Regulatory reform of the financial markets – trends and challenges

Natalie Labuschagne, JSE, Head: Public Policy13 May 2015

Outline

1. The Global Financial Crisis (GFC) and regulatory themes

2. An international shift to Twin Peaks International trends Twin Peaks in South Africa

3. International harmonisation of regulation

4. OTC derivative reform – what can we expect?

Key regulatory themes post-crisis

1. How to design appropriate regulatory arrangements?

a) Twin Peaks jurisdictions appeared to fair better during and post the GFC?• Blurring of lines across banking, insurance and securities sectors• Financial innovation and complexity of products

b) Regulatory harmonisation vs. national discretion

c) Regulator independence vs. regulator accountability

Reference: K. Davis Regulatory Reform Post the Global Financial Crisis: An Overview, a report prepared for the Melbourne APEC Finance Centre

Key regulatory themes post-crisis continued…

2) How to design appropriate regulatory interventions

a) “Light touch” regulation replaced by more intrusive, onerous regulation

b) Assessing regulatory impact difficult• Breadth and depth of regulatory reform• Extra-territoriality

c) Greater emphasis on consumer protection

Reference: K. Davis Regulatory Reform Post the Global Financial Crisis: An Overview, a report prepared for the Melbourne APEC Finance Centre

An international shift to Twin Peaks….

Reference: The Structure of Financial Supervision: Approaches and Challenges in a Global Marketplace, Financial Regulatory Systems Working Group, Group of 30, 2008, www.group30.org

4 Models of Supervision Internationally

Approaches DefinedInstitutional China, Hong Kong,and Mexico

Firm’s legal status determines which regulator.Regulator supervises both from microprudential and a business conduct perspective.

FunctionalBrazil, France, Italy, and Spain, South Africa

Business being transacted determines regulator, without regard to its legal status.Each type of business may have its own functional regulator.

IntegratedSingapore, and Switzerland A single universal regulator.

Twin PeaksNetherlands, and Australia Regulation by objective

Separation of regulatory functions between 2 regulators: one macro/microprudential and the other that focuses on conduct-of-business regulation.

UniqueUSA Functional and institutional mixture

Federal Reserve Board, SEC, CFTC, OCC, FDIC, OTS, NCUA, FHLBB, FINRA, FFIEC AND state regulators

Global trends post-crisis – consolidation of regulation

Country Before current crisis Moving towards consolidation of supervision

USA Functional/Institutional Twin Peaks/ Integrated mix - new FSOC and BCFP

UK Integrated tripartite (including HMT) Twin Peaks

Holland Twin Peaks No change

Italy Functional Twin Peaks

Spain Functional Twin Peak

France Functional Twin Peaks

Canada Integrated/Twin Peaks No change

Singapore Integrated No change

Why the move to Twin Peaks?

• Health of financial/economic system (macroprudential)

• Health of individual firms (microprudential)

• Focus on prevention• With rehabilitation

• Establishment of credible deterrent• Focus on enforcement

SUPERVISION OF CONDUCT PRUDENTIAL SUPERVISION

Twin Peaks in South Africa

Twin Peaks SA: a long road….

• FEBRUARY 2011: Policy document A safer financial sector to serve South Africa better • JULY 2011: Cabinet approved 4 policy objectives in July 2011

• Need to improve market conduct• Need to combat financial crime• Need to strengthen financial stability• Need to widen access to financial services

• BUDGET 2013: Roadmap - Implementing a twin peaks model of financial regulation in SA• DECEMBER 2013 : 1st draft of the Financial Sector Regulation Bill (FSRB) published

Additional objectives stated• Enhancing coordination and cooperation between regulators • Balancing operational independence and accountability of regulators • Establishing a crisis management and resolution framework • Strengthening enforcement and the ombuds schemes

• DECEMBER 2014 : 2nd draft of the Financial Sector Regulation Bill (FSRB) published1st draft of policy paper Treating Customers Fairly in the Financial Sector: A Market Conduct Policy Framework for South Africa

• H1 2015: Public consultation on 2nd draft of FSRB• DECEMBER 2015: Final FSRB and Twin Peaks expected to go-live 2016.• 2016: Draft CoFI Act for public comment

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Phase 1: FSR Bill

Twin Peaks Phase 1: Overlay of powers

Phase 2:

Long-termInsuranceAct

Short-termInsuranceAct Pension

FundsAct

BanksAct

FAIS

OmbudsSchemesAct

Friendly SocietiesAct NPS

ActCRSAct

CISCA

FMA

SARB(Financial Stability)Prudential

AuthorityFSCA

OverarchingPrudentialLaw

Conduct of FI (CoFI)Act

FMA???

NCA

NCA

Mutual BanksAct

Cooperative Banks Act

NCR

Phase 1: two new regulators

Phase 1 of implementationThe FSB and the Bank Supervision Department cease to exist and are replaced by the FSCA and PA

Financial Sector Regulation Act

Financial Sector Conduct Authority (FSCA) Prudential Authority (PA)

SARB

Systemic stability

Objectives to protect financial customers:• All financial institutions treat financial

customers fairly• Responsible for integrity of financial

system• Financial education programs

Objectives:• Safety and soundness of

all financial institutions; excluding financial service providers

• Assist in maintaining financial stability

LicensingLicensing

Council of Financial Regulators

Comprising:• DGs of NT, DTI, Health• CEO of PA• Commissioner of FSCA• CEO of NCR• CEO of CMS• Fin Stability Dep. Gov

MOUs

Financial Sector Inter-Ministerial Council

Comprising Ministers of:• Finance• DTI• Health• Economic

Development

Financial Stability Oversight Committee

(FSOC)(refer next slide)

Financial Sector Contingency Forum(FSCF)(refer next slide)

Some concerns with current FSRB drafting….

1. Overlay of standards – may lead to duplication of requirements and many regulators for the same activity

2. Costs of implementing and running a Twin peaks regulatory system3. Capacity/skills constraints – regulators and industry competing for

the same skills (indirect costs)4. Consequential amendments to FMA – draft wording around

recognition suggests that external market infrastructures can operate without requiring a license

5. Designation of SIFIs – no right of appeal

International harmonisation of regulation

“do as we say, not as we do….”

Rise of the global standard-setters

• “We are committed to take action at the national and international level to raise standards, and ensure that our national authorities implement global standards developed to date, consistently, in a way that ensures a level playing field, a race to the top and avoids fragmentation of markets, protectionism and regulatory arbitrage.”

- G20 Seoul Summit Declaration, 2010.• Rise of the global standard setters to achieve harmonisation:

• Financial Stability Board

• International Organisation of Securities Commissions

• International Association of Insurance Supervisors

• Bank for International Settlements

• Committee on Payments and Market Infrastructures (CPMI - old CPSS) • Basel Committee on Banking Supervision (BCBS)

Rise of large jurisdiction regulators

• European Commission (EC): EMIR, CMU

• European Securities and Markets Authority (ESMA)

• Commodity Futures Trading Commission (CFTC)

• Securities and Exchange Commission

Is harmonisation appropriate?

• Finding one global standard that is right for everyone is impossible• Impact assessments difficult• harmonising with large jurisdictions may not be appropriate

• May be forced to harmonise – equivalence/extra-territoriality

• Many processes going on that are not transparent and represent only a few

• Unintended consequences• Market fragmentation due to differing interpretations of requirements• Concentration risk e.g. global CCPs

Extra-territoriality Example 1:EC approach to recognition of 3rd countries

• JSE Clear had to apply for 3rd country recognition with ESMA• This was simply to carry on with “business as usual”, not to expand service offering to

EU nationals• Process not transparent – Asian CCPs already granted equivalence, US not• The EC and ESMA did acknowledge the appropriateness of our CCP design and risk

management processes in terms of the functioning of the market it is meant to serve.

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Extra-territoriality Example 2:EC Regulation of indices used as benchmarks in financial contracts

• Administrators (JSE) of benchmarks established in “3rd countries” required to• obtain a decision from the EC recognising that their legal framework and

supervisory practices are equivalent to that of the EU regulation,• Implement, using legislation, the IOSCO Principles for Benchmarks

• JSE Fixed Income Index Series; FTSE/JSE Africa Index Series and Custom equity Indices; JSE Money Market Index; JSE Commodity Index

• An informal group comprising the JSE and SA banks engaged with the EC to highlight the negative impact such regulation could have

• Recent regulatory proposals have been somewhat relaxed still require annual audits which are expensive.

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G20 Reform of OTC derivatives marketsStuck between a rock and a hard place

• G20 Leaders Statement: The Pittsburgh Summit (2009)• All standardized OTC derivative contracts should be traded on exchanges or

electronic trading platforms, where appropriate,• All standardized OTC derivative contracts should be cleared through central

counterparties (CCPs) by end-2012 at the latest.• OTC derivative contracts should be reported to trade repositories (TRs).• Derivatives not cleared through a CCP should be subject to higher capital

requirements.• Higher margin/collateral requirements were added later.

FMA regulations – meeting G20 requirements on regulating OTC derivatives markets

• 1st draft of FMA regs released July 2014– focused on FMIs• Introduced new category of clearing house – CCP• Onerous capital requirements for CCPs• Recovery and resolution of CCPs

• 2nd draft of FMA regs expected soon • FMA regs are expected to also be released with FSB Notices covering:

• Requirements to be authorised as OTC Derivative Provider (ODP)• Central reporting requirements to a trade repository (TR)• Margin requirements for non-cleared derivative trades• Not expecting central clearing requirements (through a CCP).

Thank you