31 January European Commission SPA2 06/ Brussels Belgium. Dear Sir/Madam,

Transcription

1 State Street Corporation 20 Churchill Place Canary Wharf London E14 5HJ T F January 2016 European Commission SPA2 06/ Brussels Belgium Dear Sir/Madam, Call for Evidence: EU regulatory framework for financial services State Street Corporation 1 welcomes the opportunity to respond to the EU Commission s call for evidence exercise. State Street Corporation (NYSE: STT) is one of the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With 30.6 trillion in assets under custody and administration and 2.5 trillion in assets under management as of March 31, 2015, State Street operates in more than 100 geographic markets worldwide, including the US, Canada, Europe, the Middle East and Asia. Whilst we are supportive of the G20 regulatory reform agenda and the strengthening of the European regulatory framework applicable to financial services, we would like to use the opportunity to share some high-level remarks and highlight a number of areas where the current regulatory framework could be improved. State Street is fully supportive of the better regulation objectives. Achieving these objectives requires an extensive dialogue amongst the European co-legislators as well as with relevant stakeholders in order to obtain the expertise and views of those concerned and to assess the implications and effects of a legislative initiative. In that context, we support longer consultation periods and encourage thorough impact assessments which will help to avoid unintended consequences from new regulation. Similarly, we believe that more consideration needs to be given to realistic timetables for implementation, including for the consideration of level 2 measures. Over the last years, we have seen different examples such as AIFMD, EMIR, UCITS V and possibly MiFID II/MiFIR where it is extremely difficult to be prepared within the foreseen timetables. A minimum 18 months period 1 State Street Corporation s identification number in the European Transparency Register is

2 starting from the date industry have all the necessary information to start applying new rules, should be the general rule. By doing so, increased costs for both the financial services industry and the investors can be avoided. In addition to these general comments, we would also wish to emphasize several specific issues: In particular, we wish to highlight the vital role securities lending plays in European financial markets through the provision of market liquidity and efficiency. We believe the current and proposed standardized approach for credit risk, as applied in the EU via CRD IV, could significantly impact on a bank s ability to conduct securities lending. We welcome the revised approach as proposed by the Basel Committee in December and urge regulators to adopt the proposed changes, and to amend the European framework accordingly. We also have concerns regarding the current proposals for risk-mitigation techniques for OTC derivatives under EMIR. Given our role as a global custodian we expect to be a provider of accounts for segregation of initial margin for uncleared swaps. However, we have a number of concerns as to how cash collateral will be treated under the current draft Regulatory Technical Standards and specifically how it could stop banks such as ourselves acting as third-party custodians. Lastly, we believe a key area that is missing from post-financial crisis rule making is a framework for the provision of a common depositary market across the European Union. We believe the European Commission should actively pursue creating a more competitive marketplace in depositary services which could lead to economies of scale with potentially positive impacts on the costs for UCITS. In order to achieve this, we believe consideration should be given to creating a depositary passport. The creation of a depositary passport would allow the development and domiciliation of investment funds in more EU Member States, especially in countries that lack providers of depositary services as well as allowing depositaries to provide their services across the EU more efficiently. Thank you once again for the opportunity to participate in the call for evidence exercise. 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 Director EMEA, Regulatory, Industry and Government Affairs 2

3 Case Id: d0-1a3e-482d-946a-a26d64fb2620 Date: 31/01/ :18:18 Call for evidence: EU regulatory framework for financial services Fields marked with are mandatory. Introduction The Commission is looking for empirical evidence and concrete feedback on: A. Rules affecting the ability of the economy to finance itself and growth; B. Unnecessary regulatory burdens; C. Interactions, inconsistencies and gaps; D. Rules giving rise to unintended consequences. It is expected that the outcome of this consultation will provide a clearer understanding of the interaction of the individual rules and cumulative impact of the legislation as a whole including potential overlaps, inconsistencies and gaps. It will also help inform the individual reviews and provide a basis for concrete and coherent action where required. Evidence is sought on the impacts of the EU financial legislation but also on the impacts of national implementation (e.g. gold-plating) and enforcement. Feedback provided should be supported by relevant and verifiable empirical evidence and concrete examples. Any underlying assumptions should be clearly set out. Feedback should be provided only on rules adopted by co-legislators to date. Please note: In order to ensure a fair and transparent consultation process only responses received through our online questionnaire will be taken into account and included in the report 1

4 summarising the responses. Should you have a problem completing this questionnaire or if you r e q u i r e p a r t i c u l a r a s s i s t a n c e, p l e a s e c o n t a c t fisma-financial-regulatory-framework-review@ec.europa.eu. More information: on this consultation on the protection of personal data regime for this consultation 1. Information about you Are you replying as: a private individual an organisation or a company a public authority or an international organisation Name of your organisation: State Street Corporation Contact address: The information you provide here is for administrative purposes only and will not be published skasper@statestreet.com Is your organisation included in the Transparency Register? (If your organisation is not registered, we invite you to register here, although it is not compulsory to be registered to reply to this consultation. Why a transparency register? ) Yes No If so, please indicate your Register ID number: Type of organisation: Academic institution Consultancy, law firm Industry association Non-governmental organisation Trade union Company, SME, micro-enterprise, sole trader Consumer organisation Media Think tank Other Where are you based and/or where do you carry out your activity? United Kingdom 2

5 Field of activity or sector ( if applicable): at least 1 choice(s) Accounting Auditing Banking Consumer protection Credit rating agencies Insurance Pension provision Investment management (e.g. hedge funds, private equity funds, venture capital funds, money market funds, securities) Market infrastructure operation (e.g. CCPs, CSDs, Stock exchanges) Social entrepreneurship Other Not applicable Please specify your activity field(s) or sector(s): Investment Services Important notice on the publication of responses Contributions received are intended for publication on the Commission s website. Do you agree to your contribution being published? ( see specific privacy statement ) Yes, I agree to my response being published under the name I indicate (name of your organisation/company/public authority or your name if your reply as an individual) No, I do not want my response to be published 2. Your feedback In this section you will have the opportunity to provide evidence on the 15 issues set out in the consultation paper. You can provide up to 5 examples for each issue. If you would like to submit a cover letter or executive summary of the main points you will provide below, please upload it here: a4a3ee11-1ce5-470a-b50a-dc79ab541d49/ Call for evidence - Cover letter - State Street.pdf 3

6 Please choose at least one issue from at least one of the following four thematic areas on which you would like to provide evidence: A. Rules affecting the ability of the economy to finance itself and grow You can select one or more issues, or leave all issues unselected Issue 1 - Unnecessary regulatory constraints on financing Issue 2 - Market liquidity Issue 3 - Investor and consumer protection Issue 4 - Proportionality / preserving diversity in the EU financial sector Issue 1 Unnecessary regulatory constraints on financing The Commission launched a consultation in July on the impact of the Capital Requirements Regulation on bank financing of the economy. In addition to the feedback provided to that consultation, please identify undue obstacles to the ability of the wider financial sector to finance the economy, with a particular focus on SME financing, long-term innovation and infrastructure projects and climate finance. Where possible, please provide quantitative estimates to support your assessment. How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 1 (Unnecessary regulatory constraints on financing) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) 4

7 E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please specify to which other Directive(s) and/or Regulation(s) you refer in your example? (Please be short and clear: state only the common name and/or reference of the legislative act(s) you refer to.) Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds COM (2013) 615 final Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) 5

8 On 4 September 2013, the European Commission published its proposed Regulation for Money Market Funds (MMFs). MMFs are collective investment schemes and are valued by investors because they provide a low risk convenient instrument in which they can store surplus cash. They are extremely simple and easy to use. In addition, they are valued by investors due to their credit diversification and the efficiencies they provide to their day-to-day financial operations. Whilst we support moves to further strengthen the regulatory regime applicable to MMFs, we believe the initial proposal fails to recognize the benefits MMFs offer to investors and will have significant negative implications for the broader economy and will ultimately fail to achieve the Commission s objectives. Specifically, we believe the initially proposed capital buffer for Constant Net Asset Value (CNAV) MMFs, which would force these funds to build up a 3% capital buffer (based on the net asset value of the fund) within three years, is misguided and we urge the co-legislators to agree on a workable solution that on the one hand strengthens the regulatory regime applicable to such funds while on the other hand allowing both Constant Net Asset Value and Variable Net Asset Value MMFs to continue. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) Money Market Funds (MMF) are collective investment schemes and are valued by investors because they provide a low risk convenient instrument in which they can store surplus cash. They are extremely simple and easy to use. In addition, they are valued by investors due to their credit diversification and the efficiencies they provide to their day-to-day financial operations. CNAV MMFs have been created to meet investors demands and needs. Investors use such funds primarily for their day-to-day cash management operations, and rely on having full, liquid, and predictable access to their investments on a daily basis. Many corporate investors require CNAV MMFs for tax and accounting purposes, because they require intra-day payments, have a de minimis tolerance for variation in capital or require fund level ratings. Furthermore, MMFs are particularly important for the short term funding of banks as well as other investors and a possible reduction in MMFs assets would work against the policy intent of encouraging a more balanced system of bank and market finance in the EU. If you have suggestions to remedy the issue(s) raised in your example, please make them here: 6

9 Recognizing the need for a compromise as well as the various proposals that are currently being considered with regards to CNAV MMFs, we believe that, subject to certain changes, in particular the removal of the so-called sunset clause, a combination of the European Parliament s proposed retail and government debt CNAV MMFs as well as the so-called Low Volatility NAV proposal could represent a solution that would not only achieve the overall policy objectives but also be workable and allow investors to continue to have access the CNAV fund structures in line with their investment needs. Example 2 for Issue 1 (Unnecessary regulatory constraints on financing) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus 7

10 PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) There are a number of overly restrictive provisions in the UCITS framework which hinder cross-border distribution activities and act as a constraint on the financing of the economy. At the moment, cross-border distribution is hindered by national gold-plating 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 cross-border fund vehicle but would also contribute to the overall CMU objective of broadening the funding of the EU economy. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: 8

11 We would recommend harmonising the current marketing standards for UCITS which would help with reducing costs and thus enhance the economic appeal of cross-border distribution. We suggest considering the following changes to the UCITS framework: Simplifying the UCITS authorisation and notification process 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 Removing Member State rules that impede the establishment of UCITS funds by management companies in other Member States The introduction of a depositary passport to enable a depository to act for UCITS funds across the single market, regardless of the Member State in which the fund is established Example 3 for Issue 1 (Unnecessary regulatory constraints on financing) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees 9

12 MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please specify to which other Directive(s) and/or Regulation(s) you refer in your example? (Please be short and clear: state only the common name and/or reference of the legislative act(s) you refer to.) Communication of an Action Plan on Building a Capital Markets Union Com (2015) 468 Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) State Street believes loan origination can play a key role in helping the successful development of the Capital Markets Union but the current regulatory framework is acting as an unnecessary constraint on financing. In order to realise this potential for financing the real economy, it is essential that a level playing field is created across Europe for the purposes of loan origination via investment funds. However, it is important that regulatory authorities achieve a balance between an appropriate level of supervision and risk oversight to ensure that this growing area of activity is allowed to develop. When creating a level playing field for loan origination via investment funds it is also important that local regulation is amended or removed where appropriate, for example a number of Member States current financial service law stipulates that only entities which are banks are able to lend. We believe 10

13 that investment funds have a clear role to play in generating growth and realising the objectives of the CMU and we therefore urge regulatory authorities to put in place a level playing field to allow them to fulfil this potential. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: When creating a level playing field for loan origination via investment funds it is also important that local regulation is amended or removed, for example a number of Member States' current financial service law stipulates that only entities which are banks are able to lend. Example 4 for Issue 1 (Unnecessary regulatory constraints on financing) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) 11

14 ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please specify to which other Directive(s) and/or Regulation(s) you refer in your example? (Please be short and clear: state only the common name and/or reference of the legislative act(s) you refer to.) EBA guidelines on limits on exposures to shadow banking entities which carry out banking activities outside a regulated framework under Article 395 para. 2 CRR (EBA/GL/2015/20) Communication of an Action Plan on Building a Capital Markets Union Com (2015) 468 Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) 12

15 State Street, in line with the broader industry, has concerns with the European Banking Authority (EBA) guidelines on limits on exposures to shadow banking entities which carry out banking activities outside a regulated framework under Article 395 para. 2 CRR. We welcome the changes that the EBA has made in its final guidelines following the feedback received from stakeholders, which we believe are a significant improvement compared to the earlier draft guidelines upon which the EBA consulted. Initially, the proposed definition of shadow banking was too broad and we were particularly concerned about the proposed inclusion of alternative investment funds ( AIFs ) which are already subject to a strict regulatory and prudential framework under the Alternative Investment Fund Manager s Directive ( AIFMD ) as well as of Money Market Funds which will be subject to EU regulation once the pending Money Market Fund Regulation has been finalised. Following the publication of the final EBA guidelines, we welcome that the EBA has partially revised its approach, in particular, with regards to some AIFs as well as its decision to review the inclusion of MMFs into the shadow banking definition once the details of the current MMFR proposal are finalized and published. We regret, however, that the EBA has not fully exempted all AIFs, in particular AIFs that are entitled to grant loans or purchase third parties lending exposures onto their balance sheet. This approach in our view contradicts the objective of the Capital Markets Union which is aimed at unlocking alternative sources of funding for the EU economy. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: We would encourage considering the exclusion of all AIFs from the scope of the shadow banking definition, in particular of loan-originating AIFs. The same is recommended with regards to MMFs, but we acknowledge that the EBA Guidelines provide a review clause for MMFs once the MMF Regulation text is finalised. 13

16 If you have further quantitative or qualitative evidence related to issue 1 that you would like to submit, please upload it here: Issue 2 Market liquidity Please specify whether, and to what extent, the regulatory framework has had any major positive or negative impacts on market liquidity. Please elaborate on the relative significance of such impact in comparison with the impact caused by macroeconomic or other underlying factors. How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 2 (Market liquidity) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds 14

17 FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please specify to which other Directive(s) and/or Regulation(s) you refer in your example? (Please be short and clear: state only the common name and/or reference of the legislative act(s) you refer to.) Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) The Financial Transaction Tax ( FTT ), as envisaged by 10/11 Member States under the so-called enhanced cooperation procedure, would significantly damage EU capital markets and undermine the aim of increasing the share of market finance of the EU economy. 15

18 In our view, the introduction of such an FTT will be detrimental to the functioning and the liquidity of EU capital markets and will ultimately reduce the returns that can be achieved for the end investor. Indeed, we believe, an EU FTT would impose an undue cost on end investors many of which are only indirectly involved with the capital markets and financial sector; for example pension funds, retail investors and industry sectors outside of financial services. Further to this we also want to highlight the significant operational and financial implications that would be placed on collecting agents. We also believe the introduction of an FTT would significantly undermine the establishment of a Capital Market Union. A tax on market transactions would serve to directly deter a move away from bank focused finance to market financing. We also wish to highlight that given that only 10/11 Members States wish to use the Enhanced Cooperation procedure in order to establish a FTT we believe this would create barriers between Member States which, again, would undermine the objectives of the CMU. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) Matherson, Thornton, Taxing financial transactions: Issues and evidence, IMF working papers, March 2011 London Economics, The Impact of a Financial Transaction Tax on Corporate and Sovereign Debt, April European Private Equity and Venture Capital Association (EVCA), Financial Transaction Tax: a report for the EVCA on the implications for private equity. Deloitte, Implications of a Financial Transaction Tax for the European Regulatory Reform Agenda, February 2014 If you have suggestions to remedy the issue(s) raised in your example, please make them here: State Street would urge the participating Member States to agree that the European Commission should withdraw this proposal which is contradictory with the CMU and the Juncker Plan. Example 2 for Issue 2 (Market liquidity) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other 16

19 adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) 17

20 Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) Consideration needs to be given to the impact the Central Securities Depositories Regulation could have on the valuable role securities lending plays in providing liquidity to markets which enable firms to act as market makers and support trading opportunities. Securities lending services are carried out to ensure the settlement of another transaction and play an important role in ensuring high rates of settlement efficiency. We therefore urge ESMA to be mindful of the potential negative impact the buy-in process and especially the proposed settlement penalties, as detailed in ESMA s proposed level two measures, could have on deterring investors from lending. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: We strongly believe that the proposed penalties for settlement fails are too high, particularly for equities, and therefore believe they should be reduced to lessen the risk that investors decide to stop the lending of securities. Example 3 for Issue 2 (Market liquidity) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. AIFMD (Alternative Investment Funds 18

21 Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) 19

22 Securities lending plays a relatively unknown but vital role in global financial markets which includes the promotion of market liquidity and efficiency, access to the collateral needed to support the centralized clearing of OTC derivatives and the production of low-risk, incremental returns for long-term investors. Custody banks have long provided a crucial role in providing agency lending services to their institutional investor clients under the active supervision of prudential regulators. Indeed, this a market characterized by, and subject to, well-developed risk controls and institutional borrowers and lenders are protected through master securities lending agreements which specify the responsibilities of each party to the transaction, along with their rights in the event of insolvency. In addition, securities loans are subject to over-collateralization with cash or other high-quality assets, the daily marking of all positions to market and the re-margining of loans to ensure ongoing over-collateralization. Although rarely used, custody banks also frequently provide an additional layer of protection to their clients by indemnifying exposures in excess of the value of the collateral received in the event of borrower default. Under the Basel Committee s current and proposed standardized approach for credit risk, banks are required to measure their exposure to securities lending transaction using a highly risk insensitive haircut-based look up table. We believe the methodology that underpins this approach is flawed due to the lack of recognition for the correlation between loans and collateral received, and the lack of recognition for portfolio diversification within the lending or collateral pools. The Basel Committee s current and proposed standardized approach therefore results in a measure of exposure that is multiples higher than the maximum possible loss that a bank could sustain and that is 40 to 50 times greater than risk exposures measured under advanced methodologies. This is likely to result in the further contraction of a market that is already significantly reduced from pre-financial crisis levels, with important negative implications for financial markets. In December 2014 the Basel Committee consulted on possible revisions to its standardized framework and in December 2015 it published a second consultative document further refining its views. We are grateful that the revised document acknowledges that custodian banks raised strong concerns on the treatment of SFTs under the comprehensive approach and that in response changes have been proposed to the methodology which addresses major areas of industry concern. This includes recognition of the correlation that exists between securities lent and collateral received, and recognition of the impact of portfolio diversification. Although still quite conservative, the revised methodology for SFT produces a more reasonable measure of exposure which is generally appropriate for a standardized view of credit risk. We urge the Basel Committee to adopt the proposed changes, and EU regulators 20

23 when they later consider the resulting recommendations, to amend the European framework accordingly. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: The current standardized approach for credit risk is implemented in the EU via the CRD IV/CRR. In December 2014 the Basel Committee consulted on possible revisions to its standardized framework and in December 2015 it published a second consultative document further refining its views. We are grateful that the revised document acknowledges that custodian banks raised strong concerns on the treatment of SFTs under the comprehensive approach and that in response changes have been proposed to the methodology which addresses major areas of industry concern. This includes recognition of the correlation that exists between securities lent and collateral received, and recognition of the impact of portfolio diversification. Although still quite conservative, the revised methodology for SFT produces a more reasonable measure of exposure which is generally appropriate for a standardized view of credit risk. We now urge the Basel Committee to adopt the proposed changes, and EU regulators when they later consider the resulting recommendations, to amend the CRD IV/CRR accordingly. Example 4 for Issue 2 (Market liquidity) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories 21

24 Regulation/ Regulation ) DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) It is a condition of Article 71 of BRRD that whilst termination rights are suspended during the stay period, payment and delivery obligations and the provision of collateral continue during the stay. Transactions which are due 22

25 to settle during the period of the stay should do so as normal. An exception to continued settlement would be where the resolution authority has suspended payment and delivery obligations using the separate power introduced under Article 69 BRRD. The contradictory nature of Articles 71 and 69 is causing uncertainty and there is concern that this uncertainty will result in reduced willingness to engage in securities lending with an expected negative impact on money markets as securities lending and repo will become a less attractive prospect for lenders/repo participants, the size of the market will contract, creating a possible liquidity crunch and potentially exacerbating runs of banking institutions in stress situations and a general shift away from lending/repo exposure to GSIB counterparties. We continue to be supportive of the resolution stay under BRRD, but share the wider industry concern relating to the operation of Article 69 BRRD and the lack of clarity on when/how the resolution authority may utilise the special powers. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: The preferable solution would be to remove article 69 BRRD. In the meantime, we would welcome clarification of the circumstances under which Article 69 BRRD would be invoked, in particular clear communication from the resolution authority at the time of imposition of a stay, stating at the outset, whether or not the authority is imposing Article 69 powers during the stay period. If you have further quantitative or qualitative evidence related to issue 2 that you would like to submit, please upload it here: 23

26 Issue 3 Investor and consumer protection Please specify whether, and to what extent, the regulatory framework has had any major positive or negative impacts on investor and consumer protection and confidence. How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 3 (Investor and consumer protection) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory 24

27 framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation contains a grandfathering provision for existing UCITS and other retail investment funds which provide a UCITS-like KIID according to national rules, until at least The reason behind the grandfathering was to protect these funds from additional implementation costs shortly after the efforts of introducing the UCITS KIID a few years ago. Nevertheless, under the current consultation from ESAs on the draft regulatory technical standards to the PRIIPs Regulation, UCITS would be effectively required to produce investor information conforming to the PRIIPs rules. This is due to the fact that the ESAs expect insurance undertakings offering multi-option investment products such as unit-linked insurance contracts to produce specific PRIIPs KIDs on each individual investment option. Since the insurance undertaking offering a unit-linked insurance contract would not be capable of producing such information on each underlying fund, it would refer to the fund provider for assistance and request delivery of the relevant information elements. As a consequence, many fund management companies will have to provide their business partners from the insurance sector with PRIIPs-compliant figures. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a 25

28 If you have suggestions to remedy the issue(s) raised in your example, please make them here: We urge the Commission and the ESAs to reconsider the proposed approach to the treatment of multi-option PRIIPs under the PRIIPs Regulation having regard to the EU legislator s deliberate choice to exempt investment funds providing a UCITS-like KIID from the duty to implement new information standards. Should the approach remain unchanged, we request postponement of the entry into force of the PRIIPs Regulation in order to facilitate practical implementation of the PRIIPs standards for investment funds. Example 2 for Issue 3 (Investor and consumer protection) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions 26

29 MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) Under the revised MiFID II/MiFIR framework, product manufacturers will have to clearly define a target market by product taking into account the risk and reward profile and charging structure of a product. Currently, there is significant uncertainty relating to the specific criteria for identifying the target market of a product. In particular, a common approach to identification of the target market would be necessary since many products are distributed cross-border and by different distribution channels which should be able to rely on the same description of the target market by the product manufacturer and as the target market specification at the manufacturer s level shall be disclosed in the PRIIPs KID according to the draft RTS currently consulted by the ESAs. At the same time, approach to determining a target market has to be feasible in practice and should allow for implementation by all distribution channels legitimated by MiFID II, including execution-only distribution. Any attempts to introduce target market criteria which effectively anticipate a suitability test on a client incumbent only in case of investment advice must be rejected as impracticable in terms of non-advisory distribution. In particular, for non-complex products eligible to be sold via execution-only services, the target market must be set very broadly in order to avoid unintended consequences for these services. 27

30 Lastly, we believe that the manufacturer of a specific financial product should not be required to provide a target market definition which takes into account investors portfolio structures comprising many different investments. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: We strongly recommend the European Commission and the European Supervisory Authorities to work together with market participants towards a viable concept of the target market. For financial instruments that are deemed non-complex for the purpose of execution-only services, the target market should be broadly defined in order to account for the effective lack of personal information in the execution-only distribution. If you have further quantitative or qualitative evidence related to issue 3 that you would like to submit, please upload it here: Issue 4 Proportionality / preserving diversity in the EU financial sector Are EU rules adequately suited to the diversity of financial institutions in the EU? Are these rules adapted to the emergence of new business models and the participation of non-financial actors in the market place? Is further adaptation needed and justified from a risk perspective? If so, which, and how? How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples 28

31 Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 4 (Proportionality / preserving diversity in the EU financial sector) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments 29

32 Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) Custodian banks like State Street are different from other more traditional banking entities and are often subject to disproportionate regulation that takes no account of their different business model and which results in unintended regulatory impacts. This includes leverage ratio requirements which tend to discourage banks from supporting high-volume, low-risk, low-return client driven financial activities which are central to the custody bank business model, due to its lack of recognition for the relative risk profile of various assets, notably central bank placements which are widely used by custodian banks to manage variability in client deposit inflows. State Street believes it is essential that EU regulators take into the account the unique characteristics of custodian banks when creating new rules. They have very different characteristics to bigger and riskier non-custodian bank G-SIBs (Globally Systematically Important Banks) and they do not present the same risk to financial stability. It is therefore not always appropriate to subject them to the same regulation. The activities they undertake are inherently less risky in comparison to non-custodian bank G-SIBs and they mostly act as agents on behalf of their clients. This less risky nature has to some extent been recognized in the G-SIB surcharge methodology, where custodian bank G-SIBs tend to have the lowest scores because of their smaller systemic footprint. This is also evident in the Basel Committee s liquidity standards (LCR and NSFR), where operational deposits, which are the primary source of funding for custodian banks are assigned a more favourable draw-down assumption than wholesale funding generally. Nevertheless, we want to see an evidence based approach by EU regulators that take accounts of the unique characteristics of custodian banks and does not subject them to inappropriate one size fits all regulation. 30

33 Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: State Street believes it is essential that EU regulators take into the account the unique characteristics of custodian banks when creating new rules. They have very different characteristics to bigger and riskier non-custodian bank G-SIBs (Globally Systematically Important Banks) and they do not present the same risk to financial stability. It is therefore not always appropriate to subject them to the same regulation. If you have further quantitative or qualitative evidence related to issue 4 that you would like to submit, please upload it here: B. Unnecessary regulatory burdens You can select one or more issues, or leave all issues unselected Issue 5 - Excessive compliance costs and complexity Issue 6 - Reporting and disclosure obligations Issue 7 - Contractual documentation Issue 8 - Rules outdated due to technological change Issue 9 - Barriers to entry Issue 5 Excessive compliance costs and complexity In response to some of the practices seen in the run-up to the crisis, EU rules have necessarily become more prescriptive. This will help to ensure that firms are held to account, but it can also increase costs and complexity, and weaken a sense of individual responsibility. Please identify and justify such burdens that, in your view, do not meet the objectives set out above efficiently and 31

34 effectively. Please provide quantitative estimates to support your assessment and distinguish between direct and indirect impacts, and between one-off and recurring costs. Please identify areas where they could be simplified, to achieve more efficiently the intended regulatory objective. How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 5 (Excessive compliance costs and complexity) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers 32

35 PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) We believe the settlement internalisation reporting requirements under the Central Securities Depositories Regulation (CSDR) has the potential to place disproportionate costs and complexity on firms which only carry out settlement internalisation in small volumes. The CSDR level 1 text highlights that reporting requirements for settlement internalisers are necessary to assess material and systemic risks posed by such activity. However, settlement internalisation may not occur within global custodian intermediaries to any substantial degree. In order to ensure the reporting requirements do not impose unnecessary additional burdens on market participants we believe the requirements should focus on the collection of only the highest, aggregated levels of volume and value. We were therefore disappointed to see the relevant Regulatory Technical Standards (RTS) require aggregated data by type of financial instrument, type of securities transactions, type of client and issuer CSD. We believe such granularity is disproportionate for market participants where settlement internalisation only occurs to a limited degree. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a 33

36 If you have suggestions to remedy the issue(s) raised in your example, please make them here: In line with a more proportionate approach it is important to consider setting thresholds for the reporting requirements that ensure the benefits of setting up reporting systems are not outweighed by the costs of doing so in circumstances where there is little, if any, volume at an institution that would be considered settlement internalisation. Example 2 for Issue 5 (Excessive compliance costs and complexity) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive 34

37 Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) We would recommend considering certain amendments to the master-feeder arrangements under the UCITS Directive in order to help reduce compliance costs and complexity for firms. 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. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a 35

38 If you have suggestions to remedy the issue(s) raised in your example, please make them here: 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. Example 3 for Issue 5 (Excessive compliance costs and complexity) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers 36

39 PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) Whilst we are supportive of measures to mitigate risk in the derivatives markets we believe there are a number of areas relating to the reporting and disclosure obligations under EMIR that are causing market participants undue complexity and burden. In our view, the EMIR frontloading requirement creates significant pricing and market risk management challenges, particularly where a CCP requires collateral to be posted that differs from the collateral permitted under the terms of the bilateral trade, in respect of the permitted currency and/or asset type. It also creates significant challenges for EU counterparties pricing trades in the absence of counterparty classification information especially when trading with non-european counterparties. We recommend removing the frontloading obligation for all future classes of derivatives declared subject to the clearing obligation. There are a number of difficulties for market participants that are an unintended consequence of risk mitigation techniques under EMIR particularly in in relation to portfolio reconciliation and transaction confirmation. Difficulties with portfolio reconciliation result from inconsistent reconciliation requirements under different regulations which introduce additional operational difficulties and complexity. This is for example the case between EMIR and the Alternative Investment Fund Managers Directive ( AIFMD ) where the latter requires more frequent reconciliation than under EMIR. In the case of firms falling under both regimes, this results in reconciliation encompassing all the data points being undertaken at the 37

40 increased frequency. State Street would recommend that the European Commission provides further clarification as to the specific terms that must be reconciled as part of the portfolio reconciliation process. Regarding timely confirmations, the T+1 deadline is a significant challenge for derivative trades that are not confirmed via electronic means. In many cases the trade volume of counterparties does not merit the introduction of electronic confirmation systems so that counterparties will still need to continue to rely on non-electronic means. We would therefore recommend relaxing the time limits, at least with regard to certain products and /or in relation to non-financial counterparties. The rules on timely confirmation of trades are very difficult to comply with for those OTC trades which are not entered into via an electronic matching system. In practice it is often helpful to agree with counterparties to use negative affirmation of trades in order to meet the confirmation deadlines, but in our experience not all counterparties wish to accept the use of negative affirmation of their trades. It would be helpful if the deadlines for timely confirmation were more flexible for the trades which are not confirmed via electronic matching, the number of which is getting fewer and fewer are not entirely based on standard market terms or which are not entered into via an electronic matching system. With regards to intragroup transactions, we do not believe that applying the risk mitigation requirements is necessary. The intragroup exemptions of Article 11, the paragraphs 5-10 should be extended to the further risk mitigating requirements of Article 11 (1) and (2) next to the requirements of Article 11 (3). For cross-border transactions, the provisions have been designed to avoid duplicative or conflicting rules and to ensure that entities do not have to comply with two separate regimes to fulfil the same regulatory requirements in two jurisdictions. While a number of third country jurisdictions have been granted equivalence status by now, the negotiations and discussions with important jurisdictions, in particular the US, are still ongoing. This creates significant uncertainty and is likely to result in the fragmentation of the global derivatives market as market participants in the EU and third countries will be unable to enter into cross-border transactions in a way where both can fulfil their regulatory requirements. We therefore urge the European Commission to take action to adopt implementing acts under Article 13 of EMIR declaring the relevant legal, supervisory and enforcement arrangements of other jurisdictions, in particular the US, as being equivalent to EMIR. State Street fully appreciates and recognizes the difficulties and challenges in assessing third country jurisdictions regulatory frameworks in order to make such an equivalence decision. However, an outcome-based, regime-by regime basis will hopefully lead to a positive result very soon. In order to accelerate the process, we would support a phased-in approach whereby certain obligations are granted equivalence ahead of others, such as the clearing obligation and those obligations under EMIR 38

41 that are currently in force prior to the collateral requirements for uncleared OTC derivatives. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: Frontloading obligation We recommend removing the frontloading obligation for all future classes of derivatives declared subject to the clearing obligation. Portfolio reconciliation State Street would recommend that the European Commission provides further clarification as to the specific terms that must be reconciled as part of the portfolio reconciliation process. Transaction confirmations The rules on timely confirmation of trades are very difficult to comply with for those OTC trades which are not entered into via an electronic matching system. In practice it is often helpful to agree with counterparties to use negative affirmation of trades in order to meet the confirmation deadlines, but in our experience not all counterparties wish to accept the use of negative affirmation of their trades. It would be helpful if the deadlines for timely confirmation were more flexible for the trades which are not confirmed via electronic matching, the number of which is getting fewer and fewer are not entirely based on standard market terms or which are not entered into via an electronic matching system Equivalence We urge the European Commission to take action to adopt implementing acts under Article 13 of EMIR declaring the relevant legal, supervisory and enforcement arrangements of other jurisdictions, in particular the US, as being equivalent to EMIR. State Street fully appreciates and recognizes the difficulties and challenges in assessing third country jurisdictions regulatory frameworks in order to make such an equivalence decision. However, 39

42 an outcome-based, regime-by regime basis will hopefully lead to a positive result very soon. In order to accelerate the process, we would support a phased-in approach whereby certain obligations are granted equivalence ahead of others, such as the clearing obligation and those obligations under EMIR that are currently in force prior to the collateral requirements for uncleared OTC derivatives. If you have further quantitative or qualitative evidence related to issue 5 that you would like to submit, please upload it here: Issue 6 Reporting and disclosure obligations The EU has put in place a range of rules designed to increase transparency and provide more information to regulators, investors and the public in general. The information contained in these requirements is necessary to improve oversight and confidence and will ultimately improve the functioning of markets. In some areas, however, the same or similar information may be required to be reported more than once, or requirements may result in information reported in a way which is not useful to provide effective oversight or added value for investors. Please identify the reporting provisions, either publicly or to supervisory authorities, which in your view either do not meet sufficiently the objectives above or where streamlining/clarifying the obligations would improve quality, effectiveness and coherence. If applicable, please provide specific proposals. Specifically for investors and competent authorities, please provide an assessment whether the current reporting and disclosure obligations are fit for the purpose of public oversight and ensuring transparency. If applicable, please provide specific examples of missing reporting or disclosure obligations or existing obligations without clear added value. How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 6 (Reporting and disclosure obligations) To which Directive(s) and/or Regulation(s) do you refer in your example? 40

43 Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive 41

44 UCITS (Undertakings for collective investment in transferable securities) Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) State Street, in line with the wider industry, is concerned about the current trade reporting regime as it has so far failed to deliver the anticipated data quality and, instead, has resulted in huge volumes of data that are difficult to aggregate and analyse. We thus support the industry calls for moving to single-sided reporting. Should the move to a single-sided reporting regime however be rejected, we would recommend changes to the current regime that will make it more workable, increase the data quality and reduce the burden for all parties involved. This includes reducing the number of matching fields as well as providing greater clarity/direction on open issues such as the use of the Legal Entity Identifier ( LEI ) and the definition and treatment of FX Forward transactions. Problems also arise from the lack of clarity around certain data fields even where additional Q&A documents have been provided. This in turn is a significant impediment to trade matching and we would therefore encourage the provision of more specific information and clearer direction with regards to the information required in certain data fields. With regards to the Unique Trade Identifier ( UTI ), ESMA s Q&A document at the moment sets out four acceptable methods for generating UTIs. Unfortunately, none of these methods reflect the methodology adopted by the International Swaps and Derivatives Association ( ISDA ) which according to our understanding is widely used in the OTC derivatives market. In our view, ISDA s methodology should be included as a further example in ESMA s Q&A document and consideration should also be given to any other methods of UTI generation that are used to a significant degree in the market. In general, State Street would encourage efforts to be undertaken to ensure that a global standard is being created on how UTIs are being generated. Furthermore, reconciliation of transactions between trade repositories is still unsatisfactory. While we understand that work between trade repositories is ongoing to address these issues, we would welcome transparency and insights into what the specific plans and timelines for this work are to provide the broader market with clarity and confidence that these issues are being addressed and by when. Lastly, we would strongly recommend exempting Exchange-Traded Derivatives ( ETDs ) from the scope of the reporting obligation. Not only was requiring the reporting of ETDs not included in the G20 Commitments and so far other jurisdictions have not implemented reporting regimes for ETDs, but ETDs are also not really a fit for the reporting templates and the ETD industry is already highly automated and data rich. However, if reporting is to include 42

45 ETDs, then we believe there is significant scope for simplification of the current requirements. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: We advocate reducing the number of matching fields as well as providing greater clarity/direction on open issues such as the use of the Legal Entity Identifier ( LEI ) and the definition and treatment of FX Forward transactions. Problems also arise from the lack of clarity around certain data fields even where additional Q&A documents have been provided. This in turn is a significant impediment to trade matching and we would therefore encourage the provision of more specific information and clearer direction with regards to the information required in certain data fields. With regards to the Unique Trade Identifier ( UTI ), ESMA s Q&A document at the moment sets out four acceptable methods for generating UTIs. Unfortunately, none of these methods reflect the methodology adopted by the International Swaps and Derivatives Association ( ISDA ) which according to our understanding is widely used in the OTC derivatives market. In our view, ISDA s methodology should be included as a further example in ESMA s Q&A document and consideration should also be given to any other methods of UTI generation that are used to a significant degree in the market. In general, State Street would encourage efforts to be undertaken to ensure that a global standard is being created on how UTIs are being generated. Furthermore, reconciliation of transactions between trade repositories is still unsatisfactory. While we understand that work between trade repositories is ongoing to address these issues, we would welcome transparency and insights into what the specific plans and timelines for this work are to provide the broader market with clarity and confidence that these issues are being addressed and by when. Lastly, we would strongly recommend exempting Exchange-Traded Derivatives ( ETDs ) from the scope of the reporting obligation. Not only was requiring 43

46 the reporting of ETDs not included in the G20 Commitments and so far other jurisdictions have not implemented reporting regimes for ETDs, but ETDs are also not really a fit for the reporting templates and the ETD industry is already highly automated and data rich. However, if reporting is to include ETDs, then we believe there is significant scope for simplification of the current requirements. If you have further quantitative or qualitative evidence related to issue 6 that you would like to submit, please upload it here: Issue 8 Rules outdated due to technological change Please specify where the effectiveness of rules could be enhanced to respond to increasingly online-based services and the development of financial technology solutions for the financial services sector. How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 8 (Rules outdated due to technological change) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central 44

47 E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) We believe the UCITS framework has a number of areas which are in need of being updated to reflect technological change. In particular, 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 45

48 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. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: 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. The Commission should look at the possibilities afforded by electronic media for reaching a wider range of customers especially given the significant variation in distribution costs for the same investment product across member states. If you have further quantitative or qualitative evidence related to issue 8 that you would like to submit, please upload it here: Issue 9 Barriers to entry Please document barriers to market entry arising from regulation that the EU should help address. Have the new rules given rise to any new barriers to entry for new market players to challenge incumbents or address hitherto unmet customer needs? How many examples do you want to provide for this issue? 46

49 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 9 (Barriers to entry) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial 47

50 Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) State Street believes a significant barrier to entry for depositary services is a regulatory framework for the provision of a common depositary market across Member States. State Street believes the European Commission should actively pursue creating a more competitive marketplace in depositary services which could lead to economies of scale with potentially positive impacts in particular on the costs for UCITS. In order to achieve this, we believe consideration should be given to creating a depositary passport. The creation of a depositary passport 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. Having recently implemented a management company passport, this is the next logical step in completing a truly single market regime especially for UCITS. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: 48

51 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 fund 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 funds in the same jurisdiction do not run the risk of being subject to different regulatory outcomes and treatment dependent on the location of the depositary. Example 2 for Issue 9 (Barriers to entry) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory 49

52 framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please specify to which other Directive(s) and/or Regulation(s) you refer in your example? (Please be short and clear: state only the common name and/or reference of the legislative act(s) you refer to.) Securities law legislation Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) The European Commission has long noted, the legal barriers, as identified in the 2001 and 2003 Giovannini Reports, should be eliminated in order to improve cross-border aspects of securities holdings and dispositions in the EU. Ending legal uncertainties which contribute to inefficiencies, cost, particularly in the context of insolvency of intermediaries and cross-border financial collateral arrangements, would help to further integrate capital markets in the EU. With regards to clear rules for acquisition and disposition of securities, there are significant differences between the rules of different jurisdictions on how transferable securities are acquired. Some laws link the legal enforceability of acquisitions and dispositions to the making of book entry credits and debits. Whilst in other jurisdictions with more dated property law principles, the legal value of credits and debits is unclear. As the system of credit and debit book entries is common practice throughout EU markets, it appears to be a natural determinant of the legal position an acquirer obtains. 50

53 Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: To address this issue, we would recommend that credit and debit account entries among EU intermediaries should be considered determinative for valid acquisition and disposition of book-entry securities, without having to address differences in national jurisdictional rules. With respect to transferable securities issued both within and outside the EU, there is a lack of certainty whether the law of a particular jurisdiction will recognise segregation of transferable securities and give effect to such segregation as expected. There could be instances in which the local law of a particular jurisdiction, the rules or practices of local market infrastructure, or local insolvency proceedings may not recognise or give effect to the expected segregation of transferable securities from the property of a relevant intermediary. This lack of certainty cannot be overcome by the efforts of custodians, due to political and jurisdictional factors outside of their control. In relation to chains of custody to the extent that they are within the EU, we support effective legal recognition of the segregation of book-entry securities from the property of a relevant intermediary in the event of the insolvency of the relevant intermediary. EU securities legislation, as well as insolvency laws, should provide that securities held for clients are segregated from the custodian s own assets. We therefore believe that with regard to transferable securities held via chains of custody which extend beyond the EU, the ability to obtain such segregation at non-eu intermediaries and the legal effect of segregation to the extent it can be obtained should be subject to the nemo dat rule. Duties of EU intermediaries to protect customer interests, to the extent recognised under relevant law, could be identified, subject to contractual arrangements with customers. 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 51

54 intermediary. 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. Example 3 for Issue 9 (Barriers to entry) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus 52

55 PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) State Street believes the Commission should give consideration as to how third country equivalence arrangements are determined in EU regulatory rulemaking and how inappropriate and inconsistent approaches to equivalence create unnecessary regulatory complexity, potentially deter investment and can hinder the free movement of capital. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: Once it has been deemed that a third country regime is needed it is essential that a consistent and proportionate assessment process is put in place to determine the proposed third country equivalence framework or the application of extra territorial application of EU rules is appropriate. A number of current regulatory initiatives such as AIFMD, EMIR, MIFID II/MiFIR, as well as 53

56 the proposed Benchmark Regulation, all have third country equivalence aspects and it is essential that such equivalence assessments are focused on ensuring an equivalent regulatory outcome rather than identical rules. This will ensure that European capital markets remain open and enable the flow of capital from outside of the EU into the European economy. Example 4 for Issue 9 (Barriers to entry) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services 54

57 Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) State Street believes the current lack of extension of the AIFMD passport to non-eu funds and managers is acting as barrier to entry and preventing EU investors from accessing a broader range of investment options. State Street supports the extension of the current EU passport regime. 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. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: The EU Commission should actively seek to extend the AIFMD passport to non-eu funds and managers where appropriate. However, a level-playing field between EU and non- EU domiciled AIFMs needs to be maintained by thoroughly assessing and ensuring that the relevant third country jurisdictions meet the requirements as set out in the AIFMD and in the relevant Level 2 measures. 55

58 These assessments should be aimed at ensuring appropriate levels of investor protection and at the same time not be misused to prevent non-eu AIFMs from accessing the EU internal market and benefiting of the EU passport. If you have further quantitative or qualitative evidence related to issue 9 that you would like to submit, please upload it here: C. Interactions of individual rules, inconsistencies and gaps You can select one or more issues, or leave all issues unselected Issue 10 - Links between individual rules and overall cumulative impact Issue 11 - Definitions Issue 12 - Overlaps, duplications and inconsistencies Issue 13 - Gaps Issue 10 Links between individual rules and overall cumulative impact Given the interconnections within the financial sector, it is important to understand whether the rules on banking, insurance, asset management and other areas are interacting as intended. Please identify and explain why interactions may give rise to unintended consequences that should be taken into account in the review process. Please provide an assessment of their cumulative impact. Please consider whether changes in the sectoral rules have affected the relevancy or effectiveness of the cross-sectoral rules (for example with regard to financial conglomerates). Please explain in what way and provide concrete examples. How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 10 (Links between individual rules and overall cumulative impact) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. 56

59 Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) 57

60 Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) State Street wishes to highlight the negative impact of certain regulatory requirements are having on custody banks ability to support their client s cash-related needs. Custody banks specialize in the provision of financial services to institutional investor clients such as pension funds, mutual funds and their non-us equivalents (e.g. UCITS), central banks, sovereign wealth funds, insurance companies and endowments. This activity centers on the safekeeping and administration of investment assets, and includes access to deposit accounts needed to support day-to-day transactional activities. Essentially, custody banks provide the equivalent of checking accounts for institutional investors, which are used to buy or sell investment securities, along with the movement of cash resulting from these investment activities. Making it possible for clients to hold cash on deposit, and to be able to freely direct the movement of such cash, is therefore a central feature of the custody function. However, while institutional investors seek to make use of available cash to maximize their investment returns, there are occasions where they will leave excess amounts on deposit with their custody banks. This is especially true in periods of financial market uncertainty, as institutional investors work to adjust their risk exposures. Custody banks have traditionally sought to manage these short-term inflows via the placement of cash with national central banks. This approach permits custody banks to safely support their clients transactional needs without introducing greater risk to the custody banks or the financial system as a whole. Yet, there have been a number of developments over the course of the past several years which have greatly accelerated the flow of excess cash to custody banks. This includes unprecedented amounts of monetary stimulus, persistent macro-economic uncertainty and the lack of viable short-term investment options for institutional investors. At the same time, there are a number of regulatory requirements associated with the implementation of the Basel III Accord which have made it far more challenging for custody banks to continue to support their client s cash-related needs. This includes national implementation of the Basel III Leverage Ratio, where in certain cases it has been set at such a high level that it serves as the de facto binding regulatory constraint. We believe that, barring relief for custody banks, the leverage ratio and other similar regulatory requirements will force the movement of client cash into the shadow banking sector, with broad implications for the stability of financial markets. A number of US banks with significant custody operations have already begun to implement measures to force excess cash off of their balance sheets, and we believe that this trend will continue once the Basel 58

61 III leverage ratio is implemented as a Pillar 1 requirement (January 2018). In August 2015 the EBA published the EU Commission s call for advice on the mandatory implementation of the Leverage Ratio and the Net Stable Funding Ratio in the EU. In relation to the leverage ratio, the EU Commission is specifically seeking further advice on whether it is possible to adopt different requirements for different institutions (based on size and systemic importance rather than business model), specifically in relation to reporting requirements and exclusion of institutions, given the wording of the level one CRD IV text. The EBA is expected deliver its report on the mandatory leverage ratio in July 2016 (in order to align timings with possible NSFR proposals) and the Commission will use this as a basis to report to the European Parliament and Council on a possible legislative proposal by December The Basel Committee is due to finalize the calibration of the Basel III leverage ratio by 2017, with an application date of 1st January As the Basel Committee and the European Commission continue to assess the implications of the Basel III leverage ratio, we strongly urge consideration of a targeted deduction for certain amounts of zero risk-weighted assets, notably central bank placements, which result from the provision of custody services. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) State Street has recently sponsored some independent research that looks at the market and policy impact of reduced custody-bank deposit capacity that results from the application of the leverage ratio to excess deposits at custody banks which are held at national central banks. The research estimates that if the leverage ratio did not apply to such deposits, an additional USD 182bn in cash-deposit capacity would be available, creating a safety net for flight-to-cash during times of market stress. Federal Financial Analytics, Where The Money Goes and Why it Matters: The Market and Policy Impact of Reduced Custody-Bank Deposit Capacity, August 2015 If you have suggestions to remedy the issue(s) raised in your example, please make them here: As the Basel Committee and the European Commission continue to assess the implications of the Basel III leverage ratio, we strongly urge consideration of a targeted deduction for certain amounts of zero risk-weighted assets, notably central bank placements, which result from the provision of custody services. 59

62 Example 2 for Issue 10 (Links between individual rules and overall cumulative impact) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism 60

63 Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) State Street believes that the Basel Committee s current and proposed standardized approach rules, which are reflected in the EU Capital Requirements Directive/Regulation, is having a disproportionate cumulative impact on securities lending activity. Securities lending plays a relatively unknown but vital role in global financial markets which includes the promotion of market liquidity and efficiency, access to the collateral needed to support the centralized clearing of OTC derivatives and the production of low-risk, incremental returns for long-term investors. Custody banks have long provided a crucial role in providing agency lending services to their institutional investor clients under the active supervision of prudential regulators. Indeed, this a market characterized by, and subject to, well-developed risk controls and institutional borrowers and lenders are protected through master securities lending agreements which specify the responsibilities of each party to the transaction, along with their rights in the event of insolvency. In addition, securities loans are subject to over-collateralization with cash or other high-quality assets, the daily marking of all positions to market and the re-margining of loans to ensure ongoing over-collateralization. Although rarely used, custody banks also frequently provide an additional layer of protection to their clients by indemnifying exposures in excess of the value of the collateral received in the event of borrower default. Under the Basel Committee s current and proposed standardized approach for credit risk, banks are required to measure their exposure to securities lending transaction using a highly risk insensitive haircut-based look up table. We believe the methodology that underpins this approach is flawed due to the lack of recognition for the correlation between loans and collateral received, and the lack of recognition for portfolio diversification within the lending or collateral pools. The Basel Committee s current and proposed standardized approach therefore results in a measure of exposure that is multiples higher than the maximum possible loss that a bank could sustain and that is 40x to 50x times greater than risk exposures measured under advanced methodologies. This is likely to result in the further contraction of a market that is already significantly reduced from pre-financial crisis levels, with important negative implications 61

64 for financial markets. In December 2014 the Basel Committee consulted on possible revisions to its standardized framework and in December 2015 it published a second consultative document further refining its views. We are grateful that the revised document acknowledges that custodian banks raised strong concerns on the treatment of SFTs under the comprehensive approach and that in response changes have been proposed to the methodology which addresses major areas of industry concern. This includes recognition of the correlation that exists between securities lent and collateral received, and recognition of the impact of portfolio diversification. Although still quite conservative, the revised methodology for SFT produces a more reasonable measure of exposure which is generally appropriate for a standardized view of credit risk. We urge the Basel Committee to adopt the proposed changes, and EU regulators when they later consider the resulting recommendations, to amend the European framework accordingly. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: The current standardized approach for credit risk is implemented in the EU via the CRD IV/CRR. In December 2014 the Basel Committee consulted on possible revisions to its standardized framework and in December 2015 it published a second consultative document further refining its views. We are grateful that the revised document acknowledges that custodian banks raised strong concerns on the treatment of SFTs under the comprehensive approach and that in response changes have been proposed to the methodology which addresses major areas of industry concern. This includes recognition of the correlation that exists between securities lent and collateral received, and recognition of the impact of portfolio diversification. Although still quite conservative, the revised methodology for SFT produces a more reasonable measure of exposure which is generally appropriate for a standardized view of credit risk. We now urge the Basel Committee to adopt the proposed changes, and EU regulators when they later consider the resulting recommendations, to amend the CRD IV/CRR accordingly. 62

65 Example 3 for Issue 10 (Links between individual rules and overall cumulative impact) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism 63

66 Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) Under the European Market Infrastructure Regulation (EMIR), the European Supervisory Authorities (ESAs) are tasked with developing rules for margin requirements for non-centrally cleared derivatives. In June 2015 the ESAs issued a second consultation on the regulatory amount of initial and variation margin that counterparties should exchange for those over-the-counter (OTC) derivative transactions that will not be subject to central clearing. We believe that whilst we support the segregation of initial margin, the proposed rules could have a significantly impact on third-party custody arrangements. The use of a third-party custodian is not required under the proposed EU rules, we expect many market participants to take advantage of the benefits of tri-party custody arrangements. However, we believe the current proposed rules could significantly reduce the feasibility of third-party custody arrangements, due to the lack of clarity on the treatment of cash - either posted as margin, or resulting from cash flows of holding non-cash margin. Specifically, it is not clear that cash may be placed on deposit with a custody bank. Deposit accounts are the standard method for holding cash in custody accounts; without the ability to accept deposits, custody banks may not be able to offer tri-party custody for margin, even when posted margin is non-cash. Whilst we acknowledge that cash on deposit creates credit risk to the custody bank we believe such risk should be mitigated by requiring prudent management of cash (i.e. by promptly reinvesting cash in other eligible assets), not by prohibiting standard custodial practices. It is important to bear in mind that, custody banks have no interest in receiving large cash deposits from margin arrangements - we are currently pushing away cash deposits due to changes in prudential rules that make them uneconomic --- but we need to be able to accept cash deposits in the normal course of providing custodial services. The draft RTS, as contained in the ESA s second consultation, prescribe the regulatory amount of initial and variation margin that counterparties should exchange for those over-the-counter (OTC) derivative transactions that will not be subject to central clearing, as well as the methodologies for their calculations. In addition, the RTS outline the criteria for the eligible collateral and establish the criteria to ensure that such collateral is 64

67 sufficiently diversified and not subject to wrong-way risk. The draft RTS include a revised phase-in for initial margin requirements and a new phase-in for variation margin, in line with the amendments of the standards issued by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) in March Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: In order to ensure banks such as ourselves will be in a position to offer third party custodians we believe the final RTS need to: Clarify the difference between cash and non-cash collateral Clarify that cash accounts will hold all cash flows connected to posted collateral Require the swaps counterparties to manage credit risk resulting from a bank holding cash collateral Clarify that cash maintained by third-party custodians may be placed on deposit Clarify that cash may only be reinvested by the custodian at the direction of the counterparties If you have further quantitative or qualitative evidence related to issue 10 that you would like to submit, please upload it here: Issue 12 Overlaps, duplications and inconsistencies Please indicate specific areas of financial services legislation where there are overlapping, duplicative or inconsistent requirements. 65

68 How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 12 (Overlaps, duplications and inconsistencies) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services 66

69 Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) Over the last few years, there has been a general trend amongst regulators that increasing segregation, whether individual accounts or smaller omnibus accounts, provides better protection. In Europe, we are seeing legislation driven changes such as AIFMD and UCITS V looking to separate funds from other investor types into their own omnibus accounts, and the CSDR Regulation mandating that CSDs should offer their participants individual accounts should they want them. However, we believe the trend for increasing segregation is not necessarily consistent with increased consumer protection and can in fact complicate the resolution process and increase costs for the end consumer. Indeed, larger pools of assets held in omnibus securities accounts and designated as client assets would likely be easier for an administrator to identify as separate from assets of the insolvent entity. A multitude of segregated accounts complicates the reconciliation/resolution process and this could lead to delays in returning client assets. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: 67

70 Progressive changes in securities markets over time have led to the increased use of omnibus account structures. We believe that these structures, where recognized by local regulations, afford investors with the same high levels of control and protection offered by individual account structures, while creating significantly more effective operational conditions. Custodians should be afforded the flexibility to utilize segregation levels and account models that are most appropriate for any given market based on local market practices, regulations, due diligence, and investor protection analysis. Implementation of any further account segregation requirements must be based on clear evidence of the resultant risk mitigation properties. Otherwise, forced and potentially arbitrary additional segregation would only serve to increased operational risk, costs and would take significantly more time to implement for disproportionately low benefit to investors. Example 2 for Issue 12 (Overlaps, duplications and inconsistencies) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees 68

71 Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) We believe there is a significant inconsistency relating to the settlement internalisation reporting requirements under the Central Securities Depositories Regulation (CSDR). The CSD Regulation defines new reporting requirements on so-called settlement internalisers. Article 2 (11) defines a settlement internaliser as any institution [ ] which executes transfer orders on behalf of clients or on its own account other than through a securities settlement system. Article 2 (9) defines a transfer order as those activities mentioned in the second indent of point (i) of Article 2 of Directive 98/26/EC (Settlement Finality. A transfer order under the Securities Finality Directive (SFD) refers to an instruction to transfer the title to, or interest in, a security or securities by means of a book entry on a register by a participant in a system defined under the same Directive. In other words, a transfer order would be only those instructions issued by a participant in a Central Securities Depository. An instruction by an organisation higher up the chain does not seem to be covered by this definition. The proposed Level 2 text developed by ESMA however has taken a different definition of a settlement internaliser. Article 1 (a) refers to a internalised settlement instruction meaning an instruction by a client of the settlement internaliser to place at the disposal of the recipient an amount of money or to transfer the title to, or interest in, a security or 69

72 securities by means of a book entry on a register, or otherwise, which is settled by the settlement internaliser in its own books and not through a securities settlement system. It could be argued that the Level 2 definition significantly increases the scope compared to the Level 1 text. Whilst Level 1 stipulates that a precondition for a settlement internalisation would be the status of a CSD participant (since transfer orders happen within a system), level 2 broadens the scope to include any settlement instruction. We believe that such deviations from the Level 1 text are not only inconsistent, they also increase the cost since the institutions issues settlement instructions is much broader then the institutions being a CSD participant. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: We would recommend aligning the Level 2 definition with that of the Level 1 Regulation. If you have further quantitative or qualitative evidence related to issue 12 that you would like to submit, please upload it here: Issue 13 Gaps 70

73 While the recently adopted financial legislation has addressed the most pressing issues identified following the financial crisis, it is also important to consider whether they are any significant regulatory gaps. Please indicate to what extent the existing rules have met their objectives and identify any remaining gaps that should be addressed. How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 13 (Gaps) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory 71

74 framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) State Street believes a significant barrier to entry for depositary services is a regulatory framework for the provision of a common depositary market across Member States. State Street believes the European Commission should actively pursue creating a more competitive marketplace in depositary services which could lead to economies of scale with potentially positive impacts in particular on the costs for UCITS. In order to achieve this, we believe consideration should be given to creating a depositary passport. The creation of a depositary passport 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. Having recently implemented a management company passport, this is the next logical step in completing a truly single market regime especially for UCITS. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a 72

75 If you have suggestions to remedy the issue(s) raised in your example, please make them here: We recognise that 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 ) to take effect. 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 fund 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 funds in the same jurisdiction do not run the risk of being subject to different regulatory 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. 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. If you have further quantitative or qualitative evidence related to issue 13 that you would like to submit, please upload it here: D. Rules giving rise to possible other unintended consequences You can select one or more issues, or leave all issues unselected Issue 14 - Risk 73

76 Issue 15 - Procyclicality Issue 14 Risk EU rules have been put in place to reduce risk in the financial system and to discourage excessive risk-taking, without unduly dampening sustainable growth. However, this may have led to risk being shifted elsewhere within the financial system to avoid regulation or indeed the rules unintentionally may have led to less resilient financial institutions. Please indicate whether, how and why in your view such unintended consequences have emerged. How many examples do you want to provide for this issue? 1 example 2 examples 3 examples 4 examples 5 examples Please fill in the fields below. For any additional documentation, please use the upload button at the end of the section dedicated to this issue. Example 1 for Issue 14 (Risk) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) 74

77 Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) Under the European Market Infrastructure Regulation (EMIR), the European Supervisory Authorities (ESAs) are tasked with developing rules for margin requirements for non-centrally cleared derivatives. In June 2015 the ESAs issued a second consultation on the regulatory amount of initial and variation margin that counterparties should exchange for those over-the-counter (OTC) derivative transactions that will not be subject to central clearing. State Street supports segregation of initial margin, and, while use of a third-party custodian is not required under the proposed EU rules, we expect many market participants to take advantage of the benefits of tri-party custody arrangements. However, we believe the current proposed rules could significantly reduce the feasibility of third-party custody arrangements, due to the lack of clarity on the treatment of cash - either posted as margin, or resulting from cash flows of holding non-cash margin. Specifically, it is not clear that cash may be placed on deposit with a custody bank. Deposit accounts are the standard method for holding cash in custody accounts; without the ability to accept deposits, custody banks may 75

78 not be able to offer tri-party custody for margin, even when posted margin is non-cash. Whilst we acknowledge that cash on deposit creates credit risk to the custody bank we believe such risk should be mitigated by requiring prudent management of cash (i.e. by promptly reinvesting cash in other eligible assets), not by prohibiting standard custodial practices. It is important to bear in mind that, custody banks have no interest in receiving large cash deposits from margin arrangements - we are currently pushing away cash deposits due to changes in prudential rules that make them uneconomic --- but we need to be able to accept cash deposits in the normal course of providing custodial services. The draft RTS, as contained in the ESA s second consultation, prescribe the regulatory amount of initial and variation margin that counterparties should exchange for those over-the-counter (OTC) derivative transactions that will not be subject to central clearing, as well as the methodologies for their calculations. In addition, the RTS outline the criteria for the eligible collateral and establish the criteria to ensure that such collateral is sufficiently diversified and not subject to wrong-way risk. The draft RTS include a revised phase-in for initial margin requirements and a new phase-in for variation margin, in line with the amendments of the standards issued by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) in March Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: In order to ensure banks such as ourselves will be in a position to offer third party custodians we believe the final RTS need to: Clarify the difference between cash and non-cash collateral Clarify that cash accounts will hold all cash flows connected to posted collateral Require the swaps counterparties to manage credit risk resulting from a bank holding cash collateral Clarify that cash maintained by third-party custodians may be placed 76

79 on deposit Clarify that cash may only be reinvested by the custodian at the direction of the counterparties Example 2 for Issue 14 (Risk) To which Directive(s) and/or Regulation(s) do you refer in your example? Please select at least one item in the list of the main adopted EU legislative acts below. Please do not tick the "other" box unless the example you want to provide refers to an legislative act which is not in the list (other adopted EU legislative acts, national legislative acts, etc..). In that case, please specify in the dedicated text box which other legislative act(s) the example refers to. Accounting Directive BRRD (Bank recovery and resolution CRR III/CRD IV (Capital Requirements Regulation/ DGS (Deposit Guarantee Schemes ELTIF (Long-term Investment Fund E-Money Directive ESRB (European Systemic Risk Board EuVECA (European venture capital funds FICOD (Financial Conglomerates IMD (Insurance Mediation Life Insurance Directive MCD (Mortgage Credit MiFID II/R (Markets in Financial Instruments Directive & Omnibus I (new EU supervisory framework) PAD (Payments Account PRIPS (Packaged retail and insurance-based investment products Qualifying holdings Directive AIFMD (Alternative Investment Funds CRAs (credit rating agencies)- Directive and Regulation CSDR (Central Securities Depositories Regulation ) Directive on non-financial reporting EMIR (Regulation of OTC derivatives, Central Counterparties and Trade Repositories) ESAs regulations (European Supervisory Authorities) EuSEF (European Social Entrepreneurship Funds FCD (Financial Collateral IGS (Investor compensation Schemes IORP (Directive on Institutions of Occupational Retirement Pensions) MAD/R (Market Abuse Regulation & Criminal Sanctions MIF (Multilateral Interchange Fees Motor Insurance Directive Omnibus II: new European supervisory framework for insurers PD (Prospectus PSD (Payment Services Regulations on IFRS (International Financial Reporting Standards) 77

80 Reinsurance Directive SFD (Settlement Finality Solvency II Directive SSM Regulation (Single Supervisory Mechanism) Statutory Audit - Directive and Regulation UCITS (Undertakings for collective investment in transferable securities) SEPA Regulation (Single Euro Payments Area) SFTR (Securities Financing Transactions SRM (Single Resolution Mechanism SSR (Short Selling Transparency Directive Other Directive(s) and/or Regulation(s) Please provide us with an executive/succinct summary of your example: (If applicable, mention also the articles of the Directive(s) and/or Regulation(s) selected above and referred to in your example) We are concerned that the proposed introduction of the mandatory buy-in process under the Central Securities Depositary Regulation (CSDR), as envisaged in the original ESMA technical standards, would inappropriately changes the role of CSDs and their participants, including that of global and local custodian intermediaries. In particular, the requirements proposed by ESMA relating to buy-ins for over-the-counter ( OTC ) transactions would significantly alter the risk profile of CSD participants, as well as raise complex legal questions over the rights of parties beyond the trading counterparties to exercise buy-ins. Buy-ins are recognized as contractual rights between trading counterparties at the trading level whilst CSD participants are generally acting in an intermediary capacity through a chain of custodians on behalf of underlying investors and in these circumstances would not be the trading counterparties with rights to effect a buy in. In addition, any obligations on CSD participants to impose buy-ins would transfer unreasonable counterparty risks from the trading level to the settlement level, leading to greater CSD participant exposure to reimbursement risks and potential buy-in disputes between the trading parties. The consequences of this new risk profile for CSD participants are significant as they are in effect taking on the role of guaranteeing the commitments of an underlying trading party, similar to the role of a CCP. This risk profile alteration for intermediaries carries significant ramifications, including the need for increased regulatory/supervisory scrutiny of such unusual arrangements and measures to protect against relevant risks, such as the increased tie up of collateral resources that would further impact market efficiencies. We were grateful to see ESMA attempt to take account of this when it consulted on revised options last summer though the proposed compromise option that was proposed would not in our view, and that of the wider industry, mitigate the issue. We are therefore awaiting the forthcoming publication of the final CSDR settlement discipline measures with interest and, whilst mindful that ESMA is 78

81 constrained by the level one text, we would be grateful for recognition of the consequences of transferring the risk involved with the buy-in process to the CSD participant level by ensuring responsibility for the buy-in process lies at the trading level. Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.) n/a If you have suggestions to remedy the issue(s) raised in your example, please make them here: We believe the responsibility for buy-ins should be at the trading level and not rest with the CSD participant. If you have further quantitative or qualitative evidence related to issue 14 that you would like to submit, please upload it here: Useful links Consultation details ( Consultation document ( Specific privacy statement ( 79

82 More on the Transparency register ( Contact 80