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Welcome to Euro Shorts, a short briefing on some of the week’s developments in
the financial services industry in Europe.
If you would like to discuss any of the points we raise below, please contact me or
one of our other lawyers.
Claire Cummings
020 7585 1406
claire.cummings@cummingslaw.com
www.cummingslaw.com
Carney hints at change to monetary policy
Mark Carney this week has warned that a dangerous housing bubble could
develop if interest rates are kept at their historic lows for too long. The
Governor of the BoE said that interest rates will be “materially lower” in the
medium term than they have been historically, but warned that a rise will
have to happen soon to avoid “other risks” developing. He repeated that the
Bank was not concerned about house prices themselves but about household
indebtedness. He said: “Housing debt can represent a major risk because
mortgages are both the largest asset of UK banks and the largest liability of
UK households”. He gave no indication of a time frame for a change in
policy.
Luxembourg approves 70% of AIFMD applications
The Association of the Luxembourg Fund Industry has said that nearly three
quarters of the firms who applied to become AIFMs by the 22 July 22
deadline have been approved. Of the 215 applications made by the deadline,
151 were approved, while a further 558 firms had asked to register by the
deadline, of which 487 had been successful.
FCA update on AIFMD applications
The FCA has updated its AIFMD webpage on the current status of
applications for authorisation, which coincides with the AIFMD deadline of
22 July 2014. According to a report by AIMA this week, a number of EU
and EEA countries have yet to transpose the AIFMD, which is hindering
AIFMs' ability to do business. These are Iceland, Lithuania, Norway,
Poland, Portugal, Romani, Slovenia and Spain.
HM Treasury report on financial services
HM Treasury has published a report on the balance of competences between
the UK and the EU on financial services and the free movement of capital,
and whether the balance is appropriate to the national interest. According to
the report, evidence suggests that in the areas covered, the balance of
competences is broadly appropriate although it is often undermined by poor
policy-making. The report suggests that for the balance to be fully
appropriate in the future, the EU should undertake significant reform of the
existing EU policy-making framework and processes, take a more
proportionate approach to legislation in all sub-sectors, and give greater
consideration to the principle of subsidiarity in retail market sectors. The
report is split into 5 chapters, the final one considering in particular the
implications of the international regulatory framework and global markets,
the impact of the euro area and the banking union on the UK's future
national interest, and how to improve the quality of EU-level rules.
CCPs experience difficulties in clearing exotic swaps
According to reports, CCPs are experiencing difficulties in expanding the
range of rates products they clear are stalling amid growing industry concern
that it could be dangerous to shoehorn more exotic derivatives into clearing
houses. This has led to a difference of opinion between the two largest
interest rate swap CCPs regarding how soon swaptions can begin to be
cleared. CME Group has reaffirmed its plans to roll out swaptions clearing
later this year, but LCH’s effort has stalled due to concerns over the ability
of CCPs to safely risk-manage the product. Global regulators are keen to
push as much of the OTC derivatives market as possible through central
clearing in order to reduce systemic risk but some industry experts believe
that in reality, only a small part of the market will be cleared and a fairly
large uncleared market will remain.
FSB aims to overhaul benchmarks
The FSB has called for the development of alternative benchmarks to try to
re-establish confidence in key market rates tarnished by manipulation
scandals. The FSB says that Libor and other financial benchmarks should be
based on actual trades, rather than estimates and "should be anchored in
observable transactions”. The FSB said it may be better for some trades,
including many derivatives, to be tied to the risk-free rate of borrowing
rather than unsecured bank borrowing rates. Those alternatives could
include the overnight indexed swap rate, government bond rates or
compounded overnight interest rates. “Shifting a material proportion of
derivative transactions to a risk-free rate would reduce the incentive to
manipulate rates that include bank credit risk and would reduce the risks to
bank safety and soundness and to overall financial stability,” the FSB said.
FTT likely to increase compliance burden
According to reports, a new article this week by GBST and Deloitte warns
that the FTT is likely to increase the compliance burden on financial
institutions and create major operational processing issues that will need to
be addressed. Market participants believe the tax could impact liquidity
providers which could be damaging for European liquidity levels and the
City of London and, following the failure of the UK’s appeal to the ECJ,
they are concerned that it also looks set to impose serious operational
challenges for banks, brokers and their buy-side clients. France and Italy
have already unilaterally introduced their own versions of the transaction tax
and further updates are expected in September in respect of the remaining
Member States committed to introducing the FTT by January 2016.
OECD global standard for automatic exchange of tax information
The OECD has released the full version of a global standard for automatic
and multilateral exchange of financial information between tax authorities.
The standard provides for annual automatic exchange between governments
of financial account information reported to governments by financial
institutions, which include custodial institutions, depository institutions and
investment entities. It covers accounts held by individuals and entities,
including trusts and foundations. The standard will be presented by the
OECD to the meeting of G20 finance ministers due to take place in
Australia on 20 and 21 September 2014. The OECD has asked for public
comments on how voluntary disclosure could be further encouraged. The
deadline for responses is 12 September 2014.
FX manipulation probe reaches possible settlement
According to a Bloomberg report, the FCA is in talks with banks to reach a
first settlement in the FCA’s currency-rigging probe launched last October.
Bloomberg reported that the FCA was in talks with Barclays Plc, Citigroup
Inc, JPMorgan and UBS AG with a deal possible this year. The FCA has
declined to comment but it appears that it may be trying to fast-track the
process and may levy fines in the coming months. Two sources said the
regulator was seeking to keep the scope narrow to speed up a settlement.
Meanwhile, the Serious Fraud Office has indicated that prosecutors could
charge the first individuals in connection with a global investigation into
alleged manipulation of currency markets as soon as next year.
Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
25 July 2014

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Euro shorts 25.7.14 including Carney hints at change to monetary policy and Luxembourg approves 70% of AIFMD applications

  • 1. Welcome to Euro Shorts, a short briefing on some of the week’s developments in the financial services industry in Europe. If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers. Claire Cummings 020 7585 1406 claire.cummings@cummingslaw.com www.cummingslaw.com Carney hints at change to monetary policy Mark Carney this week has warned that a dangerous housing bubble could develop if interest rates are kept at their historic lows for too long. The Governor of the BoE said that interest rates will be “materially lower” in the medium term than they have been historically, but warned that a rise will have to happen soon to avoid “other risks” developing. He repeated that the Bank was not concerned about house prices themselves but about household indebtedness. He said: “Housing debt can represent a major risk because mortgages are both the largest asset of UK banks and the largest liability of UK households”. He gave no indication of a time frame for a change in policy. Luxembourg approves 70% of AIFMD applications The Association of the Luxembourg Fund Industry has said that nearly three quarters of the firms who applied to become AIFMs by the 22 July 22 deadline have been approved. Of the 215 applications made by the deadline, 151 were approved, while a further 558 firms had asked to register by the deadline, of which 487 had been successful.
  • 2. FCA update on AIFMD applications The FCA has updated its AIFMD webpage on the current status of applications for authorisation, which coincides with the AIFMD deadline of 22 July 2014. According to a report by AIMA this week, a number of EU and EEA countries have yet to transpose the AIFMD, which is hindering AIFMs' ability to do business. These are Iceland, Lithuania, Norway, Poland, Portugal, Romani, Slovenia and Spain. HM Treasury report on financial services HM Treasury has published a report on the balance of competences between the UK and the EU on financial services and the free movement of capital, and whether the balance is appropriate to the national interest. According to the report, evidence suggests that in the areas covered, the balance of competences is broadly appropriate although it is often undermined by poor policy-making. The report suggests that for the balance to be fully appropriate in the future, the EU should undertake significant reform of the existing EU policy-making framework and processes, take a more proportionate approach to legislation in all sub-sectors, and give greater consideration to the principle of subsidiarity in retail market sectors. The report is split into 5 chapters, the final one considering in particular the implications of the international regulatory framework and global markets, the impact of the euro area and the banking union on the UK's future national interest, and how to improve the quality of EU-level rules. CCPs experience difficulties in clearing exotic swaps According to reports, CCPs are experiencing difficulties in expanding the range of rates products they clear are stalling amid growing industry concern that it could be dangerous to shoehorn more exotic derivatives into clearing houses. This has led to a difference of opinion between the two largest interest rate swap CCPs regarding how soon swaptions can begin to be cleared. CME Group has reaffirmed its plans to roll out swaptions clearing later this year, but LCH’s effort has stalled due to concerns over the ability of CCPs to safely risk-manage the product. Global regulators are keen to push as much of the OTC derivatives market as possible through central clearing in order to reduce systemic risk but some industry experts believe that in reality, only a small part of the market will be cleared and a fairly large uncleared market will remain.
  • 3. FSB aims to overhaul benchmarks The FSB has called for the development of alternative benchmarks to try to re-establish confidence in key market rates tarnished by manipulation scandals. The FSB says that Libor and other financial benchmarks should be based on actual trades, rather than estimates and "should be anchored in observable transactions”. The FSB said it may be better for some trades, including many derivatives, to be tied to the risk-free rate of borrowing rather than unsecured bank borrowing rates. Those alternatives could include the overnight indexed swap rate, government bond rates or compounded overnight interest rates. “Shifting a material proportion of derivative transactions to a risk-free rate would reduce the incentive to manipulate rates that include bank credit risk and would reduce the risks to bank safety and soundness and to overall financial stability,” the FSB said. FTT likely to increase compliance burden According to reports, a new article this week by GBST and Deloitte warns that the FTT is likely to increase the compliance burden on financial institutions and create major operational processing issues that will need to be addressed. Market participants believe the tax could impact liquidity providers which could be damaging for European liquidity levels and the City of London and, following the failure of the UK’s appeal to the ECJ, they are concerned that it also looks set to impose serious operational challenges for banks, brokers and their buy-side clients. France and Italy have already unilaterally introduced their own versions of the transaction tax and further updates are expected in September in respect of the remaining Member States committed to introducing the FTT by January 2016. OECD global standard for automatic exchange of tax information The OECD has released the full version of a global standard for automatic and multilateral exchange of financial information between tax authorities. The standard provides for annual automatic exchange between governments of financial account information reported to governments by financial institutions, which include custodial institutions, depository institutions and investment entities. It covers accounts held by individuals and entities, including trusts and foundations. The standard will be presented by the OECD to the meeting of G20 finance ministers due to take place in Australia on 20 and 21 September 2014. The OECD has asked for public comments on how voluntary disclosure could be further encouraged. The
  • 4. deadline for responses is 12 September 2014. FX manipulation probe reaches possible settlement According to a Bloomberg report, the FCA is in talks with banks to reach a first settlement in the FCA’s currency-rigging probe launched last October. Bloomberg reported that the FCA was in talks with Barclays Plc, Citigroup Inc, JPMorgan and UBS AG with a deal possible this year. The FCA has declined to comment but it appears that it may be trying to fast-track the process and may levy fines in the coming months. Two sources said the regulator was seeking to keep the scope narrow to speed up a settlement. Meanwhile, the Serious Fraud Office has indicated that prosecutors could charge the first individuals in connection with a global investigation into alleged manipulation of currency markets as soon as next year. Cummings Tel: + 44 20 7585 1406 Mob: + 44 7734 057 327 www.cummingslaw.com 25 July 2014