Citi 2018 FinReg Outlook

DoL Fiduciary Rule: the Saga Continues What’s Going on With SEC Derivatives Rule? CSDR Enters the Homestretch SFTR‘s Arrival is Delayed EU Thinks Green The US Department of Labor (DoL) Fiduciary Rule — which extends the definition of fiduciary investment advice to cover all financial professionals who provide retirement advice or work with retirement plans — came into effect on 9 June 2017. However, full implementation of the rule has now been pushed out until 1 July 2019. The DoL has said it will continue to assess the rule in the interim. Meanwhile, the Securities and Exchange Commission (SEC) has begun a review of its long dormant fiduciary rule. This raised the possibility that a SEC fiduciary rule may replace the DoL’s rule, which many have argued should always have been the case. Either way, it is clear some form of fiduciary rule is on the horizon. The only question is, whose rule it will be? Originally proposed in 2015, the SEC Derivatives Rule is intended to tackle the issue of embedded leverage in funds, which some policymakers feel could be a threat to financial stability. The proposals met strong criticism from the asset management industry, which claimed it would restrict the ability to mitigate risk through hedging, and affect their ability to manage bond funds and ‘leveraged’ exchange-traded funds. With the SEC under new leadership, it remains to be seen what will become of the Derivatives Rule. While John Clayton, the new SEC Chair, has indicated his focus will be on capital formation, such as reviving the IPO market, the Derivatives Rule remains on the SEC’s priority list. The question is, will the rule remain on the back burner, or will the SEC propose a revised version? The EU’s Central Securities Depositories Regulation (CSDR) is a long-gestating regulation designed to increase harmonization, safety, and efficiency of the bloc’s securities settlement processes and settlement infrastructures. CSDR went live in 2014, but was implemented in phases. For example, the 2015 move to a T+2 settlement cycle was part of the regulation. The next big phase is due to hit in 2019 when settlement discipline elements go live, which includes cash penalties for security settlement fails and mandatory buy-ins if securities are not delivered by a certain date. The bulk of the work to prepare for this next phase will start in the latter half of this year. The EU’s Securities Financing Transactions Regulation (SFTR) is part of a broader global effort to increase the transparency of market-based finance activity, more commonly referred to as ‘shadow banking.’ The SFTR aims to increase the transparency of securities financing transactions, which include activities such as securities lending and repurchase and reverse repurchase agreements. The SFTR will be implemented in a phased approach, which began last year. The final phase — mandatory reporting of securities financing transactions to trade repositories — was slated to go live in Q4 of this year. However, due to delays in finalizing the reporting rules, the start date was pushed back, with the final phase now expected to go live in the first half of 2019. Industry participants will likely welcome the additional time to prepare for the challenges associated with the reporting requirements. Late last year, the European Commission published a consultation on institutional investors’ and asset managers’ duties regarding sustainability. The purpose of the consultation is to clarify how the fiduciary duty of asset managers and institutional investors fits with environmental, social, and governance (ESG) factors and long-term sustainability. This is part of the EU’s commitment to align its financial system with its commitments to the Paris Agreement on climate change and the United Nation’s 2030 Agenda for Sustainable Development. The Commission will use the consultation to see if it needs to introduce any policy measures to improve the use of ESG factors in the investment process. It is unclear whether the Commission will recommend any policy actions. However, given the potential implications, this is something the industry should keep a close eye on. Citi Custody & Fund Services – FinReg Outlook 2018 49 48