This report presents regulatory technical standards on governance arrangements related to the remuneration policy of issuers of significant asset-referenced tokens and electronic money institutions. The requirements stipulate that these issuers must adopt a remuneration policy that promotes effective risk management. Next steps include submitting these standards to the Commission for endorsement, followed by…
This document is the final report of the European Banking Authority (EBA) published in 2024, entitled "Final report on draft RTS on governance arrangements for remuneration under MICAR." It is a 35-page regulatory standard defining the regulatory technical standards (RTS) related to governance arrangements of remuneration policies for significant token issuers, pursuant to Regulation (EU) 2023/1114 (MICAR). The scope covers issuers of tokens backed by significant assets (ARTs) and electronic money institutions issuing significant electronic tokens, as well as, upon request of competent authorities, non-significant token issuers. The document specifies the minimum governance and content requirements of remuneration policies to promote sound risk management and avoid incentives to lower risk standards, over the post-2024 application period.
The subject concerns the definition of regulatory technical standards (RTS) regarding governance arrangements of remuneration policies for significant token issuers under MICAR. This regulation aims to ensure that remuneration policies promote sound and effective risk management, without encouraging excessive risk-taking. The RTS, developed by the EBA in cooperation with ESMA, specify governance processes for adopting and maintaining remuneration policies, as well as the essential elements of these policies. They apply to issuers of tokens backed by significant assets, electronic money institutions issuing significant tokens, and potentially non-significant issuers upon decision of national authorities. The RTS are inspired by the remuneration framework for investment firms, adapted to the business model of token issuers, and include specific requirements such as: - A gender-neutral remuneration policy compatible with risk culture and business objectives. - The distinction between fixed and variable remuneration, with a maximum ratio to be defined by the issuer. - The obligation to align variable remuneration with risk-adjusted performance, including deferred, malus, and clawback mechanisms. - The possibility to pay at least 50% of variable remuneration in instruments, including shares, share-linked instruments, or significant tokens issued, except for certain entities subject to other sectoral rules. - Integration of ESG criteria into the remuneration policy, notably regarding environmental impacts of underlying technologies. The conclusions emphasize that these RTS will contribute to a harmonized framework, better risk management, and financial stability, while ensuring fair treatment of token holders. Next steps include submission of the RTS to the European Commission, then review by the European Parliament and the Council before official publication.
The document responds to the obligation set by Article 45(7)(a) of Regulation (EU) 2023/1114 (MICAR) which mandates the EBA, in cooperation with ESMA, to develop regulatory technical standards specifying the minimum content of governance arrangements for remuneration policies of significant token issuers. This requirement aims to ensure that remuneration policies encourage sound risk management and avoid incentives to lower risk standards. The scope covers issuers of tokens backed by significant assets, electronic money institutions issuing significant tokens, and potentially non-significant issuers upon request of competent authorities. The document aims to ensure sectoral consistency, notably with requirements applicable to investment firms, while adapting rules to the specific business model of token issuers, which are not considered financial instruments. Limitations include the exclusion of entities already subject to stricter remuneration frameworks (banks, fund managers) which remain subject to their sectoral rules. The objective is to establish a clear, harmonized, and proportionate framework for governance of remuneration policies, notably integrating ESG risks.
Key definitions: The document precisely defines essential terms such as "staff" (all employees and members of management bodies), "senior management", "identified staff" (personnel with material impact on the risk profile), "managerial responsibility", "business unit", "control function" (independent control functions such as compliance, risk management, audit), and "remuneration" (including all forms of fixed and variable remuneration, monetary or not) (p. 9-10).
Remuneration governance: Ultimate responsibility for the remuneration policy lies with the board of directors or management body, which must approve it and validate its amendments. Control functions must ensure an annual review of implementation compliance, which may be outsourced. Compliance, risk management, audit, and human resources functions must contribute to the policy design. Conflicts of interest related to payment in instruments must be identified and mitigated (p. 10).
Content of remuneration policies: Policies must be consistent with token holders’ interests, gender-neutral, compatible with corporate strategy, risk culture, and ESG objectives. Remuneration of control functions must be independent of the performance of the controlled units. Policies must avoid conflicts of interest and not encourage excessive risk-taking. They must be transparent, accessible to staff, and proportionate to the issuer’s size and complexity (p. 11).
Identification of key personnel: Issuers must identify staff with material impact on their risk profile according to qualitative criteria related to functions performed (management members, heads of control functions or key units, specific risk management such as liquidity, operational, anti-money laundering, reserve management, token issuance, etc.). Quantitative criteria based on remuneration were discarded to limit complexity and administrative burden (p. 11-12, 18).
Variable remuneration: Must be linked to risk-adjusted performance of the issuer, unit, and individual, including financial and non-financial criteria, notably ESG risk management. Guaranteed variable remuneration is prohibited except for the first year of a new employee. Payments related to early termination must reflect actual performance. An appropriate balance between fixed and variable remuneration must be ensured, with a maximum ratio set by the issuer. Variable remuneration of control functions must be mainly linked to control objectives and have a lower variable/fixed ratio than operational units. At least 50% of variable remuneration must be paid in instruments (shares, linked instruments, significant tokens, or other instruments according to sectoral framework), with deferred mechanisms (at least 40% over 3 to 5 years, 60% for high amounts), malus and clawback. Interest or dividends on deferred instruments must not be paid before definitive vesting. Variable remuneration must only be awarded if financially sustainable and justified by performance, and must not create payment obligations in case of non-compliance with prudential requirements (p. 12-15).
Integration of ESG risks: Policies must integrate environmental, social, and governance risks, particularly impacts related to energy consumption of blockchain infrastructures and consensus mechanisms. Variable remuneration must include criteria related to ESG risk management to encourage limiting negative impacts (p. 5, 8, 11).
Payment in tokens: Issuers may use significant tokens they issue to pay part of variable remuneration, except for entities subject to other sectoral frameworks (banks, fund managers). This option promotes alignment of staff interests with token viability and reduces operational costs (p. 5, 17).
Public consultation and adjustments: The document presents feedback from the public consultation (5 responses), with requests for clarification on definitions, scope, proportionality, and staff identification criteria. The EBA maintained consistency with existing frameworks (notably for investment firms) while adapting certain aspects to the token issuers’ model. Some definitions were added or clarified, and certain functions (e.g., data protection officer, marketing) were excluded from identification criteria (p. 21-34).
Cost-benefit analysis: The overall financial impact of the RTS is low compared to the baseline scenario without specification, with one-off costs related to policy updates and limited recurring costs for remuneration administration. Expected benefits are moderate, including better harmonization, improved risk management, and increased financial stability. The RTS do not create additional costs for entities already subject to sectoral frameworks (p. 16-20).
Established facts:
- The RTS define a clear and harmonized framework for remuneration policies of significant token issuers, aligned with MICAR requirements and consistent with existing frameworks for investment firms (p. 3-8).
- Variable remuneration must be linked to risk-adjusted performance, with deferred, malus, and clawback mechanisms, and at least 50% paid in instruments (shares, tokens, etc.) (p. 12-15).
- Key personnel are identified according to qualitative criteria related to functions and responsibilities impacting the risk profile (p. 11-12, 18).
- Policies must integrate ESG risks, notably environmental risks related to blockchain technologies (p. 5, 8, 11).
- The possibility to pay part of variable remuneration in tokens is validated, promoting alignment of interests and cost reduction (p. 5, 17).
Assumptions:
- Alignment with remuneration frameworks for investment firms ensures sectoral consistency and adequate protection level (p. 7-8).
- Exclusion of quantitative criteria for key personnel identification limits administrative burden without reducing identification relevance (p. 18).
Interpretations:
- Integration of ESG criteria into remuneration is considered necessary and compatible with regulatory objectives, without creating excessive burden (p. 29).
- Payment in tokens is seen as an innovative tool adapted to the issuers’ model, despite limited market experience (p. 33-34).
Uncertainties:
- The maturity of the significant token market and full understanding of associated risks remain limited, justifying some flexibility in rule application (p. 33-34).
- The precise impact of requirements on the competitiveness of European issuers compared to other jurisdictions remains to be observed (p. 29).
The EBA concludes that the proposed RTS effectively meet the MICAR mandate by establishing a harmonized framework for remuneration policies of significant token issuers, promoting sound risk management and avoiding incentives for excessive risk-taking. The RTS ensure consistency with existing sectoral frameworks while adapting requirements to the specific model of token issuers. Integration of ESG criteria into remuneration policies is confirmed as essential. The possibility to pay part of variable remuneration in tokens is maintained, subject to specified conditions. The RTS contribute to financial stability and protection of token holders. The report recommends submission of the RTS to the European Commission for approval, followed by review by the European Parliament and the Council, before publication in the Official Journal of the European Union. No additional action plan is detailed in the document.
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