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In this regular post, we round-up FinTech-related financial services regulatory developments for the week ending 19 April 2024.



FATF Ministers Declaration – further commitment on AML/CFT/CPF

Following the biennial meeting of Financial Action Task Force (FATF) Ministers, the FATF has published the 2024 Ministerial Declaration. Ministers have reaffirmed their commitment to combat financial crime, and fully support effective implementation of the FATF Standards in preventing and combatting money laundering, terrorist financing and the financing of the proliferation of weapons of mass destruction (AML/CFT/CPF).

The declaration notes that the FATF will undertake further work on supervision and preventive measures, beneficial ownership transparency, investigating and prosecuting money laundering, and confiscating the proceeds of crime. In particular, it will continue to engage with other international organisations and actively participate in strategic initiatives around Central Bank Digital Currencies (CBDC), to ensure AML/CFT/CPF integrity by design. [19 Apr 2024]


BCBS Chair discusses managing AI in banking

The Basel Committee on Banking Supervision (BCBS) has published a speech by Chair Pablo Hernández de Cos on managing artificial intelligence (AI) in banking. Mr de Cos discussed the micro-, macroprudential and financial stability implications related to the use of AI and machine learning (ML) in banking. He noted that banks need to anticipate and oversee the risks and challenges posed by AI/ML, and incorporate this into their day-to-day risk management and governance arrangements. Human judgment must also play a central role as part of this framework.

In his conclusion, Mr de Cos advised that the BCBS is due to publish a comprehensive report on the digitalisation of finance and the implications for regulation and supervision. [18 Apr 2024]

#AI #MachineLearning

BISIH: Interim Report on Project FuSSE – quantum-resistant cryptographic solutions

The Bank for International Settlements Innovation Hub (BISIH) has published the first interim report on Fully Scalable Settlement Engine (FuSSE) – a strategic framework for quantum-cryptography. Project FuSSE aims to modernise financial market infrastructures for the demands of the digital age.

The interim report specifically focuses on the cryptographic modules within Project  FuSSE. These modules represent a partial deliverable of the complete system but are designed to be immediately beneficial. Due to the modular design of FuSSE, central banks and other stakeholders can leverage these quantum-resistant cryptographic capabilities today, by requesting access to the project’s source code, without the need for a full deployment of the entire FuSSE framework. [18 Apr 2024]

#Quantum #Cryptography

WEF report: Modernising financial markets with wCBDC

The World Economic Forum (WEF) has published a report which explores the potential of wholesale central bank digital currency (wCBDC) to address challenges in financial markets through a global multi-stakeholder approach.

The report highlights four areas of differentiated value for wCBDCs:

  • realising a global settlement window by harmonising foreign exchange (FX) and securities markets settlement times to overcome operational hour disparities among key trading corridors;
  • expanding payment-versus-payment arrangements through cost-effective solutions that can support a diversity of currencies to enhance currency liquidity;
  • mutualising data across parties by securely transmitting settlement data across parties and jurisdictions to support automation, reduce settlement risk, and enhance trade and post-trade activities; and
  • tokenising credit risk-free settlement media for settling tokenised securities and supporting emerging tokenised payment instruments.

The report does not necessarily represent the views of the WEF, nor the entirety of its members, partners or other stakeholders. [16 Apr 2024]

#CBDC #Tokenisation


FCA: JROC proposals on Future Entity

The Joint Regulatory Oversight Committee (the FCA, PSR, Competition and Markets Authority and HM Treasury – JROC) has published its proposals for the future open banking entity (Future Entity), which will create a structure that promotes further innovation and functionality along with consumer protection. The proposals ask firms to comment on the Future Entity’s recommended structure, governance and funding for both its interim and longer-term model.

Responses are requested by 20 May 2024. The JROC will finalise its recommendations once responses have been considered. [19 Apr 2024]


PSR consults on the FPS APP scams reimbursement requirement: compliance and monitoring

The Payment Systems Regulator (PSR) has published a consultation paper (CP24/3) which sets out proposals for all payment service providers (PSPs) in-scope of the reimbursement requirement policy to report data and information to Pay.UK, so that it can effectively monitor and manage compliance with the Faster Payments Scheme (FPS) reimbursement rules, which come into effect on 7 October 2024.

CP24/3 also sets requirements for how data must be provided, and how it will be managed. It does not propose any changes to the powers exercised, or the requirements already contained within the specific directions relating to FPS APP scam reimbursement.

Responses to CP24/3 are requested by 28 May 2024. [17 Apr 2024]


BoE Deputy Governor discusses innovation in money and payments

The Bank of England (BoE) has published a speech by its Deputy Governor for Financial Stability, Sarah Breeden, at the Innovate Finance Global Summit 2024.

The Deputy Governor explained how the BoE seeks to deliver trust and support innovation, both as a provider and as a regulator of retail and wholesale money, in light of the prospect of significant technological change in payments. She also discussed the first-order threats and opportunities facing central banks and the private sector.  With regard to specific innovations, Ms Breeden covered stablecoin regulation, central bank digital currency (CBDC) development, innovation in financial market infrastructure (FMI) and the renewal of the UK real-time gross settlement system (RTGS).

The Deputy Governor confirmed that a discussion paper setting out the BoE's thinking on a number of aspects of innovation will be published in Summer 2024. [15 Apr 2024]

#CBDC #Stablecoin


ESAs consult on RTS regarding conduct of oversight activities under DORA

The European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) have launched a consultation paper (CP) on draft regulatory technical standards (RTS) on the conduct of oversight activities in relation to the joint examination teams under the Digital Operational Resilience Act (DORA).

The draft RTS aim to ensure maximum efficiency and effectiveness regarding the functioning of the joint examination teams, given their central role in the daily oversight of critical ICT third-party service providers (CTPPs).

Responses are requested by 18 May 2024. DORA and the related RTS will apply from 17 January 2025. [18 Apr 2024]


ECB: OP on digital euro safeguards

The European Central Bank (ECB) has published an Occasional Paper (OP) entitled 'Digital euro safeguards: protecting financial stability and liquidity in the banking sector'. The OP shows the usefulness of digital euro safeguards, such as holding limits, that would limit the impact of the introduction of a digital euro on banks’ liquidity and on their reliance on central bank funding. To this end, it assesses how banks might respond to the introduction of a digital euro while seeking to maximise profitability and manage their risks for a range of holding limit scenarios. The results of the simulated impact on key liquidity metrics show that, with safeguards in place and on aggregate, the liquidity metrics of euro area banks would decline but remain well above regulatory minimums. In addition, the central bank funding ratios of euro area banks would not increase materially on aggregate and would remain contained overall.

The OP presents the views of the authors and does not necessarily reflect those of the ECB. [18 Apr 2024]


ECB: 2023 annual report

The ECB has published its 2023 annual report. Highlights of the report include discussions on inflation, how the ECB continued to follow a data-dependent approach to rate decisions, the normalisation of the Eurosystem balance sheet, progress on payments, and the launch of the preparation phase of the digital euro project. [18 Apr 2024]


ESRB publishes report on operational policy tools for cyber resilience

The European Systemic Risk Board (ESRB) has published a report which reviews operational policy tools used to address systemic cyber crises across the membership of the ESRB at both the national and the supra-national levels.

The report focuses on three distinct but interacting groups of operational tools:

  • tools for gathering, sharing and managing information;
  • coordination tools to help mitigate potential negative effects on financial stability; and
  • emergency and backup systems to help ensure the sustained provision of critical economic functions.

In light of the review, the ESRB:

  • encourages financial institutions (FIs) and authorities to improve their information management and information-sharing efforts;
  • advocates for national and EU-level crisis management and coordination practices in line with European and international standards; and
  • would consider the pros and cons of system-wide contingency options and backup arrangements. [16 Apr 2024]


Hong Kong

HKEX announces to develop Orion Derivatives Platform to provide optimum trading, clearing and risk management solutions

The Hong Kong Exchanges and Clearing Limited (HKEX) has announced the development of the Orion Derivatives Platform (ODP), a new proprietary derivatives platform designed to offer enhanced trading, clearing, and risk management capabilities.  The ODP, being developed in-house by HKEX’s technology teams is expected to launch in 2028.  The move is part of HKEX's strategic priority to build future-ready technology platforms and operations, and it aims to differentiate the HKEX Group’s derivatives offerings and increase its competitiveness in the global derivatives market.

HKEX CEO, Ms Bonnie Y Chan, highlighted that derivatives are one of the fastest-growing segments of HKEX's business, with record-breaking volumes in 2023 and 2022.  The ODP will be built on a modular architecture, allowing easier introduction of new products, enhancement of microstructure, and addition of new capabilities.  It will offer enhanced trading and clearing capabilities to clients, including near 24-hour trading, additional order types, an industry-standard interface, and improved testing and onboarding experience.

ODP will also incorporate capital efficient risk management tools, such as the Value-at-Risk (VaR) model, aligning clearing capitalisation methods with international practices.  The VaR margining methodology was successfully implemented in HKEX’s cash market in 2022 offering a clearer and more efficient way to assess risk exposures. Through the development of ODP, the HKEX will bring VaR to its derivatives markets, with the aim of reducing trading costs while ensuring robust risk management.

HKEX Group Chief Information Officer, Mr Richard Leung, emphasised HKEX's commitment to driving market innovation through the development of best-in-class technology platforms. The development of ODP is ongoing and market rollout is expected in 2028.  The HKEX will actively engage with market participants in the development process and  the system migration will be carried out in phases to ensure a smooth transition.  [18 Apr 2024]


HKAB and two other Industry Associations jointly announce the commencement of service of 'Credit Data Smart' from 26 April 2024

The Hong Kong Association of Banks (HKAB), The DTC Association (The Hong Kong Association of Restricted Licence Banks and Deposit-taking Companies), and the Hong Kong S.A.R. Licensed Money Lenders Association Limited (collectively, 'Industry Associations') have jointly announced the launch of 'Credit Data Smart', a multiple credit reference agencies (CRA) operating model, which will start service on 26 April 2024.

The 'Credit Data Smart' pilot programme, launched on 20 November 2023 (see our previous update), has seen participation from over a thousand employees from nearly 20 institutions.  The programme's results showed that the data accuracy and overall service performance of the three CRAs met the requirements set by the Industry Associations. Independent third-party consultants confirmed that the three CRAs' complied with the relevant predetermined standards on information security, system, and data management. The public will be able to obtain a free credit report from each CRA once every 12 months to understand their personal credit status.

This has been welcomed by the HKMA.  The HKMA has been collaborating with the Industry Associations to introduce multiple consumer CRAs in Hong Kong, with the aim of promoting market competition, enhancing service quality, and reducing operational risk.  The implementation of 'Credit Data Smart' is an initiative under the 'Fintech 2025' strategy, and marks a milestone in consumer credit reference services in Hong Kong.  [18 Apr 2024]


SEHK announces launch of spot VA ETFs

The Stock Exchange of Hong Kong Limited (SEHK) has published a circular regarding preparation for the listing of spot virtual assets exchange traded funds (Spot VA ETFs) authorised by the SFC. Exchange participants (EPs) advised to note and understand Spot VA ETFs features and obligation and refer to the SFC's circular on SFC-authorised funds with exposure to virtual assets issued in 2023 in relation to authorisation and point of sale requirements for further information. (see our previous update)

Similar to other exchange traded products and stocks, margin financing is allowed for Spot VA ETFs subject to an individual EP’s risk management policy. However, in view of the high volatility of Spot VA ETFs, EPs should be particularly prudent in providing clients margin financing for trading such products and EPs should adhere to the SFC guidelines on securities margin financing activities.  [17 Apr 2024]


HKMA publishes insight for thematic review of TM systems

The HKMA has published a circular to authorised institutions (AIs) and stored value facility (SVF) licensees regarding the publication of its Insight for Design, Implementation and Optimisation of Transaction Monitoring Systems.

The HKMA has conducted a thematic review of transaction monitoring (TM) systems, focusing on their design, implementation, and optimization. Effective detection of suspicious transactions is crucial for anti-money laundering and counter-financing of terrorism (AML/CFT) controls.  The review examined governance, data quality, detection scenarios, threshold setting, and periodic reviews.  It also looked at how AIs and SVF licensees use artificial intelligence to optimise TM systems and provided AML/CFT specific guidance based on industry best practices.

The report summarised the key observations from the thematic review, including a number of case studies, and provides insights for AIs to strengthen the design, implementation and optimisation of TM systems to make them more effective and efficient, including by adopting more advanced technologies.

The report also shares relevant Regtech adoption cases that have demonstrated improved outcomes in respect of TM systems, and which supplement use cases provided in recent HKMA technology publications in 20192021 (see our previous update), May 2023 (see our previous update) and September 2023 (see our previous update) on the use of artificial intelligence applications, covering governance, application design, development, and ongoing monitoring. While these principles should be considered when adopting artificial intelligence, they are not intended to inhibit innovation, including in AML/CFT work. AIs can clarify control areas and regulatory expectations through the HKMA’s Fintech Supervisory Chatroom or Fintech Supervisory Sandbox. Good practices observed for successful deployment include readiness, talent considerations, change management, data governance, data quality, model testing, validation, periodic review, and awareness of limitations.  [17 Apr 2024]


HKMA shares risk management considerations related to the use of DLT to AIs

The HKMA has issued a circular to share with the industry the key risk management considerations that the HKMA has regard to when it reviews proposals of authorised institutions (AIs) involving the use of distributed ledger technology (DLT). Mr Raymond Chan (Executive Director (Banking Supervision) of the HKMA) made comments on the use of DLT in financial services in March 2024.  (see our previous update)

Since the Government's 2022 "Policy Statement on Development of Virtual Assets (VAs) in Hong Kong", there has been increased interest from AIs in applying DLT to traditional financial operations. The HKMA supports AIs adopting DLT-based solutions, provided they can manage associated risks. It encourages banks to explore the potential of taking "tokenised" deposits. The HKMA's supervisory approach is risk-based and technology-neutral, focusing on whether an AI has adequate systems and controls to manage additional risks from DLT adoption.

The HKMA has prepared a note outlining key supervisory considerations for DLT adoption, which AIs should consider when developing their DLT solutions. These considerations are non-binding, non-exhaustive, and will evolve with market and technological developments. They currently focus on products and activities receiving the most market attention, such as tokenisation of traditional assets and liabilities, and supporting services for these tokenised products.

The key considerations include:

  • Governance – the HKMA expects AIs to take full responsibility for adopting DLT and managing its risks.  This includes updating policies and frameworks to mitigate DLT-specific risks, ensuring sufficient DLT expertise among staff, offering regular training, and updating customer-facing procedures if necessary. DLT adoption introduces new risks due to its decentralization focus and untraditional governance philosophies.
  • Application design and development - the HKMA expects AIs to carefully select the right DLT network for their applications, considering its structure, governance, and associated risks.  AIs should ensure smart contracts are fit for purpose, managing vulnerabilities and establishing a rigorous governance framework for their introduction and updates.  AIs should also understand and mitigate potential legal risks, as the legal basis for DLT application is still evolving. Third-party risks should be effectively managed, especially considering the consensus-based mechanisms of DLT networks.  AIs should also design their DLT-based systems to be interoperable with both traditional and other DLT-based solutions, ensuring safe and secure connections.
  • On-going maintenance and monitoring - the HKMA expects AIs to establish a level of cybersecurity for DLT-based applications that is commensurate with traditional technology applications, countering both DLT-specific and common cybersecurity threats.  AIs should securely manage private keys with robust policies and procedures, ensuring security appropriate to the nature and risks of the application.  Compliance with data privacy and protection requirements should be ensured, with mitigating measures introduced to manage complications arising from DLT's unique nature.  AIs should also tailor contingency planning and testing arrangements for DLT, including testing scenarios and contingency arrangements specific to DLT in their business continuity planning.  This includes considering unique DLT operating dynamics and potential backup options.  [16 Apr 2024]

#DLT #Tokenisation

SFC warns public of suspected virtual asset-related frauds

The SFC has warned the public of entities operating under the names of 'TCAME' and 'BitCloud' for suspected virtual asset-related fraudulent activities and falsely claiming to be licensed or certificated in various jurisdictions.

Both entities claim to provide cryptocurrency trading services and use social media platforms or instant messaging apps to refer investors to their respective websites to register as a user for investment in cryptocurrencies.  Investors subsequently reported withdrawal issues, including being required to make additional 'deposits' to process withdrawals, while some said their accounts were frozen subsequently.

Both entities and their respective websites were posted on the SFC's Suspicious Virtual Asset Trading Platforms Alert List on 12 April 2024.  [12 Apr 2024]



BNM: Revised e-KYC requirements

Bank Negara Malaysia (BNM) has published a policy document which sets out revised requirements and guidance in implementing electronic know your customer (e-KYC) solutions for the onboarding of individuals and legal persons to the financial sector.

The revised requirements and guidance in the policy document seek to accommodate advancements in technology to facilitate the secure and safe adoption of e-KYC solutions for both individuals and legal persons while preserving the integrity of the financial system.  [15 Apr 2024]



RBI consults on draft directions: Regulation of payment aggregators 

The Reserve Bank of India (RBI) has published a consultation on two draft directions relating to the regulation of payment aggregators:

The amendments cover, inter alia, know your client (KYC) and due diligence of merchants, and operations in escrow accounts, and are intended to further strengthen the payment ecosystem.

Feedback on the draft directions is requested by 31 May 2024.  [16 Apr 2024]

#Payments #Aggregators




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Cat Dankos

Regulatory Consultant, London

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Cat Dankos

Regulatory Consultant, London

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Rashid Ahmed

FSR & CCI Professional Support Paralegal, London

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Vasuki Balasubramaniam

FSR & CCI Professional Support Paralegal, London

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