As we start to think about what 2021 has in store for market structure evolution and the regulatory landscape, one can’t help wonder what happened in 2020.
The year started with a full agenda and all eyes on how the UK and EU will operate in a post Brexit world. Coronavirus then landed and we saw many milestones get moved out into 2021; however it certainly wasn’t as simple as everything moving to the right.
As we look to 2021, we have a delayed set of milestones to contend with, Brexit and an end of the transition period, and a new Biden government with changes in leadership at various US regulators.
Let’s take a look at some of the major themes and events to look out for in 2021 – it certainly won’t be a boring year. For more in-depth analysis, please take a look at our full briefing here.
1. The post-Brexit world
Key takeaway: we start with the same rules as the EU, but UK authorities are already discussing a top-down review of the regulatory framework.
There’s been a top-down consultation concerning the UK’s regulatory framework ahead of a review of, and recommendation of changes to, individual regulations. The focus has been on the principles that should underpin a first-class and effective regulatory framework, but also on how the UK’s approach may differ somewhat from that adopted by the EU and the need for flexibility.
While this top-down approach seems appropriate from a strategic perspective, there will inevitably be issues that need to be addressed immediately. For instance, the UK has already stated that it won’t be implementing the EU’s Central Securities Depositories Regulation, and that Securities Financing Transactions Regulation will diverge from the EU regulation in that it won’t be a requirement for non-financial counterparties.
It’s now clear that the UK will – not may – diverge from EU financial regulation, especially in prudential regulation (Basel III). The UK Treasury’s consultation on the future financial framework should provide some important clues about what to expect.
It’s also going to be important to keep an eye on venues and equivalence. In a best-case scenario, there will be full equivalence between EU and UK trading venues by the end of the transition period, but this is by no means certain. In the meantime, trading venues and most market participants have already taken actions to minimise the impact on cross-border activities.
For a high-level snapshot of life after Brexit click here
For insights on Brexit resiliency click here
2. The President Biden policy agenda
Key takeaway: the new Biden administration may herald more regulation, a change at the top of US regulators and a big step change into ESG.
The new US administration could undertake a wide range of regulatory changes, but it will be hard to get much through the Senate unless the Democrats win the two run-offs in Georgia in January.
Given the overall support for robust financial regulation and international accord on the subject, it seems highly unlikely that the Biden administration will object to the changes to the Dodd Frank Act that have already been approved. Meanwhile, given Biden’s support for international co-operation, the introduction of securities financing transactions (SFT) reporting regulation in the US could be brought forward.
And in stark contrast to the Trump presidency’s approach, sustainability is likely to move to the top of the agenda right from the off. We expect to see the development of a ‘Green Roadmap’ similar to that produced by the EU, and regulation to support the overarching policy is likely to follow.
3. More debate on MiFID II
Key takeaway: although pitched as a ’quick fix’, there’s still a lot to agree next year ahead of implementation in 2022 and beyond.
The European Securities and Markets Authority (ESMA) is undertaking an extensive consultation with the finance industry (the Markets in Financial Instruments Directive II Review) to assess the proportionality of the MIFID II directive and is set to publish a number of consultative papers next year.
ESMA has also recognised the impact of coronavirus on financial services and has sought to alleviate the regulatory reporting burden by introducing some changes to the directive, dubbed the MiFID II ‘Quick Fix’, as soon as possible. From the perspective of UK-based firms, the ‘Quick Fix’ changes may well be approved after the transition period has ended, and it’s unclear whether the Financial Conduct Authority (FCA) will choose to adopt them or not.
4. LIBOR transition
Key takeaway: into the home straight, with pressure ratcheting up ahead of cessation at the end of the year.
The transition away from LIBOR remained a key focus for regulators in 2020, with only a few milestones specific to the loan markets suffering delays due to the pandemic. 2021 will be the final year for the LIBOR transition, but there’s still a huge amount to do.
Many people will be watching the take-up of the International Swaps and Derivatives Association (ISDA) Fallback Protocol increase, and also paying attention to areas that received less focus during 2020, such as the non-linear and cross-currency markets.
The Sterling Working Group has set a target of the end of Q1 2021 to see “a substantial reduction” in LIBOR exposure in the market. Whether the industry will be able to move away from LIBOR in time is a huge question as we approach LIBOR’s endgame.
5. Reporting alignment and major revisions of Dodd Frank and EMIR
Key takeaway: various changes to Dodd Frank and EMIR reporting in the works.
Following the publication of global derivatives reporting standards, regulatory authorities have worked on changing their reporting requirements to ensure the standards are adhered to. The Commodities Futures Trading Commission approved amendments to Dodd Frank parts 43, 45 and 49 in September. These changes are expected to be added to the US Federal Register before the end of 2020, and will have to be implemented 18 months after this date. The final draft of the revised EU reporting rules is also expected to be published before the end of this year, and again, they have an 18-month implementation period, so should go live towards the end of the first half of 2022. Of course, while these revised regulations won’t go live until the year after next, the lion’s share of the effort to modify reporting to meet the new requirements will have to take place in 2021.
Key takeaway: first requirements where the UK and EU start to diverge?
ESMA has been lobbied for most of 2020, mainly by Central Securities Depositories, to postpone the implementation date for CSDR from February 2021 to February 2022. In October, the EU commission confirmed the revised date.
Phases 1-3 of SFTR have gone live in 2020, and Phase 4 for non-financial counterparties is planned for January 2021. SFTR phase 4 will not be implemented in the UK.
Key takeaway: coronavirus will impact Basel III roll-out plans.
The pandemic has also impacted the implementation dates for the Basel III prudential regulations. In April, the Bank for International Settlements announced that the following components of Basel III will be postponed from January 2022 to January 2023:
Revised leverage ratio
Standardised approach for credit risk
Institutional review board (IRB) approach for credit risk
Operational risk framework
Credit valuation adjustment (CVA) framework
Market risk framework
Pillar 3 disclosure
8. Margin for uncleared
Key takeaway: the can was kicked down the road in 2020, but we’re back on schedule now with phase 5 due in September 2021.
All eyes are now on 1 September for the implementation of Initial Margin Phase 5 (to be applied to smaller financial institutions with more than EUR 50 billion notional). There’s huge market attention on finding the legal and operational resources to prepare for new margin requirements.
The key themes we're expecting to be addressed by the new requirements are:
Confirming entities in scope
A ‘tweaked’ standard initial margin model (SIMM)
Key takeaway: sustainable finance set to be one of the hot topics of 2021.
As the ESG agenda continues to progress at breakneck speed, so too does engagement among the wider market, regulators and even the new US President.
In fact, the incoming US administration has already made clear its intention to use regulation as a way of furthering the ESG cause.
In Europe, there’s been a wave of consultations, statements and draft proposals, including ESMA engaging on taxonomy to drive KPIs, the European Commission proposing a climate law and the European Insurance and Occupational Pensions Authority consultation draft around climate-risk scenario supervision. Meanwhile, the UK is set to see the FCA mandating TFCD* based climate-related disclosures and the Bank of England introducing climate stress testing in June next year.
*Note: TFCD is the Task Force on Climate-related Financial Disclosures.