1. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 0

2. 1 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 A European single market in banking Chryssa Papathanassiou Securities Settlement Systems Policy Division Directorate General Payment Systems and Market Infrastructure

3. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 2 Overview 1. Lamfalussy Process -- banking; and -- payment and settlement systems 2. Focus on main elements for smooth functioning of payment and securities clearing and settlement systems -- Some examples of the EU choices

4. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 3 Main elements on banking 1. Regulatory Convergence = Legislation is developed by means of the -- Lamfalussy Process (2001) ---Level 1 measures in FSAP ---Level 2 with 3 regulatory committees 2. Supervisory Convergence -- Consistent and equivalent transposition of Levels 1 and 2 by Level 3

5. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 4 Financial Services Action Plan: 1999 Level 1: Basic policy choices consisting of a Commission proposal submitted to the Council and the European Parliament for adoption by co- decision Level 2: Commission drafts legislation on detailed technical measures prepared by regulatory committees New Lamfalussy Process

6. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 5 New Lamfalussy Process Level 3: enhanced cooperation and networking among EU supervisors/regulators Level 4: coordinated enforcement, by the Commission to enforce Community law, underpinned by enhanced cooperation between Member States and their regulatory authorities. Not dealt with in this presentation.

7. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 6 Key measures of the FSAP - Level 1 1. Banking Supervision -Amendment of capital framework for banks and investment firms (by 31.12.2006) proposed by the Commission on 14.7.2004. Following the Lamfalussy process. Technical rules under Level 2. -Re-organisation and winding up of credit institutions (2001/24) -Pursuit and prudential supervision of e-money (2000/46)

8. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 7 Cross-sectoral issues: Directive 2002/87/EC on supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate. Should be implemented by Member States by August 2004. --Prudential requirements for financial groups with insurance plus at least one of the two, banking and securities. --Supervisory cooperation. Key measures of the FSAP - Level 1

9. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 8 2. Payment/settlement systems -Commission Communication on clearing and settlement Eurosystem responded positively -Directive on financial collateral arrangements -Commission Communication on single market for payments Key measures of the FSAP - Level 1

10. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 9 Level 2 The Commission and Member States experts agree on Level 2 legislation for technical measures --Committees assist the Commission in adoption of technical details (e.g. Directives on Markets in Financial Instruments, Market Abuse, Transparency). This is the so-called comitology procedure. --ECB has an observer status

11. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 10 Lamfalussy Approach: the new organisational structure for level 2 and 3 Banking European Banking Committee (EBC) Committee of European Banking Supervisors (CEBS) Securities/investment funds European Securities Committee (ESC) Regulatory Committees (High-level representatives of Member States) Committee of European Securities Regulators (CESR) Supervisory Committees (Representatives of supervisors/regulators) European Insurance and Occupational Pensions Committee Insurance and pension funds Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) Financial conglomerates European Financial Conglomerates Committee

12. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 11 Financial Supervision : Level 3 Supervisory convergence Level 1 and 2 legislation is transposed consistently into national laws with the help of => Committees (CEBS, CESR) -- which promote consistent implementation of EU Directives at the national level; -- cooperate and exchange information at normal times and in crises.

13. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 12 Level 3 Examples: -CEBS: expected consistent implementation of Basle II (pillar 2 of the framework and validation of banks’ internal ratings-based IRB approaches). -ESCB/CESR standards for securities clearing and settlement in the EU

14. 13 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 I. Main elements on payment/settlement systems II. The case of insolvency III. Contractual and statutory protection IV. Examples of the EU choices

15. 14 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 I. Main elements

16. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 15 I. Main elements for payment/settlement systems Payment systems rely on: licensing of credit institutions and investment firms that participate in payment and securities settlement systems; enforceability of agreements establishing rights and obligations of system operators, participants and customers of banks that participate in a payment system; enforceability of netting and finality when there is an insolvency;

17. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 16 banking and central banking law; final settlement and insolvency law; laws governing collateral arrangements; laws supporting electronic processing/New technologies (e-money); legal framework of the payment system should be evaluated in other relevant jurisdictions as well. I. Main elements for payment/settlement systems

18. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 17 Securities Settlement Systems rely on: laws and rules supporting holding, transfer, pledging and lending of securities; protection of customer assets against custodian’s insolvency; immobilisation or dematerialisation; enforceability of netting, finality, securities lending, Delivery Versus Payment; realisation of collateral; I. Main elements for payment/settlement systems

19. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 18 priority of system’s and participants’ claims against collateral posted by a participant; certainty regarding rights and interests held through a system. I. Main elements for payment/settlement systems

20. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 19 Collateral Netting Finality Legal certainty in all relevant jurisdictions for: I. Main elements for payment/settlement systems

21. 20 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 II. The case of insolvency

22. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 21 II. The case of insolvency  Main effect: the pari passu treatment of creditors, i.e. equal treatment of creditors. As a result, many jurisdictions prohibit set-off after the opening of insolvency. Certain transactions may be reversed if occurred during a time period laid down in the law before the opening of insolvency (“suspect period”).

23. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 22 II. The case of insolvency  An administrator can perform contracts that are favourable to the bankruptcy estate and set aside others (cherry-picking).  Secured creditors are satisfied first from the security interest; the rest of the bankruptcy estate is divided pro rata among unsecured creditors.

24. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 23 II. The case of insolvency  Transfers, Netting and Collateral in the framework of systems deviate from the principle of pari passu treatment of creditors in insolvency.  Even if they are provided for in a contract, they cannot be valid and enforceable.

25. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 24  There is a need for protection from the powers of the insolvency court and administrator.  Because only in this way one can avoid spill-over effects of a participant’s failures being transmitted to other participants (contagion across markets) and, to the extent that these may endanger the stability of financial markets, systemic risk. II. The case of insolvency

26. 25 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 III. Contractual and statutory protection

27. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 26 III. Contractual and Statutory Protection -by drafting contractual provisions (e.g. using master agreements) and -by enacting statutory rules ensuring the enforceability of the contractual provisions in the case of bankruptcy. How to create legal certainty?

28. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 27 Statutory protection: by changing the substantive law itself and by determining which law applies to rights and obligations in a particular arrangement (provisions of conflicts of law, as opposed to substantive law) III. Contractual and Statutory Protection

29. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 28 Abolition of ‘zero-hour rule’: Insolvency proceedings shall not have retroactive effects on rights and obligations of participants in a system earlier than the opening of insolvency proceedings III. Contractual and Statutory Protection

30. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 29 Validity and enforceability of collateral arrangements In case of default, as agreed by the parties, a collateral taker may realise the collateral securities:  by sale or appropriation and by setting off their value against, or applying it in discharge of, the relevant financial obligations. III. Contractual and Statutory Protection

31. 30 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 IV. Examples from the EU legislation

32. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 31 Consolidated Banking Directive 2000/12/EC  Restricts the business of deposit taking to credit institutions.  Financial institutions owned by credit institutions are free to provide their services in all Member States.  No single licence for financial institutions owned by other entities than credit institutions.  Issuing of e-money is restricted to credit institutions, including e-money institutions (E- money Directive) IV. Examples from the EU legislation

33. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 32 IV. Examples from the EU legislation

34. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 33 Settlement Finality Directive: minimises conflicts of law IV. Examples from the EU legislation

35. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 34 Collateral Directive: protects financial collateral for certain legal entities (narrower than SFD) cash (Art. 2.1(d)) evidenced in writing or equivalent manner or book entry (Art. 1.5) financial instruments (Art. 2. 1 (e)). IV. Examples from the EU legislation

36. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 35 Winding Up Directive: Law agreed by the parties in the contract (lex contractus) governs inter alia: Netting agreements (Art. 25) Set-off (Art. 23) Repurchase agreements (Art. 26) IV. Examples from the EU legislation

37. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 36 The law of the place where the asset is located (lex rei sitae) governs inter alia: Securities given as collateral to a system: law of the system, the registry or the location of the securities account (Prima rule Art. 24) IV. Examples from the EU legislation