We have had wave after wave of new legislation, and I will point to some of the main features but I can not be exhaustive because the statistics show we have adopted 63 pieces of legislation, produced 192 other reports, opinions and resolutions, I have chaired some 300 committee sessions and over 300 trialogue negotiation sessions – the equivalent of US conferences between the House and Senate to hammer out final legislative acts.
The first wave of legislation included the unfinished business of Basle 2 and 2.5 – in our parlance CRD3 – which dealt with the trading book and also our first round of reining in bonuses. This was accompanied by AIFMD, credit rating agencies and the new European Supervisory Framework...
Externally, regulation of hedge funds and private equity caused a lot of noise and objection from a sector that had little understanding of how European legislation worked, whilst the overlap and consistency or otherwise of our credit rating agency legislation with that of the US also gave rise to a lot of agitation...
Private equity... had had different detractors, some seeing them as asset strippers that threw employees on the dustcart, others notably Germany, fearing for the takeover of their famed Mittelstand, or SME, sector through covert acquisitions.
The second wave of legislation included the European Market Infrastructure Regulation - EMIR – which was where we set up the rules for derivatives clearing through central counterparties and reporting to trade repositories. Along with some conduct of business rules done later within our revisions of the Markets in Financial Instruments Directive and Regulation - MiFID2 – this has been legislation that has commanded more transatlantic attention than anything else. The irony of much of it is that we knew at the time we did the legislation where some hot spots would be that were premature to decide, but one or another party – and it varied around institution and political spectrum as to which – would not back down...
Meanwhile from the US side, definitions of swap-dealers and treatment of non-US persons for transaction level reporting requirements placed on non-US Swap Dealers – the famous footnote 513 – has caused not just agitation but real anger.
Likewise it has been clear since before we did EMIR, because the Parliament did a report, that we would be exempting corporates. It was clear in that report and from the legislative process for EMIR that when it came to CRD4 – our Basle 3 – it would be changed to follow suit. And it was. One of the reasons for this particular change is because of the collateral requirements of EU CCPs. And unfortunately there is no solution for this in sight, not least as the general thinking in the EU is that the systemic nature of CCPs is one of the biggest challenges to face us, and now is not the time for relaxing anything.
So I guess what I am saying here is that there was not sufficient joining up at an early enough stage and that in future there needs to be more thought about the differences that exist in markets because something went wrong.
As I said at the start, we were fighting twin problems and by this stage, sovereign bail-outs of Greece, Ireland and Portugal were bearing down heavily and there were also major legislative proposals on economic governance, the so called six pack – which tightened the budgetary controls in particular on eurozone Member States. These and the follow up two-pack, and a plethora of new legislation on statistics and a budgetary oversight semester are intrusive and painful for EU countries: the external relevance was that shoring up the stability of the eurozone was an issue of great international importance, even if the minutiae of how it was done was not studied everywhere. Another relevant fact, just as with financial services, was that the European Parliament made substantive changes, forging a strong alliance with the European Central Bank on these issues. The ECB had to know that the governance was serious in order to be confident in deploying its armoury, which has been crucial.
The third wave of financial services legislation included CRD4
, our version of Basle 3, rapidly followed by revisions to Market Abuse
and Markets in Financial Instruments
legislation. Of course Basle 3 is not finished because leverage and liquidity are still outstanding, yet a lot of the accusations hurled at the EU are about these issues. Well, my message is I do not think Basle or FSB first pronouncements are always perfect and we know that they change and modify as they work... Whilst there are serious reasons to look more to G20 and international organisations, there are serious reasons for better detailed feedback at an early stage. G20 can’t do that much detail.
On MiFID there was much to do to update and establish comprehensive coverage, and have stricter controls on market structure. The issues that took highest profile were restrictions on algorithmic and high-frequency trading and the establishment of a European regime for commodity position limits. There was also great contention over fungibility between CCPs and open access. But after much hard negotiation, again in the early hours of the morning, and a five-year delay in implementation, in the end we do have both fungibility and access.
Market Abuse rules have been tightened and modified not least in the light of the Libor and other scandals. We had very useful cooperation with the US on this. There are issues here that annoy the Parliament in terms of not being able to mandate high enough administrative fines because of the way it all interacts with criminal law which is still a new area for legislation at EU level. But we do have tougher than before minimum fines and criminal sanctions everywhere, with countries able to impose higher if they wish.
The final wave of legislation to mention – and it is not actually the last wave – takes us into territory where the EU's twin problems of financial services and eurozone stability meet in the creation of the Banking Union. We have agreed to have the ECB as the direct supervisor of the largest eurozone banks – not just giant ones, some 130 will be covered – and the ECB is the responsible supervisor for all banks so they can be called in if there are problems. The ECB will of course be applying the same rule book of EU legislation that covers those outside the eurozone as well. Again the Parliament ruffled some feathers, this time including by negotiating a tough accountability regime to the ECON Committee for the ECB’s bank supervision.
We have also just agreed new rules for bail-in for bank recovery and resolution following the FSB principles and in a move mirroring the ECB as the common supervisor for the eurozone we have also agreed - after a final 16 hour overnight trialogue to 7 am - legislation for a Single Resolution Mechanism and Authority. The decision procedure has been made a lot simpler than finance ministers had agreed, so it can operate over a weekend. A joint resolution fund has also been created that provides the working capital and liquidity for resolution processes in the eurozone. It takes a few years to be running at full mutualised capacity, but get there it does. The European Parliament played a big part in getting the Single Resolution Mechanism into a much more workable state, again finding major support from the ECB.
This has all been done in the excruciatingly tense backdrop of an existential crisis for the euro and profound responsive measures in which the ECON committee had a key role.
It is an era where the Parliament has left its mark more than ever before and I am proud of my colleagues and the work that we have done.
Looking to the future, I think there is still a lot to learn about the interconnection of banks and sovereigns and how to address the lack of flexibility that monetary union creates. Indeed we are always reducing flexibility, whether that be through budgetary controls or the additional rules present in the Single Resolution Mechanism for the eurozone compared with the options in the Bank Resolution and Recovery Directive.
Some suggest that absence of the ability to depreciate the currency may mean that there are limits to the size of banking sector that can be absorbed in the event of crisis. It has already been mooted in finance minister circles, with controversy, with regard to whether small eurozone countries can sustain large international banks and banking sectors. Others are even wondering whether to some extent this applies to the eurozone as a whole: that it is impossible to absorb a systemic banking crisis with a large banking sector if there is not the ability to use the full range of monetary tools that inevitably lead to devaluations. We all expect that the agreed rules on bail-in resolve many of these problems, and in the limited way in which this has already been tested in the EU there are reasons to be optimistic.
The final outstanding wave of legislation includes shadow banking, benchmarks, money market funds and bank structural separation. These will now be left to the next Parliament to pick up and complete although some pointers have been left.
So that is an overview of some of the key legislation and flash points, of course there are more, but in reality it is quite extraordinary how coherent the US and EU have been. However, there is room for improvement at the international level and room for TTIP
to help that process at the EU-US level. The more I think about it, the more a framework is needed to ensure much earlier engagement, working together before even international positions have been taken.
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