Yesterday’s announcement that the compliance deadline for the European Benchmarks Regulation (BMR) has been moved back by two years to 31 December 2021 is hugely welcome news for the industry. Market participants now have an extra two years to work through what will be an immensely complex transition to new or reformed benchmarks for all EU financial contracts. AFME (along with the Euro RFR Working Group and several other trade associations such as GFMA, ISDA, FIA and EMTA) had strongly argued in favour of an extension for both critical as well as non-critical benchmarks. The BMR has a number of high-level objectives, particularly around improved governance and the quality of the data that is used to calculate benchmarks, and it is having a major impact on European financial markets. Critical Benchmarks Due to the high number of transactions linked to them, EURIBOR and EONIA (Euro Interbank Offered Rate) and EONIA (Euro OverNight Index Average) have been defined as ‘critical benchmarks’ under the BMR. According to the ECB, there is an estimated €22 trillion of EONIA-linked derivatives contracts in existence and €109 trillion linked to EURIBOR. But neither EONIA, nor EURIBOR currently meet the requirements of the BMR and given the huge volume of financial contracts affected, achieving a changeover to rates which do comply will be a mammoth undertaking. This was an issue that prompted considerable discussion at AFME’s Spanish Funding Conference earlier this month, as the capital markets industry grappled with how to tackle the challenge. In his keynote address, Sebastián Albella, Chairman of the CNMV (Spanish Securities Markets Commission), pointed out that in Spain alone one in four mortgage contracts is linked to EURIBOR. The days of submission-based rates have been numbered since the onset of the financial crisis and the LIBOR rate-rigging scandal, which resulted in a global drive to reform IBORs of all kinds. The loss of public trust in the veracity of LIBOR, in particular, made it clear that maintaining the status quo was not an option. Since then, many banks have (for understandable reasons) become increasingly reluctant to continue submitting the data used to calculate IBORs. And, lastly, the underlying volume of EURIBOR and EONIA-based transactions has also been declining. These are all factors that have undermined the depth and representativeness of the data. But while the case for reform may be clear, the sheer number and variety of financial contracts linked to EURIBOR and EONIA means reform will be immensely complex. And while good progress is being made, much also remains to be done. The approach being taken combines both replacement and reform. For EONIA-based contracts, the European Money Market Institute (EMMI), the body which administers both EONIA and EURIBOR, has already announced it has ceased its efforts to reform EONIA. Subsequently, the ECB’s Euro risk free rates (RFR) Working Group announced that ESTER (Euro Short-Term Rate) will be the new designated risk-free rate to replace EONIA. EONIA-backed securities will transition to ESTER, which will also become a fall back rate in EURIBOR-based contracts. However actual ESTER data does not exist yet, and may not be available until October 2019. As an interim measure, the ECB has begun publishing “pre-ESTER” data, which will give market participants an opportunity to acclimatise to the new ESTER rate. For EURIBOR, the plan is for reform not replacement, and these reforming efforts have significant regulatory backing; indeed Sebastián Albella said it was ‘crucial’. Mikael Stenström of the ECB, also at AFME’s conference earlier this month, confirmed that he expects a positive outcome for those efforts. EMMI is expected to file for authorisation of a reformed version of EURIBOR by the second quarter of this year; this is expected to change the calculation of EURIBOR to a ‘hybrid methodology’ that relies not just on submissions but also on real transaction data (supplemented by other market data where necessary). Third Country benchmarks Additionally, third country benchmarks (rates which are produced outside of the EU), are another big area of concern. Despite their misleading ‘non-critical’ labelling under the Regulation, third country benchmarks such as non-EU Foreign Exchange spot rates are widely used by EU financial firms and corporates in hedging commercial activities and investments abroad. At present there remains considerable uncertainty about whether many third country benchmark administrators can or will become BMR compliant via the available third country routes, which could create significant disruption for market participants. The two year delay will provide a vital opportunity to review the third country regime under the BMR Review clause. This will make it possible to rectify unintended consequences and enable viable solutions to be found. Continuing progress on reform While this two year delay does offer some much needed breathing space, it will be important to maintain momentum on reform and avoid complacency. As Mikael Stenström remarked, the success of these reforms will depend on each and every market user – whether from a large or small institution – being engaged in these issues: reviewing their contracts, making provisions and engaging in the consultation processes around the reforms. We will be continuing our engagement on these issues over the coming period.

The coming into force of the simple, transparent and standardised (STS) securitisation rules last month was intended to mark a fresh start for securitisation within Europe. And while reaching this stage is in many ways a considerable achievement, the fact that so much of the underlying technical framework remains incomplete has created considerable uncertainty for the sector. January 2019 was in fact the first January since 2009 without any European ABS issuance. This somewhat shaky start is a tremendous shame given the high levels of ambition for the reforms. In December, European policymakers and regulators hailed the STS reforms as a key element in strengthening Europe’s capital markets, with Valdis Dombrovskis describing the reforms as ‘one of the cornerstones’ of the Capital Markets Union (CMU) initiative. Such language demonstrates the significant progress that has been made in rehabilitating the reputation of securitisation and in increasing levels of understanding around the important contribution it makes to well-functioning financial markets. Securitisation’s value as a tool for increasing capital flows to the real economy, boosting economic growth, is now openly acknowledged. This is a much-improved state of affairs compared to where the industry found itself in the wake of the financial crisis. At that time, despite the historically strong performance of European securitisations, the sector’s public reputation rather unfairly suffered much the same fate as that of the problematic US sub-prime mortgage sector. As a result, the European securitisation market effectively dried-up after 2008. Over a decade on, and issuance in Europe is still at a fraction of the level it once was, having dropped from €819 billion in 2008 to standing at just €269 billion in 2018 – of which only half was actually placed with investors, the remainder still being retained by originators and used to support repo funding from central banks. The Commission has said it hopes the STS framework will be the catalyst for reigniting issuance and investment. However, while much of the underlying detail supporting the regulation remains to be finalised, this ambition will continue to be unfulfilled. Several critical mandates for technical standards and guidelines are still to be completed, creating considerable uncertainty for the sector. As a result there have been no new issues of mainstream European issuance at all, so far in 2019. A certain level of disruption is inevitable whenever significant regulatory reforms are introduced, and in that sense STS securitisation is no different. But in order for the new framework to begin making a positive impact these outstanding issues need to be resolved as rapidly as possible. Whether, in the long term, the arrival of STS securitisation marks the beginning of a significant recovery for European securitisation is something which only time will tell. Arguably the market can only improve from where it currently is. What is clear is that over the coming months Europe’s policymakers must “renew their vows” and recommit to creating an environment which helps European securitisation to thrive. Maintaining that focus will be essential if we are to see a vibrant, high quality and dynamic European securitisation market emerge, delivering funding for Europe’s businesses and consumers and adding stability to our banking system.

This year will be one of major structural andinstitutional change in Europe. Whatever form Brexitfinally takes, there will likely be disruption to Europe’scapital markets. It will take time to see what impact it will have,particularly on the role of London as a financial centre inEurope. Leaving Brexit to one side, 2019 was always going to be a year of transition. Three of the biggest jobs in the European Union, the presidents of its commission, council and central bank, willhave new incumbents. These important appointments will needto be made well before the end of the year. Each European Commission is defined by the style andapproach of the president, who leaves his or her stamp on thestrategic direction of the EU. For the first time since the 1970s,there will be no British commissioner appointed. It’s highly likely that the European parliament, after elections inMay, will have a very different make-up to any other since thefirst vote in 1979. The growth of populism across the bloc isbound to be reflected in its composition and its dynamicinevitably will change because there will no longer be 73 BritishMEPs. High up on the new commission’s agenda should be takingforward the capital markets union project. This has becomeeven more important for Europe since the Brexit vote. At itsheart, the CMU is about making Europe’s capital markets more efficient in order to achieve sustainable growth. The United States already has deep liquid capital markets andthe EU has been falling behind. According to The Economist, 28of the top 100 companies globally came from the EU ten yearsago. Now it is only 17 and will drop to 12 when the UK leaves. In the past four decades six American companies have gone from foundation to valuation of $100 billion. Only one European company has achieved this. So the CMU is much more than a call to arms; it is fundamentalto the EU’s future. It is imperative to ensure that the bloc candevelop its capital markets to make it possible for growth andjobs to be created on a sustainable basis. Whoever succeedsJean-Claude Juncker as head of the European Commissionneeds to have a clear plan for taking forward the CMU in a post-Brexit world. This AFME View was originally published in The Times on 7th January

Creating a clear and responsive classification framework for sustainable finance is a vital first step in the development of an overall greener and more transparent financial system Europe has made a good start on its ambition to be a global leader in sustainability issues. For instance, 37% of total green bond issuance in the last 10 years was done in Europe - more than North America, Asia-Pacific or any other global region, according to Climate Bond Initiative data. And France is leading the EU nations with over 4%, by value, of bonds issued in the country in 2017 classed as sustainable. By publishing its Sustainable Finance Action Plan the European Commission has also provided an ambitious and much needed roadmap for putting sustainability at the heart of the financial system - European Parliament and Member States too have also pushed this issue high up their agendas. To meet the EU’s level of ambition – for instance its commitment to reduce greenhouse gas emissions by 40% by 2030 –a significant increase in private sector investment in sustainable economic activities will be required. But at present a major obstacle to attracting such investment is a lack of agreed definitions about what exactly qualifies as ‘sustainable’. Although some industry frameworks do already exist e.g. ICMA’s green bond principles, market participants lack a universally agreed and applied framework. A common workable, flexible and dynamic language is needed to better identify, compare and invest in sustainable economic activities. As a result it can be difficult for would-be investors to judge whether an investment opportunity is genuinely ‘sustainable’ or rather whether it is ‘greenwash’. This not only deters investors, but also prevents meaningful measurement and understanding about the size and make-up of the European sustainable finance sector. In order to tackle these issues AFME is supportive of the European Commission’s proposals to create a harmonised EU-wide ‘taxonomy’ for classifying whether an economic activity is environmentally sustainable, as part of its Sustainable Finance Action Plan. We believe it is a fundamental building block in the development of the EU’s sustainable financial system. But for it to have its full intended impact, we believe it must be sufficiently flexible. This need for flexibility is clear in a number of areas. For instance, while we welcome the intention behind the European Commission’s proposals to only implement the taxonomy once it is ‘stable and mature’, the reality is that in this very fast-moving area such a definitive taxonomy may never exist. There must be arrangements in place to enable the taxonomy to be regularly refreshed, to take new developments and technologies into account. The framework should also be international in scope, looking at activity both within and outside the EU. We believe it could encourage improvements in market practices worldwide. Calibrating it appropriately, so that it can be adaptable to global economic activity and also doesn’t impede the competitiveness of European markets will be hugely important. Additionally, there are many economic activities which could on some level be labelled ‘sustainable’ and a range of factors will need to be considered when making such an assessment. For example, even for something that seems fairly obviously to be ‘environmentally-friendly’, like an energy company establishing a wind farm to generate electricity, there could be complicating factors - such as if the construction of the windfarm had a negative impact on local wildlife or the local population in some way. A sustainable finance categorisation framework will need to be sensitive to such circumstances, including to the fact that many businesses will include both ‘sustainable’ and ‘non-sustainable’ elements. These is no disputing that coming up a widely-accepted and adaptable framework will be challenging. Building on existing examples of best practice could help – a number of organisations such as ICMA, the Climate Bond Initiative, and the European Investment Bank have already undertaken considerable work in this area. A range of sustainable investment strategies have also already developed in the market. Yet as proposals for the taxonomy currently stand, only investments which have a stated positive environmental or social objective would be included. This approach, known as ‘impact investing’, currently only makes up a relatively small part of the sustainable finance ecosystem. It is essential that the Taxonomy proposal allows for sufficient flexibility for “transition” investments – meaning investments in companies that are taking meaningful strides towards environmental sustainability, rather than to focus exclusively on investments that are already fully sustainable. Creating the flexible and effective categorisation framework that has been described here may seem like a tall order but achieving it is fundamental to the building the first steps towards a sustainable financial system and unlock the financing necessary to achieve sector and must remain a priority, no matter how complex the task may seem. This AFME view was originally published in L'Agefi

Europe’s capital markets are facing some of their toughest challenges since the global financial crisis. Brexit, global competition and political uncertainty risk fracturing the integration achieved so far in these markets. This unprecedented uncertainty could also threaten the future deepening and integration promised by the European Commission’s plans for an EU Capital Markets Union (CMU). We are approaching a critical juncture, with Brexit and European Parliament elections in particular, which could disrupt the smooth functioning of Europe’s capital markets. Policymakers therefore need to ensure that avoiding market fragmentation and improving the capacity of Europe’s capital markets remain at the heart of a reviewed strategy around CMU. The CMU’s original aim of developing a single European capital market remains as compelling as when the project was launched in 2015. At the project’s outset, the European Commission set a deadline of October 2019 (the end of its legislative term) to put in place the building blocks of the CMU. With less than a year left until that deadline, the initiative is at a defining moment. Several steps have been taken towards achieving the CMU’s objectives. These include the introduction of a new framework for simple, transparent and sustainable securitisation, reforms of the prospectus regulation and the promotion of SME growth markets to facilitate listings on public markets. But there is still much more to be done. Valdis Dombrovskis, vice-president of the European Commission, spoke earlier this year of the “intensive work” still required to ensure those key building blocks would be in place by the deadline. It is clear that for CMU to be a success, 2019 cannot be viewed as the end of the story. Now is the time to reinvigorate the CMU with a renewed sense of purpose and a clear vision for the future. Those who push the project forward will have the benefit of building on the strong foundations and progress that has already been made. For instance, recent research by AFME shows that there have been encouraging improvements in the availability of pools of capital for investment. In the past five years, the total amount of EU household savings invested in capital markets assets (such as life insurance and pension funds) has increased from 114% of GDP to 118% GDP. This robust pool of savings is fundamental to support job creation and economic growth in the EU. At the same time, the amount of risk capital invested into SMEs in the form of venture capital, private equity, business angel investment and equity crowdfunding has more than doubled from €10.6bn in 2013 to €22.7bn in 2017, enabling them to scale-up and innovate. But challenges still remain, with European businesses continuing to rely too heavily on bank finance. For example, in 2017, only 14% of new funding for EU businesses came from capital markets compared with 86% from bank lending. This results in capital markets funding for EU businesses being about half the level in the US, despite the US economy being a similar size. There are several outstanding areas that CMU could target, which could significantly boost the effectiveness of Europe’s capital markets. For example, as part of the aims of the CMU, and in view of the increasing retirement savings gap, member states need to encourage households to invest more savings in productive assets (in the form of equity, for instance, through private pension funds). Currently, EU households have high levels of savings, but they prefer to accumulate these in conservative cash products or bank deposits. As a result, the stock of EU household savings held in capital markets instruments is only 1.18 times GDP, compared with 2.9 times the annual GDP in the US. The CMU could help EU households use their savings more productively. This would mean policymakers providing incentives for retail investors to save for retirement. Initiatives such as a Pan-European Personal Pension Product (PEPP) would help European integration in this area, and member states could encourage the take up of PEPPs through appropriate tax incentives and consistent application in line with other member states. Corporate bond markets also play a key role in giving businesses alternatives sources of finance and investors more investment opportunities, and there is significant potential for them to upscale. At present, European corporate bond markets are about one third of the size of those in the US (10% of GDP in Europe in 2017 versus 31% GDP in the US). In November 2017, the European Commission’s Expert Group on Corporate Bonds published 22 recommendations to enhance the functioning of European corporate bond markets. Off the back of these recommendations, policymakers should now aim to propose concrete reforms and actions. The UK’s decision to leave the EU has fundamentally shifted the context of the initial CMU launched in 2015. As we enter the CMU’s next phase, policymakers should take stock of this new environment, the work done so far and the scope for further progress. It will be vital to develop policy measures that balance market resiliency, market integrity and appropriate supervision while keeping Europe’s capital markets sufficiently open and competitive. In addition, for CMU to remain relevant, it must also take into account the growing impact of developing areas of finance such as fintech and sustainable finance. Fintech is a fast-developing area, and if the EU is to truly unlock its potential, it must be global in its ambition, and coordinate with regulators across the world to create the right environment to support innovation. On sustainable finance, Europe has already made a promising start on becoming a global leader. The EU has a vital role in supporting the nascent sector to continue to grow. In particular, its plans to create a sustainable finance taxonomy is a vital first step to provide clarity on which activities can be considered ‘sustainable’ before kick-starting further developments. These are just a few areas that could form part of the CMU agenda into the future but there are many more areas where reform and better collaborative working across the EU could boost the capacity of Europe’s capital markets. It is clear that the CMU agenda for post-2019 must be bold, ambitious and far-reaching. Tackling such complex issues will require long-term political commitment and momentum to drive through the scale of the change that is needed. Whatever the political landscape next year, post-Brexit and following the European parliamentary elections, one thing is clear – CMU must continue to be a priority in order for companies, investors and savers to thrive across Europe. This AFME View was first published in Investment and Pensions Europe magazine

With less than six months remaining until the UK leaves the European Union, there remains very significant uncertainty for Europe’s financial services industry. Although Brexit poses challenges to all sectors of the economy, the potential for disruption is particularly acute for the wholesale financial sector, due to the cross-border nature of much of its business. Reaching a Withdrawal Agreement that includes a transition period should be the priority for all stakeholders involved. This is important to ensure an orderly withdrawal, preserve financial stability and avoid market disruption. At the time of writing, there remains uncertainty about whether there will be such a transition period. In the absence of a Withdrawal Agreement, firms are implementing their contingency plans to ensure they will be able to continue to serve their clients. Firms have undertaken extensive planning and are taking steps to adapt their business to the UK’s withdrawal from the single market. However, there are a number of important cliff edge risks that industry cannot tackle alone. We recently reiterated our concerns in a letter to Commission Vice-President Dombrovskis and urged the European Commission along with member states and regulators to provide certainty on the steps that will be taken to address these risks. There are a number of cliff edge risks which urgently need addressing, including: 1. Continued access to central counterparties Brexit will have major implications for clearing. London-based central counterparties (CCPs) are currently responsible for clearing euro-denominated derivative transactions worth €100tns each year. In the absence of transitional arrangements, or recognition under the European Market Infrastructure Regulation (EMIR), UK CCPs would no longer be authorised to perform clearing services under EU law and EU27 firms would no longer be able to satisfy their clearing obligations through a UK CCP. A solution is urgently required to ensure that there is no gap in the ability to access CCPs and to avoid increased capital requirements. It has been suggested that EU27 banks could move positions to EU CCPs. However, this would be unrealistic in the limited time available, would involve systemic risk, and it is questionable whether the market alone could supply sufficient liquidity for such significant shifts of positions between CCPs. There is also currently no available alternative for clearing some products in the EU27. There is a real risk that, in the absence of clarity on a solution, UK CCPs may have to start the process of delivering termination notices to their EU27 clearing participants as early as December to ensure that they will continue to comply with the law. This is likely to have a highly disruptive and adverse impact on firms, markets and end-users. Agreeing a legally sound solution, to avoid such a scenario, is required as a matter of urgency. 2. Continued servicing of existing contracts Following the UK’s departure from the single market, current passporting arrangements, which allow UK firms to serve clients across Europe, will cease. As a result, there is significant uncertainty about the ability of firms to continue to serve EU27 clients under existing contracts, particularly in relation to derivatives contracts. While firms should be able to continue to perform contractual obligations under existing contracts for OTC derivatives in most member states, it may not be possible to perform essential ‘lifecycle’ events. These include the exercise of options, transfers of collateral, unwinds or portfolio compression. Such lifecycle events occur frequently and the inability to perform them could impair the ability of banks and clients to manage exposures and risks, which is important to both to market participants and regulators. Transferring legacy clients onto new contracts in advance of Brexit would also be hugely challenging, particularly in a “no deal” scenario. The scale of this exercise would be unprecedented and there is also the risk that clients and counterparties may delay or refuse consent to such a novation process. We recently explored these challenges in more detail in a joint paper with the International Swaps and Derivatives Association (ISDA). We believe that official sector action is required to address this risk and enable lifecycle events to continue to be performed. 3. Cross-border data transfers A third cliff edge risk is the significant uncertainty around the ability for firms to continue to transfer personal data between the UK and the EU27 post-Brexit.After leaving the EU, the UK will become a third country and, without a bilateral agreement, would fall outside the EU’s “safe data” zone under GDPR. This will make it more difficult for banks and other businesses to transfer data between the EU27 and the UK. The ability to continue to transfer data is vital to support cross-border business. Firms may have a presence in several countries but will often manage certain functions such as HR or financial crime monitoring from a centralised location, as well as engaging with vendors and suppliers based in other member states. Therefore, cross-border data transfers are essential for maintaining day-to-day operations. If the European Commission deems a third country to have an ‘adequate’ data protection framework in place, then data transfers between Europe and that third country can continue uninhibited.However, a full assessment could only happen after the UK has actually left the EU. We would like to see adequacy determinations initiated by the EU27 and the UK as soon as practicable ahead of the UK’s exit. We also urge the relevant authorities to commit to providing a temporary solution to ensure that there is no gap following the UK’s withdrawal given that the additional safeguards in the GDPR can be costly and lengthy to implement. You can find further detail in our briefing note on data transfers. Clarity is urgently needed In light of the ongoing uncertainty regarding the outcome of the Brexit negotiations, and a no deal Brexit remaining a possibility, firms require urgent clarity on actions that the European Commission, member states and regulators would take to minimise the impact on clients, consumers and financial stability. With little more than 5 months remaining, the time is now to provide clarity and reassurance.

The demands facing compliance functions have arguably never been higher. Recent years have seen major regulatory changes, such as MiFID II, the Market Abuse Regulation and the fourth and fifth Anti-Money Laundering Directives. Add in a growing number of codes of conduct to get to grips with and an ever-evolving technological landscape and it’s clear to see that compliance departments have much to contend with. In the coming years it will be essential for compliance functions to adjust and enhance their capabilities, in order to meet these increasing expectations. This was one of the key themes discussed at our Annual Compliance and Legal Conference last week, including in a panel discussion responding to the findings of AFME’s recent paper, produced with EY, The Scope and Evolution of Compliance. Where in the past the core of a compliance officer’s role was to advise on regulatory requirements and monitor adherence to company policies, compliance is now expected to play a more strategic role in anticipating and managing risk. In particular, following the introduction of the Senior Managers and Certification Regime (SMCR), there is a clear need for management to be provided with a holistic overview of potential risk. As Stuart Crotaz, a Partner at EY, commented: ‘What senior management want is rich compliance advice, offering a broad perspective on the latest thinking from regulators’. Being able to provide this high level strategic advice can be a stretch for departments already at capacity delivering day-to-day requirements. This is where technological developments such as artificial intelligence and automation of processes can play a valuable role, by alleviating the demands of time-consuming manual tasks. Taking advantage of these technologies would help compliance to shift from being a function which mainly generates data to one which is able to analyse and use data strategically. But, in concert with introducing new technological solutions, the capabilities and skills of staff will also need to be upgraded to match. As Jacqueline Joyston-Bechal, Head of Compliance EMEA,BNY Mellon commented during the panel discussion: ‘We’re at a pivotal point in financial services and I don’t think there’s any excuse for not understanding new technology’. There are dramatic technological changes taking place which will affect almost every aspect of how firms conduct their business, not just in compliance. Keeping up to date with such developments can’t simply be ‘outsourced’ to IT or other specialists within the organisation. In order for compliance to ask the right questions, and assess the risks posed, they too must have a sound understanding of technological developments. As the role of compliance changes, so too must its relationship with those managing risk on the front line of business operations (the so-called first line of defence). Ensuring the right balance between having an in-depth understanding of day-to-day operations within a firm and maintaining the ability to provide independent monitoring oversight can be challenging. In such circumstances, it’s important for compliance professionals to have confidence in their own abilities and not be afraid to ask questions of those working in the first line. This will be vital for ensuring effective oversight going forward argued Molly Deere, Vice President, Assistant General Counsel, at UK Law firm Stephens. Whatever the future holds for compliance there will continue to be debate about the best way for firms to approach the challenges they face. It is for each individual firm to decide what is most appropriate for its individual circumstances. But, with three quarters of attendees at last week’s conference in agreement that the role of compliance will expand over the next three to five years, what doesn’t seem to be in dispute is that the increasing demands on compliance resources are unlikely to diminish. Read more in our full report, The Scope and Evolution of Compliance here,produced in collaboration with EY

Advances in new technology have the potential to dramatically transform how capital markets operate, driving cost and efficiency savings, and significantly improving the client experience. Whether it is machine learning and artificial intelligence, allowing firms to increase their ability to analyse and manage risks, or Cloud computing enabling easy access to IT infrastructure and powerful tools such as data analytics - new technologies are having an impact on all capital markets participants. These are just some of the areas which market leaders in both technology and financial services gathered in Paris to discuss last week, at our inaugural Global Innovation Institute conference. While the many opportunities offered by technological innovation are evident to see, for firms it can be a challenge to decide where to prioritise when considering their long-term strategy, especially when in many areas the underlying technology is still maturing. However, the risk for firms of not engaging is potentially even greater. As many of our conference panellists discussed, if organisations wait for new technological developments to become mainstream before making the leap, they may miss out on the opportunity to shape the market and adapt their position successfully. Investment and commitment are needed to be able to keep up with the pace of change. This issue was also recognised in AFME’s recent paper published with PwC, ‘Technology and Innovation in Europe’s Capital Markets’, where only 28% of member respondents to our survey felt that the current investment allocated to strategic technology change was sufficient. The current climate of relative regulatory stability provides an opportune moment to address this challenge. Over the last 10 years a major priority for industry and regulators alike has been developing and embedding the post-crisis regulatory framework. While these efforts were essential for securing global financial stability, the volume of regulatory change made it difficult to focus on other strategic priorities. With most of the post-crisis framework now in place, the industry has an opportunity to focus on longer-term structural issues. Regulators have a key role to play in supporting the successful adoption of new technology in capital markets. As Samir Assaf, Chief Executive Officer, Global Banking and Markets at HSBC commented in his keynote address, the last crisis demonstrated the importance of regulators and industry working hand in hand to improve financial markets. This is a message which was echoed by regulators and supervisors from across Europe at our conference - such as ESMA, the Banque de France, the FCA, the AMF and the Bundesbank. All spoke positively about the future role of technology in capital markets. While all recognised the potential risks posed by new technology, they were also unanimous in their commitment to support innovation. Indeed, technology also offers profound opportunities for regulators to enhance their capabilities, by implementing so called RegTech solutions. The final and equally important piece of the puzzle is effective collaboration across the whole financial ecosystem. As Rich Radley, Google Cloud’s Customer Engineering Lead, argued, the firms that really thrive will be those who have the confidence to learn from, and work with, others - whether that be regulators, small start-ups or large technology providers. Working together will be the key to success for the whole sector. AFME's 2nd Annual Capital Markets Technology and Innovation Conference will be taking place in Paris on 21st to 22nd November, find out more.

The collapse of Lehman Brothers in September 2008 was a seismic event, not just for the banking industry but economically and politically. It crystallised, graphically, one of the most dramatic financial crises in modern times. Within 9 months of the crisis I was at the heart of Number 10 seeing at first hand the internationally coordinated efforts to limit the damage of the global financial crisis. These efforts came together first at the G20 summit meeting in London, skilfully chaired by Gordon Brown, and then at the G20 in Pittsburgh in September that year. Many of the reforms agreed at Pittsburgh have underpinned and driven much-needed reform of the banking industry over the subsequent 10 years. Banks are now better capitalised, better managed, with more pre- and post-trade transparency. Banks trading on own accounts has been substantially curtailed although position taking to support liquidity and risk management still has an important role to play. Remuneration levels and compensation have been realigned more closely with shareholder interests. There is also much more global regulatory information sharing and coordination. One of the effects of the G20 reforms has been the changing competitive landscape, as the US banking sector emerged more quickly and stronger from the effects of the crisis while the European banking industry has been slower to return to full fitness. For example, the largest US bank has a market capitalisation that is more than double any EU-based bank. Perhaps the big political fallout from the crisis of 2008 was the “too big to fail” problem and the collateral damage from the perception that the taxpayer bailed out the banks in the US, UK, the Netherlands and other European countries. The long-term effect of this has been a significant and, in some ways, dramatic loss of trust both in the regulators and in the industry itself. As we look back over the last 10 years it is important to recognise that much progress has been made on the “too big to fail” problem. There is now a comprehensive and effective bank resolution regime in place in the UK and Europe. Banks are much less likely to fail, and where they do so, any losses are expected to be borne by bank investors rather than taxpayers. Authorities now have the power to deal with a failing bank that they simply did not have 10 years ago. This was clearly illustrated in the collapse of Spain’s fifth-largest bank, Banco Popular, in 2017. Financial markets and regulators reacted calmly to the bank’s demise, showing that the mechanisms created in the wake of the 2008 crash are working well. Banks are also continuing to build up loss absorbing capacity to further strengthen their resilience and enhance resolvability; the framework itself still being revised by policymakers. This will tackle the continuing concern of the possibility of the taxpayer being forced to bail out failing banks in either Europe or the US. Culture and conduct has also been a major focus of change since Lehman’s collapse. This is an area which cannot really be regulated, although the Senior Manager’s Regime in the UK has been very helpful in creating a culture of individual accountability, particularly in global institutions with complex cross-border responsibilities. However, culture and conduct changes need to come from within and here the signs are also promising. There are new styles of management, greater professionalism, and a real willingness to change. The political damage of 2008 has reverberated significantly and the loss of trust in banking is profound. It is quite clear that although there is more of a dialogue politically than there was, the political goodwill that does exist is, understandably, paper thin. But banking is too important an industry for economic success and prosperity not to have a voice in public policy. A vigorous, innovative and profitable financial sector helps consumers and households to save and invest, businesses to expand, and provides the means to fund infrastructure and trade. The significant next big challenge for the industry is to find a way of restoring public and political confidence. This is necessary for a well-functioning, well-managed and well-regulated, banking sector that is able to serve the needs of the economy and its customers over the long-term. This opinion was first published in The Daily Telegraph on 12 September 2018

Against a growing chorus of warnings, banks need to begin planning in earnest for the transition to new risk-free reference rates. A few weeks ago FCA Chief Executive, Andrew Bailey, cautioned on the dangers for firms of continuing to rely on LIBOR as a reference rate both for existing financial contracts as well as when writing new business. Despite firms being put on notice that they will need to transition to new risk-free reference rates, he stated that there was a continued ‘inertia’ and ‘misplaced confidence’ that LIBOR would continue in some form, putting both individual firms and wider financial stability at risk. He is right to be concerned, it is a big issue which requires concerted attention from industry and regulators alike. Interbank offered rates or ‘IBORs’ – of which LIBOR (London InterBank offered rate) is the most well-known – are used as reference rates for financial contracts such as bonds, securitisations and derivatives worth in the order of €100tns globally. The days of IBORS such as Sterling LIBOR, USD LIBOR and EURIBOR have been numbered since 2012 and reforms proposed in the aftermath of the so-called LIBOR rigging scandals. LIBOR is primarily a measure of the cost of borrowing between the world’s largest banks, and is calculated based on submissions from a panel of such firms. Reforms were introduced off the back of that scandal in order to make the IBORs more robust, including that the data that banks submit should be based on real transactions, as much as possible. But with volumes of unsecured lending between banks far below their peak, there is no longer enough data to sustain a rate based on these markets. Work has been taking place to identify alternative reference rates since 2014. But arguably the final death knell came last year when Andrew Bailey announced that by the end of 2021 the FCA would no longer compel panel banks to submit the data necessary to calculate LIBOR. Thus signposting regulatory expectations that by 2021 firms should be ready to shift to new risk-free reference rates (RFRs) instead. SONIA has been identified by The Bank of England as the new, unsecured overnight risk-free rate. AFME, along with many of its members and other bodies, has been engaged in those efforts, but much more needs to be done to ensure the industry is ready. For instance, a recent report we published along with ISDA, ICMA and our sister organisation, SIFMA, suggests that while there is widespread awareness that transition planning is needed, many firms, issuers and investors are yet to begin serious preparations The IBOR Global Benchmark Transition Report surveyed 150 capital markets participants including banks, corporates and law firms. It found that while 87% of market participants are concerned about their exposure to IBORs and are familiar with the matter, only 11% have allocated budget to resolving the issue and just 12% have developed a preliminary project plan. The survey also found that part of the reticence for taking action comes from industry lacking ‘a clear sense of direction’ from regulators and RFR working groups about both the desired end state as well as how firms should approach key issues such as tackling legacy transactions, which are linked to an IBOR. In this context, it is welcome that ISDA has released its consultation on technical issues related to the introduction of fallback arrangements for derivatives contracts, which reference certain IBORs. The continued work of the various RFR working groups on refining plans for the new RFRs will also provide additional clarity over time. But while it goes without saying that until many more details are finalised it won’t be possible for firms to put concrete arrangements in place, waiting for every i to be dotted before taking action isn’t really an option. The issue in June by the EIB of a £1 billion floating rate note linked to SONIA was also a major step forward, which showed that a bond linked to the new RFR could be successful. Immediate action from market participants to identify the specific risks and challenges for their own organisation will ensure they are prepared and can avoid any nasty surprises further down the line. Questions firms should start to ask themselves include ‘what is our level of exposure to IBORs?’ and ‘how would a permanent cessation of IBORs affect us and our clients’?. The IBOR Global Benchmark Transition Report includes a fuller checklist which firms can use for IBOR transition planning. Making these preparations now will ensure firms are ready to react as more details are finalised, and help to avoid a disorderly, and potentially costly, transition.