Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by Grant Thornton with co-presenter Fiona Wright (Brunswick)
This blog covers the key subjects since our last meeting that I hoped to cover but, as always, we ran out of time to deal with them all. As a Friend, you can watch the 19th `structured’ CPD web-cast with CISI. These Notes may be read to record a further 30 minutes of `structured CPD’, including a dipping into the links to the underlying stories.
Highlights from the “Brussels for Breakfast” meeting
The first meeting after the Christmas break attracted a large - and vocal – audience! Naturally, Brexit consumed half the time but we still covered some very detailed issues in banking and securities.
Opinion polls show there is not yet any sign of an upsurge in other major states wishing to leave the EU and that UK voters are unwilling to pay even a significant price for Brexit. So Prime Minister May’s speech last week was dissected at some length – particularly the tactic of being willing to walk away as that weakens commercial operator’s confidence in possible transitional agreements. Such arrangements cannot be assumed with any degree of confidence until late in the process. In any case, I put the argument (detailed in my Clearing paper: link for clients or request an Invoice) that the legal formalities of such a process may be lengthy.
The potential influence of the new President Trump was discussed. However, the real significance is likely to unfold over the next year when the 2017 election season is over in the EU, and European electors assess whether the attacks on NATO and European security look as though there will be real consequences.
Turning to detailed banking matters, the EBA’s final recommendations on loss absorbing capacity – the MREL stack – provoked much thought. As the profitability of Europe’s banks is only half its cost of capital, there can be no certainty that the system can support the needs of the economy. So the continued drive for Capital Markets Union should be underpinned.
My paper on the clearing of euro-denominated derivatives (see above) also provoked much discussion as the sheer quantum of risk in London – at 50 times UK GDP – is quite startling. Yet again, the canard was floated that the `swap line’ with the ECB would ameliorate these risks but my clear understanding is that there is no agreed line – merely a legal document to be signed if there were to be a swap agreement. The ECB’s July 2016 – so post the Brexit referendum – makes clear the grave concerns about the location of such key infrastructure outside the EU given its potential impact on financial stability.
Key items in the rest of the month’s news included:
Prime Minister Theresa May set out the Government’s priorities for the upcoming Brexit negotiations in a long-awaited speech that was regarded by The Economist as a pledge to ‘eat the cake and live with an empty plate afterwards.’ Graham Bishop pointed out that the PM’s plan was riddled with inconsistencies and set out to cherry-pick the Single Market, precisely what EU leaders have been repeatedly refusing since the UK voted out. This might be what the UK Ambassador to EU Sir Ivan Rogers suggested when he unexpectedly resigned and warned of ‘muddled thinking’ when it comes to the terms of the forthcoming leave talks.
May confirmed that the UK would be pulled out of the EU’s Single Market and that it wouldn’t seek its permanency in the customs union either. Britain will rather pursue a ‘global’ vision that unties itself from the Union’s regulatory ‘constraints’ and competes with the rest of the world as a major player in many sectors. This might mean defaulting to WTO membership if no agreement is reached before the two-year period after triggering Article 50 of TFEU, but The Economist cautioned that this option wouldn’t be easy either. May interprets the ‘No’ vote as a popular appetite for lowering immigration, even at the cost of a certain degree of prosperity - but more than half of Leave voters find unacceptable being economically worse off to regain control of UK borders over EU workers coming to Britain.
In May’s view, the European Union will remain a reliable partner and avoiding its unravelling is in both parties’ interest – and Europeans feel it that way, but EU officials have been warned by Chancellor Hammond and May herself that the UK will walk away from a bad deal and turn into an offshore tax and regulatory haven by slashing corporate tax rates – one of the strategies outlined in Bloomberg’s guide to cut EU’s unity. The economic damage that would result of cutting the UK adrift is a significant concern for EU negotiator Michel Barnier, who The Guardian reported to have said: “There will be a special/specific relationship. There will need to be work outside of the negotiation box… in order to avoid financial instability” - Barnier later clarified that he referred to a “special vigilance.”
The PM’s speech, - which The Guardian branded as “a reality check tinged with fantasy”- gave no reassurance to the decision-makers wondering whether to move jobs in banking and finance out of London, in Bloomberg’s opinion: HSBC CEO said that banks generating 20% of The City revenue will move to Paris, while Goldman Sachs warned it may halve its staff in London. The situation is bearing down on the LSE and Deutsche Boerse merger: Mario Draghi declared the ECB needs to carefully analyse the fusion given Britain’s decision to leave the EU, whereas the London Stock Exchange Group announced the sale of its French clearing arm in a move that was seen as a first step towards moving its clearing division to Paris. The ECB’s proposal that the clearing of euro-denominated products should be restricted to the Eurozone was considered in an FSNForum research note and added up to increasing nervousness over the issue of clearing, as Graham Bishop wrote.
Furthermore, LSE CEO Xavier Rolet warned the Treasury Select Committee against the failure to secure an orderly transition out of the European Union, which impact wouldn’t just see the loss of 232,000 jobs and UK’s vital clearing business, but it would also pose a risk to broader financial stability.
A transitional period for financial services has been deemed vital in a recent EU Financial Affairs Sub-Committee report to avoid a 'cliff edge' and The City main lobby welcomed the phased approach May outlined because it would allow businesses time to adjust to a new deal at the end of the Article 50 term. TheCityUK had previously published a report detailing its key priorities for the UK-based financial and related professional services industry in the Brexit negotiations in which it dropped its demand for preserving the ‘passporting’ rights guaranteed by the Single Market. UK banks seem to have set their sights on ‘equivalence’ instead and reports such as the ones released by the European Parliaments’ Economic Support Unit or the Financial Services Negotiating Forum will help them examine the regulatory equivalence clauses between UK and EU laws. ISDA released its ‘Brexit FAQs,’ an assessment of the various outcomes of the exit negotiations and its consequences related to financial regulation.
Finally, Donald Trump was sworn in on 20th January and became the 45th American president and a major concern for EU leaders as he told notorious Leaver Michel Gove in an interview for The Times that Brexit would turn out to be ‘a great thing’ and other European countries would follow the lead. “I’ll do a deal with Britain”, Trumpsaid – but this assertion might collide with the ongoing TTIP talks between EU and US, now on the line after the new American president backed ceasing negotiations. Trump’s administration would likely benefit from the unravelling of the European project – at least when it comes to achieving an advantageous deal in investment banking: Bruegel analysis showed that Europe’s banks are in retreat from playing a global investment banking role.
The Basel Committee on Banking Supervision postponed its vote over banking reform so as to allow more time to properly finalise the package of proposals after European banks won a reprieve from new capital rules they fear will hit their balance sheets greatly.
EBA published a report setting out its final recommendations for strengthening loss-absorbing capacity of banks in Europe and released a joint report with ESMA in which they call to clarify margin requirements between CRR and EMIR. The Banking Authority’s updated Risk Dashboard showed that elevated NPLs and a high cost base pose a significant profitability challenge for EU banks. The EBF responded to a BCBS consultation on regulatory treatment of accounting provisions in which it acknowledged that the interaction between accounting and capital regime should be revisited to address any overlapping measures and ensure their proper interaction.
Italian banking troubles may sign a make-or-break moment for Europe’s rules on bank resolution, according to the Financial Times, which also predicted that ringfencing will help in the next banking crisis. UK banks risk missing the 2019 deadline for separating retail money from riskier investment banking activity set in Basel III rules given they will have to comply at the same time with the operational complexities of Brexit.
The ECB delivered its contribution to the Commission’s consultation on the review of the EU macroprudential policy framework. The ECB's Yves Mersch discussed why 2017 is going to be a decisive year for the success of innovative retail payments services in Europe.
The European Parliament, the Council and the Commission agreed on a revamped prospectus regulation for the issuing and offering of securities. The reform was proposed by the Commission as part of its Capital Markets Union Action Plan.
ECON MEPs voted a resolution to guarantee securitisation will be made more reliable by aligning the interests of all market players and developing simpler and transparent structures that enable investors to understand the risks. AFME warned Europe risks losing a vital financing tool if the Parliament’s compromises are not significantly recalibrated because securitisation will become prohibitively burdensome in Europe, while Finance Watch noted that the agreement on the STS framework misses some of the key lessons from the financial crisis.
AFME overall acclaimed the consultation on MiFID II but it does not support the gold-plating of EU Directives as this leads to differences of regulation across Europe and consequent confusion. A survey found that asset managers are reducing purchases from the top nine investment banksahead of MiFID II. ESMA issued an Opinion calling for consistent application of MiFIR product intervention powers.
European Council delayed by one year 'PRIIPs' rules to allow the industry to adapt to the new regulation.
The European Commission, Insurance Europe and EIOPA welcomed the successful conclusion of negotiations on an EU/US Agreement on insurance and reinsurance.
Bruegel published a comprehensive paper describing the options for a European insurance union and how to get there.
The Commission further extended transitional relief for Pension Scheme Arrangements (PSAs) from central clearing for their over-the-counter (OTC) derivative transactions, while the Council adopted new rules on institutions for occupational retirement provision (IORPs), aimed at facilitating their development and better protecting pension scheme members and beneficiaries. The EIOPA chairman called for a public debate on the issue of past pension promises becoming untenable as a result of the low-interest-rate environment. The Financial Stability Board added to its list of “potential vulnerabilities” of pension funds following feedback to a consultation on proposals for policy recommendations arising from concerns over the financial stability implications of asset management.
The FSB set out its final policy recommendations for tackling structural weak spots in asset management activities and decided to pursue work that could lead to asset managers being deemed “systemically important”. Moody’s said these proposals will be ‘positive’ for long-term investors and large asset managers, despite their cost.
The Council agreed its negotiating stance on amendments to EU rules aimed at boosting investment in venture capital and social enterprises.
EFAMA welcomed the final Money Market Funds deal reached by the Council of Ministers in a meeting of EU Ambassadors (COREPER) and by the European Parliament’s ECON Committee.
The Slovak presidency and European Parliament representatives agreed to strengthen shareholders engagement in big European companies. But this set of rules could simply be ‘ignored’ by UK firms, becoming the first pension-related European legislation to be scrapped due to Brexit.
The IASB published documents to assist companies applying IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. IASB confirmed that it will press ahead with a series of potentially controversial amendments to its IAS 19 asset-ceiling guidance known as IFRIC 14. EFRAG submitted its Endorsement Advice on Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts.
Accountancy Europe released a paper providing an overview of accountants' and auditors' current contribution to insolvency proceedings in Europe as a support of the proposed EC Directive for an effective insolvency framework.
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