I last wrote about Brexit just prior to the referendum, and with the start of a new year, Article 50 voting in the House of Commons and a new President in the White House, it seems apt to look once again at the current state of global affairs, with its worrying return to the cataclysmic ‘Cold War speak’ of the 70s and 80s.
As mentioned before – whether in or out of Europe, the UK would be likely to maintain the regulatory frameworks set in place by MiFID / MiFIR (MiFID I certainly…) and EMIR, if only to simply keep parity with the European Union (EU) in a European Economic Area (EEA) / European Free Trade Area (EFTA) style relationship. Bearing in mind that both the EU and Commodity Futures Trading Commission (CFTC) in the US use equivalency mechanisms to ensure parity in cross-border dealing; in summary, if your laws are not “as good”, you cannot trade or are subject to the jurisdiction of the other party.
So why not MiFID II? Well, amongst the many proposed changes in the air in the US, there is a question over regulation in general, and a big question over the longevity of the Dodd-Frank regulation that was enacted to ‘protect the markets’ and which is currently in place. In this volatile environment, we must ask what would replace it if it were repealed, and more importantly where does this leave the 2009 Pittsburgh agreement of the G20 nations?
In January this year the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) met in Paris as part of a series of discussions on the harmonisation of the implementation of reporting across the G20. As a colleague wryly remarked “isn’t it interesting we have now been talking about this for 7 years?”
Hanging over this meeting were the shadows of a number of very large elephants, including:
- Unilateral developments by regulators
- Potential weakening / repeal of the Dodd-Frank Act by the US
- Breakup of Political Unity in this area (EU / US)
Underlying all of this is the big question – “what do the regulators actually want to see?”
Implementing reporting as a technical exercise is much less difficult then determining the meaning of what is required. Part of the harmonisation process would be to try and drive a singular view of the data, but there is always a clash around what the regulators want, versus what they need. In part, there appears to be an unwillingness to relay what is wanted for fear that people / firms may try to ‘game’ the system. This is compounded by market participants keeping their approaches to themselves, since there is a heavy cost of any change and an implied impact of ‘being wrong’. This is why the CPMI / IOSCO meetings are important, as this is one of the few (potentially the only!) forum where industry and regulators are sat around the same table.
Reporting trades and transactions is seen as a method of measuring risk and a way of examining other aspects such as market abuse. However, further down the value chain (or in parallel depending where you are sat), is the need to report the statistical data demanded by the European Central Bank (ECB) and the Bank of England etc, which uses the same data, but in a repurposed format. There is in general no real link between these figures, beyond the identity of the institution, so it is very likely that the firm’s ledger may show a different picture to the trade and/or transaction reporting data. The EU is starting to take a more holistic ‘does it make sense’ approach to statistical data gathering, where reports are examined and cross-checked to match the business pattern, and then the institutions are asked if this deviates from historical reports or known market patterns. This approach means that institutions will have to have a more joined up view of the underlying data being reported, with reporting initiatives across the bank needing to act in concert. This will undoubtedly present difficult challenges for many firms in terms of the use and timing of the reports and will also require a single management overview.
Given recent reports from the US, some relief may come in the form of repeal of some parts of the Dodd-Frank Act, although it is hard to gauge at the moment whether this will actually happen; certainly if does, then the ‘Volcker Rule’ would appear to be in the firing line. If this were to happen there would be an immediate impact within the overall global regulatory framework. With one regulatory regime being out of synchronisation it will distort the market, with some obvious consequences being that business will move, but, also potentially it may create a regulatory ‘black hole’. Given the size and importance of the US market, it would then become a question of whether this might encourage the loosening of rules elsewhere, or whether the other trading areas would become resolved against it?
So what about regulatory fines? Certainly, with a new administration in office in the US and outstanding settlements, the stage is set for some very large numbers to appear, in addition the National Futures Association (NFA) are also conducting a review of the documentation around policy and procedures being kept for Swaps Dealers. The last time this data was scrutinised was close to the start of Dodd-Frank in 2010, so there has been a lot of water under that particular bridge since then. Banks will have to show that they not only have all the documentation, but that the documentation actually reflects the reality.
All of this underlines the need to prepare for and manage the constant flow of regulatory change, paying particular attention to how regulation is implemented, in order to keep documentation and the institution up to date and compliant… or else feel the wrath of regulator.
It is evident that simply from a regulatory perspective, that 2017 is already shaping up to be one of the most challenging times for global and domestic banks – what is not yet clear is whether the turbulent times ahead and likely changes to long-term and well-trodden pathways, will ultimately lead to greater unity or division?