FSB Studies Implication of Use of Decentralized Financial Technologies

By Regulatory News

June 06, 2019

FSB published a report that examines the financial stability, regulatory, and governance implications of the use of decentralized financial technologies such as those involving distributed ledgers and online peer-to-peer, or user-matching, platforms. The report suggests that the use of decentralized technologies may entail risks to financial stability. These include the emergence of concentrations in the ownership and operation of key infrastructure and technology as well as a possible greater degree of procyclicality in decentralized risk-taking. Additionally, recovery and resolution of decentralized structures may be more difficult.

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

Proposed Rule 2

Proposed Rule 3

Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

The report describes the decentralization of financial services as the elimination—or reduction in the role—of one or more intermediaries or centralized processes that have traditionally been involved in the provision of financial services. In some instances, it can refer to the decentralization of risk-taking away from traditional intermediaries. The report, which has been delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Fukuoka on June 08-09, focuses on technologies that may reduce or eliminate the need for intermediaries or centralized processes that have traditionally been involved in the provision of financial services. Such decentralization generally takes one of three broad forms—the decentralization of decision-making, risk-taking, or record-keeping. There are already examples emerging of decentralization in payments and settlement, capital markets, trade finance, and lending.

Significant use of decentralized financial technologies may have implications for the effectiveness and enforceability of current regulatory frameworks, particularly where the execution of supervisory and oversight mandates focuses on the presence of centralized decision-making entities (for example, financial intermediaries). A more decentralized financial system may reinforce the importance of an activity-based approach to regulation, particularly where it delivers financial services that are difficult to link to specific entities and/or jurisdictions. Certain technologies may also challenge the technology-neutral approach to regulation taken by some authorities. These issues could continue to be the subject of further consideration by authorities.

As part of the G20 discussion, authorities may wish to consider the implications of decentralized financial technologies for proportional and consistent application of regulation of decentralized financial technologies, financial supervision, and financial regulation and regulatory approaches. Regulators may also wish to engage in further dialog with a wider group of stakeholders, including those in the technology sector that have had limited interaction with financial regulators to date. This should help avoid the emergence of unforeseen complications in the design of decentralized financial technologies at a later stage.

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Keywords: International, Banking, Insurance, Securities, Decentralized Financial Technologies, Proportionalities, DLT, Fintech, Financial Stability, G20, FSB

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FSB Studies Implication of Use of Decentralized Financial Technologies

By Regulatory News

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