Treasurers facing year of regulatory hurdles

Central banks, regulatory bodies and legislative bodies spent much of 2019 working to scale back on key post-crisis measures and either tailor or modify existing regulations in order to suit their own agendas or adapt to disruptive technologies (the latter style of ‘supervisory guidance’ is particularly popular in the US at present). At this point it’s looking like lawmakers are only going to continue to build upon this theme of regulatory divergence in 2020, too. Geopolitical instability and a lack of consensus around sensible ways to govern digital transformation and new ways of doing business mean that treasury teams had better be strapped in for a disruptive programme of regulatory updates over the next twelve months.

LIBOR and Volcker on their way out

Nobody can claim ignorance around the imminent demise of LIBOR. It’s been nearly a year-and-a-half since the UK’s Financial Conduct Authority announced its sound plans to phase out the London Inter-Bank Offered Rate once and for all – and although the benchmark’s termination isn’t scheduled to take place until the end of 2021, organisations have got to prioritise the transition over the coming months. Right now, it’s looking like treasury teams have got their work cut out for them.

LIBOR still represents around $350trn in global contracts, and researchers at McKinsey & Company estimate that up to 75% of banking models still involve. Large institutions and organisations operating in this space will need to make a point of conducting remediation on a huge number of systems, get started translating their exposures into quantified risks, repapering documents and moving contracts over to a new benchmark rate before 2021 hits.

LIBOR’s long and drawn out demise isn’t the only big regulatory funeral taking place in 2020. After earning approval from all five implementing agencies at the end of 2019, January has also marked the the arrival of Volcker 2.0 – and it has pretty big implications for smaller and medium-sized financial institutions.

Donald Trump has slashed the remit of the Volcker Rule, meaning a lot of work for treasurers in 2020, but for some teams it may be welcomed as a positive and liberating change.

For example, the Volcker Rule’s mandatory and cumbersome reporting requirements now impact upon far fewer institutions, and the final amendment includes fresh considerations around resource and process optimisation, RENTD limits, metrics reporting and enhanced exemptions for foreign banks operating in the US. Although Volcker 2.0 is now in effect, it’s worth pointing out that organisations have been given until January 2021 to reach compliance targets.

SFTR and 5MLD

It’s been a long time coming, but the EU’s Securities Financing Transactions Regulation (SFTR) technical standards are finally due to come into force in April 2020. These standards are quite far-reaching, and cover everything from the authorisation of trade repositories and performance, to access rules around data held by trade repositories and big changes to the content, format and frequency of reporting around transactions.

SFTR reporting obligations are going to be phased in across the year. Investment firms and credit institutions will be required to meet the new rules from April, while CCPs and central securities depositories will need to comply from July 2020. In October, the SFTR standards will then be phased in for all other financial counterparties – and it’s crucial to note that these obligations not only rest with acting EU parties, but also third-country equivalents acting through any sort of local EU-based branch.

Another particularly important aspect of SFTR that organisations will need to bear in mind is an obligation to backload a high proportion of securities financing transactions retrospectively. Any transactions that are still outstanding, have a remaining maturity of more than 180 days or have an open maturity and remain outstanding over 180 days after phase-in will need to meet the new standards. All of these backloaded transactions have got to be reported within 190 days of the applicable phase-in date for a particular organisation – which means treasury teams have got to finalise their preparations for SFTR now.

Know-Your-Client (KYC) and anti-money laundering (AML) compliance activity will be taking centre stage over the coming months, too. A fresh crop of legislative regulatory solutions being proposed across various domestic markets, such as the new Illicit Cash Act in the United States designed to bolster transparency around the reporting of suspicious activity. More urgent still is the EU’s fifth AML directive (5MLD), which came into force at the start of January 2020 – and it’s got major implications for a wide range of industries.

This latest directive has added a number of KYC amendments including a reduction in the threshold on anonymous prepaid cards from €250 to €150 to prevent illicit fund transfers, as well as new screening processes that ensure customers operating in virtual currencies are treated the same as those using traditional means.

Despite Brexit, it’s worth noting here that 5MLD was transposed into UK law at the start of January 2020 – thus committing the UK to establish automated measurements for onboarding, strengthening existing registers and bringing cryptocurrencies within regulatory scope. UK-based businesses must plan on working to meet the new reporting obligations regardless of the UK’s uncertain future relationship with the EU.

And there’s already a sixth anti-money laundering directive to look forward to. The new directive was proposed in 2019 to extend the scope of criminal liabilities and create tougher penalties for non-compliance, and it’s expected to come into effect by the middle of 2021 – which means that now is definitely the right time for treasury teams to start getting to grips with KYC and AML processes.