ESMA published the first trends, risks, and vulnerabilities (TRV) report of 2020. In addition to the level of risks in EU, the report also takes an in-depth look at three specific issues via articles on the implications of bigtech for the financial sector, the short-termism pressures from financial markets, and the risk exposure of EU funds to potential bond downgrades. As per the report, risks in markets under the remit of ESMA remained high, particularly in securities markets and for consumers.
The report shows that market risk remained very high in the second half of 2019, amid continued geopolitical uncertainties, including Brexit and US-China trade relations. Credit risk and liquidity risk also remained high. Credit risk, in particular, remains elevated with deteriorating corporate debt quality and increasing risks of fallen angels (bonds being downgraded to below BBB) as the share of BBB-rated debt grows. The report also discusses structural market developments in the areas of securities markets, market-based finance, sustainable finance and financial innovation, with focus on the implications and challenges associated with the entry of bigtech firms into the financial sector.
This article on the implications of bigtech for the financial sector looks at the increasing presence of bigtech firms that take advantage of their vast customer networks, data analytics, and brand recognition. However, the growth of bigtech financial services varies by region, reflecting differences in the existing financial services provision and regulatory frameworks. The high level of market concentration typically observed in bigtech may get carried into financial services, with potentially adverse impacts on consumer prices and financial stability. The analysis considers the impact these firms could have and concludes that regulatory cooperation is needed to manage the financial stability risks that could arise as bigtech firms increase market concentration. Although bigtech firms typically devote huge resources in the form of advanced technology and specialist expertise to cyber-security, this feature could make them an attractive target for cyber-attacks and increase the detriment to individuals in the event of a data breach.
The report highlights that regulators and supervisors are well-positioned to gain insights about business propositions from initiatives such as innovation facilitators (including regulatory sandboxes). Development of innovative suptech tools may provide further information about market developments, helping authorities to mitigate potential risks and set appropriate supervisory expectations. To this end, ESMA continues to facilitate and coordinate sharing of information on financial innovation among its national competent authorities. Innovation facilitators across the financial sector are a valuable source of market intelligence. The importance of sharing such information among authorities at the EU level is reflected in the recent establishment of the European Forum for Innovation Facilitators (EFIF) by EC and ESAs. There may be value in continuing to deepen cooperation at national, European, and international levels among financial sector regulators and supervisors and other authorities, such as those responsible for data protection.
Keywords: Europe, EU, Banking, Securities, TRV, Credit Risk, Liquidity Risk, Sustainable Finance, Market-Based Finance, Bigtech, Suptech, Cyber Risk, ESMA
US Agencies (FDIC, FED, and OCC) finalized two rules, which are either identical or substantially similar to the interim final rules in effect and issued earlier this year.
EIOPA is consulting on a supervisory statement on the use of risk mitigation techniques by insurance and reinsurance undertakings.
APRA announced that it is resuming consultation on the confidentiality of data submitted to APRA by the authorized deposit-taking institutions.
BoE and FCA are supporting and encouraging liquidity providers in the sterling swaps market to adopt new quoting conventions for inter-dealer trading based on SONIA, instead of LIBOR, from October 27, 2020.
Deutsche Bundesbank published special schema files for securities holdings statistics (SHS), along with a document on the XML format description.
EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).
ESMA announced that it will recognize three central counterparties (CCPs) established in the UK as third-country CCPs, from January 01, 2021.
PRA published Version 02.04 of the PRA110 liquidity metric monitoring tool (PRA110 LMM tool).
FSB confirmed the Regulatory Oversight Committee (ROC) of the Global Legal Entity Identifier System (GLEIS) as the International Governance Body for the globally harmonized identifiers used to track over-the-counter (OTC) derivatives transactions, with effect from October 01, 2020.
FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.