The Association for Financial Markets in Europe (AFME) has today published a new paper “Open Finance and Data Sharing – Building Blocks for a Competitive, Innovative and Secure Framework”. This paper precedes the European Commission’s framework for data access in financial services which is due to be published in the coming months as announced by the EU’s chief of financial policy, Mairead McGuinness. Elise Soucie, Associate Director of Technology and Operations at AFME, said: “Open Finance in the EU’s data economy will transform the way banks share data with each other, and also with third-party providers, such as fintech companies. For financial services this could mean that access to new, broader data sets could enhance the way banks operate and encourage innovation across sectors. “But with innovation comes potential for unintended consequences such as sharing data with participants in other sectors who may already have a dominant share of both individual and corporate data and which could lead to monopolies and the exploitation of data. Therefore AFME has identified four key principles to help address these risks and to support policy makers in the development of a robust Open Finance Framework.” The paper identifies four key principles to support the development of a robust Open Finance Framework, including: A level playing field is crucial In order for an Open Finance Framework to flourish not only in financial services but across multiple sectors, there must be consistent and appropriate regulatory oversight. This consistency is key in order to both support innovation, but also to discourage monopolies, encourage competition and efficiency, and to lower costs for both corporate and retail customers, creating a robust and effective data economy. For this to occur, regulation must address risks consistently and market players must have consistent regulation if data is to be shared across the sectors. Interoperability and an appropriate level of standardisation A robust data economy and its positive long-term impacts will be supported by both interoperability and an appropriate level of standardisation on a global scale. Interoperability should also support a level playing field so that, if data is being shared outside the financial services sector, it is still subject to appropriate requirements and remains high quality and fit for purpose. Furthermore, any harmonisation would also need to occur across EU Member States, while also being complementary to global frameworks. This interoperability could be supported through a market-led forum that could support the implementation of both principle-based standards and technical and security standards where appropriate. An appropriate framework for compensation Compensation is important in order to ensure fair allocation of costs across the data value chain and to safeguard fair competition. Compensation, for infrastructure and provision of data services is also important to incentivise data holders to maintain a high level of quality and high functioning data sharing mechanisms. Ensuring that each type of data is supported by an appropriate data sharing infrastructure enables data to be fit for purpose and reliable when used. Data reliability also supports a robust data economy and mitigates risks to data integrity, data security, regulatory compliance and the accuracy of end products for both corporate and retail consumers. Clear liability provisions Liability provisions are important in order to provide legal clarity with respect to the access, processing, sharing, and storage of data. These provisions should be consistent with the GDPR and should also include specifications on redress and dispute resolution as well as consent mechanisms for consent beyond the usage of the data controller. In addition to the Open Finance Framework setting out liability provisions, it should also support and enable contractual agreements as these are crucial to fill any gaps in new use cases, or specialised scenarios which may require additional clarity on the legal, technical and other conditions governing data sharing. - ENDS - Note to the editor: This summer AFME responded to the European Commission’s targeted consultation on ‘Open Finance and Data Sharing in the Financial Sector’. Commissioner McGuinness’ announcement of the European Commission’s Expert Group on Open Finance builds on the European Commission’s efforts to gain cross-industry insight into the impact of data sharing.

The Association for Financial Markets in Europe (AFME) has today published a new paper discussing whether Europe should move to a one-day settlement cycle (known as T+1). In Europe, the current settlement cycle for most transactions in equities and fixed income markets is two business days (‘T+2’). The paper follows announcements by the US and other jurisdictions earlier this year of their intention to move to shorter settlement cycles. Pete Tomlinson, Director of Post Trade at AFME, said: “An industry move to T+1 would follow the historic trend towards shorter settlement cycles, and could result in reduced market risk and associated costs. However, a move to T+1 could be the most challenging migration yet because it would remove the only business day between trading and settlement, creating significant pressure on post-trade operations, particularly for global participants. The barriers to timely settlement in the current model need to be fully understood and addressed before Europe can move to T+1. A rushed or uncoordinated approach is likely to result in increased risks, costs and inefficiencies, particularly given the unique nature of European markets which have multiple different market infrastructures and legal frameworks. For this reason, AFME is calling for an industry task force to be set up to conduct a detailed assessment of the benefits, costs and challenges of T+1 adoption.” The paper, “T+1 Settlement in Europe: Potential Benefits and Challenges” highlights the key benefits of moving to a shorter settlement cycle, including: Reduction of risk: shortening the number of days between trade execution and settlement will reduce counterparty, market and credit risk, especially during periods of high market volatility. Significant reduction of associated costs: by limiting firms’ open exposures over the settlement period, there will also be a reduction in margin requirements, allowing market participants to better manage capital and liquidity risk. Maintaining global alignment: given that some major jurisdictions will be adopting T+1, the end users of capital markets may benefit from Europe following the same approach. The paper also outlines the various barriers to overcome before such a migration can take place, including: Post trade activities compressed into shorter time frame: there would be significantly fewer hours between trading and the beginning of the settlement cycle for post-trade operational processes to take place. While it might be assumed that moving from two days to one day would reduce the available post-trade processing time by 50%, AFME actually estimates market participants will be moving from having 12 hours to 2 hours of post-trade operations time, an 83% reduction. Possible increase in settlement fails: the migration could also lead to an increase in the number of settlement fails in the market, which will incur cash penalties under Central Securities Depositories Regulation (CSDR) rules, as well as having capital impacts under Basel III requirements. Greater operational complexities for global participants: time zone differences will impact the possibility of same-day matching processes for investors from outside Europe, vastly reducing the time available to communicate and resolve any breaks or exceptions. This impact would be particularly significant on cross-currency transactions which have an FX component. Securities Lending impact: moving to a T+1 settlement cycle compresses the timeline to identify and recall securities, which could lead to breaks in the process, resulting in an increase in settlement fails and cash penalties unless there is a modification to existing processes, technology and overall behavioral changes. Impact for Exchange Traded Funds (ETFs) and Securities-based derivatives more pronounced: Due to the global composition of many ETFs, which contain underlying securities from several jurisdictions, this can often lead to settlement delays in a T+2 environment, due to time zone differences, market holidays and cross-border settlement complexity. These challenges would be even more pronounced in a T+1 environment. Challenges will also exist for securities-based derivatives with further assessment required to identify impacts to the swap lifecycle, such as margining calculation and collection. AFME’s paper strongly recommends that further cross-industry discussion is required to identify and quantify the benefits and challenges of moving to T+1 settlement. AFME cautions that a successful migration will require coordinated industry effort, from an initial impact assessment through to the development of a detailed implementation plan. - ENDS -

We are deeply saddened to hear of the death of Her Majesty the Queen. We wish to extend our deepest condolences to the Royal Family for their loss on behalf of the Association for Financial Markets in Europe and its members. We are thankful for the Queen’s many years of loyal service to the United Kingdom.

The Association for Financial Markets in Europe (AFME) welcomes today’s publication of the draft report by Rapporteur Danuta Hübner, which represents an important milestone in the legislative negotiations on the Markets in Financial Instruments Regulation (MiFIR) Review. Adam Farkas, Chief Executive at AFME, said: “The MiFIR review and the proposals from Professor Hübner come at a critical moment. With Europe facing challenging times in light of slowing growth and rising inflation, in addition to the economic impact of the war in Ukraine, the efficient functioning of secondary markets is even more vital to meet Europe’s increasing private financing needs. “To ensure the continued functioning of these markets, the MiFIR Review must preserve the diversity of trading mechanisms serving different investor needs. Banks, as market makers, are an essential part of this ecosystem, committing their balance sheets to provide liquidity to financial markets. This intermediation is vital to help support market depth and liquidity throughout changing market conditions. “Therefore, we would urge the Parliament to consider key issues affecting the competitiveness of European markets. For example, proposals which impose undue restrictions or expose committed bank liquidity providers to increased risk could have potentially damaging effects on secondary market liquidity and the competitiveness of European markets. “Capital markets are global and we commend Professor Hübner’s approach of ensuring regulatory changes in other jurisdictions are taken into account in the development of the EU framework. Keeping these developments in mind will contribute to strengthening the competitiveness and efficiency of EU markets, ensuring that investors can access optimal trading conditions, which will ultimately benefit EU savers and pensioners.” “We look forward to examining the draft report in further detail and engaging with the European Parliament over the coming months.” In particular, AFME urges the Parliament to consider the following in its deliberations going forward on the MiFIR Review: In equities markets, AFME supports the suspension of the double volume cap, which will ensure EU capital markets remain competitive by bringing this part of the regulation into line with other jurisdictions. We also note that Professor Hübner has proposed an enhanced role for ESMA in establishing a size threshold for Systematic Internaliser (SI) trades that can be executed at midpoint, a minimum quoting size for SIs and a minimum size threshold for use of the reference price waiver by trading venues. AFME cautions that if these restrictions are introduced, it is vital that they are based on sound evidence relating to market quality (i.e. the efficiency of intraday and closing price formation) and the delivery of best execution outcomes for end investors. AFME believes that applying further, unnecessary restrictions to the SI regime will erode the level playing field and inhibit SIs’ efficient facilitation of trading for institutional investors.For example, we note that the EU is a global outlier in pursuing restrictions on midpoint execution. In fixed income markets, while a 4-week price and volume deferral for very large transactions is a step in the right direction, any changes to transparency thresholds and the timing of publication of trading data that have not been based off granular analysis using a comprehensive, accurate data set, risks exposing market-makers to undue risk. The fixed income transparency regime needs to be calibrated to allow these market makers (which are committed liquidity providers) to continue to be able to quote/trade in large sizes as well as in illiquid instruments. The calibration must provide sufficient time to market-makers to hedge or unwind their positions, both in a benign environment, as well as during periods of high market volatility. The level one text should set out the principles which need to be taken into account when determining these calibrations, but the calibration exercise itself, in our view, should be delegated to ESMA on the basis of a thorough impact assessment. Establishing a well-designed consolidated tape for equites and fixed income will promote more attractive and competitive capital markets in EU and contribute to reducing home country bias in the Union, where investors tend to prefer companies from their own Member State. AFME strongly supports the statement that it is essential that the equity tape contains real-time, pre-trade data. We encourage all co-legislators to be ambitious and include pre-trade data in the equities tape at the outset. Making real-time equity market data available to all investors will provide a single view of trading in Europe, which is key for creating a truly pan-European market. Similarly, a post-trade consolidated tape for bonds will provide all investors, regardless of resources or sophistication, with a comprehensive and standardised view of the European fixed income trading environment and will help attract international capital. It is, though, important to note that a bond consolidated tape will not solely address the issues of particularly high market data costs in this market. While the development of a fully-fledged consolidated tape would be a game-changer for the Capital Markets Union, its positive impact would be undermined if the other restrictions to the trading environment, highlighted above, are introduced as this will be to the detriment of investors. On the definition of SI and SI reporting requirements, it is important to reduce uncertainty when it comes to establishing who is registered as an SI and also who should take responsibility for post-trade reporting. AFME supports proposals to introduce a designated reporter regime which will eliminate uncertainty around the question of which counterparty reports a trade for the purposes of fulfilling post-trade transparency requirements. Under the current regime, whish is based on SI designation, market participants have faced unnecessary complexity which has led to duplicative reporting. The application of a qualitative definition for SIs will remove the existing, unnecessary quantitative definition which places an unnecessary burden on EU investment firms. Combined with the decoupling of the SI regime and reporting requirements, this will lead to a framework where firms only register as SIs when it is reflective of their business model. AFME supports this approach. - ENDS -

Following the publication of the UK Financial Services Bill today, Adam Farkas, Chief Executive of the Association for Financial Markets in Europe (AFME), said: “AFME welcomes today’s Financial Services and Markets Bill setting out the UK Government’s vision for the future of the financial services sector in the UK. This will deliver meaningful change and is complementary to AFME’s long standing position in support of high regulatory standards, financial stability, competitive markets, sustainable growth, appropriate levels of investor protection and responsive legislation for financial services. “AFME is pleased to see the introduction of a new secondary objective on international competitiveness and economic growth for financial services regulators. This approach will ensure high regulatory standards are maintained while also putting an appropriate level of focus on competition. “AFME also welcomes, in particular,the proposed legislative change to remove the share trading obligation (STO) and the double volume cap (DVC). These features were not conducive to supporting secondary market liquidity and their removal will help to boost the attractiveness of capital markets in the UK, making them more agile and promoting better outcomes for investors. “We also look forward to engaging with the Bank of England and Financial Conduct Authority as they build their rulebooks in light of their new powers.” - ENDS -

Following the publication today of the UK’s Secondary Capital Raising Review, the Association for Financial Markets in Europe (AFME) and UK Finance, commented: “We welcome the Secondary Capital Raising Review’s ambitious initiative to make UK markets more attractive and competitive. The recommendations are an important step in the dialogue and ongoing process towards advancing these important objectives. We will be actively and constructively involved in the discussions and consultations to come regarding the application, development and feasibility of these aspirational proposals. We particularly support the proposed changes to allow issuers to raise funds on a soft pre-emptive basis, noting that our members helped issuers raise substantial amounts of much-needed capital through placings when this was allowed in 2020.” - ENDS -

Commenting today on the publication of the ECB’s climate stress test results, Caroline Liesegang, Head of Prudential Regulation and Research at the Association for Financial Markets in Europe (AFME), said: “The ECB climate stress tests have been a welcome learning exercise for banks and supervisors alike. It will be important for banks and supervisors to reflect upon the lessons learned, including refining climate stress testing capabilities and the importance of the ongoing work to enhance the availability and reliability of climate data from the companies which banks finance. “Climate risk analytics and climate risk data is still in its infancy. Harmonised, region-wide scenario exercises and stress tests are therefore important tools to facilitate advancement in the field, but also to create the possibility to learn. We therefore welcome that the results of this exercise are not directly linked to capital requirements. “There is still much work to do to close data gaps, refine scope and scenarios and of course, understand the mechanics of transmission channels into banks’ balance sheets and portfolios. It will take more time before banks are able to quantify climate risks more reliably and to then introduce supervisory or prudential measures if needed. Banks’ success in upgrading their data capabilities will also rely on corporate disclosure, which is in the pipeline through the Corporate Sustainability Reporting Directive (CSRD) and internationally through the International Sustainability Standards Board (ISSB). “Banks have an essential role to play in mitigating any risks that could arise from climate-related risks and in supporting the transition towards a green economy. While AFME is supportive of horizontal supervisory analysis, it is important to recognise – as the ECB stress test results show – that banks’ balance sheets are generally representative of the real economy sectors and regions they finance and it therefore remains essential for governments to continue to define clear transition pathways for sectors of the economy as they transition to Net Zero. “In order to support the development of climate risk analytics and stress tests, AFME’s member banks will continue to take action to address data and analytical shortcomings, both at global and European level. Risk management frameworks have evolved in recent years in order to integrate climate risk more effectively, though the lending process is still very much reliant on qualitative, often not comparable information. Banks have started to amend their strategic business and capital planning to address potential over-reliance on greenhouse gas intense sectors. Yet there is much more to do. Our members are currently in the process of defining data collection templates, including a suitable data processing framework for corporates and SMEs, which aims at closing client information gaps in a coordinated fashion across leading EU and global banks. AFME will continue to engage and facilitate the development of the tests going forward to ensure a meaningful transition of the European banking system. “AFME will be reviewing the results and exercise closely with members and will provide further analysis in the coming months.” - ENDS -

Commenting on the provisional interinstitutional agreement on the Markets in Crypto Assets Proposal (MiCA) reached between the French Presidency of the Council of the European Union and the European Parliament, James Kemp, Managing Director at the Association for Financial Markets in Europe (AFME), said: “MiCA is an ambitious legislative proposal to create EU-wide minimum requirements for all crypto-assets issuers and service providers. This will bring regulatory certainty, reduce fragmentation and underpin the development of a robust and well-functioning market. “In particular, AFME welcomes the pragmatic approach taken to include decentralised autonomous organisations (DAOs) and non-fungible tokens (NFTs). This is a positive development that will future-proof the EU’s regulatory framework and help it to evolve to meet the challenges presented in this rapidly evolving space, while maintaining alignment with existing EU standards and guidelines. “Amid rapid technological change and significant market innovations, the rationale for MiCA has become more important than ever for the EU. Despite the fact a provisional agreement has been reached, the completion of MiCA will still take several years due to the Regulatory Technical Standards (RTSs) underpinning the legislation. “As MiCA is finalised, AFME continues to advocate for further legal certainty on the requirements imposed on custodians of crypto assets, and, in particular, to clarify the difference between liability in cases of negligence and misconduct, and extraneous events (such as a nation state hack), which may be beyond a custodian’s control. The final provisions on liability should ensure that a proportionate and balanced approach is adopted. “Going forward, it is crucial that MiCA takes into account the broad global context of digitisation, ensuring that the EU remains open to global sources of innovation, standards and markets.” Specifically, AFME: Stresses that further clarity should be provided for custodial liability arrangements. A balanced and proportionate approach to assessing liability is key to ensure customers and clients are not driven towards unregulated solutions or self-custody, ultimately putting them at greater risk of loss, and reducing the ability for authorities to monitor and mitigate financial crime. AFME believes additional language is required to clarify what is “attributable” to custodians (i.e., losses caused by ‘wilful misconduct or gross negligence’) to ensure alignment with the service standards applicable to traditional assets. Welcomes the fact that the provisions for Decentralised Autonomous Organisations (DAOs) have become more proportionate and risk-based. The proposed overall exclusion of so-called “decentralised activities” risked creating a gap in the application of MiCA, leading to risks to financial stability and potential knock-on impacts. We thus welcome the sensible approach taken by the co-legislators which only excludes activities provided in a fully decentralised manner, without any intermediary, which significantly reduces risks for investors. Also welcomes the approach taken on Non-Fungible Tokens (NFTs) to ensure that any NFTs that are fungible in some form or not fully unique, will be covered by MiCA. An outright exclusion of NFTs could have a serious impact on financial stability and investors. Welcomes the balanced approach adopted on the environmental impact of crypto-assets which looks at treating crypto-assets in the same way as other asset classes, by including them in the EU Sustainable Finance Taxonomy. AFME’s members are committed to supporting the transition to a sustainable economy and strongly support the further development of sustainable finance. The financial sector plays a crucial role in underpinning the transition to zero greenhouse gas emissions, notably by helping to allocate capital and providing long-term investment in ways that are consistent with achieving key climate objectives. Encourages further considerations to be given to how the final MiCA text covers crypto-currencies to ensure some are not excluded from the regulatory perimeter, which could expose investors to significant risks. - ENDS - Notes to Editors: Background: Following the European Commission’s (EC) legislative proposal for the Markets in Crypto Assets proposal for the Financial Sector (MiCA) on September 24th, 2020, the European Parliament (EP) and the Council have been negotiating their respective amendments in support of the finalisation of the proposal and its forthcoming implementation. Interinstitutional negotiations (known as ‘trilogues’) have been taking place since the beginning of the year with the aim to finalise the legislation before the summer.

In light of the ongoing interinstitutional negotiations (trilogues) on the EU Green Bond Standard (EU GBS) proposal, the Association for Financial Markets in Europe (AFME) has today published a paper highlighting 6 priorities to fulfil the objectives of the EU GBS framework and to support the establishment of an effective and successful market for EU Green Bonds. Oliver Moullin, Managing Director for Sustainable Finance at AFME, said: “The EU GBS has the potential to play an important role in stimulating the issuance of green bonds in the EU amid challenging market conditions. Delivering on the proposal should therefore be a priority for the upcoming Presidency of the Council. We recommend that co-legislators keep the discussions focused on delivering a product-based, voluntary gold-standard for green bonds that is attractive to both issuers and investors.” The French Presidency of the European Council commenced the final phase of negotiations in June and talks will continue over the second half of the year under the auspices of the Czech presidency. Among the key issues for discussion are the scope of the regulation and additional entity-level requirements. This comes after the Parliament proposed introducing requirements for all issuers of sustainable bonds in the EU and to add entity-level disclosure requirements. Moullin continued: “The Parliament’s report substantially extends the coverage of the label, which would capture all bonds marketed in the EU as environmentally sustainable. This new approach is a meaningful shift from the original objectives of the proposal. We are concerned that it would adversely impact the EU green and sustainable bonds market and therefore undermine the progress in developing sustainable finance in the EU. We therefore strongly recommend that co-legislators maintain a product-based approach to deliver on the EU GBS objectives.” To support the ongoing negotiations, AFME’s paper highlights the following six priorities: 1. Focus on criteria to use the EU Green Bond designation without threatening the continued growth of the market for sustainable bonds. 2. Maintain the Standard’s voluntary nature and its strong link with the EU Taxonomy Regulation. 3. Develop a product-based framework, avoiding complex disclosure requirements at the issuer level. 4. Ensure that eligible bonds maintain their designation until maturity, after changes to the Taxonomy criteria. 5. Ensure the standard works for securitisation and supports the development of green securitisations. 6. Ensure sufficient time for each periodic review of the legislation, and maintain its voluntary nature. – Ends –

In response to the Council of the EU and the European Parliament’s agreement on the Corporate Sustainability Reporting Directive (CSRD), Oliver Moullin, Managing Director for Sustainable Finance at AFME, said: “The CSRD is a key pillar of the EU sustainable finance framework. Once implemented, it will introduce comprehensive sustainability reporting requirements for companies in the EU. Today’s agreement is an important step towards improving the quality and availability of sustainability information, which will further enable our members’ role in financing the transition to a sustainable economy.” Throughout the negotiations AFME has highlighted the challenges for international companies reporting on their global activities and exposures. On this topic, Moullin added: “To have an effective framework for sustainability reporting, it is essential to maximise the interoperability of international reporting standards. This means promoting consistency to minimise fragmentation and aid comparability of data for investors. As EU authorities develop detailed reporting standards under the CSRD, it is essential to ensure the compatibility of EU standards with the common international baseline standards being developed by the International Sustainability Standards Board.” – Ends –