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James Kemp
FX is transforming rapidly, and so is its talent
2 Jul 2019
A diverse range of skills and people are needed to ensure the success of the FX industry for the future In the past, a career in foreign exchange was often synonymous with busy trading floors, where whoever shouted the loudest was the most likely to be noticed. While this kind of environment may have served the markets of the past well, the overriding message from AFME and GFMA’s NextStepFX event last week was that the industry has changed dramatically over the last decade. Whether that’s through new technology revolutionising how trading is done, a revamped approach to conduct and culture in the wake of the financial crisis or a greater focus on working collaboratively to achieve the best outcomes both for firms and their clients. Our speakers had several different perspectives on this issue. For Robbie Boukhoufane, aportfolio manager at asset manager,Schroders, it was clear that despite the fact that the vast majority of trading now takes place electronically, human interaction and relationship building is still hugely important. For him, the key factor is that “we all strive to be more efficient and to get better outcomes for our clients”, but that you won’t join the FX industry and be “sat next to a robot”. Hanna Assayag,a Managing Director in FX at HSBC agrees and said that while, of course, “technology and data are important” facilitating effective interaction between data and analytics teams and sales, and having the skills to effectively do that, is also vital. Thalia Chryssikou, Co-Head of Global Sales Strats and Structuring at Goldman Sachs, said that for her one of the biggest changes has been the difference in what she spends her time doing day-to-day, with her role today much more varied than in the past. A lot of her focus is now dedicated to developing digital platforms and client solutions. Diverse skills needed All of this means that today’s FX industry needs, and is looking for, a whole host of different skills - from the more technical side, with expertise in coding and data analytics, to softer skills in communications and creative thinking. Diversity of talent in the broadest sense is hugely important. As the Bank of England’s, Executive Director for Markets, Andrew Hauser argued in his opening remarks, diverse teams make better decisions as they have “more ways to approach problems, and are better at self-challenge” and diversity also “improves a firm’s connection to, and empathy with its customers”. And as David Hudson, Co-Head CIB Digital & Platform Services at JP Morgan, pointed out, diversity of talent, where you recruit people with different backgrounds and prior careers, brings new ideas into your organisation. There is a hard business case too, research by McKinsey, looking at the economy more broadly, has found that the most diverse firms at an executive level are 20 – 30% more likely to outperform their peers. Attracting women into an FX career Our event last week in particular focused on why this exciting and fast-changing industry could be an appealing career path for greater numbers of women. I was pleased by the positive response we received from attendees and I had the opportunity to speak to a range of people during networking - some were currently working in a different area of financial services, others were considering a return from a career break - but common to them all was a newfound appreciation of the fact that FX was an industry where their skills and experience were in high demand. The importance of building networks Continuing to create connections between industry and the diverse talent that it wants to attract, must be a priority. As Sian Hurrell, Head of FICC Europe and Global Head of FX atRBC argued, “in this industry in particular, people will find their careers through their network” and one of the most important things that industry can do is “to create more opportunities to build networks” such as through events, structured programmes or via social media. For Robin Savchuk,International Treasurer at BNY Mellon, individuals should also feel confident to reach out and make connections. She says these contacts “don’t have to be in a formal programme, I would encourage people to seek out people you respect, want to emulate or whose opinion you value and talk to them, get their advice. With that advice echoed by Emma Norman, Director, Head of e-FICC, Europe and Americas at Westpac. It is clear that both firms and individuals should be cultivating new networks and connections, so that we can all take advantage of the opportunities innovation in FX is creating.
Jacqueline Mills
Europe’s economic future depends on better integrated financial markets
21 Jun 2019
After the 2008 financial crisis, policy makers and regulators worldwide took steps to strengthen banks against future shocks. As a result, banks today are much less likely to fail and, should a failure occur, it is very unlikely they will be bailed out with taxpayers’ money. While these are extremely positive developments, European banks’ profitability remains low, with the average return on equity (RoE) for ECB supervised banks only just above 6% at the end of 2018. This is partly due to overcapacity in the banking system, but is also caused by the effects of ultra-low interest rates, poor cost efficiency, as well as ongoing and cumulative regulatory demands. The performance of the banking sector matters as profits are the first source of additional bank capital, which is necessary to support lending to the wider economy. As outlined by the ECB, banks need to earn returns above their cost of equity – and a 6% average RoE is not enough to outweigh this cost. We also have yet to see cross-border banking activity in the EU resume to the extent is has in other jurisdictions post-crisis, be it in terms of the provision of finance directly across borders or via cross-border merger and acquisitions activity. Even in the Eurozone, where there is a single supervisor and resolution authority, national authorities continue to limit cross-border capital and liquidity flows within banking groups by putting up national “fences”. They do so as a means of dealing with the “European in life, national in death” experience of the financial crisis. While understandable, particularly when national authorities are accountable to their own parliaments, this approach disregards the significant improvements in banks’ resiliency and ignores the system-wide capacity that has been built up to absorb losses if they do occur. And while there may be a protective advantage for a single state to act in this way, when all states do the same, the entire system becomes brittle and inefficient, and everyone loses. At a recent AFME conference, delegates heard that at least an estimated EUR180billion of liquidity is “trapped” locally in Member States. This results in increased costs to end users of financial services who also pay different prices for the same service, depending on which country they are in. This is not an optimal allocation of resources and negatively impacts banks’ end customers and profitability alike. Restoring, and pursuing, EU financial integration since the crisis has clearly been a challenge. While the recent European Parliamentary elections were far more positive than some had expected, with the anti-European vote being fairly limited, many national governments still struggle to see, and deliver, the benefits of European financial integration. As evidenced by the recent report of a high-level group of national experts, Member States have reached an impasse in taking the steps we need to move forward. European Commission officials have noted the lack of ambition of Member States. And international and market observers, including those who are fully aware of the complexities of European decision-making, wonder why progress is not being made. Yet it is clear that it is precisely by moving forward with the well-known steps identified by the European Commission to complete the Banking Union and build up our capital markets that economic progress will be made which will benefit all. For instance, by promoting deeper capital markets, EU economies will not only reduce their reliance on bank financing, thereby opening up a wider range of financing options, especially for new or smaller growth companies which need equity financing, but it will also allow risk to be diversified and shared more widely. This is something which is currently lacking in the EU compared to other more integrated markets, such as the US and will further reduce the need for any public risk sharing. Moving forward with the European Deposit Insurance Scheme, which guarantees the protection of EU depositors’ money in the event of bank failure, is also necessary to create the trust required to overcome fragmentation and achieve an integrated banking market in Europe. This will be key to enabling the efficient allocation of capital and liquidity across banks, avoiding ring fencing and enhancing the safety and growth potential of the entire European economy. Unlocking Europe’s growth potential through the creation of a powerful financing union consisting of integrated banking and capital markets is long overdue. We urgently need better integrated markets that are serviced by strong, profitable financial institutions, capable of meeting the borrowing and investment needs of all Europe’s population. The goals are clear. But we cannot afford to wait for another 10 or even 5 years for this to become a reality.
Simon Lewis OBE
What's next for Europe's capital markets?
15 Apr 2019
This topic was at the top of the agenda recently when I was in Romania for the Eurofi regular gathering of European finance ministers, financial services policy makers and industry representatives. As the current EU legislative cycle winds down before the European Parliament elections in May, Europe is facing some urgent structural and institutional changes. This year there will be new leaders at the helm of the main EU institutions, including the EU Commission, Council and the ECB. Meanwhile, the EU’s largest capital market, the UK, will have to decide what form of Brexit it wishes to pursue, which will likely cause structural disruption to Europe’s capital markets, whatever the final outcome. In Bucharest, the mood was sombre but focussed. The EU is planning for the worst, while still hoping for a better outcome than a no-deal Brexit scenario. At a time of such change and uncertainty, the incoming Commission must breathe new life into the Capital Markets Union (CMU) project. There is universal agreement that Europe needs deeper capital markets to increase financing in the wider economy and to provide a broader range of funding options for businesses to invest, innovate, grow and create jobs. Steady progress has been made on the project during the Juncker Commission, but the next phase needs to be even more ambitious. Now that the CMU’s foundations have been laid, the question on policymakers’ minds is, what next? Certainly, advancing the CMU won’t be without its challenges. But there is clear commitment from the French and German central banks and finance ministries. While Brexit may have slowed down some of the project’s implementation as attention has inevitably shifted towards managing the future relationship with the UK, it certainly won’t derail the project. In fact, the case for the CMU is stronger and more urgent than ever as other European cities such as Paris, Frankfurt, Madrid, Milan and Amsterdam step up to play an enhanced role in funding Europe’s future economic growth. However, the departure of the UK from the EU does raise the question of how to avoid increased fragmentation of financial markets. To be truly transformative, the CMU must support globally interconnected markets and be able to unlock investment both from within the EU and the rest of the world to drive economic growth. It may be that in due course the UK and Switzerland can re-connect to the project via a pan-European capital market, which will benefit the 500m savers and investors across the whole of Europe. A reinvigorated CMU will also have to tackle the well-known challenge of Europe’s slow recovery following the global financial crisis and its over-dependence on debt financing. At the heart of the problem is a culture in the EU, which feels far more comfortable with bank debt than with equity. In the US, equity represents 160 per cent of GDP, while the figure in the EU is only 80 per cent. We need to narrow this gap by a change in attitude to equity and risk in the EU. Other new opportunities and challenges are also emerging in the form of rapid technological change and disruption, as well as climate change, which mean that the EU will have to be nimble and adapt policymaking to support investment, research and innovation in these areas. Of course, some key structural reforms remain, such as the harmonisation of corporate insolvency and withholding tax rules across Europe, as well as further incentives for private pension investment by EU citizens. Without strategies to tackle these fundamental issues, the flow of capital both from within and outside Europe will remain restricted. There is also the need to make Europe’s capital markets more integrated by completing the Banking Union and linking it to the CMU. This would promote a more resilient and efficient financial system which underpins economic growth and helps to address the divergence that currently exists. However, this integration could be threatened by the potential introduction of an EU Financial Transactions Tax, for which proposals in Europe currently seem to be gathering momentum again. Such a tax would, if implemented, drive up the cost of capital throughout Europe and run directly counter to the EU’s economic growth agenda – affecting jobs and investment, as well as damaging the prospects for a Capital Markets Union. Whoever succeeds presidentJean-Claude Junckerneeds to have a clear plan for taking forward the CMU project in a post-Brexit world. This is their chance to redefine the vision for Europe in order to ensure that it can continue to deliver investment opportunities for innovation and growth. This article was originally published in City AM on Monday 15th April
Upgrade Europe’s anti-money laundering framework to effectively tackle financial crime
9 Apr 2019
In September 2018, against a back-drop of high profile banking collapses and concerns about insufficient anti-money laundering (AML) oversight at a national level, the European Commission published bold and ambitious proposals to strengthen EU-wide AML supervision. If these proposals can be implemented successfully, this would mark a significant improvement in the AML regulatory framework and would represent a major step forward in the fight against financial crime. A key aspect of the proposals is to strengthen the AML supervisory powers of the European Banking Association (EBA); making it a ‘datahub’ responsible for the collation and analysis of suspicious transaction reports and giving it new investigatory and enforcement powers. The Commission also wants to see improved cooperation and information sharing between AML national supervisors, as well as greater coordination with prudential supervisors too, such as the ECB. For the EBA to be effective in its enhanced role it will require a considerable degree of additional funding and resource. AFME has previously called for the resources of the ESAs to be increased appropriately to develop and acquire the necessary skills to perform their expanded roles. There will also need to be careful coordination between the EBA and other relevant stakeholders. This requires a detailed plan and a realistic timetable for how the ESAs review proposal will be implemented in practice. In December 2018, the European Council published an action plan which set out what steps are required to achieve the Commission’s objectives. This is a welcome step, but further detail is still required. Quick changes to AML practices could make a big impact Once a new Commission begins its term in autumn this year it is likely that the pace of work on the AML proposals will increase; but in the meantime, there are three areas where relatively quick changes could have a dramatic impact on the fight against financial crime. Suspicious transaction reporting Estimates vary, but it is thought that up to 90% of suspicious transaction reports (STRs) are not useful to national AML supervisors. That is because the money laundering reporting officers within organisations feel pressure to overreport, for fear of enforcement action or personal liability if they omit information. The result is that regulators are normally swamped with information of questionable relevance, do not have the resources to analyse the information received and the most important information will not be shared between Member States. In short, the underlying threat is not addressed. If the industry is to improve the quality and usefulness of its STRs, the current reporting cycle needs to be reset. A more collaborative approach is required. Organisations must be encouraged to report much more selectively, and regulators must provide feedback on the quality of the reporting. Use of technology There are several areas where technology can help in the fight against financial crime. Technology could be used to improve the efficiency of the client onboarding process for financial institutions. Rather than firms managing the full ‘know your customer’ (KYC) checking process, specialist information providers could gather information electronically from clients and then share this information with financial institutions when they need to undertake checks. Whilst there may be data protection concerns, if these can be overcome, this could significantly reduce the cost associated with client onboarding and help to target resources more effectively. We have been pleased to see the Commission’s expert group on electronic identification and remote KYC processes looking at this topic. Technology could also be used to help address the issue of inefficient suspicious transaction reporting, already outlined. A single system could help to gather STRs in a secure central repository, analyse the information and allow for the effective and targeted sharing of information between Member States. Financial institutions could also use technology to enhance their monitoring and surveillance of money laundering risk. Many financial institutions are already employing artificial intelligence and machine learning systems to spot complex patterns of behaviour which may not be discernible by compliance teams. Harmonised AML practices At present the AML rules and their enforcement vary significantly across the EU. For example, the format and practice for suspicious transaction reporting, the customer due diligence checks performed on clients and the application of penalties for AML breaches is different across Member States. This is inefficient and costly for businesses and makes it harder for Member States to fight money laundering effectively. A harmonised approach is crucial. Whilst the Commission’s proposal (particularly the role of the EBA) aims to increase harmonisation across the EU, one quick and effective means to address this inefficiency would be to transform the Anti-Money Laundering Directive into a Regulation. This would remove any latitude for varying implementation of the rules across Member States and could create significant administrative savings. AML will continue to be a priority AML is already an important area for compliance teams in financial institutions. This looks likely to continue and indeed become an even bigger priority in the coming period as the EU’s proposals develop further, and public interest in this area continues. While this may pose challenges to businesses there are also potentially significant benefits to organisations in the form of cost savings and more effective AML procedures.
Will Dennis
Time to review the Market Abuse Regulation?
4 Apr 2019
It is now more than two years since the EU’s Market Abuse Regulation (MAR) came into force in July 2016. This landmark piece of regulation set out to create a harmonised EU framework for addressing market abuse issues, as well as significantlybroadeningthe scope of the previousregulatoryregime to cover new offences. However, whilefirms have been working hard toimplementitsince then,the scale and intricacy of this ambitious regulation continues to present challenges, which risk undermining its overall aim of reducing market abuse. Furthermore, individual EU regulators are taking varied approaches to market abuse, which could threaten its efficacy as a harmonised EU-wide regulation. MAR has a very broad scope, covering a wide range of different products and asset classes. It is also covers specific issues, such as rules on disclosure e.g. of inside information to potential investors as part of ‘market soundings’, in highly granular detail. This breadth and depth can make effective monitoring and surveillance challenging. While firms are familiarwith the types ofabusive or manipulativebehaviours they should be on the lookout for, such asprice fixing or suspicious timings around trades, the need to monitor across varied types of trading activities, often across different geographical locations,makes this a complex task. In some areas, technological solutions, such as programmes which analyse trade transactions or monitor electronic communications can help, but do not readily provide a holistic picture. This level of monitoring also generates huge amounts of data, whichcan make it hard to spot cases of market abuse amongst all the ‘noise’. Inotherareas firms face the opposite problem, where itsimply isn’t possible to obtainthe data that MAR calls for. For instance, in some markets, reliable pricinginformation isn’t available (e.g. in lower volume trading areas) which can make it difficult to identify if prices are being manipulated. Clearly, firms have a responsibility to review their systems and processes to ensure that they are taking a holistic and thoroughapproach, and are creating solutions to tackle market abuse to the best of their ability. But even with their best efforts it remains a very difficult task. Firms are also operating withina fast-changing landscape. Not only are technologicalchangescompounding the complexity of the challenge,butfirms are also grappling withother regulatory shifts, such asMiFID II and the 5th Anti-Money Laundering Directive, which overlap in parts with MAR. Despite the intention to create a harmonised regime, the term should be used advisedly, as we haveseen significant differences in the application of MAR across EU member states. For example, some, but not all EU regulators and supervisors, see market abuse as a financial crime that should be reported to Financial Intelligence Units as well as to National Competent Authorities. This results in duplicative reporting which is neither helpful to the authorities nor an efficient use of banks’ resources. Therefore, the time is ripe to review how MAR fits into thiswider landscape, to ensure itwill befit for purpose in the long term. Ensuring MAR operates effectively and achieves its intended outcomes is vitally important to ensure that market abuse is being tackled head on. It is crucialthat the plannedEuropean Commissionreview of its implementation, due during 2019, is carried out.This would provide an opportunity to take a step back andensure that the intended outcomes of the regulation are aligned with the requirements it places on firms. To be clear, serious and deliberate market abuse should be prosecuted as the criminal offence that it is. However, there is still more for regulators and supervisors to do in ensuring that the market abuse regime that underpins this work is effective. Where there are administrative and practical challenges on issues such as how insider lists are held or market soundings are conducted, these should be addressed through constructive engagement with industry participants, this is the best route to creating effective solutions.
Simon Lewis OBE
CMU: Progress has been made but much is still to be achieved
15 Mar 2019
At the end of its first phase, CMU has had a promising start but for it to make a real lasting impact reform must continue beyond 2019 Today the European Commission delivered its latest Capital Markets Union progress report, and while it makes clear how much has been achieved since the flagship project was launched in September 2015, there also remain some significant pieces of unfinished business. At a time when Europe’s capital markets are facing some of their toughest challenges since the global financial crisis, with Brexit, global competition, changes in technology, and political uncertainty creating a risk of volatility, efforts to deepen and unify EU capital markets are more important than ever. Key priorities for this legislative cycle The CMU project to date has had some notable achievements, which are noted in the Commission report. Time is short for further action within this legislative cycle, but progress is still possible in areas such as the review of the European System of Financial Supervision, where agreement on proposals to improve transparency around the work of European supervisors should be prioritised. The next phase of Capital Markets Union While these final weeks of the legislative cycle are important for cementing the progress that has been made to date, it is perhaps even more important to look ahead to the next phase of CMU. In order to truly realise the overarching aim of creating deeper, more diversified and better joined-up capital markets, which boost European economic growth, continued effort beyond this current Commission will be essential. CMU should be given even greater emphasis in the next Commission, with an ambitious agenda and a vision for the future. Some key structural reforms remain, such as the harmonisation of corporate insolvency rules across Europe and changes to withholding tax to ensure there are uniform pan-EU processes in place, along with tackling other taxation issues that create barriers to cross-border trade. In emerging priority areas such as sustainable finance, continued progress on the creation of a clear classification structure for sustainable finance investments should be a top priority. Such a taxonomy, which will provide investors with a clear framework by which to judge the sustainability credentials of investments, is a vital cornerstone for developing an overall greener and more transparent financial system. A well-constructed CMU will be essential for generating increased private sector finance investment into sustainable financial assets. Maintaining political momentum at EU member state level to address such long-term barriers and fragmentation will be key. These are challenging areas and meaningful reform will require concerted effort over time, but achieving such a vision for integrated and competitive European capital markets is vital for supporting the continent’s prosperity and long-term growth prospects.
Deadline extension for EU Benchmarks Regulation is hugely welcome
26 Feb 2019
Yesterday’s announcement that the compliance deadline for the European Benchmarks Regulation (BMR) has been moved back by two years to 31 December 2021 is hugely welcome news for the industry. Market participants now have an extra two years to work through what will be an immensely complex transition to new or reformed benchmarks for all EU financial contracts. AFME (along with the Euro RFR Working Group and several other trade associations such as GFMA, ISDA, FIA and EMTA) had strongly argued in favour of an extension for both critical as well as non-critical benchmarks. The BMR has a number of high-level objectives, particularly around improved governance and the quality of the data that is used to calculate benchmarks, and it is having a major impact on European financial markets. Critical Benchmarks Due to the high number of transactions linked to them, EURIBOR and EONIA (Euro Interbank Offered Rate) and EONIA (Euro OverNight Index Average) have been defined as ‘critical benchmarks’ under the BMR. According to the ECB, there is an estimated €22 trillion of EONIA-linked derivatives contracts in existence and €109 trillion linked to EURIBOR. But neither EONIA, nor EURIBOR currently meet the requirements of the BMR and given the huge volume of financial contracts affected, achieving a changeover to rates which do comply will be a mammoth undertaking. This was an issue that prompted considerable discussion at AFME’s Spanish Funding Conference earlier this month, as the capital markets industry grappled with how to tackle the challenge. In his keynote address, Sebastián Albella, Chairman of the CNMV (Spanish Securities Markets Commission), pointed out that in Spain alone one in four mortgage contracts is linked to EURIBOR. The days of submission-based rates have been numbered since the onset of the financial crisis and the LIBOR rate-rigging scandal, which resulted in a global drive to reform IBORs of all kinds. The loss of public trust in the veracity of LIBOR, in particular, made it clear that maintaining the status quo was not an option. Since then, many banks have (for understandable reasons) become increasingly reluctant to continue submitting the data used to calculate IBORs. And, lastly, the underlying volume of EURIBOR and EONIA-based transactions has also been declining. These are all factors that have undermined the depth and representativeness of the data. But while the case for reform may be clear, the sheer number and variety of financial contracts linked to EURIBOR and EONIA means reform will be immensely complex. And while good progress is being made, much also remains to be done. The approach being taken combines both replacement and reform. For EONIA-based contracts, the European Money Market Institute (EMMI), the body which administers both EONIA and EURIBOR, has already announced it has ceased its efforts to reform EONIA. Subsequently, the ECB’s Euro risk free rates (RFR) Working Group announced that ESTER (Euro Short-Term Rate) will be the new designated risk-free rate to replace EONIA. EONIA-backed securities will transition to ESTER, which will also become a fall back rate in EURIBOR-based contracts. However actual ESTER data does not exist yet, and may not be available until October 2019. As an interim measure, the ECB has begun publishing “pre-ESTER” data, which will give market participants an opportunity to acclimatise to the new ESTER rate. For EURIBOR, the plan is for reform not replacement, and these reforming efforts have significant regulatory backing; indeed Sebastián Albella said it was ‘crucial’. Mikael Stenström of the ECB, also at AFME’s conference earlier this month, confirmed that he expects a positive outcome for those efforts. EMMI is expected to file for authorisation of a reformed version of EURIBOR by the second quarter of this year; this is expected to change the calculation of EURIBOR to a ‘hybrid methodology’ that relies not just on submissions but also on real transaction data (supplemented by other market data where necessary). Third Country benchmarks Additionally, third country benchmarks (rates which are produced outside of the EU), are another big area of concern. Despite their misleading ‘non-critical’ labelling under the Regulation, third country benchmarks such as non-EU Foreign Exchange spot rates are widely used by EU financial firms and corporates in hedging commercial activities and investments abroad. At present there remains considerable uncertainty about whether many third country benchmark administrators can or will become BMR compliant via the available third country routes, which could create significant disruption for market participants. The two year delay will provide a vital opportunity to review the third country regime under the BMR Review clause. This will make it possible to rectify unintended consequences and enable viable solutions to be found. Continuing progress on reform While this two year delay does offer some much needed breathing space, it will be important to maintain momentum on reform and avoid complacency. As Mikael Stenström remarked, the success of these reforms will depend on each and every market user – whether from a large or small institution – being engaged in these issues: reviewing their contracts, making provisions and engaging in the consultation processes around the reforms. We will be continuing our engagement on these issues over the coming period.
A new era for securitisation?
5 Feb 2019
The coming into force of the simple, transparent and standardised (STS) securitisation rules last month was intended to mark a fresh start for securitisation within Europe. And while reaching this stage is in many ways a considerable achievement, the fact that so much of the underlying technical framework remains incomplete has created considerable uncertainty for the sector. January 2019 was in fact the first January since 2009 without any European ABS issuance. This somewhat shaky start is a tremendous shame given the high levels of ambition for the reforms. In December, European policymakers and regulators hailed the STS reforms as a key element in strengthening Europe’s capital markets, with Valdis Dombrovskis describing the reforms as ‘one of the cornerstones’ of the Capital Markets Union (CMU) initiative. Such language demonstrates the significant progress that has been made in rehabilitating the reputation of securitisation and in increasing levels of understanding around the important contribution it makes to well-functioning financial markets. Securitisation’s value as a tool for increasing capital flows to the real economy, boosting economic growth, is now openly acknowledged. This is a much-improved state of affairs compared to where the industry found itself in the wake of the financial crisis. At that time, despite the historically strong performance of European securitisations, the sector’s public reputation rather unfairly suffered much the same fate as that of the problematic US sub-prime mortgage sector. As a result, the European securitisation market effectively dried-up after 2008. Over a decade on, and issuance in Europe is still at a fraction of the level it once was, having dropped from €819 billion in 2008 to standing at just €269 billion in 2018 – of which only half was actually placed with investors, the remainder still being retained by originators and used to support repo funding from central banks. The Commission has said it hopes the STS framework will be the catalyst for reigniting issuance and investment. However, while much of the underlying detail supporting the regulation remains to be finalised, this ambition will continue to be unfulfilled. Several critical mandates for technical standards and guidelines are still to be completed, creating considerable uncertainty for the sector. As a result there have been no new issues of mainstream European issuance at all, so far in 2019. A certain level of disruption is inevitable whenever significant regulatory reforms are introduced, and in that sense STS securitisation is no different. But in order for the new framework to begin making a positive impact these outstanding issues need to be resolved as rapidly as possible. Whether, in the long term, the arrival of STS securitisation marks the beginning of a significant recovery for European securitisation is something which only time will tell. Arguably the market can only improve from where it currently is. What is clear is that over the coming months Europe’s policymakers must “renew their vows” and recommit to creating an environment which helps European securitisation to thrive. Maintaining that focus will be essential if we are to see a vibrant, high quality and dynamic European securitisation market emerge, delivering funding for Europe’s businesses and consumers and adding stability to our banking system.
Simon Lewis OBE
Europe's Leaders Must Push Capital Markets Plan
7 Jan 2019
This year will be one of major structural andinstitutional change in Europe. Whatever form Brexitfinally takes, there will likely be disruption to Europe’scapital markets. It will take time to see what impact it will have,particularly on the role of London as a financial centre inEurope. Leaving Brexit to one side, 2019 was always going to be a year of transition. Three of the biggest jobs in the European Union, the presidents of its commission, council and central bank, willhave new incumbents. These important appointments will needto be made well before the end of the year. Each European Commission is defined by the style andapproach of the president, who leaves his or her stamp on thestrategic direction of the EU. For the first time since the 1970s,there will be no British commissioner appointed. It’s highly likely that the European parliament, after elections inMay, will have a very different make-up to any other since thefirst vote in 1979. The growth of populism across the bloc isbound to be reflected in its composition and its dynamicinevitably will change because there will no longer be 73 BritishMEPs. High up on the new commission’s agenda should be takingforward the capital markets union project. This has becomeeven more important for Europe since the Brexit vote. At itsheart, the CMU is about making Europe’s capital markets more efficient in order to achieve sustainable growth. The United States already has deep liquid capital markets andthe EU has been falling behind. According to The Economist, 28of the top 100 companies globally came from the EU ten yearsago. Now it is only 17 and will drop to 12 when the UK leaves. In the past four decades six American companies have gone from foundation to valuation of $100 billion. Only one European company has achieved this. So the CMU is much more than a call to arms; it is fundamentalto the EU’s future. It is imperative to ensure that the bloc candevelop its capital markets to make it possible for growth andjobs to be created on a sustainable basis. Whoever succeedsJean-Claude Juncker as head of the European Commissionneeds to have a clear plan for taking forward the CMU in a post-Brexit world. This AFME View was originally published in The Times on 7th January
Simon Lewis OBE
Better define ‘sustainable finance’ to boost investment
20 Dec 2018
Creating a clear and responsive classification framework for sustainable finance is a vital first step in the development of an overall greener and more transparent financial system Europe has made a good start on its ambition to be a global leader in sustainability issues. For instance, 37% of total green bond issuance in the last 10 years was done in Europe - more than North America, Asia-Pacific or any other global region, according to Climate Bond Initiative data. And France is leading the EU nations with over 4%, by value, of bonds issued in the country in 2017 classed as sustainable. By publishing its Sustainable Finance Action Plan the European Commission has also provided an ambitious and much needed roadmap for putting sustainability at the heart of the financial system - European Parliament and Member States too have also pushed this issue high up their agendas. To meet the EU’s level of ambition – for instance its commitment to reduce greenhouse gas emissions by 40% by 2030 –a significant increase in private sector investment in sustainable economic activities will be required. But at present a major obstacle to attracting such investment is a lack of agreed definitions about what exactly qualifies as ‘sustainable’. Although some industry frameworks do already exist e.g. ICMA’s green bond principles, market participants lack a universally agreed and applied framework. A common workable, flexible and dynamic language is needed to better identify, compare and invest in sustainable economic activities. As a result it can be difficult for would-be investors to judge whether an investment opportunity is genuinely ‘sustainable’ or rather whether it is ‘greenwash’. This not only deters investors, but also prevents meaningful measurement and understanding about the size and make-up of the European sustainable finance sector. In order to tackle these issues AFME is supportive of the European Commission’s proposals to create a harmonised EU-wide ‘taxonomy’ for classifying whether an economic activity is environmentally sustainable, as part of its Sustainable Finance Action Plan. We believe it is a fundamental building block in the development of the EU’s sustainable financial system. But for it to have its full intended impact, we believe it must be sufficiently flexible. This need for flexibility is clear in a number of areas. For instance, while we welcome the intention behind the European Commission’s proposals to only implement the taxonomy once it is ‘stable and mature’, the reality is that in this very fast-moving area such a definitive taxonomy may never exist. There must be arrangements in place to enable the taxonomy to be regularly refreshed, to take new developments and technologies into account. The framework should also be international in scope, looking at activity both within and outside the EU. We believe it could encourage improvements in market practices worldwide. Calibrating it appropriately, so that it can be adaptable to global economic activity and also doesn’t impede the competitiveness of European markets will be hugely important. Additionally, there are many economic activities which could on some level be labelled ‘sustainable’ and a range of factors will need to be considered when making such an assessment. For example, even for something that seems fairly obviously to be ‘environmentally-friendly’, like an energy company establishing a wind farm to generate electricity, there could be complicating factors - such as if the construction of the windfarm had a negative impact on local wildlife or the local population in some way. A sustainable finance categorisation framework will need to be sensitive to such circumstances, including to the fact that many businesses will include both ‘sustainable’ and ‘non-sustainable’ elements. These is no disputing that coming up a widely-accepted and adaptable framework will be challenging. Building on existing examples of best practice could help – a number of organisations such as ICMA, the Climate Bond Initiative, and the European Investment Bank have already undertaken considerable work in this area. A range of sustainable investment strategies have also already developed in the market. Yet as proposals for the taxonomy currently stand, only investments which have a stated positive environmental or social objective would be included. This approach, known as ‘impact investing’, currently only makes up a relatively small part of the sustainable finance ecosystem. It is essential that the Taxonomy proposal allows for sufficient flexibility for “transition” investments – meaning investments in companies that are taking meaningful strides towards environmental sustainability, rather than to focus exclusively on investments that are already fully sustainable. Creating the flexible and effective categorisation framework that has been described here may seem like a tall order but achieving it is fundamental to the building the first steps towards a sustainable financial system and unlock the financing necessary to achieve sector and must remain a priority, no matter how complex the task may seem. This AFME view was originally published in L'Agefi