Hongaars voorzitterschap voltooit financiële diensten agenda (en)

Hungarian Presidency completes Financial Services agenda

With today’s discussion at the ECOFIN  Council of the Regulation on OTC derivatives, central counterparties and trade repositories, the Hungarian Presidency has completed its work on a range of legislative initiatives on Financial Services regulation.

In the areas of short selling, deposit guarantees and the Single European Payment Area, the Presidency has managed to close a legislative step and advance to the negotiations with the European Parliament. On the revision of the Directive on supplementary supervision of financial conglomerates (FICOD),  the Presidency has successfully concluded negotiations with the European Parliament. Finally, in the case of OTC derivatives, which has been the most challenging and technical file fraught with political landmines, a number of contentious issues have been resolved but the final agreement will have to wait until political issues are settled.

Short selling

Following calls by Heads of State and Government to rein in abusive market practises widely seen as having contributed to the deepening of the financial crisis, the Commission produced in September 2010 a proposal to harmonise requirements relating to short selling across the European Union. 

In March, the ECOFIN decided to review the dossier further with a view to an agreement in May. Following the intensive work that ensued, the Council gave in May the Presidency a mandate to conduct negotiations with the Parliament, laying the groundwork for a possible first reading agreement.

The presidency compromise stroke the right balance between the need to restrict abusive market practices and to safeguard liquidity in sovereign debt markets. At the same time, the compromise delivered on the key objectives of transparency, a permanent ban on naked short selling and the reinforcement of supervisory authorities. 

In particular, in order to address the concerns about liquidity, the Presidency has proposed a safeguard clause meaning that if national authorities experience a significant drop in sovereign debt liquidity they can temporarily suspend the permanent ban on uncovered short sale of sovereign debt. As regards ESMA, while there was broad support for the compromise text, the Council and the Commission have committee themselves to take into account the concerns raised by some Member States, in the negotiations with the European Parliament.

Deposit Guarantee Schemes (DGS)

The Hungarian Presidency hammered out a political compromise bringing together Member States  that  have currently no prefunding and others  that  already have a scheme with high funding levels. Differences have also been bridged in the use of the funds between Member States  that  use the DGS only for depositor compensation and those  that  are favouring a broader use of funds including early intervention. At the same time,  the Presidency put emphasis on maintaining protection of traditional saving products and on reducing the payout delay to 20 days.

The main elements of the draft recast directive are:

  Enhanced financing requirements for DGSs, with the introduction of ex-ante

contributions from banks as a minimum fixed percentage of deposits;

  Simplification and harmonisation, in particular relating to coverage and payout

arrangements; more information to depositors about the functioning of the scheme and their rights

  Further reduction of the time limit for paying out depositors and better access for DGSs to information about their members (i.e. banks)

Single European Payment Area (SEPA)

On 8 June the Presidency managed to reach an agreement among the Member States on the SEPA Regulation, setting end-dates for migrating to SEPA standards in case of credit transfers and direct debits denominated in euro and on other technical requirements. The general approach reached will enable the incoming Presidency to start negotiations with the European Parliament after the other institution confirms its report on 27 June. 

SEPA started as a market-driven project, but as compliance among banks and end-users led only to diverging results, last December the Commission proposed to set mandatory end-dates for migration. Agreeing to SEPA will eliminate differences between national and cross-border transactions, meaning first of all the mandatory usage of IBAN bank account identifiers. 

The compromise proposal adopted beginning of June sets 1 February 2013 as the migration end-date in case of credit transfers and 1 February 2014 for direct debits. It also proposes to phase out multilateral interchange fees (MIFs) by 2018. 

FICOD

On 1 June, the Presidency has reached an agreement with the EP on the revision of the supplementary supervision of financial conglomerates directive (FICOD) which was confirmed by the Council (Coreper) on 17 June. The proposal was a so-called quick fix of mainly technical issues regarding conglomerates’ supplementary supervision necessitated by the financial crisis, while a more thorough revision will follow most probably next year. 

Over the Counter (OTC) Derivatives Markets

The draft regulation was aimed at increasing transparency and reducing counterparty risk (i.e. the risk of default by one party to the contract) in the OTC derivatives market. It would also implement commitments made by G-20 leaders in September 2009.

The use of derivatives has grown exponentially over the last decade, with over 80% of derivatives traded on the OTC derivatives market, which is largely unregulated. The absence of a regulatory framework for OTC derivatives is broadly viewed as having contributed to the 2008 financial crisis.

The initial assessment of this file revealed extensive shortcomings in the original proposal and the Hungarian Presidency faced a good number of issues not covered by it. Therefore,  the Presidency had to focus on the major outstanding issues, such as the scope of the regulation and the supervisory role of ESMA. Further work has identified additional issues such as Central Counterparties’ (CCP) access to central bank liquidity and the treatment of long term savings institutions, which have been provisionally agreed on subject to a final fine tuning. By the end of the Presidency, the outstanding issues have thus been narrowed down to the

following major political issues:

ESMA powers  – There have been two major camps, one supporting national authorities to retain both authorisation and registration of CCPs, versus the other view that wants to maximise ESMA role in the process. The current presidency compromise aims to strike a balance between those two camps by combining elements from the Commission’s original proposal with safeguards enabling national authorities to retain a final say in the process. The presidency has sought political guidance on the issue and the voting modalities in the supervisory College.

Scope  –  there remains apparently a large, blocking  minority against the extending of the scope of the clearing obligations to all derivatives. Further work is needed to identify the possible way forward in this area.

Third country provisions – The Commission has raised this issue and wants further provisions in the EU regulations for 3rd countries. The Presidency incorporated a suggestion by the Commission  –  a specification that only some EU bodies would be exempted from the Regulation – to mirror similar US provisions. Further high level discussions as well as a very careful assesment in this area to proceed.