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25 July 2016

Brexit and CMU

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The CMU project should – and must – survive Commissioner Hill and Brexit because it was a major plank in Commission President Juncker’s “Political Guidelines” – effectively his manifesto for his term of office.

The Brexit referendum had a direct and practical impact on the drive for Capital Market Union: Commissioner Hill – the architect of it – resigned immediately after the result. Instantly, the UK deprived itself of a role in a portfolio that should be a major force to enhance the UK’s place in Europe. However, the CMU project should – and must – survive the man because it was a major plank in Commission President Juncker’s “Political Guidelines” – effectively his manifesto for his term of office.

Guideline 4 was entitled A Deeper and Fairer Internal Market “… We should complement the new European rules for banks with a Capital Markets Union. To improve the financing of our economy, we should further develop and integrate capital markets. This would cut the cost of raising capital, notably for SMEs, and help reduce our very high dependence on bank funding…”

Reflecting this importance, the portfolio was transferred to Commission Vice President Dombrovskis. His subsequent remarks to the European Parliament’s ECON Committee underlined the importance of the project “The Capital Markets Union is a Single Market project for all Member States. It will also make EMU more resilient, as integrated capital markets help to better absorb shocks… We need CMU more than ever.” However, the EU is clearly aware of London’s role “The possibility of Europe’s largest financial centre moving outside the EU, makes the case for deeper capital markets across the EU all the more urgent” with an unspoken, but clear, implication that the EU’s capital market would be within the EU.

Commissioner Dombrovskis told ECON that the immediate priority will be to reach agreement on the existing proposals and carry on the work programme:

Prospectus: ECOFIN reached agreement on its negotiating position with Parliament in June – only three months after Parliament agreed its position and barely six months since the Commission published its proposal.

Simple, Transparent and Standardised (STS) securitisation: The proposal is proceeding at record speed (see FW articles earlier), but the securitisation industry is maintaining some serious reservations about the design so there is still a risk that any legislation may produce a disappointingly modest result.

Consumer Green Paper. Commission’s thinking to be published in the autumn

The “call for evidence” on the intended working of legislation: part of reviewing progress on CMU next year

Remaining risks in the system and strengthening the robustness of financial infrastructure:  The key item for the City and euro clearing is any proposal for resolution of central counterparties (CCPs). However, the EU will follow the lead from the FSB and its work programme stated that “The CPMI-IOSCO consultation on additional granular guidance on resilience and recovery and the FSB high-level guidance on CCP resolution are both on track for launch by the Hangzhou Summit(4-5 September). By the end of 2016, the FSB will publish for public consultation standards or guidance on resolution issues relating to CCPs.”

Reading these consultations alongside the ECB’s re-stated commitment to having systemically important infrastructure within the euro area’s jurisdiction should give some indications of the possible timetable to another row between the UK and the EU. However, once the Article 50 Notice has been served by the UK, it would seem extraordinary to launch a legal challenge to seek protection from the ECB via the European Court of Justice.

So the initial conclusion is that Brexit is not undermining the existing components of the CMU plans. However, a collision on CCPs is clearly visible ahead. The timeline of the UK’s departure negotiations is likely to intersect that for the review of many aspects of the Call for Evidence on whether the regulatory system is working as intended. Different “intentions” may appear during the two-year negotiating period.

In particular, the Green Paper on retail financial services set a goal “to improve choice, transparency and competition in retail financial services to the benefit of European consumers and how to facilitate true cross-border supply of these services, so that financial firms can make the most of the economies of scale in a truly integrated EU market. It is also looking at and discussing the impact of digitalisation on retail financial services with a view to allow for growth of innovative solutions in this area in the EU.”

The tragedy for the UK may be that a dramatic commercial opportunity for the City – and thus the UK – may be taken away as a direct result of the referendum. The progressive pressure to create a genuine single market in retail financial services may come to fruition just as we leave the EU and give up “the passport” for financial services. The difficulties in establishing – and maintaining - “equivalence” may be compounded by any tweaks that appear during the lengthy process now underway of reviewing ALL the mechanics of the post-crisis regulatory system.

© Graham Bishop

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