The JFSA published a report providing guidance in establishing and operating efficient deference processes to mitigate the effects of fragmentation and strengthen cooperation between regulatory authorities.

Practical implementation of the deference process is not always straightforward, as a recent development between the European Securities and Market Authority (ESMA) and Indian regulatory authorities would reveal. ESMA had withdrawn its recognition decisions under EMIR for six CCPs established in India as no cooperation arrangements have been concluded with the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). RBI and SEBI were reportedly uncomfortable with ESMA’s direct and independent access to RBI and SEBI-regulated entities. This would bar all European banks from dealing with the Indian CCPs after April 30, 2023, and potentially impact the domestic bond and stock markets, which could also lead to a collapse in India’s overnight indexed swap market which is widely used by foreign banks.

This clearly underscores the importance of cooperation between regulators in terms of formulation, implementation, and recognition of rules for the orderly functioning of global capital markets.

Digital finance

Regulators in APAC recognize the importance of digital innovation in the financial sector and are working closely with each other as well as industry stakeholders to put in place regulatory frameworks that both encourage innovation and ensure relevant risks are mitigated.

In the digital assets space, regulators are seeking to strike a balance between fostering innovation and providing consumer protection, and preserving market integrity. The Monetary Authority of Singapore (MAS) has clarified on a few occasions that its ambition is to be a crypto asset hub for (1) experimenting with programmable money, (2) applying digital assets for use cases like atomic settlement, (3) tokenizing real and financial assets to increase efficiency and reduce risks in financial transactions. However, it does not want to be a hub for trading and speculating in cryptocurrencies. In this regard, MAS is experimenting with Central Bank Digital Currencies (CBDCs), facilitating stablecoins through sound regulation, allowing tokenized bank deposits, and discouraging retail investment in cryptocurrencies.

By contrast, the Hong Kong government, having previously proposed to limit crypto trading to professional investors, is now proposing to allow retail investors to trade in cryptocurrencies and crypto exchange-traded funds, as part of its development efforts to be a fintech hub. The extent of retail access to virtual assets will be subject to consultation, as will the introduction of licensing regime for virtual asset exchanges. The bill to establish a statutory licensing regime for virtual asset service providers is currently being debated by lawmakers. The Hong Kong Monetary Authority (HKMA) is also considering feedback on the appropriate regulatory approach towards stablecoins and is expected to take into account international regulatory recommendations in its final proposal. These are all in line with Hong Kong’s intent to promote development of financial services across the entire virtual asset value chain.

On Artificial Intelligence (AI), regulators recognize how the use of AI and data analytics will greatly transform the way financial services operate. The use of AI, however, does not come without risks, particularly with regard to individual consumers. In this regard, the MAS issued a set of principles to promote fairness, ethics, accountability, and transparency (FEAT) to foster greater confidence and trust in the use of AI and data analytics, as firms increasingly adopt technology tools and solutions to support business strategies and risk management. Similarly in Hong Kong, the HKMA’s Consumer Protection in respect of Use of Big Data Analytics and Artificial Intelligence recommends attention in four major areas, namely (1) governance and accountability, (2) fairness, (3) transparency and disclosure, and (4) data privacy and protection.

Green agenda

As the global path towards net zero continues to evolve, tackling climate change has become a top priority for both policymakers and industry across the APAC region. New policies, guidance and regulations are being introduced to address constraints on data availability, improve the consistency of disclosures and identify room for improvement in climate-related reporting.

For instance, APAC policymakers are taking the lead with the adoption of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Notably, New Zealand became the first country to bring TCFD recommendations into legislation. Moreover, regulators in Hong Kong, Singapore, Taiwan, and Malaysia are requiring TCFD-aligned climate reporting from financial institutions over various timelines, with implementation by latest 2025.

While APAC closely monitors and examines the application of the EU Taxonomy framework, regulators and the industry are working together on local Taxonomy development. The MAS is consulting on the Green and Transition Taxonomy for Singapore-based financial institutions to simplify the ESG investment process by identifying Taxonomies that are consistent. The ASEAN authorities have come together in developing an ASEAN Taxonomy for Sustainable Finance to serve as a common building block on transition and sustainable finance adoption for member countries.

In Hong Kong, following the publication of the updated Common Ground Taxonomy (CGT) by the International Platform on Sustainable Finance, the Government-backed Green and Sustainable Finance Cross Agency Steering Group is working toward finalizing proposals for the local green classification framework. Meanwhile, in Australia, industry-led initiatives with government and regulators are underway to develop an Australian sustainable finance taxonomy.

As different taxonomies are being developed in different jurisdictions, consistency and interoperability between different markets will continue to be critical. This explains the strong regulatory momentum across APAC for the ISSB recommendations to become a common base for jurisdictional requirements and provide sufficient comparability to achieve a useful global baseline reporting standard.

From classification to disclosures and reporting, policymakers are taking important steps to integrate green finance and foster sustainable development. Green bond policies have been put in place to promote green bond issuance, including in Hong Kong and Singapore. Carbon market development is growing in prominence as an emerging priority, and examples include carbon tax schemes in Japan, New Zealand, and Singapore, national ETS schemes in New Zealand and South Korea, and announcements from Hong Kong and India that they intend to establish voluntary carbon markets.

Prudential regulation

In February this year, the Basel Committee re-iterated that the initial Basel III reforms have played a central role in ensuring that the banking system has so far remained operationally and financially resilient during the Covid-19 pandemic. While commitment to the Basel objectives remains across APAC as Basel III implementation looms, the post-pandemic economic recovery and the ongoing fallout from the Russo-Ukraine war have led to delays in finalization in the local implementation of the risk framework.

While Hong Kong and Singapore are still working towards FRTB implementation by 2023 (despite the EU and other major jurisdictions considering later implementation deadlines), Japan has delayed until 2024 while Australia extended its implementation date to 2025. As the market looks forward for domestic rules to be finalized, firms with operations across multiple jurisdictions are encouraging policymakers to ensure greater global and regional cooperation to address possible market fragmentation.

Read the full report, Global Regulatory Forum 2022: Forging a resilient recovery, covering key developments across UK, EU, USA & APAC markets, including digital finance, the green agenda, and financial stability.

Bloomberg

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