What’s on my mind for 2021

14 January 2021

Phil LloydManaging Director, Head of Customer Sales Delivery

View bio

John Stevenson-HamiltonLIBOR Client Strategy & Engagement

View bio

Other insights

View more insights

At the start of each year I set out things we're going to be watching out for. Last year naturally we didn't anticipate COVID, but despite that a lot of progress was still made across the regulatory space.   

LIBOR1, ESG2 and of course Brexit moved forward, CSDR3 was watered down by the UK possibly reflecting what's to come, while Margin for uncleared was put on ice. 

Sitting here at home with my crystal ball, I look to lay out what I think will feature in 2021…  

LIBOR

  • The final chapter is upon us and it’s going to be a busy year. As previously mentioned, we expect the announcement that LIBOR will end (locking in the X) early this year ahead of planned cessation early 2022 but before then we have a host of consultations and upcoming deadlines.
  • Coming up: 18 Jan: FCA Tough Legacy consultation deadline; 25 Jan: IBA11 consultation on which LIBOR rates should ‘end’ deadline; 25 Jan: ISDA Fallback Protocol effective; 29 Jan: LCH consultation on big bang switch. 
  • And of course, there are others outside the UK reform. Add in term rates going live, loan milestones, linear and non-linear milestones to stop new LIBOR business, it’s going to be a big final year. How cross currency swaps and multi-currency syndicated loans evolve with each major jurisdiction in a different position will keep all on their toes. 

Brexit

  • As Andrew Bailey stated on 6 January, “Britain should abandon full access to EU financial markets if it means becoming a regulatory rule-taker”.  All eyes therefore on the end of March UK / EU MoU which is attempting to replicate the level of cooperation that existed between EU agencies and UK regulatory authorities when the UK was a member of the EU.
  • It is quite conceivable that even if divergence takes place, principles based MoUs may enable continued co-operation. UK regulatory authorities have already made it clear in the consultations on the Future Financial Framework that they prefer a principles based legislative approach rather than a rules based one. One to keep a sharp eye on throughout the year. 
  • FCA on 31 Dec 2020 announced they would allow a 3 month temporary relief from the UK DTO12 when executing orders or transacting with EU clients subject to the EU DTO (FCs13 and NFC+14).  UK firms (and EU firms otherwise subject to the UK DTO) can deal on an EU venue and the UK DTO will be dis-applied when the EU client and the UK firm do not have ‘arrangements’ in place to deal over a third country venue recognised as equivalent by both the EU and the UK (e.g. a SEF15), subject to certain additional conditions; worth looking at the EEA16 market operators market operators that have applied, and those that have already been accepted as 'ROIEs'17.

MiFID II

  • ESMA18 is undertaking an extensive consultation with the finance industry ("MiFID II Review") to assess the proportionality of the MIFID II directive and published a number of consultative papers last year, which will be followed by further ones in the first quarter of this year.
  • ESMA has also recognised the impact of coronavirus on financial services and has sought to alleviate the regulatory reporting burden by introducing some changes to the directive, dubbed the MiFID II ‘Quick Fix’, as soon as possible. From the perspective of UK-based firms, the ‘Quick Fix’ changes will probably be approved in the first quarter and it’s unclear whether the FCA will choose to adopt them or not.
  • As the ‘Quick fix’ changes are to the EU Directive not the regulation, they have to be adopted into country law requiring a 12-month implementation period. Key among the updates are the suspension of RTS19 27 reporting for 2 years and a revision to the unbundling rules for research in certain situations. Will the UK go further with these changes? 

Margin for uncleared

  • All eyes are now on 1 September 2021 for the implementation of IM Phase 5 (to be applied to smaller financial institutions with more than EUR 50 billion notional). There’s huge market attention on finding the legal and operational resources to prepare for these new margin requirements.
  • The key themes we're expecting to see raised during Phase 5 preparation: confirmation of entities in scope; repapering; threshold monitoring; a ‘tweaked’ SIMM20; and of course, an increase in demand for clearing. 

ESG

  • As the ESG agenda continues to drive forward at an incredible pace so does the focus and engagement from the wider market, regulators and even the new US President Elect. Focus is increasingly turning to creating a common language for disclosures aided by the EU drive for a standard taxonomy. A common sustainable finance taxonomy will allow increased asset flows through increased confidence, transparency, tracking and incentives. 
  • Key deliveries we should be looking out for in 2021 are the final RTS for the EU taxonomy regulation; final RTS for the EU Disclosure regulation; FCA disclosure rules in its rule book to allow firms to meet the first disclosure tranche in the joint task force delivery road map. Additionally, 10 March sustainability risk disclosure and adverse sustainability impact disclosure requirements. More to come on all this. 

Dodd Frank / EMIR21 changes

  • Following the publication of global derivatives reporting standards, regulatory authorities have worked on changing their reporting requirements to ensure the standards are adhered to. The CFTC22 approved amendments to Dodd Frank in September 2020 were published in The Federal Register at the end of November 2020. The implementation date is 18 months following this, so will be May 2022.
  • The final draft of the revised EU reporting rules was published on 17 December 2020, although the detailed technical specification has not yet been published. It seems likely that the final delegated legislation will be published in the EU Official Journal in Q2 2021. Again, there will be a 18-month implementation period, so it is likely the implementation will take place in the last quarter of 2022. Of course, while these revised regulations won’t go live until 2022, the lion’s share of the effort to modify reporting to meet the new requirements will have to take place in 2021.

Anything else?

  • We also expect the extended use of automation this year, supported particularly by buy side firms dispensing with low and high touch execution concepts and associated organisation in favour of use of appropriate automation to deliver cost & workflow efficiency. A coping mechanism for Brexit maybe seen through e-trading venues minimising high touch constraints. Additionally, increased geographical separation due to continued COVID impacts may accelerate workflow digitisation focus.   
So, this time last year we were talking about the right topics but COVID obviously put paid to some of the best laid plans. Let's just hope 2021 ends up having a more stable, dare we say boring, path noting the above points playing out. 
 

Stop the Press  

For some of our EU customers, going forward you will be receiving my publications from a new mailbox Regulatory Insights (NatWest Markets) so please watch out for it. This is to meet various Brexit requirements. 
  
And just in case you missed it --- at the end of November Moody's upgraded NatWest Markets two notches (to A3 from Baa2) and maintained the positive outlook on these ratings.  Take a look at our factbook for more details.
  
Wishing everyone a happy new year and we look forward to discussing more on the topics above with you as the year progresses.  
  
Phil Lloyd, NWM Sales  
John Stevenson-Hamilton, NWM LIBOR Client Engagement
 

That was the year that was - 2020  

I'm sure many are only too happy to leave 2020 behind, but as a reminder of the year we'd rather forget, please see below the links to all the articles we published throughout 2020 (most recent at the top):
  
That's all folks!
    
Please click here to find all of NatWest Markets’ Strategy and Sales commentary/ideas.
 
You can also find out more about our electronic offering and credentials for Rates here and for FX here.    
 

 

1

LIBOR

London Inter-Bank Offered Rate

2

ESG

Environmental, Social and Governance

3

CSDR

Central Securities Depositories Regulation

4

ISDA

International Swaps and Derivatives Association

5

FCA

Financial Conduct Authority

6

ICE

Intercontinental Exchange

7

MoU

Memorandum of Understanding

8

MiFIDII

Markets in Financial Instruments Directive 2

9

IM

Initial Margin

10

EONIA

Euro Overnight Index Average

11

IBA

ICE Benchmark Administration Limited

12

DTO

Derivative Trading Obligation

13

FC

Financial counterparties

14

NFC

Non-Financial counterparties

15

SEF

Swap Execution Facility

16

EEA

European Economic Area

17

ROIEs

Recognised Overseas Investment Exchange

18

ESMA

European Securities and Markets Authority

19

RTS

Regulatory Technical Standards

20

SIMM

Standard Initial Margin Model

21

EMIR

European Market Infrastructure Regulation

22

CFTC

Commodity Futures Trading Commission

 

Economy


This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2020 © NatWest Markets Plc. All rights reserved.