Session VII: The Global and EU
Public Policy Agenda
Christian Büche, Partner, K&L Gates Frankfurt
Sean Donovan-Smith, Partner, K&L Gates London
Tom Wilkins, Account Director, Westbourne Communications
© Copyright 2015 by K&L Gates LLP. All rights reserved.
Presentation outline
 The recent UK election and its possible
consequences
 The European Commission’s proposal for a
Capital Market Union
 Mutual recognition and equivalence across
jurisdictions, including third-country access to the
EU
 The outlook for development of MIFID and EMIR
projects
 Reform of Money Market Funds’ regulation
204
Impact of BREXIT on Financial Services
 British business will voice even more loudly its opposition
to the UK leaving the EU
 Big banks and funds’ possible relocation outside the UK
or outside the EU
 British Chamber of Commerce letter to the PM
 ‘take action to secure the UK’s economic future’ (11 May 2015)
 Bertelsmann Stiftung and Ifo institute, Germany
 Brexit could cost the UK up to 14 percent of GDP
 Threat to the Capital Markets Union (CMU)
klgates.com
205*
Consequences for the financial sector
 Moody’s : ‘ditching the EU could be harmful to the UK and there is
very little to gain by leaving the EU’
 Loss of appeal for investors — FTSE 100 is a major hub for
international companies to list
 Financial sector against a Brexit: possible banks’ relocation outside
the UK i.e. Goldman Sachs
 A danger to the Capital Markets Union (CMU)
 EU level — support for Commissioner Hill proposed CMU may weaken
 CMU is organised around all 28 member states, losing the UK and its key
financial centres will make a CMU less appealing
 Frankfurt stronger financial hub? Increasing ECB importance…
206
Alternatives to the EU
Swiss approach
 The UK receives a status similar to Switzerland — trade agreement with the
EU, but not all important issues covered: Switzerland has a free trade in
goods but not on services (unlike the EEA)
 Series of bilateral negotiations and agreements
 UK’s financial services industry would face the challenges: Switzerland only
has an agreement on non-life insurance and nothing on else on the financial
services side.
European Economic Area (EEA)
 Allows UK access to EU’s single market
 UK can adopt almost all the relevant EU legislation, but loss of influence on a
number of important issues such as trade (no formal vote)
Free trade agreement (FTA)
 Need to ensure that any FTA signed includes access to EU services markets
 UK will not be in a position to push for further liberalisation
207
What now ?
 George Osborne and Philip Hammond will have relevant
roles in negotiations
 Cameron embarks on EU tour
 1 June – talks with Germany, France and Commission President
Juncker
 9 June 2015 – UK Parliament passed EU referendum bill
 10/11 June 2015 – EU Summit (Brussels)
 One on one talks with Spain, Finland, Romania and Cyprus
 June 2015 – European Council Summit
 2017 – In/out referendum
 In the event of a Brexit, likely to take 10-15 years to
unwind Britain’s EU commitments
208
Broad areas for renegotiation
 Internal market
 Jobs and growth
 Eurozone integration
 Protection of member states/economies not in Eurozone
 Two-speed Europe
 Subsidiarity principle
 More say for national parliaments on regulation
 Social benefits
 Protection against ‘benefits tourism’
 Further development of other freedoms (services and
capital)
209
Capital Market Union
CMU in context
 Jean-Claude Juncker (then candidate for Commission President):
‘to improve the financing of our economy, we should further develop and integrate
capital markets. This would cut the cost of raising capital, notably for SMEs, and help
reduce our very high dependence on bank funding. This would also increase the
attractiveness of Europe as a place to invest’ (European Parliament Plenary, 15 July
2014)
 Appointment of Lord Hill – Commissioner for Financial Stability, Financial Services and
Capital Markets Union
 18 February 2015: Commission publishes Green Paper ‘Building a Capital Markets’
 Union’ Capital markets in EU are:
 Fragmented
 Underdeveloped and
 Play less of a significant role in financing the economy compared to other jurisdictions
 Green Paper outlines:
 Challenges facing EU capital markets
 Priorities for early action
 Measures to develop and integrate capital markets and
 Next steps
211
Components of a CMU
CMU
PROSPECTUS
DIRECTIVE
Two specific
consultations were
launched in parallel to
the CMU Green Paper
SECURITISATION
212
Prospectus Directive
 Cornerstone of EU capital markets regulation
 Last amended in 2010 and due for review in January 2016
 Recent Consultation Paper seeks to:
 Examine ways to simplify the information included in prospectuses
 Examine when a prospectus is necessary and when it is not and
 How to streamline the approval process
 Why the need for review? Reduction of burdens on issuers = easier
and more affordable to raise funds
 Disadvantages of current rules:
 Costly
 Complex
 Too much information disclosure required
213
Securitisation
 Recent Green Paper prioritises the development of a sustainable high
quality securitisation market
 Consultation Paper: ‘An EU Framework for simple, transparent and
standardised securitisation’
 Objectives:
 Lord Hill – ‘encourage safe, high-quality securitisation’
 US markets have recovered to pre-crisis levels in contrast to EU
 European Securitisation market issuance volume down from €367
billion (2009) - €156 billion (2014)
 Decline in professionals and active market participants
 Progress made by EBA, BoE and ECB
214
Why is a CMU necessary?
 Lord Hill:
‘…..the purpose of a Capital Markets Union is to make it easier to link
savings to growth and to channel savings from anywhere in the EU to
be invested in businesses anywhere in the EU. The goal is a true
Single Market in capital.’
 Improvement of SME access to funding
 Establish a genuine single capital market
 Phil Evans, director (International), Bank of England states three
benefits:
 Better match of borrowers and investors (allocative efficiency);
 Combating the overreliance on bank funding; and
 Enhancing risk-sharing across the EU
215
Overall objectives of the CMU
 Put in place the building blocks of an integrated and wellfunctioning single market for capital by 2019
 The CMU is a project for all 28 member states, not for a
subset
 It is built on the foundations of financial stability created
by the Banking Union and other financial reforms over the
the last five years
 The Single Rulebook needs to be effectively and
consistently enforced
216
How to improve access to finance
 Address information problems
 Encourage banks to provide feedback to SMEs whose
credit has been declined
 Development of more tailored accounting rules for
SMEs
 Creation of a European Investment Project Pipeline
 Dedicated website to ease access to information for investors
on infrastructure projects
217
Challenges to a CMU
 Cultural and legal traditions constraints in Member States
 EU markets’ lack of harmonisation
 Supervision – especially in technical areas
 Distinction to be drawn between common rulebook vs single
supervisor
 Issue of centralised supervision: ESMA and ECB
 International consistency
 Capital markets’ financing to complement, not replace
banking sector
218
Opportunities created by CMU
 UK
 CMU cannot be properly achieved without London/UK
 Half of all capital markets activity derive through the UK
 Increase in capital markets would reap great fruits to the UK
economy and the City of London
 UK should ensure its place at the forefront of the discourse
 SMEs
 Improved access to finance for SMEs
 SMEs are critical to the EU economy (jobs and growth)
 Focus on medium-sized companies
 Focus on ambitious SMEs
219
CMU Consultation
 Seven hundred responses received to CMU consultation and over
120 responses to its securitisation consultation.
 The Commission currently analysing response
 Response will form Action Plan to be presented in September
Key initial takeaways
 Step missing in the ‘funding escalator’ in Europe
 Need to eliminate barriers for capital to move across the EU
 Need to strengthen venture capital ecosystem in Europe
 Need to look at best practices from some EU countries on private
placement
 Ambiguity in regulatory treatment of private placements
 Divergences and inconsistencies
220
Timeline




18 February – adoption of the CMU Green Paper
13 May – deadline for responses to consultation(s)
8 June – Public hearing, Brussels
16 June – ECON vote on its motion for a resolution on
CMU
 19 June – ECOFIN Council meeting
 Action plan on CMU to be published after summer and
followed by specific legislative proposals
 CMU expected to be set up progressively in the
coming years
221
Mutual Recognition and Equivalence across
Jurisdictions, Including Third-Country
Access to the EU
 Framework established for financial institutions, funds and market
infrastructure established outside the EU to access European
investors and markets
 Cooperation agreements to be put in place between third country and
EU member state or ESMA
 Access to EU financial markets based on national laws and are
divergent
223
Recognition of third-country regulatory regime
 Equivalence determination
 Co-operation agreements
 Tax agreements
224
MIFID II
AIFMD
Requirements
 Non-EU country not listed as a
NCCT by FATF;
 A co-operation agreement in place;
 Tax agreements in place; and
 Services will be subject to ongoing
supervision by third-country regulator
Requirements
 A co-operation agreement
 Non-EU country not listed by the
FATF as a NCCT; and
 Tax-exchange agreement
Consequences
 Third-country investment firms
unable to provide investment
services to any clients
Consequences
 Non-EU AIFMs can’t market AIFs
(EU or non-EU AIFs) in the EU, or
manage EU AIFs
 EU AIFMs can’t market non-EU AIFs
in EU
225
EMIR (clearing houses)
EMIR (clearing, derivatives)
Requirements
 Co-operation agreement
 Determination of equivalence
Requirements
 Determination of equivalence
 No co-operation agreement required, but nonEU country needs to assist ESMA in
preparing its technical advice on equivalence
 Two non-EU entities trading with each other,
Commission to impose EMIR’s obligations on
each if contract falls within EMIR’s
extraterritoriality provisions which apply:
Consequences
 Inability of non-EU clearing
houses to clear for EU clearing
members and EU exchanges
and trading venues

(a) if the contract has a “direct or foreseeable
effect” in the EU; or

(b) if it is necessary to prevent the evasion of
EMIR
Consequences
 EU financial counterparties may be unwilling
to trade with non-EU counterparties whose
third countries have not been found equivalent
226
Solvency II
Benchmarks regulation
Requirements
 Determination of equivalence
Requirements
 Co-operation agreement
 Determination of equivalence
 Administrator is registered by ESMA
 Compliant with IOSCO Principles for
Financial Benchmarks
 Solvency II to come into effect 1
January 2016
Consequences
 Reinsurance contracts with non-EEA
insurers to be treated differently to
EEA-insurers
 Third-country insurers not part of
EEA-groups

Consequences
 Benchmark administrators will not be
able to provide benchmarks to EUsupervised entities for use within the
EU.
group will not be able to take into
account the local third-country
calculation of capital
227
Money Market Funds (MMFs)
MMFs in brief…
 Important source of short-term financing
 Includes treasury bills, corporates and
governments
 Hold almost 40% short-term debt issued by
banking sector
 Financial crisis highlighted MMFs can be
susceptible to systematic risk due to:
 Size and interconnectedness with the banking
sector and corporate and government finance
229
MMF Reforms Globally
International
 IOSCO charged with undertaking review of potential regulatory
reforms of MMFs and to develop policy recommendations.
 Focus on Constant Net Asset Value (CNAV)
 October 2012 – IOSCO publishes Policy Recommendations on
MMFs:
 Fifteen recommendations for common standards for regulation and
management of MMFs across jursidictions.
 Key principles on : valuation, liquidity management, stable NAV, use of
ratings, disclosure to investors and repurchase agreements.
 IOSCO recommendations: jurisdictions where money funds offered at
NAV per share, regulators should require where workable, a conversion
to a floating NAV or impose additional safeguards to reinforce stable NAV
money funds resilence and abiltity to withstand redemptions
(Recommendation 10).
230
European Union legislation
 MMF Definition (proposal):
‘Collective investment undertaking that requires authorisation as UCITS under
Directive 2009/65/EC or is an AIF under Directive 2011/61/EU, invests in
short-term assets and has as distinct or cumulative objectives offering returns
in line with money market rates or preserving the value of the investment.’
Objectives:
 Rules to make MMFs resilient to future financial crisis and secure financing role for
the economy
 Enhance the safety of MMFs, provide greater transparency, investor information
and investor protection
 Proposal impacts UCTIS and AIFMD
 Introduces authorisation procedure for all MMFs
 Relies on existing authorisation procedures for UCITS and harmonised
authorisation procedures for AIFs
 Lays down rules for financial instruments eligible for investment by MMF, the
portfolio and valuation, and reporting requirements
231
Timeline
Feb’ 12
Jul’ 12
Sep’ 13
Feb’ 15
Apr’ 15
232
Key Proposals – Eligible assets
 Art 8(1) Regulation
 MMFs are allowed to invest in the financial asset classes :
 money market instruments
 deposits with credit institutions
 financial derivatives; and
 reverse repurchase agreements
 Art 8 (2)
 specifies the activities MMFs are prohibited from undertaking:
 engaging in short selling of money market instruments
 gaining exposure to equities or commodities
 entering into securities lending or securities borrowing agreements
 entering into repurchase agreements; or
 borrowing or lending cash
 Arts 9 – 14
 further provisions on the categories of eligible assets that MMFs
may invest in.
233
Diversification and concentration of
requirements
 Aim: limits risk taking by MMFs
 Outlines clear diversification requirements for MMFs to respect and the
concentration limits an MMF can hold as single issuer:
 Five percent issuer limit for money market instruments;
 Five percent limit on deposits with a single credit institution;
 Ten percent aggregate limit to all securitisation exposure; and
 Ten percent aggregate limit to a single issuer
 10 percent limit on holdings of money market instruments issued by a
single body
 Art 14 (6) : Derogations (subject to specific condition relating to
sovereign issuers and public bodies)
234
Obligations in relation to risk management
 Rules on maturity limitations
 Weighted average maturity (WAM) and weighted average
life (WAL) and requirements on holdings of daily weekly
maturing assets aims to reduce MMF portfolio risk,
increase the liquidity profile of an MMF and capability in
satisfying investor redemptions
 Short-term MMFs portfolios
 A WAM of no more than 60 days
 A WAL of no more than 120 days
 Standard MMFs portfolios (which invest in longer-term
instruments)
 A WAM of no more than six months
 A WAL of no more than 12 months
235
Constant net asset value (CNAV)
 Three percent capital buffer requirement
 MMFs operating with CNAV required to establish and maintain capital
buffer of at least 3% at all times
 The CNAV buffer:
 Must only be used to compensate difference between CNAV per
unit or share and ‘real’ value unit or share;
 Must be composed of cash only and be held in a protected
reserve account opened with a credit institution in the name of the
CNAV MMF;
 Must be replenished whenever it falls below 3%; in the event of
the amount of the NAV buffer decreasing by 10 basis points below
the 3%, the relevant competent authority and ESMA must be
immediately notified
236
ECON Committee Draft Report
 The EP report limits CNAV funds to two types:
 Retail CNAV – limits range of investors to charities, non-profit
organisations, public authorities and public foundations (Amendment 23);
and
 EU Public Debt CNAV – requires at least 80% of investments in
instruments to be held based on debt issued by EU member states
(Amendment 25)
 ECON proposed a new kind of MMF –
 a low volatility net asset value MMF (LVNAV)
 Could possibly display a constant NAV but under strict conditions
 Subject to an authorisation for a maximum period of five years (with sunset
clause)
237
EMIR
Why the need for a review ?
 2012 EMIR entry into force
 Response to financial crisis and G20 leaders’
commitments
 Over-the-counter (OTC) derivative transactions should be
reported to trade repositories
 Standardised OTCs = clearance through central counterparties
(CCPs)
 Risks of derivatives
 Default of one market spurs domino effect
 Opportunity to examine whether the right balance has
been struck between stability and growth
239
CCPs
Aim
 Single rule book to ensure consistency around rules and in supervision of these
rules
Accounts structure
 Support principles of segregation and portability. The amount of users of
individual segregated accounts is limited and there needs to be a review on this
aspect of the EMIR
Prudential provisions
 Solid and result in safe CCPs but implementation issues have been
encountered
 Questions raised on using margins as a macro-prudential tool
Third-country arrangements
 Strong support for the concept on relying on each other’s supervision
 Key in a global market
Question: should a more granular approach be considered for these kinds of
provisions?
240
Key areas of focus
 Some provisions need to be streamlined
 i.e. Article 49(1)
 Requirement for ESMA and colleges opinion on the matter
 International consistency and competitiveness of EU rules for banks
and CCPs
 The rules are adequate but not in line with international standards and
other jurisdictions
 i.e. liquidation period (two day period adequate and one day is
short);
 Central bank access
 Not to be reliant on commercial bank monies.
 Increase in systemic stability and policy to allow CCPs to access central
bank monies.
 Risk management: Portfolio managing some rules in EMIR reflect
outdated concept of risk management
241
TRS and Trade Reporting
 Trade reporting requirements ensure:
 Info on derivative transactions are reported to trade repositories;
and
 Accessible to regulatory authorities
 Lack of an explicit common data set
 Debate over dual vs single-side reporting
 Unique Product Identifier (UPI) and Unique Trade Identifier (UTI):
problems.
 Solving these two issues will have an effect on reconciliation rates
 Agreement on UTI procedure will solve the pairing problems
 Definition of UPI for main traded products will be visible but will cover
trade volumes.
 Efforts should be made to look for stable and definitive solutions even
if implementation is longer.
242
Challenges for EMIR
 New level of expertise to be built up
 Broad concept of undertaking
 Particularly as undertaking relies on the concept of commercial
activity in the EU treaties
 Burdensome reporting implementation for SMEs
 Difficulties related to the concept of derivatives
 Unclear and relies on MIFID
 MIFID has another scope and technique
 Inconsistencies in data field
 Internal reporting burden and a fragmented market
 Different enforcement of compliance – EU vs Dodd-Frank
 EU – i.e. domestic regulatory authorities’ decisions on systemic
risk
243
Progress thus far …
 European Commission finalised discussions with ESMA
 First clearing obligations due for adoption April next year
 Three year delay for nonfinancial end users
 Extension of transitional relief for EU pension funds just announced
 Over 15 CCPs authorised or in process of obtaining authorisation
 ESMA recognised 10 non-EU CCPs established in Japan, Hong
Kong, Singapore and Australia
 Thirty non-EU CCPs awaiting recognition
 EU-US ongoing dialogue on margin standards and other issues
 Prospects for an EMIR 2? ‘Not likely’ (Lord Hill and Jonathan Faull)
244
Timeline
 22 May 2015, ESMA published opinion on effect of EMIR on the
Undertakings for UCITS
 Calls for a revision of the UCITS Directive to take into account the
clearing obligations for certain types of OTC derivative
transactions under EMIR
 10 June 2015, European Supervisory Authorities (ESAs) launch
second consultation on draft Regulatory Technical Standards (RTS)
 Outlines framework of EMIR
 Consultation runs until 10 July 2015
 18 June 2015, ESAs hold public hearing on the draft RTS
245
Consultation
 Feedback from stakeholders regarding experience of
EMIR
 Core requirements and procedures pending
implementation
 Consultation deadline is 13 August 2015
 Next steps: Commission prepares report for Parliament
and Council
246
MIFID
MIFID II




MiFID II
Updates and revises existing MIFID Directive
MIFID I came into force November 2007
Aim:
 Create harmonised regulatory regime for investment services
across EEA
 Guard against systemic risks in equity, fixed-income and
commodity markets
 Revised MIFID package adopted in October 2011
(response to financial crisis)
248
Proposals
 New framework takes into account developments in trading
environment since original directive
 Covers broad range of investments
 Widens scope of investment services needing authorisation from
national regulators
 New trading obligations to ensure derivate trades take place on
regulated platform
 New trading controls and liquidity requirements for algorithmic and
high-frequency trading; and
 Investor protection measures including restrictions on certain types of
fees and remuneration that could interfere with adviser independence
249
Time
Activities
MIFID timeline
March 2012
Consultation on MIFID II ends
May – Aug 2014
Public Consultation on Discussion Paper (RTS and ITS)
May – Aug 2014
Public Consultation on Consultation Paper (Technical Advice for Delegated Acts)
Dec 2014 – Mar
2015
Public consultation on Consultation Paper (RTS and ITS)
Dec 2014
Final Technical Advice for Delegated Acts submitted to the European Commission
Final RTS on Capital Requirements Regulation (CRR)
Feb 2015
Additional public consultation covering certain derivative classes for non-equity transparency
purposes
Public hearing on Secondary Markets and Investor Protection
Sep 2015
ESMA submits final RTS to the European Commission
Dec 2015
Final ITS and Guidelines submitted to the European Commission
Jan 2017
MIFID II operational
250
Implications of GE 2015
Tom Wilkins, Account Director, Westbourne Communications
© Copyright 2015 by K&L Gates LLP. All rights reserved.
Implications of GE 2015
Westbourne Communications
Horizon scan
If everything goes well, the UK will have
a stable Government for the next five
years
•
•
•
•
2015 GE
Continued growth
Rising employment
Rising incomes
Falling national debt
2016
Scottish and Welsh
Elections
2017
EU referendum
deadline
Westbourne’s industry perceptions
audit found most respondents are
now looking forward to stability and
continuity over the course of the
government
2019
?
Osborne
Cameron
succession budget surplus
target
2020 GE
Who are the ones to watch?
2015 - 2020
Ones to watch: the Government
Contenders for
the leadership
Beyond the
leadership, a
host of
journalists have
joined as
Government
advisers
Focused on
reducing red tape
and making
strikes harder
Mats Perrson,
former head of
Open Europe, will
advise the PM on
EU
Focused on
counterterrorism
and ‘snoopers
charter’
Camilla Cavendish
will run the No 10
policy unit
Newly elected
MP for Uxbridge
and South Ruislip
Focused on
productivity, growth
and Northern
Powerhouse
Craig Oliver
combines political
communications
director with a wider
fixing role for the
PM
James Chapman
comes from the Daily
Mail to support
George Osborne as
director of
communications
Ones to watch: Government Departments
Lord O’Neill of Gatley
Commercial Secretary to the Treasury
Harriett Baldwin MP
Economic Secretary to the Treasury
(City Minister)
David Lidington
Minister of State (Europe)
Lord Maude of Horsham
Minister of State for Trade and Investment
Greg Clark
DCLG Secretary of State
James Wharton
DCLG Minister (Northern Powerhouse)
Ones to watch: Select Committee Chairs
Iain Wright MP (Lab)
Business, Innovations and Skills
Dr Julian Lewis MP (Con)
Defence
Angus MacNeil MP (SNP )
Energy and Climate Change
Keith Vaz MP (Lab)
Home Affairs
Meg Hillier MP (Lab)
Public Accounts
Andrew Tyrie MP (Con)
Treasury
Crispin Blunt MP (Con )
Foreign Affairs
Frank Field MP (Lab)
Work and Pensions
Ones to watch: Labour contenders for leader
Left
to
right
Cameron’s hydra
Cameron has a majority, but without
a coalition partner, it is very small
There are several major
challenges on the horizon
Scottish
nationalism
Cameron
succession
EU referendum
The EU referendum entails many dangers for
Cameron, including losing the confidence of his
backbenchers and failing to lead opinion
May 2015: Labour backs EU
referendum
2015: EU referendum bill debate
2016: EU referendum in law
June 2017: Cameron’s EU
deadline for getting a reform
package
Dec 2017: Cameron’s EU
referendum deadline
Westbourne’s view of the danger
2018: British EU Presidency
2020 GE
Risk
25
Threat to
Government
80
Scottish nationalism: SNP dominance of Scottish seats and
Holyrood increase the likelihood of a second attempt at
independence
May 2015: Poll shows
increased support for
independence
SNP push for EU
referendum to be
based on ‘four-nation
consent’
SNP push for fiscal
devolution in debate over
Smith Commission bill
2016 SNP landslide at
Holyrood elections resulting
in overwhelming call for a
second independence
referendum?
Westbourne’s view of the danger
By-elections could reduce
the Conservative majority
and increase SNP power
over the next five years
2020 GE
Risk
40
Threat to
Government
90
A messy and early Cameron succession could be a
major distraction for Government
March 2015: Cameron
announces he won’t serve
third term as PM
May 2015: Boris Johnson
elected. Sajid Javid and
Theresa May begin
skirmishes
2016/17:Danger of
leadership bids
starting early and
dominating EU
debate
Westbourne’s view of the danger
2018/19: Deadline
for choosing new
Conservative leader
2020 GE
Risk
60
Threat to
Government
20