31 May 2011

May 2011 Financial Services Month in Brussels

The situation in Greece remains at the top of the EU agenda as the implications run far and wide. Press reports suggest possible international assistance that would be a step along the road to a de facto political union in the eurozone – as foreseen in my recent book.

The situation in Greece remains at the top of the EU agenda as the implications run far and wide. Press reports suggest that bolstering tax collections may require EU assistance and the failure to meet privatisation targets has led to calls for an international agency to help. Either action would be a step along the road to a de facto political union in the eurozone – as foreseen in my recent book[1].

 

But the new financial regulatory architecture that came into being around the beginning of 2011 should now be brought into action. The media are full of claims and counter-claims about the potential impact of a re-structuring of Greek government debt. This seems an ideal occasion to test out the ESRB system and a Bruegel paper called on it to make an assessment of the systemic implications. The ESRB is the institution with the best access to the data needed to undertake such an assessment. It also has the legal mandate to warn about and mitigate systemic risk.

 

Bruegel also took the opportunity to criticise French public finances - for the past thirty years, France has consistently failed to manage its public finances. The debt-to-GDP ratio has inched upwards year after year, and the country has squandered most of its credibility with EU partners because of repeatedly un-kept promises. Any unease now about France’s debt would be catastrophic.

With the results of the stress tests on European banks now very close, the tension is rising about how Basel III will be transposed into EU law via CRD IV.  BUSINESSEUROPE and EBF wrote to Commissioner Barnier on liquidity ratios calling for a deferral as CEBS had calculated these gaps to be in the order of €1.8 trillion (long-term funding) and €1 trillion (short-term liquidity) - approximately 15% and 8% of EU GDP, respectively. On the other hand, seven member states wrote to the Commissioner warning about the potential downside of using a "regulation" to implement the Basel rules because "a regulation would prevent member states from increasing or varying pillar one requirements, such as capital levels or risk weights, even when a specific situation justified it". The Commissioner responded that he will not be swayed.

In another area of banking policy, the European Payment Council set out SEPA mobile payments guidelines to promote the use of open standards, define security requirements and clarify the roles of various stakeholders in the mobile ecosystem. In this author’s view, this has the capability of taking cross-border internet trade to a new level – particularly important to those whose business is a website!

The securities world also remains in turmoil as NASDAQ OMX and IntercontinentalExchange withdrew their proposal to acquire NYSE Euronext after the US Department of Justice said it would seek to block the combination of US exchanges. More relevant to Europe, they warned that "Faced with a year-long review and serious competition issues in Europe for the proposed Deutsche Börse transaction, NYSE Euronext stockholders are being asked to take a leap of faith by voting for the proposed Deutsche Börse transaction on July 7th."

Commissioner Almunia said that competition policy is needed to tackle the harmful behaviour of individual financial services market participants and should ensure that the actual evolution of the market does not lead to structures that harm users and legitimate market participants. He is aware of the debate on inter-operability and the question of whether increased competition and the proliferation of market actors can undermine stability, but he does not see a problem here. He believes that competition and stability are not at odds. But competition policy is about to broaden its impact on financial services as the Commission opened two antitrust investigations concerning the credit default swaps market.

ECON Committee voted on EMIR but Rapporteur Langen announced that he will not start to negotiate with the Council on an agreement at this stage, saying that the Council was not ready. The Parliament will now vote in 1st reading in the week of 4-7 July. "We call for transparency and stability, in particular for those derivatives that are dealt with off stock exchanges and can cause massive disruptions of financial markets. We, as Parliament, are determined to have a piece of legislation with a minimum of exemptions for a maximum of stabilising impact". But concerns were expressed by the European Association of Corporate Treasurers and Richard Raeburn set out his doomsday scenario for end-users after a visit to Washington: The US takes the easy way forward and leaves end-users with just an FX swaps exemption. Washington, the G20 and IOSCO put huge pressure on Europe to conform with the US and avoid regulatory arbitrage. The EU heaves a sigh of relief and an amended EMIR proposal drops the concept of hedging as a basis for end-user exemption and conforms with an unacceptable (for the real economy) US implementation of Dodd-Frank. Meanwhile, the Federal Reserve and other banking regulators recently proposed rules that would force the non-US arms of US banks to collect collateral, or “margin”, in the form of cash or securities, “without regard to whether the counterparty is located inside or outside the United States” – the first sign of extra-territoriality.

ESMA issued guidelines on endorsement and clarified the use for regulatory purposes of credit ratings issued outside the EU as the test requires that the credit rating activities performed by CRAs outside the European Union are subject to requirements established by law which are “as stringent as” those in the EU.

IASB and FASB issued new guidance on fair value measurement and disclosure requirements and concluded their major convergence project – an important element of response to the financial crisis – by issuing new guidance on fair value measurement and disclosure requirements for IFRSs and US GAAP. ACCA published 'Audit under fire: a review of the post-financial crisis inquiries':  In the UK, Brussels and the US the global financial crisis has sparked a series of high-level inquiries into the role and effectiveness of audit, while in Singapore, among others, regulators are actively engaging with stakeholders to assess how audit can be enhanced. The European Commission’s wide-ranging Green Paper on audit will be debated in Brussels throughout 2011, and will eventually lead to legislation covering the European auditing profession. Michel Barnier, the EC’s Financial Services Commissioner, has already warned at a high-level summit in Brussels in February that ‘the status quo is not an option’. In the UK, the House of Lords Economic Affairs Committee has conducted a highly critical inquiry into audit competition, which has led to a referral to the Office of Fair Trading. 

Graham Bishop

 

 

© Graham Bishop