Regulatory changes will continue to be the main area of focus for the derivatives industry in 2018. In addition to that, new product types (Bitcoin and other cryptocurrencies) are also likely to dominate the way in which the derivatives industry will develop this year.
Key areas of focus in 2018:
MiFID II: The Markets in Financial Instruments Directive (MiFID) and the accompanying Markets in Financial Instruments and Amending Regulation (MiFIR) both originate from the European Commission and seek to provide legislation around the operation of financial instruments in the EU. MiFIR was implemented on 3 January 2018, and as a result MiFID is now in force. The impact of this will be that any institution (wherever located) that wishes to trade with an EU financial institution will have to conduct their business and transactions in line with MiFID and MiFIR. The impact of MiFID within the scope of the derivatives industry will be felt throughout the derivative trade cycle:
onboarding clients using a Legal Entity Identifying (LEI) number
booking the trade on a regulated trading venue
reporting (real time) that trade and trade data to a competent authority under MiFIR
demonstrating to the regulator that the trade that was done with a client was thoroughly researched and considered to ensure the best possible outcome for the client (in line with the client protection provisions).
Whilst most EU firms have already requested LEI numbers, and formalised data reporting arrangements with their SA counterparties, I suspect that this will be an ongoing project and focus going into 2018.
Collateral: As from 1 September 2017 all in-scope entities governed by EMIR and Dodd Frank have had to start posting variation margin for their derivatives exposure, subject to the new variation margin rules. SA regulators have not yet finalised the margin rules for South African in-scope entities, but it is anticipated that these regulations will be finalised and implemented during the course of 2018, in order to fulfill G20 and IOSCO recommendations. Whilst many legal agreements dealing with the new variation margin rules were finalised in time for the 1 September 2017 deadline in the EU and US, it is likely that the SA market still has much work to do from a documentation point of view in order to be ready for the pending variation margin rules which will apply to the South African market.
Clearing: Whilst the EMIR and Dodd Frank regulations on central clearing are already in force for most vanilla derivatives transactions, the South African market has not yet implemented the provisions of the Financial Markets Act relating to central clearing. A great deal of work still needs to be done from a regulatory point of view to flesh out the details of the regulations on clearing (e.g. which products are in-scope, approving clearing houses, and advising on the margin rules for cleared transactions – to name but a few) before such regulations can feasibly take effect. It is anticipated that the regulator will be focused on starting to draft subordinate legislation to this effect in the coming year, to ensure South Africa keeps to the G20- and IOSCO-recommended timeframes.
Trade Repositories: While trade reporting has become a reality in many jurisdictions in the world, South Africa has not yet approved a trade repository to act as a data warehouse for South African institutions. It is anticipated that headway will be made during this year to establish the parameters of the reporting requirements under the Financial Markets Act, and perhaps even authorising a trade repository for the South African market.
Cryptocurrencies: With the huge interest in Bitcoin and other cryptocurrencies, some leading derivatives exchanges have begun to design products to allow investors to gain exposure to this new asset. Regulators are keeping a very close eye on this new emerging asset, and it may be that some regulation or restriction on trading in cryptocurrencies will emerge during this year – in order to protect retail clients, and to ensure leverage ratios are controlled.
DeriviDoc offers training courses on clearing and regulatory initiatives like trade reporting:
An Introduction to Central Clearing
The Legal Agreements Required for Clearing
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