Solvency II is a risk-based, forward-looking and market-consistent framework and well equipped to accommodate sustainability risks. Previously, the European Insurance and Occupational Pension Authority (EIOPA) gave advice to implement the risks in Pillar 2 of the framework.
However, the European Commission asked to consider the inclusion in Pillar 1. In it its response, EIOPA emphasizes several challenges regarding sustainability risk in asset valuation, liability valuation, investment practices, underwriting practices, capital requirements and internal models.
In the opinion of EIOPA, these challenges should not lead to complacency in assessing the impact of these risks in Pillar 1 requirements. As climate change risk mainly reflects long-term financial losses, this might be difficult to include in the risk assessment. Model parameters must be calibrated regularly and be adjusted for climate change effects if insights are available.
The fact that climate change is a source of financial risk is also realized by a group of central banks and supervisors. The Network for Greening the Financial System (NGFS) published a guide on implement Sustainable and Responsible Investment (SRI) practices for central banks. This guide does not offer a one-size-fits-all approach but rather shows how some of its member central banks already apply an SRI policy. For example, Banca d’Italia weighs the securities based on the issuers’ environmental, social and governance score. Going forward, the NGFS continues to work on additional technical documents and guidelines on scenario-based climate risk analysis.
The Prudential Regulation Authority (PRA) explained in a supervisory statement the expectations towards an insurer regarding liquidity risk management. Among others, the framework should entail:
• the identification of liquidity risk driver
• the design of forward-looking scenarios and stress tests
• the use of quantitative metrics for measuring liquidity risk
For the last item, the PRA names the liquidity coverage ratio as an example. Defining an own metric is also permitted, if the insurer can document the advantages and shortcomings. The statement highlights that the risk drivers are unique to every insurer and, therefore, practices vary.
For more information, please go to the Bank of England website.
IOSCO publishes update on implementation of reforms for Money Market Funds
The update report describes the progress by IOSCO member jurisdictions in implementing the IOSCO policy recommendations on the reforms of the regulation for money market funds (MMFs).
The report covers on the progress in three reform areas, namely valuation practices of MMFs, liquidity management for MMFs and MMFs that offer a stable Net Asset Value (NAV).
The report concludes that most jurisdictions have implemented the fair value approach for the valuation of MMF portfolios. Progress in the implementation of liquidity management, however, is less advanced and differs across the various jurisdictions. Finally, approximately half of the jurisdictions now permit MMFs with a stable NAV. However, the number of this type of MMFs is limited and these MMFs are regulated with adequate safeguard.
The IOSCO update summarizes the results from a limited-scope review on the progress of IOSCO member jurisdictions in the implementation of the recommendations on incentive alignment for securitisation. The focus of the initial peer review was on the evaluation of incentives across the securitisation value chain, the implementation and elements of the approach to incentive alignment and the disclosure requirements for issuers.
The update report states that the implementation progress differs over the jurisdictions. Only half of the jurisdictions have final measures in place for incentive alignment, while even less jurisdictions already enforce measures for disclosure.
IOSCO and CPMI issue reports on key data elements in OTC derivatives
A new report published by the International Organization of Securities Commissions (IOSCO) addresses reporting governance in the over-the-counter (OTC) derivatives market.
The report, jointly written with the Committee on Payments and Markets Infrastructure (CPMI), names key criteria for respective data elements. This marks the next step to increase transparency, evade systemic risk and avoid market abuse.
For more information, please check the IOSCO website.