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Article: Smooth Sailing Ahead? | Future Regulatory Sqaulls To Come

28 May 2014 | Paloma Migone

Regulatory reforms have been at the forefront since the global financial crisis hit nearly six years ago – and it won’t be taking the back seat for a while yet. 

Market participants working globally may have passed the hurdles of some new OTC derivatives rules under the Dodd-Frank Act and the European market infrastructure regulation (EMIR), but there are more rules to come over the next few years.  As the industry continues to prepare for a deluge of regulation to kick-in, we have put together a list of regulation with the most impact in the next two years:

Packaged trades 
With swap execution facilities (SEFs) experiencing flat volumes since their launch earlier this year, some providers believe packaged trades may help attract further buy-side participation on the platforms.  The Commodity Futures Trading Commission (CFTC) earlier this month outlined a phase in approach for packaged trades – trades that include groups of products, such as a number of swaps, or a swap and a bond – on SEFs. The first stage began on 15th May for packaged transactions in which all components are swaps that have already been made available to trade. The following deadlines, which include packaged trades with different variables, are 1st June, 15th June and 15th November. 

More at the CFTC: http://www.cftc.gov/PressRoom/PressReleases/pr6918-14

Trade reporting - collateral and valuations
It was a race to the finish line when trade reporting began in February this year. Market participants on both sides of the trade must now report OTC derivatives transactions to one of six regulatory-approved trade repositories (TRs). Inconsistent and missing data flowing to TRs has made trade reporting challenging so far. And starting from 12th August, market participants will also be required to report collateral and valuations of trades, presenting a new obstacle to tackle. 

More here in this PDF: https://www.slaughterandmay.com/media/2046726/emir-reporting-of-derivatives-from-12-febuary-2014.pdf

MiFID II

Described by European Markets and Security Authority (ESMA) chairman Steven Maijoor as “the biggest overhaul of financial markets in a decade,” MiFID II is set to have a substantial impact on the industry. ESMA last week released a consultation paper on the new regulation, which is set to make changes to dark pools, data fees and high-frequency trading, and asked for public feedback by 1st August. There is still a lot of work to be done before MiFID II takes effect however, as ESMA needs to draft regulatory technical standards on more than 100 requirements within the directive, as well as provide advice to the European Commission. 

More here at the UK FCA: http://www.fca.org.uk/firms/markets/international-markets/mifid-ii

‪Central clearing ‬‬‬
The countdown for clearing was triggered by the authorisation of the first central counterparty (CCP), Stockholm-based Nasdaq OMX, in March. From that point, ESMA has up to six months to produce technical guidelines on clearing houses and products. The European Commission and European Parliament will then have three months to back the standards, meaning mandatory clearing can take effect as early as December this year. 

More here: http://www.theotcspace.com/2014/03/18/clock-starts-ticking-towards-european-mandatory-clearing-omx-authorised

FATCA ‬‬‬
The US Foreign Account Tax Compliance Act will require financial institutions in the US and overseas to identify account holders as either a US or non-US person, in an attempt to keep US account holders from hiding income and assets overseas. The US’ Inland Revenue Service is to publish the foreign financial institution list on 2 June, and starting from 1 July new account due diligence requirements and identification will begin.

More here: http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-FATCA

Basel III (CRD IV)
Europe is introducing new minimum standards on bank capital adequacy by the Basel Committee through the Capital Requirements Directive IV. The standards, which were reviewed following the financial crisis, have been set to strengthen the resilience of the banking sector, improve risk management and increase transparency. The European Commission is phasing in the leverage ratio over five years starting with 60% in 2015 and rising up to 100% in 2018, following concerns that a fast implementation could slow down bank lending. 

More here: http://ec.europa.eu/internal_market/bank/regcapital/legislation_in_force_en.htm

And here: http://www.bankofengland.co.uk/pra/pages/crdiv/default.aspx

Financial Transaction Tax
Eleven European countries are working on implementing a financial transaction tax (FTT) from January 2016. The group led by Germany and France appears to be set on introducing the levy on a phased in basis, starting with the taxation of shares and some derivatives. The UK has already tried to stop the plan, but a European Court ruled the FTT could not be blocked because it was not yet in use. However, the UK could attempt another legal challenge once the tax has been finalised. The initial FTT proposal set a levy of 0.1% on equity trades and a 0.01% on derivatives trades, but it is widely expected to be watered down to 10% of their original level. 

More here: http://ec.europa.eu/taxation_customs/taxation/other_taxes/financial_sector/index_en.htm

Margin Requirements for Un-Cleared Trades

The Bank for International Settlements' Basel Committee and the International Organization of Securities Commissions in September released the final document on rules requiring market participants to post initial and variation margin on non-cleared trades. The new rules are aimed at reducing systemic risk around the OTC derivatives market, and will be phased in over four-years beginning in December 2015. Physically settled FX forwards and swaps are except from initial margin requirements. 

More here: http://www.bis.org/press/p130902.htm

Summary

This doesn't seem like plain sailing at all, firms need to keep their compliance departments and implementation teams fully staffed for quite some time to come, and the budgets to support continuing change will have to flow. 

Paloma.