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AFME announces establishment of T+1 industry taskforce
2 Mar 2023
The Association for Financial Markets in Europe (AFME), as a leading voice on the debate surrounding a move to a one-day settlement cycle (T+1) in Europe, has today announced it is setting up a new industry taskforce. The Association is issuing a call for interest for participation from a broad and diverse group of industry associations representing stakeholders who will be impacted by a shortening of the securities settlement cycle in Europe. The task force will assess two key questions. Firstly, whether Europe should follow the US and other jurisdictions in moving to shorter settlement cycles, based on a robust cost-benefit analysis. Secondly, if so, how and when the potential move should happen. Further consideration will be required to identify the changes to the current post trade operating environment that would be necessary to facilitate T+1, and to agree on actions required to deliver those changes, including an appropriate timeframe. Adam Farkas, CEO of AFME, said: “With the US having announced its intention to move to T+1 settlement by May 2024, the discussion on whether Europe should follow suit has become more pressing. Addressing this important topic will require a collaborative approach, and therefore all impacted stakeholders are encouraged to join the industry taskforce.” Pete Tomlinson, Director of Post Trade at AFME, said: “AFME is convening this industry task force to ensure all aspects of T+1 adoption in Europe are considered, including direct economic costs and savings to the industry, as well as less tangible factors such as global alignment and market attractiveness. It is important that such a move is carefully considered. A rushed approach is likely to result in increased risks, costs and inefficiencies, particularly given the unique nature of European markets which have multiple different market infrastructures and legal frameworks.” Tanguy van de Werve, Secretary General of EFAMA said: “An Industry Task Force on T+1 settlement is a logical and necessary step for Europe, both in terms of managing the impacts of the US move to T+1, and in considering a European timetable for a possible similar move . Given the high degree of exposure to one another’s markets, the shortened settlement cycle will invariably require changes to existing processes for European firms and US investors exposed to European securities. It is important that we leverage on these shorter-term priorities to build an industry view on the need for, and potential roadmap to, a shortened settlement cycle in Europe.” - ENDS -
AFME urges co-legislators to ensure EU market attractiveness as MiFIR trilogues set to begin
1 Mar 2023
The Association for Financial Markets in Europe (AFME) has today issued a comment in response to the vote of the European Parliament's Committee on Economic and Monetary Affairs (ECON) on the MiFIR Review. Adam Farkas, Chief Executive of AFME, said: “Today’s vote is a significant step forward towards finalising the MiFIR review which governs how financial markets function in the EU. In light of today’s agreement, we are optimistic that the file can be concluded under this legislative term. “AFME particularly welcomes the constructive approach the ECON has taken in relation to the scope of the consolidated tapes, with its clear proposals to include both pre-trade and post-trade information in the equity consolidated tape, and post-trade information only in the bonds consolidated tape. We strongly urge the co-legislators to retain the design features put forward by the ECON as they are a necessary condition to ensuring the tapes will be as useful as possible for investors and effectively contribute to improving the integration and competitiveness of the EU’s capital markets. We also take note of the emergence of various potential tape providers, which is a good sign that consolidated tapes will effectively materialise once the legislative framework is in place. “On equity market structure issues, we have consistently argued in favour of reducing complexity and safeguarding investor choice across equities trading mechanisms as this allows for cheaper and more efficient execution to the benefit of end investor returns. The ECON’s approach to restrictions on certain trading mechanisms, such as volume caps and limits on execution sizes and mid-point trading, impede investor choice and best execution. These features remain at odds with international practices and risk contributing to the continued decline of the EU’s attractiveness as a global capital markets centre. “While the ECON’s approach represents an important improvement on the Commission’s original proposals, AFME continues to be concerned by the relatively rigid approach both co-legislators are taking in relation to bond market transparency. Hard coding corporate bond deferral periods that are not informed by thorough data analysis into Level 1 legislation creates the risk that liquidity provision in illiquid or large sized bond trades will be hampered, particularly during periods of stress. As recent examples of market stress episodes highlight the need for continued focus on financial stability perspectives, we encourage the co-legislators to exercise caution and not - unintentionally – place additional pressure on markets. We also encourage the co-legislators to revisit the deferral framework for non-EU sovereign bonds during the trilogues. At present, they would fall under the corporate bond regime which simply does not cater to the characteristics of sovereign markets. “As we approach inter-institutional negotiations, AFME urges policymakers to keep the competitiveness and attractiveness of EU fixed income, equities and commodities markets for investors at the forefront of its considerations” In more detail: On Equities: AFME has consistently advocated for a fair, proportionate and data-led framework, which supports diversity and competition in EU equity markets. Thresholds on certain trading mechanisms and on banks providing liquidity to their clients (e.g. pension and investment funds who invest and manage assets on behalf of clients) is damaging to investors’ pursuit of best execution, and their ability to access liquidity that would otherwise not be available. This, over time, impacts the value of investments in EU equities and disincentivises investment in EU capital markets. On Fixed Income: On corporate bonds, while we support having 5 categories of bond deferrals, we are disappointed that the ECON has retained maximum deferral periods within the Level 1 framework, instead of making greater use of delegations to ESMA for the purpose of data-based calibration. In bond markets, which are characterised by a large degree of heterogeneity in the instruments traded, liquidity is notoriously difficult to source in a timely fashion. Investors in bonds are therefore particularly reliant on banks acting as market makers and using their own capital to provide liquidity to facilitate trades. The fixed income transparency regime needs to be better calibrated than proposed to ensure continued provision of liquidity so trades in large sizes and as well as in illiquid instruments can be efficiently managed by allowing sufficient time for market-makers to hedge or unwind their positions, both in a benign environment as well as during periods of high market volatility. The level one text should set out the principles which need to be considered when determining these calibrations, but the calibration exercise itself, should be delegated to ESMA on the basis of a thorough impact assessment. On sovereign bonds, AFME does not support non-EU sovereign bond deferrals being subject to the same timeframes proposed under the corporate bond deferral framework. The paradoxical result would be that the transparency on non-EU sovereign bonds is significantly shorter than that which would be available for EU sovereign bonds. We find it hard to justify such a different regulatory treatment for financial instruments which can present similar characteristics. We support the view that pre-trade transparency requirements for bonds should only apply to trading on central limit order book and periodic auction systems on trading venues. We encourage the Co-Legislators and the EU Commission to make that clear in the final text. On the Designated Publishing Regime: Whilst we are supportive of the Designated Publishing Regime which seeks to eliminate uncertainty about which party to a trade should report a transaction and reduce the regulatory burden on investment firms, particularly smaller ones, it should not be implemented at an individual instrument level. This would make it more complicated and provide no greater benefit than what is currently in place today
AFME welcomes start of 2023 EU-wide stress test
31 Jan 2023
Following the launch of the EU-wide stress test by the European Banking Authority today, the Association for Financial Markets in Europe (AFME) issued a statement on behalf of its members, the majority of which will be part of this year’s test. Caroline Liesegang, Head of Prudential Regulation at AFME, said: “Region-wide stress tests are an important element of idiosyncratic and systemic risk assessments at banks under common macro scenarios. This year’s stress test is particularly interesting, given that this is the first time European entities of third country firms are part of the exercise. Their inclusion allows for a comparison of the robustness of operations of all large banks that provide important wholesale market services in support of the European economy. The stress test also gives insights into one of the most pressing macro-financial issues, i.e. the reversal of interest rate levels back towards long-term trends. However, this year’s EBA methodology puts undue restrictions on bank’s interest earning capacity, which may negatively impact the assessment of banks by their investors.” In particular: AFME notes the increased sample now includes larger entities of third country banks due to the size and complexity of their operations in the EU. The exercise will help banks and supervisors alike to understand the commonalities and differences across jurisdictions. Going forward, AFME also suggests regional stress test methodologies could be further aligned across the world with a view to harmonising requirements for banks and reducing the related operational burden. AFME welcomes the EBA’s and ESRB’s recognition of the effect of interest rate paths across jurisdictions on banks’ risk profiles and income. However, AFME cautions that this year’s stress test methodology mechanically controls banks’ net interest income and thereby artificially constrains firms’ ability to account for interest income even under a rising interest rate scenario. Under this methodology banks will show higher losses than they would actually incur given their business model. This might have an unintended impact on investors raising questions around banks’ seemingly higher sensitivity to macro shocks. Inflation is projected to play a key part in the functioning of the world economy over the next years reverting to target inflation levels by the end of 2025 under the baseline scenario for the Euro area, UK and US, and hovering around the 3% mark under the adverse scenario. Therefore, this will most likely not drive the impact significantly. AFME notes that successful supervisory stress tests require adequate quality assurance. This lies in the hands of the (national) competent authorities. AFME encourages supervisory authorities to engage in informed conversations with firms when assessing the results and to allow banks sufficient time to run the calculations. It is essential to strike a good balance between cross-sectional benchmarking and recognition of idiosyncratic specificities in the results. - ENDS -
AFME welcomes ECON Committee vote on Basel 3 package
24 Jan 2023
The Association for Financial Markets in Europe (AFME) welcomes the agreement by the European Parliament'sCommitteeonEconomicand Monetary Affairs (ECON) on the CRR3 legislation, voted today. Caroline Liesegang, Head of Prudential Regulation at AFME, said: “Today’s agreement is an important step in finalising the EU implementation of the international Basel III reforms. The Parliament has made positive steps forward via changes to the Commission’s legislative proposal which should be given due consideration during interinstitutional negotiations. More work is still needed on the crypto assets proposal to better define its scope to ensure tokenised securities are not captured. It is also vital that cross-border trading on financial markets can continue through the removal of the requirement for banks to establish a subsidiary or branch in the EU under Article 21c.” In particular: The industry welcomes the decision of the Committee to apply the Output Floor at the consolidated level, which reflects how it was calibrated at Basel. AFME welcomes the recognition of the important role of securitisation in the financing of the economy. The ECON Committee has included transitional adjustments to mitigate the negative impact the introduction of the Output Floor would have on this mechanism a until a wider review of the securitisation framework is undertaken. AFME further welcomes the alignment of the Parliament and Council on the implementation of the trading book reforms. The use of a delegated act for market risk is a critical tool to ensure a globally consistent and aligned implementation of the market risk capital rules. AFME also welcomes some of the clarifications brought to the treatment of equity investments in funds under the FRTB, including the extended definition of third-party vendors. AFME also welcomes the Council and Parliament postponement of the implementation of the CRR2 mandated Trading book (TB) and banking book (BB) boundary to 1 January 2025. This change helps implement the TB/BB boundary that has been split between the CRR2 and CRR3 coherently, easing the operational burden, complexity and potential rigidity in instrument designation that would have resulted from the two-step approach. AFME suggests it will be important to avoid the significant adverse impact of the proposed access requirements for third country undertakings on the ability of EU financial institutions, corporates, governmental entities, and individuals to access international markets and cross-border services. In this respect, AFME supports the Council approach to remove the requirement for Member States to require third country undertakings to establish a branch in their territory, via deletion of proposed Articles 21c and 48c(1). Finally, AFME notes the European Parliament has proposed an interim treatment to apply a 1250% risk weight to crypto assets until 31 December 2024. However, there is no definition of crypto assets in the CRR and therefore the requirement may apply to tokenised securities, as well as the non-traditional crypto assets the interim treatment is targeted at. The scope of application should be clarified in the trilogue process to ensure a faithful implementation of the finalised Basel standard to avoid any unintended impact on securities markets during the interim period. - ENDS -
AFME welcomes Council agreement on some aspects of MiFIR, but further progress needed
20 Dec 2022
The Association for Financial Markets in Europe (AFME) has today issued a comment in response to the European Council agreement on the MiFIR proposal to strengthen market transparency. Adam Farkas, Chief Executive of AFME, said: “This is a milestone agreement which moves forward negotiations on MiFIR – a regulation which governs how secondary markets function in the EU and which is fundamental for their competitiveness and attracting investments within and into the EU. While we still need to understand the details of the Council agreement, the progress made is clearly a step in the right direction and we commend the Czech Presidency’s hard work for getting this over the line. “AFME members in particular welcome the progress made by Member States in reaching this agreement by recognising the need for investor choice in equities trading mechanisms which will allow for cheaper and more efficient execution to be delivered to end investors. However, imposing artificial limitations on investors’ choice by maintaining a hard volume cap in the level one framework may still hinder the EU’s ability to attract global investors to its markets. “AFME is concerned with the rigid approach the Council has adopted to bond market transparency. These policy changes are not justified by any data analysis and, as a result, there is a significant risk that liquidity provision in illiquid or large sized bond trades could be hampered. The Council’s approach removes the possibility for flexibility to be allowed during periods of stress where investors’ demand for liquidity can spike significantly. It represents another constraint on market makers, which are already subject to strict regulatory limitations on the use of their balance sheets for liquidity provision. “Going forward, AFME would urge the European Parliament to follow suit in agreeing its own position, ensuring that it keeps the attractiveness of EU fixed income and equity markets for investors at the forefront of its considerations. AFME also suggests that it carefully reviews the potential negative impact of hard coding deferral periods for bonds into level one legislation. As an alternative approach, AFME would encourage the Parliament to consider delegating greater powers to supervisory authorities, which should adopt a data driven approach to the calibration of the deferral regime and consider the combined impact of transparency rules and other regulatory requirements on banks’ capacity to serve their clients.” Separately, the Council has also agreed an approach on the Central Securities Depositories Regulation. Adam Farkas, said: “AFME has long argued that the implementation of mandatory buy-in requirements would have a disproportionately negative impact on the liquidity and competitiveness of EU capital markets. While we believe that a complete removal of the mandatory buy-in regime is the best approach, we welcome the Council’s position to view mandatory buy-ins as a measure of last resort, to be activated subject to assessment and only in the case where the level of settlement fails would be substantial in the EU. We support further focusing on all other tools that would be more appropriate to support settlement discipline and efficiency in Europe.” In more detail: On Consolidated Tape The establishment of a properly constructed consolidated tape for equities and bonds is an important incremental step toward further integrating EU markets, reducing home biases in EU citizens’ investments and attracting international capital to the EU. AFME would nevertheless liked to have seen more ambition in the Council’s approach by the establishment of a real time pre-trade, as well as post-trade, tape for equities. We are somewhat perplexed, however, that consolidated tape revenue share is not extended to all execution venues providing their market data. Equity market structure issues: We are pleased to see the general direction of travel towards reducing complexity in EU equities market structure. This acknowledges that restrictions targeting only certain execution methods, such as those originally proposed on systematic internalisers and midpoint trading, would reduce the facilitation of cheaper, more efficient equity transactions to the detriment of end investors. However, maintaining a volume cap remains directly at odds with international best practice, threatening the EU’s objective to effectively compete with other markets globally and it detracts from the EU’s status as a destination to invest or raise capital. On Fixed Income While we support having 5 categories of bond deferrals, we are disappointed to see that maximum deferral times continue to be hardcoded into the Level One legislation. Not only does this approach lack the flexibility that is critical, especially in times of market volatility, it does not appear to be justified by any data driven analysis.An incorrectly calibrated regime,resulting in inadequate deferral periods that lead to liquidity providers experiencing undue risk, will upset the fine balance between transparency and liquidity and end up negatively impacting end investors. On Designated Publishing Regime: We are supportive of the Council’s inclusion of the Designated Publishing Entity to create a regime where firms will be able to opt in as designated reporters, thereby decoupling the reporting requirement from the obligations under the systematic internaliser regime. – Ends –
Unprecedented sustainability-linked financing and changing regulatory policy mean European High Yield market is fast-evolving
15 Dec 2022
AFME has today published an updated set of ESG due diligence questions for use by European capital markets participants. The updated guidelines follow on from the April 2020 release of the first ever set of ESG guidelines for the European high yield market. According to AFME research, the European high yield sustainability-linked bond market grew significantly during 2021 to €15.7bn on 42 deals. This compared to no European high yield sustainability-linked bonds issued in or before 2020. In 2022, and in line with general market conditions, such issuances fell significantly, but AFME expects that these kinds of bonds will remain an important part of the European high yield market. In response to such large issuance volumes, regulatory policy and market practices are also evolving. The AFME due diligence questions have therefore been updated since 2020 to reflect these changes and are intended to provide a suggested framework for market participants’ ESG due diligence. Gary Simmons, Managing Director of AFME’s High Yield Division, said: “ESG finance is a fast-evolving market. We originally published our guidelines at a time when the ESG market was still developing. Over 2020 and 2021, we saw unprecedented growth in the market for green and sustainability-linked financings. The AFME High Yield Division’s remit is to ensure that the European high yield markets are able to run as efficiently and effectively as possible, so it was important to reflect recent ESG best practices and provide the benefit of our learning over the last two years to everyone in the market.” Cynthia Cheung, Vice-Chair of the AFME High Yield Division and Managing Director and Associate General Counsel at Bank of America, said: “COP 27 caused a lot of us to pause and think again about the ways in which our markets can have a positive impact on the wider world, and it seemed the right time to look at our materials again. Like so much of AFME’s work, we believe that these updated materials have immediate practical usefulness for market participants, and our work in this area will continue.” Adam Farlow, member of the AFME High Yield Sustainable Finance Committee and Partner at Baker McKenzie, added: “As shown at COP 27, commitment to net zero and the inherent significance of climate finance within that have never been stronger. It is vital that AFME continues to support issuers and market participants in their transitions and these revitalised ESG due diligence questions provide excellent parameters to guide production of full and cogent disclosure, accurately reflective of the rapidly evolving underlying current and lending legislation.” The updated 2022 due diligence questions are available here. AFME is concurrently working on a full update to its ESG guidelines for release in early 2023 -ENDS -
AFME disappointed by ESAs’ inaction on securitisation – EU legislators should provide leadership to address regulatory imbalances
13 Dec 2022
Commenting on the publication of the European Supervisory Authorities’ (ESAs) response to the European Commission's Call for Advice on the review of the securitisation prudential framework, Shaun Baddeley, Managing Director of Securitisation at the Association for Financial Markets in Europe (AFME), said: “We are very disappointed on first reading of the report. There is a weight of evidence supporting recalibration of both the bank and insurance prudential frameworks, but the ESA’s recommendations conclude that no real change is needed at this stage. Postulating that it is probably not worth making calibrations more risk sensitive and proportionate because they cannot quantify the benefit is no justification for inaction. Regarding advice on the banking sector: “There is a wide consensus among issuers and investors that existing regulatory imbalances have been a decisive factor in the stagnation of securitisation in Europe. It is fundamental to address aspects of the regulatory framework which remain miscalibrated and are holding back the tool’s potential to support the economy. “The EBA makes eight recommendations to the Commission, which primarily focus on resolving inconsistencies with Basel standards. None of these deal head on with two key prudential challenges for banks that are holding back the securitisation market in Europe, including the miscalibration of bank capital for securitisation and the disproportionate treatment of securitisation within the Liquidity Coverage Ratio. Both of these challenges disincentivise banks from participating in this asset class. What is needed here is a temporary adjustment to the p factor until a review of the securitisation standardised formula is concluded and any long-term adjustments are made. “On a positive note, the EBA does recognise the merit in rethinking the formulation behind securitisation risk weights if this is done at the Basel level. “One of the EBA’s recommendations is to reduce the risk weight floor for originators of “resilient” transactions to support issuance of significant risk transfer transactions of granular SME and corporate portfolios, for example. However, this change will be negated for banks impacted by the phase in of Basel III, due to major distortions created by the output floor formulation for securitisation, as evidenced by recent AFME and Risk Control Ltd research. Regarding advice on the insurance sector: “EIOPA’s section provides no recommendations but posits that while there may be logic in developing a risk sensitive framework, there is little point in doing so, given the limited impact the implementation of a proportionate framework would have. AFME disagrees with this view as it disregards the evidence that in the run up to the implementation of Solvency II, substantial insurance ABS assets under management were sold as a result of the impact of Solvency II on their own capital positions. What is needed here is for EIOPA to deliver on many of their findings and introduce a risk-based framework that recognises the differencebetween senior, mezzanine and junior risk for both simple, transparent and standardised (STS) and non-STS securitisations and assign appropriate capital charges at each level. “The report also suggests that there may be other elements, regulatory or other, that need to be considered, which likely inhibit the resurgence of the market, i.e. it argues that the prudential framework is not the sole factor driving a decade of decline in Europe. While this is true, it ignores the fact that European prudential frameworks are disproportionately punitive when compared with comparable asset classes within Europe or with prudential frameworks across the world. “EU legislators should use the opportunities provided by the CRR 3 discussions and Solvency 2 discussions to acknowledge the importance of a well-functioning securitisation market and introduce targeted adjustments to support proportionate and risk-sensitive requirements for this mechanism in Europe.” – Ends –

Rebecca Hansford

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