26 May 2009

May 2009

Global co-operation on financial services supervision is now cemented in, but the unwieldy nature of such a large group probably requires sub-groups to take an operational lead and the G7 continues to provide that.

Graham Bishop's Personal OVERVIEW

Global co-operation on financial services supervision is now cemented in, but the unwieldy nature of such a large group probably requires sub-groups to take an operational lead and the G7 continues to provide that. So the G7 reaffirmed the need for far-reaching reforms and their decision to implement the agreed measures. ECB President Trichet called on policymakers to ensure a level global playing field in financial services to prevent regulatory arbitrage “It is essential that all economies of the world apply the same rules, respect the same principles as regards financial regulation...”

This week, the European Commission will announce its proposals to implement the De Larosiere Group recommendations. However, the mechanics of achieving this within the EU are now coming under greater scrutiny even though Member States such as the UK accepted the DLG ideas as “the basis” for progress, signed up for the EU’s common position and then played a leading role in embedding these within the G20 proposals. But the FT cited a draft of the Commission proposals and went on to suggest that these proposals are likely to encounter fierce resistance from the UK authorities.

The FT quoted “sources familiar with the UK position” that one main objection would probably centre on the legality of giving binding mediation powers to European supervisory authorities, so that they could ultimately determine the outcome of a dispute between national supervisors. The other fundamental concern is likely to centre on the splitting of supervisory responsibility from fiscal responsibility - and allowing the new pan-EU bodies to supervise entities which, in a crisis, might need bail-out funds from national governments.

But BIS Chairman Wellink also voiced some concerns, saying “the Achilles' heel of this part of the De Larosière report is that too little is said about this central issue ... Before we can transfer decision-making powers to the international level, we really should first agree on burden-sharing arrangements”. ECB Vice-President Papademos called for a solid legal basis for well-functioning information-sharing mechanisms, and adequate institutional mechanisms to ensure that the risk warnings issued by the Systemic Risk Council are translated into effective action.

Fortunately, one financial system can report that it “is still relatively sound compared with those in the United States and Europe". Nonetheless, FSA Japan Commissioner Sato warned that if the policies lean too much toward crisis management, it could cause moral hazard in the marketplace or distort the system in the longer run. On the other side of the world, US Treasury Secretary Geithner unveiled a plan to improve oversight of derivatives markets. The proposal includes federal oversight for major dealers as well as requiring credit default swaps and other over-the-counter derivatives to be traded on exchanges. The EU must now respond to this implied challenge.

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As expected, the legislative session ended with a flurry of measures and proposals:
• Parliament adopted the Capital Requirements Directive including the report on the review of the CRD introducing a 5 % retention rate of the total value of the securitised exposures. A review clause calls on the Commission to present a proposal by 31 December 2009 if considered convenient after consulting the CEBS and taking into account international developments. The voted text will become effective from 31 December 2010.
• It also adopted new measures on e-money and cross border payments: The new E-Money Directive will introduce proportionate prudential requirements facilitating market access to newcomers. The new Regulation on cross-border payments in the Community extends the principle of equal charges for national and cross-border payments to direct debits.
• Council adopted the amended directives on settlement finality in payment and securities settlement systems and on financial collateral arrangements as regards linked systems and credit claims, following a first reading agreement with the European Parliament. The main objective of the amendments is to bring the rules on settlement finality in payment and securities settlement systems, as well as on financial collateral arrangements, in line with the latest market and regulatory developments.
• Commissioner Kuneva outlined a roadmap on retail financial services: The proposals set out in the Communication focus on product disclosures and sales processes for all packaged retail investment products, such as investment funds, insurance-based investments and the various types of structured products. The aim is to create consistency in approach for all different Packaged Retail Investment Products.
• The Commission proposed a directive on Alternative Investment Fund Managers, including managers of hedge funds and private equity funds, that aimed to create a comprehensive and effective regulatory and supervisory framework in the EU. The Commission recognised that AIFM were not the cause of the crisis but argued that recent events indicated that some of the risks associated with AIFM had been underestimated and are not sufficiently addressed by current rules. The proposal ignited strong reactions from parts of the industries concerned – though the vigour of the G20 commitments to regulate (or at least have oversight of) all parts of the financial system means that they should not have been surprised.

Meanwhile, CEBS published its statement on the stress testing exercise the supervisory authorities in the EU are carrying out on the aggregate banking system. The objective is an EU-wide exercise with common guidelines and scenarios, so as to increase the level of aggregate information among policy makers in assessing the European financial system's potential resilience to shocks and to contribute to the convergence of best practices in the EU. CESR consulted on a possible MiFID review as developments have inevitably raised the question of whether parts of MiFID should be considered for review as market conditions have altered the risk profile of many financial instruments, at least temporarily.

European financial market infrastructure providers continue to respond to the crisis with new arrangements and products. As an example, LCH.Clearnet indicated its willingness to interweave elements of a bid for it with its own restructuring plans for its technology platform. It agreed several new competitive clearing offerings for European MTFs and cut its fees, prompting a competitive response by EquityClear. It will launch a credit default swap clearing offering in December this year in response to regulator and market demand.

DG Competition made several announcements that may portend wider actions. It opened in-depth investigations into the aid package for Hypo Real Estate and extended the scope of its in-depth investigation into Northern Rock, following substantial amendments. The main change introduced is the split of Northern Rock into a 'good' bank, which would continue commercial activities, and a 'bad' bank with most of the previous mortgage loans, which would be wound down. The FT reported that UK Treasury officials believe DG Comp could insist that Lloyds shrink its balance sheet – possibly through asset disposals – or accept restrictions over its behaviour in the market. The warning underscores the uncertainties facing banks, including Lloyds and Royal Bank of Scotland, that have taken state aid.

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Graham Bishop

 

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