Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements: Progress Report on the implementation of the FSB High-Level Recommendations

7 October 2021 | PDF full text (558 KB)

Fostering the soundness of “global stablecoins” is Building Block 18 of the FSB roadmap to enhance cross-border payments.

This report:

  • discusses key market and regulatory developments since the publication of the FSB high-level recommendations in October 2020;
  • takes stock of the implementation of the FSB high-level recommendations across jurisdictions;
  • describes the status of the review of the existing standard-setting body (SSB) frameworks, standards, guidelines and principles in light of the FSB high-level recommendations; and
  • identifies areas for consideration for potential further international work.

The report notes that, overall, the implementation of the FSB high-level recommendations across jurisdictions is still at an early stage. Jurisdictions have taken, or are considering, different approaches towards implementing the high-level recommendations, which could give rise to the risk of regulatory arbitrage and harmful market fragmentation.

The report also notes that standard-setting bodies, including BCBS, CPMI, and IOSCO are assessing whether and how existing international standards and principles may apply to stablecoin arrangements and, where appropriate, adjusting them in light of the FSB high-level recommendations. The report stresses that a number of issues may not be fully covered by existing standards and principles and that gaps should be addressed in a holistic manner that is coordinated across sectors..

Authorities have identified several issues relating to the implementation of the recommendations that may warrant further consideration and where further work at international level could be useful. These include: conditions for qualifying a stablecoin as a “global stablecoin”; prudential, investor protection, and other requirements for issuers, custodians, and providers of other global stablecoin functions (e.g. wallet providers); redemption rights; cross-border and cross-sectoral cooperation and coordination; and mutual recognition and deference.

The FSB will continue to support the effective implementation of the FSB high-level recommendations and facilitate coordination among SSBs. The FSB will undertake a review of its recommendations in consultation with other relevant SSBs and international organisations. The review, which will be completed in July 2023, will identify how any gaps could be addressed by existing frameworks and will lead to the update of the FSB’s recommendations if needed.

FSB publishes progress report on the regulation, supervision and oversight of “global stablecoin” arrangements

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Ref: 21/2021

The FSB today published a report on the progress made on the implementation of its high-level recommendations for Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements.

The report incorporates the results of a comprehensive stocktake of the implementation of the FSB’s high-level recommendations in 48 jurisdictions in the FSB and its Regional Consultative Groups, covering 21 advanced economies and 27 emerging market and developing economies.

The report notes that the market capitalisation of existing so-called “stablecoins” has continued to grow over the course of 2020/21. Overall, however, the implementation of the FSB high-level recommendations across jurisdictions is still at an early stage. Jurisdictions have taken, or are considering, different approaches towards implementing the recommendations. To address the risk of regulatory arbitrage and harmful market fragmentation and the greater financial stability risks that could arise were stablecoins to enter the mainstream of the financial system, effective international regulatory cooperation and coordination are critical.

The report also notes that standard-setting bodies (SSBs), including BCBS, CPMI and IOSCO, are assessing whether and how existing international standards and principles may apply to stablecoin arrangements and, where appropriate, adjusting them in light of the FSB high-level recommendations. The report stresses that a number of issues may not be fully covered by ongoing work and that any gaps in existing standards and principles should be addressed in a holistic manner that is coordinated across sectors.

Authorities have identified several issues relating to the implementation of the recommendations that may warrant further consideration and where further work at international level could be useful. These include: conditions for qualifying a stablecoin as a “global stablecoin” (GSC); prudential, investor protection and other requirements for issuers, custodians and providers of other GSC functions (e.g. wallet providers); redemption rights; cross-border and cross-sectoral cooperation and coordination; and mutual recognition and deference.

The work on fostering the soundness of GSCs is an important part of the FSB’s Roadmap for enhancing cross-border payments endorsed by the G20 in October 2020. The FSB will undertake a review of its recommendations, in consultation with other relevant SSBs and international organisations. The review, which will be completed in July 2023, will identify how any gaps could be addressed by existing frameworks and will lead to the update of the FSB’s recommendations if needed.

The FSB is continuing to monitor closely FinTech developments and potential financial stability risks, including risks arising from the growth of crypto-assets and stablecoins in particular.

Notes to editors

The establishment of effective regulatory, supervisory and oversight approaches for GSC arrangements is a key building block (building block 18) of the FSB’s roadmap to enhance cross-border payments.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Governor and Vice Chair for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Principles on Outsourcing

1 October 2021

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Principle 1: A regulated entity should conduct suitable due diligence processes in selecting an appropriate service provider and in monitoring its ongoing performance.

Principle 2: A regulated entity should enter into a legally binding written contract with each service provider, the nature and detail of which should be appropriate to the materiality or criticality of the outsourced task to the business of the regulated entity.

Principle 3: A regulated entity should take appropriate steps to ensure both the regulated entity and any service provider establish procedures and controls to protect the regulated entity’s proprietary and client-related information and software and to ensure a continuity of service to the regulated entity, including a plan for disaster recovery with periodic testing of backup facilities.

Principle 4: A regulated entity should take appropriate steps to ensure that service providers protect confidential information and data related to the regulated entity and its clients, from intentional or inadvertent unauthorised disclosure to third parties.

Principle 5: A regulated entity should be aware of the risks posed, and should manage them effectively, where it is dependent on a single service provider for material or critical outsourced tasks or where it is aware that one service provider provides material or critical outsourcing services to multiple regulated entities including itself.

Principle 6: A regulated entity should take appropriate steps to ensure that its regulator, its auditors, and itself are able to obtain promptly, upon request, information concerning outsourced tasks that is relevant to contractual compliance and/or regulatory oversight including, as necessary, access to the data, IT systems, premises and personnel of service providers relating to the outsourced tasks.

Principle 7: A regulated entity should include written provisions relating to the termination of outsourced tasks in its contract with service providers and ensure that it maintains appropriate exit strategies.

FSB launches new financial stability surveillance framework

30 September 2021

Press enquiries:
+41 61 280 8477
[email protected]
Ref: 20/2021

The FSB today published its new Financial Stability Surveillance Framework. The framework supports the comprehensive, methodical and disciplined review of vulnerabilities by the FSB, and thereby helps to identify and address new and emerging risks to financial stability.

The framework embodies four key principles:

  • focus on vulnerabilities that may have implications for global financial stability;

  • scan vulnerabilities systematically and with a forward-looking perspective, while preserving flexibility;

  • recognise differences among countries; and

  • leverage the comparative advantages of the FSB while avoiding duplication of work.

The framework places particular emphasis on incorporating multiple perspectives in the assessment of both current and emerging vulnerabilities. It includes a common terminology and taxonomy – which defines key concepts such as vulnerabilities, shocks and resilience – that will aid shared understanding and consensus building amongst FSB members. It also distinguishes between global vulnerabilities that are currently material, those that may become material in the next 2 to 3 years, and those that may become material over a longer horizon.

Once identified, material global vulnerabilities will be subject to more intensive monitoring and analysis, and, as appropriate, policy dialogue among FSB committees. In addition, the FSB will communicate its view on vulnerabilities through its Annual Reports and other formats.

John C. Williams, President and Chief Executive Officer of the US Federal Reserve Bank of New York, who chaired the group that developed the framework, said “The new surveillance framework provides a global, cross-border and cross-sectoral perspective on current and potential emerging vulnerabilities that draws on the collective views of the FSB’s broad membership, as well as analysis by the FSB and outreach to private sector experts”.

Klaas Knot, President of De Nederlandsche Bank, Vice-Chair of the FSB and Chair of its Standing Committee on the Assessment of Vulnerabilities (SCAV) that oversaw the preparation of the report, said “The assessment of vulnerabilities in a rapidly evolving environment is a primary mission of the FSB and a cornerstone in maintaining financial stability. The new framework will further enhance the FSB’s ability to identify and address such vulnerabilities in a proactive manner”.

Notes to editors

The assessment of vulnerabilities affecting the global financial system is a core mandate of the FSB, as defined in the FSB Charter. Identifying material vulnerabilities facilitates monitoring by relevant public authorities and the preparation of policy actions to mitigate the financial stability risks posed by the vulnerabilities.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Governor and Vice Chair for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

FSB Financial Stability Surveillance Framework

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The assessment of vulnerabilities affecting the global financial system is a core mandate of the FSB.

The new surveillance framework will support the comprehensive, methodical and disciplined review of vulnerabilities, helping to identify and address new and emerging risks to financial stability.

The framework aims to identify vulnerabilities in a proactive and forward-looking manner. It provides a global, cross-border, and cross-sectoral perspective on current vulnerabilities that draws on the collective perspective of the FSB’s broad membership.

Operational Framework

The framework embodies four key principles:

  • focus on vulnerabilities that may have implications for global financial stability;
  • scan vulnerabilities systematically and with a forward-looking perspective, while preserving flexibility;
  • recognise differences among countries; and
  • leverage the comparative advantages of the FSB while avoiding duplication of work.

The framework places particular emphasis on incorporating multiple perspectives in the assessment of both current and emerging vulnerabilities. It includes a common terminology and common taxonomy of vulnerabilities, which will aid shared understanding and consensus building amongst FSB members.

The FSB will regularly communicate its view on vulnerabilities through its Annual Reports.

The use of artificial intelligence (AI) and machine learning (ML) by market intermediaries and asset managers

1 September 2021

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Measure 1: Regulators should consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and ML. This includes a documented internal governance framework, with clear lines of accountability. Senior Management should designate an appropriately senior individual (or groups of individuals), with the relevant skill set and knowledge to sign off on initial deployment and substantial updates of the technology.

Measure 2: Regulators should require firms to adequately test and monitor the algorithms to validate the results of an AI and ML technique on a continuous basis. The testing should be conducted in an environment that is segregated from the live environment prior to deployment to ensure that AI and ML: (a) behave as expected in stressed and unstressed market conditions; and (b) operate in a way that complies with regulatory obligations.

Measure 3: Regulators should require firms to have the adequate skills, expertise and experience to develop, test, deploy, monitor and oversee the controls over the AI and ML that the firm utilises. Compliance and risk management functions should be able to understand and challenge the algorithms that are produced and conduct due diligence on any third-party provider, including on the level of knowledge, expertise and experience present.

Measure 4: Regulators should require firms to understand their reliance and manage their relationship with third-party providers, including monitoring their performance and conducting oversight. To ensure adequate accountability, firms should have a clear service level agreement and contract in place clarifying the scope of the outsourced functions and the responsibility of the service provider. This agreement should contain clear performance indicators and should also clearly determine rights and remedies for poor performance.

Measure 5: Regulators should consider what level of disclosure of the use of AI and ML is required by firms, including: (a) Regulators should consider requiring firms to disclose meaningful information to customers and clients around their use of AI and ML that impact client outcomes. (b) Regulators should consider what type of information they may require from firms using AI and ML to ensure they can have appropriate oversight of those firms.

Measure 6: Regulators should consider requiring firms to have appropriate controls in place to ensure that the data that the performance of the AI and ML is dependent on is of sufficient quality to prevent biases and sufficiently broad for a well-founded application of AI and ML.

FSB Financial Statements: 2020-21

30 August 2021 | PDF full text (572 KB)

This report contains the FSB’s audited financial statements for the financial year 1 April 2020 to 31 March 2021. The report also details the FSB’s governance arrangements and its transparency and accountability mechanisms.

A detailed explanation of the activities undertaken to implement the mandate and tasks of the FSB is provided in the annual report on the implementation and effects of the G20 (post-2008 crisis) financial regulatory reforms, which will be published in November.

Application Paper on Macroprudential Supervision

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Macroprudential supervision is aimed at identifying and, where necessary, addressing both vulnerabilities of individual insurers and the insurance sector to shocks from the external environment (inward risks) and the build-up of systemic risk at the individual insurer level or within the sector as a whole that may be transmitted to the external environment (outward risks).

This Application Paper on Macroprudential Supervision provides further guidance on the supervisory material related to macroprudential supervision in Insurance Core Principle (ICP) 24. As part of the holistic framework for the assessment and mitigation of systemic risk in the insurance sector, the IAIS revised ICP 24 to more explicitly address, among others, the build-up and transmission of systemic risk at the individual insurer and sector-wide level. The Holistic Framework and ICP 24 were adopted by the IAIS Annual General Meeting in November 2019.

Continuity of access to FMI services (FMI intermediaries) for firms in resolution: Framework for information from FMI intermediaries to support resolution planning

20 August 2021 | PDF full text (323 KB)

Access to FMI services is essential for banks to be able to continue performing their critical functions or critical services under all circumstances, including in cases where banks need to be resolved.

In 2017, the FSB published its Guidance on Continuity of Access to Financial Market Infrastructures for a Firm in Resolution. The Guidance sets out arrangements and safeguards to facilitate continuity of access to FMI services for a firm in resolution with a view to maintaining the firm’s critical functions that rely on the continued access to FMI services. As part of implementing the Guidance, authorities and firms (as FMI service users) develop plans to facilitate continuity of access in resolution. This requires information about the nature of the FMI service user’s relationship with both FMIs and FMI intermediaries on the arrangements and safeguards that would affect an FMI service user’s access to FMI services in the run-up to, and during, its resolution.

Following a workshop held in May 2019 with stakeholders about the implementation of the Guidance, the FSB developed a questionnaire for FMIs to aid resolution planning for firms that use FMI services and their resolution authorities (RAs), which has now been revised. FMI intermediaries were out of scope of that questionnaire, in view of the more bespoke nature of their relationships with FMI service users.

Following on from this, the FSB has considered how it can most effectively support firms and RAs in accessing the information they need from FMI intermediaries to prepare their resolution plans, and how it can support FMI intermediaries in meeting the needs of their clients and their clients’ RAs.

The framework set out in the document published today seeks to help FMI intermediaries better understand which information clients and their RAs may need from them. It does so by providing an overview of the baseline information that is potentially relevant for clients and RAs, which they and FMI intermediaries can then discuss, as needed, in their bilateral engagement. Thus the framework makes it more predictable for FMI intermediaries which topics could be part of information requests from their clients and/or from their clients’ RAs. This could potentially allow them to identify opportunities to streamline their response process, reducing the resources required to provide this information.

As part of our outreach, the FSB will host a webinar for stakeholders on this Framework on 16 September 2021. Representatives of FMI service providers, FMI service users and authorities who would like to attend should contact [email protected] for more details.

Continuity of access to FMIs for firms in resolution: Streamlined information collection to support resolution planning (revised version 2021)

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This questionnaire updates the previous questionnaire for FMIs, which was published in August 2020. It has been revised following an evaluation of stakeholders’ first experiences with the process via an online survey in April 2021. While a large majority of respondents (from various perspectives) indicated that the questionnaire template was useful, a number of suggestions were also made. To the extent feasible, these have been incorporated as clarifications or amendments to the introductory section. No major changes have been made to the questionnaire itself – this keeps the burden for FMIs low when they next update their responses.

The questionnaire was developed in consultation with FMIs, FMI participants and FMI oversight authorities. It covers general information on the FMI and its legal structure; (the rulebook/contractual provisions regarding termination; and arrangements and operational processes to facilitate continued access in resolution. It is designed to reduce the burden of duplicative information-gathering efforts by streamlining the collection of certain baseline information relevant to continuity of access in resolution. The questionnaire aims to reduce the “many to one” nature of inquiries from FMI participants and authorities to FMIs for resolution planning and streamline the provision of this information from FMIs to firms and authorities through the use of a common template.

All FMIs are encouraged to complete the questionnaire and to publish their responses, or to make them available in other ways to FMI service users and resolution authorities to inform their resolution planning.

The FSB emphasises that if an FMI chooses not to complete the questionnaire, it should be prepared to respond to its clients’ (and their resolution authorities’) information requests within reasonable deadlines as mutually agreed.