Capital Markets – Regulatory environment for 2019 | HCLTech

Capital Markets – Regulatory environment for 2019

Capital Markets – Regulatory environment for 2019
April 11, 2019


With so much disruption and scrutiny facing Financial services players, let’s take a closer look at the key regulatory requirements for capital markets this year.

Let's take a closer look at the key regulatory requirements for capital markets this year. #capitalmarkets #riskmanagement #securitycompliance @hclfs

  1. MiFID 2


    Since MIFID2 went live last year, we have found that the full benefits of the increase in market data post MiFID II have yet to be realised.  The main concerns are about the high costs and poor availability of market data. Despite this, supervisors will focus on how firms use the increased data to achieve best execution. especially in fixed income. Firms should use the available data to assess a number of risk areas, such as price, execution quality, market impact, and market liquidity. Firms will invest in enhancing order management systems to utilise their own data, as well as data from APAs, and will look at vendor services, for example, on TCA. In addition, we expect supervisors will scrutinise the next round of Top 5 Execution Venue (RTS 28) reports due in April 2019

    Transaction reporting

    Our clients should be prepared for their Supervisors to require remediation work on MiFID II transaction reporting in 2019. Effective governance and controls are core requirements meaning as business evolves there is complete and accurate reporting. Our clients should undertake reviews as soon as possible to ensure compliance and focus on the root causes of poor data quality. They should set up a strong governance framework and process to manage exceptions, as well as produce effective MI.

    Algorithmic trading

    The markets appetite for algorithmic trading is expected to increase as more trading moves onto venues and firms focus on saving their costs. Our clients should watch out for the much anticipated supervisory scrutiny in this area given the detailed rules. To address their risks, traders will have to focus on the governance and controls of algorithms and be able to show to their regulators that they understand the algorithms they use, have stress tests for each individual model and go through a robust approval process.

  2. EMIR

    We expect in the final stage of IM phase‑in that firms in scope of EMIR will need to start preparing for. It is expected far more counterparties will fall into scope

  3. SFTR

    At the start of this year, 2019 Technical Standards under the SFTR became applicable. Our clients who are Credit institutions and investment firms will have a year to comply with the rules (other SFT counterparties will be phased in over 21 months). Participants will need to conduct a data assessment and build new infrastructure and processes to source and capture the data internally. As SFTR reporting is built on the same regulatory framework laid down by EMIR the two regulations have much in common. Lessons learned from EMIR when implementing SFTR are invaluable including communicating effectively with counterparties to match report contents, ensuring oversight of delegated reporting, and embedding sufficient skills and knowledge in support functions.


    Traded Risk under FRTB regulations will be implemented in the EU as a reporting requirement to begin with and our clients will need to consider what a two‑phase FRTB introduction means for their implementation plans. Through a Delegated Act published by the end of 2019, firms will be expected to start reporting their market RWs under the FRTB SA one year later whilst still facing uncertainty throughout 2019 over the future shape and economics of the binding capital requirements for market risk, which are likely to be deferred by a number of years. Many banking clients of ours have been planning substantial upgrades to risk and data infrastructures for the FRTB, however, whilst this is underway, they will now need to consider how to incorporate the early reporting requirement into their overall FRTB programmes. Banks should therefore use this year to start addressing the quality of their trading data, and consider what can be done to achieve better data standardisation


    The CRR2 regulations will detail the stable funding treatment in the EU of derivatives and repo activity under the NSFR. This will enable EU banks to start assessing their liquidity risks early and strategically plan how to adjust their funding structure


    Due to the continued phase‑in of EMIR IM some new counterparties will be brought into scope by 1 September 2019 and will have to follow applicable Margin, clearing and settlement rules. However, it is the final phase‑in in 2020 that will capture nearly ten times more counterparties, even though the proportional increase in activity caught will be limited. In response to this Industry groups have called on international standard‑setting bodies to raise the threshold triggering compliance to lower the number of firms falling in scope. Assuming no change, newly in‑scope counterparties, as well as existing counterparties and custodians, will be advised to start preparing in 2019 for this final phase‑in. Main requirements include establishing custodial relationships, preparing regulatory IM calculators, and negotiating and executing documentation. With any security settlement delay or failure the cost of non compliance mean firms will have to pay penalty fees and conduct a mandatory buy‑in which will apply from September 2020. Practically this means this year, our client banks and brokers will be well advised to conduct assessments on their settlement failures and the responsible counterparties to help them understand what they must implement to minimise cost increases.

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