OUTLOOK FOR FINANCIAL MARKETS REGULATIONS IN 2015
Submitted by christian on Thu, 01/22/2015 - 18:06
- Structural reform and resolution in the financial sector: Although requirements for banks to ring-fence some of their activities have been debated for years, little progress on implementation has been demanded. This will change in 2015, however. Further progress on restructuring, to meet authorities’ expectations of resolvability will also be important. And activity will not be limited to initiatives that are already established. Significant uncertainty hangs over new EU requirements for bank structural reform, first proposed in January 2014. In the eurozone, the Single Resolution Board (SRB) [European Resolution Authority for the Banking Union working in close cooperation with the national resolution authorities of the participating Member States] will begin operation. It’s not only banks facing resolution requirements – Financial Market Infrastructures and some insurers will face similar questions too.
- New institutions in action: 2015 will see banks continue to ride a sharp learning curve as the EC- the newest supervisor in town – overhauls the culture of supervision and good practice across the eurozone. The SRB will also start to get up and running; the centralised resolution authority is set to have significant influence over the direction of resolution actions for 5 eurozone cross-border banks. We will also begin to see where the new guard at the European Commission and Parliament stands on developing financial services legislation. Emphases on promoting growth, as well as “safety and soundness” considerations, are already evident.
- Data and regulatory reporting: Appetite from supervisors for more granular data has been growing since the start of the financial crisis. Several initiatives will combine to make data and reporting once again critical for firms in the coming year. Although short term cost and time pressures may force firms to adopt tactical solutions, it could well be more effective to take a more fundamental, strategic approach in the medium term. These challenges apply across all financial services. The follow-up to the Asset Quality Review (AQR) will be important to banks in the eurozone, but the issues extend much further. Data needs include those need for rewarding a bank in proportion for resolution and the principles for effective risk data aggregation. More stringent data and profit requirements for insurers will be driven primarily by Solvency II.
- Culture and treatment of customers: Culture and the treatment of customers will remain at the fore. Although everyone in financial services can now talk culture, the real challenge is to “do” culture. This is where supervisors expect to see hard evidence of significant further progress in 2015. The idea is that regulators should take preventative action in areas susceptible to market abuse, rather than wait for misconduct to materialise. Overall, it will be increasingly important for firms to produce reliable and meaningful conduct risk “data”.
- Implications for strategy and business models: Initiatives, motivated by competition considerations, are prominent at the EU level. Much of the regulators’ competition-related work is likely to have implications for strategy and business models.
- Stress testing and risk management: The ECB’s Comprehensive Assessment may be over, but it doesn’t end there. Stress testing will continue to develop in the UK, eurozone and US, becoming an increasingly important supervisory tool. Murmurings about cross-border coordination will get louder too – once authorities become more comfortable with the role the tests play in their respective jurisdictions. Firms will need think about how to join up their risk management and stress testing responses, providing ‘one firm’ capability across all countries.
- Capital Markets Union: CMU is a flagship initiative of the new European Commission. The primary motivations of the initiative are to increase jobs and economic growth, and to develop a more resilient financial system. In contrast to the Banking Union, the CMU will apply to the whole of the EU and seeks to facilitate the growth of new markets. That will be achieved by increasing market-based funding: (Lowering the costs of raising capital; Eliminating barriers to the cross-border provision of financing, particularly for SMEs and infrastructure projects; Transparent and simple securitisation markets, and the development of EU private placements markets are seen as key. Important questions remain: What CMU will entail? How it will interact with existing initiatives? How ambitious the plans will be? This new and important agenda will be particularly well debated as different stakeholders vie to influence the emerging agenda.
- Business model mix: As banks roll out changes to meet the requirements of Basel III, the main strategic challenge will be what business model – and mix of activities – a bank will pursue once the following constraints are taken into account: (Capital, Liquidity, Leverage, Stress testing, Loss-absorbing capacity requirements). Although uncertainties remain, there is no reason for banks to delay in building the capabilities, which are needed to manage their balance sheets in this much more complicated regulatory environment.
- Solvency II and insurance capital: Preparations for Solvency II implementation will enter their final year in 2015, with the long term guarantee package having been agreed in 2014. The main developments for 2015 will be the approval of the Delegated Acts which will be transposed into national law by all EU Member States. Guidelines for supervisors have been issued on systems of: (Governance; Own Risk and Solvency Assessments; Reporting; Pre-applications for internal model approval to prepare firms for the implementation of the regime. Solvency II will raise questions for insurers in terms of business mix and of optimal asset allocation.
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The interaction of market structures: Financial market structures are being radically altered by multiple regulatory requirements. As a result, the way in which users of those markets interact with them is set to change too. Old issues of extraterritoriality have not yet gone away, and appear unlikely to any time soon. 2015 will likely see a key equivalence decision in relation to the US derivatives rules, with implications for the geography of derivatives trading. The politics of the Transatlantic Trade and Investment Pact are tricky, hence TTIP remains one to watch.
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