markets trends and challenges Natalie L abuschagne JSE Head Public Policy 13 May 2015 Outline The Global Financial Crisis GFC and regulatory themes An international shift to Twin Peaks ID: 811988
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Slide1
Regulatory reform of the financial markets – trends and challenges
Natalie
L
abuschagne, JSE, Head: Public Policy
13 May 2015
Slide2OutlineThe Global Financial Crisis (GFC) and regulatory themes
An international shift to Twin Peaks
International trends
Twin Peaks in South Africa
International harmonisation of regulation
OTC derivative reform – what can we expect?
Slide3Key regulatory themes post-crisis
How to design appropriate regulatory
arrangements
?
Twin Peaks jurisdictions appeared to fair better during and post the GFC?
Blurring of lines across banking, insurance and securities sectorsFinancial innovation and complexity of productsRegulatory harmonisation vs. national discretionRegulator 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
Slide4Key regulatory themes post-crisis continued…
2) How
to design appropriate regulatory
interventions
“Light touch” regulation replaced by more intrusive, onerous
regulationb) Assessing regulatory impact difficultBreadth and depth of regulatory reformExtra-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
Slide5An international shift to Twin Peaks….
Reference:
The
S
tructure
of Financial Supervision: Approaches and Challenges in a Global Marketplace, Financial Regulatory Systems Working Group, Group of 30, 2008, www.group30.org
Slide64 Models of Supervision Internationally
Approaches
Defined
Institutional
China, Hong Kong,
and Mexico
Firm’s
legal status
determines which regulator.
Regulator supervises both from microprudential and a business conduct perspective.
Functional
Brazil, 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.
Integrated
Singapore, and
Switzerland
A
single universal regulator
.
Twin
Peaks
Netherlands, 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.
Unique
USA
Functional
and institutional
mixture
Federal Reserve Board, SEC, CFTC, OCC, FDIC, OTS, NCUA, FHLBB, FINRA, FFIEC
AND
state regulators
Slide7Global trends post-crisis – consolidation of regulation
Country
Before current
crisis
Moving towards
consolidation of supervisionUSAFunctional/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
Slide8Why the move to Twin Peaks?
Health of financial/economic system (macroprudential)
Health of individual firms (microprudential)
Focus on prevention
With rehabilitation
Establishment of credible deterrentFocus on enforcement
SUPERVISION OF CONDUCT
PRUDENTIAL SUPERVISION
Slide9Twin Peaks in South Africa
Slide10Twin 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 2011Need to improve market conductNeed 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 :
1
st
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
S
trengthening
enforcement
and the
ombuds
schemes
DECEMBER 2014 :
2
nd
draft
of the
Financial Sector Regulation Bill (FSRB)
published
1
st
draft of policy
paper
Treating
Customers Fairly in the Financial Sector: A Market Conduct Policy Framework for South
Africa
H1 2015
: Public consultation on 2
nd
draft of FSRB
DECEMBER 2015
: Final FSRB and Twin Peaks expected to go-live 2016.
2016:
Draft
CoFI
Act for public comment
Slide11Phase 1: FSR Bill
Twin Peaks Phase 1: Overlay of powers
Phase 2:
Long-term
Insurance
Act
Short-term
Insurance
Act
Pension Funds
Act
Banks
Act
FAIS
Ombuds
Schemes
Act
Friendly Societies
Act
NPS
Act
CRS
Act
CISCA
FMA
SARB
(Financial Stability)
Prudential
Authority
FSCA
Overarching
Prudential
Law
Conduct
of FI (
CoFI
)
Act
FMA
???
11
NCA
NCA
Mutual Banks
Act
Cooperative Banks
Act
NCR
Slide12Phase 1: two new regulators
Phase 1 of implementation
The FSB and the Bank Supervision Department cease to exist and are replaced by the FSCA and 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
Licensing
Licensing
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)
Slide13Some concerns with current FSRB drafting….
Overlay of standards
– may lead to duplication of requirements and many regulators for the same activity
Costs
of implementing and running a Twin peaks regulatory system
Capacity/skills constraints – regulators and industry competing for the same skills (indirect costs)Consequential amendments to FMA – draft wording around recognition suggests that external market infrastructures can operate without requiring a licenseDesignation of SIFIs – no right of appeal
Slide14International harmonisation of regulation“do as we say, not as we do….”
Slide15Rise 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)
Slide16Rise of large jurisdiction regulators
European Commission (EC): EMIR, CMU
European Securities and Markets Authority (ESMA)
Commodity Futures Trading Commission (CFTC)
Securities and Exchange Commission
Slide17Is 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 consequencesMarket fragmentation due to differing interpretations of requirementsConcentration risk e.g. global CCPs
Slide18Extra-territoriality Example 1:EC approach to recognition of 3rd countries
JSE Clear had to apply for 3
rd
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 notThe 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.
Slide19Extra-territoriality Example 2:EC
Regulation of
indices used as benchmarks in financial
contracts
Administrators (JSE) of benchmarks established
in “3rd countries” required toobtain 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.
19
Slide20G20 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.
20
Slide21FMA regulations – meeting G20 requirements on regulating OTC derivatives markets
1
st
draft of FMA
regs
released July 2014– focused on FMIsIntroduced new category of clearing house – CCPOnerous capital requirements for CCPsRecovery 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).
Slide22Thank you