Reforms in Financial Regulation in Europe

Eddy Wymeersch

BankingSystemic risk – strengthening solvency and

liquidity of the bank strengthening the banks own funds: Basel III

and CRD IVremuneration: make it less short term to

reduce systemic riskcrisis resolution systemsLiquidity rules prepared in Basel

Orderly functioning of markets

AIFMDShort sellingDerivativesPost trade in securities

securities law further work on C&S

Mifid: market structureMAd, PD, TD reviewsetc

Insurance Roll out of Solvency II, advice by CEIOPS

Insurance mediationInsurance guarantee schemes

Major regulatory reformsBanking

Capital Requirements Directive III/IV countercyclical buffers new capital requirements

CEBS work streamsCrisis management in the banking sector:

crisis resolution with haircuts proposed by Comm. but Parl. proposals in Germany

DGS new style can we move to a European Fund? or a system of mutual support by the existing funds

Major regulatory reformsSecurities

CRA changes approved: direct supervision by ESMAAIFMD: approvedESAs: approvedShort selling: in CouncilReview of MAD, PD , TD and Mifid: consultationPost trade: EMIR, European Securities law:ongoingCorporate governance Financial Institutions:

cons.closed later general corporate governance

Prips: consultationAudit: consultation closed

SecuritiesDerivatives

identify the derivatives that should be cleared general obligation to clear, unless taxed in own

funds organisation and safeguards for CCPs

legal status: banks, who will supervise TR: what has to be registered and what not?

Supervision US links: reciprocity Corporates: exempted if below floor

AIFMBroad scope: all managers of collective

investment are subjectexc. banks, insurance (?) holding companies, family officesRegistration of the managers, not of the fundsPassport for funds by EU registered managers

AIFMPoints of contention

remuneration: similar to banksdepositary: with full restitution liability, but for

sub depositaries only for due diligenceevaluator Conduct of business rules on conflicts of

interestThird country regime: very complicated but no

full access to third AIFM/AIF

Short sellingapplicable to all instruments Short sale

also derivatives if related to decrease of pricesovereign bonds: includes CDSNet short: Long minus Short of all kindsObligations

disclosure at 0,2% to Supervisors,+ 0,1% of issued capital

at 0,5% to market

Short sellingSovereign debt

net shortuncovered position, no relation with that St

debtminimum threshold: to be fixed later, variableNotification

Applicable also outside the Union

Short sellingpermissible shorts only if:

borrowedagreement to borrowlocated pursuant to agreement

Measures against late settlement Buy-in procedureswithin 4 days: buy-in by CCP or trading venue

if non: cash compensation to buyer by CCP/trading venue

if not: daily payments to CCP or Trading venue Exemption for market makers/primary markets

Short sellingSignificant fall in price

exceptional power to restrict for significant fall in prices 10% national decision but coordination by ESMA including market making

Corporate Governance Consultation is closed: applicable to financial

institutions, later to all listed companies

Supervisory role of independent directorsNew role for shareholders Insurance and asset managers: recent

reforms: are these not enough?

CG in Financial institutionsLimit number of mandates per person: devote

sufficient timeSplit Chairman – CEODiversity in board, including gender diversityCompulsory evaluationSkill and experienceRisk- audit committees: 1 or 2? cross

participationCRO: stronger positionMuch attention to risk management and controls

CG in Financial institutionsSerious offences: to be reported to the board? –Whistle blowingInstitutional investors: disclosure voting practicesIdentification of shareholders and empty votingRemuneration policies Involve shareholders and employees? Conflicts on interest: how to deal with itShareholders: long term investors preferred

ESMARegulation final 9 November 2010

not yet publishedThree parallel authorities-agencies + ESRBStart 1 January 2010Structure: similar to CESR: substantial

powers with the national supervisorsLegal powers quite limited

Regulatory powers in AIFMDLevel 1: Directive-Regulation in co-decision

Level 2: Delegation to Commissionde facto advice of ESMA, but proposal by Comm. subject to art 190 of TFEUcall back by EP or Councilrevocation of delegation of Council or

EP

Regulatory powers in AIFMDLevel 2 Delegated Acts art 290 TFEU

Proposal by ESMA for Regulatory Technical Standards and Endorsement by Commission

No Commission own initiative, except refusal to act by ESMA

Commission can endorse, refuse to endorse, modify, substitute

Regulatory powers in AIFMDLevel 2 Implementing Acts art 291 TFEU

ESMA proposal and Commission endorsement No Commission own initiative Commission can endorse, refuse to endorse, modify

substitute No formal intervention of Council or Parliament Mostly formalities, formats, procedures

Directive must identify “delegated” or “implementing" acts

Soft powers Guidelines in many fields

not necessarily secondary questions: matters too difficult to formally regulate matters with differences op opinions matters subject to further developments

not legally binding but authority rests on consensus by members, flexibility in practice

indicates likely interpretation by national supervisors

useful for markets

MediationDifferences of opinion between national

supervisorsESMA mediation panel: Chair + 2 membersFinding a compromise solution, if not binding

decisionMostly narrowly described: but see art 53

Especially in process of identifying who will be in charge of non-EU AIF: “MS of reference”, “equivalence” e.g. of FATF regime (art 35. 2 and 15)

Practical importance: unpredictable

Prohibition of certain instrumentsart 45

See art 6 a of the ESMA regulationprohibit distribution of non authorised non-EU

fundsrestrictions for excessive concentration in

cross border casesrestriction for counterparty risk

Only in case of orderly functioning and integrityfinancial stability

Right of Appeal Appeal against decision of nat. supervisorsBefore national courts for all negative

decisions (refusal, withdrawal)Decision to be properly reasoned

Administrative decisions to be taken within 6 months, if not: appeal, but against what?

Right of Appeal Against ESMA individual decisions: before

Board of appeal of the three ESAsNot for regulations: preparatory act before

Comm. endorsementAppeal suspends and remand to ESMAAppeal decision is binding on national

supervisorsAnyone affected by a decision can appeal.

General powers Cooperation among supervisors

information exchange standard notifications cross-border supervision with non EU supervisors

Central Registry of AIFM/ AIF also list of rejected applications: art. 37(10)

Convergence of supervisory practicescoordination task e.g. on leverage restrictions

Nothing about colleges

Conclusion

Much work ahead !What will the new Authorities become? Overregulation? more or less in line with USWill it save us from the next crisis?