11 April 2017

129th Brussels for Breakfast – Notes

Paula Martín/Graham Bishop

Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by Grant Thornton with co-presenters Mark Foster (Kreab) and Patrik Karlsson (ICMA).

Highlights from the “Brussels for Breakfast” meeting

Just two weeks after UK Prime Minister May sent the long-awaited letter to serve Notice of the UK’s intention to leave the EU that had to be the main topic of the meeting given the broad implications for financial services in the UK and EU27. The letter re-iterated four times the wish to have the exit negotiation run in parallel with talks on the future trade deal. But the European Council, in its first reaction in just 90 minutes, insisted on sequential negotiations – as did the European Parliament a week later. Shortly, the EU27 will give chief negotiator Barnier a mandate with detailed guidelines.

The preferred negotiating positon of “the City” appears to moving rapidly away from demands for continued “passporting”. In a presumably co-ordinated barrage, BoE Governor Carney delivered a speech arguing for “super-equivalence” though now in the form of “deference to each other’s comparable regulatory outcomes...and open supervisory co-operation” backed by an independent dispute resolution mechanism. Curiously, the PRA sent out a letter at the same moment on contingency planning. This pointed out that EU firms operating in the UK might well come under PRA supervision and “in that case, we would need to form our own judgements rather than relying exclusively on those of others” – perhaps a contrast to deference.

Nonetheless, the IRSG has just produced a paper arguing that `criteria for access’ to EU markets could be based on global rules. The B4B debate became very animated about all the implications, especially in the context of the earlier letter to the G20 from the Chair of the FSB – BoE Governor Carney – calling for a continued “willingness to rely on each other’s systems and institutions”.  However, the debate within the UK may yet collide with the implications of the comments by Sabine Lautenschlager – Vice Chair of the ECB Supervisory Board: “It is the ECB that grants licences in the euro area… we will only grant licences to well- capitalised and well-managed banks… we will not accept empty shell companies…”

Similar sentiments appear to have animated the EP’s ECON debate on CCP resolution: ESMA Chair Maijor called for a resolution framework to ensure CCP viability in crisis events “beyond severe and plausible market conditions.” EPP Chair Weber spelt out some implications that euro-denominated clearing could no longer be undertaken in the City after Brexit.

The Rome Declaration by the EU27 on the 60^th anniversary of the EU called for a multi-speed Europe – but heading towards the same goal. It also called for “completing the Economic and Monetary Union”. The B4B debate suggests that, despite the hopes of the UK commentariat that such lofty sentiments have no practical implications, events may yet happen that will profoundly re-shape the financial services industry in the UK.

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Key items in the rest of the month’s news included:

March was an extraordinarily agitated – and somehow tragic - month for European politics and for the European project itself. Prime Minister May finally served the UK’s notification of its intention to leave the EU: the withdrawal procedures are now fully underway, but uncertainties remain largely unchanged for lawmakers, citizens and businesses.

May demanded that both the withdrawal terms and the new relationship agreement – stressing the importance of a trade deal as open as possible – should be addressed at the same time, and issued a veiled threat to EU leaders  if they don’t accept the UK’S conditions, explicitly stating that the EU’s security might be undermined under a ‘no deal’ scenario. But the European Parliament’s resolution on its guidelines for the negotiations poured cold water on May’sstrategy: Britain should first settle its bill and protect citizens' rights before a new trade deal with the bloc can be discussed. 

The exact amount of the financial settlement between the EU and the UK has been the subject of speculation - Bruegel published a breakdown of the ‘Brexit bill’ in an attempt to quantify the various assets and liabilities that might factor in the agreement.  Whilst the payment has been said to be around  £50bn, an ‘exit bill’ of £10bn or more would be unacceptable to at least two thirds of voters –according to  poll by The Guardian.  

The conditions drafted by MEPs -  starker and tougher than expected, in the FT’s view, - handed the British Government  an unpleasant surprise: Spain will have veto rights over any agreement on Gibraltar, a long-standing issue between both countries that aroused tensions at home, with some former officials revived the Falkland war ghost. Nationalism in Scotland and Catalonia is likely to become another matter of concern for both countries – the Spanish government has been advocating a hard line against Sturgeon’s SNP to avoid Scottish independence becoming a blueprint for the Catalan cause. The Spanish ambassador clarified that Spain wouldn’t block an application from Scotland to join the EU, but that the region wouldn’t receive a special treatment during the membership process.

The UK Government ‘Great Repeal Bill’ followed suit, leaving commentators unimpressed and demanding further clarifications of what would happen in a ‘no deal’ scenario: MPs had previously warned that there was “no evidence that the Government was planning for the possibility of a ‘no deal’.” British lawmakers and companies need therefore to start contingency planning for how to deal with the real possibility of a messy Brexfast, according to EPC’s Fabian Zuleeg.  But a ‘no deal’ might still not be ‘a big deal’, according to research by Civitas, which shows that the Single Market has not delivered the export growth it was expected to.  

The common trade space is however the framework for euro-derivatives clearing business in London, the biggest in Europe – this cannot continue as normal, according to Merkel ally Manfred Weber who said that “the euro business should be managed on EU soil” and to MEPs who have urged regulators to press for “extraterritorial” oversight of the City of London after Brexit as a condition for allowing the UK financial centre to keep its dominance in the lucrative market for clearing euro-denominated derivatives.   Parts of the activity might be being transferred to the continent already, with Euronext announcing that it will move derivatives clearing business from LSE to ICE. But the huge costs and complexity involved in moving clearing from London to Europe makes the process no piece of cake, according to analysis at City AM. Supervision of credit-rating agencies after divorce from the EU is under question too after ESMA decided to tighten rules on credit-ratings groups and consulted on its guidelines.

ECB chief economist Peter Praet said Brexit does not pose a risk to financial stability, but the Eurozone’s financial centres could “play a more prominent role” in the global financial systemonce the UK has left.  In order to tackle weaknesses in supervision, Brussels is looking at giving tougher powers to the ESAs – the Commission launched a public consultation on the operations of the European Supervisory Authorities to seek views on possible changes to their current operation framework.

European cities have rushed to attract business from London, with Frankfurt taking the early lead of top investment roles, according to interviews by the Financial Times with more than 30 senior financiers and officials.  Lobby group Frankfurt Main Finance expects thousands to move to Frankfurtas interest in the German city rises as a result of Brexit. Poland aims to be winner in mid-tier financial and technical work where jobs are far more numerous.   But the shift might not be so huge, in line with comments from top executives such as the head of JP Morgan, who has admitted he will not move many jobs out of Britain in the next two years as a result of Brexit.  

How do the British think Brexit will hit their lives? A new poll revealed that most British young people are against Brexit, feel their views are being ignored in the greatest change that will shape their country for decades to come, and overwhelmingly want to have a final say over the Brexit deal– and experts say that a General Election would be desirable before withdrawal for the sake of the overall stability of the United Kingdom’s constitutional settlement. Brexit has become the top issue facing Britain, rising to the highest score since records began in September 1974.   

The 29 March was thus a dark day for Europe, in the Berliner Zeitung’s words: the EU is now set to find its balance again.Brussels’ stance towards the negotiations remains unaltered: the EU leaders have been called to maintain unity by main actors such as the EU top Brexit negotiator Michel Barnier and Council President Donald Tusk. The remaining EU27 celebrated the 60^th anniversary of the Rome Treaty with a demonstration of unity and strength – but several voices demand reform and real leadership:  the Parliament’s chief broker Guy Verhofstadt called for ‘radical reform’, whereas Sir Michael Leigh wrote that the EU “badly needs leaders who would avoid empty slogans, which merely repackage the status quo, and instead propose tangible solutions to everyday problems.” The answer might come from southern European countries, where citizens’ confidence in European institutions was dented during the crisis years and where trust in the EU and satisfaction with democracy are returning.

Banking

Graham Bishop focused on banks’ resolution capital requirements, warning that the post-Crash re-ordering of Europe’s financial system is coming to an awkward phase in which resolution capital conditions might become a doomsday machine for EU-based banks: if Europe’s banks cannot roll over their standard bonds into “MREL” bonds, then balance sheets must contract – with all the economic evils associated. Senior bankers asked regulators to treat the euro area as a single jurisdiction to bring down major lenders’ capital surcharges and loss-absorbing debt requirements for systemic risk that Europe’s biggest banks must meet.

CEPS produced a paper wondering what European bank can still follow the multiple objectives that are being pursued by the Commission with its amendments to prudential rules in the banking reform package. The likely impact of Brexit and effective banking supervision adds to the equation and could affect the competitiveness of EU-based banks. The UK vote for a split with the EU was a major challenge for European banking sector last year, according to ECB’s Nouy and Lautenschläger, who also cited NPLs, TRIM and the completion of the banking union as issues facing EU banks. Brexit implementation is set to be a concern of the first order for wholesale banking and AFME set out the main challenges for wholesale banks, their clients and supervisory authorities.

The Deutsche Bundesbank‘s Andreas Dombret said that “real progress” had been made to ease the deadlock reached in finalising Basel III package, and long phase-in periods could help those banks that would be hardest hit by the changes. The FSB Chair sent a letter to G20 leaders setting out the need for full implementation of the agreed reforms, which already has helped the global financial system to move from a state of fragility to greater resilience.  But the EBA warned that proposals from the European Commission to transition banks to the new IFRS 9 accounting model could mean a backwards step.

The EBA provided guidance on how valuation information should help determine the terms of bail-in under BRRD, while a paper by the European Parliament assessed the effectiveness of the various resolution tools to deal with legacy assets such as NPLs under the resolution framework.

The banking authority updated the list of Other Systemically Important Institutions (O-SIIs) in the EU and called for improvements to decision-making framework for supervisory reporting requirements.

The Basel Committee released its final guidance on the Prudential treatment of problem assets - definitions of non-performing exposures and forbearance, and the details of the interim regulatory treatment of accounting provisions and standards for transitional arrangements.

The ECB’s Benoît Cœuré addressed the low level of short-term yields of the euro area’s safest sovereign bonds and their apparent disconnect with those of overnight index swaps (OIS) – for Bruegel analysts, the solution might be a uniform sovereign exposure limit to reduce flight-to-quality effects on northern European bonds.

The ECB’s Peter Praet urged to speed up efforts for completing the Banking Union, whereas the SSM’s Angeloni outlined three broad challenges among the most important ones facing banks and supervisors for achieving this ambitious project.

Securities

On the occasion of the Capital Markets Union mid-term review,the ECB's Vítor Constâncio said that, "to be truly effective, CMU will require harmonisation in a number of sensitive areas, including key legislation and policies related to financial products, such as investor protection and bankruptcy procedures."   Accountancy Europe,  Insurance Europe and  EFAMA responded to the Commission consultation on the mid-term review of the CMU. CEPS published thatthe impact of Brexit and the French and German national elections might make the goal of completing CMU an increasingly remote one.

The European Parliament approved new uniform rules on the information given in investor prospectuses to protect investors and help SMEs access diverse sources of capital. AFME released its securitisation data report Q4 2016, which showed an increase in securities product issuance compared to previous periods. 

ESMA discussed haircuts in EU securities financing transactions and produced extensive work on MIFID II: it issued detailed guidance of market structure issues under MiFID II, updated its MiFID II/MiFIR investor protection Q&As, issued final specifications for non-equity tape and issued implementing rules for package orders under MiFID II.  IOSCO approved the enhanced standard for cross-border enforcement cooperation.

On the implementation of the Central Securities Depositary Regulation, ESMA updated its Q&Aand published two sets of guidelines under CSDR. Regarding CCPs, Steven Maijoor gave a statement to ECON Hearing on CCP Recovery & Resolution and established five Memoranda of Understanding to cooperate with non-EU regulators on CCPs under the European Markets Infrastructure Regulation.  The financial watchdog updated its EMIR Q&A and validation rules following the publication of the revised technical standards on reporting under Article 9 of EMIR. Research by ESMA concluded that there might be relatively ample liquidity in sovereign bond markets.

Asset Management

The European Council reviewed its current Shareholders' Rights Directive.  The Parliament approved new tools that include giving shareholders a say on directors’ pay and making it easier for firms to identify their shareholders.  

The European Parliament approved new rules to make money market funds (MMFs) more resistant to crises and market turbulence.

Insurance

EIOPA published the methodology to derive the Ultimate Forward Rate (UFR) and its implementation process. The Insurance Distribution Directive (IDD) has to be implemented in the member states by 23 February 2018, and first steps are being taken in this direction, with Germany adopting a controversial approach to implementation.