Pandemic and exceptional measures by Eric de Nexon
To cope with the pandemic facing us today, lockdowns were quickly imposed in most countries as an essential measure to contain it as effectively as possible. From the very first weeks, it became clear that this response to the health crisis would lead to a serious economic crisis, given its significant impacts on most activities, often bringing operations to a partial or complete halt, sometimes without being able to guarantee strict compliance with the standards and regulations governing them.
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Well aware of these problems, public authorities promptly took all kinds of measures to support the economy and to adapt the rules to the particular conditions brought about by the lockdown situation in order to best support the economy within a framework guaranteeing business continuity and safety.
All sectors have been affected in one way or another, and the financial services sector is certainly no exception.
One of the major challenges turned out to be compliance with regulatory commitments, especially with regard to the various remediationprojects, regulatory initiatives, and infrastructure projects, to which the stakeholders were strongly committed.
We felt that it would be worthwhile to point out some of these measures, already taken or still being discussed, relating specifically to the activities of post-trade participants and their customers.
As I indicated, there have been various types of measures, often temporary, mainly concerning longer or shorter time frames.
The shorter time frames were quickly adopted by regulators and supervisors, recognising that the priority for financial institutions and intermediaries would be to ensure production with resources that could be mobilised to take action remotely and would probably work for some time in worse conditions than normal.
The longer time frames are intended to take into account the time that will be needed to return to normal conditions and the delay in carrying out projects to implement the main regulatory initiatives and infrastructure projects. For the most part, the initial time frames for these initiatives will be postponed.
The pandemic has prompted the ECB to adapt its oversight system, in particular by establishing a close dialogue with banks, focused on implementing business continuity plans and managing the risks most affected by the crisis.
At the same time, the ECB has taken a number of strong measures to ease the oversight burden and to allow banks to focus on crisis management and deal with current operational difficulties. For example, it has suspended any new on-site inspections and, for six months, the issuing of any decisions or follow-up letters. It also decided to extend the time frame for completing all remediations in progress by six months and lightened the schedule for working meetings and data requests.
The AMF has also taken equivalent measures by deciding to continue audits in progress, but in a more basic manner, and to postpone those that were supposed to begin, all in close collaboration with the entities concerned.
It has defined its business continuity expectations and reiterated that the reporting of EMIR and MiFID IItransactions should continue to be provided without delay and with the same level of quality ordinarily expected so that it can carry out its own market and participant oversight duties.
Conversely, the French financial markets authority (AMF) postponed the submission date for certain periodic reports, such as the internal control report (30 June 2020) and the asset protection report (30 September 2020).
In response to the extremely high volatility of the financial markets, it then introduced a stricter framework for short selling.
With regard to investment funds, it focused on implementing gates and other measures aimed at ensuring the liquidity of funds, while respecting the equality of unitholders.
It also communicated extensively on the implementation of the temporary measures (and associated good practices) that had been adopted by orders to simplify and adapt the rules on notices, information, assembly, and resolutions of general meetings. Companies have been exceptionally permitted to hold their general meeting without the physical presence of their shareholders and others entitled to attend, such as auditors and representatives of staff representation bodies. This possibility of closed proceedings means that shareholders have only been able to exercise their voting rights remotely in advance of the general meeting.
Lastly, together with the ACPR, the AMF has gone to great lengths to step up its efforts to inform retail investors about the risks of scams during this opportune period for an upsurge.
Other national regulators have taken similar measures to address the impacts of the health crisis, often in connection with actions coordinated at the European level by the ESMA. These measures are generally detailed on their website.
The ESMA has taken a number of measures within its area of authority. It started by making recommendations aimed at ensuring, in the midst of a health crisis, business continuity, transparency of information on market activity and financial reporting, as well as strict risk management by stakeholders and their monitoring by regulators. Later measures, in coordination with national regulators, included regulating short-selling, postponing certain regulatory time frames (in particular, the entry into force of the reporting obligation imposed by the SFTR, postponed to 13 July 2020), relaxing the external auditing obligations for index promoters, and extending the deadlines for financial reporting for issuersand periodic reporting for investment funds. Similarly, most of the deadlines for responding to consultations in progress were extended by four weeks. Although this postponement was well received in view of the impacts of the pandemic, it is often insufficient considering the difficulties encountered by institutions in mobilising the appropriate experts, assigned to much higher-priority tasks.
Lastly, following the BCBS/IOSCO recommendations and in coordination with the other two European ESAs, the ESMA approved the one-year postponement of the requirement of bilateral exchange of margins between counterparties of OTC derivatives for the last two ramp-up phases.
Beyond these various measures, which can be described as short-term and have made it possible to deal with the urgency of the situation and to postpone the most imminent deadlines, the current issue revolves around deadlines further in the future that do not appear to be able to be maintained without posing very significant risks to the ecosystems concerned.
Four initiatives in particular has been identified by the industry, which urged their postponement in order to compensate for the delay in carrying out projects and the risk of all or some of the players concerned being unprepared on the dates initially set for their implementation.
CSDR – Settlement Discipline Regime (SDR) – penalties and buy-ins
On 8 May 2020, the European Commission approved the ESMA’s proposal to postpone the entry into force of the Settlement Discipline Regime initially scheduled for 13 September 2020 to 21 February 2021. The final approval of the Regulatory Technical Standard (RTS) remains subject to a one-month period of no objections by both co-legislators.
This postponement is consistent with industry expectations with respect to the application of penalties for settlement failures. The central securities depositories and their participants will be ready to apply these penalties as of 21 February 2020. The T2S platform will be adapted and available in November 2020, which will make it possible to calculate penalties for information and educational purposes starting in December 2020. At this stage, certain questions still need to be answered, but this will not jeopardise the new effective date.
The same cannot be said of buy-ins, for which an indefinite postponement has been requested. The difficulties encountered in implementing the buy-in process go far beyond merely the impacts of the pandemic and alone justify the postponement request.
For several years, domestic and European trade associations have been working on the operational deployment of buy-in rules as defined by the regulatory texts. This work has raised a very many questions that currently remain unanswered, even though they have already been submitted to the ESMA, most often accompanied by suggested answers. In addition, and most importantly, the trade associations in charge of monitoring market activities have highlighted the impacts that the new buy-in regime could have on certain market segments, particularly in terms of liquidity.
Pandemic or not, by virtue of this fact alone, the industry is currently unable to prepare for an operational implementation by the beginning of 2021. This has been clearly stated in two mails sent to the European Commission and ESMA, one by ICMA on 20th of May 2020, the second by ECSDA on the 8th of June 2020.
A letter signed by 12 national and European trade associations was sent to the European Commission on 9 April 2020 to obtain a 12-month postponement of the entry into force of the Directive, originally scheduled for 3 September 2020
In this case, the reasons given are related to the impacts of the pandemic on project planning within institutions, as well as the risk of a possible conflict between the implementation of the ShRD II measures and the holding of certain general shareholders' meetings, potentially postponed to autumn 2020, which would not be manageable by operational teams. Considering the exceptional circumstances resulting from the pandemic, one was expecting some benevolence from the European Commission.
In the end, its hopes were dashed: the DG JUST, which is in charge of the matter, responded negatively in a letter dated 28 May 2020. Professional associations are still considering continuing their action, given that the situation has by no means improved for financial institutions and sticking to the initial entry-into-force date remains inconceivable.
Consolidation of T2 and T2S platforms
More and more players involved in the implementation of this project have realised the need to request a one-year postponement of the migration date of this project, scheduled for November 2021, given the obvious inability of the teams to meet the deadlines in view of the delays caused by the pandemic to date, and in the future.
The requests made by banking institutions, but also by the infrastructure, were formalised in a letter advocating for this postponement sent to the ECB’s Governing Council on 7 May 2020 by several European banking associations. The ECB now seems to be considering the possibility of postponing the consolidation project and, consequently, the ECMS project planned for November 2022. It would first like to obtain the opinion of the various market players (securities and payment providers, central banks, ancillary systems such as EBA Clearing’s EURO1, etc.) before submitting a formal postponement request to the Governing Council and circulated a new questionnaire at the end of May 2020 that has already been completed by stakeholders.
The ECB is likely to propose alternative scenarios with a delay of six or nine months instead of a one-year postponement. It sees a risk in definitively “tying” the implementation date of TARGET2 Services to the date of the SWIFT ISO cross-border migration. All things considered, the ECB is not wrong. However, the industry has no choice: this is the only sensible, lower-cost alternative for payment providers. A decision can possibly be expected in June 2020.
ECMS – European Collateral Management System
This project, originally scheduled for November 2022, may be delayed due to the postponement of the T2 and T2S platform consolidation project (see above). The postponement date will obviously depend on the date chosen for the consolidation project.
The lockdown is ending, and a relaxation of the lockdown is beginning. The lockdown has demonstrated the operational resilience of financial services providers, and the emergency measures taken by regulators and supervisors in recent months have contributed to this. The coming months should see a return to normal. However, this process will undoubtedly be lengthy and complicated. It is important that public authorities continue to support the movement by adapting constraints on providers and, in particular, by reviewing the regulatory timetables in coordination with the industry.