CSSF Circulars on Governance and Risk Management for Certain Entities
CSSF published Circular 20/759, which updates the Circular 12/552 on central administration, internal governance, and risk management. The original Circular 12/552 was earlier applicable to both credit institutions and investment firms. However, now Circular 12/552 remains applicable in its entirety to credit institutions and, in part, to professionals carrying out loan transactions. In addition, CSSF published a Circular 20/757 that repeals the Circular 12/552 for investment firms and replaces it with Circular 20/758. The Circulars 20/757, 20/758, and 20/759 have become applicable from January 01, 2021.
Circulars 20/757 and 20/759 comply with the EBA guidelines on internal governance and on management of interest rate risk arising from non-trading book activities; these circulars also comply with the joint ESMA and EBA guidelines on assessment of the suitability of members of the management body and key function holders. In addition, Circular 20/759 complies with the EBA guidelines on the application of the definition of default under the Capital Requirements Regulation and the specification of types of exposures to be associated with high risk. The main changes to Circular 12/552 include the following:
- Extension of the scope to financial holding companies and mixed financial holding companies
- Details on the application of proportionality in the establishment of internal control functions
- Consideration of the environmental, social, and governance (ESG) risk factors, to ensure the viability of business model
Appendix 1 to Circular 20/757 includes "track changes” version between Circulars 12/552 and 20/758, while Appendix 2 presents the main changes between Circulars 12/552 and 20/758. The Circular 20/758 specifies the measures to be taken by investment firms in terms of central administration, internal governance, and risk management. It incorporates the principles, guidelines, and European and international recommendations that apply in this area, placing them proportionately in the context of the financial sector in Luxembourg. The circular contains relevant definitions, structural requirements for central administration and internal governance, specific risk management requirements, and the specifics of entry into force of this circular.
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Keywords: Europe, Luxembourg, Banking, Securities, Investment Firms, Governance, ESG, Proportionality, Interest Rate Risk, CRR, CSSF
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