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Proposed GFMA principles regarding Critical Third Parties
17 Jun 2022
I. Background • Financial Institutions (FIs) are only one part of the financial services ecosystem. Some third-party providers (TPPs) that sit outside of the financial services regulatory perimeter are playing an increasingly important role in the financial system. In many cases, TPPs perform critical activities for FIs and operate in highly concentrated sectors. • Global authorities and regulators are increasingly assessing the risks posed by these critical third parties (CTPs) (including Cloud Service Providers (CSPs)) and the potential impact on financial stability. This is apparent from recent announcements (UK FPC and HM Treasury), speeches (BIS), and other more concrete developments (EU, Korea, MAS, FSB). At the core of authorities’ concerns is the possibility that a concentration of services in a small number of TPPs may mean that a failure or disruption, whether technical, commercial, or legal, at one or more of those providers could impact the provision of financial services so severely that it leads to a financial stability event. While the major CSPs are the main use case for this concern, authorities are also considering other IT TPPs, which, while less prominent, could represent a single point of failure. • This is still an emerging topic at an early stage of debate and with many options being considered. This GFMA paper, therefore, outlines our set of proposed principles on how to best address these risks and is looking to proactively engage with regulators and standard setters on this important topic.
MiFIR 2021 Corporate Bond Trade Data Analysis and Risk Offset Impact Quantification
3 May 2022
Press releaseavailable in English, French, German. AFME has today published a first of its kind study on fixed income data on trade-out times. This new concrete data will help inform the MiFIR fixed income deferrals calibration policy discussion. This shows that the majority of fixed income trades could be made transparent in near real-time, but also finds there is a clear need for a longer deferral period for the publication of larger or illiquid trades. Data provided by FINBOURNE Technology for this study demonstrates that an inadequate deferral calibration - as currently proposed by the European Commission - could have potentially significant negative implications for market liquidity. The AFME paper analyses recent European fixed income trade data from around 5,500 of the most frequently traded securities. The analysis focuses on the corporate bond landscape (rather than government bonds) to identify which types of trades could be subject to near real-time price and volume transparency, and which types of trades should be subject to deferrals. From the data set studied, AFME and Finbourne find that different deferral periods need to be applied based on the trade size and issuance volume, among other characteristics. Applying the Commission’s proposed deferral regime to all trades, especially those larger in size or illiquid, risks exposing liquidity providers to potential undue risks, which could negatively impact the amount of liquidity/pricing that market makers are able to provide. Key findings: Small trades (of less than EUR 500k) account for the majority (c. 70%) of the overall number of trades in the data set and can support being reported in near real-time.Therefore, making these small transactions transparent will significantly improve transparency by almost 10 fold, increasing from 8% of transactions currently being reported real-time to almost 70% of transactions becoming near real-timetransparent. The smaller the trade size and the more liquid the instrument, the less risk is associated with rapid dissemination of price and volume informationfor liquidity providers, with the ‘trade out’ (i.e. moving the risk off the bank’s balance sheet) being less than 1 day for liquidity providers. However, this 70% reflects 13% of market volume. Therefore these transactions represent a much smaller percentage of market volume than of the number of trades. Larger transactions (of more than EUR 500k) reflect a relatively small percentage of total transactions, accounting for c. 30% of total transactions but a much larger share of market volume. The data analysis demonstrates that the larger the transaction, the longer it takes to 'trade out' and clear the market. For trades larger than EUR 1 million, it takes on average 6 business days to ‘trade out’ of positions. For trades over EUR 5 million it takes on average 19 days to trade out, while larger trades take even longer. The deferral regime should have a conceptual link between trade size categories (i.e. near real-time transparency), bond liquidity and deferral periods (i.e. for a regime with a higher trade size, or deemed illiquid the deferral period should be longer); At the same time,longer deferrals for the small number of large transactions should limit the risk of liquidity reduction in the market for institutional investors. AFME therefore opposes a hardwiring of price and volume deferral calibration in primary legislation (as is currently proposed). Since each fixed income asset class will include a significant number of illiquid bonds, AFME urges the co-legislators to adopt a range of deferral periods, going beyond the Commission’s proposal for maximum deferral period for prices (by the end of the day) and volume (within two weeks). ESMA will then be able to calibrate the details of which bonds should go into the various deferral categories, this should be based off detailed and high-quality data.
Central Bank Digital Currencies: A Global Capital Markets Perspective
22 Feb 2022
New GFMA Paper by BCG and Clifford Chance Outlines Benefits and Challenges of Wholesale Central Bank Digital Currencies Paper Encourages Collaboration between Public and Private Institutions and Outlines Opportunities, Challenges, and Questions Concerning the Design, Issuance, Legal Status, and Use Cases of wCBDCs BOSTON, February 22, 2022—Over 70% of central banks have begun exploring the possibility of introducing central bank digital currencies (CBDCs). A new paper, commissioned by the Global Financial Markets Association (GFMA) from Boston Consulting Group (BCG) and Clifford Chance LLP, identifies the GFMA’s critical considerations for the success of potential CBDCs in wholesale markets (wCBDCs). EntitledCentral Bank Digital Currencies: A Global Capital Markets Perspective, the paper is based on research, as well as extensive interviews conducted with contributing member firms and market participants with particular expertise relevant to CBDCs, during the fourth quarter of 2021. The authors’ recommendations stress that: Central banks in collaboration with the private sector should continue to explore the role that wCBDCs can play in driving innovation and efficiencies in wholesale markets. Central banks should take a measured approach in the introduction of wCBDCs and the timeline should be cautious to mitigate any potential transition risk impacting safety and soundness, and financial stability. wCBDCs are expected to operate alongside legacy instruments and systems, and not to replace them. It is therefore important for wCBDCs to be interoperable with the broader financial market ecosystem. The use of sandboxes, proof of concept, dialogue with market participants, and pilot programs based on specific use cases will test the application of wCBDCs and help identify the impact on capital markets. After sufficient analysis of lessons learned, financial institutions and regulators should define a transition period that is reflective of the risks and opportunities, and an effective implementation. The paper outlines the opportunities, challenges, and questions concerning the design, issuance, and legal status of wCBDCs, while introducing use cases to provide a framework for continuing a constructive conversation.
The Rising Cost of European Fixed Income Market Data
3 Feb 2022
The Association for Financial Markets in Europe (AFME) has published a new report, commissioned from Expand Research LLP, which finds that the cost associated with fixed income market data has soared between 2017-2021, increasing by 50%. This has been driven by price increases of 35% on the existing cost base and new, incremental usage which accounts for an additional 15% of spend. This is compared to a 25% price increase for sell-side market data more generally. Fixed income data costs are therefore rising much faster than the average cost of overall market data. The report, “The Rising Cost of European Fixed Income Market Data”, identifies the sources of rising market data costs within fixed income markets and proposes solutions to encourage greater liquidity, efficiencies and growth in European markets, which play a critical role in providing funding for governments and corporates. Key findings: Costs in all categories have increased, with the composition of data spend significantly different than for equities. Buyside costs have also increased significantly. Figure 3 of the report demonstrates that costs have increased regardless of the number of market data users and is driven by price increases and changes to charging structures. Figure 3 also demonstrates that the cost of sourcing the data is rising yearly and the trend is likely to continue, steepening the trajectory further. As a result, increasing market data costs are likely to have forced some consumers to scale back their data purchase to a minimum and often to economically suboptimal levels. In some cases, it could lead to strategic decisions to withdraw from specific markets. The report identifies a first step to achieving more reasonable fixed income data costs is to establish and apply a set of industry developed standards to fixed income market data across the industry. These should cover: Standardised pricing models for purchasing data from all vendors. Uniform formats in which the data is stored and provided to firms. A consistent procedure for accessing the data.
European Benchmarking Exercise (EBE) for Private Securitisations
1 Dec 2021
This report is part of the European Benchmarking Exercise, a market-led initiative organised by AFME, EDW and TSI Its purpose is further to enhance the quality and usefulness of disclosure in the private cashsecuritisation market, both ABCP and balance sheet financed, in the EU and UK, in order toassist market participants and reassure supervisors Synthetic securitisations and public ABS bonds are not in scope of this report This report provides, on a voluntary basis, aggregated transaction-level data gathered from12 banks across 6 countries The overall market is estimated at least €189bn of total commitments; specific data receivedcovers €63bn of commitments Private securitisations backed by Trade Receivables and Auto Loans or Leasing make uparound 80% of the market, of which 39% and 80% respectively are funded throughsyndicated transactions Over 80% of private cash securitisations fund sellers in the EU, and over 70% directly fundreal economy (non-financial) sectors of the economy As is usual, Trade Receivables contain certain concentrations of debtors, while Auto Loansor Leasing have more granular portfolios The majority of transactions were initiated after the Global Financial Crisis but before theentry into force of the Securitisation Regulation Of all transactions by volume, 84% were undertaken by sellers with ratings of BBB and below at inception, and the average seller rating was BBB. In contrast the average transaction rating is in the range A to AA. This shows that private cash securitisations provide a cost-effectivemeans of financing especially for lower rated sellers. We expect this to be the first in a series of such reports, to be published regularly over time. All amounts are in EUR.
Sustainable Finance in Europe: Regulatory State of Play - Key impacts for banks and capital markets
23 Nov 2021
A new report by the Association for Financial Markets in Europe (AFME) and Linklaters titled, “Sustainable Finance in Europe: Regulatory State of Play” provides a practical guide to the significant number of initiatives which make up the regulatory framework for sustainable finance in the EU, UK and Switzerland. It highlights how the banking sector is impacted and makes recommendations to further the goal of developing sustainable finance in Europe. The report provides analysis and identifies key milestones and actions for the banking industry in the five key elements of the European sustainable finance regulatory framework including: Sustainability reporting and disclosures; The development of taxonomies for sustainable activities; The development of market standards; Incorporation of ESG into banks’ risk management; and Initiatives relating to sustainable corporate governance. AFME assesses the current state of play of the European regulatory framework and highlights three priority areas to facilitate the flow of capital to help achieve sustainability objectives: Finalising effective foundations Significant progress has been made over a short space of time, but it is important to finalise and implement effective regulatory building blocks as enablers of sustainable finance including (a) developing a disclosure framework for sustainability reporting; (b) providing a common classification system of sustainable economic activities; and (c) ensuring that ESG risks are effectively integrated into banks’ risk management. Ensuring coherence and consistency Due to the urgency of the task to tackle climate change, a very large number of initiatives have been put in place in a short space of time. While recognising the urgency of the task at hand, it is necessary to ensure that the framework is coherent and consistent, particularly as many aspects are complex and interconnected. As the foundations are finalised, AFME calls on policymakers and regulators to carefully consider the coherence of the framework as a whole to ensure that it is meeting its goals of facilitating the allocation of investment to meet sustainable objectives, avoids undue complexity and overlapping, duplicative or inconsistent requirements. Further enhancing the consistency, understanding and usability of the framework would facilitate its implementation and help support well-functioning sustainable finance markets. Strong international coordination Climate change and other sustainability objectives are a global challenge which necessitates an internationally coordinated response. In order to maximise the benefits of sustainable finance, it is vital to leverage international capital markets and to provide a coherent approach for multinational businesses and financial institutions which are key to supporting the transition.
Introducing a New Hybrid Recapitalisation Instrument for Smaller EU Corporates
18 Nov 2021
The Association for Financial Markets in Europe (AFME), with support from PwC and Linklaters, has today published a new report, which provides a practical guide for European authorities and Member States looking to introduce a new hybrid recapitalisation instrument that could help provide funding for smaller corporates post-COVID. The report, “Introducing a New Hybrid Recapitalisation Instrument for Smaller EU Corporates” builds on an earlier January 2021 report which examined the recapitalisation needs of smaller EU corporates following the pandemic and found that a hybrid equity instrument could enable a greater number of SMEs to gain access to equity-like funding without relinquishing control of their organisation – one of their chief concerns. However, such a solution needs to be tailored to the local accounting, legal framework, and tax and insolvency treatment in individual EU Member States, to achieve the key attributes necessary for creating an instrument which meets the needs of both investors and corporate issuers. Existing domestic frameworks in Germany, France, Italy, Spain and the Netherlands are presented as examples which officials in other Member States can refer to in developing structures which work in their own countries and preferably at EU-wide level. The report presents the following analysis: An overview of the key hybrid instrument attributes required to achieve the desired equity accounting, tax deductibility and insolvency treatment. A summary of state aid considerations that are likely to be taken into account in assessing the introduction of such equity-accounted hybrid instruments for the purposes of compliance with EU state aid requirements. A generic sample term sheet outlining the proposed instrument features which can be used as a reference for discussion with officials, investors and mid-cap/SME corporate issuers. AFME believes the report will provide a useful reference for policy makers and key stakeholders in order to bring the idea of a new hybrid instrument for SMEs to reality and that officials, corporates and investors can continue to work together to design solutions adjusted to the needs of companies seeking investment capital in the phase of economic recovery. This report follows AFME’s January 2021 report, which estimated that Europe could face a funding gap of €450-600bn in equity and hybrid capital to prevent business defaults with the gradual reduction of state support measures.
Guiding Principles for Data Sharing - A Perspective for European Capital Markets
3 Nov 2021
AFME is pleased to publish “Guiding Principles for Data Sharing: A Perspective for European Capital Markets”, which has been developed with input from members of the AFME Data Strategy Working Group. Data sharing is an essential function within European capital markets, in which firms see opportunities for further data sharing to support common objectives such as greater security and resilience, sustainability, innovation and compliance and monitoring. European authorities have also similarly identified the value of data, both within and across sectors. For example, the European Data Strategy, published by the European Commission in February 2020, sets out an ambitious horizontal strategy for promoting data-driven innovation across multiple industry sectors and providing clear rules for data access. However, barriers to data sharing remain, with high costs, security and data protection risks and a lack of standardisation, all of which currently reduce incentives for sharing between market participants. We believe these issues must first be addressed as part of any further data sharing initiatives in order to be cost-effective and bring value to the market and end users. This paper examines these opportunities, barriers and risks in further detail, and concludes by providing nine guiding principles to support European policymakers in addressing the risks and barriers identified when implementing future data sharing policies. These principles are also applicable in a global context, and we welcome further collaboration between public authorities and the industry across jurisdictions to support the development of global data standards and cross-border data sharing arrangements.