As the saying goes, “the more things change, the more they stay the same.” When thinking about 2017’s global financial regulatory landscape, the sentiment fits nicely.
Entering 2017, we expected policy debates would continue, but three issues would dominate the conversation. These were (in no particular order): MiFID 2, Brexit, and US President Trump’s deregulation agenda. And guess what? They did!
2017 also saw notable regulatory scrutiny of areas ranging from data protection and cybersecurity to regulatory reporting and a razor-sharp focus on fee transparency in the funds space. We also saw continued and rapid growth in exchange-traded funds (ETFs) which resulted in greater interest from regulators contemplating their own rules for ETFs. IOSCO and the SEC will most likely take up the ETF baton in 2018.
We predict that while 2017 was largely a year of debate and reflection, 2018 will be a year of action. Nowhere will this be more apparent than in the US, where the SEC is likely to implement a wide range of new rules across the asset management space.
Turning attention back to the big three, let’s break them down:
At the start of 2017, MiFID 2 was widely predicted by industry participants to be the most complex piece of regulation global asset managers would face. That was on the money. Whether it was assessing the scope (still ongoing), establishing the detailed level of data for transaction reporting, or implementing product governance surveillance, it is fair to say that the global regulatory energy expended on MiFID 2 during 2017 was unprecedented.
The biggest area of debate within MiFID 2 has been research unbundling. The impact on US/EU trading was so significant, ESMA and the SEC were driven to provide regulatory relief on parts of the rules that required unexpected (and reassuring) trans-Atlantic regulatory coordination. It is also important to note that the SEC unbundling ruling is temporary. A full and final resolution will need to be pursued in 2018. MiFID 2’s unbundling requirements are likely to retain a lot of air time past its 3 January implementation date as investment firms look to adapt to the various requirements.
In another unparalleled event, the political negotiations regarding the divorce settlement of the UK and the EU reached new levels of complexity and uncertainty. Considering what is at stake for both parties, this was not a surprise. Brexit also provided a trigger for the European Supervisory Authorities to revisit third-country delegation standards to ensure those standards are maintained and harmonized post-Brexit. There are several specific UK/EU asset management issues, such as reciprocal market access, where not much progress has been made, but we will watch closely in 2018 as “phase two” talks address these issues.
It now seems likely that there will be an extended transition period in which the UK will retain European regulations or their equivalent. As negotiations continue, politics will remain a major influence in shaping the future regulatory relationship between the EU and the UK.
Trump’s Deregulation Agenda
In February, the Trump Administration signed an executive order on the US financial framework and President Trump himself signed a presidential memorandum on the DoL Fiduciary Rule. Both documents were strong signals of the administration’s plans for significant financial regulatory reform. However, anyone anticipating a seismic shift towards deregulation has been disappointed thus far. Implementing change is easier said than done given the partisanship that continues in Congress. So far, there have been subtle, surgical adjustments to US regulation through regulatory agency appointments and targeted executive actions, as in the case of the DoL Fiduciary Rule and Dodd-Frank.
In the US, 2017 was a year defined by more delays than deletions of regulation, which theoretically sets up 2018 to be a year of action. There are elements of the Volker Rule and Dodd-Frank that may be altered incrementally, but not through any large-scale overhaul. We expect to see the SEC bring more of its current agenda forward in 2018, including on portfolio liquidity, derivatives, and ETF regulation.
As we sign off for 2017, the On The Regs team would sincerely like to wish all our readers a peaceful festive break! Look for more updates and our annual Regulatory Field Guide coming in January.