Australia: Exchange - International: Europe
Financial Services Regulation Newsletter - Issue 21

PRA AND FCA RESPONSES TO EIOPA GUIDELINES FOR PREPARING FOR SOLVENCY II PUBLISHED

On 2 January 2014, the European Insurance and Occupational Pensions Authority ("EIOPA") updated its webpages on the following final guidelines on preparing for the Solvency II Directive (2009/138/EC) to make available the replies it has received from the national competent authorities ("NCAs") of member states, including, in the case of the UK, the PRA and FCA:

• Guidelines on forward looking assessment of own risks;
• Guidelines on pre-application of internal models;
• Guidelines on submission of information to NCAs;
• Guidelines on system of governance.

The final guidelines came into force on 1 January 2014. EIOPA published official translations of them on 31 October 2013, at which point NCAs had two months to report to EIOPA regarding their compliance, or intention to comply, with them.

CRR IMPLEMENTING TECHNICAL STANDARDS ON DISCLOSURE OF OWN FUNDS PUBLISHED IN OJ

On 31 December 2013, the text of the European Commission implementing Regulation (Regulation 1423/2013) setting out implementing technical standards ("ITS") relating to the disclosure of own funds requirements under the Capital Requirements Regulation (Regulation 575/2013) ("CRR") was published in the Official Journal of the European Union ("OJ").

The ITS specify uniform templates for the disclosure of own funds. They require firms to complete a template describing the main features of their capital instruments, a general own funds disclosure template, and a transitional own funds disclosure template, in accordance with the instructions set out in the Regulation.

The ITS were developed by the European Banking Authority ("EBA") (under Articles 437 and 492 of the CRR). The EBA published the final draft ITS in July 2013.

EUROPEAN COMMISS ION ADOPTED TEXT OF DELEGATED REGULATION ON CALCULATION OF CREDIT RISK ADJUSTMENTS

On 24 December 2013, the Council of the EU published a cover note (dated 20 December 2013) attaching a European Commission document containing the text (C(2013) 9338 final) of the delegated Regulation supplementing the CRR on prudential requirements for credit institutions and investment firms, with regard to regulatory technical standards ("RTS") for specifying the calculation of specific and general credit risk adjustments.

The Commission adopted this delegated Regulation on 20 December 2013. The delegated Regulation will be published in the OJ if no objection is expressed by either the European Parliament or the Council within the relevant time period specified in the EBA Regulation (Regulation 1093/2010).

The EBA published the final draft of the RTS (produced in accordance with Article 110(4) of the CRR), on 26 July 2013, at which time the draft was submitted to the Commission for adoption.

COUNCIL PUBLISHES GENERAL APPROACH ON SRM REGULATION

On 22 December 2013, the Council of the EU published a note (18070/13) from its General Secretariat to the member state delegations containing the text of its general approach on the proposed Regulation establishing a single resolution mechanism (SRM Regulation) for the European banking union.

The Council agreed the general approach on 18 December 2013 in its configuration as the European Economic and Financial Affairs Council ("ECOFIN"). The SRM Regulation is awaiting its first reading in Parliament.

On 24 December 2013, the Council published a note (18134/13) attaching a decision of the representatives of the eurozone member states meeting within the Council and the terms of reference concerning the intergovernmental agreement on the single resolution fund that were also agreed on 18 December 2013.

EBA FINAL DRAFT TECHNICAL STANDARDS ON SECURITISA TION RETENTION RULES

On 17 December 2013, the EBA published final draft regulatory and implementing technical standards ("RTS" and "ITS") on securitisation retention rules in the CRR (EBA/RTS/2013/12 and EBA/ITS/2013/08).

The final draft RTS concern the retention of net economic interest and other requirements related to exposures to transferred credit risk under Articles 405, 406, 408 and 409 of the CRR. The final draft ITS relate to the convergence of supervisory practices with regard to the implementation of additional risk weights under Article 407 of the CRR and specify the measures to be taken in the event of breach of the obligations in Articles 405, 406 or 409 of the CRR.

The EBA has submitted these technical standards to the European Commission for adoption in the form of EU Regulations.

The CRR's risk retention requirements replaced equivalent requirements under Article 122a of CRD II from 1 January 2014. The RTS provide further detail on the retention rules in the CRR, and some of the changes that were made to the draft RTS following an earlier consultation.

EBA FINAL DRAFT STANDARDS FOR EXPOSURE DETERMINATIONS

On 5 December 2013, the EBA published its final draft Regulatory Technical Standards ("RTS") which define the conditions and methodologies to be used by credit institutions to determine the overall exposure to a client or group of connected clients resulting from an exposure to a transaction with underlying assets and the risks inherent in the structure of the transaction itself. The draft RTS set out the methodology for the calculation of the value of exposures to transactions with underlying assets, the procedure used to determine the contribution of underlying exposures to overall exposures to clients and groups of connected clients and the conditions under which the structure of the transaction does not constitute an additional exposure.

The RTS have been sent to the European Commission and await adoption as EU Regulations. Once adopted the RTS will be directly applicable throughout the EU.

SEPA INITIATIVE DEADLINE EXTENDED

The Single Euro Payment Area ("SEPA") initiative deadline for implementation in all EU member states in the Eurozone has been extended by another six months. Companies in the Eurozone were told they must be compliant with SEPA by 1 February 2014 in order to avoid a shutdown of their payments systems. However, in a press release on 9 January 2014, the Commission announced an additional transition period of six months to ensure minimal disruption for consumers and businesses. The reasons for this were that "migration rates for credit transfers and direct debits are not [currently] high enough to ensure a smooth transition to SEPA despite the important work already carried out by all involved." The extended transition period does not change the formal deadline for migration to SEPA.

SEPA will provide a common payment processing system across the EU. SEPA introduces key changes to the way businesses process electronic funds, transfers and direct-debit payments. With a single, unified set of SEPA standards, organisations and individuals will be able to make payments using these standardised payment methods through their existing banks. A central feature of the standardisation is the move from account numbers to an international account identifier number and code.

Companies have been warned about the now extended deadline for migration to SEPA, at which point banks will only be able to accept SEPA credit transfers and SEPA direct debits and therefore any company who is not compliant will not be paid or be able to pay. Under the initiative, customers will be able to pay domestically and cross-border throughout Europe from one bank account, improving customer security. It is hoped that the move to a uniform payments market will increase competition, providing consumers with a greater range of products with lower costs. It is hoped that SEPA will benefit not only consumers but businesses as well. Small and medium firms will benefit from simplified processing as well as faster settlements, improving their cash flow. Larger firms will benefit from major savings due to the standardised procedure for the whole of Europe.

However, it has been argued that many businesses may not be aware of the potential repercussions of the new pro-consumer SEPA product schemes. Under the Direct Debit scheme a customer will be entitled to seek a refund of amounts debited from their account on a "no questions asked" basis, up to eight weeks after the debit date. The business will be out of pocket, as this right to a refund will apply even where the goods or services have been received by the customer, negatively impacting the businesses cash flow. Although debt collection of the sum is available, in the event that the goods or services have been delivered, this provides no comfort in the case of an insolvent customer. While businesses have the option to protect themselves by using alternative payment methods this is an unattractive option due to the convenience of direct debit to both parties.

Further, a recent study by the Irish Small and Medium Enterprises Association ("ISME") highlighted that difficulties with SEPA compliance are especially pronounced for small and midsize businesses. For example, these companies lack both the technical personnel in-house to direct the necessary changes and the money to hire in specialists. ISME recommended that a separate B2B SEPA system was created in order to facilitate easier use.

ESMA PUBLISHES FINAL DRAFT TECHNICAL STANDARDS ON THE CROSS BORDER APPLICATION OF EMIR

In November 2013 the European Securities and Markets Authority ("ESMA") issued final draft regulatory technical standards ("RTS") related to derivative transactions by non-EU counterparties. The RTS provides additional detail on how EMIR will apply to transactions between non-EU counterparties which would have a direct, substantial and foreseeable effect within the Union and non-evasion.

Following an ESMA consultation on these standards in July 2013 the RTS report sets out the feedback received and what policy decisions have been made in response. Some of the key points include:

• Clarification on how it will be determined whether contracts actually have a direct, substantial and foreseeable effect within the EU;
• The term gguaranteeh was defined to avoid confusion;
• Clarification was given on relevant grandfathering provisions; and
• Examples of anti-evasion were removed in order to clarify that anti-evasion would be determined by a criteria based approach.

The RTS was submitted to the European Commission for adoption as an EU Regulation. The Commission has three months from November 2013 to decide whether to endorse the RTS, at which point, if endorsed, the European Parliament and Council will then approve the RTS before they take effect.

FMLC HIGHLIGHTS CONCERNS RELATING TO ALGORITHMIC AND HIGH-FREQUENCY TRADING UNDER MIFID II AND MAR

At the end of October 2013, the Financial Markets Law Committee ("FMLC") published a letter that it had sent to the European Commission highlighting concerns relating to algorithmic and high-frequency trading. The letter sets out that this trading specifically relates to points of ambiguity in legislative proposals to amend the Markets in Financial Instruments Directive ("MiFID II") and the proposed Regulation on insider dealing and market manipulation ("MAR").

In an appendix to the letter the FMLC have produced a list of points which present the provisions with which they are concerned and the ambiguities identified. The FMLC hope that "presentation, in brief terms, of these ambiguities may make a contribution to legal clarity and certainty." Where possible, the FMLC have also proposed solutions such as amending wording to simplify and clarify the intention of the provisions and empowering ESMA to produce guidance on specific issues.

EUROPEAN COMMISS ION EXECUTIVE TESTIFIES BEFORE UK PARLIAMENT

Patrick Pearson, head of Financial Markets Infrastructure in the European Commission's Internal Market Directorate General, testified before the UK parliament about anticipated EC rulemakings. According to Reuters, Pearson said the Commission will cautiously consider potential curbs to shadow banking and, in doing so, seek to avoid any unintended consequences. It is unlikely that the Commission will require banks to divest themselves of their proprietary trading activities.

EBA REPORT ON BANK TRANSPARENCY

The EBA published a follow-up review which assesses the disclosures made by 19 European institutions in response to the Basel Pillar 3 requirements, as set out in the EU Capital Requirements Directive. Despite improvements in some specific areas, credit institutions' compliance with disclosure requirements remains unchanged compared to last year's assessment where no bank had fully met all the requirements. The report also highlighted that comparability and consistency of disclosures between the different institutions could be improved.

DRAFT EU PROPOSA L TO IMPLEMENT LIIKANEN REPORT

On 6 January 2014 it was reported that the European Commission has drafted a response to the 2012 Liikanen report. The proposals would ease banking reforms so that large European banks would not have to automatically ring fence their complex products from their simple deposit taking operations. The proposals give wide discretion to national supervisors when applying the banking reforms and the ring fencing aspect, recommended by Liikanen, would not be mandatory. The proposals would mean less costs and restrictions for the banks. The Commission also included in its report their own modified version of the US Volcker rule outlawing proprietary trading for the 30 biggest banks in Europe. The ban would apply to banks irrespective of whether they have decided to ring-fence their business. It is anticipated that the European Parliament and member states will not reach agreement on the Commission's proposals before the end of December 2015.

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