Four themes to get right in 2020: Libor, SFTR, cyber security and market equivalence

By David Woolcock | 27 January 2020

As is traditional this time of year, our good intentions of new year resolutions fade to what we might expect to be dominant themes in 2020, and it has to be said that if certain plans are not yet well advanced you might want to get to it.

Libor

In 2018 I wrote about the impending move away from Libor-based products ‘Libor - living on borrowed time’ and last week saw a bevy of announcements from the FCA, Bank of England and the Working Group on Sterling Risk-Free Reference Rates (RFRWG). The message could not have been starker with the recommendations from the RFRWG: –

  • To cease issuance of cash products linked to sterling Libor by end-Q3 2020;
  • Take steps throughout 2020 to demonstrate that compounded Sonia is easily accessible and usable;
  • Take steps to enable a further shift of volumes from Libor to Sonia in derivative markets;
  • Establish a framework for the transition of legacy Libor products, in order to significantly reduce the stock of Libor referencing contracts by Q1 2021; and
  • To consider how best to address issues with ‘tough legacy’ contracts.

In a statement Tushar Morzaria, chair of RFRWG said “2020 will be a pivotal year in the transition journey, with critical focus on enabling the flow of new business away from sterling Libor. The Working Group on Sterling Risk-Free Reference Rates has therefore defined a key priority to cease issuance of sterling Libor cash products by the end of Q3. In conjunction, the RFRWG fully supports the Bank of England and FCA initiative to encourage market makers to change the market convention for sterling interest rate swaps from Libor to Sonia in Q1 2020.”

There have been similar comments from national competent authorities (NCAs) in other markets with equally strong messages coming from the US and elsewhere. Indeed 2020 will see the continuation of the beginning of the end for Ibors. In a change of tone for the UK market a direct statement was made In a joint letter to senior managers of UK banks and insurers, the regulators reiterated a statement by the BoE's financial policy committee (FPC) that “the intention is that sterling Libor will cease to exist after the end of 2021. No firm should plan otherwise.”

Securities Financing Transactions Regulation (SFTR)

I wrote last week ‘Starting the new year with a call to arms’, SFTR reporting will be a recurring theme for 2020. On top of this, as focus delves beyond the mere formatting issues of data quality, it would not be a surprise to see some firms having some uncomfortable questions to answer. With NCAs having conducted reviews around best execution last year we can expect to see fines levied with respect to compliance for both RTS 27 & 28.

Cyber security

In the UK, with the final roll-out of the Senior Managers Certification Regime (SMCR), cyber security is an area of intense scrutiny for all firms. In the final guidance for SMCR, it is envisaged that firms will need to identify a senior manager who is responsible for the following – “Oversight of the firm’s cyber security framework. Review of all major IT incidents, including significant outages and cyber security breaches.” This is already required by the General Data Protection Regulation (GDPR), but now with the added threat of sanction under the SMCR the focus must surely increase. With the recently much publicised incident involving Travelex we can expect ramped up scrutiny of this key risk in 2020.

Market equivalence

The last theme for 2020 is the continued cooperation between the G20 regulators and in particular the EU arrangement known as "equivalence in financial services". The ongoing negotiations of the UK’s EU withdrawal treaty will put the EU under pressure to better define the mechanism. This will have ramifications for all third countries (countries outside of the EU). We have seen the lose-lose scenario of the EU not renewing equivalence with Switzerland at short notice which led to equity securities that are listed on Swiss exchanges being banned from trading on EU exchanges. We must hope that this will not become too much of a political football and negotiators will concentrate on outcomes that benefit both parties.

All in all a busy year awaits and we will be returning to look at these themes in more depth as the year unfolds.

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