Global Regulatory Trends for 2022
As 2022 dawns we look ahead at the regulatory requirements for asset managers, asset service providers and investment managers. This review is based on the regulatory trends of 2021 and new regulatory requirements of 2022. We have taken stock of the regulatory environment and examined the multi-pronged global regulatory approach that combines the balancing of new regulatory measures with fine-tuning of existing measures.
The current geopolitical and economic climate means that a multi-pronged regulatory approach is undoubtedly a challenge for the global regulators and a burden on the market participants. Notwithstanding this, it is clear that global regulators have their sights on many game-changing and innovative regulatory initiatives for 2022 and beyond.
Sustainable Investments
The global ambitions to reach near net-zero emissions over the coming decades requires regulatory focus on sustainable investments. The EU has a taxonomy on the horizon that will segment economic activities into environmentally sustainable categories. The industry is already somewhat challenged in deciding how best to source and manage the data required for the new taxonomy. The COVID pandemic has changed the outlook for the industry. The EU has a Next Generation economic recovery package as a direct result of the worldwide crisis. The package is founded on two important factors. The Member States must allocate a minimum of 37% of allocations to climate investments and reforms and a minimum of 20% to digital transformation. As a result, in addition to the increased focus on sustainable investment management, on 21st April 2021 the proposal for the Corporate Sustainability Reporting Directive, was introduced. This requires disclosure of sustainability information and under the EU Sustainable Finance Disclosure Regulation (SFDR).
Digital Transformation
Regulators are aware of the wide need for improved digital transformation and industry wide adoption of best practices in this area. The EU Digital Strategy (including the proposed Data Governance Act, Digital Services Act, Digital Markets Act and the Data Act) is designed to provide EU citizens with access to cross-border financial services and facilitate scaling-up of financial services organisations’ digital operations. This in itself leads to more regulations in the future.
In addition the Markets in Crypto-Assets Regulation (MiCA) will regulate currently out-of-scope digital assets and their service providers in the EU, and will provide a single EU-wide licensing regime by 2024. The EU Digital Operational Resilience Act (DORA), will make third-party technology and service providers subject to resilience testing exercises, incident classification and reporting rules.
Liquidity Management
A number of regulatory initiatives already underway have been carried over into 2022. ESMA is working to define common rules on AIFM and UCITS liquidity management tools; to define common rules for AIFMs managing loan-originating; to clarify delegation rules for AIFMs and UCITS with respect to third countries; to create a centralised database of market data on securities traded across EU trading platforms; to replace the Double Volume ‘dark pools’ cap of 4% on individual trading venues and 8% EU-wide thresholds with 7% threshold.
EU vs UK Regulatory Requirements
EMIR REFIT is also on the horizon. EMIR REFIT highlights an emerging trend in divergence between ESMA regulations and UK regulations. There may well yet be two EMIR REFITs - one for UK participants and one for EU participants. The EU and UK firms may soon have to maintain two sets of reporting standards across many different regulations, which is in itself problematic. In relation to MiFIR transaction reporting, the UK FCA remains aligned with ESMA through the use of international, IT and data standards. ESMA published ESMA’s final report on their MiFID transaction reporting review in March 2021. It remains to be seen whether the FCA will carry out its own review anytime soon.
Investment Firm Directive & Regulation
On 26 June 2020 the EU’s Investment Firm Directive and Regulation (IFR/IFD) went into effect. This regime introduced its own funds, liquidity assets, remuneration, governance and reporting requirements for firms. For 2022 the EBA and ESMA are finalising Level 2 IFR/IFD mandates, and from the 30th April the sound remuneration and internal governance guidelines will apply. Again a divergence of regulation is apparent for 2022 as the FCA has introduced the Investment Firm Prudential Regime (IFPR). This new framework applied as of the 1st January and as a result like their EU counterparts under IFR/FD, UK investment firms will now need to meet a variety of new regulatory requirements.
Regulatory Reporting in Asia & North America
In Asia data standards are a focus area for 2022. MAS and ASIC have commenced consultations on CPMI IOSCO guidelines on UPI, UTI and CDE. This will lead to further future technology modifications across the industry.
In North America the CFTC have not implemented changes to their reporting rules since they first went live in 2014. That said, this year is a year of change for the North American regulatory reporting industry. The SEC SBSR Real Time and Backloading reporting requirements come into effect in February and April. The CFTC Re-write is scheduled for a May implementation. The pace of regulatory change continues to accelerate in North America. On the back of changes such as SEC 18f-4 last year, proposed regulatory changes (such as SEC Rule 10c-1) continued to be a trend into 2022. Undoubtedly North American market participants have more work now than ever to remain compliant with the emerging regulatory change.
