06 February 2012

January 2012 - Financial Services Month in Brussels

The new Danish Presidency informed ECOFIN and Parliament of the objectives of its programme including:  

• strengthening financial regulation and supervision: Follow-up and monitoring of support measures for the financial sector; finalisation of negotiations with the European Parliament on the regulation of derivatives trade, the revised Directive on deposit guarantee schemes and adaptation of legislation to new supervisory structures ("Omnibus II" Directive); rapid progress on capital and liquidity requirements for credit institutions ("CRD IV"); progress on the regulation of credit rating agencies, the revision of the Directive on transparency requirements for listed companies, revised rules for securities trade and on market abuse and improved consumer protection (i.a. the Mortgage Credit Directive); and work on forthcoming proposals on crisis management in the financial sector; and
• taxation: Progress on the common consolidated corporate tax base and start of technical discussions on the Commission's proposal for a financial transaction tax;

Commissioner Barnier was busy in January. He came to the City of London to reiterate that the EU needs the UK and the UK needs the EU. “Contrary to what I often read, there is no plot. No plot to undermine the City. No plot to boost Paris or Frankfurt at the expense of the City.” He presented all the legislative initiatives that will be published during the course of 2012, saying that European leaders were right to reject the so-called "safeguards" in financial services the UK asked for, and explained why the safeguards are not necessary. He also decided to create a High-level Expert Group on structural aspects of the EU banking sector, and appointed Erkki Liikanen as the Chairman. The Group should start in February and finish during the course of summer. Its mandate will be to determine whether, in addition to on-going regulatory reforms, structural reforms of EU banks would strengthen financial stability and improve efficiency and consumer protection, and if that is the case make any relevant proposals as appropriate.  The record of such groups is that they can trigger profound changes – examples such as Lamfalussy and De Larosière immediately spring to mind. For the record, the UK Government published its Financial Services Bill which will fundamentally transform and strengthen financial regulation in the United Kingdom. The new regime sets out a clear, coherent and comprehensive regulatory framework, which will help to mitigate future risks to stability.

AFME, AIMA, EACH, EBF, FOA, ICMA and ISDA wrote a letter to Commissioner Barnier, ECON chair Bowles and ECOFIN chairman Corydon regarding the ESAs because the reform programme is moving into a phase of drafting detailed implementing and technical rules. In the current circumstances, the challenges associated with this phase are acute. Not only will an enormous number of technical and implementing measures have to be drafted in this period (collectively representing an unprecedented re-making of financial markets in Europe), but this will be done at a time of great economic difficulty. Just as an example of the workload flowing from level 2 measures, and based upon the current CRD IV/CRR proposals, about 200 deliverables will be expected from the EBA alone. This overload needs to be tackled quickly and decisively by the European institutions collectively.

ECON published its draft report on CRD IV/CRR and Rapporteur Karas proposed to rely only on the buffer guide and the variables developed by the ESRB, as freedom in choosing variables would inevitably lead to regulatory arbitrage. In this respect, the treatment of systemically important financial institutions is still to be discussed. He is in favour of the Commission's proposal and highlights that the spirit of the European Parliament's demands (as submitted through the Initiative Report on Economic Governance in Financial Institutions) have been respected. Karas wants EBA to be more involved in the current CRD IV/CRR debate in order to guarantee that they can work in parallel with the EU institutions. Karas also said that CRD IV/CRR need to find the right balance on the risk weight formulas, mainly on the SMEs case and on the sovereign debt. But the FT reported a joint paper from Schäuble and Baroin calling for Basel III rules to be watered down. Karel Lanoo at CEPS argued that the most important amendments to consider include the introduction of risk-weighting on sovereign exposures within the EU, and the related application in the large exposures regime. An examination of the European Parliament’s initial review of the proposed legislation in a post-crisis context suggests that the institution is being excessively timid.

The long-running debate about the proposed merger between Deutsche Börse and NYSE Euronext has ended – almost certainly. The Commission blocked it as it would have resulted in a quasi-monopoly in European financial derivatives traded globally on exchanges as the two exchanges control more than 90 per cent of global trade in these products. The Commission's investigation showed that new competitors would be unlikely to enter the market successfully enough to pose a credible competitive threat to the merged company. Commissioner Almunia said: "The merger between Deutsche Börse and NYSE Euronext would have led to a near-monopoly in European financial derivatives worldwide. These markets are at the heart of the financial system and it is crucial for the whole European economy that they remain competitive. We tried to find a solution, but the remedies offered fell far short of resolving the concerns."  He also outlined ways in which he wants the competition system overhauled, better to meet the requirements of the EU's single market. One EU official said that the changes likely to be proposed would be the “most far-reaching reform of state-aid control in 50 years”.

MiFID II continues to attract much comment: The EBF demanded more signposting at Level 1 to ensure that important matters of principle are clear and that OTFs should be regulated in ways that permit OTFs and existing venues to compete fairly for business. It also wants market access for EU banks to countries that have committed to a common set of regulatory principles for financial services reform (i.e. the members of the G20) to remain a primary policy objective in the review of MiFID. FESE members have been proactive in identifying solutions to the lessons learned and observed in the application of MiFID I. FESE proposed a number of changes to the proposals which, if adopted, would provide welcomed additional clarification and strengthening of the draft legislation. EuropeanIssuers welcomed the extension of transparency requirements to all financial instruments traded on organised venues. However, it remains concerned about the possible lack of transparency in two areas: the size of the business evading pre-trade transparency and  the quality of post-trade transparency.

Credit Rating Agencies continue to attract legislator’s attention as ECON’s public hearing heard that obliging companies to "rotate" their use of them could actually reduce competition among agencies. ESMA’s Verena Ross also questioned whether ESMA risked a conflict of interest in regulating the CRAs methodology whilst not influencing the rating outcome. Moreover, the required annual analysis of the industry’s concentration would require completely new skills. Charles Goodhart questioned the nature of sovereign ratings when default can come explicitly or via inflation – pointing out the UK’s example of destroying real value as quickly and surely as default.

The final stages of agreeing EMIR are in sight now that ECOFIN has agreed the vital compromise about ESMA’s power over clearing houses. But they have published what is thought to be the first set of guidelines for stress-testing the sector, in a bid to ensure their stability. Surprisingly at this stage of the debate, industry insiders are now wondering if clearing houses could become the next casualty of the crisis as regulators insist that banks run their riskiest and private trades through them.

Will UK pension funds turn out to be the first victim of Prime Minister Cameron’s celebrated “veto”? The debate about the implications of an extensive application of Solvency II to Defined Benefit funds is gathering pace as criticism rises about the vagueness of the Commission’s 517-page consultation. The problem is that the only States with relevant DB schemes are the UK, Ireland and Holland – a long way short of a “blocking minority” in Council.

The move towards global accounting standards is seen as an essential part of the global financial reform agenda, providing the transparency on which to build a better, more resilient global financial infrastructure. IASB’s Hans Hoogervorst pointed out that the majority of G20 members (including Russia and Brazil) now require the use of IFRSs. Chinese accounting standards are now closely aligned with IFRSs and Japan allows large international Japanese companies to use IFRSs. The SEC’s Chief Accountant said in public recently that the SEC will make a decision on IFRS in the coming months.

Graham Bishop

© Graham Bishop