Global Risk Regulator - January 2021
- January 2021 Speakers' Corner: COVID, recession and Brexit to influence UK regulation in 2021
- UK strikes deal with Singapore and aims for ambitious digital agreement
- AXA warns UK money market funds are at risk from negative rates
- Heath Tarbet to step down from CFTC following change of administration
- Resolution plan fixes of certain foreign banks approved by federal regulators
China gears up for launch of digital currency - with global implications: Residents of Suzhou, an ancient city in the Yangtze Basin, recently pioneered China’s new digital currency – and banks and fintechs are taking note.
'On December 12, 100,000 winners of a civic lottery in Suzhou each received 200 yuan ($31) in digital renminbi as part of Beijing’s battle against fintechs and the US. Over the next two weeks, the money could be spent at 10,000 supermarkets, stores and restaurants in Suzhou and on JD.com, China’s largest retailer. Mainland media outlets enthused over consumers scanning QR barcodes and paying with their digital renminbi. Unlike apps Alipay and WeChat Pay, users were able to send and receive funds in the digital currency without the internet, simply by touching each other’s phones. As a trial in ease-of-use, as well as a precision-targeted drop of ‘helicopter money’, the experiment passed off without a hitch. Others had already taken place in Shenzhen, Xiong’an, and Chengdu. The central bank, the People’s Bank of China (PBoC), has been working on the project since 2014. The Digital Currency Electronic Payment (DCEP) is scheduled to debut in 2022. “The launch of DCEP will be historic because of its scale, scope and precedent. All the world will be watching,” the Washington-based Institute of International Finance (IIF) declared in December.'
FSB warns of climate change threat to financial stability: Policy-makers and their advisers have at last recognised the implications of climate change on financial stability, marking a sea change in political sentiment on this issue.
'Despite the significance of this, the contents of the 32-page FSB report remain largely abstract. Rather than forecasting how individual financial sectors may be impacted or sketching out temperature-rise scenarios for specific investment portfolios, the findings tease out which factors could most threaten the global financial system. In particular, the FSB study seeks to unearth feedback loops that might amplify global warming’s disruptions to this intricately connected system and translate them into catastrophic systemic financial shocks. The FSB’s report is, in part, reassuring: “Central estimates of the impact on asset prices of a well-anticipated transition to a low-carbon economy are relatively contained”. A study is cited that suggests the loss in global wealth from so-called stranded assets, for example, may range from $1tn to $4tn, or less than 3% of managed financial assets.'
Shadow banks face tougher rules following COVID-induced volatility: Global regulators have long kept an eye on the shadow banking sector from afar and warned that it may be a source of systemic risk, but the pandemic-driven market turmoil in March was a tipping point. The Financial Stability Board is now calling for firm action to “strengthen the resilience of non-bank financial intermediation”.
'The FSB now plans to work with standard-setting bodies to make shadow banks more sturdy, and calls on the international regulatory community to focus on three main areas. First, regulators should look at the individual risk factors and specific markets that contributed to amplification of the shock seen in March, including whether the post-financial crisis reforms have worked as intended. Second, the FSB advises studying the systemic risks posed by non-bank financial institutions and the financial system as a whole, including the interactions between banks and non-banks, the resilience of the NBFI sector and cross-border spill-overs. Third, financial regulators should review policies to address systemic risks posed by NBFIs, including the adequacy of policy tools and the concept and desired level of resilience in these firms.'
FSB treads fine line on CCP resolution issue in final guidance: Clearing house members have cautiously welcomed the latest FSB guidance on CCP resolution, which contained few surprises, but argue it should go even further.
'The latest guidance is essentially a deeper dive into specific aspects of CCP resolution addressed in previous guidance documents. It offers operational guidance for resolution authorities on things like what constitutes default losses and how to draft resolution plans for CCPs in its five-step process. The FSB also published a separate overview of responses to the consultation that includes comments from two virtual outreach events on the draft guidance. Although there were important clarifications in the final version of the guidance, nothing appeared dramatic, say clearing experts. The International Organization of Securities Commissions and the FSB are also understood to be working together next year to consider if more policy guidance needs to be given above and beyond what is in the operational report.'
CBDC experiment paves way for market infrastructure revolution: The infrastructure of financial markets came a step closer to being revolutionised following an experiment involving the Bank for International Settlements (BIS) and the Swiss National Bank (SNB) using central bank digital currencies (CBDCs) for settling transactions.
'However, some industry sources believe it is too soon to write-off clearing houses, depositories and even exchanges. They point out that they are still needed as an insurance policy, because even in an instantaneous environment problems could still occur between counterparties, relating for example to potential system failures. They also point out that financial infrastructure firms are themselves investing in DLT and looking for ways to become much more efficient with SIX, a participant in Project Helvetica, being a case in point. The good news for commercial banks is that wholesale CBDCs are not nearly as potentially disruptive as general purpose or retail CBDCs, which could theoretically see the public keep their deposits with the central bank and in process disintermediate a large swathe of the financial sector. For the moment, Switzerland like most other central banks in developed countries, does not appear to be even contemplating such a move for fear that it could destabilise the financial system. In developed countries, wholesale CBDCs seem likely to happen. Project Helvetica was split into two pilots exploring the integration of tokenised assets and central bank money on SIX’s SDX platform. The first proof of concept (POC 1) for settling tokenised assets involved issuing a novel wholesale CBDC, while POC 2 built a link between SDX’s new securities settlement platform and the existing central bank payment system. Both POCs were reported to have worked from a technical and legal perspective.'
Please contact Ella Jacob at [email protected] for further information.