UN MARCHE DES CAPITAUX POUR L EUROPE; PERSPECTIVES ET ENJEUX. Josina Kamerling Head of Regulatory Outreach EMEA Paris, 14 January 2016

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1 UN MARCHE DES CAPITAUX POUR L EUROPE; PERSPECTIVES ET ENJEUX Josina Kamerling Head of Regulatory Outreach EMEA Paris, 14 January 2016

2 MOST UNDERESTIMATED RISK TO GLOBAL MARKETS FROM THE CFA GLOBAL MARKET SENTIMENT SURVEY

3 THE CURRENT STATE OF AFFAIRS IN THE EUROPEAN CAPITAL MARKETS 3

4 REGULATORY AVALANCHE EU Regulatory Landscape 4

5 Capital markets have expanded in the EU over recent decades: WHY A CAPITAL MARKETS UNION? trillion total stock capitalization (around 65% of GDP) by end 2013 versus 1.3 trillion in 1992 (22% of GDP). 2. Total value of outstanding debt securities exceeded 22.3 trillion (171% of GDP) in 2013, compared to 4.7 trillion (74% of GDP) in Stock market capitalization (2013)* Nonetheless, European market remain underdeveloped in comparison with other jurisdictions *as % of GDP Source: 5

6 FINANCIAL MARKETS FOR INVESTORS Where does the average EU family invest its money? Source: 6

7 Citizens buy financial products mainly in their home country Source: 7

8 CFA MEMBERSHIP SURVEY ON SME FINANCING

9 SME SURVEY

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12 CFA MEMBERSHIP SURVEY ON CMU

13 BARRIERS TO THE DEVELOPMENT OF EU CAPITAL MARKETS 70% 65% 63% % Barrier (Top Two Box 4 + 5) 60% 50% 49% 48% 47% 40% 30% 27% 20% 10% 0% Differences in taxation treatment across jurisdictions Differences in legal frameworks surrounding the ownership and transfer of securities Protectionist policies inhibiting crossborder mergers and acquisitions Administrative burdens associated with the issuance of securities (including prospectus and filing requirements) Insufficient secondary market liquidity in corporate debt markets Lack of investor demand for SMEs Q: To what extent are each of the following a barrier to the development of EU capital markets? Scale: Please rate each on a 1 to 5 scale, where 1 means it is not a barrier at all and 5 means it is a huge barrier. 13

14 IMPORTANCE OF CROWDFUNDING AND PEER-TO-PEER LENDING PLATFORMS IN THE PROVISION OF CAPITAL TO SMEs Important (4 + 5) 47% Not important (1 + 2) 30% 3 23% Q: How important are crowdfunding and peer-to-peer lending platforms in the provision of capital to SMEs? Scale: Not important at all Very important + No opinion (chart excludes no opinion) 14

15 ACCESSIBILITY OF CREDIT INFORMATION ON UNLISTED SMEs Not accessible at all Very accessible % 4 5% Very accessible (5) 1% Not accessible at all (1) 17% 2 66% Q: To what extent is credit information on unlisted SMEs readily accessible? Scale: Not accessible at all Very accessible + no opinion (chart excludes no opinion) 15

16 DIVERGENCE OF NATIONAL INSOLVENCY: A BARRIER TO INVESTMENT? Not a barrier A huge barrier 5 A huge barrier (5) 19% Not a barrier (1) 4% 2 11% 3 27% 4 39% Q: To what extent do you consider the divergence of national insolvency frameworks a barrier to investment? Scale: Not a barrier at all A huge barrier 16

17 ACTION PLAN ON CMU (SEPTEMBER 2015) 17

18 ACTION PLAN ON CMU (SEPTEMBER 2015) Commission will aim to pursue six objectives to achieve the prefixed target 1. FINANCING FOR INNOVATION, START-UPS AND NON-LISTED COMPANIES 2. MORE FLEXIBILITY FOR COMPANIES TO ENTER AND RAISE CAPITAL ON PUBLIC MARKETS 3. INVESTING FOR LONG TERM, INFRASTRUCTURE AND SUSTAINABLE INVESTMENT 4. FOSTERING RETAIL AND INSTITUTIONAL INVESTMENT 5. LEVERAGING BANKING CAPACITY TO SUPPORT THE WIDER ECONOMY 6. FACILITATING CROSS-BORDER INVESTING 18

19 FINANCING FOR INNOVATION, START-UPS AND NON-LISTED COMPANIES Support venture capital and equity financing by Proposal for pan-european venture capital fund-of-funds and multi country funds Revise EuVECA and EuSEF legislation Study on tax incentives for venture capital and business angels Overcome information barriers to SME Investment Strengthen feedback given by banks declining SME credit applications Investigate how to develop or support pan-european information system Map out existing local or national support and advisory capacities across the EU to promote best practices Promote innovative forms of corporate financing Report on crowdfunding Develop a coordinated approach to loan origination by funds and assess the case for a future EU framework 19

20 MORE FLEXIBILITY FOR COMPANIES TO ENTER AND RAISE CAPITAL ON PUBLIC MARKETS Strengthen access to public markets Review regulatory barriers to SME admission on public markets and SME Growth Markets Proposal to modernize the Prospectus Directive Review EU corporate bond markets, focusing on how market liquidity can be improved Support equity financing Address the debt-equity bias, as part of the legislative proposal on Common Consolidated Corporate Tax Base 20

21 INVESTING FOR LONG TERM, INFRASTRUCTURE AND SUSTAINABLE INVESTMENT Support infrastructure investment Adjust Solvency II calibrations for insurers' investment in infrastructure and European Long Term Investment Funds Review of the CRR(Capital Requirements Regulation) for banks, making changes on infrastructure calibrations, if appropriate Ensure consistency of EU financial services rulebook Call for evidence on the cumulative impact of the financial reform 21

22 FOSTERING RETAIL AND INSTITUTIONAL INVESTMENT Increase choice and competition for retail Promote Green Paper on retail financial services and insurance Help retail investors to get a better deal EU retail investment product markets assessment Support saving for retirement Assessment of the case for a policy framework to establish European personal pensions Expand opportunities for institutional investors and fund managers Assessment of the prudential treatment of private equity and privately placed debt in Solvency II Consultation on the main barriers to the cross-border distribution of investment funds 22

23 LEVERAGING BANKING CAPACITY TO SUPPORT THE WIDER ECONOMY Strengthen local financing networks Explore the possibility for all Member States to authorize credit unions outside the EU's capital requirements rules for banks Proposal on simple, transparent and standardized (STS) securitizations and revision of the capital calibrations for banks Consultation on an EU-wide framework for covered bonds and similar structures for SME loans 23

24 ANACREDIT REGISTER ECB REGULATION SMEs are the backbone of European economy But available information is currently very scarce Partial surveys (ECB, Commission) Small loans (< EUR 1 mln) as a proxy for SME financing AnaCredit will fill this important data gap: Low reporting threshold (EUR 25,000) to cover SMEs financing Use of EC s definition for SMEs (staff headcount and turnover or total balance sheet) Collection of firm s total balance sheet and annual turnover for the calculation of ratios for risk assessment purposes for the analyses of SMEs sources of financing in relation to their performance 24

25 Credit institutions will have to report (unless they have been granted derogation by the respective NCB) around 100 attributes on all loans above the 25,000 threshold granted to legal entities on a loan-by-loan basis with a monthly frequency to the respective NCB (NCBs will then transmit to shared dataset) as of March 2018 National credit registers will continue to exist 25

26 FACILITATING CROSS-BORDER INVESTING Remove national barriers to cross-border investment Report on national barriers to the free movement of capital Improve market infrastructure for cross-border investing Targeted action on securities ownership rules and third-party effects of assignment of claims Review progress in removing remaining Giovannini barriers Foster convergence of insolvency proceedings Legislative initiative on business insolvency, addressing the most important barriers to the free flow of capital Remove cross-border tax barriers Best practice and code of conduct for relief-at-source from withholding taxes procedures Study on discriminatory tax obstacles to cross-border investment by pension funds and life insurers 26

27 THE PROSPECTUS DIRECTIVE REVISION 27

28 Treatment of non-equity securities the EUR prospectus exemption threshold for non-equity securities is removed unless issuers offer non-equity securities to qualified investors or unless they require a minimum denomination commitment of EUR per investor. Prospectus Exemptions apply automatically to any offers below EUR and may be applied by a Member State to offers below EUR 10 Million if the securities are only offered in that one Member State Incorporation by reference is not allowed for the prospectus summary, but is otherwise permitted. Reference must be made to documents that are public. The EC has specified a list of eligible documents and ESMA is to define further documents that may be used via RTS Alignment with other pieces of legislation - the EC has for instance aligned the SME, SME Growth Markets and MTF definitions with those contained in MiFID. Furthermore, information contained in Key Information Documents (KID) under PRIIPS may be used for the prospectus summary Clarification of the definition of the Home Member State for non-equity instruments The Home Member State for nonequity securities is the member state where the issuer is registered. However, for non-equity securities of at least EUR 1000 denomination per issue or securities that give the right to acquire transferable securities or to receive a cash amount, the home member state can be either the member state of registration or the state in which an offer to the public or an admission to trading on a regulated market is made. Minimum Disclosure Regime (MDR) is available for secondary issuance and for SMEs. SMEs can only use the reduced disclosure regime for offers to the public. The prospectus here will be based on a Q&A Format for which ESMA will develop guidelines. Convergence of Prospectus scrutiny and approval ESMA is to analyse the approval and scrutiny processes utilised by national competent authorities (NCAs) across the EU within 3 years of entry into force of the Regulation with the intent of achieving more convergence in terms of methodology and timing Prospectuses approved under 3 rd country rules/ equivalence criteria NCAs can approve such prospectuses provided the 3 rd country standards are equivalent to the Prospectus Regulation - Commission may adopt DAs on general equivalence criteria TIMING 24 th November 2016 Commission to adopt Prospectus Regulation Regulation to apply 12 months after entry into force ESMA to develop RTS in a number of areas and deliver them to the Commission 9 months after entry into force of the Regulation 28

29 SECURITISATION REGULATION 29

30 EUROPEAN MBS ISSUANCE $ bn CMBS RMBS Total

31 CFA SURVEY ON SHADOW BANKING % 56% 56% 55% In your opinion, which of the following policy options would be most effective for achieving orderly and sustainable securitisation markets? Global AMER APAC EMEA 46% 40% 38% 41% 41% 38% 33% 31% 31% 29% 28% 26% 32% 32% 27% 23% 17% 15% 13% 12% 9% 7% 5% 6% 5% 3% 4% 3% Greater product standardisation and simplification of issuance structures Exposure limits to other bank or non-bank entities Greater legal certainty over backstops (e.g. by sponsors or by governments) Continued regulatory focus on standards for credit rating agencies Restrictions on maturity mismatches within securitisation vehicles Recourse to central bank liquidity or public credit guarantees Other Not sure 31

32 SECURITISATION LEGISLATIVE PACKAGE 1. RISK RETENTION Minimum of 5% risk retention, measured at origination. EBA RTS to specify retention requirements including the modalities of retaining risk, measurement of the level of retention, prohibition of hedging/selling the retained interest, retention on consolidated basis and exemption for indexes. 2. DUE DILIGENCE REQUIREMENTS It is clear that the Commission s intent is that investors keep performing their due diligence on the compliance also with STS securitisations. 3. STS CRITERIA Elements of simplicity, transparency and standardization include homogeneous pool of underlying, no active portfolio management on a discretionary basis and no re-securitisations 4. SHORT-TERM SECURITIZATION The Commission has drifted away from the EBA advice (to include STS ABCP only with maturity below than 1 year)amending previous texts to allow for longer term underlying exposures (weighted average life of two years and max maturity of three). 5. COMPLIANCE MECHANISM The approach taken is that the responsibility lies with originators and investors to ensure compliance with the STS characteristics of the transaction 6. DOOR OPENED WITH SYNTHETIC SECURITIZATIONS While only true sale securitisations are included in the STS framework, the Commission will look for input from the EBA and reflect on their potential introduction in the framework. 7. SUPERVISION 8. THIRD COUNTRY DIMENSION It remains at Member States level, with a strong cooperation with the European Supervisory Authorities. Investment in third country securitisations is still allowed, as long the same due diligence is performed as for EU securitisations. 32

33 RETAIL FINANCIAL SERVICES 33

34 RETAIL FINANCIAL SERVICES GREEN PAPER: KEY THEMES Digital innovation as a game changer and rebuilding confidence Goals; increased x border selling and purchasing and increased portability 13.6m Europeans live in a different Member State from their country of origin Less than 1% of household loans are x border Less than3 % of credit card customers purchase from another country 34

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36 UPDATE ON MIFID 2 36

37 1. MIFID/R Quick Fix (ie legislation to effect the 12 month delay in implementation deadline) Was expected early Jan but now expected to be published by the Commission for end Jan/ early Feb 2. Expectation is Quick Fix will also delay other OJ dependent dates including reviews, access and consolidated tape date. 3. Investment research the main change made, is the language added (since the May draft) to clarify that the Commission Sharing Agreement model can continue to exist under the new regime 4. Delegated Acts now planned to be adopted by Commission in Feb ahead of the RTS 5. RTS now planned to be adopted by the Commission en bloc in March 37

38 DELEGATED ACTS ON MIFID 2 ISSUE Safeguarding of client financial Instruments and funds Product Governance requirements Inducements (incl Investment research) Organisational requirements (for investment firms performing investment services and ancillary services) Operating conditions for investment firms Operating obligations for trading venues Position Reporting for Commodity Derivatives Data provision obligations for reporting service providers Determination of liquid market for equities Publication, order execution and transparency obligations for Systematic Internalisers Derivatives (Portfolio Compression) Supervisory measures on product intervention and position management INSTRUMENT Directive Directive Directive Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation 38

39 MEP BALZ CUMULATIVE IMPACT ASSESSMENT INI REPORT EP 39

40 MEP BALZ CUMULATIVE IMPACT ASSESSMENT INI REPORT EP Balz report focusses on stocktaking and challenges of the EU financial services regulation - It supports the Commission s Investment Package, including the Capital Markets Union (CMU). - It stresses that an efficient and effective financial services framework ensuring financial stability is a prerequisite in order to increase (long-term) investment and to foster growth in a competitive European economy and underlines the linkage between economic and financial stability. - Notes the achievements in establishing a Banking Union. - Recognizes the efforts made to establish a more transparent securitization market. - Calls on the Commission to conduct a thorough assessment of the benefits of securitization for SMEs and the marketability of securitization instruments as a matter of priority, and to report to Parliament. Report aims to develop a more coherent/consistent FS regulatory framework across Europe - Not about de-regulation - Taking granular approach versus broad overlook of all legislation - Which areas to focus on (harmonisation of consumer protection requirements, re-calibration of capital requirements / securitisation, data & reporting requirements, IFRS for SMEs / SME growth market) - How and what to clarify on the application of proportionality and look at harmonising exemption application across files - How to make better use of impact assessments and how this could help CMU in this respect 40

41 EUROPEAN COMMISSION'S CALL FOR EVIDENCE AND BETTER LAWMAKING INITIATIVE 41

42 EUROPEAN COMMISSION'S CALL FOR EVIDENCE Call for evidence due end of the month of January is to gather feedback on : 1. Rules affecting the ability of the economy to finance itself and grow 2. Unnecessary regulatory burdens 3. Interactions, inconsistencies and gaps 4. Rules giving rise to unintended consequences Responses to this call for evidence will be assessed against the following objectives: a) promoting economic and financial stability in the EU. b) maximizing the benefits of the financial system to the economy, jobs and sustainable growth and promoting better access to finance, notably for SMEs. c) completing the EU single rulebook and promoting the single market for all 28 Member States. d) restoring trust in the financial system following the crisis and ensuring a high level of consumer and investor protection. e) ensuring the EU rules are as simple and clear as possible and keeping regulatory burden to the minimum necessary. f) promoting the competitiveness of the EU economy. Following this call for evidence, Commission services will report on the main findings and next steps by mid See also Working Group of Member States 42

43 BETTER LAWMAKING INTERINSTITUTIONAL AGREEMENT It is one of Juncker s key priorities, the agreement will have a direct impact on all future EU policy initiatives Institutionalise existing practices, in particular the increased involvement and scrutiny of the Parliament in the level 2 process, create new instruments, such as an annual burden survey, and an annual joint declaration on inter-institutional programming One of the key changes is the change to the objection period for Level 2 measures, which is reduced from 3+3 months to 2+2 months meaning that once the drafts are published, there is much less political room for manoeuvre and an expectation that there will be fewer big surprises for the Commission. Increased role of the Parliament in the Level 2 process with formal involvement in the drafting process reflecting the reality that many MEPs have already been calling for under this mandate. Opportunities for consultation form a significant part of the new instruments agreed, with consultations to be launched at the impact assessment stage, prior to the adoption of a proposal and then both during the preparation of draft delegated acts and prior to their adoption for Level 2 measures. This creates a significant openness towards engaging, and will increase the accountability of adopted measures. From an institutional perspective, there will be a much greater level of coordination between the Commission, Parliament and Council during the legislative process, including a joint database to reflect the state of play across files, and a reinforced use of impact assessments. The inter-institutional agreement has been endorsed by the Commission and the General Affairs Council on 15 December As far as the Parliament is concerned, an opinion report has to be drafted and voted by the AFCO Committee before the text is tabled for plenary approval. The Conference of Presidents (political group leaders) however gave their preliminary approval to the provisional text on 16 December This should allow for a swift endorsement and signature procedure, with an entry into force to be expected in the first half of

44 HOW TO IMPROVE THE EUROPEAN SUPERVISORY ARCHITECTURE? The European System of Financial Supervision ( ESFS ) was created with the objective of putting in place regulatory co-ordination and co-operation to ensure a well-functioning internal market for EU financial services The establishment of the ESFS in 2010 created the micro-prudential authorities of the European Supervisory Authorities ( ESAs ) working within a network of national competent authorities ( NCAs ) and the macro-prudential authority of the European Systemic Risk Board ( ESRB ). In 2014, review reports by the Commission on the ESFS concluded that while the ESFS had performed well overall, areas for improvements were identified, particularly in relation to the governance of the ESRB and the ESAs. The Commission will publish a White Paper in 2016 on the governance and the financing of the ESAs. Also in 2014, The EP, noting the fragmentation of legislation relating to financial markets, financial services and financial products, put forward a number of suggestions for improving the functioning of the EFSF, particularly in relation to governance, enhanced powers in the area of consumer protection and supervisory cooperation and convergence An effective supervisory framework, backed by sanctions and enforcement mechanisms, is seen as key to the further development of a single EU Rulebook. The new initiative of Better Regulation will also affect the way forward for supervisory practices 44