Boring but important – regulatory developments in Switzerland
The financial crisis of 2008/2009 triggered a wave of new regulations in Switzerland. Besides client protection and stability for the overall economic system, reform projects are a response to international regulation and aim, in particular, to harmonize Swiss regulations in line with new EU regulations. One such example is the Markets in Financial Instruments Directive II (MiFID II) and its regulation (MiFIR; both to come into effect on 1 January 2018), as well as the European Market Infrastructure Regulation (EMIR), to preserve access for Swiss financial institutions to the European financial market. One of the main pieces of the new Swiss banking regulation is the Financial Market Infrastructure Act (FinMIA), which combines provisions that were dispersed across various federal acts, adjusting them in line with changed market requirements.
Another important regulatory development is the Securities Financing Transactions Regulation (SFTR), which comes into effect in the first quarter of 2019. With SFTR, the European Commission wants to increase the transparency of the Securities Financing Transactions market, which is currently not covered by other regulation. This regulation will require companies to report their Securities Financing Transactions to an approved trade repository.
Systemically important financial institutions can put entire economies at risk in a crisis. Recovery and resolution plans (RRPs) have been enhanced since the 2008 financial crisis with the goal of ensuring that systemically important institutions, such as banks and financial market infrastructure providers, can be stabilized and restructured (recovery), for example in the fields of payment transactions and securities lending. Only in the worst-case scenarios will resolution plans enter into force, where such institutions are removed from the marketplace in an orderly fashion. RRPs are currently high up on the international regulatory agenda and have become firmly anchored in Swiss law. A special feature for Switzerland is that RRPs must include an emergency plan to ensure that a systemically important bank (SIB) can, at all times and without interruption, maintain functions that are essential to the Swiss economy and cannot be replaced at short notice. Switzerland was a pioneer with this particular feature, which is an integral part of all RRPs today.
The consequences of tightened regulation – opportunities for financial market infrastructure providers
Fundamental changes in the financial sector are reflected in the business forecasts of banks. The regulatory environment puts additional pressure on banks’ mid- and back-office processes, particularly in the areas of risk management, reporting, and regulatory compliance. Banks are currently working under severe budget constraints, with a large portion of their technology resources focused on addressing regulatory and compliance issues. Significant achievements in core process efficiency and improvement are difficult to come by.
As a consequence, banks are increasingly willing to make use of third-party technical solutions in order to reduce their long-term costs. This is where financial market infrastructure providers such as SIX come in. SIX, for example, has transformed (and continues to transform) itself from a process-oriented organization to a service-oriented one-stop shop for regulatory, tax and risk compliance needs. New services from SIX help banks cut back on operational complexity, which results in sustainably reduced operational risks and costs. Additionally, these services allow banks to fully concentrate on their core business activities and strengths.
As of 1 January 2018, the PRIIPs (Packaged Retail & Insurance-based Investment Products) regulation requires product manufacturers to create, maintain and distribute a large volume of Key Information Documents (KIDs) in plain language for retail investors living in the European Economic Area to easily understand and compare products. SIX has developed a fully automated regulatory document service, which generates legally compliant KIDs on demand with automatic updating and distribution throughout the entire lifecycle of an investment product. This service includes the complex calculations needed to produce summary risk indicators and performance scenarios.
In the area of tax services, a big challenge is the handling of the US Foreign Account Tax Compliance Act (FATCA). This US law puts the responsibility on foreign financial institutions (FFIs) and other financial intermediaries to ensure full FATCA compliance by US citizens and residents in order to prevent tax evasion through the use of offshore accounts. SIX provides FFIs with critical data elements required for their FATCA compliance. It also offers numerous services, such as tax reporting, tax vouchers, tax refunds and tax reclaims, for a multitude of jurisdictions.