Looking at 2021, it is hard to predict all challenges as the regulatory turnover is constantly increasing. For sure, most of the 2020 challenges will still keep us busy in 2021:
The COVID-19 pandemic is far from being over and will continue to impact our lives massively this year. Extended Lockdowns and measures to prevent higher infection rates (Social distancing, travel bans, etc.) will certainly come, although everybody hopes that these will be relieved soon after the vaccination. Looking at the economy, COVID-19 has certainly the biggest impact on the retail businesses, restaurants, and SMEs in general. However, if those start to get insolvent due to the missing revenues, the financial industry will definitely see important loan defaults which might have dramatic impacts on this industry too. We should hope for the best, but we should not close our eyes as this is a real risk for the global economy.
However, the last year has shown that the financial industry is capable to adapt to such drastic changes even in short time. There are lots of FinTech/RegTech companies that can help the financial industry to adapt and still comply with their legal, compliance and regulatory requirements even under the current situation. Our deltaconX multi-regulatory platform, for example, has made it quite easy for our clients to comply with their various reporting requirements even working remotely as our deltaconX regulatory platform is fully web-based and hosted in a highly secure private cloud infrastructure.
For SFTR’s last wave, meaning the Non-Financial Counterparties, this one will go live today. Although this is not the biggest wave in the number of entities, it should not be underestimated as this wave include some special financial institutions, pension funds as well as some supranational institutions, which generally do not trade huge numbers of transactions, but the ticket size is usually quite important. In addition, to the new participants there is still some work to do on various levels.
Even if the rejection rates at the TRs are very low (between 3-5%) for the reports on trade level, collateral reporting is still significantly lower, and therefore creates some headache to the market participants and industry bodies. There is work that needs to be done by the market participants, the trade repositories and also ESMA to make this process more streamlined and to adjust some validations.
The pairing rates are constantly increasing since the introduction of SFTR and are at a quite good level but also here we observe that the rates for collaterals tend to be significantly lower than on trade level.
Despite the fact that most industry bodies, market participants and even the vendors tend to focus on the things that actually went well, market participants should not forget that TR Acceptance and Pairing are only the first two steps of the validation process and that Matching and full Reconciliation are the targets that need to be achieved at least on the long run. We have implemented advanced exception and reconciliation management functionalities in our deltaconX multi-regulatory platform to support our clients to achieve this goal. Reported data can be changed directly in our platform and we also display the values that caused reconciliation breaks including the value that has been reported by our clients’ counterparties, so that our clients can easily determine on which areas they have to focus on and can then take these interactions directly on our platform.
All the above said, SFTR will keep the market participants, industry bodies, vendors, trade repositories and regulators busy during this year.
The “DRAFT TECHNICAL STANDARDS UNDER EMIR REFIT” have been published on December 17th, 2020 only and should be endorsed by the European Commission until March 17th, 2021 at the latest. After the publication in the Official Journal market participants have 18 months to implement these changes. These changes will have a significant impacts, where we hereafter like to highlight the most important ones:
- ISO 20022 XML will be the only format that can be accepted by the TRs
- Up to 203 Fields have been defined by the new technical standards (compared to 129 in the previous technical standards)
- Separate Collateral reporting will be introduced
The aim of these new technical standards is to harmonise the different reporting regimes (a lot of elements are known from SFTR) and to improve the data quality by implementing a standard.
On the other side, we see that EMIR reporting becomes more and more complex, as the ISO 20022 Standard itself is a quite complex one, the number of fields increased from originally 89 to 129 in 2017 and as of 2022 it will be most likely 203 (or even more), and a new reporting type will be introduced. The increasing complexity of all regulations make it very challenging to comply with the reporting requirements in full autonomy.
Even though 18 months seem to be a quite long time for the implementation, we recommend that people are looking into these new standards soon and make up their minds about a vendor that can support them as soon as possible as the changes are anything but trivial.
Beside EMIR REFIT, ESMA also consulted on MiFIR Transaction Reporting. They intend to submit the final report on MiFIR in Q1 2021, so in short time and only a couple of months after EMIR REFIT. Although ESMA appreciates that both regimes have different intentions in terms of information that should be gathered (detect market abuse vs. systemic risk detection), one of the intentions of the consultation is to harmonise the MiFIR and EMIR reporting. Looking at the significant changes under EMIR it can be expected that also MiFIR will see some fundamental changes. Beside the challenge to comply with these massive changes in each regulation, market participants will most probably be required to implement the two mammoth projects in parallel by taking in consideration the changes of the other project!
The CME wind down has been closed in 2020 so this will not impact the market participants anymore despite some potential adjustments that still need to be done. The take over of RegS from Deutsche Börse by MarketAxess, however, is still a topic for 2021 as the transition from the RegS System to the MarketAxess system will be performed over the course of 2021. This means that over 700 RegS clients have either to be migrated or have to find a new service provider.
BREXIT is finally done although we strongly believe that especially in the financial sector most of the market participants would have hoped that it would have not happened. Anyway, the BREXIT deal does not contain much relieve for the financial sector which will make it difficult or factually impossible to continue business as usual. In the upcoming months, there will be a lot more negotiations between the United Kingdom and the European Union, which will hopefully help the financial industry in the future. However, considering this is not the case and looking at the different initiatives in Europe, it is very likely that the EMIR/SFTR/MIFIR regulations in the European Union will divert over time from the UK onshore versions. This will make dual sided reporting or delegated reporting for counterparties or clients in the other jurisdiction even more challenging than it is already today.
We must admit that all of the above-mentioned challenges do not sound very promising for market participants as it makes clear that the regulations are ever becoming more complex, while some market participants feel that we are already over regulated. However, it becomes clearer every day that this trend in strengthening the regulatory oversight will not stop. The missing global political alignment makes this even more complex in a world in which economic globalisation is much more advanced than the political one. Most of the market participants are not only active in one region but they have to comply with regulatory requirements in many jurisdictions over the globe which all differ in terms of scope, requirements and timing in which regulations are entering into force or change over time.
But there are also good news: Market participants are not left alone. Companies like deltaconX that are specialised in regulatory reporting are helping them with highly performant solutions that require minimal implementation cost or manual workload at a very competitive price. There are partnerships between front-, middle and back office solution providers which have been put in place with regulatory experts like us. We have put in place partnerships with SimCorp, Finastra and Murex during the last two years that allow their users to comply with the ever-changing regulatory requirements in a streamlined way by investing very limited time and efforts. But also, a direct connectivity to us can bring a lot of advantages and scaling to our clients by simultaneously benefit from advanced system capabilities and expertise while reducing the total cost of ownership.
As we have identified the above-mentioned issues in regards to the different requirements depending on the jurisdiction our clients are exposed to, we have decided to not only enhance our system functionalities and adapt our system to the changing requirements, but we will also expand our regional coverage by delivering a Dodd Frank (CFTC and SEC), a MAS (Singapore) and a ASIC (Australia), and a Canadian Derivative Reporting solution in 2021. Further regulations are foreseen to be added in the course of the next 24 months.
About deltaconX
deltaconX is a full-service provider offering a unique software & support package catering for European financial-, energy- and commodity trading organizations enabling them to meet their various regulatory reporting and market surveillance obligations such as EMIR EU & UK, MiFIR/MiFID II EU & UK, SFTR EU and UK, FinfraG and REMIT within a unified platform. Manual efforts and the total costs of ownership are therefore reduced to a minimum.
For more information visit us at www.deltaconX.com
