Finally, the Commission is overseeing the implementation of a package of rules designed to modernize the collection and dissemination of core equity market data. The amendments would expand the content of core data and implement new oversight and governance provisions related to the collection and dissemination of core market data. If these reforms are fully implemented as envisioned, core market data will be disseminated through a decentralized consolidation model that will feature competing consolidators replacing the current centralized model. Much work needs to be done to fully implement the final rules. The market will be watching closely in the coming months as the SEC will need to make a number of key decisions.
Digital finance
Regulators, both individually and collectively through the Financial Stability Oversight Council (FSOC), have called for legislative intervention to provide clarity to the market and additional authority to regulators to address and effectively respond to the novel issues presented by digital assets. Recent developments have highlighted the risks to investors and consumers, and the potential for disruption to the traditional financial system, in the absence of a clear and robust regulatory framework.
Numerous digital asset-focused bills have been introduced in 2022. These have largely focused on providing clarity to the ‘security vs. commodity’ debate and providing a robust oversight framework covering stablecoins. The sudden collapse of FTX in November could serve as a galvanizing event for Congressional action with more robust consumer protection provisions, particularly the segregation of customer funds.
In 2022, regulators significantly increased the number and scope of crypto-related enforcement actions. This trend is likely to continue into 2023, bolstered by the crumbling of FTX. In the absence of comprehensive legislation, enforcement and litigation will continue to define the regulatory landscape. This approach has brought accusations of regulation by enforcement and raised jurisdictional issues between regulators and has failed to provide additional clarity to the “commodity vs. security” debate.
Green agenda
Addressing climate change and managing climate-related financial risk are continuing priorities for US regulators, both domestically and internationally. In August, President Biden signed the Inflation Reduction Act, the largest government-led investment in clean energy in U.S. history, which seeks to achieve a roughly 50% reduction in greenhouse gas emissions by 2030. At COP27, the U.S. unveiled the Energy Transition Accelerator, a new carbon credit program designed to enlist investors in efforts to reduce emissions and accelerate the construction of renewable energy.
The Federal Reserve announced plans for a select group of the largest banks in the U.S. to participate in a pilot climate scenario analysis exercise designed to measure and manage climate-related financial risks.
This year, the SEC proposed a set of new climate and ESG rule proposals designed to increase disclosure and address climate-related financial risks and greenwashing concerns. The proposed rules are expected to be finalized in 2023. Climate issues are likely to remain highly politicized in the U.S., and we expect fierce opposition to continued SEC rulemaking in this space. The SEC is said to be considering making some changes to the proposed climate rules, including whether to mandate reporting of Scope 3 greenhouse gas emissions. Legal and political challenges to climate and ESG regulation are expected in the months ahead.
The Commodity Futures Trading Commission (CFTC) has also solicited public feedback on all aspects of climate-related financial risk pertaining to the derivatives markets and the underlying commodities markets. Voluntary carbon markets, in particular, will likely be a focus for the CFTC in the coming months.
Prudential regulation
In the wake of the global financial crisis, US bank regulators moved to shore up the banking system through a set of revisions to the regulatory capital framework in line with the post-crisis standards set forth by the Basel Committee on Banking Supervision (Basel III).
These revisions were finalized in the US in 2013. After the BCBS issued a final set of standards in 2017 (the “Basel III Endgame”), US regulators are now working to further revise the US capital framework to implement and align with this final set of Basel III standards. US regulators recently reaffirmed their commitment to the Basel III endgame and indicated that a joint proposed rule would be issued for public comment “as soon as possible.”
With the benefit of nearly a decade of experience with the current regulatory framework, regulators are planning to use this opportunity to engage in a broader holistic review of the existing capital framework beyond the Basel III endgame to assess whether the overall capital framework is functioning as intended, with a particular focus on the largest and most complex banks.
This holistic review will include the surcharge for systemic banks (G-SIBs), the enhanced supplementary leverage ratio, stress testing, and the countercyclical capital buffer. The regulators seek to establish a framework that is both forward-looking and tiered so that the highest standards apply to the riskiest firms. Accordingly, Community banking organizations, which are subject to different capital requirements, would not be impacted by the proposal.
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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