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Paula Martín Camargo
The UK Parliament started the New Year taking back the driver’s seat of the Brexit battle in Britain after a series of raucous parliamentary skirmishes that have laid bare the strength of the opposition to a cliff-edge withdrawal from the EU among lawmakers. An extension of the official departure date seems now a plausible option and has been floated to EU officials, who are open to the idea but dismiss further concessions that would make the plan more palatable to British Parliament members.
MPs managed to pass a key amendment which will force PM Theresa May to come back to Parliament with an alternative plan just three sitting days after the deal she agreed in Brussels last month is rejected next Tuesday – as it is widely expected to be. This controversial tweak limits May’s supposed strategy to run down the clock right to Brexit eve so MPs are left with the binary choice of staring right into the no-deal abyss or voting the PM’s proposal.
The clash is therefore set for next week with a vote on the 15th that will most probably see May’s deal rejected – the deadline for May’s alternative motion would then be January 21. The Tory leader will then have to propose a motion that will be amendable, which could see MPs testing options such as a so-called Norway plus model or even a second referendum – a People’s Vote on the final deal the majority of Britons now want, as shown in the widest poll on the issue to date. The whole Brexit process could ultimately be cancelled if a majority in Parliament or a landslide popular vote calls for it: the EU top judge ruled that the UK can unilaterally withdraw Article 50.
With less than three months until Brexit day, UK and EU businesses are running short of time to brace themselves for whatever scenario, and Brussels is stepping up preparations for a tumultuous no-deal divorce. To avoid mayhem in European financial markets ISDA had previously warned about, ESMA supported continued access to UK CCPs for a year under an equivalence decision - a measure that seeks to prevent disruption in central clearing -, while the European Council agreed to establish a "CCP supervisory committee" within ESMA and the ESAs proposed to amend bilateral margin requirements to assist Brexit preparations for OTC derivative contracts.
The dispute with the US over tightening clearing oversight for third parties after Brexit received somewhat soothing news before Christmas with the decision by American derivatives markets regulators to allow Deutsche Börse to handle trillions of dollars of deals from big American asset managers. Another row that risks having further ramifications for Brexit Britain is the decision by the Swiss authorities to decline a Brussels offer to formally agree a proposed new “institutional framework” governing EU trading relations with Switzerland.
The UK financial authorities issued further communications that aim at making a disorderly Brexit as smooth as could be: the Bank of England made further changes to the PRA Rulebook, whereas the FCA consulted on further proposals to prepare the UK's regulatory regime on contracts and securitisation – ISDA had responded to the FCA’s first consultation on the Handbook and BTS.
The City highlighted its importance as a net contributor to the UK’s economy: the total tax contribution of UK financial services increased to £75bn in 2018, the highest it has been in eleven years. This equates to 10.9% of the UK Government’s total tax receipts and could receive a severe blow if the relocation of capital to the EU keeps its pace: a report from consultancy EY warned that British financial services firms have moved almost £800bn in staff, operations and customer funds to Europe since the Brexit vote. In another worrying sign, Deutsche Bank and 16 other lenders recently tested moving interest-rate swap positions from London to Frankfurt.
March 29 2019 is not the only big day pinned in Europe’s calendars: the European Parliament elections in May look set to open the door to right wing forces that had been outcast in the EU since World War II, but have been gaining strength for years and now find an echo to their proposals in the streets. Taking centre stage in the Europhile side, top EU negotiator for Brexit talks Michel Barnier may end up being elected as Commission President. Barnier would pursue a path of more integration and greener economy during his mandate, he signalled in several articles at the beginning of the year.
Economic
The ECOFIN endorsed the political agreement reached with the EP on a package of risk reduction measures in the banking sector and adopted an action plan to better tackle money laundering and terrorist financing. The Eurogroup report to Leaders on EMU deepening, which included a term sheet on the ESM reform, the terms of reference of the common backstop to the SRF and a way forward on the banking union, was adopted by EU leaders at a Euro Summit in December. Bruegel advised on “clear flaws” of the Eurogroup’s reform of the ESM toolkit that, in the authors’ view, should have been corrected at the meeting.
The euro area financial stability environment has become more challenging since May 2018, the latest Financial Stability Review of the ECB warned, but a growing economy and improved banking sector resilience continued to support the financial stability environment in the euro area. A greater international role for the euro, as outlined by European Commission president Jean-Claude Juncker, would result in “quite limited” financial advantages, research at Bruegel found, apart from “financial autonomy”.
Banking
The EBA published its annual report on risks and vulnerabilities in the EU banking sector, which found further improvements in EU banks resilience but highlights challenges connected to profitability, funding and operational risk. The Banking Authority’s updated risk Dashboardshowed that EU banks have further improved their resilience, but profitability remains weak. It will run its next EU-wide stress test in 2020, in line with its previous decision to aim for a biennial exercise.
The impact and implementation of IFRS 9 was thoroughly assessed by the EBA in its first observation report, while the Chair of the IASB Hans Hoogervorst addressed financial industry concerns that the new accounting model might exacerbate procyclicality and discussed current risks in the global financial system.
The ECB announcement that it has appointed temporary administrators to the troubled Banca Carige to safeguard the bank’s financial stability was the first time the European Central Bank used these powers - Graham Bishop assessed whether Carige is a foretaste of a new dimension of the slow-burning EU banking crisis, and if this is the first bank where, paradoxically, the final nail in the coffin may be IFRS 9. The ECB announced that it will directly supervise 119 banks this year.
Andrea Enria succeeded Daniele Nouy as head of the supervisory board of the European Central Bank. This change of guard will have to deal with important challenges to address a far-from-healthy eurozone banking sector, in spite of the SSM’s achievements, such as a low return on equity, regional worries such in Germany or Italy, or an incomplete Banking Union. Michael Lever, Head of Prudential Regulation at AFME, said that more work is required to complete Banking Union, while the IMF proposed five actions to strengthen the pan-European banking project.
ECB’s official Ignazio Angeloni told Il Sole 24 ore that he sees a possible inversion of the economic cycle that could slow 2019 growth while banking contagion risks may rise, while the Single Resolution Board head Elke König told the FT that a page had been turned in how the bloc handled bank failures, but that she wants more firepower to ensure that a failure of one financial institution does not spread chaos throughout the banking system.
The Council endorsed a package of measures to reduce riskin the EU banking sector that deliver on three of the key objectives on the roadmap to a banking union: enhancing the framework for bank resolution, the possibility of suspending a bank's payments and/or contractual obligations when it is under resolution, and strengthening bank capital requirements to reduce incentives for excessive risk taking.
The EU agreed new rules on business insolvency with the overall objective to reduce the most significant barriers to the free flow of capital stemming from differences in member states' restructuring and insolvency frameworks and to enhance the rescue culture in the EU. Furthermore, the directive also aims to reduce the amount of non-performing loans (NPLs).
The huge amount of NPLs on eurozone banks’ balance sheets is another cause for concern: the Council and the Parliament reached a provisional political agreement on capital requirements applying to banks’ bad loans, and the EBA published its final Guidelines on disclosure of non-performing and forborne exposures.
EBA provided an overview of Competent Authorities implementation and transposition of the CRD IV package, and ISDA issued FAQs on the procedures for excluding non-EU non-financial counterparties under the capital requirements regulation.
The ECB’s working group on euro risk-free rates called on market participants to comment on its technical analysis of the paths available for transitioning from the EONIA to the euro short-term rate (ESTER), as well as on its recommendation of the preferred transition option. The Basel Committee consulted onrevisions to leverage ratio Pillar 3 disclosurerequirement to address leverage ratio window-dressing.
The European Council confirmed a political agreement on aligning the costs of cross-border payments in euros between euro and non-euro countries and increasing the transparency of charges related to currency conversion services across the EU. The European Central Bank launched an innovative pan-European service for settling electronic payments instantly, called TARGET instant payment settlement (TIPS).
Capital Markets Union
ECMI issued its 2018 Statistical Package on the dynamics of European and global capital markets. ISDA published an analysis of recent trends in the size and composition of over-the-counter derivatives markets, using the latest data from the Bank for International Settlements and ISDA.
The recast of European financial rules, MiFID II, has had a rocky start: The FT affirmed that MiFID II has thrown up several unintended consequences, putting a strain on relationships between analysts and fund managers, while The Economist warned that the EU’s unbundling directive is reinforcing the power of scale.
The common EU rules on securitisation begun to apply as of 1st January and were reinforced by further regulation such as ESMA standards on supervisory cooperation under the STSR and a statement by the ESAs clarifying securitisation disclosure requirements and consolidated application of securitisation rules. But the PCS warned against regulatory wobbles in the introduction of the new securitisation regime and strongly urged European authorities reflect deeply on the wisdom of any further shocks to the securitisation market.
Insurance
EIOPA outlined the key financial stability risks for the (re)insurance and occupational pensions sectors in the European Economic Area and announced the results of the 2018 insurance stress test, which confirmed overall the significant sensitivity to market shocks combined with specific shocks relevant for the European insurance sector. The IAIS released for public consultation its document on a holistic framework for systemic risk in the insurance sector.
A group of 11 global insurance associations wrote a joint letter to the IASB chair calling for a two-year delay to IFRS 17, following the IASB’s decision to propose a one-year deferral of the effective date of the standard. Among them was Insurance Europe, which also raised serious concerns on the Commission’s draft proposals for the 2018 review of the Solvency II Delegated Regulation.
The Insurance body expressed its worries about the quick-fix approach taken by the ESAs in their proposals for changes to the Key Information Document for PRIIPs, and signed a joint statement that raises concerns about the European Commission’s collective actions proposals.
Asset Management
EFAMA welcomed the vote of the EP’s Economic and Monetary Affairs committee amending the proposal on cross-border distribution of funds, which was followed by the Council agreeing its position on new regulatory and supervision framework for investment firms. EFAMA and AMIC published a joint report on liquidity stress tests in investment funds, which highlights the role of stress tests as an important risk management tool which allows the fund manager to assess the impact of different market stresses at the portfolio level. Stress testing will be also applied to Money Market Funds: ESMA published the responses to its Consultationon stress test scenarios under the MMF Regulation.
New trends such as cyber defence and fight against climate change are here to stay but the financial world is lagging when it comes to adapt itself to these new realities: the EU Council scrapped a disputed IORP II delegated acts from the green finance proposal, while the CEO of Europe’s occupational pension fund association Leppälä suggested that theCommission’s sustainability goals risk not being achieved if EU financial regulation restricts pension fund investment in risky assets. For its part, the ECB official Benoît Cœuré warned that cyber threat facing the financial sector continues to be a challenge.
Anti-money laundering
The Council adopted conclusions on an action plan to better tackle money laundering and terrorist financing and agreed its position on a proposal reinforcing the role of the European Banking Authority to supervise banks that was welcomed by EFAMA.
A PIIE study recommends the creation of a European AML Authority that would supervise banks, other financial institutions, and nonfinancial firms for AML purposes.