APAC 2024 Regulatory Outlook | Insights

Risk, capital and financial stability

Authorities across the APAC region are engaged on various regulatory initiatives to promote greater investment flow and strengthen financial stability.

Banking regulation

Implementation of the ‌Basel III standards governing bank capital requirements is a key consideration throughout the region. Japan is one of the early leaders in its Basel III implementation effort with capital rules applying first to major banks since March 2023 and then to regional banks from March 2025. For market risk in particular, both Hong Kong and Singapore have confirmed that they will introduce reporting requirements from July 2024 and then the capital adequacy and disclosure requirements from January 2025. Elsewhere, India has issued rules on capital requirements for operational risk and earlier Malaysia’s regulator issued a new policy document setting out the standards for credit risk management which came into effect on 1 January 2024.

APAC banking regulators have more on their plate than just new capital requirement rules. For example, Hong Kong is considering changes to simplify its current three-tier structure into a two-tier system with deposit-taking companies falling under the same category as restricted license banks. Australia has finalized new rules to strengthen the crisis preparedness of banks, insurers, and superannuation funds. Australia will also review the treatment of liquid assets and bank liquidity risk, and new requirements will likely take effect from early 2025. Other priorities for Australia’s banking regulator in 2024 will include interest rate risk in the banking book, market risk, and improving the effectiveness of additional Tier 1 capital instruments.

Emerging risks

The risks that non-bank financial institutions pose to wider financial stability continues to rise as a prominent regulatory concern, and the Reserve Bank of Australia is actively exploring the risks that emerge from non-traditional, interconnected, and complex parts of the financial sector such as superannuation funds. Similarly, Japan is set to review major banks’ exposure to overseas commercial real estate in light of the rapid rise in interest rates and the sensitivity of the sector to this new macroeconomic environment.

Asset management & liquidity

The APAC asset management sector can anticipate further regulatory reform this year. Japan’s Government has designated asset management reform as a strategic national priority which includes requiring financial groups to review on asset management business strategy product governance, amongst other plans to encourage market entrants.  Malaysia will soon issue final requirements for liquidity risk management to ensure that effective assessment of exposures to liquidity risk. The new requirements will take effect six months after publication. Similarly, New Zealand is due to set out its approach to liquidity policy issues, following industry consultation, such as liquid asset eligibility criteria and stable funding requirements.

Insurance

The rules governing the insurance sector are subject to reform in jurisdictions such as Hong Kong, which has introduced the draft requirements for the risk-based capital regime for the insurance industry. This new regime will render capital requirements more sensitive to their asset and liability matching, risk profile and mix of products. Meanwhile, Singapore has also set out the requirements under the risk-based capital framework for all licensed insurers, including the way in which assets and liabilities are to be valued.

Digital finance

With relatively young and technologically nimble demographics, the APAC financial services sector provides fertile ground for the adoption and testing of new technologies. Regulators across the region are keen to help lead the next phase of digital transformation in financial services through the development of safe but flexible regulatory regimes.

Artificial intelligence

APAC nations are taking an active and leading voice in the global conversation over establishing a regulatory framework for AI. Japan, for example, intentionally used its recent position as Chair of the 2023 G7 Presidency to drive the conversation on AI forward and leans toward a more guidelines-based approach to avoid over-burdening industry. This more light-touch approach to AI regulation is shared by ASEAN member states who are set to soon publish a Guide on AI Governance and Ethics, under Singapore’s chairmanship of the ASEAN Digital Ministers’ Meeting.

Taiwan’s Financial Supervisory Commission is consulting on guidelines for the use of AI in the financial industry, following the 6 Core Principles and 8 Supporting Policies on the same that had been published in 2023. Singapore’s regulator, the Monetary Authority of Singapore (MAS), released an open-source toolkit to enable the responsible use of AI in the financial industry, known as the Veritas Toolkit 2.0. This represents the first responsible AI toolkit developed specifically for financial services and is designed to help financial institutions assess the application of principles such as fairness, ethics, accountability, and transparency. MAS, in collaboration with a consortium of industry participants via Project MindForge, will also be soon publishing a whitepaper setting out private sector perspective for the responsible use of generative AI.

Data protection and cross-border data flows

Various APAC jurisdictions are beginning to tighten their laws on the flow of data across borders. India’s recently finalized Digital Personal Data Protection Bill permits cross-border data transfers except to specifically “blacklisted countries”, which remain to be decided. Moreover, India’s financial regulators have mandated that regulated firms will have to ensure that their data is stored in India. Further details on what this means in practice will be revealed this year when India’s market regulator finalises the Consolidated Cyber Security and Cyber Resilience Framework.

Rules issued a year ago by Indonesia’s financial services authority shine a spotlight on the protection of consumers’ data within regulated financial-technology businesses. Commercial banks are required to locate their electronic system data centres and disaster recovery centres within Indonesia. Banks may only have overseas data centres after obtaining agreement from the regulator.

Data flows between Mainland China and the Hong Kong-Guangdong-Macau Greater Bay Area are set to develop following the memorandum of understanding signed between Hong Kong’s Innovation, Technology & Industry Bureau and China’s Cyberspace Administration. In the medium term, it remains to be seen what implications this would have for data flows from Hong Kong overseas, given mainland China’s stringent data protection and localization requirements.

Markets and trading

APAC regulators are seeking to develop the region’s capital markets through introducing various reforms to the rules governing securities trading.

Market and trade surveillance

Improving trade execution quality, transparency, and market integrity remains a top priority for APAC regulators as they look to build public confidence and promote investor protection.

Surveillance is fast becoming a hot-issue in India with the markets regulator recently consulting on whether to require broking firms to make their senior management accountable for the detection and prevention of fraud and market abuse by setting up surveillance and control systems. They also proposed a similar proposal for asset management companies. More clarity will come this year once final rules are published.

Recent reforms to Japan’s best execution policy continue to bed in one year after their introduction in January 2023. Specifically, firms are now required to take a price-oriented approach to orders from retail investors by comparing quotes and transaction costs offered by alternative trading venues and traditional exchanges, for example. If smart order routing is used, it is mandatory for firms to add the purpose and principles of SOR-based order execution to their policy to enhance transparency.

In Singapore, the Trade Surveillance Practice Guide published by the regulator and Singapore Exchange Regulation urged brokers to consider adopting automated surveillance systems, AI and machine learning to enhance monitoring of trading activities. The rise in volume and complexity of trades has led to changes in the way market and trade surveillance is conducted, with increasing momentum for using automation and innovative technology to achieve best practice.

OTC derivatives reporting

APAC jurisdictions have undertaken changes to their over-the-counter derivatives reporting requirements to foster greater international harmonization and mirror much of Europe’s EMIR Refit. The Japan FSA finalised their OTC derivatives reporting requirements in December 2023, requiring mandatory reporting of the UTI (unique transaction identifier), CDE (critical data elements), LEI (legal entity identifier), and specify that the ISO 20022 XML message format must be used. These rules come in force from April 2024. New OTC derivatives reporting rules including the UPI will come into force in Singapore and Australia in October 2024, and Hong Kong sometime later in 2025.

The growth of new fields to be reported and differences between global jurisdictions represents a challenge for firms. With manual reporting of trades becoming increasingly unfeasible, these rules changes are spurring greater automation for regulatory reporting.

Accelerated T+1 settlement

The accelerated T+1 settlement conversation has made its way to APAC, with India leading the way by transitioning to T+1 settlement for equities in 2023 and working toward instant settlements (T+0).

Besides India, other APAC regulators have yet to take a stance on whether they will shorten the settlement cycle. This has not stopped industry participants from considering the impact that this change in the US would have on APAC and whether the region’s market structure is ready for it. This conversation will gain greater traction in the year ahead, with regulators engaging industry stakeholders for input and dialogue.

China market opening-up

China will continue to open up its onshore financial markets, approve more foreign financial institutions to establish wholly owned regulated entities, and ease operations in China. The main initiatives include repo connect in the interbank bond market and preparing for China treasury bond futures contracts to launch in Hong Kong which will have far-reaching impact on Chinese financial markets.

Green finance

Countries across the APAC region are making significant headway with the development of new rules and initiatives to facilitate the green transition.

Green transition and standard

Work is underway to finalise guidance on financing the early retirement of coal-fired power plants in the region, which is a key priority for the Glasgow Financial Alliance for Net Zero Asia-Pacific Network. This initiative comes as coal power generation continues to rise in Asia and represents the largest source of carbon dioxide emissions globally.

As a sign of growing Asian leadership of the green finance agenda, both Japan and Hong Kong hosted GFANZ country chapters in 2023 and Japan is expected to issue the first government climate transition bond early this year.

Having launched its Finance for Net Zero action plan, MAS will soon develop transition guidance for the industry to help guide Asia’s net zero transition. This follows MAS having issued its fourth and final consultation on detailed thresholds and criteria for financing the early phase-out of coal-fired power plants.

The Sustainability Standards Board of Japan will issue draft standards by end-March 2024 to implement and develop Japanese sustainability disclosure standards that are aligned with the International Sustainability Standards Board (ISSB). Similarly, the Australian Accounting Standards Board will soon consult on detailed disclosure standards. Regulators in Hong Kong are preparing for the implementation of disclosure standards for listed companies from January 2025.

Disclosures

India continues to move toward the development a comprehensive ESG regulatory framework that covers disclosure requirements for listed entities, ESG ratings, and ESG investing by mutual funds. In particular, ESG ratings are a growing regulatory theme across the region with Singapore having issued a draft industry code of conduct for providers of ESG ratings and data products to embed best practices. Similarly, Hong Kong has also begun industry discussions to draft a voluntary code of conduct for ESG ratings and data products.

Mandatory climate reporting rules in New Zealand are due to take effect in early 2024 and the country’s financial regulator has issued guidance to help firms meet obligations under the new disclosure regime. Australia’s mandatory climate reporting regime will kick in from July 2024 and new disclosure standards will apply in South Korea from February 2024, requiring ESG funds to explain how the investment process incorporates ESG elements.

Singapore’s Sustainability Reporting Advisory Committee recommended last year that all listed issuers should be required to report ISSB-aligned disclosures from fiscal year 2025 and non-listed companies with SGD $1 billion or more in revenue from FY 2027.

Taxonomy

Green taxonomy development remains a major theme across the APAC region. Hong Kong has set out its approach to developing a taxonomy to provide a local green classification framework while Singapore and China have established a green finance taskforce to strengthen the interoperability between their taxonomies.

Having already published the first phase of the country’s taxonomy on sustainable finance, Thailand is set to employ a traffic light system that distinguishes between green, amber (transitional) and red activities. The second phase of the Thailand taxonomy will focus on manufacturing, agriculture, real estate, construction and waste management. Singapore has launched the Singapore-Asia Taxonomy which helps to define green and transition activities that contribute to climate change mitigation across eight focus sectors. The MAS will soon produce a comparison of the Singapore Taxonomy, EU Taxonomy and Common Ground Taxonomy.

Climate risk

Managing climate risk continues to present challenges in the APAC region, and the Reserve Bank of India is developing guidance to manage climate risks through a three-pillar approach encompassing green deposits, a disclosure framework, and stress-testing guidance.

New Zealand is encouraging financial institutions to develop their scenario analysis capability and improve governance through the development of new guidance for managing climate-related risks. Meanwhile, Australia is implementing its second climate vulnerability study which will focus on insurance to help the industry understand the impact of climate risks. In Malaysia, new principles and requirements for climate risk management have just come into effect in December 2023.

Hong Kong has published guidelines to enhance the second round of climate risk stress testing, with over 30 firms confirmed to participate in the stress test this year. The Hong Kong Monetary Authority also plans to integrate climate risks into its banking supervisory processes by 2025.