G20 Financial Reform – What’s in store for 2020: A South African Case study - VERMEG

G20 Financial Reform – What’s in store for 2020: A South African Case study By Tracey Adams, Regional Collateral Management Head

As 2019 came to a close for the financial industry in South Africa, there was an acknowledgement that 2020 could be a year of regulatory change with respect to trade reporting and BCBS/IOSCO. Following the G20 meeting in September, South Africa’s government was keen to promote deeper cross-border economic and infrastructure integration, but also under increased pressure to start taking the necessary steps around regulatory and supervisory policy issues that they had signed up to in 2014. What does it all mean today, however, when South Africa remains under lockdown?

The COVID-19 virus is taking a strain on most parts of banking infrastructure and personnel, from back office operations to front office funding. Business continuity plans will be in full force, as teams work remotely and yet try to pursue a business as usual approach. Whilst many business units would have already locked down 2020 roadmaps, agreed budgets and mobilised change teams, there are now operations, risk, and front office managers fighting to put forward and prioritise hot fixes, as this period of abnormality uncovers system gaps that need to be plugged. The thought, therefore, across business lines, to have to remain fluid and potentially re-formulate roadmaps and budgets will be adding layers of pressure. Are we likely to expect further delays to regulatory change?

On the 6th March 2020, twenty-one days before the national lockdown, the Financial Stability Board (FSB) published a peer to peer review that sought to ‘examine the framework for bank resolution and deposit insurance in South Africa …. [and] focus on the implementation and effectiveness of regulatory, supervisory or other financial sector policies in a specific FSB jurisdiction’. In summary, whilst the review was carried out in 2019, the FSBs thirty-nine-page document, as of this month, is to expect some delays, as key dates have been published around regulatory policy.

South Africa’s implementation of G20 financial reforms covers five areas; Basel III, Compensation, Over-the-counter (OTC) derivatives, Resolution and Non-bank financial intermediation. OTC derivatives reform made up a large proportion of the priority areas in the peer to peer review. Many of them sit in a bracket where final rulings have been published, but not implemented and/or draft regulation had been published or framework being implemented. There are two areas of significance: Trade reporting and Margin requirements for non-centrally cleared OTC derivatives.

Trade Reporting. A large amount of work has been done on trade reporting. On the 15th August 2018 the Joint Standard: Requirements and Additional Duties of a Trade Repository (TR Joint Standard) was issued by the PA and FSCA. This standard prescribes additional criteria for the licensing of an external trade repository, and furthermore intended to include the Committee on Payments and Market Infrastructures and the Technical Committee of IOSCO’s Principles for Financial Market Infrastructures. On 11 October 2018 The Financial Sector Conduct Authority published the Conduct Standard for Authorised OTC Derivative Providers. Despite the depth of information around trade reporting to date, no decision has been made on trade reporting. The peer to peer review cited that ‘…as there are currently no licensed trade repositories or recognised or exempt external trade repositories in South Africa, this has resulted in a delay in trade reporting obligations.’ Many banks and other financial institutions will be relieved at this, as trade reporting bore significant issues and for many other jurisdictions that have had to already implement it.

Margin requirements. The directive around Margin requirements for non-centrally cleared OTC derivatives, as per the peer to peer review, takes a slightly different route to that of trade reporting, in that its implementation has been given a date of the 01st October 2020. On the 8th April 2019, the PA and the FSCA published the revised Joint Standard on Margin Requirements for Non-Centrally Cleared OTC Derivative Transactions, for a final round of public consultation. This Joint Standard, now in the parliamentary process, will  incorporate the internationally agreed standard on margin requirements for non-centrally cleared OTC derivative transactions, as prepared by the BCBS and IOSCO, into the South African  banking industry, in order to mitigate the potential systemic risks from non-centrally cleared OTC derivative transactions. It is too soon to tell whether or not the directive around non centrally cleared OTC derivatives will be moved again, but the assumption must be that it won’t. Whilst South Africa’s derivative trading book is significantly smaller that some jurisdictional counterparts, financial institutions in the region ought not to take the changes lightly. The IOSCO framework brings complexity, not only from a back-office processing perspective but also from a front office funding perspective. From all of those back office managers that have been thinking about system requirements to cope with increased margin calls, to all front office funding desks pondering optimisation should start to think about how the October 2020 date will change their day to day, and, compounded with this, what additional impact the current  pandemic will have on any regulatory changes.

Spreadsheet