Predictions for 2022: Regulation

Experts from ISLA, Cassini Systems, OSTTRA, CACEIS and Meritsoft weigh in with the predictions in regulation for the New Year.

By Editors

Fines for failing trades and Basel IV start being real

Andrew Dyson, CEO, ISLA

In early 2022 we will see the implementation of cash penalties for settlement fails. For the first time institutions trading in Europe will have a clear incentive to address issues that have been ignored for many years. As the impact of the fines begins to bite, I believe we will see a greater interest in addressing the root cause of settlement fails.

The further development of market wide best practice will be the first step in recognising how we minimise failures through adopting the same definitions and rules around trading and life cycle events. This will include greater rigour around knowing your counterparty as Basel IV demands more scrutiny and a better understanding of your counterparties.

This in turn will highlight the need for greater and more effective cross market cooperation to define those standards in the form of a common domain model that will underpin future product developments across our industry and beyond.

This will be a classic example of where a regulatory change will fundamentally drive change within the industry. The regulators will be delighted!


Troubled waters for UMR Phase 6 firms if preparedness has not started by end of 2021 

Liam Huxley, CEO and founder, Cassini Systems

­­The roll out of the Uncleared Margin Rules (UMR) completes its final Phase next year – 1 September 2022 – and in a similar fashion to MiFID, not only do firms have to comply; they must overhaul their business processes.  Whereas with MiFID non-compliance could get you a rap on the knuckles or maybe a fine, with UMR Phase 6, non-compliance can force you to cease trading with some or all counterparts. The September deadline may look a long way off, but like MiFID it will get difficult quickly if firms start their changes too late. 

Avoiding trouble before the deadline requires UMR preparation to have started now, which includes reviewing your internal processes and engaging with your counterparties. Avoiding problems after the UMR deadline requires firms to implement a solution that addresses all the three C’s: Compliance, Controls and Cost. 

Compliance is being able to calculate and monitor your regulatory Initial Margin (IM) and post and receive the appropriate collateral. Controls is about ensuring you implement solutions that give you transparency and forecasting to proactively control margin and collateral levels. The Final C, Costs, is about taking measures to identify margin offsets and understand carry cost as a part of overall trade cost. This is required to ensure compliance with MIFID best execution rules as well as reducing carry cost and improving P&L. 


UMR phase 6, Libor transition and greater repo automation

Philip Junod, senior director, TriReduce and TriBalance business management, OSTTRA 

As financial institutions are looking at the best approach to take ahead of phase six next September, those that take the most pragmatic approach to segregating collateral will be in the best position. For those only using cash collateral today, the additional operational requirements brought about to segregate non-cash collateral may seem more attainable given the extension. One thing is for certain, financial institutions can’t afford to waste time. They need to clearly understand each model and assess not just their operational capacity, but their systems capability well in advance of phase six. 

The transition away from Libor also presents significant operational challenges for the many banks, swap dealers, hedge funds and asset managers who have all been trying identify ways to convert their Libor linked derivatives trades in each jurisdiction. A bilateral approach to portfolio compression is certainly helping market participants to reduce Libor switchover risk, optimise capital, and enhance operational efficiency ahead of the December deadline. 

Lastly, a healthy underlying repo market will be fundamental to a well-functioning EU cash bond market in 2022. The trouble is that inefficient repo workflows have long been an operational burden for market participants. As the issuance programme begins to ramp up in the coming months, it is paramount that some of the longstanding manual processes that have hung over repos are automated in order for the market to be fast tracked into the 21st century.  

Nowhere is this more important than in the area of collateral – which is currently very siloed. Some institutions have a repo and a bilateral cleared team using completely different systems and legal entities. Financial institutions should be trying to move to one centralised team and one system in order to bring more efficiencies to repos trading.


Track and trace – fails management beyond CSDR

Daniel Carpenter, head of regulation at Meritsoft, a Cognizant company

While mandatory buy-ins have been postponed, implementation of the CSDR penalty regime is set to impose significant additional costs on banks’ operations from February. While the penalties won’t apply for trades failing to settle in non-EEA jurisdictions, the GameStop incident at the start of 2021 served to highlight the impact of settlement fails across the global markets.

With the focus now on reducing fails to minimise the impact of fines, systems and processes must be put in place to enable firms to fully understand their settlement fails workflows. It’s crucial that global custodian banks can provide granular levels of data, daily, to allow tracking and validation of CSD fine feeds. All the relevant data must be available digitally, and accessible centrally, to enable in-depth analysis of where trades are failing and why. Only then can market participants take action to reduce their incidence of fails and make informed decisions about which counterparty relationships are more, or less, profitable.

Once these solutions are in place, new technologies such as AI will increasingly be used to predict the likelihood of future fails as businesses look beyond the regulatory imperative to achieve ever-greater efficiencies and cost optimisation across their operations.

A tipping point for ESG and climate risk regulation 

Pat Sharman, managing director, UK, CACEIS

Rising regulation in 2021 began to focus the pensions and asset management industry on the impact of climate risks to companies and fixed income issuers, but 2022 will be a tipping point when these risks become more fully understood as standardised data becomes more widely available. This will drive more action from pension schemes in the dialogue they have with asset managers in how these risks are managed to fulfil their fiduciary duty to protect member pension pots from the risks of climate change.  

Developing more knowledge on the impact of climate risks to investments and seeking more data to measure these risks will be key areas of industry focus in 2022.

I’m a big supporter of regulation in his area, which I believe remains a key catalyst in driving ongoing change to manage climate risks. This includes regulation such as EU Taxonomy and future plans around reporting, such as the UK’s recent Greening Finance paper, ‘A Roadmap to Sustainable Investing’ that seeks to harmonise climate reporting requirements for companies, asset owners and asset managers. At CACEIS, we’re supporting the finance industry through educational initiatives and data solutions, helping pension schemes and asset managers deliver on their climate responsibilities.