Looking back, 2022 was tumultuous for many reasons, however purely from a regulatory implementation perspective there was something of a lull while authorities took stock of what comes next. The year started with the demise of GBP LIBOR[2], and we saw Margin Phase 6 land in September. Beyond that the focus has more been on consultations on things to come – lots of developments on ESG, emerging rules around crypto (in all its various forms), and from a UK perspective on what the post-Brexit UK regulatory landscape will look like.

As we have done for a number of years now, we set out very briefly below some of the key themes we see which will feature in the reg space during 2023:

As we explained in Bonfire of the Regulations, in December Jeremy Hunt announced a (re-?) package of 31 initiatives across the financial sector. In reality to a large extent this was bringing together under one banner a number of items already in flight, but it did serve to remind the market of the scope of change underway (and has led to some press recently on the government’s capacity to meet the deadlines set) and the gradual divergence of UK & EU rules.

Following the Skeoch report earlier in 2022, expect HMT[3] to consult mid-2023 on near-term changes to bank ring-fencing rules. Short-term expect some greater flexibility in application of rules and longer-term a move to align closer to resolution regimes.

As ever lots to talk about here, but to pick a few themes:

2023 will be the first year that corporates are in scope of EU NFRD[4] and will have to report EU Taxonomy-aligned metrics (and expect emerging taxonomies in other jurisdictions); ESG disclosure & reporting will continue to evolve, but companies will be cautious to only report what they have to, given growing concerns on greenwashing; finally biodiversity will be vying for attention alongside climate following agreements at COP15, with TNFD[5] due to publish their disclosure framework, likely to follow a similar path to TCFD[6], becoming mandatory across multiple jurisdictions. Check out our Sustainability Hub for a wide range of articles on this topic. 

Expect 2023 to be the year that regulators focus more on crypto (or more widely “digital”) assets (no doubt hastened by implosion of FTX); although this covers a broad church...from crypto currencies, to stablecoin, to central bank digital currencies to the broader use of DLT[7] for digital tokens, such as for the tokenisation of securities; the EU is pressing ahead with MiCA[8], expected to be ratified early this year with rules applying from 2024; the UK is also finalising proposals for regulation across a range of crypto assets, as referenced in the Edinburgh Reforms announcement.

The UK / EU reviews of MiFID2[9] have not moved on a great deal since we set them out back in March. The EU will see their changes published in the OJ[10] in Q2, and the UK is expected to publish the final WMR[11] rules in Q3. Expect clarification around the definition of the perimeter for trading venues, a revision to the transparency requirements and announcement on the consolidated tape among other things. The FCA[12] consultation on venue perimeter closed in November, results due Q2 – key to watch how revisions to guidance might encourage or stifle innovation and transparency.

The PRA[13] is consulting on their implementation of the Basel 3.1 standards; broadly they align fairly closely to Basel 3.1, with revisions to approaches for Credit Risk, Credit Risk Mitigation, Op Risk, Market Risk (FRTB[14]), CVA risk[15], and Counterparty Credit Risk (CCR); also there is the introduction of the RWA[16] output floor, and the phasing out of the CVA exemptions for sovereigns, pension schemes & NFCs[17]; UK banks are assessing the impacts of these changes to capital requirements ahead of their final implementation in January 2025; the EU is undertaking a similar review under CRD6 / CRR3 (see ECB opinion).

Back in the heady days of the (first) leadership election in the UK last summer, much was made of rolling back EU regulation such as Solvency II to “enable investment in towns like Stoke-on-Trent” (something we were somewhat sceptical of at the time). Since then we have seen the HMT consultation & response in November (see our Insurance & Pensions team analysis) which is the first step in a lengthy legislative review process that will likely run through all of this year (ref 2023 priorities). Concern remains that the real impact of these reforms may end up being diluted by increased oversight powers for the PRA. In addition there are nearer-term tweaks to existing rules such as the revision to reporting requirements.

The SEC[18] has announced plans to reduce the settlement period for securities from T+2 to T+1, together with proposals to encourage straight-through-processing; these changes are expected to come into effect at some point during 2024; one area of concern flagged in industry comments is the knock on impact on the FX market, with the challenges to meet settlement deadlines where FX tickets would also have to be raised and settled. It is not clear yet whether UK / EU regulators may press for a similar change.

The vulnerabilities exposed in the LDI fund market by the unprecedented rise in yields for gilts at the end of September has caused the BoE to look more closely at the resilience of the ‘shadow banking’ sector; per the recent summary from the FPC[19] in December, non-bank financial institutions will face stress tests and additional scrutiny during 2023. Given the FSB report[20] in November on non-bank financial intermediation, also expect a broader coordinated global response. 

June 2023 brings the season finale for LIBOR transition with the withdrawal of USD; as we said in November, expect some frantic activity ahead of 30 Jun as final transactions are transitioned or fallbacks put in place; that said we also expect there to be synthetic USD LIBOR (time limited to Sep 2024), as well as legal safe harbour for US-law-governed contracts, available for any tail ‘tough legacy’ that has not moved by the deadline; note also that synthetic GBP LIBOR for 1m & 6m will be withdrawn in Mar 23, and for 3m in Mar 24, so critical any tail trades there are dealt with as well.

Initial Margin Phase 6 landed in September, though there has been a tail post 1 Sep of counterparties that are yet to set up IM[21] docs & custodian arrangements, and rely on ongoing threshold monitoring to ensure they do not breach the €/$50m collateral threshold (and there are some who have had to cease trading to avoid breaches); as we said in Ready or not, IM is the gift that keeps on giving, and we are now into the BAU world of annual reviews.

Outside of the odd tweak to scope, such as to cover the move from LIBOR to RFRs[22] recently, mandatory clearing is pretty much business as usual now; the one to watch in 2023 is the withdrawal of the Pension Scheme Exemption from clearing, which the EU has said they will not extend again when it expires on 18 June; the UK does have the option to extend their UK equivalent exemption but no indication yet whether they will. 

A revision of transaction reporting standards is underway on both sides of the Atlantic; the CFTC[23] has already announced a series of changes to Dodd Frank trade reporting (some live since Dec, phase 2 later in 2023), and under EMIR Refit[24] the EU has a block of changes in the pipeline (to apply from Apr 2024).

There are some revisions to KIDs[26] requirements both in UK and EU as of January this year, then longer term the UK announced in the Edinburgh Reforms plans to revoke PRIIPS regulation entirely and replace with an alternative framework for retail disclosure. 

So a mixed bag of initiatives across a broad set of topics to watch out for. We would also encourage you to check out the 2023 Year Ahead articles by our Strategy team covering the wider economic outlook.

As ever please get in touch through your usual bank contacts if you would like to discuss these or any other topics you think we have over-looked.

Best wishes to all for the new year!