Financial regulations globally are undergoing rewrites and reviews with continued change afront this year. A regulatory roundup with Linklaters’ Capital Markets Practice, shares an update on some of the key regulations and directives financial institutions must prepare for in the coming months. Read on for an update on EMIR 3.0/UK EMIR, CSDR, SFRD and CSRD.
EMIR 3.0 /UK EMIR – Pauline Ashall, Partner in Linklaters’ Capital Markets Practice
“We expect to see continued evolution of EMIR and UK EMIR in 2023, with developments across clearing, margin for uncleared derivatives and reporting of derivatives.
In the EU, the Commission has published a proposal for a regulation amending EMIR (so-called “EMIR 3”). The proposal focusses on clearing, reflecting the findings of the Commission’s targeted review of the central clearing framework in the EU, as well as addressing concerns identified during recent turmoil in energy markets and more general points that have become apparent in the operation of EMIR. Whilst the legislative process, and certainly implementation, is expected to extend beyond 2023, the progress of the proposal will generate considerable interest during the course of the year.
Pursuant to the Financial Services and Markets Bill, UK EMIR is set to be rewritten, primarily in regulators’ rule books. This is part of a bigger picture as the UK government looks to rewrite the bulk of retained EU law related to financial services. Various provisions of UK EMIR are to be split between the existing regulatory perimeter under the regulated activities order (RAO) and the proposed designated activities regime (or DAR), a new regulatory framework for the regulation of certain activities relating to financial markets.
The government intends to deliver this programme by splitting retained EU law into “tranches” and expects to make significant progress on the first two tranches by the end of 2023. Whilst UK EMIR falls within tranche 3 and, therefore, the “lift and shift” of UK EMIR is not expected to get underway this year, certain temporary exemptions available under the existing framework are due to expire ahead of this process. Industry advocacy is ongoing and we may see some developments on these points during 2023. Substantive changes to UK EMIR are also expected to result from the Wholesale Markets Review, including exempting PTRR exercises from the clearing obligation. These changes are expected to be included in primary legislation as Parliamentary time allows, so are not expected to come into force in 2023.
Both under EMIR and UK EMIR, changes to reporting requirements and procedures for data quality have now been finalised. There is considerable alignment between the two regimes. Reports will need to be made in accordance with the applicable new requirements from 29 April 2024, in the case of EMIR, and 30 September 2024, in the case of UK EMIR. With the level of detail to be reported significantly extended, including a considerable number of new reporting fields, the implementation periods will provide valuable time for counterparties to make necessary changes to processes and documentation.”
CSDR – Pauline Ashall, Partner in Linklaters’ Capital Markets Practice
“In 2022, following confirmation that the much-criticised mandatory buy-in (MBI) rules would not apply from 1 February 2022 along with the rest of the CSDR settlement discipline regime, attention quickly turned to what form any future revised MBI rules would take. We expect to have more clarity later in 2023 once the EU institutions have completed their trilogue negotiations and agreed on a final set of amendments.
While the industry’s preferred outcome of removing the MBI regime altogether now looks unlikely, it does seem as though MBIs will only end up applying in certain exceptional circumstances where settlement failures for a particular transaction type or asset class have reached unacceptable levels over a sustained period of time.
The derivatives industry has long been pushing for settlement fails relating to collateral transfers and physically settled derivatives to be explicitly carved out from any future MBI regime, on the basis that they would lead to significant uncertainties and unintended consequences, would cut across existing contractual provisions and (in the case of collateral transfers) are already extensively regulated elsewhere. It remains to be seen whether the EU institutions will take these objections into account.
In the UK, the settlement discipline regime was not onshored as part of Brexit, and the UK is not proposing to introduce its own regulatory settlement discipline regime. However, most UK firms are indirectly impacted by the EU regime as it bites on securities cleared through an EU central securities depository (CSD).”
DORA – Richard Hay, Counsel in Linklaters’ Capital Markets Practice
“Over 20,000 firms in the EU will need to get themselves ready to implement the digital operational resilience act, or DORA, which takes effect on 17 January 2025 after a two-year transition period. Within this period, firms must also make sure their implementation programme responds to technical standards from the European Supervisory Authorities which will extend some of the high level requirements already in DORA and add to the regulatory burden. This wave of technical standards has the potential to complicate matters for firms around halfway through their DORA implementation projects.
“A significant headache for many firms is the challenge of implementing a global resilience strategy in a way which is compliant with local regimes. Although the outcomes of the UK and EU regimes are largely aligned, the detailed requirements differ. Other jurisdictions are also developing rules aimed at building the operational resilience of their financial sectors. Whether these will align or diverge remains to be seen but in either case firms will need to keep abreast of developments as the year goes on.”
SFDR & CSRD – Leanne Banfield, Counsel in Linklaters’ Capital Markets Practice
“After a long delay, the SFDR Level 2 requirements finally began to apply from 1 January 2023. But that is not the end of the story, as further amendments to the Level 2 will come during the course of 2023. The Commission will also publish Q&As addressing some quite fundamental questions posed by the ESAs in 2022, including around the definition of a “sustainable investment”. It is hoped that the Commission’s responses do not cut across the approach that market participants already adopted in preparation for the 1 January 2023 application date.
Although the SFDR does not directly capture derivatives, asset/fund managers, insurers and pension providers will be caught and so it is important that banks are aware of the regulation that their clients need to comply with, as investors look to the banks to help them navigate their way through the regulation and to provide the information to allow them to make the relevant disclosures. It will also be key to think about how products are being marketed and what is disclosed in the documentation, particularly where such products are being promoted as green, as many regulators crack down on greenwashing.
The UK has proposed its own sustainability disclosure requirements (SDR) which would differ from the EU SFDR in several important respects. Notably, they would impose a general ‘anti-greenwashing’ rule on all FCA regulated firms (not just asset managers, unlike the focus of the EU SFDR) that would require them to revisit their approach to ESG and sustainability across all product types and disclosures. Under the labelling regime envisaged by the SDR, firms would need to provide details on (among other things) their use of derivatives in sustainable investment products.
The Corporate Sustainability Reporting Directive (CSRD) will bring far-reaching changes to how EU and non-EU companies report on a number of ESG issues. It transforms sustainability reporting and will require a big shift in mindset for those affected.
The CSRD became law in December 2022 and will be phased in in stages, starting from 1 January 2024. The new regime will require a wider range of EU companies, as well as some non-EU companies, to report on environmental matters, social and human rights and governance factors across their value chain, in accordance with mandatory reporting standards that the Commission is expected to adopt in June 2023. Tests for whether companies are in scope are complex, particularly for non-EU companies with securities listed on a regulated EU market who may be required to report as early as 2025 depending on their size and the nature of those securities. So 2023 will be a busy year for entities as they decide which parts of their organisation are in scope and what systems they need to put in place to collate the necessary information.”
*This feature is part of the DerivSource “Glocal series” where we explore global trends through a local lens.
