News on Securities Finance Regulations | CASLA: The market faces challenges related to regulatory definitions

Regulatory requirements need to be much clearer, agreed panelists at the CASLA conference in Toronto.

In a panel discussion titled “Regulation Discussion: Who Drinks and Who Pays?” Croatian wording about regulations was used, usually denoting a confusing and disorganized situation.

In light of applicable regulations, in particular the Basel III Endgame Act and U.S. Securities and Exchange Commission (SEC) Regulation 10c-1a, speakers agreed that this formulation was accurate.

Focusing on the tail end of Basel III, the panel outlined the key problems the regulation created for banks.

First, they discussed potential issues with defining investment-grade counterparties under the Basel III Endgame and how narrowing this definition could impact the capital treatment of certain assets.

The session also discussed beneficial owners’ concerns about the operational risk framework, highlighting the additional requirements it will place on banks’ overall balance sheets by assigning additional capital requirements based on the results of stress tests.

One of the panelists particularly drew attention to the increase in market risk, pointing to the challenges facing companies’ business models, operational activities, and franchise optimization.

When asked whether the regulation would actually be the “end game,” one speaker was dubious. However, they acknowledged that the collective impact of the regulation would highlight some gaps in the market infrastructure on which to build.

Then the discussion moved to the consideration of Art. 10c-1a, highlighting the numerous questions that the regulations have not yet answered.

For example, questions remain about what constitutes a “reportable event” and how much new development will be required for existing SFT reporting systems.

Similarly, speakers explained that jurisdictional issues were still unresolved and that the requirements of the Financial Transactions in Securities Regulation could potentially overlap. In fact, they suggested that reporting requirements should be significantly clarified.

After the panel ended, the discussion returned to the initial title: who will drink and who will pay?

For one panelist, the issue comes down to capacity. They say the Canadian market could see some success, arguing that the size of the U.S. treasury settlement model may take some time before everyone has sufficient access to it.

The panel noted that obtaining new standard documents that are modern and useful for this purpose will be really important.

Speakers expressed uncertainty as to whether they could achieve this in preparation for the implementation of these regulations, or at least in a way that was generally useful to the market as a whole. But they are trying really hard to make it happen.