The European Association of Co-operative Banks (EACB) welcomes the opportunity to contribute to the discussion and European Commission’s work on post-trade in a Capital Markets Union.
Apart from the response to the consultation questions, the EACB we would like to make a few general remarks which are important from a co-operative banks’ view and which we consider should always be kept in mind when it comes to post-trading and any relevant work. We consider that it is necessary for the EC to take a step back and look at the bigger picture, test past thinking and consider improvements taking a holistic approach. In particular:
- Legal requirements and unintended consequences in terms of liquidity fragmentation: Liquidity has already moved to centralised CCP and there will be move away from bilateral trading. This will become even more evident when the Trading Obligation under MiFIR kicks in. This has huge consequences (among others regarding pricing and liquidity) for smaller non financial counterparties (NFC-) but also smaller cooperative banks and building societies for example. Indeed this will leave them with more difficult access to hedging possibilities. This hedging is a vital part of the retail and real economy focused business of cooperative banks, providing an essential managing tool that then allows those banks to effectively finance individuals and SMEs.
We have already seen that the use of and access to OTC derivatives by NFCs have substantially and considerably decreased. This is due to several factors including: 1) The complexity of the regulations for parties that may not have sufficient legal knowledge; 2) The increase of the price of the OTC derivatives - such products have become very costly - due to the decrease of liquidity in the derivative markets; 3) The pass through of costs incurred by FCs in connection with the implementation of EMIR (IT costs, operational setup, project management, repapering, legal support, etc.); and 3) The leverage ratio impact under Basel III.
As no alternative to (OTC) derivatives for these firms exists to be able to hedge the risks incurred in connection with currencies, commodities or interest rates, this means that such parties are not able to hedge their risks. It should also be borne in mind that when no hedging is possible, this involves risks for NFCs which will be taken into account by credit institutions when considering the creditworthiness of NFCs. This leads to a direct impact on the financing possibilities for NFCs because credit institutions account non-hedging as an increased counterparty risk. The decrease of financing possibilities has a direct impact on the economy and the customers’ interest.
- Reporting requirements generate (one of) the highest costs among the regulatory obligations. These costs generate an increasingly high burden for all banks but are disproportionately high for smaller banks. Overall costs as well as those in all specific areas are considerably higher relative to business size (e.g., balance sheet) for smaller banks. Banks anticipate still higher regulatory costs. Notably, in each size category 80% of all banks expect that reporting requirements will generate the highest additional costs. Streamlining reporting requirements is essential for efficient reporting.
- Market participants have very recently implemented or are in the process of implementing very complex pieces of legislation that could also have significant impact on post-trading. For that reason we do consider that a “pause” of the EU co legislators would be necessary to allow the market to a correctly implement or ameliorate implementation solution but also co legislators to evaluate and assess the holistic effect of various legislation.
In the same vain, as many current changes in the European market structures (such as T2S, MiFiD II, CSDR etc.) are very new or even not (fully) implemented and cannot have shown a significant and “measurable” effect .It might be too early to discuss the impact of such significant changes at this stage.
More in general on this point, we would like to draw your attention to the need to make a differentiation between deficiencies in European or international regulation/legislation and possible improvements/developments in the markets. While the first requires adequate action from the authorities in charge (e.g. harmonisation of taxation, or clarification of insolvency protection of asset owners across the European legislations), the second should be left to the search process of an open market economy.
- “ Fintechs”: In this fast-changing environment, a level playing field is key to assure not only fair competition but also consumer protection. The latter should remain the key priority. A level playing field has the role of ensuring clients are not put at risk and that financial stability is maintained, irrespective of the service provider. The Digital Single Market is an opportunity for all operators willing to embrace the digital transformation. The same regulatory conditions and supervision should apply to all actors who seek to innovate and compete on FinTech: large digital players (big tech firms), financial institutions players (incumbent banks) and FinTech start-ups.
Any regulatory framework must keep barriers to entry to a minimum, and should also not hinder incumbents’ ability to innovate and develop. The principle of ‘same services, same risks, same rules and same supervision’ in order to ensure consumer protection and market integrity should always apply.
- Another important point that needs to be duly considered in the design of the regulatory framework is the timing factor. Adequate, realistic and legally effective implementation periods should ensure in future that the legislative acts of the different stages are coordinated with each other and that there is still sufficient time to implement the new regulations in time. Two recent examples show that this is not always the case. Both MiFID II and the PRIIPs Regulation are supplemented by comprehensive Level II measures, without which implementation cannot take place. Both legislative projects failed to adhere to the timetable envisaged, which led to considerable legal uncertainty and significant additional costs for market participants and in particular banks and investment firms.
- Brexit could also have important consequences and implications for derivatives markets and the post-trading EU market in general and all relevant developments need very close attention.
- The report of the EPTF is highly appreciated.
For our detailed consideration and to read the whole EACB response to the EC Consultation: