Christine Lagarde of IMF Highlights Disruptive Potential of Big Tech

By Regulatory News

June 08, 2019

Basel III, Systemic Risk

The IMF Managing Director Christine Lagarde spoke at the G20 High Level Seminar on "Our Future in the Digital Age,” in Japan, about the opportunities and risks presented by financial innovation. She highlighted that many countries are asking for greater international cooperation in fintech and pointed out that big tech firms are likely to lead to a significant disruption in the financial landscape.

The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

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Effective Date: June 18, 2019

Press Release

Proposed Rule 1

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Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

Ms. Lagarde announced that a paper will be released later this month to present findings of the IMF-World Bank survey on the fintech priorities. The survey covered IMF member countries, with about 96 countries participating in the exercise. While discussing the preliminary findings from the survey, she highlighted that "countries are asking for greater international cooperation in fintech," with nearly 80% mentioning cyber-security as their most important priority.

She also emphasized that "A significant disruption to the financial landscape is likely to come from the big tech firms, who will use their enormous customer bases and deep pockets to offer financial products based on big data and artificial intelligence. These developments hold out the promise of accelerating inclusion and modernizing financial markets, but raise, in addition to privacy issues, competition and market concentration concerns, both of which could lead to vulnerabilities in the financial system." She added that "This presents a unique systemic challenge to financial stability and efficiency... ." The IMF Managing Director concluded that integrating different national approaches to crypto-assets, non-bank fintech intermediaries, and the governance of data is crucial for harnessing the potential of fintech to promote greater financial inclusion and development. However, we must also "find a way to preserve financial stability and integrity, protect consumers, and increase financial literacy."

Related Link: Speech

Keywords: International, Banking, Insurance, Securities, Bigtech, Cyber Risk, Fintech, International Cooperation, Financial Stability, Systemic Risk, IMF

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