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Pablo Portugal
Strengthening the ESAs and supervisory convergence in Europe: reflecting on progress and next steps
3 Jun 2021
As the European Supervisory Authorities (ESAs) mark their ten-year anniversary this year, the European Commission’s recent consultation on supervisory convergence and the single rulebook provided an opportunity to reflect on their functioning and the evolution of financial markets supervision in the EU. The latest review of the founding regulations of the ESAs, which concluded in late 2019, led to targeted changes to the tasks, powers and governance of ESMA, EBA and EIOPA. While it is premature to provide a full assessment of the impact of the changes, recent developments have provided practical experience on the effectiveness of current arrangements, including areas for potential improvement. An effective response to the Covid-19 crisis The unprecedented challenges arising from the lockdown measures in early 2020 were a major test to the resilience of EU financial markets and the ability of the ESAs to react to urgent situations in a timely and effective manner. The Covid-19 emergency showed that the ESAs have the capacity to respond quickly to major challenges in financial markets, and put forward measures to coordinate actions at the EU level. The clarifications and regulatory forbearance statements issued by ESMA during this period were critical to help firms manage resources and avoid unnecessary stability and operational risks at a time of heightened market volatility. Market participants also welcomed the guidance on the recording of telephone communications, the postponement of certain measures and pronouncements pledging to ensure open and functioning markets, among other actions. The EBA, meanwhile, took several steps to provide operational relief to banks. These includedcalls to supervisors for flexibility and pragmatism in the application of the prudential framework, while banks welcomed guidance in relation to debt moratoria and accounting issues, as well asthe postponement of the 2020 stress test to 2021. One area for further consideration is the use of the“no-action letters” procedure that was introduced following the ESAs review. As acknowledgedby ESMA, its experience during the COVID-19 crisis illustrated the limitations of this mechanism under the current legal framework. During the crisis ESMA continued to issue “de-prioritisation of enforcement” statements which do not have the same status as the no-action relief tools available to authorities in other major jurisdictions. These non-binding statements issued by ESMA, while very important, do not offera guarantee that national regulators will act in a harmonised mannerand mean that market participants stillface the potential need to liaise with several competent authorities on whether they intend to follow the advice of the ESAs, in addition to managing any emerging divergences. Further reflection is needed onthe design of a more effective tool that would allow the ESAs to address sudden market developments and provide a higher degree of legal certainty to market participants. Enhancing supervisory mandates and supporting the competitiveness of EU markets As markets and supervisory needs continue to evolve, it is important to consider how the mandates of the ESAs should be adjusted to reflect evolving priorities in the financial sector. The focus on the Capital Markets Union (CMU) project creates a strong case for embedding the promotion of competitive and efficient EU financial markets in the mandates of ESMA and the other ESAs, alongside their existing core mandates. The importance of competitiveness is manifested in a number of areas. For example, an efficient and competitive securities trading ecosystem leads to better outcomes for end-users, and is important to attract global market participants and promote the growth of EU financial centres. As part of the focus on competitiveness, the policy outputs of the ESAs should give greater emphasis to economicanalysis and impact assessment. Recommendations issued by the ESAs to the Commission – for example, ahead of a legislative review – carry significant weight and play a major role in the formulation of legislative proposals and the work by the co-legislators. It is therefore important that the ESAs regularly conductcost-benefit assessments ofhigh-impact proposals and technical standards they put forward in order to understand their impact on investors and the general functioning of markets, including on their efficiency and liquidity. By way of example, AFME members believe that aspects of the securitisation Level 2 framework have led to unduly complex and costly requirements that outweigh the benefits for market participants. The mandates of the ESAs could formally also reflect the aim of ensuring that all outputs are consistent with and serve to advance the CMU. Regulatory frameworks should be tested against the objectives of making market-based mechanisms attractive and encouraging participationin the EU’s capital markets. In the sustainability area, a welcome aspect of the 2019 ESAs review was the requirement for ESMA to take into account risks related to environmental, social and governance related factors in performing its tasks. The increased demand for reliable and comparable ESG data and ratings should lead to reflections on extending ESMA’s direct supervisory powers to cover providers of such services. Supervisory convergence in Europe – an ongoing process In its report of June 2020, the CMU High-Level Forum rightly highlighted that “high-quality, well-resourced and convergent supervision based on a single rulebook is a key pre-requisite for a well-functioning Capital Markets Union.” These needs remain more pressing than ever as EU policymaking focuses on scaling up the capital markets ecosystem, deepening financial integration, advancing the green and digital transitions and navigating a complex international landscape.The trend pointing towards a more multipolar wholesale markets environment in the EU, featuring a range of financial centres serving as hubs for various activities, reinforces the need for consistent and coherent supervisory approaches across Member States. While it may be too soon to undertake another comprehensive reform of the ESAs’ founding regulations, targeted efforts should continue towards promoting an inclusive and transparent approach to supervisory convergence. Reinforcing certain aspects of the ESAs’ working practices and strengthening mechanisms for the assessment of outputs and consultation with market participants is particularly important to ensure that supervisory objectives are achieved, and outcomes are conducive to stronger EU financial markets. In conclusion, in the decade since their establishment, the ESAs have made a number of achievements and delivered significant progress towards more robust and integrated regulation and supervision in Europe. In today’s financial markets environment it is increasingly recognised that their role is fundamental not only to the preservation of stability and investor protection but also to thepromotion of an efficient, competitive and sustainable financial system in the EU, objectives that should be at the heart of the European policy agenda in the coming years. Read AFME’s response to the Commission’s consultation on supervisory convergence and the single rulebook.
Post Pandemic Compliance: Preparing for What Happens Next - AFME Webinar
11 May 2021
On 29 April, AFME held a webinar featuring industry policymakers and participants, discussing the changing landscape of compliance in light of the pandemic, and how firms can prepare for what will happen next. Changes in supervisory expectations create challenges for compliance functions but also opportunities, as there is room to expand the role and impact of compliance within the organisation. These changes are taking place across several key areas such as technological change and ESG, as well as culture, behaviour, and conduct. Lessons Learned from COVID Speakers acknowledged that, while compliance models coped remarkably well with the impact of the Covid-19 pandemic, they have also had to swiftly adapt. Compliance practices have become increasingly digitised in adapting to accommodate hybrid working, while also addressing the ever-present cost and efficiency challenges. Compliance teams have also had to adopt greater flexibility, with priorities changing more frequently and have learned to implement change ‘overnight’. This has emphasised the importance of both hiring staff with the adaptive skillsets, and being able to bring together at short notice stakeholders from across the business to implement rapid responses to new circumstances. On a related note, connectivity between second line functions has been key to prudent risk management during the pandemic, with many firms considering how greater long-term efficiencies can be achieved in this respect. On the other hand, this must be balanced against the need to maintain the independence of the Compliance function – the willingness to challenge and to escalate. Whereas business continuity and risk assessments were the main priority at the outset of the pandemic, compliance functions now need to consider what the ‘new normal’ may be and what practices from the past year should be wound up, continued or adapted. From a supervisory perspective, the experience has also been revealing. There has been a need to shift to remote, rather than on-site, supervisory inspections, elements of which may be able to continue longer term. Operational resilience and firms’ adoption of outsourcing has also come under increased scrutiny, proving the supervisory view that firms need to be prepared to respond ‘when’, not ‘if’ they face challenging circumstances. Technology The shift to remote working driven by COVID-19 naturally accelerated changes in the application of technology within compliance. As well as an increase in voice (and in some cases video) recording, many firms accelerated their adoption of more advanced surveillance and data-collection systems to compensate for the lack of face-to-face contact, in some cases incorporating advanced techniques such as Artificial Intelligence. This has presented compliance teams with an abundance of structured and unstructured data, which brings challenges as well as rewards. Firms will need to establish the integrity of complex data sets and ensure that data is being harnessed for client benefit in order to build trust with stakeholders and clients. Moreover, since there is potentially endless scope to invest and expand, compliance teams will need to identify the right targets, prioritise their resources and establish what they want to achieve with their use of data. ESG Environmental, social, and corporate governance (ESG) factors will play a fundamental role in the future financial system, which is leading to increased focus within compliance. There are many expectations in respect of how commercial enterprises address ESG, but the topic is still also new to many and developing fast. Trust is key in this area, since it is necessary to build confidence into approaches to avoid the appearance of ‘greenwashing’. As part of this, firms need to evolve and mature their disclosure practices in relation to ESG, which will be a key area for compliance input. Compliance functions will also need to assess their future involvement in ESG and build expertise in this field, in order to advise the business and help manage associated risks. Culture and Conduct One of the greatest challenges for compliance teams has been maintaining and building culture and good conduct in a remote working environment, while staff have been navigating so much change. This encompasses not only long-standing relationships between colleagues, but also onboarding and training new starters. Firms have made increased use of virtual workshops to keep staff connected and up to date with the latest skills and practice. Encouraging debate of practical market conduct scenarios in small groups, even in a virtual environment, has proved successful, particularly with junior staff. The importance of remaining true to corporate values was also emphasised and how firms should remind their staff to consider the concerns of other staff and stakeholders in remote working environments. Compliance Priorities for the Coming Months As the webinar drew to a close, the key message conveyed by speakers focused on the importance of ongoing prioritisation of resources and targets. Compliance functions should identify their unique value proposition and obtain stakeholder buy-in, in order to avoid becoming spread too thinly between ever-expanding objectives – one speaker used the neat analogy that if you add more lanes to a motorway, you’ll just end up with more cars, rather than greater efficiency. This will be key to maintaining a sustainable compliance model as firms transition into new ways of working.
Unpacking the Disclosure Landscape - AFME ESG Webinar
20 Apr 2021
(Online Recording) Europe’s Sustainable transition cannot wait – this was the key message permeating the views of policymakers and industry participants during AFME’s webinar held on Wednesday, 14 April. After a comprehensive overview (presentation available here) from Latham & Watkins outlining the structure of its joint report with AFME ‘ESG Disclosure Landscape for Banks and Capital Markets in Europe’, panel discussions began. Europe has been making rapid progress in developing regulation to support its sustainable transition and it holds similar ambitions in the development of ESG disclosure requirements. Policymakers outlined the need to make sustainability reporting requirements, including under the NFRD, more standardised, accessible, comparable and consistent with existing regulation to accelerate its adoption. Emphasis was also put on ensuring the framework developed is effective globally and avoids fragmenting standards across jurisdictions. A key point of discussion among panellists was the challenge this speed poses to financial services. Industry participants on the panel placed particular importance on synchronising the timing and content of the various sustainability reporting frameworks. Financial Institutions will face a significant challenge in meeting deadlines for their disclosure obligations due to corresponding data from clients likely not being available due to non-financial corporates having a later deadline. Panellists highlighted that greater time and coordination would help alleviate this problem. Moreover, it was highlighted that if financial institutions resort to using different approaches to meet disclosure requirements - using proxies and estimates - their disclosures may not be comparable to other institutions. This would defeat the purpose of the sharing of information. Other challenges mentioned also included the granularity of the European framework. With hundreds of data points needing to be produced against potentially thousands of counterparties, the scale of the undertaking for financial services is large. It was suggested that the demand for data could be focused on a reduced number of data points, while still disclosing valuable, actionable ESG information. Policymakers acknowledged the challenges facing financial services but emphasised that the timing was being driven by the urgent need to address climate change and that this is supported at the highest political level in Europe. At the same time, ESG disclosures are a work in progress and financial services firms are not expected to perfect their reporting processes overnight. Industry participants noted that using proxies during an intermediary period while corporates build up their own disclosures will have some limitations in terms of quality and comparability. It would therefore be more practical and effective to focus on a smaller and simpler set of disclosure requirements as a starting point that would capture the most material issues and where reliable data can be sourced. The requirements can be adjusted progressively as the data and reporting capabilities mature.
Emmanuel LeMarois
Have Agile work practices become more important for banks during the COVID-19 pandemic?
31 Mar 2021
Introduction The COVID-19 pandemic has clearly demonstrated the importance of technology for maintaining productivity and collaboration across a remote workforce (e.g., video conferencing use, cloud-based tools). However, new ways of working, such as Agile work practices, have also played an important role during this period. As first identified in a 2020report we developed with Murex, the collaborative nature of Agile work practices has been embraced by remote teams, helping to maintain connectivity for delivering IT projects and business as usual activities. Due to benefits Agile work practices provide, and an increasing focus from regulators on the importance of technology to support recovery efforts related to the pandemic, we expect the adoption of Agile work practices to increase in importance. To be successful, organizations must now identify the benefits and lessons learned from adopting Agile work practices during the last 12 months, especially as they look at day-to-day solutions for more permanent hybrid working arrangements or innovative ways to deliver large-scale transformation. Agile work practices should be seen as another important tool, providing the workforce with necessary skills, connectivity and control over their time to remain productive and engaged. What are Agile work practices, why have banks adopted them and what opportunities do they present now? Agile work practices set out an alternative way to deliver IT projects, moving away from a traditional “waterfall approach” (a linear process of design, test, build activities), toward quicker, iterative, development cycles (known as “sprints”). This meant IT projects could be broken into smaller parts, allowing for feedback and changes to be made more quickly, in turn increasing the quality of the end result. The original Agile concept for IT projects has since been adopted by organisations, such as banks, and subsequently adapted to a wider range of change and business-as-usual activities known as “Agile work practices”. Adopting Agile work practices has helped banks achieve a range of benefits, such as delivering incremental updates to business applications more quickly or more dynamic allocation of resources based on changing operational needs. For example, some banks have used Agile work practices for client-onboarding to incorporate new features and requirements for KYC processes more quickly (this use has increased during the COVID-19 pandemic due to the changes needed to onboard clients digitally). The importance of new ways of working such as Agile work practices was recently acknowledged by the European Commission in their 2020 Digital Finance Strategy for Europe. The strategy emphasised that the adoption of new technologies in financial services such as cloud, DLT and AI increasingly require an Agile approach because their development is by nature more open and collaborative (e.g., new technology adoption, such as AI, is increasingly encompassing a wider range of internal staff roles, and third parties, to develop and implement). Our 2020 report with Murex on Agile work practices, developed as the COVID-19 pandemic began to unfold, highlighted that the disruption faced by banks required them to be increasingly flexible to change (e.g., quickly deploying new remote working tools across the workforce) and able to quantify and mitigate any impacts on productivity. The value of Agile work practices in navigating ongoing disruption and uncertainty Six months since the publication of our 2020 report with Murex, we have again engaged senior members of AFME’s Technology and Operations Committee to assess how the adoption of Agile work practices has been helpful to overcome ongoing challenges in the current operating environment. Our members observed that Agile work practices have had a positive impact on banks’ day-to day and ability to cope with the disruption, and are likely to increase in importance throughout 2021. Instead of being dedicated to delivering specific projects, Agile work practices are now being incorporated into the day-to-day running of teams. Pre-pandemic, teams would usually organize weekly meetings to discuss individual and common priorities or increase team-building. It is not uncommon today for teams to have daily Agile “stand-ups.” These short, time-boxed status checks offer benefits to dispersed teams, as they can synchronize work more regularly, allow priorities to be reassessed, and connect staff to increase team-building. Agile tools such as “virtual white-boarding,” “user stories” or “customer journeys” have also been used to maintain staff productivity and engagement, by shifting the focus of work toward the main key stakeholders of a project (e.g., looking at delivery from the perspective of a future user or client). This has been effective to make work more meaningful in a period of significant uncertainty. Agile work practices also provided banks with greater flexibility and control over resource allocation by implementing tools that measure productivity. For example, common Agile tools such as ‘burndown charts,” “velocity charts,” “escaped defects,” and “cycles times” have provided dispersed teams with reporting tools used to measure progress more accurately. This was an advantage during the COVID-19 pandemic for banks with mature Agile teams—they were more prepared to provide insights on productivity gains or losses and ultimately had greater flexibility, control and transparency over resource allocation. Banks with mature Agile work practices were able to quickly shift resource allocation, on a cross-border basis, to address short term priorities while maintaining focus on strategic multiyear programs, such as the London Inter-Bank Offered Rate (LIBOR) transition or the Fundamental Review of the Trading Book (FRTB). Agile work practices have also played an important role in attracting talent and enabling continuous workforce upskilling. For example, Agile work practices have enabled increased staff development by driving cross-functional teams (e.g., combining the skills and knowledge of multiple roles into a single team). This has resulted in a positive impact on company culture by breaking silos and increasing collaboration during a time where face-to-face interaction has dramatically reduced. What does this mean for Agile work practices in 2021 and beyond? Agile work practices are now increasingly being incorporated into the culture and day-to-day of teams. Adopting new ways of working, such as Agile, will therefore continue to be an important area of focus for banks. We believe the adoption of new ways of working, such as Agile work practices, will become increasingly important for all financial market participants, including regulators, as we continue into 2021 and beyond. Their adoption at scale will in turn act as a catalyst for the EU’s Digital Finance Strategy and its ambition to increase collaboration and new technology adoption within financial services. It is now crucial that Agile work practices, benefits and lessons learned are identified, as banks look toward more permanent hybrid working arrangements and innovative ways to deliver large-scale transformation. Agile work practices should be seen as another important tool to drive efficiency and productivity, providing staff with necessary skills, connectivity and control over their time. AFME initiatives AFME Report: Adopting Agile Work Practices at Scale in European Capital Markets AFME Webinar conference panel: Adopting Agile Work Practices at Scale within European Wholesale Markets Authors: Emmanuel Le Marois, Associate Director, Technology and Operations, AFME Arnaud de Chavagnac, Head of cloud, technology and services marketing, Murex
Financing the Recovery: The Role of Financial Markets in Rebuilding the European Economy - AFME & BusinessEurope webinar
24 Mar 2021
(The webinar recording is available online) Over a year into the pandemic and Europe is in danger of facing a new wave of restrictions. Despite Europe’s banking system performing resiliently in 2020 and public authorities providing unprecedented support to businesses, it is clear this support will eventually need to be rolled-back according to panellists at AFME’s and Business Europe’s webinar on Europe’s economic recovery. As Europe recovers from the pandemic actions will be needed to promote alternative sources of funding. On March 19, AFME and BusinessEurope held a webinar on Europe’s economic recovery. The call featured senior policymakers from the European Parliament, European Commission, European Central Bank, and the Ministry of Finance of Portugal. In his opening remarks,Markus Beyrer, Director General of BusinessEurope, highlighted the uncertainties and likely uneven progress towards the economic recovery. On the positive side, manufacturing has performed relatively strongly, with export demand from the US and China playing a positive role. Also, many businesses are now better prepared to face the lockdowns. However, Beyrer also noted that business confidence remains low, making it unlikely that business investments will pick up soon. In this context, viable businesses need to be protected and a too sharp withdrawal of support measures (e.g. the moratoria on debt or the guarantee measures) would be damaging. But of course, we cannot stay in “crisis mode” forever. Beyrer stressed the importance of the Recovery and Resilience Facility to boost investments and transform the EU economy. But private investment is also important and businesses need to have access to the finance they need. Beginning discussions,Isabel BenjumeaMEP spoke of the need to improve the European financial system, highlighting this could be facilitated by further integrating European financial markets and addressing low-levels of bank profitability and developing financial markets capacity. Crucially, Benjumea spoke of the need to learn lessons from the 2008 financial crisis and how the burden of financing the recovery should not solely fall on banks: a more diversified financial system is essential. To support the recovery, public intervention needs to be complemented by private investments and a complete Capital Markets Union, together with the completion of the Banking Union, can enable those investments. Michael Cole-Fontayn, Chair of the AFME Board, summarised the finding of AFME’s recent report on “Recapitalisation of EU businesses post Covid-19”, which reveal that many mid-size and SME corporates do not wish to give up control of their business but are willing to pay a premium not to dilute their voting rights, as well as are willing to distribute a share of profits to investors. Hybrid instruments are therefore likely to be well suited to address these needs. AFME recommends exploring the development of a new EU-wide hybrid instrument designed specifically for non-financial corporates and SMEs. He welcomed the recent French measures to support the provision of “equity loans” – a form of subordinated debt - to firms which were affected by the crisis but remain viable. Michael stressed the need to maintain momentum on the long term priorities like CMU and Banking Union. 1. Panel discussion ‘The performance of European Banking and Capital Markets During the Pandemic ‘-moderated by: James Watson, Director, Economics Department, BusinessEurope Speakers: - Edouard Fernandez-Bollo, Member of the Supervisory Board, European Central Bank (ECB) - Erik Fossing Nielsen, Global Chief Economist, UniCredit - Klaus Günter Deutsch, Head of Department Research, Industrial and Economic Policy, Federation of German Industries - Michael Lever, Managing Director, Head of Prudential Regulation, AFME Edouard Fernandez-Bollo, highlighted the following three aspects: firstly, the EU financial system has shown resilience (operationally and financially), even beyond what was expected. Banks’ solvency ratios will be stronger in 2021 than is 2020, despite very significant provisions for credit risk. This is also the result of the many support measures that public authorities, national and EU, have adopted since March 2020. Secondly, the support measures will need to be removed but carefully, and banks will need to anticipate and monitor the effect of this phasing out. Thirdly, the issue of low banks’ profitability remains as a structural vulnerability, which has been aggravated by this crisis. Banks will need to adapt their business models, increase revenues, reduce costs, to respond to this structural challenge and to concentrate on the sectors which will lead the recovery. Erik Nielsennoted that banks will remain central in the EU, as a shift towards more diversified capital markets will take time. He noted however that while it is true that banks are stronger and part of the solution, the main reason is the guarantees provided by the governments, and should these guarantees be withdrawn too quickly the impact on banks would be significant, which could lead to a credit squeeze. Erik insisted on the major issue of low banks’ profitability: for the past 10 years the European banking system has not been able to generate a ROE above its cost o capital. This limits banks’ ability to remain well capitalised. Reasons include the very low growth, the policy mix. On the need to reduce costs: while certainly important it can be the only solution (a 35% reduction would be needed to bring ROE to the average level, an unrealistic reduction); higher revenues are needed, but let’s not forget that they represent an implicit tightening of the monetary conditions. How to square this circle remains an open and difficult question. Erik noted the larger size of the fiscal stimulus in the US, a direction the EU might have to follow. Klaus Deutsch, highlighted the strong fiscal response of EU institutions and governments, which has protected companies from insolvency. Financing conditions for EU businesses have remained relatively good. These support measures have been designed on the assumption of a pandemic under control by Q2 this year; given that vaccination programs might actually require to be completed in Q3 or Q4, these measures need to be prolonged. Also sectors like leisure, travel, hospitality, which have a relatively large share in some countries, will need special attention, to avoid long-term repercussions. Klaus stressed the key role played by the ECB in providing liquidity to the system. He also cautioned about an implementation of the Basel standards which could lead to significantly higher capital requirements for banks, constraining their ability to lend. Klaus suggested the need for an EU framework for how to avoid insolvencies in businesses which, while viable, are particularly hit by the pandemic (e.g. travel / tourism sector). Michael Leverstressed the important role played by banks in this phase, with record levels of net lending to the economy and with the ability to absorb extensive moratoria and to facilitate high level of debt issuance in capital markets. Michael highlighted the uncertainties around the recovery and a trend toward tightening of credit conditions. In any case debt financing cannot be the only source of financing: innovative recapitalisation tools are also necessary. Michael noted that bank consolidation in Europe, which would require progress on Banking union, would help address banks’ low profitability. 2. The second panel discussed ‘The Road to The Recovery - Policies to Ensure Access to Finance and Well-Functioning Banking and Capital Markets’-moderated by Stefano Mazzocchi, Managing Director, Advocacy, AFME Speakers: - João Nuno Mendes, Secretary of State for Finance, Ministry of Finance, Portugal - Martin Merlin, Director, Bank, Insurance and Financial Crime, European Commission, DG FISMA - Véronique Ormezzano, Head of Group Prudential Affairs, BNP Paribas - Tarek Tranberg, Head of Public Affairs and Policy, European Association of Corporate Treasurers (EACT) The second panel focused on the necessary policies to ensure access to finance and well-functioning banking and capital markets. João Nuno Mendesshared optimism, emphasising the strong consensus between EU authorities on the need to implement exceptional measures to support Europe’s economic recovery. The recovery plans that will be adopted in the coming months will define structural, and not purely liquidity, measures. Also, the idea of new hybrid instruments to recapitalise EU businesses is a particularly important one. He highlighted how Europe’s recovery provides an opportunity to revitalise capital markets and act as a catalyst for entrepreneurship. Progressing on the Banking Union is also crucial and a roadmap will be presented by mid-2021. On Basel III, Joao said implementation should avoid possible impacts on the recovery. Martin Merlindistinguished policies between those that could be implemented in the short-term versus the long-term. In the short-term, new instruments such as hybrids - proposed inAFME and PwC’s report on Recapitalising EU corporates- could be looked to fill Europe’s immediate equity gap. Additional short-term measures also included effectively implementing new regulations such as Basel III and wisely calibrating prudential regulation so that we do not unnecessarily penalise banks’ ability to invest in the European economy (particularly equity investments). Insurance companies’ ability to invest in equities can also be strengthened in the context of Solvency II. Martin agreed that financial regulation needs to be calibrated carefully; however it is not “the only show in town” and we cannot overburden it with too many objectives in addition to financial stability. For long-term measures, progress on the Capital Markets Union project was identified as an important goal for this legislature. Martin also stressed the positive impact that keeping momentum on the long-term objectives can have in the short term, thanks to the signalling and confidence-building effects. Veronique Ormezzanowelcomed the bold steps undertaken by the EU institutions and member states, which have enabled banks to continue to support their clients and the economy. Veronique summarised the recent French scheme, which will guarantee (up to 30%) investments funds which would invest in such loans: banks will provide the loans to firms and will then transfer these loans to investments funds in which institutional investors will invest. In order to align all interests, banks will keep a minimum share of each loan (probably 10%). This measure will also apply to subordinated bonds, in order to mobilize private equity funds. Business can start reimbursing the debt after 4 years. Veronique also highlighted the need to consider the competitiveness of Europe’s financial sector when implementing new reforms. Particularly important will be the implementation of Basel III as well as the upcoming stress-tests. Sustainability objectives are also crucial, but appropriate transition arrangements need to be adopted. The importance of reviving securitisation markets in Europe to support growth was also stressed. Tarek Tranbergsummarised the many challenges corporates face in this environment, both in terms of short term “survival” and in terms of structural changes (e.g. shift to sustainable objectives). Corporates have managed the emergency phase thanks to their ability to access liquidity support from banks, with government support. This support should be maintained until there is a risk of prohibitively high financing costs. Recapitalisation instruments are essential to avoid excessive debt. In a CMU context easing some of the listing requirement for smaller companies would be important. However, bank lending will remain crucial and for corporates, it is important that Basel III implementation does not result in a reduced ability to access bank loans or risk hedging. Corporates are also worried about initiatives to standardise corporate debt markets.
The State of Spanish Securitisation– AFME’s Spanish Capital Markets Conference Round-up
2 Mar 2021
On 24 February, policymakers and industry participants gathered to discuss pertinent issues surrounding Spain’s capital markets. Among the views expressed were those of keynote speaker, MEP Luis Garicano. Referencing statistics in the recent report byThe Bank of Spain, Garicano highlighted the risk of insolvency to small & medium-sized firms (SME) and its implications for the Spanish economy if left unaddressed, “We must act now to stop the solvency crisis before it takes over and is really difficult to deal with.” He emphasised the need for immediate action, which he broke down into three key pillars. Firstly, he proposed improvements to Spain’s insolvency framework for SMEs. He highlighted that the framework is not providing a suitable level of support to SMEs with future growth potential. He proposed steps to make the process more efficient and agile. The second pillar was to improve debt restructuring procedures by offering incentives for restructuring. He suggested involving the state in public restructurings and collaborating with banks in a manner where they have shared incentives. The third pillar proposed was the implementation of state aid. Here Garicano commended the recent steps made by the Spanish government and the announcement of an €11 billion direct aid package. Optimistic for 2021 Carlos San Basilio Pardo, Secretary General of the Treasury and International Financing, Spanish Ministry of Economy and Business Affairs, in a fireside chat also praised the work of governments and European authorities in facilitating positive financing conditions for companies affected by the pandemic. He noted a rapid Spanish economic recovery in the latter part of last year and held similar optimism for this year and how this would be supported by new measures aimed at guaranteeing the solvency of companies. Lastly, San Basilio highlighted the importance of reviewing Spain’s fiscal regulatory framework and making it easier to understand and navigate. The state of Spanish Securitisation The first panel of the day was on the topic of Spanish securitisation and how it had coped during the pandemic. Heike Hoehl, Executive Director, Syndicate, Santander CIB, noted how the recovery was better than expected given the severity of the impact on the market in the first few months of the pandemic. Timothy Cleary, Partner, Clifford Chance, echoed similar sentiments noting that after a large dip in the number of transactions in the initial months of the pandemic, from April and May he began to see a return in deal activity. Cleary also highlighted that he did not see a significant change in the structuring of deals (risk transfer deals) as a result of COVID. However, he did note that investors were avoiding exposure to sectors such as hotels and tourism, as well as loans that are in moratoria or have more recently been subject to moratoria as a result of COVID. María Turbica Manrique, Vice President, Senior Credit Officer, Moody's Investors Service, commented that she did not yet see evidence of significant deterioration in credit performance across asset classes, but cautioned that the real impact on unemployment and house prices was yet to be realised. Fernando González, Senior Adviser, European Central Bank (ECB), sharing insights from the banking supervision perspective, said he saw “a very strategic role” for significant risk transfer (SRT) transactions going forward. Proceedings concluded with polling where the majority of the audience estimated that Spanish securitisation issuance in 2021 would be about the same as in 2020.
The road to Europe’s post-pandemic recovery – Industry discussion
29 Jan 2021
For Europe to successfully fund its post-pandemic economic recovery, it will need to strike a delicate balance. This will be between achieving the necessary scale to accelerate Europe's corporate sector recovery while also adopting a tailored approach to funding through equity as well as existing and new hybrid instruments. This was one of the key takeaways from AFME’s webinar, ‘Sizing and Resolving COVID-19 European Corporate Recapitalisation – Equity and Hybrid Markets Solutions’, held on 26 January 2021. The event featured a panel discussion between policymakers and industry experts including Tatyana Panova Head of Unit for Capital Markets Union, DG FISMA, European Commission; Uli Grabenwarter, Deputy Director, Equity Investments, EIF; James Chew, Global Head, Regulatory Strategy, HSBC; Stefano Firpo, Senior Director, Intesa Sanpaolo. AFME & PwC’s report,Recapitalising EU businesses post COVID-19, was used as a platform for discussions. Tatyana Panova began proceedings by emphasising the importance of national, private and public sector collaboration and ensuring that crisis support is channelled to businesses. Tatyana said that re-equitisation is one of the priorities of the Capital Markets Union Action Plan and she welcomed AFME & PwC’s analysis that examines how equity finance can be promoted. She explained that even though support through a public-private fund could help businesses, the right balance would also need to be struck. This would be between achieving the necessary scale in the investment available while also mitigating the additional conditions attached. Panova acknowledged the potential benefits of hybrid instruments in supplying capital without as many conditions (e.g. requirements that diminish ownership control of a company). She mentioned that in encouraging greater use of the instruments industry should consider the impact of standardisation. She explained that in some cases 'straight jacketing' could reduce the benefits associated with hybrid instruments. Similarly, Uli Grabenwarter emphasised the need for measures implemented to be sophisticated and accommodate the needs of specific companies. Different sectors have been affected differently by the pandemic, and therefore may have different growth perspectives and different funding requirements. Speaking next, Stefano Firpo, touting the viability of hybrid instruments, stated that they were already a useful instrument in the market and greater standardisation would help reduce market fragmentation. Similar to Grabenwarter, he highlighted that equity needs in the market are also unequal, with certain companies and firms requiring significantly more than others. He stressed the need for an aggregation platform to help attract investment to smaller firms that might otherwise struggle to get funding. James Chew emphasised that the measures to support Europe’s economic recovery are not a one-year program and need to be viewed from a long-term perspective. He highlighted that one of the greatest investment needs was in funding innovation in Europe. Chew highlighted that industries have now changed due to the pandemic and will need to adapt. If firms are consumed by trying to stay afloat and are short on equity funding, they will be unable to innovate to boost their long-term growth prospects. The session concluded with all panellists agreeing that Europe’s post-pandemic recovery and sustainability agendas are intertwined and should not be considered separately. As businesses restructure their business models and recover from the pandemic, it will be expected to be a sustainable recovery too. Listen to the webinar in detail via our online recording. AFME Contacts: Patricia Gondim Interim Head of Media Relations [email protected] +44 (0)20 3828 2747
Richard Hopkin
AFME “call to action” for active transition of LIBOR linked securitisations
6 Jan 2021
Less than 12 months now remain before the continuation of panel-based LIBOR can no longer be guaranteed. The UK authorities have stated that it is “in the interests of financial markets and their customers that the pool of contracts referencing LIBOR is shrunk to an irreducible core[1] ahead of LIBOR’s expected cessation, leaving behind only those contracts that genuinely have no or inappropriate alternatives and no realistic ability to be renegotiated or amended.”[2] Such contracts are commonly referred to as “tough legacy” transactions. AFME calls on all market participants to join us in actively transitioning as many transactions as possible to identify and reduce the stock of “tough legacy” securitisations to this “irreducible core” well in advance of the end of 2021. If not already done, we urge issuers and investors to contact each other via established channels (set out in transaction documentation) in order to identify and implement the required practical next steps for the bonds affected. AFME (and other trade associations) have been engaged in this subject for some time and stand ready to help facilitate cross-market discussions where required. While draft legislation has been laid before Parliament to assist in the resolution of “tough legacy” transactions, the UK authorities have made clear that “Parties who rely on regulatory action … will not have control over the economic terms of that action. Moreover, regulatory action may not be able to address all issues or be practicable in all circumstances …”.[3] The FCA has further pointed out that although it may be given the powers to facilitate a “synthetic” LIBOR to be developed and used, it will not be bound to use such powers. In view of the potential deterioration in liquidity in LIBOR-based instruments and other financial and non-financial risks associated with inaction, including the loss of control over economic terms, if there is any solution for such transactions that enables active transition to the relevant risk-free rate to be effected then AFME urges that that solution should be considered as a matter of urgency in line with the FCA’s expectation that market participants should effect a material reduction in the stock of outstanding LIBOR-based FRNs by the end of Q1 2021. AFME will continue to work with its members, other trade associations and all market participants to further this goal and we welcome engagement from the broadest set of stakeholders. AFME Contacts: Richard Hopkin Anna Bak [email protected] [email protected] +44 (0)20 3828 2698 +44 (0)20 3828 2673 [1] AFME emphasis. [2] Statement of H. M. Treasury, 23rd June 2020. [3] Ditto.
Pablo Portugal
The new framework for on-balance-sheet securitisation
18 Dec 2020
When the European Commission unveiled its Covid-19 capital markets recovery package in July 2020, a much welcomed measure was the proposal to extend the framework for simple, transparent and standardised (STS) securitisations to cover on-balance-sheet securitisations. On-balance-sheet securitisation can be a vital tool in the current economic environment. The mechanism is especially helpful in managing credit risk and capital requirements in relation to corporate and SME loans, which are both capital-intensive when held on balance sheet and difficult to securitise in the traditional securitisation markets. A well-designed framework can therefore make it easier to lend to new borrowers, including homeowners, consumers, SMEs and entrepreneurs, and help support Europe’s economic recovery. A new regulatory framework must always be prudentially sound and provide strong levels of investor protection. But it must also be economically viable and attractive for its targeted users; in this case, it must provide the necessary incentives for banks and investors to use this type of securitisation. Following the political agreement recently announced by EU legislators, has the right balance been achieved between these objectives? A better capital treatment, improved standards and integration of sustainability considerations In order to encourage the use of the STS label and increase bank lending, EU legislators have introduced preferential risk weights for the senior tranche of an on-balance-sheet securitisation which is retained by the originator. Subject to supervisory approval of the risk transfer, this frees up capital for the originator bank to continue making new loans to other borrowers. The new framework will also further increase transparency in relation to on-balance-sheet securitisation and, in time, will lead to greater standardisation in a way which conforms to what are seen as "best practice" standards. Greater standardisation will also make it easier for investors to compare transactions across different originators and jurisdictions. Another positive element in the legislation is the introduction of provisions to integrate sustainability into the wider securitisation framework. Standards will be developed to report on the sustainability of securitisation products and the European Banking Authority will draft a proposal for a dedicated framework for sustainable securitisation.An appropriate framework can do much to support the market for green securitisation, which is in early stages of development. Could some new requirements undermine the effectiveness of the framework? Extensive analysis of EU on-balance-sheet securitisation markets since 2008 shows that, even without the availability of the STS label, this portfolio management tool has been widely used by banks in many jurisdictions across the EU, and that these securitisations have experienced extremely low loss rates. In particular, there have been virtually no losses affecting the senior tranches of on-balance-sheet securitisations which are retained by the originator. A number of additional safeguards included will preserve and strengthen the prudent use of this mechanism. However, some provisions introduced by the legislators are likely to increase complexity and make the framework more expensive to use. One example of this is the requirement for the investor to have recourse to high-quality collateral to secure repayment of their investment. These requirements are more onerous than those generally used in existing on-balance-sheet securitisations, and will add cost and complexity to transactions. Another concern stems from the newly-introduced requirement to risk weight synthetic excess spread expected to be made available for future periods, particularly as this applies to all on-balance-sheet securitisations, regardless of whether they achieve the STS label. These requirements risk undermining the economic viability of future transactions, including those involving the European Investment Fund when it acts as Protection Seller which have recently provided vital support to thousands of SMEs across the EU. Much will depend on how the EBA approaches the implementation of this requirement through the development of technical standards in this area. It would indeed be unfortunate if these requirements lead to a more limited use of the new STS label or make many on-balance-sheet securitisations transactions uneconomic at a time when they are most needed. In conclusion, EU legislators should be commended for fast-tracking this initiative intended to support bank lending to European businesses and households through very difficult times. It is, however, too early to draw conclusions on how effective the framework will be in meeting these objectives. The design of the technical standards will be an important consideration. The success of the framework will ultimately depend on whether a good balance has been achieved between the necessary regulatory safeguards and incentives for market participants to make use of, and invest in on-balance-sheet securitisations.
How Have Europe’s Capital Markets Evolved Since the Launch of the CMU Project?
9 Dec 2020
(This article was originally published in The International Banker on 1 December. ByAdam Farkas, Chief Executive Officer, Association for Financial Markets in Europe (AFME) In October, AFME, in partnership with 10 other organisations, published areport1that provides context and evidence on how Europe’s capital markets performed in the first half of 2020. Statistics used in this piece regularly reference this document. As we reach the tail-end of 2020, it is important to reflect not only on how Europe’s economy has coped during an unprecedented period but also how financial markets have evolved. At the beginning of the year, the European Commission’s (EC’s) overarching goal was to produce policies that supported growth, competitiveness and transition to a low-carbon economy, with a particular focus on helping small businesses. During the COVID-19 crisis, these social priorities have become only more pronounced and so, too, has the role of Europe’s capital markets. Since its inception, the European Union (EU) has aspired to create a single market for capital, but the road to achieving this goal is still a long one. Progress has been slow in achieving one of the core objectives of Europe’s Capital Markets Union’s (CMU’s) project to build deeper and more integrated capital markets. In fact, this year, the Commission released its new CMU Action Plan in a bid to accelerate this process. The health of Europe’s markets is pivotal as they must play a central role in funding Europe’s sustainable transition and supporting new innovative businesses. Therefore, now more than ever, it is crucial to have data-based evidence on how Europe’s CMU objectives are being advanced and to ensure that momentum is maintained in building a fully integrated CMU. Equity markets: resilient but still undersized Europe’s equities markets are an important source of funding for businesses. Corporates and SMEs (small and medium-sized enterprises) especially require affordable funding to facilitate their future growth, and the diversity of equity-finance options makes them well suited to fulfilling this role. Fortunately, in the first half of 2020, EU27 corporates benefited from an unprecedented amount of funding from capital markets. Large levels of funding were seen from equity markets, reaching €45.8 billion in equity-issuance volumes. However, despite an increase in funding for corporates, there is still a serious lack of progress in providing equity to SMEs. The proportion of new equity risk capital for SMEs declined from 2.5 percent in 2019 to 1.8 percent in the first half of 2020. This was driven by a large increase in bank lending, while levels of risk capital remained relatively unchanged from prior years. Crucially, to boost funding levels, securities markets require a more integrated and competitive ecosystem. The Commission has already outlined its intention to review the MiFID 2/R (Markets in Financial Instruments Directive 2) framework as well as to revisit IPO (initial public offering) listing rules. However, more work is required to ensure that the securities market structure is fit for purpose in the post-Brexit environment. A diverse and well-regulated capital market better supports the needs of investors and consumers’ pensions and savings. A positive development for European capital markets over the past six months has been that the COVID-19 crisis has not significantly disrupted European cross-border funding. Indicators show an increase in intra-European integration over the last five years, which has not been reversed by the pandemic. Importantly, 96 percent of European debt offerings were marketed within Europe in the first half of 2020, rather than being marketed globally. This was a 3-percent increase from last year and a substantial rise from 2007. Innovation:the key to future growth As Europe looks to recover from the pandemic, it cannot ignore the importance of investing in innovation. To remain globally competitive, Europe not only needs to boost investment in research and development (R&D) but also foster the emergence of fintech (financial technology) unicorns that could be significant resources of job creation and growth. On this front, in the first half of 2020, Europe performed resiliently. A total of €3.6 billion was invested into European fintech companies over the period. However, more should be done to strengthen Europe’s innovation landscape. For instance, while valuations of fintech unicorns in Europe have continued to grow, more could be done to support the emergence of new unicorns. To help reduce barriers to further R&D investment, positive progress has already been made to harmonise national authorities’ approaches to regulating new technologies across Europe. Over the past year, European supervisory authorities (ESAs) launched the European Forum for Innovation Facilitators to help them share views and experiences and to develop a common approach to fintech regulation. Importantly, the Commission has also recently published its Digital Finance Package, which seeks to harmonise rules on operational resilience and bring forward an EU-wide framework for crypto-assets. This is an important step forward in creating a regulatory environment that is fit for purpose, creates legal certainty and ensures Europe is in a position where it can attract further investment and lead in the digital age. Going forward, the task of policymakers will be to ensure that its policy of harmonisation is widely adopted across the EU27. Maintaining the lead in sustainability Europe, for a number of years, has been considered the global leader in sustainable finance. In the first half of 2020, Europe consolidated this position by reaching €71.8 billion in sustainable bonds issued by June 2020. If this rate of funding is maintained, by the end of the year, volumes should surpass Europe’s record year of issuance (2019). This growth has seen the emerging popularity of social bonds—bonds that raise funds for projects with positivesocialoutcomes. Nearly one-third (27 percent) of sustainable bond issuance in Europe in the first half of 2020 was categorised as social, the largest proportion of the sustainable market in any half-year to date. Crucially, the dominance of Europe in global environmental, social and governance (ESG) markets in 2020 is also reflected by the fact that 52 percent of all global sustainable-bond issuances are taking place in the EU. However, despite its high issuance levels, Europe needs to be wary of complacency. While Europe’s sustainable-finance activity is on the rise, levels of activity vary significantly across the EU. Nineteen European countries have been active in the sustainable-finance market, but new entrants are becoming increasingly rare. Moreover, some countries have not yet tapped the market for sustainable finance. While Europe, as a whole, is pushing forward in utilising sustainable finance, it needs to be a priority of policymakers to ensure that it isn’t pushed by just a few active countries but is instead embraced by the entirety of the EU27. Establishing a harmonised regulatory approach to defining sustainable activities would help reduce barriers to the adoption of sustainable finance across Europe. As Europe absorbs the economic and social hardships during the second wave of the COVID-19 pandemic, European capital markets will again be called upon to support EU businesses. Looking at the performance of European capital markets during the past six months, there has been progress in areas such as sustainable finance, but there has also been a relative decline in areas such as raising capital for SMEs. Europe’s capital markets are still being held back by regional fragmentation and inconsistent legal frameworks. To overcome these challenges, the CMU project now requires ambition and political momentum to achieve the next level of integration. As Europe’s capital markets continue to evolve in the wake of COVID-19, key national stakeholders cannot afford to stand still.
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