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By Paula Martín/Graham Bishop
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 `structured’ CPD web-cast with CISI – this month running for 45 minutes on 20th December. These Notes may be read to record a further 30 minutes of `structured CPD’, including a dipping into the links to the underlying stories.
Inevitably, we had to start with the Supreme Court hearing on Article 50 but not much new light could be shed on it at this stage – more in the St Valentine’s Day B4B when we will have the actual judgment to chew over. The Brussels decision-making process is beginning to crystallise but that just highlights the magnitude of the task – even for a transitional arrangement. If there is agreement in principle, then the standard EU democratic process will have to amend perhaps 100 financial services Directives and Regulations. As the EU does not have a “royal prerogative”, it will require detailed analysis and proposals on ‘000s of pages of law – easily five years before coming into force. What happens in the interim?
Given the absurdity of UK MEPs being elected in May 2019 to the Parliament, Brussels seems to regard the December 2018 European Council as an effective deadline for agreement. In the meantime, both Draghi and Dijsselbloem gave some very hard-line comments about retaining the integrity of the Single Market and arguing that the EU’s financial centre must remain in the EU - “we can’t allow” it to be outside.
The `banking package’ came out with many detailed proposals to `re-calibrate’ rather than `de-regulate’ – as the EBF put it. The debate highlighted some of the divisions within Europe and the determination not to have EU banks forced to uncompetitive capital standards. But the elephant in the room was the possibility the President-elect Trump might repeal some aspects of Dodd-Frank.
However, the debate on the CCP resolution proposal was even more heated as the scale of the contracts cleared in the UK was laid bare. The key question is the power of the EU authorities to intervene in the running of a non-EU CCP located in the UK after Brexit. It all revolves around the question of who pays, and it became apparent that the idea of automatic swap lines to the UK from the ECB was indeed a myth. “All swap lines are discretionary”!!
The new proposal on business insolvency from the Commission also raised questions about whether this was just “nice to have” for CMU or was it a pre-requisite. The need for training practitioners and adequate methods for bond-holders to seize their collateral was clear. Also in the corporate governance space, IFRS9 is now in force and the swing to expected-loss provisioning may be quite significant for most banks that replied to the EBA’s survey. Though it comes into force on 1 Jan 2018, ESMA is expecting both 2016 and 2017 accounts to reflect the new rules.
Political
Prime Minister May’s pledge to trigger Article 50 by March 2017 and start the exit from the EU is making London-located banks and British lawmakers seek a solution to keep unfettered access to the Single Market, or any hints from EU leaders on what terms the negotiation will be. May faces a very complicated choice if she wants to follow the voters’ will: NatCen Social Research revealed that 90% of British people want the UK to stay in the EU single market but be able to control immigration – an alternative not in the EU’s ‘menu’. The financial sector is pressing the Government to keep a ‘no change’ Brexit deal, with no barriers to financial services trading and cross-border hiring.
But the heads of European institutions keep on spreading the bad news for the United Kingdom when it leaves the EU: the ECB President Mario Draghi spoke at a European Parliament ECON Committee hearing and said that the UK would “first and foremost” suffer the consequences of Brexit. The increasing nervousness has no way of escape: Financial firms that are trying to prepare for Britain losing access to the Single Market by setting up contingency plans and planning to shift operations out of the UK have been told to relax – Bloomberg reported that ECB officials revealed finance executives that there will be no first-mover advantage when it comes to gaining regulatory approvals.
The Bank of England Governor Mark Carney reportedly urged May to seek a transitional arrangement with the EU27 while it negotiates its exit, but every EU leader - when asked- responds with the mantra that there will be “no negotiation without notification” of the UK’s intention to leave. If this notification happens in early 2017, UK officials will have just less than a year and a half to reach a deal – in EU parliament's Brexit negotiator Guy Verhofstadt words after his first meeting with UK Brexit secretary David Davis. The ‘three tier’ approach that European Commission's top Brexit negotiator Michael Barnier wants to apply to the talks would make this deadline very difficult to meet: "pending issues" - such as UK payments to the EU, border issues and the single market - would have to be discussed along with long-term arrangements.
Piling on the pressure, the Eurogroup President Jeroen Dijsselbloem said the City risked its position as the leading financial hub and would lose ‘passporting’ rights if it didn’t abide by European rules. In Dijsselbloem’s view, Brexit "is a lose-lose situation, which [European leaders] must manage as well as possible". ECB's Mersch voiced concerns regarding the future of the supervision of non-euro area CCPs that clear significant amounts of euro currency after the ‘divorce’. London is a major centre for euro-denominated clearing and losing this status would cost The City as much as 83,000 jobs, according to a private report by EY. Japan’s ambassador confirmed that seeing clearing forced into continental Europe after Brexit would make the business be transferred to Frankfurt or Paris. The prospects are gloomy for British insurers too: Ireland’s insurance regulator has increased greatly its staff ahead of an expected move of operations from London-based insurers.
The Bank of England released its Financial Stability Report for November 2016along with the results of British banks’ stress-tests: Governor Carney said it was in the EU27 leaders’ interest to secure an orderly exit as the UK was “effectively the investment banker for Europe”.
The CEPS produced a study showing that Brexit-induced policy uncertainty will continue to cause instability in key financial markets and has the potential to damage the real economy in both the UK and other European countries, even in the medium run. In the short run, new measures proposed by the European Commission on CCPs, clearing, capital requirements and resolution might present a risk of higher barriers to the City of London even before the Brexit negotiations begin.
Banking
The European Commission proposed new rules on capital requirements and on bank recovery and resolution that were explained by Commission Vice-President Valdis Dombrovskis and welcomed by AFME. Graham Bishop took part in a London Economics team that studied the impact of the Capital Requirements Regulation (CRR) on the access to finance for business and long-term investments.
The Commission’s reform of TLAC rules might cause a clash between Germany and France as reported by the Financial Times: there are concerns in Berlin that the proposals fail to do enough to shield taxpayers from the costs of banking crises. The EU proposals grant banks concessions from global standards set by the Basel Committee and may encourage President-elect Donald Trump in his plan to scrap the Dodd-Frank Act.
The Financial Stability Board published the 2016 list of global systemically important banks (G-SIBs) and the Basel Committee on Banking Supervision released further information related to the assessment. The EBF underlined that the Commission’s banking reforms show that the EU is now close to completing its implementation of the G20 global reform agenda as the package appears to comfort banks with a regulatory framework conducive to growth in the EU. Addressing the BCBS meeting in Chile, the EBF Board called on the Committee to respect the G20 mandate for additional capital requirements. The Banking Federation also presented a paper that outlined its vision for banking in the digital single market.
The EBA consulted on guidelines for the application of the IRB approach and published its final standards on assessment methodology to validate market risk models. The ECB’s Sabine Lautenschläger gave an account of the European banks' situation.
The EPC published the first rulebook of the SCT Inst scheme, while the CPMI released a report on the development and importance of fast payments services.
Securities
The Commission proposed new EU rules for the recovery and resolution of Central Counterparties, adopted measures to implement rules on central securities depositories that were developed by the ESAs based on ESMA’s technical advice, and published a report on the review of EMIR.
The FSB issued the responses received to the discussion note on Essential Aspects of CCP Resolution Planning that will assist its work in developing standards or guidance for CCP resolution and resolution planning. ESMA defined a common supervisory approach for CCPs’ service extensions and change of risk models under EMIR.
The combined results of the BIS semi-annual and triennial surveys of outstanding OTC derivatives positions showed that central clearing now predominates in OTC interest rate derivatives markets.
ESMA Chair Maijoor argued that safeguarding investors is key to Capital Markets Union’s success, while the European Banking Federation issued a new joint paper that highlights the importance of securitisation for jobs and growth in Europe.
Deutsche Bundesbank and Deutsche Börse jointly presented a functional prototype for the blockchain technology-based settlement of securities.
Insurance
The Commission invited the European Supervisory Authorities to amend PRIIPs rules - on multi-option PRIIPs, performance scenarios and the comprehension alert - and to develop guidance in line with the relevant provisions of the RTS on the practical application of credit risk mitigation factors for insurers. Chris Cummings, Chief Executive of the Investment Association, said that the Commission's decision to delay the PRIIPs date of implementation by a year should provide regulators the time to agree a better PRIIPs KID.
Asset management
The Financial Conduct Authority published the interim findings of its asset management market study, which suggests that there is weak price competition in a number of areas of the asset management industry. The Investment Association issued an initial and second response to the Asset Management Market Study Interim Report.
The challenges presented by MiFID II are the top concern for 73% of asset managers, research by State Street Corporation showed, but the review of the UK’s corporate governance might also mean severe effects for investment groups on the way asset managers vote on pay and monitor issues such as board independence and company strategy.
ESMA responded to the Commission’s consultation on a potential EU personal pension framework, whereas the French asset management association has proposed creating a pan-European personal pensions productas one of a host of measures to boost the standing of the country’s industry. France’s €23.5bn civil service pension fund ERAFP recommended pension funds to be allowed to enter into repo transactions with the ECBto help turn pension savings into more productive capital.
Belgium’s pension fund association decried the government proposal for personal workplace pensions, calling for the “specificity” of the different pension pillars to be respected, while Germany’s corporate pension funds have given the thumbs-up to government plans to strengthen occupational pensions in the country.
The presidency reached a provisional agreement with representatives of the European Parliament on a draft regulation on money market funds (MMFs), aimed at making such products more robust.
Corporate Governance/Accounting
ESMA publisheda Public Statement on Issues for consideration in implementing IFRS 9: Financial Instruments before its official adoption by the European Commission. The EBA provided its views on the implementation of IFRS 9 and its impact on banks across the EU and then launched a second impact assessment of IFRS 9 on EU banks.
The FEE responded to the EC’s proposed introduction of a public Country-by-Country Reporting (CbCR) requirement – the Accountant Federation said it supports transparency and restoring trust in tax systems.
Financial Services Policy
The Commission published the results of its Call for Evidence on EU financial services and concluded that overall the financial services framework does not need to be changed, but targeted follow-up actions to fine-tune the framework have been proposed in access to financing, proportionality, reducing regulatory burdens and consistency of the rules. The EBF and Insurance Europe responded to the Commission’s regulatory framework revision.
ESMA Chair Maijoor spoke at the European Commission’s Hearing on the Review of the EU macro-prudential framework and his speech focused on extending the macro-prudential framework to non-banking, especially in light of the CMU project. ESMA finalised its advice on future rules for financial benchmarks.
Economic
The European Commission for the first time presented a set of European rules on business insolvency that was hailed by AFME and ACCA.
The ECB's Praet spoke at the EMU Forum 2016 on the importance of a genuine banking union for monetary policy, to achieve greater macroeconomic stability.
A new report – commissioned by the BBA and based on independent PwC analysis – found that UK banks’ tax contribution climbed to £34.2 billion in 2015.