Graham Bishop's Personal Overview
The rising importance of the euro area in global financial markets was underlined in two distinct ways. First, the International Capital Market Association (ICMA) reported that the euro has displaced the US dollar as the world’s pre-eminent currency in international bond markets, having outstripped the dollar-denominated market for the second year in a row. Outstanding debt issued in the euro was worth the equivalent of $5 trn at the end of 2006 compared with $4 trn for the dollar. That represents a startling turnabout from the pattern seen in recent decades, when the US bond market dwarfed its European rival: as recently as 2002, outstanding euro-denominated issuance represented just 27% of the global pie, compared with 51% for the dollar.
However, the main factor is a rise in euro-denominated issuance by companies and financial institutions. One factor driving this is that European companies are moving away from their traditional reliance on bank loans – and embracing the capital markets to a greater degree. The Euro Debt Market Association (AMTE) has called for convergence of actions in SME financing activity through securitisation, to increase SME lending through an efficient use of Euro capital markets. That approach would bring the benefits of cheaper euro funding directly to smaller firms.
But the second illustration of the rise in the euro’s importance came from New York where the Mayor and Senator are sufficiently concerned about the risk of losing status as a world financial centre that they commissioned a report from McKinsey & Company. It revealed that New York could lose its status unless there is a major shift in public policy. Both warned that New York financial markets, stifled by stringent regulations, and high litigation risks, are in danger of losing businesses and high-skilled workers to overseas competitors, relegating New York to regional market status and adversely impacting the U.S. economy. The City of London immediately responded by warning against complacency. However, the EU is already engaged in evaluating the economic impact of the Financial Services Action Plan – one of the drivers of the EU’s move up the global rankings. Nearly all the experts judged that the evaluation comes too early to provide robust final results, but they saw it as providing added value from the policy point of view. The major challenge identified was the question how to distinguish the effects of FSAP from other market effects.
The next challenge for the EU may be to make the FSAP measures work in practice and deliver the desired benefits. So CESR, CEBS and CEIOPS have agreed in their joint work programme for 2007 to focus on those topics for which there is a high risk of disruptive regulatory arbitrage, where cross-sector cooperation can deliver obvious gains in the effective conduct of supervisory activities, and where co-operation between the Committees could bring about a real efficiency gain.
Infrastructure issues continue to dominate headlines as the ECB vigorously defended the proposed T2S settlement system. It believes that the implementation of T2S in the eurozone could cut settlement costs by up to 90%. Even with very conservative assumptions, the T2S component of the fee will be lower than the lowest CSD fee today and will come closer to comparable prices in the US. In current market conditions, the ECB estimated that settlement transactions costs would fall to 28 cents, versus at least 45 cents in the Euro zone currently. If approved, the Target2-Securities platform could be operational in 2013.
One of the stock exchange mergers came to fruition as shareholders in Euronext and NYSE voted for the merger and the Dutch government agreed the move. But the LSE/NASDAQ battle remains a cliff-hanger as the LSE share price remains above NASDAQ’s offer so it seems unlikely to get the increased holding that it needs for control. With just ten months to go before MiFID comes into operation, the claims about various business models can then be tested in the market-place.
Cross-border euro payments remain a hot topic as the Commission issued an evaluation report which shows that since the introduction of a Regulation charges for cross-border euro payments have fallen. But the bad news is that Europe's banks will miss the 1 January 2008 SEPA deadline for direct debits because Europe's lawmakers have failed to pass the Payment Services Directive which underpins SEPA.
CEIOPS issued it 2007 work programme and underlined the scale of what still needs to be achieved on Solvency II as it plans to issue advice in March on a number of aspects related to all the Pillars of the Solvency II regime. CEIOPS plans to issue a report on eligible elements of capital in March 2007 and a third round of Quantitative Impact Study (QIS3) is planned immediately afterwards.
The Commission launched a public consultation on its future strategy and priorities on statutory audit in relation to non-EU countries. The 2006 Directive on Statutory Audit requires third-country audit firms to register in each EU Member State where their clients' securities are admitted to trading. Preliminary estimates indicate that approximately 220 audit firms auditing issuers from about 63 third countries will be affected by these rules.
The Directive allows for exemptions from registration if a third-country audit regulation is found to be equivalent. But this finally triggered some blunt warnings about implications. Paul Boyle, chief executive of the Financial Reporting Council, has told The Daily Telegraph that he is "astonished" that few in the City have woken up to the impact of the EU directive governing the use of foreign auditors by companies seeking to list on European exchanges.
Graham Bishop
***********
(For full text download pdf below)
© Graham Bishop
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article