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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.
By Graham Bishop/Paula Martín
Summary
Reflecting on the referendum result, it is remarkable that all three leading Brexiteers have already been found unsuitable to hold the highest public office in the land. However, the key for the City is whether the reform programmes of Banking Union and CMU will be impacted. The ECOFIN Conclusions suggested that the momentum remains, even to the point of pushing ahead with technical work on EDIS despite the well-known political difficulties.
However, the theme running through the whole discussion was the possible impact on UK-based firms of their continuing ability to passport their services into the EU and if not, what would “equivalence” mean in practice. It is apparent that there is an urgent need to understand the facts today. But ECOFIN calling for an effective CRDV underlines that this will not be a static debate. The EU will respond to future developments and, increasingly, is no longer committed to slavishly following global standards from Basel. Will the UK have to give effective control back to Brussels if the City is to remain “equivalent”?
The lengthy discussion on the forthcoming CCP resolution proposal - first from the FSB and then from Brussels – suggests there will soon be plenty of practical examples of the difficulties ahead.
The 24th June was a sad day for Britain, as Graham Bishop described it: the Britons had voted for Brexit. Nearly 52% of the population voted ‘out’ of the European Union, to the great surprise of the EU institutions whose leaders weren’t able to explain the outcome of such a momentous decision in the UK and European history. The ECB put in motion its contingency plan and assured that it was closely monitoring financial markets.
The British PM David Cameron resigned after having campaigned for Remaining and left the decision of triggering Article 50 of the Treaty of the EU to his successor. This movement created a bigger fuss among the EU leaders, who convened a European Council and urged the UK to start the secession process “as soon as possible”, stating that “no negotiation [would be launched] before notification [of the formal request for leaving the EU]”. Council President Tusk also called for a wider reflection on the EU project itself, for greater unity among the remaining Member States, and for deepening the big projects – such as EMU, CMU and Banking Union – that have been undertaken within the EU. Eurogroup President Dijsselbloem delivered a speech focusing on these issues the day before the EU referendum. Commissioner Jonathan Hill resigned following the referendum outcome and was replaced by Commission Vice-President Valdis Dombrovskis, who chaired the ECON meeting on 6th July.
The Bank of England commented on the EU referendum result and reassured the banks and the markets stating that the bank was prepared for such a scenario; however, its Financial Stability Report admitted that "there is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging." Graham Bishop reviewed the BoE’s July FSR and wondered where were “the Brexiteers plans to deal with this entirely foreseeable impact on the well-known fragilities of the UK.” The EBF released its statement on Brexit saying that “a significant amount of contingency planning has already been undertaken by the European banking industry.”
The deployment of the TEU’s secession clause and who is legitimated to do it is now in the centre of the debate: Andrew Duff published the ultimate guide to the Article 50, whereas three constitutional lawyers argued that the Prime Minister does not have the power to trigger the process of Article 50 without the prior authorisation of UK Parliament.
In the meantime, the pound reached its lowest point in 30 years and fears over the loss of ‘passporting’ rights and euro trading dominance grew in The City. ESMA’s Maijoor had previously warned of the risk of Brexit for UK asset managers. Graham Bishop took part in the hearing of the LSE Commission on the Future of Britain in Europe that produced the report ‘Financial regulation and the protection of Eurozone outs’.
Banking
The Council agreed on a 'roadmap' to complete the Banking Union focusing on three main areas: a European deposit insurance scheme (EDIS); a common backstop to the single resolution fund; and bank regulations with a view to reducing risks. The EBA published information to clarify the use of 2016 EU-wide stress test results in the SREP process, issued its final Guidelines on stress tests for deposit guarantee schemes, and announced the details of its 2016 transparency exercise.
France and Italy’s finance ministers published a joint paper calling for a cap on Total-Loss Absorbing Capacity (TLAC), following a statement from the Single Resolution Board which argued that the agency may force some banks to have loss-absorbing reserves of “well above” 8 per cent of their liabilities. This may force Brussels to intervene in the dispute, amid concerns that the different approaches could “impede the resolution of cross-border banks and provide uncertainty for issuers and investors alike”, according to a document obtained by the Financial Times. The BCBS published implementation assessments on frameworks for systemically important banks, and Fitch issued a study saying that expected changes to sovereign debt regulationcould lead to a 30 per cent increase in capital requirements for the main EU banks.
The Institute of International Finance (IIF) wrote to the Basel Committee warning about new rules aimed at making it harder to cheat on safety measures included in Basel IV which may encourage risky loans, according to the financial entity. ECB's Villeroy urged the BCBS to respect "virtuous" national practices of banks, arguing that the proposals put forward by the Committee do not at this stage fully respect earlier commitments to not significantly increase overall capital requirements for banks. The Basel Committee rules for derivatives capital were opposed as well, and Bloomberg reported that the European bank’s call for changing a leverage ratio requirement that could hurt the clearing industry had gained ground thanks to the Bank of England’s Carney and CMU Commissioner Hill’s backing.
ESMA published a Statement reminding banks and investment firms of their responsibility to act in their clients’ best interests when selling bail-in-able financial instruments, while the EBA published an analysis on governance arrangements and indicators for recovery plans.
The ECB’s latest Financial Stability Review showed that euro area systemic stress was contained in May despite bouts of global financial market turbulence. It also warned that European banks have spent a third of their net profits on provisions to cover expected legal costs since the start of the economic crisis in 2008. The Central Bank reported on the results of the survey on the access to finance of enterprises in the euro area until March 2016.
The BCBS consultation on internal models was responded jointly by GFMA, ISDA, IACPM and JFMC, and by the EBF. The EBF also published its comment to DG FISMA consultation paper on further considerations for the implementation of the NSFR in the EU. The European Commission launched a public consultation on the evaluation of the financial conglomerate directive.
The ECB’s Economic Bulletin included an article on the role of euro area non-monetary financial institutions in financial intermediation. ECB’s Mersch gave a speech on the future of Europe’s banking sector. The ECB published a paper on shadow banking in the euro area, while the FSB analysed the implementation of its Policy Framework for Shadow Banking Entities. Bruegel reviewed the first eighteen months of the European banking supervision.
On payments, the EPC published the summary of the first meeting of the ‘Forum’ steering committee, the coordination body of the European P2P payments stakeholders. The ECB’s Wacket reported on the progress towards pan-European instant payments in euro, which might be a step closer now after four of the UK’s biggest banks have signed up to launch “Pay by Bank app”.
Securities
The Council agreed its stance on prospectus rules for trading securities, a major building block in the development of a Capital Markets Union. The proposed regulation was responded by ESBG, European Investors, European Issuers and FESE.
The European Commission adopted a delegated regulation on central clearing for interest rate derivatives.
ESMA issued its technical standards on indirect clearing arrangements for OTC and exchange-traded derivatives; established a memorandum of understanding with the CFTC under the European Market Infrastructure Regulation to cooperate on CCPs; issued an Opinion on inside information disclosure under the Market Abuse Regulation (along with an updated Q&As document on MAR implementation) and published an updated list of recognised third-country CCPs.
ESMA’s Maijoor spoke at the European Parliament on MiFID II – for which a one-year delay has been enacted, - Maijoor gave a speech at Financial News 20th Anniversary on MiFID II, the UK referendum and ESMA's role in regulation; and talked about CCP Recovery and Resolution. ESMA published the responses received to its consultation on Guidelines on CSDR, among which is AFME’s comment.
The ECB's Cœuré reported on the progress towards a macro prudential framework for central counterparties, while ISDA analysed the resolution of central counterparties in a new white paper. ESMA assessed the usefulness of distributed ledger technologies. The world’s largest equity derivatives clearinghouse, OCC, was placed on CreditWatch with a negative outlook by S&P, damaging its ability to comply with European clearing standards.
The European Supervisory Authorities wrote to the Commission on the delay to adopt the bilateral margin rules for derivatives. The European Commission adopted a proposal for the incorporation of the Regulations on the ESAs into the EEA.
Insurance
EIOPA consulted on policy proposals regarding the implementation of the Insurance Distribution Directive; the Insurance Authority also advised to enhance the asset class for high-quality infrastructure investments under Solvency II and released a joint letter on the supervisory convergence work by the ESAs on PRIIPs– so did Insurance Europe. EIOPA is to launch an EU-wide thematic review on market conduct. The FSB released a guide on resolution planning for systemically important insurers.
Asset Management
The European Council reached an agreement with the European Parliament on institutions for occupational retirement provision (IORPs)- Investment & Pensions Europe assessed the sweeping reforms. EIOPA published the final Advice on the further development of a single European Union market for personal pension products.
The Investment Association and AIMA responded to the EU Commission’s consultation on cross border investment funds. EFAMA responded to the ESMA Consultation Paper on Draft Technical Advice under the Benchmarks Regulation.
The Council agreed its negotiating stance on money market funds; the Commission welcomed EU Council’s backing and EFAMA reacted to the reforms.
ICMA published a study exploring the evolution of the European investment grade corporate bond market.
Corporate Governance/Accounting
IPE published an article in which it summarised views on a potentially damaging report of the Parliament’s ECON on the activities of the IFRS Foundation and the IASB. IASB’s Hoogervorst outlined plans to prioritise improvements to the communications value of financial statements as the main outcome of the IASB’s recent Agenda Consultation. Hoogervorst talked about the risks faced by the global economy resulting from post-crisis economic policies and regulatory reforms.
Financial Services Policy
ECIIA commented on the EU’s Call for Evidence on EU regulatory framework for financial services. Fourteen international trade associations and business groups announced the formation of a Transatlantic Financial Regulatory Coherence.
Economic
The Council agreed its stance on anti-corporate tax avoidance rules and Parliament MEPs called for tax haven blacklist, patent box rules and CCCTB. The Council adopted the rules on the exchange of tax-related information on multinationals. EBF and FEE commented on the Anti-Tax Avoidance Directive.
IRSG responded to the Commission's consultation on an effective insolvency framework within the EU.