related financial risk are continuing priorities for US regulators, both domestically and internationally. In August 2022, President Biden signed the Inflation Reduction Act, the largest government-led investment in clean energy in U.S. history, which seeks to achieve a roughly 50% reduction in greenhouse gas emissions by 2030. At COP27, the U.S. unveiled the Energy Transition Accelerator, a new carbon credit program designed to enlist investors in efforts to reduce emissions and accelerate the construction of renewable energy.
The Federal Reserve announced plans for a select group of the largest banks in the U.S. to participate in a pilot climate scenario analysis exercise designed to measure and manage climate-related financial risks.
This year, the SEC proposed a set of new climate and ESG rule proposals designed to increase disclosure and address climate-related financial risks and greenwashing concerns. The proposed rules are expected to be finalized in 2023. Climate issues are likely to remain highly politicized in the U.S., and we expect fierce opposition to continued SEC rulemaking in this space. The SEC is said to be considering making some changes to the proposed climate rules, including whether to mandate reporting of Scope 3 greenhouse gas emissions. Legal and political challenges to climate and ESG regulation are expected in the months ahead.
The Commodity Futures Trading Commission (CFTC) has also solicited public feedback on all aspects of climate-related financial risk pertaining to the derivatives markets and the underlying commodities markets. Voluntary carbon markets, in particular, will likely be a focus for the CFTC in the coming months.
In the wake of the global financial crisis, US bank regulators moved to shore up the banking system through a set of revisions to the regulatory capital framework in line with the post-crisis standards set forth by the Basel Committee on Banking Supervision (Basel III).
These revisions were finalized in the US in 2013. After the BCBS issued a final set of standards in 2017 (the “Basel III Endgame”), US regulators are now working to further revise the US capital framework to implement and align with this final set of Basel III standards. US regulators recently reaffirmed their commitment to the Basel III endgame and indicated that a joint proposed rule would be issued for public comment “as soon as possible.”
With the benefit of nearly a decade of experience with the current regulatory framework, regulators are planning to use this opportunity to engage in a broader holistic review of the existing capital framework beyond the Basel III endgame to assess whether the overall capital framework is functioning as intended, with a particular focus on the largest and most complex banks.
This holistic review will include the surcharge for systemic banks (G-SIBs), the enhanced supplementary leverage ratio, stress testing, and the countercyclical capital buffer. The regulators seek to establish a framework that is both forward-looking and tiered so that the highest standards apply to the riskiest firms. Accordingly, Community banking organizations, which are subject to different capital requirements, would not be impacted by the proposal.
This article was written by Vicky Cheng and Patricia Or, APAC Regulatory Affairs Specialists at Bloomberg.
Due to the cross-border nature of capital markets and the global reach of American and European financial institutions, market structure reforms that originate in Europe and America have imposed an extra-territorial impact on jurisdictions across the Asia-Pacific (APAC) region. Regulators across Asia have broadly adopted more of a “price-taker” role in formulating regulations in the wholesale securities and derivatives market, and are in various stages of progress in implementing requirements related to the MiFID II and EMIR regimes.
Interpretation and implementation of rules coming out of the EU and US can vary among the APAC regulators, potentially resulting in harmful and unintended market fragmentation. As such, the Japan Financial Services Agency (JFSA) in 2020 led the International Organization of Securities Commissions (IOSCO)’s work on deference (i.e., the process by which one regulatory authority defers to another when justified).
The JFSA published a report providing guidance in establishing and operating efficient deference processes to mitigate the effects of fragmentation and strengthen cooperation between regulatory authorities.
Practical implementation of the deference process is not always straightforward, as a recent development between the European Securities and Market Authority (ESMA) and Indian regulatory authorities would reveal. ESMA had withdrawn its recognition decisions under EMIR for six CCPs established in India as no cooperation arrangements have been concluded with the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). RBI and SEBI were reportedly uncomfortable with ESMA’s direct and independent access to RBI and SEBI-regulated entities. This would bar all European banks from dealing with the Indian CCPs after April 30, 2023, and potentially impact the domestic bond and stock markets, which could also lead to a collapse in India’s overnight indexed swap market which is widely used by foreign banks.
This clearly underscores the importance of cooperation between regulators in terms of formulation, implementation, and recognition of rules for the orderly functioning of global capital markets.
Regulators in APAC recognize the importance of digital innovation in the financial sector and are working closely with each other as well as industry stakeholders to put in place regulatory frameworks that both encourage innovation and ensure relevant risks are mitigated.
In the digital assets space, regulators are seeking to strike a balance between fostering innovation and providing consumer protection, and preserving market integrity. The Monetary Authority of Singapore (MAS) has clarified on a few occasions that its ambition is to be a crypto asset hub for (1) experimenting with programmable money, (2) applying digital assets for use cases like atomic settlement, (3) tokenizing real and financial assets to increase efficiency and reduce risks in financial transactions. However, it does not want to be a hub for trading and speculating in cryptocurrencies. In this regard, MAS is experimenting with Central Bank Digital Currencies (CBDCs), facilitating stablecoins through sound regulation, allowing tokenized bank deposits, and discouraging retail investment in cryptocurrencies.
By contrast, the Hong Kong government, having previously proposed to limit crypto trading to professional investors, is now proposing to allow retail investors to trade in cryptocurrencies and crypto exchange-traded funds, as part of its development efforts to be a fintech hub. The extent of retail access to virtual assets will be subject to consultation, as will the introduction of licensing regime for virtual asset exchanges. The bill to establish a statutory licensing regime for virtual asset service providers is currently being debated by lawmakers. The Hong Kong Monetary Authority (HKMA) is also considering feedback on the appropriate regulatory approach towards stablecoins and is expected to take into account international regulatory recommendations in its final proposal. These are all in line with Hong Kong’s intent to promote development of financial services across the entire virtual asset value chain.
On Artificial Intelligence (AI), regulators recognize how the use of AI and data analytics will greatly transform the way financial services operate. The use of AI, however, does not come without risks, particularly with regard to individual consumers. In this regard, the MAS issued a set of principles to promote fairness, ethics, accountability, and transparency (FEAT) to foster greater confidence and trust in the use of AI and data analytics, as firms increasingly adopt technology tools and solutions to support business strategies and risk management. Similarly in Hong Kong, the HKMA’s Consumer Protection in respect of Use of Big Data Analytics and Artificial Intelligence recommends attention in four major areas, namely (1) governance and accountability, (2) fairness, (3) transparency and disclosure, and (4) data privacy and protection.
As the global path towards net zero continues to evolve, tackling climate change has become a top priority for both policymakers and industry across the APAC region. New policies, guidance and regulations are being introduced to address constraints on data availability, improve the consistency of disclosures and identify room for improvement in climate-related reporting.
For instance, APAC policymakers are taking the lead with the adoption of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Notably, New Zealand became the first country to bring TCFD recommendations into legislation. Moreover, regulators in Hong Kong, Singapore, Taiwan, and Malaysia are requiring TCFD-aligned climate reporting from financial institutions over various timelines, with implementation by latest 2025.
While APAC closely monitors and examines the application of the EU Taxonomy framework, regulators and the industry are working together on local Taxonomy development. The MAS is consulting on the Green and Transition Taxonomy for Singapore-based financial institutions to simplify the ESG investment process by identifying Taxonomies that are consistent. The ASEAN authorities have come together in developing an ASEAN Taxonomy for Sustainable Finance to serve as a common building block on transition and sustainable finance adoption for member countries.
In Hong Kong, following the publication of the updated Common Ground Taxonomy (CGT) by the International Platform on Sustainable Finance, the Government-backed Green and Sustainable Finance Cross Agency Steering Group is working toward finalizing proposals for the local green classification framework. Meanwhile, in Australia, industry-led initiatives with government and regulators are underway to develop an Australian sustainable finance taxonomy.
As different taxonomies are being developed in different jurisdictions, consistency and interoperability between different markets will continue to be critical. This explains the strong regulatory momentum across APAC for the ISSB recommendations to become a common base for jurisdictional requirements and provide sufficient comparability to achieve a useful global baseline reporting standard.
From classification to disclosures and reporting, policymakers are taking important steps to integrate green finance and foster sustainable development. Green bond policies have been put in place to promote green bond issuance, including in Hong Kong and Singapore. Carbon market development is growing in prominence as an emerging priority, and examples include carbon tax schemes in Japan, New Zealand, and Singapore, national ETS schemes in New Zealand and South Korea, and announcements from Hong Kong and India that they intend to establish voluntary carbon markets.
In February this year, the Basel Committee re-iterated that the initial Basel III reforms have played a central role in ensuring that the banking system has so far remained operationally and financially resilient during the Covid-19 pandemic. While commitment to the Basel objectives remains across APAC as Basel III implementation looms, the post-pandemic economic recovery and the ongoing fallout from the Russo-Ukraine war have led to delays in finalization in the local implementation of the risk framework.
While Hong Kong and Singapore are still working towards FRTB implementation by 2023 (despite the EU and other major jurisdictions considering later implementation deadlines), Japan has delayed until 2024 while Australia extended its implementation date to 2025. As the market looks forward for domestic rules to be finalized, firms with operations across multiple jurisdictions are encouraging policymakers to ensure greater global and regional cooperation to address possible market fragmentation.
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