Regulatory Almanac Part 1: Top 10 Events of 2013
1. One SEF forward, two SEFs back: Despite protests both from within and without of the CFTC, the US went ahead with the 2 October go-live date for swap execution facilities. But the sudden discovery, for some, of Footnote 88 meant that many firms were forced to register as SEFs, and many more found that they were trading on SEFs. This led to a flurry of no action letters as the CFTC realised that it could not reasonably enforce the rules, and so the international swaps market is now where it should have been in September (i.e. trying to figure out how to implement the SEF rules).
2. Bigger fines, smaller targets: Not only did JP Morgan incur a record-breaking $13 billion settlement relating to the sale of retail-backed mortgage securities, but several other fines also caught our attention including: FinCEN fining TD Bank (a Tier 2 bank) $37.5 million for failing to report suspicious transactions, and the AMF issuing its largest-ever fine against a lone French trader for insider trading.
- Cross-border differences continue to give international institutions sleepless nights
- Regulators’ focus is changing with smaller institutions and back office functions now under greater scrutiny
- We’re closer than ever to a global LEI, but we’re not there yet
3. Taxes became more certain than death: The IRS came out with a final set of rules on FATCA in February, meaning that other countries were also able to put in place their own implementing legislation in the second half of the year. However, recognising the considerable implementation challenges faced by foreign financial institutions (often due to incomplete inter-governmental agreements) the IRS ultimately delayed the deadline by six months. Meanwhile, 11 European Member States continue to press ahead with a financial transaction tax in mid-2014.
4. We had the other kind of crash: Following a three-hour outage on Nasdaq in August, the SEC finally decided to take action on the increasing number of technical problems amongst exchanges and firms’ trading systems. In addition to this, on the other side of the Atlantic, European regulators have stepped-up their game over data privacy (with the draft General Data Protection Regulation) and algorithmic trading (by including registration and testing requirements for algorithmic traders in MiFID II).
5. Regulation came to the buy-side: EMIR became very real for funds and corporates on 15 September, from which date they had to have finalised their portfolio reconciliation and dispute resolution agreements with their counterparties. But hot on its heels is AIFMD, which was transposed into national law this year, meaning that funds are now nose to the grindstone to implement it before July 2014 (unless they’re regulated by the FCA of course).
6. The handshake was no longer enough: Differences, particularly between the US and EU in the OTC space, threatened to take the ‘global’ out of ‘global markets’, had it not been for relief from enforcement on both sides of the Atlantic, whether in the form of mutual recognition or no action relief. As CFTC Commissioner O’Malia said, these rules required more than just ‘general agreement’ at the international level, and actually need regulators and politicians to come down to the next level of granularity in their discussions.
- Will the EU/US pay attention to criticisms of its approaches from the international level, including IOSCO and the FSB?
- Will 2014 see the buy-side shaping-up or shipping-out?
- Where will global coordination come from for other identifiers including the UPI and UTI?
7. We learned that regulation is an iterative (not a one-time) process: The (potential) arrival of MiFID II, combined with sequels from other franchises (AMLD IV, CRD IV, UCITS V etc.) tells us that this current wave of regulation will not be the last. Firms that want to remain compliant have to adapt to keeping BAU under constant change management.
8. One small step for regulators, one giant leap for the LEI: The endorsement of several local operating units, or their pre-LEIs, means that we are one step closer to a single LEI. As a result, regulators have stepped-up their requirements for LEIs: ESMA has requested LEIs for EMIR reporting, the CFTC has agreed to mutual recognition of non-US endorsed LEIs and the EBA is requiring banks to register all their entities for LEIs by March 2014.
9. Regulators started to get serious about data: 2013 was the year that regulators, particularly in Europe, decided to go behind the veil and delve into the systems that underpin global banking institutions. With this in mind, we saw a huge number of standards finalised for risk data including COREP and FINREP and the BCBS’ Principles for Risk Data Aggregation.
10. We saw the last of ‘too big to fail’ (or did we?): Cyprus became a testing ground for bail-in, Tier 1 banks had to submit their recovery plans, and draft legislation on recovery plans and ring-fencing is currently in the works. But will all this mean that publicly-funded bailouts are gone for good? Following EMIR, some point to CCPs as the new institutions that are TBTF.