Reaching the level of financial integration implied by capital markets union (CMU) may require some innovative thinking about legal and regulatory processes. Lord Hill, the EU’s financial services commissioner, was clear at the outset of his term that difficult reforms are needed “such as in company, securities and insolvency laws, and [to] tackle barriers in other cross-cutting areas such as taxation...” Previous holders of his office have plucked much, or perhaps even all, of the low-hanging fruit.
This means that he will probably be judged on his success in tackling the most difficult issues. That suggests it may be prudent to avoid the impasses already reached in many years of “fruitless” effort. Is it necessary to solve these complex issues totally and in one go, or is it possible to work on specific stumbling blocks along the CMU road?
In euro-speak, the latter approach is known as a “29th regime”. With 28 member states, each
with its own national system of, say, insolvency rules, the idea is to create an EU-wide system that stands above them and that economic agents can opt-in to. It may be easier for a citizen to
think of an EU system that is an alternative to his/her own national one – a “second system”.
What will be decisive is that, once they have opted-in, citizens cannot decide to go back to the national system if things do not turn out well. In the case of insolvency, for example, they would not be allowed to revert to national courts to prevent bondholders taking possession of the asset – something that would clearly be unfair to a bondholder who had priced credit risk on the basis of different foreclosure rules.
Is it possible to identify precisely those situations where such a 29th regime might help boost investment? Legal purists will argue that the 29th regime concept is only a discussion about lack of uniformity in EU law, rather than a way forward. However, I would argue that an increasing number of private sector agreements are achieving the same practical results as a 29th regime. Can more be done along these lines – both privately and by EU law?
The magnitude of the financial crisis has already forced at least two examples of a 29th regime in practice, and on the statute books. These are:
• The Bank Recovery and Resolution Directive (BRRD). This is a specific EU-wide insolvency system for banks that overrides all national arrangements. If you want to be a bank, you are automatically opted in.
• The Single Supervisory Mechanism (SSM). If you want to be a big bank, you are automatically opted in. If you prefer not to be in it, then you can become a small bank (although in the event of
trouble you will be brought straight back into it).
Formal examples of a wider approach already exist – for example, the concept of a European company (“Societas Europaea”) was introduced in 2001 and there is now discussion of a corresponding structure for private companies. And, in 2012, the European Commission asked the European Insurance and Occupational Pensions Authority for advice on structuring the private personal pension market to encourage cross-border labour mobility and specifically requested that the 29th Regime be considered. The 29th Regime possibility was highlighted again in the February green paper on CMU.
Legal rulings may not be what brings convergence across Europe, however. An interesting opportunity is opening up for a range of de facto 29th regimes via private sector “market conventions”.
During the changeover to the euro two decades ago, the Commission set up the Giovaninni Group to examine how to convert private markets to the new currency. Most of the group’s members (including this one) were surprised to find that many of the “rules of the market” actually had no legal backing at all. That is why many pan-EU conventions were set up and all players agreed to abide by them, stepping away from their old national systems. There are now many examples of this approach both in the EU and globally – the classic is probably the International Swaps and Derivative Association (ISDA) Master Agreement for derivatives.
Is there scope for pushing new developments in this direction and supplementing private agreements with the barest minimum of supporting legislation? The history of the ISDA
agreement shows that small groups can come to detailed arrangements among themselves that benefit society more widely.
A promising possibility might come from the rise of the private placement market. A relatively small number of players are involved, their interests are closely aligned, and the Euro PP working group documents have been well received. The International Capital Markets Association, for example, says that they “represent a fair and balanced standard between the interests of borrowers and investors”.
Does it deal with the ultimate problem of insolvency where legislation varies from country to country? The SAFE Policy Center suggests “a special European regime for restructuring corporate bonds outside of insolvency proceedings”. This seems analogous to the special regime for banks (BRRD). If this can be achieved demonstrably and robustly in a very specific, limited area, could it not be broadened to cover the debt obligations of a European company, or even of its private cousin as well?
The borrower, at the end of the day, would make the free choice of being regulated by a 29th regime. Investors, equally, could decide whether they consider the terms attractive.
© Graham Bishop
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