As the year closes, Lynn Strongin Dodds looks at important dates on the 2025 financial regulatory calendar. Ironically many are not new but the latest update of existing legislation. Read on for our financial regulatory roundup for 2025.
EMIR 3.0
Clearing has been a bone of contention for years but Brexit in 2016 opened the door for the European Union (EU) to finally design rules to shift traders’ allegiance from London to the bloc. From the end of this year, they will have a six-month period to implement the latest iteration of the European Market Infrastructure Regulation (EMIR) – 3.0.
The cornerstone is the so-called active accounts which cover all categories of derivatives subject to clearing, identified by the European Securities and Markets Authority (ESMA) as being systemically important. Currently, these are euro denominated OTC interest rate (IRD), Polish zloty and short-term interest rate derivatives (STIR).
An active account is defined by three operational criteria, the first dubbed “permanently functional” which means that it should have the necessary IT connectivity, internal processes, and legal documentation. Second, it has to be sufficiently resilient to allow clearing of large volumes of derivative contracts at all times and finally, the infrastructure should accommodate new business at any time.
There is also the representativeness requirement which is tied to the size of a firm. It requires organisations to mirror to some extent the portfolio they have in the UK on the continent. For example, those that exceed €100bn of outstanding notional clearing volume will need to clear at least five trades at a maximum of fifteen subcategories per month which is equivalent to 900 trades per year.
There are some exemptions. For example, it will not apply to counterparties with a notional clearing volume outstanding of less than €6bn in respective derivative contracts or to client clearing services. It will also be scaled down to one trade for European pension schemes because many only make a limited number of concentrated long-term IRD trades. In addition, counterparties which already clear at least 85% of their trades in systemically important derivative contracts at an EU central counterparty (CCP) will be immune.
ESMA will be in charge of monitoring implementation efforts via a newly established Joint Monitoring Mechanism (JMM) which will also evaluate the effect on the overall exposure to Tier 2 CCPs as well as the fees charged by CCPs in general for setting up the account and for clearing.
The regulator will also look at other developments in clearing which can affect EU CCPs such as cross-border client clearing relationships, concentration risks due to integration of EU financial markets, and cross-border risks.
Transparency regime
The UK Financial Conduct Authority (FCA) transparency regime, which is set to take effect on 1 December 2025, introduces new measures to enhance information and reduce costs in the bond and derivatives markets.
The new regime is in response to a December 2023 consultation under the Wholesale Markets Review (WMR), which found that the existing transparency framework in these markets lacked significant impact on price formation and imposed high operational costs. The revised rules will replace the Financial Instruments Transparency System (FITRS) with a simpler, timelier post-trade transparency regime.
Currently transparency requirements apply only to bonds admitted to trading on a venue and to derivatives subject to a clearing obligation. The new rules eliminate public trade reporting requirements for OTC trading of non-specified instruments conducted by investment firms. Trading venues will need to meet updated standards for transparency, while recognised investment exchanges will have to follow high standards similar to those used for exchange-traded derivatives such as futures.
This translates into reducing instances where transactions that do not contribute to price formation are reported to the public as well as improving the content of post-trade reports and the correct identification of derivatives. Liquidity determinations will also no longer rely on prior calculations but instead, a set of proxies will be employed to categorise an instrument as liquid.
Other changes include revising the definition systematic internalisers (SI) from a quantitative to a qualitative approach, though the regulator does not expect this shift to affect which firms are designated as SIs. At the moment the FCA is consulting on the future of the SI regime for bonds and derivatives, with feedback invited until 10 January 2025. It aims to introduce more substantive changes to SI obligations alongside the new definition, with both changes expected to take effect at the end of next year.
DORA
Given the amount of air time devoted to the EU’s Digital Operational Resilience Act (DORA), market participants should be well prepared. It kickstarts 2025 on 17 January with aim of creating a more coherent and comprehensive framework from an often disjointed, patchwork set of rules scattered across different sectors and EU countries.
The regulations is looking to bolster the IT defences of the region’s financial service firms in the event of a serious disruption such as a cyber-attack, The main focus will be on five key areas – ICT risk management, ICT related incidents, digital operational resilience testing, third party risk and information sharing.
DORA is also part of a wider global legislative agenda that pension funds need to be cognisant of even if they are not directly impacted by it. This includes the Critical Entities Resilience Act (CER), Network and Information Systems Security 2 Directive (NISD2) and Data Governance Act. Last year also saw an agreement reached on the Cyber Resilience Act, the first set of global cybersecurity rules for digital and connected products that are designed, developed, produced and made available on the EU market.
As a recent white paper by Broadridge in consultation with consultancy Firebrand notes, DORA is widely regarded as the most comprehensive and stringent regulation for operational resilience globally, requiring detailed self-assessment and planning. The rules also have extraterritorial reach which means information technology and communications (ICT) third party service providers within as well as outside the European Union will be in scope.
The paper notes not complying can result in a fine as the national competent authorities can impose sanctions of up to 2% of a firm’s total annual worldwide turnover. Moreover, ICT third-party service providers that are designated as “critical” by the European Supervisory Authorities (ESAs) may face penalties of up to €5m.
There are though unresolved issues regarding the DORA requirements for subcontracting ICT services. The FIA shared its position recently calling for “proportionate and risk-based approach to supply chain risk management that should be based on materiality and not subcontractor rank.” The trade body asserts that such an approach would ensure firms “are able to focus and continue to monitor material risk across the entire supply chain.” In the recently published regulatory technical standards, ESAs asserted “remaining RTS on Subcontracting will be published in due course.”
Read more: Countdown to DORA: Industry Pushes to Iron out Final Details
Anti Money Laundering package
The most recent reiteration of the EU anti money laundering (AML) legislation represents a significant and structural change in the region’s approach since the first directive was issued in 1991. Effective 1 July 2025, the new AML package reshapes the regulatory, institutional and supervisory framework.
The reforms establish a single AML rulebook as well as an AML Authority (AMLA) that will provide supervisory oversight over high-risk financial entities, harmonising standards for AML in the region. The Authority will also foster improved cooperation and information-sharing. This should lead to not only improved risk assessment but also protection against emerging financial crime risks such as those relating to cryptocurrencies and digital assets.
In terms of preparations, market participants need to update risk assessment methodologies, to ensure their procedures align with the new regulations and that all aspects of the single rulebook are incorporated. In addition, more stringent customer verification and monitoring systems will need to be implemented particularly for high-risk clients and to meet the new enhanced due diligence requirements.
Firms should also establish protocols for accessing and reporting to centralised bank account registers as well as conduct comprehensive training programmes to help employees get up to speed with the new AML world order.
Basel endgame?
In a speech delivered to the Brookings Institution on 10 September 2024, Federal Reserve Board vice-chair for Supervision Michael Barr indicated he planned to dilute the capital impact of Basel III Endgame and Global Systemically-important Bank (G-SIB) which was set to become effective July 2025.
Under the planned proposals, GSIBs would have 9% higher common equity Tier 1 capital requirements in the aggregate, and other large banks would face an estimated 3% to 4% increase in capital requirements, This was far less onerous than the original Basel endgame which have had a 19% increase for the largest firms and 6% for the next group. This received strong pushback from banks, industry groups and members of Congress on both sides of the aisle.
For cleared derivatives, Barr will recommend that the Financial Stability Board adjusts capital treatment by lowering the level of capital that clearing banks are required to hold against the client-facing leg of a client-cleared derivatives transaction. “This change would better reflect the risks of these transactions, which are highly collateralised and subject to netting and daily margin requirements,” he adds. “This also would avoid disincentives to client clearing…”
However, given change is afoot in the US with the impending Trump administration in 2025, the jury is out as to whether these watered-down proposals would get the requisite seal of approval from the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). There is a view in some investment banking quarters that the restrictions will be further eased or scrapped altogether.
Read more: Basel 3 Endgame: Regional US Banks Must Prepare for Compliance
Related reading:
US Securities Lending Trade Reporting: SEC 10c-1a Update
Clear the Decks – A Look at SEC Clearing and Repo Mandates
Policymakers Review Opening Moves of Basel III Endgame
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