RiskTech Forum

Chartis: New concerns wash up as the wave of regulation subsides

Posted: 12 March 2018  |  Source: Jay Vigneswaralingham  |  Source: Chartis


For the world’s biggest Financial Institutions (FIs), the ‘tidal wave’ of global regulation that gained momentum after the 2007/8 financial crisis has now broken ashore. Weighty regulations and directives that have taken many years to draw up, amend, negotiate and amend again are now finally upon us. The wave has had pretty far-reaching effects, too, fundamentally changing the way FIs operate and transforming the challenges they face.

The finalised text for Basel 3 – the Basel Committee on Banking Supervision’s official response to the global financial crisis – was published on 7 December 2017, and its full implementation is expected in 2019. This conclusion has been welcomed in many international jurisdictions, including both the US and the EU, and long-awaited consensus seems to be carving out a path toward less turbulent implementation processes in future.

In the EU, the second Markets in Financial Infrastructure Directive (MiFID II) had its go-live date on 3 January this year. Many of its issues were resolved through Q&A documents in the run-up to implementation, although some FIs have received extensions for initial issues around Legal Entity Identifiers. Equally significant EU legislation, such as the Second Payment Services Directive (PSD 2) – which dropped recently – and the General Data Protection Regulation (due to come into force on 25 May) have put the role of data and data management systems front and center of discussions in the finance and risk departments in most, if not all, European FIs.

Significantly, however, after almost unanimous pushback in all major jurisdictions, the implementation date for the Fundamental Review of the Trading Book (FRTB) has been delayed by at least three years, which means many countries won’t begin to implement systems to address the regulation until 2022 at the earliest. With IFRS 9 the only other standard in force any time soon, there is an argument that the tide of incoming rules and regulations may be waning somewhat.

This could mean less for FIs to worry about in the short term, and give them and vendors a period of relative calm. It’s likely that the next year or so will be a time of consolidation in which FIs will need to allocate fewer resources to tackling existing deadlines, and devise fewer contingency plans for incoming regulations. Implementation is now the focus for FIs and vendors alike.

Vendors will need to keep a close eye on regional regulators’ demands on FIs as the various regulations and standards take effect. Regulation has been one of the most important drivers of product development in the past 10 years, but vendors may be hoping they won’t have to incorporate multiple add-on modules in their product development timelines to address what can seem like constant change in the landscape. The opportunities for vendors now will be to identify overlaps in the regulations, and explore how to form fit-for-purpose/transferable solutions across jurisdictions and geographies (IFRS 9 and CECL being the obvious examples). Vendors will also need to shift more of their focus onto their consulting services and how best to implement their solutions for their FI clients.

One trend that’s becoming more prominent is regulatory divergence in the global landscape. Regional and national regulators have shown more willingness to deviate from certain requirements of global standards (such as Basel) as banks face tighter profit margins and policymakers apply more pressure to keep economic growth healthy. This could mean more fragmentation in the regulations that global FIs have to deal with, because their subsidiaries may face different rules to those they face at home. Inevitably this will increase the complexity for technology vendors, which will have to adapt their systems for different jurisdictions.

So, despite the relative lull, it could be that the only certainty for FIs and vendors this year will be ongoing uncertainty about how the rules are applied by regional regulators. Ultimately this will mean tighter working relationships with the regulators to help vendors and FIs alike navigate the year ahead.