Corporate treasurers in Europe could be forgiven for thinking that the post-crisis avalanche of regulatory change must, by now, have run its course. From Basel III to SEPA, the last few years have been characterised by a significant number of new regulations. However, there is plenty more yet to come – and treasurers should have a thorough understanding of the upcoming changes in order to stay ahead of them.
Specific regulations which could affect treasurers in the coming years include the following:
Money market fund regulation
Money market funds are commonly used by treasurers as a means of investing excess cash. However, this area has been subject to considerably scrutiny since the financial crisis. In the US, the Securities and Exchange Commission is in the process of introducing new rules which will require all prime institutional funds to operate on a variable net asset value (VNAV) basis, as well as complying with various disclosure requirements.
Similar rules may follow in Europe. “Europe envisages a similar regime to the US, with the objective of reducing systemic risk – however, also impacting the return landscape for MMFs,” commented Ruth Wandhöfer, global head of regulatory and market strategy at Citi.
The revised Payment Services Directive was adopted by the European Parliament in October 2015 and published on 23rd December. Member states will need to comply by 13th January 2018.
Wandhöfer noted that while PSD2 mainly focuses on consumers and smaller companies, “some innovation in the space of payment initiation and account information could also provide incremental benefits to larger corporates over time”. She added that there is still a fair amount of uncertainty around regulatory technical standards and processes.
Tax is also attracting regulatory focus. Tax transparency rules proposed by the European Commission in April would require multinationals with annual revenues of over €750 million to disclose country-by-country information about where their profits are generated and where they pay tax.
“This Directive proposal reinforces the importance of tax transparency – a theme that corporates (and banks alike) have become accustomed to as part of developments such as the US Foreign Account Tax Compliance Act (FATCA), the OECD Common Reporting Standard (CRS) and the OECD’s Base Erosion and Profit Shifting (BEPS) initiatives,” said Wandhöfer.
She noted that the proposal is linked to other initiatives which introduce the sharing of information between tax authorities, such as the revised Administration Cooperation Directive, which implements the OECD’s BEPS Action Plan.
“In addition, the global OECD BEPS reform package as well as the OECD Common Reporting Standards are seeing more and more local legislative action around the globe,” Wandhöfer added. “This means that corporates will need to focus their attention across many different geographies as required by their footprint.”
MiFID II is due to come into effect on 3rd January 2018. As well as replacing the original MiFID regulation, the revised regime will also bring the new Markets in Financial Instruments Regulation (MiFIR).
“MiFID II will affect corporate treasury functions significantly,” said Chris Leonard-Appleton, Director, Regulation at Thomson Reuters. “We worked closely with regulators in getting clarification to ensure that corporate firms could continue using an MTF [multilateral trading facility] if they are hedging on the platforms, but there will still be a lot of work to do around data and reporting.”
Leonard-Appleton added that MiFID II will have a number of impacts on corporate hedging strategies, from providing additional data to venues for transaction reporting to bifurcating liquidity pools globally.
Where hedge accounting is concerned, IAS 39 is being replaced with IFRS 9. IFRS 9 has a mandatory effective date of 1st January 2018, although it can be adopted sooner.
“IFRS 9 is widely considered a welcome change and a step in the right direction compared to its predecessor (IAS 39),” commented Bruce Manson, head of treasury and risk management solutions at Bloomberg. “From a corporate treasurer's perspective, this change will give them the flexibility to align hedge accounting with their risk management policies and practices thus providing opportunities for certain economic hedges to now become eligible for hedge accounting.”
While not a regulation in itself, the UK’s decision to exit the European Union could have significant implications from a regulatory point of view.
“There’s a lot to be worked out around which route we will go down, given the integration of regulation across Europe through the EU,” said Mark Crowhurst, a director at PwC. “How the regulatory environment develops between the UK and the EU will be complex and is likely to involve divergence around specific areas, leaving firms to deal with considerable regulatory uncertainty for a number of years"
For some companies, Crowhurst says this could lead to questions about where treasury is located. “As a corporate treasurer, I may be asking if I am better off having my treasury in Paris rather than in London, as financial services activities potentially relocate around Europe” he explained.
“Paris might give me better access to euro capital markets – if you look at the lack of liquidity in sterling bond markets compared to the euro bond market. The counter argument is that it is very hard to replicate the economies of scale of the London model in terms of maturity of regulation, resources, infrastructure and access to financial services advice.”
Impact for treasurers
For treasurers, the upcoming regulatory changes present a number of challenges – both in terms of complying with individual rules and operating effectively in the changing landscape. With so many changes in the pipeline, how should treasurers go about addressing them?
“Given the increased breadth of ongoing regulatory reform, which impacts corporates, it is a priority for corporates to focus their attention on these changes to ensure that first of all no compliance requirement is being missed and secondly to address the specific requirements in an effective way,” said Wandhöfer. “This may require more steps than just ensuring the production of specific compliance reports or shifting strategy in the space of investment, but also may lead to a re-evaluation of legal entity set-up, the taxation model etc.”
Leonard-Appleton pointed out that regulatory change adds cost to corporate treasurers in the short term. “Treasurers have suddenly had to add regulatory compliance to their repertoires,” he says. “The pace of change may have slackened from a policy perspective, but now everyone is having to deal with a bewildering array of technical rules that are both vast and complicated in scope. Treasurers have to think about all of this while also doing their day job of managing commercial and treasury risk, which is a big ask.”
Treasurers should also be aware of regulatory changes that will affect their banks as well as their own businesses, and should monitor any possible implications.
Despite the challenges brought by regulatory change, the new landscape may have some benefits where innovation is concerned. “Regulatory change forces innovation by altering the status quo,” said Manson. “New ways to address regulatory challenges will drive innovative solutions.”
Wandhöfer added that more solutions are coming to the market which simplify and automate regulatory reporting, help identify risks and inconsistencies and increase analytic output and transparency. “The emergence of RegTech as a focused fintech approach to solving regulatory challenges for firms is an area that should be kept in mind by corporates,” she added.
The changing regulatory landscape could also theoretically open up the market by enabling other fintech companies to enter this space. Crowhurst notes a rise in various FX brokers offering better pricing to SMEs and mid-tier corporates. However, these fintechs are also themselves subject to the changing regulatory environment.
Regulatory change is a fact of life for corporate treasurers. With so many changes in the pipeline, treasurers should make sure that the understand the impact on their own businesses – as well as on their banks – and make sure that all requirements are met. Treasurers should also be aware of opportunities and new innovation that may arise as a result of the changing regulatory climate.
By Rebecca Brace.