The EC’s regulatory rundown

Patrick Pearson of the European Commission delivery a speech at The Network Forum this week, here, Virginie O’Shea, founder, Firebrand Research, picks the highlights of the address including points around CSDR and settlement fails.

This week’s The Network Forum involved a lot of lively debate on a variety of regulatory and operations topics, but one of the FinReg nerd highlights for me was hearing from the European Commission’s head of financial market infrastructure and derivatives, Patrick Pearson. He detailed the EC’s priorities for this year and looked ahead to the next three years of work on the regulatory agenda in Europe—and it was a long list.

With his alliterative name, worthy of a Marvel comic FinReg superhero, or supervillain (depending on your industry viewpoint), Pearson is a regular on the speaker circuit and you have to be a quick note-taker if you want to catch everything he says. True to form during his panel on clearing, he went above and beyond the topic in hand by discussing the EC’s current industry concerns and areas of investigation. His opening riposte was that the clearing infrastructure topic in hand was far less concerning to the EC than the high number of settlement failures that the industry has experienced during the COVID-19 crisis.

The EC is currently under pressure from the industry to delay the final requirements of the Central Securities Depositories Regulation (CSDR), which include the introduction of a harmonised regime for mandatory buy-ins and settlement penalties. The industry isn’t very keen on the buy-in regime at all—understandably, as it is viewed as unduly onerous on top of the financial penalties for settlement failure—and is keen to see that part of the regime either removed or significantly delayed. Pearson made reference to the settlement discipline regime (SDR – unhelpfully confusing as an acronym here as it sounds like someone just forgot to add the C), but didn’t give any hint as to whether the EC will agree to postpone the deadline beyond February.

Pearson has an effective poker face and, having been on a panel or two with him, I know he is expert at dodging difficult questions, so I wasn’t surprised that we didn’t get a hint at whether the EC will relent on the deadline. He did, however, stress that the CSDR review is happening in the second half of this year and it will be comprehensive. The EC is going to review industry feedback and take every aspect into account, which indicates that maybe the industry message is getting through here.

But CSDR is far from the only topic on the EC’s to-do list for 2020. Pearson noted that the EC is very concerned about the collateral scramble that seemed to happen as part of the crisis and that if the extreme volatility at the start of the lockdowns had continued for a few more weeks, the industry may have been facing significant collateral shortages. This means that EMIR 2.2 (or 3 or 4 or whichever one we are at now) will likely focus a little more on the collateral optimisation and management practices in the industry than clearing.

He also noted that the recast Shareholder Rights Directive (SRD II) is up for review this year and that tax harmonisation is also on the EC’s radar more generally along with the other remaining Giovannini barriers.

The EC is also looking at digital operational resilience as a topic this year and this will be a priority in the next half. The industry can expect a consultation and some proposals before the end of the year on this subject. It will be interesting to see whether the EC takes the same tack as the UK’s Financial Conduct Authority (FCA), which published its own consultation in December last year. The fact that both are examining this space should set alarm bells ringing for firms that have experienced significant operational difficulties during the crisis, as this subject is all about operational risk reduction and examining dependencies in your IT frameworks. We can expect a lot more scrutiny of vendor relationships and portability, IT security, and third-party oversight and governance. The current crisis is a perfect test case for the regulators, so expect references to be made to any public incidences and outages.

ESMA and the EC will also be doing more work on the full alphabet soup of compliance regimes that have come into force over the last decade. This includes examining how Brexit impacts all of them and equivalence decisions per regime. No wonder they’re continuing to recruit more staff!