13 March 2018

今後の注目点は、アイルランド国境問題、不良債権問題、MiFID2（第2次金融商品市場指令）、IFRS（国際財務報告基準）第17号（保険契約）、サイバー・セキュリティ、他

Highlights from the “Brussels for Breakfast” meeting

Now only 381 days until we go over the “cliff” – so the 150^th B4B may mark the end of the UK’s EU membership! A lengthy Brexit discussion was inevitable.

Prime Minister May delivered her set-piece policy speech at the Mansion House that had great significance for financial services. On the one hand, she accepted there would be no passporting but on the other hand, called for “mutual recognition” for goods. We had a lengthy discussion on mutual recognition – how it gained prominence in 1992 and the full meaning of Single Market `directives’ being enacted into the laws of each state so that the Commission could launch infringement proceedings if necessary. Nowadays, the supervisory authorities – the ESAs – might take action but the backstop was always actions at the ECJ.

However, this system failed amidst the huge stresses of the GFC and the thrust now is to enact directly applicable Regulations: CRR, MiFIR etc. Coupled with a single supervisor e.g. SSM and a single rule book, financial regulation is well on the way to moving entirely to the European level. Why would EU27 want to go back to the failed system of the 1990s?

The drive towards more integration continues unabated as seven “northern” finance ministers issued a joint statement calling for completion of the banking union but with reservations on “far reaching transfers of competences”. Having checked the Council voting calculator, they are just short of being a blocking minority!

The EBA issued its monitoring of Basel III compliance in terms of the CRD/CRR.  The good news is that – in aggregate – EU banks are well above the minimum standards – but there are outliers. There was also news of a concerted attempt to revive correspondent banking by providing standardised method to check a correspondent’s compliance with laws on anti-money laundering, terrorism finance, anti-bribery and know-your-client. This mix of policies has undermined the finance of world trade but the difficulties are immense: SWIFT estimates that 7000 banks each have 1 million or more customers to be checked!

Continuing the theme of moving on from “mutual recognition”, ESMA launched its interactive Single Rule Book to facilitate consistent application for securities legislation under its remit.

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These Notes for the Friends of Graham Bishop will be supplemented by our full Workbook for our CPD clients (link) – in conjunction with the 30-minute CISI webcast. We our “CPD Weekly – 10 Minute Read ‘n Verify” (link) complies with ESMA Guidelines

Key items of the rest of the month:

Theresa May gathered her ‘war cabinet’ at Chequers, the PM’s country house, to try to agree on a single voicefor the Government’s approach to a future trade deal with the European Union. But the model understood to be May’s preferred, the ‘three basket approach’ – under which Britain would in time diverge from some rules while conserving others that would also remain subject to change in future, - had been ruled out from Brussels overnight, as it would breach the bloc’s pledge to forestallcherry-picking. In spite of this categorical negative, the German Chancellor Angela Merkel threw a lifeline to May, suggesting that a bespoke trade deal with the UK didn’t necessarily mean that it was choosing the elements of the single market that suits Britain the most.

The reported agreement among the members of the cabinet, a “managed divergence” based on May’s initial approach, was almost immediately dismissed by Council President Donald Tusk as “pure illusion”, while Irish Taoiseach Leo Varadkar called urgently for a detailed position, saying that the negotiations are at a point “well beyond […] aspirations and principle,” and  top EU negotiator Michel Barnier rebuffed May’s aspiration to be able to reject EU rules during transition.

Barnier outlined the EU’s stance towards Northern Ireland during his presentation of the draft Article 50 Withdrawal Agreement, that seeks to speed up talks: to avoid a hard border in the island that threatens the Good Friday Agreement, "Northern Ireland has to be covered by the Union customs code," he reminded – a plan which had previously triggered a row among British and EU officials and had made Scotland call to be kept as well within the single market. The opposition leader Jeremy Corbyn made his boldest speech yet setting out Labour’s position in this regard: UK must have “a” customs union to ensure access to European markets and to avoid controls along Northern Ireland’s border, Corbyn said.

Come Brexit day, the UK expects a transition period to last as long as it takes to "prepare and implement the new processes and new systems," a draft UK document on the transition period released the day before the Ministers’ meeting to thrash out a proposal for the trade . Some of its proposals will make “uncomfortable reading” for Tory Brexiteers, BBC’s Norman Smith said: Brexit Secretary’s demands to strike trade deals with other countries during the implementation period and to reject rules that go against the UK’s interests had vanished into thin air in the document; whereas the PM’s demand that EU citizens coming to Britain during the transition deal should have less rights than those already in the country – dismissed by the EU Parliament President Guy Verhofstadt as one that “penalises citizens”- was radically u-turned to allow EU nationals arrived before March 2019 to stay permanently. Furthermore, the UK will lose its rebate from the EU at the end of 2020 if it seeks to extend the Brexit transition beyond that point, The Guardian reported.  This extension, warned MPs, would cost Britain £5bn in new contributions to the EU without having any say about the destiny of those funds.  

Extricating the UK from the EU after 40 years of membership was never going to be smooth sailing, and Theresa May outlined the hard, unpalatable facts that both parts will have to face head-on. It will be a compromise in which neither part will get exactly what it wants, May said in a detailed, straightforward speech that had been preceded by remarks by former Prime Ministers Tony Blair and Sir John Major, who upped pressure on May ahead of her long overdue speech – the former warning that May “simply can’t” achieve her aims, and the latter calling for a free vote on the final Brexit deal in Parliament.

The Deutsche Bank became the first large bank to publicly announce that it will relocate its global booking hub to mainland Europe as part of its efforts to counter the loss of British-based financial companies’ passporting rights after the UK parts ways with the trading bloc.  The German bank said it had confirmed a reasonable worst-case Brexit scenario after holding talks with regulators and supervisors. It may have taken seriously the ECON Committee’s draft report that states that CCPs “cannot be supervised only by their national competent authorities.” By the same token, European supervisors’ warnings encouraged the new chief executive of Deutsche Börse to say that he wants the Frankfurt exchange to win at least a quarter of the market for clearing euro interest rate swaps from London after Brexit.  

Banking Union

EU lawmakers’ focus has started to shift dramatically from the perils Brexit could entail for the EU, to Eurozone reform. To achieve a more robust monetary union, a group of MEPs, economists and former EU officers suggested a new political approach to EU reform that would include a real European executive that is democratically accountable. The Euro Area is in need of a Fiscal Union,economists at the IMF warned, given that the architecture supporting Europe’s currency union remains incomplete and leaves the region vulnerable to future financial crises. As for the Financial Union set out in the Five Presidents’ Report, the Deutsche Bundesbank official Andreas Dombret argued that the third pillar of the Banking Union – a European Deposit Insurance Scheme – should be postponed in order to maintain stability, while researchers at ECMI warned that much remains to be done to monitor policy, market and technological developments, and reminded policymakers of the inefficiencies in Europe's capital markets to achieve a true Capital Markets Union.

Analysts at the ECB proved a significant link between deteriorating asset quality - high non-performing loans - and the great retrenchment in cross-border banking in the EU, combined with the fact that regulatory arbitrage might be possible via the use of foreign branches, while stricter policies at home may preclude banks from direct lending activities abroad. These findings make the case for completing the banking union.

An EU long-term budget is also on the table: the European Commission set out options – and their financial consequences for such a new and modern, long-term EU budget after 2020.

The Basel Committee may have already started a long, lacklustre journey to its ultimate death, a banking consultant warned in the FT, lashing out at the inability of the global regulator to assess clearly how much capital each bank needs to comply with banking standards, let alone the impossibility of the regulator to impose these requirements to banks worldwide given its lack of effective power.

One of the staunchest enemies of global banking rules is – or was said to be – US President Donald Trump. When he came to power, Trump threatened with rolling back regulation that forced American banks to hold capital or abide by global rules. But as Patrick Jenkins at the FT estimated, Trump’s only measures to date to roll out his deregulatory agenda have been appointments to the key regulatory bodies whose strongest moves have been to signal an intention to interpret elements of Dodd-Frank and other US financial rules less strictly. 

Innovation and digitalisation are changing payment services at a very fast pace:ECB’s Yves Mersch said that the legislative framework established by PSD2 supports such innovation and enhances competition. “It offers a legislative basis for a level playing field between new entrant TPPs (fintechs) and incumbent banks,” according to Mersch. 

Capital Markets Union

Owen Walker at the Financial Times raised some practical issues around the applicability of the MiFID II ‘inducement’ rule,and warned that “investment bank research has been in slow decline for years, but the increased emphasis on its cost, highlighted by Mifid II, has led fund managers to question its value and pull back from all but the most worthwhile analysts.” The biggest fund managers have already been forced to absorb the research costs, such as Fidelity International, which backtracked on its decision to pass on the cost of investment research to clients after coming under pressure to pay the charge from its own pocket.  

PCS responded to the Commission’s consultation on possible changes to the Liquidity Coverage Ratio regime and on STS. The heart of the Commission’s proposal is the replacement of the current Level 2 securitisation assets with STS securitisations, which PCS finds disappointing and potentially damaging to investors and the still weak European securitisation market.

Verena Ross, ESMA’s Executive Director, appeared before ECON scrutiny on the Short-Selling Regulation to explain the three main areas of ESMA’s SSR advice, such as the exemption for market making activities and the definition of market making activities; the procedure for imposing short-term restrictions on short-selling; and the method of notification and disclosure of net short positions. A briefing on the evaluation of certain elements of the rules in place had been drawn-up for theParliament’s Economic and Monetary Affairs Committee’s meeting. The Securities and Markets Authority launched its Interactive Single Rulebook, a new service for market participants and other interested stakeholders across the European Union.  

A paper prepared by economists at the Bank of International Settlements looked at whether the information value of credit rating agency announcements relating to sovereign bonds has dwindled since the Global Financial Crisis and found that, overall, upgrades and downgrades from a stable/developing status exhibit the strongest market responses.  

Insurance

Boosting demand for insurance against cyber-attacks is increasing pressure on regulators to provide regulatory shield: Ferma announced that it is planning to release guidance later this year on buying cyber insurance to help risk managers obtain cover that better reflects their needs. Cyber-attacks and the entry into force of GDPR are behind the surge in demand for cyber cover in France.

EFRAG issued an IFRS 17 Insurance Contractssimplified case study for those who do not have the resources to complete the full case studyto assess the expected impact of IFRS 17.  

Asset Management

EFAMA’s latest Investment Funds Industry Fact Sheet showed that 2017 has been an exceptional year for the European fund industry, with net assets of UCITS and AIF surpassing the EUR 15 trillion mark.  

The European Commission’s study on EU markets for private placements found thatprivate placement of debt instruments with institutional investors could play a greater role in financing medium-sized companies in the future.  

AIMA reported on the High Level Expert Group on sustainable finance’s recommendations for asset managers and institutional investors.  

ESMA issued its final Implementing Technical Standards regarding the application of Market Abuse Regulation. The European Commission launched the EU Blockchain Observatory and Forum.