Session VII: The Global and EU Public Policy Agenda

Transcription

1 Session VII: The Global and EU Public Policy Agenda Christian Büche, Partner, K&L Gates Frankfurt Sean Donovan-Smith, Partner, K&L Gates London Tom Wilkins, Account Director, Westbourne Communications Copyright 2015 by K&L Gates LLP. All rights reserved.

2 Presentation outline The recent UK election and its possible consequences The European Commission s proposal for a Capital Market Union Mutual recognition and equivalence across jurisdictions, including third-country access to the EU The outlook for development of MIFID and EMIR projects Reform of Money Market Funds regulation 204

3 Impact of BREXIT on Financial Services British business will voice even more loudly its opposition to the UK leaving the EU Big banks and funds possible relocation outside the UK or outside the EU British Chamber of Commerce letter to the PM take action to secure the UK s economic future (11 May 2015) Bertelsmann Stiftung and Ifo institute, Germany Brexit could cost the UK up to 14 percent of GDP Threat to the Capital Markets Union (CMU) klgates.com 205*

4 Consequences for the financial sector Moody s : ditching the EU could be harmful to the UK and there is very little to gain by leaving the EU Loss of appeal for investors FTSE 100 is a major hub for international companies to list Financial sector against a Brexit: possible banks relocation outside the UK i.e. Goldman Sachs A danger to the Capital Markets Union (CMU) EU level support for Commissioner Hill proposed CMU may weaken CMU is organised around all 28 member states, losing the UK and its key financial centres will make a CMU less appealing Frankfurt stronger financial hub? Increasing ECB importance 206

5 Alternatives to the EU Swiss approach The UK receives a status similar to Switzerland trade agreement with the EU, but not all important issues covered: Switzerland has a free trade in goods but not on services (unlike the EEA) Series of bilateral negotiations and agreements UK s financial services industry would face the challenges: Switzerland only has an agreement on non-life insurance and nothing on else on the financial services side. European Economic Area (EEA) Allows UK access to EU s single market UK can adopt almost all the relevant EU legislation, but loss of influence on a number of important issues such as trade (no formal vote) Free trade agreement (FTA) Need to ensure that any FTA signed includes access to EU services markets UK will not be in a position to push for further liberalisation 207

6 What now? George Osborne and Philip Hammond will have relevant roles in negotiations Cameron embarks on EU tour 1 June talks with Germany, France and Commission President Juncker 9 June 2015 UK Parliament passed EU referendum bill 10/11 June 2015 EU Summit (Brussels) One on one talks with Spain, Finland, Romania and Cyprus June 2015 European Council Summit 2017 In/out referendum In the event of a Brexit, likely to take years to unwind Britain s EU commitments 208

7 Broad areas for renegotiation Internal market Jobs and growth Eurozone integration Protection of member states/economies not in Eurozone Two-speed Europe Subsidiarity principle More say for national parliaments on regulation Social benefits Protection against benefits tourism Further development of other freedoms (services and capital) 209

8 Capital Market Union

9 CMU in context Jean-Claude Juncker (then candidate for Commission President): to improve the financing of our economy, we should further develop and integrate capital markets. This would cut the cost of raising capital, notably for SMEs, and help reduce our very high dependence on bank funding. This would also increase the attractiveness of Europe as a place to invest (European Parliament Plenary, 15 July 2014) Appointment of Lord Hill Commissioner for Financial Stability, Financial Services and Capital Markets Union 18 February 2015: Commission publishes Green Paper Building a Capital Markets Union Capital markets in EU are: Fragmented Underdeveloped and Play less of a significant role in financing the economy compared to other jurisdictions Green Paper outlines: Challenges facing EU capital markets Priorities for early action Measures to develop and integrate capital markets and Next steps 211

10 Components of a CMU CMU PROSPECTUS DIRECTIVE Two specific consultations were launched in parallel to the CMU Green Paper SECURITISATION 212

11 Prospectus Directive Cornerstone of EU capital markets regulation Last amended in 2010 and due for review in January 2016 Recent Consultation Paper seeks to: Examine ways to simplify the information included in prospectuses Examine when a prospectus is necessary and when it is not and How to streamline the approval process Why the need for review? Reduction of burdens on issuers = easier and more affordable to raise funds Disadvantages of current rules: Costly Complex Too much information disclosure required 213

12 Securitisation Recent Green Paper prioritises the development of a sustainable high quality securitisation market Consultation Paper: An EU Framework for simple, transparent and standardised securitisation Objectives: Lord Hill encourage safe, high-quality securitisation US markets have recovered to pre-crisis levels in contrast to EU European Securitisation market issuance volume down from 367 billion (2009) billion (2014) Decline in professionals and active market participants Progress made by EBA, BoE and ECB 214

13 Why is a CMU necessary? Lord Hill:..the purpose of a Capital Markets Union is to make it easier to link savings to growth and to channel savings from anywhere in the EU to be invested in businesses anywhere in the EU. The goal is a true Single Market in capital. Improvement of SME access to funding Establish a genuine single capital market Phil Evans, director (International), Bank of England states three benefits: Better match of borrowers and investors (allocative efficiency); Combating the overreliance on bank funding; and Enhancing risk-sharing across the EU 215

14 Overall objectives of the CMU Put in place the building blocks of an integrated and wellfunctioning single market for capital by 2019 The CMU is a project for all 28 member states, not for a subset It is built on the foundations of financial stability created by the Banking Union and other financial reforms over the the last five years The Single Rulebook needs to be effectively and consistently enforced 216

15 How to improve access to finance Address information problems Encourage banks to provide feedback to SMEs whose credit has been declined Development of more tailored accounting rules for SMEs Creation of a European Investment Project Pipeline Dedicated website to ease access to information for investors on infrastructure projects 217

16 Challenges to a CMU Cultural and legal traditions constraints in Member States EU markets lack of harmonisation Supervision especially in technical areas Distinction to be drawn between common rulebook vs single supervisor Issue of centralised supervision: ESMA and ECB International consistency Capital markets financing to complement, not replace banking sector 218

17 Opportunities created by CMU UK CMU cannot be properly achieved without London/UK Half of all capital markets activity derive through the UK Increase in capital markets would reap great fruits to the UK economy and the City of London UK should ensure its place at the forefront of the discourse SMEs Improved access to finance for SMEs SMEs are critical to the EU economy (jobs and growth) Focus on medium-sized companies Focus on ambitious SMEs 219

18 CMU Consultation Seven hundred responses received to CMU consultation and over 120 responses to its securitisation consultation. The Commission currently analysing response Response will form Action Plan to be presented in September Key initial takeaways Step missing in the funding escalator in Europe Need to eliminate barriers for capital to move across the EU Need to strengthen venture capital ecosystem in Europe Need to look at best practices from some EU countries on private placement Ambiguity in regulatory treatment of private placements Divergences and inconsistencies 220

19 Timeline 18 February adoption of the CMU Green Paper 13 May deadline for responses to consultation(s) 8 June Public hearing, Brussels 16 June ECON vote on its motion for a resolution on CMU 19 June ECOFIN Council meeting Action plan on CMU to be published after summer and followed by specific legislative proposals CMU expected to be set up progressively in the coming years 221

20 Mutual Recognition and Equivalence across Jurisdictions, Including Third-Country Access to the EU

21 Framework established for financial institutions, funds and market infrastructure established outside the EU to access European investors and markets Cooperation agreements to be put in place between third country and EU member state or ESMA Access to EU financial markets based on national laws and are divergent 223

22 Recognition of third-country regulatory regime Equivalence determination Co-operation agreements Tax agreements 224

23 MIFID II Requirements Non-EU country not listed as a NCCT by FATF; A co-operation agreement in place; Tax agreements in place; and Services will be subject to ongoing supervision by third-country regulator AIFMD Requirements A co-operation agreement Non-EU country not listed by the FATF as a NCCT; and Tax-exchange agreement Consequences Third-country investment firms unable to provide investment services to any clients Consequences Non-EU AIFMs can t market AIFs (EU or non-eu AIFs) in the EU, or manage EU AIFs EU AIFMs can t market non-eu AIFs in EU 225

24 EMIR (clearing houses) Requirements Co-operation agreement Determination of equivalence EMIR (clearing, derivatives) Requirements Determination of equivalence No co-operation agreement required, but non- EU country needs to assist ESMA in preparing its technical advice on equivalence Two non-eu entities trading with each other, Commission to impose EMIR s obligations on each if contract falls within EMIR s extraterritoriality provisions which apply: (a) if the contract has a direct or foreseeable effect in the EU; or (b) if it is necessary to prevent the evasion of EMIR Consequences Inability of non-eu clearing houses to clear for EU clearing members and EU exchanges and trading venues Consequences EU financial counterparties may be unwilling to trade with non-eu counterparties whose third countries have not been found equivalent 226

25 Solvency II Requirements Determination of equivalence Solvency II to come into effect 1 January 2016 Benchmarks regulation Requirements Co-operation agreement Determination of equivalence Administrator is registered by ESMA Compliant with IOSCO Principles for Financial Benchmarks Consequences Reinsurance contracts with non-eea insurers to be treated differently to EEA-insurers Third-country insurers not part of EEA-groups group will not be able to take into account the local third-country calculation of capital Consequences Benchmark administrators will not be able to provide benchmarks to EUsupervised entities for use within the EU. 227

26 Money Market Funds (MMFs)

27 MMFs in brief Important source of short-term financing Includes treasury bills, corporates and governments Hold almost 40% short-term debt issued by banking sector Financial crisis highlighted MMFs can be susceptible to systematic risk due to: Size and interconnectedness with the banking sector and corporate and government finance 229

28 MMF Reforms Globally International IOSCO charged with undertaking review of potential regulatory reforms of MMFs and to develop policy recommendations. Focus on Constant Net Asset Value (CNAV) October 2012 IOSCO publishes Policy Recommendations on MMFs: Fifteen recommendations for common standards for regulation and management of MMFs across jursidictions. Key principles on : valuation, liquidity management, stable NAV, use of ratings, disclosure to investors and repurchase agreements. IOSCO recommendations: jurisdictions where money funds offered at NAV per share, regulators should require where workable, a conversion to a floating NAV or impose additional safeguards to reinforce stable NAV money funds resilence and abiltity to withstand redemptions (Recommendation 10). 230

29 European Union legislation MMF Definition (proposal): Collective investment undertaking that requires authorisation as UCITS under Directive 2009/65/EC or is an AIF under Directive 2011/61/EU, invests in short-term assets and has as distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment. Objectives: Rules to make MMFs resilient to future financial crisis and secure financing role for the economy Enhance the safety of MMFs, provide greater transparency, investor information and investor protection Proposal impacts UCTIS and AIFMD Introduces authorisation procedure for all MMFs Relies on existing authorisation procedures for UCITS and harmonised authorisation procedures for AIFs Lays down rules for financial instruments eligible for investment by MMF, the portfolio and valuation, and reporting requirements 231

30 Timeline Feb 12 Jul 12 Sep 13 Feb 15 Apr

31 Key Proposals Eligible assets Art 8(1) Regulation MMFs are allowed to invest in the financial asset classes : money market instruments deposits with credit institutions financial derivatives; and reverse repurchase agreements Art 8 (2) specifies the activities MMFs are prohibited from undertaking: engaging in short selling of money market instruments gaining exposure to equities or commodities entering into securities lending or securities borrowing agreements entering into repurchase agreements; or borrowing or lending cash Arts 9 14 further provisions on the categories of eligible assets that MMFs may invest in. 233

32 Diversification and concentration of requirements Aim: limits risk taking by MMFs Outlines clear diversification requirements for MMFs to respect and the concentration limits an MMF can hold as single issuer: Five percent issuer limit for money market instruments; Five percent limit on deposits with a single credit institution; Ten percent aggregate limit to all securitisation exposure; and Ten percent aggregate limit to a single issuer 10 percent limit on holdings of money market instruments issued by a single body Art 14 (6) : Derogations (subject to specific condition relating to sovereign issuers and public bodies) 234

33 Obligations in relation to risk management Rules on maturity limitations Weighted average maturity (WAM) and weighted average life (WAL) and requirements on holdings of daily weekly maturing assets aims to reduce MMF portfolio risk, increase the liquidity profile of an MMF and capability in satisfying investor redemptions Short-term MMFs portfolios A WAM of no more than 60 days A WAL of no more than 120 days Standard MMFs portfolios (which invest in longer-term instruments) A WAM of no more than six months A WAL of no more than 12 months 235

34 Constant net asset value (CNAV) Three percent capital buffer requirement MMFs operating with CNAV required to establish and maintain capital buffer of at least 3% at all times The CNAV buffer: Must only be used to compensate difference between CNAV per unit or share and real value unit or share; Must be composed of cash only and be held in a protected reserve account opened with a credit institution in the name of the CNAV MMF; Must be replenished whenever it falls below 3%; in the event of the amount of the NAV buffer decreasing by 10 basis points below the 3%, the relevant competent authority and ESMA must be immediately notified 236

35 ECON Committee Draft Report The EP report limits CNAV funds to two types: Retail CNAV limits range of investors to charities, non-profit organisations, public authorities and public foundations (Amendment 23); and EU Public Debt CNAV requires at least 80% of investments in instruments to be held based on debt issued by EU member states (Amendment 25) ECON proposed a new kind of MMF a low volatility net asset value MMF (LVNAV) Could possibly display a constant NAV but under strict conditions Subject to an authorisation for a maximum period of five years (with sunset clause) 237

36 EMIR

37 Why the need for a review? 2012 EMIR entry into force Response to financial crisis and G20 leaders commitments Over-the-counter (OTC) derivative transactions should be reported to trade repositories Standardised OTCs = clearance through central counterparties (CCPs) Risks of derivatives Default of one market spurs domino effect Opportunity to examine whether the right balance has been struck between stability and growth 239

38 CCPs Aim Single rule book to ensure consistency around rules and in supervision of these rules Accounts structure Support principles of segregation and portability. The amount of users of individual segregated accounts is limited and there needs to be a review on this aspect of the EMIR Prudential provisions Solid and result in safe CCPs but implementation issues have been encountered Questions raised on using margins as a macro-prudential tool Third-country arrangements Strong support for the concept on relying on each other s supervision Key in a global market Question: should a more granular approach be considered for these kinds of provisions? 240

39 Key areas of focus Some provisions need to be streamlined i.e. Article 49(1) Requirement for ESMA and colleges opinion on the matter International consistency and competitiveness of EU rules for banks and CCPs The rules are adequate but not in line with international standards and other jurisdictions i.e. liquidation period (two day period adequate and one day is short); Central bank access Not to be reliant on commercial bank monies. Increase in systemic stability and policy to allow CCPs to access central bank monies. Risk management: Portfolio managing some rules in EMIR reflect outdated concept of risk management 241

40 TRS and Trade Reporting Trade reporting requirements ensure: Info on derivative transactions are reported to trade repositories; and Accessible to regulatory authorities Lack of an explicit common data set Debate over dual vs single-side reporting Unique Product Identifier (UPI) and Unique Trade Identifier (UTI): problems. Solving these two issues will have an effect on reconciliation rates Agreement on UTI procedure will solve the pairing problems Definition of UPI for main traded products will be visible but will cover trade volumes. Efforts should be made to look for stable and definitive solutions even if implementation is longer. 242

41 Challenges for EMIR New level of expertise to be built up Broad concept of undertaking Particularly as undertaking relies on the concept of commercial activity in the EU treaties Burdensome reporting implementation for SMEs Difficulties related to the concept of derivatives Unclear and relies on MIFID MIFID has another scope and technique Inconsistencies in data field Internal reporting burden and a fragmented market Different enforcement of compliance EU vs Dodd-Frank EU i.e. domestic regulatory authorities decisions on systemic risk 243

42 Progress thus far European Commission finalised discussions with ESMA First clearing obligations due for adoption April next year Three year delay for nonfinancial end users Extension of transitional relief for EU pension funds just announced Over 15 CCPs authorised or in process of obtaining authorisation ESMA recognised 10 non-eu CCPs established in Japan, Hong Kong, Singapore and Australia Thirty non-eu CCPs awaiting recognition EU-US ongoing dialogue on margin standards and other issues Prospects for an EMIR 2? Not likely (Lord Hill and Jonathan Faull) 244

43 Timeline 22 May 2015, ESMA published opinion on effect of EMIR on the Undertakings for UCITS Calls for a revision of the UCITS Directive to take into account the clearing obligations for certain types of OTC derivative transactions under EMIR 10 June 2015, European Supervisory Authorities (ESAs) launch second consultation on draft Regulatory Technical Standards (RTS) Outlines framework of EMIR Consultation runs until 10 July June 2015, ESAs hold public hearing on the draft RTS 245

44 Consultation Feedback from stakeholders regarding experience of EMIR Core requirements and procedures pending implementation Consultation deadline is 13 August 2015 Next steps: Commission prepares report for Parliament and Council 246

45 MIFID

46 MIFID II MiFID II Updates and revises existing MIFID Directive MIFID I came into force November 2007 Aim: Create harmonised regulatory regime for investment services across EEA Guard against systemic risks in equity, fixed-income and commodity markets Revised MIFID package adopted in October 2011 (response to financial crisis) 248

47 Proposals New framework takes into account developments in trading environment since original directive Covers broad range of investments Widens scope of investment services needing authorisation from national regulators New trading obligations to ensure derivate trades take place on regulated platform New trading controls and liquidity requirements for algorithmic and high-frequency trading; and Investor protection measures including restrictions on certain types of fees and remuneration that could interfere with adviser independence 249

48 Time March 2012 May Aug 2014 Consultation on MIFID II ends Activities MIFID timeline Public Consultation on Discussion Paper (RTS and ITS) May Aug 2014 Public Consultation on Consultation Paper (Technical Advice for Delegated Acts) Dec 2014 Mar 2015 Dec 2014 Public consultation on Consultation Paper (RTS and ITS) Final Technical Advice for Delegated Acts submitted to the European Commission Final RTS on Capital Requirements Regulation (CRR) Feb 2015 Additional public consultation covering certain derivative classes for non-equity transparency purposes Public hearing on Secondary Markets and Investor Protection Sep 2015 Dec 2015 Jan 2017 ESMA submits final RTS to the European Commission Final ITS and Guidelines submitted to the European Commission MIFID II operational 250

49 Implications of GE 2015 Tom Wilkins, Account Director, Westbourne Communications Copyright 2015 by K&L Gates LLP. All rights reserved.

50 Implications of GE 2015 Westbourne Communications

51 Horizon scan If everything goes well, the UK will have a stable Government for the next five years Continued growth Rising employment Rising incomes Falling national debt Westbourne s industry perceptions audit found most respondents are now looking forward to stability and continuity over the course of the government 2015 GE 2016 Scottish and Welsh Elections 2017 EU referendum deadline? Cameron succession 2019 Osborne budget surplus target 2020 GE

52 Who are the ones to watch?

53 Ones to watch: the Government Contenders for the leadership Focused on reducing red tape and making strikes harder Focused on counterterrorism and snoopers charter Newly elected MP for Uxbridge and South Ruislip Focused on productivity, growth and Northern Powerhouse Beyond the leadership, a host of journalists have joined as Government advisers Mats Perrson, former head of Open Europe, will advise the PM on EU Camilla Cavendish will run the No 10 policy unit Craig Oliver combines political communications director with a wider fixing role for the PM James Chapman comes from the Daily Mail to support George Osborne as director of communications

54 Ones to watch: Government Departments Lord O Neill of Gatley Commercial Secretary to the Treasury David Lidington Minister of State (Europe) Lord Maude of Horsham Minister of State for Trade and Investment Harriett Baldwin MP Economic Secretary to the Treasury (City Minister) Greg Clark DCLG Secretary of State James Wharton DCLG Minister (Northern Powerhouse)

55 Ones to watch: Select Committee Chairs Iain Wright MP (Lab) Business, Innovations and Skills Dr Julian Lewis MP (Con) Defence Angus MacNeil MP (SNP ) Energy and Climate Change Crispin Blunt MP (Con ) Foreign Affairs Keith Vaz MP (Lab) Home Affairs Meg Hillier MP (Lab) Public Accounts Andrew Tyrie MP (Con) Treasury Frank Field MP (Lab) Work and Pensions

56 Ones to watch: Labour contenders for leader Left to right

57 Cameron s hydra

58 Cameron has a majority, but without a coalition partner, it is very small There are several major challenges on the horizon

59 Scottish nationalism EU referendum Cameron succession

60 The EU referendum entails many dangers for Cameron, including losing the confidence of his backbenchers and failing to lead opinion May 2015: Labour backs EU referendum 2015: EU referendum bill debate 2016: EU referendum in law June 2017: Cameron s EU deadline for getting a reform package Dec 2017: Cameron s EU referendum deadline 2018: British EU Presidency Westbourne s view of the danger Risk GE Threat to Government 80

61 Scottish nationalism: SNP dominance of Scottish seats and Holyrood increase the likelihood of a second attempt at independence May 2015: Poll shows increased support for independence SNP push for EU referendum to be based on four-nation consent SNP push for fiscal devolution in debate over Smith Commission bill 2016 SNP landslide at Holyrood elections resulting in overwhelming call for a second independence referendum? Westbourne s view of the danger 2020 GE By-elections could reduce the Conservative majority and increase SNP power over the next five years Risk Threat to Government 40 90

62 A messy and early Cameron succession could be a major distraction for Government March 2015: Cameron announces he won t serve third term as PM 2016/17:Danger of leadership bids starting early and dominating EU debate May 2015: Boris Johnson elected. Sajid Javid and Theresa May begin skirmishes 2018/19: Deadline for choosing new Conservative leader Westbourne s view of the danger Risk GE Threat to Government 20