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The debate on the report on Hedge Funds and Private Equity revealed that the technical specifications of “Rule 39” still lack clarification. The Committee also held a hearing on the future structure of supervision in
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Hedge Funds and Private Equity
Lamfalussy follow-up: Future structure of supervision
Exchange of views with Eddy Wymeersch
Hedge funds and private equity
Before starting the discussion on the 211 amendments made to the report of Poul Rasmussen (PSE/DK) it became evident that the technical specifications of the proposed “Rule 39” still lacks clarification. Concerns concentrated on the question of the admissibility of amendments to the report and the annex. It is yet unclear which articles/amendments fall under “Rule 39”, if amendments could be made and how they need to be formulated, and if parts of the annex or the whole annex can be deleted. Amendments, therefore, try to cover all possible scenarios. Committee also learned that the final decision is with the Chair of the Committee.
In a written declaration the chair of the Committee, Pervenche Beres (PSE/FR), announced to officially provide the Committee members by 25 June – the day of ECON votes – with the necessary information about the technicalities of “Rule 39”. However, it was also said that Members will be ‘timely informed’ before the vote – i.e. one week before the vote in ECON Committee takes place.
Ieke van den Burg (PSE/NL) noted that the “Rule 39” is a ‘straightjacket’ and reminded that this will also affects her report on “Lamfalussy follow-up: future structure of supervision”.
Opening the discussion on the 211 amendments rapporteur Poul Rasmussen said that there is a good chance for reaching compromises. He already prepared a list of possible compromise amendments that should serve as a base for discussion with EPP and ALDE groups.
He said a new recital should be introduced stating that ‘enhanced supervision should cover all actors’, he said. He also proposed a compromise in the recitals ‘that stresses that regulation should be universal and complete’. Rasmussen also pointed to issues on ‘appropriate levels of transparency’ (point K) and conflicts of interest (point O) as possible lines of compromises.
With regard to the Recommendations made in the Annex the rapporteur indicated six areas for which he sees room for agreement. These are:
- Financial stability aspects, in particular with regard to the capital adequacy and illiquid financial instruments
- Transparency
- Investors information
- Protection of employees
- Excessive debt measures
- Conflict of interest
Shadow rapporteur Sharon Bowles (ALDE/UK) made clear that the report contains too many areas for regulation. Se was surprised about the scope and number of things the rapporteur wants to regulate although discussions beforehand already indicated that many things are ‘regulated indirectly’. The amendments she made, together with Wulf Klinz (ALDE/DE), should be understood as the maximum line for compromise. Otherwise she would prefer the deletion of those articles she indicated in her amendments. “I don’t see how to regulate things that are not on-shore”, she said and warned against unintended consequences. “Some things in the Annex are totally impossible”, she added.
John Purvis (EPP/UK), speaking for shadow rapporteur Kurt Lauk (EPP/DE), said that the report should get rid of the impression that Private Equity and Hedge Funds are “monsters”. It became evident that the EPP group prepared different ‘lines’ of amendments reflecting the uncertainties about “Rule 39” provisions. These range from amendments aimed to reach compromises to deleting some of the recommendations made in the Annex. However, Mr Purvis made clear that in case no good compromises can be found he intends to vote against the whole report.
Piia-Noora Kauppi (EPP/FIN) criticized that the report neglects the possibility of soft law and self regulation such as codes of conduct. “Hard Law” as proposed in the report should only be the ‘last resort’, she said. Also, community legislation already contains regulations on Private Equity and Hedge Funds. A ‘fall back’ position could therefore be to delete the whole annex, she said.
EPP and ALDE group already indicated that they entered in discussions to find a common line for compromises.
Timeline:
25 June: Vote in ECON Committee
Hearing on Lamfalussy follow-up: future structure of supervision
Starting the hearing Ieke van den Burg (PSE/NL) underlined her interest in the link between micro and macro prudential supervision. The so-called “twin-peaks” concept that differentiates prudential and conduct of business supervision was of particular interest.
Starting the discussion, Tommaso Padoa-Schioppa concentrated on the institutional aspects and the powers of supervisors. He noted that the introduction of the euro added some additional requirements to supervision. However, to establish a European supervisor would demand a change of the Treaty. As this is unlikely to happen Padoa-Schioppa predicts that supervision will remain national.
He criticized that, although regulations are written at EU level, the transposition into national law tends to end up in different national rules. He therefore called for regulation to be flexible, uniform, not too burdensome for market participants, and with supervision to be consistent across countries. In reality, however, supervision is currently not sufficiently designed, inflexible and not uniform - as the example of Basel II shows, he said.
It has to be questioned if, after 8 years, the Lamfalussy approach has failed, he said. The Lamfalussy Committees were divided and scattered around
Peter Praet, Chair of the Banking Supervision Committee of the ECB, focused on the lack of interaction between the micro supervision provided by CEBS, and the macro supervision from the BSC. As the last five years were characterized by a strong integration of banks within the market, the systemic aspects of supervision cannot be neglected.
In the short term, domestic standing groups (composed of central banks, supervisors and the treasury) need to be strengthened and have to function efficiently. Furthermore, two networks of authorities, i.e. the central banks network and the colleges of supervisors, need to be improved. Particularly, the colleges do not function properly, he said.
Michel Prada, Chair of the AMF, concentrated on the institutional aspects of the Lamfalussy process and called for a move to a more harmonized approach, and also advocated the proposed ‘twin-peaks approach’.
Supervisors should act more pro-actively, rather than re-actively, in particular as some of the market failures of the current turmoil were known in advance – but no-one did acted. The agreed roadmap and its improvements with regard to supervision are insufficient, Prada said and called on the Commission to act.
Finally, Johnny Åkerholm, former Chair of the IIMG, underlined that the risk-taking behaviour is difficult to regulate, but there is a need to act with regard to the incentive structures. The Lamfalussy approach was certainly useful for legislation, he said, but it did not help in living with more integrated markets. The "three Committee" system is too burdensome and too many institutions are involved, he added.
With regard to the roadmap, he noted that there is a timing problem as it only provides very slow process and does not enhance institutional cooperation. There will be a huge problem when a cross-border crisis situation occurs, he said and advocated Option 3 of the working document.
Questions from MEPs concentrated on the Lamfalussy procedure and supervisory aspects. Wolf Klinz (ALDE/DE) and Jose Garcia-Margallo (EPP/ES) asked whether the working document is not too ambitious and one should better concentrate on the comparability of national supervisory structures. Mr Garcia-Margallo also wondered whether more harmonisation or better implementation of existing law should be the preferred strategy.
Ieke van den Burg (EPP/NL) and Piia-Noora Kauppi (EPP/FIN) both supported the ‘Twin Peaks’ model and asked about what should be done to push it. Mrs Kauppi also said that the EPP group is currently working to develop a common position on the supervision of the European top (40) financial services companies.
John Purvis (EPP/UK) and Daniel Daianu (ALDE/ROM) questioned how to ensure that the big financial market players have to pay for the risk they take. Mr Purvis was also interested if principle-based regulation would be a way forward for community legislation.
Finally, Pervenche Beres (PES/FR) and Ieke van den Burg were interested in the international dimension. Mrs van den Burg demanded that the Commission has to take the supervisors on board when entering into discussions with the SEC.
Tommaso Padoa – Schioppa responded that the speed of the process is the main problem, not the direction. Still open issues relate to the question of burden sharing, but it has to be discussed if this has to be clarified in advance or in occurrence of a crises. Also, the integrated supervision of the European top (30) financial institutions has to be solved. Finally, the Level 3 Committees – best constituted by a combination of CEBS and the BSC, have to work properly and deal all open issues such as burden sharing, the rule book, etc. “CEBS creation was absurd”, Padoa – Schioppa said complaining about some of the politically driven decisions. “It is not only located far away from the European Central Bank, but also outside the Euro-Area.”
Peter Praet reminded on the governance of supervision and underlined the need for sufficient and qualified staffing. The number of supervisors visiting the biggest European financial institutions is far too low, he warned. Also, the liquidity risk issue has not – or not sufficiently – been taken into account resulting from the wrong assumption that markets are always liquid.
Michel Prada and Johnny Åkerholm both touched upon the differences between rules-based and principles-based regulation stating that in the end the differences are not that big. Even principle-based regulation ends up into very detailed rules, Åkerholm said and criticized the heterogeneous interpretation of community legislation in the member states. What is needed is a clear definition of maximum and minimum regulation, Prada said.
Exchange of views with Eddy Wymeersch Eddy Wymeersch, chairperson of CESR, underlined that the need for regulatory powers for the Committee was the most urgent question that has to be resolved. He also noticed that in contrast to the other level 3 Committees the needs for CESR are quite different, and the ‘home-host’ relationship is less crucial than for CEBS and CEIOPS. However, he also called for a better representation of CESR in the IASB. Wymeersch also made clear that the Qualified Majority Voting ‘will change the game’, although this only relates to non-binding issues. To bring in binding QMV is unlikely and would be a revolution, he said. Outlining the different work streams CESR is currently working on, he noticed that CESR is currently looking at the parameters of valuation standards. Also, it might be interesting to have some more disclosure requirements in the OTC-market, he said. Wymeersch was particularly straightforward when it came to the question of mutual recognition with the US SEC and the enforcement of rules. Responding to a question from Ieke van den Burg (PES/NL) who warned against the predominance of the SEC, he said that both sides have to respect each others different cultural aspects when it comes to the questions of sanctions and enforcement. He will not accept to take over With regard to possible registration and legislation for CRAs in Europe Wymeersch was quite sceptical. With regard to the complexities it should be sufficient when Credit Rating Agencies sign up the agreed IOSCO Code, he said. Responding to Wolf Klinz (EPP/DE) on the Management Company Passport he said that it is all about the question of what are the necessary powers the supervisors should keep. What is needed is a good balance between supervision and the freedom of establishment. He also noted that he does not see any problem or ‘danger’ when it comes to derivatives clearing in the