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#Brexit, Banking and Equivalence

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As usual, the Financial Services Club was delighted to host David Doyle as our starting speaker for 2018, and he presented a fine overview of all the things bubbling as top  of the agenda in the European Union’s regulatory plans for 2018.

Led by the Bulgarian presidency, the agenda focuses primarily on pushing forward the Banking Union, the Capital Markets Union, and consolidating the EU Financial Supervisory bodies into a pan-European structure covering banking, securities and pensions.

The Banking Union was created after the financial crisis to ensure that Europe had a Single Supervisory Mechanism to cover all future banking exposures, wherever they occur in Europe. That’s good news for the Italians and Greeks, as it means there will be a central insurance scheme to bail out their ailing banks, should they need it. It’s bad news for the Germans, Dutch and Nordics however, who believe that the subsidisation of the southern state banks will be at expense of the northern state banks. Watch that space as there will be frictions there.

Similarly, there is a strengthening of the Single Supervisory Mechanism by bringing together and strengthening the financial supervisors. The European system of financial supervision (ESFS) was introduced in 2010, and consists of the European Systemic Risk Board (ESRB) and three European supervisory authorities (ESAs), namely:

The aim is to ensure that these bodies become the single supervisory bodies for all European states by 2019. As outlined in the press release on the Capital Markets Union in September 2017, a single capital markets supervisor and completing the Financial Union (comprising the Banking Union and the Capital Markets Union) by 2019 is necessary to guarantee the integrity of the euro.

All well and good, although much of the evening focused on Brexit, rather than the details of these regulations.

Video source: The Financial Times

David outlined the path we are following and the fact that now we’ve agreed to the basics around the Irish border, EU citizens’ rights and the cost of leaving. Now we move into transition and the issue is that there is no precedent for what we now need to build.

According to David, Michel Barnier is stuck, as there is no historical legal agreement or structure for a Free Trade Agreement allowing Financial Services from the UK to continue to deal with Europe. In fact, the only option is an Equivalence Regime.

The BBA wrote a very good Brexit paper last year on what Equivalence means:

When assessing the operational rights or treatment of foreign banks in the EU the EU assesses whether the standards of regulation and supervision in a bank’s home market are ‘equivalent’ to those of the EU.

A determination of equivalence can be beneficial for a foreign bank or for an EU bank dealing with a foreign bank (or foreign stock exchange or central counterparty for clearing securities transactions (‘CCP’)). The benefits are not uniform and can vary considerably depending on the EU legislation under which equivalence is given. Typical advantages could include (i) granting foreign banks limited market access rights inside the EU for certain services, (ii) more favourable treatment for branches of foreign banks located in the EU, or (iii) more favourable treatment for EU banks having exposures to a foreign bank, stock exchange or CCP.

Equivalence is not a substitute for the operational rights created by the EU passporting system for banks. It operates in fewer areas, covers fewer services and is inherently less secure. Some of the more significant equivalence regimes for foreign banks will not come into effect for several more years.

Equivalence is determined in different ways in different areas. It is based not on exact transposition of EU laws, but on a comparison of the intent and outcome of laws. In some cases, the EU will require that another country extend reciprocal recognition as a condition of granting equivalence.

Equivalence is not negotiated, but requested. Assessments are launched at the EU’s discretion. It can also be withdrawn, along with any rights that depend on it, at the EU’s discretion if a country is judged to have diverged from EU standards for any reason.

However, a country granted equivalence is not obliged to mirror changes to EU law if it does not wish to – subject to a potential loss of rights.

Nevertheless, some experts believe that even an Equivalence Regime will not work.  We shall see.

Anywho, here are David’s slides for those of interest:

In the meantime, I found a very good summary of all things happening in Europe that affects banks in Lexology. FYI, just in December 2017, here’s what was happening:

Political agreement reached on Fifth Money Laundering Directive (5AMLD)

The European Commission issued a press release which includes a factsheet and which states that the Council of the EU and the European Parliament have reached political agreement on the proposed 5AMLD. The European Parliament also issued a press release. The text of 5AMLD has not yet issued but it appears that the following points will be included:

  • Corporate Beneficial Ownership (BO) Registers will be public.
  • Trust BO Registers will be accessible to competent authorities, FIUs, the professional sectors subject to AML rules (banks, lawyers and so on) and will be accessible to other persons who can demonstrate a legitimate interest. When a trust is a beneficial owner of a company, access to this information can be requested.
  • The national BO Registers will be interconnected directly. Member States will have to introduce verification mechanisms to help improve the accuracy of the information and the reliability of these registers.
  • Member States will have limited ability to allow the anonymous use of electronic money products.
  • AML rules will be extended to virtual currency exchange service providers, tax related services, letting agents, art dealers, electronic wallet providers.
  • European “politically exposed person” will be subject to same due diligence as those from outside of EU.
  • Protection for whistleblowers.
  • Entities will be obliged to apply systematic enhanced controls on the financial transactions from and to high risk third-countries (as identified in the EU Commission list). The list will include third-countries with low transparency on beneficial ownership information, no appropriate and dissuasive sanctions or which do not cooperate nor exchange information.

Article 29 Working Party (WP29) published its guidelines on transparency

On 12 December, 2017, the Article 29 Working Party (WP29) published its guidelines on transparency. The guidance should assist controllers in understanding the obligation of transparency concerning the processing of personal data under the GDPR. The schedule to the guidance contains a list of the mandatory transparency information that must be provided to a data subject, so this note focuses on the WP29’s recommendations in regard to the provision of that information to data subjects.

WP29 publishes guidance on consent

On 12 December, 2017, the Article 29 Working Party (WP29) published its guidelines on consent under the GDPR. Consent is one of the lawful grounds on which personal data processing may be based. The consent guidance considers the extent to which the GDPR requires controllers to change their consent requests/forms.

EBA publishes final draft technical standards on central contact points under PSD2

The final draft regulatory technical standards (RTS) on central contact points under Directive (EU) 2015/2366 (PSD2) have been published by the EBA. The RTS specify the criteria for determining when the appointment of a central contact point in a host Member State is appropriate and the functions that these contact points should fulfil. The RTS apply where the host Member States require payment institutions and electronic money institutions operating in its territory through agents under the right of establishment to appoint a central contact point in its territory.

The proposed criteria for determining when the appointment of a central contact point is appropriate was retained by the EBA, following feedback received during the consultation period. However one change was made to clarify that payment institutions and electronic money institution who meet any of the criteria set out in the RTS should notify the CA of the host MS accordingly.

ESAs publish amended technical standards on the mapping of external credit assessment institutions (ECAIs)

The Joint Committee of the three European Supervisory Authorities (the ESAs) has published two amended implementing technical standards (ITS) on the mapping of credit assessments of ECAIs for credit risk. These amendments reflect the recognition of five new credit rating agencies and the de-registration of one. The ITS aim at ensuring that only credit ratings issued by ECAIs can be used for calculating capital requirements of financial institutions and insurance undertakings. The ESAs also published individual mapping reports illustrating how the methodology was applied to produce the five additional mappings under the Capital Requirements Regulation (CRR) mandate.

ESAs publish draft technical standards to strengthen group-wide management of money laundering and terrorist financing risks

The Joint Committee of the three European Supervisory Authorities (ESAs) has published its draft regulatory technical standards (RTS) specifying how credit and financial institutions should manage money laundering and terrorist financing (ML/TF) risks at group level. In particular, where they have branches or majority-owned subsidiaries based in third-countries whose laws do not permit the application of group-wide policies and procedures on anti-money laundering and countering the financing of terrorism (AML/CFT). These were published in accordance with Article 45(6) of Directive (EU) 2015/849 and are part of the ESA's work on fostering a common approach to AML/CTF.

Guidelines on procedures for complaints of alleged infringements of Payment Services Directive 2

The EBA has published guidelines on procedures for complaints of alleged infringements of PSD2. The guidelines set out the EBA's view of appropriate supervisory practices within the European System of Financial Supervision or of how Union law should be applied in a particular area. These guidelines apply to complaints submitted to competent authorities with regard to payment service providers' alleged infringements of Directive (EU) 2015/2366 as laid down in Article 99(1) of the Directive. The guidelines apply from 13 January 2018 and competent authorities should comply by incorporating them into their practices as appropriate.

ESMA Consults on draft RTS for prospectuses

ESMA has launched a consultation on draft regulatory technical standards (RTS) under the new Prospectus Regulation (Regulation (EU) 2017/1129). These RTSs set out a number of requirements concerning the following topics:

  • the key financial information that should appear in the summary of the prospectus
  • data and machine readability of information to be sent to ESMA in relation to the storage and mechanism providing the public with free of charge access and search functions
  • advertisements relating to public offers or admission to trading
  • situations which require the publication of a supplement to a prospectus
  • publication of a prospectus

The consultation is open for comments until 9 March 2018.

EBA consults on draft technical standards on risk retention for securitisation transactions

The EBA has launched a public consultation on its draft regulatory technical standards (RTS) specifying the requirements for originators, sponsors and original lenders related to risk retention as laid down in the new EU securitisation framework (STS Regulation). The RTS aim to provide clarity on the requirements relating to risk retention, thus reducing the risk of moral hazard and aligning interests and will replace the current Delegated Regulation on risk retention. The consultation runs until 15 March 2018.

EBA consults on the homogeneity of underlying exposures in securitisation

The EBA has launched a public consultation on draft regulatory technical standards (RTS) specifying a set of criteria for the underlying exposures in securitisation to be deemed homogeneous, as part of the requirements under the new EU securitisation framework. The RTS have been developed according to Articles 20(14) and 24(21) of the STS Securitisation Regulation. The homogeneity requirement aims to facilitate the assessment of underlying risks by investors and to enable them to perform robust due diligence. The RTS are applicable to both asset-backed commercial paper (ABCP) and non-ABCP securitisations. The consultation runs until 15 March 2018.

Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012

The Regulation, which applies to securitisations the securities of which are issued on or after 1 January 2019, lays down a general framework for securitisation. It defines securitisation and establishes due-diligence, risk-retention and transparency requirements for parties involved in securitisations, criteria for credit granting, requirements for selling securitisations to retail clients, a ban on re-securitisation, requirements for SSPEs as well as conditions and procedures for securitisation repositories. It also creates a specific framework for simple, transparent and standardised (‘STS’) securitisation.

ESMA updates its CSDR Q&A

ESMA has published an update of its Q&As regarding the implementation of the Central Securities Depository Regulation (CSDR). The Q&As provide common answers to questions regarding practical issues on the implementation of the new CSDR regime. They cover updates on organisational requirements regarding membership of user committee and record keeping requirements in respect of settlement banks.

ESMA updates Q&As on the Benchmarks Regulation

ESMA has published updated Q&As regarding the implementation of the Benchmarks Regulation (BMR). The Q&As include two new answers regarding the following topics:

  • authorisation and registration: on the obligations applicable to administrators
  • requirements for users: regarding the written plans to be produced by supervised entities

ESMA updates Market Abuse Regulation (MAR) Q&As

ESMA has updated its Q&A document regarding the implementation of the MAR. The Q&A:

  • clarifies the time span for the calculation of the CO2 equivalent emissions and rated thermal input that should be considered to determine whether a participant in the emission allowance market is subject to MAR
  • includes Q&As on emission allowances and emission allowances market participants (EAMPs).

EBA publishes updated ITS package for 2018 benchmarking exercise

The EBA has published an update to its implementing technical standards (ITS) on benchmarking of internal approaches, which define the benchmarking portfolios for the 2018 benchmarking exercise. The update includes minor changes and clarifications that the EBA agreed with the Commission in advance of the Commission's adoption of these standards. These updates do not entail any change to the policy or legal content of the technical standards but eliminate inconsistencies in wording and facilitate harmonised data submissions in April 2018.

EBA publishes its standardised data templates as a step to reduce non-performing loans (NPLs)

The EBA has published data templates that will create the foundation for NPL transactions across the EU. They will provide a common EU data set for the screening, financial due diligence and valuation during NPL transactions. The EBA is providing these templates to allow banks to supply comparable and standardised data on NPLs to meet the need of investors and other stakeholders. They are designed in a way that they can act as a market standard, used by banks on a voluntary basis for NPL transactions, and to form the foundation for NPL secondary markets initiatives.

Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC (Fifth Money Laundering Directive)

The EC adopted a proposal to further reinforce EU rules on anti-money laundering to counter terrorist financing and increase transparency about who really owns companies and trusts. The proposal will reinforce the measures introduced by the Fourth Anti-Money Laundering Directive with the following changes: full public access to the beneficial ownership registers, interconnection of the registers, extending the information available to authorities. The proposed update of the legal rules will be adopted by the European Parliament and the Council of Ministers under the ordinary legislative procedure.

ESMA advises the Commission EC on specific elements of the Short-Selling Regulation

ESMA has issued its technical advice to the European Commission (EC) on how to improve the Short-Selling Regulation. ESMA proposed a number of concrete amendments on controversial areas of the SSR to improve its relevance, effectiveness, coherence, and efficiency in line with the mandate received. The technical advice includes proposals around the three main elements of the mandate which are:

  1. exemption for market making activities
  2. short-term bans on short-selling
  3. transparency of net short positions

ESMA publishes CRA market share calculation

ESMA has published its annual market share calculation for EU registered credit rating agencies (CRAs). The purpose of the market share calculation is to facilitate issuers and related third parties in their evaluation of a CRA with no more than 10% total market share in the EU. The publication aims to guide the user through the requirements of Article 8d of the CRA Regulation and provides background and guidance as to how the market share calculation is performed and should be used.

EBA issues guidance for the use of cloud service providers by financial institutions

The EBA has launched its final guidance for the use of cloud service providers by financial institutions. The EBA recommendations are applicable as of 1 July 2018 and are addressed to credit institutions, investment firms and competent authorities. They clarify the EU-wide supervisory expectations if institutions intend to adopt cloud computing, so as to allow them to leverage the benefits of using cloud services, while ensuring that any related risks are adequately identified and managed. The recommendations address five key areas:

  • the security of data and systems
  • the location of data and data processing
  • access and audit rights
  • chain outsourcing
  • contingency plans and exit strategies

Single Market: trading safe products across Europe

The European Commission has tabled two legislative proposals to make it easier for companies, especially SMEs, to sell their products across Europe, and to strengthen controls by national authorities and customs officers to prevent unsafe products from being sold to European consumers. The Commission aims to tackle remaining structural weaknesses in the Single Market for goods:

  1. Mutual recognition – perfectly safe products sometimes cannot move freely within the Single Market because of diverging national rules and lack of trust and cooperation between national authorities.
  2. Enforcement of the rules – too many dangerous or non-compliant products can still find their way onto the market, so national authorities need to cooperate better to remove them and protect customers.

Opinion of the European Banking Authority on the transition from PSD1 to PSD2

The EBA has issued an opinion on the transition from PSD1 to PSD2. PSD2 has conferred on the EBA the development of 12 technical standards and guidelines, to specify detailed provisions in relation to payments security, authorisation, passporting, supervision and more. The EBA has finalised ten of these deliverables in December 2017, with the remaining two due to be completed at the beginning of 2018.

Not all the provisions of PSD2 or EBA technical standards and guidelines will be applicable on 13 January 2018. The opinion therefore, contains both general and specific comments and advice in relation to:

  • The implications for payment service providers and competent authorities of the delayed finalisation and/or adoption of some of the 12 EBA instruments developed under PSD2.
  • The rights and obligations of various types of payment service providers during the ‘transitional’ period under the PSD2.
  • The application of the EBA Guidelines on the security of internet payments under PSD1 (EBA-GL-2014-12) during that transitional period.
  • The support the EBA will provide to market participants after the application date of PSD2, 13 January 2018.

ESMA consults on securitisation requirements

ESMA has published three consultation papers on draft technical standards implementing the Securitisation Regulation (SR). The regulation establishes a general framework for securitisation and creates a specific framework for simple, transparent and standardised (STS) securitisation. Securitisations are transactions that enable a credit institution or a corporation to refinance assets, such as loans, by transforming them into tradable securities. The consultation is open for feedback until 19 March 2018.

ESMA issues updated statement on preparatory work in relation to CFDs, binary options and other speculative products offered to retail clients

ESMA has issued a statement updating on its work in relation to the sale of contracts for differences (CFDs), binary options and other speculative products to retail investors. ESMA will conduct a brief public consultation in January 2018 on this matter.

New rules make EU issuers' annual financial reports machine-readable

ESMA has published the final draft regulatory technical standards (RTS) setting out the new European Single Electronic Format (ESEF). Starting from 2020, this format shall be used by all issuers to prepare their annual financial reports. ESMA also published a reporting manual and detailed instructions to issuers to facilitate the implementation of the RTS. The publication of the RTS is accompanied by the launch of a new webpage on the ESEF.

Public consultation on building a proportionate regulatory environment to support SME listing

The European Commission has issued a public consultation on building a proportionate regulatory environment to support SME listing. The consultation will run until 26 February 2018. The public consultation will focus on three broad categories of issues:

  1. seek to identify how the 'SME Growth Market' concept, created by MiFID II, can be further improved
  2. identify areas where the administrative burden placed on listed SMEs can be lightened
  3. where some targeted regulatory changes could help (re)build the local ecosystems surrounding SME-dedicated exchanges

GDP-linked Bonds: Some Simulations on EU Countries

The European Commission issued a discussion paper on GDP-linked bonds. The paper explores some implications of GDP-linked bonds, an instrument for national debt management that has recently sparked growing interest. The results, based on the data and tools of the Commission Debt Sustainability Monitor, suggest significant potential benefits from GDP-linked bonds in reducing debt uncertainties for all European economies.

Final Guidelines - Joint Guidelines under Articles 17 and 18(4) of Directive (EU) 2015/849 on simplified and enhanced customer due diligence and the factors credit and financial institutions should consider when assessing the money laundering and terrorist financing risk associated with individual business relationships and occasional transactions - The Risk Factors Guidelines

The guidelines, which come into effect on 26 June 2018, set out factors firms should consider when assessing the money laundering and terrorist financing (ML/TF) risk associated with a business relationship or occasional transaction and also set out how firms should adjust the extent of their customer due diligence measures in a way that is commensurate to the ML/TF risk they have identified. The guidelines focus on risk assessment of individual business relationships and occasional transactions.

EBA consults on amended technical standards on benchmarking of internal models

The EBA has launched a consultation to amend the Commission Implementing Regulation on benchmarking of internal models to adjust the benchmarking portfolios and reporting requirements in view of the benchmarking exercise the EBA will carry out in 2019. The consultation will run until 31 January 2018 and a public hearing will take place at the EBA premises on 23 February 2018.

EBA report shows EU banks comply with LCR requirement of 100% ahead of its full implementation

The EBA has published its fourth impact assessment report for the liquidity coverage ratio (LCR), which shows that EU banks have continued to improve their LCR since 2011. The report is based on liquidity data and wider bank balance sheet statistics from 157 EU banks across 16 Member States.

Evidence on finance and economic growth

The ECB has published a working paper on finance and economic growth. This paper reviews and appraises the body of empirical research on the association between financial markets and economic growth that has accumulated over the past quarter-century. The paper highlights the mechanisms through which financial markets benefit society, while also highlighting the channels through which finance can slow down long term growth.

Questions & Answers: Commission sets out roadmap for deepening Europe's Economic and Monetary Union

The European Commission presented a package which included communications on further steps towards completing Europe's Economic and Monetary Union and new budgetary instruments for a stable euro area within the Union framework, a proposal for the establishment of a European Monetary Fund, a proposal to integrate the substance of the Treaty on Stability, Coordination and Governance into the Union legal framework, an amendment to the Common Provisions Regulation and an amendment to strengthen the Structural Reform Support Programme.

This package delivers on the commitment made by President Jean-Claude Juncker in his 2017 State of the Union address to present concrete next steps for further deepening Europe's Economic and Monetary Union (EMU). The Commission invites the European Parliament and the Council to reflect on the ideas presented as part of this package, with a view to reaching a common understanding on the roles and functions of a European Minister of Economy and Finance by mid-2019.

The portfolio of euro area fund investors and ECB monetary policy announcements

The ECB published a working paper on the portfolio of euro area fund investors and ECB monetary policy announcements. The working paper studies the impact of major ECB monetary policy announcements on the portfolio allocation of euro area fund investors, using daily data between 2012 and mid-2016.

ESMA latest risk dashboard sees no change in overall risk levels

ESMA has issued the risk dashboard No.4 2017, covering risks in the EU’s securities markets for Q3 2017. In Q3 2017EU financial markets remained relatively calm, although reactive to global geopolitical events which was reflected in increased market expectations of the near-term volatility following global political tensions. ESMA’s overall risk assessment remains unchanged from Q2 at high levels.

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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