1. EU Regulatory Change Impacting the Securities Industry - Chartered Institute for Securities & Investment
Richard Young
29th March 2010

2. Agenda Regulatory Background and Drivers New EU Regulatory Structure
Securities Market Infrastructure and Safer Derivatives
Funds Regulation:
UCITS
Alternative Investments
MiFID Review
Crisis Management
EU Harmonisation Initiatives:
Giovannini Barriers
Securities Law Directive
T2S

3. EU Regulatory Change: Key Drivers:
Response to the Financial Crisis and the G20:
Action:
Apply G20 agreement in the European context through range of individual measures addressing priority areas:
Capital Requirements/Capital Buffers
Liquidity Monitoring
Shadow Banking Industry
Transparency
OTC Derivatives
Credit Rating Agencies
Fair Value Accounting
Remuneration Policies
Existing EU Harmonisation Agenda:
Progress the Single Market in Financial Services by continuing deployment of measures to remove barriers to cross border transactions

4. Agenda Regulatory Background and Drivers New EU Regulatory Structure
Securities Market Infrastructure and Safer Derivatives
Funds Regulation:
UCITS
Alternative Investments
MiFID Review
Crisis Management
EU Harmonisation Initiatives:
Giovannini Barriers
Securities Law Directive
T2S

5. EU Regulatory Change: Current EU Regulatory Structure
Council
EU Parliament
Level 1
Primary Legislation
European Commission
ECB
European Banking Committee
European Securities Committee
European Insurance and Occupational Pensions Committee
Level 2
Committee of European Banking Supervisors
CEBS - London
Committee of European Securities Regulators
CESR - Paris
Committee of European Insurance & Occupational Pensions Supervisors (CEIOPS)
Frankfurt
Level 3
Level 4 - Enforcement
National Regulators e.g. FSA

6. EU Regulatory Change: New Regulatory Structure (following De Larosiere Report):
European Systemic Risk Board (ESRB)
to monitor and assess risks to the stability of the financial system as a whole ("macro-prudential supervision"), and provide early warning of systemic risks that may be building up and, where necessary, recommendations for action to deal with these risks.
European System of Financial Supervisors (ESFS)
European Banking Authority (EBA),
European Insurance and Occupational Pensions Authority (EIOPA)
European Securities and Markets Authority (ESMA)
Responsibilities include:
Developing proposals for technical standards;
Settling cases of disagreement between national supervisory authorities, including within colleges of supervisors;
Contributing to ensuring compliance with Community law;
Exercising direct supervisory powers for defined entities with a pan European reach;
Co-ordination and decision-making in crisis situations; and
Collecting relevant information.
When – in place by early 2011

7. EU Regulatory Change: New EU Regulatory Structure (2)
Council
EU Parliament
European Commission
ECB + ESCB
European Systemic Risk Board
European Banking Authority (EBA) - London
European Securities and Markets Authority (ESMA) - Paris
European Insurance Authority and Occupational Pensions Authority (EIOPS)
National Regulators e.g. FSA

8. Agenda Regulatory Background and Drivers New EU Regulatory Structure
Securities Market Infrastructure and Safer Derivatives
Funds Regulation:
UCITS
Alternative Investments
MiFID Review
Crisis Management
EU Harmonisation Initiatives:
Giovannini Barriers
Securities Law Directive
T2S

9. EU Regulatory Change: Securities Market Infrastructure and Safer Derivatives
Moving OTC Derivatives as far as possible to Centralised Clearing through one or more CCPs (Exchange Traded where possible)
Standardisation of OTC Derivatives Contracts – new securities authority to decide clearing eligible contracts
Increased capital requirements for bilateral trading (ensuring the price of risk is paid)
Tighter regulation of CCPs (and possibly CSDs) to ensure risk is reduced (standards for inter-operability) – central authorisation
Increased transparency with Trade Data Repositories
When – European Market Infrastructure Legislation – Summer 2010

10. Agenda Regulatory Background and Drivers New EU Regulatory Structure
Securities Market Infrastructure and Safer Derivatives
Funds Regulation:
UCITS
Alternative Investments
MiFID Review
Crisis Management
EU Harmonisation Initiatives:
Giovannini Barriers
Securities Law Directive
T2S

11. EU Regulatory Change: Funds Regulation-UCITS
Enhancement to the EU Directive 85/611/EEC from 1985 designed to allow Collective Investment Schemes to operate freely i.e. be sold ‘across border’ or ‘passported’ within the EU on the basis of authorisation from one member state.
UCITS IV builds on previous legislation to include:
The Management Company Passport which will allow funds authorised in one Member States to be managed remotely by Management companies established and located in another Member State and be authorised by that Member State’s regulatory body.
The removal of administrative barriers to cross-border distribution of UCITS funds by improved cooperation mechanisms between national regulators.
The creation of a framework for mergers between UCITS funds and allows the use of "master/feeder” structures to accommodate the cultural preference towards domestic funds.
The replacement of the "Simplified Prospectus" with a short two-page "Key Investor Information” document.
When – UCITS IV scheduled for implementation mid 2011

12. EU Regulatory Change: Funds Regulation (2) –Alternative Investments Directive (AIFM)
The proposed Directive impacts all funds that are not harmonised under the UCITS Directive e.g. Hedge Funds, Private Equity and Real Estate investment funds
The proposed Directive aims to:
establish a secure and harmonised EU framework for monitoring and supervising the risks that these funds pose to their investors, counterparties, other financial market participants and to financial stability; and
permit, subject to compliance with strict requirements, alternative investment managers to provide services and market their funds across the internal market of the EU.
Measure has proved controversial on a number of fronts but especially in connection with the marketing of third country funds into the EU and the measures one size fits all approach
When – Timing uncertain as latest draft was dropped from the meeting of EU finance ministers in March - further discussions during Q2 2010

13. Agenda Regulatory Background and Drivers New EU Regulatory Structure
Securities Market Infrastructure and Safer Derivatives
Funds Regulation:
UCITS
Alternative Investments
MiFID Review
Crisis Management
EU Harmonisation Initiatives:
Giovannini Barriers
Securities Law Directive
T2S

14. EU Regulatory Change: MiFID Review
MiFID (Markets in Financial Instruments Directive) originally implemented in November 2007.
Aim: to introduce a single market and regulatory regime for investment services across the EU/EEA, and setting up high level organisational and conduct of business standards that must apply to all firms.
MiFID Review. Revisions in the following areas are expected:
Removing obstacles to the consolidation of trade data/consolidated tape;
dark pools and internal crossing reviewed;
transparency obligations for non-equities and best execution reviewed.
transaction reporting for OTC derivatives
When: Late 2010

15. Agenda Regulatory Background and Drivers New EU Regulatory Structure
Securities Market Infrastructure and Safer Derivatives
Funds Regulation:
UCITS
Alternative Investments
MiFID Review
Crisis Management
EU Harmonisation Initiatives:
Giovannini Barriers
Securities Law Directive
T2S

16. EU Regulatory Change: Crisis Management
The EU wishes to put in place a harmonised process for emergency action to stabilise large financial groups operating cross border in a crisis situation
During the recent financial crisis interventions were made to prevent a number of bank failures – but this was done at the national level.
Currently there is no framework at the EU level for these situations
EU wishes to focus on:
Early intervention tools for supervisors
Cross border bank resolution regimes
Harmonised bank insolvency framework

17. EU Regulatory Change: Crisis Management (2)
Measures that could be adopted here include:
Effective cross border resolution regimes overseen by colleges of supervisors or centralised EU Resolution Authority
Orderly wind-down procedures, living wills
Crisis management funding coming from pre-funded industry resolution fund and or - “haircuts” on unsecured bondholders (i.e. wholesale creditors)
When – Legislation planned for Spring 2011

18. Agenda Regulatory Background and Drivers New EU Regulatory Structure
Securities Market Infrastructure and Safer Derivatives
Funds Regulation:
UCITS
Alternative Investments
MiFID Review
Crisis Management
EU Harmonisation Initiatives:
Giovannini Barriers
Securities Law Directive
T2S

19. EU Regulatory Change: Giovannini – Brief Recap
Giovannini Context – the EU financial markets harmonisation program; European Code of Conduct, MiFID, Target2 Securities
Giovannini Committee - EU advisory committee headed by Alberto Giovannini of Unifortune - Identified15 Barriers to harmonised European clearing and settlement in 2003
Barriers a mixture of public and private sector
Ongoing monitoring of progress by the EU Commission – through CESAME Committee

20. EU Regulatory Change: Giovannini – Key Areas of Progress
Barrier 1 – Communications protocol for cross border clearing and settlement published by SWIFT in increasing but incomplete implementation by EU clearing and settlement infrastructures
Barrier 3 - Industry standards for EU General Meetings and Corporate Actions processing agreed by industry – implementation to begin in 2010
Barrier 6 – Harmonisation of EU settlement cycles – industry group currently studying required changes to market structure
Barrier 11 – EU Commission recommendation on withholding tax relief at source regime published 2009 – ongoing implementation monitoring by member states to begin 2010

21. EU Regulatory Change: Securities Law Directive
A number of the Giovannini Barriers cannot be overcome without legal intervention at the EU level. A new Securities Law Directive will address these areas:
Legal aspects of Barrier 3 – Corporate Actions
Barrier 9 – Location of securities
Barrier 13 – Legal treatment of book-entry securities
When – Directive expected summer 2010

22. EU Regulatory Change: T2S
T2S will be a single IT platform enabling centralised settlement of securities in the euro area and beyond. It is being developed on behalf of the European Central Bank
Central Securities Depositories (CSDs) would outsource their securities accounts to T2S, which would perform the processing of their settlement instructions on these accounts. There will be an option for CSD customers to connect directly to T2S

23. EU Regulatory Change: T2S connection options
T2S parties have choice between direct and indirect connection to the platform.
Source: ECB website and T2S URD 23

24. EU Regulatory Change: Summary of Other Key Activities
Credit Rating Agencies – New regulatory regime – supervised directly by the new European Securities and Markets Authority
Capital and Liquidity standards. Additional changes to the Capital Requirements Directive (CRD). Current consultation covering amongst other areas:
Liquidity standards:
Definition of capital: Raising the quality, consistency and transparency of the capital base.
Leverage ratio: Introducing a leverage ratio as a supplementary measure to the Basel II risk-based framework
Counterparty credit risk: strengthening the capital requirements for counterparty credit risk exposures arising from derivatives, repos and securities financing activities.
When – 2nd half of 2010

25. Thank you
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