EUROPEAN POST-TRADE FORUM. Presentation on EU Regulatory Framework for Post-Trading. Dermot Turing, independent expert

Transcription

1 24 February 2016 EUROPEAN POST-TRADE FORUM Presentation on EU Regulatory Framework for Post-Trading Dermot Turing, independent expert Introduction 1. This note summarises the position of regulation at EU level affecting the post-trade sector as at January Since the financial crisis, a substantial body of legislation has been passed which affects all aspects of financial services, and in some cases radically alters the incentives and obligations applicable to market participants. Much of the legislation is very new and some is still bedding down, so that the full effects have yet to be seen. However, it is apparent already that there are some gaps. Current legislative framework 3. The new legislation which is primarily targeted at the post-trade sector can be listed as follows (Level 1 measures only): a. Regulation 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) b. Regulation 909/2014 on improving securities settlement and on central securities depositories (CSDR) c. Regulation 600/2014 on markets in financial instruments (MiFIR). Other legislation which has relevance in the post-trade sector includes: d. Directive 98/26/EC on settlement finality in payment and securities settlement systems (SFD) e. Directive 2002/47 on financial collateral arrangements (FCD) f. Regulation 575/2013 on prudential requirements for credit institutions and investment firms (CRR) g. Directive 2014/59 establishing a framework for the recovery and resolution of credit institutions and investment firms (BRRD). 4. The following conclusions may be drawn about the current legislation: a. A harmonised system of regulation for CCPs and CSDs has been introduced. These provide common EU-wide standards for compliance which are consistent with the Principles for Financial Market Infrastructures 1 and therefore capable of being recognised internationally. The harmonised regulatory system also facilitates cross-border service provision and creates a more competitive marketplace for providers of CCP and CSD services. b. Investor protection has been enhanced through the obligations imposed on CCPs, CSDs and their participants, in particular to offer segregated accounts. 1 CPSS, Principles for financial market infrastructures (April 2012) EPTF v1.0 1

2 c. The Settlement Finality Directive regime has been adopted for armour-plating of CCPs against insolvency risks associated with participant failure, even though it was not originally designed for this. d. The CSDR and MiFID/MiFIR create a competitive environment whereby it is much harder for infrastructures to refuse to provide services or information on grounds unrelated to risk. e. The importance of gathering and retention of data has been recognised, with (i) duties placed on firms to provide information and (ii) regulation of certain data services providers (TRs, APAs, CTPs, ARMs) provided for in MiFID/MiFIR, EMIR and Regulation 2015/2365 (SFTR). Possible future agenda 5. This note looks at the areas for possible development of EU regulation in the post-trade sector, by considering in turn: a. Regulation which has been considered but not pushed through to completion ( Unfinished Business ). b. Regulation which is still bedding down ( Unseasoned Regulation ). The policy behind these regulatory developments can be considered to have been settled, and therefore not suitable to be re-opened for debate, but the precise impact of the new approach remains to be evaluated over time. c. Regulation which has not yet been considered, in relation to participants in the post-trade sector who fall wholly or partly outside the scope of the principal regulatory measures listed above ( Unregulated Services ). In some cases the services are familiar and have been provided for a long time, and in other cases the services are newer to the market. 6. Within each category various possible developments of regulatory policy are considered and points for possible discussion identified. These are set out in Annex I. Out-of-scope matters 7. The following have not been considered further in this note. 8. Various pieces of regulation are being finalised at EU or international level. These are important, but this note assumes that they are effectively complete even though the final steps remain outstanding. In particular, these include: a. The Level 2 measures to complete the CSDR framework. b. The EU-US agreement on equivalence under EMIR and CCP margining rules. c. The possible revision of EMIR RTS with regard to indirect clearing. d. The Level 2 measures to complete the MiFID2 framework. 9. The changes to the way commodities and commodity derivatives are traded and dealt with posttrade. There is arguably a need to improve the way that title to certain commodities can be proved and assets transferred on a cross-border basis, which might have beneficial effects for the single market for these products, but this is not considered to be in-scope for the present EPTF mandate. 10. The regulation of payment systems (clearing and settlement of payment transactions ). As far as systemically important payment systems are concerned, the ECB SIPS Regulation 3 provides international regulatory legislation. The SEPA initiative is also designed to bring about a single 2 Commission Delegated Regulation No 149/2013 (regulatory technical standards on indirect clearing arrangements etc) 3 Regulation of the ECB No 795/2014 on oversight requirements for systemically important payment systems (ECB/2014/28) EPTF v1.0 2

3 euro payment area across the Union. Payment is a vital component of post-trade activity, but barriers have not been identified in this sub-sector which would impede the development of the Capital Markets Union. The views expressed in this note are those of an independent expert and do not reflect the official policy of the European Commission or any other organisation EPTF v1.0 3

4 Annex I Potential Developments in EU Post-Trade Regulation Unfinished business Development of policy Sub-sector Significance Discussion points Reference materials 1. Asset ownership and location All laws Differing national laws on ownership and transfer of securities and receivables No EU-wide conflicts of laws rule to enable consistent identification of relevant legal system These obstacles hinder collateral arrangements, crossborder transfers, securitisations etc 2. Insolvency armour-plating Clearing Weakness in protection of clients in insolvency of clearing members: - EMIR transfer and leapfrog may violate insolvency or property laws - SFD protects netting and transfer orders, not general default management action by a CCP 3. Competitive landscape FMIs Cost and innovation Spreading of risk 4. Recovery and resolution regimes for infrastructures FMIs Risk concentration in CCPs Business continuity in CSDs What barriers exist to adoption of ownership laws, conflicts of laws rules (including location rules) Whether sufficient to rely on private sector solutions for transfer and leapfrog Whether SFD should be strengthened to apply more explicitly to CCPs default management Whether regulatory sheltering of vertical groupings should continue Whether interoperability of CCPs should be extended beyond cash market products Extent to which losses should be reallocated among ring of agent banks surrounding infrastructures How resolution tools for CSDs should differ from CCPs Whether resolution tools for banks (securities law legislation) LexUriServ.do?uri=CELEX: 52009XC0325(02):EN:NOT (non-adoption of Hague Convention) civil/files/report_assignment_en.pdf (BIICL study on receivables) EMIR art 48 SFD MiFIR arts 35, 36 EMIR Title V; other/ _Interoperability_report.pdf?7079c168cb8fc b76ed (ESRB paper on interoperability) content/uploads/joint-ccp- Workplan-for-2015-For- Publication.pdf (FSB workplan re CCPs) EPTF v1.0 4

5 Unseasoned regulation Unregulated services 5. Tax reclaim procedures Settlement Long recognised to be an impediment to an integrated securities market 6. Recovery and resolution of banks and investment firms 7. New prudential measures for banks and investment firms (exposure to CCPs, liquidity coverage, leverage ratio) and potential capital requirement for intra-day credit risk Agent banks 4 Agent banks Risk concentrates in the ring of agent banks surrounding infrastructures Risk concentrates in the ring of banks which participate in infrastructures 8. Information security All Importance of data integrity and records of title 9. Services for: matching and confirmation portfolio compression 10. Transfer agency services (UCITS) Vendors Agent banks Increasing dependency of trading firms; multilateral netting without SFD protection Client protection, DvP on subscription, redemption and transfer 11. Account operation services Agent banks Similar to custody but agent does not hold the securities 12. Collateral transformation services should be disapplied where CCP or CSD has bank licence What barriers exist to adoption of T-BAG recommendations How infrastructures and clients should manage risk of agent bank failure how R&R will work in practice Why CRR deviates from Basel III standard on exposures to CCPs Whether C&S services should receive special derogations Whether Cybersecurity (NIS) Directive should be extended beyond CCPs to other FMIs and regulated data service providers Whether direct regulation desirable or necessary Whether absence of clear rules constitutes a barrier Whether absence of MiFID passport or MiFID regulation constitutes a barrier Agent banks Collateral hunger Whether existing regulatory framework is suitable _tbag-report-2013_en.pdf (T- BAG report) BRRD CRR (exposures to CCPs) (intra-day credit risk monitoring) document/st init/en/pdf (NIS Directive agreed text, Annex II) EMIR art 11 RTS 149 art 14 MiFIR art 31 MiFID (Directive 2014/65) Annex I CSDR/SFD definition of system MiFID Annex I MiFID Annex I SFTR (Regulation 2365/2015) 4 The term agent banks has been used as shorthand to describe participants in CCPs and CSDs who provide clearing and settlement services for clients. This is not intended to exclude investment firms or imply that agency in a legal sense is meant. EPTF v1.0 5