Solvency ii Association G Street NW Suite 800 Washington, DC USA Tel:

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1 P a g e G Street NW Suite 800 Washington, DC USA Tel: Dear member, We have an interesting update on EIOPA s Action Plan 2016 and Way Forward for Colleges of Supervisors Since 2013 EIOPA sets out a multi-annual Action Plan for Colleges of Supervisors.

2 P a g e 2 The EIOPA Board of Supervisors adopted the Action Plan 2015/2016 for Colleges of Supervisors in October The focus of the Action Plan 2015/2016 is the implementation of Solvency II in 2016 and the major changes for supervision under the new regulation. two amendments to the approved Action Plan 2016 were decided taking into account recent priorities and needs. A two-fold approach for setting the themes for colleges in 2017 was decided. Proposed Action Plan 2016 update Theme III. "Discussion of plans for/extent of sub-group supervision at national level or EEA regional cross-border level" has been brought forward to the year The potential need for supervisors to provide clarity to the industry and decide earlier on the application of sub-group supervision was already recognized last year when colleges were invited to consider completing this theme already in In context of theme I referring to the review of the appropriate quality and adequate set of data/information needed under the new Solvency II reporting system colleges are invited to discuss how EIOPA could facilitate effective, efficient and secure information usage and sharing within colleges. The input received could be used for developing an approach jointly by EIOPA and the NSAs for analytical and technical support for information sharing in colleges. This would be part of the wider initiative to further elaborate on the possible use of the European database for additional reports, analytics and indicators to be used at the national level. Themes for Colleges 2017 Themes for colleges 2017 will be set following a two-fold approach: Supervisory themes for colleges as an integral part of a broader initiative resulting from the EIOPA annual work programme with the objective to support consistent and high quality supervision across the EEA. These supervisory themes will be translated into specific actions for colleges.

3 P a g e 3 Specific themes to promote and enhance the colleges work and support the functioning of colleges. These topics will be collected fromcollege members including group and host supervisors and EIOPA. With this approach it is ensured that the themes cover the specific needs of the college work but are also fully integrated into EIOPA's work programme. Updated Action Plan 2016 Theme I.: What is the appropriate quality and adequate set of data/information for the college to form a shared view on the risks of the group and its major solo entities? To comply with by 31 October 2016 The college discusses the quality and consistency of the data/information reported by the group and solo entities under the Solvency II regulatory framework and agrees on a data set to be exchanged and used for the college shared view on the risks based on the implementing technical standards on information exchange within colleges of supervisors. In this context the college reviews the appropriateness of the thresholds for significant risk concentration and intragroup transactions. In addition, colleges are invited to discuss on how EIOPA could facilitate effective, efficient and secure information exchange in colleges under the new Solvency II reporting system. The objective of this task is to enhance quality and efficiency of the work within the over 90 EEA colleges by facilitating exchange of data and information and developing an analytical approach based on Article 357 of the Commission Delegated Regulation and the Guidelines for exchange of information on a systematic basis wihin colleges, but also ad-hoc for specific events and emergency situations. The input received from colleges will be part of a wider initiative to further elaborate on the possible use of the European database for reports and analytics, from which national competent authorities can benefit. Theme II: Improve the transparency of the college work To comply with by 31 December 2016

4 P a g e 4 The group supervisor consults the college on the information to be communicated to the group in relation to the background, the objectives of the college meeting, the shared view of the risks, and on the constructive feedback on the group management performance at the college meeting. Theme III: Are there any plans for sub-group supervision? This theme was brought forward to 2015 The potential need to bring this theme forward was already envisaged last year when colleges were invited to implement the theme already before Only relevant for colleges with group structures including sub-groups at national or EEA-cross border level. The aim is to ensure consistency of the implementation of Union law and a level playing field across Europe. With an explicit reference to the specifities and the risk profile of the subgroup discuss any plans and explain the need for/extent of sub-group supervision at national level or EEA cross-border level based on Articles 215, 216 and 217 of the Solvency II Directive, the criteria included in the Delegated Acts and in the EIOPA Guidelines on Solvency II relating to Pillar 1 requirements. If applicable, discuss the feedback to the group and the solo entities. Theme IV: Are ORSA and group solvency calculations appropriate and consistent across the group? To comply with by 31 December 2016 Share and discuss the supervisors views regarding the structure, quality and consistency of the ORSA approach across the group under the final Solvency II regulatory framework and consult on the feedback to the group and, where appropriate, solo entities. In case the final Solvency II - based ORSA report is not available early enough to comply with the above deadline the forward looking assessment of own risks reports under the preparatory guidelines can be used.

5 P a g e 5 Review the progress and consistency of the implementation of the solvency calculation (including technical provisions, own funds and the solvency capital requirement) based on the final Solvency II framework and enhance the dialogue with the group, and, where appropriate with solo entities. Where the solvency capital requirement (SCR) is calculated using the standard formula, the college considers the supervisors assessment of the appropriateness of the standard formula for group and solo solvency purposes and the actions that are appropriate based on the assessment. Theme V.: Agree on a procedure for reviewing that the full or partial internal model is still appropriate for group and solo solvency calculation purposes in the light of developments within the group entities or external environment To comply with by 31 December 2016 by colleges with approved full or partial internal model. This theme is relevant for colleges where, based on Article 231 of the Solvency II Directive, a full or partial internal model was approved to calculate the consolidated group SCR as well as the solo SCR of insurance or reinsurance entities in the group. Article 36 (2) of the Solvency II Directive requires the review of the compliance of the full or partial internal model with the internal model specific provisions and guidelines of the Solvency II framework. The college discusses whether there are indications that the supervisors need to review the on-going appropriateness and compliance of the full and partial internal model, such as where the group has recalculated the group solvency calculation under Article 219(2) of the Solvency II Directive. In this context colleges may need to also assess major model changes.

6 P a g e 6 Guidelines on classification of own funds Introduction 1.1. These Guidelines are drafted according to Article 16 of Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (hereinafter EIOPA Regulation ) These Guidelines relate to Articles 93 to 95 of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking up and pursuit of the business of Insurance and Reinsurance (hereinafter Solvency II ) as well as to Articles 69 to 73, 76, 77, 79 and 82 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC (hereinafter Commission Delegated Regulation 2015/35 ) These Guidelines are addressed to supervisory authorities under Solvency II The purpose of these Guidelines is to provide guidance on how the lists of ownfund items and the features determining classification for each tier should be applied. The Guidelines also set out procedures relating to the classification of own funds including the prior supervisory approval of Items not on the lists of own-fund items Undertakings have different capital items in their financial statements. Most of these will correspond to the defined lists of basic own-fund items in Commission Delegated Regulation 2015/35, which do not require supervisory approval. Some, including retained earnings, will be taken into account within the reconciliation reserve, which is a single own-fund item. Other Items not on the lists will need to be approved as basic or ancillary own-funds items. All items should be assessed against the features for determining

7 P a g e 7 classification to judge whether they qualify as available own funds and their appropriate tier The terms of the contractual arrangement governing the own-fund item should comply with the substance not just the form specified in Solvency II and be clear and unambiguous Paid-in ordinary share capital including its related share premium account, and paid-in initial funds, members contributions or the equivalent basic own-fund item for mutual and mutual-type undertakings, should form the highest quality own funds which can be relied on to absorb losses on a going-concern basis. The quality of such own funds should not be undermined The interpretation of share premium account should be based on the economic substance as different terminology may be employed in national law. Share premium account should therefore be understood as a separate account or reserve to which share premiums, the amount between the value received and the nominal value of the share at issuance or the value received at issuance and the value recognised in share capital, are transferred in accordance with national law The Guidelines clarify that in order for undertakings to always retain full flexibility in raising new own-fund items, paid-in subordinated mutual member accounts, paid-in preference shares including the related share premium account, and paid-in subordinated liabilities should not, by their contractual arrangements, prevent or hinder new own funds being raised Own-fund items should have sufficient maturity, depending on the tier in which they are classified. The Guidelines set out that this requirement should not be undermined by any call options prior to five years for items of all tiers as defined in Article 94 of Solvency II, irrespective of whether they relate to changes that lie within or outside the control of the undertaking. While the repurchase or buyback of any own-fund item is permitted at the option of the undertaking on or after the first possible call date, the undertaking should not create any expectation at issuance that the item will be bought back, redeemed or cancelled before the contractual maturity

8 P a g e 8 of the item. Since a repayment or redemption may have a substantial impact on the solvency position of the undertaking in the short and medium term, a repayment or redemption is always subject to supervisory approval. This is without prejudice to the treatment of transactions that are not deemed to be repayment or redemption as described in Articles 71(2), 73(2) and 77(2) of Commission Delegated Regulation 2015/ In order to avoid deterioration in an undertaking s solvency position, own-fund items need to provide that undertakings will be able to maintain own funds when there is non-compliance with the Solvency Capital Requirement (hereinafter SCR ) or if repayment or redemption would result in such noncompliance. The Guidelines set out that this should be independent of any contractual obligations or any notice of repayment and redemption given Since distributions cannot be made where they further weaken the solvency position of the undertaking, the Guidelines set out that alternative coupon satisfaction mechanisms should only be permissible in a restricted manner, whereby the cancellation of distributions is not undermined and there is no decrease in own funds of the undertaking Arrangements intended to stop or require payments on other items undermine full flexibility. The Guidelines make it clear that the use of dividend stoppers, capping or restricting the level or amount of distributions to be made on the item referred to in Article 69(a)(i) of Commission Delegated Regulation 2015/35, in any own-fund item, regardless of the tier, that would prevent payment on Tier 1 items is prohibited as they could discourage new providers of own funds and thus represent a hindrance to recapitalisation In order that any principal loss absorbency mechanism can achieve its purpose at the point of the trigger, the terms of the contractual arrangement should be clearly defined and legally certain, and capable of being applied without delay. The Guidelines explain that while a future write-up is generally permitted, this mechanism should not undermine the loss absorbency and should only be allowed on the basis of profits generated after restoring compliance with

9 P a g e 9 the SCR While called-up but not paid-in ordinary share capital may be classified as Tier 2 basic own funds, provided that the Tier 2 features are met, the Guidelines provide that this capital should only count as own funds for a limited time. This is to avoid the calling-up of capital solely for the purpose of satisfying the requirements of own funds classification without any intent that the item should become paid-in in due course These Guidelines also provide guidance in the event of noncompliance with the SCR. Non-compliance with the SCR arises when the value of own funds eligible to cover the SCR is less than the amount of the SCR. This should not be confused with a significant non-compliance with the SCR as defined in Article 71(8) of Commission Delegated Regulation 2015/35 specifically for the purposes of principal loss absorbency mechanisms. Non-compliance with the Minimum Capital Requirement (hereinafter MCR ) arises when the value of own funds eligible to cover the MCR is less than the amount of the MCR For the purpose of these Guidelines, the following definition has been developed: Item not on the lists means an own-fund item not included in the lists set out in Articles 69, 72 and 76 of Commission Delegated Regulation 2015/ If not defined in these Guidelines, the terms have the meaning defined in the legal acts referred to in the introduction The Guidelines shall apply from 1 April Section 1: Tier 1 items Guideline 1 - Tier 1 paid-in ordinary share capital and preference shares For the purposes of Article 69(a)(i) of Commission Delegated

10 P a g e 10 Regulation 2015/35, undertakings should identify paid-in ordinary share capital by the following properties: (a) the shares are issued directly by the undertaking with the prior approval of its shareholders or, where permitted under national law, its administrative, management or supervisory body (hereinafter AMSB ); (b) the shares entitle the owner to a claim on the residual assets of the undertaking in the event of winding-up proceedings, which is proportionate to the amount of the items issued, and is neither fixed nor subject to a cap Where an undertaking has more than one class of shares it should: (a) in accordance with Article 71(1)(a)(i) and (3)(a) of Commission Delegated Regulation 2015/35, identify the differences between classes which provide for one class to rank ahead of another or which create any preference as to distributions, and only consider as possible Tier 1 ordinary share capital the class which ranks after all other claims and has no preferential rights; (b) consider any share classes ranking ahead of the most subordinated class or which have other preferential features which prevent them from being classified as Tier 1 ordinary share capital in accordance with point (a) as potentially qualifying as preference shares and classify such items in the relevant tier according to their features. Guideline 2 - Reconciliation Reserve For the purposes of Article 70(1)(a) of Commission Delegated Regulation 2015/35, undertakings should include own shares held both directly and indirectly For the purposes of Article 70(1)(b) of Commission Delegated Regulation 2015/35: (a) undertakings should consider a dividend or distribution to be foreseeable at the latest when it is declared or approved by the AMSB, or the other persons who effectively run the undertaking, regardless of any requirement for approval at the annual general meeting; (b) where a participating undertaking holds a participation in another undertaking, which has a foreseeable dividend, the participating

11 P a g e 11 undertaking should make no reduction to its reconciliation reserve for that foreseeable dividend; (c) undertakings should consider the amount of foreseeable charges to be taken into account as: (i) the amount of taxes which are foreseeable and are not already recognised as a liability on the Solvency II balance sheet; (ii) the amount of any obligations or circumstances arising during the related reporting period which are likely to reduce the profits of the undertaking and for which the supervisory authority is not satisfied that they have been appropriately captured by the valuation of assets and liabilities in accordance with Commission Delegated Regulation 2015/35. Guideline 3 - Tier 1 features determining classification of items referred to in Article 69(a)(i), (ii) and (iv) of Commission Delegated Regulation 2015/ In the case of an item referred to in Article 69(a)(i), (ii) and (iv) of Commission Delegated Regulation 2015/35, undertakings should consider the features which may cause the insolvency or accelerate the process of the undertaking becoming insolvent as including: (a) the holder of the own-fund item is in a position to petition for the windingup of the issuer in the event of distributions not being made; (b) the item is treated as a liability where a determination that the liabilities of an undertaking exceed its assets constitutes a test of insolvency under the applicable national law; (c) the holder of the own-fund item may, as a result of a distribution being cancelled or not being made, be granted the ability to cause full or partial payment of the amount invested, or to demand penalties or any other compensation that could result in a decrease of own funds. Guideline 4 - Tier 1 features determining classification of items referred to in Article 69(a)(i) and (ii) of Commission Delegated Regulation 2015/ In the case of an item referred to in Article 69(a)(i) and (ii) of

12 P a g e 12 Commission Delegated Regulation 2015/35, for the purposes of displaying the features in Article 71(3) of Commission Delegated Regulation 2015/35 (full flexibility), undertakings should: (a) consider distributable items as comprising retained earnings, including profit for the year ended prior to the year of distribution, and distributable reserves as defined under national law or by the statutes of the undertaking, reduced by the deduction of any interim net loss for the current financial year from retained earnings; (b) determine the amount of distributable items on the basis of the individual accounts of the undertaking and not on the basis of consolidated accounts; (c) reflect in the determination of distributable items any restrictions imposed by national law with regard to consolidated accounts; (d) ensure that the terms of the contractual arrangements governing the ownfund item or any other own-fund item do not cap or restrict the level or amount of distribution to be made on the item referred to in Article 69(a)(i) of Commission Delegated Regulation 2015/35, including capping or restricting the distribution to zero; (e) ensure that the terms of the contractual arrangement governing the ownfund item do not require a distribution to be made in the event of a distribution being made on any other own-fund item issued by the undertaking The undertaking should identify the legal basis for the cancellation of distributions in accordance with Article 71(1)(l)(i) of Commission Delegated Regulation 2015/35 prior to classifying an item as Tier 1. Guideline 5 - Tier 1 features determining classification of items referred to in Article 69(a)(iii), (v) and (b) of Commission Delegated Regulation 2015/ In the case of an item referred to in Article 69(a)(iii), (v) and (b) of Commission Delegated Regulation 2015/35, undertakings should consider features which may cause insolvency or accelerate the process of the undertaking becoming insolvent as including: (a) the holder of the own-fund item is in a position to petition for the windingup of the issuer in the event of distributions not being made;

13 P a g e 13 (b) the item is treated as a liability where a determination that the liabilities of an undertaking exceed its assets constitutes a test of insolvency under applicable national law; (c) the terms of the contractual arrangement governing the own-fund item specify circumstances or conditions which, if met, would require the initiation of insolvency or any other procedure which would prejudice the continuance of the undertaking or its business as a going concern; (d) the holder of the security relating to an own-fund item may, as a result of a distribution being cancelled, be granted the ability to cause full or partial payment of the amount invested, or to demand penalties or any other compensation that could result in a decrease of own funds For the purposes of displaying the features in Article 71(1)(d) of Commission Delegated Regulation 2015/35 (absorbing losses once there is non-compliance with capital requirements and not hindering recapitalisation), undertakings should ensure that the terms of the contractual arrangement governing the own-fund item or the terms of any connected arrangement: (a) do not prevent a new or increased own-fund item issued by the undertaking from ranking ahead of, or to the same degree of subordination as, that item; (b) do not require that any new own-fund items raised by the undertaking are more deeply subordinated to that item in conditions of stress or other circumstances where additional own funds may be needed; (c) do not include terms that prevent distributions on other own-fund items; (d) do not require that the item is automatically converted into an item that ranks more highly in terms of subordination, in conditions of stress or other circumstances where own funds may be needed, or as a result of structural changes including a merger or acquisition For the purposes of displaying the features in Article 71(1)(f)(ii) of Commission Delegated Regulation 2015/35 (repayment or redemption before 5 years), undertakings should ensure that the item does not include a contractual term providing for a call option prior to 5 years from the date of issuance, including call options predicated on unforeseen changes that are outside the control of the undertaking.

14 P a g e Subject to the satisfaction of all relevant features for determining classification and to prior supervisory approval, supervisory authorities should consider arrangements predicated on unforeseen changes, which are outside the control of the undertaking and that would give rise to transactions or arrangements which are not deemed to be repayment or redemption, to be permitted as provided for in Article 71(2) of Commission Delegated Regulation 2015/ For the purposes of displaying the features in Article 71(1)(m) of Commission Delegated Regulation 2015/35 (waiver of cancellation of distributions), undertakings should ensure that: (a) any alternative coupon satisfaction mechanism is only included in the terms of the contractual arrangement governing the own-fund item where the mechanism substitutes any payment of the distribution in cash by providing for distributions to be settled through the issue of ordinary share capital; (b) any alternative coupon satisfaction mechanism achieves the same degree of loss absorbency as the cancellation of the distribution, and there is no decrease in own funds; (c) any distributions under an alternative coupon satisfaction mechanism occur as soon as the supervisory authority has exceptionally waived the cancellation of distributions using unissued ordinary share capital which has already been approved or authorised under national law or under the statutes of the undertaking; (d) any alternative coupon satisfaction mechanism does not allow the undertaking to use own shares held as a result of repurchase; (e) the terms of the contractual arrangement governing the own-fund item: (i) provide for the operation of any alternative coupon satisfaction mechanism to be subject to an exceptional waiver from the supervisory authority under Article 71(1)(m) of Commission Delegated Regulation 2015/35 on each occasion that the cancellation of the distribution is required; (ii) do not oblige the undertaking to operate any alternative coupon satisfaction mechanism For the purposes of displaying the features in Article 71(4) of

15 P a g e 15 Commission Delegated Regulation 2015/35 (full flexibility over distributions), undertakings should ensure that the terms of the contractual arrangement governing the own-fund item do not: (a) require distributions to be made on the item in the event of a distribution being made on any other own-fund item issued by the undertaking; (b) require the payment of distributions to be cancelled or prevented on any other own-fund item of the undertaking in the event that no distribution is made in respect of that item; (c) link the payment of distributions to any other event or transaction which has the same economic effect as points (a) or (b) For the purposes of displaying the features in Article 71(1)(e), (5), (6) and (8) of Commission Delegated Regulation 2015/35 (principal loss absorbency mechanisms), undertakings should ensure that: (a) the loss absorbency mechanism, including the trigger point, is clearly defined in the terms of the contractual arrangement governing the ownfund item and legally certain; (b) the loss absorbency mechanism can be effective at the point of the trigger, without delay and regardless of any requirement to notify holders of the item; (c) any write-down mechanism that does not allow for future write-up should provide that the amounts written down in accordance with 71(5)(a) of Commission Delegated Regulation 2015/35 cannot be restored; (d) any write-down mechanism that allows for a future write-up of the nominal or principal amount provides that: (i) write-up is permitted only after the undertaking has achieved compliance with the SCR; (ii) write-up is not activated by reference to own-fund items issued or increased in order to restore compliance with the SCR; (iii) write-up only occurs on the basis of profits which contribute to distributable items made subsequent to the restoration of compliance with the SCR in a manner that does not undermine the loss absorbency

16 P a g e 16 intended by Article 71(5) of Commission Delegated Regulation 2015/35; (e) any conversion mechanism provides that: (i) the basis on which the security relating to an own-fund item converts into ordinary share capital on significant non-compliance with the SCR is specified clearly in the terms of the contractual arrangement governing the security; (ii) the conversion terms do not fully compensate the nominal amount of a holding by allowing an uncapped conversion rate in the event of falls in the share price; (iii) in specifying a range within which the instruments will convert, the maximum number of shares the holder of the security may receive is certain at the time of issuance of the security, subject only to adjustments to reflect any share splits which occur subsequent to the issuance of those instruments; (iv) the conversion will result in a situation where losses are absorbed on a going-concern basis and the basic own-fund items that arise as a result of the conversion do not hinder recapitalisation; Where undertakings have own-fund items with conversion mechanisms, they should ensure that sufficient shares have already been authorised in accordance with national law or the statutes of the undertaking, so that shares are available for issuance when needed. Guideline 6 - Tier 1 features determining classification of items referred to in Article 69(a)(i), (ii), (iii), (v) and (b) of Commission Delegated Regulation 2015/35 immediate availability to absorb losses In the case of an item referred to in Article 69 (a)(i), (ii), (iii), (v) and (b) of Commission Delegated Regulation 2015/35, undertakings should only consider an item as immediately available to absorb losses, if the item is paid in and there are no conditions or contingences in respect of its ability to absorb losses. Guideline 7 - Tier 1 features determining classification of items referred to in Article 69(a)(i), (ii), (iii), (v) and (b) of Commission

17 P a g e 17 Delegated Regulation 2015/35 repayment or redemption at the option of the undertaking In the case of an item referred to in Article 69(a)(i), (ii), (iii), (v) and (b) of Commission Delegated Regulation 2015/35, for the purposes of displaying the features in Article 71(1)(h) and (i) of Commission Delegated Regulation 2015/35, undertakings should: (a) ensure that the terms of the legal or contractual arrangement governing the item, or any connected arrangement, do not provide for any incentive to redeem as set out in Guideline 19; (b) not create any expectation at issuance that the item will be redeemed or cancelled, nor should the legal or contractual terms governing the ownfund item contain any term which might give rise to such an expectation Undertakings should treat the item as repaid or redeemed from the date of notice to holders of the item or, if no notice is required, the date of supervisory approval, and exclude the item from own funds from that date In the case of an item referred to in Article 69(a)(iii), (v) and (b) of Commission Delegated Regulation 2015/35, for the purposes of displaying the features in Article 71(1)(j) of Commission Delegated Regulation 2015/35 (suspension of repayment or redemption), undertakings should ensure that the terms of the contractual arrangement governing the ownfund item include provisions for the suspension of the repayment or redemption of the item at any point, including when notice of repayment or redemption has been given other than following an exceptional waiver as described in Guideline 15, in the event of non-compliance with the SCR or if the repayment or redemption would result in such non-compliance For undertakings that have suspended repayment or redemption in accordance with Article 71(1)(j) of Commission Delegated Regulation 2015/35, the undertakings subsequent actions should form part of the recovery plan referred to in Article 138 of Solvency II. Guideline 8 - Contractual opportunities to redeem and appropriate margin In the case of a request for supervisory approval of a repayment or redemption between 5 and 10 years after the date of issuance in accordance with Article 71(1)(g) of Commission Delegated Regulation 2015/35,

18 P a g e 18 undertakings should demonstrate how the SCR would be exceeded by an appropriate margin following the repayment or redemption for the period of its medium-term capital management plan or, if longer, for the period between the date of redemption or repayment and 10 years after the date of issuance In assessing whether a margin is appropriate the supervisory authority should take into account: (a) the current and projected solvency position of the undertaking, taking into account the proposed repayment or redemption and any other proposed redemptions and repayments or issuances; (b) the undertaking s medium-term capital management plan and Own Risk and Solvency Assessment (hereinafter ORSA ); (c) the volatility of the undertaking s own funds and SCR having regard to the nature, scale and complexity of the risks inherent in the business of the undertaking; (d) the extent to which the undertaking has access to external sources of own funds and the impact of market conditions on the ability of undertakings to raise own funds. Section 2: Tier 2 items Guideline 9 - Tier 2 list of own-fund items In the case of items referred to in Article 72(a)(i), (ii) and (iv) of Commission Delegated Regulation 2015/35, undertakings should ensure that: (a) the time period between calling on shareholders or members to pay and the item becoming paid in, is not longer than three months. During this time, undertakings should consider the own funds to be called up but not paid in and should classify them as Tier 2 basic own funds provided that all other relevant criteria are met; (b) for items which are called up but not paid in, the shareholder or member that owns the item is still obliged to pay the outstanding amount in the event of the undertaking becoming insolvent or entering into winding-up procedures, and that the amount is available to absorb losses.

19 P a g e 19 Guideline 10 - Tier 2 features for determining classification In the case of items referred to in Article 72(a)(i) and (ii) of Commission Delegated Regulation 2015/35, for undertakings determining classification in accordance with Article 73(1)(b) of Commission Delegated Regulation 2015/35, paragraph 1.24 of Guideline 3 applies mutatis mutandis In the case of items referred to in Article 72(a)(iii), (iv) and (b) of Commission Delegated Regulation 2015/35, for undertakings determining classification in accordance with Article 73(1)(b) of Commission Delegated Regulation 2015/35, paragraph 1.27 of Guideline 5 applies mutatis mutandis For the purposes of displaying the features in Article 73(1)(c) of Commission Delegated Regulation 2015/35 (repayment or redemption before five years), undertakings should ensure that the contractual arrangement governing the own-fund item does not include a contractual term providing for a call option prior to five years from the date of issuance, including call options predicated on unforeseen changes that are outside the control of the undertaking Subject to the satisfaction of all relevant features for determining classification and to prior supervisory approval, supervisory authorities should consider arrangements predicated on unforeseen changes which are outside the control of the undertaking and that would give rise to transactions or arrangements which are not deemed to be repayment or redemption, to be permitted as provided for in Article 73(2) of Commission Delegated Regulation 2015/ For the purposes of displaying the features in Article 73(1)(e) of Commission Delegated Regulation 2015/35 (limited incentives to redeem), undertakings should only include in the contractual terms of the arrangement governing the own-fund item or any connected arrangement, limited incentives to redeem as set out in Guideline Undertakings should treat Tier 2 basic own-fund items as repaid or redeemed from the date of notice to holders of the item or, if no notice is required, the date of supervisory approval, and exclude the item from own funds from that date Undertakings should ensure that the terms of the contractual arrangement governing the own-fund item:

20 P a g e 20 (a) for the purposes of displaying the features in Article 73(1)(f) of Commission Delegated Regulation 2015/35 (suspension of repayment or redemption), include provisions for the suspension of the repayment or redemption of the item at any point, including when notice of repayment or redemption has been given or at the final maturity date of the instrument other than following an exceptional waiver as described in Guideline 15, in the event of non-compliance with the SCR or if the repayment or redemption would result in such non-compliance; (b) for the purposes of displaying the features in Article 73(1)(g) of Commission Delegated Regulation 2015/35 (deferral of distributions), include provisions for the deferral of distributions at any point in the event of non-compliance with the SCR or if the distribution would result in such non-compliance For undertakings that have suspended repayment or redemption in accordance with Article 73(1)(f) of Commission Delegated Regulation 2015/35, the undertakings subsequent actions should form part of the recovery plan referred to in Article 138 of Solvency II. Section 3: Tier 3 items Guideline 11 - Tier 3 features for determining classification For undertakings determining classification in accordance with Article 77(1)(b) of Commission Delegated Regulation 2015/35, paragraph 1.27 of Guideline 5 applies mutatis mutandis to Tier 3 basic own-fund items For the purposes of displaying the features in Article 77(1)(c) of Commission Delegated Regulation 2015/35 (repayment or redemption before five years), undertakings should ensure that the contractual arrangement governing the item does not include a term providing for a call option prior to the intended maturity date, including call options predicated on unforeseen changes that are outside the control of the undertaking Subject to the satisfaction of all relevant features for determining classification and to prior supervisory approval, supervisory authorities should consider arrangements predicated on unforeseen changes which are outside the control of the undertaking and that would give rise to transactions or arrangements which are not deemed to be repayment or redemption to be permitted, as provided for in Article 77(2) of Commission Delegated Regulation 2015/35.

21 P a g e For the purposes of displaying the features in Article 77(1)(e) of Commission Delegated Regulation 2015/35 (limited incentives to redeem), undertakings should only include in the contractual terms of the arrangement governing the own-fund item or any connected arrangement limited incentives to redeem as set out in Guideline Undertakings should treat Tier 3 basic own-fund items as repaid or redeemed from the date of notice to holders of the item or if no notice is required the date of supervisory approval, and exclude the item from own funds from that date In the case of an item referred to in Article 76(a)(i), (ii) and (b) of Commission Delegated Regulation 2015/35, undertakings should ensure that the terms of the contractual arrangement governing the own-fund item: (a) for the purposes of displaying the features in Article 77(1)(f) of Commission Delegated Regulation 2015/35, include provisions for the suspension of the repayment or redemption of the item at any point, including when notice of repayment or redemption has been given or at the final maturity date of the instrument other than following an exceptional waiver as described in Guideline 15, in the event of noncompliance with the SCR or if the repayment or redemption would result in such noncompliance. (b) for the purposes of displaying the features in Article 77(1)(g) of Commission Delegated Regulation 2015/35, include provisions for the deferral of distributions at any point in the event of non-compliance with the SCR or if the distribution would result in such non-compliance For undertakings that have suspended repayment or redemption in accordance with Article 77(1)(f) of Commission Delegated Regulation 2015/35, the undertakings subsequent actions should form part of the recovery plan referred to in Article 138 of Solvency II. Section 4: All basic own-fund items Guideline 12 - Repayment or redemption For the purposes of displaying the features in Article 71, Article 73 and Article 77 of Commission Delegated Regulation 2015/35, undertakings should consider repayment or redemption to include the repayment, redemption, repurchase or buyback of any own-fund item or any other

22 P a g e 22 arrangement that has the same economic effect. This includes share buybacks, tender operations, repurchase plans and repayment of the principal at maturity for dated items as well as repayment or redemption following the exercise of an issuer call option. This is without prejudice to the treatment of transactions that are not deemed to be repayment or redemption as described in Articles 71(2), 73(2) and 77(2) of Commission Delegated Regulation 2015/35. Guideline 13 - Encumbrances For the purposes of displaying the features in Articles 71(1)(o), 73(1)(i) and 77(1)(h) of Commission Delegated Regulation 2015/35, undertakings should: (a) assess whether an own-fund item is encumbered on the basis of the economic effect of the encumbrance and the nature of the item, applying the principle of substance over form; (b) consider encumbrances as including, but not limited to: (i) rights of set off; (ii) restrictions; (iii) charges or guarantees; (iv) holding of own-fund items of the undertaking; (v) the effect of a transaction or a group of connected transactions which have the same effect as any of points (i) to (iv); (vi) the effect of a transaction or a group of connected transactions which otherwise undermine an item s ability to meet the features determining classification as an own-fund item; (c) consider an encumbrance arising from a transaction or group of transactions which is equivalent to the holding of own shares as including the case where the undertaking holds its own Tier 1, Tier 2 or Tier 3 own fund items Where the encumbrance is equivalent to the holding of own shares,

23 P a g e 23 undertakings should reduce the reconciliation reserve by the amount of the encumbered item When determining the treatment of an own-fund item which is encumbered according to Article 71(1)(o), 73(1)(i) or 77(1)(h) of Commission Delegated Regulation 2015/35, but the item together with the encumbrance displays the features required for a lower tier, undertakings should: (a) identify whether the encumbered item is included in the lists of ownfund items for the lower tier in Articles 72 and 76 of Commission Delegated Regulation 2015/35; (b) classify an item included in the lists according to the appropriate features for determining classification in Articles 73 and 77 of Commission Delegated Regulation 2015/35; (c) seek approval from the supervisory authority to classify any items not included in the lists in accordance with Article 79 of Commission Delegated Regulation 2015/ If an item is encumbered to the extent that it no longer displays the features determining classification, undertakings should not classify the item as own funds. Guideline 14 - Call options predicated on unforeseen changes Undertakings should consider unforeseen changes that are outside their control, referred to in paragraphs 1.29, 1.30, 1.45, 1.46, 1.52 and 1.53, as including: (a) a change in law or regulation relevant to the undertaking s own-fund item in any jurisdiction or the interpretation of such law or regulation by any court or authority entitled to do so; (b) a change in the applicable tax treatment, regulatory classification or treatment by rating agencies of the own-fund item concerned. Guideline 15 - Exceptional waiver of suspension of repayment or redemption When applying for an exceptional waiver of the suspension of repayment or redemption according to Articles 71(1)(k)(i), 73(1)(k)(i), and

24 P a g e 24 77(1)(i)(i) of Commission Delegated Regulation 2015/35, undertakings should: (a) describe the proposed exchange or conversion and its effect on basic own funds, including how the exchange or conversion is provided for in the terms of the contractual arrangement governing the own-fund item; (b) demonstrate how the proposed exchange or conversion is or would be consistent with the recovery plan required by Article 138 of Solvency II; (c) seek prior supervisory approval of the transaction in accordance with Guideline 18. Guideline 16 - Exceptional waiver of cancellation or deferral of distributions When applying for an exceptional waiver of the cancellation or deferral of distributions according to Articles 71(1)(m) and 73(1)(h) of Commission Delegated Regulation 2015/35, undertakings should demonstrate how the distribution could be made without weakening their solvency position and how the MCR would be met An undertaking seeking an exceptional waiver in respect of settlement via an alternative coupon satisfaction mechanism should take into account the amount of ordinary share capital that would need to be issued, the extent to which restoring compliance with the SCR would require the raising of new own funds, and the likely impact of the share issuance for the purposes of the alternative coupon satisfaction mechanism on the undertaking s ability to raise those own funds, and should provide such information and analysis to the supervisory authority. Guideline 17 - Principal loss absorbency: conversion In the application of a principal loss absorbency mechanism in the form of a conversion feature according to Article 71(1)(e)(ii) of Commission Delegated Regulation 2015/35, the AMSB of the undertaking and other persons who effectively run the undertaking should be aware of the impact that a potential conversion of an instrument could have on the capital structure and ownership of the undertaking and should monitor this impact as part of the undertaking s system of governance. Guideline 18 - Supervisory approval of repayment and redemption

25 P a g e Where an undertaking seeks supervisory approval of repayment or redemption according to Articles 71(1)(h), 73(1)(d) and 77(1)(d) of Commission Delegated Regulation 2015/35 or a transaction not deemed to be a repayment or redemption according to Articles 71(2), 73(2) and 77(2) of Commission Delegated Regulation 2015/35, it should provide the supervisory authority with an assessment of the repayment or redemption taking into account: (a) both the current and short-to-medium term impact on the undertaking s overall solvency position and how the action is consistent with the undertaking s medium-term capital management plan and its ORSA; (b) the undertaking s capacity to raise additional own funds if needed, having regard to the wider economic conditions and its access to capital markets and other sources of additional own funds Where an undertaking is proposing a series of repayments or redemptions over a short period of time, it should inform the supervisory authority, which may consider the series of transactions as a whole rather than on an individual basis An undertaking should submit the request for supervisory approval three months prior to the earlier of: (a) the required contractual notice to holders of the item of repayment or redemption; (b) the proposed repayment or redemption date Supervisory authorities should ensure that the period of time within which it decides on the request for repayment or redemption does not exceed three months from the receipt of the request After receiving supervisory approval of the repayment or redemption the undertaking should: (a) consider that it is allowed, but not obliged, to exercise any call or other optional repayment or redemption under the terms of the contractual arrangement governing the own-fund item; (b) when excluding an item treated as repaid or redeemed with effect from the date of notice to holders of the item or if no notice is required the date

26 P a g e 26 of supervisory approval, reduce the relevant category of own funds and make no adjustment to or re-calculation of the reconciliation reserve; (c) continue to monitor its solvency position for any non-compliance or potential non-compliance with the SCR, which would trigger the suspension of repayment or redemption during the period leading up to the date of repayment or redemption; (d) not proceed with the repayment or redemption if it would lead to noncompliance with the SCR even if notice of repayment or redemption has been given to the holders of the items. Where repayment or redemption is suspended in these circumstances the undertaking may reinstate the item as available own funds and the supervisory approval for repayment or redemption is withdrawn. Guideline 19 - Incentives to redeem For the purposes of displaying the features in Articles 71(1)(i), 73(1)(e) and 77(1)(e) of Commission Delegated Regulation 2015/35, undertakings should consider incentives to redeem that are not limited as not permitted in any tier Undertakings should consider incentives to redeem that are not limited as including: (a) principal stock settlement combined with a call option, where principal stock settlement is a term in the contractual arrangements governing an own-fund item that requires the holder of the own-fund item to receive ordinary shares in the event that a call is not exercised; (b) mandatory conversion combined with a call option; (c) an increase in the principal amount which is applicable subsequent to the call date, combined with a call option; (d) any other provision or arrangement which might reasonably be regarded as providing an economic basis for the likely redemption of the item. Guideline 20 - Eligibility and limits applicable to Tiers 1, 2 and 3

27 P a g e For the purposes of calculating eligible own funds in accordance with Article 82 of Commission Delegated Regulation 2015/35 for the SCR, undertakings should: (a) consider all Tier 1 items set out in Article 69(a)(i),(ii,)(iv) and (vi) of Commission Delegated Regulation 2015/35 as eligible to cover the SCR; (b) consider those restricted Tier 1 items in excess of the 20% limit in Article 82(3) of Commission Delegated Regulation 2015/35 as available as Tier 2 basic own funds For the purposes of calculating eligible own funds in accordance with Article 82 of Commission Delegated Regulation 2015/35 for the MCR, undertakings should: (a) consider all Tier 1 items set out in Article 69(a)(i),(ii,)(iv) and (vi) of Commission Delegated Regulation 2015/35 as eligible to cover the MCR; (b) consider those restricted Tier 1 items in excess of the 20% limit in Article 82(3) as available as Tier 2 basic own funds; (c) consider that the effect of Article 82(2) of Commission Delegated Regulation 2015/35 is that Tier 2 basic own-funds items are eligible as long as they are less than 20% of the MCR. Section 5: Approval of the assessment and classification of Items not on the lists Guideline 21 - General features of the application When submitting a request for approval in accordance with Article 79 of Commission Delegated Regulation 2015/35 the undertaking should: (a) submit a written application for approval of each own-fund item; (b) submit the application in one of the official languages of the Member State in which the undertaking has its head office, or in a language that has been agreed with the supervisory authority; (c) approve the application at the AMSB, and submit documentary evidence of that approval; (d) provide an application in the form of a cover letter and supporting

28 P a g e 28 evidence. Guideline 22 - Cover letter The undertaking should submit a cover letter confirming that: (a) the undertaking believes any legal or contractual terms governing the own-fund item or any connected arrangement are unambiguous and clearly defined; (b) taking into account likely future developments as well as circumstances applying as at the date of the application, the undertaking considers that the basic own-fund item will comply, in terms of both legal form and economic substance, with the criteria in Articles 93 and 94 of Solvency II and the features determining classification set out in Articles 71, 73 and 77 of Commission Delegated Regulation 2015/35; (c) no facts have been omitted which if known by the supervisory authority could influence its decision regarding whether to approve the assessment and classification of the own-fund item The undertaking should also list in the cover letter other applications submitted by the undertaking or currently foreseen within the next six months for approval of any items listed in Article 308a(1) of Solvency II together with corresponding application dates The undertaking should ensure that the cover letter is signed by persons authorised to sign on behalf of the AMSB. Guideline 23 - Supporting evidence The undertaking should provide a description of how the criteria in Articles 93 and 94 of Solvency II and the features determining classification set out in Articles 71, 73 and 77 of Commission Delegated Regulation 2015/35 have been satisfied including how the item will contribute to the undertaking s existing capital structure, and how the item may enable the undertaking to meet its existing or future capital requirements The undertaking should provide a description of the basic own-fund item, sufficient to allow the supervisory authority to conclude on the loss absorbing capacity of the item including the contractual terms of the arrangement governing the own-fund item and the terms of any connected

29 P a g e 29 arrangement together with evidence that any counterparty, where relevant, has entered into the contract and any connected arrangement and evidence that the contract and any connected arrangement are legally binding and enforceable in all relevant jurisdictions. Guideline 24 - Procedures for supervisory authorities Supervisory authorities should establish procedures for the receipt and consideration of the applications and information provided by undertakings in accordance with Guidelines 21 to 23. Guideline 25 - Assessment of the application Supervisory authorities should confirm receipt of the application Supervisory authorities should consider an application complete if the application covers all the matters set out in Guidelines 21 to Supervisory authorities should confirm if the application is considered complete or not on a timely basis, and at least within 30 days of the date of receipt of the application Supervisory authorities should ensure that the period of time within which it decides on an application: (a) is reasonable; (b) does not exceed three months from the receipt of a complete application, unless there are exceptional circumstances which are communicated in writing to the undertakings on a timely basis Where there are exceptional circumstances, supervisory authorities should not take longer than six months from the receipt of a complete application to decide on an application If necessary to its assessment of the own-fund item, supervisory authorities should request further information from the undertakings, after they have considered an application to be complete. The supervisory authority should specify the additional information needed and the rationale for the request. The days between the date the supervisory authority requests such

30 P a g e 30 information and the date the supervisory authority receives such information should not be included within the periods of time stated in paragraphs 1.87 and The undertaking should inform the supervisory authority of any change to the details of its application Where an undertaking informs the supervisory authority of a change to its application, the supervisory authority should treat it as a new application unless: (a) the change is due to a request from the supervisory authority for further information; or (b) the supervisory authority is satisfied that the change does not significantly affect its assessment of the application Undertakings should be able to withdraw an application by notification in writing at any stage prior to the decision of the supervisory authority. If the undertaking subsequently resubmits the application or submits an updated application, the supervisory authority should treat this as a new application. Guideline 26 - Communication of the supervisory authorities decision When supervisory authorities have reached a decision on an application, they should communicate this in writing to the undertakings, on a timely basis Where the supervisory authority rejects the application, it should state the reasons on which the decision is based. Section 6: Transitional arrangements Guideline 27 - Transitional arrangements Undertakings should assess all basic own-fund items issued prior to 1 January 2016 or the date of entry into force of Commission Delegated Regulation 2015/35 referred to in Article 97 of Solvency II, whichever is earliest to determine whether they display the features determining

31 P a g e 31 classification under Articles 71 and 73 of Commission Delegated Regulation 2015/35. Where such items display the features determining classification as Tier 1 or Tier 2, undertakings should classify the item in that tier, even if the item cannot be used to meet the available solvency margin according to the laws, regulations and administrative provisions which are adopted pursuant to Directive 73/239/EEC, Directive 2002/13/EC, Directive 2002/83/EC and Directive 2005/68/EC Where items that are available as basic own funds in accordance with Article 308b(9) or (10) of Solvency II are exchanged or converted into another basic own-fund item after 1 January 2016 or the date of entry into force of Commission Delegated Regulation 2015/35 referred to in Article 97, whichever is earliest, undertakings should consider the item into which it is converted, or for which it is exchanged, as a new item which does not satisfy Article 308b(9)(a) or (10)(a) of Solvency II Supervisory authorities should consider items which are only ineligible due to the application of limits according to the laws, regulations and administrative provisions which are adopted pursuant to Directive 73/239/EEC, Directive 2002/13/EC, Directive 2002/83/EC and Directive 2005/68/EC, as satisfying the requirements in Article 308b(9)(b) and (10)(b) of Solvency II. Compliance and Reporting Rules This document contains Guidelines issued under Article 16 of the EIOPA Regulation. In accordance with Article 16(3) of the EIOPA Regulation, Competent Authorities and financial institutions shall make every effort to comply with guidelines and recommendations Competent authorities that comply or intend to comply with these Guidelines should incorporate them into their regulatory or supervisory framework in an appropriate manner Competent authorities shall confirm to EIOPA whether they comply or intend to comply with these Guidelines, with reasons for noncompliance, within two months after the issuance of the translated versions.

32 P a g e In the absence of a response by this deadline, competent authorities will be considered as non-compliant to the reporting and reported as such. Final Provision on Reviews The present Guidelines shall be subject to a review by EIOPA.

33 P a g e 33 Guidelines on look-through approach Introduction 1.1 According to Article 16 of Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (hereinafter EIOPA Regulation ) EIOPA is drafting Guidelines on the look-through approach. 1.2 The Guidelines relate to Article 104 and 105 of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (hereinafter Solvency II ). 1.3 These Guidelines are addressed to supervisory authorities under Solvency II. 1.4 These Guidelines aim at increasing consistency and convergence of professional practice in the application of the look-through approach for all types and sizes of solo undertakings using the standard formula across Member States. 1.5 These Guidelines aim at supporting undertakings in calculating their market risk related Solvency Capital Requirements under Solvency II. 1.6 Only cases that do not already qualify as risk-mitigation techniques are considered for potential application of the look-through approach. Where insurance or reinsurance undertakings use risk-mitigation techniques the assumption is that the underlying risks are understood and have already been looked-through. 1.7 If not defined in these Guidelines the terms have the meaning defined in the legal acts referred to in the introduction. 1.8 The Guidelines shall apply from 1 April Guideline 1 Money market funds 1.9 Undertakings should apply the look-through approach to money market funds.

34 P a g e 34 Guideline 2 Number of iterations 1.10 Undertakings should perform a sufficient number of iterations of the lookthrough approach, where appropriate (e.g. where a fund is invested in other funds) to capture all material risk. Guideline 3 Investments in real estate 1.11 Undertakings should cover the following investments in the property risk submodule: (a) land, buildings and immovable property rights; (b) property investment held for the own use of the undertaking For equity investments in a company exclusively engaged in facility management, real estate administration, real estate project development or similar activities, undertakings should apply the equity risk sub-module Where undertakings invest in real estate through collective investment undertakings or other investments packaged as funds, they should apply the look-through approach. Guideline 4 Data groupings 1.14 With reference to the groupings referred to in Article 84 (3) of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC (hereinafter Commission Delegated Regulation 2015/35 ), where assets covered in the spread and interest rate risk submodules are grouped according to duration bands, undertakings should ensure that the durations assigned to the bands are demonstrably prudent Where groupings across different credit quality steps are used, undertakings should ensure that the credit quality steps assigned to the groups are demonstrably prudent. Guideline 5 Data groupings and concentration risk 1.16 Where in accordance with Article 84 (3) of Commission Delegated Regulation 2015/35, any grouping is applied to the single name exposures of the underlying assets of collective funds for calculating the market risk concentration charge and it cannot be demonstrated that the groups into

35 P a g e 35 which the fund is split do not contain any of the same single name exposures, undertakings should assume that all assets for which the actual single name exposure is not identified belong to the same single name exposure The above paragraph is not applicable where exposure limits to single name exposures exists according to which the fund is managed Undertakings should aggregate exposures to groups referred to in paragraph 1.16 across all collective funds in which they are invested and reconcile the exposures to each group with the exposures of the known single names in their asset portfolio. Guideline 6 Indirect exposure to catastrophe risk 1.19 When calculating the Solvency Capital Requirement in respect of indirect exposures to catastrophe risks, such as investments in bonds for which repayment is contingent on the non-occurrence of a given catastrophe event, undertakings should take into account any credit and catastrophe exposures Catastrophe exposures should be treated in the relevant catastrophe submodules as though the underlying catastrophe exposure is directly held by the undertaking. Guideline 7 Catastrophe bonds issued by the undertaking 1.21 Where an undertaking issues catastrophe bonds which do not meet the requirements for risk-mitigation techniques set out in Articles 208 to 215 of Commission Delegated Regulation 2015/35, their treatment in the standard formula should not result in a capital relief in respect of the catastrophe features of these bonds Undertakings should treat these catastrophe bonds in the calculation of the Solvency Capital Requirement as though the repayment schedule was not contingent on the non-occurrence of a catastrophe event. Guideline 8 Longevity bonds 1.23 Where undertakings buy longevity bonds which do not meet the

36 P a g e 36 requirements for risk-mitigation techniques set out in Articles 208 to 215 of Commission Delegated Regulation 2015/35, they should calculate the capital charge in respect of mortality and spread risk as set out in paragraphs 1.24 to The capital charge of the standard formula mortality sub-module should be based on a notional portfolio of term assurance contracts: (a) paying out the given sum on death; (b) based on a representative sample of the reference population underlying the longevity index; (c) where the term of each term assurance contract is equal to the term of the coupon payment The notional portfolio should be constructed by undertakings in such a way that under best estimate assumptions the total benefit payments sum to the coupon payable The capital charge of the spread risk sub-module should be based on a bond or a loan with the same market value, duration and credit quality step as the longevity instrument Where undertakings sell longevity bonds they should calculate the capital charge in respect of the longevity sub-module as though the notional portfolio consists of endowment contracts, paying out the required sum at survival to a given age, which collectively produce cashflows equivalent to those of the bond Undertakings should not consider longevity bonds which do not meet the requirements for risk-mitigation techniques set out in Articles 208 to 215 of Commission Delegated Regulation 2015/35 to increase in value when the stresses in the life underwriting risk module are applied. Compliance and Reporting Rules 1.29 This document contains Guidelines issued under Article 16 of the EIOPA Regulation. In accordance with Article 16(3) of the EIOPA Regulation, Competent Authorities and financial institutions shall make every effort to comply with guidelines and recommendations.

37 P a g e Competent authorities that comply or intend to comply with these Guidelines should incorporate them into their regulatory or supervisory framework in an appropriate manner Competent authorities shall confirm to EIOPA whether they comply or intend to comply with these Guidelines, with reasons for non-compliance, within two months after the issuance of the translated versions In the absence of a response by this deadline, competent authorities will be considered as non-compliant to the reporting and reported as such. Final Provision on Reviews 1.33 The present Guidelines shall be subject to a review by EIOPA.

38 P a g e 38 Final Report Draft Regulatory and Implementing Technical Standards MiFID II/MiFIR Acronyms and definitions used ADT Average daily turnover ADNA Average daily notional amount AIFMD Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (AIFMs) Aii Alternative instrument identifier ANNA Association of national numbering agencies APA Approved publication arrangement AVT Average value of transactions BIPM Bureau International des Poids and Mesures CDS Credit default swap CESR Committee of European Securities Regulators CCP Central counterparty CFD Contract for difference CFI Classification of Financial Instruments CFTC U.S. Commodities Futures Trading Commission COFIA Classes of financial instrument approach Commission European Commission CP Consultation Paper (2014/1570) published by ESMA on 19 December 2015 and its addendum (2015/319) published on 18 February 2015

39 P a g e 39 CRD IV Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC CRR Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 CSD Central securities depositary CT Consolidated tape CTP Consolidated tape provider DEA Direct electronic access DMA Direct market access DP Discussion Paper (2014/548) published on 22 May 2014 EBA European Banking Authority EC European Commission ECB European Central Bank EEA European Economic Area EEOTC Economically equivalent OTC contracts EFP Exchange for physical EIOPA European Insurance and Occupational Pension Authority EMIR European Market Infrastructures Regulation Regulation (EU) 648/2012 of the European Parliament and Council on OTC derivatives, central counterparties and trade repositories also referred to as the Regulation EOD End of the day ESMA European Securities and Markets Authority

40 P a g e 40 ESMA Regulation Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC ETCs Echange traded commodities ETD Exchange-traded derivative ETF Exchange-traded fund ETNs Exchange traded notes EU European Union FC Financial counterparty FCD Financial Collateral Directive Directive 2002/47/EC of the European Parliament and the Council FESE Federation of European securities exchanges FIX Financial information exchange FIXML Financial information exchange markup language FpML Financial products markup language FRA Forward rate agreement FSB Financial Stability Board FX Foreign exchange HFT High frequency trading ISIN International Securities Identification Number: a 12-character alphanumerical code that uniquely identifies a security. It is defined by ISO code 6166 IBIA Instrument by instrument approach ICAAP Internal Capital Adequacy Assessment Process

41 P a g e 41 IOI Indication of interest IOSCO International Organisation of Securities Commissions IPO Initial public offering IRS Interest rate swap ISO International Organization for Standardization ITS Implementing Technical Standards LEI Legal entity identifier LIS Large in scale LOI letters of intent MAD Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse MAR Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation). MIC Market identifier code MiFID or MiFID I Markets in Financial Instruments Directive Directive 2004/39/EC of the European Parliament and the Council MiFID II Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU MiFIR Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments and amending Regulation (EU) No 648/2012 MO Market operator MS Member State MTF Multilateral trading facility MTN Medium-term note

42 P a g e 42 NCA National Competent Authority NDA Non-disclosure agreements NDF Non deliverable forward NTW Negotiated trade waiver OIS Overnight index swap OJ The Official Journal of the European Union OMF Order management facility OTC Over-the-counter OTF Organised trading facility PPRB Person with proprietary rights to a benchmark Q&A Questions and Answers RDS Reference data system RFQ Request for quote RM Regulated market RPO Recovery point objective RPW Reference price waiver RTO Recovery time objective RTS Regulatory Technical Standards SA Sponsored access SFI Structured finance instrument SFP Structured finance product SI Systematic internaliser

43 P a g e 43 SME Small and medium sized enterprise SME-GM Small and medium sized enterprise growth market SMS Standard market size SMSG Securities and Markets Stakeholder Group SSTI Size specific to the instrument SREP Supervisory Review and Evaluation Process STP Straight through processing TFEU Treaty on the Functioning of the European Union TR Trade repository TREM Transaction reporting exchange mechanism UPI Universal product identifier TV Trading venue UCITS Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009, on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) UTC Coordinated universal time XBRL Extensible business reporting language 1. EXECUTIVE SUMMARY Reasons for publication Directive 2014/65/EU and Regulation (EU) No 600/2014 (MiFID II and MiFIR) require ESMA to develop a multitude of Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS).

44 P a g e 44 The package of standards subject to this report was consulted upon in a Discussion Paper (DP) published in May 2014 and two Consultation Papers (CP) published in December 2014 and February With this report ESMA publishes its final proposals for a total of 28 draft technical standards. Contents This final report deals with technical standards from the areas of transparency (Standards 1-5), market microstructure (Standards 6-12), data publication and access (Standards 13-16), requirements applying on and to trading venues (Standards 17-19), commodity derivatives (Standards 20 and 21), market data reporting (Standards 22-25), posttrading (Standard 26) and investor protection (Standards 27 and 28). It describes the feedback received in the public consultations and the rationale behind ESMA s final proposals. Annexed to this final report are the draft technical standards themselves (Annex I) and the ESMA cost-benefit-analysis (Annex II). Next Steps The final report has been submitted to the European Commission on 28 September The Commission has three months to decide whether to endorse the technical standards. 2. TRANSPARENCY 2.1. Transparency requirements in respect of shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments Pre-trade transparency for trading venues Background/Mandate Article 4(6) of MiFIR 1. ESMA shall develop draft regulatory technical standards specifying the following:

45 P a g e 45 (a) the range of bid and offer prices or designated market-maker quotes, and the depth of trading interest at those prices, to be made public for each class of financial instrument concerned in accordance with Article 3(1), taking into account the necessary calibration for different types of trading systems as referred to in Article 3(2); (b) most relevant market in terms of liquidity of a financial instrument in accordance with paragraph 1(a); (c) specific characteristics of a negotiated transaction in relation to the different ways the member or participant of a trading venue can execute such a transaction; (d) negotiated transactions that do not contribute to price formation which avail of the waiver provided for under paragraph 1(b)(iii); (e) the size of orders that are large in scale and the type and the minimum size of orders held in an order management facility of a trading venue pending disclosure for which pre-trade disclosure may be waived under paragraph 1 for each class of financial instrument concerned; I. Pre-trade information to be made public by type of trading system 1. MiFID II provides for two types of trading venues for shares, depositary receipts, exchange traded funds (ETFs), certificates and other similar financial instruments: regulated markets and multilateral trading facilities (MTFs). Under current MiFID within each of those two categories of trading venues, different types of trading systems may be operated in order to bring together buying and selling trading interests, such as quote driven systems, continuous auction order book systems and periodic auction systems. 2. ESMA, consistently with current MiFID, is of the view that the type of trading system should be the starting point for determining the appropriate level of pre-trade transparency which must be made public. In that regard Article 3(2) of MiFIR requires that the transparency requirements referred to in paragraph 1 shall be calibrated for different types of trading systems including order-book, quote-driven, hybrid and periodic auction trading systems.

46 P a g e 46 As a consequence and in order to ensure uniform applicable conditions between trading venues, the same pre-trade transparency requirements, calibrated according to the type of trading system operated, should apply equally to regulated markets and MTFs. 3. MiFIR empowers ESMA to calibrate the proper pre-trade transparency regime by defining the range of bid and offer prices or designated marketmaker quotes, and the depth of trading interest at those prices, to be made public for each class of financial instrument concerned. 4. In the CP and based on the assumption that equity-like products are traded principally through the same trading systems as shares, ESMA proposed to calibrate the content of the pre-trade transparency requirements based on an amended version of Table 1 in Annex II of Implementing Regulation (EC) No 1287/2006 (which only applies to shares admitted to trading on a regulated market) regardless of the type of equity financial instrument traded. Furthermore, ESMA proposed to include in the table a definition of request for quote (RFQ) systems together with the pre-trade transparency requirements applicable to those systems. Analysis following feedback from stakeholders 5. The majority of responses supported the definition of RFQ systems and the corresponding pre-trade transparency requirements. Some respondents, which in principle agreed with the proposal, suggested that RFQ systems should not be permitted to bring together buying and selling interest for equities. Instead, they suggested that this trading system should be limited to equity-like instruments. The main concern was that RFQ systems for equities will have similar levels of transparency to systems operating under the pre-trade transparency waivers, but will not be regulated as such. 6. ESMA is of the view that RFQ systems will be subject to a prescribed level of pre-trade transparency under the draft RTS, as other trading systems were under Table 1 of Annex II of Implementing Regulation (EC) No 1287/2006 and will not be able to waive pre-trade transparency like systems operating under waiver programmes.

47 P a g e There was broad support for the pre-trade transparency requirements proposed for RFQ systems, albeit some respondents suggested that publishing quotes should not be part of the definition of the trading system; instead it should be part of the transparency requirements. ESMA agrees with the comments and has modified the definition of RFQ systems accordingly in Table 1 of Annex I of the draft RTS. 8. Some respondents were of the opinion that the proposed requirements would have a detrimental effect on the quality and quantity of the quotes provided on RFQ systems, and instead proposed a range of amendments to the pre-trade transparency requirements to make the requirement workable (i.e. publishing the average bids and offers and a volume band, and giving the system operator a window period to collect the quotes before making them available). ESMA is of the view that the proposed pre-trade transaprency requirements for RFQ systems should be sufficiently flexible to allow for differences between trading protocols, and to maintain the actual level of liquidity. 9. A number of respondents did not agree with the definition of hybrid systems due to the lack of clarity about the type of systems that would be caught under this category. Given the constant evolution of markets, and consequently of trading systems, ESMA proposes to retain the hybrid systems definition so as to have a category for trading systems that may develop in the future. Proposal 10. ESMA, in line with the CP, proposes to retain the amendment to the current Table 1 in Annex II of Implementing Regulation (EC) No 1287/2006 for the purpose of establishing the content of pre-trade information that trading venues shall make public depending on the type of trading system operated, extending the requirements to actionable indication of interests (IOIs) which are, according to Article 2(1)(33) of MiFIR, messages between members or participants of a trading venues containing all the necessary information to agree to a trade. 11. ESMA also proposes to retain the definition of RFQ systems as presented in the CP with one caveat, publishing quotes will be part of the requirements instead of part of the definition.

48 P a g e 48 Additionally, and in order to provide further flexibility and to avoid that members or participants who are providing their quotes to the requester first are put at a disadvantage, the final draft RTS allows for the publication of all submitted quotes in response to a RFQ at the same time, i.e. once all quotes have been provided and the moment they become executable, whereas in the CP ESMA proposed that those systems should disclose all executable bids and offers the moment they are received. II. Most relevant market in terms of liquidity 12. Under MiFIR, systems operating a trading methodology where orders are matched on the basis of a price derived from another system (the socalled reference price) can operate under a pre-trade transparency waiver provided that certain conditions are met. Firstly, the reference price must be widely published and regarded by market participants as a reliable reference price. Secondly, the set of eligible prices for matching orders within the systems operated by the trading venue is limited to the mid-point within the current bid and offer price or where not available, the opening or the closing price of the relevant session. Finally, the reference price can only be sourced from the trading venue where that financial instrument was first admitted to trading or the most relevant market in terms of liquidity. 13. MiFIR empowers ESMA to draft regulatory technical standards specifying the most relevant market in terms of liquidity for the purpose of the reference price waiver. In the CP, ESMA noted that the concept of the most relevant market in terms of liquidity is also relevant in the context of the obligation of investment firms to report transactions under Article 26 MiFIR. However, in the CP, ESMA emphasised the different purposes of the most relevant market in terms of liquidity for transaction reporting and for pretrade transparency and proposed to adopt two different definitions. In the CP, ESMA proposed that the most relevant market in terms of liquidity for a financial instrument should be the trading venue with the highest level of liquidity for that financial instrument measured by the total value of transactions executed by the trading venue during the relevant calendar year.

49 P a g e 49 ESMA also proposed, in order to strike an appropriate compromise between accuracy and operational costs, that the determination of the most relevant market in terms of liquidity would occur on an annual basis. Analysis following feedback from stakeholders 14. While the majority of respondents were in favour of having a methodology to determine the most relevant market in terms of liquidity based on the trading venue with the highest turnover, some respondents stated that the most relevant market in terms of liquidity should only be sourced from systems that provide continuous trading, excluding auctions and RFQ systems. It was also suggested that the calculation of turnover should include transactions executed under a pre-trade transparency waiver, especially transactions executed under an order management facility. With respect to the frequency, all respondents agreed with determining the most relevant market in terms of liquidity on an annual basis. 15. Finally, a few respondents expressed concerns about how to determine the most relevant market when ETFs are dually listed in different currencies. ESMA appreciates that there might be merit in treating ETFs listed in several currencies as different financial instruments as they may have different liquidity profiles. However, the mandate of ESMA is limited here to defining the most relevant market in terms of liquidity and does not include the definition of what constitute a financial instrument. Proposal 16. ESMA proposes that the most relevant market in terms of liquidity for a share, depositary receipt, ETF, certificate and other similar financial instrument should be the trading venue with the highest turnover for that share, depositary receipt, ETF, certificate or other similar financial instrument and regardless of the trading system (e.g. continuous trading order book, RFQ systems, etc.) under which the trading venue operates. The calculations shall take into account all relevant trading sessions (i.e. continuous and auction trading) and shall exclude reference price and negotiated transactions as well as pre-trade LIS transactions (i.e. a

50 P a g e 50 transaction executed on the basis of at least one order that has benefitted from a large in scale waiver and where the transaction s size is above the applicable large in scale threshold). III. Negotiated transactions 17. A negotiated transaction is a transaction involving one or more members or participants of a trading venue who negotiate privately the terms of the transaction which is then reported under the rules of the trading venue. For example, two members or participants bilaterally agree the price and volume of a trade before transmitting it to the trading venue. In some circumstances, the trade could not be executed under the systems operated by the trading venue (e.g. a consolidated limit order book) because of special conditions or requirements attached to the trade (e.g. portfolio trades or contingent transactions like delta-neutral equity hedges of a derivative) or because the transaction does not constitute liquidity addressable by market participants other than the counterparties negotiating the transaction (e.g. a give-up or give-in). The trading venue to which the negotiated transaction is reported remains responsible for ensuring that the negotiated transaction meets the relevant conditions for the negotiated trade and all other applicable requirements. 18. MiFIR allows, under certain circumstances, pre-trade transparency obligations to be waived for systems that formalise negotiated transactions. In particular Article 4(1) of MiFIR specifies that: Article 4, MiFIR 1. Competent authorities shall be able to waive the obligation for market operators and investment firms operating a trading venue to make public the information referred to in Article 3(1) for: [ ] (b) systems that formalise negotiated transactions which are: (i) made within the current volume weighted spread reflected on the order book or the quotes of the market makers of the trading venue operating that system, subject to the conditions set out in Article 5; (ii) in an illiquid share, depositary receipt, ETF, certificate or other similar financial instrument that does not fall within the meaning of a liquid market and are dealt within a percentage of a suitable reference price,

51 P a g e 51 being a percentage and a reference price set in advance by the system operator; or (iii) subject to conditions other than the current market price of that financial instrument; 19. Under MiFIR, negotiated transactions are subject to some restrictions on admissible execution prices depending on the type of the transaction and the characteristics of the financial instrument being traded. 20. Negotiated transactions which are subject to conditions other than the current market price can be executed at any price where otherwise permitted by the rules of the trading venue. 21. Negotiated transactions which are subject to the current market price must instead comply with price conditions depending on whether or not there is a liquid market for the instrument being traded: i. for liquid financial instruments, negotiated transactions must be executed within the spread - negotiated transactions falling under this limb are subject to the double volume cap mechanism as described in the relevant section of this document. ii. for illiquid financial instruments, negotiated transactions can be executed at any price falling within a certain percentage of a suitable reference price, provided both the reference price and the percentage are set in advance by the system operator. In ESMA s view, this implies that operators of trading venues should set the reference price and the percentage in an objective and clear manner having regard to the nature of the market in the financial instrument and its overarching obligation to maintain fair and orderly trading. 22. With respect to negotiated transactions, MiFIR empowers ESMA to draft RTS specifying (i) the characteristics of a negotiated transaction in relation to the different ways the member or participant of a trading venue can execute such a transaction and (ii) the negotiated transactions that do not contribute to price formation which avail the waiver provided for under Article 4(1)(b)(iii) of MiFIR. Analysis following feedback from stakeholders

52 P a g e In the CP, ESMA clarified that negotiated transactions shall be executed under the rules of a trading venue and negotiated privately by members or participants of a trading venue and that negotiated trades shall not be restricted to transactions between members or participants dealing on own account but may involve a client or clients of the member or participants. For that reason, and consistently with the existing framework for negotiated transactions under the Implementing Regulation (EC) No 1287/2006, ESMA proposed that a member or participant of a trading venue can execute such a negotiated transaction by undertaking one of the following tasks: i. dealing on own account with another member or participant who acts for the account of a client; ii. dealing with another member or participant, where both are executing orders on own account; iii. acting for the account of both the buyer and seller; iv. acting for the account of the buyer, where another member or participant acts for the account of the seller; and v. trading for own account against a client order. 24. Respondents to the CP were in support of maintaining the current approach (i.e. the approach adopted under Article 19 of the Implementing Regulation (EC) No 1287/2006) with regard to the different ways a member or participant of a trading venue can execute a negotiated transaction. However, a number of respondents suggested including circumstances where an investment firm is dealing on own account with another member or participant on behalf of a client, and not just for the account of a client. ESMA agrees that this is a possible characteristic of a negotiated transaction and, in order to take this concern into account, has replaced the expression acting for the account of a client with acting on behalf of a client, which should encompass all possible circumstances. 25.With regard to the negotiated transactions that do not contribute to price formation, in the CP, ESMA proposed to include a transaction that:

53 P a g e 53 i. is executed in reference to a price that is calculated over multiple time instances according to a given benchmark, such as volume-weighted average price or time-weighted average price; ii. is part of a portfolio trade that involves the execution of 10 or more financial instruments from the same client and at the same time and the components of the trade are meant to be executed only as a single lot; iii. is a give-up or a give-in; iv. is contingent on a derivative contract having the same underlying and where all the components of the trade are meant to be executed only as a single lot; or v. is contingent on technical characteristics of the transaction which are unrelated to the current market valuation of that financial instrument. 26. A large number of respondents opposed having an exhaustive list of negotiated transactions as the evolution of market practices may result in new types of transactions which need to be accommodated by the negotiated trade waiver. ESMA acknowledges the need to cater for future market developments and has added a final item in the list to provide sufficient flexibility to include new types of transactions that may develop in the future whilst providing legal clarity and a harmonized regulatory framework. 27. Furthermore, some respondents suggested that the list of transactions under Article 2 (transactions not contributing to the price discovery process for the purpose of the trading obligation for shares) and Article 6 (negotiated transactions subject to conditions other than the current market price) of the draft RTS should be closely aligned where possible on the basis that there is no reason to exclude transactions outside the scope of Article 23 of MiFIR from the possibility of being traded under the rules of a trading venue, and thereby subjecting them to more control and surveillance, through the negotiated trade waiver. 28. Most respondents were in favour of the inclusion of nonstandard/special settlement trades to the list of transactions that do not contribute to the price formation process. However, after careful consideration, ESMA remains unconvinced that the arguments brought forward during the consultation constitute sufficient

54 P a g e 54 legitimate reasons to consider those transactions as not contributing to the price formation process. ESMA is also concerned about the potential risk of circumvention such an inclusion would represent and, hence, has decided not to add those types of transactions to its list. 29. Lastly, during the consultation, it was brought to ESMA attention that other types of transactions should benefit from the negotiated trade waiver and be excluded from the trading obligation: i. transactions carried out by a CCP or trading venue as part of its default management processes, including liquidations of securities held originally as margin or transactions in instruments to close out the positions of defaulting members; and ii. transactions carried out under the rules of a trading venue, CCP or Central securities depositary (CSD) to effect buy-in of unsettled transactions. 30. ESMA recognises that there is some merit in including those types of transactions to the list of transactions not contributing to the price discovery process since they are usually taking place in emergency situations that may require to have access to all possible trading channels and to trade in a non-transparent manner. For this reasons, ESMA has decided to add those specific transactions to the lists of: i. transactions not contributing to the price discovery process as specified for the purposes of the trading obligation; and, ii. negotiated transactions subject to conditions other than the current market price. Proposal 31. ESMA proposes to amend the specific characteristics of a negotiated transaction in relation to the different ways a member or participant of a trading venue can execute such transaction in order to include instances when an investment firm is dealing on behalf of a client.

55 P a g e With regard to the types of negotiated transactions that do not contribute to the price formation process, ESMA proposes an exhaustive list to have a clear regulatory framework, with the last item providing some flexibility to include types of trades that may appear in the future. The proposed list includes a transaction that: i. is executed in reference to a price that is calculated over multiple time instances according to a given benchmark, including transactions executed by reference to a volume-weighted average price or a time-weighted average price; ii. is part of a portfolio trade; iii. is contingent on the purchase, sale, creation or redemption of a derivative contract or other financial instrument where all the components of the trade are meant to be executed only as a single lot such as exchanges for related positions; iv. is executed by a management company as defined in Article 2(1)(b) of Directive 2009/65/EC or an alternative investment fund manager as defined in Article 4(1)(b) of Directive 2011/61/EU of the European Parliament and of the Council which transfers the beneficial ownership of financial instruments from one collective investment undertaking to another and where no investment firm is a party to the transaction; v. is a give-up or a give-in transaction; vi. has as its purpose the transferring of financial instruments as collateral in bilateral transactions or in the context of central counterparty (CCP) margin or collateral requirements or as part of the default management process of a CCP; vii. results in the delivery of financial instruments in the context of the exercise of convertible bonds, options, covered warrants or other similar financial derivative; viii. is a securities financing transaction; ix. is carried out under the rules or procedures of a trading venue, a CCP or a central securities depository to effect buy-in of unsettled transactions in accordance with Regulation (EU) No 909/2014;

56 P a g e 56 x. any other transaction equivalent to those described in points (a) to (i) and which is contingent on technical characteristics which are unrelated to the current market valuation of the financial instrument traded. IV. Order management facility waiver 33. The order management facility waiver refers to functionalities operated by trading venues where certain orders are exempted from pre-trade transparency pending their disclosure to the market (i.e. subject to being released to an order book prior execution). In absence of more specific requirements under MiFID I, CAs and ESMA have elaborated opinions aimed at ensuring supervisory convergence on the set of functionalities deemed to be compliant with the waiver. In accordance with those opinions, contingent orders such as reserve or iceberg orders and stop orders are currently considered orders held on an order management facility compliant with MiFID I. 34. MiFIR empowers ESMA to draft RTS specifying the type and minimum size of orders held in an order management facility. Analysis following feedback from stakeholders 35. The vast majority of respondents agreed with ESMA s definition of the key characteristics of orders held in an order management facility, and with the minimum sizes proposed. Proposal 36. ESMA proposes to retain the proposed definition of the relevant characteristics of orders held in an order management facility and not to restrict it to reserve and stop orders. With regard to the minimum size, ESMA maintains the proposal set in the CP that for all orders held in an order management facility, including stop orders, the minimum size should be, at the point of entry of the order, the minimum tradable quantity established by the trading venue. For reserve orders, the minimum size should be, at the point of entry and following any amendment, not smaller than EUR 10,000. V. Large in scale waiver

57 P a g e Under MiFID I, orders that are large in scale (LIS) can benefit from a waiver from pre-trade transparency. The waiver is designed to protect large orders from adverse market impact and to avoid abrupt price movements that can cause market distortions. MiFIR recognises that mandatory public display of large orders can increase execution costs to the detriment of market liquidity and endinvestors. 38. MiFIR empowers ESMA to draft RTS to specify the size of orders that are LIS compared with normal market size for each class of shares, depositary receipts, ETFs, certificates and other similar financial instruments. 39. In the CP ESMA proposed to adopt for all equity and equity-like financial instruments an approach using the average daily turnover (ADT) as a proxy for liquidity and market impact and allowing, for each financial instrument, the calibration of orders which may be considered LIS compared to the normal market size on this basis. Shares and depositary receipts Analysis following feedback from stakeholders 40. With respect to shares and depositary receipts, ESMA maintained in the CP the proposal made in the DP published in May 2014 and proposed to use for both shares and depositary receipts the following ADT classes and corresponding thresholds: Table 1: Shares and depositary receipts orders large in scale compared with normal market size (as proposed in the CP)

58 P a g e In line with the responses received to the May 2014 DP1, responses to the CP were split reasonably evenly between those supporting the ESMA proposal and those advocating a revision of the proposal. 42. The first group of respondents agreed that the ADT remains a valid measure which has worked in the past, is easy to calculate and well understood by market participants. They pointed out that, since building upon the existing regime, the proposal was also easy to implement for market participants who have already in place appropriate systems and procedures. 43. The second group of responses reiterated the arguments put forward in the responses to the DP against the use of the ADT which is viewed as a too simplistic measure of liquidity and market impact and proposed using different measures to substitute or to complement the ADT, such as the average value of transactions (AVT) or the depth of the order book. Some respondents also noted that the proposed yearly calculation fails to take into consideration the erratic variation of liquidity. 44. In concordance with the CP proposal, ESMA appreciates that approaches different from the proposed one based on the ADT are possible. However, it remains convinced that any approach has different pros and cons and that, for instance, the approaches based on order book data would be significantly more complex to use in practice. In ESMA s views, while the ADT may not provide the best metric on which to establish the LIS threshold in all circumstances, it is a reliable metric positively correlated with liquidity which, from an operational perspective, can be collected and processed in a relatively simple way.

59 P a g e 59 Therefore, ESMA considers that the rationale provided in the CP supporting the use of ADT is still valid and has decided to maintain its initial proposal to use ADT as a proxy. 45. Similarly to the responses received to the DP, respondents expressed concerns about the proposed thresholds for each class of ADT and in particular for less liquid shares (which often are shares issued by small and medium enterprises). In their views, the proposed thresholds would fail to capture a sufficient proportion of the orders as LIS and would entail very high trading costs in particular for the smallest ADT class (according to some responses, transaction costs might reach up to 200 bps for the class below EUR 100,000). ESMA appreciates those concerns and agrees that it is important that LIS thresholds are appropriate and in particular for less liquid shares such as SME shares. ESMA notes that, in the CP s proposal, the greater level of granularity and the new ADT categories (and related thresholds) which have been added to the current MiFID I regime partially addressed those concerns. It is worth noting in this respect that under MiFID I the threshold for the shares with an ADT lower than EUR 100,000 (and up to EUR 500,000 EUR) is EUR 50,000 whereas under the proposed regime it was set at EUR 30, However, ESMA appreciates that there is some merit in introducing further granularity into the system in order to better take into consideration the less liquid shares such as SME shares. Therefore, in its final table, ESMA has added a new ADT category for shares with an ADT of less than EUR 50,000 with a corresponding threshold of EUR 15,000. The thresholds for deferred publication have also been modified on that basis. 47. Finally, some respondents asked for further clarification with respect to the transactions that should be taken into consideration for the ADT calculations, supporting a broad approach in this respect, i.e. the inclusion of lit, dark and OTC transactions.

60 P a g e 60 ESMA confirms that the ADT calculations should include all transactions executed in the relevant financial instrument, regardless whether they are traded on- or off-venue. Proposal 48. In respect of shares and depositary receipts, ESMA reiterates its proposal to use the ADT as the relevant metric to establish orders that are large in scale. However, the table presented in the CP has been slightly amended and a new ADT category for shares with an ADT below EUR 50,000 has been added. Table 2: Shares and depositary receipts orders large in scale compared with normal market size (as proposed in the final draft RTS) 49. ESMA also proposes to maintain the current recalibration frequency where the ADT of each financial instrument is determined on an annual basis. ETFs 50. The large in scale regime for ETFs proposed in the CP was similar to the one for shares and depositary receipts in that the LIS thresholds would increase with the ADT of the financial instrument. However, following feedback received to the DP, ESMA also sought views in the CP on an alternative option under which a single large in scale threshold (EUR 1,000,000) would apply to all ETFs regardless of their liquidity or the liquidity of their underlying.

61 P a g e 61 Analysis following feedback from stakeholders 51. Similarly to the feedback received on the post-trade deferrals, respondents rejected almost unanimously an LIS regime based on ADT and agreed with the alternative option to adopt a single large in scale threshold for ETFs that will apply across the board. In line with the comments on the DP received in May 2014, respondents stressed the unsuitability of the ADT as a measure of liquidity and market impact for ETFs, arguing for instance that ADT would not capture the actual liquidity of ETFs where the creation/redemption mechanism inherent to ETFs allows liquidity providers to access additional, nondisplayed liquidity. They also noted that an ADT-based approach could result in having two ETFs with the same underlying assets being treated differently. 52. With respect to the threshold to be set, the vast majority of respondents supported the EUR 1,000,000 threshold proposed by ESMA in the CP which is thus maintained as the final proposal. 53. It is worth noting that some respondents recommended ESMA to differentiate between ETFs for which the creation/redemption process occurs just after the closing auction and those for which the creation/redemption process occurs at least 3 hours after the closing auction (e.g. ETFs which have an underlying trading in a different time zone - e.g. European ETF on Malaysian stock). However, ESMA believes that such a differentiation would bring too much complexity into the system and thus maintains its proposal to adopt a single threshold for all ETFs. Proposal 54. ESMA proposes to establish a single EUR 1,000,000 LIS threshold for all ETFs regardless of their underlying or their liquidity. Certificates Analysis following feedback from stakeholders 55. Certificates are defined by MiFIR as transferable securities which are negotiable on the capital market and which, in case of repayment of

62 P a g e 62 investment by the issuers, are ranked above shares but below unsecured bond instruments and other similar financial instruments. ESMA identified two types of financial instruments traded in the Union that would be considered certificates under the above definition: Spanish Participationes Preferentes and German Genusscheine. 56. For the DP, ESMA collected data on the trading of those instruments and proposed two possible scenarios based on a different classification of the ADT but did not advance any proposal for LIS thresholds. Based on feedback to the DP, ESMA proposed in the CP to establish a very simple regime for LIS orders for certificates with only two ADT classes and LIS thresholds. As for the other instruments, ESMA proposed to determine the ADT of each instrument on an annual basis. 57. ESMA received limited feedback on certificates, probably related to the fact that those financial instruments are available in very few jurisdictions. Some respondents highlighted that where a certificate is economically equivalent to a share issued from the same issuer, the calibration of the classes and the LIS thresholds should follow those applicable to shares. On the contrary, where the certificate is a distinct instrument (i.e. with different payoffs from the shares issued by the same issuer), then the LIS threshold should be calibrated based on its own liquidity features. 58. During the consultation, ESMA also received feedback suggesting including additional instruments in this category and in particular Rabobank-certificates. As stated in the advice to the Commission with respect to liquidity thresholds for equity instruments, ESMA believes that those instruments should indeed fall into the certificate category. Proposal 59. ESMA remains of the view that certificates have different payoffs from shares and are hence separate financial instruments which ought to be subject to a different transparency regime.

63 P a g e 63 ESMA has decided to maintain the table presented in the CP and which is reproduced below. Table 3: Certificates orders large in scale compared with normal market size Stubs Analysis following feedback from stakeholders 60. A stub usually refers to the reminder of an order (i.e. a limit order that is not immediately executed under prevailing market conditions) that was LIS at the time it was submitted to a trading venue and that was partially executed. Following partial execution, the order may fall below the relevant LIS threshold. In such circumstances it is not clear whether the LIS waiver continues to apply to the stub and, hence, whether the order has to be made transparent if and when remaining on the order book. 61. In the DP, ESMA evaluated the pros and cons of requiring stubs to meet the relevant LIS threshold following partial execution to continue to be eligible to the LIS waiver. On the one hand, ESMA considered that allowing stubs to remain protected under the LIS waiver would result in a more consistent treatment of the whole order, greater protection for large orders and greater incentive to execute transaction on order books and ultimately in better quality of execution. On the other hand, requiring stubs to be made transparent when falling below the relevant threshold was considered as conducive to greater transparency and consistent with an approach where similar sized orders are, ceteris paribus, subject to equivalent transparency requirements. As a compromise, ESMA s proposal in the DP was to require stubs to be made transparent only when, following partial execution, the size of the stub would fall below 75% of the relevant LIS threshold.

64 P a g e Overall, respondents to the DP did not support ESMA s proposal to make stub orders transparent when falling below a certain level below the LIS threshold and supported an approach where stubs would remain protected under the LIS waiver. The main reasons were that the proposed approach would hinder investors ability to execute large orders through order books by revealing sensitive information to the market and would be too complex and difficult to implement and, hence, would be disproportionate to the marginal benefits. 63. ESMA therefore proposed in the CP to clarify that LIS orders may remain protected under the LIS waiver regime even when, following partial execution, they fall below the relevant LIS threshold provided that the price or other relevant conditions for execution are not amended following execution. 64. The majority of the respondents agreed with the new proposal. A few respondents were in favour of having stubs transparent. However, ESMA remains of the view that subjecting stubs to transparency is difficult to implement and the costs of such an approach would be disproportionate to the benefits. Proposal 65. ESMA has therefore retained the approach proposed in the CP Pre-trade transparency for investment firms in respect of equity an equity-like financial instruments Background/Mandate Article 14(7) of MiFIR. In order to ensure the efficient valuation of shares, depositary receipts, ETFs, certificates and other similar financial instruments and maximise the possibility of investment firms to obtain the best deal for their clients, ESMA shall develop draft regulatory technical standards to specify further the arrangements for the publication of a firm quote as referred to in paragraph 1, the determination of whether prices reflect prevailing market conditions as referred to in paragraph 3, and of the standard market size as referred to in paragraphs 2 and 4. I. Arrangements for the publication of a firm quote

65 P a g e SIs are required to publish firm quotes in respect of equity and equitylike instruments traded on a trading venue for which there is a liquid market, when dealing below standard market size (SMS). MiFIR already specifies or delegates through implementing measures various aspects of the obligation to make those quotes public. Those aspects include, among other things, the means by which a quote is made public such as the facilities of any regulated market that has admitted the financial instrument to trading, an approved publication arrangement (APA) or through proprietary arrangements. Analysis following feedback from stakeholders 67. The vast majority of respondents agreed with ESMA s proposal to require SIs to adopt arrangements for the publication which ensure that the information is sufficiently reliable and free of errors, that the information is capable of being consolidated with other similar data from other sources and that it is made available to market participants on a nondiscriminatory basis. Additionally, there was broad support for requiring SIs to make public the time quotes are entered or updated, supporting the two objectives of this provision: i. A timestamp assigned by the SI might help to ensure its quotes are firm and reliable by improving the audit chain of the publication to the benefit of market participants. It aims at avoiding potential disputes that may arise when a quote is changed close to the time a client order is entered and when, due to this change the client order fails to match the new systematic internaliser's quote. The risk is particularly serious when SIs use a website (which is allowed as a proprietary arrangement according to Article 17(3)a of MiFIR) as the publication of quotes may suffer from the website page slowing down and displaying outdated quotes. ii. Moreover, the inclusion of the timestamp in the pre-trade information published by the SI is a key information for the client to better analyse expost the quality of prices quoted by SIs, and in particular to assess with accuracy the responsiveness of the SI and the validity periods of quotes.

66 P a g e 66 Without a timestamp assigned by the SI itself, market participants would need to rely on the information potentially provided by data vendors, the timestamps of which would be less accurate, especially when quotes are published through a website as pointed out by some respondents to the question on access to the quotes of SIs. Proposal 68. Given the broad support from the respondents, ESMA is maintaining the proposal to adopt arrangements for the publication which ensure that the information is sufficiently reliable and free of errors, that the information is capable of being consolidated with other similar data from other sources and that it is made available to market participants on a nondiscriminatory basis. Moreover, SIs will be required to timestamp their quotes. II. Quotes reflecting prevailing market conditions 69. Under Article 14(3) of MiFIR the prices published by SIs in accordance with Article 14(1) of MiFIR must reflect the prevailing market conditions for each financial instrument for which the investment firm is a SI. However, Article 15(2) of MiFIR permits SIs in justified cases to execute orders at a better price than those quoted at the time of reception of the order, provided that this price falls within a public range close to market conditions. Analysis following feedback from stakeholders 70. Most respondents agreed to maintain the existing definition of prevailing market condition of Article 24 of the Implementing Regulation (EC) No 1287/2006, according to which a quote or quotes reflect prevailing market conditions when they are close in price to comparable quotes for the same share on other trading venues. However, some respondents expressed concerns that SIs are not required to meet tick size requirements, which can create regulatory arbitrage. ESMA notes that although it appreciates the concern, it has no empowerment under Level 1 to mitigate this risk. 71. Other comments received by ESMA considered that the definition was too vague and thus subject to diverging interpretations.

67 P a g e 67 ESMA appreciates the concern and shares the view that a more specific provision will provide more legal certainty and facilitate harmonised application across the Union. To this end, ESMA has slightly modified its original proposal so as to to provide further clarity by specifying the benchmark (most relevant market) and other elements of the comparability (time and the size elements) rather than simply referring to other trading venues. Proposal 72. ESMA has slightly amended the definition proposed in the CP. Under this revised provision, a price reflects prevailing market conditions if it is close in price to quotes of equivalent sizes for the same financial instrument on the most relevant market in terms of liquidity for that financial instrument at the time of publication. III. Standard market size 73. A key aspect of the SI regime is the concept of the SMS. MiFIR requires SIs to compy with pre-trade transparency requirements when dealing in sizes up to the SMS and to make public quotes - a firm bid and a firm offer for sizes of at least 10% of the SMS for the share, depositary receipt, ETF or certificate for which they are SIs. 74. Article 14(4) of MiFIR requires shares, depositary receipts, ETFs and certificates to be grouped together in classes on the basis of the arithmetic average value of the orders executed in the market for that financial instrument. The SMS must be of a size representative of the arithmetic average value of the orders executed in the market for the financial instruments included in each class. Analysis following feedback from stakeholders 75. On the basis of the responses to the DP and with the objective of maintaining and enhancing transparency, ESMA proposed in the CP to establish equivalent classes by AVT for financial instruments with an AVT larger than 20,000.

68 P a g e 68 The SMS for the class with an AVT between 0 and 20,000 would be 10,000, the SMS for the next class ( 20,000-40,000) would be 30,000 and so forth. ESMA also favoured a recalculation of the AVT for each financial instrument on an annual basis. In other words, ESMA proposed to amend the SMS under current MiFID I and to group the two smallest classes into a single class for shares with an AVT between zero and 20,000 and set a SMS of 10, To recall, this corresponded to the second of the three option presented by ESMA in its DP, which were; i. Option 1: maintain the existing classes while lowering the SMS for the smallest class by AVT from 7,500 to 5,000; ii. Option 2: group the two smallest classes into a single class for shares with an AVT between zero and 20,000 and set an SMS of 10,000; or iii. Option 3: maintain the current classes and SMSs for each class as under Table 3 of Annex II of the Implementing Regulation (EC) No 1287/2006 (status quo option). 77. A slight majority of respondents disagreed with the ESMA proposal. However, within those respondents, half of them advocated for lower SMS whereas the other half was on the contrary in favour of a more stringent regime. The arguments put forward included the following: i. Those supporting lower SMSs stressed that, as showed in the DP, around 95% of all trades have a volume of up to EUR 10,000. The introduction of a class with an AVT of up to EUR 20,000 and an SMS of EUR 10,000 as proposed by ESMA would hence result in almost every trade falling below the SMS. Whilst this would lead to increased transparency this must be, in the respondents view, weighed against the protection of SIs against unreasonable risks.

69 P a g e 69 For them, the right equilibrium cannot be achieved if nearly all trades are below the SMS. In this regard, ESMA would like to stress that, as already highlighted in the DP, it is vital to further reinforce the objective of increased transparency for SIs through well-targeted implementing measures. However, ESMA is unconvinced that the reduction in the average size of transaction necessarily reflects greater market risk for SIs. ii. Those supporting higher SMS thresholds stressed in particular that it is crucial to avoid creating significantly less rigorous transparency regime for SIs compared to the one generally enforced by trading venues in respect to market makers. Some suggested an alignment of the quantitative thresholds between SIs (SMS thresholds) and trading venues (LIS threshold). In their view, the methodology for the calculation should be changed, with ADT also applied to the SI instead of AVT. For them, the weakness of the AVT approach is simply that as liquidity increases for a specific share, the average size of transaction usually tends to decrease, resulting in lower SMS threshold for that share above which one can trade in the dark, which is completely counter-intuitive. ESMA notes that MiFIR defines how the SMS should be calculated for shares and equity-like instruments and that that size shall reflect the average size of transaction for each class of financial instruments. 78. More generally, ESMA appreciates the concern raised by certain respondents with regard to the unintended consequences that a significant misalignment of the respective transparency regimes for trading venues and SIs could have. Respondents noted in this respect that SIs do not truly contribute to price formation. Due to the volume caps that will apply to dark trading on trading venues and to the trading obligation for shares, SIs might become an increasingly attractive option for accommodating current trading activity.

70 P a g e 70 In order to address such a development, which would go against the Level 1 framework objective to foster transparency, a key point for regulators and policymakers should be to ensure the bilateral nature of SI activity. 79. According to those respondents, some recitals in MiFID II/MiFIR may be used by market participants to argue that riskless counterparty trading can be undertaken by SIs, thus providing an alternative home for current OTC broker crossing business. Such a development, combined with the relatively light transparency regime applied to SIs (especially when compared to functionally equivalent market makers on multilateral trading venues) together with their new ability to provide price improvement under MIFID II, would effectively see the re-introduction of an organised trading facility (OTF) category within the equity space. This is because, if ultimately allowed for the SI, riskless principal trading would de facto enable the matching of two client orders by interposing the SI own account between them for a fraction of time, i.e. taking very limited market/counterparty risk. 80. ESMA believes that this would indeed go against the political, technical and legal agreement underpinning the Level 1 text. It is worth noting that ESMA has acknowledged this is an issue and raised it in its December 2014 Technical Advice to the Commission but ESMA cannot provide further clarity in the final draft RTS as it has no relevant empowerment to do so. Proposal 81. After careful consideration, ESMA has decided to maintain the proposal presented in the CP which represents the best possible compromise between those requesting more stringent thresholds and those advocating for a more accommodating regime for SIs. The proposal is summarised in the table below.

71 P a g e 71 Table 4: Standard market size 82. In order to ensure consistent implementation in the Union, the methodology to be used for calculating the average value of transactions has been specified in the final draft RTS which also clarifies that calculations should take into consideration all transactions executed in the Union whether executed on or outside a trading venue excluding reference price, negotiated and post-trade LIS transactions. In that context, post-trade LIS transactions are transactions for which deferred publication is permitted or, in other words, the smallest threshold for each ADT class set out in table 4 of Annex II of the final draft RTS Trading obligation for shares I. Transaction in shares that do not contribute to the price discovery process Background/Mandate Article 23(3) of MiFIR 3. ESMA shall develop draft regulatory technical standards to specify the particular characteristics of those transactions in shares that do not contribute to the price discovery process as referred to in paragraph 1, taking into consideration cases such as: (a) non-addressable liquidity transactions; or (b) where the exchange of such financial instruments is determined by factors other than the current market valuation of the financial instrument. ESMA shall submit those draft regulatory technical standards to the Commission by 3 July Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

72 P a g e In the DP, ESMA consulted on the interpretation of the first exemption from the trading obligation (non-systematic, ad-hoc, irregular and infrequent), on the content of the proposed list of types of transactions not contributing to the price formation process and on whether the list should be exhaustive as well as whether benchmark and portfolio trades should be considered as transactions determined by factors other than the current market valuation of the financial instrument. 84. Many respondents generally agreed with ESMA that the exemption under Article 23 of MiFIR requires greater clarity as its application raises a number of relevant issues for a variety of market participants including investment firms and institutional investors such as asset managers. 85. In the DP, amongst the topics that would benefit from further clarity, the following issues were mentioned: (i) the link with the concept of frequent and substantial activity under the SI definition, (ii) the treatment of riskless principal transactions and (iii) the arrangements to allocate shares to final investors or other specific types of transactions or distribution procedures. 86. Lastly, most of respondents disagreed with ESMA s proposal to establish an exhaustive list. However ESMA remains in favour of maintaining an exhaustive list since this will deliver a clearer and more harmonised regulatory framework in the Union. Analysis following feedback from stakeholders 87. In the CP, ESMA requested views on the proposed list of transactions not contributing to the price discovery process and, again, about its exhaustive character. A majority of respondents supported the proposal but some of them asked for clarifications or provided some drafting suggestions. 88. Responses received indicate that there are still certain areas apart from the ones highlighted in the DP where further guidance would be necessary.

73 P a g e 73 However, ESMA notes that this is mainly due to the limitation of the mandate to determine transactions not contributing to the price formation process. Various stakeholders requested more clarity about concepts that are out of the scope of the ESMA mandate. Nevertheless, should this be necessary, ESMA may consider developing further guidance in order to provide market stakeholders with more clarity and assist CAs in their supervisory duties. 89. In order to ensure consistent interpretations, ESMA has also adopted an approach where the list of transactions not contributing to the price discovery process has been established based on the attributes of the transactions rather than using market terminology (e.g. benchmark transaction). However, a number of respondents repeatedly requested clarification about whether exchange for physical transactions (EFPs) or exchanges for depositary receipts were included, about inter funds transfers or the treatment of non-segregated collateral. ESMA has taken into consideration those comments and has proposed an improved drafting accordingly. 90. A significant number of respondents pointed out the need for alignment of the different type of transactions that do not contribute to the price formation process under the different mandates such as the technical advice to the Commission on the definition of SI, the negotiated trade waiver and the trading obligation for shares. ESMA acknowledges the need for consistency and has aligned the definitions to the extent possible. 91. Views were divided about the exhaustive character of the list of transactions. The supportive respondents expressed a concern of a possible circumvention whereas those in favour of a non-exhaustive list claimed for the need of adding new types of transactions which might appear depending on market evolution.

74 P a g e 74 It should be noted that they did not provide any concrete example in this regard though. Taking into account all these elements and the ultimate regulatory goal, ESMA maintains the current proposal with some amendments aiming at mitigating the concerns and providing additional clarity. 92. In particular, it is worth noting that, as opposed to the list of negotiated transactions that do not contribute to the price formation, ESMA has decided here not to addan item that provides a certain degree of flexibility and facilitate the inclusion of the potential new types of transactions that may develop in the future. With regard to the trading obligation, the exemption is indeed automatic and does not require any prior authorisation whereas in the case of negotiated transactions the granting of the exemption is subject to a assessment process through ESMA. There is hence some benefit in implementing the trading obligation exemption more narrowly. Proposal 93. With regard to the particular characteristics of those transactions in shares that do not contribute to the price discovery process, ESMA proposes the following types of transactions to be included: i. the transaction is executed by reference to a price that is calculated over multiple time instances according to a given benchmark, including transactions executed by reference to a volume-weighted average price or a time-weighted average price; ii. the transaction is part of a portfolio trade which includes five or more different shares; iii. the transaction is contingent on the purchase, sale, creation or redemption of a derivative contract or other financial instrument where all the components of the trade are to be executed only as a single lot such as exchanges for related positions; iv. the transaction is executed by a management company as defined in Article 2(1)(b) of Directive 2009/65/EC or an alternative investment fund manager as defined in Article 4(1)(b) of Directive 2011/61/EU which

75 P a g e 75 transfers the beneficial ownership of shares from one collective investment undertaking to another and where no investment firm is a party to the transaction; v. the transaction is a give-up or a give-in transaction; vi. the transaction has as its purpose the transferring of shares as collateral in bilateral transactions or in the context of CCP margin or collateral requirements or as part of the default management process of a CCP; vii. the transaction results in the delivery of shares in the context of the exercise of convertible bonds, options, covered warrants or other similar derivatives; viii. the transaction is a securities financing transaction; ix. the transaction is carried out under the rules or procedures of a trading venue, a CCP or a central securities depository to effect a buy-in of unsettled transactions in accordance with Regulation (EU) No 909/2014 of the European Parliament and of the Council Post-trade transparency for trading venues and investment firms Background/Mandate Article 7(2) of MiFIR 2. ESMA shall develop draft regulatory technical standards to specify the following in such a way as to enable the publication of information required under Article 64 of Directive 2014/65/EU: (a) the details of transactions that investment firms, including systematic internalisers and market operators and investment firms operating a trading venue shall make available to the public for each class of financial instrument concerned in accordance with Article 6(1), s published under Article 6(1) and Article 20, distinguishing between those determined by factors linked primarily to the valuation of the financial instruments and those determined by other factors; (b) the time limit that would be deemed in compliance with the obligation to publish as close to real time as possible including when trades are executed outside ordinary trading hours. (c) the conditions for authorising investment firms, including systematic internalisers and market operators and investment firms operating a trading venue to provide for deferred publication of the details of

76 P a g e 76 transactions for each class of financial instruments concerned in accordance with paragraph 1 of this Article and with Article 20(1); (d) the criteria to be applied when deciding the transactions for which, due to their size or the type, including liquidity profile of the share, depositary receipt, ETF, certificate or other similar financial instrument involved, deferred publication is allowed for each class of financial instrument concerned. Article 20(3), MiFIR 3. ESMA shall develop draft regulatory technical standards to specify the following: (a) identifiers for the different types of transactions published under this Article, distinguishing between those determined by factors linked primarily to the valuation of the financial instruments and those determined by other factors; (b) the application of the obligation under paragraph 1 to transactions involving the use of those financial instruments for collateral, lending or other purposes where the exchange of financial instruments is determined by factors other than the current market valuation of the financial instrument; (c) the party to a transaction that has to make the transaction public in accordance with paragraph 1 if both parties to the transaction are investment firms. 94. ESMA is required to draft RTS implementing the new post-trade transparency regime for equity and equity-like instruments. Those measures include the content and timing of the information to be made public, the identifiers for different types of transactions, the criteria and conditions for the deferred publication of transactions and, for OTC transactions, the application of post-trade transparency obligations in respect of transactions involving the use of equity and equity-like instruments for collateral, lending or other purposes where the exchange of financial instruments is determined by factors other than the current market valuation of the financial instrument. I. Content of the information to be made public

77 P a g e 77 Analysis following feedback from stakeholders 95. In the CP, ESMA was of the view that the content of the information currently required to be published for shares admitted to trading on a regulated market was still valid and applicable to all equity and equity-like instruments. The information that ESMA proposed to be made public in respect of transactions in shares, depositary receipts, ETFs, certificates and other similar financial instruments included the date and time of the transaction, the instrument identifier, the price and price notation, the quantity and the venue identifier. 96. Respondents were mostly in favour of maintaining the current regime for shares and to extending it to all equity and equity-like instruments. In the CP, many respondents reiterated their support to the Market Model Typology developed by a number of market participants, including trading venues, aiming at improving the standardisation and content of post-trade information in Europe. ESMA agrees that the Market Model Typology is a valuable initiative, and it has considered the various flags proposed in the context of the identifiers for on-venue and OTC transactions. However, ESMA has to develop a flag regime that meets the specific requirements of MiFIR. 97. A few respondents were worried that the information under MiFIR post-trade transparency may be inconsistent with EMIR requirements. Considering EMIR and MIFIR have quite a different scope of application, ESMA believes the risk of inconsistency between the two sets of obligations, especially for equities, is rather limited. 98. A larger number of respondents supported the addition of a trade identifier code which would help following the execution chain, some stressing that a trade identifier code would support the uniqueness of trade identification. ESMA is of the opinion that a unique trade identifier would be valuable information to be added to the information to be published post-trade.

78 P a g e 78 Additionally, respondents largely supported the inclusion of the date and time of publication among the required fields. 99. Finally, based on the consultation feedback, ESMA believes it is necessary to publish post-trade the venue of publication in order to identify the trading venue, APA or consolidated tape provider (CTP) publishing the transaction. Proposal 100. ESMA, in line with the CP, proposes to require investment firms and trading venues to publish the following information in respect of transactions executed by them or under their rules: i. Trading date and time; ii. Instrument identification code; iii. Unit price; iv. Price currency; v. Quantity; vi. Venue of execution; vii. OTC trading; viii. Publication date and time; ix. Venue of Publication; x. Transaction identification code In order to ensure that the information to be made available to the public for the purpose of post-trade transparency is operational and meaningful for the interested stakeholders, a common format for provision of such information needs to be defined. Additionally, due to the fact that trading venues which are subset of entities subject to post-trade transparency requirements are obliged at the same time to report financial instrument reference data as per RTS 23, and an overlap exists between the data to be provided under both

79 P a g e 79 requirements, alignment of the formats for relevant data has been considered reasonable and beneficial The formats to be applied for the post-trade reports are therefore consistent with the ISO 20022, which has been chosen as most suitable for the purpose of reference data reporting under MiFIR Art. 27. ISO is a standardisation methodology which sets out guidelines, principles and formats that should be followed in the development of a common formal notation to describe financial processes The alignment with the formats used for reference data (and thus, with ISO methodology) concerns only the way the information is represented, for example the same codes are used to represent the same values. It does not affect the data requirements themselves nor the means of their collection or publishing (for example, no specific technical format, like XML, is required for the publication of data). In practical terms, it means that the additional burden resulting from the alignment is limited to the transformation of the data so that they are represented in a standard way, thus it can be considered marginal. II. Identifiers 104. The main purpose of identifiers is to complement the information content of post-trade reports by disclosing the technical characteristics of a transaction or the particular circumstances under which a transaction has occurred (such as a transaction executed under a pre-trade transparency waiver or which is subject to conditions other than the current market price). Identifiers hence improve price formation in the market and support achieving and monitoring best execution Under current MiFID trading venues and investment firms are already required to make public additional information in the form of flags when a transaction is determined by factors other than the current market price, in the case of negotiated transactions and following any amendment of previously disclosed information.

80 P a g e 80 Analysis following feedback from stakeholders 106. In the CP, ESMA proposed a list of flags on the basis of the DP and the previous work done by the Committee of European Securities Regulators (CESR) in its technical advice to the Commission on post-trade transparency standards (CESR/10-882). ESMA suggested enhancing this list to take into consideration the new transparency requirements imposed by MiFID II and in particular the implementation of the volume cap mechanism under Article 5 of MiFIR and the trading obligation for shares under Article 23 of MiFIR ESMA received a large number of responses which were generally supportive of the greater granularity proposed by ESMA A number of respondents pointed out the possible inconsistency or overlap between G and T flags which both relate to non-price forming trades. ESMA appreciates that the distinction between the two flags was not sufficiently clear and needs to be further clarified. Confusion is in particular due to the fact that several provisions in the RTS relate to similar concepts: i. Transactions not contributing to the price discovery process and which are not covered by the trading obligation for investment firms as set out under Article 23; ii. Transactions where the exchange of financial instruments is determined by factors other than the current market valuation of the financial instrument and which are excluded from the post-trade reporting obligations when traded OTC (Article 20(3)(b) of MiFIR); and iii. Negotiated transactions which are subject to conditions other than the current market price (Article 4(1)(b)(iii) of MiFIR) Although the three lists above are referring to similar transactions, they do not cover the exact same range of transactions. Hence, in ESMA s view, it remains appropriate to affect a specific flag to each of those types of transactions.

81 P a g e 81 This should allow the market stakeholders to be adequately informed about the nature of a published transaction and should ensure accurate monitoring and supervision of the practical implementation of those provisions Other respondents were concerned that introducing an identifier for orders that are LIS for the purpose of the pre-trade transparency waiver under Article 4(1)(c) of MiFIR would expose them to the rest of the market (e.g. in case of partial execution) and discourage the execution of large orders through central order books. ESMA appreciates the concern raised and the flag on pre-trade LIS waiver has been deleted However, identifying non pre-trade transparent transactions remains necessary for ESMA s monitoring role (Article 52 of MiFIR) and for transparency calculations. Trading venues should therefore keep record of information about the transaction executed on their venue regardless of whether the information has been subject to a specific post-trade flagging or not There was some opposition to the inclusion of an algorithmic trading flag. Nevertheless, the need to include such identifier derives from Article 65(1)(h) of MiFID II where CTPs are required, where applicable, to collect and consolidate information about the fact that a computer algorithm was responsible for the investment firm decision and execution of the transaction. As consequence, ESMA maintains its proposal. Proposal 113. ESMA has reviewed the list of identifiers following responses to the CP and is proposing to require the following flags to be included in post-trade reports: i. Benchmark transactions; ii. Agency cross transactions;

82 P a g e 82 iii. Non-price forming transactions which are excluded from the post-trade reporting obligations when traded OTC; iv. Transaction not contributing to the price discovery process for the purposes of Article 23 of Regulation (EU) No 600/2014 and as set out in Article 2 v. Special dividend transactions; vi. Post-trade large in scale transactions; vii. Reference price transactions; viii. Negotiated transactions in liquid financial instruments; ix. Negotiated transactions in illiquid financial instruments; x. Negotiated transactions subject to conditions other than the current market price; xi. Algorithmic transactions; xii. Transactions above the SMS; xiii. Transactions in illiquid instruments; xiv. Transactions which have received price improvement; xv. Cancellations; xvi. Amendments; xvii. Duplicative trade reports With regard to flags, it should also be stressed that the flags to be used have been modified in order to comply with ISO standard (please see the section above on the content of the information to be made public). In practice, this means that the flags are now composed of 4 letters instead of one as initially proposed in the CP. III. Timing

83 P a g e MiFIR empowers ESMA to establish draft RTS on the time limits that would be in compliance with the obligation to publish the details of a transaction as close to real time as possible, including when a transaction is executed outside normal trading hours Under MiFID I, post-trade information relating to transactions taking place on trading venues and within normal trading hours must be reported as close to real time as possible and in any case within three minutes of the relevant transaction. When a transaction occurs under the rules of a trading venue but outside normal trading hours (e.g. a negotiated transaction executed outside the systems operated by the trading venue to bring together buying and selling trading interest) the publication requirement is deemed to be complied with when the transaction is made public before the opening of the next trading day of the trading venue on which the transaction takes place (e.g. a trade occurring late in the evening must be published before the beginning of the trading day the following day). For transactions executed outside a trading venue (including those executed under the systems of a SI) the time limits are set in respect of the trading day of the most relevant market in terms of liquidity or during the investment firm s normal trading hours In the CP, ESMA consulted on the definition of normal trading hours and on the maximum permissible delay of the publication of executed transactions. In line with the DP and with the previous CESR technical advice to the Commission on equity markets (CESR/10-208), ESMA proposed that, in order to improve the quality of post-trade information and the overall market transparency, the maximum permissible delay should be shortened to one minute after the relevant transaction for equity and equity-like instruments. Finally ESMA also consulted on whether different delays should be permissible depending on the type transaction. Analysis following feedback from stakeholders 118. Respondents expressed support for ESMA s proposal to consider that the market opening hours as published by the market operator should be considered as normal trading hours.

84 P a g e 84 However, a number of market participants had different views in respect of whether the ordinary hours shall include the opening and closing auctions which, in most markets and for most securities, set the start and the end of the trading day. ESMA is of the view that periodic auctions are systems that significantly contribute to the price discovery process (as market participants are able to execute larger than average transactions at a price which is generally considered reliable). For that reason, ESMA considers it important that normal trading hours for a trading venue include the phases during which an instrument is in a periodic auction in order to allow market participants to execute transactions with as much information set on recently executed transactions as possible In respect of the maximum permissible delay, ESMA received mixed views on the shortening from three minutes to one minute. Some participants expressed the view that the one minute delay is challenging for non-electronic transactions (for manual transactions or transaction made over the phone). A few respondents considered that one minute delay was still too long ESMA appreciates that a maximum of one minute delay may be challenging under the technical arrangements currently adopted by certain market participants. However, the aim of the MiFID review is to improve those arrangements and set more rigorous transparency requirement for the benefit of the quality of the price formation process Finally, some respondents considered that a longer delay should be envisaged for portfolio transactions. One respondent also believed that ETFs should be granted a longer delay based on the fact that trading of these instruments is largely manual. Nevertheless, ESMA is of the view that there is no reason to have different maximum permissible delays for different classes of equity-like instruments.

85 P a g e 85 Besides, ESMA believes that the drafting of Article 17 of the draft RTS (CP version) on transparency requirements in respect of shares, depositary receipts, exchange-traded funds, certificates already covered the specific case of post-trade transparency for portfolio transactions. Proposal 122. On the basis of the strong support to the proposed definition of normal trading hours, ESMA suggests to maintain this definition. In order to respond to the MiFID II objective to increase market transparency and without any strong case against its initial proposal, ESMA suggests maintaining its proposal to shorten to one minute the maximum permissible delay to publish transaction details. IV. Securities financing transactions and other transactions determined by factors other than the current market valuation of the financial instrument 123. Article 20(3)(b) of MiFIR empowers ESMA to develop draft RTS in respect of post-trade disclosure of OTC transactions involving the use of financial instruments for collateral, lending or other purposes where the exchange of financial instruments is determined by factors other than the current market valuation of the financial instrument ESMA notes that a similar empowerment exists under Article 28 of current MiFID. On the basis of that empowerment Article 5 of the Implementing Regulation (EC) No 1287/2006 does not consider transactions, for the purpose of the transparency regime, securities financing transaction, the exercise of options or of covered warrants and primary market transactions However, as mentioned above, ESMA notes that the empowerment under Article 20(3)(b) concerns OTC transactions only and that the level 1 text does not provide a similar empowerment for on-venue trades which, therefore, will have to comply with the general post-trade transparency obligations. Analysis following feedback from stakeholders 126. In the CP, ESMA consulted on whether specific flags for securities financing transactions and other types of transactions determined by

86 P a g e 86 factors other than the current market valuation of the financial instrument would be necessary. A significant number of respondents were of the view that securities financing transactions should not be considered as reportable transactions as the publication of those transactions would not contribute to the price discovery process while the administrative burden and costs for market parties would be substantial. ESMA also proposed to exclude from transparency obligations transfers of financial instruments as segregated collateral as they are non-price forming transactions. However, quite a number of respondents explained that there was no reason to restrict this exemption only to segregated collateral Finally, according to one respondent transactions executed by trading venues and CCPs pursuant to buy-in rules should be treated as non-price forming trades for the purpose of post trade transparency. As explained above, ESMA has decided to include those types of transactions to the list of transactions not contributing to the price discovery process as specified for the purposes of the trading obligation and to the list of negotiated transactions subject to conditions other than the current market price. While ESMA consider that there is merit in excluding those transactions from the trading obligation and, where traded on-venue, to allow them to be eligible to the negotiated trade waiver as per Article 4(1)(b)(iii) of MiFIR, ESMA remains unconvinced that those transactions should be exempted from post-trade transparency when traded OTC. On the contrary, ESMA believes that the same post-trade transparency regime should apply regardless of whether the buy-in transaction is executed on-venue (under the negotiated trade waiver) or outside the rules of a trading venue. Proposal 128. ESMA agrees that certain OTC non price forming transactions should not be considered as reportable trades for the purpose of the post-trade transparency regime.

87 P a g e 87 Consistently with current MiFID, ESMA proposes to establish a list of types of transactions determined by factors other than the current market valuation of the financial instrument to which Article 20 of MiFIR would not apply. The list includes: i. excluded transactions for the purpose of Article 26 of Regulation (EU) No 600/2014 as specified in RTS 22 on obligation to report transactions; ii. transactions executed by a management company as defined in Article 2(1)(b) of Directive 2009/65/EC or an alternative investment fund manager as defined in Article 4(1)(b) of Directive 2011/61/EU which transfers the beneficial ownership of financial instruments from one collective investment undertaking to another and where no investment firm is a party to the transaction; iii. give-ups and give-ins; and iv. transfers of financial instruments as collateral in bilateral transactions or in the context of a CCP margin and collateral requirements or as part of the default management process of a CCP. V. Large in scale thresholds shares and depositary receipts 129. Under current MiFID, as specified in the MiFID Implementing Regulation (Implementing Regulation (EC) No 1287/2006), LIS thresholds for deferred post-trade transparency are determined on the basis of the ADT of the share and the length of the deferral. The minimum qualifying size for an LIS transaction increases with the liquidity (using ADT as a proxy) of the share and the length of the deferral. Analysis following feedback from stakeholders 130. In the DP already, and consistently with the recalibration of the liquidity classes in the context of the pre-trade waiver for LIS orders, ESMA had proposed a new table with 8 liquidity classes and, for each class, three thresholds increasing with the length of the deferral (60 minutes, 120 minutes and end of day (EOD)) applying to both, shares and depositary receipts.

88 P a g e 88 The table proposed by ESMA in the CP is reproduced below for information purposes. Table 5: Post-trade LIS thresholds for shares and depositary receipts (as proposed in the CP) 131. Many respondents criticised that implementing this table would have a negative impact on liquidity, pricing, volatility of and investment in SME stocks, in particular. They also pointed out that the LIS threshold represents a much higher percentage of the ADT for transactions in less liquid sharesthan for transactions in more liquid ones. Respondents representing small issuers stressed that some stocks are so illiquid that an EOD deferral may turn out to be meaningless, market

89 P a g e 89 makers becoming cautious or ultimately stopping performing market making in highly illiquid stocks altogether. Respondents concluded that the ESMA proposal would not be aligned with the Capital Markets Union focus on promoting access of SMEs to capital markets Some respondents offered specific proposals to address this issue, including allowing more generous deferral periods for illiquid stocks (up to EOD +5), creating a specific class for highly illiquid stocks or linking the size of eligible trades to a percentage of ADT ESMA is aware of the goals of the Capital Markets Union and does not intend to make it more difficult capital market funding for SMEs. At the same time, ESMA also has to consider that a huge proportion, in terms of number of instruments, of shares traded on EU trading venues are concentrated in the lower liquidity bands of the table. MiFID II intends to introduce meaningful transparency for those shares and this objective would be challenged if deferrals of EOD + 5 were to be implemented Therefore, ESMA opted for a compromise solution whereby a new class for highly illiquid stock and depositary receipts (below EUR 50,000) is created with a lower LIS threshold and also grants an EOD + 1 deferral for the largest transactions in that new liquidity band ESMA clarified in the CP that an EOD means that market participants would have to publish the transaction (i) after the closing auction of the same trading day, if the transaction was concluded more than two hours away from the end of the trading day or (ii) before the start of the following trading day, if the transaction was concluded within the last two hours of the same trading day While a number of respondents were in favour of this solution, other respondents considered this as too onerous and ultimately as damaging liquidity, particularly in the already lower liquid bands.

90 P a g e 90 These respondents advocated maintaining the delays foreseen in the MiFID I Level 2 Implementing Regulation or at least allowing for a deferral until noon on the next trading day ESMA decided as a compromise to slightly amend its proposal and indeed allow for the largest transactions in each liquidity band to be published at noon local time on the following trading day at the latest. Proposal 138. In respect of shares, ESMA retains the proposal to increase the number of liquidity bands and, thus, to align pre-trade and post-trade regimes in this regard so as to simplify implementation for investment firms and trading venues However, in response to the feedback received to the CP, ESMA introduces a new liquidity band of below EUR 50,000 where large trades can be granted a delay of publication of EOD + 1. ESMA therefore proposes to establish the thresholds and corresponding delays as specified in the table below: Table 6: Deferred publication thresholds and delays for shares and depositary receipts (as included in the final draft RTS)

91 P a g e In detail, therefore the following regime would apply to shares and depositary receipts: i. Transactions eligible to a 60 or 120 minute delay in accordance with the above table have to be published respectively within 60 or 120 minutes after the transaction. ii. The largest transactions in each liquidity band (those eligible for an end of day publication) also have to be published as close to real as possible after the end of the closing auction if concluded earlier than 120 minutes before the end of the present trading day.

92 P a g e 92 If they are concluded within 120 minutes from the end of the trading day, they shall be published by local time of the next trading day at the latest. iii. The largest transactions (greater than EUR 25,000) in the liquidity band below EUR 50,000 ADT have to be published after the end of the closing auction of the following trading day, regardless of the time when they were executed during the present trading day. VI. Large in scale thresholds ETFs Analysis following feedback from stakeholders 141. In the CP, ESMA proposed two alternative options for establishing the LIS thresholds for ETFs The first option was based on using the ADT of the actual ETF for setting the LIS thresholds while applying the same set of liquidity bands for post-trade deferrals as those ESMA had proposed for pre-trade waivers The second option ESMA had published for consultation in reaction to feedback received to the DP was to establish a simple regime where the minimum LIS qualifying size for all ETFs, regardless of their liquidity, is set at EUR 5,000,000 and where the publication for any trade beyond that threshold should occur at the end of the trading day Respondents almost unanimously rejected the first option based on the ADT of the ETFs themselves arguing that the liquidity of an ETF depends on the liquidity of the underlying and that setting the thresholds based on the ADT of the ETFs themselves may install different thresholds for ETFs of identical liquidity and as a consequence may create incentives for an inefficient capital allocation The large majority of respondents preferred the creation of a simple and transparent regime where all ETFs are treated equally by either establishing a single monetary threshold triggering a uniform deferral for all or by imposing a two-step monetary threshold system where exceeding the first threshold triggers a shorter delay while exceeding the second threshold a longer one. A minority of respondents also favoured a simple regime but wanted to link the length of the deferral period to the point in time when the creation and redemption process of each specific ETF occurs.

93 P a g e A large group of respondents including a broad range of different market participants proposed a system where all transactions up to a size of EUR 10,000,000 would be made transparent in real-time, transactions of a size between EUR 10,000,000 and EUR 50,000,000 would benefit from a deferred publication of 60 minutes while transactions in a size exceeding EUR 50,000,000 would be published at the end of the trading day Taking into account the specificities of the ETF market and the importance of post-trade transparency, in particular, in a market environment where a large proportion of trading is conducted OTC, ESMA has decided to adopt the system as proposed by this group of respondents ESMA considers that an ambitious post-trade transparency regime for ETFs would contribute to creating a level-playing field between on-venue and OTC trading of ETFs in the Union, would stimulate competition and overall improve the price discovery system and the quality of execution for the end-investor. Proposal 149. ESMA therefore proposes the following regime: Table 7: Deferred publication thresholds and delays for ETFs (as included in the final draft RTS) VII. Large in scale thresholds Certificates Analysis following feedback from stakeholders 150. In the CP, ESMA proposed to establish two classes of liquidity: ADT above and below EUR with time deferrals of 120 minutes or EOD depending on the size of the transaction within each liquidity class. Few stakeholders commented on the proposal and there was no significant opposition to this proposal.

94 P a g e 94 ESMA clarifies that the authorisation of deferred publication is at the discretion of the CA. Proposal 151. ESMA proposes to establish two classes of liquidity, ADT above and below EUR with deferrals of 120 minutes till end of the trading day according to the following table. These LIS thresholds would also apply to other similar financial instruments. Table 8: Deferred publication thresholds and delays for certificates and other similar financial instruments (as included in the final draft RTS) 2.2. Transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives Liquidity and pre-trade and post-trade transparency for non-equity instruments I. Feedback to the CP and revised proposal applicable across all asset classes Background/Mandate Articles 9(5)(c), (d), and (e) of MiFIR 5. ESMA shall develop draft regulatory technical standards to specify the following: [ ] (c) the size of orders that are large in scale and the type and the minimum size of orders held in an order management facility pending disclosure for which pre-trade disclosure may be waived under paragraph 1 for each class of financial instrument concerned;

95 P a g e 95 (d) the size specific to the financial instrument referred to in paragraph 1(b) and the definition of re-quest-for-quote and voice trading systems for which pre-trade disclosure may be waived under paragraph 1; (e) the financial instruments or the classes of financial instruments for which there is not a liquid market where pre-trade disclosure may be waived under paragraph 1. Articles 11(4)(c) of MiFIR 4. ESMA shall develop draft regulatory technical standards to specify the following in such a way as to enable the publication of information required under Article 64 of Directive 2014/65/EU: [ ] (c) the conditions for authorising investment firms, including systematic internalisers, and market operators and investment firms operating a trading venue, to provide for deferred publication of the details of transactions for each class of financial instrument concerned in accordance with paragraph 1 of this Article and with Article 21(4); ESMA shall submit those draft regulatory technical standards to the Commission by 3 July Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/ This section summarises ESMA s proposal for the liquidity assessment of non-equity instruments and the setting of thresholds for waivers from pretrade transparency and deferrals from post-trade transparency presented in the December CP. It presents general feedback applicable across all asset classes received to the CP and describes the revised general approach set out in the draft RTS for the liquidity assessment, the thresholds for waivers from pre-trade transparency and the deferrals from post-trade transparency applicable to all non-equity instruments. Asset-class specific feedback, as well as, an explanation of the revised approach to reflect the specific market structure of the various asset classes are presented in sections A to K of this chapter. 2. MiFIR introduces transparency requirements for bonds, structured finance products, emission allowances and derivatives (including securitised derivatives) with powers for CAs under Article 9(1) of MiFIR to waive the obligation for market operators and investment firms operating a trading venue to make public pre-trade information for:

96 P a g e 96 i. orders that are large in scale compared with normal market size; ii. orders held in an order management facility of the trading venue pending disclosure; iii. actionable indications of interest in request-for-quote and voice trading systems that are above a size specific to the financial instrument, which would expose liquidity providers to undue risk and takes into account whether the relevant market participants are retail or wholesale investors; and iv. derivatives which are not subject to the trading obligation and other financial instruments for which there is not a liquid market. 3. Similarly, on the post-trade side CAs may, under Article 11(1) of MiFIR, authorise market operators and investment firms to provide for deferred publication in respect of transactions that are: i. large in scale compared with the normal market size for the financial instrument or for the class of financial instruments; ii. related to financial instruments or to the related class of financial instruments for which there is not a liquid market; and iii. above a size specific to that financial instrument or that class of financial instruments traded on a trading venue, which would expose liquidity providers to undue risk and takes into account whether the relevant market participants are retail or wholesale investors. Liquidity CP proposal 4. The concept of a liquid market for non-equity instruments is defined in Article 2(1)(17)(a) of MiFIR. On the basis of this definition and the mandates to define the classes of non-equity financial instruments for which a waiver/deferral may be granted because there is not a liquid market for them, ESMA is required to specify the non-equity financial instruments or classes of financial instruments for which there is not a liquid market.

97 P a g e In the CP ESMA proposed to use COFIA as the basis for determining the liquidity of all non-equity financial instruments. The proposed approach provided for the segmentation of non-equity financial instruments into specific sub-classes defined on the basis of a set of criteria (e.g. maturity, currency, underlying instrument, etc.) taking into account the specificities of the various asset classes. On this basis, sub-classes (and all the instruments belonging to those subclasses) were deemed to be liquid or illiquid on the basis of the liquidity criteria listed under Article 2(1)(17)(a) and as further described in the December CP. Any newly issued instrument would have been classified as liquid if it belonged to one of the pre-defined liquid classes and as illiquid otherwise. 6. The assessment of the different non-equity instruments was carried out on data samples from trade repositories and trading venues for securitised derivatives, derivatives and emission allowances and from transaction reporting data for bonds and structured finance products (SFPs). 7. Under the proposal in the CP, classes deemed to be liquid would have been established until the RTS was reviewed. Feedback from stakeholders 8. Overall, most respondents expressed strong concerns about the static nature of ESMA s approach and the level of the liquidity thresholds used to identify liquid classes. Most stakeholders recommended instead a methodology based on a periodic assessment of liquidity to reflect the episodic trading patterns of many non-equity instruments. 9. With regard to the liquidity thresholds, most stakeholders considered that ESMA had set the levels too low to adequately separate liquid classes from illiquid classes. There were also some concerns that not all liquidity criteria set out in Article 2(1)(17)(a) were applied (e.g. the presence of market makers was only considered for securitised derivatives).

98 P a g e 98 As a solution to address both those shortcoming, respondents recommended ESMA set more stringent liquidity thresholds. Derivatives 10. A number of concerns applicable only to the liquidity assessment for derivatives were raised. 11. Firstly, most responses expressed strong reservations about the data used for the liquidity assessments, in particular for those assessments based on data from trade repositories (TRs). Overall, stakeholders considered that the data collection period of three months was too short and recommended the use of a data sample covering at least one year. Respondents raised concerns about the quality of TR data in general, stressing that reporting and data quality is, to date, very low and that reported data is not granular enough. While respondents appreciated that ESMA had cleaned the data before performing the calculations the resulting dataset was not considered to be of sufficient quality for the purpose of the analysis. Regarding trading venues data which was used for ETDs, the general view was that it covered too few trading venues and that the sample size should be increased to cover both more EU trading venues as well as trading venues from third countries. 12. Secondly, stakeholders considered that the level of granularity for constructing the classes was insufficient to build homogeneous classes and recommended ESMA to further develop the taxonomy more in line with market practice. Some classes were considered too broad (e.g. the contract for difference (CFD) definition considered to include equity swaps), insufficiently precise, or not in line with market practice (e.g. spread bets for FX derivatives). This lack of granularity results, in the stakeholders view, in inconsistent classes which are, at times, too heterogeneous. Respondents recommended using a more granular COFIA, which takes into account more asset-class specific criteria (e.g underlying for single

99 P a g e 99 name credit default swaps (CDS) and options/futures on stocks) for the definition of classes, and equivalent liquidity thresholds where classes are broken down to an equivalent level of granularity. Furthermore, responses highlighted some missing classes (e.g. new categories of commodities that are financial instruments under the new MiFID II/MiFIR regime). 13. Thirdly, many respondents considered that the consequence of deficiencies in data quality and the lack of granularity resulted in significant misclassifications of illiquid classes as liquid and vice versa (although to a lower degree). 14. Finally, many respondents were concerned that the liquidity assessment did not distinguish between exchange traded derivatives (ETDs) and OTC derivatives which would result in market distortions. In particular, stakeholders were concerned that for some asset classes (e.g. equity derivatives) only data from trading venues had been taken into consideration and OTC trades not considered. 15. Further details pertinent to a specific derivative asset class are provided in the dedicated section of each asset class. Bonds and structured finance products 16. Overall, feedback on the proposal for bonds and structured finance instruments was split into two groups. While some supported the proposed COFIA, mainly from the buy-side and exchanges, many respondents, mainly from the sell-side, asked ESMA to reconsider using IBIA. It should also be noted that most respondents in favour of COFIA considered necessary to accompany this approach with a recalibration of the LIS and SSTI thresholds to address the problem of wrongly qualified bonds. Sections A and B of this chapter summarise in more detail the feedback for bonds and structured finance products. Securitised derivatives

100 P a g e Overall, responses supported ESMA s approach to declare all securitised derivatives as liquid. The feedback for securitised derivatives is summarised in section C. Emission allowances 18. ESMA received only very limited feedback for emission allowances. The feedback for emission allowances is summarised in section K. Proposal 19. ESMA proposes to use a revised and more granular COFIA as the basis for determining the liquidity of all classes of non-equity financial instruments. For bonds IBIA will be used. Derivatives and emission allowances 20. For derivatives and emission allowances, the changes ESMA has made are described in the following paragraphs. 21. A periodic (yearly) liquidity assessment has been introduced which will allow the regular reassessment of liquidity. In consequence, the draft RTS does not set out anymore the classes that have a liquid market or do not have a liquid market. The revised draft RTS provides instead for (1) a detailed taxonomy in the annex, including the segmentation criteria for defining the classes and their related granularity for the liquidity assessment (2) the quantitative liquidity criteria and related thresholds and/or the qualitative criteria to be used for the liquidity assessment. As suggested by respondents to the CP, the revised proposal provides for a greater level of granularity, which will result in more homogeneous classes.

101 P a g e 101 To address possible market distortions stemming from the inconsistent treatment of OTC derivatives compared to ETDs, ESMA categorises these instruments in the same class, where appropriate. 22. To appropriately reflect the very diverse characteristics of the various non-equity instruments, ESMA distinguishes in the draft RTS between three levels of granularity for classifying non-equity instruments (in order of increasing granularity): asset class, sub-asset class and sub-class. The liquidity assessment is carried out on the highest level of granularity. While this is in most cases the sub-class level, it has to be noted that not all non-equity instruments require the use of the highest level of granularity and in some cases granularity at the sub-asset class is sufficient (e.g. emission allowances) Table 9 provides an illustration of the various levels using the example of interest rate derivatives. Table 9: Example of the level of granularity applied interest rate derivatives 23. Annex III of the draft RTS specifies the segmentation criteria for constructing the various sub-asset classes and sub-classes and defines the level of granularity to be used for the liquidity assessment. 24. Concerning, the criteria against which to assess liquidity, ESMA maintained its approach to use the same assessment based on two liquidity criteria as in the CP, i.e. average daily notional amount and average daily number of trades. To better reflect the specific market structure of derivatives covered, ESMA introduces in some cases additional criteria (e.g. distinguishing between on-the-run and off-the-run status for credit derivatives).

102 P a g e Finally, ESMA increased the liquidity thresholds against which the liquidity of a sub-asset class or a sub-class will be assessed. To the extent possible, ESMA proposes the use of equivalent thresholds for equivalent sub-asset classes or sub-classes to avoid market distortions and to take into account that derivatives may have comparable economic terms but are transacted in different forms (e.g. EUA- emission allowance and CER-emission allowances). 26. ESMA considers that those changes, taken together, ensure a more accurate determination of the liquidity. It is expected that fewer instruments will be considered liquid due to the more granular definition of sub(-asset)classes and the increased liquidity thresholds. 27. Last but not least, ESMA provides for an alternative methodology with respect to the one described above for certain sub-asset classes and for the asset class of foreign exchange derivatives. Table 10 below provides a summary of the methodology applied to each sub-asset class. However, further details are provided in the dedicated section of each asset class (sections D to K). Last but not least, details on transitioning into the new regime are provided in section III of chapter Bonds and structured finance products 28. In light of the feedback ESMA suggests to apply IBIA for bonds. For SFPs ESMA has reviewed the proposal and suggests a two-step assessment based on two tests of the liquidity of these instruments which build on one another and will ensure that SFPs will be subject to an appropriate transparency regime should the overall market for these instruments become more liquid again. The proposal for bonds and structured finance products is summarised in sections A and B. Securitised derivatives

103 P a g e ESMA has maintained the main elements of its proposal for securitised derivatives. More details are presented in section C.

104 P a g e 104

105 P a g e 105 The Court of Justice declares that the Commission s US Safe Harbour Decision is invalid Whilst the Court of Justice alone has jurisdiction to declare an EU act invalid, where a claim is lodged with the national supervisory authorities they may, even where the Commission has adopted a decision finding that a third country affords an adequate level of protection of personal data, examine whether the transfer of a person s data to the third country complies with the requirements of the EU legislation on the protection of that data and, in the same way as the person concerned, bring the matter before the national courts, in order that the national courts make a reference for a preliminary ruling for the purpose of examination of that decision s validity. The Data Protection Directive provides that the transfer of personal data to a third country may, in principle, take place only if that third country ensures an adequate level of protection of the data. The directive also provides that the Commission may find that a third country ensures an adequate level of protection by reason of its domestic law or its international commitments. Finally, the directive provides that each Member State is to designate one or more public authorities responsible for monitoring the application within its territory of the national provisions adopted on the basis of the directive ( national supervisory authorities ). Maximillian Schrems, an Austrian citizen, has been a Facebook user since As is the case with other subscribers residing in the EU, some or all of the data provided by Mr Schrems to Facebook is transferred from Facebook s Irish subsidiary to servers located in the United States, where it is processed. Mr Schrems lodged a complaint with the Irish supervisory authority (the Data Protection Commissioner), taking the view that, in the light of the revelations made in 2013 by Edward Snowden concerning the activities of the United States intelligence services (in particular the National Security Agency ( the NSA )), the law and practice of the United States do not offer sufficient protection against surveillance by the public authorities of the data transferred to that country. The Irish authority rejected the complaint, on the ground, in particular, that in a decision of 26 July 2000 the Commission considered that, under

106 P a g e 106 the safe harbour scheme, the United States ensures an adequate level of protection of the personal data transferred (the Safe Harbour Decision). The High Court of Ireland, before which the case has been brought, wishes to ascertain whether that Commission decision has the effect of preventing a national supervisory authority from investigating a complaint alleging that the third country does not ensure an adequate level of protection and, where appropriate, from suspending the contested transfer of data. In today s judgment, the Court of Justice holds that the existence of a Commission decision finding that a third country ensures an adequate level of protection of the personal data transferred cannot eliminate or even reduce the powers available to the national supervisory authorities under the Charter of Fundamental Rights of the European Union and the directive. The Court stresses in this regard the right, guaranteed by the Charter, to the protection of personal data and the task with which the national supervisory authorities are entrusted under the Charter. The Court states, first of all, that no provision of the directive prevents oversight by the national supervisory authorities of transfers of personal data to third countries which have been the subject of a Commission decision. Thus, even if the Commission has adopted a decision, the national supervisory authorities, when dealing with a claim, must be able to examine, with complete independence, whether the transfer of a person s data to a third country complies with the requirements laid down by the directive. Nevertheless, the Court points out that it alone has jurisdiction to declare that an EU act, such as a Commission decision, is invalid. Consequently, where a national authority or the person who has brought the matter before the national authority considers that a Commission decision is invalid, that authority or person must be able to bring proceedings before the national courts so that they may refer the case to the Court of Justice if they too have doubts as to the validity of the Commission decision. It is thus ultimately the Court of Justice which has the task of deciding whether or not a Commission decision is valid.

107 P a g e 107 The Court then investigates whether the Safe Harbour Decision is invalid. In this connection, the Court states that the Commission was required to find that the United States in fact ensures, by reason of its domestic law or its international commitments, a level of protection of fundamental rights essentially equivalent to that guaranteed within the EU under the directive read in the light of the Charter. The Court observes that the Commission did not make such a finding, but merely examined the safe harbour scheme. Without needing to establish whether that scheme ensures a level of protection essentially equivalent to that guaranteed within the EU, the Court observes that the scheme is applicable solely to the United States undertakings which adhere to it, and United States public authorities are not themselves subject to it. Furthermore, national security, public interest and law enforcement requirements of the United States prevail over the safe harbour scheme, so that United States undertakings are bound to disregard, without limitation, the protective rules laid down by that scheme where they conflict with such requirements. The United States safe harbour scheme thus enables interference, by United States public authorities, with the fundamental rights of persons, and the Commission decision does not refer either to the existence, in the United States, of rules intended to limit any such interference or to the existence of effective legal protection against the interference. The Court considers that that analysis of the scheme is borne out by two Commission communications, according to which the United States authorities were able to access the personal data transferred from the Member States to the United States and process it in a way incompatible, in particular, with the purposes for which it was transferred, beyond what was strictly necessary and proportionate to the protection of national security. Also, the Commission noted that the persons concerned had no administrative or judicial means of redress enabling, in particular, the data relating to them to be accessed and, as the case may be, rectified or erased. As regards a level of protection essentially equivalent to the fundamental rights and freedoms guaranteed within the EU, the Court finds that, under

108 P a g e 108 EU law, legislation is not limited to what is strictly necessary where it authorises, on a generalised basis, storage of all the personal data of all the persons whose data is transferred from the EU to the United States without any differentiation, limitation or exception being made in the light of the objective pursued and without an objective criterion being laid down for determining the limits of the access of the public authorities to the data and of its subsequent use. The Court adds that legislation permitting the public authorities to have access on a generalised basis to the content of electronic communications must be regarded as compromising the essence of the fundamental right to respect for private life. Likewise, the Court observes that legislation not providing for any possibility for an individual to pursue legal remedies in order to have access to personal data relating to him, or to obtain the rectification or erasure of such data, compromises the essence of the fundamental right to effective judicial protection, the existence of such a possibility being inherent in the existence of the rule of law. Finally, the Court finds that the Safe Harbour Decision denies the national supervisory authorities their powers where a person calls into question whether the decision is compatible with the protection of the privacy and of the fundamental rights and freedoms of individuals. The Court holds that the Commission did not have competence to restrict the national supervisory authorities powers in that way. For all those reasons, ***the Court declares the Safe Harbour Decision invalid***. This judgment has the consequence that the Irish supervisory authority is required to examine Mr Schrems complaint with all due diligence and, at the conclusion of its investigation, is to decide whether, pursuant to the directive, transfer of the data of Facebook s European subscribers to the United States should be suspended on the ground that that country does not afford an adequate level of protection of personal data. NOTE: A reference for a preliminary ruling allows the courts and tribunals of the Member States, in disputes which have been brought before them, to refer questions to the Court of Justice about the interpretation of European Union law or the validity of a European Union act. The Court of Justice does not decide the dispute itself. It is for the national court or tribunal to dispose of the case in accordance with the Court s

109 P a g e 109 decision, which is similarly binding on other national courts or tribunals before which a similar issue is raised.

110 P a g e 110 Understanding the Safe Harbour privacy principles U.S. Department of Commerce July 21, 2000 The European Union's comprehensive privacy legislation, the Directive on Data Protection (the Directive), became effective on October 25, It requires that transfers of personal data take place only to non-eu countries that provide an "adequate" level of privacy protection. While the United States and the European Union share the goal of enhancing privacy protection for their citizens, the United States takes a different approach to privacy from that taken by the European Union. The United States uses a sectoral approach that relies on a mix of legislation, regulation, and self regulation. Given those differences, many U.S. organizations have expressed uncertainty about the impact of the EU-required "adequacy standard" on personal data transfers from the European Union to the United States. To diminish this uncertainty and provide a more predictable framework for such data transfers, the Department of Commerce is issuing this document and Frequently Asked Questions ("the Principles") under its statutory authority to foster, promote, and develop international commerce. The Principles were developed in consultation with industry and the general public to facilitate trade and commerce between the United States and European Union. They are intended for use solely by U.S. organizations receiving personal data from the European Union for the purpose of qualifying for the safe harbor and the presumption of "adequacy" it creates. Because the Principles were solely designed to serve this specific purpose, their adoption for other purposes may be inappropriate. The Principles cannot be used as a substitute for national provisions implementing the Directive that apply to the processing of personal data in the Member States.

111 P a g e 111 Decisions by organizations to qualify for the safe harbor are entirely voluntary, and organizations may qualify for the safe harbor in different ways. Organizations that decide to adhere to the Principles must comply with the Principles in order to obtain and retain the benefits of the safe harbor and publicly declare that they do so. For example, if an organization joins a self- regulatory privacy program that adheres to the Principles, it qualifies for the safe harbor. Organizations may also qualify by developing their own self- regulatory privacy policies provided that they conform with the Principles. Where in complying with the Principles, an organization relies in whole or in part on self- regulation, its failure to comply with such self- regulation must also be actionable under Section 5 of the Federal Trade Commission Act prohibiting unfair and deceptive acts or another law or regulation prohibiting such acts. In addition, organizations subject to a statutory, regulatory, administrative or other body of law (or of rules) that effectively protects personal privacy may also qualify for safe harbor benefits. In all instances, safe harbor benefits are assured from the date on which each organization wishing to qualify for the safe harbor self-certifies to the Department of Commerce (or its designee) its adherence to the Principles in accordance with the guidance set forth in the Frequently Asked Question on Self-Certification. Adherence to these Principles may be limited: (a) to the extent necessary to meet national security, public interest, or law enforcement requirements; (b) by statute, government regulation, or case law that create conflicting obligations or explicit authorizations, provided that, in exercising any such authorization, an organization can demonstrate that its non-compliance with the Principles is limited to the extent necessary to meet the overriding legitimate interests furthered by such authorization; or

112 P a g e 112 (c) if the effect of the Directive or Member State law is to allow exceptions or derogations, provided such exceptions or derogations are applied in comparable contexts. Consistent with the goal of enhancing privacy protection, organizations should strive to implement these Principles fully and transparently, including indicating in their privacy policies where exceptions to the Principles permitted by (b) above will apply on a regular basis. For the same reason, where the option is allowable under the Principles and/or U.S. law, organizations are expected to opt for the higher protection where possible. Organizations may wish for practical or other reasons to apply the Principles to all their data processing operations, but they are only obligated to apply them to data transferred after they enter the safe harbor. To qualify for the safe harbor, organizations are not obligated to apply these Principles to personal information in manually processed filing systems. Organizations wishing to benefit from the safe harbor for receiving information in manually processed filing systems from the EU must apply the Principles to any such information transferred after they enter the safe harbor. An organization that wishes to extend safe harbor benefits to human resources personal information transferred from the EU for use in the context of an employment relationship must indicate this when it selfcertifies to the Department of Commerce (or its designee) and conform to the requirements set forth in the Frequently Asked Question on Self- Certification. Organizations will also be able to provide the safeguards necessary under Article 26 of the Directive if they include the Principles in written agreements with parties transferring data from the EU for the substantive privacy provisions, once the other provisions for such model contracts are authorized by the Commission and the Member States. U.S. law will apply to questions of interpretation and compliance with the Safe Harbor Principles (including the Frequently Asked Questions) and relevant privacy policies by safe harbor organizations, except where

113 P a g e 113 organizations have committed to cooperate with European Data Protection Authorities. Unless otherwise stated, all provisions of the Safe Harbor Principles and Frequently Asked Questions apply where they are relevant. "Personal data" and "personal information" are data about an identified or identifiable individual that are within the scope of the Directive, received by a U.S. organization from the European Union, and recorded in any form. NOTICE An organization must inform individuals about the purposes for which it collects and uses information about them, how to contact the organization with any inquiries or complaints, the types of third parties to which it discloses the information, and the choices and means the organization offers individuals for limiting its use and disclosure. This notice must be provided in clear and conspicuous language when individuals are first asked to provide personal information to the organization or as soon thereafter as is practicable, but in any event before the organization uses such information for a purpose other than that for which it was originally collected or processed by the transferring organization or discloses it for the first time to a third party(1). CHOICE An organization must offer individuals the opportunity to choose (opt out) whether their personal information is (a) to be disclosed to a third party or (b) to be used for a purpose that is incompatible with the purpose(s) for which it was originally collected or subsequently authorized by the individual. Individuals must be provided with clear and conspicuous, readily available, and affordable mechanisms to exercise choice. For sensitive information (i.e. personal information specifying medical or health conditions, racial or ethnic origin, political opinions, religious or philosophical beliefs, trade union membership or information specifying the sex life of the individual), they must be given affirmative or explicit (opt in) choice if the information is to be disclosed to a third party or used for a

114 P a g e 114 purpose other than those for which it was originally collected or subsequently authorized by the individual through the exercise of opt in choice. In any case, an organization should treat as sensitive any information received from a third party where the third party treats and identifies it as sensitive. ONWARD TRANSFER To disclose information to a third party, organizations must apply the Notice and Choice Principles. Where an organization wishes to transfer information to a third party that is acting as an agent, as described in the endnote, it may do so if it first either ascertains that the third party subscribes to the Principles or is subject to the Directive or another adequacy finding or enters into a written agreement with such third party requiring that the third party provide at least the same level of privacy protection as is required by the relevant Principles. If the organization complies with these requirements, it shall not be held responsible (unless the organization agrees otherwise) when a third party to which it transfers such information processes it in a way contrary to any restrictions or representations, unless the organization knew or should have known the third party would process it in such a contrary way and the organization has not taken reasonable steps to prevent or stop such processing. SECURITY Organizations creating, maintaining, using or disseminating personal information must take reasonable precautions to protect it from loss, misuse and unauthorized access, disclosure, alteration and destruction. DATA INTEGRITY Consistent with the Principles, personal information must be relevant for the purposes for which it is to be used. An organization may not process personal information in a way that is incompatible with the purposes for which it has been collected or subsequently authorized by the individual.

115 P a g e 115 To the extent necessary for those purposes, an organization should take reasonable steps to ensure that data is reliable for its intended use, accurate, complete, and current. ACCESS Individuals must have access to personal information about them that an organization holds and be able to correct, amend, or delete that information where it is inaccurate, except where the burden or expense of providing access would be disproportionate to the risks to the individual's privacy in the case in question, or where the rights of persons other than the individual would be violated. ENFORCEMENT Effective privacy protection must include mechanisms for assuring compliance with the Principles, recourse for individuals to whom the data relate affected by non-compliance with the Principles, and consequences for the organization when the Principles are not followed. At a minimum, such mechanisms must include (a) readily available and affordable independent recourse mechanisms by which each individual's complaints and disputes are investigated and resolved by reference to the Principles and damages awarded where the applicable law or private sector initiatives so provide; (b) follow up procedures for verifying that the attestations and assertions businesses make about their privacy practices are true and that privacy practices have been implemented as presented; and (c) obligations to remedy problems arising out of failure to comply with the Principles by organizations announcing their adherence to them and consequences for such organizations. Sanctions must be sufficiently rigorous to ensure compliance by organizations.

116 P a g e 116 Carl-Ludwig Thiele The euro - past pitfalls and future challenges Speech by Mr Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbank, at the People's Bank of China School of Finance, Tsinghua University, Beijing, 22 September Introduction Dear Professor Li, Dear Professor Kang, Ladies and gentlemen, I am delighted to have the opportunity to be here in Beijing to talk to you about Europe and the euro - about the background and particular features of European monetary union, its pitfalls, which have placed Europe under great strain, and the challenges that we need to overcome if Europe is to remain a reliable player. European monetary union has its peculiarities, which makes it difficult to compare it with any other single currency area. It is only when one is aware of these particular features and the historical backdrop against which this currency area has emerged that it is possible to understand the causes of the crisis in the euro area - and the steps needed to overcome them. In my presentation, I will attempt to view European unification, a stable European monetary union and a prosperous euro area through the eyes of a realist. However, Walter Hallstein, the first President of the European Commission, apparently had a special kind of realist in mind when he said: "Whoever does not believe in miracles in European matters is not a realist." I will come back to this at the end of my speech. 2. European unification Ladies and gentlemen,

117 P a g e 117 A united Europe is of major significance to Germany. This is not only because Germany is an integral part of Europe but also because the Germans feel a particular obligation to promote European unification. The reasons for this are largely historical. A glance back in history shows just how important mutual understanding and amicable relations are for the countries of Europe. The First World War broke out just over 100 years ago. This war has been etched into the memory of so many Europeans. The grim consequences of war are still fresh in our minds: a disturbingly high number of civilian and military victims, the wartime economy, hundreds of thousands impoverished or starved to death and survivors deeply traumatised. This list could go on and on. And the Second World War began only 21 years after the end of the First World War. It was a war in which unprecedented crimes were perpetrated, millions were left dead and Europe was subsequently divided into two blocs. After suffering so much at the hands of war, the west European countries strived for deeper European integration, for a united Europe. The reasons for this were many and varied. Securing peace within Europe was undoubtedly the dominant rationale. The relationship between European neighbours France and Germany played a key role in this context. Hostility between the two nations, be it overt or latent, had persisted for centuries. This so-called "Franco-German enmity" was surmounted in the wake of the devastating Second World War and developed over time into a Franco-

118 P a g e 118 German friendship, an engine driving the process of European unification and integration. However, belonging to a community of values was of particular importance to Germany following the Hitler dictatorship and the Holocaust. Konrad Adenauer, the first Chancellor of the Federal Republic of Germany, expressed this as follows: "The unity of Europe was the dream of a few. It became the hope of many. Today it has become a necessity for all of us." But there was also a desire to sustainably improve Europe's economic prosperity. It is not incidental that European integration began by stepping up economic integration. After the Second World War ended, progress was made on various fronts, culminating initially in the single European market. The foundations of this single European market were the "four basic freedoms": the free movement of people, goods, services and capital. But it became evident at an early stage that economic integration in Europe could only really take off if it was accompanied by a stable single currency. As far back as the start of the 1970s, there existed a plan to establish a European economic and monetary union that was to be fully implemented by Ultimately, progress was not so rapid after all. No serious attempt to establish monetary union was made until Jacques Delors took over the presidency of the European Commission in the late 1980s. The Maastricht Treaty was later signed by EU member states in European monetary union and its regulatory framework In 1999, the long-cherished dream of European monetary union became true, marking a major step towards deeper European integration.

119 P a g e 119 Introducing a single currency had tangible benefits. Prices of goods could be more easily compared throughout the member states. Exchange rate risk was eliminated and transaction costs fell. This in turn promoted trade, not only within the monetary union but also with the rest of the world. Money and capital markets converged further. And, last but not least, the euro brought with it a period of remarkable price stability for the member states. At this point, it is important to understand that the European monetary union is a thoroughly unique single currency area. While the 19 sovereign states within it have committed to comply with a single monetary policy, they remain responsible for their own fiscal and economic policies. This means that a single monetary policy, which has the clear objective of ensuring price stability, is accompanied by 19 national fiscal policies. As you can see, the principle of subsidiarity is constitutive for Europe: as many decisions as possible should continue to be made at the national, or even the local, level. Former United States Secretary of State Henry Kissinger once highlighted the EU's complex structure by asking: "Who do I call if I want to call Europe?" Nowadays, he would have to call 19 telephone numbers to discuss fiscal policy matters, as 19 national governments make decisions regarding public spending and any borrowing required for financing purposes. The universal rule that political processes can easily lead to increased spending and, as a result, to excessive borrowing as well applies far more to a monetary union with independent national fiscal policies than to central governments. This is because, in a monetary union, the negative effects of a sharp rise in debt in one country can spill over, at least in part, to the other member

120 P a g e 120 states. Why is that the case? Generally speaking, the same rules that apply to a private borrower also apply to a country: the higher the debt burden, the lower the creditworthiness. So, in a properly functioning capital market, a country that is more indebted is generally required to pay higher interest on its sovereign debt. However, things are different in a monetary union, as capital market participants assume that the member states belong to an "inseparable union with a common destiny" as part of which they will help each other out financially in emergency situations, forming a kind of joint-liability scheme. As a result, debt interest rises not only for the individual, more indebted country, but usually also for the other member states, which are expected to provide solidarity and financial assistance. Yet, for the country creating more debt, interest rates tend to rise less strongly. Monetary union, therefore, holds incentives for an individual member state to run up higher debt as the negative effects of greater indebtedness - meaning higher borrowing rates - are partly borne by the other member states. This can be compared with the overfishing of the seas as it, too, affects both the community of neighbouring countries as well as the country causing the problem. The architects of monetary union were well aware of the problem of incentives. Which is exactly why they took precautions. It was, therefore, laid down from the start in the Treaty of Maastricht that a country is forbidden from assuming the debt of another country or the community of states. In other words, this laid down the foundation for a general no bail-out principle. The Maastricht Treaty is, thus, guided by the principle of individual

121 P a g e 121 responsibility, or the balance of liability and control. In the concise words of German economist Walter Eucken: "Whoever reaps the benefits must also bear the liability." Or, in very down-to-earth terms: Whoever orders, pays. An additional security threshold for monetary union as a stability union is the prohibition of monetary financing of governments. The central banks of the Eurosystem, that is the European Central Bank and the 19 national central banks, are forbidden from directly financing euro-area countries. In order for this ban on monetary financing of governments to be implemented in practice, the independence of the Eurosystem from political instructions was enshrined at the same time. Political decision-makers cannot, therefore, force the central banks of the Eurosystem to grant member states loans or directly purchase their sovereign paper. Ultimately, these measures could contravene the mandate of ensuring price stability, causing lasting harm to the Eurosystem's credibility and thus to the very foundations of a successful monetary policy. Germany has, in the past, had bad experiences with central banks which were not free of political lobbying. For example, expenditure on arms in the First World War was financed directly by the central bank, which essentially catered to the needs of the government. The consequence was a complete devaluation of the Reichsmark. By contrast, the independence of the Eurosystem was firmly anchored. First, institutionally, by prohibiting national and supranational institutions from issuing the ECB or the national central banks with instructions. And second, functionally, by awarding the sole prerogative regarding strategies and measures to ensure price stability to the Eurosystem. The independence of the central banks is further safeguarded by specific

122 P a g e 122 debt ceilings, which are intended to prevent member states from accumulating excessive debt. A country's public deficit is not supposed to exceed a maximum of 3% of its GDP within a one-year period. Moreover, a country's overall sovereign debt should not go beyond 60% of its annual GDP. These rules are designed to prevent governments from exerting pressure on monetary policy makers, as lower interest rates allow governments to borrow more cheaply. Or due to the fact that existing debt is devalued by a higher rate of inflation. So far so good. 4. Crisis However, things turned out differently than expected - above all because the carefully drafted financial policy rules were not complied with. Most countries were far from having a balanced budget, and public deficits often even exceeded the three-percent threshold. Debt levels in the member states were often not lowered either. The exact opposite was the case in some countries for that matter. At the same time, market participants did not trust sufficiently in the no bail-out principle I touched on earlier. Despite the very large differences in debt levels and economic developments among the euro-area member states, they aligned their risk premiums to a great extent, which, in turn, led to the already strongly indebted countries becoming more indebted. In the end, confidence in the capital markets vanished with regard to whether the future crisis countries would still be able to service their sovereign debt in accordance with the rules. This culminated in investors granting these countries loans only at very high interest margins or withholding them altogether. At the same time, it became clear that the countries that were later hit by

123 P a g e 123 crisis had failed to set up sound and sustainable economic structures that were beneficial for growth. Instead, enterprises and households often took advantage of the substantially lower interest rates as a result of joining the euro area and ran up great amounts of debt. And rather than investing this money in expanding competitiveness, it was used for private and government consumption. Wages increased to a considerably larger extent than productivity, with price competitiveness eroding as a result. And last but not least, cheap loans and capital inflows fuelled the real estate bubbles in Ireland and Spain. This is why this "special boom", which was caused by low interest rates, was anything but sustainable and sparked the crisis in Europe. Although, to be precise, "the crisis" was a conglomerate of various crises, encompassing financial market crisis, economic crisis and sovereign debt crisis. Above all, however, it is a crisis of confidence, the complexity of which is also reflected in the fact that the euro area has been battling to overcome this crisis for seven years now. 5. Overcoming the crisis How can this finally be achieved? Or, put differently, what lessons are to be learned from the crisis? To win back the confidence lost and to return to a path of sustainable growth, we need to tackle the root causes of the crisis instead of treating the symptoms. The economic situation in the euro area may be recovering, but there are still some structural challenges to resolve. And until the causes of the crisis have been eliminated, we cannot be sure that it will not pop up again. The most recent discussions on Greece have shown this only too well.

124 P a g e Measures in the member states First of all, the crisis countries themselves must eliminate the causes of the crisis at home. For one thing, they have to ensure that their public debt is sustainable. This needs to be done before consumer and investor confidence can return. Indeed, as the saying goes, "you can't borrow your way out of a debt crisis". Therefore, lasting confidence can only be built on a foundation of sound public finances. In addition to having budgetary rigour, member states also need to implement growth-enhancing structural reforms. Many of these have already been set in motion as a result of the sovereign debt crisis. As such, not only have structural budget deficits been significantly lowered, but the deterioration of international competitiveness has also been largely reversed. But there is still some way to go in terms of making the labour markets more flexible, further liberalising the goods and services markets and cutting bureaucracy. To begin with, these adjustment processes are a burden on the economic recovery of many of the crisis countries. However, the subsequent positive growth effects more than make up for this. Spain, in particular, is currently experiencing this first-hand and is already reaping the benefits of the structural reforms it has implemented. Since 2009, its structural budget balance has improved by roughly seven percentage points and its labour market has been made more flexible. Both of these achievements were decisive factors in enabling the Spanish economy to lift itself out of recession quite some time ago and to exhibit its current strong growth.

125 P a g e 125 The oppressively high levels of unemployment are also gradually decreasing. The benefits for Spain will be all the higher in the coming years if it remains fully faithful to this reform process. There is a saying I like that practically passes as a Chinese proverb in Germany. It reads: "When the winds of change are blowing... some people build walls and some people build windmills." Well, the Spanish have built quite a few windmills in recent years. In the first half of this year, the world's attention was focused on Greece to a much greater extent than on Spain and its successful reform process. In light of the refusal of the Greek government to accept the bail-out conditions, and due to acute financing needs, there was even speculation about whether the country would potentially have to leave the euro area or even the European Union itself. This risk has since vanished, thanks to the adoption in August of a third assistance programme for Greece, which is subject to strict conditions and temporarily resolved the country's funding bottleneck. However, further payments are contingent on Greece fulfilling these conditions. In addition, the central challenge facing Greece lies in implementing structural reform measures for greater competitiveness as well as achieving sound government finances in the long term and establishing a functioning administration. Only then will Greece overcome its current period of weakness and embark on a path of growth. 5.2 Reforming the regulatory framework However, aside from the unsound developments in European periphery countries, the euro area's regulatory framework also needs to be strengthened.

126 P a g e 126 The principle of aligning liability and control must once again be more rigorously enforced. This is because, over the course of combating the crisis, the element of joint liability has been increasingly expanded. This, in turn, has severely disrupted the balance between liability and control. The crisis countries were granted large-scale emergency loans by other member states and the European Stabilisation Mechanism. But the Eurosystem also reacted, for example by not only lowering interest rates, but also by loosening the requirements for monetary policy collateral. In addition, the Eurosystem acquired government bonds of crisis countries on the capital markets in order to ensure monetary policy had a more uniform impact. However, this propelled the Eurosystem deep into uncharted and dangerous territory, blurring the boundary to prohibited monetary financing of governments. That being said, all parties are well aware that monetary policy is unable to resolve the crisis in the euro area, and is merely buying time for policy makers to implement the necessary measures. In order to permanently safeguard monetary union as a union for stability, it is important to bring liability and control back into a more balanced position. Essentially, this can be done in two ways: - either the euro area evolves into a genuine fiscal union, where fiscal and tax policies are coordinated centrally at European level... - or a Maastricht Framework 2.0 is established in which the principle of individual responsibility is reinforced. However, I do not see a majority in any euro-area country supporting the communitisation of fiscal and tax policies. At the current juncture, reinforcing the existing regulatory framework and

127 P a g e 127 strengthening the principle of individual responsibility therefore seems like a more realistic way of bringing liability and control in Europe's monetary system back into equilibrium. Europe has already taken some steps in the right direction in this regard. For example, the refined fiscal rules require balanced budgets or even slight surpluses. In addition, procedures have been introduced to identify and rectify macroeconomic imbalances. However, these rules need to be enforced. And this is where we have a clear deficit. "Flexibility" is the European Commission's new watchword when it comes to interpreting how the fiscal framework should be implemented. And the scope for flexible interpretation has actually widened over the past few years on the back of changes to the budgetary rules. However, sustained economic growth cannot be built on a foundation of resurgent expanding public debt. For as I already mentioned, lasting confidence and long-term growth are only possible through sound public finances. Ladies and gentlemen, Thus far I have touched on two key areas where there are lessons to be learned from the crisis: first, that individual countries need to implement reforms themselves and second, the need to strengthen and strictly adhere to a regulatory framework in which liability and control at the national level are balanced - as envisaged for the euro area from the start. 5.3 European banking union Moreover, as the crisis unfolded, the financial system was exposed as the Achilles' heel, not just in Europe but on an international scale.

128 P a g e 128 As a result, steps were taken at the G20 level to tighten banks' capital and liquidity requirements, thus giving rise to Basel III. Compounding this, weaknesses were identified in Europe's banking supervision structures. National supervisors were often found to assess their own country's banking system too favourably, with the effect that failing banks and stumbling states dragged one another down. Only by destroying the harmful nexus between banks and governments will we be able to manage these contagion effects. And this is where the nascent European banking union comes into play. It represents a major step towards deepening European integration and consists of two elements: The Single Supervisory Mechanism (SSM), which operates under the aegis of the ECB, has been in place for just under 12 months. Its purpose is to ensure consistently high supervisory standards so as to prevent banks, at an early stage, from getting into difficulties. But such problems cannot be entirely ruled out, not even under a stringent regulatory regime. After all, the possibility of failure is a hallmark of any market economy. It is therefore important to be able to allow banks to fail without governments - and thus also taxpayers - having to foot the bill. For banks must also be subject to the liability principle, without which no market economy can function properly. This is the rationale behind the launch of the European Single Resolution Mechanism (SRM) in The mechanism will make sure that non-viable institutions can be withdrawn from the market in an orderly fashion provided this does not jeopardise financial stability. And this will be done according to a clearly defined liability cascade.

129 P a g e 129 If a bank is wound down in future, shareholders and creditors will be first in line to bear the costs. Only when this source of funds proves insufficient will there be recourse to a single resolution fund financed by the entire European banking sector. And only as a last resort will taxpayers in the respective country, or even in other member states, be called upon to help shoulder the burden. In other words, beginning in 2016, institutions subject to supervision at the European level will also be resolved at this level. This will facilitate closer European integration. Together, these two constructs, the SSM on the one hand and the SRM on the other, form a meaningful whole, in which liability and control are balanced. 5.4 Abolishing the preferential treatment of government bonds If the close ties between governments and banks are to be loosened, in future loans to sovereigns must no longer be deemed free of risk in regulatory terms. It follows that government bonds should henceforth be treated similarly to loans to enterprises and households, meaning they should be backed by capital commensurate with the risk. And limits also need to be applied to such exposures, as is the case with loans to private debtors. This would prevent risk from becoming concentrated on banks' balance sheets. These topics are now being deliberated by the Basel Committee on Banking Supervision and the European Economic and Financial Committee, and rightly so. I appreciate that capital requirements and large exposure limits make the task of financing governments more complicated and consequently more expensive. Thus, gradual phase-ins are undeniably a good idea. However, this is no reason to refrain from change.

130 P a g e Sovereign insolvency code Looking ahead, there is an additional area where new regulatory provisions are required. In extreme cases, sovereigns, too, must in future be able to declare themselves insolvent, as the liability principle should also apply to them. Otherwise, the Eurosystem could come under pressure to finance cashstrapped governments at knock-down terms. So what happens when a sovereign defaults? It doesn't mean that the country concerned disappears off the map in the way that a company might. Rather, the government in question finds itself no longer able to service its debt as contractually agreed, normally meaning that this debt has to be restructured. The legal basis for this would have to be provided by a sovereign insolvency code. In my opinion, this is an essential prerequisite for an enduringly sustainable regulatory framework in which fiscal policy remains a national responsibility. 6. Conclusion Ladies and gentlemen, In my presentation, I have shone a light on the history of European integration and the crisis in the euro area. I have also looked towards the future, and outlined the challenges that lie ahead and how we might best deal with them. The most significant aspects are as follows. It is the member states who hold the key to sustainably overcoming the crisis in Europe. The European banking system, the member states and the European

131 P a g e 131 regulatory framework have to be made more crisis-resistant so that the euro area can return to a path of sustainable growth. As I mentioned earlier on, there's plenty of good news at all three of these levels. But that doesn't mean we can declare the crisis over. The adjustment process in the crisis countries is likely to continue for quite some time. The tightened regulatory framework needs to be applied more forcefully in practice and additional measures will have to be introduced. Ultimately, the only way to overcome the crisis is to gradually rebuild confidence. But this is only possible if the euro area consistently maintains its stability course. As far as the euro area is concerned, I see no reason to be overly pessimistic. What matters is that the member states continue to muster the will to rigorously tackle the root causes of the crisis. I began this speech with a reference to Walter Hallstein's conviction to the effect that: "Whoever does not believe in miracles in European matters is not a realist." But where do I stand with regard to this quotation now that my speech is coming to a close? Well, as I see things, we do not need any miracles in Europe today.the foundations for achieving stability in the euro area are already in place. However, these need to be enhanced in some important respects and they should be rigorously enforced. It will not be a walk in the park. But neither is it the stuff of miracles. Thank you for your attention.

132 P a g e 132 Digital Darwinism and the financial industry - a supervisor s perception Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, at the Speech at the EBS (EBS University of Business and Law) Symposium, Oestrich-Winkel 1. Introduction Ladies and gentlemen Thank you for the opportunity to contribute to this EBS Symposium. As a banking supervisor, I am happy to share with you my thoughts on digital Darwinism in the financial industry. 2. Digital transition from an evolutionary perspective Dinosaurs are an often-used means of illustrating how "Darwinism" works. We still don't really know why those creatures - which ruled the earth for millions of years - suddenly became extinct. Some make volcanic eruptions responsible; others cite meteorites or a sharp drop in sea level as a possible explanation. In any case, the assumption is not that dinosaurs ceased to exist because they could not cope with their new environment or adapt quickly enough. Applying this diagnosis to the financial sector, where banks have reigned throughout the last few centuries, and supposing that the digital transition indeed constitutes a new environment for banks, one may pose a rather provocative question: are banks dinosaurs that will one day become extinct? You may guess that I do not share this doom scenario, so let me start out by describing my views on the evolution of the banking business. The digital era may indeed be considered a new environment for banks. Digitalisation of the financial sector is an irrevocable change that came about due to several factors.

133 P a g e 133 First, the digitalisation of the financial sector has been fuelled by the development of highly effective, state-of-the-art technologies like broadband networks, advances in data processing and the ubiquity of smartphones. And there is a premise that is common to virtually all technological advances in market economies in the last few centuries: when a product becomes available, sooner or later it creates its own demand and puts market forces into action. That means technological and social changes are intertwined. Bank customers are becoming increasingly open to digital banking. Think of innovative concepts such as online video consultation services, digital credit brokerage and the incorporation of social media into banking. Banking is still a "people business", but it's no longer reduced to proximate and personal relationships. So there is plenty of demand for use of the technological potential of digital banking: cheap and quick automatised processes, solutions for complex financial issues, service tailored to customers' individual needs. A fundamental challenge that banks now face is that in some business fields, we may expect a sudden and rapid change of the game that is being played. One rather obvious case in point is that of payment services. Service providers such as PayPal or Apple have implemented payment systems geared to consumers in a digital environment. Once customers become used to a new way of paying, competitors offering similar products will certainly have difficulties trying to convince customers to switch providers. The pioneer may have a decisive advantage. Now, in evolutionary terms, the question is whether banks can adapt quickly enough. Banks have used IT for decades, but these fast-moving times present

134 P a g e 134 wholly new possibilities for its use: P2P lending becomes feasible, internet and mobile applications are sprouting up and internet giants such as Google or Facebook are cultivating "big data" methods. These enterprises have grown up with - at times - entirely new perceptions of business, work and life. And they have the appropriate staff. That may be crucial. It is one thing to build new ideas, but quite another to incorporate them into the company DNA. Traditional banks, on the other hand, typically do not have a digital DNA. Theirs is an analogue world in which they have refined their knowledge about banking over decades and built up a customer relationship based on trust. Think of areas like investment advice and corporate finance as well as banks' own business of generating synergies between business strands. The question now is: what part of their knowledge is still valuable and what part do banks need to reframe? However, we cannot predict how the financial sector will look in ten years' time. There are just too many "unknown unknowns". Still, there is a recurring fallacy that reduces evolution to a narrow one-way street. If there are new market entrants whose businesses are well-adjusted to the digital environment, banks should be inclined to imitate their behaviour. But - to be clear - there is no one-size-fits-all strategy for digital banking. As in other industries, there will always be demand for more differentiated strategies, for example individual and personalised services as opposed to algorithm-based advice. Also, we should not be surprised to see the focus return to a key component of the banking business: establishing safety and trust.

135 P a g e 135 Furthermore, the digital age does not simply redistribute market shares of a fixed revenue pie: there are also entirely new opportunities for desirable businesses. Convenient banking is valuable. Banks could benefit from this, either through greater customer loyalty or through additional business volumes resulting from extra services. Win-win schemes are also conceivable in credit markets. "Big data" methods can generate highly informative individual risk profiles. This could enable banks to extend loans to private customers and small businesses which would otherwise not receive any financing. Even investment counselling could benefit. Video-based consulting, for example, does more than reflect modern life style of customers; it may also reduce costs for banks by rendering some branch offices unnecessary. Other keywords of digital openings are "co-creation", where customers participate in the development of products, and "multichannel banking". But my aim today is not to present an all-encompassing overview on digital bank business ideas. Instead, let us move one step back and look at the bigger picture. Reshaping the financial sector doesn't need to be left to new market entrants. This creative challenge can also be taken up by established banks. Supervisors, too, have an interest in seeing banks engage in innovation if this enhances the functionality of the financial sector and stabilises profitability in the medium and long run. To sum up, there is an "open end" to the evolution of the digital financial sector.

136 P a g e 136 If you ask diehard evolutionists for a forecast of the future, they will merely point to a trial-and-error process that should eventually give us an answer. For an individual company, that is of course not helpful. As a banking supervisor, I am not inclined to attempt a market forecast. Still, there is a bottom line for banks from the line of thought I outlined earlier, namely that it is appropriate neither to blindly imitate nor to stick to old habits. The message to every player in the financial industry is simple: rather than being caught off-guard, banks have to participate actively in shaping future banking services. A new game is being played, and new strategies need to be developed and executed decisively. 3. Cyber risks - an evolutionary attachment to the digital bank Along with the digitalisation of industries, there is another evolution that warrants our attention. It is a development that is neither intended by the visionaries and trailblazers of the digital world nor beneficial. I am referring to the evolution of cybercrime. While we cannot predict how banking will look in ten or twenty years' time, we can be almost certain that risks of fraud, theft and manipulation in banks through cyberspace will continue to rise. The reason is straightforward: digital channels can be used to steal a lot of assets with comparatively little effort today. Nowadays, a large proportion of banks' assets and value-generating capability is stored on hard drives and servers. The technical infrastructure facilitates the managing of bank accounts and grants access to money. But it also provides access to vast sources of data.

137 P a g e 137 There have been several incidents recently of truly large-scale data theft. Company secrets, too, are at stake. If, for example, the trading algorithms of your bank became known to others through illegal activities, they could be exploited in the market, causing huge losses to banks. In the same way, politically motivated acts of sabotage jeopardise trust in financial functions and integrity. Looking at those on the other side of cybercrime, the potential attackers - they often have access to far more powerful weapons than before and convenient access through the internet. Targeted attacks on IT systems can originate from anywhere in the world. Hackers often need little more than a laptop with internet access. Why do we have to expect a continuous evolution in this field? Attack vehicles like computer viruses differ widely and may target any chink in a bank's defence, rather as human viruses attack biological systems. Its logic follows the arms race between criminals and law enforcers that can be traced down through human history, but is now taking place with digital weapons. What makes this evolution more dangerous still is that we now face a highly complex digital world where progress is constantly being made in technologies and innovations. But, crucially, you cannot risk a trial-and-error process here. Once an easy point of attack is identified in the IT infrastructure, the word will quickly spread and criminals from all over the world will try to exploit the weakness. On top of this, we need to bear in mind that cyber and general IT risks are not only of a technical nature. The human factor often plays a crucial part.

138 P a g e 138 Employees may act in gross negligence, or they may be tricked by a Trojan horse or a phishing mail. In complex IT systems, even small system errors can quickly cause enormous damage. The error-prone human factor can only be eliminated by installing an appropriate system of controls and incentives. In today's world, this is an important management task. 4. Adaptation as a managerial task Before IT-related problems came to affect the very core of the digital economy, they were commonly shifted to the IT department. But this approach to IT risks is outdated. Awareness of digital risks and setting up a strategy are now a leader's duties. If your business crucially relies on digital processing, any strategic decision at the company level requires knowledge and understanding of risks. Besides, we frequently observe that banks find it difficult to reorganise their IT systems. While a complete, "big bang" overhaul may be preferable, it often meets with resistance from many parts of the company. To avoid being locked into more and more outdated structures, banks should not just consider the expected short-term benefits when designing their IT strategy. Furthermore, the digital world demands from banks' managers something I would describe as unbiased attentiveness towards new technologies. If banks don't think "digitally", they're going to find it difficult to compete for digital customers. They have to reassess their client relations and even rethink different lifestyles and social trends.

139 P a g e 139 The individual needs and wishes of customers are more pivotal than ever before. Take a look at social networks, at online shopping or even at information research - consumers are already used to having their own needs catered for. Consequently, banks will have to get into the habit of looking at things from the customer's perspective. Let us also bear in mind that competition is becoming more global and more transparent, the competitors more diverse. In addition to FinTech companies, other industries with a strong IT focus are only one step away from the banking world. This means that the lines between industries are becoming blurred. Now more than ever, banks need to be aware of what the competition is doing so that they can review and refine their own strategies. From an evolutionary perspective, adaptability is another essential attribute. The digital world welcomes experimentation, is prone to sudden trends, and is constantly changing. Although the banking industry may not always be subject to all of this constant movement, adaptability is definitely becoming more important. So a flexible IT infrastructure that supports adaptability, for example, will be vital. Business models can also be more open and flexible in structure. Just think of the "digital ecosystem" strategies banks are now deploying. 5. Towards a resilient sector As a banking supervisor, I am wholeheartedly in favour of the goal of a stable sector. But this should not be understood as adopting a static view towards stability.

140 P a g e 140 For a workable financial industry, it is not decisive whether services are provided offline or online, by humans or by automated services. Our yardstick needs to measure whether the sector continues to fulfil its duty towards the real economy, which is to transform risks and provide payment and other financial services. That's what is meant by a resilient financial sector. To that end, we have to ensure there are no "dead ends" to the digital evolution in the financial industry. I refer to IT-related risks in particular. If we rely on computers and digitalised processes, we have to make sure that they are reliable and trustworthy. Sector-wide reputation and functionality are at stake. Nowadays, a customer's personal payment information is stored not only at the bank but at a multitude of service providers and retailers as well. How can a bank ensure the safety of its payment services against a cyberattack on a retailer's network or on that of a third-party vendor? Combined efforts should be seen as insurance. You never know who will be the next victim of an attack. And attacks don't stop at borders, so cooperation of this kind is also needed at the global level. In an interconnected and therefore interdependent financial sector, strengthening the common defence should also be in the banks' very own interest. 6. Conclusion Let me restate my views on "digital Darwinism". Adaptation to a digitalised financial world does not simply require banks to develop new and ground-breaking ideas.

141 P a g e 141 It has more to do with a well-adjusted strategy - which means that it's not just a race between development departments, but between leaders. As a supervisor, I therefore urge that we do not interpret digital competition as a race merely for the most advanced technologies, but for the right mix. This is why I am not in favour of comparing banks to dinosaurs. Traditional banks may typically have a pre-digital DNA, but they are capable of learning, adapting to a digital landscape and cooperating with technological pioneers. And each bank needs to find its own strategy. Banking business itself is as irreplaceable as ever before. So what will not change? Business success will continue to hinge on entrepreneurial skills. In an increasingly digital finance sector, the role of banking will still be to serve the real economy. And banking is based on trust. To keep this in mind will be key to ensuring a thriving and stable financial sector.

142 P a g e 142 Reintegrating the banking sector into society - earning and re-establishing trust Speech by Ms Sabine Lautenschläger, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism, at the 7th International Banking Conference "Tomorrow's bank business model - How far are we from the new equilibrium", organised by Bocconi University, Milan Introduction Ladies and Gentlemen, esteemed audience, First of all let me thank the organisers of this conference, and especially Andrea Sironi, for their kind invitation. I very much welcome this opportunity to elaborate on what I think are currently some of the most important questions in banking: How can bankers regain the trust that was lost during the crisis? How can the banking sector be reintegrated into society? There is no doubt that banks, bankers and the whole industry are experiencing one of the worst crises of confidence ever. The turmoil of 2008 and 2009 played a major role in this loss of public trust, but the problem did not end after the most acute phase of the crisis. Even seven years later, confidence in the banking sector is still very low. Numerous scandals, like the manipulation of LIBOR rates, large-scale tax evasion, the fraudulent behaviour of rogue traders, misconduct in the selling of mortgages, and large taxpayer bailouts of banks, have reinforced the perception that wrongdoing is widespread in the banking sector. But mistrust is not only confined to banks themselves. Investors and clients also have less confidence in the correct functioning of the banking sector and in the ability of supervisors and regulators to prevent excessive risk-taking.

143 P a g e 143 We should worry about this loss of trust in the banking sector: It impairs the proper functioning of banks to reallocate resources. It hampers growth. It leads to instability and costly crises. In a recent paper, Gennaioli illustrated the role that trust plays in banking by comparing finance to medicine. Banking, is a service like healthcare, in which "transactions" take place between two parties that differ in terms of information, knowledge and technical competence. Patients put themselves in the hands of their doctor, and investors, like patients, would like to be in good hands and not be taken advantage of. But how can trust in the banking sector be restored? Who are the key players in this process? Is it enough to reform the regulatory and supervisory framework, as we have done in recent years? Banks, intermediation and trust Let me start by using a simplification of the activities of banks to explain why it is worthwhile investing in regaining trust. Traditionally, the core activity of a commercial bank is to take deposits from individuals who have a surplus of resources and to allocate those resources to productive activities. Banks thereby perform three main functions. First, they provide payment and settlement services to households, entrepreneurs, companies and other financial institutions. Second, they enable savers to reap the full benefits of long-term investments, while still being able to access liquidity when needed. Third, they assess and monitor the creditworthiness and payment

144 P a g e 144 behaviour of borrowers more efficiently than an individual investor could. Through these activities, banks reduce the inefficiencies caused by asymmetric information and incentive problems between those who save and those who borrow. It is mainly via this channel, that banks create value and contribute to economic growth. However, even though banks assess and monitor borrowers' creditworthiness, savers may still be concerned about whether banks - and their managements - have the necessary skills and will make the required effort to protect their savings. Asymmetric information and incentive problems are still present, but arise at new, different levels: no longer between savers and borrowers, but between savers, bankers and supervisors. In the relationship between banks and their creditors, incentive conflicts may arise between managers on one side (who set the bank's strategy, make investment decisions and monitor the performance of investment projects and the payment behaviour of debtors) and shareholders and debt holders on the other side (who provide the bank's funding and who bear the ultimate risks and receive the benefits of the bank's activities). Information problems may also occur among banks that are linked by mutual business relationships or collective vulnerabilities to systemic events. Asymmetric information and incentive problems can be addressed through contracts, institutions and appropriate regulatory and supervisory frameworks. But this is a rather abstract and idealised view. In reality, more is needed: trust is needed. The medical analogy is a handy way to illustrate this. Patients can always sue doctors for malpractice. They could always enforce the "contract" with their doctor. However, no patient will ever consult a doctor whom he does not trust,

145 P a g e 145 even though he can sue him. The same applies to banking. In general, creditors will not deposit money in a bank whose integrity and soundness they do not trust. Shareholders can set up remuneration schemes to incentivise managers whose activities they cannot monitor full time. But shareholders also need to trust their managers, because not all of their activities are perfectly contractible and, even if they were, it could be difficult and time-consuming to enforce the incentive contract in court. At this point, one could interject that, while trust may have been essential for banking in the past, this is no longer the case today. Our economy and society have undergone dramatic changes in recent decades, which have also affected banks. Innovation and technological progress have reduced the need for trust in some situations. Computerisation has allowed banks to use data-driven applications rather than rely on expert judgement for the evaluation of creditworthiness of borrowers or the pricing of financial products. However, banks and their business have become much more complex than they used to be, which increases the asymmetry of information and, hence, the need for trust. For example, it is not now uncommon for banks now to have multiple parent-subsidiary structures operating in different jurisdictions across the globe. Some banking products have become so sophisticated that most people, even some bankers, no longer fully understand them. By the way, I expect every CEO or Board member to do without products which they do not understand. Today, banks are more complex to manage harder to monitor and their activities are more difficult to understand than was previously the case,

146 P a g e 146 and the asymmetric information and incentive problems I mentioned earlier are more prominent than ever. In short, trust is and has always been essential for banks to carry out their activities, foster economic growth and add value to society. Banking is and always has been trusting. What can be done to restore trust? Given the currently low level of confidence in, and within, banks, what needs to be done to rebuild trust? The role of regulatory reform First, whose job is it to regain trust? In the aftermath of the crisis, significant changes have been made in the regulatory and supervisory framework. Reforms of capital and liquidity regulation, risk management, governance and resolution regimes have been introduced. Moreover, consumer protection has been enhanced. The regulatory framework now has a better and broader base, and is less vulnerable to arbitrage. While much has been achieved, I would like to highlight one piece of work in particular. Last year, the Financial Stability Board published a set of guidelines on supervisory interaction with banks on risk culture. The guidelines are aimed at assisting supervisors in their assessment of risk culture by listing a number of indicators or practices that can be indicative of an overall sound and well-balanced approach. These include an appropriate "tone from the top" within a bank and other key factors, such as accountability, effective internal communication, the existence of challenge mechanisms within the decision-making process, and incentives for employees.

147 P a g e 147 Supervisors themselves have also changed since the crisis. They are now stricter, more pro-active and assess banks in a much more holistic way. Topics such as governance, remuneration and risk appetite are among the key priorities on every supervisor's agenda this year. In the Single Supervisory Mechanism (SSM) for example, we are in the final stages of a thematic review of governance and risk appetite in the 123 institutions directly supervised by us which will feed into this year's assessments of the capital and liquidity adequacy of banks. Our initial findings indicate that a number of banks, while meeting national requirements, do not comply with international best practices with regard to governance. Our key observations include examples of power concentration in individual board members (e.g. holding multiple offices or chairmanships within the same group), a lack of separation between a bank's risk and audit functions, information asymmetries among board members, and instances where the board simply does not take enough time to discuss and reflect on individual issues. It is also apparent that some banks are still in the early stages of implementing their risk appetite framework and therefore still have a lot of work to do to ensure its consistent application throughout the entire organisation. All of these issues reduce the quality of decision-making and risk awareness within a bank and can obscure or even encourage malpractice. Therefore, we will require banks to follow up on these findings. But are the efforts of regulators and supervisors enough? Can trust be rebuilt simply by having better and more credible rules? Our finance-medicine analogy suggests that the answer to these questions is no. It is the doctor who holds the key to earning the trust of his patients. Likewise, rebuilding trust in the banking sector requires the active

148 P a g e 148 engagement of bankers and their stakeholders. Regulatory and supervisory reforms are necessary, but not sufficient to restore people's trust in banks. My view is that, while regulatory reform and supervisory action were certainly necessary to lay the foundations on which banks can restore trust, regulators and supervisors are not the key players in this process. The main effort to regain trust must come from bankers, in particular from banks' management and their boards as the tone from the top as well as the accountability of banks' top management are key for risk culture and staff's behaviour. Without their active effort, society will not start to trust again. The necessary process will be laborious and time-consuming; and it will not be one measure or action that does the job, but rather a complex mixture of governance, risk appetite, risk culture and behaviour from the top. The role of banks and their stakeholders in restoring trust So what must bankers do to rebuild trust? First, bank's management should develop viable business models with a clear long-term perspective. Many of the recent crises have been the consequence of banks targeting high, but risky, short-term gains rather than pursuing lower, but more stable, long-term returns. Banks should refocus on their core functions: providing valuable investment opportunities to savers, while shielding them from liquidity risk, and providing funds to those who need them, while assessing and monitoring their creditworthiness. Financial intermediation is not simply a way to garner revenues; it also supports economic growth and thus, ultimately, provides an important service to society. Significant changes in the economic environment in recent decades have diverted banks from these core functions.

149 P a g e 149 It seems that the combination of an increased range of investment opportunities and funding sources, a trend towards more liberal regulation, and an increasingly competitive environment caused banks to reshuffle their priorities towards maximising short-term corporate and often also personal gain. The change in banks' business models from "originate to hold" to "originate to repackage and sell", which was the proverbial spark in the tinder box that set off the financial crisis, can be seen as a prime example of losing sight of the goal of maximising long-term value. Second, a bank's management and board must have a sense of responsibility for developing the bank's individual risk culture, thus enabling it to deal with risk in a way that supports this long-term business perspective and fosters transparency and accountability. Every bank needs a strong cultural base, which should embody the bank's essence and aspirations and embrace its role as a profit-oriented organisation without neglecting its relevance for the well-being of national economies and for the finances of both individuals and corporations. This strong cultural base should serve as a shared value framework throughout the organisation. On top of these foundations, every bank needs clear risk-taking policies, allowing it to reach its business objectives, while ensuring that risk-taking activities beyond the institution's risk appetite can be identified and addressed in a timely manner. To complement this, there must be clear governance arrangements defining processes and responsibilities for decision-making, risk management, control and audit. Lastly, a bank requires well-functioning communication mechanisms and IT systems to link the bank's decision-making, risk management and control organs together, to convey information to where it is needed, and to help create awareness and transparency about the bank's objectives, policies and values throughout the organisation. Changing an existing culture and the way an organisation thinks about its business is clearly a major challenge.

150 P a g e 150 In particular, at a time when the banking sector as a whole is having to comprehensively rethink the values it embodies and the culture it lives. Although some progress has been achieved recently, much more is still needed. In this context, I welcome the continued initiative of policy-makers to stimulate further progress in this area. For example, in May this year, the G finance ministers and central bank governors urged the Financial Stability Board to begin developing a bankers' "code of conduct" to complement the existing guidance. Third, banks' senior management and boards have to create adequate incentive schemes, including remuneration policies, to promote long-term perspectives within their organisation. We have witnessed too many scandals over recent years, too many cases of misconduct where responsible parties were not sufficiently held accountable. We have witnessed banks cooperating only reluctantly in criminal investigations, and we have seen interest groups rejecting outright any attempt to reform remuneration in the banking sector. Regaining trust will not be easy. Bank managers must convince the public that they will reward socially beneficial behaviour, while unacceptable behaviour will be credibly sanctioned, up to the top. Most importantly, people need to believe that managers will be truly responsible for the conduct of those who report to them. To achieve a turnaround in public sentiment, those working in banks must believe in the value of sustainable business models and ethical behaviour. The tone from the top is key in this endeavour - the message must be that not everything that is legal is also legitimate and that the bank is only interested in legitimate business. This may require a considerable revision of human resources policies, too.

151 P a g e 151 For a start, senior management could think about introducing new recruitment and training guidelines that indicate what sort of talent and personalities should be hired and how the bank's values should be taught to employees. A well-balanced combination of monetary and non-monetary incentives should be in place. Staff should have reasonable compensation and development options aligned with the behaviour they exhibit in implementing the bank's desired values and culture. Remuneration, performance evaluation and promotion systems should be calibrated in such a way that they reward client orientation, long-term value creation and sound risk management practices rather than shortterm revenues. One possibility could be to extend even further the existing claw-back times for bonuses to discourage unacceptable behaviour, possibly up to seven years. Staff should face clear rules on responsibility, liability and integrity and be subject to proportionate follow-up or disciplinary measures in the case of infringements. Last, but not least, the expectations of bank shareholders are critical and key to re-establishing trust. Their demand for higher returns puts pressure on banks and induces them to embark on risky business activities. Hence, efforts to restore trust cannot be successful without a corresponding change in attitude among shareholders. They must understand that there is no such thing as a "free lunch". Properly adjusting for risk, shareholders may actually be better off when banks behave cooperatively and achieve a high level of trust. The role of bankers' self-interest Having identified possible actions bankers can take to restore trust, an important question remains.

152 P a g e 152 Why should bankers ever take such actions? Is it in their own interest? As I stressed before, trust is essential for the functioning of the banking sector. Without trust, banks cannot function properly. This not only has negative consequences for the rest of the economy, but also negatively affects banks themselves. There are several channels through which a lack of trust negatively affects banks. First, it is a potential root cause of crises. Crises usually lead to a significant and often long-lasting contraction in bank profits, as can be seen, for instance, from the large drop in the S&P 500 index for the banking sector. Moreover, they are usually followed by an "aggressive" regulatory response to constrain banking activities. Second, a lack of trust negatively impacts on the relationship between regulators and banks. The interaction tends to become more adversarial. Regulators become less willing to listen to bankers and to take their views on how to do business into account. Third, a lack of trust in some banks and bankers usually translates into a negative sentiment towards the entire industry. This, in turn, has negative implications for business. Customers may leave, and it is more difficult to recruit talent. But this negative sentiment not only has repercussions for banks' business prospects, it also affects the social standing of bankers, whose image is often tarnished in society.

153 P a g e 153 Concluding remarks Let me conclude. The recent crisis is a stark reminder that banking is trusting. The dramatic changes in the banking environment brought about by financial innovation and technological progress have not diminished the role of trust in banking. Any lack of trust significantly impairs the functioning of the banking sector and prevents banks from contributing to economic growth. A lack of trust also negatively affects banks' business and profitability. It is in the banks' collective interest to restore and preserve a high level of trust in, and within, the banking sector. Rebuilding trust is a long and complex process. It certainly requires effort on the part of regulators and supervisors, and a lot has been achieved there. But, ultimately, as the analogy with the trust between doctors and patients makes clear, most of the heavy lifting will have to be done by the banks - their senior managements, boards and shareholders - themselves. There is plenty that they can do and should be doing.

154 P a g e 154 ENISA CE2014 Cyber Europe 2014, After Action Report, Public version Report on Cyber Crisis Cooperation and Management ENISA Cyber Crisis Cooperation and Exercises (C3E) program team: Razvan Gavrila, Adrien Ogée, Panagiotis Trimintzios (Program Manager) and Alexandros Zacharis. ENISA would like to thank to all participants in Cyber Europe 2014 for their valuable contribution. A full version of the After Action Report, containing detailed observations, challenges, recommendations and actions has been made available to all national cybersecurity authorities which participated in Cyber Europe All participants to the exercise interested in the full version shall liaise with their national cybersecurity authority. About ENISA The European Union Agency for Network and Information Security (ENISA) is a centre of network and information security expertise for the EU, its MS, the private sector and Europe s citizens. ENISA works with these groups to develop advice and recommendations on good practice in information security. It assists EU MS in implementing relevant EU legislation and works to improve the resilience of Europe s critical information infrastructure and networks. ENISA seeks to enhance existing expertise in EU MS by supporting the development of cross-border communities committed to improving network and information security throughout the EU. More information about ENISA and its work can be found at

155 P a g e 155 Executive Summary Cyber Europe offers to 32 different countries, Member States of the European Union (EU) and the European Free Trade Association, hereafter collectively referred to as the Member States (MS), the possibility to engage in cooperation activities at various levels with the shared objective to mitigate jointly large-scale cybersecurity incidents. The EU Standard Operational Procedures (EU-SOPs), used to support these cooperation activities, provide Member States with guidelines which they can use in the face of large-scale cybersecurity incidents. The main goal of Cyber Europe 2014 was to train Member States to cooperate during a cyber crisis. The exercise also aimed at providing an opportunity to Member States to test national capabilities, including the level of cybersecurity expertise and national contingency plans, involving both public and private sector organisations. In order to address the different layers of cyber crisis management, Cyber Europe 2014 was divided in three escalating phases, spread over 2014 and early The exercise was a success, for it allowed ENISA to draw numerous lessons, recommendations and concrete actions, which will help to enhance cyber crisis preparedness in Europe. The common ability to mitigate large scale cybersecurity incidents in Europe has progressed significantly since 2010 when the first Cyber Europe exercise was organised. In particular, Cyber Europe 2014 has shown how valuable it is to share information from many different countries in real-time in order to facilitate high-level situation awareness and swift decision-making. Nevertheless, such processes are unprecedented in real-life and hence requires primarily capability development and possibly also policy guidance from both the Member States as well as the EU Institutions and Agencies. It is crucial that Member States continue to rely upon and improve multilateral cooperation mechanisms, which complement the bilateral and regional relations they have with trusted partners.

156 P a g e 156 The EU-SOPs, which are meant to support the former, will be further improved to better take into account the evolving cybersecurity policy context in Europe. In addition, experience gathered throughout this exercise and the previous ones will strongly guide the development of future EU cyber cooperation instruments and exercises. The full after action report includes an engaging action plan which ENISA and Member States are committed to implement. 1. Exercise overview 1.1 Objectives and setup The goal of this exercise has been to contribute to the training of Member States participating organisations with a view to help them cooperate during a cyber crisis. More specifically, this exercise provided opportunities to assess the effectiveness of cooperation and escalation procedures in the face of crossborder cyber incidents which impact the security of vital services and infrastructure. CE2014 had the following key objectives: 1. Test the European alerting, cooperation and information exchange procedures between nationallevel authorities responsible for cyber incidents. 2. Provide an opportunity for Member States to test internally their national NIS contingency plans and capabilities. 3. Explore the effect of multiple and parallel information exchanges between private-public and private-private. 4. Explore the NIS incident response escalation and de-escalation processes (technical-operationalpolitical). 5. Explore the public affairs handling of large-scale cyber incidents.

157 P a g e 157 In order to better tackle the challenges of each layer involved in crisis management, the exercise was divided into three phases: technical, operational and strategic, each phase escalating into the next one. 1.2 Planning The exercise was organised by ENISA and planned jointly with representatives from the participating Member States. It required six planning conferences which took place in Belgium, Greece (twice), Luxembourg, Netherlands and Spain. 1.3 Exercise platform The exercise planning, conduct and evaluation was supported by the ENISA Cyber Exercise Platform (CEP). Developed by ENISA, CEP allows to: - Work on all planning documentation (including Exercise Plan, Scenarios, Incidents/Injects, Policies, Press Releases, etc.). - Facilitate the exercise communication. - Support the development of incidents and injects. - Conduct the exercise (send injects, monitor progress, reporting, etc.). - Simulate the exercise world (news and media, social media, videos, etc.). - Evaluate the exercise (polls, surveys, after action report production). - Stay up-to-date with the exercise events and logistics. CEP is currently being further developed by ENISA in order to be leveraged in future cyber exercises. ENISA accepts requests to contribute to future developments of the platform. In case of interest, please contact the ENISA Cyber Crisis Cooperation team (c3e@enisa.europa.eu).

158 P a g e 158 Any requests received will be evaluated and requesting parties will be informed accordingly of their expected contribution and role as appropriate. 2. Participation The recruitment of participants was the responsibility of the exercise planners (one per Member State and Institution). 2.1 Technical level exercise (TLEx) Participants of TLEx came from 29 countries and the EU Institutions. The participatin teams were composed of technical experts from public and private CERTs. 2.2 Operational level exercise (OLEx) Participants to OLEx were operational crisis management teams from cybersecurity agencies, national and/ or governmental CERTs, as well as crisis management teams from private companies in the telecom and energy sectors. 2.3 Strategic level (SLEx) Participants to SLEx were senior officials responsible for the management of the cybersecurity components of a crisis within the relevant national authorities. 3. Scenario overview The scenario of Cyber Europe 2014 revolved around a proposal for an EU regulation related to Member States importing of energy resources. The regulation aimed to introduce a tax to fund the development of green technologies such as wind farms, solar roads and electric cars. Opponents to the regulation claimed its objective was merely to increase taxes in the midst of the economic crisis. Several countries around the world, potentially impacted by such regulation, claimed that it was a geopolitical manoeuver aimed at undermining their development.

159 P a g e 159 Large lobbying and disinformation campaigns were organised to influence the decision on the EU regulation. Despite these efforts, negotiations moved forward and Member States and EU Institutions became the target of cyber attacks aimed at exfiltrating information about the regulation and destabilizing its energy market. The technical phase (TLEx) of Cyber Europe 2014 was organised at this point in the scenario, with incidents ranging from open source intelligence gathering on social media, mobile phone malware analysis to denial of service attacks and advanced persistent threats. The disruptions caused by these attacks did not prevent the regulation from passing. This led to a series of large-scale cyber attacks, with the goal to instigate fear and prevent the voting of the regulation. Several 0-day vulnerabilities were used to develop advanced exploits, attack various critical infrastructure operators networks and numerous online services. The operational phase of Cyber Europe 2014 (OLEx) was organised at this point in the scenario. The crisis then escalated further, with several energy infrastructure operators severely impacted in the midst of a harsh winter, key critical technologies breached and an increasingly worried public opinion. The strategic phase of Cyber Europe 2014 (SLEx) was organised at this point in the scenario. 4. Key findings and recommendations The key findings from Cyber Europe 2014 are the following: - Cyber Europe 2014 proved to be an excellent opportunity to explore, understand and evaluate existing European cyber cooperation mechanisms at the technical, operational and strategic levels. The exercise strengthened the European cybersecurity community.

160 P a g e Participants were fully engaged in cooperation at national and European levels, which led to a shared understanding of all facets of the crisis within a few hours. - During the exercise, many multilateral interactions at the international level took place, highlighting the importance of regional cooperation. - The EU Standard Operational Procedures and communication tools helped to provide higher situational awareness and structured cooperation activities during the simulated cyber crisis. - Increased familiarity with these procedures could allow for a faster response. - The large majority of participants recognised the benefits of exercising for the first time a strategic level cooperation. - Cyber Europe 2014 contributed to trust building between Member States as it fostered new relationships and strengthened existing ones. - The participating organisations took the scenario seriously and responded adequately to all challenges, either mitigating incidents at the technical level or using their respective contingency and business continuity plans. - Participants to the technical phase recognised that it refreshed, if not increased their cybersecurity capabilities: 98% indicated interest to participate in the next exercise. - The Cyber Exercise Platform proved to be a powerful tool to plan, conduct and evaluate the exercise. - The introduction for the first time of the three phases in Cyber Europe was an important step towards understanding the inner challenges of such large scale crisis management processes. - Large scale cyber exercises such as Cyber Europe 2014 are complex projects which require a long planning phase (over 2 years) and the contribution of scarce expertise, both from ENISA and the Member States. 5. Key recommendations from the exercise

161 P a g e 161 The following are the key recommendations from the exercise: 1. Cyber Europe exercises, as well as any cooperation activity at European level during real cyber crises, build upon existing relations between Member States. ENISA and the Member States will continue to invest in trust building activities to maintain and further develop existing trust. 2. ENISA and the Member States should further develop the operational procedures which drive the cooperation activities during a cyber crisis, taking into account existing and future cooperation frameworks, to bring these procedures to a maturity level similar to those found in other sectors such as civil protection and aviation. 3. ENISA and the Member States will seek further integration with national and regional activities. 4. ENISA will address future Cyber Europe activities as a programme containing both trainings as well as small and large scale exercises, in order to provide a better experience and achieve greater impact. 5. Lastly, ENISA will further develop the Cyber Exercise Platform to offer a richer experience to both players and planners, as well as to support the organisation of national and regional exercises, fostering the development of a cyber exercise community.

162 P a g e 162 Jens Weidmann Euro crisis and no end in sight Speech by Dr Jens Weidmann, President of the Deutsche Bundesbank, at the industry soirée of the industry confederation for the district of Gütersloh (Unternehmerverband für den Kreis Gütersloh e. V.), Gütersloh 1. Welcome Dr Miele Ladies and gentlemen Thank you for inviting me to your industry soirée. I am happy to see that there are so many people who are interested in listening to my speech. According to the astronomical definition, autumn began this morning at precisely Summer has, therefore, definitely come to a close now. The refugee crisis has been the political topic dominating the press these past few weeks, and I am sure it will continue to make the headlines in the autumn. The troubling pictures of death and forced displacement in the crisis regions of the Middle East give us an idea of the scale of suffering endured by the refugees of war and have set in motion a wave of willingness to help here in Germany. Giving a helping hand to people whose lives are in danger should be the most natural thing in the world in a civilised country. However, the large influx of refugees undoubtedly also represents a colossal challenge which will ask a lot of us - not only in financial terms. There are also language and cultural barriers that need to be overcome. But if we manage to integrate those who are allowed to stay into our society, migration also offers long-term opportunities. Demographic change means that we are going to need additional workers in the future to maintain our level of prosperity.

163 P a g e 163 According to the current population projection by the Federal Statistical Office, the working-age population will diminish by up to 15 million persons by 2060, which represents a decrease of 30%. "Work is the best path to integration." This wise remark by the deputy chairman of the Gütersloh industry confederation, Dr Ernst Wolf, was quoted last week in the context of an initiative that was launched by the confederation to offer these people greater job opportunities, which is something I can only support. Integration can only be a success overall if people are swiftly and sustainably integrated in the labour market. If we cast our minds back to the beginning of the summer, the headlines were dominated by a different topic altogether - the "Greek drama". Following what could be described as a showdown in the night from 12 to 13 July in Brussels, a political agreement brought to an end a marathon session of negotiations. Since then, the third assistance programme for Greece has been concluded in formal terms, too. On top of the more than 200 billion in fiscal assistance already granted, Athens is set to receive further loans from the European Stability Mechanism (ESM); however, in return, Greece must undertake lasting consolidation and reform steps. Unfortunately, a great deal of time and trust have been squandered recently. Last Sunday, the Greek people were asked to vote in yet another early general election. It is now up to the re-elected government to put the country on a course that will overcome the crisis once and for all. It now needs to deliver on its political promises. It will be crucial for Greece to implement reforms aimed at creating a competitive economic structure and a more efficient public administration, and for the country's public finances to be consolidated in a sustainable

164 P a g e 164 manner. Admittedly, the problems faced by Greece cannot be compared with those of other countries as they run far deeper; but what other crisis countries have experienced ought to encourage the Greeks. They have shown that austerity and reform programmes do work - provided, of course, that they are not implemented only half-heartedly. The trending concept of "ownership" is also part and parcel of this. The more reluctant a government is to embrace reforms and consolidation, the more questionable their success will be. Spain and Ireland have made clear progress on the path out of the crisis, as have Portugal and Cyprus. At the same time, it would be short-sighted to imagine that the situation in Greece is the euro area's only problem. The crisis in the euro area, which has been lingering on for more than five years now, is a clear lesson that the monetary union as a whole has weaknesses. These weaknesses and the steps that are needed to eliminate them and to preserve monetary union as a lasting union of stability will be the topics of my speech this evening. 2. Monetary policy in the spotlight After all, as a monetary policymaker, I have a vital interest in making sure that the European framework in which we create monetary policy is a coherent one. Without such a framework, monetary policymakers will find it difficult to deliver on their key remit of safeguarding price stability. The crisis laid bare that the success of monetary policy also hinges on factors over which it effectively has no control, such as the state of public finances, the financial system or the economy's competitiveness. It showed that central banks can quickly be pushed to offer a quick fix by providing cheap money.

165 P a g e 165 Now, as then, European monetary policymakers are facing unrelenting pressure, and central banks are being expected to perform a multitude of different tasks. Before I delve into the topic of reforming the regulatory framework, I would therefore like to say a few words on the Eurosystem's monetary policy. European monetary policy has been in a state of emergency for the past seven years. In order to prevent the global financial and economic crisis from escalating, the ECB Governing Council began drastically reducing the key ECB interest rates from the autumn of 2008 onwards and also agreed on a number of far-reaching unconventional measures. These measures aimed at shoring up liquidity levels at banks which had lost confidence in each other. A further objective was to uphold the supply of credit to the economy. With the onset of the euro-area sovereign debt crisis in 2010, European monetary policymakers came under even greater pressure to act, and the focus increasingly shifted to the Eurosystem central banks. One major reason for this was that the political coordination processes within Europe are sometimes cumbersome and central banks have powerful instruments at their disposal to prevent the crisis in the euro area from coming to a head. Some would even say that it was ultimately the Eurosystem which kept monetary union alive. This should, however, have primarily been the task of politicians. At the end of the day, the instruments used by central banks are more like a painkiller, ie they temporarily make the problems more bearable, but they do not tackle the root causes and are even associated with risks and sideeffects. You could say the central banks played a "sweeper" role, and they did so by implementing measures that took them to the outer bounds of their mandate.

166 P a g e 166 And by that, I particularly mean the targeted purchases of government bonds of individual crisis-stricken countries. Given that the profits and losses on this paper are distributed among the Eurosystem central banks, the purchases are, in economic terms, nothing more than the introduction of euro bonds through the back door. Ladies and gentlemen The Eurosystem's mandate is to ensure price stability within the euro area. It is not to ensure the solvency of the individual member states through the "communitisation" of such liability risks via the central banks' balance sheets. Democratically elected politicians, ie parliaments and governments, should be the ones who decide whether liability risks should be mutualised. And it is important to remain within the bounds set by the European Treaties when making these decisions. Furthermore, monetary policy must be wary of playing second fiddle to fiscal policy as this could make it increasingly difficult for monetary policymakers to ensure price stability. As you are no doubt aware, the Eurosystem resumed its purchases of euroarea government bonds in March this year, this time on a very large scale as it is planned that these purchases will continue until at least September Unlike in the case of the previous purchase programmes, the national central banks are now restricting their government bond purchases to securities issued by their home country; any profits or losses arising from the purchases are not distributed within the Eurosystem. This approach does at least, to a certain extent, take account of the concerns that were previously voiced, also by me, in connection with the previous purchase programmes. And yet, these purchases still blur the boundaries between monetary and fiscal policy. After all, the Eurosystem central banks are becoming the biggest creditors of their respective countries.

167 P a g e 167 That is why, in my opinion, government bond purchases are not a monetary policy instrument like any other and should therefore purely be used, if at all, as a contingency instrument. As a result of a difficult weighing-up process, I therefore took a sceptical view of the recent decision of the ECB Governing Council to purchase government bonds. Nevertheless, I cannot deny that in 2015 we are now in a completely different monetary policy situation than we were at the beginning of the sovereign debt crisis back in We are not expecting very dynamic price developments, also in the medium term, and interest rates have already been reduced to zero. Our definition of price stability states that the inflation rate in the euro area ought to be just under 2% in the medium term. However, much like at the beginning of the year when the most recent government bond purchase programme was adopted, the inflation rate currently stands at just above zero. This is due to the sluggish growth in the euro area, the adjustment processes in the crisis-stricken countries and above all the sharp decline in crude oil prices. Factoring this effect out of the inflation rate, price inflation currently stands at around 1%. Particularly, the dampening effect which the decline in energy prices is having on the inflation rate should be no more than a short-term phenomenon, and the adjustment processes, too, are only temporary. Hence the ECB's medium-term projection that inflation will climb back towards 2%. I am still of the opinion that monetary policymakers should look through the energy price-driven inflation fluctuations since they are of a temporary nature and are in any case strengthening the economy owing to an increase in purchasing power. In Germany alone, the decline in oil prices this year has saved consumers and enterprises something like 25 billion.

168 P a g e 168 That's almost 1% of GDP. Unlike the monetary policy debate back in January, the economic recovery in the euro area has now stabilised. The concerns about deflation, which had been overblown even at the start of the year, have now dissipated further. There is no disputing the fact that the subdued economic development in the euro area and the muted outlook for inflation necessitate an accommodative monetary policy stance. So you might appreciate why a prospective normalisation of monetary policy is not currently on the agenda. What you may not be able to understand, however, is how the ECB Governing Council defines price stability. You may be wondering: what is the problem if prices rise by significantly less than 2% on average? From a consumer's perspective I can fully understand this argument, especially as the 2% inflation target is not necessarily a precise definition. Nevertheless, from an economic perspective there are good reasons why all major central banks worldwide, such as the Federal Reserve, the Bank of Japan and the ECB, too, now tend to set inflation targets of around 2%. The Bundesbank likewise assumed a "2% price norm" when it derived its money supply targets, which was, however, to be interpreted as "the maximum tolerable inflation rate in the medium term". In essence, an inflation rate of 2% is ultimately a compromise between two countervailing objectives: A low inflation rate helps to reduce the macroeconomic costs of inflation. These costs occur above all because in the event of inflation, prices can no longer serve to the same extent as an indicator of scarcity. For enterprises or consumers, it is more difficult to identify whether an increase in prices is the result of a rise in demand or a reduction in supply, or whether the price was merely adjusted during a wave of numerous price rises. Conversely, a higher rate of inflation provides a safety margin to the zero

169 P a g e 169 interest bound, which, as we have seen in a number of countries, actually stands at somewhat below zero. The lower the targeted rate of inflation, the higher the risk of bumping into the zero interest bound, which is currently the case in the euro area. Furthermore, central banks consequently also have less scope to stimulate the economy using conventional instruments and also to prevent deflationary developments. The latest research indicates that an inflation rate of "close to, but below 2%" is a good compromise between the permanently accruing inflation costs and the occasional benefits resulting from having a greater safety margin. Moreover, the Governing Council's credibility would undoubtedly take a major knock if it were to redefine its objective now of all times. It would probably be like what happened when the deficit rules were relaxed in 2005 after several large countries had trouble complying with them. That put paid to the credibility of the Stability Pact once and for all. When the time is right for the Eurosystem to exit the ultra-loose monetary policy, then that is precisely what it should do, undeterred by cries from finance ministers or financial markets. It should follow the example of former Chairman of the US Federal Reserve Paul Volcker, who once said: "Our credibility will be related more to making the right decision than to worrying too much about what the market says about it in the short run." In short, the expansionary monetary policy should not be continued for longer than absolutely necessary because, over time, it also generates risks that can begin to play a role for monetary policy if they influence long-term price developments or the central bank's ability to safeguard price stability. One risk is that low interest rates produce an illusion of sustainability, with the result that structural reforms and fiscal consolidation might end up being kicked further and further down the road. Another that springs to mind is the risk to financial stability because the low-interest-rate setting can lead to excesses in the financial and asset markets.

170 P a g e 170 Low interest rates are also squeezing the earnings of banks, insurers, building and loan associations, pension funds, and so on. The results of a survey of 1,500 small and medium-sized banks released last week by the Deutsche Bundesbank and BaFin show that these institutions are struggling to cope with the low-interest-rate environment. Looking at their own calculations and forecasts, the banks reported an aggregate drop in pre-tax profits of one-quarter up to At the same time, I see the risk that zero interest rates might impede the process of economic mutation, that is to say, what Joseph Schumpeter once described as "creative destruction". The danger is that enterprises which are in fact insolvent continue to receive credit and therefore do not disappear from the market, whilst the growth of healthy companies is stunted. We also talk about zombie firms and evergreen lending in this regard. But savers are also amongst the casualties of the low-interest-rate setting. Something that is often overlooked in this respect, however, is that the real rate of interest, ie adjusted for inflation, on savings deposits is not really all that low by historical standards. The real interest rate on savings deposits in Germany is currently somewhere around 0.25%, on a par with its average over the past ten years. And there were repeated spells of negative real interest rates in the 1970s, 1980s and 1990s. 3. The future of monetary union Ladies and gentlemen It's not the job of monetary policymakers to serve the interests of one group or another. The primary task of monetary policy is to ensure price stability. That is, and always will be, the most valuable contribution which monetary policy can make to our prosperity. This also holds true, and notably so, in the euro area, which has been put to a very stiff challenge by the financial and sovereign debt crisis. It's a challenge, incidentally, that we are still a long way from overcoming.

171 P a g e 171 That brings me to the weaknesses I mentioned earlier in the institutional framework of monetary union that need to be eliminated. The original structure sketched out in the late 1980s and early 1990s looked something like this. Monetary policy was to be entrusted to an independent central bank whose main task was to safeguard price stability. Fiscal and economic policy, on the other hand, would remain a matter for national policymakers. In order to make this asymmetric structure safe and ensure that monetary policy would indeed be able to achieve the goal of price stability, various precautions were put in place. The ban on the monetary financing of governments by the central bank - to prevent money from being "printed" to fund government debt. The no-bail-out clause - which makes it clear that no member state is liable for the debts of another member state. Debt rules - which were designed to prevent member states from accumulating excessive debt. The founding fathers of the euro probably assumed that monetary union would sooner or later evolve into a political union anyway. Addressing the Bundestag in November 1991, the then Federal Chancellor Helmut Kohl remarked that "the idea of sustaining economic and monetary union over time without political union is a fallacy" - a view shared by the Bundesbank at the time. His expectation that the euro would be no more than a stepping stone towards deeper political integration has been shown to be mistaken, at least it has so far. Monetary union will soon be seventeen years old and there is still no sign of a political union. And anyhow, monetary union without political union doesn't seem all that far-fetched to me.

172 P a g e 172 I do indeed think that monetary union can function without political union provided that the principle of individual national responsibility is rigorously adhered to. But the past few years have shown us that monetary union in its current form is a fragile creature and risks going astray. So perhaps we should take Kohl's remarks as more of a warning than a prophecy. US investor Warren Buffett coined the phrase: "You only find out who is swimming naked when the tide goes out". That's how it was in the euro area, where matters began to go astray very early on but didn't emerge clearly for all to see until the crisis erupted. Dwindling competitiveness, yawning current account deficits, the inefficient use of capital inflows, mounting private sector indebtedness - all these developments made the countries affected more prone to crisis, but they weren't addressed by the EU. Indeed, unlike fiscal developments, matters that went awry at the macroeconomic level, such as excessive current account imbalances, weren't even given a second glance. And even an area which has been regulated since time immemorial - public finances - brought forth serious irregularities with the aid of the lax application of the agreed rules. The crisis ultimately forced the countries concerned to correct the abovementioned distortions. The fiscal assistance from the rescue programmes helped them to drag out the necessary adjustment process and thus perhaps make it a little more feasible at a political level. The numerous rescue and crisis-response measures taken in recent years have therefore stabilised the euro area for now. But they've also effectively established elements of mutualised liability and thus upset the balance between liability and control. That is to say, risks have been mutualised, but the corresponding control

173 P a g e 173 rights have not been transferred to the Community level. The principle of individual national responsibility has obviously lost some of its credence, but it has not been replaced by a compelling approach built around the principle of common responsibility. Ladies and gentlemen Perhaps some of you know the famous "The crooked picture" sketch performed by German comedian Loriot. Loriot plays a man who is shown to a waiting room where he notices that a picture on the wall is crooked; he tries to straighten it but everything goes wrong - lamps are knocked down, cupboards topple over, porcelain is shattered and the whole room descends into chaos. The regulatory framework of monetary union is a little like Loriot's picture frame: crooked. But unlike the crooked picture, the crooked regulatory framework is more than just an aesthetic problem: it threatens the structural stability of monetary union as a whole. Yet how can we right it again without unleashing chaos? The multitude of proposals for the institutional reform of monetary union that have been voiced in the past few weeks can essentially be divided into three categories. First, there are proposals that aim to strengthen the fundamental principle of the framework that was formulated in the Maastricht Treaty: they propose a continuation of decentralised decision-making powers in fiscal and economic policy matters alongside national liability, with the targeted removal of the weaknesses that this framework has revealed. Second, there are proposals for a huge step forward into European integration; these envisage monetary union evolving into a fiscal union, perhaps even an all-encompassing political union - with joint liability, but also joint rights of control. And third, there are a host of proposals blending elements of the first and second categories, mostly in the guise of expanded joint liability but largely unaffected national sovereignty.

174 P a g e 174 These reform proposals follow the maxim of "having your cake and eating it, too". The problem with these mixed forms is that liability and control fall out of balance. To my mind, however, the unity of liability and control is a key prerequisite for the structural stability of monetary union. Ultimately, then, I believe there are just two paths that lead to a stable monetary union. The middle path recommended by so many could, on the other hand, be a road to nowhere. The Five Presidents' Report on the future of the euro area, which was authored by the President of the European Commission Jean-Claude Juncker together with presidents Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz, and which was presented at the end of June, appears to me to aim clearly for centralisation and risk-sharing. But the five presidents say nothing about the transfer of effective control rights, not to mention sovereignty rights - understandably so, one might add. After all, there is very little willingness among European governments to veritably relinquish sovereignty. And the national parliaments insist on retaining their most prestigious right, the right to make the budget. Nobody likes having their affairs meddled with. That's already a common response whenever the European Commission requests corrections be made to national budget plans. Last autumn, when there was the prospect of the European Commission rejecting the French budget, the French finance minister Michel Sapin said: "The Commission (...) has absolutely no power to reject or knock down or censure a budget. Here as elsewhere, sovereignty belongs to the French parliament." Nobody would really dispute that comprehensive reform can only be

175 P a g e 175 achieved one step at a time. But if we don't want to stumble, the steps also have to be taken in the right order. I will give you two examples. The five presidents call for the prompt establishment of a joint deposit guarantee scheme. Given that we now have a system of joint banking supervision in the euro area, it would be logical in a way, at least for the institutions supervised directly by the ECB, to belong to a single deposit guarantee scheme. However, the fortunes of banks do not hinge solely on supervision, but are still heavily influenced by national economic policy and national legislation, too. Consider the national insolvency codes, for example. More forgiving rules on the insolvency of corporates or private individuals can impair the profitability of banks and shift burdens from the private or public sector into banks' balance sheets. If this drives banks into distress, depositors from other European countries would then effectively have to foot the bill. This is why I regard cross-border risk-sharing in respect of deposit protection as premature. I feel similarly about another form of risk-sharing that is proposed again and again, specifically the creation of a single unemployment insurance fund. As long as member states themselves control the main job creation levers - which is to say, they decide autonomously whether to implement labour market reforms, how high to set the minimum wage or even if they are investing enough in education and training - then risk-sharing would be premature here, too. Using these or other instruments - sometimes there is talk of a euro-area budget, sometimes of "fiscal capacity", and at other times of a "macroeconomic stabilising function" - economic shocks affecting individual countries could, of course, be better cushioned. But the big risk is that payments intended to cushion country-specific shocks become permanent one-way transfers.

176 P a g e 176 Some have even come out and explicitly called for a revenue-sharing arrangement. France's economy minister Emmanuel Macron, for example, said in an interview with the Süddeutsche Zeitung: "Monetary union without a revenue-sharing scheme - that's impossible! The strong have to help." Macron concedes that advocating permanent fiscal transfers is breaking a taboo for Germany, but in turn, raises the prospect of reforms in France, arguing that we all have to change our ways. In other words, France wishes to remain the sole decision-maker in questions of structural reform, but is indicating good intentions. Ladies and gentlemen If I may return to the image of a crooked frame: regular transfer payments, without setting up a genuine fiscal union, would be like skewing the angle of a crooked picture even more. Genuine fiscal union or even political union categorically requires sovereignty to be surrendered to the union level. This would not only necessitate amendments to the European Treaties, but in many cases, to national constitutions as well. And questioning monetary union's focus on stability would be taboo as well. Transfer payments are unhelpful as long as there is a lack of political will to relinquish sovereignty. Strengthening and reinforcing the Maastricht framework is thus the right way to make monetary union more stable. Decentralised decision-making powers in fiscal policy should, in principle, be retained. What needs to be strengthened is the liability principle, that basic law of the market economy which you, as businesspeople, also have to bear in mind. Walter Eucken once got straight to the heart of the liability principle with the succinct line: "Whoever reaps the benefits must also bear the liability."

177 P a g e 177 Without liability, a market economy system cannot function. The weaknesses of the decentralised approach can be eliminated, in my view. A host of institutional reforms have already been implemented, several of them somewhat half-heartedly, unfortunately. First, the fiscal rules of the Stability and Growth Pact were tightened and a fiscal compact was agreed upon. The aim is for the fiscal rules to become more stringent and binding again in order to build confidence. Second, a procedure for identifying macroeconomic imbalances at an early stage was established, in which the European Commission regularly examines whether private sector debt or member states' current account balances, for example, are a source of harmful imbalances. Third, a crisis mechanism was set up - a temporary one at first, then a permanent one - which is designed to serve as a "firewall", safeguarding the stability of the financial system in the euro area. Fourth, a banking union was resolved, introducing a Single Supervisory Mechanism under the aegis of the ECB and a Single Resolution Mechanism for ailing banks. After all, it had become clear that banks' difficulties have knock-on effects across national borders, but that national supervisors are all too keen to put on "rose-tinted spectacles" when it comes to "their institutions". And fifth, financial market regulation was intensified. Here, too, it was important to enforce the liability principle more rigorously once again. Of course, merely putting stricter regulations in place is not enough; these actually have to be applied. As far as fiscal regulations are concerned, a certain degree of doubt about the consistent implementation thereof is not entirely unwarranted. The leeway and discretion accorded for interpreting these regulations are immense and being used time and time again to delay budgetary

178 P a g e 178 consolidation. Wolfgang Schäuble, Germany's Finance Minister, recently reiterated just how important it is for the European Commission to strike the right balance between its political function and its role as guardian of the treaties. As a result of this double mandate, the Commission often leans towards compromises to the detriment of budgetary discipline. By instead entrusting budgetary surveillance to an independent fiscal authority, the regulations could be interpreted more stringently. Yet a stricter interpretation of the fiscal regulations alone is still not sufficient to safeguard sound public finances. We must also strengthen the disciplining function of the financial markets. The "no bail-out clause" simply lacks credibility. This is one key reason as to why there were next to no risk premiums on government bonds of highly indebted member states prior to the financial crisis. Investors quite rightly assumed that the euro-area countries would not allow a member state to fail as this would have negative consequences for financial stability throughout the euro area. Conversely, this means that the no bail-out principle can only be credible if there is an orderly procedure for winding up a sovereign without this having a knock-on effect on financial stability. We have to make the prospect of a sovereign default less frightening, as it were. The collective action clauses implemented in 2013 have already signalled to investors that they should expect a debt haircut if a government becomes overindebted. In order to be in an even better position to hold bearers of government bonds liable for their decisions, it would be helpful to have in place a mechanism that automatically extends the maturities of government bonds should a country receive funds from the ESM.

179 P a g e 179 This would prevent a situation in which European taxpayers pay off private creditors. However, to make the prospect of sovereign default less frightening, it is also essential to ensure that such an event does not endanger the stability of the entire financial system. The assistance granted to Greece was justified not least by the fact that a Greek default would have put the stability of the European financial system at risk. And this is where banking regulation comes into play. The more equity and liable (ie bail-in-able) debt capital that banks have, the better equipped they are to withstand sovereign debt restructuring. This is why it is so important that regulations on increasing liable capital are taken now at both international and European level. This will also boost the financial system's resilience if it is faced with a negative shock. If banks had been better capitalised, the consequences of the financial crisis would not have been so severe. In order to effectively cut the toxic links between banks and sovereigns that the euro-area crisis intensified so dramatically, we must end the preferential regulatory treatment of sovereign debtors in the medium term. This preferential treatment comprises, among other things, the fact that banks do not have to hold any equity for loans to governments as these are assumed to be risk-free. The consequence of preferential treatment is that banks have a strong incentive to invest in government bonds - precisely those banks that already have too little equity. The Greek drama has shown beyond a doubt that government bonds are far from risk-free. Gradually abolishing this preferential treatment is likely to inflate risk premiums on government bonds with a higher probability of default.

180 P a g e 180 In turn, this should have an additional disciplining effect on these countries. Conversely, lending to households and corporations becomes more attractive, spelling an improved credit supply in certain countries. As it could become more expensive for countries to borrow funds, there is considerable resistance at international level to abolishing this preferential treatment. However, the topic is now on the agenda of the relevant committees, and my colleagues and I will not let up in the fight for change. 4. Conclusion Ladies and gentlemen I do not wish to take up too much of your time, so I shall refrain from going into further detail. My aim is merely to demonstrate that centralisation is not the only route to a stable monetary union. The union can also be stabilised with a decentralised structure, as long as the conditions are right. And until member states are prepared to surrender sovereignty in return for improved risk sharing, this is also the better route. Incidentally, strengthening the Maastricht framework would also relieve the strain on Eurosystem central banks, which all too often had to take on the role of "sweeper" during the crisis. In the world of football, the position of sweeper has been outdated since back in the days of Franz Beckenbauer, and the emergence of the defensive back four has made it quite a rarity indeed. Let us do the same, then, for monetary union; let us replace the sweeper with a strong line of defence: a strengthened Maastricht framework. Thank you for your attention.

181 P a g e 181 Disclaimer The Association tries to enhance public access to information about risk and compliance management. Our goal is to keep this information timely and accurate. If errors are brought to our attention, we will try to correct them. This information: - is of a general nature only and is not intended to address the specific circumstances of any particular individual or entity; - should not be relied on in the particular context of enforcement or similar regulatory action; - is not necessarily comprehensive, complete, or up to date; - is sometimes linked to external sites over which the Association has no control and for which the Association assumes no responsibility; - is not professional or legal advice (if you need specific advice, you should always consult a suitably qualified professional); - is in no way constitutive of an interpretative document; - does not prejudge the position that the relevant authorities might decide to take on the same matters if developments, including Court rulings, were to lead it to revise some of the views expressed here; - does not prejudge the interpretation that the Courts might place on the matters at issue. Please note that it cannot be guaranteed that these information and documents exactly reproduce officially adopted texts. It is our goal to minimize disruption caused by technical errors. However some data or information may have been created or structured in files or formats that are not error-free and we cannot guarantee that our service will not be interrupted or otherwise affected by such problems. The Association accepts no responsibility with regard to such problems incurred as a result of using this site or any linked external sites.

182 P a g e 182 Solvency II Association 1. Membership - Become a standard, premium or lifetime member. You may visit: 2. Monthly Updates - Subscribe to receive (at no cost) Solvency II related alerts, opportunities, updates and our monthly newsletter: 3. Training and Certification Become a Certified Solvency ii Professional. We are pleased to announce our updated Distance Learning and Online Certification programs: Become a Certified Solvency ii Professional (CSiiP) m.htm Become a Certified Solvency ii Equivalence Professional (CSiiEP) m.htm For instructor-led training, you may contact us. We can tailor all programs to your needs. We tailor Solvency II presentations, awareness and training programs for supervisors, boards of directors, service providers and consultants. 4. Solvency II Association Authorized Certified Trainer (SOLV2A-ACT), Certified Solvency ii Professional Trainer (CSiiProT) Program - Become an ACT. This is an additional advantage on your resume, serving as a third-party endorsement to your knowledge and experience. Certificates are important when being considered for a promotion or other career opportunities.

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