Global regulatory update - PowerPoint Presentation

1. Global regulatory updateACSDA General AssemblySantiago de ChileApril 2014

2. The origins of the Crisis…2006 : Mortgage defaults in the US subprime mortgage marketGlobal economy contaminated through securitisationCompounded by Credit Default Swaps which led to freeze of private credit marketsFreeze caused liquidity problems and insolvenciesNational governments forced to support domestic banks and provide emergency liquidity

3. …and its spread2009 : Banking crisis reinforced by Eurozone sovereign debt, growth and competitiveness crisisEurozone faced governance issues2012 : European Stability Mechanism established as a permanent rescue mechanismReform of regulation of financial institutions

4. Pre-crisis regulatory drivers…SecuritiesMarkets

5. …have been transformed post-crisisPREVENTIONPrevent negative impacts from bank losses and failuresIncrease capital and liquidity buffersReduce risk profileEnsure orderly failure without taxpayer supportBEHAVIOURImprove behaviour and integrity of financial marketsEnsure consistent regulation across European marketsTRANSPARENCYImprove transparency particularly of the derivatives market more trading on exchangesMore clearing via CCPs Reporting to Trade Repositories

6. The Main Global AuthoritiesGlobal bodies e.g. G20 are now main drivers for regulatory change with local implementation by national authorities.FSB(Financial Stability Board)Assesses vulnerabilities and sets international guidelines for the financial sector Monitors implementation of G20 agreements in financeEnsures peer reviews of the implementation of international agreements (with IMF)BIS(Bank for International Settlements)Serves central banks in their pursuit of monetary and financial stability, and fosters international cooperation in these areas Its Committee for Payment and Settlement Systems (CPSS) is focused on Financial Market InfrastructuresIOSCO(International Organization of Securities Commissions)Brings together the world's securities regulators and is a global standard setter for the securities sector

7. The Global scope of post-crisis reforms EU MeasuresPrevention: Bank Recovery & Resolution, Banking Union (SSM, SRM), CRD IV/CRR, Liikanen report on bank restructuring, DGS, ICSBehaviour/ Transparency: MIFIR & MIFID, AIFMD review of UCITS, Securities Law Legislation FMIs: EMIR, CSDR, T2S, R&R for FMIsOther: FTT US measuresPrevention/Behaviour/FMIs: Transparency: Dodd-Frank Act, Volcker Rule, Consumer Protection Act, Resolution Planning, Basel 3Behaviour: Triparty collateral review FMIs: OTC Derivatives, Designated Financial Market Utilities Other: FATCA Asia-Pacific MeasuresAsia was only indirectly hit by the crisis; initiatives are hence on: Implementation of Global commitments Enhancements of local markets and market infrastructures through OTC Derivatives reform in HK, Japan and Australia, HK multi-currency clearing, RMB as a settlement currencyGlobal MeasuresPrevention of failures: Recovery & Resolution, G-SIFIs & Capital add-ons: Basel 3, intra-day liquidity, spec. add-ons for G-SIFIsChange of behaviour: Shadow Banking, Banker compensationTransparency: LEI, Client Asset ProtectionAttention to FMIs: CPSS/IOSCO PFMIs, Central clearing of OTC derivatives, R&R of FMIs

8. Drivers of change in the EU securities marketsHARMONISATIONRemoval of technical, legal and fiscal barriers to low cost cross border settlementGiovannini, CESAME & EGMISecurities Law DirectiveISMAGSAFETYStandard for safety, soundness and efficiency in the provision of trading, clearing & settlement servicesESCB/CESRCPSS/IOSCO principles for FMIsCSD RegulationResolution & Recovery frameworksCOMPETITIONImproved access and interoperabilityMiFID II/MIFIREMIRCSD RegulationCONSOLIDATION/EFFICIENCYPublic sector intervention in merger control & consolidation of settlement in CeBMTarget 2 Securities

9. T2S is of particular importance to CSDs.. A technical platform:With Both cash & securities a/c (integrated model)Creation of realignment instructions between the accounts that CSDs hold with each otherManagement of static data reflecting securities eligible on each linkLean settlement functionalitiesValidationMatching SettlementBasic reportingA unified operating windowNight time settlement with multiple sequencesReal time settlement A technical settlement infrastructure for European CSDs and Central Banks providing:

10. …as is CSD RegulationDesigned to make CSDs safer but introduces more competition .Defines what a CSD is authorised to doIntroduces process changesmandatory dematerialisation or immobilisation of securitiesCan be a challenge for some States, hence 2025 as a deadlineT+2 settlement cyclemandatory measures to address settlement failsDisclosure and potential suspension of systematically failing participantsIntroduces specific authorisation and supervision processPassport with cooperation between home and host authoritiesMandatory User CommitteesDefines rules for CSDs with a banking licence including capital requirements

11. Other relevant regulatory initiatives AIFMD Fund depositaries: specific treatment in case of custody performed by SSS:SSS services are not a delegation of a depositoryResolution and Recovery RegimesCPSS/IOSCO & FSB consultations on special regimes for FMIs and their participants;Expected EU Commission initiatives Securities Law LegislationLong-awaited, and covering rules for holding and transfer of securitiesWill impact whole custody chainMay also deal with collateral re-hypothecation issuesFinancial Transaction Tax (FTT)

12. How do these initiatives affect our clients? Effects on the industry are significant, still not fully understood nor predictable (since so many regulations have yet to be implemented) but still growingBalance sheet restructuring will continue, driven bydeleveragingthe ECB’s Asset Quality Review (undertaken by the ECB prior to the introduction of the Single Supervisory Mechanism in the Eurozone)the CRDthe need to maintain complex recovery plans, contribute to new statutory resolution funds, and potentially issue new bonds which can be bailed-in (i.e. convertible into equity) if necessaryThese additional costs will result ininternal cost reduction and a search for economy of scale gains through (for example) mutualisation (outsourcing) of back officesrestructuring, specialisation, and disintermediation (as non-banks increase their share of the financing market)