The impact of COVID-19 on key global financial regulatory reforms

 

Paris, France, 30 April 2020

While protecting the global population’s health is the overriding priority and concern in the COVID-19 emergency, the knock-on impact on people’s livelihoods and on the financial economy continues to grow in magnitude. Within financial circles, much energy is focused on trying to respond to the array of needs that have arisen overnight, by adapting a “business as usual” approach to ensure business continuity for employees and customers.

Notwithstanding the additional challenges faced by improvement and transformation projects in maintaining the same momentum in the current circumstances, capital markets players are embracing digital tools like never before to keep projects moving as much as possible. 

This context also applies to regulatory projects. Global regulators have been quick to recognise the added strain and have already announced a number of implementation timeline extensions to ease the burden and help companies plan resources appropriately.

Here we outline some of the key global financial regulations that have been affected by the COVID-19 pandemic and our observations about how this will impact regulatory compliance and related IT transformation projects.

 

1)      The Uncleared Margin Requirements (UMR) regulations, which require firms to post collateral for over-the-counter transactions not covered by CCPs including physical FX forwards, FX options, cross-currency swaps, exotics and equity options, have been extended. Phase 5 participants who were rushing to be ready for the September 2020 deadline have been granted an additional 12 months to September 2021 and phase 6 participants, who only recently benefited from a one year extension, have been given an additional year up to September 2022 to comply.

Whereas this delay may not have been required by the many institutions who were already on track to comply, for others it gives them welcome additional time to achieve compliance in a less rushed manner, which in the longer run should pay off if the additional time is used to go beyond bare compliance to improving businesses process and IT infrastructure.

 

2)      Basel III, a set of international banking regulations designed to mitigate risk within the international banking sector has been delayed by one year until 2023. The “FRTB” market risk capital charge, the revised CVA capital charge, SA-CCR, leverage ratio and operational risk frameworks have all been granted one extra year with the announcement of a blanket Basel III extension to 1st January 2023. This delay now means that we could see a convergence of both the US and European dates, which gives global institutions the benefit of a more level regulatory playing field. Europe had already announced a two-step implementation plan, with reporting only as a first step, given the time constraints surrounding CRR3, the next legislative phase of Capital Requirements Regulation within the EU.

Overall there is mixed industry opinion on this announcement, as banks are now in a hold position for a longer period with Basel 2.5 market risk capital charges. In times of turbulence, banks face a challenge of a higher pro-cyclical VaR on top of the stressed VaR component. FRTB addresses this shortcoming but it is now delayed until 1st January 2023.

However, there is no time to lose. For example, with the European Banking Authority confirming an effective delay to the FRTB reporting deadline from April to September 2021, European banks still only have 16 months to prepare and to iron out all of the various data-related, pricing and risk sensitivities issues that typically arise.

One key industry initiative that many banks are finding useful is the ISDA (International Swaps and Derivatives Association) FRTB benchmarking initiative. As well as giving a means for banks to compare their calculation approaches, it gives a valuable forum to discuss interpretations of the technical rules, which helpfully supports cohesion and conformity across the industry.

 

3)      SFTR reporting extension in Europe - ESMA has granted a three month supervisory enforcement extension until July 13th 2020 on new reporting obligations under SFTR, which introduces requirements to improve transparency and monitor the risks associated with the securities financing transaction market.

The relief here, though minor, is helpful given the timing of this particular deadline falling in the middle of COVID-19 lockdown. It doesn’t change much however in terms of the magnitude of what is required to comply with SFTR reporting obligations, but it affords a little bit of breathing space.

 

Overall, banks and financial institutions will do well to continue with their commitments and plans as much as possible to allow for any contingency planning that will be inevitable. We see that many committed regulatory projects are being maintained, allowing for adjustments on the timings for the remaining stages given the extra time available. For regulatory projects that were about to start, many banks are reviewing the timelines to see whether it is better to proceed as is or to delay some projects as part of a re-ordering of priorities at programme level, which are driven by bank-level factors and circumstances.

Both of these scenarios could allow for opportunities to embrace digital transformation and design best practices by accelerating integration in a scalable and sustainable way, which in the long term will allow for the most effective and impactful form of compliance.

If you need more information or advice from our specialists, please get in touch.