2022 Regulatory Reporting Trends and Predictions
2022/3 will be busy for the global regulatory reporting community with many areas to focus on, including EMIR REFIT, the CFTC Rewrite, SEC 10C-1, the JFSA and more. Accordingly, we asked our esteemed colleagues and RegTech experts to share their predictions for the year ahead.
# 1: The run-up to EMIR REFIT
Irene Mermigidis, Managing Director, REGIS-TR S.A.
With EMIR REFIT on the horizon, and a key hot topic within the regulatory reporting space, it is our responsibility as Trade Repositories to support Market Participants in their understanding and preparation of the upcoming changes that are currently being agreed ahead of implementation.
To many, regulatory reporting is still seen as a necessary evil and participants don’t often welcome the constant change in framework. The changes we will see as part of REFIT will be seismic and, whilst we know broadly what it will entail, the details remain unconfirmed. With regulatory reporting, the devil is in the detail. Whilst REGIS-TR, along with our fellow TRs, are committed to providing the support, information and advice that our participants need, we cannot provide direct legal or compliance advice on individual reporting obligations. Advice must go alongside a disclaimer that we cannot act as a legal or compliance counsel, but rather provide as much information as possible for them to reach their own conclusions.
TRs understand that REFIT remains a moving target making it difficult to prepare for. Beyond the impact of REFIT itself, there is also the complexity of a possible (and likely) divergence between EMIR REFIT and UK EMIR REFIT – to which we still do not know the extent of. The risk that participants across the EU and UK may have to maintain 2 sets of reporting standards will be problematic, but as a TR we are here to support and guide our clients through these changes – however turbulent. If any of our participants have any concerns, we urge them to contact their REGIS-TR service support team to discuss.
#2: Common Data Standards, MAS and ASIC
Priya Kundamal, Head of DDRS, Derivatives, Singapore, DTCC (The Depository Trust & Clearing Corporation)
Data standards are a continuing and critical focus for 2022. Adoption of CDE and UPI are top of the list and ISO 20022 is critical as well. Together these standards move toward the G20 reforms first outlined in the regulator summit following the 2008 financial crisis. However, while adoption is occurring as regulations are rewritten or issued incorporating CDE, it is not being done consistently. We are already seeing differences in the adoption of CDE, as well as the introduction of additional jurisdiction specific fields. This undermines the ability for regulators to be able to combine data across the globe in order to monitor, manage and mitigate systemic risk.
From an APAC perspective, MAS and ASIC have already commenced consultations based on CPMI IOSCO guidelines on UPI, UTI and CDE. These upcoming global and wide-ranging changes mean significant technology modifications by the industry, trade repositories and, in many cases, regulators who consume the data. Coordination among the regulators in terms of consistent standards would go a long way in reaching the goal of good quality data coming out of trade reporting. It is increasingly likely that we may not have any rewrites go-live in 2022 as compliance dates get extended further into 2023 and beyond. However, 2022 is shaping up to be the foundational year to zoom in and prepare for these common data standards so that we are all ready for the change.
#3 – MiFIR transaction reporting – divergence and enforcement
Simon Appleton, Director, MiFID II transaction reporting, Kaizen Reporting
In relation to MiFIR transaction reporting, the big topic is the question of divergence between EU and UK reporting obligations. I see the UK’s FCA staying aligned with ESMA through the use of international standards promoted by International Organisation for Standardisation (ISO), as well as IT and data standards rather than the data content itself where I think everything is up in the air. We are awaiting the FCA’s MiFID review consultation paper with baited breath. The longer it’s delayed the more it could indicate additional areas of divergence given ESMA’s final report on their MiFID transaction reporting review was published back in March 2021. It remains to be seen whether the FCA will go for an interim solution that paves the way for greater divergence at a later date. We have confidence that the UK’s Treasury (regarding their very broad Wholesale Markets Review) and the FCA (regarding their MiFID review) will continue to consult broadly before implementing any new rules. However, they will also need to consider the renewed emphasis on promoting economic growth and the competitiveness of the UK’s financial services sector.
As regulators look to pivot to becoming data-led, we would expect to see more enforcement activity on MiFIR transaction reporting over the next 12 months, particularly in Europe. Regulators remain concerned with data quality across the reporting regimes but are also keen to make more use of that data in both firm and market supervision. To deal with this, firms will find more services and tools become available to help with the increasing complexity of reporting including in the remedial space as well as for their day-to-day reporting responsibilities.
#4 – U.S. Regulatory Reporting Landscape
Igor Kaplun, Executive Director and North America Head of Business Development for Global Regulatory Reporting Solutions, IHS Markit
2022 will be an action-packed year for the reporting industry in North America. The CFTC and SEC derivatives reporting rules under Dodd-Frank are under the spotlight. The CFTC Re-write is slated for a May 2022 implementation, but industry consensus seems to be building around a delay of at least 6 months, but also a Rewrite 2.0 at some point in the future to address the UPI/ISO piece.
The next phases of the long awaited SEC SBSR Real Time and Backloading reporting requirements come into effect in February and April respectively so the industry will be very much in execution mode the first part of the year complying with those new requirements.
The Canadian regulators are closely watching the timelines and impact of the CFTC rules-write as they planned to propose updates to their existing rule set. No set timelines yet, but proposed rules in 2022 would suggest an implementation target of sometime in 2023, which could coincide with the reporting overhaul slated under the EMIR REFIT. Like the CFTC, the Canadian regulators have largely avoided major changes to their reporting rules since they first went live in 2014 and would try to stay close to what’s being implemented in the under the CFTC/SEC with so many firms impacted across those jurisdictions.
The pace of regulatory change continues to accelerate with major rewrites to regulations and possible new regulations (proposed Rule 10c-1 by the SEC) putting the pressure on market participants to remain compliant with the ever changing regulatory reporting landscape. Cost, resources and staying ahead of what’s around the corner are topics certainly weighing on the minds on the reporting industry in North America.
#5 – CSDR – Get ready for cash penalties
Peter Tomlinson, Director, Post Trade and Prime Services, AFME (Association for Financial Markets in Europe)
February 2022 will see the introduction of at least some of the CSDR Settlement Discipline measures. Whether or not this will include mandatory buy-in rules remains unclear, with legislators considering a delay, given widespread industry feedback that the introduction of those rules will have disproportionate and unintended consequences for market liquidity and stability.
One thing is for sure – the rules on cash penalties will go live. Its sometimes overlooked, given the focus on buy-ins, but we expect the cash penalties to have a significant impact on market participants. The rules are designed to incentivise improved settlement efficiency by penalising parties who fail to settle transactions on the intended settlement date, typically T+2.
The process of calculating, reporting, and collecting penalties is managed by the CSD where the transaction was intended to settle. Penalties will be debited from the CSD participant deemed responsible for the fail, and credited to their counterparty.
Of course, in most cases the CSD participant is a settlement intermediary who should not be the ultimate payer or receiver of the penalty. Transmitting the reporting and payment of penalties from CSD to those end parties is the key challenge for the industry to get right.
#6: Common Domain Model, increased digitalisation and regulations
Adrian Dale, Head of Regulation & Market Practice, ISLA
It always amuses me how, when remembering 2021, past events feel like they only happened the other day. To refresh my memory, I scanned the ISLA news stories over the course of 2021, skimming industry conferences, a conveyor belt of consultations, published papers and guides, as well as milestone projects like the ISLA Clause Library & Taxonomy and Common Domain Model (CDM).
Few who have anything to do with transaction settlement in EU markets would disagree that the multiple impacts of CSDR settlement disciplines dominated. Some may have been reluctant to look up from that issue, knowing that to do so would mean encountering a plethora of other headline topics, not least of which is sustainability.
Looking in the crystal ball for 2022, what do we see? Firstly, let’s mention just some of the regulatory acronyms ahead of us: AIFMD, BASEL, CMU, CRD, CRR, CSDR, ELTIF, ESG, MIFID, MIFIR, SFTR, SRD, SSR and UCITS. The list in reality is far longer, considering the UK’s enthusiastic plans and not forgetting the recent consultation from SEC regarding transparency.
Secondly, looking deeper into the crystal ball, few can fail to see the signs of the inevitable digital evolution in our markets. Not just for the fact that the technologies developed a decade ago have yet to be fully embraced, but more as a matter of urgency to cope with the appetite for data, speed, efficiency, and certainty that those technologies offer. ISLA has regulatory and digital evolution firmly in our roadmap and looks forward to working with members to navigate our markets in 2022.
#7 – CSDR and SFTR: the road ahead
Alexander Westphal, Director, Market Practice and Regulatory Policy, ICMA (International Capital Market Association)
A priority issue in the ICMA work programme has been the planned implementation of CSDR settlement discipline in February 2022. A key element of these measures, the mandatory buy-in (MBI) regime, has been a major concern for ICMA and its members, and we have consistently argued against the implementation of the rules in their current form which we believe are flawed and potentially extremely damaging for market liquidity and stability. The recent decision by EU co-legislators to decouple MBIs from the other settlement discipline measures has therefore been a major relief and a very welcome move. We are now waiting for ESMA to act on the decision to postpone the implementation of MBIs in order to allow for a reassessment of the current rules as part of the ongoing CSDR Review.
That said, other measures, in particular cash penalties will still go ahead as planned and we are supporting members in their implementation efforts, coordinating closely with other trade bodies. We also see CSDR as an opportunity for the industry to pro-actively support settlement efficiency, focusing particularly on the usage of a number of important optimisation tools, such as the shaping of settlement instructions, partial settlement or auto-borrowing programmes offered by the (I)CSDs. Over the course of 2021, the ERCC has been looking very closely at these topics and related opportunities and are about to release a white paper on settlement efficiency which will summarise our findings so far and hopefully trigger some interesting cross-industry discussions.
Another priority for us remains SFTR. Well over one year after the initial go-live members of the ERCC’s SFTR Task Force still remain very engaged and continue to meet on a monthly basis to work through a long list of reporting issues and related best practices. Our detailed ERCC Recommendations for Reporting under SFTR continue to evolve to reflect these discussions. 2022 is expected to bring an opportunity to draw some lessons from the SFTR experience so far and push for broader changes, as ESMA is planning to launch the EU SFTR review in the first half of the year.
#8 – Level 2 IFR/IFD and CBDF
Marie-Adelaide de Nicolay, Head of Brussels Office, AIMA (The Alternative Investment Management Association) and Remmert Keijzer, Associate Director, AIMA
2022 see the materialisation of a few pieces of regulation in the EU, including the new regime for cross-border marketing and pre-marketing of investment funds (‘CBDF’) and the adoption of technical standards for the new prudential rules for investment firms.
As regards CBDF, firms have been working on implementing the new rules since the entry into force of the package in August 2021, but some Member States are late in their transposition process. This means that firms will still have to keep an eye on how the rules are implemented in those Member States and ensure that 1) their pre-marketing activities are logged, ‘informally notified’ to the local NCAs and correctly documented and traced internally in relation to any following reverse enquiries that might fall in the 36-month period and 2) the internal process to de-notify a fund is compliant with the new rules, among other elements. The new ESMA marketing guidelines will also enter into force beginning of February 2022 and will require an update of all marketing documentation to ensure those are in compliance with the new guidelines.
For MiFID investment firms, 26 June 2020 was the date where the EU’s Investment Firm Directive and Regulation (IFR/IFD) went into effect. The IFR/IFD is a new, bespoke regime that introduces own funds, liquidity assets, remuneration, governance and reporting requirements for firms. While investment firms will have already had to implement a range of requirements to ensure compliance with the IFR/IFD, 2022 will be the year in which the EBA and ESMA will focus on finalising the remaining Level 2 IFR/IFD mandates, and the year when the sound remuneration and internal governance guidelines will apply (30 April). In the UK, the FCA has introduced a near-identical regime, the Investment Firm Prudential Regime (IFPR). This new framework will apply as of 1 January and as with the IFR/IFD, many UK investment firms will now need to meet a variety of new requirements which they have previously not been subject to.
# 9 – Crypto Provides Regulators With Fresh Challenges in 2022
Mark Kelly, Director, Regulatory Advice Limited
In 2022 we are likely to see more businesses buying cryptocurrency for at least a portion of their treasury reserves, given that some firms in 2021 have made more from those reserves than from their regular business activities!
Offering cryptocurrency services as a business is a different proposition, with some regulators putting significant barriers in the way of firms wishing to enter this market.
Further regulatory consultations are focusing mainly on stablecoins, perhaps because these have the potential to undermine traditional banking services. But the real compliance challenges will come from fitting the latest crypto innovations into current regulatory structures ill-equipped to deal with them.
For example, a Decentralised Autonomous Organisation (DAO) can sometimes fill the role of a corporation, but without disclosing the identity of its founders or their physical location, making corporate legislation around registration impossible to apply and levying of taxes a mighty challenge. At other times a DAO may bring together a pool of purchasers into a collective investment scheme with never a nod in the direction of the relevant securities laws.
Governments are already wrestling with how to appropriately measure and tax crypto earnings. Their task now needs to be extended to income derived from Non-Fungible Tokens (NFTs), the digitised artworks which have been the major trend of 2021 and which show no sign of being a passing fad.
#10 – SOFR – IBOR Reform and UMR
SOFR – IBOR Reform: The recently published Q3 2021 Review of LIBOR Reform by OSTTRA and based on data processed by MarkitSERV shows the global market is making great strides in its transition away from Interbank Offered Rates (IBORs) to Risk Free Rates (RFRs), with sudden and dramatic progress seen in SORA, SARON, TONA and SOFR.
In the US there has been a clear uptick in SOFR liquidity driven by the initial phase of the SOFR first initiative for interbank swaps. This initiative is phased so we would expect its impact to continue to grow in swaps over the coming months. We also expect to see adoption of SOFR in the Non-Linear markets now that there is a plan to publish the ICE Swap Rate, products such as swaptions could not cash settle without the ISR. We are also watching for the potential broader usage of term rates e.g., Term SOFR and credit sensitive rates e.g. BSBY
UMR – the drama continues: The uncleared margin rules (UMR) have had several years of phased rollout which has progressed from just 20 in-scope firms in 2016 increasing to more than 300 in September 2021. September 1st, 2022 marks the 6th and final official phase-in date, and it’s marked by a significant drop in the regulatory threshold for compliance. This means firms with non-cleared OTC portfolios of just €/$8bn Average Aggregate Notional Amount will fall into scope, including large swathes of the buyside, expected to be 700+ new parties.
A common set of ‘headaches’ seen in earlier phases, included; signing new legal documentation with each in-scope counterparty, onboarding to custodians or triparty agents to ensure collateral segregation, developing an IM calculation mechanism and establishing a process to manage the end-to-end operational flow. Many phase 6 firms may be able to take advantage of regulatory relief which allows them to delay the complex & lengthy tasks of establishing legal documentation and opening of custody accounts until they pass a regulatory threshold, effectively until their IM requirement exceeds €/$50m. For many phase 6 firms this may take years, and some may even remain below this amount indefinitely. In this case, firms will be able to take a ‘lighter’ compliance path that focuses on daily IM calculation & monitoring.
The decision to follow this path may sound attractive to firms looking to reduce the effort required to comply. However, a failure to correctly assess those portfolios where monitoring is appropriate may mean quickly breaching rules or limiting trading options – where counterparties refuse to trade without new IM documentation in place. In order to determine if the lighter path is a viable option, firms must run IM simulations across all of their impacted portfolios.
#11 -Bonus Trend: The evolving regulatory reporting landscape
Ronen Kertis, Head of Global Regulatory Reporting Solutions, IHS Markit
Regulatory reporting has moved on from just gathering and sending data, with today’s “Regulatory Reporting 2.0”. This advancement in reporting is transforming how firms use and benefit from their reporting processes and the data generated, in addition to having the right tools in place to proof their reporting such as pairing, matching and reconciliation. As such, we expect to see more firms refreshing their reporting approach, focus and systems during the coming year.
Furthermore, in 2022, our internal teams will be focused on preparing clients for EMIR REFIT, JFSA, the CFTC Rewrite and now the possibility of the new proposed SEC 10c-1 rule. We know from our recent Regulatory Reporting survey that European clients are well underway in their EMIR REFIT preparations, while CFTC Rewrite planning is low.
We’ve long seen how forward planning ensures implementation is smoother and less error-prone, and European market participants, who have experienced this during multiple regulatory reporting changes, have taken this lesson to heart. We are strongly encouraging all market participants to take the time available not only to increase the likelihood of seamless reporting from go-live, but also to understand what they can and should take from other reporting processes and to consider optimising and streamlining their reporting overall. None of this is possible if changes are implemented at the last minute.
Disclaimer: This blog is for informational purposes only. Any views expressed are those of the authors and should not be taken as a substitute for legal advice, nor advice on specific regulations.