• What’s in the shadows: regulators have stepped up their focus on non-bank financial institutions (NBFI), aka shadow-banking, whether directly or via their oversight of banks; April saw a publication by FSB on liquidity preparedness of NBFIs, and a Dear CRO letter from the PRA³ on private equity-related financing activities; and the second round of the BoE SWES⁴ is underway (assessing the impact of ‘severe but plausible stress to financial markets’ – see Fig 1 below for channels being investigated), with feedback on findings expected later in the year. The latest Bank of England (BoE) financial stability report from June 2024 devotes 2 out of 6 sections to the resilience of market based finance and vulnerabilities in private equity (PE). Meanwhile the EU has announced a consultation on macro-prudential policies for NBFI. The regulatory focus on NBFI is wrapped in the broader industry move from traditional to alternatives within asset management – a recent report from Bain anticipates private markets growing almost threefold in the next 7 years to account for 30% of all global assets under management (AuM). But regulators have met some resistance from parts of the industry, with the Securities and Exchange Commission (SEC) having their Private Fund Advisor rules struck out by a US circuit court as exceeding their authority.

• Basel 3.1 delays amid US resistance: in response to robust lobbying in the US (e.g. watch Tough enough already!) we are anticipating a re-proposal and consultation on the capital rules referred to as the ‘Basel Endgame’ in H2 2024. The estimates related to the initial proposal had indicated a > 20% increase in RWAs for the largest firms in the US. Meanwhile, we await final rules in the UK, anticipated on 12 September, with reports that implementation could be further delayed to January 2026. In the EU, rules are expected to apply from January 2025, though to mitigate the impact on EU firms the ‘FRTB’⁵ parts of the package will not go live until 1 January 2026. For a comprehensive analysis of both current Basel 3.1 developments and the wider bank regulatory capital agenda. Access the short webinar and our Regulatory Capital Compendium.  
• Push to clear swaps within EU: the main focus of EMIR 3.0 is around mandatory clearing, and specifically the introduction of the Active Account Requirement (AAR), which requires EU counterparties to be able to clear certain products through an EU-based CCP⁶; the final measures have fallen short of what some in the industry feared would mean an enforced clearing of all EUR swaps inside the EU, resulting in a bifurcation of the international swap clearing market; in the end it looks like at least for now counterparties must demonstrate the capacity to clear with the EU, but do not actually have to move all their transactions; beyond AAR there are some other adjustments to clearing rules in EMIR 3.0, and a few other related measures; legislation is expected to be published in the EU Official Journal in Q4 2024 with provisions live from late 2025. Currently temporary equivalence granted to UK CCPs is due to expire in June 2025, so it remains to be seen whether the EU will use EMIR 3.0 and the AAR framework to step back from that cut-off.
• Mandatory clearing of treasuries & repo in US: the SEC has published rules that will require central clearing of certain US treasuries by the end of 2025 and UST repos by middle of 2026; the US treasury market has $26tn in outstanding securities, and the SEC estimates at least 80% of the cash market is currently uncleared; their intention is to improve market resilience by increasing the share of activity subject to centralised netting and risk management policies; this is a substantial change in a substantial market – inter-dealer brokers and their clients will need to prepare for the changes now, considering access to clearing, risk management and collateral management; expect increased margin costs to affect bid / ask spreads, with a consequent impact on low-margin / high-volume trading. 
  
• Understanding pre-hedging: authorities are concerned that there remains uncertainty in the market around what constitutes pre-hedging, a legitimate risk management practice, versus front-running, a form of market abuse. The FMSB⁷ published a spotlight review on pre-hedging in July containing a series of case studies in order to advance the industry debate. In March IOSCO set out their intention to assess and mitigate ‘observed vulnerabilities in pre-hedging practice’, though there has been no further announcement yet, and expectation is it will be later in the year before we hear more.
  
• Surely not another MiFID? the two-year review within the EU into MiFID2 / MiFIR is drawing to a close and new requirements are either already effective (in the case of MiFIR since Mar 2024) or will be phased in over coming 12-18 months (for MiFID2 following transposition to national competent authorities). The main focus of what is collectively referred to as the ‘MiFIR Review’ (and sometimes MiFID3) has been on transparency of data and investor protection. There have been various revisions to the rules around pre- and post-trade transparency, including simplification of some of the criteria and removal of obligation for Systematic Internalisers (SIs) to undertake pre-trade transparency at all (which the UK is expected to follow under the Wholesale Markets Review (WMR)). The big idea is the Consolidated Tape (CT) – various providers (e.g. venues and approved publication arrangements) will be obliged to contribute data ‘as close to real time as technically possible’ for equities, bonds & derivatives. A framework to appoint Consolidated Tape Providers (CTP) is set out but as yet none have been appointed.
  
• Not forgetting the UK and WMR: not to be outdone, the UK has been progressing its own revisions to the UK flavour of MiFID2 (among other things), under the auspices of the WMR; the latest set of proposals just dropped in July covering a revision to the prospectus rules, some revisions to the unbundling rules for research (permitting bundling payments for research with trade execution subject to disclosure), and some revisions to the Derivatives Trading Obligation (DTO) to align the scope to mandatory clearing (similar to measures under MiFIR review); UK is already reviewing SI definitions (expected live Jan 2025) and is in the throes of putting together their CT framework.
  
• PRIIPs⁸ KIDs get RIS: last year the EU published final proposals on their Retail Investment Strategy (RIS), the package of measures to empower retail investors to make more informed investment decisions; the proposals are now working their way through the EU legislative process, expected to come into force in 2025; they include measures around inducements, pricing, benchmarks, suitability & appropriateness; there are revisions to various disclosure requirements under MiFID2, and changes to PRIIPS Key Information Documents (KIDs); give or take it is the EU version of Consumer Duty in the UK (similar themes, though details differ in practice). 
  
• Doing your Consumer Duty: the Consumer Duty rules for new and existing products came into effect last year, with closed products following suit this July, implementing the guiding Consumer Principle to ‘act to deliver good outcomes for retail customers’; the impact of the Duty across financial services has already been far reaching, as the FCA⁹ reflected in their ‘1 year on’ webinar at the end of July; Sheldon Mills who has spearheaded the implementation at the FCA listed various positive changes through the year, while identifying what comes next, including initiatives to address potential harm to consumers, obtaining better information from firms on how the Duty is being implemented and sharing good practice to drive better outcomes.   
  
• Settling for less with T+1: the move to T+1 settlement in the US at the end of May went more smoothly than some had feared, with minimal operational disruption during the cutover; that said there are reports in the industry that there has been a detrimental impact on European funds investing in US equities due to settlement misalignment; with the US done, the focus has inevitably shifted to if / when the UK and EU may follow, with a potential switchover mooted for 2027.
  
• Testing time for insurers: July saw the PRA publish its proposed approach for the 2025 Life Insurance Stress Test (LIST), intended to assess sector and individual firm resilience to “severe but plausible” events. The test, which will be split into one “core” and two “exploratory” scenarios, is due to be formally launched in January 2025. Find our full write-up here.
  
• Focus on FundedRe: on 26 July, the PRA released final policy in relation to funded reinsurance (FundedRe), outlining its expectations for appropriate risk management and modelling of such arrangements. Whilst there was limited change from last November’s draft policy (see our summary here), the regulator also issued a “Dear CEO” letter, containing a (potentially technically demanding) data request for firms “using, or considering using, FundedRe”. More information here.
  
• Pension superfunds might fly: in late July The Pensions Regulator published interim superfund guidance, with the headline revision being the introduction of a framework for profits to be returned to owners. Prior to this, the fact that investors had no certainty over how or when they could realise a return on their investments had been seen as a major roadblock for the “run on” superfund model. More info here.
  
•  Defining the Defined Benefit (DB) Funding Code: final draft of the DB Funding Code went before parliament on 29 July. The Code requires low dependency on the sponsor by the time the scheme duration reaches 10 years. This is expected to involve hedging at least 90% of rates and inflation risk. The latest changes remove prudence in some areas, keep bar-belled strategies alive a bit more for de-risked portfolios, and also make it easier for de-risked portfolios to have tactical over-weights to short-dated corporate bonds and floating rate notes. More info here.
  
• National Wealth Fund established: the new Labour government in the UK has set an ambitious climate and environmental agenda, including achieving net-zero greenhouse gas emissions from electricity generation by 2030 and banning new internal combustion vehicles by the same year. They have established the National Wealth Fund and Great British Energy to drive investment in clean energy, aiming to attract significant private sector funding. The National Wealth Fund will bring together the existing British Business Bank and the UK Infrastructure Bank having committed £7.3 billion of seed capital. Investments will start being made immediately into green infrastructure (“industries of the future”) and look to catalyse upwards of £20 billion of private capital.
  
• Climate transition plan disclosures: additionally, there are plans to make the UK a leader in green finance by requiring financial institutions and major companies to disclose their climate transition plans. These initiatives are complemented by commitments to waste reduction, promoting a circular economy and nature conservation and restoration. See our latest ESG policy round up insights here.
  
• Securing securitisation: the EC intends to launch a public consultation on securitisation later in 2024. The main topics it is expected to cover are items such as barriers to issuance, disclosure, due diligence requirements, the STS¹⁰ framework, and prudential requirements for banks and insurers. The aim is to try to identify the segments of the securitisation market that could most effectively contribute to the Capital Markets Union (CMU) objectives (with CMU firmly back on the agenda per a speech this week from Eurogroup president Paschal Donohoe). Securitisation plays a significant role in risk and capital management as well as funding acting as a transmission mechanism enabling borrowers who support the real economy to access the capital markets. In the UK new securitisation legislation is now finalised and due to apply from November with no material changes to previous regime that was onshored following Brexit. A second round of consultation with more rule changes (incl private vs. public securitisation, disclosure template, due diligence, risk retention, etc.) is still to come, probably in early 2025.
  

Do get in touch through your usual bank contact to speak to us about these topics or more widely across changes in market structure.  

[1] EMIR European Market Infrastructure Regulation

[2] MiFID Markets in Financial Instruments Directive

[3] PRA Prudential Regulation Authority

[4] SWES System-wide exploratory scenario exercise

[5] FRTB Fundamental Review of the Trading Book

[6] CCP Central counterparty clearing house

[7] FMSB Financial Markets Standards Board

[8] PRIIPs Packaged Retail Investment and Insurance-Based Products

[9] FCA Financial Conduct Authority

[10] STS Simple, Transparent and Standardised (STS) Securitisations