Global Risk Regulator - March 2021
- March 2021 Speakers' Corner: Basel III reforms: why it’s heads in the cloud time for banks
- Lord Hill proposes radical shake-up of UK’s listing regime to boost competitiveness
- ECB says COVID-19 has reduced eurozone banks' recovery capacities
- ASIFMA calls for consistent regulatory approach to use of cloud by financial firms
- Fed gearing up to incorporate climate risks in regulatory framework
Tough legacy contracts slow transition away from Libor: Letting go of “the world’s most important number” - Libor - is proving harder than regulators had hoped, and new draft laws designed to settle “tough legacy” contracts are no panacea.
'Derivatives are easier to transition than bonds and loans, thanks to the International Swaps and Derivatives Association’s IBOR fallbacks protocol, which is designed to help counterparties make large-scale amendments to legacy contracts. They can use tools such as portfolio compression to whittle down the number of derivatives contracts that reference Libor. In the UK alone, 12,000 firms had signed the ISDA protocol by January and 85% of the uncleared UK derivatives are already ready for the end of Libor. Ann Battle, head of benchmark reform at ISDA, says: “Derivatives contracts can be amended and therefore they are not like some of the tough legacy contracts that cannot. However, amending the contracts does require both counterparties to agree to the terms of the amendment.” Finance and legal experts say that some derivatives contracts will indeed be tough to re-negotiate, such as non-linear derivatives where the pay-off changes over time and for which the fundamentals of the trade would change with a different benchmark, or alternatively derivatives that are part of a complex bigger structure which is itself tough legacy.'
Singapore prioritises transition activities in its green taxonomy: The overwhelming focus on transitioning the world economy to green technologies such as solar energy has a simple drawback: it fails to place value on minimising emissions over the coming decades of existing brown industries like generating electricity from fossil fuels.
'The green taskforce sees its approach as a blend of the EU’s, China’s and Malaysia’s thinking. The taxonomy is based methodologically on the EU’s rigorous and highly detailed green taxonomy, which has emerged as a sort of sustainability template. But at a practical level there are radical differences: the new taxonomy classes as sustainable those activities that allow for a gradual transition away from activities with the highest environmental footprint but for the moment are not green. The taxonomy identifies economic sectors that have the potential to make a substantial contribution to climate change mitigation or adaptation in south-east Asia, and then sets out criteria for economic activities within those sectors to qualify as environmentally sustainable. Among the sectors of focus are: agriculture and land use, energy, construction, communications technology, transport and fuel, carbon capture and waste. For an activity within these sectors to qualify as environmentally sustainable, it must contribute to one or more of four environmental objectives: climate change mitigation, climate change adaptation, protecting biodiversity and promoting resource resilience. In addition, the activity must not significantly harm any of the four environmental objectives, negatively impact Asean communities’ social and economic well-being (unless trade-offs can be justified in the long run), or breach local laws and regulations.'
Digitisation rush leaves supervisors concerned about cyber risks: Last year a major cyber attack, known as SolarWinds, infiltrated the IT systems of hundreds of organisations across the globe, causing data breaches for multinational corporations, the US government and even the European parliament.
'Such are the concerns about cyber risks that the Bank for International Settlements focused on this area in its January 14 bulletin. Among its key takeaways is that the uptick in cyber attacks against financial institutions had not yet led to significant disruptions or a systemic impact, but warned of significant risks. The BIS reported that most cyber incidents are unintended, such as accidental data disclosures and processing errors. Staff education programmes and better processes should substantially reduce such mistakes. However, around 40% of cyber incidents are deliberate. It details some of the more common types of attacks, with a typical one being malicious software (malware), which is designed to damage IT systems or to steal data. Users are tricked into downloading malware through an email from what appears to be a trusted source, but is in fact from a criminal. Another type of attack detailed by the BIS is a zero-day exploit which targets software or hardware vulnerabilities, which is undisclosed. Once discovered, a zero-day exploit can see customers and vendors of the IT assets under attack with no predefined detection signatures or available remedial patches. The BIS noted that this type of attack is exacerbated by certain vendors offering rewards of up to $2.5m to anyone able to uncover such loopholes. They then sell solutions to these vulnerabilities into the market.'
SEC moves to beef up regulatory powers after meme stock trading frenzy: The SEC is scrambling to beef up its regulatory prowess after criticisms of its oversight of trading platforms like Robinhood during the GameStop saga. SEC chair nominee Gary Gensler has outlined his priorities for the hard-pressed regulatory agency.
'One of the main criticisms of the GameStop saga was how clearing houses process and settle trades. This will likely be a top priority for the next SEC chair, predicts Charley Cooper, a former chief operating officer at the CFTC and now chief communications officer at enterprise software firm R3. During the peak of the trading rush, Robinhood had to halt trading as it could not meet its rapidly rising margin calls from the National Securities Clearing Corporation. Customers were far from happy. Central counterparty clearing houses are afforded a substantial degree of discretion when it comes to margin calls, particularly during volatile market conditions, but critics argue that this high barrier denies retail investors fair access to markets. Rating agency Moody’s says that changes that would reduce a CCP’s discretion in setting margins could be credit-positive for its members but credit-negative for the CCP itself. However, its analysts predict that any substantial proposed changes in this area would likely face strong regulatory scrutiny. The GameStop debacle also heralded calls from many - including the founder of the platform at the centre of it, Robinhood - for real-time settlement to replace the current two-day cash equity clearing and settlement cycle in the US. This would reduce clearing counterparty risk, as demonstrated when the cycle transitioned to the current two-day ‘T+2’ period from ‘T+3’ in September 2017.'
Big tech eyeing financial services prompts regulatory rethink: When it comes to supervising big tech firms moving into financial services, the debate may need to extend beyond financial stability to include competition and data privacy, and even the design of regulatory frameworks.
'He said that in some policy domains, such as consumer protection or anti money-laundering, an activity-based approach might be sufficient, but in others, such as financial stability, an entity-based approach is indispensable. In a third group of policies covering operational resilience and competition, regulations require a combination of activity- and entity-based rules, addressing the specific risks that different types of players can generate to meet those policy objectives. In terms of anti-money laundering and consumer protection, Mr Restoy noted that major jurisdictions impose comparable rules across all financial services providers – though there might be differences in supervision and enforcement, depending on the entity type. Taking a functional approach may help eliminate any discrepancies in this area. He explained that despite some progress, rules governing operational resilience for traditional financial institutions are generally more stringent than for those for other entities. “As things move forward, and some big techs continue to increase their presence in the financial services market, their operations may acquire systemic importance,” said Mr Restoy.'