As social distancing becomes the norm globally, policymakers and regulators have started to respond to the new normal that is emerging: existing policies and practices are being adapted, and a new business models which are riding the wave of disruption have come under regulatory focus – both in mitigating risks and promoting resiliency through innovation. Perceived normality also has led to a resumption of political activity, which had somewhat been muted during the most intense stages of the sanitary response. The key concern in most jurisdictions is the economic fallout of the measures taken to manage COVID-19. Please get in touch with us if you would like to discuss these and other developments.
Key Policy Developments
- COVID Relief: Congress passed and President Trump signed into law two separate pieces of legislation relating to the pandemic: (1) H.R. 266 (the “Paycheck Protection Program and Health Care Enhancement Act”) which amended the CARES Act to increase the amount authorized for commitments to the SBA’s Paycheck Protection Program (PPP) and allocated additional SBA funds for emergency grants under its Economic Injury Disaster Loan (EIDL) program; and (2) H.R. 7010 (the “Paycheck Protection Program Flexibility Act of 2020”), legislation that modified certain terms and conditions relating to the forgiveness of loans provided under the SBA’s PPP. Congress also recently voted to extend the Paycheck Protection Program (PPP) until August 8, 2020. Congress is currently debating whether it will pass additional or extend existing stimulus measures that expire in July (e.g., PPP loans, unemployment insurance bonus, etc). There is some uncertainty about what is needed. Although recent unemployment data has been somewhat positive, there has also a surge in COVID cases that could result in new lock-downs.
- Congress in Session: In late June, both Chambers of Congress were back in session at the same time for the first time since the pandemic. In May, the House passed a resolution allowing proxy voting and hearings by video conference. In the Senate, although no proxy voting is allowed for floor votes, some Senate committees have begun holding meetings with senators participating remotely. And while not yet used, existing Senate rules permit voting by proxy in committee.
- NDAA: Congress is debating the National Defense Authorization Act (NDAA) for 2021, a bill that is historically ‘must pass’ legislation. A final bill will likely include several recommendations from the Solarium Commission Report that focused on updating and improving that nation’s cybersecurity readiness. One provision grants the Department of Homeland Security the ability to subpoena internet service providers to identify entities that they believe may be the owner of a vulnerable system. The provision also gives them the ability to notify critical service providers that may be operating vulnerable systems. A key recommendation of the Commission to create a head of cyber security in the Administration is unlikely to be included due to opposition from the Administration. Instead it appears Congress is considering mandating a study to determine feasibility of a creating such a position.
There is also a bipartisan and bicameral effort to include a provision that would change BASA / AML / Beneficial Ownership rules. The House recently voted to include that provision, while the Senate has not and is unlikely to do so. The issue will likely have to be hashed out in negotiations between the House and Senate on a final bill.
Several more hot-button issues remain outstanding. One in particular has drawn a veto threat from the President. The House passed an NDAA bill out of committee that includes language requiring the Department of Defense to rename bases and other property with Confederate monikers within a year. The President has threatened to veto any bill that contains such a requirement.
- German Presidency priorities and revised work programmes: Germany has picked up the baton of the EU presidency and will be determining the EU’s policy priorities over the next 6 months. Apart from focusing on a COVID economic recovery, Germany will prioritise sustainability and digitization in the area of financial services. In that sense, although the European Commission has had to review its Work Programme in light of the pandemic, these two overarching themes remain high up the bucket list. Concrete expected actions include a proposal on crypto-assets, a framework for operational and cyber resilience and a renewed Sustainable Finance strategy.
- EU and UK divergence at last: And so it begins. The UK government has confirmed that it will not implement certain areas of the EU’s Securities Financing Transaction Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR), due to apply after the transition period ends. Some are seeing divergence under SFTR and CSDR as the beginning of the end of regulatory alignment.
- NIS 2.0: The European Commission is considering to tackle the inconsistent implementation of the Network and Information Security (NIS) Directive in a review of the latter. The new framework could potentially eliminate any wiggle-room EU countries currently have when applying it at national level. This won’t be well received by EU Member States.
- Central banks have highlighted the importance of climate risk management. The Hong Kong Monetary Authority issued a circular to its Authorized Institutions in which it highlighted the importance of being agile and responsive to changes when managing climate risks given their distinctive nature, while the Monetary Authority of Singapore launched consultations on Environmental Risk Management Guidelines for Financial Institutions.
- China’s National People’s Congress is consulting on a Data Security Law. Through the proposed law, the government intends protect the legitimate rights of individuals and organisations over the use of their data, and additionally sets out technical requirements for data protection and specifies the rights and responsibilities of different stakeholders and regulators.
- Korea’s OTC derivatives reform is ready to be passed by parliament. The Financial Services Commission’s revisions to the Financial Investment Services and Capital Markets Act (FSCMA) were approved at a cabinet meeting on June 30 and will be submitted to the National Assembly in July. It introduces a licensing and supervisory regime for a derivatives trade reporting as well as margin requirements.
- Australia has introduced an open data framework for financial institutions. From July 1st, individual customers in Australia can request their bank share their data for deposit and transaction accounts and credit and debit cards. From 1 November 2020 consumers will be able to share their data relating to home loans, investment loans, personal loans and joint accounts. On 29 June 2020, the Australian Government announced the formal designation of the energy sector as the next sector to join the Consumer Data Right ecosystem.
- Digital currencies make progress. Bank of Thailand will develop a prototype payment system for businesses using its central-bank digital currency (CBDC), which has been explored by Project Inthanon – seeing the CBDC used for wholesale domestic and cross-border payments. People’s Bank of China, for its part, has reportedly selected Didi as a partner for its large-scale pilot for its new digital currency. Bank of Korea has set up a panel to explore the necessary legal framework for a CBDC launch – coming on the heels of their April announcement to set up a 22-Month Pilot Programm to Test CBDC Issuance.
- India has revamped its FMI oversight framework. The new Oversight Framework for Financial Market Infrastructures (FMIs) and Retail Payment Systems (RPSs) was published in mid-June.
Talk of the Town
Central Bank Digital Currency
The U.S. Congress continues its exploration of the digitalization of money and specifically, on the potential for a US CBDC. Both the House and Senate held hearings to consider CBDC issues, calling on Fed Chair Powell and former CFTC Chair Chris Giancarlo as witnesses to discuss the issue. Chair Powell, during a House Financial Services Committee hearing, underscored that the Fed continues to explore this area and potential implications for monetary policy, privacy, cybersecurity, and financial inclusion. He reiterated that serious questions would need be addressed before the US would consider implementing a digital currency. He also emphasized that central banks should be responsible for CBDC design and creation of money supply, rather than the private sector. Former CFTC Chair Chris Giancarlo is currently helping lead an initiative, the “Digital Dollar Project”, that aims to help advance exploration of a U.S. CBDC.
Notably, there is bipartisan Congressional interest in potentially developing a U.S. CBDC to solve distinct, albeit related, problems. For Democrats, such as Senator Sherrod Brown (D-OH), there is a focus on the Fed potentially leveraging a U.S. CBDC to increase financial inclusion by allowing Americans to set up bank accounts with the Federal Reserve. Others see the potential to use a U.S. CBDC to improve the delivery of stimulus payments or other government benefits. Several Republicans, meanwhile, have wondered whether there is a need for a U.S. CBDC to help maintain the dollar’s place as the global reserve currency. Nevertheless, others Members of Congress have noted that the lack of internet access in some parts of the country and the need to maintain users’ privacy while ensuring compliance with existing anti-money laundering (AML) and other regulations still pose significant hurdles to successfully implementing a U.S. CBDC.
EU’s Next Generation:
The name hasn’t really quite caught on yet, but the European Commission’s proposal for a recovery instrument with financial firepower of €750 billion will continue to cause many sleepless nights among EU Heads of State and those in charge of getting an agreement out of them. Ironing out disagreements, especially between the ‘frugal four ’ (Austria, Denmark, Sweden and the Netherlands) and others, will be tough, but time pressure might help as the instrument is expected to kick in early next year.
The end of the dispute between EU and US authorities over the infamous European Market Infrastructure Regulation (EMIR) 2.2 – a proposal for the supervision of non-EU CCPs – seems like a beacon of hope for an otherwise tense transatlantic relation. Stumbling blocks range from how to deal with the BigTechs to taxing Spanish olives and it is far from clear whether the outcome of the US presidential election will offer a basis for improvement.
Hong Kong National Security Law
Throughout the past weeks the passing of the Hong Kong National Security law has been the focus of attention, especially in the affected territory. The Standing Committee of the National People’s Congress passed the National Security law and swiftly promulgated by the Hong Kong government. The law was drafted in secret and was only published upon its entry into force, without public consultation and bypassing the local legislature. The resulting law is exceptionally broad, with impact ranging from privacy to education, is extraterritorial, and in many cases over-rides the territory’s legal structure. The law has been supported by some Hong Kong residents, regarding it as a way to address the protests the territory witnessed; others, however, have expressed concern about the reach and scope for it to be used by the Central Government to advance its own interests above those of the residents, without the protections otherwise afforded through its domestic legal system.
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.
Internationally, it the passing of the law has been broadly condemned by most democratic governments, which also raise concerns over the increased assertiveness of the Chinese State. Specifically, it been viewed by the United Kingdom as an infringement on the terms of the UN-registered Sino-British Declaration on which the two nations agreed on the terms of the return of Hong Kong to China. The United States has also decided that the passing of the law and the broader political context prevents it from no longer regarding Hong Kong as a separate territory, with far-reaching implications on matters of trade and cultural exchange, and potentially on other matters. China has responded by saying that the passing of such a law is a purely domestic matter, not one where foreign countries should weigh in on or interfere with. Further, in an apparent effort to shore up domestic and international support, it has granted access to a portion the enormous stock of Chinese savings through Hong Kong as well as extending the access to the onshore bond market – the second largest in the world –, possibly expecting that the commercial interests of such access might offset the geopolitical and ideological opposition.
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