It is too early to fully measure the impact of Covid-19 on the world economy, but pundits already predict that it will be as bad or worse than the 2007-08 crisis. Some economists have even gone as far as forecasting $1tn of lost income worldwide.
Facing a situation of unequalled emergency, regulators have had to respond with equally urgent measures. In Europe, this has translated into the European Securities and Markets Authority (Esma) extending response dates for all ongoing consultations with a closing date on or after March 16 by four weeks. In a similar move, the FCA pushed all closing dates for open consultation papers back to October 1.
“This is an attempt by European authorities to create a harmonised response to relaxing financial reporting obligations,” said Tim Cant, regulatory partner at Ashurst. “The key point for listed companies, for instance, is that even in the absence of providing a financial report they’re expected to update the market as to why they have been delayed, or their progress in doing so.”
In the UK, the Bank of England subsequently cut interest rates to almost reach zero and scrapped annual stress tests for eight major UK banks and building societies. The FCA also granted temporary relief for listed companies facing challenges with corporate reporting, having given them an extra two months to publish audited financial statements.
“In these unprecedented times, firms are dedicating engineering and human resources to ensuring business continuity and it’s important to minimise operational risk,” said Pablo Portugal, managing director of advocacy at the Association for Financial Markets in Europe (Afme). “Authorities, along with market participants, should consider the feasibility of rolling out major implementation projects and technology updates in the coming period.”
In the list below, we look at some of the key regulations that have already been impacted by the Covid-19 crisis, and how this will affect market practice.
Basel III
On March 27 the Basel Committee announced that the implementation of the updated Basel III standards has been deferred by a year to January 2023. A total of eight revised frameworks were postponed as part of the delay, including output floor rules, revised pillar three disclosures, and the standardised approach for credit risk. The committee said the delay aimed to provide additional operational capacity for banks and supervisors to respond to the crisis.
"It is important that banks and supervisors are able to commit their full resources to respond to the impact of Covid-19,” said François Villeroy de Galhau, chairman of the committee’s supervisory group GHOS and governor of the Bank of France. “This includes providing critical services to the real economy and ensuring that the banking system remains financially and operationally resilient.”
As the new standards were finalised with the objective of complementing the initial set of Basel III rules, the committee said that the delayed timeline was unlikely to dilute banks’ capital strength. “Current events demonstrate once again the importance of a resilient financial system, which these reforms will help reinforce further,” the committee said in a statement.
It’s still unclear whether the capital requirements directive 5 (CRD5) and capital requirement regulation 2 (CRR2) – both part of the updated Basel III guidelines and due to be implemented in 2020 and 2021 respectively – were also delayed. “Their EU implementation timeline is complicated and it remains to be seen how the EU commission will react to the Basel III delay,” said Julia Smithers Excell, partner at White & Case.
The fundamental review of the trading book (FRTB), however, was part of the delayed rules. Consisting of a revised market risk framework, FRTB is due to introduce new capital requirements for banks’ trading desks. “FRTB and all the components of Basel III will further enhance loss-absorbing capital buffers, making banks even more resilient in times of crisis,” said Tim Lind, managing director of DTCC Data Services. “Given the previous timeline of January 2022, preparations should already be well underway across the industry, and market participants should continue to advance in this area.”
Uncleared Margin Rules (UMR)
Earlier this month, the Basel Committee and Iosco [International Organization of Securities Commissions] announced a one-year delay for the last two phases of the margin requirements for non-centrally cleared derivatives. Phase five, which covers firms with an aggregate average notional amount (AANA) of non-centrally cleared derivatives superior to €50 billion, will now come into play in September 2021. Phase six, which covers entities above the €8 billion threshold, will be brought in a year later.
The UMR were introduced as part of the European Markets Infrastructure Regulation (Emir). They require counterparties to exchange both initial and variation margins on derivatives transactions that aren’t cleared by a central counterparty (CCP). The requirements first took effect in 2017 but were phased in progressively, with each phase lowering the threshold above which firms fall into scope.
Margin rules have previously been criticised by market participants. Some of them, for instance, suggested that phase five and six thresholds were too low and would bring “every man in the street” into scope. In the run up to phase five, there were also reports that firms hitherto not impacted by the rules – typically buyside firms – were taking steps to optimise their portfolios to avoid being caught up. Many of them will likely be pleased with the delay.
“Covid-19 is an industry-wide challenge,” said John Straley, executive director of institutional trade processing at DTCC. “The additional time provided by the UMR delay will be welcomed by market participants as they focus resources on managing risks associated with current market volatility.”
A joint letter co-signed by 20 industry associations had previously been addressed to the Basel Committee and Iosco to request the delay. The letter mentioned that market volatility had seriously affected firms’ ability to update their infrastructures in order to meet the new requirements in time.
“Whilst the prior financial crisis witnessed a flight to quality, the events in February and March have evidenced a flight to liquidity,” said Alexander McDonald, CEO at the European Venues and Intermediaries Association (EVIA). “Market participants have shredded assets in favour of dollar cash, clearly to a great extent to meet margin calls. It’s clearly in light of these sweeping impacts that the delays to further require counterparties to post cash collateral have been granted by the global standard setters.”
Mifid II
2020 was due to be a key year for the Mifid II review, and one that many hoped would bring about some long-awaited changes to the regime. Last year, the authorities set out a gradual review process that was due to take place throughout this year, and possibly beyond.
However, as part of the extended consultation response dates announced by Esma, many Mifid II-related consultations have now been pushed back, which is likely to delay the overall review process. These, for instance, included reviews of the transparency regime for both non-equity and equity instruments, of the systematic internalisers regime and of the new investment firms regulation (IFR) and investment firms directive (IFD).
The industry has displayed great levels of discontent towards Mifid II since it was first implemented two years ago. “I haven’t given up on Mifid II,” said Jason Waight, head of regulatory affairs and business management at electronic bond trading platform MarketAxess. “However, it clearly hasn’t yet fulfilled the goals outlined by regulators. We may need to give it more time to see how that transforms in the future.”
Responding to industry concerns on telephone recording rules under Mifid II, Esma also published a statement to clarify its position. The statement read: “[We] recognise that, considering the exceptional circumstances created by the Covid-19 outbreak, some scenarios may emerge where … the recording of relevant conversations may not be practicable – for example due to the sudden remote working by a significant part of staff, or the lack of access by clients to electronic communication tools.”
Esma also granted forbearance on the new tick-size regime for systematic internalisers that came into force on March 26 this year. Competent authorities are expected not to prioritise supervisory actions in relation to the regime from March 26 until June 26 this year.
Securities Financing Transaction Regulation (SFTR)
As exclusively reported by Practice Insight, Esma gave a three-month reprieve to phase one go-live firms under SFTR earlier this month. The move marked one of the first regulatory delays directly resulting from the coronavirus crisis.
Concerns had been growing among market participants as the initial go-live date of April 11 drew nearer, with many fearing that the crisis would impact their ability to get systems ready in time.
“The case was building up for us to request an intervention from Esma,” said Alexander Westphal, director of market practice and regulatory policy at the International Capital Market Association (Icma). “While challenges as to market readiness for the go-live date already existed, these were compounded by the Covid-19 crisis.”
A joint industry letter co-authored by Icma had been addressed to the regulator a few days earlier to request the delay. Although Esma’s decision was a welcome relief, many market participants said they wouldn’t ease the pressure off compliance efforts. “July will be here before we know it, so although this gives firms some extra time to work through any integration issues, they can’t take their foot off the pedal,” said Linda Coffman, executive vice-president at SmartStream Technologies.
Libor
The potential delay of the transition from the London interbank offered rate (Libor) and other ibors to risk-free rates has certainly spurred a lot of speculation in recent weeks. This is particularly relevant in the UK, where regulators have significantly ramped up the pressure on market participants by imposing a series of stringent deadlines throughout this year.
Among these, the ceasing of cash product issuances by end-Q3 2020 was largely perceived as the most hard-hitting. “The September deadline is certainly aggressive for the bank lending market, as only a handful of Sonia loans have been signed so far and the vast majority of banks still aren’t offering them as a matter of course,” said Joshua Roberts, associate director at JCRA.
A recent poll conducted by Smartbrief showed that 80% of respondents believed the Libor transition should be delayed. “This is an opportunity for the authorities to push the Libor can a bit further down the road,” said a senior figure at an industry body. “The truth of the matter is that banks have been pushed very hard by the authorities to try and euthanise Libor, but there are a lot of difficulties involved. I think everybody will agree that delaying the transition is a good thing.”
The current crisis could also be a great opportunity to test the resilience of alternative risk-free rates. “This crisis is an enormous stress test for the market, and one that will enable to assess the extent to which risk-free overnight rates can be used as a reliable replacement for Libor,” the source added. “This will need to be analysed before we can take the reform any further.”
Putting an end to speculation, the FCA released a statement in which it clarified its position. “The central assumption that firms shouldn’t rely on Libor being published past 2021 hasn’t changed and [this] should remain the target date for all to meet,” the regulator wrote, adding that many preparations for the transition should be able to continue as normal.
The FCA, however, conceded that the timing of some transition programmes could be affected. “Particularly in segments of the UK market that have made less progress in transitioning – such as the loan market – it is likely to affect some of the interim milestones,” the regulator wrote. This leaves a glimmer of hope that the dreaded Q3 deadline could be pushed back.
Senior Managers and Certification Regime (SMCR)
First rolled out to banks in 2016, SMCR was extended to all FCA solo-regulated firms at the end of last year, bringing an extra 47,000 UK firms – including asset and hedge fund managers and financial advisers – into scope.
This year is set to be key for SMCR. While March 9 marked the deadline for banks and insurers – in scope since 2018 – to submit their data to the FCA’s directory, FCA solo-regulated firms are due to submit theirs in December. Benchmark administrators are also due to be brought into the regime’s scope the same month, but sources are already speculating on how feasible this will be.
Although these deadlines haven’t yet been formally delayed, the FCA recently announced a number of alleviating measures. “We understand that firms may take longer than usual to submit revised statements of responsibilities in the present environment,” the regulator said in a statement. “We expect firms to submit [these] as soon as reasonably practicable, taking into account the current circumstances.”
The regulator also said it could possibly extend the 12-week rule allowing individuals to perform senior manager responsibilities without approval to a longer period.
Note: This is a non-exhaustive list of regulatory delays. Practice Insight chose to focus on the most significant pieces of UK and EU regulation that have already been impacted. We will continue to closely monitor further regulatory delays caused by the Covid-19 crisis in the months to come.
