Global regulatory update ACSDA General Assembly Santiago de Chile April 2014
Dec 15, 2015
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
PREVENTION
Prevent negative impacts from bank losses and failures• Increase capital and liquidity
buffers
• Reduce risk profile
• Ensure orderly failure without taxpayer support
BEHAVIOUR
Improve 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 Authorities
Global 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 Measures
Asia 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)