While the world has been preparing and taking action to face the challenge of a pandemic, capital markets have so far remained resilient and continue to operate normally in spite of major fluctuations and operational hurdles. As an integral part of the capital markets, policymakers have continued working towards keeping orderly, efficient markets. In this refreshed version of Across The Pond, we explore these changes. Please get in touch with us if you would like to discuss these and other developments.
Key Policy Developments
- The CFTC has moved forward on revising its swap data reporting rules. On February 20th, the CFTC voted unanimously to publish proposals that would modify Part 43 (Real-Time Reporting) and Part 45 (Swap Data Recordkeeping and Reporting) rules, and to reopen the comment period on a previously published proposal that would amend the Part 49 rules (SDR and Data Reporting). The changes are intended to simplify the swap reporting rules and harmonize the CFTC’s rules with the SEC’s and ESMA’s. All three proposals are now open for public comment.
- Proposed Rule – Amendments to the Real-Time Public Reporting Requirements (Part 43): The proposed rule would adopt international standards to standardize swap data that the CFTC receives and revises the reporting rules for block trades. One such revision was to extend the delay for the reporting of block trades from 15 minutes to 48 hours, which is designed to give market participants more time to place a hedge position after entering into a block-sized trade. Chairman Tarbert and Commissioners Behnam, and Berkovitz questioned the 48-hour delay, saying that it could undermine market integrity and result in price mismatches.
- Proposed Rule – Amendments to the Swap Data Recordkeeping and Reporting Requirements (Part 45): The proposed rule would clarify what market participants have to report to swap data repositories (SDRs), as well as what data SDRs will be receiving and how to validate it.
- Proposed Rule – Amendments to Swap Data Repository and Data Reporting Requirements (Part 49): The proposal would amend certain regulations applicable to SDRs, reporting counterparties, and other market participants. The proposed amendments would, among other things, update requirements for SDRs to verify swap data with reporting counterparties, update requirements to correct swap data errors and omissions, and update and clarify certain SDR operational and governance requirements.
- House Financial Services Committee Considers Amendment Opposing Financial Transaction Tax (FTT). On February 27th, during a House Financial Services Committee markup, Ranking Member Patrick McHenry (R-NC) offered an amendment to the FY2021 Budget resolution that would have inserted language stating that the Committee opposes any proposal that would negatively impact the capital markets. The amendment was rejected along mostly party lines.
- CBDC: A US-issued central bank digital currency (CBDC) remains an open question as the Fed explores costs and benefits associated with a possible digital currency. Fed Chair Powell recently cited ongoing concerns including cyber and privacy risks, and Fed Governor Brainard reiterated the Fed’s collaboration with other central banks to further explore CBDCs.
- Commissioner Peirce Safe Harbor Proposal: SEC Commissioner Hester Peirce – “Crypto Mom” – outlined a securities law safe harbor for token distributions, proposing a three-year registration “grace period” to allow network developers to develop a functional or decentralized network, provided specific conditions are met. The Commissioner has requested feedback on the proposal.
- Yet another MiFID II/MiFIR review. EU-27 embarked upon a revision of MiFID since its largest capital market will be leaving by the end of the year. The European Commission has launched a first consultation for this purpose (specifically investor protection and the development of a consolidated tape) and there is likely to be a second consultation later in the year. Stakeholders have the opportunity to identify the areas of MiFID they think should be revised. Draft text by the Commission is expected in Q3 2020 (tbc). (Read more)
- NFRD aka ESG information disclosure consultation. As part of the Sustainable Finance work that the EU is spearheading, this consult offers the opportunity for revising an old set of rules and standards to strengthen corporate reporting. Even though the EU is not likely to propose a unique standard, the consult does address the issue of whether sector-specific standards should be accomplished with existing international/EU frameworks or new systems. Reliability and comparability of data is expected to be a crucial component for the success of any endeavor in this space. This has also caught the attention of supervisors with ESMA suggesting that “fostering transparency and reliability in the reporting of the non-financial information” is a key priority. (Read more)
- EU-UK FTA. EU-UK trade negotiations started in earnest aiming to ironing out differences in contested areas including fisheries and financial services (albeit not officially part of the negotiations). We expect to have some progress by June, in time for the first EU-UK summit. Obvious hurdles are the lack of a common vision and a lack of time.
- FMI legislative framework under review in Australia and New Zealand. In Australia the Council of Financial Regulators consulted late last year on some amendments to the current legislative framework, while the Reserve Bank of New Zealand ran a parallel consultation. New Zealand has now introduced a new bill to Parliament. Both recognize both the value and importance of FMIs, as well as the global reach of their activities. (Australia consultation; New Zealand bill)
- The US and Singapore jointly voiced their support for data mobility in financial services. The US Treasury and the Monetary Authority of Singapore pledged to ensure that relevant financial services data could be transferred without hinderance; oppose measures restricting data storage and processing as long as it has appropriate regulatory access; and, where such access is lacking, allowing the institutions to execute remedial action prior to imposing localization. (Read more)
- The IMF and Singapore published a case study on cyber risk surveillance. The IMF Working Paper, produced in conjunction with the Monetary Authority of Singapore, explores a range of analytical approaches to assess and monitor cyber risk to the financial sector, including various approaches to stress testing. (Read more)
Talk of the Town
Democratic Presidential Primary Candidates and Financial Services
Vice President Joe Biden and Senator Bernie Sanders have emerged as the two front-runners in the Democratic primary. In tone and substance, they offer contrasts on several policy fronts, including financial services. Senator Sanders has released a slew of financial services proposals that if implemented could significantly alter the current landscape of financial services, including a proposal to break up any bank deemed “too big to fail,” to reinstate “Glass-Steagall” rules mandating the separation of commercial and investment banking, imposing a financial transaction tax (FTT), capping credit card consumer loan interest at 15%, and allowing post offices to engage in banking activities. Vice President Biden has offered fewer specific plans for reforming financial services, but his record from the Senate and public comments offer a window into policies he may pursue. In an interview, Biden endorsed an FTT, which has had nearly unanimous support among Democratic nominees. Biden, however, has also suggested in that same interview that he thought it would not raise much revenue, and thought that it would be difficult to pass. Biden reportedly considered making his support for the FTT more formal, but it has thus far been omitted from any of his broader economic or tax plans. Beyond that, Biden supported the Dodd-Frank reforms, has expressed regret that he voted for the repeal of Glass-Steagall, and has called for a rollback of corporate tax cuts, bumping the corporate tax rate from 21% to 28%. Thus, while there is some overlap between Biden and Sanders on financial services issues, Biden has staked out less aggressive policy positions on financial services. Of course, the potential that either candidate would be able to move forward on any significant reforms to financial services policy or implementing an FTT will depend heavily on the composition of Congress.
Surprisingly not Brexit… but time for consultations
The von der Leyen Commission has committed to keeping themselves busy in its first 100 days right, especially in the area of digital transformation. It has therefore launched public consultations on crypto-assets, cyber-resilience, AI and a data strategy for the EU. Arguably, there could be fragmentation stemming from the regulatory actions following those consultations, if not embedded into a global approach.
EU Data Strategy
Access to and use of data have become a sensitive issue in an interconnected world. Potential rules in this area raise many question: Can you protect data without proper oversight? Do you need the data to be located in a specific jurisdiction for that oversight? And if there are localization requirements, what does that mean for a transition into the cloud? We hope to have some answers soon. Data spaces are to be set out by Q3 2020 (tbc) and an all-encompassing EU Data Act is expected by Q1 2021 (tbc). (Read more)
Asia Bond Markets – Ready for Primetime?
China has been slowly reforming its capital markets, and one of the most notable changes has been with regard to its fixed income markets. While they had been somewhat accessible through the Qualified Foreign Institutional Investor program (QFII), it was subject to quotas and complex currency conversion requirements. In recent years, however, the Chinese bond markets have made great efforts to promote international participation: they have allowed direct investment without quotas into the China Interbank Bond Market (CIBM), as well as through the Bond Connect scheme – which allows foreign investors to leverage the existing custody and settlement arrangements through Hong Kong Monetary Authority’s Central Moneymarkets Unit. In order to build an offshore CNY yield curve, the People’s Bank of China has started regular issuances of sovereign bonds in Hong Kong too.
Investors, however, have been cautious about incorporating Chinese bonds into their portfolios; they only make up around 2.2% of the market. Reasons include limited foreign exchange and hedging products, but they are rapidly increasing. The Chinese government has been steadfast in their policy to open the fixed income capital markets, as have other markets in the region. The long-running ASEAN+3 Bond Market Forum has sought to promote fixed income markets in the region through standardization and adoption of best practices, and global indices are increasingly incorporating Asian assets which have become easier to access.
As global interest rates drop and many investors seeking high-quality assets with attractive yields, policymakers in the region are likely to continue promoting investment in their fixed income markets to attract foreign capital and fund growth in their jurisdiction.
With any questions, please do not hesitate to reach out DTCC Government Relations at DTCCGovernmentRelations@dtcc.com.
Managing Director, DTCC Global Government Relations
Managing Director, Government Relations (EMEA & APAC)
Executive Director, Global Public Policy & Office of Fintech Strategy
Executive Director, Government Relations (EMEA)
Director, Global Public Policy
Director, Government Relations (APAC)
Ana Uria Weiss
EU Affairs Adviser
Associate Director, US Government Relations