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10 July 2018

Brussels and Chequers: a lacklustre performance - 143rd Brussels for Breakfast – CPD Notes

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PM May’s Pyrrhic victory at Chequers gave support to her ‘soft Brexit’ proposal but at the cost of three of her most vocal ministers. EU officials hinted at flexibility towards the new plan, now that their biggest and most debated project - the banking union - has been put to rest until December.

Graham Bishop/Paula Martín Camargo

Organised by the Centre for the Study of Financial Innovation (CSFI) with co-presenterFiona Wright (Brunswick)This blog covers the key subjects since our last meeting that I hoped to cover but, as always, we ran out of time to deal with them all. As a Friend, you can watch the 34th `structured’ CPD web-cast with CISI. These Notes may be read to record a further 30 minutes of `structured CPD’, including a dipping into the links to the underlying stories.

Highlights from the “Brussels for Breakfast” meeting

We could not avoid the Brexit implications flowing from the Chequers Cabinet meeting but first we reviewed the build-up to the June EU Council meeting. The starting point was the Meseburg Declaration – was the Franco-German motor of the EU springing back to life? The short answer was `not really’. Though President Macron had put forward many ideas, Chancellor Merkel felt too weakened by the election to respond fully. With pushback from the northern EU states grouped in the “Hanseatic League”, the Summit fell well short of the hopes built up in the past few months but some items were agreed by the Euro Summit: agreement to finalise the Banking Union package by year-end, `start works on a roadmap towards’ EDIS and the ESM to provide the backstop to the SRF.

The Chequers statement was discussed in some detail as it was all about “common rulebooks for goods” but stated baldly that regulatory flexibility for services would be retained. So there would not be the current levels of access to EU markets as the plan would not replicate passporting (and equivalence would not last long either). In effect, the City has been thrown into the Thames!

The issues surrounding de-risking banks took quite bit of time. Finally – after decades of trying – insolvency procedures seem to be advancing. The pressure is on to improve processes as a key part of CMU. On the one hand for bondholders, but on the other hand to enable banks to work down their NPLs by gaining control of the collateral. As an example this can take three years in Italy – but there is a wide dispersion between Courts – suggesting States do not need to wait for EU-level legislation before acting to improve matters.

The ECB’s Banking Supervision reported on its third cycle of reviewing banks’ recovery plans and stated a key realisation was that the nice plan on paper may not work well in periods of extreme stress. Clearly, that would negate the drive to bail-in creditors instead of taxpayers!

Comments on Legal Entity Identifiers (LEIs) turned out to be surprisingly vigorous. Though good progress has been made, there are major gaps and these must be sorted before the Prospectus Directive and Securities Financing Transaction Regulation come into effect in a year. We also noted the complaints from asset managers about the reduction in analyst coverage following MiFID’s unbundling of charges. Perhaps uncharitably, we wondered about the size of the research budgets of the `complainers’!


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 issues of the rest of the month included:

Theresa May has managed to get her cabinet on board for the ‘softest of soft Brexits’ – as an economist and prominent Brexiteer denounced in mid-June, after May appeared to see off a Tory rebellion - after the meeting of ministers at Chequers, the UK Prime Minister’s country retreat. But the compromise reached claimed its first victims and threw May’s team into disarray with the resignations of top UK’s Brexit Secretary David Davis, his deputy at the Department for Exiting the EU, and Foreign Secretary Boris Johnson - Davis being replaced by fervent Brexiteer Dominic Raab and Johnson by Remainer Jeremy Hunt.

The British PM had played hardball at Chequers, challenging conflicting members of the toughest Eurosceptic wing within her government to back her ‘soft Brexit’ approach. She ultimately reached an agreement on a so-called ‘free trade area’ that would keep the UK as close to the EU as possible. But will the terms agreed fall within Brussels’ red lines?

As for now, May’s eleventh-hour deal may have averted a split in her warring cabinet by making dissenters quit and everyone else sign up to her plans, but it is far from securing the EU’s approval since it would establish a very special deal for a single third country with the bloc, effectively meaning the cherry-picking of parts of the EU’s four freedoms. The wording of the proposal tries to divert from the single-market access for goods’ bid rejected in its initial form by some EU leaders as a nonstarter: heavyweights like France, Germany and Spain would block any attempt to combine single market membership with immigration curbs, the new Spanish foreign minister warned.

European officials and member states previously expressed their concern about the tortuous progress of the negotiations and the ‘huge, serious divergences’ EU’s Chief Brexit negotiator Michel Barnier warned that still exist between both parts’ plans, and cautiously await for May’s much-vaunted Brexit White Paper, due to be published later this week.

Brussels is sceptical that London will be able to present a solid proposal that will fall in line with the EU’s legal requirements, and has asked “all stakeholders” to prepare to whatever the outcome of the negotiations. But crashing out of the European Union without a deal is not an option for a bloc of 50 Conservative MPs that have told the FT they are ready to obstruct any no-deal Brexit, and up to 48% of British voters would want to have a say over the final deal, according to a Survation poll. The Prime Minister will also have a hard time convincing the British she can really handle Brexit talks: the public doesn’t trust PM May’s ability to negotiate a good deal, a survey for The Times and 69% of the respondents to a YouGov poll found. The shambolic pace of the negotiations may be taking away appetite for Brexit: a compendium of YouGov’s latest polls showed that support for Brexit is waning, with only 40% of voters that still want to leave.

The EBA’s measures were met with outrage at the Bank of England: Governor Mark Carney warned that “It will not be possible, ahead of March 2019, for private financial institutions on their own to mitigate fully the risks of disruption to financial services,” whereas representative of The City Miles Celic criticised what he deemed Brussels’ politicisation of the issue. Chancellor of the Exchequer Phillip Hammond closed ranks with the BoE in arguing for mutual recognition of the EU and the UK’s financial  rules - the system favoured by Britain’s financial sector to allow greater regulatory autonomy though to the detriment of more access to EU’s markets.In the plan devised by May, services and financial services, the biggest sector of British exports, would be covered by a looser framework and relinquish seamless access to EU’s markets, in exchange for more regulatory flexibility. This is too vague in detail and not yet agreed in Europe, so unlikely to dissipate uncertainty for financial firms: the EBA called on banks and other financial institutions to hasten their preparations for Brexit, while ICMA warned against cliff-edge risks in international capital markets, and the EIOPA renewed its call for insurers to inform customers about disruption the British departure may cause in cross-border contracts.

Financial services rules set in motion this year won’t be the answer for continuing the City activity in a semi-business-as-usual way: MiFID equivalence won't work for Brexit Britain, Kay Swinburne, UK’s most senior financial-services lawmaker in the European Parliament, told Bloomberg. The way the EU has time-limited access for Swiss business under these rules, and France’s proposal for tightening requisites for third countries signal the unfitness of this option.

Time is running out for London to retain the lucrative business of clearing derivatives denominated in euros, a flash point hotly contested in view of Brexit: A European Parliament committee endorsed a bill to amend the ECB’s governing statute, explicitly granting it authority over clearing houses for euro-denominated contracts through its Article 22. Uncertainty around this thorny issue has made two big UK banks such as Barclays and HSBC shift some euro clearing from London to Frankfurt.

How will this all translate to the future of the City? The former Policy Chairman at the City of London Corporation Sir Mark Boleat predicted that a post-Brexit British financial services industry would be significantly smaller in the long term if Britain remains outside the EEA. This would mean an exodus of finance firms relocating to the EU, the head of the International Monetary Fund warned, suggesting that such a move will happen irrespective of the final deal struck.  The shrinkage might have already begun: an EY report on London attractiveness as a financial hub shows investment from abroad in Britain’s financial-services firms fell 26% last year, with Germany and France collecting the biggest gains.


The political will expressed by French President Emmanuel Macron and German Chancellor Angela Merkel at their meeting at Meseberg to create a common Eurozone budget as well as to begin the transformation of the current ESM into a more powerful European Monetary Fund (avoiding all reference to the ‘monetary’ part given the ECB opposition to it) and the enthusiasm of the heads of finance of member states to start discussions on a common European Deposit Insurance Scheme – in spite of the warnings by German economists about the lack of preparedness of banks for such an instrument - and on enhancing the ESM as backstop to the Single Resolution Fund weren’t delivered at June’s European Council: EU leaders postponed the completion of the banking union. An agreement on the backstop to wind down ailing banks was delayed to December as well as Council President Donald Tusk’s expectations to add more anti-crisis tools to the ESM. At the heart of the disagreement was a group of countries led by Germany’s insistence to secure a strong political oversight of the instrument.

EU leaders and institutions want to make sure that struggling banks will not bring back the economic pains they caused in the 2007-2008 global crash, and keep up their work on lowering the huge burden of Non-Performing Loans for banks, testing their resistance to financial distress and establishing how to orderly resolute them and help them recover: the European Parliament compared the 2018 stress test design to previous exercisesto check how demanding and consistent it is;AFME issued a paper on liquidity in resolution;while the ECB reported on best practices in recovery planning, and the EP Think Tank published a paper on new EU insolvency rules, an initiative that will contribute substantially to addressing the high levels of NPLs in banks’ balance sheets. The effort has been globally shared until now, with the unravelling of the anti-crisis measures in the US and the dismantling of the stimulus programs provided by central banks: the IMF studied how to deal with failed banks, whereas BIS’ head Agustín Carstens warned that the “disciplining force” of financial markets will leave debt-laden governments with limited room to boost growth. European economic recovery has renewed the appetite for bank mergers, with most of them being domestic until now. Bruegel assessed the odds of cross-border mergers in the new bank consolidation wave.  

The ECB urged lenders to put an end to their foot-dragging in picking a new lending benchmark that would be put in place after the end of key interbank EONIA, and accused them of being complacent until regulators stepped up the pressure. A possible candidate could be Euro Short-Term Rate (ESTER), a model much harder to rig than LIBOR or EURIBOR because it is based on transactions weighted according to volume, but it won’t be ready until the second half of next year and ECB staff fear that is a little too close to the 2020 deadline.

ISDA, AFME, ICMA, SIFMA and SIFMA AMG published a joint Global benchmark report, which outlinesrecommendations on steps firms can take to prepare for the transition from interbank offered rates (IBORs) to alternative risk-free rates (RFRs).   ISDA published a checklist of steps firms can take now to start implementation of reformed interest rate benchmarks.

Capital Markets Union

The Commission welcomed the progress made by EU leaders on initiatives that are key for the drive towards the Capital Markets Union, such as the cross-border distribution of investment funds package and the pan-European personal pension product (PEPP).

ESMA officials reported on MiFID II implementation: Chair Steven Maijoorstressedthe need for a third country regime for trading venues in MiFID II and confirmed that Legal Entity Identifiers (LEI) implementation has been smooth, with 95.5% of the instruments reported in ESMA’s reference data system having the correct LEI. Executive Director Verena Ross highlighted that many stakeholders are now calling for the LEI to be the standard pan-European identifier that can be used for all regulatory purposes.   But the transition to MiFID is being painful, and the obligation to disclose the research costs to asset managers, known as unbundling, is taking a heavy toll on the industry, especially on sellside analysts whose exodus is being exacerbated by the new EU-wide rules, the FT reported.  As a result, the UK’s FCA has launched an investigating into how the reforms to research payments are affecting the industry.

ESMA issued an opinion to clarify CCPs’ liquidity risk assessment under EMIR, while ICMA publisheda report thatseeks to explain the additional market risks and economic uncertainties the CSDR buy-in regime will create for bond market participants as well as intermediaries and lenders of securities.  

The new regulation that has entered into force this year, and the EU’s bigger projects currently being crafted may be hard to swallow for financial firms and professionals, but they are setting an example for the wider community: analysis by Bloomberg has shown that the EU is emerging as the new sheriff for global financial markets, in opposition to the US’ new wave of de-regulation. Multinationals forced to abide by European standards are finding it easier and more effective to implement a blanket global policy.


The EIOPA published a new set of statistical information on the European insurance sector based on Solvency II regulatory reporting for the fourth quarter of 2017.   Data contained in a survey by Insurance Europe showed that the insurance package brings benefits - over three quarters of the respondents have seen a positive effect on their risk management and governance practices and on their management of assets and liabilities - but deters long-term business.

Corporate Government

The IASB Chair Hans Hoogervorst gave an account on the use of IFRS Standards around the world and the current thinking of the accounting institution.  

Anti-Money Laundering

Brussels is tightening its grip on money-laundering criminals:  the Council confirmed the agreement reached between the Bulgarian presidency and the Parliament on new rules on using criminal law to counter money laundering, and endorsed an agreement on a draft regulation aimed at improving controls on cash entering or leaving the Union.  

Accountancy Europe published a factsheet assessing how accountants and auditors’ day-to-day work will be affected by the 5th EU Anti Money Laundry Directive, and a paper on the main legislative changes between the Fourth and Fifth Anti-Money Laundering Directive.

Clients Union

The European Supervisory Authorities held its 2018 Consumer Protection Day. Finance industry representatives and regulators sought to address major challenges facing consumer protection in financial services across the European Union.   The protection of individual investors is becoming an increasingly pressing matter: EFAMA confirmed the shortcomings of the PRIIPs regulation for investors, saying that the rules  are causing serious detriment to these same investors by mandating figures, particularly in relation to performance and costs, that at best confuse them and at worst mislead them.

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