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    OSFI Amends Pillar 3 Disclosure Guidelines, Issues Other Updates

    April 28, 2023

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until June 27, 2023, on draft amendments to the Pillar 3 disclosure guidelines for domestic systemically important banks (D-SIBs) and small and medium-sized deposit taking institutions (SMSBs). OSFI also issued a statement to reinforce guidance around the design of the regulatory treatment of Additional Tier 1 and Tier 2 capital instruments, announced changes to the minimum base assessments applicable to federally regulated financial institutions for the fiscal year 2023-2024, and proposed recommendations on fiat-referenced crypto-asset arrangements and activities, with the comment period ending on June 16, 2023. In further developments, OSFI released a report on the ethical, legal, and financial implications of artificial intelligence on financial services institutions in collaboration with the Global Risk Institute (GRI) and took further action to protect creditors of the Canadian Branch of the Silicon Valley Bank by taking permanent control of the branch's assets.

    The draft amendments to Pillar 3 disclosure guidelines for SMSBs incorporate the market risk and credit valuation adjustment risk disclosures of the Basel III Pillar 3 framework. The guideline provides OSFI’s updated disclosure expectations and serves as the comprehensive source for Pillar 3 disclosure requirements for SMSBs. The guiding principles aim to provide a firm foundation for achieving transparent, high-quality Pillar 3 risk disclosures that will enable users to better understand and compare an SMSB’s business and its risks. The guideline applies to all SMSBs except for foreign bank branches and subsidiaries of SMSBs or D-SIBs that report consolidated results to OSFI, which are expected to apply the market risk framework of the Capital Adequacy Requirements Guideline effective in first quarter of 2024. These disclosures would be effective for the fiscal year-end 2024 reporting period. The annex to this guideline summarizes the disclosure requirements, indicate whether they are required in a fixed or flexible format, and lists the publishing frequency associated with each table and template. SMSBs are expected to disclose prospectively the tables and templates as required by section V of this guideline in accordance with the implementation deadlines per the annex to this guideline. SMSBs may early adopt disclosure requirements and provide comparative period disclosures over future reporting periods.

    The consultation on fiat-referenced crypto-asset arrangements and activities is focused on fiat-referenced crypto-assets pegged to a fiat currency, backed at least one-for-one by cash and cash equivalents, and issued as a liability of a financial institution. As a follow-up to the interim crypto-exposure advisory from OSFI, the consultation is one of the key milestones in the phased approach that aims to provide clarification on digital assets, as announced by OSFI as part of the Digital Innovation Roadmap and the 2022-2023 Annual Risk Outlook. The information collected will support OSFI in further consultations related to exposure to crypto-assets announced in Budget 2023. It is also aligned with the coordinated efforts of domestic and international regulators who are exploring prudential and non-prudential options to address risks tied to these crypto-assets. The feedback from this consultation will help inform the potential development of risk management expectations for federally regulated financial institutions that engage in activities in this sector.

    Finally, the OSFI-announced report on artificial intelligence summarizes key takeaways from a Financial Industry Forum on Artificial Intelligence (FIFAI) and explores the integration of artificial intelligence in the financial services sector. The report aspires to promote stronger risk management practices with the goal of helping practitioners effectively manage the challenges and potential of artificial intelligence in the sector, along with the best approaches to the adoption and management of such technologies. The report discusses the “EDGE” principles—Explainability, Data, Governance, and Ethics—to further support safe artificial intelligence development. As use of artificial intelligence at financial institutions continues to advance and evolve, forum discussions concluded that stronger trust needs to be built in the technology to help accelerate adoption. Appropriate levels of explainability and disclosure for each use case as well as a customer-centric approach that upholds ethical values and protects privacy are needed. A strong governance framework, including data governance, that follows a risk-based approach and is based on multidisciplinary collaboration promotes trust within financial institutions. A harmonized regulatory framework that is simple to comply with, while providing guardrails for innovation, promotes trust across the broader financial system.

     

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    Keywords: Americas, Cananda, Banking, Basel, Pillar 3, Disclosures, D-SIBs, SMSBs, Regulatory Capital, Market Risk, Capital Adequacy, Reporting, Regtech, Cryptoassets, Artificial Intelligence, Digital Assets, Silicon Valley Bank, OSFI

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