Bank of England FX legal committee reviews benchmark, stablecoin and AI regulation

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Bank of England reviews FX, AI, crypto

Highlights

EU Benchmarks Regulation faces a key deadline end-2024, with a move toward a narrower regime covering only critical and significant benchmarks and new exemptions.
The UK's stablecoin and cryptoasset regulation will expand with HM Treasury's new framework and Financial Conduct Authority rules expected in summer, impacting FX market participants.
The FXJSC Legal Sub-Committee expects ongoing regulatory changes around AI, stablecoins, and benchmarks, with governance changes including adding a Deputy Chair to its Terms of Reference.

Regulatory agenda for FX markets

As reported by the Bank of England, the FXJSC Legal Sub-Committee discusses legal and regulatory developments affecting the foreign exchange market at its March 17 meeting in London. The committee, chaired by the central bank, includes market participants, infrastructure providers and UK financial regulators.

On EU Benchmarks Regulation, members focus on the effect of the regime on FX benchmarks, especially non-EU rates. The discussion notes that the original EU framework captures a broad set of benchmarks and creates practical difficulties for non-EU administrators seeking to qualify under the third-country regime. With the latest extension due to expire at the end of this year and limited appetite for further delays, the EU is moving toward a narrower framework covering only selected categories such as critical, significant and certain commodity benchmarks, while exemptions are emerging for some non-central-bank administered benchmarks.

The committee also reviews the UK approach, where regulators intend to designate systemically important benchmarks under a narrower framework. HM Treasury is reviewing that designation regime, with only limited amendments expected.

Members also examine stablecoins and broader cryptoassets, highlighting issues around classification, regulatory perimeter and links to existing market infrastructure. The discussion contrasts the EU's MiCAR framework, which brings cryptoassets into scope and separates them from existing financial instrument regimes, with a more targeted UK approach focused on systemic stablecoins and possible testing in settings such as the Digital Securities Sandbox.

On artificial intelligence, the group identifies the FX market as a strong potential use case because of data availability and market structure. The discussion compares the UK approach, where AI is treated as a tool subject to existing rules depending on use, with the EU AI Act, which classifies AI uses and imposes obligations including transparency. Members note continuing concerns around cyber security, operational resilience, data protection and intellectual property, while legal liability remains with human actors rather than AI itself.

Future priorities and governance implications

The meeting sets out several topics for future discussion as firms and policymakers adapt to changing regulation. These include a review of the FXJSC's 2018 competition guidance, outreach linked to an ISDA consultation and a further update on benchmarks regulation once the framework becomes more settled.

Members also note that HM Treasury is developing a broader UK cryptoasset framework that introduces regulated activities, including stablecoin issuance, and that Financial Conduct Authority rules are expected in the summer. That package is likely to be relevant for FX market participants tracking how digital asset regulation interacts with trading, settlement and client arrangements.

On governance, the sub-committee agrees to align its Terms of Reference with the Operations Sub-Committee by adding a Deputy Chair role. One application has been received, and the chair indicates the intention is to confirm the applicant unless members raise comments, with silence treated as approval.

Our earlier coverage of the Bank of England’s proposed leverage limits in the UK gilt repo market explained plans to introduce minimum haircuts to curb hedge fund borrowing against gilts and reduce the risk of destabilizing deleveraging during stress. We also outlined industry concerns about higher funding costs and shifts in market activity, alongside the BoE’s parallel push toward greater central clearing and the wider backdrop of similar reforms being explored in other major jurisdictions.

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