5 min read
What does 2020 have in store within the regulatory space? Here's a quick whistle stop tour of some key things to look out for in the coming 12 months...
- LIBOR1ramps up - expect the rhetoric on LIBOR transition to continue to ramp up with more regulator driven milestones. The ISDA2 fallback protocol publication in Q1 will focus attention, and as the cash markets catch up we will start to see substantive moves to RFR3. And a bonanza for the lawyers as the volume of contract repapering escalates.
- MiFID III?? - no, not really. But the planned review of MiFID II might produce some expansion to transparency rules and other changes.
- More reporting with SFTR4- go live of initial reporting obligations for securities financing transactions (repos etc) in April will add to the FI5 reporting burden.
- EMIR6 reporting obligation shift - generally EMIR REFIT changes from 2019 have bedded in, though the shift in responsibility for transaction reporting NFC7 to FC8 in June 2020 is still to come.
- Repapering for margin phase 5 - the class of 2020 for Initial Margin starts to pull in smaller FIs (> €50 billion notional) in September, expect more legal documents work and more careful tracking of thresholds.
- CSDR9 brings fines & buy-ins - in November CSDR will introduce late settlement fines and mandatory buy-ins causing further operational complexity in the securities market.
- Evolving capital framework -we're likely to hear much about the increasing capital burdens of Basel III on (especially European) banks this year, though 2020 is too early to see these impacts in business models or pricing.
Add to all this the continuing speculation on how Brexit trade negotiations in 2020 will affect passporting and equivalence recognition for the UK, and the ever increasing profile of ESG (Environmental, Social and Governance) concerns in the finance industry, and we are in for another busy year.
Read on for more details on the subjects mentioned above.
While lots happened in 2019, the real milestones will be 2020:
- ISDA launch protocol in Q1 to amend fallbacks for major currency types noting publication of the credit spread adjustment ("X") calculated by 5 year median in Q4 2019. EURIBOR10 fallbacks also to be included. Publication will cause widespread outreach as banks ask counterparties to adhere to protocol for their legacy swaps portfolios
- 3 months after protocol publication amendments to ISDA 2006 Definitions become effective, meaning all new derivatives trades referencing ISDA Master Agreements will automatically apply new fallback language (irrespective of adherence to protocol for legacy)
- Market convention for GBP swaps to change in Q1/Q2 2020 - expect broker market to transition to SONIA11 for driving outright curve rather than LIBOR
- Banks stream executable OIS12 as part of term rate construction. Discussions on construction and appropriate use of term rate will continue
- Clarity to be sought around pre-cessation triggers ahead of another market consultation. Further guidance required on "non-representative" criteria for LIBOR from both authorities and clearing houses
- Loan market focus to achieve regulatory goal of no more LIBOR loans post Q3 2020. Milestones will be targeted around technology blockers and agreeing market conventions
- Clearing houses to apply discounting change fromEONIA13 to €STR14 flat in June and US Federal Reserve (The Fed) Funds to SOFR15 in October. Bi-lateral market expected to follow CCP16 Again, this is likely to cause widespread outreach as banks ask counterparties to amend CSAs17 to reference €STR (rather than EONIA) as the EUR interest rate
- Credit Adjustment methodologies for Fallbacks in cash products consultation due to close Feb 6th. While the consultation wording is a little confusing we believe the focus is on credit spread and not the actual RFR. We would be surprised if the market didn't settle on historic average methodology following derivative market
- Official Federal Reserve publication of backward looking, compounded 30/90/180 day averages of SOFR and a SOFR index expected 1H20
- See the LIBOR Risk Disclosure on our website for links to useful information on transition and www.RealisedRate.com for help on how to calculate in arrears compounded RFRs
While we have noted a second order development off the back of frictional costs of the regulation we are very alive to the standard review process the EU18 Commission is looking to conduct, specifically:
- The desire for more transparency with consultations expected around Trading Obligation & Transparency and Market Structure, specifically Algos
- Looking at the nature of venue/off venue trading regulation
- ESMA19 intends to launch a consultation in Q1 2019 to seek stakeholders’ feedback on the potential changes to MiFID II in respect of transparency and the trading obligations and is starting work on OTFs20
- Expecting ESMA to publish transparency calculations for derivatives from April to better inform the speed to which flows become more transparent and reportable in the future
Securities Financing Transaction Regulation (SFTR)
- April 2020 reporting go-live for credit institutions
- Reporting requirements on a daily basis and include:
- MTM21 for Securities, Borrowing & Lending (SBL) original trades
- Collateral updates for Repos and SBL, both daily valuations and changes to the collateral’s composition
- Margin with clearers
- Collateral reuse
- Market looking for ways to optimise regulatory burden including delegation of reporting and move to E-trading
- E-platforms, Clearers and Triparty gearing up to provide SFTR required data to firms from April
See our website for information on NatWest Markets SFTR reporting values (LEI22, UTI23 etc)
- Most requirements from the EMIR REFIT review in 2019 are now in place, however there is one key milestone left.
- From 18 June 2020, when transacting with an NFC24 which is below the clearing threshold for all asset classes, the FC25 will be responsible for all reporting on behalf of both counterparties.
- The Master Regulatory Reporting Agreement (MRRA) published by ISDA and some other trade bodies gives the market a way to align to a single template the help manage operations across a range of reporting obligations.
Margin for Uncleared
This regulation, designed to encourage clearing, continues to bring more of the market into scope, the announcement of the extension does cause a traffic jam in documentation demands for 2020 (phase 5) & 2021 (phase 6), competing with LIBOR contract changes, although from what we're hearing, phase 5 2020 is the big bang. As the scope increases we’re expecting to see greater emphasis on regulatory 'mitigants' and market developments:
- Threshold monitoring - counterparties may make an assessment, based on current and previous trading volumes and products, whether threshold monitoring is appropriate to stay below the 50m threshold. If not appropriate, then broker dealers are likely to require regulatory initial margin documentation with counterparties prior to entering into swaps from the relevant compliance date.
- Custodians - as more custodians (and offerings) become available for Phases 5 and 6, the choice of custodian is becoming more complex. UMR26 documentation is largely driven by custodian and the choice between traditional “third-party” and “triparty” offerings is a significant one. We see triparty – with its inbuilt collateral inventory and management services – as more cost-effective in terms of UMR optimization with minimal draw on internal resources.
- Grid vs. SIMM27- we are seeing increased focus from clients exploring ways to minimise costs / optimise IM28 as more come into scope during 2020. Much will depend on the directional nature of trades. We have capacity to support either and will work with customers around representative trading populations to determine an optimal outcome. Early engagement of course key.
- EMIR RTS29 final report expected to be implemented post publication in Official Journal. We have seen many questions around treatment of FX forwards with additional 'institution' definition for deliverable FX forwards and swaps. As per current market practice, deliverable forwards will continue to be out of scope for IM and for VM30 will only be in scope under CRR31 regulations (Credit Institutions and Investment Firms acting on own behalf). The UMR phase-in ladder now does, of course, have an additional phase in UMR-6 scheduled for September 2021.
- Clearing- it’s easy to forget one of the regulatory goals of UMR to begin with: the economic incentive to clear (as foundational to the Pittsburgh G20 agenda in 2009). In short, the motto “if it can be cleared it shall be cleared” is alive and well, and we expect an increase in trades moving to clearing.
Central Securities Depository Regulation (CSDR)
- Objectives to give greater transparency, achieve shorter settlement periods and reduce settlement fails.
- Achieved by mandating buy-ins, introducing settlement fail fines and having late matching fines from November 2020.
- Expect to see short term liquidity impacts, operating teething issues and potential increased Repo market activity as short positions covered.
Please get in touch with us if you would like to discuss any of these topics in more detail.
For those that might have missed them, we have compiled all the articles we wrote last year below. Many of the issues we called out back then - triggers, use of term rate, conventions etc - are as applicable now as they were back then (call it 2020 foresight!).
That was the year that was....2019
Have a look through last year's articles, most recent at the top:
- Compounding the problem with conventional wisdom?
- LIBOR fallbacks.... and the winner is...
- SOFR and €STR join the scrum
- LIBOR on the ropes but when is the knockout blow?
- EONIA to ESTR - what's in a name change?
- LIBOR - Back to the Future
- MiFID II – the rise of the machines, but can your voice still be heard?
- Loan market IBOR credit adjustment - look forward before you look back
- Two's company, three's a crowd....EURIBOR, EONIA and ESTR
- Delay... what delay... margin final phase kicked out by a year
- Howzat? – another SONIA transition blocker bowled
- Has the loan market "Realised" SONIA's potential?
- ABP LIBOR to SONIA Consent Solicitation - The Results
- Get in training for EMIR REFIT
- Drink up, LIBOR is in the last chance saloon
- The end of May (LIBOR not Theresa)
- ABP LIBOR to SONIA – One giant leap for reform?
- Itchy trigger finger on LIBOR transition?
- IBOR transition car crash – how good is your insurance?
- IBOR Reform: Ringing the bell for the end of term?
- Margin for Non-cleared - 8bn or 50m?
- SONIA - LIBOR: time to jump clear before this gets chaotic - FCA
- What do EU RFR, BREXIT & EU Benchmark Regulation have in common?
- Margin & clearing regulation: close but no cigar?
- LIBOR transition filling your Christmas hamper
London Interbank Offered Rate1, International Swaps and Derivatives Association2 Risk-Free Rates3, Securities Financing Transactions Regulation4, Financial Institution5, European Market Infrastructure Regulation6, Non-Financial Counterparty7, Financial Counterparty8, Central Securities Depositories Regulation9, Euro Interbank Offered Rate10, Sterling Overnight Index Average11, Overnight Index Swap12, Euro Overnight Index Average13, Euro Short Term Rate14, Secured Overnight Financing Rate15, Central Counterparty Clearing House16, Credit Support Annexes17, European Union18, European Securities and Markets Authority19, Organised Trading Facilities20, Mark to Market21, Legal Entity Identifier22, Unique Transaction Identifier23 Non-Financial Counterparty24, Financial Counterparty25, Uncleared Margin Requirements26, Standard Initial Margin Model27, Initial Margin28, Regulatory Technical Standards29, Variation Margin30, Capital Requirements Regulation31.
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