First mover disadvantage
29 March 2016
The EU moved first with its reporting requirements for SFTs, but beating other FSB members to the punch might have been a mistake. Paul Landless of Clifford Chance and Greg Lyons of Debevoise & Plimpton report
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How has the EU鈥檚 regulatory framework developed?
?
Paul Landless: The EU鈥檚 view and priorities may be viewed as broader to the Financial Stability Board鈥檚 (FSB) goals of addressing financial stability risks.
?
The EU鈥檚 rules for reporting under the Securities Financing Transactions Regulation (SFTR) is very wide in that it captures any European entity鈥檚 activity, whether or not it is regulated by the EU. There are issues on product scope as well. Lending money for acquisition financing where the target鈥檚 shares are given as securities could trigger some requirements, even though it鈥檚 a relatively day-to-day corporate transaction. Some types of margin lending could be caught up in this too.
?
I don鈥檛 think the FSB had a reporting system like this in mind鈥攐ne that picked up all and sundry. As well as being more very broad in some areas, the two-year phase-in of some of the EU鈥檚 SFTR rules is underway already and is being implemented faster than other FSB members, many of which have not proposed equivalent rules.
How much scope is there for discrepancies in sanctions on reporting?
?
Landless: A lot of the regulation in Europe, such as the European Market Infrastructure Regulation (EMIR) and SFTR, can hand over enforcement to member states. SFTR is a regulation with a capital 鈥楻鈥� and not a directive needing national implementation, so everyone is using the same rulebook, but the differences come in the rigidity of enforcement by each member state. For example, the French regulator could have a very strict compliance view compared to the German regulator if it sees operational failings. It could be a matter of resources if carrying out these rules requires a large IT investment or increasing your headcount.
Given the potential for overlap leading to an overbearing regulatory environment, has there been much push back from the industry?
Greg Lyons: In Europe and Asia, there are reports citing material concern by certain governments and government agencies that the Basel Committee on Banking Supervision has published a broad array of rules since the financial crisis without reconsidering the aggregate impact of those rules or whether their objectives are consistent.
For example, in November of last year, Bank of England governor Mark Carney indicated that 鈥渋t would be a miracle if all that regulation 鈥� perfectly fit together so that there was no duplication 鈥� and no contradictions鈥�.
Similarly, earlier this year, Denmark鈥檚 ruling Liberal party voiced the concern that by simply adopting the Basel standards without adjustments, Europe had put itself at a disadvantage to US banks.
The Swedish Financial Supervisory Authority and the chair of the European Banking Authority have also raised questions about the need for adjustments in the rules, and in Asia, the Japanese Financial Services Agency has also indicated that the impact of Basel III may be too large.
In the US, on the other hand, the regulators appear to be doubling down. Last year, Janet Yellen, chair of the Federal Reserve, said in congressional testimony: 鈥淐apital charges are causing firms to think seriously about whether or not they should spin off some of their enterprises to reduce their systemic footprint 鈥� And frankly that鈥檚 exactly what we want to see happen鈥�.
Due to the concern around some aspects of SFTR, is there still time to negotiate some of the more controversial points?
Landless: The main body of the regulation is already in force. The things we need to get more details on are all the specific rules around reporting. Questions to do with how you report trades, what goes in reports and how to license different trade repositories all still need to be answered.
?
However, at the moment there is no guarantee that the European Securities Markets Authority (ESMA) will add any more colour to the other rules on increased marketing disclosure and account reporting around a fund鈥檚 SFT usage for investors, and therefore it is very unclear what consultation or negotiation is feasible, on any of it.
?
On the other hand, there is no room to manoeuvre around the rules on collateral re-use with the trade documentation requirements for disclosure and proper execution going live in July.
?
Paul Landless: The EU鈥檚 view and priorities may be viewed as broader to the Financial Stability Board鈥檚 (FSB) goals of addressing financial stability risks.
?
The EU鈥檚 rules for reporting under the Securities Financing Transactions Regulation (SFTR) is very wide in that it captures any European entity鈥檚 activity, whether or not it is regulated by the EU. There are issues on product scope as well. Lending money for acquisition financing where the target鈥檚 shares are given as securities could trigger some requirements, even though it鈥檚 a relatively day-to-day corporate transaction. Some types of margin lending could be caught up in this too.
?
I don鈥檛 think the FSB had a reporting system like this in mind鈥攐ne that picked up all and sundry. As well as being more very broad in some areas, the two-year phase-in of some of the EU鈥檚 SFTR rules is underway already and is being implemented faster than other FSB members, many of which have not proposed equivalent rules.
How much scope is there for discrepancies in sanctions on reporting?
?
Landless: A lot of the regulation in Europe, such as the European Market Infrastructure Regulation (EMIR) and SFTR, can hand over enforcement to member states. SFTR is a regulation with a capital 鈥楻鈥� and not a directive needing national implementation, so everyone is using the same rulebook, but the differences come in the rigidity of enforcement by each member state. For example, the French regulator could have a very strict compliance view compared to the German regulator if it sees operational failings. It could be a matter of resources if carrying out these rules requires a large IT investment or increasing your headcount.
Given the potential for overlap leading to an overbearing regulatory environment, has there been much push back from the industry?
Greg Lyons: In Europe and Asia, there are reports citing material concern by certain governments and government agencies that the Basel Committee on Banking Supervision has published a broad array of rules since the financial crisis without reconsidering the aggregate impact of those rules or whether their objectives are consistent.
For example, in November of last year, Bank of England governor Mark Carney indicated that 鈥渋t would be a miracle if all that regulation 鈥� perfectly fit together so that there was no duplication 鈥� and no contradictions鈥�.
Similarly, earlier this year, Denmark鈥檚 ruling Liberal party voiced the concern that by simply adopting the Basel standards without adjustments, Europe had put itself at a disadvantage to US banks.
The Swedish Financial Supervisory Authority and the chair of the European Banking Authority have also raised questions about the need for adjustments in the rules, and in Asia, the Japanese Financial Services Agency has also indicated that the impact of Basel III may be too large.
In the US, on the other hand, the regulators appear to be doubling down. Last year, Janet Yellen, chair of the Federal Reserve, said in congressional testimony: 鈥淐apital charges are causing firms to think seriously about whether or not they should spin off some of their enterprises to reduce their systemic footprint 鈥� And frankly that鈥檚 exactly what we want to see happen鈥�.
Due to the concern around some aspects of SFTR, is there still time to negotiate some of the more controversial points?
Landless: The main body of the regulation is already in force. The things we need to get more details on are all the specific rules around reporting. Questions to do with how you report trades, what goes in reports and how to license different trade repositories all still need to be answered.
?
However, at the moment there is no guarantee that the European Securities Markets Authority (ESMA) will add any more colour to the other rules on increased marketing disclosure and account reporting around a fund鈥檚 SFT usage for investors, and therefore it is very unclear what consultation or negotiation is feasible, on any of it.
?
On the other hand, there is no room to manoeuvre around the rules on collateral re-use with the trade documentation requirements for disclosure and proper execution going live in July.
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