Blog: Banking and finance regulatory news, April 2021 # 3 | Hogan Lovells – JDSupra – JD Supra

Contents

  • Regulation of non-transferable debt securities: HM Treasury consultation
  • Mortgage Guarantee Scheme: PRA statement on regulatory treatment of mortgage loans
  • LIBOR transition in sterling structured products: Working Group paper
  • EU CRR: Implementing Regulation on ITS on public disclosures
  • Targeted review of internal models: ECB results
  • CRR: EBA final draft RTS on methods of prudential consolidation
  • BRRD: updated Implementing Regulation on ITS on MREL reporting by resolution authorities
  • BCBS 2021-22 work programme
  • Climate target setting for banks: UNEP FI guidelines

Regulation of non-transferable debt securities: HM Treasury consultation

HM Treasury has published a consultation paper on the regulation of non-transferable debt securities (NTDS) (often referred to as mini-bonds).

NTDSs are unlisted bonds typically issued by companies to retail investors to raise finance. Generally, the issuance of NTDS is not a regulated activity under the Financial Services and Markets Act 2000. As an unregulated activity, investors benefit from few regulatory protections, such as the Financial Ombudsman Scheme and the Financial Services and Compensation Scheme, when investing in mini-bonds.

The consultation proposes two options for regulatory reform: (1) making the direct-to-market issuance of certain NTDS, where the proceeds of the issue are used to on-invest or on-lend, a regulated activity; and (2) extending the scope of the Prospectus Regulation to cover NTDS, so that public offers of NTDS would require a Authority-approved prospectus.

The consultation closes on 21 July 2021. Alongside the consultation, HM Treasury has published independent research into NTDS and their role in the economy.

Mortgage Guarantee Scheme: PRA statement on regulatory treatment of mortgage loans

The UK Prudential Regulation Authority (PRA) has published an updated statement on the regulatory treatment of retail residential mortgage loans under the Mortgage Guarantee Scheme (MGS). The statement provides information on capital, notification, disclosure and reporting requirements for loans under the MGS as set out in the relevant UK legislation. The PRA’s approach to capital is applicable to mortgage insurance schemes with similar contractual features to MGS, but the approach to reporting, notification, and disclosure only applies to MGS and not to other securitisation programmes.

This statement does not provide an exhaustive commentary of the regulatory requirements for MGS loans. The PRA emphasises that firms should review the relevant legislation and, as necessary, seek independent advice to satisfy themselves that they meet all applicable requirements. In particular, the UK Capital Requirements Regulation (UK CRR) requires firms to obtain a legal opinion on the effectiveness and enforceability of credit protection afforded by a guarantee such as MGS.

LIBOR transition in sterling structured products: Working Group paper

The Working Group on Sterling Risk-Free Reference Rates has published a paper that supports the transition of legacy structured products where GBP LIBOR is in use and considers how a sterling structured products market could be designed using compounded in arrears SONIA.

The Working Group’s priorities and roadmap envisage a broad-based transition from GBP LIBOR to SONIA by the end of 2021 across sterling bond, loan and derivatives markets. This includes the sterling structured products market, which has links to a number of areas within these broad product categories. The paper addresses various types of structured products, including on-balance sheet issuances and repackaging transactions (new and legacy). The Working Group encourages market participants to amend their legacy GBP LIBOR referencing structured products now where it is feasible to do so.

EU CRR: Implementing Regulation on ITS on public disclosures

Commission Implementing Regulation (EU) 2021/637, which lays down implementing technical standards (ITS) on public disclosure requirements for institutions under the EU CRR, has been published in the Official Journal of the European Union (OJ). The purpose of the ITS is, among other things, to optimise the Pillar 3 policy framework to provide a single comprehensive package, improving clarity for users of information. It will also promote market discipline by increasing the consistency and comparability of the information disclosed by institutions, and its alignment with the regulatory changes introduced by CRR II and with the Basel Committee on Banking Supervision (BCBS) revised Pillar 3 disclosure framework.

In addition, the Implementing Regulation repeals Commission Implementing Regulation (EU) 1423/2013, Commission Delegated Regulation (EU) 2015/1555, Commission Implementing Regulation (EU) 2016/200 and Commission Delegated Regulation (EU) 2017/2295.

The Implementing Regulation enters into force on 11 May 2021. It will apply from 28 June 2021.

Targeted review of internal models: ECB results

The European Central Bank (ECB) has published the results of its targeted review of internal models (TRIM). The ECB explains that large and more complex banks typically use internal models to determine some of their risk-weighted assets, which serve as a basis for banks to calculate their capital needs. The TRIM review aimed to ensure that internal models comply with the rules and provide different outcomes only when the underlying risks are different.

With 200 on-site investigations conducted in 65 significant banks using internal models, TRIM is the largest project ever carried out by ECB Banking Supervision. Section 4 of the report contains a summary of findings and key observations.

CRR: EBA final draft RTS on methods of prudential consolidation

The European Banking Authority (EBA) has published a final report on draft regulatory technical standards (RTS) on the methods of prudential consolidation under Article 18 of the EU CRR.

Under Article 18(1) of the CRR, for prudential consolidation purposes, institutions must fully consolidate all institutions and financial institutions that qualify as their subsidiaries or, where relevant, the subsidiaries of their parent financial holding company or parent mixed financial holding company. However, under certain circumstances, Article 18 allows institutions to apply a different method of consolidation (other than full consolidation) for the purpose of prudential consolidation. The draft RTS specify the conditions for the application of the different methods of prudential consolidation.

The EBA proposes that the Delegated Regulation should enter into force on the twentieth day following that of its publication in the OJ.

BRRD: updated Implementing Regulation on ITS on MREL reporting by resolution authorities

Commission Implementing Regulation (EU) 2021/622 laying down ITS on uniform reporting templates, instructions and methodology for reporting on the minimum requirement for own funds and eligible liabilities (MREL) under the Bank Recovery and Resolution Directive (BRRD) has been published in the OJ. These ITS replace the existing ITS on MREL reporting by resolution authorities set out in Commission Implementing Regulation (EU) 2018/308. Commission Implementing Regulation (EU) 2021/622 enters into force on 6 May 2021.

BCBS 2021-22 work programme

The BCBS has published its work programme for 2021-22. The work programme sets out the BCBS’ strategic priorities for the coming year. It reflects the outcome of a recent strategic review by the BCBS designed to ensure it continues to effectively promote global financial stability and strengthen the regulation, supervision and risk management practices of banks worldwide.

The work programme focuses on three key themes:

  • COVID-19 resilience and recovery;
  • horizon scanning, analysis of structural trends and mitigation of risks; and
  • strengthening supervisory coordination and practices.

Climate target setting for banks: UNEP FI guidelines

The United Nations Environment Programme Finance Initiative (UNEP FI) has published guidelines for climate target setting for banks. The guidelines were drafted by a group of banks and will be reviewed every three years. They consist of the following four principles and additional guidance on each principle:

  • banks will set and publicly disclose long-term and intermediate targets to support meeting the temperature goals of the Paris Agreement;
  • banks will establish an emissions baseline and annually measure and report the emissions profile of their lending portfolios and investment activities;
  • banks will use widely accepted science-based decarbonisation scenarios to set both long-term and intermediate targets that are aligned with the temperature goals of the Paris Agreement; and
  • banks will regularly review targets to ensure consistency with current climate science.

The implementation, monitoring and reporting against the guidelines aligns with UNEP FI’s Principles for Responsible Banking.

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