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Graham Bishop’s Personal Overview.
Mechanical preparations for MiFID seem to be accelerating and recruitment consultants report a sharply rising demand for compliance officers. But many fundamental points are still unanswered – to the alarm of Commissioner McCreevy, who publicly expressed his fears that the dream of a single rule book may be turned into a “practical nightmare” by “a dozen or more gold-platers”. Trade associations report that nationalism is alive and well in other fields such as implementing the Prospectus and Market Abuse Directives. So the next few months will bring a critical test for CESR’s ability to co-ordinate its member regulators to achieve the level playing field.
But, if CESR should fail, the defeat will go far wider than just CESR as it will be a body blow to the entire concept of a single market. It would terminate the only really visible success of the Lisbon Agenda. Heads of Government must respond politically, and ensure that their own national officials are both empowered and enthused to rise to the challenge ahead.
More strategic thinking about MiFID is surfacing in the aftermath of the failed bid by NASDAQ for LSE. Both London and NYSE/Euronext are talking to the Tokyo market but they are also talking about their plans to offer services to investment banks that may reduce the banks’ need to set up their own “systematic internaliser” (SI) facility. But the exchanges may face a quandary: if they make it easy for any bank with a significant order flow to become an SI, then SIs will become much more widespread and cannibalise the exchanges’ main business. The careful nuances of these commercial offers should become clearer in the months ahead.
Whatever the exchanges decide, settlement remains a key obstacle to a single capital market and the ECB’s proposal seems to be running into further opposition. Unsurprisingly, the 42 settlement bodies that are members of ECSDA have written to the European Central Bank urging it not to proceed with plans to build its own cut-price securities settlement system until it can say how the new utility will be owned, governed and operated. But finance ministers also seem to be receiving advice along similar lines and the ECB needs to be seen to respond fully to these concerns. Both T2S and the Code of Conduct share a design weakness – they need private firms to agree to give up some of their profits and today’s shareholder value culture may make it difficult for managements to act in a public-spirited way. But a far-sighted corporate governance ethos might show that it is commercially sensible for the long-run existence of the business, as users may opt for a different system and will not easily change back again. Do the key hedge fund stakeholders have that long time horizon?
Hedge funds themselves came into the limelight at the G7 meeting in Essen where the ministers agreed to remain “vigilant” about the possible systemic risks posed by the scale of these funds. Both the US and the UK agreed to this compromise even though the US seems to be investigating the hedge fund world more seriously about possible trading abuses. Though a separate issue, there have also been expressions of disquiet by some leading politicians in the UK about the management techniques employed by private equity funds, and this has been echoed in the battle for the French Presidency.
Solvency II moves steadily towards a firm proposal from the European Commission (currently expected in July) and many of the remaining arguments were epitomised within the notes of the CEIOPS advisory panel meeting. The UK’s FSA put forward a proposal that relies heavily on the easy transferability of capital from group level to an individual company within a member state to maintain the solo capital adequacy of that company but this was recognised as being outside the current request for advice from the Commission. QIS2 was seen as being an exercise in the possible design of the capital adequacy systems but QIS3 – now imminent – is more about calibrating capital at the right level. However, some of the key elements of design will have to be delegated to the “Lamfalussy level 2” procedure and that may be a test of how far the European Parliament is willing to trust the newly-agreed comitology procedure.
The banking community finally heard the results of the Commission’s competition enquiry into retail banking. This reported a number of competition concerns in the markets for payment cards, payment systems and retail banking products - demonstrated by large variations in merchant and interchange fees for payment cards, barriers to entry in the markets for payment systems and credit registers, obstacles to customer mobility and product tying. But supervisory, regulatory and other legislative measures also act as entry barriers.
Financial stability remains a source of concern and the Commission issued a report estimating the cost implications of harmonising EU Deposit Guarantee Schemes (DGSs) after considering the information collected from a survey distributed across EU DGS. The BIS also issued a paper for comment on the principles for home-host supervisory cooperation and allocation mechanisms in the context of Advanced Measurement Approaches (AMA). The consultation aims to clarify the key elements of supervisory cooperation and establish a framework of principles to facilitate information sharing in the assessment and approval of AMA methodologies.
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Graham Bishop