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11 October 2016

123rd Brussels for Breakfast – Notes

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Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by Grant Thornton with co-presenter Hand Hack (FTI Consulting).

Highlights from the “Brussels for Breakfast” meeting

As is inevitable at the moment, Brexit developments dominated the discussion – with a deepening fear that it would be a Hard Brexit following the comments by the Prime Minister in her Party conference speech. What does this term really mean? At the least it seems to mean not even being a member of the EEA as that implies breaching several red lines: free movement of people, contributions to the budget an accepting the supremacy of the ECJ. Clearly, this means loss of passporting rights and thus direct access to the ECB for payments.

This led on to a wide-ranging discussion of ECB Director Mersch’s comments about the evolution of the Eurosystem’s market infrastructure. The consolidation of T2 and T2S could easily embed the notion that participants must be EEA-authorised, thus ruling out post-Brexit UK firms. It is not only ECB rules that may develop: Basel has yet to finalise Basel III in critical areas – most importantly the treatment of banks holdings of mortgages and corporate loans. In the US, these are normally converted into securities via Ginnie Mae etc. But EU banks still have vast holdings on-balance sheet and there is a real risk that the EU may decide to diverge from Basle on such issues.

The State of the Union message from Commission President Juncker included a commitment to accelerate CMU. Several legislative components are already underway (STS securitisation, Prospectus Directive) and more proposals are nearing launch (insolvency regime, withholding tax barriers, debt-equity bias as part of CCCTB) and further down the track would come personal pensions, supporting Fin Tech and further steps on the supervisory framework. Some of these ideas may make faster progress in a world without the UK acting as an “impediment”.

An interesting constitutional development occurred in the spat between the EP and Commission on the Key Investor Document for PRIIPS. The EP Plenary voted 602 to 4 to support ECON’s vote against the Commission proposal for Regulatory Technical Standard that would give excessive importance to historic performance measures thus creating a `misleading and flawed’ measure. The Parliament has been looking for a good opportunity to flex its muscles so it seized the opportunity to support industry concerns.

Join us again on November 8th for the 124th “Brussels for Breakfast” notes and CISI live webcast afterwards

Events over the past month

The notes below are my choice of the key events in the unfolding story of Brexit and EU financial sector reform. The links will take you to the underlying stories in the categories to which you have subscribed.


The FT reported the City of London fears that the May government was shifting towards ‘hard’ Brexit – and so it is going to be, if we look at PM Theresa May’s speech to the Conservative party conference, in which she announced her intention to trigger Article 50 by end of March 2017. The Prime Minister said Britons will “have the freedom to make our own decisions on a whole host of different matters, from how we label our food to the way in which we choose to control immigration." As Graham Bishop pointed out, “It reads like Hard Brexit; it’s spun as Hard Brexit so it probably is Hard Brexit because it is completely inconsistent with EEA membership.”

A Hard Brexit is completely the opposite to what 5,500 financial services firms aim to achieve in the upcoming UK-EU negotiations, given their reliance on the single-market passports to do business across the EU, according to figures publishes by the FCA. More data analysed by the FT revealed that banks that use the UK as a gateway to the EU employ more than 590,000 people, have more than £7.5tn of assets and make annual profits of more than £50bn.

A vital bridge that was explored further by Bruegel’s Schoenmaker, who provided evidence on the future of financial services in the UK following the Brexit vote to the House of Lords EU Sub-Committee on Financial Affairs, in which he highlighted the magnitude of the importance of ‘passporting’ and clearing and settlement in euros for the British financial services industry. Following this, Graham Bishop published analysis on whether CCPs would move to the Eurozone or continued to be traded within the UK, after the separation from the EU was concluded. Moreover, Bundesbank’s Weidmann warned that passporting rights to operate across EU will be lost if UK does not at least stay within the European Economic Area. In fact, executives at global investment banks in London told Bloomberg they are planning for the loss of euro clearing after Brexit. In Graham Bishop's view - quoted in the article-, the ECB “has no choice but to take clearing away." 

All this anxiety over ‘what next’ appears to be taking its toll on financial services sector, according to research by CBI and the accountancy firm PwC. This might be the reason behind firms putting hiring on hold while they assess the damage of the UK's vote to leave the EU. Simon Tilford went beyond optimism and employment and predicted that Brexit would make Britain's mediocre economic record worse.

The Swiss stock exchange is among the first financial services companies to say goodbye to The City and look elsewhere in the EU for Single Market access, according to the FT – Switzerland may not be a model that suits Britain after its disconnection from the European Union: Brussels and Berne are heading for the rocks over migration from the EU, which the Swiss voted to limit disregarding the EU’s inseparable ‘four freedoms’. The EU might end forcing Switzerland to accept freedom of movement if it wants to maintain access to the Single Market and will therefore put an end to the Brexiteers’ proposal of taking the European country as an example for the future UK-EU relationship, wrote Graham Bishop in Financial World magazine.

Commentators have rushed to contribute their knowledge of EU regulation to find a solution for this titanic ‘Gordian knot’: retaining access to the Single Market or being able to curb migration from the EU? Andrew Duff wrote about the feasibility and opportunity of a new Treaty of London that is able to re-shape the European neighbourhood; Morgan Stanley’s Reza Moghadam suggested the UK should join the EU banking union and allow free movement of labour in finance. Martin Sandbu criticised International Trade Secretary Liam Fox’s naiveté in his department’s approach to solving the huge challenges Brexit presents.

British analysts are concerned about the 27 EU members adopting an aligned tough strategy towards the ‘divorce’ talks, with more than 20 European business associations and companies interviewed by Reuters saying they back their government's position that Britain's banking sector can only enjoy EU market access post-Brexit if the country still follows the bloc's rules.  The ‘special relationship’ between the UK and the US might prove not to be enough to prevent American financial firms suffering from Brexit fallout: the biggest trade groups for the US finance industry have urged Treasury secretary Jack Lew to lobby for a post-Brexit “transition period”so members can adjust to the negative consequences that might arise from a mismanagement of the process.  But Brussels has kept its ‘no negotiation without notification’ mantra, hence Michel Barnier, newly appointed as Chief Negotiator for the Preparation and Conduct of the Negotiations with UK, might have to wait until the first quarter of 2017 to start talks – with no ‘transition period’ envisaged.


The Basel Committee published the results of its latest Basel III monitoring exercise – the ECB expects the new rules to be finished by the end of the year and they shouldn’t raise banks' capital requirements significantly, said the banking supervisor Daniele Nouy. The European Central Bank published new research highlighting significant discrepancies in the way eurozone countries deal with bad loans.

EBA issued the results of the CRDIV-CRR/Basel III monitoring exercise as of 31 December 2015; while AFME released two Position Papers under CRD 5/CRR2: Large exposures framework and Interaction of IFRS 9 with capital requirements.

The CPMI established a task force to look into the security of wholesale payments that involve banks, financial market infrastructures and other financial institutions. The European Cards Stakeholders Group (ECSG) announced the creation of this new multi-stakeholder association dedicated to the promotion of card harmonisation in the Single Euro Payments Area.  The Financial Times revealed that banks are finding blockchain hard to put into practice: technologists and business people have to make drastic changes to force the radical technology to adhere to the norms of the banking world.


The European Commission set out the next steps to accelerate the completion of the Capital Markets Union, an announcement made by President Juncker during his State of the Union address and welcomed by AFME.

ESMA's Maijoor delivered a statement to the Economic & Monetary Affairs Committee hearing, in which he covered ESMA's activities in the areas of the single rulebook, supervisory convergence, risk analysis and supervision and enforcement.

ESMA launched a consultation on trading obligations for derivatives, whilst ICMA ERCC reported on the trade registration models used by European CCPs for repo transactions. The Covered Bond Label Foundation (CBLF) announced that more than half of Labelled Cover Pools had been disclosed using the Harmonised Transparency Template.


The draft legislation on packaged retail investment products (PRIIPs) was rejected by MEPs as so “flawed and misleading” that it could actually lose them money, a movement that was praised by EFAMA, ALFI, the Investment Association and Insurance Europe.

Asset Management

ESMA published the responses to its Call for evidence on asset segregation and custody services under AIFMD; ALFI and ICMA’s AMIC responded to FSB consultation on alleged structural vulnerabilities from asset management.

The FT echoed investment experts worries, who believe regulators are paying more attention to asset managers’ balance sheets and telling them to hold more capital in an attempt to reduce systemic risks.

European supervisors have rejected attempts to relax clearing regulations for pension funds, arguing the European Commission failed to offer any evidence to support its requested changes.

Corporate Governance / Accounting

The IASB issued amendments to its existing insurance contracts Standard, IFRS 4, and the Bank of England’s Prudential Regulation Authority (PRA) published a package of final rules on guidance and proposals on accountability, remuneration and whistleblowing.

Financial Services Policy

ECB’S Mersch said the Eurosystem’s strategic reflections on the future development of its market infrastructure centre around three components: the consolidation of TARGET2 and TARGET2-Securities; the settlement of services to support instant payments; and a Eurosystem collateral management system. For his part, ECB's Cœuré reported on the EURIBOR reform and asked banks in the euro money market to participate in the pre-live verification exercise the administrator is planning, in order for the reform to be a success.

Financial / Economic

Former ECB’s board member Lorenzo Bini Smaghi wrote that Europe’s banks need consolidation to find stability, warning about the excessive fragmentation of the European banking system which is hurting its profitability.

EurActiv reported that budget reform and the possibility of a Pan-European tax are now on the table after the UK’s Brexit vote, an issue previously blocked by the United Kingdom.

© Graham Bishop

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