Reforms in Financial Regulation in Europe

1. Reforms in Financial Regulation in Europe Eddy Wymeersch

2. Banking • Systemic risk – strengthening solvency and liquidity of the bank • strengthening the banks own funds: Basel III and CRD IV • remuneration: make it less short term to reduce systemic risk • crisis resolution systems • Liquidity rules prepared in Basel

3. Orderly functioning of markets • AIFMD • Short selling • Derivatives • Post trade in securities • securities law • further work on C&S • Mifid: market structure • MAd, PD, TD reviews • etc

4. Insurance • Roll out of Solvency II, advice by CEIOPS • Insurance mediation • Insurance guarantee schemes

5. Major regulatory reforms • Banking • Capital Requirements Directive III/IV • countercyclical buffers • new capital requirements • CEBS work streams • Crisis 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

6. Major regulatory reforms • Securities • CRA changes approved: direct supervision by ESMA • AIFMD: approved • ESAs: approved • Short selling: in Council • Review of MAD, PD , TD and Mifid: consultation • Post trade: EMIR, European Securities law:ongoing • Corporate governance Financial Institutions: cons.closed • later general corporate governance • Prips: consultation • Audit: consultation closed

7. Securities • Derivatives • 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

8. AIFM • Broad scope: all managers of collective investment are subject • exc. banks, insurance (?) • holding companies, family offices • Registration of the managers, not of the funds • Passport for funds by EU registered managers

9. AIFM • Points of contention • remuneration: similar to banks • depositary: with full restitution liability, but for sub depositaries only for due diligence • evaluator • Conduct of business rules on conflicts of interest • Third country regime: very complicated but no full access to third AIFM/AIF

10. Short selling • applicable to all instruments • Short sale • also derivatives if related to decrease of price • sovereign bonds: includes CDS • Net short: Long minus Short of all kinds • Obligations • disclosure at 0,2% to Supervisors,+ 0,1% of issued capital • at 0,5% to market

11. Short selling • Sovereign debt • net short • uncovered position, no relation with that St debt • minimum threshold: to be fixed later, variable • Notification • Applicable also outside the Union

12. Short selling • permissible shorts only if: • borrowed • agreement to borrow • located pursuant to agreement • Measures against late settlement • Buy-in procedures • within 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

13. Short selling • Significant fall in price • exceptional power to restrict for significant fall in prices • 10% • national decision but coordination by ESMA • including market making

14. Corporate Governance • Consultation is closed: applicable to financial institutions, later to all listed companies • Supervisory role of independent directors • New role for shareholders • Insurance and asset managers: recent reforms: are these not enough?

15. CG in Financial institutions • Limit number of mandates per person: devote sufficient time • Split Chairman – CEO • Diversity in board, including gender diversity • Compulsory evaluation • Skill and experience • Risk- audit committees: 1 or 2? cross participation • CRO: stronger position • Much attention to risk management and controls

16. CG in Financial institutions • Serious offences: to be reported to the board? – • Whistle blowing • Institutional investors: disclosure voting practices • Identification of shareholders and empty voting • Remuneration policies • Involve shareholders and employees? • Conflicts on interest: how to deal with it • Shareholders: long term investors preferred

17. ESMA • Regulation final 9 November 2010 • not yet published • Three parallel authorities-agencies + ESRB • Start 1 January 2010 • Structure: similar to CESR: substantial powers with the national supervisors • Legal powers quite limited

18. Regulatory powers in AIFMD • Level 1: Directive-Regulation in co-decision • Level 2: Delegation to Commission • de facto advice of ESMA, but proposal by Comm. • subject to art 190 of TFEU • call back by EP or Council • revocation of delegation of Council or EP

19. Regulatory powers in AIFMD • Level 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

20. Regulatory powers in AIFMD Level 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

21. 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

22. Mediation • Differences of opinion between national supervisors • ESMA mediation panel: Chair + 2 members • Finding a compromise solution, if not binding decision • Mostly 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

23. Prohibition of certain instrumentsart 45 • See art 6 a of the ESMA regulation • prohibit distribution of non authorised non-EU funds • restrictions for excessive concentration in cross border cases • restriction for counterparty risk • Only in case of • orderly functioning and integrity • financial stability

24. Right of Appeal • Appeal against decision of nat. supervisors • Before 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?

25. Right of Appeal • Against ESMA individual decisions: before Board of appeal of the three ESAs • Not for regulations: preparatory act before Comm. endorsement • Appeal suspends and remand to ESMA • Appeal decision is binding on national supervisors • Anyone affected by a decision can appeal.

26. 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 practices • coordination task e.g. on leverage restrictions • Nothing about colleges

27. Conclusion • Much work ahead ! • What will the new Authorities become? • Overregulation? more or less in line with US • Will it save us from the next crisis?