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An alternative view may be that the regulatory tsunami is slowly turning into a more ordinary wave of regulations. Indeed, the term “shadow”, although not very flattering for the industry, would suggest that regulators have addressed the body casting the shadow, as identified in the G20 regulatory agenda.
As body and shadow are two sides of a coin, the bad news is that this regulatory topic may add several additional hits to already well-regulated entities or activities. Recently, the FSB (Financial Stability Board, a joint committee between securities regulators, IOSCO, and banking regulators, BCBS) has issued several consultation papers on its forward strategy to tame (or at least frame) what they consider being in the shadow.
We see major problems potentially arising in the REPO, Securities lending and Re-hypothecation area, where the FSB seeks to impose limits on collateral used, limits in the shape of hair cuts to the size of transactions as well as limits in the number of re-use, in addition to forcing trade to be reported to authorities (fortunately, to already created Trade Repositories). Beyond the fact that it may be entirely in contradiction with certain civil law rights (notably property) and that in the vast majority of cases banks (subject to Basel/CRD regulation) will be one counterpart, this approach would be introduced at a particularly inopportune time, just before Dodd-Frank, EMIR and CRD/CRR or Basel III regulations enter into force. At the moment, very few people, if any, have a view on the collateral and securities or cash resources that these projects will require.
According to the agenda at FSB level, it will lead to a regulatory approach to be formalised by the next G20 summit in September 2013, followed by regulatory projects in each Member State/region. It is to be feared that some of these regions may want to be first of the class and start earlier. The EU Commission has said that it will issue its general approach by the end of the year 2012 and rumours seem to confirm that MMFs will at least be part of a regulatory package in the early part of 2013. In terms of timing, the regulatory agenda appears relatively long-term, but in the EU there will be elections in June 2014, which may mean either a rush to draft all measures before mid-2013 to finalise them in due time or no action well into 2014. Recent experiences suggest the former.