London Singapore Brussels Paris

Today New City Initiative is comprised of 45 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.

« Back to News

Some Regulatory Changes You May Have Missed

Published by Charles Gubert

Some Regulatory Changes You May Have Missed

The next few months are going to be challenging for NCI members. Firstly, the constantly interchangeable dynamics around Brexit are generating enormous regulatory and market uncertainty. In addition, asset managers are bracing themselves for a raft of regulatory changes including a tightening up of ESG (environment, social, governance) investment provisions; the possible introduction of amendments to the Alternative Investment Fund Managers Directive (AIFMD) and a roll-out of stricter margining obligations for bilateral, un-cleared OTC instruments under the European Market Infrastructure Regulation (EMIR). With so much activity underway, other equally pressing matters have received far less air time.

The LIBOR bugbear facing boutiques

From 2021, LIBOR, which benchmarks interest rates for a whole stream of financial products (securitisations, loans, derivatives, etc.) will not exist. Admittedly, some asset managers have spent a lot of time readying themselves for the move to overnight risk free rates, but a lot of firms are still unprepared.  So why does it matter? Any boutique firm trading bonds or using derivatives could find the behaviour, valuations and risk modelling underpinning those instruments changes markedly as a consequence of this shift to alternative rates. Asset managers therefore need to begin inserting fall-back provisions into their contracts, or repapering them altogether, in what could be a very costly and time-consuming exercise.

Why the buy side should start caring about settlements

For many boutiques, the responsibility for ensuring their trades settle on time lies with their custodians or brokers. Under CSDR (Central Securities Depository Regulation), this could change. CSDR, having introduced a t+2 settlement regime inside the EU, is now fixated on imposing better settlement discipline in the market. The CSDR rules give CSDs the authority to fine guilty counterparties in instances when settlements do not complete on the contracted settlement date. As such, boutiques could find themselves incurring large fines if they do not deliver securities in good time to their brokers.  If NCI members are to avoid these penalties, they need to start delivering securities to their brokers much faster.

More to the EU than just Brexit

While Brexit has dominated discussions in Europe, much less has been said about the EU’s increasingly fractious relationship with Switzerland. The root of the EU-Swiss dispute lies with MiFIR (Markets in Financial Instruments Regulation) Article 23, a clause which states that any trading of shares by EU investment firms must take place on a recognised trading venue. While Switzerland’s trading venues currently have EU equivalence, that designation is up for review in June 2019, which is causing widespread uncertainty. If equivalence is refused, EU investment firms could be prevented from trading equities at Swiss venues.

Somewhat irked by this prospect, the authorities in Switzerland have announced countermeasures which will bar foreign trading venues from listing or admitting to trade any Swiss companies [1] unless that venue is recognised by FINMA, the national regulator. For third country venues to qualify for FINMA recognition, a precondition is that the venue must be operating out of a market which does not prevent its local investment firms from trading Swiss shares in Switzerland. Again, not only does this create challenges for investment firms but it risks leading to companies listing outside of Switzerland or holding off their IPOs. [2]

[1] Loyens Loeff

[2] Loyens Loeff