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What are the key issues that have developed in the banking and financial services sectors throughout 2015? Simon Puleston-Jones, chief executive officer at FIA Europe, examines future implementation issues for some of the key pieces of financial services implementation.
Equivalence has been an issue under European Market Infrastructure Regulation (EMIR 2012), as the European Commission (Commission) has looked to determine
It’s clearly been most protracted with respect to recognition of the USA, but the Commission and Commodity Futures Trading Commission (CFTC) are focusing all their efforts on reaching a positive resolution.
We have seen further evidence of the negative impact that the leverage ratio under the Capital Requirements Directive IV (CRD IV) is having on access to clearing. To address this, the leverage ratio should be amended so as to recognise the exposure-reducing effect of segregated margin—at present, the leverage ratio does not give clearing brokers any recognition for the fact that, when they clear derivatives for their clients, they are receiving collateral against that exposure. This therefore uses up brokers’ balance sheet capacity to facilitate clearing quicker and reduces the number of client clearing brokers that individual clearing brokers can provide. Nomura, RBS, BNY Mellon and State Street have all pulled out of swaps clearing in the past 18 months. The direction of travel points towards a further contraction in the number of clearing brokers that are able to provide access to clearing.
Clearing house recovery and resolution will be high on the agenda. It’s unclear precisely when we will see the Commission’s proposals on this, but firms and trade associations are already pro-actively discussing this important topic with the Commission and national regulators and legislators.
The findings of the EMIR review will be very important—the consultation closes in August. We are currently working closely with our members to collate their input. In general, the implementation challenges and unanswered questions within EMIR are well known.
With respect to the Markets in Financial Instruments Directive II (MiFID II) and the Market Abuse Regulation, the European Securities and Markets Authorities (ESMA) and the Commission have agreed to conduct an early legal review of the draft Regulatory Technical Standards (RTS). This has led to the delayed submission of final draft RTS by ESMA to the Commission to the end of September—instead of July. The FCA will then consult on handbook changes to implement MiFID II in December 2015, with the final FCA policy statement on implementation of MiFID II due in June 2016. Relevant UK industry participants will need to review the final RTS and resulting implementing technical standards together with FCA policy statements and handbook changes very closely upon publication, as they will have a very significant impact on their business from 3 Jan 2017.
Firms should now be working through their MiFID II change management plans to address the impact that MiFID II will have on their business. The scale of anticipated changes should not be underestimated. Given the long lead-times, the IT development work, in particular, should be started sooner rather than later.
The Commission announced its ‘better regulation’ agenda last month. Their proposals should be warmly welcomed, as they are designed to result in a much more transparent and open Commission, that is more receptive to feedback from industry participants. Such a development can only be for the good of legislators and those that implement the legislation.
The negative impact of capital rules on access to clearing is increasingly evident. Indirect clearing remains a challenge for the industry, not least due to the jurisdictional, insolvency and capital issues.
One thing that came out clearly from the EMIR public hearing at the Commission on 29 May is a desire across the industry for single-sided reporting under EMIR. Also important is the ongoing challenge faced by regulators in ensuring that they have all the data that they need to regulate markets properly and set thresholds at the right level. ESMA seems to recognise this challenge of interpreting ‘big data’, and is seeking to tackle it through some of its recent proposals relating to trade reporting under EMIR. It’s a move in the right direction, but further work is needed to ensure the regulators have timely access to data and the means to interpret such data in a way that is useful to them for supervisory and enforcement purposes.
Interviewed by Duncan Wood.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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