By Rachel Wolcott, Culture editor at Thomson Reuters
Regulatory change programmes are proving more difficult to coordinate and execute in a distributed working environment, forcing firms to find better ways to work and, in some cases, prompting them to seek help from regulators and lawmakers.
While regulators have put some initiatives on hold, that work has been replaced with continuing COVID-19-related changes as well as expectations that high-profile initiatives — for example, Libor transition and securities financing reporting — will largely keep to original deadlines. UK banks' new obligation to provide state-backed loans and offer mortgage and credit card customers payment holidays has created additional change programmes for the front office, as well as for compliance and risk managers.
European Market Infrastructure Regulation ( EMIR) and Markets in Financial Instruments Directive ( MiFID)-related tasks have emerged for CME Group customers following its announcement it will close its European trade repositories and authorised reporting mechanism (ARM).
Distributed working will make large-in-scale change programmes more complex and potentially unwieldy, but small changes and troubleshooting have become difficult too. Troubleshooting compliance IT systems that may take a few minutes to resolve in person naturally becomes more complex when a dozen team members must convene on video conferencing software. Likewise, policymaking and rules interpretation, as well as promulgation, is complicated by distributed working.
"If firms are getting stuck, what they need to do is take a step back and look at the fundamentals of the regulatory change and assessment processes. [Firms should] go through them step by step to identify which parts have relied on being able to hash things out using Excel and in person. Are these the reasons that we're getting stuck and, if so, what are the solutions available to these now very concrete and distinct problems? [Firms should] come back to those fundamentals and identify which parts are vulnerable when it comes to remote working — whether it's being able to discuss in a committee or propose changes out to all the stakeholders and discuss them in a way that everyone can look at — and figure out a solution," said Nicholas Melas, senior implementation manager at ClauseMatch in London.
COVID-19 itself may be the biggest regulatory change programme currently facing firms. Regulatory think-tank JWG reported financial services compliance officers worldwide have received 3,021 COVID-19-related alerts just two months into the pandemic. JWG has forecast a total of 15,695 documents by the year end.
"We are seeing that [compliance and policy] communications sent in an email as an updated statement is no longer viable, because
it doesn't really guarantee that people actually read it. That's one step toward actually complying with it. We're hearing some of the conversations around but those two points — getting a policy updated quicker and ensuring it's actually being consumed by employees — is becoming incredibly crucially important," Anastasia Dokuchaeva, head of partnerships at ClauseMatch in London.
Mortgage and credit card payment holidays are an example of COVID-19 related regulatory change. UK lenders are now obligated to grant mortgage customers payment holidays of up to six months. Overnight, this UK Financial Conduct Authority (FCA) initiative has created a change programme at lenders seeking to implement new expectations on payment forbearance. This has a knock-on effect on how firms account for impaired loans, manage foreclosure and communicate with customers. The government-backed loan schemes have created similar prudential and conduct-related changes which must be communicated to, and implemented by, a remote workforce.
"One of the developments I'd like to have seen more than I have is a temporary exemption or policy that overrides what's in place, but can be reviewed every week or over a slightly longer timeframe. The reason we're not seeing a lot of that is because of the technological limitations. A lot of the existing approaches don't have the ability to create clear links between that temporary document and all the policies that it effects. Without that technological solution, my hypothesis is that you can't develop a good way of resolving the conflicts between the temporary policy and the existing one," Melas said.
Libor transition is perhaps the biggest regulatory change programme for larger firms, because it entails changes to derivatives and loan businesses. Two sizeable challenges remain. One is transitioning legacy derivatives contracts and loans onto Sonia, the new risk-free rate, or a fall-back rate. The second, equally difficult task, is embedding Sonia into banks' lending and risk management IT and developing lending products.
"Undoubtedly COVID-19 has slowed things down and the regulators' response is a reaction to that. At the same time, a lot of the project work from the bank side has been continuing. Libor work or pitches may have slowed down because of us being confined, but that is not the case anymore. All the banks have understood that it won't go away. They won't get an extra year. They therefore have to think about it now. That said, from a transactional perspective, there has been a slowdown in the readiness to embrace [measures], including new rates in transactions. They have said they are not ready from an operational and IT perspective to include the new rates," said Sharon Lewis, a partner at Hogan Lovells in London.
Citing COVID-19, the Working Group on Sterling Risk-Free Reference Rate's (RFRWG) Tough Legacy Taskforce, which is looking at transition arrangements for the difficult-to-transition cohort, has called for legislation to address these exposures.
"The case for action has been strengthened by the market impact of the COVID-19 pandemic. While the deadline for the market to be ready for the cessation of Libor by the end of 2021 remains the same, there is less time available in practice to meet it. To the extent that action can feasibly be taken, and accepting the challenges and dependencies required in delivering it, the taskforce proposes that the UK government considers legislation to address tough legacy exposures in contracts governed by English law that reference at least sterling Libor, and ideally other Libor currencies, that are still in operation when Libor is expected to cease on or after the end of 2021," the RFRWG wrote in its on the identification of tough legacy issues.
Legislation, however, is not needed for the bulk of Libor transition work. Firms will need to look for alternatives to PDFs, spreadsheets and email communications to ensure change is executed consistently and accurately.
"Sifting through that legacy documentation is an enormous task. Firms are doing ... a lot of work already with [optical character recognition] tools to digitise all kinds of content. but digitising is just one leg of the Libor repapering or any repapering exercise. What we are seeing firms ask now is how you then transform that legacy and prepare those amendments for renegotiation? That's where humans are back to editing multiple versions and trying to communicate to each other doing all these agreements of terms. That's a huge amount of work, and in that sense working from home doesn't help. Digitisation and having those working-from-home collaborative tools is key," Dokuchaeva said.
Some European firms have, mid-pandemic, been landed with an unexpected and potentially difficult piece of regulatory work: moving
EMIR data and MiFID II transaction reporting to a new trade repository or ARM after CME announced its exit from those businesses.
The exit could affect up to 200 firms, many of which have started the groundwork to deal with the change.
"MiFID II go-live offered a gradual build-up over a three-year period, so firms had longer to prepare. This is big news because it's unplanned work. Firms are concerned because it's regulatory reporting and there has to be a clear transition. They can't stop reporting and then start up again when they're ready" said Len Delicaet, head of regulatory reporting strategy at MarketAxess.
Delicaet estimated it will take a six to eight-week programme for firms to complete transition from CME to a new provider. MarketAxess has already called upon extra MiFID II expertise to assist clients in the transition, and Delicaet said he expects providers to be putting in long hours to complete the work by November 30. It is feasible to complete the transition working from home, he said.
"Yes, it is a bit more challenging using just your voice rather than a presence to understand what a client's challenges are. You just have to be explicit and cover everything. We are two and a half years into MiFID. People are familiar with the regime and the data and know what to do. However, I have empathy for firms who had a full business-as-usual or change management agenda and now have to make additional transition plans on top. We have been speaking with potential clients regularly to support a seamless transition to our reporting solution and are working on onboarding firms now," Delicaet said.