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AFME and Protiviti report warns of potential barriers to adoption of cloud services in capital markets
22 Sep 2021
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 –
GFMA and BCG Global Principles for Developing Climate Finance Taxonomies
16 Jun 2021
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).
The landscape for European equity trading and liquidity
1 Jun 2021
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.