Welcome to Euro Shorts, a short briefing on some of the week’s developments in the financial services industry in Europe.

If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers.

Claire Cummings

020 7585 1406

claire.cummings@cummingslaw.com www.cummingslaw.com

ECB cuts interest rate to 0.05%

The European Central Bank cut its benchmark interest rate to 0.05%, down from 0.15%, this week. The move was accompanied by an announcement by the ECB that it is to embark on a new plan to buy asset-backed securities and covered bonds in a bid to stimulate the ailing eurozone economy. ECB chief Mario Draghi said the plan to buy private sector bonds from euro zone banks would have a “sizeable impact” on the bank’s balance sheet. The bank stopped short of engaging in full-scale quantitative easing which would involve the purchase of sovereign debt. Unlike the US, Britain and Japan, the ECB has not engaged in quantitative easing since the onset of the financial crisis, a decision which has been criticised by some analysts. Mr Draghi said the ECB was unanimous in its commitment to using other “unconventional instruments”, a phrase taken as code for printing money, if inflation looked as if it might stay too low for too long. The ECB’s programme, which is due to commence next month, is not supported unanimously by Mr Draghi’s colleagues, although it had a “comfortable majority”.

LME launches new clearing house

The London Metal Exchange will launch its new clearing house on 22 September, after it received approval from UK and European regulators. The LME, the world's oldest and largest market for industrial metals such as copper and aluminium, decided to build its own clearing house three years ago to increase income, boost development of new products and improve risk monitoring. The Bank of England has approved LME Clear's application as a CCP under EMIR; this followed a positive opinion by regulators and central banks in France and Germany. LME Clear will initially clear all trades on the LME and those matched on the OTC matching service and is looking into expanding types of allowed collateral to include warehouse warrants, as well as Chinese renminbi, as an acceptable cash collateral.

EU banker bonuses challenged by the UK

In September 2013 George Osborne, the Chancellor of the Exchequer, announced that Britain would take legal action against the EU cap on bankers’ bonuses. Action will begin in the European Court of Justice on Monday 8 September 2014. When announcing the intention to begin legal proceedings, HM Treasury said “Britain has been at the forefront of global reforms to make banking more responsible, including big reductions in upfront cash bonuses and linking rewards to long-term success. These latest EU rules on bonuses, rushed through without any assessment of their impact, will undermine all of this by pushing bankers' fixed pay up rather than down, which will make banks themselves riskier rather than safer" and went on to make the point that because base salaries cannot be subject to claw-back provisions in the same way that a bonus can be, higher levels of basic pay may actually make financial firms more vulnerable in the event of a crisis.

Rogue trader to leave prison 110 days into three-year sentence

It has been reported that Jerome Kerviel, the former Societe Generale banker whose trades cost the bank nearly €5bn , is to leave prison near Paris after serving 110 days of his three-year sentence. His lawyer has stated that “He will leave Fleury Merogis on Monday and he will resume a completely normal life,” and undertake “community service”. Under French law Mr Kerviel has served sufficient time to apply for conditional release.

Kerviel was convicted in 2010 of breach of trust, forgery and entering false data after losing nearly €5bn (£4bn) and staking €50bn of the bank’s money. He was sentenced to five years in prison, two were suspended, and ordered to pay back the money he lost. Kerviel has repeatedly claimed that he was made a scapegoat for the financial crisis, with SocGen turning a blind eye to his trades as long as

he made money. An internal report by Societe Generale found that managers failed to follow up on 74 different alarms about Kerviel’s activities and some executives resigned, including long time chairman Daniel Bouton.

FCA findings of review into non-financial counterparties under EMIR

The FCA has published its report outlining the findings from its latest review of non-financial counterparties (NFCs) subject to EMIR on its EMIR implementation webpage. The FCA conducted its review into NFCs during June 2014, focusing on energy producers and oil producers, with the aim of understanding how NFCs are defining their hedging activity and monitoring their status against the EMIR clearing threshold. In particular, the FCA considered the compliance obligations that now apply to NFCs. The report sets out the FCA's findings in four areas: (i) approach to calculation of the clearing threshold and identification of hedging and non-hedging transactions; (ii) trade reporting; (iii) trade confirmation; and (iv) reconciliations.

FSB prepares report on derivatives breaking away from Libor

The Financial Stability Board has published a report stating that the OTC and exchange-traded derivatives markets can no longer rely solely on Libor, but must migrate to a reformed Libor benchmark and a variety of others which are more risk-free. The FSB acknowledges that there are potential drawbacks, such as higher costs and less liquidity and market participants are critical of regulators imposing a benchmark which has been installed artificially. The FSB has suggested around 16 suitable risk-free rates, which range from central bank rates to repo and overnight indexed swap rates. In response, the UK says that they will “consider whether it is feasible to issue recommendations to UK-regulated firms to move derivatives to a risk-free rate”.

ESMA publishes risk dashboard for second quarter 2014

ESMA has published its risk dashboard for the second quarter of 2014, together with a report on trends, risks and vulnerabilities. The dashboard covers the third quarter of 2014 and analyses liquidity, market, contagion and credit risks during that period. The report, which covers the first half of 2014, assesses the performance of EU securities markets, considering trends and risks, to develop a comprehensive picture of systemic and macro-prudential risks in the EU for the use of national and EU bodies in their risks assessments. The report states that conditions in the EU's securities markets, asset management industry and market

infrastructures remained favourable and, furthermore, contains an in-depth analysis of four topics monitored by ESMA because of their potential for presenting future vulnerabilities, namely trading venue developments, operational risk and new challenges, the systemic relevance of securities financing markets in the EU, performance and risks of ETFs and crowdfunding.

Finger scans to replace PINS for corporates

Barclays Bank is to introducing new finger scanning technology to replace PINS and passwords for certain customers. From 2015 it will supply some if its corporate clients with a portable device, The Barclays Biometric Reader, which will read and verify vein patterns before allowing access to online banking and payment authorisation. Unlike fingerprints, vein patterns are extremely difficult to replicate. Barclays have said that the technology is recognised as one of the most secure biometrics in the market and explained that the finger in question "must be attached to a live human body in order for the veins in the finger to be authenticated". No copies of finger veins will be made.

Cummings

Tel: + 44 20 7585 1406

Mob: + 44 7734 057 327

www.cummingslaw.com

5 September 2014