Looking ahead to the key FinReg issues asset managers will face in the second half of 2017—and beyond.
It’s been a busy year so far in the world of financial regulation. In Europe, policymakers finalized the rules for PRIIPs and reached an agreement on Money Market Reform. Despite the calls for delay, the variation margin rules for non-cleared OTC derivatives also came into effect. Meanwhile, the UK triggered Article 50 in March, formally initiating its withdrawal from the EU. Across the Atlantic, President Trump called for a review of the US regulatory framework, while the controversial DoL (Department of Labor) Fiduciary Rule was briefly delayed and then confirmed to go live on 9 June.
As we enter the second half of the year, we take a look at the upcoming key regulatory milestones—and uncertainties—asset managers will face in the coming months.
What We Know
Still All MiFID, All the Time
Atop global asset managers’ agenda is MiFID 2 (Markets in Financial Instruments Directive). Sweeping in its scope, it is probably the biggest piece of regulation they will face this decade, let alone this year.
Of all the challenges associated with MiFID 2, the unbundling of research costs is causing the most consternation. This is particularly true in the US, where the new unbundling rules conflict with existing US regulations, making it impossible to comply with both MiFID 2 and local rules. US asset managers are hoping that the SEC (Securities and Exchange Commission) will grant an exemption to avoid any regulatory conflict. Otherwise, they will face an uncomfortable decision—either forgo research or set up different operating models for their European businesses.
Given the workload, the calls for further delays in MiFID 2 implementation have been growing steadily louder. So far, EU policymakers have held the line and insisted that the date will not move. Even if their position softens, it seems unlikely that there will be a wholesale delay. Asset managers must continue to implement the rules and assume the implementation date will remain unchanged.
Get Your KIDs Ready
In Europe, asset managers also need to prepare for PRIIPs (Packaged Retail and Insurance-Based Investment Products), which goes live the same day as MiFID 2. After a protracted battle, the PRIIPs rules were finalized in March. No one is particularly satisfied with the final rules so it is very likely that they will be revisited in relatively short order. Nevertheless, asset managers with investment products in scope need to ensure they have their Key Information Documents ready by the start of 2018.
Reporting Modernization Kicks Off in August
In the US, the first phase of the SEC’s Reporting Modernization rules takes effect when the S-X rules go live in August. Given the operational and data challenges these rules present, there have been calls for the SEC to delay the start date of the S-X rules for six months. However, as with MiFID 2, managers should assume there will be no delay and move ahead with their preparations.
US Securities Settlement Cycle is Getting Shorter
In September the US securities settlement cycle will move from T+3 (trade date plus three days) to T+2 (trade date plus two days) in order to reduce risk and bring the US in line with most other global markets. Once implemented, asset managers should reassess the settlement cycles of their funds to ensure that their portfolio trading is as efficient as it can be. Typically, fund subscriptions and redemptions settle on a T+3 basis. However, with the T+2 securities settlement cycle becoming the global standard, asset managers may want to align fund redemption and subscriptions with the underlying portfolio’s settlement cycle.
US ETF Rules Tightened
US ETF managers also need to prepare for the SEC’s Continued Listing Standards, which go live in October. The new rules require ETFs to comply with the exchanges’ listing standards on an ongoing basis. ETFs that are not compliant—or whose indexes are not compliant—will have their tickers flagged and may be de-listed if corrective actions are not taken. Given the current regulatory mood, this may just be the tip of the iceberg for ETF regulation.
What We Don’t Know
Trump’s FinReg Agenda?
Earlier this year, President Trump signed a number of executive orders and presidential memorandum dealing with financial regulation. These executive actions were simply calls for impact studies on various elements of the US financial regulatory framework. We should start to see the findings of these studies later this summer, which will give us a clearer picture of the administration’s regulatory agenda.
New Priorities for the SEC?
With Jay Clayton taking the helm at the SEC, there are questions about how the SEC’s priorities may change. In his public statements, Clayton has focused on capital formation and reviving the US IPO market, which has led many to believe that he will abandon some of the reforms of his predecessor, Mary Jo White. In particular, the often derided derivatives rule, which sought to limit the amount of embedded leverage in funds, may be put on hold, if not scrapped completely.
DoL Fiduciary Rule Redux?
Despite going live on 9 June, the fate of the DoL Fiduciary Rule is far from certain. The DoL softly launched the rule and has given the industry six months to fully comply. In the meantime, the DoL will continue to review the rule, as directed by President Trump. Additionally, in his first major act as SEC Chair, Clayton revived the push for the SEC Fiduciary Rule, which was abandoned by the SEC in 2013. The combination of the ongoing DoL review and the SEC push raises the possibility that an SEC Fiduciary Rule could be used to replace the DoL Fiduciary Rule. This would be music to the ears of the asset management industry, which has long argued the SEC should be in charge of the Fiduciary Rule. Either way, the debate about the DoL rule seems far from finished.
How Hard a Brexit?
Brexit continues to be the major source of uncertainty. By triggering Article 50 in March, the UK has until 2019 to reach an agreement with the EU on the terms of their divorce. Beyond that, there are still a lot of unknowns about what Brexit will look like after the dust settles. Many firms have already come to the conclusion that a hard Brexit is the probable outcome and have already begun to enact their contingency plans. As this happens, policymakers will be on high alert to ensure that EU regulatory standards don’t slip.
Between the impeding regulatory changes and uncertainty, asset managers have plenty to keep them busy for the rest of the year. And the forecast for 2018? I won’t be getting easier. Looming on the horizon for 2018 are EU Money Market Reform, SEC Liquidity Rules, and the EU’s Data Protection Regulations, just to name a few. As the old saying goes: In life, nothing is certain but death, taxes, and regulatory change.