End of the great re-regulation

After a relentless stream of regulations over the past decade, we are entering a quiet period where market players can put their regulatory work to one side and concentrate on other business matters guilt free.
By Joe Parsons

Smoke is beginning to appear from the old regulatory acronym generator. MiFID II, AIFMD, PRIIPS, EMIR, GDPR, the list goes on. These G20-led regulations have come – or are coming – to fruition thick and fast, as regulators look to live by a new mantra of YOFCO (you only financial crisis once).

The legislative changes have been relentless in the decade following the collapse of Lehman Brothers and the ensuing global financial meltdown, all with the aim of bring protection, transparency and oversight across the capital markets.

On the one hand, one could objectively argue the markets are now safer, end-investors are more protected, and new roles and companies have been born out of the extensive changes.

As Axa Investment Managers’ head of global regulatory development, Stéphane Janin, says so concisely, “since the last crisis, we didn’t get another crisis” before using the examples of AIFMD and UCITS, and their resiliency to the Euro sovereign debt crisis and the aftermath of the Brexit vote as proof of regulations working the way they should.

The other side of the coin shows a different story, mainly for the financial institutions themselves. The cost of complying with new regulations has been nothing short of colossal, from the actual money spent on compliance to exiting business which has become non-profitable or off-boarding clients to meet balance sheet requirements.

But as they say, there’s no point crying over spilt milk. The changes have happened, and most financial players have begrudgingly accepted this reality. But what of the future of regulations?

Well, following the introduction of the behemoth regulation in Europe that was MiFID II, along with the far-reaching GDPR and various new reporting requirements, you could argue that we have now entered a phase of regulatory inertia, where some may believe the biggest changes are behind them and forthcoming rules too far ahead to worry about.

Subsequently this is a time where perhaps business priorities have overtaken regulatory initiatives, maybe for the first time in a decade.

 “The implementation of MiFID II, PRIIPs, and BMR marked the end of the ‘Great Re-regulation’ that followed the global financial crisis,” says Sean Tuffy, head of market and regulatory intelligence, EMEA, custody & fund services at Citi. “The number of major regulatory implementations on the horizon is greatly reduced. This has given the industry some time to absorb the changes.”

An element of complacency?

Does this mean the industry is complacent? Possibly not. Part of the relaxed approach may be because the second half of 2018 calendar shows no major deadlines, while the first part of 2019 is largely the same. In fact, the biggest upcoming regulations are sitting in 2020.

This is giving business and senior executives time and resources to focus on new technologies and data quality, which are both emerging as differentiators.

An empty calendar is not all that is holding companies back from pouring more money into prepping their regulatory models, because at the same time there is regulatory uncertainty; not just in the final frameworks of some of the reporting requirements, but due to two major geopolitical events that have occurred in the past two years and which could alter the regulatory landscape. You may be familiar with them – Britain voting to exit the European Union and a new President being sworn into power in the United States.

“When we’re advising client on regulations in general it tends to be more around making the business fit for purpose, implementing an operating model to deal with what is likely to come,” says Robert Mirsky, managing partner, London, head of the global asset management practice group at EisnerAmper.

“If we talked about this a year ago I would have said there are operating model changes that need to take place.

“Then two major things have happened to change the direction of regulations. One is Trump and two is Brexit. What it has meant is that the US is in a position where the leadership is saying ‘why do we have so many regulations?’. The Treasury has come out and said about the asset management industry that ‘it is a tremendously important industry for the average man on the street’ so the increasing burden and costs are being passed on to the end investor.

“So there is a changing mind-set. Generally speaking, if the US decides not to follow along with what Europe is doing then Europe is out of luck. What the response is to that will be very interesting.”

Regulatory fatigue

These geopolitical events may have hit the pause button on major operational changes with so much uncertainty. At the same time, there is also an element of regulatory fatigue, whereby the rules have come in such quick succession in recent years that even the regulators are said to be flagging slightly. This has meant that without impending deadlines the thought of additional preparation work for forthcoming deadlines may not be high on the agenda.

“It’s been 10 years of constant change in the regulatory reporting space,” says Ian Rennie, managing director at Kaizen Reporting. “Senior managers in the clients we deal with – tier one banks, asset managers, hedge funds and brokers – they are dealing with this fatigue.

“MiFID II was certainly the most complex. It was just the wide-ranging nature of it and it was the most complicated since the Dodd-Frank Act.”

While it was inevitable this would happen to market participants, the more surprising twist in the tale is that the fatigue has impacted regulators as well. Constant fightback on rules, ever-changing deadlines and the rejection of pleas for increased budgets and staffing to deal with the weight of the load have taken their toll over the decade. Now a range of reporting mandates have come into force, they are also coming under pressure to use the data in order to meet the G20 endeavours of increasing transparency and oversight of the markets.

“There is a huge burden on the regulator to monitor and review the information they are collecting,” adds Mirsky. “Regulators over the world are trying to add resource as the governments look to cut resources.”

Without 2018/2019 deadlines, the focus may now switch to data quality. Reporting rules have conjured up widespread confusion across the market with demanding requirements along with inconsistencies across different regulations. This could also be the first area regulators begin clamping down on. Rennie believes the pressure will be coming from above.

“There will be a continuous focus on the quality of the data, with the regulatory bodies coming under huge pressure from their regulators – the Bank of England and Federal Reserve, for example,” he adds.

A focus on data quality

Regulators have collected countless amounts of data in recent years through widespread reporting requirements, but now they need to ensure the data is usable and clean so they can achieve their goal of further transparency into the markets.

For market participants, they will be aware of their own data situation when it comes to reporting and will know whether it needs to be improved to avoid disciplinary action.

“One area that firms have used the relative calm period in regulatory change is reporting,” adds Citi’s Tuffy. “Over the last 10 years, the amount of regulatory reporting requirements has dramatically increased in this space. Often there is overlap between various reporting requests. However, due to the staggered nature of the regulatory requirements when these requirements went live, they were often looked at in isolation. Now we’re seeing firms take a step back and review their regulatory reporting obligations to see if they can take a more holistic approach.”

In terms of ‘taking its toll’ rankings, MiFID II was certainly up there at the top, along with Basel III, Dodd-Frank and the amalgamation of every reporting rule which has been introduced. With potential fines on the horizon, work will undoubtedly still be in progress on improving data quality, but ultimately when it comes to looking at the calendar, and comparing the current pressures to the past five years, the second half of 2018 into the beginning of 2019 looks far more relaxed. Some experts argue this shouldn’t be the case though, for one reporting regulation is on its way which dwarfs all others.

“Securities Financing Transactions Regulation (SFTR) is entering a part of the market that has to a large extent been in the dark to this point,” explains Ronan Brennan, chief product officer at Compliance Solutions Strategies (CSS).

The purpose of SFTR is to provide greater transparency on cross-asset class lending, borrowing, repurchase agreements and sale/buy-back agreements among counterparties in the EU.


Unlike some other parts of the industry, market participants active in repo and securities lending markets have not had to comply with reporting requirements before when engaging in these activities. It’s been a lightly regulated space.

Therefore, with an estimated 150 reporting fields to fill in, the need for unique transaction identifiers (UTI), and dual-sided reporting – among others – the challenges will be vast. The chains involved with the re-use of the collateral securities in other securities financing transactions will also add to the complexity.

“The data set required for reporting is not one that is necessarily co-located today and will require a firm to potentially create a new reporting hub that stitches data together from disparate sources and systems that were not necessarily considered ‘connected’ heretofore,” adds Brennan.

“SFTR requires some very careful understanding of security T&Cs as there is a distinct lack of homogenous ways of structuring repos, lending and margin set-up.”

For those who have been familiar with EMIR and its relatively relaxed enforcement procedure, there may be a surprise when the forbearance from regulators that they have seen in the past isn’t there for SFTR. Despite grace periods with the comparable OTC derivatives reporting requirements back in 2016, one source tells Global Custodian, “the tolerances that were there for EMIR might not be there for SFTR.” They add that this time around, “ESMA has learnt from the disaster that was EMIR”.

The rules will also be far-reaching. SFTR will cover any counterparty established in the EU, regardless of location of the individual branch, plus EU branches of non-EU firms. It will also cover SFTs reused by EU counterparties and SFTs reused by third-country counterparties, whose transactions are operated from an EU branch or are provided under a collateral arrangement by a counterparty established in the EU, or by an EU branch of that third-country counterparty.

The other set of rules on the horizon is Central Securities Depositories Regulation (CSDR). This particular new set of measures for the authorisation and supervision of EU Central Security Depositories (CSDs) is aimed again at increasing the safety and efficiency of securities settlement and harmonising the way CSDs across the EU operate.

On the horizon           

The regulation is tied into the objectives of the Target2Securities (T2S) system by the introduction of a securities settlement discipline regime, while the rules also provide for mandatory buy-ins for settlement fails, and strict prudential and conduct of business rules for CSDs.

“The CSDR regime has been on the agenda for a number of years, but implementation guidance has just arrived in May of this year,” says Kerril Buke, CEO of Meritsoft.

Burke explains how the penalties regime will be one of the biggest focuses of CSDR, particularly when it comes to settlement fails and the buy-in regime. With penalties likely to land quickly in an area unfamiliar with such financial penalties, the debate will be around who absorbs the fines.

“Depending on the nature, the type of security and the fail, there will be a late matching penalty which will be calculated on a daily basis,” adds Buke.

“They are also introducing a buy-in regime. If you haven’t delivered the shares I could issue you with a buy-in notice.

“At the moment on the interest compensation side of things, you need the appropriate systems to identify it. In the future on the penalties side for every single fail that is going through a CSD or ICSD in Europe, they will be subject to mandatory penalty calculation. Certain service providers might say ‘I’ll bear the cost’ but as a custodian you can’t afford to do that. If that transaction you are settling is on behalf of a client, if the cost is a few hundred dollars a day, then the economics don’t really make sense. In addition, in the event that rather than receiving a penalty you receive a credit, you will need to pass that on.”

Time to put your feet up

“It’s all going to be down to who’s fault is it. But in terms of impact, they will certainly have to gather the evidence. From a custodian perspective, a lot of funds are offered contractual settlement, and that hasn’t mattered before because of penalties and compensation claims netting out, but in this case, there will be some issues, particularly around penalty related credits,” added Burke.

Much like SFTR, the expectation is that the rules will go live in 2020, with CSDR pencilled in for September. At the risk of being blamed for a lack of preparation in a couple of years, could there be room for other priorities than regulatory groundwork right now?

There is a great opportunity for market participants to focus on more business-led decisions and shoring up their data quality.

An eye still needs to be kept on upcoming regulations such as SFTR, CSDR and how geopolitical events will impact the future. There may also be rules incoming which haven’t even been officially announced yet.

“Regulation related to ESG is going to come down the pipe,” adds Mirsky. “As ESG becomes more of a required component, regulators are starting to take more notice. The problem with ESG is that there isn’t a regulatory model.”

Along with ESG rules, we could soon be looking at EMIR II, AIFMD II and MiFID III, all of which are primed for revisions. So, enjoy this downtime, because as the tenth anniversary of the collapse of Lehman Brothers has reminded us it’s been a pretty hectic spell of regulations since the financial crisis, and more are on their way.