Heading into 2020 the securities financing industry is coming to the end of a long road of regulatory reforms, but, with several major hurdles still to be navigated there’s no time to take our eyes off the ball
Before we take our first tentative steps out into the new dawn of the second decade of the 21st century, it’s worth taking a moment to consider how far the global securities financing markets have come in the past 10 years – as well as considering the road left to travel.
Strange as it may sound given how many column inches, conference panels and board meetings have been dedicated to some now very familiar regulatory acronyms, the majority of the terms most spoken about today were merely a twinkle in the regulator’s eye at the start of the decade.
AIFMD, CSDR, the US Dodd-Frank Act, EMIR, MMF reform, MiFID II, SFTR, UCITS V, UMR, and the Volcker Rule (see table overleaf for full names), to name only a few of the most relevant to the securities finance world, are all the product of feverish work by various market watchdogs in the past 10 years.
In fact, not only did the first decade of the millenium pre-date many of the most prominent regulations we have today, it pre-dated some regulators themselves. The European Securities and Markets Authority (ESMA) only formed in 2011, and the UK’s Financial Conduct Authority, as we know it today, followed in 2013. Do you feel old yet?
The new decade is only a few days old and undoubtedly brings the potential to usher in a host of new changes for the securities finance industry – mostly driven by space-age technology we could only dream of when the current millenium began – that will push the market to new heights by 2030.
That is, of course, assuming TIME magazine’s person of the year for 2019, Greta Thunberg, isn’t correct and we aren’t all far too occupied by a wholly different type of liquidity problem than the one usually discussed in these pages.
However, assuming we are all still able to enjoy the luxury of terra ferma for at least the next 12 months, there is a slew of regulatory challenges – or opportunities as they call them in the IT world – to face in the coming year. With this in mind, let’s take this opportunity to have a quick round-up of just two of the major obstacles the industry crossed last year and a few highlights of what still awaits us.
The big one: SFTR
The first phase of SFTR is finally set to come into force on 13 April, no ‘ifs’, no ‘buts’, no last-second reprieve, says ESMA. However, the final reporting standards that were widely expected to be delivered last month, at the latest, only appeared yesterday afternoon (see SLT’s lead story for full details).
The report was a welcome by suprise for the industry as many speculated that its failure to arrive in December as expected meant it wouldn’t be forthcoming until mid-to-late January. But, here we are.
The final report followed a release on the 20 December that updated version of its XML schemas for SFTR reporting that rectified several defects found in its previous draft released on 31 October.
The new version is understood to be largely the same as the previous release from a technical standpoint but was still an important amendment as this new fourth version was granted its ISO-registration.
The 11th-hour correction was undoubtably frustrating for development teams that had been operating on the October draft but it was a crucial step for reporting service providers that had signed contracts with clients that stipulate that the reports generated would be via the ISO 20022 messaging framework.
In October 2019 at the Risk Management Association’s (RMA) annual conference, the CEO of the International Securities Lending Association (ISLA) predicted that a last-minute reveal was likely and that many dev teams would be working throughout the festive break to get their SFTR reporting solutions in line with the updated requirements.
At ISLA’s own event a few weeks before the RMA’s, a poll of delegates found that just under two-thirds believed that they would not be ready for April if they only got their marching orders from ESMA in December. The reality is that those in scope for phase one have recieved their full marching orders with only 14-weeks to go – a tall order by anyone’s standards.
In its XML schema release, ESMA stated that more SFTR information would be forthcoming in January, which is widely understood to mean that even more information and clarifications may also appear in the near future. Some optimistic commentators have speculated that ESMA would only release the final standards this late if the changes from the level two text were minor and easy to adapt to ahead of April and intial reviews of the text seems to bear that out. Others are now questioning whether it, in fact, points to there maybe being some ‘ifs’ and ‘buts’ to test that deadline after all.
The next big thing: CSDR
Hot on the heels of SFTR comes its potentially meaner cousin, CSDR, due in September. Many industry commentators have highlighted that the features of CSDR, which aims to improve settlement rates across several markets, including securities financing, arguably poses more of a challenge to market participants than SFTR. Primarily, this is because the settlement discipline regime will introduce cash penalties for transactions deemed to have failed after a set period, along with mandatory buy-ins – both firsts for the securities finance industry.
However, unlike SFTR, where there is still no discernable chance of a delay, regardless of the mounting body of market research warning of a wide-spread lack of readiness, CSDR’s buy-in rules are expected to be pushed back from the September deadline to at least November.
The possibility of a delay was first flagged by the International Capital Market Association (ICMA). The association noted that the technology framework around the regulation would not be in place by September as it required an update to the SWIFT messaging protocol which will only come with SWIFT’s regular November update.
Specifically, the need for a delay is related to the cash penalties element of CSDR, which has the knock-on effect of also delaying the buy-in provisions. CSDR’s buy-in regime is also facing criticism from ICMA and other industry bodies for not being fit-for-purpose for a variety of reasons. This adds further weight to the argument to delay and reform the rules before unleashing them on the market.
At the time of writing, the European Commission has not confirmed the delay, but it is understood that it may do so later this month.
To conclude, the festive cheer may only just have worn off for some but the first month of 2020 is likely to require market participants to hit the ground running as there’s likely to be several twists and turns in the regulatory road ahead. Good luck!
