Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by Grant Thornton with co-presenter Mark Hoban (International Regulatory Strategy Group – IRSG)
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
We had to open with Brexit and follow up on the verdict from the Supreme Court that was announced in the middle of the last meeting. The verdict was clear but the Court conspicuously refrained from opining on the question of whether the Notice can be revoked – as a matter of EU law, the issue would fall to the ECJ. The Brexit White Paper only had one page devoted to financial services and did not seem to provide any further clarity than the Prime Minster had done in her Lancaster House speech.
Mark Hoban presented the IRSG report on “The EU's Third Country Regimes and Alternatives to Passporting” which concluded that the focus of the Brexit negotiations should be on designing and delivering a bespoke UK-EU deal rather than reforming or adapting existing frameworks. A key aspect is the anchoring of EU standards to the global frameworks but discussion highlighted that the US – under its new President – may be backing away from some aspects of global bank regulation. Moreover, the issue of “dispute resolution” may become complex in the heat of a crisis.
A Commission staff paper on “Bank lending constraints in the euro area” provoked a surprising amount of discussion as the cumulative scale of the minimum capital requirements plus various buffers is only now coming into focus – with a natural impact on constraining bank credit growth. The new element highlighted in a BBA paper is the interaction of the new IFRS9 rules on moving to “expected credit losses”. There is a risk of a new element of pro-cyclicality in an economic downturn as capital is absorbed by these “expected” losses.
The problems of the banking sector underscores the EU27’s strong need to continue with an effective Capital Market Union even as Brexit occurs. However, a key component is the oft-stated efficiency of the London markets through liquidity driven be the derivatives market. This is already a politically charged topic – Eurogroup Chair Dijsselbloem was forthright that it is “unthinkable” for UK banks to do business in the EU without a sustainable coupling to EU rules.
This may come to a head deep in the technicalities of CCP resolution as ESMA has announced that the 2017 stress tests are just getting underway. This time they will include the interconnectedness of each CCP, its clearing members and the other CCPS – an exceptionally complex task.
Key items in the rest of the month’s news included:
Prime Minister Theresa May set out the 12 priorities the government will use in the UK’s divorce from the European Union to shape a new role for a “global Britain” outside the EU’s single market. May’s speech was welcomed in Britain and Europe as it provided some certainties, even if it pledged to deliver the ‘hardest Brexit’ Brexiteers had been calling for. EU officials, though, took note of her veiled threats of breaking talks off and turning the UK into a tax and regulatory haven if the deal achieved wasn’t fit for Britain’s interests. Eurogroup President Dijsselbloem warned against the UK “going rogue and creating an offshore tax haven,” which “would be a huge mistake.”
May’s Brexit bill passed the first vote in House of Commons after losing its appeal to the High Court decision to require Parliamentary approval to trigger Article 50, but was forced to publish a White Paper outlining its main negotiation lines. Graham Bishop analysed the Government’s document stance towards financial services and the likelihood of the ECJ ruling that this very ‘intention to leave’ can be revoked in the future.
In the meanwhile, the EU27 remains united in its intention of conducting negotiations as a bloc only once Article 50 has been invoked: the Council President Tusk addressed the remaining European leaders before the Malta summit and used the American motto "United we stand, divided we fall" – in a clear reference to Donald Trump’s support for Brexit - to warn them against the threats the EU now faces. A common external enemy may serve as a boost for European unity, as Dijsselbloem hoped for, but Brexit negotiations will mean an extremely bumpy road for at least two years: the FT reported that central bankers may face off the impact of a disorderly Brexit for financial stability – and it may prove significant, according to Bruegel, which has recommended the EU27 to upgrade its financial surveillance architecture to minimise the financial market fragmentation resulting from Brexit and the corresponding increase in borrowing costs for firms. Not to mention the costs to the EU budget – FT’s Alex Barker estimated that the UK might have to pay up to €60 billion in charges to settle to disentangle itself from the EU, in what May’s officials called ‘spurious demands’.
But how the Brexit process will unfold after the triggering of Article50? The European Institute looked into how this “never walked before” path might look, whereas CEP proposed "Ukraine Plus" as a feasible model for an agreement with Britain. Whatever the outcome, banks are growing increasingly aware they will lose unfettered access to the EU market and they are already moving on: TheCityUK dropped its demands for keeping ‘passporting’ rights and looked for alternatives in its latest report, which called for a bespoke UK-EU deal rather than reforming or adapting existing frameworks. But this so-called bespoke agreement must not include euro-clearing in the event of a hard Brexit, the vice chairman of the world’s largest asset manager BlackRock warned, echoing the ECB’s Draghi call for EU institutions to seek more oversight of the euro-clearing trade in London once Britain leaves the bloc. Furthermore, British banks will still have to accept Brussels banking standards to keep access to the European market, according to Dijsselbloem. STS securitisation might be Brexit’s first casualty: the Brussels project to boost EU securitisation market has stalled over the Brexit vote amid political clashes over how far financial centres from outside the bloc should be allowed to take part.
UK-based foreign banks are paying attention to the signs and have started relocating their staff: up to 30,000 UK jobs and 17% of bank assets would move to the EU as a direct consequence of Brexit, Bruegel estimated. HSBC CEO said trading operations that generate 20% of London revenue may move to Paris, while Goldman Sachs revealed it may halve its London staff to 3,000 and transfer key operations to New York and Frankfurt. The German financial hub is making room for as many as 10,000 workers from Britain’s financial services industry, and Amsterdam will also welcome British financial staff within weeks.
Donald Trump’s executive orders and cabinet appointments are shaping how his presidency will look, and banking may be another big issue as the US President has ordered the review of Dodd-Frank financial reform law – the move might call into question the BCBS Basel III rules that have been blamed for raising European banks’ capital requirements significantly. The move spurred concerns among European lawmakers that Trump will seek deregulation, with ECB’s Draghi saying a relaxation of banking rules is the "last thing we need". A new paper by financial firm Oliver Wyman might shine a light on the implications of the Trump Administration for financial regulation.
DG ECFIN assessed the lending constraints faced by the banking sectors of euro area Member States arising from a combination of low profitability, adverse bank equity markets and the phase in of new capital requirements. The latter will be affected by the upcoming IFRS 9 as analysed by the British Bankers Association, and a European Commission proposal to force overseas banks operating in the EU to set up holding companies with ring-fenced capital was accused by the Bank of England of not being “in line with international standards”. The FT reported that a global deadline for reform of the $544tn derivatives market has triggered a last-minute scramble by hundreds of small banks, insurers and pension funds.
Bruegel released an assessment on the new insolvency standards for banks, looking into whether they would help Europe’s debt deleveraging. The EBF responded to the ECB Draft Guide on “fit and proper assessments”. ECB's Mersch reviewed the trends that have affected both the supply and demand for good collateral which confluence reflects the situation in the repo market nowadays. Bloomberg gathered policy makers’ statements supporting the creation of a EUbloc-wide bad bank to help tackle the 1.2 trillion euros of soured loans on lenders’ books.
The British Bankers Association stressed the need for an international approach to technology in banking. New technologies are being widely applied in payments but the effort faces major challenges raised by digitalisation, the Governor of the Bank of France De Galhau said. De Galhau addressed how FinTech is reshaping the banking, insurance and financial industry. Blockchain is becoming an effective trend, with a seven-bank consortium delivering trade finance on blockchain this year.
The European Commission launched a consultation on the Capital Markets Union mid-term review. The President of the ECB Draghi said that the Eurosystem has laid some of the key fundamentals for a capital markets union, notably the launch of TARGET2-Securities.
ESMA announced the details of its 2017 CCP stress test which will assess the resilience and safety of the EU’s CCPs from a systemic risk viewpoint, whereas the FSB consulted on a guidance for CCP resolution and resolution planning. ESMA published its Annual Report and Supervision Work Programmes setting out its main areas of supervisory focus for CRAs, TRs and third country CCPs in the European Union. The Authority assessed the DLT’s potential and interactions with EU rules.
ESMA’s chairman Maijoor's spoke about the improvements ESMA has identified to assist it in its role, supervisory convergence and the 3rd country regime and on reforms in OTC derivatives markets and benchmarks.
IOSCO analysed the potential of tech-driven change in the securities market industry.
Steven Maijoor warned that asset managers are to face tougher tests to assess whether they could become the centre point of systemic risk. Maijoor also called on the region’s policymakers to rethink the way they share oversight of the world’s clearing houses, another part of markets critical to market stability. EU officials were also called to draw their attention to a proposal to amend EuVECA and EuSEF laid out by the EP think tank, in an effort to revive risk capital in the European Union.
Hedgeweek reported that the risks of cybersecurity threats are rising for global asset management groups and this is making the Money Laundering Reporting Officer (MLRO) an increasingly vital role in the operations of investment funds.
The French asset management association called for the creation of an individual pension product consistent with the pan-European personal pension being explored in the EU, and for the creation of cross-border pension funds.
EIOPA published draft Implementing Technical Standards on the Insurance Product Information Document (IPID), as part of its work on the detailed rules for the Insurance Distribution Directive (IDD). The IPID was conceived as a standard that will improve the quality and accessibility of the information given to consumers before purchasing non-life insurance products.
Insurance Europe reviewed Solvency II one year on from its entry into force and concluded that it has been successfully implemented, but that the excessive layers of conservativeness built into its design risks harming consumers, long-term investment and the economy.
Corporate governance / Accounting
Accountancy Europe published an updated state of play of the process of implementation of new EU audit rules in 31 European countries.
The IESBA announced completion of the major first phase of its strategic project to restructure its International Code of Ethics for Professional Accountants, whereas AFME responded to the EBA-ESMA consultation on the suitability of members of the management body and the key function holders confirming that the notions of management body in its supervisory and management function need to be clarified. The uptake of IFRS Standards is strengthening accountability and enabling cross-border investments, in the IASB’s Hans Hoogervorst’s view.
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