In December’s first regulatory round-up we see collaboration among global industry bodies over regulatory reporting and the Common Domain Model. In the US, the SEC adopts a new rule designed to avert conflicts of interest regarding asset-backed securities. In Europe, the Euro risk-free rates working group disbands and the UK’s FCA rolls out changes to improve how equity secondary markets operate.
- SEC adopts rule to prohibit conflicts of interest in certain securitisations
- CFTC issues proposed guidance regarding the listing of voluntary carbon credit derivative contracts
- UK and India central banks sign MoU to facilitate international clearing activities
- FCA introduces changes to improve how equity secondary markets operate
- Euro risk-free rates working group disbands
- ESAs put forward amendments to sustainability disclosures for the financial sector
- ICMA, ISDA, ISLA and FINOS launch version 5.0 of the Common Domain Model
- ICMA publishes updated Master Regulatory Reporting Agreement
Americas
SEC adopts rule to prohibit conflicts of interest in certain securitisations
The US Securities and Exchange Commission (SEC) has adopted a rule intended to prevent the sale of asset-backed securities (ABS) that are tainted by material conflicts of interest.
Securities Act Rule 192 will implement Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act.
The rule prohibits a securitisation participant, for a specified period of time, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in the relevant ABS. Under new Rule 192, such transactions would be “conflicted transactions.”
Consistent with the statute, Rule 192 provides exceptions for risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities of a securitization participant. These exceptions permit certain market activities, subject to satisfaction of the specified conditions, which will allow securitization participants to continue important risk management, liquidity commitment, and market-making activities.
“I am pleased to support this rule as it fulfils Congress’s mandate to address conflicts of interests in the securitization market, a market which was at the centre of the 2008 financial crisis,” said SEC Chair Gary Gensler. “As directed by Congress, today’s rule prohibits securitization participants — including those who sell or facilitate the sale of an asset-backed security — from engaging in transactions that involve or result in any material conflict of interest with investors in that ABS. Further, as required by Section 621 of the Dodd-Frank Act, the final rule provides exceptions for risk-mitigating hedging activities, bona fide market making, and certain liquidity commitments. Such a rule benefits investors and issuers alike.”
CFTC issues proposed guidance regarding the listing of voluntary carbon credit derivative contracts
The Commodity Futures Trading Commission has approved a proposed guidance and request for public comment regarding the listing for trading of voluntary carbon credit derivative contracts. The proposed guidance outlines certain factors a CFTC-regulated exchange, or designated contract market, should consider when addressing requirements of the Commodity Exchange Act (CEA) and CFTC regulations that are relevant to the contract design and listing process.
“Today’s action by the CFTC is the culmination of a two-year examination of carbon markets, and many more years of in-depth work regarding the impacts of climate on financial markets. The Voluntary Carbon Market Proposed Guidance is a clear statement that the CFTC will do its part to elevate the standard setting efforts already underway,” said CFTC Chairman Rostin Behnam. “Our goal all along has been to help shape standards in support of integrity, which will lead to transparency, liquidity, and ultimately price discovery – all established hallmarks of CFTC regulated markets. I am incredibly proud of our agency for taking such intentional and impactful action today.”
The proposed guidance recognises that outlining factors for an exchange to consider in connection with contract design and listing may help to advance the standardization of voluntary carbon credit derivative contracts in a manner that fosters transparency and liquidity, accurate pricing, and market integrity.
Taking into account certain unique attributes of voluntary carbon credit derivatives, the proposed guidance outlines factors that an exchange should consider in connection with the specification and monitoring of contract terms and conditions, in order to help ensure compliance with existing Core Principle requirements under the CEA. The proposed guidance also addresses certain requirements under the CFTC’s Part 40 Regulations relating to the submission of new derivative contracts, and contract amendments, to the CFTC.
The comment period for the proposed guidance will be open for 75 days, and will end on 16 February 2024.
EMEA
UK and India central banks sign MoU to facilitate international clearing activities
The Bank of England (the BoE) and the Reserve Bank of India (RBI) have signed a Memorandum of Understanding (MoU) concerning cooperation and exchange of information in relation to the Clearing Corporation of India.
The MoU establishes a framework for the BoE to place reliance on the RBI’s regulatory and supervisory activities while safeguarding UK financial stability. The MoU also demonstrates the importance of cross-border cooperation to facilitate international clearing activities and the BoE’s commitment to deference to other regulators’ regimes where justified.
This MoU satisfies the requirement under Article 25(7) of the UK European Market Infrastructure Regulation which will allow the BoE to assess the Clearing Corporation of India application for UK recognition.
FCA introducing changes to improve how equity secondary markets operate
The Financial Conduct Authority (FCA) has made changes to improve how equity secondary markets operate. The changes are part of the Wholesale Markets Review to promote competition and growth.
As part of these changes, the FCA is introducing a new Designated Reporter (DR) regime, clarifying who holds the obligation of making sure that a trade is made public. It aims to establish a simpler and clearer regime for the reporting of OTC transactions.
The other changes will: enhance the quality of trade execution for investors by lowering the cost of trading, reducing market impact and ultimately increasing liquidity; improve the content and consistency of post-trade transparency for equities; simplify the reporting of transactions executed over-the-counter (OTC) for all financial instruments; improve choice and competition by allowing UK trading venues to reference prices from overseas venues, where those prices are robust, reliable, and transparent; enhance the quality of execution by removing restrictions preventing trading venues from using the same tick size used by trading venues established overseas.
The amended post-trade transparency requirements, including the DR regime, will come into force in April 2024, while the other rule changes come into force immediately.
Euro risk-free rates working group disbands
The European Securities and Markets Authority (ESMA), in its capacity as Secretariat of the Working Group on Euro Risk-Free Rates (EUR RFR WG), has issued the final statement of the group, announcing the completion of the EU Interest Rate Reform.
In the statement, ESMA summarises the key achievements of the EUR RFR WG, such as the identification of €STR as risk-free rate for the euro area and the definition of EURIBOR fallback provisions for each asset class.
ESMA also encourages industry to ensure that all financial products referencing EURIBOR, including mortgages, embed robust fallback provisions.
The EUR RFR WG has accomplished its mission and the group has been discontinued as of 13 November 2023.
ESAs put forward amendments to sustainability disclosures for the financial sector
The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) have published their final report amending the draft Regulatory Technical Standards (RTS) to the Delegated Regulation supplementing the Sustainable Finance Disclosure Regulation (SFDR). The ESAs propose adding new social indicators and streamlining the framework for the disclosure of principal adverse impacts of investment decisions on the environment and society.
The ESAs also suggest new product disclosures regarding “greenhouse gas emissions reduction” targets.
Additionally, the ESAs propose further technical revisions to the SFDR Delegated Regulation: improvements to the disclosures on how sustainable investments “Do No Significant Harm” (DNSH) to the environment and society; simplification of the pre-contractual and periodic disclosure templates for financial products; and other technical adjustments concerning, among others, the treatment of derivatives, the calculation of sustainable investments, and provisions for financial products with underlying investment options.
World
ICMA, ISDA, ISLA and FINOS launch version 5.0 of the Common Domain Model
ICMA, in partnership with the International Swaps and Derivatives Association (ISDA), the International Securities Lending Association (ISLA) and the Fintech Open Source Foundation (FINOS) have launched version 5.0 of the Common Domain Model (CDM), released in November.
The CDM aims to unify a series of actions, life cycle events, and product definitions through the development of a single language or code. CDM 5.0, a production release, is the culmination of development releases from the second and third quarters of 2023 since the CDM was made an open-source project at FINOS in February of this year.
Jane Gavronsky, chief operating officer at FINOS, said: “The ongoing consistency in releases provides compelling evidence of the CDM’s progress and its establishment of a steady cadence as an Open Standard project within FINOS.”
Gabriel Callsen, director, FinTech and Digitalisation, ICMA, said: “Repo market participants can now use the production version of the CDM to help automate a broad range of repo trading and post-trade processes, reducing the operational burden and freeing up resources to automate manual tasks and prepare for potential industry innovations such as the shortening of the settlement cycles and the emergence of digital bonds.”
ICMA publishes updated Master Regulatory Reporting Agreement
The ICMA has, in collaboration with the Association for Financial Markets in Europe (AFME), the Futures Industry Association (FIA), ISDA and ISLA, published an updated version of the Master Regulatory Reporting Agreement (MRRA) and the accompanying Explanatory Memorandum.
Originally published in 2019, the MRRA provides users with a template agreement for documenting regulatory reporting arrangements in relation to derivatives and securities financing transactions entered into under industry standard documentation, such as the Global Master Repurchase Agreement (GMRA).
The MRRA sets out common terms governing mandatory and delegated reporting of derivatives transactions under EMIR, compatible with changes introduced via EMIR Refit, as well as securities financing transactions under the SFTR.
The updates to the 2023 version of the MRRA include changes to address the fact that UK SFTR and UK EMIR are now operational, and that UK SFTR does not apply to NFCs.
