Caleb Hawkins, head of our compliance and legal desks, speaks to Andras Bacsfalvi, Chief Compliance Officer at MKB Bank.
Throughout this ‘Compliance During Covid-19’ series, Caleb interviews a number of compliance professionals and experts around the market to get their insight around the market during Covid-19.
In episode 6 Caleb speaks with Andras Bacsfalvi, Chief Compliance Officer at MKB Bank.
The economic crisis created by the coronavirus had a serious adverse effect on the world economy, with major stock indexes suffering huge losses (S&P500: -20%, Eurostoxx 50:- 30%, Nikkei: -26%) as a reaction to market insecurity, while the Volatility Index (VIX) which measures the 30-day forward looking volatility increased by 60 per cent since the outbreak of the virus to an all-time high level.
Increased market turbulence poses a higher risk to money-and capital markets (especially to regulated markets) as the panic linked to the rapid spread of the virus significantly raised the vulnerability of both local and EU financial markets. As this trend was not expected to be reversed in the first weeks, regulators must adopt new rules to strengthen the confidence of the market participants.
The unexpected volatility and the accompanying selling pressure brought a further drop in the stock indexes as well as in the individual share prices that increased the number of short sellings. Sudden price drops devoid of any fundamental basis always erode the market trust in the whole EU financial market, making thereby the economic situation more severe. Now it seems that the financial market situation is better but no one knows for sure what shape the real recovery will have. V? U? W? L? I guess it will be more like K, where the rich become richer and the poor become poorer.
The compliance function plays a crucial role in the institutional realization of prudent operation even after the declaration of the emergency phase, as in carrying out its wide-ranging general tasks, it must demonstrate its ability to adapt dynamically in sudden and dynamic circumstances as well. In order to ensure that operations work properly, it is not enough to simply step in, for example, with the introduction of government measures, but also to develop forward-looking strategies to identify and manage emerging risks.
Due to the economic - in particular national economic - effects of the epidemiological situation, a changed environment has emerged and as a consequence there must be ready-to-respond answers to developments in the field of capital markets, to the new challenges of anti-money laundering, or, where appropriate, the increased role of consumer protection expectations.
As a result of the current pandemic situation the importance of the rules governing the recording of relevant communication has grown significantly, so in the coming month we will see rules amending the current set of regulations. Another consequence of the current situation is the delaying of the application of some regulations: with regards to SFTR I expect the current milder supervisory approach (e.g. not to prioritize SFTR-compliance in their supervisory approach toward counterparties) advised by ESMA to remain at least until the end of 2020. As per the CSDR regulation I await the delay proposed by ESMA regarding the settlement discipline regime will be adopted by the Commission, as the current volatile market situation makes it harder for CSDs and investment firms to meet the technical requirements set by the regulator.
With regards to the MiFID II. SI regime I already saw the postponement of the publication of EU-wide data for derivative instruments and as per my expectations we will see milder supervisory approach as well as the potential of further postponement of application.
The pandemic gave the mandatory 2-year supervision of MiFID II. set for the spring of 2020 a special importance, as the rules governing call taping and other means of communication recording have an even more important role in these extraordinary days. I think a special focus will be given to the rules governing client communication. Another hot topic of the amendment might be a regulatory answer to the turbulent market situation created by the pandemic as it may have an adverse effect on market trust.
In my opinion the upcoming revision of the Market Abuse Regulation should take into consideration the negative effects of covid-19, which may result in stricter rules for the handling of inside information and upgraded requirements for the automated detection of market manipulation, with a special focus to financial instruments with an illiquid market and the manipulation techniques taking advantage from this fact (e.g. more elaborated rules for front running). The rules for the delayed disclosure of information may also be affected by the current situation as publicly listed companies severely affected by the financial effects of the pandemic may use these rules to hide important information from market participants, which necessitates a stricter supervisory and regulatory approach toward this issue.
The upcoming revision of the PRIIPs regulation will also have to deal with the consequences of the pandemic, namely the inclusion of specific types of risks in the KIDs as well as setting the scope of the relevant financial instruments in order to minimize the risks. The revision will have to deal with the appropriate wording of the KIDs to ensure that the information contained in the documents addresses clients in a fair, clear and not misleading way.
It is not easy to hire and train someone remotely but we should prepare for this world. I believe if we could adapt to this new situation (and I can assure you we could pretty well) then we will solve the above mentioned puzzle somehow. The role of compliance will be much more important than ever, and now we have the knowledge and experience that we can face and cope with any kind of problem that can appear.
If you wish to give your thoughts or opinions on the market over these uncertain and unprecedented times, then please reach out to Caleb Hawkins at firstname.lastname@example.org.