KPMG Regulatory Horizons Q3 - 2022

Welcome to the latest edition of KPMG Regulatory Horizons. 

In this update we take stock of the EU Presidency mandate as it transitions from France to the Czech Republic. We also consider the economic environment and how this is impacting the regulatory landscape. Our articles cover fund liquidity, Basel 4 and carbon markets. And last but by no means least, we look at the key digital finance developments in relation to cryptoassets, stable coins, AI and machine learning, and the ongoing debate around decentralised finance (DeFi).

EU presidency update

As the Czech Republic takes up the Presidency of the EU, it must take forward several challenging pieces of legislation which require political agreement from Member States. Such as supporting the Capital Markets Union with the CSDR review proposal; the review of the AIFMD, ELTIF reform and the MIFIR amendments and amendments to CRR3 (see article here).

Alongside this, there are numerous initiatives in play relating to sustainability and the challenges of meeting net zero targets, not least the development of Sustainability Reporting Standards (ESRS and ISSB); further developments on the EU Taxonomy; and increased focus on carbon markets.

Under the French Presidency, progress was made on the Commission’s 2020 Digital Finance package with political agreement on MICA and the EU Pilot regime on DLT infrastructure. The regulation of digital assets is a rapidly developing area, as is the use of artificial intelligence in financial services and the wider economy – for more on the evolving approaches on these topics – and the BCBS’s second consultation on the prudential treatment of cryptoassets – see articles below.

The economic environment

Policy makers and regulators are having to consider the worsening economic environment. In June, the ESRB concluded that risks to financial stability have increased perceptibly since March. It noted significant deterioration in global economic growth prospects owing to the sharp increase in energy, food and commodity prices – compounded by the Russian invasion of Ukraine and renewed supply chain disruptions.

ESMA’s Trends, Risks and Vulnerabilities report, also published in June, considers contagion and operation risks to now be very high, joining liquidity and market risks. Credit risk remains high and is expected to rise. Risks remain very high in securities markets and for asset management. Infrastructures have shown resilience to the increased risks in market volatility and cyber risk but risks remain high. Both the EBA and the Bank of England report that banks have good capital and liquidity ratios but expect impairments to increase.

Given the current volatility in the markets, regulators are unlikely to reduce their focus on fund liquidity management and will now seek to conclude the policy debate that was relaunched following the March 2020 market turmoil. The war in Ukraine has also introduced new regulatory challenges for fund managers to navigate (see article here).

EMA FS Regulatory Insight Centre

^{Central Securities Depositories Regulation (CSDR)
Alternative Investment Fund Managers Directive (AIFMD)
European Long-Term Investment Fund regulation (ELTIF)
Capital Requirements Regulation (CRR)
European and International Sustainability Reporting Standards (ESRS and ISSB)
Market in Crypto-assets Regulation (MICA)
European Systemic Risk Board (ESRB)}