The 2023 Annual Review, "Remaining resilient in turbulent times – steps taken towards competitive capital markets", summarises AFME's work over the past year. Capital markets have continued to evolve in a turbulenteconomic and geopolitical environment this past year. Rapid reversals of conditions manifested in some stress events in the banking system. Nevertheless, capital markets have demonstrated resilience. AFME's efforts have been dedicatedto reinforcing capital markets, ensuring their ability to bolster the real economy and serve the diverse needs of stakeholders, including investors and savers.

AFME is supportive of the development of a thriving digital economy within a clear legal and regulatory framework. As these frameworks continue to emerge around the globe, we believe that this is a crucial moment for the financial services industry and regulators to mitigate risks and prevent any unintended gaps in regulator perimeters. In particular, we believe it is crucial to avoid the potential exclusion of so-called “decentralised activities” as this could open opportunities for regulatory arbitrage and weaken the application of emerging frameworks. This exclusion could create unintended risks to financial stability and potential knock-on impacts. While as noted by the Financial Stability Board (FSB) the current overlap of DeFi and Traditional Finance (TradFi) is not yet significant, this should be actively monitored and managed. Our white paper discusses the following principes: The importance of developing a foundational taxonomy classification mechanism for DeFi (and DeFi activities) as well as digital assets. Further research and global cooperation should be encouraged to determine the appropriate, proportionate, and comprehensive regulatory solutions for the unique challenges posed by DeFi. It is crucial to leverage existing processes and frameworks to create a holistic regulatory perimeter. Our paper includes recommendations for: Requiring authorisation prior to conducting regulated financial activities; The importance of choosing an appropriate accountability structure; An initial industry view on establishing a risk-based approach to DeFi; and Support for a ‘Level Playing Field’ and working towards consistent regulation despite varying levels of centralisation. However, in discussing these principles it is important to note that this area of the market is still rapidly evolving and changing. This paper is not intended to be a definitive solution to the challenges posted by DeFi. It is instead a foundational piece of work to further explore some of the technical issues posed by this new area of digital finance, as well as raise some initial proposals on how DeFi could be addressed from a regulatory standpoint. We aim to open an initial discussion across industry on this topic, and look forward to continuing to work on innovative policy solutions for DeFi with both the public and private sector, especially as we look ahead to the Regulatory Technical Standards (RTS) for the Markets in Crypto Assets (MiCA) Regulation, and eventually MiCA 2.

The Association for Financial Markets in Europe (AFME) and Oliver Wyman have today published a new report entitled “A Common Path to improve European Climate Risk Stress Testing and Scenarios Analysis”. The report outlines the key challenges EU banks are experiencing surrounding climate risk stress testing and provides recommendations to improve future stress tests. The report finds that, since the last ECB climate risk stress testing exercises, banks have developed sophisticated approaches to improve their understanding and analysis of climate risks internally, taking inspiration from lessons learned and supervisory guidance in place. The report discusses key highlights from banks’ experience and understanding so far, while outlining areas of focus to improve future climate stress tests and scenarios analysis. Following a survey of 15 of AFME’s member banks and engagement with relevant regulatory and supervisory authorities, such as the ECB, EBA and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), the report highlights key challenges that EU banks are currently experiencing in terms of: scope, data, time horizons, scenarios and different risk types. The report also provides several recommendations for policymakers in order to improve future climate risk stress tests and scenarios analysis. In this respect, AFME’s member banks suggest further supervisory provisions, including: materiality thresholds, consistent data governance framework and collection guidance, meaningful and quantifiable scenario analysis (not solely limited to credit risk) with shorter time horizons, and a framework for nature-related risk considerations in line with the work of the TNFD and NGFS. The paper follows a previous AFME publication on industry learning from the 2022 ECB climate stress testand aims to bridge efforts of banks and policymakers to improve climate risk stress testing methodology and data. AFME urges further collaboration between banks and policymakers to engage on meaningful solutions, in line with the detailed recommendations set out in the report.

AFME has today published a new reportidentifying the key challenges relating to compliance with investor due-diligence requirements under Article 5 of the Securitisation Regulation in the EU and UK and suggesting potential strategies to overcome such challenges. The report finds that, under Article 5, investors are likely to interpret ambiguous provisions conservatively and in doing so will assume disproportionately high costs to the business. In addition, the report says that the regulation substantially reduces agility and flexibility in the investment process, thereby materially reducing investment opportunities for new investors, regardless of the credit risk, which in turn, impacts liquidity in the secondary markets and results in a less efficient market for all. These factors have the unintended effect of creating such high barriers to entry, even for seasoned credit investors, that it becomes challenging to build a business case to participate in the ABS market.

The Global Financial Markets Association (GFMA) together with Boston Consulting Group (BCG), Clifford Chance and Cravath, Swaine & Moore LLP, have today published a new report highlighting the potential transformative benefits of Distributed Ledger Technology (DLT) for capital markets and calling for market participants to proactively shape its future use, as well as for greater regulatory clarity from policy makers. The report, “The Impact of Distributed Ledger Technology in Global Capital Markets” evaluates the opportunities and risks of DLT and DLT-based securities and assesses the applicability of existing legal, regulatory, and risk management frameworks. To illustrate the potential of DLT in capital markets, the report examines three emerging use cases: collateral management; tokenization of assets; and sovereign and quasi-sovereign bonds. The report finds that DLT could unlock transformative cost-saving and operational efficiency benefits (for example, approximately $20 billion annually in global clearing and settlement costs) and innovation-led growth, broader market access, and new liquidity pools when operating at scale (e.g., approximately $16 trillion global market for tokenized illiquid assets by 2030). Despite the growing momentum in developing DLT use cases, the report also acknowledges that, there is still no widespread adoption in securities markets, with most DLT-based issuances to date largely experimental exercises due to the challenges identified. GFMA therefore sets out five calls to action, for industry participants and regulators, to overcome existing barriers to adoption and advance the development of DLT-based capital markets: · Harmonize global regulatory and legal frameworks for clear and unambiguous definition of the key terms and risk mitigants required to support the development of a transparent, disciplined, risk-focused, and effective digital market infrastructure. · Enable interoperability by building consensus on common standards and vision for DLT-based markets to guide market linkages with traditional market infrastructure. · Drive faster adoption by prioritising resources in asset classes where DLT has the most upside potential to help pool and deepen liquidity, particularly for illiquid assets. · Collaborate on the advancement of DLT to promote technical solutions, including around scalability, cybersecurity and regulatory compliance. · Continue the development of DLT-based payment solutions, such as tokenized commercial bank money and deposits, to facilitate safe and efficient settlement processes. The GFMA has developed an approach to the classification of digital assets that reflects the principle that the treatment of digital assets should be underpinned by a clear methodology for identifying different types of digital assets’ risk. This will allow for tailored regulatory treatment, to mitigate reputational risks caused by conflating different use cases of DLT, as well as promoting legal clarity and confidence for asset managers, investors, and issuers.

AFME has today published a paper on Liquidity Provision and Risk Management in Corporate Bond Markets. This document is intended to provide insight into the technical complexities and uncertainties inherent in hedging market risks assumed by banks when providing liquidity on demand to end investors. This report follows on from AFME's “MiFIR 2021 Corporate Bond Trade Data Analysis and Risk Offset Quantification” report, co-authored with Finbourne Technology, and seeks to provide further in-depth and technical analysis. This paper focuses on the material differences between fully trading out of a risk position (100% out of risk) and hedging the various market risks associated with holding that position. The report also aims to explain how these inherent complexities and uncertainties are relevant for, and should inform, the ongoing reviews of MiFIR post trade transparency and deferral regimes being conducted in both the EU and UK.

AFME has today published an updated edition of the 2021 Sustainable Finance in Europe: Regulatory State of Play report. The progress in the development of the European sustainable finance regulatory framework hasn't shown signs of slowing down since the publication of our last report. This rapid rate of change, combined with the overwhelmingly positive feedback from stakeholders, encouraged us to renew AFME's partnership with Linklaters and publish this updated version for 2023. Thisreportreviews the latest developments and their impact on banks and capital markets, providing a practical guide to the wide range of initiatives in Europe. It aims to help members keep track of the main sustainable finance-related regulatory developments within the European Union, the United Kingdom and Switzerland. This guide was first published in November 2021 but has now been updated to reflect the developments that have occurred since then.

AFME has today published a new report entitled "European Green Securitisation Regulatory State of Play".The report sets out a comprehensive overview of the current European regulatory landscape for green securitisation, highlighting the challenges preventing it from fully contributing to Europe’s green transition, as well as the full scale of its potential growth by 2030. The report shows that the European green securitisation market is lagging behind other global jurisdictions, including: In the course of five years, only 24 securitisation transactions with ESG characteristics have been issued. Although Europe is a leading region for green and sustainable bonds, Europe’s green securitisation market remains subdued. For instance, between 2019-2022 green securitisation issuance represented only 1.4% of total European green issuance, whereas it accounted for 8.1% in China and 32.3% in the US. The report also examines the potential scale of future green securitisation issuance by 2030 providing estimates for growth based on data from S&P Global Ratings. The findings are: Residential mortgage loans on energy-efficient properties: Gross green mortgage lending could reach €125 billion annually across eight European RMBS markets, i.e. Belgium, France, Ireland, Italy, the Netherlands, Portugal, Spain and the U.K. Lending for green home renovation: If residential buildings reach a 3% renovation rate by 2030, this could generate an annual funding requirement of about €75 billion, which may partly be addressed by further mortgage advances that are securitisable. This figure assumes a fully-funded typical renovation cost of about €17,000 per property, and considers the same eight European RMBS markets mentioned above. Electric auto financing: In respect of new battery electric vehicles, securitisable financing could reach €80 billion annually, while there could be a further €30 billion in annual financing required for used ones. These estimates concern only the five major European auto ABS markets, namely France, Germany, Italy, Spain and the U.K.

AFME and Protiviti have published a new report entitled“State of Cloud Adoption in Europe - Preparing the path for cloud as a critical third-party solution”,outlining four key barriers holding back the pace of cloud adoption within the financial services sector. The reportfinds that while cloud can clearly be an enabler for financial services innovation, some key barriers are currently making it harder for firms to adopt and fully leverage its potential. The paper sets out four key challenges that financial institutions are currently experiencing, including: Concentration of Cloud Services Globally, 65% of Cloud services are provided by just three entities, whose dominance is raising concerns among financial regulators, highlighting the risk of concentration in the Cloud marketplace. Regulatory Complexity Regulatory fragmentation, uncertainty and the time required for regulatory approvals is preventing financial institutions from innovating, slowing the pace of Cloud adoption. FIs are also subject to multiple different regulators that may ask for the same information in different formats and through different channels. Data Localisation The forthcoming EUCS certification framework could have far-reaching negative implications if the proposals to achieve “immunity against third-country law” via EU control requirements are adopted. Management of Disruption in the Cloud Several high-profile Cloud service outages have highlighted the need for greater visibility and confidence in Cloud providers’ abilities to predict, manage and communicate disruptions to their Cloud services. Regulators expect FIs to have primary responsibility for resisting threats to operational resilience, to guard against service disruptions and to recover from incidents. The paper provides nine recommendations for policy makers in order to help address these challenges.

AFME and EY have today published a new report“Into the Wild: Why nature may be the next frontier for capital markets”.The report, published in the lead up to the COP15 UN Biodiversity Conference, explores how finance can be channelled to help address nature loss. With more than half of global GDP dependent on nature, natural capital financing is rising up the agenda for policy makers, investors and the financial services sector. The global biodiversity financing gap has recently been estimated at USD 598-824 billion per annum. While growing investor demand is creating new opportunities to develop nature-related financing products, the report finds banks and other market participants face challenges in mainstreaming and scaling nature finance products. Key challenges include a lack of verifiable data and common metrics for nature and biodiversity. The report also provides an overview of the natural capital finance products currently in the market and showcases a number of case studies of innovative practices currently being used by AFME members. The report concludes by examining the current regulatory landscape and makes five key recommendations for policy developments that can help direct capital towards solutions to conserve and restore nature: Gathering and translation of nature-related data into decision-grade data for financial services; A strong global nature reporting framework; Agreement on how to define measurable, meaningful impact on biodiversity through metrics and key performance indicators (KPIs) Standardisation of product classifications; and Development of a currency for nature.