Olympic sprint through some recent regulatory developments

Anyone watching the Olympics will be used to flipping between events.

Regulatory developments

In this spirit of variety, here's a quick sprint through a mixed bag of recent regulatory developments. As most are winding down for the summer break and heading off to the beach (or end of the garden depending on travel restrictions), we thought it would be useful to take stock of what’s in play. We have been selective on just calling out a few themes:

  • LIBOR[1]. The last week or two has been all about the US. We have seen the 'SOFR[2] first' for interbank linear derivatives on 26 July 2021, the formal recommendation of Term SOFR and the ongoing tussle on Credit Sensitive Rates. The US also announced an 'RFR[3] first' milestone of 21 September 2021 for Cross Currency(which was swiftly supported by UK and EU working groups), and of course the UK have had all eyes on the Q3 target to complete active transition for GBP ('where viable'). See Act Now or Fallback, SOFR So Good and the Loan Tail for more on transition challenges. It's the final furlong for Sterling, Swiss and Yen, but expect more on Dollar as SOFR liquidity builds, the role of Term SOFR beds in and the dance with Credit Sensitive Rates continues. With Euros, EURIBOR[4] remains but with EONIA[5] discontinuation in January 2022, the EU RFR working group has written to ESMA[6] asking whether the European Commission would consider designating €STR+8.5 as the replacement rate for any contracts left referencing EONIA upon cessation.
  • ESG. You could fill a book each week with ESG developments (and plenty do). However, we have limited ourselves to some commentary on the regulatory aspects; the executive summary - get ready for a lot more reporting! Also, with COP26 (of which NatWest is the banking sponsor) only a few months away, expect the frenzy around ESG to only intensify. The EU recently announced their Sustainable Finance Strategy, setting out the three blocks of their framework: taxonomy, disclosures and tools, and explaining what actions the EU plans to take to finance the transition to a sustainable economy. Read Who Ate All the PIEs for more on ESG reporting, and check out the compass for what's in the taxonomy. The EU are also pushing forward with the 'S' of ESG as well as with a report on their Social Taxonomy. Whilst, the UK are busy; the FCA is consulting on climate related disclosures, and Rishi Sunak, Chancellor of the Exchequer, has made green finance a key part of his vision for financial services. Finally, a quick word on the 'G'. Governance has not had as much airtime as ‘E’ and ‘S’ but that is starting to change. Fund managers, for example, are increasingly looking to independent depository services to ensure they can demonstrate effective governance – see our Trustee & Depository Services team for more on this.
  • Wholesale Markets Review. The review, announced on the same day as Rishi Sunak's Mansion House speech, is the UK’s take on revising the MiFID2[7] regime it inherited from the EU. We won't go into all the detail, but there are changes proposed around: trading venue definition, systematic internaliser (SI) determination, TOTV[8] concept for OTC[9] derivatives, pre-trade transparency liquidity assessments, post-trade transparency regime and reporting. So quite far-reaching with the possibility of significant impact, especially in the area of transparency and liquidity determination for fixed income and derivatives (generally accepted to be flawed in its current format). This might drive (perhaps unintended?) changes in behaviour in voice versus electronic execution. The EU is considering their own package of measures, with consultation expected later this year.
  • MiFID2 ("quick fix"). Both the EU and UK have announced a series of 'quick fixes' that are being applied to MiFID2 to alleviate the regulatory reporting burden. The measures in each jurisdiction are broadly the same, though there are a few differences. The most obvious difference is in how quick is 'quick'. The UK implemented most of their fixes on 26 July 2021, but the EU won't be ready until February 2022 (due to the protracted legislative process in the EU). The measures include removal of costs and charges reporting for professional and eligible clients and the withdrawal of RTS27[10] (quality of execution) and RTS28[11] (top 5 venues) reporting obligations entirely. In the EU, RTS28 remains.
  • Margin. Phase 5 of initial margin is live on 1 September, and it is safe to say that plenty will not be ready. The volume of legal document work involved across the industry has been huge, with lots of other calls on legal and operational resources. But there is at least a glimmer of hope for those that may have left it too late – it comes in the form of Threshold Monitoring. As long as you don't go over the ‘speed limit’ (€/$ 50m in collateral posted or received) then IM[12] requirements are not invoked.  But if you are prone to speeding, this could be a risky strategy, so best to tie up the legal documents asap regardless.
  • Cross border. In his Mansion House speech, Rishi Sunak acknowledged that efforts to agree a comprehensive equivalence regime with the EU had failed, but that the UK now had "the freedom to do things differently and better". We're starting to see this divergence manifest in various places. ESMA did not recognise UK trading venues for DTO[13]. There were worries that this might trigger a move of execution volumes from UK to US SEFs[14] (that are third country eligible), but so far this has not materialised, though EU clients have moved to execution on EU MTFs[15]. Clearing is in a state of limbo. ESMA has given UK CCPs[16] an 18 months temporary equivalence determination which takes us to June 2022.  But, after that who knows, we may see bifurcation of the EUR swaps market.
  • ISDA[17] Definitions. As if there is not enough legal work on the table, the new 2021 ISDA Definitions come into play from October 2021. The changes represent a great step forward in usability of what has become an unwieldy collection of supplements stretching back years. But the jury is out on what sort of strains it might place on legal and operational teams in the short term.
  • eFX market structure. The latest version of the FX Global Code has been published by the GFXC[18] covering the leading principles that guide the FX market. The updated code places greater emphasis on transparency and disclosure requirements, especially on anonymous platforms, and on algorithmic trading due diligence. With increased FX algo volumes and key advancements in client execution algorithms, such as those at NatWest, there is increased focus on standardisation of pre-trade questionnaires and post-trade transaction cost analysis (TCA) to ensure that clients can properly compare algo providers. More broadly in the eFX market we’re seeing a real focus on how to reduce market impact, whether through the use of sophisticated market-making experiments such as watermarking (which can lead to the curation of liquidity pools) or through increased use of hidden orders and a focus on market-impact and performance data to drive key decisions.

There is a lot to digest here, and of course this is only a selection of the regulatory and market structural changes we could mention. So, please reach out to us to discuss any of above.

Or get back to channel surfing the Olympics.

And for all able to get away this year, or just staying at home, have a great summer!

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Glossary of abbreviations

[1] LIBOR - London Inter-bank Offered Rate

[2] SOFR - Secured Overnight Financing Rate

[3] RFR - Risk-Free Rate

[4] EURIBOR - Euro Interbank Offered Rate

[5] EONIA - Euro Overnight Index Average

[6] ESMA - European Securities and Markets Authority

[7] MiFID2 - Markets in Financial Instruments Directive 2

[8] TOTV - Traded on Trading Venue

[9] OTC - Over the counter

[10] RTS27 - Regulatory Technical Standards 27

[11] RTS28 - Regulatory Technical Standards 28

[12] IM - Initial Margin

[13] DTO - Derivatives Trading Obligation

[14]] SEFs - Swap Execution Facility

[15] MTFs - EU multilateral trading facility

[16] CCPs - Central counterparty clearing houses

[17] ISDA - International Swaps and Derivatives Association

[18] GFXC - Global Foreign Exchange Committee

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