AFME is pleased to publish “Anti-Money Laundering Transaction Monitoring in the Markets sector” in collaboration with EY. A key challenge that the industry faces is how to best identify money laundering activities. This has intensified in recent years following high profile cases in the capital markets space which has, understandably increased regulatory scrutiny of firms’ Anti-Money Laundering (AML) controls. Firms do already have established Anti-Financial Crime programmes, designed to detect suspicion of money laundering, supported by AML transaction monitoring (TM). In this paper we consider the effectiveness of the processes that make up a firms AML TM control framework and provide a road map to support firms in designing and operating the most effective solution. To enable this, we have explored several key themes in the preparation of this paper. We consider how effective the current AML TM approaches in the markets sector are and we review the results that they yield. We identify how existing AML TM systems can be enhanced and we consider the evolving skillset that is needed to support this. We also look at the use of data, technology, and enhanced analytics to further drive improvements, building stronger more efficient solutions and leveraging opportunities for intelligence-led investigations. We also review the processes around the submission of Suspicious Activity Reports (SARs) and explore the advantages to the sector as a whole in establishing greater collaboration between private and public sector bodies. We conclude by considering the benefits of convergence, between market abuse surveillance function and the AML TM function.

MiFID II introduced obligations to record telephone conversations and any electronic communications that are intended to lead to a transaction. Records must be kept for at least five years. The Covid-19 pandemic, which began in 2020, saw the majority of AFME member firms move towards a predominantly home-based model of remote working. Firms also saw a significant increase in their use of electronic communications and videoconferencing tools; for providing training and onboarding of new staff, as well as for communicating with employees and certain clients. European regulators acknowledged the disruptive effects of Covid-19 and introduced measures to alleviate some regulatory obligations. In particular, ESMA recognised that, considering the exceptional circumstances resulting from the Covid-19 outbreak and despite steps taken by firms, the recording of relevant conversations required by MiFID may be impracticable in some scenarios. However, many also maintained that firms should continue to meet regulatory requirements for the recording of telephone conversations or electronic communications. Notably, Julia Hoggett, FCA Director of Market Oversight, clarified in her speech ‘Market abuse in a time of coronavirus’ that the FCA expects that, going forward, office and working from home arrangements should be equivalent. Firms are expected to update their policies, refresh training and issue reminders on firms’ policies. Firms must also ensure adequate oversight and surveillance of their firms use of electronic communications and identify and mitigate any new risks the new remote working environment may create. Regulators are clear that use of privately owned devices where recording is not possible, should be prevented. Firms must formally approve the use of new communication channels ensuring that controls are in place to prevent market abuse and protect the firm’s data. With this in mind, members of AFME’s Compliance Issues working group worked with Latham & Watkins to produce this key industry considerations paper. The paper focuses on the legal and regulatory framework, identifies the risks that firms are facing – including the impact of remote and hybrid working, which was amplified as a result of Covid 19 - and provides examples of good practice to manage and mitigate those risks. It also provides recommendations for industry and regulators in adapting to the changing environment, be that hybrid working or in embracing innovation and new technology. The paper is also intended to be used within firms to support discussions between legal, compliance, surveillance, and board level committees, to help firms to understand, and potentially harmonise, the industry’s approaches towards mobile devices and e-comms. The paper will also be used to support discussions with European regulators. Please note that this Paper is intended for general informational purposes only, and does not provide, and does not constitute, investment, tax, regulatory, business or legal advice to any individual or entity.

The Association for Financial Markets in Europe (AFME) and PwC have published a new report “Conduct Analytics - Insights-led and Data-driven: The Future of Conduct Risk Management”. One of the challenges consistently highlighted by our Members is the need to develop better data and analytics relating to conduct to identify and (ideally) pre-empt conduct risk. This paper explores how firms can address this by evolving their Conduct risk management frameworks to make better use of Conduct Analytics, supported by a clear and effective Conduct Analytics framework. For many banks, the use of Conduct Analytics is a journey, with some firms further advanced than others. In recognition of this, we provide a blueprint for firms to use as they develop and review their frameworks, focusing on an “insights-led and data-driven approach”. There are several key factors that will underpin the success of the advanced use of Conduct Analytics; Firstly, it is important for firms to recognise the value in using Conduct Analytics to efficiently identify patterns and trends which in turn provide valuable insights across their entire business. Secondly, approaches should be agile and evolve in line with the needs and progression of the business, calibrated to identify new risks as they emerge and periodically reviewed to ensure their effectiveness. Thirdly, the paper encourages firms to strengthen their efforts to measure and monitor culture and suggest that in doing so, firms will be able to reduce the additional policing of individuals.

A new report published today by the Association for Financial Markets in Europe (AFME) and Protiviti outlines potential key regulatory barriers to the greater adoption of cloud services in capital markets and provides recommendations for policymakers and Cloud Service Providers (CSPs) to assist banks with their adoption. The report entitled “Building Resilience in the Cloud” finds that, while banks are increasing migration to the cloud and identifying solutions to address regulatory concerns, two solutions that are becoming increasingly proposed by policymakers - portability and multi-cloud strategies – are likely to introduce further barriers to adoption. The report presents an assessment of five scenarios, covering the failure of a CSP in a particular region through to the loss of an entire CSP globally, to highlight why these solutions may not be appropriate in all instances. The report finds that the proposed recommendations from policymakers around portability and multi-cloud strategies would present significant challenges to banks from adopting a risk-based approach, limiting the benefits of cloud services and increasing the technical complexity to support multiple CSPs. James Kemp, Managing Director, AFME, said: “Banks are adopting cloud for a wide range of benefits, including greater business agility, innovation opportunities, and the ability to increase their security and resilience. We have seen through the pandemic that cloud services have been fundamental to enable remote working and provide access to core IT and business services. “However, emerging policy in the EU and globally is in danger of mandating how banks adopt cloud because of the perceived risks for security, the concentration of providers, and resilience of the sector overall. While the solutions being discussed, such as ensuring portability or the use of multi-cloud strategies, can provide resiliency benefits, they risk introducing significant limitations and complexity which would lead to reduced cloud adoption overall. “Banks should not be limited in taking a risk-based approach tailored to their cloud usage and technical needs allowing them to deploy multiple complementary solutions for resilience, rather than specific solutions being mandated for all.” James Fox, Director, Enterprise Cloud at Protiviti, said: “With digital transformation continuing to drive the adoption of cloud within financial services, we have seen that banks in particular are becoming increasingly more confident in using the cloud for sensitive workloads. Despite increased regulatory attention, we have seen an overwhelming demand from banks for access to new and innovative services powered by the cloud, which increases security and resilience and enables banks to quickly react to unforeseen events, such as COVID-19, due to the flexibility and configurability of the cloud. By working with banks on this paper, we have seen the range of mechanisms that are actively being used to enhance the security and design of cloud infrastructure that allows incidents to be resolved quickly and efficiently. Whilst banks are proactively taking a risk-based approach to the adoption of the cloud, there is a need for further clarity on cloud resilience, risk requirements and the opportunities that exist for sharing best practice between banks.“ Recommendations in the paper where policymakers and engagement from CSPs can assist banks with the resilient adoption of cloud services include: Ensure regional and global alignment on cloud resilience and risk expectations; Enhance information sharing and transparency requirements for CSPs; Promote increased comparison amongst CSP service offerings; and Encourage cloud cross-border data flows and storage. – Ends –

A new report published today by the Association for Financial Markets in Europe (AFME) and Protiviti outlines potential key regulatory barriers to the greater adoption of cloud services in capital markets and provides recommendations for policymakers and Cloud Service Providers (CSPs) to assist banks with their adoption. The report entitled “Building Resilience in the Cloud” finds that, while banks are increasing migration to the cloud and identifying solutions to address regulatory concerns, two solutions that are becoming increasingly proposed by policymakers - portability and multi-cloud strategies – are likely to introduce further barriers to adoption. The report presents an assessment of five scenarios, covering the failure of a CSP in a particular region through to the loss of an entire CSP globally, to highlight why these solutions may not be appropriate in all instances. The report finds that the proposed recommendations from policymakers around portability and multi-cloud strategies would present significant challenges to banks from adopting a risk-based approach, limiting the benefits of cloud services and increasing the technical complexity to support multiple CSPs.

The Association for Financial Markets in Europe (AFME) and Capco have published a new report exploring the benefits of global operating approaches in capital markets and the implications of emerging EU and global policy, which risks driving localisation. Banks use global approaches to provide operations and technology services across the various locations and markets in which they operate, bringing efficiency, resilience, regulatory, service and cost benefits. However, policymakers in the EU and globally have an increasing focus on the impact of financial markets becoming more interconnected, covering third-party providers, outsourcing, intragroup arrangements, and operational resilience. This focus could result in requirements on banks to localise operations and technology services, ultimately impacting broader policy objectives by increasing funding costs for clients and investors and reducing investment in more resilient technologies and operations. Collaboration between banks and policymakers will be essential to consider any future policy impacts on global operating approaches. A risk and principles-based approach is needed to consider the implications of more interconnected financial markets against the efficiency and benefits of how todays banks operate. The report can be accessedhere.

The “Global Guiding Principles for Developing Climate Finance Taxonomies –A Key Enabler for Transition Finance” is a follow-up to one of the recommendations in GFMA/BCG report from December 2020,Climate Finance Markets and the Real Economy, Sizing the Global Need and Defining Market Structure to Mobilize Capital. Similarly, the scope of this paper is limited to Climate Finance taxonomies and does not cover broader environmental, social, and governance (ESG) taxonomies. Climate Finance taxonomies help enable financing, providing guidelines for investors and credit institutions on how “climate-aligned” a given corporate is at the entity level, or the alignment of specific activities undertaken by an entity to science-based pathways. Taxonomies should not be used as proxy for physical, transitional, or prudential risk assessment of financial institutions. A taxonomy captures only a snapshot of a corporate’s activities; therefore, to comprehensively understand a corporate through the lens of Climate Finance, a taxonomy should be used in conjunction with forward-looking decision-relevant metrics, enabled by mandatory disclosures. The report identifies that all existing and new taxonomies should be assessed against five global principles: Climate Finance taxonomies should be broadened beyond use of proceeds structures (e.g. green bonds) to capture entity-level activities and all eligible sources of capital. Climate Finance taxonomies should be objective in nature, supported by clearly defined metrics and thresholds aligned to theParis Agreement, and science-based targets. Climate Finance taxonomies should have a consistent set of principles and definitions, but provide flexibility for regional and temporal variation to align with differences in transition pathways. Climate Finance metrics should be defined and applied to sectors using science-based targets, balancing ease of use with transparency and robustness to both assess climate impact and support third-party verification. Climate Finance taxonomies should be based on a governance process that is robust, inclusive, and transparent, and has the flexibility for continued evolution. All existing and new taxonomies should be assessed against these global principles for Climate Finance taxonomies as well as the conclusions factored into shaping future enhancements and development of new taxonomies. The five principles are by design high level and not prescriptive for applications that are based on regional or nationally defined contributions, climate targets and policies, and sector-specific transition pathways. They are designed to be foundational in the development of Climate Finance taxonomies by ensuring key features underpinning each principle are considered (see checklists within the report).

A new report published today by Oxera and commissioned by the Association for Financial Markets in Europe (AFME), provides evidence that the majority of equity trading in Europe (83%) takes place on venues[i]. A much smaller share (17%) takes place off-venue on alternative trading mechanisms known as systematic internalisers[ii] (SIs) and over the counter (OTC). This in-depth analysis counters claims that SIs and OTC transactions are disproportionately dominating the European equities landscape. These misperceptions have been based on raw trading data compiled by ESMA from national authorities and is not granular enough to distinguish between different trading modalities. As such, it does not provide an accurate picture of the equities trading landscape in the EU. Adam Farkas, Chief Executive of AFME, said: “This latest analysis from Oxera highlights how existing raw equity trading data reported to ESMA can inaccurately represent the trading landscape and to influence policymaking with the risk of perpetuating the dominance of exchanges in equity trading. This is cause for concern because an overly concentrated trading landscape hampers competition, investor choice and keeps costs of trading high. Ensuring sufficient diversity of trading is to the benefit of individuals’ pensions and savings, whether it is via their direct participation in markets, or via the institutional investors which represent them. A lack of competition in trading on the EU’s secondary markets may also be holding back the growth of primary markets which are underdeveloped compared to the size of the EU economy.” “AFME is therefore calling for improvements to regulatory data definitions and collection processes to be prioritised in the upcoming MiFIR Review so that policymakers have an accurate picture of EU market developments and can compare them internationally. The Review should not privilege any particular trading mechanism - otherwise we risk running counter to its objectives of improving market liquidity and investor outcomes.” Reinder Van Dijk, Partner at Oxera, said “When considering the European equity trading and liquidity landscape, policymakers and market practitioners may have different questions depending on their perspectives of interest. A significant volume of OTC and SI reported transactions are technical in nature. While technical trades may be relevant from a supervisory and/or post-trading perspective, it is not informative to include them in an analysis of the trading and liquidity landscape. Oxera’s analysis of the trading and liquidity landscape in this report applies filters to the full universe of reported equity transactions to distinguish true economic trading activity from the reporting of technical transactions. Although Oxera’s report provides more clarity, further work is required to obtain a precise view of the equity trading and liquidity landscape in Europe.” – Ends – [i] Trading venues are Regulated Markets and Multilateral Trading Facilities (MTFs). Trading mechanisms that take place under the rules of a trading venue can be broken down into the categories: lit order book, auctions, dark venues, and off-book on-exchange. [ii] Systemic Internalisers are investment firms using their balance sheets to trade with clients at their own risk. By doing so, they play an important role allowing trading to still take place when other market participants are unable or unwilling to trade. Their trades are made visible to the rest of the market after execution to avoid market prices moving before the trade takes place, which would otherwise amplify the risk they take.

The Association for Financial Markets in Europe (AFME) has launcheda report highlighting the need for financial institutions to have access to consistent non-financial reporting from corporates to be able to support the transition to a low-carbon economy. TheEuropean ESG Disclosure Landscape for Banks and Capital Marketsreport, written in partnership with Latham & Watkins, maps the complex ESG reporting landscape for financial institutions. It calls on policymakers and regulators to build a coherent framework to support sustainable finance by: prioritising the availability of high-quality data from non-financial corporates; providing clarity, avoiding inconsistencies and duplication between reporting requirements for financial institutions, and; taking into account the global nature of financial institutions.

AFME is pleased to present its views and recommendations on key priority areas in the sixth Capital Requirements Directive and the third Capital Requirements Regulation (CRD6/CRR3). The legislative proposal is expected to be published by the European Commission in mid-2021 and will come at an important juncture when policymakers are dealing with the fallout from the Covid-19 crisis and the need to ensure a strong and sustained economic recovery. This makes it even more important that the impact of CRR3 is correctly assessed and carefully calibrated, so that it is designed and implemented in a way that does not, unintentionally, constrain banks’ ability to support the economy. At the same time CRR3 needs to be considered in the context of EU’s urgent priorities to complete the Banking Union, reduce fragmentation of financial markets and develop and deepen Europe’s capital markets through the establishment of a genuine Capital Markets Union. In this publication, drafted in cooperation with ISDA, we present our recommendations for a CRR3 that is faithful to the overarching objectives contained in Basel III but which at the same time reflects the priorities outlined above.