Moderator: Pedro Pinto, Director, Head of MiFID, Advocacy, AFME Speakers: Tanya Panova, Head of the Capital Markets Unit. European Commission, DG FISMA Christiane Hölz, Managing Director, DSW (Deutsche Schutzvereinigung für Wertpapierbesitz e.V.) Elisa Menardo, Director, Public Policy Europe and UK, Credit Suisse Neil Ryan, Consultant, Finbourne Technology Keshava Shastry, Managing Director and Head of Capital Markets, DWS Tanguy van de Werve, Director General, EFAMA (Tanya Panova, Keynote speech recording) On 30th September AFME, EFAMA hosted a joint webinar on the establishment of a consolidated tape for the benefit of all investors. The webinar featured a range of perspectives from the capital markets landscape, including the views of Tanya Panova, head of the Capital Markets Unit, at the European Commission DG FISMA. The webinar kicked-off with Tanguy van de Werve, EFAMA, outlining the need for Europe to remain relevant and attractive to global investment flows. In this regard, he highlighted how there has been a consolidated tape in the US for decades, and similarly UK Treasury has been consulting on a tape for the UK market. Pre-empting later conversations, he highlighted the importance of data quality to the functioning of the tape and how retail investors may benefit from the use of the tool. Tanya Panova, EC, provided a keynote on the Commission’s work on the CMU project over the past year. She outlined how much of their work has gone on behind the scenes, stating that she expects many of their proposals to come out in the coming period (the Solvency II reform was already proposed on 22 September). The intention behind the proposals will include plans to help address barriers to financing companies. She highlighted that there will be two proposals focussed on data, addressing its fragmentation, and increasing value, as well as a proposal related to the establishment of a consolidated tape. She explained that the tape would only make a difference if done properly, highlighting that one of the main reasons why the tape did not emerge since the application of MiFID II is due to poor data quality. Among the points Panova raised on data, she stated that it needs to be consolidated efficiently, but also have extensive coverage. Only if most of the venues and their data are included will it be of value to brokers and all groups of investors. She also noted that the tape is likely to coexist with any other data products. Neil Ryan, FINBOURNE, acknowledged that there are existing vendors such as his organisation who can already deliver a consolidated tape with an independent view, applying cutting-edge technology to solve the data quality challenge. Singing the praises of the benefits a consolidated tape could bring, Elisa Menardo, Credit Suisse, stated that it would help democratise access to data and access to funding. By giving greater visibility to businesses that choose to list on a particular venue, it makes them more likely to raise more funding next time they go to market. Keshava Shastry, DWS, concurred stating that the added visibility would be helpful to investment managers and end-investors and outlined a number of use cases where a real-time consolidated tape for equities would help asset managers managing their investments in a more effective way. However, Christiane Hölz, DSW (Deutsche Schutzvereinigung für Wertpapierbesitz e.V.) argued that the consolidated tape’s use case is not clear yet. She highlighted that there are urgent and serious issues facing the real economy that need to be addressed first. This included trading on dark venues, as well as data quality and access. Panova in response emphasised that taking such an approach would bring about more challenges and would not bring markets closer to the final result of establishing a tape that benefits investors. Menardo concurred stating that data quality issues can be addressed during the legislative process. As the webinar drew to a close panellists agreed that despite the challenges to establishing a consolidated tape, the transparency benefits make it a tool worth pursuing.

Defining green investments is not an exact science. A lack of clarity around what should be classed as a climate-friendly investment has long been an obstacle preventing funding from flowing to green projects. The EU has been keen to change this by introducing a classification system, known as the ‘Green Taxonomy’, as part of its wider efforts to become the first continent in the world to be carbon neutral by 2050. The Taxonomy became law last summer and provides a framework to determine whether a company’s economic activity is deemed sustainable. While this initial classification has provided a helpful starting point towards providing better definitions to boost green investment while avoiding greenwashing, there are still a number of grey areas which need further clarity to ensure sustainable finance can flourish and the EU’s Taxonomy becomes a leading standard of sustainable finance. For example, the Taxonomy currently lacks the desired flexibility in how it recognises green investments, particularly with respect to companies already taking intermediary steps on the path towards being more sustainable. Companies need a framework that recognises overall improvements in the environmental performance of their activities, as opposed to the current binary system which defines low carbon "green" economic activities and neglects other types of activities. The problem with a framework that doesn’t sufficiently recognise activities that contribute to an improvement in the company’s environmental performance is that it leads to lower capital inflows and curtails activities which are on their way to being considered green. Going forward, the Taxonomy needs to include both activities and companies that are already low carbon, but also be forward-looking and include companies that demonstrate the commitment and potential for transition. A further limitation relates to the Taxonomy’s coverage of sectors of the economy, which restricts the use of taxonomy-based labelling schemes such asthe EU Green Bond Standardand theEU Ecolabel. The EU has recognised these limitations in its recentRenewed Sustainable Finance Strategy, which is a positive step towards achieving its net-zero carbon emission objectives. Finally, more clarity is needed around how the Taxonomy should be applied – for example, at the moment it only applies to a company’s economic activities, but it should really be applied more broadly to companies as a whole. As it stands, companies can only finance specific projects linked to eligible green activities. This is generally done by issuing bonds, because the company will use the proceeds from issuing the bond on green projects and, in turn, the bond may qualify as green under the EU Green Bond Standard. But as the screening is only possible for activities, it is difficult to use the Taxonomy to identify green or transitioning companies who issue equity, for example. If it was possible to use the Taxonomy to screen companies, banks would be able to provide more general-purpose sustainability-linked funding to green companies or companies on a credible transition path. This entity-level approach would mobilise a wider range of supporting financial instruments such as such as loans, bonds, equity, derivatives and structured products. It is no easy feat to define a new and rapidly growing area of sustainable investment opportunities which span multiple sectors and regions. Such differences mean pathways to transition will be different across jurisdictions and industries. For this reason, a single global taxonomy is a near-impossible task. Therefore, what will be important is for regulators to cooperate to ensure taxonomies work together. There are signs this is already happening, particularly with theInternational Platform on Sustainable Finance, which includes members from 17 jurisdictions, representing 55% of both global greenhouse gas emissions and GDP, with the goal of developing mutually compatible taxonomies and sustainability reporting standards. At the global level, it will be vital for policymakers to agree on a minimum set of global guiding principles and definitions to underpin taxonomies across regions. This was also recommended by the Global Financial Markets Association and Boston Consulting Group in a recent report ‘Global Guiding Principles for Developing Climate Finance Taxonomies – A Key Enabler for transition Finance’. Although there will continue to be grey areas to resolve around the evolution of such taxonomies, they remain vital for determining whether investments in certain activities are aligned with climate goals. Going forward, the main challenge will be to ensure taxonomies are flexible enough to broaden the set of eligible sources of financing to unlock as much funding as possible for a greener economy. This article was originally published in Thomson Reuters Foundation09/08/2021

The pandemic has shown that the future will be digital and the pace of this evolution is accelerating. Innovation and new technology adoption promises to deliver efficiency gains to the economy, enabling businesses and clients to interact more quickly and at lower costs, all of which will support the economic recovery. With the publication of the EU Digital Finance Strategy in September 2020[1], a 5 year plan by the European Commission to transform EU financial services into a truly integrated digital single market, the EU has set an ambitious roadmap to become a major player in the digital economy. This is underpinned by several initiatives and regulatory reforms such as the DORA (Digital Operational Resilience Act)[2]. DORA will lay the foundation for a harmonised, secure and resilient EU digital financial sector. However, while the EU’s ambitions and the rapid progress of the digital transformation of financial services is positive, it is important to ensure that the quality and implementation of regulatory reform, remain a central component of the EU’s work program. Crucially, new regulatory frameworks should strike the appropriate balance between promoting security and resilience whilst fostering innovation. The importance of digital operational resilience Digital operational resilience is the ability to build, test and continuously improve the technological and operational integrity of an organisation[3]. It aims to ensure that an organisation can guarantee the continuity and quality of its services in the face of operational disruptions impacting its information and communication technologies (ICT). As identified in the DORA proposal, the existing EU regulatory framework for the management of ICT risks has been fragmented thus far. For instance, when financial entities have to report cyber incidents to regulatory authorities, they are subject to various frameworks which all have their own terminology and template (e.g., NISd, PSD2, GDPR). This fragmentation dramatically increases pressure on financial entities as, in parallel, they are in a race against time to safely recover and protect their business from a potentially major cyber-threat. DORA, aims to harmonise these requirements and ensure that all stakeholders in the financial sector have the necessary security measures to prevent or mitigate ICT risks. With the adoption of this new proposal, we see strong benefits for financial entities to have a harmonised and comprehensive framework for ICT risk management. Not only will DORA bring synergies at EU level, but it will also have the merit to contribute to the creation of a robust digital single market for financial services. Striking a balance between resilience and innovation DORA’s scope is significant and covers many aspects of how financial entities should manage ICT risks. While DORA is principally focused on requirements for the EU financial sector, the direct oversight of ICT critical third parties (ICT CTPPs) has far reaching consequences for technology companies like Cloud Service Providers (CSPs). Indeed, the oversight framework introduced in DORA will determine which third-parties are ‘critical’ for the EU financial sector and establish a number of provisions to subject ICT CTPPs to EU financial supervisors. Supervisors could impose specific requirements on how ICT CTPPs service EU financial entities and in worst case scenarios (when a risk from an ICT CTPP is deemed too great), requiring outright termination of contractual relationships with a financial entity. So far, the European Parliament and Council of the EU are progressing discussions on DORA at a rapid pace. While this gives hope for a final text in Q1 2022, the financial services industry is yet to see amendments that account for the holistic nature of such an ambitious proposal. Requirements in DORA could have significant impacts on the EU financial sector. For instance, the risk of immediate termination of contracts could make it more difficult for EU financial entities to use ICT CTPPs, which offer innovation and efficiency benefits. It may even deter some technology providers from servicing the EU due to the increased regulatory uncertainty. An opportunity for global leadership It is crucial that EU policymakers continue to appreciate that the speed of regulatory development is not the only priority, the outcome must be a long-term fit-for-purpose framework that will reduce fragmentation in the EU single market, support innovation and technology adoption, whilst promoting robust standards for managing ICT risks. Achieving this goal will support EU competitiveness in a fast growing digital market. The EU also has an opportunity to set the tone globally on how ICT risks stemming from third party technology providers should be managed and regulated. So far, despite progressive discussions, many of these providers have not fallen under the purview of a significant regulatory framework. Crucially, in an increasingly interconnected global financial system, the EU must work in close cooperation with other jurisdictions and international bodies, setting an example on achieving economic recovery without compromising financial stability risks over the long run. [1]https://ec.europa.eu/info/publications/200924-digital-finance-proposals_en [2]https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52020PC0595 [3] Operational resilience is the ability to continue servicing critical functions despite disruption

Diverse and liquid equity markets are the cornerstone of healthy capital markets. Without them, there is less choice and higher trading costs for investors, which in turn negatively affects savers and pensioners. Therefore, it is essential to resolve the current disagreement over where trading should take place in order to ensure best outcomes for investors. In recent years, Europe’s capital markets have undergone a host of changes. Since the introduction of European markets legislation, MiFID II, in 2018, a careful balance has been struck between different types of equity trading mechanisms. According to a new report from economics and finance consultancy, Oxera, 83% of equity trades take place on venues, such as stock exchanges, with alternative trading mechanisms, such as systematic internalisers (which are normally owned by banks or investment firms), accounting for 11% and over-the-counter trades just 6%. According to this in-depth analysis, alternative trading mechanisms are far from dominating the landscape, but instead provide much-needed choice for investors. Market diversity is important because if trading is concentrated on a particular type of venue it could hamper market competition, reduce choice for investors and keep the costs of trading high. This would also hold back the growth of Europe’s primary markets and IPOs, which rely on the deepest secondary market liquidity pools for the highest valuations, making Europe a desirable place to list. For example, in 2020, only €17.5 billion in IPOs took place in Europe, compared to €154.5 billion in the US, including the IPOs of some highly innovative European companies. Yet, some market participants quite worryingly argue that an even greater share of trades should take place on venues. They call for regulatory intervention to significantly constrain the activities of alternative trading mechanisms and this is likely to limit competition and investor choice. These arguments are driven by the notion that trading on exchanges is more transparent and alternative trading mechanisms are “dark forces”. Alternative trading mechanisms, or systematic internalisers are the particular focus of their concerns. Therefore, it is worthwhile taking a closer look at these arguments. Systematic internalisers are a key part of the market. They are owned by banks or investment firms which use their balance sheets to provide liquidity and take on risk positions to trade with their institutional investor clients directly when clients wish to use them to achieve the best price and minimise trading costs. They also facilitate transactions for their clients at times when other market participants might be unable or unwilling to trade. These functions are particularly important for pension funds or other asset managers who manage the pensions and savings of individuals and therefore are looking for the maximum return on investment and to keep the cost of trading low. As for transparency, systematic internalisers provide the same pre-trade transparency as exchanges for smaller trades. In fact, many European exchanges themselves are also operating so called “dark pools” that respond to specific investor needs. While the transparency of lit trading on exchanges is undoubtedly a contributor to efficient price formation, so-called “dark trading” - which caters for specific transactions, such as large size trades, creates additional liquidity that otherwise would not be available. In any case, trading on alternative trading mechanisms remains at very low levels and certainly does not dominate the trading landscape. This is evidenced in Oxera’s analysis, which paints a clear picture of the current state of liquidity in Europe. As Europe looks to navigate its recovery from the pandemic, now more than ever its capital markets need to be diverse and competitive. This goes hand-in-hand with building well-developed primary markets. It would also contribute to the necessary re-equitisation of Europe’s economy. Before looking to adjust equity market structure rules in the EU, policymakers need to have a full understanding of the existing secondary market trading landscape. For this they need to ensure that they have the right data analysis to hand which clearly shows where liquidity lies. Otherwise, Europe’s capital markets could be less able to support the post-pandemic recovery in the coming years, and in the longer run could risk losing their global competitiveness. This article was originally published in Les Echos (14 June) and Boersen Zeitung (2 July).

The world is in a race against climate change and, while there is still a long road ahead, the EU is confidently leading the pack. With the publication of the EU Renewed Sustainable Finance Strategy, Europe continues to power ahead with regulatory reform that will lay the foundations to accelerate its sustainable transition and reach its net-carbon neutral 2050 goals. However, while the EU’s rapid progress on sustainable finance is positive, it is important to ensure that the quality and usability of regulatory frameworks, as opposed to the speed of regulatory development, remain the central considerations in the next stages of the work programme. Crucially, the new regulatory frameworks should balance ambition with pragmatism. Data quality should be prioritised Time is of the essence in tackling climate change, but data quality and usability should not be compromised. The existing and upcoming ESG disclosures rules require banks to produce and report a highly granular quantity of ESG information, requiring the tracking of hundreds of data points against potentially thousands of companies. To meet these obligations, banks have to use estimates, proxies and data from third-party vendors, which means their quantitative disclosures are less reliable. This undermines one of the key objectives of the EU in supporting the transition, which is to develop a solid reporting framework to fight greenwashing. There is unquestionably a need for banks to share details on the ESG impact of their activities but avoiding unnecessary complexity and granularity would go a long way towards helping firms’ transparency efforts. Additionally, there have been many concerns surrounding the sequencing between financial institution and non-financial institution reporting obligations. We appreciate that the Commission has taken them into consideration in the recently published legislation on disclosures under the EU Taxonomy Regulation. Still, from 2023 banks will need to start preparing new ESG regulatory disclosures (so called Pillar 3) based on data supplied from their borrowers and investee companies whilst non-financial corporates will not start reporting relevant information until later in 2023 or when the Corporate Sustainability Reporting Directive will enter into force. Corporates are therefore unlikely to provide the data necessary for banks to fulfil their reporting obligations in full, leading to less transparency and possibly penalties. There is also an issue of supervision. With the enormous challenge for the financial services sector to provide regulators with these vast amounts of data, ESG data and rating service providers will often have to help fill in the gaps, but financial institutions are concerned about a lack of transparency over the methodologies used by such providers. Therefore, the quality, reliability and comparability of these services will be key to Europe's sustainable transition and should be appropriately supervised. An EU level supervision of ESG service providers would ensure that a consistent supervisory approach is adopted, and that financial and non-financial companies can build on reliable and comparable data. Support companies in transition For the global economy to meet the goals of the Paris agreement, there also needs to be greater recognition of what are considered as “transition activities”. These are activities that help contribute to reducing carbon emissions in the economy. Presently, the definition and screening criteria that determine a “transition activity” do not include many of the sustainable actions companies are in fact taking. Such activities still make a meaningful contribution to decarbonization, but are currently not recognised as such. If such activities are missed out, then less capital or a higher cost of funding will be applied to financing these activities which disincentivises further sustainable activity, when in fact they should be supported. Moreover, financing transitioning companies could be expanded by broadening taxonomies to capture entity-level activities. Both of these changes would go a long way to helping accelerate Europe’s pathway to achieving net-zero carbon emissions by 2050. As the European Commission unveils a Renewed Sustainable Finance Strategy it should continue to appreciate that the speed of regulatory development is not the only priority. EU authorities need remain focussed on the availability of relevant, reliable and comparable information that helps facilitate capital flows towards sustainable activities. Europe is a global leader in sustainable finance and if authorities can balance ambition with healthy pragmatism and close cooperation with other jurisdictions, Europe will remain the global leader for many years to come.

As the European Supervisory Authorities (ESAs) mark their ten-year anniversary this year, the European Commission’s recent consultation on supervisory convergence and the single rulebook provided an opportunity to reflect on their functioning and the evolution of financial markets supervision in the EU. The latest review of the founding regulations of the ESAs, which concluded in late 2019, led to targeted changes to the tasks, powers and governance of ESMA, EBA and EIOPA. While it is premature to provide a full assessment of the impact of the changes, recent developments have provided practical experience on the effectiveness of current arrangements, including areas for potential improvement. An effective response to the Covid-19 crisis The unprecedented challenges arising from the lockdown measures in early 2020 were a major test to the resilience of EU financial markets and the ability of the ESAs to react to urgent situations in a timely and effective manner. The Covid-19 emergency showed that the ESAs have the capacity to respond quickly to major challenges in financial markets, and put forward measures to coordinate actions at the EU level. The clarifications and regulatory forbearance statements issued by ESMA during this period were critical to help firms manage resources and avoid unnecessary stability and operational risks at a time of heightened market volatility. Market participants also welcomed the guidance on the recording of telephone communications, the postponement of certain measures and pronouncements pledging to ensure open and functioning markets, among other actions. The EBA, meanwhile, took several steps to provide operational relief to banks. These includedcalls to supervisors for flexibility and pragmatism in the application of the prudential framework, while banks welcomed guidance in relation to debt moratoria and accounting issues, as well asthe postponement of the 2020 stress test to 2021. One area for further consideration is the use of the“no-action letters” procedure that was introduced following the ESAs review. As acknowledgedby ESMA, its experience during the COVID-19 crisis illustrated the limitations of this mechanism under the current legal framework. During the crisis ESMA continued to issue “de-prioritisation of enforcement” statements which do not have the same status as the no-action relief tools available to authorities in other major jurisdictions. These non-binding statements issued by ESMA, while very important, do not offera guarantee that national regulators will act in a harmonised mannerand mean that market participants stillface the potential need to liaise with several competent authorities on whether they intend to follow the advice of the ESAs, in addition to managing any emerging divergences. Further reflection is needed onthe design of a more effective tool that would allow the ESAs to address sudden market developments and provide a higher degree of legal certainty to market participants. Enhancing supervisory mandates and supporting the competitiveness of EU markets As markets and supervisory needs continue to evolve, it is important to consider how the mandates of the ESAs should be adjusted to reflect evolving priorities in the financial sector. The focus on the Capital Markets Union (CMU) project creates a strong case for embedding the promotion of competitive and efficient EU financial markets in the mandates of ESMA and the other ESAs, alongside their existing core mandates. The importance of competitiveness is manifested in a number of areas. For example, an efficient and competitive securities trading ecosystem leads to better outcomes for end-users, and is important to attract global market participants and promote the growth of EU financial centres. As part of the focus on competitiveness, the policy outputs of the ESAs should give greater emphasis to economicanalysis and impact assessment. Recommendations issued by the ESAs to the Commission – for example, ahead of a legislative review – carry significant weight and play a major role in the formulation of legislative proposals and the work by the co-legislators. It is therefore important that the ESAs regularly conductcost-benefit assessments ofhigh-impact proposals and technical standards they put forward in order to understand their impact on investors and the general functioning of markets, including on their efficiency and liquidity. By way of example, AFME members believe that aspects of the securitisation Level 2 framework have led to unduly complex and costly requirements that outweigh the benefits for market participants. The mandates of the ESAs could formally also reflect the aim of ensuring that all outputs are consistent with and serve to advance the CMU. Regulatory frameworks should be tested against the objectives of making market-based mechanisms attractive and encouraging participationin the EU’s capital markets. In the sustainability area, a welcome aspect of the 2019 ESAs review was the requirement for ESMA to take into account risks related to environmental, social and governance related factors in performing its tasks. The increased demand for reliable and comparable ESG data and ratings should lead to reflections on extending ESMA’s direct supervisory powers to cover providers of such services. Supervisory convergence in Europe – an ongoing process In its report of June 2020, the CMU High-Level Forum rightly highlighted that “high-quality, well-resourced and convergent supervision based on a single rulebook is a key pre-requisite for a well-functioning Capital Markets Union.” These needs remain more pressing than ever as EU policymaking focuses on scaling up the capital markets ecosystem, deepening financial integration, advancing the green and digital transitions and navigating a complex international landscape.The trend pointing towards a more multipolar wholesale markets environment in the EU, featuring a range of financial centres serving as hubs for various activities, reinforces the need for consistent and coherent supervisory approaches across Member States. While it may be too soon to undertake another comprehensive reform of the ESAs’ founding regulations, targeted efforts should continue towards promoting an inclusive and transparent approach to supervisory convergence. Reinforcing certain aspects of the ESAs’ working practices and strengthening mechanisms for the assessment of outputs and consultation with market participants is particularly important to ensure that supervisory objectives are achieved, and outcomes are conducive to stronger EU financial markets. In conclusion, in the decade since their establishment, the ESAs have made a number of achievements and delivered significant progress towards more robust and integrated regulation and supervision in Europe. In today’s financial markets environment it is increasingly recognised that their role is fundamental not only to the preservation of stability and investor protection but also to thepromotion of an efficient, competitive and sustainable financial system in the EU, objectives that should be at the heart of the European policy agenda in the coming years. Read AFME’s response to the Commission’s consultation on supervisory convergence and the single rulebook.

On 29 April, AFME held a webinar featuring industry policymakers and participants, discussing the changing landscape of compliance in light of the pandemic, and how firms can prepare for what will happen next. Changes in supervisory expectations create challenges for compliance functions but also opportunities, as there is room to expand the role and impact of compliance within the organisation. These changes are taking place across several key areas such as technological change and ESG, as well as culture, behaviour, and conduct. Lessons Learned from COVID Speakers acknowledged that, while compliance models coped remarkably well with the impact of the Covid-19 pandemic, they have also had to swiftly adapt. Compliance practices have become increasingly digitised in adapting to accommodate hybrid working, while also addressing the ever-present cost and efficiency challenges. Compliance teams have also had to adopt greater flexibility, with priorities changing more frequently and have learned to implement change ‘overnight’. This has emphasised the importance of both hiring staff with the adaptive skillsets, and being able to bring together at short notice stakeholders from across the business to implement rapid responses to new circumstances. On a related note, connectivity between second line functions has been key to prudent risk management during the pandemic, with many firms considering how greater long-term efficiencies can be achieved in this respect. On the other hand, this must be balanced against the need to maintain the independence of the Compliance function – the willingness to challenge and to escalate. Whereas business continuity and risk assessments were the main priority at the outset of the pandemic, compliance functions now need to consider what the ‘new normal’ may be and what practices from the past year should be wound up, continued or adapted. From a supervisory perspective, the experience has also been revealing. There has been a need to shift to remote, rather than on-site, supervisory inspections, elements of which may be able to continue longer term. Operational resilience and firms’ adoption of outsourcing has also come under increased scrutiny, proving the supervisory view that firms need to be prepared to respond ‘when’, not ‘if’ they face challenging circumstances. Technology The shift to remote working driven by COVID-19 naturally accelerated changes in the application of technology within compliance. As well as an increase in voice (and in some cases video) recording, many firms accelerated their adoption of more advanced surveillance and data-collection systems to compensate for the lack of face-to-face contact, in some cases incorporating advanced techniques such as Artificial Intelligence. This has presented compliance teams with an abundance of structured and unstructured data, which brings challenges as well as rewards. Firms will need to establish the integrity of complex data sets and ensure that data is being harnessed for client benefit in order to build trust with stakeholders and clients. Moreover, since there is potentially endless scope to invest and expand, compliance teams will need to identify the right targets, prioritise their resources and establish what they want to achieve with their use of data. ESG Environmental, social, and corporate governance (ESG) factors will play a fundamental role in the future financial system, which is leading to increased focus within compliance. There are many expectations in respect of how commercial enterprises address ESG, but the topic is still also new to many and developing fast. Trust is key in this area, since it is necessary to build confidence into approaches to avoid the appearance of ‘greenwashing’. As part of this, firms need to evolve and mature their disclosure practices in relation to ESG, which will be a key area for compliance input. Compliance functions will also need to assess their future involvement in ESG and build expertise in this field, in order to advise the business and help manage associated risks. Culture and Conduct One of the greatest challenges for compliance teams has been maintaining and building culture and good conduct in a remote working environment, while staff have been navigating so much change. This encompasses not only long-standing relationships between colleagues, but also onboarding and training new starters. Firms have made increased use of virtual workshops to keep staff connected and up to date with the latest skills and practice. Encouraging debate of practical market conduct scenarios in small groups, even in a virtual environment, has proved successful, particularly with junior staff. The importance of remaining true to corporate values was also emphasised and how firms should remind their staff to consider the concerns of other staff and stakeholders in remote working environments. Compliance Priorities for the Coming Months As the webinar drew to a close, the key message conveyed by speakers focused on the importance of ongoing prioritisation of resources and targets. Compliance functions should identify their unique value proposition and obtain stakeholder buy-in, in order to avoid becoming spread too thinly between ever-expanding objectives – one speaker used the neat analogy that if you add more lanes to a motorway, you’ll just end up with more cars, rather than greater efficiency. This will be key to maintaining a sustainable compliance model as firms transition into new ways of working.

(Online Recording) Europe’s Sustainable transition cannot wait – this was the key message permeating the views of policymakers and industry participants during AFME’s webinar held on Wednesday, 14 April. After a comprehensive overview (presentation available here) from Latham & Watkins outlining the structure of its joint report with AFME ‘ESG Disclosure Landscape for Banks and Capital Markets in Europe’, panel discussions began. Europe has been making rapid progress in developing regulation to support its sustainable transition and it holds similar ambitions in the development of ESG disclosure requirements. Policymakers outlined the need to make sustainability reporting requirements, including under the NFRD, more standardised, accessible, comparable and consistent with existing regulation to accelerate its adoption. Emphasis was also put on ensuring the framework developed is effective globally and avoids fragmenting standards across jurisdictions. A key point of discussion among panellists was the challenge this speed poses to financial services. Industry participants on the panel placed particular importance on synchronising the timing and content of the various sustainability reporting frameworks. Financial Institutions will face a significant challenge in meeting deadlines for their disclosure obligations due to corresponding data from clients likely not being available due to non-financial corporates having a later deadline. Panellists highlighted that greater time and coordination would help alleviate this problem. Moreover, it was highlighted that if financial institutions resort to using different approaches to meet disclosure requirements - using proxies and estimates - their disclosures may not be comparable to other institutions. This would defeat the purpose of the sharing of information. Other challenges mentioned also included the granularity of the European framework. With hundreds of data points needing to be produced against potentially thousands of counterparties, the scale of the undertaking for financial services is large. It was suggested that the demand for data could be focused on a reduced number of data points, while still disclosing valuable, actionable ESG information. Policymakers acknowledged the challenges facing financial services but emphasised that the timing was being driven by the urgent need to address climate change and that this is supported at the highest political level in Europe. At the same time, ESG disclosures are a work in progress and financial services firms are not expected to perfect their reporting processes overnight. Industry participants noted that using proxies during an intermediary period while corporates build up their own disclosures will have some limitations in terms of quality and comparability. It would therefore be more practical and effective to focus on a smaller and simpler set of disclosure requirements as a starting point that would capture the most material issues and where reliable data can be sourced. The requirements can be adjusted progressively as the data and reporting capabilities mature.

Introduction The COVID-19 pandemic has clearly demonstrated the importance of technology for maintaining productivity and collaboration across a remote workforce (e.g., video conferencing use, cloud-based tools). However, new ways of working, such as Agile work practices, have also played an important role during this period. As first identified in a 2020report we developed with Murex, the collaborative nature of Agile work practices has been embraced by remote teams, helping to maintain connectivity for delivering IT projects and business as usual activities. Due to benefits Agile work practices provide, and an increasing focus from regulators on the importance of technology to support recovery efforts related to the pandemic, we expect the adoption of Agile work practices to increase in importance. To be successful, organizations must now identify the benefits and lessons learned from adopting Agile work practices during the last 12 months, especially as they look at day-to-day solutions for more permanent hybrid working arrangements or innovative ways to deliver large-scale transformation. Agile work practices should be seen as another important tool, providing the workforce with necessary skills, connectivity and control over their time to remain productive and engaged. What are Agile work practices, why have banks adopted them and what opportunities do they present now? Agile work practices set out an alternative way to deliver IT projects, moving away from a traditional “waterfall approach” (a linear process of design, test, build activities), toward quicker, iterative, development cycles (known as “sprints”). This meant IT projects could be broken into smaller parts, allowing for feedback and changes to be made more quickly, in turn increasing the quality of the end result. The original Agile concept for IT projects has since been adopted by organisations, such as banks, and subsequently adapted to a wider range of change and business-as-usual activities known as “Agile work practices”. Adopting Agile work practices has helped banks achieve a range of benefits, such as delivering incremental updates to business applications more quickly or more dynamic allocation of resources based on changing operational needs. For example, some banks have used Agile work practices for client-onboarding to incorporate new features and requirements for KYC processes more quickly (this use has increased during the COVID-19 pandemic due to the changes needed to onboard clients digitally). The importance of new ways of working such as Agile work practices was recently acknowledged by the European Commission in their 2020 Digital Finance Strategy for Europe. The strategy emphasised that the adoption of new technologies in financial services such as cloud, DLT and AI increasingly require an Agile approach because their development is by nature more open and collaborative (e.g., new technology adoption, such as AI, is increasingly encompassing a wider range of internal staff roles, and third parties, to develop and implement). Our 2020 report with Murex on Agile work practices, developed as the COVID-19 pandemic began to unfold, highlighted that the disruption faced by banks required them to be increasingly flexible to change (e.g., quickly deploying new remote working tools across the workforce) and able to quantify and mitigate any impacts on productivity. The value of Agile work practices in navigating ongoing disruption and uncertainty Six months since the publication of our 2020 report with Murex, we have again engaged senior members of AFME’s Technology and Operations Committee to assess how the adoption of Agile work practices has been helpful to overcome ongoing challenges in the current operating environment. Our members observed that Agile work practices have had a positive impact on banks’ day-to day and ability to cope with the disruption, and are likely to increase in importance throughout 2021. Instead of being dedicated to delivering specific projects, Agile work practices are now being incorporated into the day-to-day running of teams. Pre-pandemic, teams would usually organize weekly meetings to discuss individual and common priorities or increase team-building. It is not uncommon today for teams to have daily Agile “stand-ups.” These short, time-boxed status checks offer benefits to dispersed teams, as they can synchronize work more regularly, allow priorities to be reassessed, and connect staff to increase team-building. Agile tools such as “virtual white-boarding,” “user stories” or “customer journeys” have also been used to maintain staff productivity and engagement, by shifting the focus of work toward the main key stakeholders of a project (e.g., looking at delivery from the perspective of a future user or client). This has been effective to make work more meaningful in a period of significant uncertainty. Agile work practices also provided banks with greater flexibility and control over resource allocation by implementing tools that measure productivity. For example, common Agile tools such as ‘burndown charts,” “velocity charts,” “escaped defects,” and “cycles times” have provided dispersed teams with reporting tools used to measure progress more accurately. This was an advantage during the COVID-19 pandemic for banks with mature Agile teams—they were more prepared to provide insights on productivity gains or losses and ultimately had greater flexibility, control and transparency over resource allocation. Banks with mature Agile work practices were able to quickly shift resource allocation, on a cross-border basis, to address short term priorities while maintaining focus on strategic multiyear programs, such as the London Inter-Bank Offered Rate (LIBOR) transition or the Fundamental Review of the Trading Book (FRTB). Agile work practices have also played an important role in attracting talent and enabling continuous workforce upskilling. For example, Agile work practices have enabled increased staff development by driving cross-functional teams (e.g., combining the skills and knowledge of multiple roles into a single team). This has resulted in a positive impact on company culture by breaking silos and increasing collaboration during a time where face-to-face interaction has dramatically reduced. What does this mean for Agile work practices in 2021 and beyond? Agile work practices are now increasingly being incorporated into the culture and day-to-day of teams. Adopting new ways of working, such as Agile, will therefore continue to be an important area of focus for banks. We believe the adoption of new ways of working, such as Agile work practices, will become increasingly important for all financial market participants, including regulators, as we continue into 2021 and beyond. Their adoption at scale will in turn act as a catalyst for the EU’s Digital Finance Strategy and its ambition to increase collaboration and new technology adoption within financial services. It is now crucial that Agile work practices, benefits and lessons learned are identified, as banks look toward more permanent hybrid working arrangements and innovative ways to deliver large-scale transformation. Agile work practices should be seen as another important tool to drive efficiency and productivity, providing staff with necessary skills, connectivity and control over their time. AFME initiatives AFME Report: Adopting Agile Work Practices at Scale in European Capital Markets AFME Webinar conference panel: Adopting Agile Work Practices at Scale within European Wholesale Markets Authors: Emmanuel Le Marois, Associate Director, Technology and Operations, AFME Arnaud de Chavagnac, Head of cloud, technology and services marketing, Murex

(The webinar recording is available online) Over a year into the pandemic and Europe is in danger of facing a new wave of restrictions. Despite Europe’s banking system performing resiliently in 2020 and public authorities providing unprecedented support to businesses, it is clear this support will eventually need to be rolled-back according to panellists at AFME’s and Business Europe’s webinar on Europe’s economic recovery. As Europe recovers from the pandemic actions will be needed to promote alternative sources of funding. On March 19, AFME and BusinessEurope held a webinar on Europe’s economic recovery. The call featured senior policymakers from the European Parliament, European Commission, European Central Bank, and the Ministry of Finance of Portugal. In his opening remarks,Markus Beyrer, Director General of BusinessEurope, highlighted the uncertainties and likely uneven progress towards the economic recovery. On the positive side, manufacturing has performed relatively strongly, with export demand from the US and China playing a positive role. Also, many businesses are now better prepared to face the lockdowns. However, Beyrer also noted that business confidence remains low, making it unlikely that business investments will pick up soon. In this context, viable businesses need to be protected and a too sharp withdrawal of support measures (e.g. the moratoria on debt or the guarantee measures) would be damaging. But of course, we cannot stay in “crisis mode” forever. Beyrer stressed the importance of the Recovery and Resilience Facility to boost investments and transform the EU economy. But private investment is also important and businesses need to have access to the finance they need. Beginning discussions,Isabel BenjumeaMEP spoke of the need to improve the European financial system, highlighting this could be facilitated by further integrating European financial markets and addressing low-levels of bank profitability and developing financial markets capacity. Crucially, Benjumea spoke of the need to learn lessons from the 2008 financial crisis and how the burden of financing the recovery should not solely fall on banks: a more diversified financial system is essential. To support the recovery, public intervention needs to be complemented by private investments and a complete Capital Markets Union, together with the completion of the Banking Union, can enable those investments. Michael Cole-Fontayn, Chair of the AFME Board, summarised the finding of AFME’s recent report on “Recapitalisation of EU businesses post Covid-19”, which reveal that many mid-size and SME corporates do not wish to give up control of their business but are willing to pay a premium not to dilute their voting rights, as well as are willing to distribute a share of profits to investors. Hybrid instruments are therefore likely to be well suited to address these needs. AFME recommends exploring the development of a new EU-wide hybrid instrument designed specifically for non-financial corporates and SMEs. He welcomed the recent French measures to support the provision of “equity loans” – a form of subordinated debt - to firms which were affected by the crisis but remain viable. Michael stressed the need to maintain momentum on the long term priorities like CMU and Banking Union. 1. Panel discussion ‘The performance of European Banking and Capital Markets During the Pandemic ‘-moderated by: James Watson, Director, Economics Department, BusinessEurope Speakers: - Edouard Fernandez-Bollo, Member of the Supervisory Board, European Central Bank (ECB) - Erik Fossing Nielsen, Global Chief Economist, UniCredit - Klaus Günter Deutsch, Head of Department Research, Industrial and Economic Policy, Federation of German Industries - Michael Lever, Managing Director, Head of Prudential Regulation, AFME Edouard Fernandez-Bollo, highlighted the following three aspects: firstly, the EU financial system has shown resilience (operationally and financially), even beyond what was expected. Banks’ solvency ratios will be stronger in 2021 than is 2020, despite very significant provisions for credit risk. This is also the result of the many support measures that public authorities, national and EU, have adopted since March 2020. Secondly, the support measures will need to be removed but carefully, and banks will need to anticipate and monitor the effect of this phasing out. Thirdly, the issue of low banks’ profitability remains as a structural vulnerability, which has been aggravated by this crisis. Banks will need to adapt their business models, increase revenues, reduce costs, to respond to this structural challenge and to concentrate on the sectors which will lead the recovery. Erik Nielsennoted that banks will remain central in the EU, as a shift towards more diversified capital markets will take time. He noted however that while it is true that banks are stronger and part of the solution, the main reason is the guarantees provided by the governments, and should these guarantees be withdrawn too quickly the impact on banks would be significant, which could lead to a credit squeeze. Erik insisted on the major issue of low banks’ profitability: for the past 10 years the European banking system has not been able to generate a ROE above its cost o capital. This limits banks’ ability to remain well capitalised. Reasons include the very low growth, the policy mix. On the need to reduce costs: while certainly important it can be the only solution (a 35% reduction would be needed to bring ROE to the average level, an unrealistic reduction); higher revenues are needed, but let’s not forget that they represent an implicit tightening of the monetary conditions. How to square this circle remains an open and difficult question. Erik noted the larger size of the fiscal stimulus in the US, a direction the EU might have to follow. Klaus Deutsch, highlighted the strong fiscal response of EU institutions and governments, which has protected companies from insolvency. Financing conditions for EU businesses have remained relatively good. These support measures have been designed on the assumption of a pandemic under control by Q2 this year; given that vaccination programs might actually require to be completed in Q3 or Q4, these measures need to be prolonged. Also sectors like leisure, travel, hospitality, which have a relatively large share in some countries, will need special attention, to avoid long-term repercussions. Klaus stressed the key role played by the ECB in providing liquidity to the system. He also cautioned about an implementation of the Basel standards which could lead to significantly higher capital requirements for banks, constraining their ability to lend. Klaus suggested the need for an EU framework for how to avoid insolvencies in businesses which, while viable, are particularly hit by the pandemic (e.g. travel / tourism sector). Michael Leverstressed the important role played by banks in this phase, with record levels of net lending to the economy and with the ability to absorb extensive moratoria and to facilitate high level of debt issuance in capital markets. Michael highlighted the uncertainties around the recovery and a trend toward tightening of credit conditions. In any case debt financing cannot be the only source of financing: innovative recapitalisation tools are also necessary. Michael noted that bank consolidation in Europe, which would require progress on Banking union, would help address banks’ low profitability. 2. The second panel discussed ‘The Road to The Recovery - Policies to Ensure Access to Finance and Well-Functioning Banking and Capital Markets’-moderated by Stefano Mazzocchi, Managing Director, Advocacy, AFME Speakers: - João Nuno Mendes, Secretary of State for Finance, Ministry of Finance, Portugal - Martin Merlin, Director, Bank, Insurance and Financial Crime, European Commission, DG FISMA - Véronique Ormezzano, Head of Group Prudential Affairs, BNP Paribas - Tarek Tranberg, Head of Public Affairs and Policy, European Association of Corporate Treasurers (EACT) The second panel focused on the necessary policies to ensure access to finance and well-functioning banking and capital markets. João Nuno Mendesshared optimism, emphasising the strong consensus between EU authorities on the need to implement exceptional measures to support Europe’s economic recovery. The recovery plans that will be adopted in the coming months will define structural, and not purely liquidity, measures. Also, the idea of new hybrid instruments to recapitalise EU businesses is a particularly important one. He highlighted how Europe’s recovery provides an opportunity to revitalise capital markets and act as a catalyst for entrepreneurship. Progressing on the Banking Union is also crucial and a roadmap will be presented by mid-2021. On Basel III, Joao said implementation should avoid possible impacts on the recovery. Martin Merlindistinguished policies between those that could be implemented in the short-term versus the long-term. In the short-term, new instruments such as hybrids - proposed inAFME and PwC’s report on Recapitalising EU corporates- could be looked to fill Europe’s immediate equity gap. Additional short-term measures also included effectively implementing new regulations such as Basel III and wisely calibrating prudential regulation so that we do not unnecessarily penalise banks’ ability to invest in the European economy (particularly equity investments). Insurance companies’ ability to invest in equities can also be strengthened in the context of Solvency II. Martin agreed that financial regulation needs to be calibrated carefully; however it is not “the only show in town” and we cannot overburden it with too many objectives in addition to financial stability. For long-term measures, progress on the Capital Markets Union project was identified as an important goal for this legislature. Martin also stressed the positive impact that keeping momentum on the long-term objectives can have in the short term, thanks to the signalling and confidence-building effects. Veronique Ormezzanowelcomed the bold steps undertaken by the EU institutions and member states, which have enabled banks to continue to support their clients and the economy. Veronique summarised the recent French scheme, which will guarantee (up to 30%) investments funds which would invest in such loans: banks will provide the loans to firms and will then transfer these loans to investments funds in which institutional investors will invest. In order to align all interests, banks will keep a minimum share of each loan (probably 10%). This measure will also apply to subordinated bonds, in order to mobilize private equity funds. Business can start reimbursing the debt after 4 years. Veronique also highlighted the need to consider the competitiveness of Europe’s financial sector when implementing new reforms. Particularly important will be the implementation of Basel III as well as the upcoming stress-tests. Sustainability objectives are also crucial, but appropriate transition arrangements need to be adopted. The importance of reviving securitisation markets in Europe to support growth was also stressed. Tarek Tranbergsummarised the many challenges corporates face in this environment, both in terms of short term “survival” and in terms of structural changes (e.g. shift to sustainable objectives). Corporates have managed the emergency phase thanks to their ability to access liquidity support from banks, with government support. This support should be maintained until there is a risk of prohibitively high financing costs. Recapitalisation instruments are essential to avoid excessive debt. In a CMU context easing some of the listing requirement for smaller companies would be important. However, bank lending will remain crucial and for corporates, it is important that Basel III implementation does not result in a reduced ability to access bank loans or risk hedging. Corporates are also worried about initiatives to standardise corporate debt markets.