As mentioned yesterday, we finished the debate at the CAS-WG Plenary with
a panel discussion about the future for the City and the UK financial system in
light of European regulatory change.
The panel consisted of (from left to right):
- Bob Fuller, Director at Fixnetix;
- Andrew Simpson, Market Structure Consultant; and
- Martin Watkins Director, Market Infrastructures,
Ernst and Young.
It was a fascinating 45 minute discussion of the negative position the UK sits in today, from a regulatory perspective in Europe. The Banking Union, Transaction Tax, Bonus Cap and more, has all hit London hard so, unsurprisingly, this was a pretty negative debate about where the regulators have got to in Brussels.
Here is a short synopsis of what was said …
You have to look past the complexities of where we are today
and look to where we are heading long-term.
You need to think about the G20, EMIR, Dodd-Frank, MiFID II and more and
see what they are trying to achieve.
First, they are clearly aiming to regulate the OTC
market. This market which was opaque
will be made transparent with a CCP that manages the whole market.
The next thing that comes into play is CRD IV, the EU Basel
III interpretation. CRD IV means that
you will not be able trade with uncollateralised risk as you will need to prove
that you have the collateral and can provide it. That is the point of it: everything will be collateralised.
This will means a tightening of capital rules and also a requirement for collateral
to back any trading being transacted on the OTC and other exchanges.
Now, if you need to see collateral backing with cash on
exchanges, particularly the size of that trading with collateralised backing,
then you need real-time custodial services.
You will need a real-time link to your CCPs and CSDs, and if you have
not got those real-time links you will be unable to stay in business.
What’s going to happen is that collateral will become part
of the trading activity. Right now, we
think of this as post-trade servicing but it will become a pre-trade activity.
If you cannot demonstrate the ability to back your trades in
pre-trade, then you will not be able to trade.
So clearing and settlement moves from being a post-trade activity to a
A little bit like MiFID defined best execution as a mix of
cost, price, speed and likelihood of settlement, that last part becomes a
paramount part of the pre-trade mix.
This will create collateralised real-time dashboards and
real-time settlement, so that I can move collateral from one exchange to
That means the amount of change in technology will be structural
and major, especially as we have this crash course between these regulations:
MiFID II, CRD IV, EMIR and more.
All of this is with a backdrop of zero or negative GDP growth
in Europe and America, and it begs the question of how and what this will mean
to liquidity and trading overall. In
fact, the disparity between East and West in terms of regulations and market
needs, creates a high degree of regulatory arbitrate and demonstrates a high
degree of disparity in the implementation of the regulatory structures.
There is, in fact, a fragmentation of those structures
rather than a harmonisation, as the G20 and other authorities claim.
It means much more focus upon Shadow Banking, and a move to
leverage arbitrage opportunities between the East and West.
We need to recognise that there is still an on-going
financial crisis and we are deep into that crisis. If you look back to 1929 and the time for
recovery compared to now, this is a much longer and slower recovery. We need to think about how to create growth
now therefore, rather than removing liquidity and investment from the markets,
which is what these regulations will encourage, we need to turn this around and
look at how to create a resilient financial market that encourages growth rather
In fact, we have a direct conflict between the growth agenda
and the control agenda, and the two are clashing. You have the politicians who realise that
they need to keep a public voice that this
is a disaster that will never happen again, and then the direct
consequences from the things they are introducing which means the system is not
moving the way they would expect. There
is not the release of capital and liquidity required to drive growth in the
economies, and that is a direct result of these actions.
There is too much being done at the same time in the regulatory
hemisphere as well. Not all of it is co-ordinated and, in fact, much of it is
not uniform with unrealistic deadlines, some of which conflict. There is even debate within the European Commission
about how some of these things should work.
There are some positive lights, but they are few and far
For example, Martin Wheatley talked about the systemically important
indexes and industry benchmarks in investment markets, and these are now being
clarified and agreed. That will give certainty
to what is regulated and unregulated, and sure there will be competition and
market forces about charging and pricing, but the certainty is what brings growth.
Uncertainty kills growth and we have far too much uncertainty
By way of example, take the discussion about trade repositories
which are meant to go live by 1st July, and there is still a debate about whether
they should be independent or not. If
they are not independent, there is a lengthy dialogue about how that would work
and it would require a two or three year window for this to be achieved. Now that may be a healthy debate, but how can
you practically implement something that is still uncertain in such a short timeframe? This uncertainty is not helpful.
Similarly the Single Supervisory Mechanism for the Banking Union. This is really unclear and the timelines are
unrealistic. How will it work? Will there be a Banking Resolution that goes
with this? Will it be delivered at the same
time as credit security for retail? Can
it be supported by a fiscal union across Europe, which is necessary for it to
In fact, the Single Supervisory Mechanism is out of pace
with every other regulatory change that is out there and, as a result, none of
these things will have happened in the timeframes that the controllers desire.
However, Ireland currently has the EU Presidency and they
have made it clear that during their Presidency, the Banking Union is one of
the top three things they want to achieve.
They will not be implemented the Union, that will come later, but they
want the Union agreed and ratified during their Presidency and this is one of
the things they will focus upon getting done.
That is regardless of the fact that the IMF recently stated
that one of the greatest risks for Europe’s future and financial security is
the fragmented nature of the implementation of the Banking Union.
And this just goes to the core of what is driving these regulations,
which is politics.
Why are the Germans bringing in controls over the use of
High Frequency Trading (HFT) platforms this July? Because Angela Merkel has an election to win
in September and needs to be seen to be doing a good job of managing the
Why is the Financial Transaction Tax going through at the moment? Because bashing banks is a good idea and if
the politicians can show the banks being forced to payback, then that’s a vote
Our problem in the UK is that we keep trying to use logic rather
than politics to win the game, and that is why we are losing. We get involved in European politics too late
and that is why we lose.
We also do it wrong.
You do not threaten to take your European partners to court, as Boris
Johnson recently announced, if you want to get your partners on your side. We need to be seen to be far more conciliatory
and supportive of Europe.
In conclusion, we cannot afford to get it wrong when it comes
to Europe. If David Cameron gets it wrong, then that is a vote loser and he
will not get re-elected.
That means that our representatives in Europe need to hold
up London and our financial system – not our financial players – as a beacon of
innovation and regulation. Show the
European system that we are leading the rebuilding of the markets, just as we
did with LIBOR fixing. Our system responded to that quickly and fairly. Show the Commission that we understand the
problems and are dealing with them. Demonstrate that we can innovate and regulate
in tandem and that it is working. Demonstrating
this will be far more effective than arguing for change that supports the UK
The next CAS-WG meeting will be in June and the Subject Groups will be meeting during April and May. If you are interested in joining any group, please send an email to [email protected].