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09 January 2018

2018: the year of the make-or-break for the Brexit talks - 137th Brussels for Breakfast – CPD Notes

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The start of the New Year marked the entry into force of the EU's revamped rules for financial services, MiFID II, and re-set in motion a big headache for European regulators and firms: Brussels and London will have less than 10 months to ink a trade deal and the terms of their new relationship.

Graham Bishop/Paula Martín

Organised by the Centre for the Study of Financial Innovation (CSFI) with co-presenterJohn Rega (Mlex) 

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 29th `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

Just 444 days to go to the Brexit cliff – the usual starting point for discussion nowadays! After the December European Council, the EU 27 agreed a new set of guidelines that will tie chief negotiator Barnier’s hands: this month (January) they will adopt a negotiating Directive on the “about two year” transitional arrangement. Subsequently, they will agree in March the guidelines for negotiating the future relationship. The first step will be to draft the Withdrawal Agreement itself as quickly as possible – translating in full and faithfully into legal terms – the agreement reached late in 2017. This process may well reignite the fundamental fudge on the Irish issue.

We devoted much time to what the “Canada +++” deal might actually mean as that seems the only plausible template – given the UK red lines. Its 1598 pages only devote 230 pages to Treaty text and the remainder is mind-numbing detail on specific trade items. But the treaty text includes the very explicit “prudential carve out” for financial services. A deal based on this text will need to be ratified by more than 35 legislative bodies – a formidable hurdle and several participants doubted such a process would be possible in the remaining, short time available.

MiFID II and MiFIR came into force on the 3rd – amidst widespread fears of chaos. As is now normal with such fears, they seem to have been completely overblown as only two issues emerged around the table: the sudden agreement to a 30-month delay on “open access” to futures markets and the Legal Entity Identifier (LEI) problem mainly due to non-EU entities which had not bothered to incur the €8-9 cost of registering.

However, the drive to create a CMU is alive and well with a string of consultations on the details required to bring the STS securitisation measures into operation. Interestingly, there was general agreement that mundane technical steps such as the EBA standard template for information on NPLs and the ESMA decision to require all issuers to provide their financial statements after 2020 in standardised, machine–readable form would trigger profound market change as Artificial Intelligence could make sense out of the huge data that would become available.

I highlighted my forthcoming article in Financial World on the state of play in banking union. The drive to complete it remains undimmed and a review of the last 5 years of legislation reveals that what used to be quite unthinkable is now in force… but it remains a work in progress. In particular, the EBA report on MREL revealed just how much banks are responding to regulatory pressure to end TBTF by shrinking their balance sheets instead of expanding capital. Surprisingly, bond investors do not yet seem to be charging for the new `bail-in’ risks – another problem lying in wait for the years ahead?

Finally, GDPR preparations for its introduction this May, seemed woefully behind as it is being treated as a compliance issue rather than a business problem.


These Notes for the Friends of Graham Bishop will be supplemented by our full Workbook for our CPD clients (link) – in conjunction with the 30-minute CISI webcast. We have launched our new “CPD Weekly – 10 Minute Read ‘n Verify” (link) to comply with ESMA Guidelines

Key items of the rest of the month 

After an agonising last-minute UK-EU deal that was less seen in Brussels and at home as an agreement than an unconditional surrender of London, the EU27 agreed their guidelines for Phase2  of the Brexit talks during the Council meeting of 15 December, laying the bases for the Commission’s recommended draft negotiating directives that set out additional details on transitional arrangements.

The Council urged the UK to enshrine in domestic law the agreed principles and warned that, during any transition period  to secure an orderly withdrawal, Britain would have to fulfil all obligations - including abiding by the European Union Court of Justice’s resolutions-, while losing all voting rights in the bloc. A transition period that, the Commission recommended, “should not last beyond 31 December 2020.” After that date, the UK will no longer be covered by our international agreements,” the EU Brexit top negotiator Michel Barnier said. “They will be leaving approximately 750 agreements, which we have signed,” at its own peril.

Ahead of the Commission communication, the British Parliament’s Treasury Committee had called for standstill transitional arrangements that “must be simple enough to negotiate within a matter of weeks,” allow the UK to start establishing independent trade relationships and after which certain sectors, including financial services, will need an additional adaption period.

A short transition that helps cushion a hard landing might be the only ‘mild’ option for both parties in the event of a no-deal and British officials are being told to prepare for such a scenario, The Times learnt. Prime Minister May’s Brexit team reportedly believes that the EU’s concerns that it will be hit by a sudden £8 billion black hole in its budget will help them secure extra time to soften the economic impact in Britain if trade talks break down.

Experts at VoxEU analysed how exposed UK exports are under a scenario where trade reverts to WTO rules and found that one-third of UK exports to the EU will remain tariff-free, while one-quarter of exports (£47 billion) will face high tariffs and/or the risk of restrictive quotas or anti-dumping duties. 

The so-called “Phase 2” of the Brexit negotiations – the trade talks – will be the hardest and longest, and a strong indicator of this might be the Government’s inability so far to spell out what kind of trade relationship it wants after the UK has left the EU.

Fed Trust’s Dr Andrew Blick explained what the Secretary of State for Exiting the EU, David Davis, meant when he described his plans for a future trading arrangement with the EU as ‘Canada plus plus plus’.  Dr Blick warned that “the ‘have our cake and eat it’ option vaunted by ‘leave’ optimists – whereby the UK retains those aspects of EU membership it wishes to while jettisoning the others – is clearly excluded by the EU position papers.”

Cabinet members seem to not have agreed a common position: Chancellor Philip Hammond left open the possibility of the UK joining a new customs union with the EU in a letter that sets out as strategic objectives frictionless trade with the EU, avoiding a hard border with Ireland and an independent international trade policy.  

This option might resonate with the IPPR think tank’s proposal to create a ‘shared market’ for the UK and the EU with a new customs union similar to the existing one and regulatory alignment that would allow tariff-free trade, and the UK to benefit from EU trade deals.

The UK might ultimately have to choose between a comprehensive FTA with the EU and one with one of its biggest rivals, the US: the Americans have made clear that they want Britain to ‘reset’ EU regulations after Brexit to boost the chances of a UK-US trade deal. On the other side, the European Commission has warned that the US Tax reforms could disrupt international insurance and reinsurance business and even violate international treaties against double taxation.

Bulgaria will be the member state in charge of overseeing the UK’s departure during its presidency mandate at the Council of the EU, and implementing the negotiating directives in this second stage might prove challenging: French President Emmanuel Macron warned against a possible rift in Europe’s unity over the Article 50 negotiations that could see individual states holding talks with England in their sole interest, in a movement that could enfeeble the EU’s final objectives as a bloc.

Macron issued his call for maintaining a “united front” despite France’s aggressive agenda to ‘seize the opportunity’ brought about by Brexit to supersede Britain as the European leader in financial services. The focus of the talks have been on the investment banks’ exposure, however the £8tn asset management industry might become the key issue: the FT reports that ministers and BoE officials are bracing for a French-backed move to curb British access to EU funds in financial hubs such as Dublin and Luxembourg by toughening the so-called “delegation” rules under fears that a large proportion of assets regulated in the EU would be run from a third country with a symbolic presence in a European state. But delegation won’t the only battlefront in the sector: fund managers at The City have warned of a “sneaky Brexit” that would see a talent drain to rival financial centres combined with fading investment.

Brussels seems determined to prove to London that it won’t get the bespoke trade deal it wants, even if leaders such as the Italian prime minister called on the EU to offer a “tailor-made” Brexit trade deal to the UK : Michel Barnier told The Guardian that Britain cannot have a special deal for the City of London because “there is not a single trade agreement that is open to financial services,” and that the outcome was a consequence of “the red lines that the British have chosen themselves. In leaving the single market, they lose the financial services passport.” This principle was also pointed out by the Bank of France Governor François Villeroy de Galhau, who rejected accusations of French moves to undermine The City powers, but warned that “clearing activities in euro, for all those of “super-systemic” importance, must be located where the supervision of the Eurosystem can be exercised effectively.”

The FIA published a white paper on the Impact of a No-Deal Brexit on the Cleared Derivatives Industry andrecommended that the parties agree to grandfather UK CCPs, trading venues and trade repositories to preserve their EMIR authorisation and qualified central counterparty (QCCP) status before exit day.  In addition, the Futures Industry Association suggested that UK regulatory authorities grant equivalence and recognition under English law to EU27 market infrastructures.

Switzerland accused the EU of using a finance dispute to give Britain ‘a taste’ of what life will be like after Brexit for trade in financial services with Europe. The EU's equivalence decision on Swiss share trading venues – the Commission allowed European and Swiss equities traders access to each other’s markets for just 12 months from January - shows the hard stance Brussels has taken on giving third countries access to its markets if they do not accept the EU’s regulations or recognise the ECJ jurisdiction.   

A Canada-style free trade agreement with the EU post-Brexit might not even be ambitious enoughfor Britain’s major banks and other financial institutions that wrote to Theresa May and Philip Hammond. The letter from UK Finance said that alignment with EU rules on finance is paramount and urged the Government to give the City a preeminent place in trade talks to avoid a major blow to British economy.  

The world's biggest investment banks based in Britain are split on whether they should move hundreds of billions of clients’ assets ahead of Brexit: some of them are planning to begin “novating” — the process of moving client assets from one legal entity to another — assets to EU entities by April 2019, while other want to leave existing trades where they are even after the UK leaves the EU.   

The Bank of England published regulations that seek to shield European banks from tougher banking rules once the UK leaves the European Union: it will not force all European-headquartered investment banks to ring-fence their capital and liquidity in the UK after Brexit.  The move is a significant concession from the UK and soothes concerns that the FCA would require investment banks to establish new subsidiaries, but it would also give the BoE significant leverage over EU-based banks, allowing them to reach back into headquarters operations of lenders who only operate in London as a branch.

The Bank of England alsoissued guidance on its approach to international central counterparties (CCPs), saying that non-UK CCPs operating currently in the UK will be able to do so after the UK’s withdrawal from the EU.

But the BoE’s position is conditional on how much cooperation there will be between European and British supervisors post-Brexit, and on the outcome of the disconnection negotiations, people familiar with the situation told the Financial Times.

The no-deal backdoor is an option that’s being taking into serious considerations in case an ‘acceptable’ way forward cannot be conjured: the UK should not exclude the possibility ofleaving without a deal on financial services, wrote Jonathan Ford in the FT. Ford warned The City against tangling itself in European red tape “simply to preserve a portion of the 20 per cent of its business that is EU-facing.”

The way Theresa May’s government is handling the negotiations might been seen very negatively from Brussels, but the public and MPs at home and within the very Tory party aren’t any happier. The head of the Department for Exiting the European Union, David Davis, was finally forced to publish Brexit sectoral analyses officials have been conducting and which span sectors such as asset management, Fintech, insurance and pensions, payment systems, or banking. Davis’ reluctance to do so – and the debate sparked over the reports’ very existence - almost cost him a formal reprimand by MPs.

But what May is set to face at the end of January might call the entire Brexit enterprise into question:  pro-European Conservatives first made her grant parliament a “meaningful vote” on the final Brexit deal, then linked their approval to the Withdrawal Bill to an amendment  to the legislation that would allow ministers to delay the effective date of Brexit, arguing that parliament might need to study and ratify a final departure agreement. The process of ratifying the text is watering down the initial sweeping powers the Bill provided for the Government in its initial form, and may snatch the PM’s power to easily consent to the final deal with the EU.

The ‘Brexit Bill’ might not even come into force anyway: analysts at Nomura bank found that shifting opinion could force the UK to hold a second Brexit referendum this year. Authors Jordan Rochester and Andy Chaytor highlighted that “Around 75% of MPs (including a slim majority of Conservative ones) are pro Remain," and if the trend of a “slim majority in the polls saying in hindsight it was wrong for Britain to vote to leave the EU” – such as the one shown by the latest BMG/Independent Poll - becomes a commanding one, this “may embolden Remain MPs on all sides of the house to push for a second referendum.” This view finds grounds also in the Lib Dems’ call for a second EU referendum in December 2018 or Tony Blair’s call on Labour leaders to back this proposal: the former Prime Minister said voters were “entitled to think again, if the circumstances changed”.

And circumstances – particularly the economic ones – are changing rapidly. Worsening, to be precise: The International Monetary Fund found that Britain’s vote to leave the EU is already damaging the UK despite a strong recovery in the world economy. The Fund warned that “losses in tax revenues could exceed any gains from ceasing net contributions to Brussels.”

Economists surveyed by the FT supported this gloomy vision, while the British Chambers of Commerce’s head issued a warning call in The Guardian, saying that “businesses are so dismayed at the lack of leadership and unclear messages that many are considering contingency plans and preparing for lower levels of investment,” and that patience among businesses is ‘wearing thin’.   The BCC also warned that sectors such as hotels and hospitality or engineering and manufacturing are already suffering from a lack of EU workers, with many firms saying they will have to close and others considering moving overseas to find the staff they need.  

Capital Markets Union

MiFID IIcame into force on the 3rd January amidst great concerns in the financial services industry that ESMA tried to allay providing last-minute guidance on cross-border investment services and MiFID transposition and releasing documents such as updates on MiFID II trading halts procedure, further guidance for transactions on 3rd country trading venues for post-trade transparency and position limits and an overview of MiFID II deferral regimes.

The European regulator updated its MiFID II Q&As on transparency and market structures; on Investor Protection topics such as inducements, suitability, and provision of investment services and activities by third country firms; and on MiFIR data reporting.

The Securities and Markets Authority tried also to soften the implementation period: ESMA granted an extra six months to allow compliance with new rules that force all institutions, as well as companies issuing securities, to have individual reference numbers for trading, a code known as Legal Entity Identifier (LEI).   Regulators want to make sure the rules will be applied as swiftly as possible, and so the Financial Conduct Authority called on asset managers to notify the regulator if they are struggling with MiFID II implementation. 

At the heart of the sector’s fears is who will absorb the costs of research, as the revamped MiFID rules force fund managers to pay for it themselves or agree a formal charge with their clients: IPE research found that 92 out of the 120 biggest managers of European institutional assets plan to absorb the cost of external investment research.  

European authorities reinforced the push for reviving the European securitisation market: ESMA consulted on securitisation requirements, while the EBA launched a consultation on its draft Technical Standards on risk retention for securitisation transactions and on the homogeneity of underlying exposures in securitisation.

The FSB, the Basel Committee, the CPMI and IOSCO launched surveys as part of their joint work to review the effects on incentives to centrally clear over-the-counter (OTC) derivatives trades in the aftermath of G20 reforms. 


The push is on to complete Banking Union, wrote Graham Bishop, who took stock of the progress so far and next steps and warned that there are many large and complex issues to be resolved to bring banking union to full fruition and the desired timescale is short. The project is one of the main pillars of the European Economic and Monetary Union – Marco Buti in a SUERF publication identified the priorities to strengthen EMU by 2025 and beyond.   

The EBA published its standardised data templates as a step to reduce NPLs, updated its estimates of capacity and funding needs of a representative sample of European banks to meet MREL under alternative scenarios and published a discussion paper on the European efforts to transpose into EU law the Fundamental Review of the Trading Book (FRTB) and Standardised Approach for Counterparty Credit Risk (SA-CCR) developed by the Basel Committee. The Banking Authority released an impact assessment report showing that EU banks have continued to improve their Liquidity Coverage Ratio since 2011 and fully comply with this requirement ahead of its implementation.

The Bank of France chief François Villeroy de Galhau gave an account of two important challenges faced in shaping the global European banking system: first, the Single Resolution Mechanism, the second pillar of the Banking Union, has just successfully passed its first real test this summer with the orderly resolution of Banco Popular. However, there is still room for improvement in coordination. According to a new report from the ECA, the SRB, which was set up to ensure the resolution of banks in the EU, is still “very much a work in progress”.  
The Executive Director of Resolution of the Bank of England, Andrew Gracie, said that the UK now has in place a comprehensive bank resolution regime that is compliant with international standards and “will remain so after Brexit.” Secondly, De Galhau warned that Europe still suffers from overcapacity and cross-border consolidation is needed.

The SSM supervisory priorities identified thekey drivers of banking sector risks in 2018: the protracted low interest rate environment, large stocks of non-performing loans (NPLs), among others.

The European Commission continued its work on SMEs strengthening as a key Capital Markets Union initiative: the Commission launched a consultation on building a proportionate regulatory environment to support SME listing and consulted on how to make it easier for SMEs to tap capital markets.  

The EBA published an Opinion on the transition from PSD1 to PSD2 and issued final draft technical standards on the future EBA register under the Payment Services Directive.   

Regulators and experts diverge on cryptocurrencies: the ECB's Cœuré said that “Bitcoin is not a currency” but a “speculative investment” that pose a “risk of large capital losses.” But 71% of the economists surveyed by the Centre for Macroeconomics (CFM) and the Centre for Economic Policy Research (CEPR) responded that Bitcoin does not pose a risk to financial stability, despite growing scrutiny amid manic buying around the world.  

Clients Union

EFAMA sounded the alarm over new PRIIPs rules that will “confuse and mislead investors “. The packagethreatens to cause serious investor detriment by mandating figures, particularly in relation to performance and costs, the AM Association warned.  

EIOPA issued a Q&A on the comprehension alert in the Key Information Document for Insurance-Based Investment Products (IBIP).

The Council agreed its position onnew rules to allow the free flow of non-personal data across country borders under the General Data Protection Regulation (GDPR), which comes into force in May 2018. Experts have warned less than half of firms (45%) currently have a compliance plan in place to meet GDPR requirements, and Munich Re is gearing up a tool to help companies to be ready in time to comply with the new data rules


EIOPApublished its December 2017 Financial Stability Report of the (re)insurance and occupational pensions sectors in the European Economic Area and analysed the first Solvency and Financial Condition Reports to identify areas for improvement.

Asset Management

EFAMA welcomed the Commission’s proposal for a Directive and a Regulation establishing a self-standing prudential regime for investment firms, but Moody’s warned that the asset management sector faces “fundamental” challenges in the near future, despite the industry’s outlook stabilising. 

EIOPA published the results of its 2017 Occupational Pensions Stress Test, which identified spill-over risks into the real economy from shocks to the European occupational pensions sector. The Pensions Authority found a Europe-wide deficit of up to €700bn and warned the sector against not addressing the problem andunfairly burdening the younger generation.   

The EU’s plans for a pan-European personal pension plan (PEPP) aim to unify a fragmented market and address problems such as the ones EIOPA highlighted, and will be presented to the European Parliament in the new year by Dutch MEP Sophie in ’t Veld.   EU member states endorsed another extension of the exemption from central clearing for pension funds adopted by the European Council in the week of 18 December.  

Corporate Governance/Accounting

Insurance Europe's response to the Commission proposal on new obligations for intermediaries to report cross-border tax planning arrangements raised concerns that the proposed additional reporting obligations would cause a significant administrative burden.

ESMA published guidance setting out the new European Single Electronic Format (ESEF), a new template that will have to be used from 2020 by all issuers to prepare their annual financial reports. 

Financial Services Policy

IT challenges such as cyber threats and being ready for GDPRare among the ones that cause more anxiety in the financial services sector: Over 200 Information Technology (IT) executives revealed that wealth and asset managers in Europe are closer to embracing new technologies than banks because CEOs in the industry understand the importance of technology within the business.  

The presidency and the European Parliament reached an agreement on strengthened EU rules to prevent money laundering and terrorist financing.  

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