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Extra time for regulatory implementation

Along with disruption to financial markets, COVID-19 is also influencing regulatory timetables

Fully aware that asset management firms are experiencing volatility levels unseen in recent times, regulators have already delayed the implementation of several requirements and may consider deferrals for more regulations in the near future. This temporary relief is critical in enabling asset managers to concentrate on protecting their businesses during the crisis while they run middle and back-office operations almost entirely remotely.

Several critical regulatory deferrals are noted below, followed by a Regulatory Round-Up summary.

Key insights

  • Regulatory timetables globally are being pushed back due to the impact of COVID-19
  • The final two phases of the IM requirements for uncleared derivatives, the EU's SFTR and Canada's Client Focused Reforms, will be temporarily delayed
  • Other major regulatory changes–including the EU's SRD II and the global transition from established benchmarks to alternative risk-free rates–may also face deferrals due to the pandemic

Deferral of the Client Focused Reforms in Canada

Client protection measures due to be adopted by the Canadian Securities Administrators (CSA) in December 2020 have been pushed back as financial institutions continue to grapple with COVID-19. Provisions contained in the CSA's Client Focused Reforms package, which are designed to mitigate the risks of conflicts of interest emerging at investment advisers, will now come into force in June 2021.Moreover, relationship disclosure requirements that must be made by registrants to their clients have also been delayed until December 2021.2

The Canadian regulators conceded that companies would struggle to comply with the rules given the current circumstances, especially as many staff have been redeployed to facilitate continuity of key business functions.3 The CSA's decision has been applauded by industry associations, including the Investment Funds Institute of Canada (IFIC). IFIC said the extension would allow the industry to focus its resources on more immediate challenges.4

SFTR–regulators compromise on a limited delay

European Union (EU) regulators have also delayed the introduction of some of their flagship rules. In March 2020, the European Securities and Markets Authority (ESMA) confirmed that the Securities Financing Transactions Regulation (SFTR) would be postponed by three months until July, just days after receiving correspondence from the International Capital Markets Association (ICMA) and the International Securities Lending Association (ISLA) warning that financial institutions did not have the capacity to ensure compliance with the original deadline.5

The delay will be a major relief to impacted firms

SFTR, which requires financial institutions-including asset managers-to report information about their securities financing trades to trade repositories, is operationally demanding and would have consumed a lot of firm-wide resources. Although both of these industry groups had originally requested for SFTR to be deferred until October 2020, ISLA nonetheless said it applauded ESMA's decision, adding that the delay will be a major relief to impacted firms.6

Uncleared margin rules on the shelf

COVID-19 is also having a significant effect on incoming derivatives regulations. In April 2020, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) announced they would push back the final two phases of the margining requirements for non-centrally cleared derivatives by one year.7

Under the revised timetable, firms with an aggregate average notional amount (AANA) of non-centrally cleared derivatives exceeding EUR 8 billion must comply with the initial margining rules (IM) by September 2022.8 Entities with an AANA of uncleared derivatives greater than EUR 50 billion must be compliant with the margining obligations by no later than September 2021.9

Again, the decision by BCBS/IOSCO to delay was likely heavily influenced by industry bodies. In March 2020, several diverse industry groups including the International Swaps and Derivatives Association (ISDA), the Association for Financial Markets in Europe (AFME) and the Alternative Investment Management Association (AIMA) penned a letter to BCBS/IOSCO stating that the imposition of remote working set-ups had made it harder for people to access legal and operational documents and to communicate with their counterparties.10

These practical impediments, argued the industry bodies, would make it incredibly difficult for member firms to meet the final two IM deadlines. “We believe that efforts to minimize losses from the current crisis should take precedence over preparations to address the potential risk of future exposure from small market participants. Moreover, we emphasize that, if during this historically volatile time, firms divert internal resources away from managing their risk and portfolios and instead focus on implementation of UMR, investors may be adversely affected," read the letter.11

Regulators face requests to delay SRD II

Although regulators have yet to consent to any delay formally, industry bodies including AFME, ISLA, the European Central Securities Depositories Association (ECSDA) and the Association of Global Custodians (AGC) have urged that the introduction of the Shareholder Rights Directive II (SRD II) be held off for another year until September 2021.12

SRD II is designed to help promote better shareholder engagement, and by doing so, it will require that a number of major structural reforms be adopted by intermediary providers such as custodians and central securities depositories (CSDs).

Industry bodies
have urged that the
introduction of the
Shareholder Rights
Directive II (SRD II) be
held off for another year

Notwithstanding the challenges resulting from COVID-19, the industry groups pointed out SRD II had also not been properly transposed across member states, further noting there was a lack of standardization.13 The letter also highlighted that the postponement of company annual general meetings (AGMs) and the redeployment of key IT staff to contingency planning efforts would also impede financial institutions' SRD II preparations.14

Potential regulatory delays elsewhere

As the situation stands, market participants should not make any assumptions about potential changes to the LIBOR deadline, a point that was reiterated in a statement by the UK's Financial Conduct Authority (FCA), the Bank of England and members of the Working Group on Sterling Risk-Free Reference Rates.15

Nonetheless, the statement conceded that COVID-19 had impacted the LIBOR transition programs at certain financial institutions, especially those in the loan market and “it is likely to affect some of the interim transition milestones."16 With so much uncertainty prevailing in the market, there are growing calls for regulators to adopt a unified position on managing the shift away from IBOR to alternative risk-free rates.17

COVID-19 has thrown the regulatory calendar into a state of flux, and it is becoming increasingly apparent that many of the rules that were supposed to take effect in 2020 will inevitably face long delays.

Regulatory Round-Up

Confirmed and anticipated regulatory delays due to COVID-19 disruption Confirmed delays

  • Canadian Securities Administrators (CSA) Client Focused Reforms: Due December 2020. Now delayed until June 2021. CSA disclosure requirements have also been delayed until December 2021.2
  • European Market Infrastructure Regulation (EMIR) Margin Requirements: Due September 1, 2020 for Phase five implementation; Due September 1, 2021 for Phase six implementation. Now delayed until September 1, 2021, and September 1, 2022, respectively
  • Securities Financing Transactions Regulation (SFTR) trade reporting: Due March 2020, now delayed until July 2020
  • Central Securities Depositories Regulations (CSDR) settlement discipline regime: Due September 2020, now delayed until February 1, 2021 (the original decision to defer CSDR was unrelated to COVID-19)
  • Basel III measures (Fundamental Review of the Trading Book [FRTB] and Credit Value Adjustment Risk [CVAR]: Due January 1, 2022, now delayed to January 2023
  • Commission de Surveillance du Secteur Financier (CSSF): Deadline for UCI, SIF, and SICAR reports: relief up to the summer for most reports provided the CSSF is informed. Submission on time is encouraged, where the submission can be made within the usual time limits without compromising the quality of the reporting and in line with the health rules to contain the spread of COVID-19
  • Ireland's Office of the Revenue Commissioners (ORC): Filing deadline for Funds' De Minimis Elections: Due March 31, 2020, now delayed to June 30, 2020

Potential delays

  • SRD II: Industry bodies have called for SRD II to be delayed from September 2020 until September 2021
  • LIBOR reform: UK regulators are reported to be assessing the impact of COVID-19 on the upcoming LIBOR transition, due to take place at the end of 2021

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