The Three Pillars of COVID-19 Regulation

March 20, 2020
Global regulators continue to react to the various undulations of the markets caused by the ongoing COVID-19 emergency. That’s a bit of an understatement – the response so far has been nothing short of frenzied.

Through a steady stream of statements and policy amendments, some of the most prominent regulators have covered a lot of ground: business continuity processes (BCP), fund liquidity, short selling, money markets, daily dealing property funds, compliance, and much more. Capturing, reading, and assessing every regulatory dispatch from across the globe currently is more than a full-time job, but stepping back a little from the cloud of dust, it’s clear that the reactions to COVID-19 by regulators are forming three distinct pillars: Existing regulations, 2020 implementations, and open consultations.. What follows is an examination of each pillar.

1. Existing regulations

Despite the extraordinary conditions that asset managers and wider society are currently operating in, regulators have maintained an expectation that overall the existing rules and regulations must be adhered to. This doesn’t come as a major surprise since many of the rules were implemented to provide investor protections, market transparency, and better risk management practices that were to a degree lacking in “the last crisis.”

However, there is some recognition by regulators that these are far from normal times. The Securities and Exchange Commission (SEC), for instance, has afforded some targeted relief on certain “in person” logistical challenges. The Financial Conduct Authority (FCA) has provided an olive branch on components of MIFID, particularly as it relates to phone recording and transaction reporting where there is a suggestion of “best efforts” due to the obvious logistical constraints on firms.

In the primary UCITS domiciles of Ireland and Luxembourg, regulators have been proactively checking in with regulated firms on their operational resiliency and ensuring their business continuity plans continued to be effective. These elements are continuing to be verified with firms throughout the period of turbulence. As has the continued focus on fund liquidity, with large redemption activity reporting in both domiciles as well as regulators engaged with funds after receipt of such information. 

The question remains whether further temporary relief on existing requirements is required in the best interest of investors. If further relief is needed, will regulators listen? Time will tell.

2. 2020 implementations

The second area which has bubbled up is the fact that there are several sizeable regulatory implementations set for 2020. We had previously defined 2020 as the year of clarity and precision, however, it’s now inevitable that 2020 will go down as the year of COVID-19.

You may recall that there are several significant regulatory implementations slated which have large operational changes baked in.

These include several EU initiatives such as the Central Securities Depositary Regulation (CSDR), Shareholder Rights Directive 2 (SRD2), Securities Financing Transaction Regulation as well as slightly longer dated items like the EU ESG regulations.  The SEC regulatory agenda for 2020 was pretty jam packed and wide-ranging but they too must now think about their own and industry capacity, timelines, and priorities. 

Yesterday, ESMA gave their first issuance of regulatory respite for a pending regulation through provision of a 3-month delay for the reporting and trade repository (TR) registration start dates for SFTR. This followed an industry submission that highlighted the sizeable resources and operational impacts of the COVID-19 pandemic and the challenges this crisis presents for SFTR implementation. The scope and effectiveness of this relief is still being considered by industry, but what is clear is that ESMA recognizes that large scale regulatory implementations may require greater degrees of pragmatism and patience.

3. Open Consultations

As night follows day, there remains a number of open industry consultations on a myriad of regulatory topics. These, however, are not considered high priority in the grand scheme of things as decisions on how to spend limited capacity are being made. As such, we have seen the FCA extend closure dates for several open consultations including, ironically, one on “Building operational resilience.” The SEC have also recognized that focus for now must be on the continuation of business in a period of unparalleled volatility and uncertainty. The SEC has already extended periods for comments on several open issues which were due this month recognizing the challenges associated with COVID-19. Notable among this list were comments on the Accredited Investor definition, the Derivatives Rule, and the 597-page Regulation NMS related to market data dissemination.  It is very likely that these and other consultations will need to be pushed out especially if the ongoing situation continues to prevail.

Bottom Line

While uncertainty abounds in the current situation, what is certain is that the effects of COVID-19 will continue to shape existing, pending, and future regulatory actions. We will continue to provide updates here as new developments emerge.

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