06 March 2012

Benoît Coeuré: The reform of financial regulation – priorities from an European Central Bank perspective

Timely and consistent implementation of Basel III

We acknowledge the leading role of the Commission and welcome its commitment to a consistent transposition of the new capital and liquidity rules into European law. One very important topic is the introduction of a single rulebook in the EU. We consider such a rulebook as an important step towards establishing a single market for financial services and enhancing financial integration in Europe. One of the benefits of this rulebook would be a commonly agreed definition of regulatory capital. The consistent application of such a definition would make it easier to compare eligible capital instruments from bank to bank within the EU, thereby strengthening the confidence of market participants in the loss-absorbing capacity of banks’ capital and, more generally, in the resilience of the EU’s financial sector.

Towards a pan-European approach to the resolution of systemic financial institutions

A milestone in this area is the international framework for global systemically important banks agreed by the FSB and the Basel Committee on Banking Supervision. The framework proposes a progressive capital surcharge, depending on a bank’s systemic importance. This surcharge system is necessary to provide banks with correct incentives to decrease over time their own systemic footprint.

I strongly believe that the EU needs to make progress towards a truly integrated resolution regime that adequately mirrors the cross-border nature of its banking sector. Many policy initiatives have been put in place to restore confidence in European banks, despite concerns over their sovereigns. Low short-term interest rates in the euro area should in the short term help to prevent a disorderly adjustment of balance sheets and support the profitability of financial institutions, but they may weaken the incentives for repairing balance sheets in the first place. A pan-European financing arrangement would be one of the most effective measures to break the link between the creditworthiness of banks and that of their sovereigns. Its establishment would also remove the need for ad hoc policy measures in response to crises, such as the one-off EU-wide capital exercise conducted by the EBA, which incorporated market valuations of sovereign exposures in times of stress.

OTC derivatives, market infrastructures, and the MiFID review

To enhance the functioning of OTC derivatives markets, the G20 agreed that standardised OTC derivatives contracts should be traded on exchanges or electronic trading platforms and cleared through central counterparties by the end of 2012; in addition, OTC derivative contracts should be reported to trade repositories.

I see two particular priorities at the current juncture. First, I have the impression that international discussions in recent months have focused heavily on the implementation of the mandatory clearing obligation and paid much less attention to objectives in the fields of standardisation and trading. We should not forget that standardisation is a pre-condition for centralised clearing. Second, as the EU and the US are moving to finalise the technical details of their new legislative requirements for OTC derivatives, I believe that further efforts are necessary to ensure consistent requirements. To this end, it will be essential that both the final EU and US rules converge to reflect fully the substance of the updated principles for financial market infrastructures, which the Committee on Payment and Settlement Systems and the International Organisation of Securities Commissions will release next month.

Let me briefly touch on the further development of financial market infrastructures for OTC derivatives, focusing on the role of central clearing counterparties (CCPs) and trade repositories. The rationale for fostering the use of CCPs is that a CCP reduces systemic risk by acting as counterparty to every trade, applying multilateral netting, and particularly stringent risk management practices. In this way, potential contagion risks in the case of a default of a CCP clearing member are minimised both for the CCP itself and for the financial system more broadly. On the other hand, trade repositories play a critical role in providing centralised data record services for OTC derivatives transactions, regardless of their degree of standardisation. This enables a comprehensive overview of open positions and the corresponding exposures arising from OTC derivatives transactions.

Let me finally say a word on the revision of the Markets in Financial Instruments Directive – the MiFID review. The ECB fully supports the European Commission’s proposals, which mark an important step towards strengthening investor protection and creating a sounder and safer financial system in Europe. The EU regulatory framework needed a revamp to take into account adequately financial innovation and the latest technological developments, and to address the G20 commitments to tackle the less-regulated and more opaque parts of the financial system. With regard to the specific measures that are being proposed, let me mention a number of key issues. First, the ECB welcomes the upgrade to the market structure framework, which will extend the scope to a new trading platform, i.e. the organised trading facility (OTF). Second, the ECB also fully supports the proposed extension of pre- and post-trade transparency requirements beyond equity instruments, to include structured products and derivatives. When properly calibrated, such measures would enhance price formation and support the evaluation of financial instruments. Third, the proposals to increase data consolidation are also crucial, both for investors and the authorities. They would ensure efficient comparison of prices and trades across venues and facilitate the monitoring of market abuse by the supervisory authorities. Finally, as regards the proposals to tackle the development of new trading strategies, such as algorithmic trading and high-frequency trading, the ECB supports these amendments insofar as they would enhance the efficient functioning and integrity of markets.

Full speech

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