Green Paper - Shadow Banking
On 19 March 2012, the European Commission published a Green Paper which discussed how existing and proposed EU measures already address shadow banking activities. At this stage the Commission is focusing its analysis on the following possible shadow banking entities and activities:
- Special purpose entities which perform liquidity and/or maturity transformation. For example, securitization vehicles such as Special Investment Vehicles (SIV) and other Special Purpose Vehicles (SPV).
- Money Market Funds (MMFs) and other types of investment funds or products with deposit-like characteristics, which make them vulnerable to massive redemptions.
- Investment funds, including Exchange Traded Funds (ETFs) that provide credit or are leveraged.
- Finance companies and securities entities providing credit or credit guarantees, or performing liquidity and/or maturity transformation without being regulated like a bank.
- Insurance and reinsurance undertakings which issue or guarantee credit products.
- Securities lending and repo.
The deadline for comments on the Green Paper is 1 June 2012. Following the consultation on the Green Paper the Commission will decide on the appropriate follow-up including legislative measures where appropriate. The Commission will also continue to engage in ongoing international work, including work to ensure any level playing field concerns are addressed.
A conference on shadow banking is also taking place in Brussels on 27 April 2012.
View Green Paper - Shadow Banking, 19 March 2012
View Taking action on shadow banking: Avoiding new sources of risk in the financial sector,19 March 2012
View Conference - Towards better regulation of the shadow banking system, 19 March 2012
MiFID review - timing
The European Parliament has updated its legislative observatory procedure files concerning the legislative proposals revising the Markets in Financial Instruments Directive (MiFID).
Both procedure files indicate that the European Parliament will consider the legislative proposals in plenary session from 22 to 23 October 2012.
View Legislative observatory - Financial supervision: Markets in financial instruments (recast), 27 March 2012
View Legislative observatory - Financial supervision: Markets in financial instruments; OTC derivatives, central counterparties and trade repositories, 27 March 2012
Draft ECON report - recast MiFID
On 26 March 2012, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report on the proposed recast Markets in Financial Instruments Directive (MiFID).
The draft report contained a draft European Parliament legislative resolution setting out amendments to the proposed recast Directive. The report also contained an explanatory statement by ECON rapporteur, Markus Ferber, which set out his position on the proposal. In the explanatory statement Ferber:
- Supported the European Commission’s proposal to extend the scope of MiFID and limit the exemptions. In addition he proposed a reporting obligation for persons to explain why their activity is ancillary to their main business.
- Supported the aim of strengthening the regulatory framework for investor protection. However, he disagreed with the proposed new obligation to specify whether investment advice is independent and if it is based on a broad or a more restricted analysis of the market on the basis that restricting the use of the word “independent” may mean that other forms of advice have a negative connotation.
- Introduced a new obligation that investment firms shall, when designing a new product, specify a target group within the retail or professional client category and ensure that the product is designed to meet those customers’ needs and marketed to clients within the target group.
- Questioned whether the creation of a new category of organised execution venue, the Organised Trading Facility (OTF), is the right way to capture organised venues which are not caught by the existing categories (Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) and Systematic Internalisers).
- Noted that the proposals contain specific obligations imposed on anyone who is carrying out algorithmic trading whilst defining algorithmic trading broadly. Ferber suggested a more differentiated approach and proposed definitions for high frequency trading and a high frequency trading strategy to identify a particular subset of algorithmic trading, and in addition a ban of direct electronic access.
- Acknowledged the Commission’s proposals for RMs, MTFs and OTFs to ensure that they are resilient in extreme market conditions and that they have in place proper circuit breakers and business continuity arrangements. Ferber welcomed this approach but made three proposals to strengthen it. First, to slow down trading and order flows he proposed that all orders should be valid for at least 500 milliseconds. Second, for all trading venues there should be parameters for halting trading which should be reported to competent authorities and the European Securities and Markets Authority should publish these on its website. Third, to require trading venues to ensure their fee structures contain higher fees for placing an order which is cancelled than for an order which is executed and higher fees for market participants who place a high ratio of cancelled orders.
- Generally welcomed the Commission’s approach that all trading venues on which commodity derivative contracts are traded should adopt position limits or alternative arrangements in order to ensure the proper functioning of the market. However, Ferber argued that certain adjustments are necessary in that the use of controls on positions should be an addition, not an alternative, to the use of position limits. However, in setting such limits there should be differentiation between positions related to commercial activity as regards to commodity and other positions.
View Draft ECON report - recast MiFID, 26 March 2012
Draft ECON report - MiFIR
On 27 March 2012, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report on the proposed Markets in Financial Instruments Regulation (MiFIR).
The draft report contained a draft European Parliament legislative resolution setting out amendments to the proposed Regulation. The report also contained an explanatory statement by ECON rapporteur, Markus Ferber, which set out his position on the proposal. In the explanatory statement Ferber:
- Questioned whether the creation of a new category of organised execution venue, the Organised Trading Facility (OTF), was the right way to capture organised venues which are not caught by the existing categories.
- Proposed to define “bilateral” and “multilateral” system more clearly in order to achieve a precise distinction between bilateral and multilateral trading.
- Believed that the provisions concerning access to market infrastructure could give rise to problems through liquidity fragmentation or if interoperability were involved. He argued that supervisors needed to be able to intervene to prevent these problems materialising, as was recognised in the European Market Infrastructure Regulation.
- Supported the measures which increase transparency and supported the MiFIR requirements extending pre- and post-trade transparency to equity like products and non-equities.
- Welcomed the proposed obligations in relation to transaction reporting which included a new requirement for Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) and OTFs to keep data on orders so that it is accessible to supervisors for at least 5 years.
- Noted that competent authorities could set permanent bans or restrictions on financial products or activities or practices coordinated by the European Securities and Markets Authority (ESMA). In addition ESMA can temporarily ban or restrict products, practices and services. However, Ferber questioned whether the possibility to ban products or services only ex-post is enough to ensure financial market stability or investor protection and therefore proposed two additions. First, that ESMA or competent authorities should not only monitor financial instruments but additionally investment products which also include structured deposits. Second, in addition to the possibility to impose bans or restrictions on products which have already been marketed, ESMA or competent authorities should also be able to impose restrictions or prohibitions on a precautionary basis before an investment product or financial instrument is placed on the market.
View Draft ECON report - MiFIR, 27 March 2012
ESMA final report on draft RTS and ITS for Regulation on short selling and certain aspects of CDS
On 31 March 2012, the European Securities and Markets Authority (ESMA) published its Final Report concerning draft technical standards on the Regulation on short selling and certain aspects of credit default swaps (the Regulation).
ESMA has considered the feedback it received to its consultation in drafting regulatory technical standards (RTS) and implementing technical standards (ITS) to the Regulation. The Final Report sets out a summary of the responses to the consultation and describes any material changes to the proposed technical standards. It also includes in Annex II a cost benefit analysis on which ESMA was not able to consult on. The Final Report also contains the final draft RTS and ITS which will be submitted to the European Commission.
The Commission has three months to decide whether to endorse the draft technical standards. A further regulatory technical standard, on the method of calculation of the fall in value of a financial instrument, which is required under Article 24(8) of the Regulation, will be submitted in the course of April 2012.
View ESMA Final Report - Draft technical standards on the Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps, 30 March 2012
Securitisation, shadow banking and the value of financial innovation
On 19 April 2012, the FSA published a speech given by Adair Turner (Chairman, FSA) entitled Securitisation, shadow banking and the value of financial innovation.
In his speech Turner first considered how and why the wave of financial innovation in the area of securitised credit ended in the financial crash of 2008. And second, he considered the value of financial innovation and whether it has a systematic tendency to be less valuable than innovation in other sectors of the economy.
At the end of his speech Turner discussed the policy implications of shadow bank financial innovation which are that regulators should seek to constrain the instability created by credit and money creation processes, by credit and asset price cycles. This implies:
- Much higher bank capital and liquidity requirements than were in place before the financial crisis - the Basel III reforms. These constrain banks’ asset-equity ratios at an institutional level.
- Appropriate constraints on shadow bank credit and money equivalent creation - for instance through asset-equity controls at the contract level - minimum initial haircuts. These will be considered by the Financial Stability Board this year.
- The development of macro-prudential countercyclical levers which can lean against the strength of the credit and asset price cycle. The UK’s interim Financial Policy Committee has recently recommended to Parliament that it should have the power to vary across the cycle both total bank capital requirements and the risk weights applied to specific types of asset (such as real estate). It has also flagged that regulating margins on secured financing contracts might be desirable in the future, within the context of internationally agreed approaches.
View Securitisation, shadow banking and the value of financial innovation, 19 April 2012