Regulation, regulation, regulation…the ‘new normal’?
As we begin 2015, banks and other financial institutions could be forgiven if they feel a sense of ‘regulatory fatigue’. This is understandable as it is now clear that regulation is here to stay for the foreseeable future.
A new year always provides us with an opportunity to set new goals, challenges and resolutions. Perhaps the start of 2015 is the perfect time for firms to recharge their batteries, re-evaluate the regulatory landscape and begin to embrace and accept regulation as the ‘new normal’.
Looking back at 2014, we saw the introduction of The European Market Infrastructure Regulation (EMIR). The reporting requirements for collateral reporting, delegated reporting, clearing and product standardisation have and will continue to be a challenge for firms. Greater consensus is required on reporting standards and firms will be looking towards the European Securities and Markets Authority (ESMA) for greater guidance and support in 2015.
As a consequence of EMIR, we are likely to see some realignment within the OTC derivatives market. Compliance comes at a high financial cost for firms. Many have found it difficult to justify the required investment for new systems and processes and have struggled to find ways to keep business lines profitable.
The future will mean more firms making the difficult decision to withdraw from those markets which have become unprofitable for them, or where they cannot justify the level of investment.
The demands of reporting and the effective management of data will continue to be important as firms look to embrace the 14 principles mandated by BCBS239. Critics argue that BCBS239 is not prescriptive enough, however there are pros and cons to the directive not having specific requirements.
Firms can view it as yet another ‘box ticking’ exercise, but there is also an opportunity to make significant and long lasting improvements to the governance and structure of many financial institutions. The question is will those who are affected embrace this opportunity?
Following hard on the heels of BCBS239, 2015 will also see the growing importance of BCBS261. This directive which relates to non-centrally cleared derivatives will see many firms having to divert investment and resources to build new front-to-back processes and settlement mechanisms for initial margin on uncleared derivatives.
The European Parliament’s adoption of MiFid II and MiFIR in April 2014 was a significant landmark. The scale of the legislation and the challenge of EU member states protecting their own interests mean some firms view the directive as extremely difficult to implement.
In May 2014 ESMA published its discussion and consultation papers on proposals for regulatory technical standards and how to implement them. In 2015 we can expect further discussion and publications from ESMA as the standards are finalised.
The priority for firms should be to remain up-to-date and engage with the policy-making process, as well as continue developing strategies and plans ahead of the MiFID II 2017 deadline.
In the UK, it is now more than four years since the Independent Commission on Banking (ICB) report, led by Sir John Vickers, was completed in September 2011. The report recommended that banks ‘ringfence’ their retail and investment banking activities, creating a clear divide between them and ensuring that retail banks are protected from the potential risks of investment banking.
As we anticipated, the report is back on the agenda for the UK’s major banks. They have been asked to submit their proposals to The Bank of England, setting out how they intend to insulate their retail operations from their investment banking activities. The Bank of England started work scrutinising these plans during the first week of 2015, and we look forward to the seeing the outcome.
Although UK banks still have until 2019 to implement the reforms, the scale of such structural change and the costs involved mean firms are under increased pressure to satisfy The Bank of England’s demands and demonstrate how they will comply with by the deadline.
If 2014 taught us anything, it’s that regulation can now be considered to be the ‘new normal’ and it isn’t going away. To be successful in this environment, firms need to be open minded, flexible and agile about the future. Not every firm will want or be able to do this – for those that do, the coming year presents a number of opportunities.
So a Happy New Year to everyone; 2015 will prove to be both a challenging but exciting year, as the focus on regulation continues.
This blog appeared on Finextra, click here to view the entry on the Finextra website