28 November 2011

November 2011 Financial Services Month in Brussels

As we all groan under the weight of a seemingly endless flow of proposals to remedy the financial system’s failings, the European Commission has just promised that we will still be busy in 2012. But this is just the primary legislation! The level 2 measures are already brewing – often with ten times the number of detailed secondary items.

So the Commission’s 2012 work programme will propose the remaining pieces of legislation, focusing on the protection of investors in UCITS. Investor protection and transparency are also at the heart of an initiative on pre-contractual disclosures on complex investment products (PRIPs), as well as on insurance mediation. The Commission is carrying out an in-depth evaluation of the need to reform the Insolvency Regulation and may develop future options for more efficient cross border insolvency rules.

The momentum behind the FTT continues to build: Finance Ministers asked the Council working groups to analyse the Commission proposal on the FTT, especially as yearly revenues could amount to €57 billion - depending on market reaction. This could be used, either wholly or partially, gradually to replace Member States' contributions to the EU budget. As German Finance Minister Schäuble put it: “If we cannot reach an agreement at 27, then we must consider whether we should not introduce it first for the 17 eurozone members, in the confident expectation that it will soon be introduced for all 27”. Amidst the welter of new rules, Commission Barnier is becoming more sensitive to accusations that his regulatory reforms are aimed at undermining London, and he went out of his way to deny this.

Financial markets are often accused of useless innovations but a really useful financial innovation is just coming over the horizon: Mobile Contactless SEPA Card Payments. The EPC Guidelines offer a description of the mobile contactless payments ecosystem today and the stakeholders involved, to provide a clear understanding of the technology available and its deployment within the market.

November witnessed several attacks on some of the allegedly useless products: Parliament voted a regulation to curb short selling and trading in CDS. The rules will impose much more transparency and virtually ban certain CDS trades, thereby making speculation on a country's default more difficult. But Financial News appealed: “Don't shoot the messenger, listen to the message”. The unpalatable truth needs to be faced that some governments have been fiscally irresponsible and should not attempt to place the blame for the current crisis at the door of the CDS market. ISDA issued the following statement in order to ensure an accurate understanding of how credit events are determined for CDS: "Proposals must be clear, they must be binding on all holders and someone must make a complaint". None of this has happened for Greek CDS – yet.

Commissioner Barnier stressed that rating agencies are needed to measure risks, but plans to ban sovereign credit ratings in “exceptional circumstances” have been shelved. Two think tank reports on CRAs came out: The outcome of the CEPS study suggests that in most cases the ratings had been benevolent rather than overcritical. Bruegel commented that tighter regulation of rating agencies is unlikely to have a material positive effect on ratings quality. Better standardised public disclosures of risk factors by issuers are the most promising avenue for future improvements in credit risk assessments.

Consequences flow from such debates about risk and EIOPA questioned 'risk-free' bonds, calling for a re-think over whether the industry should consider government bonds as risk-free in the light of the eurozone debt crisis. But common sense analysis needs a firm factual foundation and IASB Chairman Hoogervorst said about the agreement with IFAC: “The ongoing financial crisis has shown the importance of transparency in financial reporting by both private and public sector entities. The IFAC CEO said: “The sovereign debt crisis has exposed the risk to financial stability from poor quality financial reporting by governments. International Public Sector Accounting Standards are the benchmark for financial reporting in the public sector”. Just as welcome was the FT report that the US accounting standards-setter has expressed cautious support for plans to incorporate international requirements into the country's rule book, ahead of a decision by the Securities and Exchange Commission on harmonisation of global standards.

The Basel Committee issued final rules for identifying global systemically important banks (G-SIBs) and the magnitude of additional loss absorbency that they should have. At the Cannes Summit, the G20 Leaders endorsed the implementation of an integrated set of policy measures to address the risks to the global financial system from these firms. But that leads straight into the next issue: Crisis Resolution Regimes. The FSB published a new internationally-agreed standard that sets out the instruments and powers that national resolution regimes should have to resolve a failing SIFI. It will help address the “too-big-to-fail” problem by making it possible to resolve any financial institution in an orderly manner and without exposing the taxpayer to the risk of loss, protecting vital economic functions through mechanisms for losses to be shared (in order of seniority) between shareholders and unsecured and uninsured creditors.

The ICFR examined the recent proposals for the resolution of financial institutions by FSB and FSA but suggests that while progress has been made, there are a number of outstanding issues regarding cross-border resolutions. ECB Vice–President Vítor Constâncio commented that the seeds of an integrated EU resolution framework are already there today, but it is an open question whether the EU will have the audacity, and in particular the political will, to move towards that. To preserve the benefits of integrated cross-border banks in Europe there is the need to build a European resolution regime that enhances market discipline.

Amongst the plethora of technical but highly important issues, the Basel Committee issued their second consultative paper on the capitalisation of bank exposures to central counterparties. The Committee will finalise the rules around year end, for January 2013. The CGFS reported that expanding direct access to CCPs may reduce the concentration of risk in the largest global dealers. As direct access is broadened, it is essential that CCPs' risk management procedures be adapted appropriately to ensure their continued effectiveness.

Deutsche Börse and NYSE Euronext confirmed they had submitted remedy proposals aimed at eliminating the existing overlap in European single equity derivatives. They say this remedy would address DG Competition’s stated concerns in the area of single equity derivatives. To ensure continued competition in European interest rate and equity index derivatives, they propose to grant unprecedented third-party access to Eurex Clearing for derivatives product innovations, and the clearing services would be provided on a fair, reasonable and non-discriminatory basis and include cross margining.

The implications of Solvency II continue to materialise. The CEA sounded a warning of a considerable adverse impact on consumers if a number of key issues are not addressed. Overly conservative capital requirements for insurers could translate into increased prices and a more limited choice of products for consumers, just when they most need insurance. But the implications for pensions continue to cause concern. The stakeholder criticism of Solvency II relates to how defined-benefit scheme liabilities are valued. Their concern is that a typical scheme’s liabilities under a Solvency II regime could increase by as much as 40 per cent with a further 50 per cent as a risk buffer. But an adapted Solvency II regime would not change the liabilities at all: it measures them with a different ruler. The 40 per cent part of the increase is the difference between a “funding” valuation of the employer’s liabilities and a “solvency” valuation for the scheme.

© Graham Bishop