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09 March 2017

128th Brussels for Breakfast – Notes

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As the triggering of Article 50 approaches, so does the Summit that marks the 60th anniversary of the Treaties that laid the foundations of the EU. The increasing friction between Eurosceptics and the EU27, and an apparent absence of direction were portrayed in the Commission's White Paper.

Paula Martín/Graham Bishop

Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by Grant Thornton with co-presenter Mike Vercnocke (City of London Corporation)  

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 20th `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

Following the House of Lords votes to amend the “Article 50” Bill, the “B” subject was unavoidable and discussion moved to the EU27 response. It seems that Barnier’s team is in place and ready to receive its mandate and negotiating guidelines from a special session of the European Council. Then the phoney war will be over and negotiations can start in earnest. However, few thought that two years would be enough to handle the incredible scale and complexity of the talks. Indeed, it is possible that the UK will revoke its notice once the complexities and problems become fully apparent. Recent opinion polls suggest that +/- 30% want to leave the EU at any price, but more than 50% are showing reservations about a Hard Brexit. High profile speeches by former Prime Ministers Blair and Major re-inforce the growing qualms.

Brexit is but one of the factors forcing the EU to take a hard look at itself and President Juncker has now published a White Paper on five options – to inform the debate at the celebrations for the 60th anniversary of the Treaty of Rome. However, the “Big 4” leaders met in Versailles and made clear their preference for a multi-speed Europe (Option 3). For financial services, that means “incremental progress on improving the functioning of the euro area” – in other words, continue along the existing path. A May Reflection Paper will elaborate the content - after the French elections.

The Commission’s Staff Working Paper on equivalence triggered a lengthy debate as it is so fundamental to the City’s hopes of retaining its role as the financial capital of Europe. The omens do not seem good as the Commission is set to take a tough line in defending the financial stability of the EU27 rather than mercantilist support for the trading opportunities of London-based banks. It became very clear that an apparently-technical decision on equivalence has always been – in reality – a political one.

The EBA published its monitoring of CRD/CRR/Basel III compliance and was upbeat about EU banks – but the big problem looming is “resolution capital” rather than CET1 levels. The EBA has just published a raft of papers on the subject and we will return to these next month. But the bottom line is that a hobbled banking system continues to need CMU as a safety valve for supplying credit to the EU economy. However, much of the debate pre-supposes that President Trump will continue to support the global framework for bank regulation. We await the confirmatory tweet!

Why did the LSE abandon the DB merger on a fairly minor issue? The readers around the table of German newspapers were fairly clear that political opinion had turned against it after Brexit.


Key items in the rest of the month’s news included:


The European Commission presented its contribution to March 25 Rome Summit, a White Paper on the Future of Europe that lays out five possible scenarios for the remaining 27 members and seeks the way to revitalise the European project against Euroscepticism  – the ECB's Praet commented that the outcome of the UK referendum can be partly attributed to the spread of negative popular narratives about European integration. Juncker didn’t express his preference for any of the scenarios but senior officials said he recognised that the last one, the ‘further integration’ option, was the best for Europe.

Notwithstanding this, five days after the launch of Juncker’s paper, the leaders of the new ‘Big Four’ – Germany, France, Italy and Spain – met in Versailles and opted for scenario 3, the ‘multispeed Europe’ in a symbolic though strong show of muscle and solidarity. A common EU voice and deeper trade relations with China and other WTO peers will be much needed in the new world order the US President Donald Trump is helping to shape through his opposition to multilateralism and the decline of American power in global economy, according to Bruegel.

The different ‘exits’ are a major risk the European Union faces, and as British PM May’s self-imposed date for triggering Article 50 TFEU looms, ECB officials keep warning The City over Brexit risk: The Bundesbank's Dombret cautioned London that it is likely to lose its role as "the gateway to Europe" for vital financial services such as clearing of euro-denominated bonds, whilst  the SSM’s Lautenschlaeger said UK banks can’t keep access to the EU Single Market with shells, and described how European banks would be affected by the British departure.

Even if banking rules were "equivalent" between the UK and the rest of the European Union, ‘equivalence’ is "miles away from access to the single market", said Dombret, echoing the Commission’s reassessment of EU equivalence decisions to make it tougher for third countries to access the common trade area. “One of the possible scenarios,” according to the Bundesbank official, “is making cooperation possible in two legally distinct jurisdictions, with different legal frameworks. This would mean that firms would have to comply with partially-differing rules,” Dombretconcluded. The Financial Times weighed in the ‘equivalence’ debate, backing the shared interest in establishing access between The City and Europe after the British ‘divorce’ is effective. Buta more comprehensive ‘equivalence’ regime is needed to cushion the impact of Brexit on the Asset Management industry, a CEPS paper argued -AIFMD passport is no longer seen as the ‘silver lining’ for the fund industry, BVCA’s Hames said. Credit rating agencies’ activities in London have also been thrown into doubt by Brexit, with financial professionals warning that it could take many months to prepare either the FCA or the Bank of England to take over the oversight currently carried out by ESMA.

May’s administration is under great pressure at home to secure a good deal that keeps British business trade with the EU at full speed: A LSE study by high-level British economists insisted that the loss of EU passport is a ‘major threat’ to UK financial services firms and urged the government to ensure access as a “matter of urgency”, whereas the FCA’s Bailey told MPs a hard Brexit poses risks to the integrity of financial markets. The Commons International Trade Committee urged the government toclarify its vision for UK trade after 2019—and provide reassurance that contingency plans will be in place for the eventuality that the UK does not get an agreement with the EU. At this stage, just 35% of British public would back Britain leaving the EU without an agreement with other states. But seeking a transition deal to soften a cliff-edge fall may lock Britain under the jurisdiction of the European court of justice for years, the EU Parliament chief negotiator Verhofstadt warned.

Old British political heavyweights have sounded the alarm over what some have called May’s daydreaming: What British brokers are seeking is the ‘squaring of the circle’ and they may not deliver their promises because it is not feasible[GB1] to  achieve them, former UK PM Major warned. “People voted without knowledge of the true terms of Brexit,” said Tony Blair mirroring Major’s words. Additional voting figures might shed light over the pattern of how the UK voted.Blair went further, urging ‘Remainers’ to “rise up” and fight to change the voter’s minds about leaving the EU. The former UK ambassador to the EU Sir Ivan Rogers, was very critical of the government’s stance in the negotiations, telling MPs that Merkel and other leaders will reject single market access for some sectors.  

Nicolas Véron and Dirk Schoemaker argued in a Bruegel paper that Brexit represents a unique opportunity for the EU to step up the integration of the European financial markets. Up to 30,000 UK jobs and 17% of bank assets would move to the EU as a direct consequence of Brexit.  The main risks of this shift of balance relate to the supervision of wholesale activities of financial firms and capital markets, and to address them, European leaders should reinforce ESMA. The FT gave some hints on how a post-Brexit redesign can still save the capital markets union project.

Bruegel analysed the migration of financial firms to the EU27 that will result from Brexit and compared the four European cities that are likely to host most of the UK’s wholesale market: Frankfurt, Paris, Dublin and Amsterdam. But an American city will attract the biggest chunk of London’s businesses: New York is set to be the biggest winner, senior financial executives said in a worldwide survey that highlighted the doubts about the future of London as a major global financial hub. However, the British capital is not the only UK city that will lose out from Brexit: the biggest City lobby reported that the majority of professionals working in the banking and financial industry are based outside London and contributed nearly 11% (£176bn) of total Gross Value Added in 2015.

Not only bank jobs will be lost; it is becoming clearer that employers will suffer a shortage of European staff they need, but also that UK population growth will take a hit, according to data by the Office for National Statistics. Lords recommended the government to pursue a preferential agreement with the EU on migration that could secure reciprocal preferential treatment for UK nationals in Europe and improve the prospects achieving the UK's objectives on access to the Single Market. For Andrew Duff, the goal of the imminent European Council guidelines must be to expedite the departure of the British without wrecking the rest of Europe.


EBA published the results of the CRDIV-CRR/Basel III monitoring exercise as of end June 2016, which showed a further improvement of European banks' capital positions. The Banking Authority agreed on the tentative timeline of the 2018 EU-wide stress test, and also published its final Guidelines on liquidity coverage ratio (LCR) disclosure and its final draft Regulatory Technical Standards on the disclosure of encumbered and unencumbered assets for the provision of transparent and harmonised information. The Basel Committee issued a second set of FAQs and answers on Basel III's Net Stable Funding Ratio.

EU leaders should focus in 2017 on restoring the banking sector’s credibility by providing it with more capital and better oversight, wrote Christopher Smart in Project Syndicate. European banks have not recovered from the crisis, a VoxEU column argued, in part due to heavy provisions for non-performing loans – a comprehensive approach to those could address market inefficiencies and reduce bad loans to bearable levels.

IIF-GFMA responded to the FSB Consultation on Guiding Principles on the Internal TLAC of G-SIBs and on the guidance on continuity of access to Financial Market Infrastructures for a firm in resolution.

The EBA published its opinion on transitional arrangements and credit risk adjustments due to the introduction of IFRS 9, acknowledging that the level of provisions could change over time and in particular during downturns because there will be more exposures from stage 1. The authority consulted on specification of an economic downturn, according to which institutions shall estimate the downturn loss given default (LGD) and conversion factor (CF). The ECB launched a public consultation on draft amendments to the ECB regulation on reporting of supervisory financial information, which were aimed at updating the regulation mainly to reflect changes in the International Financial Reporting Standards.    
The EBA paved the way for open and secure electronic payments for consumers under the PSD2 with the publication ofits final draft Regulatory Technical Standards on strong customer authentication and common and secure communication. Blockchain payments are becoming increasingly topical, with first-level figures such as the European Central Bank's Coeuré saying that blockchain fintech has a “long way to go” to satisfy financial regulators. But the industry is ahead of lawmakers in this field, with almost half of the membership base of the Post-Trade Distributed Ledger (PTDL) Group saying that it will become adopted in the financial post-trade area in three to five years. For those fearing disruption in the financial services industry, City AM described the main changes blockchain will cause in the sector.


The Commission has put its eyes on accelerating the drive to a Capital Markets Union, with a report that looks at how to tackle national barriers to capital flows.   A Buegel paper on this issue found strong support for the hypothesis that the larger the assets managed by institutional investors, the smaller the home bias and thereby the greater the scope for risk sharing.

The Economist recognised that even the new CMU proposal, rather than encouraging securitisation, may have had the opposite effect. The Commission is seeking to reactivate this ‘structured finance’: Vice-President Valdis Dombrovskis confirmedwork on securitisation of EU sovereign bonds, explaining that the goal of setting up European Safe Assets is to reduce banks’ exposure to sovereign debt.  PCS launched its new label for risk transfer/synthetic securitisations.

ESMA is examining a potential loophole in MiFID II rules: the regulator is concerned over the potential establishment of networks of systematic internalisers by investment firms to circumvent certain MIFID II obligations.  

The ESAs published a statement in response to industry requests relating to operational challenges in meeting the deadline of 1 March 2017 for exchanging variation margin that was responded by IOSCO and FCA.

The Organization of Securities Commissions found no substantial evidence showing that liquidity in the secondary corporate bond markets between 2004 and 2015 has deteriorated markedly from historic norms for non-crisis periods.   IOSCO published a report thathighlights the increasingly important intersection between Fintech and securities market regulation, and described the impact it has on investors and financial services.  

The FT argued that centralising the trading of derivatives into clearing houses has reduced risks to the financial system from the failure of an individual bank, but magnified the importance of clearing houses, which have been saddled with the ‘too-big-to-fail’ tag – a recognition they don’t fit, according to the newspaper.

Asset Management

OMFIF's Nugée said that there is a growing concern among regulators and market participants alike that the next crisis may appear in the asset management community.   The FCA published a clear warning to asset managers on research spending issues, especially on research valuation and budgeting. The UK’s regulator is seeking feedback on market structure and regulation to assess whether they reinforce short-termism.

The 10 EU member states negotiating the possible introduction of a financial transactions tax (FTT) will carry out further technical analysis of its effects on pension funds and the real economy.


Swiss voters rejected a proposed reform of the country’s corporate tax system that were designed to bring Swiss' practices closer to global standards and abolish special treatment for multinationals.

Insurance Europe raised concerns on the European Commission’s proposal for a Common Corporate Tax Base (CCTB) and consolidation, saying that certain aspects of the suggested measures must be refined to ensure added value for European businesses.that were designed to bring Swiss’ practices closer to global standards and abolish special treatment for multinationals.


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