financial sector regulatory reforms

Q: What are the key areas of financial regulatory reforms implemented in the decade following the Global Financial Crisis of 2008?

After the 2008 crisis, key reforms focused on better capital requirements and liquidity rules. They also covered market structure, transparency, risk management, and corporate governance. The aim was to make financial systems stronger and lower the risk of future crises.

Q: How did the post-GFC regulatory reforms impact the asset management sector?

The reforms changed how asset managers are checked for financial stability risks. They now look at the products and activities, not just the firms. This approach helps prevent big risks in the asset management sector.

Q: What were the key changes made to the regulation of over-the-counter (OTC) derivatives trading?

OTC derivatives trading now has stricter rules. It must be cleared through central systems, reported to trade repositories, and traded on exchanges or electronic platforms. This makes trading safer and more transparent.

Q: What are some of the future priorities for regulatory reforms in the financial sector?

Future priorities include moving from LIBOR to safer rates and watching over central clearing counterparties (CCPs). They also focus on clearing up confusion about exchange-traded products (ETPs) and tackling cybersecurity issues.

After the 2008 Global Financial Crisis, the financial sector has seen big changes. These reforms have changed the industry a lot, affecting banks and asset managers¹. Now, with more supervisory checks coming in 2024, knowing about these changes is key¹.

Contents

So, what are these reforms and how do they affect financial institutions? They’ve brought in new rules on things like capital, liquidity, market structure, and risk management¹². These changes aim to make the financial system more stable and resilient worldwide¹².

Now, we’re asking: How can financial firms deal with these changes and stay innovative? We’ll look into the main parts of these reforms and what’s needed to keep up in this changing world.

Key Takeaways

The financial sector has undergone significant regulatory reforms since the 2008 Global Financial Crisis.
These reforms have impacted a wide range of financial firms, from banks to asset managers.
Key areas of reform include enhanced capital requirements, new rules governing liquidity, market structure, transparency, and risk management.
Regulators are expected to increase supervisory scrutiny of financial institutions in 2024, with a focus on consumer protection and innovative products.
Understanding and complying with these evolving regulations is crucial for financial institutions to navigate the changing landscape successfully.

The Decade of Financial Regulatory Reform: 2009 to 2019

Introduction

After the 2008 Global Financial Crisis, there was a big push for financial regulatory reforms worldwide. Policymakers and groups like the G20 worked hard to make the financial system stronger. They aimed to increase transparency and boost investor trust with new rules³.

International Standard Setting & Global Financial Regulation

Groups like the G20, Financial Stability Board (FSB), Basel Committee on Banking Supervision (BCBS), and International Organization of Securities Commissions (IOSCO) led the way in setting global standards. They helped shape rules and monitored how countries followed the G20’s financial reform promises³.

These reforms covered many areas. They touched on asset management, OTC derivatives, money market funds, and more. They also included reporting and registration for funds and investment advisers, and managing liquidity risks³.

“The ten years following the 2008 Global Financial Crisis saw a significant increase in financial regulatory reforms. New rules and regulations were implemented across a broad range of areas, touching asset management, over-the-counter (OTC) derivatives, money market funds, reporting and registration requirements for private and alternative funds, mutual fund reporting, investment adviser reporting, liquidity risk management programs, and more.”

Key Post-GFC Financial Regulatory Reforms

After the Global Financial Crisis (GFC), financial regulators made big changes to make the financial sector more stable. These changes affected many parts of finance, like banking, derivatives trading, and how money is managed for consumers.

One big change was making banks and others hold more capital and liquidity. The Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO) set new rules in 2012. These rules aimed to make financial markets more stable⁴.

New rules were also made for trading in over-the-counter (OTC) derivatives. Now, there are rules for central clearing and reporting⁴. Also, rules for money market funds, private funds, mutual funds, and investment advisers were updated. These changes helped manage risks better⁴.

Regulators made sure mutual funds had better plans for managing liquidity and went through stress tests⁴. The Financial Stability Board (FSB) gave advice on how to handle central counterparty (CCP) resolution and resolution planning in 2017⁴. This made these key market players more resilient.

The reforms after the GFC have been wide-ranging, affecting almost every part of finance⁵. They aimed to boost banks’ financial strength, improve stress testing, cut down on risks, and enhance supervisory efforts. They also aimed to improve risk management across the board⁵.

“The scope of the reforms covered in the analysis is limited to modifications or developments in international standards for the regulation of financial entities (banks and CCPs) rather than markets.”⁶

Regulatory Reforms in the Financial Sector: Need to Know About Compliance

After the Global Financial Crisis (GFC), the financial sector has seen big changes to make it more stable. These changes include a new way to look at risks in asset management. After a detailed review, the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) decided to regulate risks at the industry level. This means looking at the whole sector, not just individual companies⁷. The US also followed this approach with guidance from the Financial Stability Oversight Council (FSOC).

Activities-Based Regulation in Asset Management

This new way of regulating asset management aims to tackle risks better. It looks at the risks from certain products and activities, not just at companies. The goal is to make sure the whole asset management industry can handle shocks and protect the financial system⁷. Now, regulators work on finding and reducing risks that could come from asset management, like liquidity issues, too much debt, and certain investment strategies.

Regulatory Reforms in Asset Management	Key Objectives
Activities-Based Regulation	Assess and address financial stability risks at the industry level Focus on products, services, and activities rather than individual firms Ensure resilience of the asset management sector as a whole
Recommendations and Standards	Developed by the FSB and IOSCO Provide guidelines for managing liquidity, leverage, and investment strategies Promote consistency across jurisdictions
Regulatory Oversight	Increased monitoring and supervision by authorities like the FSOC Identification and mitigation of systemic risks in the asset management sector Ensure alignment with broader financial stability objectives

This new approach to regulating asset management marks a big change after the GFC. By focusing on risks from certain products and activities, regulators aim to make the financial system stronger. This helps prevent big problems from happening.

Central Clearing and Derivatives Trading

After the 2008 financial crisis, there was a big push to move over-the-counter (OTC) derivatives trading to a central clearing system⁸. In 2009, the G20 leaders agreed that OTC derivatives should be reported and cleared through central counterparties (CCPs)⁸. They also wanted these trades to happen on exchanges or electronic platforms⁸. This change aimed to make markets more transparent and reduce risks⁸. The Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) have been helping to make these changes happen⁸.

The Dodd-Frank Act in 2010 gave the CFTC control over the $400 trillion swaps market⁸. The Act brought many new rules to the swaps market, which was largely unregulated before⁸. It allowed the CFTC to oversee swap dealers and set rules for them⁸. Swap dealers must meet certain capital and margin requirements to lower financial risks⁸. They also have to follow strict standards to reduce risks and improve market integrity⁸.

Now, standardized derivatives must be traded on regulated exchanges or swap execution facilities⁸. Central clearinghouses for these derivatives aim to reduce financial risks by standing between parties in a trade⁸. These clearinghouses have been reducing risk in futures trading since the late 1800s⁸.

Most of the G20’s OTC derivatives reforms are in place, with some progress since October 2019⁹. In 23 FSB member countries, trade reporting for OTC derivatives and interim capital rules for non-centrally cleared derivatives are active⁹. Platform trading rules are in 13 countries, with one country delaying final rules until 2021⁹. Seventeen countries have set standards for mandatory central clearing⁹.

Some countries have taken steps to deal with the COVID-19 pandemic⁹. These steps include easing reporting rules, boosting supervision, and changing risk frameworks⁹. Almost all countries have strict trade reporting rules⁹. Over 80% of new trades must be reported to trade repositories⁹. The number of countries with rules for mandatory central clearing is still 17⁹. The number of trade repositories in these countries has slightly dropped⁹. Russia has set rules for determining which derivatives must be centrally cleared since Q4 2021⁹.

“The move to central clearinghouses for standardized derivatives is intended to reduce risk in the financial system by acting as a middleman between parties in a transaction and taking on counterparty default risk.”

Data Reporting Requirements Before and After the GFC

The Global Financial Crisis (GFC) of 2008 showed big data gaps. These gaps made it hard for regulators to watch and fix risks. After the GFC, new rules for data reporting were made. These rules give regulators a clearer view of the financial system¹⁰.

Before the GFC, data reporting was not detailed enough. This made it hard for regulators to see all the risks and connections in finance. But the crisis showed the need for more detailed and regular data. This would help regulators watch and act quickly¹¹.

To fix this, new rules for data reporting were set. These include:

Mandatory reporting of over-the-counter (OTC) derivatives trades to trade repositories¹⁰
Expanded reporting on the activities and exposures of big financial institutions¹⁰
More details on securitized products and other complex financial tools¹¹

These rules have greatly helped regulators see and understand risks better. This lets them act early to keep the financial system stable¹⁰. The changes after the GFC have given policymakers the tools to spot and fix big problems¹¹.

The financial world keeps changing. Keeping strong data reporting rules is key to good financial oversight¹⁰. By staying alert and adapting, regulators can use data to protect the global financial system¹¹.

Bolstering Financial Stability Through Reforms

Final Recommendations on Structural Vulnerabilities

After the Global Financial Crisis (GFC), leaders worldwide worked to make the financial system stronger. They aimed to reduce risks. The Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) led this effort. They shared their final advice in 2017 on how to make the asset management sector safer¹².

These 14 recommendations were about what activities and products to watch closely. Eleven of them were for mutual funds¹². IOSCO then made rules for managing liquidity risk and using leverage in mutual funds¹². These steps help make this key financial area more stable¹².

The recommendations focus on the asset management sector, especially mutual funds¹².
IOSCO set rules for managing liquidity risk and using leverage in mutual funds¹².
These changes are part of a bigger plan to make the financial system more stable after the GFC¹².

“Strengthening financial stability and addressing structural vulnerabilities in the asset management sector are critical priorities in the post-GFC regulatory landscape.”

By following these guidelines, policymakers hope to make the financial system more resilient. They want to prevent future crises. The asset management sector is key to this goal. The new rules aim to keep it stable and sustainable for the long term¹².

Regulatory Focus on Consumer Protection

After the Global Financial Crisis (GFC), regulators have made consumer protection a top priority. They want to make sure new products and services don’t harm consumers¹³. They’re looking closely at how banks manage risks with partners and use new tech like AI and DLT¹³.

Regulators plan to update rules on fair lending and open banking in 2024¹³. They want to make sure banks put their customers first as they bring in new products¹³.

Regulatory Initiatives	Key Focus Areas
Dodd–Frank Wall Street Reform and Consumer Protection Act (2010)	Significant changes in consumer protection regulations in the financial sector¹³
Federal Reserve System’s Risk-Focused Supervisory Program (2013)	Tailored examinations based on a bank’s risk profile¹³
Uniform Interagency Consumer Compliance Rating System (2017)	Evaluating an institution’s compliance management system¹³
Consumer Affairs Letters (CA Letters)	Guidance on how examiners scope and examine compliance management systems¹³

Financial institutions need to keep up with these new rules. They should check their past reports, fix any problems, and keep up with updates¹³. By focusing on consumer protection, banks can gain trust, encourage innovation, and keep the financial system healthy¹³.

“The regulatory focus on consumer protection is crucial in ensuring that financial institutions prioritize the interests and well-being of their customers, especially as they introduce innovative products and services.”

Implementation Status and Challenges

The push to put in place post-GFC rules has hit some bumps, especially with the COVID-19 pandemic. This pandemic slowed down the pace of implementing G20 reforms over the last year. The Financial Stability Board (FSB) and standard-setting bodies pushed back some deadlines to help firms and authorities deal with the pandemic. Many countries also took steps to ease the financial sector’s burden during the pandemic.

Delayed Timelines Due to COVID-19

Even with big strides in implementing reforms over nine years¹⁴, the COVID-19 pandemic set back the timeline for finishing these reforms. Deadlines were extended to give firms and authorities more time to tackle the crisis. The Financial Stability Board (FSB) and standard-setting bodies focused on responding to the pandemic first.

Work has been done to create new standards to make the financial system more resilient and less prone to crises¹⁴. Yet, adopting these new rules is still ongoing. Some areas, like setting standards for counterparty credit risk and margin requirements for derivatives, need faster action¹⁴. It’s important to check how these reforms are working to make sure they meet their goals and don’t cause new problems¹⁴.

The financial sector is still struggling to keep up with regulatory changes. Companies find it hard to put these updates into action¹⁴. To overcome these hurdles, it’s key to use cloud-based content platforms, standardize regulatory terms, assign clear roles, assess the impact on business, and use strong tools for managing regulatory changes¹⁴.

Key Regulatory Reforms	Implementation Status	Challenges
Basel III Capital and Liquidity Standards	Substantial progress, but some areas still require expeditious implementation	Balancing financial stability and economic growth, adapting to changing market conditions
Margin Requirements for Non-Cleared Derivatives	Gradual implementation, with some delays due to COVID-19 pandemic	Ensuring consistency and a level playing field across jurisdictions
Central Clearing of Standardized Derivatives	Significant progress, but some areas still require further implementation	Addressing liquidity and operational challenges, managing interconnectedness risks

“Implementing new regulatory standards is crucial for reaping the benefits of global regulatory reforms, emphasizing consistency and a level playing field across jurisdictions.”

The Financial Stability Board (FSB) and standard-setting bodies have been key in pushing forward the implementation status and tackling the challenges of the financial sector¹⁴. Working together internationally has been vital for making progress in financial sector reforms¹⁴. These bodies will keep assessing the reforms to make sure they work as planned and don’t bring new issues¹⁴.

Future Priorities for Regulatory Reforms

The financial sector is facing new challenges that need attention from policymakers and regulators. Recent insights suggest that firms should focus on both new and existing rules to make the most of the 2024 regulatory changes¹⁵.

Now, regulatory priorities like prudential rules and recovery plans are more important than ever¹⁵. Firms must pay attention to consumer impact, ESG, digital assets, and more¹⁵.

With global tensions and economic issues on the rise, financial firms must work closely with regulators to spot potential risks¹⁵. It’s key to have strong governance for digital and AI use to add value and reduce risks¹⁵.

Adapting to the end of LIBOR and using alternative rates
Improving CCP risk management and governance
Clearing up confusion on exchange-traded products (ETPs)
Boosting cybersecurity efforts
Fixing underfunded pension plans
Protecting bondholder rights
Reforming cash investment options
Reducing market fragmentation in Europe and other areas
Keeping the equity trading market stable
Updating the MiFID framework

As priorities change, firms must be flexible, work with regulators, and focus on initiatives that promote resilience and consumer safety¹⁵.

“Developing a digital asset strategy is important to account for cross-jurisdictional differences in maturity within the digital asset ecosystem.”¹⁵

Handling ESG risks requires a company-wide approach, including plans for net-zero targets and sustainability reports¹⁵. Firms should understand how their products affect consumers and adjust to regulatory changes¹⁵.

It’s crucial to fight financial crime and fraud, and technology can help with this¹⁵. Ensuring operational resilience is key for financial firms, focusing on cyber security and risk management¹⁵.

Regulatory Reforms on the Horizon

Future regulatory changes are coming, with big developments ahead. The Federal Reserve, FDIC, and OCC want banks with $100 billion in assets to increase their capital by 16%¹⁶. The biggest banks would see a 19% increase under this plan¹⁶. This rule will start in 2025 and take three years to fully implement¹⁶.

In the UK, the FCA and PRA worked with the industry on new rules in 2023¹⁷. In 2024, the FCA will likely issue new consultations on public offers and trading admissions¹⁷. PIFs will also set aside capital for potential redress liabilities as per the FCA’s proposals¹⁷.

Staying updated and adaptable to these changes is vital for firms to navigate the evolving landscape and find new opportunities¹⁵.

Conclusion

The last ten years have seen big changes in financial regulatory reforms. These changes have made the rules for financial firms much clearer. They’ve worked to make the financial system more stable, transparent, and safe for consumers. Even with big steps forward, implementing these changes has been tough, especially during the COVID-19 pandemic¹⁸.

Now, regulators are looking at new risks and priorities. They’re focusing on things like moving away from LIBOR, watching over central clearing counterparties, and how new tech affects consumers¹⁹. It’s important to keep the rules up to date to keep the global financial system strong and stable.

Financial institutions are facing a changing world of rules. Banks and other financial groups need to have strong policies and train their staff often. They should also invest in new tech to stay in line with the law and reduce risks²⁰. Having a strong focus on following the rules, working together, and being ready for emergencies is key. This helps financial institutions stay strong and adjust to new rules²⁰.

FAQ

What are the key areas of financial regulatory reforms implemented in the decade following the Global Financial Crisis of 2008?

After the 2008 crisis, key reforms focused on better capital requirements and liquidity rules. They also covered market structure, transparency, risk management, and corporate governance. The aim was to make financial systems stronger and lower the risk of future crises.

How did the post-GFC regulatory reforms impact the asset management sector?

The reforms changed how asset managers are checked for financial stability risks. They now look at the products and activities, not just the firms. This approach helps prevent big risks in the asset management sector.

What were the key changes made to the regulation of over-the-counter (OTC) derivatives trading?

OTC derivatives trading now has stricter rules. It must be cleared through central systems, reported to trade repositories, and traded on exchanges or electronic platforms. This makes trading safer and more transparent.

What were some of the new data reporting requirements introduced as part of the post-GFC regulatory reforms?

New reporting rules give regulators a clearer view of financial risks. They help in monitoring and managing risks better. This makes the financial system more stable.

How did the COVID-19 pandemic impact the implementation of the post-GFC regulatory reforms?

The pandemic slowed down the progress of G20 reforms. The Financial Stability Board and standard-setting bodies gave extra time to firms and authorities. This was to help them deal with the COVID-19 crisis.

What are some of the future priorities for regulatory reforms in the financial sector?

Future priorities include moving from LIBOR to safer rates and watching over central clearing counterparties (CCPs). They also focus on clearing up confusion about exchange-traded products (ETPs) and tackling cybersecurity issues.