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17 October 2018

October European Council: the clash of the ‘big shots’ over Brexit - 145th Brussels for Breakfast – CPD Notes

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Yesterday’s European Council may have been May’s last chance to secure a deal that will avoid a crash Brexit next year. There will only be another Council meeting when there are concrete proposals as nothing new was offered by the UK – except some willingness to lengthen the transitional period.

Graham Bishop/Paula Martín Camargo


Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by Chartered Institute of Securities and Investment (CISI) and with co-presenterJohn Rega (Mlex).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 36th `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

The Brexit frenzy is building up but we kept our Trappist vow of silence on the politics of the subject and only touched on the practical implications --- of which there are many and profound issues. But first – who will be the next Commission President? A string of possibles declared they were not running but the real question is whether the Spitzenkandidat system will survive. Despite the superficial attraction of an indirect election by the people, it now looks as though it would deliver a permanent EPP President. But the EPP has the same number of Heads of State as ALDE – 8 out of 27. Whatever the HOSGs do, the end-point is a vote in the European Parliament to approve the candidate who must obtain an absolute majority of the expected 705 members.

Discussion of President Juncker’s last State of the European Union (SOTEU) led us to his call for the euro to emerge as a genuine international currency – responding to US sanctions on Iran that start in a fortnight. Clearly, an international payments system cannot be set up in that time but it may turn out that President Trump will have forced the EU to counter the long-standing use of the US dollar’s role in international payments as a powerful instrument of US foreign policy.

However, the role of the US in uncovering money-laundering in the EU illustrated the gaps in the EU’s own system – see my article in Financial World Oct/Nov edition. The string of extraordinary breaches has now forced the EU to look at using existing powers for “European” authorities to take direct action on bank and their national regulators. This may be re-enforced by a new role for the EBA as well as a new permanent committee to force co-operation.

But the Breakfast would not have been complete without the discussion on the practicalities of Brexit as the BoE is now warning of the risks to £41 TRILLION (20 times UK GDP) of derivatives. If there is `no deal’ then CCPs may have to give customer three months’ notice to shift contracts – effectively before Christmas! What would that Founding Father of the EU – Winston Churchill – have said about the politics of all this? My recent paper made it clear that he would have deployed his eloquence to urge us to Remain in the EU.


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.

Key items of the rest of the month

Time is running out for an agreement on Brexit terms before the official departure date on 29 March next year. Deep disagreements between both sides over the (seemingly) unsurmountable stumbling rock of avoiding a hard border on the island of Ireland dashed hopes over the weekend of securing some progress before the European Council this Wednesday that could pave the way for a final deal on an extraordinary 17/18 November meeting. Top EU Brexit official Barnier’s proposal to refine its backstop solution that would see minimised checks on goods travelling between Northern Ireland and the Republic of Ireland was flatly rejected by Brexit Secretary Dominic Raab on Sunday.

Officials at Brussels hinted at domestic problems that hindered Prime Minister May’s wiggle room to make further concessions, i.e. dire warnings from the Northern Irish DUP that props up her government and had even threatened with calling an early election, should a border emerge in the Irish sea to guarantee the protection of the EU’s customs union.  Europeans also believe that a good fight with Michel Barnier’s team will help May at home show a strong hand that may appease Brexiteers within her own cabinet threatening revolt because they are increasingly worried that the deal May wanted to clinch with the EU will keep Britain tied to the EU’s customs union indefinitely, curtailing the UK’s power to strike new trade deals. Brexit backers set 2022 as the deadline to such an arrangement. The Prime Minister may still have a hidden card to head off rebellion within her flanks: Bloomberg revealed that May plans to rush her Brexit deal through Parliament, while The Sunday Times reported that aides at Number 10 secretly begun to plot a snap election in November to save the Brexit talks and May’s job after EU leaders rebuffed her Chequers proposal in Salzburg.

It remains in doubt whether Theresa May will even survive to this week, after former Brexit Secretary David Davis called for a vote against her Chequers plan. The Prime Minister struck a more conciliatory tone in Parliament Monday to say that more time is needed to negotiate over the EU’s proposal for a "backstop to the backstop,” which was saluted by French President Emmanuel Macron saying that “collective intelligence” would ultimately prevail. France is no greater fan of the proposal: finance minister Bruno Le Maire said it would be ‘suicidal,’ and claimed the EU is more concerned with its own future than Britain’s. A weakened German government after Angela Merkel’s Bavarian allies lost their historic absolute majority won’t certainly help May’s case in Brussels.

October European Council was thus poised to be the ‘moment of truth’ to agree on a Brexit deal, as Council President Donald Tusk warned, while cautioning that parts of May’s Chequers agreement “would not work” for the EU.  But Tusk was gloomy after listening to the chief EU Brexit broker’s update about Britain’s prospects of coming out of the Council with an agreement. Michel Barnier briefed the EU27 about the ongoing talks and many member states came out thinking that a deal was ‘achievable’ – as Theresa May put it at her arrival at the Council meeting – in November, while others reflected that the issue might drag on until December.  Anyways, “much more time is needed,” said Barnier, for an orderly Brexit, and talks will continue over the next weeks. The Frenchman also said to be open to a one-year extension of the Brexit transition if Theresa May accepts a “two-tier” backstop to avoid a hard border in Northern Ireland.

Given the breath-taking turn of events, Brussels’ efforts for that date might be also expected to focus on bracing for a chaotic divorce from the United Kingdom as negotiations go down to the wire.

Meanwhile, alternative mechanisms to avert or delay Brexit, or to seek a popular vote on the final deal the government will bring from Brussels go ahead. A legal action to revoke article 50 was referred to the European court of justice, while former Lib-Dem leader Nick Clegg wondered how delaying the effective date of departure from the European Union would affect the next Parliament elections, due in May 2019. Support for a People’s Vote on the final Brexit deal is growing from all sides: after a poll showing that 86% of Labour members want a new Brexit vote, shadow Brexit secretary Keir Starmer announced that Labour had not ruled out backing another referendum on EU membership that included the option of remaining in the bloc.

MPs will have "multiple" opportunities to give the public the final say, a report by the People's Vote campaign group stated – but the UCL Constitution Unit urged to put in place a series of processes as soon as possible to ensure the vote is legitimateLawmakers could still force concessions to an agreed Brexit deal during the process of putting it on the statute books and make amendments to the withdrawal bill, researchers found.

The historic legitimacy of a second vote – and ultimately cancelling the whole process – can be found in Graham Bishop’s thorough analysis of Winston Churchill’s speeches. Bishop studied the monumental work of one of the most prominent ‘founding fathers’ of the European Union and has no doubt that Churchill would have voted to Remain.

A no-deal Brexit could put the integrity of the United Kingdom to test hastening independentist sentiments in Wales, the new Plaid Cymru leader warned, while Scotland’s desire to remain in the EU was reflected on its government’s support for a new Brexit referendum, if the question is put to SNP MPs.

The NI CBI Directorvoiced concerns that crashing out of the EU without a deal would render business in Northern Ireland not viable. This will also happen to one in six British manufacturers, a new EEF/ComRes poll showed, while FTI Consultingwarned that 60% of businesses are preparing to move research and development facilities and teams out of the UK. The advice for business from the UK government in case of a cliff-edge Brexit? You should consider leaving, the last batch of official guidance conceded.

EU finance is stepping up preparations for the worst: the European Parliament produced insight into third country equivalence in EU banking and financial regulation, whereas Steven Maijoor outlined ESMA’s work towards the full and efficient implementation of MiFID II and its preparations in case of a no deal Brexit. A bloc of industry groups spearheaded by ISDA set out the adverse impact of hard Brexit on derivatives in the EU. The ECB warned London-based banks they have a maximum of three years after Brexit to curtail their use of a “back-to-back” booking model which facilitates keeping staff and capital in the UK.

Prospects for UK finance are sombre: Bank of England warned that as much as £41tn of derivatives contracts maturing after Brexit are at risk unless European officials address regulatory uncertainty.  The FCA is accelerating work to get ready for the increasing possibility of a no-deal Brexit and launched a consultation on its proposals. Draft rules endorsed by a European Parliament committee are set to complicate things further for UK-based firms that want to continue underwriting stocks and bonds and doing market-making business for clients in the EU.  

Despair over everlasting uncertainty around financial regulatory issues and CFO concerns that the long-term business environment will be worse because of the UK’s split with the EU are making firms gear up plans for packing up and leave, according to EY, and as many as 5,000 City jobs could be lost by Brexit day. Most of them could head to Frankfurt, the city posed to reap the biggest gains from Brexit banks’ relocation schemes.

Foreign investors that use London as a gateway to the EU are still in the darkness over what business will be like after the UK waves goodbye, and fears are starting to weigh on business plans. A growing number of Japanese firms are heeding Tokyo’s ambassador to Britain’s warning that there’s no better option to frictionless trade under the single market, shifting operations out of the UK or threatening to scale back if no deal is agreed. Nomura bank has turned to Paris as its post-Brexit European lending hub.

In the global sphere, things could get hairy for British business: Bloomberg reported that the US has threatened to block the UK from the global procurement pact when Britain reapplies to the 46-countries strong agreement post-Brexit, a move that would deny British companies access to a near $2 trillion marketplace. Efforts to untie the UK from the EU at the WTO will need to redouble as more than a dozen of the biggest countries in the world opposed the EU’s proposal to modify its World Trade Organization commitments to account for Britain’s forthcoming departure from the bloc. Members also rejected the UK’s separate plan to replicate the EU’s WTO trade terms, a scheme that would anyways seriously damage key UK industries when put in practice, analysts at Verfassungsblog warned.   


September 15th, 2018 marked ten years from the collapse of financial services firm Lehman Brothers and the global financial crisis that followed – and the world is “in danger of sleepwalking" into another crisis, former UK PM Gordon Brown warned. The OECD chief echoed the alarm, saying that banks are still "too big to fail," in spite of the measures put in place to prevent another disaster. ISDA CEO acknowledged the progress made but highlighted areas for improvement, the most important being the cross-border harmonization of rule sets.

One particular area of concern is the growing role of shadow banking, which has expanded to more than 42 trillion euros in assets at the end of 2017, or about 40% of the bloc’s financial system, according to the European Systemic Risk Board. Supervisors need to keep a close eye on these ‘outsiders’, Bank of France Governor Francois Villeroy de Galhau said. The ECB President Mario Draghi expressed concerns that regulation couldn’t be strengthened because of regulators’ lack of powers to deal with the expanding sector, but commentators at the FT pointed directly at policymakers themselves to share the blame for creating such shadowy risks.

The Basel Committee keeps monitoring the impact of Basel III, the set of measures that aim at preventing that the circumstances that led to the financial crack ever happen again, and members met to discuss a range of policy and supervisory issues, and to take stock of the implementation of post-crisis reforms. As for the effect of the reform package on the European banking system, the EBA published its report on EU banks capital and updated data on liquidity measures in the EU.

As much as the crisis exposed weaknesses in the regulation and supervision of banks around the world, in the EU, the ECB President Mario Draghi said, that frailty was exacerbated by fragmentation. Draghi discussed the measures that are urgently needed to foster banking integration.  The ECB President said that, with common public risk-sharing through a backstop for the resolution fund, the incentives at the national level to limit capital and liquidity flows would disappear. That would in turn lead to greater banking integration and private risk-sharing at the euro area level and ultimately, to the reduction of risks. The new Vice-President of the ECB, Luis de Guindos, reinforced this idea, saying that “both EDIS and the backstop for the SRF would ultimately increase confidence and reduce the likelihood and the cost of a bank failure.” With a view to secure the role of banks in a strengthened European Capital Market Union, the EBF published its vision paper “Financing the Europe of tomorrow: How to unlock Europe’s latent growth potential.”

The European Banking Authority updated Risk Dashboard showed sustained improvements in the management of NPLs across the EU but pointed out that banks profitability remains a key hurdle. And there are other challenges in sight: German banking consultancy Zeb warned that increasing regulatory scrutiny, Brexit-related costs, rising bad loan provisions and low interest rates would dent banks’ profits by 40% over the next five years.

The EBA published two reports on EU banks' funding plans and asset encumbrance which indicate increased appetite for client deposits and market-based funding in the coming years. It also acknowledged the adoption of amended supervisory reporting standards by the European Commission, and launched its 2018 EU-wide transparency exercise, whichwill cover capital positions, risk exposure amounts, sovereign exposures and asset quality. The Bank of England will publish its stress testing results on 5 December 2018.

The recommendations of the FSB to transition from disgraced benchmarks like LIBOR to others approved by the EU financial institutions have begun to take roots: large firms have already issued bonds linked to new benchmarks such as Sofr and Sonia, the FT reported.   The Bank of England asked firms in the UK about their preparations for transitionfrom LIBOR to risk-free rates. The ECB has recommended replacing the euro overnight index average (EONIA) with the new euro risk-free rate ESTER, since EONIA will no longer meet the criteria of the EU Benchmarks Regulation as of 1 January 2020.                                                                        

Capital Markets Union

AFME published a new report with the support of European trade associations tracking the progress of the Capital Markets Union project through seven Key Performance Indicators (KPIs).   The ECMI warned that the design of the proposal fails to appreciate the dangers associated with capital markets finance and its ensuing debt-creating effects, which has been one of the catalysts behind the crises and scandals that have unfolded over the past 15 years, authors argued.  

Research at the European Parliamentshowed how the Commission’s proposal on a regulation on sovereign bond-backed securities (SBBS), a new class of low-risk securities backed by a diversified pool of national government bonds, could help reduce banks’ high exposure to their sovereigns’ own debt. The EBF welcomed the proposal and signalled some areas for improvement.

ESMA ChairSteven Maijoor assessed progress on MiFID implementation at the annual ECON hearing: the revamped MiFID rules have begun to hurt brokers, who have suffered a dramatic fall in commissions, the FT reported.  

Maijoor also briefed MEPs on works towards integrating capital markets in the EU, and on ESMA’s readiness for ensuring financial stability in the union in case of a tumultuous Brexit. The Securities and Markets Authority will focus on supervisory convergence and supervision next year, and is ready to adapt its 2019 Work Programme if Brexit turbulences threat to disrupt European markets, and to take account of the potential revisions of ESMA’s mandate under the ESAs’ Review and EMIR 2.2.                   

ICMA published a discussion paper on CSDR mandatory buy-ins and securities financing transactionswhich focuses more specifically on the implementation challenges for in-scope repo and securities lending markets.  


Insurance Europe reiterated that the 11 problems with the way IFRS 17 depicts insurers’ performance and business model flagged by EFRAG must be addressed and the implementation date of the standard be delayed by two years to allow time for improvements.  The ratings agency AM Best also called for postponement of the official date of 1 January 2021, saying it leaves insurers with a relatively short period for preparation.

Asset Management

The European Supervisory Authorities wrote a letter to the European Commission expressing their concerns regarding the possibility of duplicating information requirements for investment funds from 1 January 2020 and the importance of legislative changes to the Key Information Document for PRIIPs to avoid such a situation.  The ESAs will propose targeted amendments in the first quarter of 2019. The Investment Association highlighted some flaws in the Packaged Retail Insurance-based Investment Products regulation and proposed solutions, in particular to the methodology for calculating transaction costs.   

The Pan-European Pension Product (PEPP) could become a significant investment vehicle in support of the EU economy, even overtaking the current UCITS, CEPS CEO Karel Lanoopredicted. Lanoo praised the simplicity of the proposal under the CMU project and urged lawmakers to fine-tune its design, which will steer some member states towards giving the product a favourable treatment. 

Corporate Governance / Auditing

The UK’s Competition and Markets Authority (CMA) announced a further review of the audit market competitiveness, while the FRC set out a new strategic focus to ensure audit serves the public interest.

Anti-Money Laundering

The Council adopted a tougher anti-money laundering directive which will hopefully address concerns that the EU banks’ shortcomings in dealing with this international issue have rendered the bloc a paradise for money launderers. Moreover, the EBA’s inability to impose fines adds to the rules’ flaws: that may change given the Commission Vice-president’s remarks after the latest ECOFIN. Valdis Dombrovskis said the EBA should be able “to require national supervisors to investigate alleged breaches of individual banks and consider – as a last resort – taking decisions or sanctions”.

The Banking Authority has decided not to open a breach of Union law investigation into the Malta Financial Services Authority (MFSA). The EBA will prove Danish and Estonia supervisors over Danske Bank’s massive money laundering scandal. 

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