02 April 2012

March 2012 - Financial Services Month in Brussels

March was a very busy month for the EU’s legislative system. The European Council met at the beginning of the month and agreed: “It is important to rapidly complete the regulatory reform of the financial sector. Furthermore, the proposals relating to bank capital requirements and to markets in financial instruments should be agreed, respectively by June and December 2012, bearing in mind the objective of having a single rule book… It is important to restore investor confidence in the EU banking sector and to ensure the flow of credit to the real economy, in particular through the strengthening of banks' capital positions without excessive deleveraging… In the margins of the European Council, the participating Member States signed the Treaty on stability, coordination and governance in the EMU.”

This author blogged that the “25” have just signed a manifestation of the shift to a political union at the most macro level of economic governance. At the micro level of financial regulation, the political union of the euro area is already in full swing. Reflecting these developments, the FSA’s CEO – Hector Sants - remarked that “the rules will be made by Europe, and the role of PRA and FCA will primarily be one of supervision and enforcement. Essentially, the UK is moving to become a ‘supervisory arm’ of Europe.”

At the very end of the month, the European Commission launched a final consultation on the banking resolution regime. As part of the final steps to prepare the forthcoming legislative proposal on the recovery and resolution of banks and investment firms, the Commission is engaging in discussion with key stakeholders on a number of outstanding points, mainly the bail-in tool. Yet another consultation underlines the delicate nature of this particular discussion. Fund managers – especially in the insurance industry - have made clear that bonds that can mysteriously convert to equity are an unappetising investment. At the political level, the delay makes it very likely that key Council decisions on the subject will be undertaken during the Irish Presidency – a state that is suffering greatly from the EU’s refusal to permit them to bail-in Irish bank bondholders earlier in the crisis. The politics of such discussions may be difficult.

The financial transaction tax is already a vexed topic and the Danish Presidency completed the first technical reading but noted that a whole range of sensitive issues remains to be addressed, including the coverage of currency derivatives and government bonds and its impact on the costs of hedging and government borrowing, etc. But Reuters reported that German Finance Minister Schäuble conceded for the first time that efforts to get a financial transaction tax implemented in the eurozone were doomed. Nevertheless, he was hopeful some countries in the European Union would begin implementing an enhanced stamp duty, including derivatives, this year but admitted this would not be possible in the broader bloc.

Amongst ECON Committee’s many actions in March, it began consideration of amendments on CRD IV/CRR. Rapporteur Karas announced that 2,195 amendments were tabled in total. He wants to stick to the timetable and is sure that there is enough time for the negotiations but said that there are many amendments that raise concerns on the disproportionate requirements that the EBA could impose on certain institutions.

The Commission published its green paper on shadow banking and such activities include securitisation, securities lending and repurchase transactions. Shadow banking performs important functions in the financial system. For example, it creates additional sources of funding and offers investors alternatives to bank deposits. But it can also pose potential threats to long-term financial stability. The FSA’s Chairman - Lord Turner - set out how the shadow banking sector contributed to the financial crisis, the risks it still poses to financial stability, and the importance of a sufficiently comprehensive and radical policy response. He underlined that there is a need to ensure that the regulatory response appropriately covers shadow banking as well as banks.

ICMA European Repo Council discussed official concerns about ‘shadow banking’ and repo. Godfried De Vidts, Chair of ICMA’s European Repo Council, said: “We should not lose sight of the fact that repo is a legitimate funding tool used by regulated banks and financial institutions and an instrument of financial policy for central banks. The AIMA argued that credit hedge funds are not 'shadow banks', and highlighted the crucial differences between the key functions of a traditional bank and those of credit hedge funds and other non-bank financial institutions.

Turning to securities, a landmark moment came when ECON approved the text of EMIR – highlighting the obligatory clearing for OTC derivatives, reporting for all derivatives; strong role for ESMA; pension schemes: recognition of CCPs from third countries and revision after three years. Commissioner Barnier emphasised that “the EU has now also fulfilled its G20 commitments in this field, and on time". Now the grinding details get underway and ESMA published the responses to its EMIR consultation. The Regulation delegates or confers powers to the Commission to adopt regulatory technical standards (RTS) and implementing technical standards (ITS) on a number of areas.

ECON Committee published its draft report on MiFID II/MiFIR and Rapporteur Ferber supports the Commission's proposal to extend the scope of the MiFID rules and limit the exemptions, as he is in favour of closing all gaps in the regulatory framework in order not to have parts of the market left unregulated. Finally, the Rapporteur reduces the number of delegated and implementing acts, as he considers that the major political decisions have to be taken within the ordinary legislative procedure by Parliament and Council, and specifies the periods for ESMA to draft the requested regulatory standards. ECON also published its draft report on MAD/MAR. Rapporteur McCarthy stressed that the new Market Abuse Framework must be future proof.

The European Commission published a regulation on Central Securities Depositories (CSDs) designed to bring more safety and efficiency to securities settlement in Europe and shorten the time for securities settlement and minimise settlement fails. Commissioner Barnier said: "Today's proposal will ensure a true single market for the services provided by national CSDs".

ECON Committee adopted the Omnibus II Directive related to Solvency II: "The insurance sector should be able to provide long-term guarantees to the benefit of consumers and remain a long-term investor in the market in times of crises", said Rapporteur Balz. "The question of whether life insurance products are an appealing type of investment is also a matter of social policy. This is why we want such decisions to be taken on a political level rather than by civil servants of the Commission." EIOPA is going to draft a report on the functioning in practice of long-term guarantees within five years after the new Directive comes into force. MEPs want to keep major aspects of the assessment of long-term liabilities in the legislation process. However, it seems that the EP’s Plenary vote on Omnibus II has been pushed back to September but the Commission commented that: “All parties remain committed to adopting Solvency II as quickly as possible and to a date of application of 1 January 2014”. 

The detail of AIFMD is now surfacing and the IMA urged ESMA not to constrain AIFMs, as ESMA appears to be restricting the common practice of managers delegating investment management and risk management. This is common among many types of AIF and should not be constrained. Also, there is some ambiguity about whether MiFID-authorised firms can also be alternative investment fund managers or whether they must first relinquish their MiFID licence. Hedge fund managers fear a U-turn, as the Directive says that if third-country managers want to access EU investors, they may need to be compliant with the Directive. The Commission wants the third-country regulators - such as the US Securities and Exchange Commission - to oversee their own managers and see if they are AIFM Directive-compliant. The regulators themselves are concerned about having to establish if their citizens are following foreign laws as the new agreements would bind them to do.

© Graham Bishop