On 4 May 2012, the European Commission published updated versions of its documents relating to the planning of its initiatives for 2012. This included updated versions of:
On 27 April 2012, the European Commission (the Commission) published a speech given by Michel Barnier (European Commissioner for Internal Market and Services) entitled Towards better regulation of the shadow banking system.
On 27 April 2012, the European Central Bank (ECB) published a speech given by Vitor Constâncio (Vice-President, the ECB) entitled Shadow banking - The ECB perspective.
At the beginning of his speech, Constâncio noted that the term "shadow banking" is widely used to cover activities related to credit intermediation, liquidity and maturity transformation taking place outside the regulated banking system. He also added that the shadow banking system has significantly expanded and shifted regulated banking activities into institutions, transactions or markets which are not within the scope of regulation.
Constâncio then addressed the general problems created by unregulated shadow banking as well as the main guidelines for the necessary regulatory reform that is progressing internationally under the aegis of the Financial Stability Board. He then focused on repo markets, given their importance for the functioning of money markets and consequently for central banks.
Near the end of his speech Constâncio proposed the creation of an EU central database on euro repos. Due to its role in macro-prudential financial stability and the closeness of repo to monetary policy, Constâncio argued that the ECB would be well placed to centralise the gathering of data for the euro repo market.
Constâncio acknowledged that the creation of an EU central database would require the European Commission to put forward legislative measures. As a first step he called for the preparation of a detailed feasibility study of the repo market database in cooperation with the Commission.
ESMA speech - Shaping the future of Europe’s financial markets
On 11 May 2012, the European Securities and Markets Authority (ESMA) published a speech given by its Executive Director, Verena Ross, entitled Shaping the future of Europe’s financial markets.
Ross’ speech is set out under the following headings:
- ESMA’s role in the new EU framework. Ross states that ESMA has two key aspects to its mission as an organisation: the building of a "single rulebook" for the regulation of the EU’s financial markets and ensuring its consistent application at national level.
- Development of a single rulebook. Ross explained that in terms of the development of a single rulebook for Europe, ESMA took on its new role as EU securities markets standard setter with clear responsibilities for the development of technical standards and advice for new, or soon to be revised, pieces of legislation. In particular over the last year ESMA produced the first technical standards (for credit rating agencies and short selling) but also conducted significant preparatory work for devising the standards for the European Market Infrastructure Regulation (EMIR).
- Supervisory convergence. Ross acknowledged that while the single rulebook will be the basis of achieving supervisory convergence, having a single legal text does not actually achieve convergence in implementation and actual regulation on the ground. She stated that supervisory convergence is still very much “work in progress” but describes a number of work streams through which ESMA has worked on achieving a common approach to regulation. This included issuing opinions on the treatment of sovereign debt under IFRS and conducting peer reviews of national authorities’ activities.
- Direct supervision. Ross noted that beyond supervisory convergence, ESMA has been given responsibility to directly supervise a number of cross-border market players. She states that bringing credit rating agencies under the umbrella of EU supervision is a milestone achievement. From 2013 ESMA will also take on direct supervisory responsibility for trade repositories under EMIR.
- Key priorities for 2012. Ross explained that ESMA will work on establishing harmonised binding implementing measures in different areas such as EMIR, the Alternative Investment Fund Managers Directive and the revised Prospectus Directive. She stated that EMIR will dominate ESMA’s agenda for the next 6 months, with a consultation paper in June and final standards due to be delivered by the end of September.
- ESMA’s stakeholders - national regulators, market players and investors. Ross reminded her audience that while it may be the national tendency to see rules and regulations emanating from Brussels as an attempt to stifle the UK’s financial services sector, they should view its consultative process as an opportunity to contribute to the development of the European regulatory system.
- ESMA’s role in international cooperation. Ross stated that global leaders have established common objectives at the G20 level and regulators have set up a number of international groups aimed at providing international consistency the different regimes. Ross further stated that at the end of the process there must be reliance on equivalence and co-operation among authorities.
View Shaping the future of Europe’s financial markets, 11 May 2012
ESMA publishes its 2012 Regulatory Work Programme
On 7 May 2012, the European Securities and Markets Authority (ESMA) published its 2012 Regulatory Work Programme.
The aim of the work programme is to provide information on the planned technical standards, technical advice and guidelines and recommendations that will be issued by ESMA in 2012.
The accompanying press release stated that the work programme was based on ESMA's 2012 Work Programme which was published on 4 January 2012. However, this version provides a more detailed outline of ESMA's individual work streams. Key work streams relate to the Regulation on short selling and certain aspects of credit default swaps, the European Market Infrastructure Regulation and the Alternative Investment Fund Managers Directive.
View ESMA publishes its 2012 Regulatory Work Programme, 7 May 2012
Call for evidence on transaction reporting
During the course of 2012 the European Securities and Markets Authority (ESMA) intends to proceed with an initiative of preparing guidelines on harmonised transaction reporting under the Markets in Financial Instruments Directive (MiFID), which will also include, among others, an update of the guidance issued by ESMA’s predecessor, CESR, entitled How to report transactions on OTC derivative instruments.
On 7 May 2012, ESMA issued a call for evidence in relation to transaction reporting. ESMA published this call for evidence in order to provide an opportunity to interested parties to comment on this initiative. The deadline for responding to the call for evidence is 4 June 2012.
View Call for evidence on transaction reporting, 7 May 2012
Final report - ESMA’s technical advice on possible delegated acts concerning the Regulation on short selling and certain aspects of CDS
The Regulation on short selling and certain aspects of credit default swaps (the Regulation) was published in the Official Journal of the EU on 24 March 2012 and comes into effect from 1 November 2012.
On 19 April 2012, the European Securities and Markets Authority (ESMA) published a final report setting out technical advice on a number of delegated acts concerning the Regulation. The final advice was set out as follows:
- Section 1 covered the definition of when a natural or legal person is considered to own a financial instrument for the purposes of the definition of short sale (Article 2(2) of the Regulation).
- Section 2 related to the net short position in shares or sovereign debt covering the concept of holding a position, the case when a person has a net short position and the method of calculation of such a position including when different entities in a group have long or short positions or for fund management activities related to separate funds (Article 3(7) of the Regulation).
- Section 3 set out advice in instances where a credit default swap (CDS) transaction is considered to be hedging against a default risk or the risk of a decline of the value of the sovereign debt and the method of calculation of an uncovered position in a CDS (Article 4(2) of the Regulation).
- Section 4 defined the initial and incremental levels of the notification thresholds to apply for the reporting of net short positions in sovereign debt (Article 7(3) of the Regulation).
- Section 5 specified the parameters and methods for calculating the threshold of liquidity on sovereign debt for suspending restrictions on short sales of sovereign debt (Article 13(4) of the Regulation).
- Section 6 contained ESMA’s proposal of advice on what constitutes a significant fall in value for various financial instruments and also specifies, in the form of a draft regulatory technical standard, the method of calculation of such falls (Article 23(7) and (8) of the Regulation).
- Section 7 set out criteria and factors to be taken into account by competent authorities and ESMA in determining when adverse events or developments arise (Article 30 of the Regulation).
View Final report - ESMA’s technical advice on possible delegated acts concerning the Regulation on short selling and certain aspects of credit default swaps, 19 April 2012
Shadow banking: Thoughts for a possible policy agenda
On 27 April 2012, the Bank of England (BoE) published a speech presented by Paul Tucker (Deputy Governor Financial Stability, the BoE) entitled Shadow banking: Thoughts for a possible policy agenda.
In his introduction Tucker acknowledged the European Commission's Green Paper on shadow banking and stated that it is time to move onto a concrete policy agenda.
In the first part of his speech, Tucker set out three broad points regarding the definition of shadow banking:
- It is very clear that shadow banking is not the same as the non-bank financial sector. This is not a debate about the appropriate regulatory framework for the whole of finance.
- Non-bank intermediation of credit is not a bad thing in itself.
- Shadow banking comes in lots of shapes and colours. There are degrees to which any particular instance of shadow banking replicates banking.
Tucker then set out his current thinking on policy in the following areas:
- Shadow banks that are really part of banks.
- Banks' provision of committed lines of credit to independent shadow banks.
- Money funds.
- Securities dealers, finance companies.
- Securities dealers and the "rehypothecation" of client assets.
- Securities lending, repo and collateralised-financing markets.
- Conclusion: innovation, evolution and surveillance.
In his conclusion Tucker stated that:
"But it would be foolhardy to imagine that we can frame policies today that will stand the test of time. The financial system will evolve, and we need to permit innovation. A policy framework on shadow banking therefore needs to be adaptive. And it mustn’t try to shut everything down. As I said at the outset, non-bank finance is not intrinsically a bad thing. We will need effective surveillance of what is going on and what concentrations of risk are emerging – through outfits like the FSB’s committee on vulnerabilities and, in the EU, through the European Systemic Risk Board. And we will have to make discerning policy judgments that are explained and consulted upon. That is exactly what the EU, alongside the FSB, is now embarked on."
View Shadow banking: Thoughts for a possible policy agenda, 27 April 2012
MPs announce terms of reference for corporate governance and remuneration inquiry
On 28 April 2012, the House of Commons' Treasury Select Committee published the terms of reference for a new inquiry into corporate governance in systemically important financial institutions.
Andrew Tyrie MP (Committee Chairman) commented:
“The Committee will seek to address, among other things, why it was that so many experienced and technically competent non-executives - the cream of British corporate life - appeared to be asleep in some of the boardrooms of our major financial firms.
"In systemically risky institutions, it is particularly important to find a way to encourage more constructively engagement with shareholders on crucial governance issues, including risk and remuneration.
"We will look at whether, and if so how, they can and should do more. Rightly, shareholders have shared the blame and the losses.
"When it came to the destruction of major banks, the taxpayer also lost out, making corporate governance a crucial issue of public and Parliamentary concern."
View MPs announce terms of reference for corporate governance and remuneration inquiry, 28 April 2012
ISDA position paper on MiFID/MiFIR: The OTF and SI regime for OTC derivatives
On 2 May 2012, the International Swaps and Derivatives Association (ISDA) published a position paper concerning its views on the European Commission's MiFID review proposals regarding the Organised Trading Facility (OTF) and the Systematic Internaliser (SI) regime. In the paper the ISDA made the following points:
- The Commission’s approach that the trading obligation should only capture clearing eligible and sufficiently liquid contracts was endorsed.
- The establishment of the OTF category (and the discretion afforded to the operator of an OTF) was welcomed, but the ISDA has reservations about the fact that the derivatives trading obligation promotes multilateral trading systems above bilateral ones, even when the latter offers equivalent levels of transparency.
- Clarity is needed as to the relative roles of regulated trading venues, systematic internalisation and pure bilateral over-the-counter trading.
- The treatment of block trades in derivatives is crucial and that it is appropriate, and in many cases necessary, for such transactions to occur on a bilateral basis, which currently does not appear to be possible under the proposals.
- The SI regime for ‘non-equities’ should operate at the level of liquid instrument to ensure consistency with the approach to pre- and post-trade transparency and the approach to the equities regime.
- More broadly, the Commission’s approach to ‘non-equities’ markets poses a challenge given the differences between asset classes within the non-equities category, such as derivatives and fixed income, with significant differences between them in terms of quoting practice, pricing conventions and levels of automation of trading.
View ISDA position paper on MiFID/MiFIR: The OTF and SI regime for OTC derivatives, 2 May 2012