REGULATORY DEVELOPMENTS IN ASIA PACIFIC Volume 2, 2021

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CONTENTS REGULATORY OUTLOOK .................................................................................................................................................... 3 Update on Regulatory Landscape

WATCHING BRIEF ................................................................................................................................................................... 5 Upcoming Regulatory Changes

AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY SUPERANNUATION DATA TRANSFORMATION 7 Regulatory Overview and Update

PORTFOLIO HOLDINGS DISCLOSURE ............................................................................................................................ 9 Regulatory Update

YOUR FUTURE, YOUR SUPER ........................................................................................................................................... 10 Regulatory Overview and Update

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISION DESIGN AND DISTRIBUTION ....................... 11 Regulatory Update

CORPORATE COLLECTIVE INVESTMENT VEHICLES................................................................................................. 12 Regulatory and Tax Frameworks

DETAILED RULES OF IMPLEMENTING CROSS-BOUNDARY WEALTH MANAGEMENT PILOT SCHEME IN THE GUANGDONG-HONG KONG-MACAO GREATER BAY AREA ........................................................................ 13 Recent Developments

SECURITIES AND FUTURES COMMISSION OF HONG KONG GRANT SCHEME FOR OPEN-ENDED FUND COMPANIES AND REAL ESTATE INVESTMENT TRUSTS .......................................................................................... 14 Recent Developments

HONG KONG OVER-THE-COUNTER DERIVATIVE REGULATORY REGIME ........................................................ 15 Regulatory Overview

SINGAPORE FUNDS INDUSTRY GROUP ....................................................................................................................... 16 Regulatory Overview

MONETARY AUTHORITY OF SINGAPORE OVER-THE-COUNTER DERIVATIVES REPORTING RULES...... 17 Regulatory Overview

TRANSITION AWAY FROM LONDON INTERBANK OFFERED RATE ..................................................................... 18 Regulatory Update

This newsletter outlines Northern Trust’s thoughts about recent regulatory changes, and how they might affect your programmes. It summarises recent developments impacting the financial industry and how Northern Trust will support clients through this period. For more information, contact your Northern Trust representative or visit northerntrust.com.

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REGULATORY OUTLOOK Northern Trust analyses the impacts regulatory change has on the financial industry. As we assess these changes, some industry and regulatory initiatives have gained our attention.

Digital assets are growing in popularity as distributed ledger technologies (DLT) become more prevalent. Earlier this year, the first digital over-the-counter SWAP was successfully executed between DZ Bank and BayernLB. The transaction was completed using DLT, with Eurex Clearing. Central banks are leveraging DLT to reduce market exposure, cost reduction, and overall efficiencies. Here is a quick snapshot of the current inflight central bank digital currency programmes that are moving forward:

• China • The Bahamas • Eastern Caribbean Currency Union • Marshall Islands

• Sweden

In the U.S., the House of Representatives has introduced the Digital Asset Market Structure and Investor Protection Act on 29 June 2021. The Act will create a regulatory regime for digital assets, which will define the type of cryptocurrencies that would be considered assets; that can be treated as commodities; and increased tax data collecting requirements. The Treasury department would have the authority to veto the creation of stablecoins; define rules for decentralised finance; and create a crypto exchange. There may be some opposition from the Republican party. However, this reflects the growing need for governance around these unregulated products.

On 16 July 2021, the Securities and Futures Commission (SFC) in Hong Kong issued a warning statement that cryptocurrency exchanges, such as Binance, are offering trading services to Hong Kong investors without their platforms being registered to conduct “regulated activity”. SFC warns that Stock Tokens are securities and the marketing or distribution of tokens constitute a “regulated activity”. Investors assume the risk when using digital tokens that are unregistered and could result in a loss to the investor.

This edition of the newsletter will focus on key regulatory initiatives that impact the fund industry and highlight key updates from Australia, China, Hong Kong and Singapore.

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With the acceleration of digitalisation, cybersecurity has been at the forefront of industry concerns. Since the pandemic, there has been an increase in attacks, and the shadowy actors leveraging ransomware have been particularly active. In Asia, we have seen increased attention in regulating cyber security:

• Australia issued the Security Legislation Amendment (Critical Infrastructure) Bill 2020, which would allow the federal government to impose obligations on private and public enterprise.

• China’s Civil Code became effective in January of this year. They recently passed the Data Security Law that will become effective on 1 September 2021 and the newly proposed Personal Information Protection Law will have widespread implications that address cross-border data transfers, compliance requirements on data intermediary services, and create independent oversight bodies to govern how personal data is being used in accordance to the law.

• Hong Kong Monetary Authority (HKMA) launched the Cybersecurity Fortification Initiative 2.0 that includes enhanced cybersecurity incident response, enhancements for thereat intelligence, and attack simulations.

• Japan released a report on IT and cybersecurity highlighting improvements that need to be made.

• New Zealand implemented the mandatory breach reporting in December 2020.

• The Monetary Authority of Singapore (MAS) released enhanced guidelines on technology risk management and business continuity requirements.

Environmental, Social, and Governance (ESG) reporting has gained widespread traction. SFC in Hong Kong published a new guidance for ESG unit trust and mutual funds. It revises its 2019 guidance and requires firms to disclose:

• ESG fund shall accurately reflect the fund’s primary investments and/or strategy;

• Disclosure of the ESG focus, ESG investment strategy, asset allocation, any reference benchmark and related risk;

• SFC requires that an ESG fund should conduct periodic assessment, at least annually, to assess how the fund has attained its ESG focus; and

• Fund managers are reminded to regularly monitor and evaluate the underlying investments to ensure the ESG funds continue to meet the stated ESG focus and requirements.

The new disclosures will take effect on 1 January 2022.

We have outlined key regulatory developments in the following Watch Brief and articles that will assist you with the evolving regulatory frameworks across the Asia-Pacific region. If you should have any questions, contact your relationship manager.

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WATCHING BRIEF AUSTRALIA

Financial Accountability Regime:

Treasury released a consultation on the Financial Accountability Regime in July focusing on recommendation from the Financial Services Royal Commission which recommended the extension of the Banking Executive Accountability Regime to all Australian Prudential Regulation Authority (APRA) regulated entities.

APRA guidance on remuneration:

During April 2021, APRA released for consultation a draft prudential practice guide on remuneration, which sets out principles and better practice examples to assist entities in meeting the requirements proposed in the new prudential standard, “CPS 511 Remuneration” (CPS 511). The consultation closed on 23 July 2021.

Government consults on greater transparency of proxy advice:

The government has moved to increase the transparency and accountability of proxy advice that is provided to a range of institutional investors. There is currently limited regulation on how proxy advisers undertake research, formulate and disclose voting recommendations on resolutions at company meetings. The high influence of proxy advisers and market domination by four firms has been highlighted as part of the government’s rationale behind seeking feedback on the adequacy of the current regulatory regime and potential changes to the way in which proxy advisers are regulated and the need for additional transparency.

Feedback is currently being sought from stakeholders on options that can:

• Ensure independence between superannuation funds and proxy advice; • Facilitate engagement between companies and proxy advisers; and • Require suitable licensing for the provision of proxy advice.

Australian Securities and Investments Commission breach reporting reforms:

New breach reporting obligations for Australian financial services and credit licensees come into effect on 1 October 2021. The new obligations will require Australian Financial Services licensees to self-report breaches within 30 days of becoming aware a ‘reportable situation’ has materialised.

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The new regime widens the scope of what must be reported to the Australian Securities and Investments Commission (ASIC). Entities and licensees will be required to report non-compliance or breaches of a targeted set of ‘reportable situations’. A reportable situation occurs when:

1. There is a significant breach of a 'core obligation' (s912D(1)(a) of the Corporations Act or s50A(1)(a) of the National Credit Act), or

2. There is conduct that constitutes gross negligence or serious fraud (s912D(2) of the Corporations Act or s50A(2) of the National Credit Act).

ASIC has provided examples of breaches that it may deem to be ‘significant’ and those that it may not deem to be significant.

ASIC consults on crypto assets as underlying assets for exchange-traded products (ETPs) and other investment products

In June 2021, ASIC sought feedback on proposals about ETPs and other investment products that provide investors with exposure to crypto assets.

ASIC is seeking to identify good practices for market operators and product issuers as it deems crypto assets to have unique features and risks. The consultation paper aims to set the ground rules for crypto asset ETPs in Australia, with a focus on pricing, custody, risk management and disclosure practices. Given the increasing global attention in crypto asset ETPs, fast evolving crypto asset market and local demand for domestic crypto-related ETPs, ASIC is engaging in a wide consultation process to collect stakeholder feedback.

HONG KONG

Consultation on a proposed licensing regime for virtual asset services providers:

The Hong Kong Government released the conclusions of its public consultation on a proposed licensing regime for virtual asset services providers (VASPs) on 21 May 2021 (“Consultation Conclusions”).

The proposal to introduce a licensing regime for VASPs (“Proposal”) formed part of the Financial Services and Treasury Bureau’s public consultation on enhancing anti-money laundering and counter-terrorist financing regulation in Hong Kong, which closed on 31 January 2021. The Proposal was prepared in line with the Recommendations of the Financial Action Task Force on VASPs.

HKMA announces guideline on the Green and Sustainable Finance Grant Scheme:

The Green and Sustainable Finance Grant Scheme (GSF Grant Scheme) will provide subsidy for eligible bond issuers and loan borrowers to cover their expenses on bond issuance and external review services. It took effect on 10 May 2021 and is valid for three years. The guideline on the GSF Grant Scheme is set out in this link.

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SINGAPORE

Guide for climate-related disclosures and framework for green trade finance:

On 19 May 2021, a financial industry taskforce convened by MAS launched several initiatives to accelerate green finance in Singapore through improving disclosures and fostering green solutions. The Green Finance Industry Taskforce issued a detailed implementation guide for climate-related disclosures by financial institutions; a framework to help banks assess eligible green trade finance transactions; and a whitepaper on scaling green finance in the real-estate, infrastructure, fund management and transition sectors.

AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY SUPERANNUATION DATA TRANSFORMATION In November 2019, APRA announced its intention to commence a data transformation project aimed at improving the breadth, depth and quality of the superannuation data collection process.

The aim is to improve the comparability and consistency of reported data, with the project split into three distinct phases.

• Phase 1 (Breadth) will address the most urgent gaps in APRA’s data collection, particularly for choice products and investment options.

• Phase 2 (Depth) will increase the granularity of the entire collection, taking advantage of APRA’s new Data Collection Solution and enhanced data analytic capabilities.

• Phase 3 (Quality) will assess the quality and consistency of the additional data reported during Phases 1 and 2, and review and address any implementation issues.

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UPDATE

During March 2021, APRA released its’ response to the consultation on reporting requirements in relation to the first phase of the project, as well as final associated reporting standards.

Whilst the commencement date for submission of the new forms remains for reporting periods ending on or after 30 June 2021, a number of concessions were made to the initial proposals. These include:

• An extension to the submission date for the first submission to 30 September 2021. All new data collections will be via the new APRA Connect portal.

• A two-year transition period for the reporting on asset class characteristics required for ‘SRS 550.0 Asset Allocation’, with selected elements requiring inclusion from June 2021 and the remainder from June 2023.

• A one-year delay to the reporting of the RSE level components (investments, currency exposure and derivatives) of the Asset Allocation standard.

• Reduced initial coverage of products for reporting on Performance, Asset Allocation and Fees and Costs.

APRA has acknowledged the challenges faced by industry participants and has adopted a consultative approach to in an attempt to resolve these issues. It has released responses to various ‘Frequently Asked Questions’, as well as highlighting the need for data to be prepared on a “best endeavours” basis during the initial submissions.

NORTHERN TRUST ACTIONS

Northern Trust is actively involved in discussions with the Australian Custodial Services Association in the attempt to ensure that changes to reporting requirements are introduced in a measured fashion. We are currently working with clients to ensure that our reporting suite evolves to meet the revised requirements ahead of the first submission date.

Northern Trust Updates

Northern Trust reviewed the regulatory requirements for firms under the Investment Firm Directive and Regulation and understand that the majority of the burden of implementation will fall on investment managers. However, there are a number of data elements which may be required to support the classification determination or K-factor production. If you require our support, or should you wish to discuss this topic in further detail, please contact your Northern Trust representative.

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PORTFOLIO HOLDINGS DISCLOSURE The Portfolio Holdings Disclosure (PHD) requirements will apply to most superannuation trustees, who will need to provide information about fund holdings on the fund website within 90 days of the reporting period.

The ASIC has previously announced a deferral of the commencement date to 31 December 2021 to enable time for regulations to be finalised.

UPDATE

During April 2021, Treasury released an exposure draft focusing on “Improving Accountability and Members Outcomes” as part of the Your Future, Your Super (YFYS) regulations. This included proposed formats for the disclosure of information as part of the PHD requirements.

The proposals include two options that could be adopted, with feedback requested around the costs associated with the respective formats.

The first option requires uniform information to be disclosed across each asset class, and includes the name of the asset, security identifier, as well as number of units held, market value and weighting.

A more detailed second option is also proposed, which would require the disclosure of additional tailored information based on the particular asset class. This includes the need to include counterparty and ratings data for derivative positions.

At the beginning of August, as part of the finalisation of the YFYS regulations, it was announced that the PHD regulations are be expected to be finalised during the coming weeks following further industry consultation.

NORTHERN TRUST ACTIONS

Northern Trust is actively supporting clients with reporting obligations as they evolve via the provision of a standard reporting solution to further facilitate customisation based on individual client needs. This product will be further refined based on the finalisation of the required reporting format.

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YOUR FUTURE, YOUR SUPER INTRODUCTION

The YFYS package of reforms were announced by the Australian Federal Government as part of the Budget in October 2020, with the aim of reducing the number of underperforming superannuation funds and in lowering the costs to members.

The focus of measures centres around four key elements, which seek to address some of the recommendations from the Productivity Commission review and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry:

• Your superannuation follows you. Through the ‘stapling’ of employees to a single superannuation account, the aim is to reduce the number of accounts and costs incurred by members.

• Empowering members. The Australian Tax Office has developed a new online “YourSuper” comparison tool which enables members to compare and select their own MySuper products by facilitating the comparison of fund performance and fees.

• Holding funds accountable for underperformance. APRA has been tasked with imposing an annual performance test on funds. Upon the failure of consecutive tests, underperforming funds will be prevented from accepting new members until a further annual test highlights that the issue has been addressed. Funds whose products fail the benchmarking tests will be required to disclose this fact to members.

• Increased accountability and transparency. Additional measures will be introduced to ensure that trustees are acting in the “best financial interest” of fund members and are able to demonstrate this.

As a result of industry feedback during the consultation period, a number of changes were made to the initial proposals.

These included the incorporation of administration fees as well as revisions to the various indices in relation to unlisted infrastructure and property assets initially proposed as part of the performance measures. In addition, the Government withdrew its ability it to intervene in the investment or expenditure of superfunds in various situations.

The YFYS reforms were finalised by the Australian Government on 5 August 2021, following the passing of the Treasury Laws Amendment (Your Future, Your Super) Act 2021 by Parliament in June.

Changes came into effect from 1 July 2021 for MySuper products (excluding stapling, which is due to commence on 1 November) and will become effective from 1 July 2022 for various other products.

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AUSTRALIAN SECURITIES AND INVESTMENTS COMMISION DESIGN AND DISTRIBUTION The Design and Distribution Obligations (DDO) regime introduces obligations for product issuers and distributors in relation to financial products. The obligations require issuers and distributors of financial products to have an adequate product governance framework in place. This is to ensure that financial products are targeted at the right market and that products are designed and distributed in a manner that improves customer outcomes. Products captured under DDO are mainly those that necessitate disclosure to investors and require a Product Disclosure Statement. DDO is the Australian response to the international regulatory development and has overlaps with MiFID II. However, compliance with MiFID II does not guarantee DDO compliance, as there are some areas where each regime is more extensive and prescriptive than the other.

Broadly, an issuer of a financial product under the DDO regime is a person who must prepare a prospectus. The DDO is effective 5 October 2021.

UPDATE

Treasury proposes a range of amendments to the DDO in the build-up to the October effective date of the new regime. The amendments were made in response to some industry feedback and have made clarifications around the product types (margin loans to corporates, foreign cash that is immediately settled, no cash payment facilities) that are exempt from the DDO obligations. The amendments also apply existing retail and investor definitions to the DDO governance framework.

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CORPORATE COLLECTIVE INVESTMENT VEHICLES On 28 August 2021, Treasury released legislation for public consultation to support amendments to the tax and regulatory framework for the Corporate Collective Investment Vehicle (CCIV) regime. This follows on from, and is in response to the February 2019 release of the full exposure draft package of the regulatory and tax law which was subject to public consultation.

The CCIV forms part of the government’s plan to increase the competitiveness of Australia’s managed fund industry and has committed to establishing a commercially viable regime for CCIVs from 1 July 2022.

The CCIV will allow fund managers to offer investment products using vehicles that are more comparable to overseas vehicles with the intent to attracting more international investors.

The new draft legislation includes:

• a new Chapter 8B in the Corporations Act 2001 containing the core provisions outlining the establishment of CCIVs and their operational and regulatory requirements;

• amendments to other legislation to support the implementation of CCIVs (such as amendments to the Australian Securities and Investments Commission Act 2001 and the Personal Property Securities Act 2009); and

• the tax legislation which ensures that the tax treatment of CCIVs aligns with the existing treatment of attribution managed investment trusts, providing investors with the benefits of flow-through taxation.

While the core regulatory framework and basic operational requirements for CCIVs set out in the 2019 exposure draft package have been maintained, some changes have been made in response to the related consultation process. These changes include:

• providing greater flexibility in the CCIV regime for the use of custodian and depositary services;

• facilitating the listing of a retail CCIV with one sub-fund on a prescribed financial market in Australia; and

• facilitation of cross-investment between different sub-funds of a CCIV.

In addition, the draft tax framework for CCIVs has also been simplified to ensure the attribution flow-through taxation arrangements applying to attribution managed investment trusts is available to CCIVs.

The consultation is open until 24 September 2021.

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DETAILED RULES OF IMPLEMENTING CROSS-BOUNDARY WEALTH MANAGEMENT PILOT SCHEME IN THE GUANGDONG-HONG KONG-MACAO GREATER BAY AREA

CHINA

On 6 May 2021, the People’s Bank of China, the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission jointly issued a consultation on ‘Detailed Rules of Implementing Cross-boundary Wealth Management Connect (WMC) Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area’.

The regulators set net cash flows of 150 million RMB for transactions under the pilot scheme in northbound or southbound direction while the individual investment quota was set at 1 million RMB. Cross-boundary remittance under the pilot scheme will be conducted in a closed-loop system through the bundling of designated remittance and investment accounts to ensure that the relevant funds will only be used to invest in eligible investment products. The draft rules stipulate the qualifications or requirements for products, investors and banks that join the pilot scheme.

Account opening arrangements have been a major concern for market participants, because of restrictions that may be imposed from time to time on travel between the Mainland and Hong Kong due to COVID-19. It is worth noting that the Consultation has helpfully provided that the designated investment accounts may be opened remotely, i.e. Mainland banks may verify the identity of, and witness the execution of client agreements for Mainland China investors in order for them to invest through the southbound WMC. This additional flexibility means that Mainland China investors are no longer required to travel to Hong Kong or Macao in person to open an account initially, which could accelerate the launch of WMC.

For more information, please click here (Chinese only).

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SECURITIES AND FUTURES COMMISSION OF HONG KONG GRANT SCHEME FOR OPEN-ENDED FUND COMPANIES AND REAL ESTATE INVESTMENT TRUSTS

HONG KONG

On 9 May 2021, the SFC announced details of a grant scheme funded by the Government of the Hong Kong Special Administrative Region to provide subsidies for qualified open-ended fund companies (OFCs) and real estate investment trusts to set up in Hong Kong.

Under the OFC Grant Scheme, an investment manager will receive 70% of the eligible expenses in connection with each incorporation of an OFC or each re-domicile of an OFC to Hong Kong. Each OFC subsidy is capped at HK$1 million. Note that if the OFC commences winding-up proceedings or applies for termination of registration within two years from the date of its incorporation or re-domiciliation, the Hong Kong Government may claw back the subsidy. Each investment manager is eligible to receive an OFC subsidy for a maximum of three OFCs. Under this scheme, the following expenses should be eligible:

• Fees charged by law firms in respect of the preparation of the articles of association of the OFC, a subscription agreement for investors to subscribe for shares of the OFC, an investment management agreement between the OFC and the investment manager and a private placement memorandum or other offering document in respect of the offering of the shares of the OFC

• Fees charged by law firms in respect of the provision of OFC formation related tax advice.

The grant scheme accepts applications from 10 May 2021 until 9 May 2024. Details, including the eligibility criteria and application process, were set out in a press release issued by the SFC on 10 May 2021.

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HONG KONG OVER-THE-COUNTER DERIVATIVE REGULATORY REGIME On 15 April 2021, the HKMA and the SFC issued a joint consultation on the annual update to the list of Financial Services Providers (Note 1) under the over-the-counter (OTC) derivatives clearing regime (Note 2). An additional entity is proposed to be included on the list, and an entity to be removed.

Interested parties were invited to submit comments to the HKMA or the SFC by 14 May 2021.

The joint consultation paper can be downloaded from here.

Notes:

1. The list includes entities that meet the following two criteria: a) They belong to a group of companies appearing on the list of global

systemically important banks published by the Financial Stability Board, or on the list of dealer groups which undertook to the OTC Derivatives Supervisors Group to work collaboratively with central counterparties, infrastructure providers and global supervisors to continue to make structural improvements to the global OTC derivatives markets; and

b) They are members of the largest central counterparties offering clearing for interest rate swaps in the US, Europe, Japan and Hong Kong.

2. The current clearing regime covers transactions between major dealers where at least one of them is a prescribed person (i.e. an authorised institution, an approved money broker or a licensed corporation). Transactions in certain standardised interest rate swaps in G4 currencies (i.e. US Dollar, Euro, British Pound and Japanese Yen) and Hong Kong Dollar between a prescribed person which has reached the prescribed clearing threshold and another major dealer which is not a prescribed person also have to be centrally cleared. To that end, the concept of Financial Services Providers was introduced to identify such major dealers outside of Hong Kong.

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SINGAPORE FUNDS INDUSTRY GROUP

SINGAPORE

A new partnership between MAS and the private sector was announced on 21 April 2021 to strengthen Singapore’s value proposition as a leading full-service asset management and fund domiciliation hub.

The Singapore Funds Industry Group (SFIG) brings together all the key players across the entire asset management value chain, including not just fund managers but also service providers, such as lawyers, tax advisors, fund administrators and directors. These service providers work closely with fund managers to support a fund’s operations throughout its life cycle in areas such as fund structuring and set-up, fund administration, regulatory reporting, tax advisory, and fiduciary oversight.

The SFIG identifies emerging industry trends and formulate strategies to develop the asset management ecosystem. The SFIG will comprise four working groups (WGs).

• The Infrastructure and Innovation WG monitors market developments and spur innovation to transform the funds servicing value chain. The WG develops industry-wide utility solutions to achieve greater economies of scale and efficiencies, such as fund data and settlement platforms which will collect and harness insights through data analytics, streamline manual processes and automate reporting.

• The Policy WG provides advice and recommend improvements to regulatory, legal and tax frameworks, to better serve the needs of fund managers and investors. The WG will review and recommend enhancements to the current suite of fund structures and consider broadening the range of fund structuring options in Singapore.

• The Capabilities and Training WG focuses on building a deep pool of fund specialists and directors in areas such as product development, administration, distribution and fund oversight and governance. The WG will collaborate with tertiary institutions, professional bodies and training providers to upskill professional standards and build deep capabilities for these professionals, including in new and emerging areas such as green finance and ESG solutions.

• The Promotion and Advocacy WG raises the global profile of Singapore as a leading asset management and fund domiciliation hub, through outreach and engagements with Singapore-based and global asset managers, asset owners and service providers

More information on SFIG can be found on its website at www.singaporefunds.sg/.

Market Highlight

The Promotion and Advocacy Working Group raises the global profile of Singapore as a leading asset management and fund domiciliation hub.

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MONETARY AUTHORITY OF SINGAPORE OVER-THE-COUNTER DERIVATIVES REPORTING RULES On 5 July 2021, MAS issued a new consultation paper seeking views on proposed amendments to its reporting rules for OTC derivatives.

The proposed amendments aim to facilitate the aggregation of OTC derivatives data through standardisation and harmonisation of data elements by incorporating the Committee on Payments and Market Infrastructures and International Organisation of Securities Commissions’ technical guidance on the harmonisation of the unique transaction identifier (UTI), unique product identifier (UPI) and other critical data elements (CDE).

The consultation sets out MAS’s proposed approach in relation to UTI generation and the proposed reportable data fields, including UTI, UPI and CDE.

With regard to the UTI, MAS proposes to amend the rules to require reporting entities to report a UTI which is uniquely assigned to each OTC derivatives contract. In addition, when a UTI is allocated to an OTC derivatives contract, the UTI should remain as the identifier throughout the life of the contract.

To avoid the risk of multiple UTIs being generated for the same reportable OTC derivatives contract, only one entity should be responsible for generating the UTI for a reportable OTC derivatives contract.

For OTC derivatives contracts that are centrally-cleared, MAS proposes that the central counterparty (CCP) or the clearing member that is a party to the contract generates the UTI.

For purely domestic OTC derivatives contracts which are neither centrally-cleared nor centrally-executed, and where only one counterparty to the contract is subject to reporting obligations, MAS proposes that the reporting entity generates the UTI.

Where both counterparties are subject to reporting obligations, MAS proposes a hierarchy where the UTI generator is either the confirmation platform, an entity agreed by the counterparties, the trade repository, or one of the counterparties – in that order.

MAS also proposes to include in the reporting rules additional data fields which will assist it to effectively carry out our duties, as well as to align the definitions of common data fields to the CDE Technical Guidance.

MAS Final Guidelines

MAS intends to finalise the reportable data fields and the UTI Guidelines by Q2 2022 and implement the revised requirements in Q2 2023. The consultation, available here, was open for comment until 3 September 2021.

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Additional guidelines are proposed to be issued on the interpretation of the data fields, adopting international standards on structure and format, where available.

The MAS recognises the benefits of a single standard for OTC derivatives reporting, and intends to adopt the ISO 20022 XML message format, which is in the development stage, for OTC derivatives reporting to the trade repository.

With regard to the UPI, MAS plans to update its guidelines once the global UPI system is available, which is expected no later than Q3 2022.

MAS intends to finalise the reportable data fields and the UTI Guidelines by Q2 2022 and implement the revised requirements in Q2 2023. The consultation, available here, was open for comment until 3 September 2021.

TRANSITION AWAY FROM LONDON INTERBANK OFFERED RATE REMINDER OF KEY DATES

The UK’s Financial Conduct Authority (FCA) announced in March that from 31 December 2021, most of the 35 London Interback Offered Rate (LIBOR) settings would cease to exist or no longer be representative. The exceptions are five USD LIBOR settings that will cease immediately following the LIBOR publication on June 30, 2023. This later date for certain USD LIBOR settings is intended to allow more legacy USD LIBOR-linked contracts to mature on their existing terms. Note that the euro overnight index average will also be discontinued on 3 January 2022 and replaced by the euro short-term rate`

The market has been working to transition away from LIBOR since 2017, with national working groups for the relevant currencies putting forward alternative Risk-Free Rates (RFRs) that seek to address the challenges inherent in LIBOR definition, namely:

• The lack of underlying transactions on which to base the rate; • The use of expert judgement to supplement the rates; and, • The impact of the underlying liquidity dynamics of the markets being

referenced.

With the deadline nearing, the focus on executing the transition is becoming more acute. Speaking before the U.S. House of Representatives, Federal Reserve Vice Chair for Supervision, Randal K. Quarles, said completing the LIBOR transition was one of the regulator’s two highest priorities for 2021 and “the time for comment, speculation, and delay has long since passed”, adding that banks' practices would be examined in accordance with the fact that using LIBOR in new contracts post 31 December 2021 would create safety and soundness risks.

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REGULATORS GLOBALLY PUSHING FOR ACTION

This is a global theme: on 2 June 2021 the Financial Stability Board (FSB) announced that all new use of LIBOR benchmarks should cease as soon as practicable and no later than the timelines set out by home authorities and/or national working groups in the relevant currencies. In particular, even though some USD LIBORs will continue until mid-2023, the US Banking Supervisors have stated that firms should cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by no later than 31 December 2021.

In a supervision newsletter published in May 2021, the European Central Bank re-enforced the message that “it is crucial that banks actively manage these transitions by reducing their legacy contracts and, where necessary, amending the wording of other affected contracts to provide clarity on these changes”.

ASIC, APRA and the Reserve Bank of Australia (RBA), issued a media release in support of the guidance and expectations set by the FSB and the US Banking Supervisors.

The People's Bank of China is urging commercial banks to transition away from LIBOR, and to stop signing new, or extending existing, contracts using LIBOR rates ahead of the year-end cessation date. Japanese financial institutions must “swiftly proceed with the LIBOR transition going forward” to avoid disrupting financial markets.”, said Masayoshi Amamiya, Deputy Governor, Bank of Japan, in an important intervention, given some concern that progress in Japan may be behind that of other markets.

STATE OF READINESS

There has been significant progress in the transition away from LIBOR, driven by a series of industry milestones set by national works and the work of market participants. As of June 2021, >14,000 parties had adhered to the ISDA 2020 IBOR Fallbacks Protocol, with the Bank of England’s Governor, Andrew Bailey, estimating that over 97% of sterling interest rate derivatives now have a robust safety net in place.

In line with the UK RFR Working Group milestones, from the end of March 2021, the majority of new GBP LIBOR business should have ceased, further shifting demand to RFR markets. New sterling floating rate note issuance has almost exclusively referenced SONIA - Sterling Overnight Index Average - for some time. In the sterling swap market, the share of SONIA referencing swaps regularly exceeds the LIBOR equivalent with continued progress since the ‘SONIA-first’ interdealer quoting convention switch last year. Over 50 GBP bonds have actively transitioned from LIBOR to SONIA ahead of cessation, while this leads the way in comparison to other markets there is still a body of work to deal with legacy contracts. Lending has proved more challenging, here market conventions and relevant infrastructure to support the use of overnight rates have been slower to settle and implement. In a letter from UK supervisory authorities to UK banks, the pace of transition in syndicated lending business was highlighted as lagging other segments of the market.

Derivatives Implications

Watch our webinar on the Derivative Implications of LIBOR Transition.

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KEY MILESTONES FOR H2 2021

While much good progress has been made there are still significant milestones through Q3 and Q4 of this year. In the US, the Commodity Futures Trading Commission recommended, as a market best practice, that interdealer brokers change USD linear swap trading conventions from USD LIBOR to Secured Overnight Financing Rate (SOFR) on July 26, 2021. The initiative (referred to as ‘SOFR-First’ in a nod to the UK’s earlier ‘SONIA-First’ switch) is a key enabler of a SOFR term rate. Following the successful completion of that change, the Alternative Reference Rates Committee (ARRC) formally recommended CME Group’s forward looking SOFR term rate and put forward use cases for how best to employ the SOFR Term Rates to successfully transition away from USD LIBOR.

Derivative CCPs have been considering some of the challenges posed by relying on the International Swaps and Derivatives Association (ISDA) Fallbacks for cleared swaps. Consultations with the industry have been progressing and proposals to execute pre-emptive conversions of legacy LIBOR contracts to market standard Overnight Index Swap trades shortly before LIBOR cessation are being developed.

In Singapore, the process to transition from the SGD Swap Offer Rate (SOR) to the Singapore Overnight Rate Average (SORA) has also progressed. Financial institutions will have to cease issuing Singapore Interbank Offered Rate -linked financial products and SOR derivatives by the end of September this year. The extension of USD LIBOR discontinuation means that SOR will end when USD LIBOR ceases in mid-2023, however, as with the US, the priority is to “stop adding legacy SOR exposure as soon as practicable”.

The UK RFR Working Group’s roadmap for 2021 includes an end-Q3 target to “complete active conversion of all legacy GBP LIBOR contracts expiring after end 2021, where viable and, if not viable, ensure robust fallbacks are adopted where possible”.

“TOUGH LEGACY”

Where possible, it is an important caveat in several financial products to address the tough legacy* challenges which have gained increasing attention from supervisors. In the same Congressional hearing referenced earlier, Federal Reserve Vice Chair Quarles, when asked about the issue, indicated there was really no way to address the issue other than a legislative solution.

Legislation has been passed in the EU and in New York, allowing for a fallback rate to be mandated where existing contractual clauses have no or “no-suitable” fallback provision. Federal legislation is being drafted in the US. The FCA in the UK are taking a different approach, gaining new powers to change the underlying methodology of LIBOR and to continue publishing a ‘synthetic LIBOR’ for certain LIBOR settings once the rate loses representatives; consultations are continuing with a final policy not expected until Q4 leaving some uncertainty as to the scope of the provisions.

Tough Legacy* Challenge

“Tough Legacy” refers to LIBOR linked contracts that lack adequate language to deal with LIBOR cessation and may not be possible to amend ahead of cessation.

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The FCA has continually reminded market participants “that any permitted use of synthetic LIBOR would not be a permanent solution, so parties will need to continue their efforts to amend their contracts”. This sentiment can be applied more broadly with a consensus view across supervisors that fallbacks are not an alternative to pre-emptive actions.

CREDIT SENSITIVE RATES

There has been some coverage in the market on credit sensitive benchmarks such as the American Interbank Offered Rate and the Bloomberg Short Term Bank Yield Index rate. These rates behave similarly to LIBOR and so could be easier to implement operationally than daily RFRs that lack a credit sensitive element, do not have term rates available, and need to be compounded or averaged over a period. While some see arguments in favour of the challenger rates, supervisors have been expressing caution and reinforcing recommendations of a switch to robust, alternative RFRs.

Speaking on this topic at ARRC’s SOFR symposium in May, Governor of the Bank of England, Andrew Bailey, reiterated the need for financial firms and borrowers to choose the most robust alternative reference rates, noting concerns in his speech that “substituting Libor for credit sensitive rates that do not address all of its [LIBOR’s] fundamental weaknesses, ….risk much of the good progress that has been made”.

Remarks by Secretary of the Treasury, Janet L. Yellen, echoed this view - ““The decisions made now around the selection of alternative rates will determine whether some of LIBOR’s shortcomings may be replicated through the use of alternative rates that lack sufficient underlying transaction volumes. I am concerned about recent use, and potential future growth in use, of these rates in derivatives. The most critical step in the transition is the move toward truly robust alternative rates, like SOFR, which can mitigate the need for future transitions”. July’s confirmation by the ARRC that it “supports the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity” and that it recognises that the SOFR Term Rate may be appropriate for end-user facing derivatives that hedge cash instruments linked to the Term Rates may help in this regard. However, the ARRC was clear that it “does not support the use of the SOFR Term Rate for the vast majority of the derivatives markets".

NORTHERN TRUST ACTIONS

Northern Trust’s LIBOR Transition Programme remains on track. Relationship Managers and Client Service Teams are reaching out to clients to identify specific actions to be undertaken to execute on the transition. Please contact your Relationship Manager if you have questions or for further information.

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All source documents referenced within this newsletter can be directly accessed

using the hyperlinks contained within the electronic edition of the newsletter. To

access the electronic edition please go to:

www.northerntrust.com/insights-research/regulatory-developments

*Information contained herein is current as of the date appearing in this material

only and is subject to change without notice.

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