Regulation

Summer round up – what’s hot in regs

With the leadership contest for the next Prime Minister in the UK in full swing, the candidates are adding to an already hot summer with talk of a “bonfire of red tape”.

In reality much of this is in flight already, though the impact of the revisions to the rules as they move from EU to UK law is not always as seismic as the rhetoric might suggest. The Financial Services & Markets Bill introduced to parliament on 20 July sets out the goals of enhancing competitiveness, repealing EU law and safeguarding consumers. It follows the roadmap announced by the now ex-chancellor and would-be PM Rishi Sunak at last year’s Mansion House speech.

But as we have seen with the measures for MiFID2 under the Wholesale Markets Review (WMR), the adjustments can be quite subtle. And that is not necessarily a bad thing – a number of commentators have pointed out that the rules were put in for a reason following the financial crisis (and much was driven by the UK pre-Brexit), so a wholesale removal of all controls might not be desirable.

Perhaps more campfire than bonfire?

As we enter the summer, we provide below a quick round up of “what’s hot” in the regulatory space at the moment. Please get in touch if you would like to discuss any of these topics or the wider regulatory agenda.

  • Financial Services & Markets Bill: the new Chancellor used the Mansion House speech to restate the government’s plans for the post-Brexit financial services regulatory framework. The government’s proposals, contained in the new Financial Services & Markets Bill will see responsibility for detailed rule making transferred to regulators, allowing them to act in a more dynamic manner.
  • WMR & MiFID2 review: both UK and EU are undertaking very extended (if not that extensive) reviews of the MiFID2 legislation (though in UK under the umbrella of the ‘Wholesale Markets Review’ covering both treatment of venues and other topics). Confusingly HMT[2] has also just launched a post implementation review of MiFID2 which has some overlaps with WMR. Consultations have been going on for some time (see our summary in March), with more deliberations still to come across both jurisdictions. The perimeter for the definition of trading venues is a contentious topic to watch out for.
  • Solvency II: the consultation on reforming Solvency II just closed on 21 July. Promising to unlock billions in investment for infrastructure projects, the changes were championed by Sunak while still chancellor though have been picked up by Truss in the recent PM debates. The reforms aim to release capital, revise credit risk management models, increase flexibility for investments, reduce reporting burdens and boost competition.
  • Crypto: efforts to regulate crypto along similar lines as other financial activities is worrying some in the industry that it will stifle innovation. However in a recent speech, the Deputy Governor, Financial Stability at the Bank of England (BoE), set out some lessons from the recent ‘crypto-winter’. Future regulation should be based on the principle of “same risk, same regulation”. In the EU legislators have reached provisional agreement on a sweeping package of measures to regulate crypto assets under the banner Markets in Crypto Assets (or MiCA). This is clearly an area we are going to hear a lot more on.
  • ESG: where to start? Too much to mention all here – the ECB[3] climate risk stress test results for banks, the recent agreement to include certain nuclear & gas activities in the EU Taxonomy, the FSB[4] flagging of challenges to financial stability to name a few. We have some excellent pieces from our Sustainable Finance team on our hub – e.g. the monthly newsletters for corporates and financial institutions, the FMSB spotlight on ESG Ratings and the ESG Policy Roundup.
  • Margin: phase 6 on Initial Margin is live on 1 Sep. See our recent note for a run-down of the main issues. Bottom line, not everyone will have legal docs ready in time, and those depending upon Threshold Monitoring need to take special care. Expect some disruption to trading bilateral derivatives, some just caused by miscommunication on scope or monitoring levels, at the start of the month.
  • Clearing: mandatory clearing is being extended to include SOFR[5] & TONA[6] across a number of jurisdictions. For the US the CFTC[7] is consulting on this now (live Oct?), and in UK the BoE is running a similar consultation with rules to apply from 31 Oct. In EU SOFR (7d>3y) already mandated to clear, but consultation underway to extend maturities, add TONA and make €STR DTO[8] (execute on venue). The EU has confirmed a final extension to clearing exemption for Pension Schemes to Jun 2023, and to the temporary equivalence for UK CCPs[9] to clear EUR swaps to Jun 2025.  
  • Transaction Reporting: ESMA[10] has undertaken a review of EMIR[11] reporting obligations – reporting entities will not have to adhere to new standards until Jan 2024, however with substantial changes proposed it is likely to take significant change resources through 2023. The CFTC has also revised their reporting guidelines under Dodd Frank (though with no action relief until Dec 22), for example introducing mandatory LEIs[12] (though for those in Europe that already came with EMIR & MiFID2 earlier).
  • LIBOR[13]: we did a recent piece on everything that matters here. The Financial Conduct Authority is running a consult on withdrawal of synthetic LIBOR rates for GBP (1m & 6m in Mar 23, 3m sometime later) which might cause some issues for those final few contracts that haven’t moved. And expect USD engagement to ramp up after the summer ahead of June 2023 cessation. Key difference to GBP is in the broader use of Term SOFR as a fallback for cash products (and as a go forward rate for lending).
  • Securities Depositories: CSDR[14] amendment proposal allowing the central securities depositories (CSD) to collect and distribute all types of penalties, including those for settlement fails relating to cleared transactions.  
  • Capital: on 27 June, the PRA[15] published a letter to firms on the ‘Fundamental Review of the Trading Book (FRTB). PRA re-iterated that it will consult on the UK implementation of Basel 3.1, including FRTB, in Q4 2022, with a planned implementation date of Wednesday 1 January 2025.

We seem to say this every time we do a ‘quick round up’, but lots to look out for coming-up. Please get in touch through your usual contacts if you would like to discuss any of these topics in more detail.

And enjoy the summer!

Notes:

  1. MiFID: Markets in Financial Instruments Directive
  2. HMT: Her Majesty’s Treasury
  3. ECB: European Central Bank
  4. FSB: Financial Stability Board
  5. SOFR: Secured Overnight Financing Rate
  6. TONA: Tokyo Overnight Average Rate
  7. CFTC: Commodity Futures Trading Commission
  8. €STR DTO: euro short-term rate derivatives trading obligation
  9. CCPs: Central counterparties
  10. ESMA: European Securities and Markets Authority
  11. EMIR: European Market Infrastructure Regulation
  12. LEI: Legal Entity Identifier
  13. LIBOR: London Interbank Offered Rate
  14. CSDR: Central Securities Depositories Regulation
  15. PRA: Prudential Regulation Authority

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