Essential and Important Functions: The Backbone of Digital Financial Resilience

In the dynamic world of finance, regulation plays a crucial role in ensuring the stability and trustworthiness of the system. A concept that has gained relevance in recent years is that of “essential or important functions,” particularly in the context of digital operational resilience within the financial sector. In this post, we will delve into this concept and its significance in European financial regulation.

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What is an “Essential or Important Function”?

Regulation (EU) 2022/2554 of the European Parliament and of the Council, known as the Digital Operational Resilience Act (DORA), establishes a framework for managing risks related to information and communication technologies (ICT) within the financial sector. In this context, the definition of “essential or important functions” becomes particularly relevant.

According to Article 3, point 39, of the DORA Regulation, an “essential or important function” is defined as:

1. A function considered essential or important in accordance with Union sectoral legislation.
2. Any function whose interruption, deficiency, or failure may: a) Materially affect the ability of a financial entity to fulfill its obligations under applicable legislation. b) Adversely impact the financial results of the financial entity. c) Undermine the soundness or continuity of its financial services and activities.

This definition aligns with that established in Article 2, paragraph 1, point 35, of Directive 2014/59/EU, which defines “essential functions” as:

“Activities, services, or operations whose interruption could lead, in one or more Member States, to the disruption of essential services to the real economy or to the disruption of financial stability, due to the size, market share, external and internal connectivity, complexity, or cross-border activities of an entity or group…”

The Importance of Essential or Important Functions

The proper identification and management of essential or important functions are crucial for several reasons:

1. Operational Resilience: By identifying these functions, financial entities can prioritize efforts to ensure the continuity and resilience of their most critical operations.
2. Risk Management: It enables more effective assessment and mitigation of ICT-related risks, focusing on areas that could have the most significant impact in case of failures.
3. Regulatory Compliance: The DORA Regulation sets specific requirements for managing ICT risks related to these functions, including the need to establish and maintain resilient ICT systems.
4. Financial Stability: Protecting these functions contributes to the overall stability of the financial system, reducing the risk of disruptions that could have cascading effects.
5. Consumer Protection: It ensures the continuity of essential financial services for customers and the economy as a whole.
6. Outsourcing and Third-Party Providers: The DORA Regulation places particular emphasis on managing risks associated with the outsourcing of essential or important functions, establishing specific requirements for contractual agreements with ICT service providers.

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DORA: Essential Contractual Clauses for the Digital Resilience of Financial Entities

The Digital Operational Resilience Act (DORA) Regulation imposes new requirements on financial entities regarding cybersecurity and digital operational resilience.

Conclusion

The definition and management of “essential or important functions” are key elements in the new European regulation on digital operational resilience. Financial entities must pay particular attention to identifying these functions and ensuring they have the appropriate systems and processes to guarantee their continuity and resilience.

The DORA Regulation marks a turning point in the regulation of digital resilience within the financial sector, and “essential or important functions” are the central pillar around which much of this legislation revolves. Entities that adapt to these new requirements will not only comply with the law but will also be better prepared to face the technological challenges of the financial future.

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DORA: Contract Clauses. Beyond the Basics: Deepening Contractual Requirements for Robust Digital Resilience