We are grateful for the opportunity to respond to the EU Commission s public consultation on the Capital Markets Union mid-term review.

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1 State Street Corporation 20 Churchill Place Canary Wharf London E14 5HJ T F th March 2017 Via electronic submission Dear Sir/Madam, Public consultation on the Capital Markets Union mid-term review 2017 We are grateful for the opportunity to respond to the EU Commission s public consultation on the Capital Markets Union mid-term review. State Street Corporation (NYSE: STT) is one of the world's leading providers of financial services to institutional investors, including investment servicing, investment management and investment research and trading. With $29 trillion in assets under custody and administration and $2.47 trillion 1 in assets under management as of December 31, 2016, State Street operates in more than 100 geographic markets worldwide, including the US, Canada, Europe, the Middle East and Asia. For more information, visit State Street s website at State Street fully supports the development of a Capital Markets Union believing it offers us the chance to harness the benefits of Europe s capitals markets and use it to create growth and jobs across the region. We wish to highlight a number of areas where more can be done to increase efficiencies and deliver better value for end-investors. In particular, we believe attention should be given to where efficiencies can be realized in the cross-border distribution and marketing of investment funds as well as the need to remove operational and legal barriers in the post-trade framework. Please feel free to contact us should you wish to discuss State Street s submission in greater detail. Sincerely, Dr. Sven S. Kasper Senior Vice President EMEA Head - Regulatory, Industry and Government Affairs 1 AUM reflects approx. $30.62 billion (as of December 31, 2016) with respect to which State Street Global Markets, LLC (SSGM) serves as marketing agent; SSGM and State Street Global Advisors are affiliated. Page 1 of 10

2 Public consultation on the CMU mid-term review 2017 A. Financing for innovation, start-ups and non-listed companies Q: Are there additional actions that can contribute to fostering the financing for innovation, start-ups and non-listed companies? Loan origination State Street believes the harmonisation of rules and practices regarding loan origination could play an important role in helping provide finance to support innovation, start-ups and non-listed companies. Currently there is a wide divergence in practice amongst Member States when setting rules around loan origination. Increased harmonisation could ensure an appropriate level of regulation of loan origination across the EU in order to effectively mitigate risk as well as to ensure greater consistency between Member States. However, we would also caution against authorities imposing constraints that would curtail this growing activity since this would be against the stated objectives of the Capital Markets Union (CMU). It is important to strike an appropriate balance when regulating loan origination, as has been borne out in the Irish experience. We therefore support the Commission s intention to work with Member States and the European Supervisory Authorities (ESAs) to assess the need for a coordinated approach to loan origination by funds and the case for a future EU framework. B. Making it easier for companies to enter and raise capital on public markets Q: Are there additional actions that can contribute to making it easier for companies to enter and raise capital on public markets? Corporate Bond Market Liquidity Corporate bond markets have been subject to significant structural and regulatory change in recent years that have impacted market liquidity and we fully support the Commission s work in improving understanding of the drivers of liquidity as well as consideration of possible recommendations and solutions. In terms of possible recommendations, we believe that some very limited standardisation of corporate bond markets may be feasible and even helpful for some larger debt issuers but, for most, and particularly smaller issuers, the advantages of flexibility will suit their particular funding needs better. In relation to financial stability, care would also need to be taken in concentrating rollover risk, if maturity dates were standardised. We believe, therefore, that the potential benefit lies in aligning coupon dates for some issuers, which could bring some marginal benefits in terms of meshing with the most liquid parts of the hedging market. We believe direction should be taken from the market in order to determine where greater standardisation is viable (as it has in relation to derivatives on interest rates and credit). This could cover standardisation not just in relation to economic terms but also some legal/credit considerations. Lastly, we note that the application of MiFID II in January 2018 will likely have a significant impact on corporate bond market liquidity in a way that is currently impossible to predict. We therefore urge the Commission to appreciate the need to further analyse and understand the impact of the MIFID II legislation on corporate bond market liquidity once it has been implemented. Page 2 of 10

3 C. Investing for long term, infrastructure and sustainable investment Q: Are there additional actions that can contribute to fostering long-term, infrastructure and sustainable investment? ELTIFs We believe ELTIFs have an important role to play in creating a CMU by enabling investors to invest in companies and infrastructure projects on a longer term basis. We are therefore grateful for the Commission s work in amending the relevant Solvency II Delegated Act to reduce the risk charges for qualifying equity and debt investments in ELTIFs and infrastructure projects. It is essential that an investment in ELTIFs should not be subject to unfavourable accounting or capital treatment for specific types of investors such as smaller pension fund, insurance investors and infrastructure corporates. Lastly, we believe that since ELTIFs can originate their own loans, there is no reason why ELTIFs should be prevented from investing in other high quality loans and the Commission, as part of its CMU initiative, should look at ways to provide the necessary flexibility to do this. Barriers to the cross-border distribution of investment funds Removing barriers to the cross-border distribution of investment funds has a crucial role to play in supporting the growth of long term, infrastructure and sustainable investment. Please see our comments in response to the F: Facilitating Cross-border investment section for further detail of our recommendations in this area. D. Fostering retail investment and innovation Q: Are there additional actions that can contribute to fostering retail investment? Increased digitisation and innovation We believe increasing the digitisation of information, as well as consideration of the creation of digital passport, could play important roles in generating higher levels of retail investment and innovation. Through digitalisation and innovation, access to, and delivery of, information to investors can be improved by reducing costs and making it easier for investors to obtain information in a timely, accessible manner. In addition, the electronic transmission and filing of updates or amendments to registration documents could be harmonised to enable the single market passport to be obtained through a single home Member State filing, akin to the MIFID services passport Over the longer term, in line with the industry, we would invite the European Commission to consider the idea of a digital passport, i.e. a single saving solution that once completed and validated by a single provider would allow a consumer to open securities accounts or purchase other investment services including UCITS with more providers (even in different Member States) and individually manage his/her digital account in a consolidated manner. With the advances being made in technologies such as Distributed Ledger, we believe the means of building such infrastructure becomes more viable. We would therefore like to see measures to increase digitisation of information for retail investors and consideration of the creation of a digital passport feature in the forthcoming Commission Action Plan on Retail Financial Services. Page 3 of 10

4 PEPP We acknowledge that the creation of standardised pension product has the potential to deliver benefits for European consumers. A standardised product could allow economies of scale to be achieved that could lead to cost savings for the EU s consumers as well as improve the portability of pension products across Member State borders, which in turn would support the mobility of the EU s work force. However, cross-border pension provision is currently limited due to the national specificities of social, labour and tax laws and we believe any proposals to create a standardised product need to respectful of current pension provision in Member States and not look to supplant national pension provision but be in addition to such provision. We also believe it could be beneficial to explore whether a standardised pension offering should benefit from an EU passport to ensure such products can be effectively marketed across different member states. We also would welcome the development of a standardised set of product rules that would help create consumer confidence in the product. In addition, we believe it is crucial that the standardised product should be a simple to understand pension product that allows consumers to easily comprehend what charges they face and how their savings are invested. We therefore welcome the prospect of a Commission legislative proposal later this year to establish a framework for a standardised European personal pension product. E. Strengthening banking capacity to support the wider economy Q: Are there additional actions that can contribute to strengthening banking capacity to support the wider economy? Impact of Basel rules on custodians We would like to highlight a number of regulatory issues at the Basel level that impact State Street. While State Street accepts and understands its role as a G-SIB, we find that the global banking regulatory regime often does not take into account the specific characteristics of specialist providers of custody services and thus hinder us from providing an important intermediary function for the wider economy. For example, we are currently seeking to tailor a number of Basel proposals, including the leverage ratio, the treatment of credit exposures to investment funds, and the credit treatment of securities financing transactions so that they more proportionally reflect the business model of custody banks. We believe that there are possible modifications that are compatible with the desire for greater simplicity, but which are sufficiently risk sensitive so as not to threaten the fundamental function of global custodians. Excess Cash We believe that leverage-based measures of capital do not properly reflect the role that custody banks as play as a safe store of value for client cash and their extensive use of essentially riskfree central bank placements to manage deposit inflows. This is especially true in periods of financial market uncertainty, as our clients seek to manage their risk exposure. As such, we have strongly recommended that the Basel Committee consider the introduction of an exemption in the Basel III leverage ratio for central bank placements, and note that this approach is consistent with recent action taken by the Bank of England in the UK. Accordingly, we believe that the European Commission should consider a similar approach in its proposal to implement the Basel III leverage ratio in the EU. Lastly, to the extent that the Basel Committee decides to proceed with the implementation of a G- SIB leverage ratio surcharge, we believe that such a surcharge should be implemented on a tiered basis according to each G-SIB s risk-based capital surcharge. Page 4 of 10

5 Securities Lending We would also like to highlight the issue of securities lending as contemplated In the Basel Committee s December 2015 consultation on revisions to the standardized approach for credit risk, which incorporates a new, more risk-sensitive methodology for the measurement of exposures to SFTs. We are grateful that the Basel Committee has acknowledged the concerns of the custody banks relative to the treatment of SFTs, and that in response, changes have been proposed to the standardized methodology which addresses its most significant structural limitations. We urge the Basel Committee to swiftly finalize the proposed changes, so that they can be incorporated into national regulatory capital standards well in advance of the end of the Basel III phase-in period (January 2019). This includes adoption by the EU Commission in the context of its risk-reduction package. Investment Fund Exposures Lastly, we would like to draw attention to the Basel Committee s March 2016 proposal to introduce greater standardization in the advanced internal ratings based approach for credit risk. While we do not oppose the introduction of greater standardization, we believe the existing standardized approach for credit risk does not accurately reflect the particular characteristics and risk profile of our investment fund client base. This includes regulated investment funds, such as UCITS, which are subject to detailed transparency, investor disclosure, asset quality, asset segregation and asset diversification mandates, as well as ongoing regulatory scrutiny. As such, we have urged the Basel Committee to establish a dedicated work stream tasked with the development of an alternative and appropriately risk-sensitive methodology for investment funds distinct from the general corporate exposure category, and we urge the EU Commission to also do the same. This includes a base RWA of 20%, along with a credit conversion factor for unfunded commitments to regulated investment funds that does penalize their use. Securitisation State Street continues to support efforts to reinvigorate the European securitisation market, through the establishment of an EU framework for simple, transparent and standardised securitisations ( STS ). A well-designed framework will facilitate the flow of funding to the real economy and broaden the base of available funding more generally. Whilst State Street recognises and supports provisions to improve the robustness and safety of the securitisations market, we would advocate a more balanced-approach in certain areas, particularly with regards to the obligations upon investors. Where there is high burden and cost of compliance, investors may be deterred form re-entering the market, which may undermine the objectives of the Capital Markets Union. In addition, we would draw attention to the potential unintended consequences the STS Regulation may have on other well-functioning sectors of the market, and in particular, on UCITS funds. The current obligations for investors, combined with third-country provisions, may preclude UCITS funds from investing in certain securitisations with a third-country element. Such a restriction could have a detrimental effect on UCITS as a global brand and its international attractiveness. We therefore recommend this issue is considered in more detail. Page 5 of 10

6 F. Facilitating cross-border investment Q: Are there additional actions that can contribute to facilitating cross-border investment? Please propose complementary policy measures, explain their advantages, and illustrate any foreseeable challenges to their implementation. Making it easier to invest across borders should be a central focus of the CMU project and we fully support the Commission s work on removing national impediments to the free flow of capital. We believe this is an area that has the potential to realise the most gains for the CMU and there are a number of measures that we would like to see put in place. Changes to the current fund legislation framework We welcome the recently published Commission report on addressing national barriers to capital flows, believing this is a good start to realising the potential that increasing the cross-border distribution of funds could play in helping support the CMU initiative. In addition to the measures already highlighted in the report, we believe there are several other steps that should be taken to further improve existing fund legislation to facilitate the increased cross-border distribution of funds, to increase their efficiency and to make it easier to set up such funds in a broad range of countries. Marketing and distribution requirements At the moment, cross-border distribution is hindered by national gold-plating of marketing rules as well as a lack of harmonisation and simplification of the UCITS authorisation and notification process. Addressing these areas would not only enhance the efficiency of UCITS as a crossborder fund vehicle but would also contribute to the overall CMU objective of broadening the funding of the EU economy. Specifically, we believe there is scope for harmonising the electronic transmission and filing of updates or amendments to registration documents, to enable the single market passport to be obtained through a single home Member State filing, akin to the MIFID services passport With regards to facilitating cross-border distribution, we would urge the Commission to take a look at the various distribution rules for Packaged Retail Investment Products (PRIIPs) which are governed by the UCITS Directive, AIFM Directive, MiFID II and IDD. While this patchwork of overlapping and sometimes contradicting legislations already creates problems with national distribution, these problems are further aggravated through EU Directives having either been implemented slightly differently by EU Member States or being differently interpreted by National Competent Authorities. We also advocate removing Member State rules that impede the establishment of UCITS funds by management companies in other Member States. Master-feeder arrangements We also recommend considering certain amendments to the master-feeder arrangements under the UCITS Directive. UCITS IV sought to increase efficiencies in the European fund market through greater rationalisation and the generation of economies of scale. One tool to achieve this was the provision for master-feeder structures under the UCITS framework. However, the application of a 10% rule prevents UCITS which invest more than 10% in another fund from investing in a feeder fund. This discourages managers from setting up feeder fund structures as many managers would thereby exclude a key part of their potential client base. We recommend that the 10% rule be amended to allow look through to the underlying master into which the feeder UCITS/CIU invests such that the 10% rule applies to the master fund. Page 6 of 10

7 Requirement to appoint a paying agent Furthermore, we would recommend changes to the requirement to appoint a paying agent. This requirement dates back to the original UCITS Directive in 1985 and has been carried forward in previous revisions to UCITS and also under AIFMD and the ELTIF Regulation. These requirements developed at a time when cross-border bank transfers in the EU were slow and expensive and it was difficult to obtain adequate information on a cross-border basis at a time before the internet existed. Furthermore, the rules assume a model of direct UCITS sales whereas in practice the vast majority of UCITS sales are intermediated through a local advisor or execution platform, which is designed to facilitate payments and provide access to all information a retail investor may need. The result is that currently managers put in place facilities agents and paying agency agreements around Europe which are in practice never used with the cost ultimately being borne by end investors We recommend that these requirements under the UCITS Directive and ELTIF Regulation should be updated with rules which reflect the widespread use of the internet, the ease with which cross border payments can be made and the reality of contemporary distribution models. AIFMD passport State Street welcomed ESMA s work last year in looking at the extension of the funds passport to 12 non-eu countries. In our view, it is important to ensure that the EU is open and accessible to non- EU AIFMs and non-eu AIFs as this allows EU investors to choose from a broader range of investment funds and investment strategies. In particular, we urge the Commission to speed up implementation of ESMA s advice on the granting of passporting to third countries, especially in relation to the US. AIFMD re-hypothecation reporting One further issue we would like to see the Commission address as part of the CMU is an issue US prime brokers are experiencing in relation to rehypothecation / reuse reporting under AIFMD and how depositaries can satisfy themselves that US prime brokers are complying with the relevant requirements. For the purposes of compliance with AIFMR Article 91(3)(c), US prime brokers have indicated that due to the securities holding framework in the US market it is not possible for them to identify or report which specific securities in an individual client s portfolio have been rehypothecated / reused. As a result, funds using US Prime Brokers are faced with financing restrictions. However, the prime broker can report on the value of assets that are available for rehypothecation / reuse for each client where they have exercised their right of use in respect of that client s assets. We therefore believe that whilst US prime brokers may not be meeting the letter of requirements they are complying for all intents and purposes. We would therefore like the Commission, as part of the upcoming review of AIFMD as well as part of the CMU, to consider addressing these concerns. Share classes State Street is concerned that the recently published ESMA opinion on share classes will limit the ability of funds to offer a diverse range of share classes that meet the needs of investors. Page 7 of 10

8 The ability to offer various share classes that meet the needs of different investors all invested in the same underlying exposure allows a much wider range of investors to invest in a single pool of assets than would otherwise be the case, with all benefitting from lower costs due to economies of scale. Whilst we are broadly supportive of the development of a consistent approach to share classes within UCITS, we caution against limiting a UCITS ability to offer customised share classes since this would lead to a proliferation of smaller sized funds. Investors in these smaller funds would then be subject to proportionately higher costs due to suffering the detriment of reduced shareholder diversification and operational efficiencies. Another unintended consequence of limiting the use of share classes would be that investors would have less choice because some investment exposures cannot be managed within the existing guidelines as target levels of diversification cannot be achieved with small sizes of assets under management. We were therefore disappointed to see that in its Opinion ESMA concluding that hedging arrangements at the share class level, other than currency risk hedging, are not compatible with the requirement for a fund to have a common investment objective. We would also welcome clarification as to whether or not currency hedging of the underlying investment exposure is allowed since this would be in the best interest of shareholders as means of risk management. Lastly, allowing the creation of share classes and thereby large and more efficient funds as well as a broader choice for investments is in line with the stated objectives of the CMU initiative, aimed at attracting more non-bank financing for the EU economy. Supervisory convergence State Street fully supports ESMA s work in exploring greater supervisory convergence amongst Member States. Building a common supervisory culture among national competent authorities to promote sound, efficient, and consistent supervision is crucial to encouraging cross-border distribution of investment funds and the free flow of capital across borders. We therefore encourage ESMA to continue exploring how to strengthen the efficiency of supervision at both a macro and mirco level. Depositary passport Further to targeted changes to the investment fund legislative framework, State Street would encourage the European Commission to actively pursue the concept of a European depositary passport. Having recently implemented a management company passport, this is the next logical step in completing a truly single market regime for UCITS. Such a passport will, however, require further harmonization and, above all, time before it is implemented to allow the harmonization of the depositary regimes under the AIFMD and UCITS V (and possibly under the revised Institutions for Occupational Retirement Provision ( IORP ) Directive) to take effect. From a depositary perspective, the suggested passport would create a more competitive marketplace in depositary services and could lead to economies of scale with potentially positive impacts on the costs for UCITS. At the same time, depositaries will have to ensure that independent of where they are located, they have the relevant knowledge and expertise of the relevant local regulatory and legal requirements that apply in the relevant UCITS domiciles. Furthermore, in order for the passport to function, not only the above-mentioned harmonization and time is needed, but also clear coordination of regulatory oversight as well as a coordination of custody, insolvency and securities laws is needed. This will ensure that investors in different UCITS in the same jurisdiction do not run the risk of being subject to different regulatory Page 8 of 10

9 outcomes and treatment dependent on the location of the depositary. Lastly, when considering the passport in more detail and as part of its impact assessment, the Commission should consider any possible tax implications especially for non-corporate funds as locating the depositary outside the jurisdiction of the fund could potentially change national authorities treatment of a fund. Such a depositary passport would further increase competition in the depositary market. More importantly, it would allow the development and domiciliation of investment funds in more EU Member States, especially in countries that lack providers of depositary services. It would also allow depositaries to provide their services across the EU more efficiently. We fully acknowledge that a depositary passport raises certain concerns with regards to supervision and investor protection. Regarding supervision, in particular in situations where both the management passport and the depositary passport would be used, supervision could involve three different national competent authorities. Sufficient information sharing and cooperation agreements are therefore needed to ensure the effective exchange of necessary information as well as appropriate supervision of the overall fund structure. We share the view that the concept of a depositary passport could be piloted and tested in the context of the AIFMD implementation as part of the third country passport. The latter requires that the depositary is established in the country where the fund is domiciled or in the country where the manager is established (the member state of reference for a non-eu manager). Introducing a depositary passport would allow third country funds with an EU depositary to keep this depositary rather than relocate to their home jurisdiction. Post trade framework The European Commission is well aware of the long-standing efforts to root out various post-trade legal and operational barriers existing in the EU, such as those identified in the earlier Giovannini Reports. Emerging barriers resulting from the considerable evolution in the regulatory and market landscape during the past few years are also being investigated as part of the recent work of the European Post Trade Forum. State Street welcomes this ongoing focus on barrier identification and removal. We believe this should be a priority area of emphasis for the CMU. Barriers diminish the investor experience by causing uncertainty, safety and efficiency concerns, and unwarranted burdens that may reduce investment opportunities. Some key examples where further action needs to be taken include: Segregation Recent legislation driven changes (e.g., AIFMD, UCITS V, CSD Regulation) evidence a trend of inappropriately equating increased investor safety with an increase in asset segregation by client type or at individual fund levels throughout the chain of custody. We urge the Commission to consider clarifying that segregation decisions should not be based on the strict application of certain models for all circumstances but must take into consideration due diligence performed by custodians, prevailing custodial practices, and legal analysis regarding appropriate account structures and available insolvency protections. This approach ensures operational efficiency and asset safety without creating new risks, costs, and implementation challenges. Registration and disclosure Today there is a wide variety of Member State registration rules and shareholder transparency regimes. When looked at in a cross-border context, the patchwork of rules ultimately leads to increased cost and complexity for investors and asset servicing intermediaries. We therefore believe there is scope for the Commission, as part of the CMU initiative, to look at ways of harmonising and standardising shareholder transparency and operational registration procedures. Page 9 of 10

10 Reporting There is a lack of harmonisation in numerous post-trade reporting requirements which not only increases the cost of reporting but also the associated data analysis. Consideration should therefore be given to harmonising the multiple post trade reporting requirements that currently exist in EU financial services regulation. Settlement finality The Settlement Finality Directive (SFD) was intended to decrease risks in securities settlement and payment systems by delineating finality of transfers and minimising systemic disruptions from participant defaults. With progressive changes over time in settlement infrastructures, market participant links and related procedures (e.g., T2S), it is time to refresh the SFD and its protections in line with the changed environment. Property rights and law conflicts Differing legal frameworks in each Member State regarding the treatment of property rights in securities and debt claims contribute to increased levels of legal uncertainty, complexity and consequent costs on cross-border activity. We therefore welcome the Commission s intention to focus on the impacts and resolution of conflict of law challenges. Insolvency law Furthermore, we would recommend pursuing harmonisation of insolvency law between Member States, so that there is clear recognition of the segregation of financial instruments held by an intermediary for its clients from assets belonging to that intermediary. Further to this, there should be a presumption that client assets which are segregated from assets belonging to an intermediary, do not belong to such intermediary, which would help to return of client financial instruments in case of the financial insolvency of the intermediary. Free movement of collateral We would like consideration to be given to the role that removing barriers to the cross-border use of collateral could play in helping facilitate the movement of capital across borders. Collateral has become increasingly important in recent years and serves as a way for market participants to mitigate market risk. The provision of collateral allows lenders to recover a large proportion of the debt in adverse circumstances. The use of collateral mitigates such risk and therefore plays a key role in facilitating cross-border flow of capital. We therefore urge the Commission to consider measures that would facilitate the free flow of capital and the availability of collateral across entities and across borders as well as to look at ways to ensure that collateral is not constrained by regulatory restrictions. In addition, we believe there is scope to looks at ways in which the provision of collateral could be standardised where appropriate in order to enhance the availability and movement of collateral. Title transfer collateral arrangements Finally, we would strongly advocate ensuring a consistent approach with regards to the use of title transfer collateral arrangements (TTCA) in different pieces of legislation. At the moment, AIFMD, UCITS V, MiFID II, and EMIR seem to have different approaches with regards to TTCA. This makes it difficult for firms to comply and complex for firms operating under different authorisations and jurisdictions. Page 10 of 10