Global regulatory update

ACSDA General AssemblySantiago de ChileApril 2014

The origins of the Crisis…

• 2006 : Mortgage defaults in the US subprime mortgage market

• Global economy contaminated through securitisation• Compounded by Credit Default Swaps which led to freeze

of private credit markets• Freeze caused liquidity problems and insolvencies• National governments forced to support domestic banks

and provide emergency liquidity

…and its spread

• 2009 : Banking crisis reinforced by Eurozone sovereign debt, growth and competitiveness crisis

• Eurozone faced governance issues• 2012 : European Stability Mechanism established as a

permanent rescue mechanism• Reform of regulation of financial institutions

Pre-crisis regulatory drivers…

SecuritiesMarkets

Financial stability SAFETY

Cross-border efficiency

HARMONISATION EU Single market

COMPETITION CONSOLIDATIO

N

…have been transformed post-crisis

PREVENTIONPrevent negative impacts from bank losses and failures• Increase capital and liquidity

buffers• Reduce risk profile• Ensure orderly failure without

taxpayer support

BEHAVIOURImprove behaviour and integrity of financial markets• Ensure consistent regulation

across European markets

TRANSPARENCY

Improve transparency particularly of the derivatives market • more trading on exchanges• More clearing via CCPs • Reporting to Trade

Repositories

The Main Global AuthoritiesGlobal bodies e.g. G20 are now main drivers for regulatory change with local implementation by national authorities.

FSB(Financial Stability

Board)

• Assesses vulnerabilities and sets international guidelines for the financial sector

• Monitors implementation of G20 agreements in finance• Ensures peer reviews of the implementation of

international agreements (with IMF)

BIS(Bank for International

Settlements)

• Serves central banks in their pursuit of monetary and financial stability, and fosters international cooperation in these areas

• Its Committee for Payment and Settlement Systems (CPSS) is focused on Financial Market Infrastructures

IOSCO(International

Organization of Securities Commissions)

• Brings together the world's securities regulators and is a global standard setter for the securities sector

The Global scope of post-crisis reforms

EU Measures• Prevention: Bank Recovery &

Resolution, Banking Union (SSM, SRM), CRD IV/CRR, Liikanen report on bank restructuring, DGS, ICS

• Behaviour/ Transparency: MIFIR & MIFID, AIFMD review of UCITS, Securities Law Legislation

• FMIs: EMIR, CSDR, T2S, R&R for FMIs• Other: FTT

US measures• Prevention/Behaviour/FMIs:

Transparency: Dodd-Frank Act, Volcker Rule, Consumer Protection Act, Resolution Planning, Basel 3

• Behaviour: Triparty collateral review

• FMIs: OTC Derivatives, Designated Financial Market Utilities

• Other: FATCA

Asia-Pacific MeasuresAsia was only indirectly hit by the crisis; initiatives are hence on: • Implementation of Global

commitments • Enhancements of local

markets and market infrastructures through

• OTC Derivatives reform in HK, Japan and Australia, HK multi-currency clearing, RMB as a settlement currency

Global Measures Prevention of failures: Recovery &

Resolution, G-SIFIs & Capital add-ons: Basel 3, intra-day liquidity, spec. add-ons for G-SIFIs

Change of behaviour: Shadow Banking, Banker compensation

Transparency: LEI, Client Asset Protection Attention to FMIs: CPSS/IOSCO PFMIs,

Central clearing of OTC derivatives, R&R of FMIs

Drivers of change in the EU securities markets

HARMONISATION

Removal of technical, legal and fiscal barriers to low cost cross

border settlement

• Giovannini, CESAME & EGMI• Securities Law Directive• ISMAG

SAFETYStandard for safety, soundness

and efficiency in the provision of trading, clearing & settlement

services

• ESCB/CESR• CPSS/IOSCO principles for

FMIs• CSD Regulation• Resolution & Recovery

frameworks

COMPETITION Improved access and interoperability

• MiFID II/MIFIR• EMIR• CSD Regulation

CONSOLIDATION/

EFFICIENCY

Public sector intervention in merger control & consolidation of

settlement in CeBM• Target 2 Securities

T2S is of particular importance to CSDs..

A technical platform:• With Both cash & securities a/c (integrated

model)• Creation of realignment instructions between

the accounts that CSDs hold with each other• Management of static data reflecting securities

eligible on each link

Lean settlement functionalities• Validation• Matching • Settlement• Basic reporting

A unified operating window• Night time settlement with multiple sequences• Real time settlement

A technical settlement infrastructure for European CSDs and Central Banks providing:

…as is CSD Regulation

• Designed to make CSDs safer but introduces more competition .

• Defines what a CSD is authorised to do

► Introduces process changes► mandatory dematerialisation or immobilisation of securities► Can be a challenge for some States, hence 2025 as a deadline► T+2 settlement cycle► mandatory measures to address settlement fails► Disclosure and potential suspension of systematically failing participants

• Introduces specific authorisation and supervision process

► Passport with cooperation between home and host authorities► Mandatory User Committees

• Defines rules for CSDs with a banking licence including capital requirements

Other relevant regulatory initiatives

• AIFMD ► Fund depositaries: specific treatment in case of custody

performed by SSS:– SSS services are not a delegation of a depository

• Resolution and Recovery Regimes► CPSS/IOSCO & FSB consultations on special regimes for FMIs

and their participants;► Expected EU Commission initiatives

• Securities Law Legislation► Long-awaited, and covering rules for holding and transfer of

securities► Will impact whole custody chain► May also deal with collateral re-hypothecation issues

• Financial Transaction Tax (FTT)

How do these initiatives affect our clients?

• Effects on the industry are significant, still not fully understood nor predictable (since so many regulations have yet to be implemented) but still growing

• Balance sheet restructuring will continue, driven by deleveraging the ECB’s Asset Quality Review (undertaken by the ECB prior to the introduction of

the Single Supervisory Mechanism in the Eurozone) the CRD the need to maintain complex recovery plans, contribute to new statutory

resolution funds, and potentially issue new bonds which can be bailed-in (i.e. convertible into equity) if necessary

• These additional costs will result in internal cost reduction and a search for economy of scale gains through (for

example) mutualisation (outsourcing) of back offices restructuring, specialisation, and disintermediation (as non-banks increase their

share of the financing market)