Back to the future: the impact of technology on regulation and the new emphasis on conduct and governance
The SAIFM’s annual regulatory summit provides the financial markets and financial services sector with an annual update on the latest regulatory developments, some of which are still in the developmental stage. Awareness of proposed regulatory initiatives however, are essential for practitioners to prepare for meaningful dialogue with regulators. The 6th Regulatory Summit will not disappoint and cutting-edge discussions will take place with regulators and colleagues.
The impact of technological innovations on the financial services sectors are increasingly attracting the attention of regulators across the globe – also in South Africa. The International Organisation of Securities Commissions (IOSCO) released a consultation paper on 28 May 2019 which identifies risks and regulatory considerations associated with the trading of crypto assets on crypto asset trading platforms. Increasingly a coherent international approach to the regulation of crypto assets will be followed. South Africa has been at the forefront of developments with regard to the regulation of Fintech and crypto assets by the establishment of a Financial Technology (Fintech) division at the SA Reserve Bank that focuses on crypto currencies, innovation facilitators (innovation hubs, regulatory sandboxes and accelerators) and distributed ledger (blockchain) technology pertaining to wholesale payment system functions.
Rapid technological advances in the regulatory field have served to facilitate swifter and more effective compliance with regulatory requirements. Given the emphasis on data accumulation, dissemination and reporting by regulators, the scope for technological solutions can only increase. The extent to which this is happening globally and in South Africa, will be explored.
The South African capital market is going through an unprecedented phase of regulatory developments to ensure compliance with international requirements. Some of the initiatives are still in the consultation phase. An update on the most relevant issues for financial market practitioners will be provided, including Securities Financing Transactions (draft conduct standards); the proposed regulatory regime for financial benchmarks; the proposed short-selling reporting framework; the equivalence framework for external market infrastructures; a standard on a recovery and resolution plan; margin requirements for non-centrally cleared derivative transactions; exemptions of external market infrastructures; reporting obligations to a trade repository; and the code of conduct for OTC derivatives providers.
Another cutting-edge issue which has been gaining prominence – globally as well as locally – is the importance of sustainability in the financial markets. IOSCO released a statement in January 2019 regarding the desirability of disclosing Environmental, Social and Governance matters (ESG) as such matters could have a material short-term and long-term impact on the risks and returns for investors and on their voting decisions. Investors are increasingly demanding reliable information on ESG matters as part of their long-term investment strategies. Securities regulators have an important role to play to ensure transparency with regard to ESG matters, as investors need such information to make informed investment decisions. It is also important that debt and instrument issuers disclose their governance and oversight of material ESG-related risks. In South Africa the JSE offers the FTSE/JSE Responsible Investment Index and the FTSE/JSE Responsible Investment Top 30 Index. Ratings are conferred by FTSE Russell, the JSE’s index partner, which assesses qualifying companies in respect of ESG issues. This afford investors the opportunity to gain an understanding of companies’ ESG exposures and their management thereof.
Governance and regulatory issues are also important for rating agencies in the process of forming an opinion about the credit worthiness and thus sustainability of a particular issuer or debt issue. Rating agencies provide various ratings products such as credit ratings on issuers of debt and on individual debt issues to the market. An opinion is thus formulated on the general credit worthiness of a particular issuer, debt issue or other financial obligation, based on relevant risk factors and by assigning a rating based on a common framework. The extent to which regulatory and governance factors, which could form part of the business or financial risk profile, could influence the outcome of a rating assigned, will be discussed.
Governance and risk management is increasingly in the spotlight due to the potential impact that failures in these crucial areas may have on the integrity and stability of the financial markets. The summit will conclude by looking at the need to strengthen governance and develop clear frameworks to identify, measure, manage and disclose risks – particularly with regard to the financial markets.
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