Global Risk Regulator - February 2021
- February 2021 Speakers' Corner: FCA fleshes out IFPR priorities in consultation
- ECB’s aim of encouraging cross-border eurozone bank mergers faces hurdles
- Bank asset quality tops 2021 ECB supervisory concerns
- OCC pauses ‘fair access rule’ pending further scrutiny
- Gensler nominated to lead SEC paving way for tougher oversight
- Gamestop shares attracts regulators
March 2020 volatility sparks debate over clearing house initial margin models: ISDA is pushing financial regulators to scrutinise margin models at clearing houses after COVID-induced market volatility last spring sent initial margins through the roof, while CCPs sound a note of caution.
'A sudden rise in initial margin will have different impacts on different parts of markets. Large clearing members with solid capital and liquidity ratios may have less issues than their clients. For smaller asset managers and trading firms, it is important to have some idea of how much money should be earmarked for initial margin during a period of market stress and how much they can productively invest. Clearing members say that margin spikes place pressure on their resources. Bill Stenning, managing director for clearing, regulatory and strategic affairs at Société Générale, confirms that the scale of the increase in margin calls back in spring had an impact. He says: “As a clearing broker, you have to post margin on behalf of clients but clients may not be able to post margin so essentially we are extending credit and liquidity.” CCPs maintain that initial margin moves worked as they should. Teo Floor, chief executive officer at CCP12, the global association of CCPs, says: “The market moves were unexpected, but I wouldn't say that the changes in margin rate per contract were unexpected. Obviously if market conditions change then you would expect that the margin levels have to change. I don't think that there is a financial stability concern to raising initial margin rates, if market conditions change.”
Concerns over Franco-Dutch initiative leading to burdensome ESG reporting: French and Dutch securities regulators are pushing for tougher standards for environmental, social and governance data in the fight against greenwashing, but critics fear burdensome reporting will stifle innovation in the race against climate change.
'To that end, the AMF and its Dutch counterpart, the Autoriteit Financi?le Markten, have come up with a proposal for an EU-wide regulatory framework for sustainability-related service providers (SSPs). They say that it aims to prevent misallocation of investments, reduce greenwashing, and boost investor protection. It includes requirements on transparency on methodologies, management of conflicts of interest, internal control processes, and enhanced dialogue with companies subject to sustainability ratings. SSPs would have to open their books to the European Securities and Markets Authority on methodologies, management of conflicts of interest and internal control processes. The transparency requirements are fairly substantial. Service providers would have to provide: a description of the products they offer and their characteristics; the main source of raw data used or marketed; the processes in place for collecting data; how they work around an absence of reported data; data reliability controls; how they manage potential conflicts of interest; details about conversations they have with the companies they rate and so on. The proposal is new in terms of its vast scope, but not in its intention to streamline ESG metrics. In March, a new EU-wide framework on sustainability-related disclosures in the financial sector will come into force. This will require certain investors and asset managers to disclose how they integrate ESG factors into their risk processes and investment decision making, as part of their duties towards investors and beneficiaries.'
Hong Kong leverages its capital markets in bid to dominate green finance: Hong Kong, encouraged by mainland China, has ambitions to become Asia’s green financial hub, though the territory still has a way to go to establish its sustainable credentials.
'The energy behind the shift is palpable. Mr Daryl Ho, executive director of banking policy at the HKMA, declares: “What we can tell you confidently is that Hong Kong is very committed to developing sustainable finance…We are firing on all cylinders.” Among the Hong Kong regulator’s current initiatives with the financial sector are a pilot climate risk-stress test, building a sizeable green-bond programme, and enhancing the investment practices of the Exchange Fund (the de facto sovereign wealth fund run by the HKMA) by taking into account ESG factors. Mr Ho adds: “Asia shares the same responsibility as the West in seeking to achieve the climate target of the Paris Agreement. However, there is a higher degree of diversity in Asia as compared to the West, in terms of economic and political structure, stage of economic development, as well as regulatory landscape. “Obviously, the starting point of the green finance journey in this part of the world is very different from that in Europe, where under an economic and political union like the EU, there is a unified strategy and action plan to develop sustainable finance,” he says.'
FCA could examine industry conduct once pandemic is over: Some industry sources are warning that once the COVID-19 pandemic has passed, the UK’s Financial Conduct Authority could carry out a ‘look back’ exercise to see if firms followed proper compliance procedures and maintained good conduct.
'The UK is currently experiencing its third population lockdown since March 2020 to stop the spread of the pandemic, which has seen most financial professionals working from home, rather than their offices. In the first lockdown, supervisors made the pragmatic decision to loosen some reporting requirements to prioritise financial stability and the smooth functioning of capital markets as participants were forced to adapt to a new work environment. From that perspective, the transition was very successful as markets and financial institutions continued to function normally. Nonetheless, some industry sources report that during the lockdowns there has been reduced interaction between the UK’s Financial Conduct Authority (FCA) and regulated firms with so many regulatory staff also working remotely. All this has raised fears that remote working could have become a breeding ground for misconduct.'
Bank of England resurrects market maker of last resort concept: Suggestions by a Bank of England official that central banks could become market makers of last resort due to structural market changes have triggered mixed reactions with some embracing the idea, while others see potential moral hazard and yet another group thinks it is essentially a regulatory problem.
'An example of the difficulties in exiting large market positions was highlighted by the so-called ‘taper tantrums’ in 2013, when the US Federal Reserve announced that it was winding down its then QE programme, which caused big sell-offs in bond markets. None of the big central banks ever fully reversed their post 2007-9 global financial crisis (GFC) QE programmes when the COVID pandemic struck Western nations early last year. And they are now more deeply embedded in capital markets than ever. A truly staggering statistic is that it took the Fed five years to expand its balance sheet by $3tn via QE following the GFC. Last year’s market turmoil triggered by the COVID-19 pandemic induced social restrictions to stop its spread, saw the Fed shell out the same amount again in just three months. Meanwhile, Mr Hauser outlined that since March last year, G10 central banks hoovered up another $8tn in assets (and counting). And central banks are becoming increasingly twitchy about the situation. Successive crises are dragging them deeper into capital markets and the economy creating an unhealthy dependency making it hard to see a way out.'