Europe’s capital markets join forces with academics on banking regulation & supervision FRANKFURT AM MAIN - The Association for Financial Markets in Europe (AFME) has become the newest supporting member of the European Banking Institute (EBI), joining the 28 academic members from all over Europe, as well as representatives of EU institutions such as the ECB, SRB and EBA and other European banking associations, in order to help develop international academic research on European banking regulation and supervision.Jacqueline Mills, Managing Director, Head of the AFME Frankfurt Office, said: “AFME is delighted to join the EBI, which is a valuable forum for academics, regulatory and supervisory authorities and market participants to debate current issues affecting the industry. AFME is highly supportive of European research in the area of prudential regulation and supervision, particularly in view of the complex regulatory and supervisory environment most market participants are currently facing.”Mills continued: “We hope that AFME’s focus on the particular challenges for global banks can bring a new perspective to the work of the EBI’s academic members. AFME’s participation will also help highlight the link between banking regulation and the development of capital markets, a topic we hope will be increasingly addressed by the European academic community.”Dr Thomas Gstaedtner, President of the Supervisory Board of the EBI, said: “AFME’s participation in the European Banking Institute (EBI) is a clear signal of the need for further academic research in the area of wholesale financial markets.”Gstaedtner also said: “In my role as President of the Supervisory Board of the EBI, I warmly welcome AFME’s decision to support EBI’s activities on a broad range of regulatory and capital markets issues. The EBI is a platform where key market players such as AFME can interact with academics, regulators and supervisors to discuss high quality academic work. The regulatory environment is in constant evolution, in particular in light of Brexit, therefore, the European banking and financial industry requires more dialogue.”Enrico Leone, Chancellor of the European Banking Institute, said “the EBI is extremely pleased to welcome AFME as a Supporting Member. AFME’s participation will further enrich our academic research, in particular on capital markets. Our academic and supporting members are looking forward to working with them.”Leone also said: “The enthusiastic support our academic joint venture is receiving from supervisors and the industry shows there is a clear need for research in the field of banking regulation and supervision to mirror the supranational/European dimension at which it is developed.”– Ends –

Commenting on the European Commission’s proposals for Sovereign Bond-Backed Securities (SBBS), announced today, Victoria Webster, Director of Fixed Income at AFME, said:“AFME supports continuing discussion regarding the creation of a European “safe asset”. At the same time, we believe that a number of essential criteria to successfully develop a market for SBBS have not yet been met. In order for such instruments to be workable, more analysis by a variety of market participants is needed.“We therefore encourage EU legislators to consider further consultations with Debt Management Offices, Primary Dealers and investors before deciding to progress this initiative further.”In particular, some elements that would need to be taken into account are(i) demand, as investors can already build portfolios replicating what would be the underlying portfolios of SBBS, with the ability to shift risk more easily than if they were holding tranches of SBBS, and(ii) its structure, as the fixed blend of national bonds and the high contagion risks between the bloc’s countries without risk-sharing measures are likely, therefore trust in SBBS will be lowest when they are most needed in times of crisis.– Ends –

Welcoming the European Commission’s plans for legislative actions to promote sustainable finance and SME growth markets as part of the Capital Markets Union (CMU) package, Simon Lewis, Chief Executive of AFME, said:“Facilitating access to finance for SMEs is a key element of the Capital Markets Union. And we are already seeing that the CMU initiatives are having a positive impact on SMEs’ ability to access a broader range of financial products. For example, total annual funding from venture capital, business angels and equity crowdfunding has increased 65% in the last 5 years from €7bn in 2013 to almost €12bn in 2017. Therefore, the completion of the CMU remains vital in order to create the right foundation for long-term economic growth across Europe and to help reorient long-term capital flows towards SMEs. “Capital markets also have a key role to play in the transition towards a greener economy. For example, developing the green securitisation market could encourage more diversified European issuance and has the potential to encourage the development of energy efficient housing. We therefore welcome the further sustainable finance proposals from the Commission today demonstrating its leadership role in this essential area.” On SME growth markets:AFME is fully supportive of the Commission’s focus to help improve access to long-term sources of financing for European SMEs, which are net job creators. However, it is well-known that many small businesses struggle to reach the size required in order to attract larger institutional investors on the public markets. This is why policymakers must continue their ongoing efforts to build the CMU, which can help build up Europe’s capital markets’ capacity so that promising small firms can raise risk capital at all development stages. To enhance the number of SMEs going public, it is important to make sure that those companies can: Access a true single market with standard rules across the EU Member States to enable businesses to scale-up cross-border; Access additional funding from European venture capital and private equity funds. The average European VC-backed company receives only €1.3 million compared to €6.4 million in the US. Filling this gap would build companies with enough scale to access public institutional investors in the public markets. On sustainable finance:AFME: Supports the progressive development of a sustainability taxonomy – with strong involvement from sustainability and financial market experts – as well as the promotion of green standards and labels, which will help position Europe as a global leader in sustainable finance; Very much supports better voluntary disclosures through the existing industry-led FSB TCFD work. Sufficient disclosure of material information must play a key role in making sustainable investment decisions and promoting socially responsible investment analysis; Recommends even further measures, such as steps to encourage development of the green securitisation market, which could play a future role in encouraging energy efficient housing, for example; Reiterates the importance of further work in the EU prior to any recalibration of prudential measures to ensure that capital frameworks can still achieve financial stability aims. A green supporting factor provides a clear incentive for institutions to transition to a green economy, but it should be recognised that capital requirements are there to mitigate risk, and green investments could also contain risks that may then not be fully represented in capital requirements. – Ends –

New White Paper outlines AFME’s vision for integrated, safe and efficient post trade in Europe AFME’s Post Trade Division has today published a new White Paper setting out a vision for a future post-trade system in Europe.The paper explores the issues currently impeding progress in European post trade reform and outlines some key objectives for public authorities and the industry in the paper entitled ‘A Roadmap for Integrated, Safe and Efficient Post Trade Services in Europe’.Areas of focus include: a sound legal basis for cross border holdings in book entry securities, an efficient method of reclaiming withholding taxes, ensuring open access and interoperability for European CCPs, ensuring collateral management is harmonised and unencumbered by unnecessary restrictions and continuing the process of fully embedding T2S as a low cost, pan-European settlement platform.Stephen Burton, Managing Director of Post Trade at AFME, said: “European post trade reform must go further if we are to build larger and more diverse capital markets in Europe. While the solutions put forward to date are necessary, they have not gone far enough in addressing the barriers to efficient post trade. In order to make progress towards an integrated, low-risk and low-cost post-trade eco-system in Europe, European and national authorities should prioritise reform. The overarching goals of post trade reform are well-established, the mandate and the foundations have been clearly set, now it’s time for action.”One of the paper’s key recommendations focuses on the opportunities created by new technologies. With the advent of new technology, such as Artificial Intelligence, cloud-based applications and distributed ledger technologies, there is the potential to revolutionise how post trade services are delivered. The consequence for industry of not developing common standards and collectively maximising its benefits could be further fragmentation. Therefore, the paper calls for industry to work collaboratively on this.The White Paper follows some major recent developments, such as the publication in August 2017 of the European Post-Trade Forum (EPTF) report, and the publication on 8 March 2018 of the European Commission’s latest initiatives for its Capital Markets Union project, including Action Plans on Fintech and on Sustainable Finance.AFME’s vision is for: a truly integrated, harmonised, low-risk and low-cost post-trading system in Europe post-trade infrastructures and service providers that compete in a harmonised and standardised operational, legal and regulatory environment offering innovative and low-cost services to all users on a non-discriminatory basis. To achieve the vision of low-risk and low-cost post trading in Europe, AFME’s White Paper calls for: the barriers determined by the European Post Trade Forum (EPTF Barriers) in 2017 to be swiftly dismantled in the context of the European Commission’s Capital Markets Union project (CMU); a longer-term strategy, based on detailed analyses, to achieve the targeted future state of the post-trading landscape to be developed, including responsibilities and timelines, and to be implemented accordingly; the opportunities created by new technology should be leveraged; close and institutionalised cooperation between the public and the private sector should be continued, including an intensified dialogue with European and national public authorities in a bespoke and targeted manner; post trade reform should be pursued across all European markets, including non-EU capital markets. – ENDS –

Welcoming the joint announcement by the European Commission and HM Treasury, that they will ask the European Central Bank and the Bank of England to convene a technical working group on risk management, Simon Lewis, Chief Executive at AFME, said: “We welcome today's announcement that the ECB and the Bank of England are convening a group to address technical issues to manage risk around a no deal Brexit scenario. While banks continue their preparations for all scenarios, it is imperative that the regulators come together to address cliff edge risks in the interests of financial stability across Europe. It is important that issues such as contractual continuity, access to market infrastructure and transfers of data are addressed to ensure an orderly withdrawal in all scenarios." –Ends –

This press release is also available in French, German, Italian and Spanish The Association for Financial Markets in Europe (AFME) and PwC have today published a new ex-post study on the impact of regulation on banks’ capital markets activities. While there have been many forward-looking studies examining how banks may respond to regulatory reforms, this latest study is the first that examines how banks have actually responded to regulations 10 years on from the global financial crisis.At a point where global supervisors have finalised the post-crisis reform programme, AFME commissioned PwC to assess the role played by regulation in motivating changes to banks’ capital markets activities. Simon Lewis, Chief Executive at AFME said: “While the benefits from the post-crisis regulatory framework are clear, now is the right moment to examine how this framework has influenced banks’ capital markets activities. Our study finds that since the crisis, there has been a significant decline in banks’ global capital markets assets with regulation being by far the largest single driver of these changes. This clear link between regulation and its impact on banks’ capital markets activities strongly argues for EU and global authorities to commission further studies of the potential effects of these rules on the provision of primary and secondary market services to end users, such as corporates and investors, before undertaking any further major regulatory changes.” Nick Forrest, Director at PwC, said: “Our study shows that since the global financial crisis, regulation has had a key impact on the shrinkage of banks' balance sheets - with a bigger effect than other economic and market trends. Banking regulations have contributed to a particularly substantial reduction in banks' balance sheet capacity to support the issuance, marketing and secondary trading of corporate debt, equity and related hedging products. This can ultimately lead to reduced access and higher cost of borrowing for corporate borrowers." The study draws upon data across a selection of 13 global banks - which in aggregate represent 70% of global capital markets activities - covering three years of data: 2005, 2010 and 2016 as the latest full year of data available. Among the key findings from the study are:• The aggregate annual regulatory cost that applies to capital markets activities across the 13 banks in our sample is estimated to be approximately US$37bn, representing 39% of total capital markets expenses in 2016. • Capital and leverage requirements are the most substantial drivers of regulatory cost and account for almost 90% of the total regulatory impacts. • Regulation drove a 14 percentage point reduction in (pre-tax) capital markets return on equity (ROE) from 2010 to 2016 (from 17% to 3%) before banks’ mitigating actions via deleveraging, cost reductions or repricing. Following such actions, overall ROE (excluding one-off charges) recovered to 11% by 2016. • Rates and credit activities have been most impacted by regulation in ROE terms. • Higher regulatory costs and low returns have been significant drivers of assets deleveraging in banks’ capital markets activities. • Regulation alone accounted for about two thirds of the net 39% decline in capital markets assets across the sample of banks between 2010 and 2016, with pronounced falls in rates, credit, commodities and equities assets. • Macroeconomic trends and non-regulatory factors also explain some of the movement in assets. • Broad trends of deleveraging across regions suggests these are global in nature, and not limited to individual firms or regions. The PWC/AFME study captures information up to 2016. It therefore does not incorporate data on the impacts from the recent introduction of MiFID II/MiFIR or banks’ responses to the forthcoming implementation of NSFR and the remaining Basel III capital reforms. Taken together with banks’ 2017 capital markets results, this strongly suggests that the trends seen in the study are likely to continue. AFME recommends that European and global authorities undertake further ex-post cumulative impact studies. These should specifically examine how regulation impacts the economics, for providers of primary and secondary market capital markets products and their incentives and capacity to continue offering them to end-users, such as corporates and investor users of financial services. Particular attention should be given to the provision of market making services in impacted asset classes. Click here to download the full report. - ENDS -

Following the update from the Bank of England today on its approach to how banks and other financial services firms should prepare for Brexit, Simon Lewis, Chief Executive of AFME, said:“We welcome this further guidance from the Bank of England, confirming that member firms can plan on the basis of the transitional period agreed last week.“We also welcome the publication of the final policy on the authorisation of branches of international banks, providing further clarity for banks. It will now be important for the UK and EU regulators to put in place cooperation arrangements to support this.“While this additional regulatory clarity is very helpful, the approach of the regulators in the EU27 will also be key in achieving the objective of an orderly withdrawal. We hope that over the coming weeks, much-needed further clarity can be provided on issues such as contractual continuity, access to financial markets infrastructure and data flows.”– ENDS –

Following the conclusion of the EU Summit today, Simon Lewis, Chief Executive of AFME, said:“We are encouraged by the steady progress being made towards Phase 2 of the negotiations and the political agreement on a transition period marks an important stage in the Brexit process.“It will now be important to have clarity from regulators as to their expectations in light of the agreed transition period. While a transition period will help mitigate a number of potential cliff edge risks, the draft Withdrawal Agreement does not currently address issues such as contractual continuity, access to financial markets infrastructure or data flows.”– ENDS –

Welcoming the initial agreement on a transition period, announced today, Simon Lewis, Chief Executive of AFME, said:“The initial agreement on a transition period announced today is a major step forward and we look forward to seeing more details at the EU summit later this week. While this agreement is a big move in the right direction, it will be important to see that there is real political and regulatory commitment from both sides to a transition period.”– ENDS –

Following the publication of the European Commission’s legislative initiatives on NPLs today, Simon Lewis, Chief Executive at the Association for Financial Markets in Europe (AFME) said: “The Commission’s proposals for the development of a secondary market for NPLs is an important initiative which should enable banks to accelerate the reduction of such loans on their balance sheets. High levels of NPLs have long tied up valuable bank financing which might otherwise have been deployed in supporting economic growth.“Plans to enable creditors to more rapidly recover their collateral may also contribute to a freeing up of defaulted loans, but it will be important to ensure full consistency with existing insolvency regimes and other legal requirements. The appropriate level of provisioning of NPLs should be determined on a bank-by-bank basis in agreement with supervisors rather through the enforced application of uniformly applied Pillar 1 prudential backstops.” On the specific legislative actions:Accelerated Extrajudicial Collateral EnforcementAFME believes that this framework would be helpful to better protect creditors from borrower defaults as it will provide more certainty on loan recovery proceedings and improve times associated with such recoveries. During the discussion of the legislative proposal, lawmakers should ensure consistency with other legal frameworks, including, most importantly, the Commission’s proposed Directive on EU insolvency, as well as existing insolvency regimes and any legal guarantees or other credit support that might already be in place.NPL Secondary MarketsAccess to third-party loan servicers is crucial to the development and growth of secondary markets for NPLS. Measures aimed at facilitating the provision of cross-border credit servicing activities are a step in the right direction towards a true EU market for NPLs.AFME also welcomes the introduction of common standards for supervision of credit servicing activities. Consumers should be protected by guaranteeing the financial expertise of loan servicing providers, as well as the suitability of asset recovery practices.There are other major barriers, not addressed in the Commission’s legislative proposal, that lawmakers and Members States should also take into consideration to further develop the market for NPLs. For example, ways to facilitate the wider participation of investors, or efforts to reduce transfer and registration costs of loan transactions.Pillar 1 prudential backstopAFME considers that blunt, one-size-fits-all Pillar 1 prudential backstops are unnecessary. Any potential shortcomings in provisioning which have not been clearly justified should be addressed in an institution-specific manner under a Pillar 2 approach allowing security- and country-specific differences that affect expected recovery periods to be taken into account. – ENDS –