13 September 2016

122nd Brussels for Breakfast – the Blog

Summary of the meeting

Inevitably, the continuing fallout from the Brexit decision dominated the discussion. The Swiss model was dissected as the EU’s reaction to the 2014 Swiss referendum on immigration seems likely to set part of the tone for negotiations with the UK. Can the Swiss Government simply ignore the referendum result as there is no mechanism to hold them to account? If not, February 2017 could be a watershed for Switzerland – and a get-real call to the UK. We also discussed the theory that the UK can withdraw its Article 50 “Notice of intention to quit the EU” at any stage before the two-year deadline. Peter agreed it could, as did the other lawyers.

The 2016 bank stress test results drew much comment – CET1 is now up about 50% from 2011 to 13.2% so well into a sound area for the banks in aggregate. But the stress scenario continues to show that a quarter of the losses would still stem from `misconduct’ charges. Basel III developments highlighted the real risk of a major clash between the EU and the US over the treatment of items such as mortgages which loom large in Europe.

The FSB discussion note on CCP resolution was published in mid-holiday, just ahead of the G20 Summit and we talked about the surprising resort to asking the market for answers to questions rather than supplying answers so long after the Great Crash. The cross-border jurisdictional questions have huge implications for ECB/UK relations/. Will the ECB insist on calling clearing back into the Eurozone?

Brexit

British PM Theresa May attended the G20 leaders meeting, where she faced pressure over trade deals and began conversations with the Australian government to start bilateral trade talks this month. Japan was the first country to formally weigh into the upcoming Brexit negotiations, with the publication of a government note during the summit that lays out the key requests from Japanese businesses to continue operating in the UK after Brexit.

The City of London's policy and resources committee chairman Mark Boleat wrote in City AM that the UK faces two critical trade-offs in determining its future EU relationship: the delay to trigger Article 50 and the decision between keeping access to the EU Single Market or immigration control – Vote Leave’s pivotal ask. Even if May has expressed her intention to handle the notification of the UK’s intention to leave the EU in early 2017, EU regulation expert Jean-Claude Piris wrote that, even after triggering Article 50 and notifying the EU of its intention to leave, there is no legal obstacle to the UK changing its mind and revoking the whole process. Any manoeuvre to keep access to the Single Market while obtaining an emergency brake on EU migration will be stopped in the Parliament, stated Guy Verhofstadt MEP who has been recently appointed as representative on Brexit matters.

The FT reported in mid-August that the City of London had given up hope of its “passporting” rights and was now seeking a Swiss-style deal for EU market access. The article was based on a BBA blueprint for a bespoke arrangement, but the British Banking Association itself branded it “grossly misleading”. Graham Bishop analysed the feasibility of such a scheme in a piece for Financial World and wondered if the “Swiss Model” would even exist in 2017 – given the current dispute between the EU and Switzerland on migrant quotas.

An alternative to universal access to EU market would be what investors and bankers know as “equivalence”, but as the FT pointed out, policymakers have warned of serious complications to align EU and UK rules. Unfettered access will be key in the forthcoming EU-UK relationship renegotiation, since restriction to EU single market could hit a fifth of investment banking revenues in the City of London, according to early estimates by the industry.

 Staff allocation would be among the immediate issues in a hard Brexit scenario– UBS CEO has warned that the group could move 30% of London employees to elsewhere in the region. UBS’ Ermotti mentioned European financial hubs from Paris to Madrid, but a CFS survey found that Frankfurt could emerge as the major winner of a Brexit. Either way, 82% of respondents to a CFA Institute poll showed that global investment professionals expect London to lose out on disconnection from the EU, and 44% think that the impacts of Brexit will be ongoing.

The financial services industry is deeply concerned about the implications of losing EU membership and is determined to make its voice heard: the City of London has set up two new bodies that will advise the British government on negotiating new financial services trading terms with the European Union - Graham Bishop has been appointed as member of the Financial Services Negotiation Forum. TheCityUK released a report highlighting the extent of financial and related professional services trade and investment between the UK and Europe, while the FT warned policymakers against diluting the City regulation.

Rebecca Harding, Chief Economist at BBA, reacted to the BoE's decision to cut interest rates in UK, saying that "policymakers have clearly been troubled by what they see in the immediate aftermath of the referendum result."

Basel II progress and reports to G20

The Basel Committee reported to G20 Leaders on Basel III implementation since the last meeting on November 2015. One of the key topics is the adoption of the Basel III standards for the leverage ratio and the Net Stable Funding Ratio: EBA recommended introducing the Leverage Ratio in the EU and published indicators from 36 global systemically important institutions (G-SIIs) whose leverage ratio exposure measure exceeds 200 billion Euro. EBF responded to EBA consultation on guidelines on the Leverage Credit Ratio disclosure whereas PensionsEurope answered to European Commission’s consultation on the Net Stable Funding Ratio.

FSB published further guidance on resolution planning and issued its fifth report to the G20 on progress in banking resolution. EBA consulted on the appropriate basis for the target level of resolution financing arrangements.

EBA published an Opinion welcoming the Commission's proposal to bring virtual currency entities in the scope of the Anti-Money Laundering Directive.

Acceptance of block-chain and distributed ledger technology

The FT reported that FCA was considering approving a “small but significant number of firms” using blockchain technology - the process behind bitcoin, the cryptocurrency.

The TARGET Working Group (which represents EBF, the European Savings and Retail Banking Group and the European Association of Co-operative Banks in discussions with the ECB/Eurosystem in respect of the TARGET 2 euro RTGS system) and ALFI responded to ESMA discussion paper on the distributed ledger technology applied to securities markets.

EBA consulted on strong customer authentication and secure communications under PSD2, and published its final draft technical standards on separation of payment card schemes and processing entities under the Interchange Fee Regulation (IFR), which general objective is to create a Single Market for card payments across the EU.

CCPs

FSB published a discussion note on Essential Aspects of CCP Resolution Planning and progress report on its CCP workplan, as well as progress reports on the implementation of reforms to the OTC derivatives market and on the removal of barriers to trade reporting.

CPMI-IOSCO issued reports - on the financial risk management and recovery practices of 10 derivatives CCPs and on resilience and recovery CCPs – from its advance regulatory agenda aimed at enhancing the resilience of central counterparties. The European Commission said the diversification requirement relating to the use of sovereign bonds as collateral for non-centrally cleared derivatives should be scrapped for pension schemes.

EU-wide stress tests and expected credit losses

EBA published its 2016 EU-wide stress test results, which in EBF’s view showed the resilience of EU banking sector. But analysts at Credit Suisse issued a research paper predicting that more than a quarter of the lenders the Banking Authority has studied will fall below minimum capital requirements in the stress test’s “adverse scenario”. The European Parliamentary Research Service produced a report on the developing rules on capital requirements for financial institutions in the EU.

EBA consultedon its draft Guidelines which focus on the treatment of connected clients for large exposures as defined in the Capital Requirements Regulation (CRR). It also published the outcome of a review of its Single Rulebook Q&As as input to the European Commission's CRR-CRD review. ECB released an Addendum to its Guide on options and discretions available in Union law, a further step in harmonising supervision of significant banks in the euro area.

EBA published for public consultation Guidelines on credit risk management practices and accounting for expected credit losses, a document that builds on the BCBS guidance on credit risk and accounting for expected credit losses published by the Basel Committee. The European Banking Authority also amended its technical standards on benchmarking of internal approaches for running the 2017 exercise.

Liquidity in corporate bond markets

IOSCO released for public comment a consultation report on the examination of liquidity of the Secondary Corporate Bond Markets.

Insurance

The ECON committee rejected as “misleading” and flawed the Commission’s PRIIPS proposals, which set the regulatory technical standards that investment providers would have to meet to provide greater transparency about investment products and clearer information to investors. EFAMA welcomed ECON’s motion for a resolution, stating that “what is crucial now is to get the Level 2 PRIIP KID right - and this means amending appropriately the draft RTSs.”

Insurance Europe responded to a European Commission consultation on a proposed EU services passport for the single market questioning the ability of a services passport to facilitate cross-border insurance.

Corporate Governance/Accounting

EBA published guidelines on effective communication between supervisors and statutory auditors, which should contribute to fostering financial stability and safety and soundness of the banking system.

Financial Services Policy

ICMA launched a consultation to review its Buy-in Rules under the Secondary Market Rules & Recommendations. FSB published its second progress report on measures to reduce misconduct risk, which aims to examine whether reforms to incentives are having sufficient effect on reducing misconduct; improving global standards of conduct in the FICC markets; and reforming major benchmarks.