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Regulatory Déjà Vu

Akber Datoo

Another regulation requiring financial institutions to repaper their client documentation, another series of delays, and another compliance deadline postponed – once again, market confidence is undermined and, in this case, trade volumes potentially affected. But the changes to FINRA Rule 4210 come hard on the heels of a number of critical new regulations from MiFID II to EMIR; after nearly a decade of continuous regulatory change, why is the industry still failing to step up?

The significance of the operational changes and documentation challenges associated with margin reform cannot be underestimated. And whilst financial institutions are hardly faultless, if the industry collectively is truly to address this critical aspect of international banking, then it is now high time for the regulators to take greater responsibility for providing clear and coordinated guidance, as well as sufficient time to implement, insist Johan Bear and Darren Fortunato, senior consultants at D2 Legal Technology, and managing partner, Akber Datoo.

Up to the Wire

Akber Datoo

Akber Datoo

Once again, regulators appeared to be tinkering with requirements in the run up to an implementation date. And this time, it has already caused market disruption – not to mention affected confidence – and resulted in another delay with about two months to go. Developed in response to the financial crisis, amendments to FINRA Rule 4210 affect Covered Agency Transactions in the U.S. and require registered broker dealers to collect daily variation margin and, in some cases, maintenance margin, from customers on specified transactions.

Originally scheduled for implementation on December 15th 2017, compliance was pushed back to June 25th 2018 and has now been pushed back again to March 15, 2019. SIFMA called for the latest postponement – citing continued confusion surrounding potential on-going changes to Rule 4210. With rumours abounding in the market about further modifications to actual requirements, counterparties have been uncertain as to how to proceed – and rather than start along this process, many simply decided to wait for clarity.

As a result, many of the largest counterparties delayed signing up, leaving a very significant proportion of transactions still to be covered. With an estimated $200 billion in covered agency transactions entered into every day, delay introduced a significant amount of uncertainty in the market, affecting both pricing and liquidity.

And with many of these settlements typically dated between 60 and 90 days, the lack of clarity was beginning to impact the ability of broker dealers to engage in these types of transactions.  Would it have been possible to enter into a trade that may not have settled until after the June 25th implementation date if the counterparty documentation was not in place? While some may have opted to be in technical breach, there were very valid concerns about the potential impact on transaction volumes.  FINRA’s second extension to March 15, 2019 should just about alleviate immediate concerns, but leaves the situation open for the future. Uncertainty remains.

New Attitude

Questions clearly have to be asked about why the regulator was still discussing changes with just two months to go before implementation – if this really was and remains the case. If not, questions have to be asked about why the regulator had not made clear and decisive announcements to clarify the situation. A market awash with rumour and counter-rumour is hardly one that inspires confidence – and, to be frank, why provide organisations with any reason to delay compliance activity?

But the industry needs to accept some degree of blame. While the regulator, again, is failing to support the market in achieving its compliance goals – following on from the same late changes that dogged EMIR, Margin for Uncleared Derivatives and MiFID II – a decade on from the financial crisis, financial institutions are still failing to recognise that compliance has become Business as Usual (BAU).

Again and again the regulators devise complex new requirements, set a deadline, only to discover after the market has had a chance to digest and review that they do not actually work in practice. The timescales for push back and renegotiation inevitably lead to implementation date postponement – as happened recently with margining of deliverable FX Forwards which followed the delayed Variation Margin (VM) ‘big bang’ implementation date.

Clearly the regulators need to provide better guidance and workable timescales. But one of the biggest contributors to the delay is not just slow to respond regulators but the time financial institutions take to discuss the new demands, to onboard the required skills and expertise, and to determine the implications of each regulation.

There is absolutely no justification for delayed responses. Yes, each regulation has specific demands, but the concept of regulatory change is now a constant – these skills and expertise should be embedded within every organisation.  With the right people the right processes, systems and technology and, critically, the right attitude, financial institutions would not be constantly demanding forbearance or requesting postponement.

Legal Agreement Document and Data Management – the Foundation to Successful Compliance

Indeed, despite this constant of regulatory change, few financial institutions have sufficiently invested in the necessary capabilities to ease the burden of compliance with the twists and turns of the regulations.

From the use of document generation and negotiation tools, to digitisation of their legacy legal agreement portfolios and the management of key terms – legal contract data – within these agreements, contract lifecycle management is crucial to successfully managing the repapering exercise.

And, where such capabilities and systems do exist, they are often isolated and lack integration with trading systems, meaning that firms will struggle to truly optimise repapering efforts in line with business needs.  This is especially the case with the supposed accommodation FINRA is seeking to make for Rule 4210, allowing dealers to take a capital charge in lieu of margin for certain accounts.

Compliance is BAU

Some firms have accepted that compliance is now BAU – but this is a market that demands co-operation. It is consensus that drives forward change: if all the major counterparties adopted the same BAU approach, the speed with which regulatory compliance could be achieved would be transformed.

And yes, the fact that regulators tinkered with MiFID II requirements right up to the last minute, just as FINRA appears to be playing with Rule 4210 requirements, is incredibly frustrating. But the fact is that if BAU, contract lifecycle management processes were in place, firms would have fed back on their concerns months sooner. Problems would have been aired and addressed, and there would be no need for on-going amendments.

Regulatory change is now constant – and demands constant, continuous, dedicated activity within every financial institution. Organisations need the right teams, comprised of highly experienced legal practitioners, project managers, documentation experts and IT specialists, and they need a commitment to rapidly assessing new the regulations in depth and getting ‘ahead of the curve’ by becoming proactive rather than reactive.

There also needs to be better collaboration between the buy and sell side when it comes to new regulations. Much of the confusion regarding Rule 4210 has been created by buy and sell sides feeding back separate and distinct concerns to FINRA. Work together; leverage expertise within these BAU teams to share concerns; and provide the regulator with workable, valid and valuable insight.


The financial market has to change, fast.  It has to move away from regulatory déjà vu. Different product types, different regulators, same problem: is not acceptable. Confused requirements, delayed push back, request for postponement, waiting on forbearance, repeated extensions, it is a highly unvirtuous circle. The implications for market confidence, even market value, are significant. The regulators need to step up and take greater responsibility for providing clear, coordinated (but practical) regulation, as well as sufficient time to implement. But they also need to be supported by cross-industry recognition that compliance is BAU for every single organisation and that consensus and collaboration must be at the heart of achieving not just regulatory compliance, but the underpinning goal of that regulation: reduced risk and improved market confidence.

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