COVID-19 What to Expect on Financial Regulatory Reform Implementation

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Regulators in the UK have put on hold any non-essential financial regulatory work in the wake of the coronavirus disruption, according to an article in the Financial Times. The same is happening in the US where the Senate Banking Committee’s ranking member Sherrod Brown, D-Ohio, called for federal financial regulators to shelve all rulemaking projects that aren’t directly related to “protecting the financial system and mitigating economic fallout from the outbreak.” 

As we reported in our earlier post, global financial rule makers have many initiatives underway that were set to come to conclusions in the coming weeks and months, but these are likely to be put on hold as there will be a lack of bandwidth to provide useful feedback on anything other than COVID-19 related proposals. 

Here at Vox, we’ve reviewed a number of the more influential regulations where the deadlines for implementation are likely to be impacted by the coronavirus disruption.

The situation is changing almost daily at the moment, so consider the following as ‘food for thought’ and check the regulator’s pronouncements for the most recent news!

First of all, note that there are different ways that an implementation can change. Most obviously, a deadline can be pushed back; but we could also see scope reductions, creation or modification of phases to stagger the workload; and potentially even deadlines left in place with ‘no action’ enforcement relief for a period of time.

Benchmark Reform

The LIBOR offload affects every corner of the industry, and all participants (banks, asset managers, hedge funds, and more) so it is undoubtedly going to be impacted no matter what people are saying now.

Delinking £400tn of contracts and lending products from the LIBOR benchmark interest rate by the end of the 2021 deadline is no small feat at the best of times. Our expectation is that LIBOR will live on longer than anticipated.

Initial Margin

This initiative, which impacts virtually every dealer-client relationship, had already seen its “final” phase divided in two, providing smaller market participants with additional time to prepare by pushing back their compliance date to the new Phase 6 in 2021.

IM is a tremendous undertaking, requiring the repapering of client agreements and a lot of back-and-forth, mostly manual communication to ensure it is done correctly. We don’t see the Phase 5 deliverable (September 2020) remaining at its current scope, though whether this pushes back deadlines or simply pushes scope into Phase 6 is unclear. In fact, in a note published today (March 26) by ISDA, they urge global regulators to announce a delay to Phase 5 and Phase 6 implementation until the overall impact of COVID-19 is known.

Fundamental Review of the Trading Book (FRTB)

The FRTB is a set of proposals by the Basel Committee on Banking Supervision for a new market risk-related capital requirement for banks. This reform often referred to as “Basel IV“, is one of the initiatives taken to strengthen the financial system.

This project requires a lot of intellectual firepower from banks and is massively data-intensive, so mandatory work-from-home makes an already difficult task just that bit more complicated. And although the deadline is January 2022, banks were already ramping up projects to start collecting (and scrubbing) the necessary firmwide data.

It’s hard to say exactly what the outcome will be, but hitting that January 2022 deadline for implementation is a tall order. Our expectation is that the date will be pushed out to allow banks the time to regroup after the coronavirus disruption eases. 

CFTC Swap Dealer Regulation

In January 2020, the CFTC approved a proposed rule to improve the regulation of cross-border swap transactions and established a formal process for requesting comparability determinations for swaps compliance requirements. Comments were due by March 9, 2020, which was an aggressive target given the large number of clients. 

All participants (regulators, industry bodies, stakeholders, clients, and infrastructure players) are involved in the process so it’s not very efficient. Manual processes have slowed progress. Feedback has dropped off, while banks focus on the market turmoil.  It’s easy to predict that it will be quite some time before a new deadline emerges.

Volcker 2.0

This deals mostly with proprietary trading, compliance and metrics issues and adopts as proposed, covered funds changes for which the five agencies – the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Securities and Exchange Commission – had proposed rule text. The final rule reflects the agencies’ intent to resolve ambiguity and unduly complex and inefficient requirements.

This is notionally a simplification, making implementation less onerous, but you still have to do the work to create the new submission. The mandatory compliance date of January 1, 2021, is likely in jeopardy.  Our expectation is that the timeline will be pushed back rather than making an adjustment to the scope of the proposal.

MIFID2

MIFID2 was implemented in Jan 2018, and over the past year, the EU had been soliciting comments from the industry across a number of topics. While some of the responses had already been collected, others are delayed and our expectation is that any changes will be pushed out by at least a quarter, probably more. (Given there were no hard dates for changes, this won’t be as disruptive as some of the changes noted above.)

Much of this initiative is reviewing trade reporting requirements, which were introduced in Phase 1 – all trades had to be reported same-day so that the industry could have transparency into the European markets – but the industry view is that it’s over-complicated and not providing any value.

An additional part of this initiative is reviewing the Key Investor Document (KID) requirements for structured notes, which we address with our Opal product offering.

Of course, MIFID changes are driven by the EU and no mention of EU rulemaking is complete without…

Brexit!

Negotiations were due to restart on March 18, with Britain determined to exit the ‘transition period’ by December 31st. However, these were put on hold even before Michel Barnier, the EU’s chief negotiator, confirmed that he had contracted COVID-19.

The delay has naturally raised expectations that Boris Johnson will be forced to break his promise by requesting an extension to negotiations. According to an article in The Economist, Charles Grant of the Center for European Reform said, “The chances of getting a deal fixed in time are diminishing,” he notes. “An extension is more likely.”

This delay may also impact the MIFID2 reviews as the industry would prefer the UK to be consistent with Europe, as much as possible.

Summary

There is a sizeable amount of regulatory work for the industry to complete over the next few years – much more than we have listed above. The COVID-19 pandemic has disrupted many plans, and left many decisions up in the air.

Will global regulators get together to collaborate on which deadlines get pushed back or re-scoped? While the US prudential regulators typically work closely with each other, there is less transatlantic co-operation. However it plays out, it is critically important that the US and the EU head in the same direction.

If you have any questions on how regulatory reform will impact your business, or you need help implementing changes, we’re here to help.  You can drop us a line here or visit our website for more information.

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