As the FSB pointed out in their 2022 report, NBFIs’ share of global financial assets grew 16% between 2008 and 2021 to $239tn, and make up almost 50% of all assets (up from 42% in '08). In their 2023 report the BoE FPC [3] say:

The FSB report echoed the same concerns, flagging that "Liquidity mismatches in non-bank financial entities could also amplify shocks if they lead to simultaneous asset sales across markets".

As risk assets have migrated away from banks, not least as a result of regulations imposed upon those banks, so too have concerns around financial stability. In this piece we reflect on a few of the recent announcements in NBFI oversight, as well as other regulatory developments in play at this time.

• LDI [4] Leverage: following events in September 2022, the BoE (FPC) issued recommendations in Mar 2023 for steady-state minimum levels of resilience for LDI funds, which were subsequently adopted as guidance by The Pensions Regulator and the FCA [5]. See our Pensions Newsflash, accessible on Market Insights*, for more detail.    
• MMF [6] Liquidity: in May the FCA launched a Discussion Paper to strengthen resilience of MMFs. In addition there has been international action with ESMA [7] publishing a working paper and the FSB producing policy proposals.  
• Liquidity Tool: the BoE proposed in a speech by Andrew Hauser, their Executive Director for Markets, a new backstop lending facility initially for Pension & Insurance firms including LDI funds, though it may extend wider in due course. You can also find more detail on this in our Pensions Newsflash*.
• Dear CRO Letter: the PRA [8] has sent a letter to CROs [9] at regulated firms (banks & designated investment firms) following their Fixed Income Financing Review, saying they have "found a number of shortcomings in firms’ counterparty risk management processes and margining arrangements that should be remediated". Clearly there is additional focus across both banks and other firms, following recent episodes of extreme volatility.

So, lots going on in the NBFI space. It feels like after many years of focus on banks the authorities may now be broadening their scope as well. That is not to say however that other areas have been neglected… there continues to be developments elsewhere:

• Basel 3.1: US regulators have proposed July 2025 for compliance with the Basel 3 Endgame (comprising FRTB [10] and remaining measures). US banks have expressed concern about the potential impact on competitiveness of the higher capital requirements. However, in the UK the PRA has announced alignment to this timeline, though the EU plans to stick to the current phase-in timeline starting January 2025. US & UK proposals align more closely on CVA [11] exemptions & SA-CCR [12] reductions compared to EU proposals; there is something of an irony in that the capital measures to be rolled out may push more risk assets into the NBFI sector, which per comments above is an area of increasing concern to global authorities.
• Solvency II / UK: recently the PRA announced details of proposed changes to the MA [13] rules that govern the assets annuity writers can invest in as part of the post-Brexit Solvency UK regulatory regime. The consultation opens the door for new “assets with highly predictable (HP) cash flows”, likely including a broader range of callable, prepayment and extension features, but could still fall short of hopes for boosting investment in UK productive finance assets. MA changes are expected to take effect by end-June 2024, following risk margin calibration changes at FY23, and with the rest of the fully on-shored rules in place by FY24. See here* for further information.
• ESG: as we reflect on the world’s hottest September, ESG policy continues to develop at pace. Markets moved one step closer to standardised reporting with ISSB’s [14] inaugural IFRS S1 (general sustainability) and S2 (climate-related) disclosure guidelines, however jurisdictional adoption may face challenges amidst increased politicisation. The clear trend for increased transparency is here to stay but KPMG has found that only 1 in 4 companies are prepared for pending ESG data assurance requirements, raising further market data quality concerns. At the same time, a record number of funds removed ‘sustainable’ from their name during H1 in response to increased regulatory and reputational concerns. You can check out our Sustainability Hub for a wide range of articles on these topics. 
• T+1 Settlement: work is ramping up to prepare for the changes to T+1 Settlement for Securities transactions, with its knock-on effect on FX settlement. In February the SEC confirmed the go live date for the implementation as 28 May 2024. SIFMA [15] has compiled a playbook & trading video to guide market participants through the implementation steps. The knock-on impact on CLS FX settlement is discussed in the GFMA [16] paper here.
• Clearing: under the auspices of the EMIR [17] review ("EMIR 3.0") the EU is looking at the clearing of Euro swaps, with the AAR [18] a path to require firms subject to the clearing obligation to clear a proportion of their trades at an EU CCP [19]. This proposal has been met with concern by some industry bodies, and is leading to speculation on the respective impact on activity at CCPs such as LCH & Eurex.
• Margin: we are now in the cycle of annual reviews, with names potentially dropping in (& out) of scope. In March 23 ISDA [20] published an updated version of their Standard Initial Margin Model (SIMM) Governance Framework, which sets out how the IM Model works, including back-testing requirements of SIMM. One concern is where Threshold Monitoring is in place under the framework, that in the event a shortfall breaches thresholds the expectation is that remediation should be completed within 40 days, which if it involves papering of documents and opening of custodian accounts, could be quite challenging. 
• Consumer Duty: the Consumer Duty has been in force since the end of July 2023, for new and existing products and services that are open to sale or renewal, with the next deadline of July 2024 for those that are closed. The guiding Consumer Principle is "to act to deliver good outcomes for retail customers". Meeting this year’s deadline was challenging both from a timing and cost perspective across the industry, but focus is now shifting to monitoring and assessment, and the upcoming 2024 requirements.
• Consolidated Tape: a hot topic at the recent FILS [21], the plan for a CT [22] for fixed income is being firmed up, and vendor selection is underway. In the UK the FCA published a consultation in July, and in the EU there is agreement to move forward with selection of a CT provider.   
• LIBOR / EURIBOR: perhaps the last time we mention this… USD LIBOR [23] ceased in June 2023, and all that remains are some legacy tail positions that reference synthetic LIBOR (which under the bonnet is either Term SONIA [24] or SOFR [25] + Credit Adjustment Spread), which is due to cease publication in March and September 2024 for GBP (3m) and USD (1, 3 & 6m) respectively. On the EURIBOR [26] front, no signs from the official sector on any intention to cease publication - indeed EMMI [27] recently announced some proposed revisions to the benchmark methodology to remove level 3 submissions which is being interpreted as an effort to encourage more banks to join the submission panel.
• Ring-fencing: following the Skeoch Report in 2022 there was speculation that in addition to nearer term measures to refine ring-fencing rules, there might be a more wholesale revision of the requirements via alignment to resolution regimes; with the latest consultation the government is focusing on the technical reforms suggested by Skeoch which make the regime less rigid, while longer-term alignment with the resolution planning regime – the subject of a Call for Evidence earlier in 2023 – remains under consideration.     
• Crypto: in July the FSB published its global regulatory framework for crypto-asset activities based on the principle of ‘same activity, same risk, same regulation’, providing recommendations for sectoral SSBs [28] and ultimately local jurisdictions to adapt and adopt. In September the FSB & IMF [29] published a joint paper presenting their combined recommendations across macro-economic, regulatory & supervisory policy.   
• Digital Assets: the Financial Services and Markets Act 2023 provides HM Treasury with powers to set up financial market infrastructure sandboxes, which includes a 'Digital Securities Sandbox', a technology agnostic regulatory sandbox to facilitate experimentation and promote innovation.   

So, lots to talk about. Please do get in touch through your usual bank contact if you’d like to discuss these or any other changes to market structure. 

*Further analysis and information can be found on Market Insights. If you do not have access to Market Insights, please contact us here.

1. Bank of England
2. Financial Stability Board
3. Financial Policy Committee
4. Liability-Driven Investment
5. Financial Conduct Authority
6. Money Market Funds
7. European Securities and Markets Authority
8. Prudential Regulation Authority
9. Chief Risk Officers
10. Fundamental Review of the Trading Book
11. Credit Valuation Adjustment
12. Standardised Approach for Counterparty Credit Risk
13. Matching Adjustment
14. International Sustainability Standards Board
15. Securities Industry and Financial Markets Association
16. Global Financial Markets Association
17. European Market Infrastructure Regulation
18. Active Account Requirement
19. Central Counterparties
20. International Swaps and Derivatives Association
21. Fixed Income Leaders’ Summit
22. Consolidated Tape
23. London Interbank Offered Rate
24. Sterling Overnight Index Average rate
25. Secured Overnight Financing Rate
26. Euro Interbank Offered Rate
27. European Money Markets Institute
28. Standard Setting Bodies
29. International Monetary Fund