Basel 3.1 continues to take centre stage, especially in the US (with 'Stop Basel Endgame' ads even popping up at NFL games). In the UK the effects of Consumer Duty regulation will continue to be felt, especially across the Wealth sector. The operational challenges of implementing T+1 Settlement are giving many firms sleepless nights, and the increasing burden of ESG reporting might add to the insomnia.

The US, UK and EU elections are likely to dominate political agendas in 2024, and that of course may have a knock-on impact on the regulatory agenda, though whether this accelerates or delays legislative programmes may vary. This, and a backdrop of increasing geo-political tensions and an uncertain environment, in terms of inflation and interest rates.

Our focus in this article is on market structure and regulation, but we’d also like to direct you to the excellent Year Ahead report by our Strategy team that covers the broader macro-economic picture: economy, rates environment, politics, net zero and China.

• Focus on NBFI: increasingly regulators are extending their focus to the risks associated with the NBFI sector, which makes up around 50% of all global financial assets. We saw a number of papers late last year (BoE [1], FSB [2]) focused on the risks inherent in 'shadow banking', and this year has kicked off with a coordinated request from UK, EU and US regulators to obtain information about risk exposure to the NBFI sector as a whole, and in the UK the next phase of the 'SWES' (System Wide Exploratory Scenario) is underway; modelling a variety of 'severe but plausible' stress scenarios.

• Basel 3.1: US regulators have proposed July 2025 for compliance with the Basel 3 Endgame (comprising FRTB [3] and remaining measures). There has been coordinated pushback from US banks, with concern about potential impact on competitiveness of the higher capital requirements voiced at the recent Senate hearing by Wall Street firms; in the UK the PRA [4] has announced alignment to this timeline as well as the first set of 'near final' rules in December, though the EU plans to stick to the current phase-in timeline starting January 2025. US and UK proposals align more closely on CVA [5] exemptions and SA-CCR [6] reductions compared to EU proposals.

• T+1 Settlement: work is ramping up ahead of go live on 28 May 2024 for the changes to T+1 Settlement for Securities transactions in the US, with its knock on effect on FX settlement. SIFMA [7] has compiled a playbook and trading video to guide market participants through the implementation steps. The knock on impact on CLS [8] FX settlement is discussed in the GFMA [9] paper here. In the UK and EU discussions continue on possible application there, with the UK appearing to lean towards adopting a slower roll out aligned to EU timelines.

• Solvency II / UK: last year the PRA [10] announced details of proposed changes to the matching adjustment (MA) rules that govern the assets annuity writers can invest in as part of the post-Brexit Solvency UK regulatory regime. The consultation opens the door for new “assets with highly predictable (HP) cash flows”, likely including a broader range of callable, prepayment and extension features, but could still fall short of hopes for boosting investment in UK productive finance assets. MA changes come into force end June 2024, following confirmation of risk margin calibration changes in December 2023, and with the rest of the fully on-shored rules in place by FY24. See here for further information.

• Role of PE in Insurance: in recent years, private equity's (PE) influence over insurance companies has become a prominent theme for debate internationally. Before Christmas, publications from the Bermuda Monetary Authority and the IMF [11] put the topic back into the spotlight. Set in the context of the highest ever deal volume for bulk annuity transactions between pension schemes and annuity writers in the UK in 2023 (est. £45bn), with some level of reliance on offshore funded reinsurance ('FundedRe'), this space will be one to watch. See our Insurance team's recent piece on the role of PE.

• MiFID2 Trade Transparency: FCA [12] published a consultation on trade transparency in December. The consultation sets out the regulator’s proposals to revise the transparency framework for the bond and derivatives markets in the UK. The proposed rules introduce asset class buckets and, at least within Fixed Income, look like they may reduce real-time transparency requirements for Systematic Internalisers (SIs). The path for FX, currently considered illiquid under MiFID rules, would be subject to further consultation.

• Consolidated Tape: in the UK the FCA has set out final policy on consolidated tape (CT) framework for bonds, with response to discussion paper for equities. In the EU there is agreement to move forward with selection of a CT providers.

• ESG: 2024 is expected to be the year of implementation of key wide-ranging legislation in Europe, along with the development of further rules and guidance. Other countries and jurisdictions are expected to follow suit, although the pace of regulatory and policy evolution will likely be very different across different regions. The publication of the UK Taxonomy has been 'imminent' for some time, but 2024 may see it published. Issuers and investors across all industries will be focusing on the application of multiple ESG reporting requirements, and more broadly expect a greater focus on transition finance. See our ESG Look Ahead for more detail on what to expect.

• Consumer Duty: the next deadline for Consumer Duty is July 2024 for products and services that are closed (already in force for those that are open to sale or renewal). The guiding Consumer Principle is "to act to deliver good outcomes for retail customers". There have already been implications of the new rules felt across the Wealth Management industry, and regulators are currently looking at 'double dipping' per recent Dear CEO letter.

• Swaps Clearing: under the auspices of the EMIR [13] review ("EMIR 3.0") the EU is looking at the clearing of Euro swaps, with the Active Account Requirement (AAR) a path to require firms subject to the clearing obligation to clear a proportion of their trades at an EU CCP [14]. The exemption granted to UK-based CCPs to clear EUR swaps expires in June 2025, and it is unclear at this stage whether any further extension may be forthcoming (given EU administration changes there may be little time in the legislative calendar to approve an extension).

• US Treasury Clearing: in December the SEC announced adoption of new rules around mandatory clearing of US treasuries, covering cash and repo transactions entered into by clearing members, with exemptions for some counterparty types (details in link). There will be a phased in delivery, with cash transactions first at the end of 2025, then repo following in mid-2026. The implementation timeline is a little longer than originally expected, and one change to earlier proposals is that hedge funds and leveraged accounts will not have to clear cash trades.

• Pre-hedging: last July ESMA [15] published a call for evidence on the practice of pre-hedging, and IOSCO [16] is considering [its] position with a report expected later this year. Considerations hinge on the extent to which some consider pre-hedging a form of front running versus others considering it a regular market practice beneficial to clients and the operation of the market. The FMSB [17] have this topic as one of their Market Practices initiatives.

• Capital Markets Union (CMU): France's Finance Minister has announced a French task force on the reboot of CMU, as part of efforts to focus on a broad range of further simplification measures to support growth in the EU, though given the sponsorship, will likely have a particular emphasis on France's role as a financial centre. See also Banque de France governor's thoughts on how a re-energised CMU can help fund a digital and green transformation.

• LIBOR / EURIBOR: synthetic LIBOR [18] (which under the bonnet is either Term SONIA [19] or SOFR [20] + Credit Adjustment Spread) is due to cease publication in March and September 2024 for GBP (3m) and USD (1, 3 and 6m) respectively. On the EURIBOR [21] front, no signs from the official sector on any intention to cease publication, with the Euro RFR [22] WG disbanding and closing minutes stating EURIBOR "is not scheduled to be discontinued".

• Ring-fencing: following the Skeoch Report in 2022 there was speculation that in addition to nearer term measures to refine ring-fencing rules, there might be a more wholesale revision of the requirements via alignment to resolution regimes. With the latest consultation the government is focusing on the technical reforms suggested by Skeoch which make the regime less rigid, while longer-term alignment with the resolution planning regime – the subject of a Call for Evidence earlier in 2023 – remains under consideration.

• Crypto and Digital Assets: the SEC's approval of the first spot Bitcoin Exchange Traded Products (ETFs) has been heralded as a watershed moment in the industry. It comes in the wake of growing regulatory scrutiny of the sector; last July the FSB published its global regulatory framework for crypto-asset activities based on the principle of ‘same activity, same risk, same regulation’, providing recommendations for sectoral standard setting bodies (SSBs) and ultimately local jurisdictions to adapt and adopt. In September the FSB and IMF published a joint paper presenting their combined recommendations across macro-economic, regulatory and supervisory policy. Expect much more on this topic through 2024.

Please do get in touch through your usual bank contact if you’d like to discuss these or any other changes further. We look forward to engaging with clients throughout the year.

*A selection of the insights linked above can be accessed via Market Insights. If you do not have access to Market Insights, please contact us here.

[1] Bank of England

[2] Financial Stability Board

[3] Fundamental Review of the Trading Book

[4] Prudential Regulation Authority

[5] Credit Value Adjustment

[6] Standardised Approach – Counterparty Credit Risk

[7] Securities Industry and Financial Markets Association

[8] Continuous Linked Settlement

[9] Global Financial Markets Association

[10] Prudential Regulation Authority

[11] International Monetary Fund

[12] Financial Conduct Authority

[13] European Market Infrastructure Regulation

[14] Central Counterparties

[15] European Securities and Markets Authority

[16] International Organisation of Securities Commissions

[17] Financial Markets Standards Board

[18] London Inter-Bank Offered Rate

[19] Sterling Overnight Index Average

[20] Secured Overnight Financing Rate

[21] Euro Interbank Offered Rate

[22] Risk-free rates