July 2024


Regulatory tipping points for markets in 2024 and beyond

Our Markets and Financing Research Retreat offers a wide range of academic expertise and timely market insights.

At our Markets and Financing Research Retreat in Boston, a discussion moderated by Tobias Krause, senior managing director in State Street Global Markets’ Risk and Capital group, delved into the financial industry regulations that are most significantly impacting large banks and the buy side.

Krause was joined by colleague Derek Guadagnoli, Risk and Capital Optimization, Patricia Hostin, global head of Agency Lending for State Street Global Markets, and Joseph Barry, State Street’s global head of Public Policy.

The panel discussed the impact of the active Federal Reserve Board regulatory agenda and similar initiatives in the European Union, emphasizing the importance of these changes in shaping the future market landscape – a topic on which State Street has a broad global perspective as both a bank and an investment manager, and a partner to our clients.

Impact of regulatory changes

The most constraining regulation large banks are contending with right now is Basel III Endgame, which finalizes rules increasing the amount of capital banks must hold to conduct business, especially with clients like investment funds. Given their high risk weights under the regulation, these funds require more capital to service under Basel III rules, making it costly for large banks to service them despite their generally high credit quality and low default risk.

For investment managers, new rules and regulations span a broad range of areas, including liquidity risk management and reporting requirements, money market reform, investment advisor rules and improvements to the resiliency of the market ecosystem. Of note is the European Central Bank’s macroprudential strategy, which will require that managers be evaluated on their societal impact as well as financial requirements.

And more change is on the way. While one knock-on effect of recent risk- and capital-related regulations has been a boost in private equity market investing, Barry flagged that regulatory focus is now turning to private markets, and he anticipates further changes in the near future.

Driving debate on new capital rules

Banks and asset managers have been actively engaging with regulators to navigate the evolving landscape. For example, large banks have been working with the Federal Reserve on capital requirements adjustments, a critical component of financial stability efforts. Additionally, industry groups including the Investment Company Institute have voiced concerns about the impact of regulations on the markets and the increased cost and compliance burdens that will be borne by funds.

Barry said industry participants are being more vocal when it comes to flagging the economic impact of regulations through a variety of methods. These include direct engagement with regulators, but also public consultations and comment letters, industry reports and surveys, engagement in industry groups and forums, and even concerted media campaigns.

“Active pushback from the industry – both on the banking side and the investment management side – is helping to get some of the rules pulled back,” Barry said.

Innovation is key to adapting solutions

In addition to stepping up its public policy efforts, the industry is working on developing creative solutions to support clients’ trading and securities lending programs. Novel securitization structures and innovative financing options such as central clearing for securities lending and intermediation structures are just a few examples.

Hostin noted, “At the end of the day, capital is a finite resource, and a lot of capital is required to support our clients – there are only so many areas where we can optimize. We’re planning ahead, looking at impacted clients to see which solutions best fit their needs – even for those who may not see the relevance right now.”

Changes to liquidity regulation and risk weights for investment funds enacted through Basel III Endgame will continue to impact how banks operate and support clients. “For managers, future-proofing your business for legislative changes is critical, and you can do that by partnering with innovative, visionary service providers,” added Guadagnoli.

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