A painful journey to a safer market
Financial regulators have introduced an avalanche of regulation since the 2008 financial crisis designed to make financial markets safer and more efficient.
However, the Lens discovered further evidence this week that the industry is creaking under this change agenda.
ESMA, the EU regulator for securities markets, last week announced the postponement until 2021 of new rules designed to make investment operations work more efficiently.
Scheduled originally for September 2020, these rules under the Central Securities Depository Regulation (CSDR) are largely well intentioned and designed to make trades complete more efficiently with less risk.
Basically, these say that when you sell me a share or bond, you need to deliver that security within a specified time after the trade is executed. And as a buyer, I need to pay you within the same timeframe.
That is a good arrangement. You get paid, I take ownership of the security. If either of us fails to deliver, we will incur a nominal fine and, if necessary, the securities will be bought in from somewhere else.
The problem is that the asset managers, banks, broker-dealers and others affected by this regulation are already busy implementing a series of other regulatory changes that are running in parallel. Each requires impact assessment, IT changes, new legal arrangements, testing and other preparation.
This CSDR provision follows on the heels of the Securities Finance Transaction Regulation, which has been introduced in phases over the past three years. The Lens is aware that a sizeable group of asset managers will struggle to meet the October 2020 deadline for SFTR implementation.
Asset managers who use derivatives products to manage risk may also need to comply with Uncleared Margin Rules (UMR) which are being introduced over a similar period.
This is a lot of regulatory adjustment for firms that typically want to get on with managing money and delivering favourable investment solutions to their customers.
Feeling the pain, 14 industry associations wrote a joint letter to ESMA and the European Commission two weeks ago asking for a postponement to these CSDR rules ̶ and requesting changes to some of its content.
ESMA has granted a four-month extension – which will help a bit, but not that much.
Then the show must resume. But behind the scenes, discontent is growing among a performance-weary stage crew.