Further delays to the shift away from the LIBOR rate
Throughout 2020, the Federal Deposit Insurance Corporation and the Working Group on Sterling Risk-Free Reference Rates (among others) urged banks to begin moving away from LIBOR. But the adoption of alternative rates has been slow, particularly in the US market where, in 2020, $96 trillion in LIBOR-referencing swaps were made, far outstripping the $1.8 trillion in SOFR trades. The advent of Covid-19 has further complicated things, causing many financial institutions to rethink their priorities.
As things stand, the deadline for LIBOR is December 2021. However, there is a proposal by the ICE Benchmark Administration for three, six and twelve-month dollar LIBOR to continue until the middle of June 2023. This 18-month extension would mean the majority of existing contracts tied to LIBOR would expire by the time the benchmark disappeared. Until January 25, 2021, feedback on this proposal is open, and various regulatory bodies, including the Financial Conduct Authority (FCA) and Federal Reserve Board (FRB), have made statements on it.
UK open banking and the Brexit question
The UK’s Competition and Markets Authority’s (CMA) final open banking implementation roadmap is scheduled to end in early 2021. It will be up to the banking and finance industry to keep open banking functionality running from then on. However, the future of open banking in the UK has also been up in the air as Brexit negotiations dragged on over the course of 2020.
As we enter 2021, the UK Parliament adopted the UK-EU Trade and Cooperation Agreement, specifying a new set of rules to moderate the relationship between the two jurisdictions. Starting in January, UK financial firms lost their right to passport licenses to other EU countries, and they will face visa issues if they wish to employ EU citizens. Brexit is also forcing UK fintechs to follow different standards in the UK and the EU, respectively. And this divergence will likely increase in the future as both jurisdictions develop more fintech-related policies, like an open finance framework.
A new rulebook for ‘Request-to-Pay’ in a big year for European payments
In the summer of 2020, the European Payments Council (EPC) launched a three-month public consultation period on the draft rulebook it had created for its new Single Euro Payment Area (SEPA) Request-to-Pay (SRTP) scheme — a secure, flexible messaging service that will be overlaid on top of the existing payments infrastructure. Following that, on 30 November, 2020, the EPC announced that it had published its first version of the rulebook.
The SRTP rulebook covers the operating rules and technical elements that allow a payee to request a payment from a payer in a wide range of use cases. The adherence process for SRTP will be opened in May 2021, while the rulebook’s effective date is slated for 15 June, 2021. A second version of the rulebook, which will support more elaborate functionalities, is currently in development and will reportedly be released at the end of November 2021.
It comes at a time of great change for European payments, with a group of major banks aiming to create a unified payment solution for consumers and merchants across Europe, called the European Payments Initiative (EPI). While the initiative was launched as an interim company in September of last year, and the go-live is planned for the first quarter of 2022, the founding banks aim to launch the target company for EPI in the last quarter of this year.
TARGET Instant Payment Settlement (TIPS): Deployment throughout the euro area
TIPS was developed as an extension of TARGET2 and settles payments in central bank money. As such, it plays a critical role in providing the infrastructure for a digital euro as well as increasing cross-border payment efficiency. The European Central Bank (ECB) is working to ensure the full deployment of instant payments across the euro area by the end of 2021.
To do so, it needs all payment providers that conform to the SCT Inst scheme and are reachable in TARGET2 to become reachable in a TIPS central bank money liquidity account. TIPS implementation will also require all automated clearing houses offering Instant Payment services to migrate their technical accounts from TARGET2 to TIPS.
Basel III: Limited roll out but still on track
Before Covid-19 struck, large international banks had made significant progress towards phasing in final Basel III capital requirements. As noted by the latest Monitoring Report, many banks’ liquidity ratios had also improved compared to June 2019. Then came the pandemic and resulting economic fallout. Regulators quickly became less worried about reining banks in and more concerned that stringent capital requirements would discourage banks from lending in a Covid-stricken economy.
Regulators temporarily relaxed capital buffers, but an uptick in lending didn’t happen. Banks attributed this to a lack of demand, and indeed their caution may be vindicated as relief programs run out and buffers sink even lower in 2021. Whatever happens, senior members of the Basel Committee were confident enough to tell G20 finance ministers in November 2020 that “any further potential adjustments to Basel III will be limited in nature.”
In Europe, the finalization of Basel III is implemented in two lots. A first lot leading to the adoption on June 7, 2019 of the CRR 2 regulation and the CRD 5 directive applicable from mid-2021; and a second lot (CRR 3 and CRD 6), which will apply from 2023.
RUBA and the reform of monetary statistics in Europe
The new France-based RUBA (Reporting Unifié des Banques et Assimilés) – formerly known as SURFI (Système Unifié de Reporting Financier) – is expected to be applied during the first quarter of 2021, according to a decree on 31 December, 2020. However, the official date is still to be defined.
This new reform will take into account a new system of reporting, changes on 11 existing statements and a new RUBA taxonomy. It’s hoped that the changes will bring greater transparency to the movement of digital currency, offsetting debit and credit bank balances, both in Euros and in foreign currencies. The threshold for triggering liability is currently under discussion with the declarants.
OSCAMPS and the adaptation to a new cashless landscape
Mainly concerning France, OSCAMPS (Outil de Surveillance et de Cartographie des Moyens de Paiement Scripturaux, AKA Tool for Monitoring and Mapping Cashless Means of Payment) is set for change in the first quarter of 2021. OSCAMPS, which was put into effect in 2001, tasks Banque de France with the monitoring of cashless payment transfers – such as cheques, bank cards, transfers, direct debits and internet payments – in order to improve security for such transactions.
Such transfers have, of course, increased exponentially during the current health crisis. In 2020, card transactions overtook cash payments, with nearly two-thirds of those surveyed stating that they had paid for their last transaction by card, compared with 26 percent in cash. And the ceiling of contactless payments rose from €30 to €50. While these changes to how we make payments on a daily basis drastically improves convenience, it also raises the rate of fraud.
The latest changes to OSCAMPS seek to address the new digital landscape, making cashless payments safer by tightening up the authentication and monitoring processes, as well as breaking down data collection by region and every six months.