EU releases MIFID II consultation and technical advice

The European Securities and Markets Authority (ESMA) published today the final advice for more than 175 rules contained in the Markets and Financial Instruments Directive (MiFID II). The Directive introduces tougher rules in transparency for Commodities, OTC Derivatives, High-frequency trading. MiFID II also strengthens investor protection and eases systemic risk and competition.

Full market implementation due on January 3 2017.

ESMA Press Release

ISDA Launches Principles on CCP Recovery

The International Swaps and Derivatives Association (ISDA) launches the Principles on CCP Recovery. The paper published today identifies the key issues that need to be addressed, and makes several recommendations on how to proceed. These issues can be broken down into two basic themes:

• The adequacy and structure of a CCP’s loss-absorbing resources; and

• Crisis management planning in the form of a clearly defined and transparent recovery and resolution framework (R&R) for CCPs when losses threaten to exceed their loss-absorbing resources.

The Principles comprehend transparent risk management standards, practices and  methodologies; Mandatory, standardised and transparent stress testing; Significant CCP SITG; Clearly defined CCP recovery plans; and Clearing service termination or resolution.

The paper is available here

OTC Derivatives Regulators Group (ODRG) issued a report to the G20 leaders

The Over-the-counter (OTC) Derivatives Regulators Group (ODRG) issued a report that provides an update to the G20 leaders regarding the ODRG's continuing effort to identify and resolve cross-boarder issues associated with the implementation of the G20 OTC derivatives reform agenda.

The report reflects the progress on cross-boarder issues identified by the ODRG. It also acknowledges the progress in implementing regulatory reforms since the St. Petersburg Summit (September 2013). This report consolidates for the G20 leaders the substance of previous reports made during 2014 to the G20 Finance Ministers and the Central Bank of Governors.

The Report

Are the CCPs’ powers too wide-ranging?

A comprehensive and clear definition of Central Counterparties is proposed by the European Commission stating that ‘a CCP is an entity that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer. Due to its central role in the market, a CCP normally bears no market risk (the latter is still borne by the original parties to the trade)’ 

The concerns evidenced during recent financial crises have boosted the need for an extensive and well-founded regulatory framework for the CCPs. Nevertheless, the risk to create new too big to fail institutions must be seriously considered by regulators. Thus, regulation and supervision of Central Counterparties must preserve the nature of these entities as Financial Market Infrastructures that enable better management of risk instead of creating risks themselves. The warning comes from the increase of the scale and importance of CCPs for the functioning of the financial system, inspired by the G20 commitments on reforming OTC derivatives.

Following this rationale the Bank for International Settlements and the International Organisation of Securities Commissions (IOSCO), an umbrella group of regulators, have called for the drafting of a recovery plan. In a report published last month the regulators said CCPs should be given the tools to “continue to provide critical services as expected, even in times of extreme stress”.

Regulators included the option for CCPs to tear up derivatives contracts or apply a “haircut” to margins. The report also said clearing houses should be able to allocate any uncovered losses to their members and to replenish any funds they had used after a “stress event”.

Related articles:

FT Article 4th Nov 2014

FT Article 15th Oct 2014

International Banks' commitment to enhancing systemic stability: industry initiative to remove cross-border close-out risk

The International Swaps and Derivatives Association, (ISDA) today announced that 18 major global banks (G-18) have agreed to sign a new ISDA Resolution Stay Protocol, which has been developed in coordination with the Financial Stability Board to support cross-border resolution and reduce systemic risk. This represents a major step in strengthening systemic stability and reducing the risk that banks are considered ‘too big to fail’.

The Protocol will impose a stay on cross-default and early termination rights within standard ISDA derivatives contracts between G-18 firms in the event one of them is subject to resolution action in its jurisdiction. The stay is intended to give regulators time to facilitate an orderly resolution of a troubled bank. Background information on ISDA Resolution Stay Protocol

The timing of implementation as planned considers that the first wave of banks will adopt the Protocol before the G-20 meeting in Brisbane in November. This wave involves 18 major banks and certain of their affiliates. They will adhere to the protocol on a voluntary basis by early November 2014. The protocol will become effective for those firms on January 1, 2015 – except for the US bankruptcy related provisions, which become effective only upon relevant regulations being issued by US regulators.

As proposed, the ISDA Resolution Stay Protocol is a major component of a regulatory and industry initiative 'to address the too-big-to-fail issue by improving the effectiveness of cross-border resolution actions against a big bank – therefore ensuring taxpayer money is never again needed to prop up a failing institution.

The Protocol is one of the results of the St. Petersburg G20 Summit in 2013, where the Financial Stability Board made a commitment to "develop policy proposals on how legal certainty in cross-border resolution can be further enhanced" by the time of the Brisbane Summit. The FSB Consultative Document

The consultative document proposed a package of policy measures and guidance consisting of some elements that jurisdictions should consider including in their statutory cross-border recognition frameworks in order to enable effective cross-border resolution as required by the FSB Key Attributes of Effective Resolution Regimes, and contractual approaches to cross-border recognition that the FSB agreed to support and promote pending widespread adoption of comprehensive statutory frameworks.

The FSB Press Release

The list of the adhering parties

Bank of England seeks to strengthen the financial system through structural reform

The Bank of England has published four papers that propose changes to improve the resilience and resolvability of deposit-takers and reduce the disruption to customers and the system if a deposit-taker or insurer fails.

Several changes are expected to take place by January 2019 (preliminary plan of legal and operating structures should be submitted by 31 December 2014). The changes the Government introduces aim to ensure the minimal disruption of services when ring-fenced banks and groups containing ring-fenced banks are under resolution. 

The supervisor engaged with the tasks is the Prudential Regulation Authority (PRA) that will be consulting on three areas of ring-fencing policy: the legal structure of banking groups; governance; and continuity of services and facilities.

The PRA is also consulting on changes to enhance depositor and insurance policyholder protection.

The official documents

Reporting the progress in the implementation of the Single Supervisory Mechanism SSM

The European Central Bank (ECB) is preparing to take on new banking supervision tasks as part of a Single Supervisory Mechanism (SSM). The ECB will assume its new banking supervision responsibilities in November 2014, 12 months after SSM Regulation creating the supervisor entered into force. The main objectives of the SSM are to ensure the safety and soundness of the European banking system and to increase financial integration and stability in Europe.

The Single Supervisory Mechanism creates a new system of banking supervision that includes the national competent authorities of the participating European Union countries and the ECB.  However, is the ECB the one responsable for the effective and consistent functioning of the SSM, cooperating with the national competent authorities of participating EU countries. 

The European Central Bank (ECB) has issued several reports about the progress in the implementation of the SSM. The last report of may 2014 assured that the establishment of the SSM governance structures, including the related organisational rules and arrangements, has largely been completed.  Moreover, complying with the deadline of 4 May 2014, the SSM Framework Regulation was adopted by the Governing Council on a proposal of the Supervisory Board and published on 25 April 2014, together with a Feedback Statement on the outcome of the consultation and the amendments, which had been introduced. (SSM Quarterly Report 2014 / 2).

Additionally, the establishment of Joint Supervisory Teams (JSTs), which will be the main operational structure for the conduct of supervision by the SSM, has been initiated. It is also reported that there has been significant progress in the conduct of the comprehensive assessment, which required the selection of portfolios subject to examination in the asset quality review. The details of the scenario of the stress test, as decided by the European Banking Authority (EBA), and prepared in cooperation with the European Systemic Risk Board (ESRB) and the ECB, were released on 29 April 2014.  The Supervisory Board approved a Supervisory Reporting Manual, which will provide the data framework to support the conduct of supervision. (SSM Quarterly Report 2014 / 2)

See European Central Bank, SSM Quarterly Report: Progress in the Operational Implementation of the Single Supervisory Mechanism Regulation 2/2014 http://www.ecb.europa.eu/pub/pdf/other/ssmqr20142en.pdf