In this edition of the regulatory round-up, we see JP Morgan’s securities division fined $18 million for violating whistleblower protection rules. Globally, organisations take stock of 2023 or particular markets. Others seek feedback on impending rules and regulations.
- JP Morgan fined US$18m for violating whistleblower protection rule
- Bank of England releases paper on quantitative easing and the functioning of the gilt repo market
- ESMA steps up its monitoring of EU alternative investment funds
- IOSCO seeks feedback on post trade risk reduction services
- ICMA ERCC publishes its analysis of how the repo market performed over the 2023 year-end
- ICMA and ASIFMA publish results of the latest survey of the Asia-Pacific repo market
- FIA and ISDA recommend changes to Singapore’s capital framework for clearinghouses
Americas
JP Morgan fined $18m for violating whistleblower protection rule
The US Securities and Exchange Commission (SEC) has charged JP Morgan Securities (JPMS) for impeding hundreds of advisory clients and brokerage customers from reporting potential securities law violations to the SEC. JPMS agreed to pay an US$18 million civil penalty to settle the charges. The firm violated the Securities Exchange Act of 1934.
According to the SEC, from March 2020 through July 2023, JPMS regularly asked retail clients to sign confidential release agreements if they had been issued a credit or settlement from the firm of more than $1,000. The agreements required the clients to keep confidential the settlement, all underlying facts relating to the settlement, and all information relating to the account at issue. In addition, even though the agreements permitted clients to respond to SEC inquiries, they did not permit clients to voluntarily contact the SEC.
Gurbir Grewal, director of the SEC’s division of enforcement, said: “Whether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing.”
“But that’s exactly what we allege J.P. Morgan did here. For several years, it forced certain clients into the untenable position of choosing between receiving settlements or credits from the firm and reporting potential securities law violations to the SEC. This either-or proposition not only undermined critical investor protections and placed investors at risk, but was also illegal.”
Europe
Bank of England releases paper on quantitative easing and the functioning of the gilt repo market
The Bank of England has released a paper examining the impact of quantitative easing (QE) on the provisioning of liquidity and the pricing in the UK gilt repo market.
The paper compares the behaviour of banks that received reserves injections via QE operations to other similar banks in terms of the amounts lent and pricing. The authors, Mahmoud Fatouh, Simone Giansante and Steven Ongena, also investigate whether leverage ratio capital requirements affected the amounts of liquidity supplied by broker-dealers and the spreads they charged.
The paper finds that QE interventions can improve liquidity provision, and that their size determines how this is attained. QE can also reduce the cost of borrowing in the repo market unless it was associated with spikes in demand for liquidity.
“Our findings further indicate that the leverage ratio supports the provision of liquidity during stress, as it prompts banks to become less leveraged. However, the larger capital charge repo transactions attracted under the leverage ratio requirement is reflected in their spreads,” the report said.
ESMA steps up its monitoring of EU alternative investment funds
The European Securities and Markets Authority (ESMA), has published a report on the EU alternative investment funds (AIFs)’ market and an article on the risks posed by leveraged AIFs in the EU.
ESMA confirms the risks posed by real estate (RE) funds, in a context of declining volumes of transactions and falling prices in several jurisdictions.
Existing liquidity mismatches in AIFs are particularly heightened by the high share of open-ended RE funds, some of which offer daily liquidity. This vulnerability could be systemically relevant in jurisdictions where RE funds own a large share of the RE market.
ESMA found that the size of the sector declined slightly (-3%) to €6.8 trillion in 2022 and AIFs account for 36% of the EU fund industry. The fall in value was mainly driven by valuation losses for funds exposed to bonds and equities amid adverse market developments in 2022.
The report also found that RE funds face multiple risks related to leverage, market footprint, valuation discrepancies and liquidity mismatches, and leverage for hedge funds remains very high, and that this may pose a risk of market impact.
International
IOSCO seeks feedback on post trade risk reduction services
The board of the International Organization of Securities Commissions (IOSCO) has published a consultation report on Post Trade Risk Reduction Services (PTRRS), which identifies potential policy considerations and risks associated with the use and offering of PTRRS associated with over-the counter (OTC) derivatives trades, and presents sound practices as guidance to IOSCO members and regulated users of PTRRS.
IOSCO is seeking to better assess the risks associated with the increased use of PTRRS and concentration of PTRRS providers, particularly in the areas of portfolio compression and counterparty risk optimisation.
IOSCO is seeking input from market participants on the discussion question in the report as well as the proposed sound practices, on or before 1 April 2024.
ICMA ERCC publishes its analysis of how the repo market performed over the 2023 year-end
The ICMA European Repo and Collateral Committee has published its annual analysis of how the repo market performed over the recent year-end.
ICMA’s European Repo and Collateral Committee (ERCC) has published a review of repo market performance and conditions over the “turn” of the year since the wholly unexpected and somewhat unprecedented extreme price moves observed in the euro repo market at 2016 year-end.
The report showed that compared to previous year-ends, the 2023 turn for the euro repo market proved to be “relatively unexceptional”. While the market began pricing in around 250bp premium for German GC and 150bp premium for French GC back in October, this continued to erode closer to the end of the year, ultimately trading around 60bp and 40bp rich respectively.
The report attributed this to a number of factors: a reduction in the level of excess reserves; an increase in the supply of government bonds; general deleveraging and a lack of positioning by hedge funds; the collapse in the EUR-USD FX basis; and reduced pressure on bank intermediation arising from various regulatory reporting requirements.
ICMA and ASIFMA publish results of the latest survey of the Asia-Pacific repo market
ICMA’s Global Repo and Collateral Forum (GRCF) and ASIFMA’s Secured Funding Markets Committee have published the results of the latest survey of the Asia-Pacific repo market.
The Asia survey reports the outstanding value of repos and reverse repos as at 14 June 2023 and offers a breakdown of those positions. The survey does not measure the size of domestic repo markets in the APAC region but rather cross-border business involving internationally active banks.
While in previous years the survey has been split into two, one for trading in Japan and the other for trading elsewhere in the APAC region, the survey for 2023 covers only the APAC non-Japan region.
Across the APAC non-Japan region, the survey reported US$269.1 billion in outstanding value and an average daily turnover of US$12 billion, compared with USD 310.0 billion and almost USD 43 billion per day in 2022. However, the survey size was reduced by the loss of previous participants rather than a contraction in the market.
The survey suggested modest growth in the outstanding value of the ex-Japan APAC repo market but declining turnover, which implies more longer-term transactions
The bulk of business continued to be directly negotiated with counterparties but electronic trading increased its share, albeit from a low base. The survey sample ran net repo (cash borrowing) positions in electronic and voice-brokered trades and a net reverse repo (cash lending) position in directly-negotiated trades.
CCP-clearing played a small and diminishing role. Repos tended to be cleared on a CCP after having been negotiated directly between counterparties rather than on an ATS (that is, repo tended to be cleared by post-trade registration).
ESAs publish first set of rules under DORA for ICT and third-party risk management and incident classification
The three European Supervisory Authorities (EBA, EIOPA and ESMA) have published today the first set of final draft technical standards under the DORA aimed at enhancing the digital operational resilience of the EU financial sector by strengthening financial entities’ Information and Communication Technology (ICT) and third-party risk management and incident reporting frameworks.
The joint final draft technical standards include: Regulatory Technical Standards (RTS) on ICT risk management framework and on simplified ICT risk management framework; RTS on criteria for the classification of ICT-related incidents; RTS to specify the policy on ICT services supporting critical or important functions provided by ICT third-party service providers (TPPs); and Implementing Technical Standards (ITS) to establish the templates for the register of information.
APAC
FIA and ISDA recommend changes to Singapore’s capital framework for clearinghouses
FIA and ISDA have jointly responded to a consultation from the Monetary Authority of Singapore on proposed amendments to the capital framework for approved exchanges and approved clearinghouses.
The associations welcomed the introduction of a separate liquidity requirement for clearinghouses and proposed that MAS consider a more conservative minimum threshold of at least 12 months of operating expenses, rather than the six months put forward in the proposed amendments.
The associations also agreed with the proposed amendments to eligible capital components, which should only include equity instruments and should exclude the clearinghouse’s own capital, also known as skin in the game. For the total risk requirement, the response suggested the alignment of the operational risk component with the liquidity risk requirement and the inclusion of some clarifications on the investment risk and general counterparty risk components.
© Markets Media Europe 2023
