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Navigating the Next Market Downturn at TSAM London

Date: July 24, 2023

Author:

Aspasia Latsi
International Regulatory Analyst, Confluence
Now that the TSAM – the Summit for Asset Management in London – is over, it is time to look back and delve into the subject of market downturns, as discussed during the regulatory roundtable “Navigating the next market downturn,” which was part of the Confluence-sponsored Regulatory & Compliance stream.
Given that the two-day conference brought together industry leaders, it provided a first-hand opportunity to discuss the regulatory landscape and, more precisely, the ever-topical issue of the market downturns in the aftermath of the Covid-19 outbreak. Several recent regulatory developments provided fuel for the thought-provoking discussion. Seated at the table were professionals from diverse financial backgrounds, open to sharing their insights and ideas. So, what were the main takeaways from this conversation?
There is always going to be a next market downturn.

No matter what measures are taken, downturns cannot be prevented. They appear in the form of financial crises, new pandemics, wars, and even environmental disasters. The aforementioned situations could affect the financial markets and result in added measures from the competent authorities.

Because market downturns cannot always be foreseen, we could at least pay attention to the common elements they potentially share. One example worth looking into is the public reporting of large security-based swap positions (SBSs) which has retained its relevance to date since the 2008 financial crisis. At that time, SBSs played a role in that crisis and, yet again, in the recent crisis followed by the Archegos Capital Management collapse. This led to the proposed new SEC (Securities and Exchange Commision) Rule 10b-1 regarding the reporting of SBSs positions by the SEC in the US . Yet, despite the different types of financial downturns, there might be a pattern in certain circumstances, and lessons can be learned from past experiences.

 

How do regulators react in such circumstances?

It has been highlighted that regulators and the competent authorities in general are getting stricter and stricter by producing more complex legislation. TSAM attendees expressed the view that the authorities should act in a prompt and preventive manner rather than attempt to resolve the issues raised at a later stage.  

The Covid-19 outbreak is a good example of how regulators reacted. In the European Union, the European Securities and Markets Authority (ESMA), temporarily lowered the reporting threshold from 0.2% to 0.1% under the Short Selling Regulation in response to the pandemic. ESMA assessed the outcome of that temporary measure and decided to permanently lower the reporting threshold to address potential negative effects on financial stability. Should there be ample evidence that the temporary measures are beneficial, the regulation will be amended.

What could the firms change / do differently?

Many firms already have their own in-house processes in place, as was also noted by the roundtable attendees. Alternatively, asset managers cooperate with third-party vendors, such as legal content providers and RegTech companies, when they opt for outsourcing solutions. To deal with the next market downturn, roundtable participants echoed that they would ensure they have the right processes in place, as well as make sure their regulatory / compliance / risk teams react quickly and efficiently to these crises. As a general comment, it was stated that top-level Subject-Matter Experts are hard to find, and outsourcing could be an appropriate solution when coping with financial downturns, as oftentimes third-party vendors specializing in niche areas employ such professionals.

Overall, TSAM London granted the opportunity to industry leaders in the asset management field to exchange ideas and gain insights, but also in relation to the way regulators and market players react to the challenging impacts of downturns. The lively and genuine dialogue aimed to contribute to the understanding and preparation of the asset managers in such situations and we can say that it was a step in the right direction towards fulfilling these requirements.  

Disclaimer: The information contained in this communication is for informational purposes only. The opinions expressed herein are those of the author and do not necessarily reflect those of Confluence. Confluence is not providing legal, financial, accounting, compliance, or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.

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