AFME, in collaboration with EY, is pleased to publish‘ESG and the Role of Compliance’,whichsets out observations on how compliance functions cansupport their firms in robustly and transparently managing the regulatory risks associated with Environmental, Societal and Governance (ESG). This discussion paperis intended to be practical, to support the thinking and enable discussions within firms on shaping the role of compliance and ESG. The observations and considerations in this report have been prepared through a questionnaire and interview-based format with AFME members covering seven themes around the topic of how compliance functions address ESG, including: strategy, organisation and coverage, compliance risk management framework, systems and capabilities, regulatory environment, data and key performance/key risk indicators. The report is structured into four sections: Defining the role of compliance in ESG How firms are addressing the immediate priority risks The longer-term infrastructure changes which will be required Key considerations for compliance moving forward

This research paper examines the impact on the European securitisation market of the introduction by regulators of the Standardised Approach (SA) Output Floor. This rule change forms one of the final elements of Basel III. It requires that advanced banks, those which calculate regulatory capital based on the Internal Ratings Based Approach (IRBA), hold the greater of (i) IRBA capital and (ii) a percentage of the capital one obtains when the alternative SA is employed. Our findings are as follows: 1. For the regulatory wholesale asset class: i. Corporate securitisations, both for large corporates and SME portfolios, will be largely eliminated by the introduction of the Basel SA Output Floor as currently envisaged. This could contribute to a significant reduction in the availability of bank funding to European firms. ii. Existing transactions done for risk management purpose, especially corporate ones, are likely to fail the EU Significant Risk Transfer (SRT) test applied by supervisors and, hence, will have to be terminated. Some of the negative effects of the SA Output Floors on existing transactions would be substantially mitigated if IRBA banks were required to evaluate EU SRT tests only under IRBA, at transaction level, even if the aggregate SA Output Floor is binding. iii. The impact of Basel and EU rule changes will be felt at a time when securitisation as a capital management tool would likely otherwise be more widely used owing to the rise in capital for corporate lending implied by the SA Output Floor. 2. For the regulatory retail asset class: the SA Output Floors regime will encourage greater securitisation activity in residential mortgage and other retail loan portfolios because the increase in capital for loans held on balance sheet will exceed, sometimes disproportionately, that of securitised assets. These findings suggest that implementation of the SA Output Floors will disfavour one asset class substantially while benefiting another asset class with no clear rationale based on policy priorities or risk sensitivity. This is a consequence of adopting regulatory rules that are not soundly rooted in an understanding of the relative riskiness of different asset classes. While provisional adjustments can moderate some foreseeable effects on securitisation transactions, a more profound reform of the regulatory treatment of securitisation is needed for this financial technique to contribute to the development of the European economy.

This study examines the relative liquidity of Asset Backed Securities (ABS), Covered Bonds (CBs) and Corporate Bonds (Corps). The measure of liquidity that we employ is half the bid-ask spread divided by the mid-price. This equals half the round-trip cost of buying and selling the security per unit of value of the position as reflected in current market quotes. We focus on Investment Grade (IG), GBP-denominated securities and senior ABS. We compare the liquidity of different categories of ABS, namely Simple Transparent and Standardised (STS) versus non-STS ABS. To compare the liquidity of any two categories of security, we compute the cost of an average transaction for all individual securities. For this, we utilise all the observations available on Bloomberg for the period March 2012 to June 2021. Transactions costs are defined as half the bid-ask spread, divided by the mid-price. Key findings are as follows. Mean transactions costs are very similar for AAA and AA-rated ABS and CB. Mean transaction costs for Corps with equivalent ratings to those of ABS or CBs are somewhat higher. Looking at detailed comparisons based on quantile plots, up to 2016, AAA-rated CBs appear more liquid than ABS. From this point in time, however, ABS are more liquid. When all IG ABS are considered, ABS again appear more liquid than CBs post-2016. Although they do appear equivalent in liquidity around the time of the onset of the pandemic. Corps are clearly less liquid than CBs over the whole sample period of March 2012 to June 2021. Corps are more liquid than ABS in 2013 but, thereafter, ABS are more liquid. Comparisons of the liquidity of STS and non-STS are only possible from the end of 2019 when the required data became available. Differences are relatively small. The data suggest that the most liquid non-STS are more liquid than the most liquid STS ABS.

AFME and Finbourne Technology have published new data on EU sovereign and public bond trading highlighting the importance of a carefully calibrated deferral regime. Among the key findings are: There is a high degree of trade transparency in EU sovereign bond markets, especially when compared to corporate bond markets, with a significant majority of EU government bond trades (76%) currently being made real-time transparent (compared to 8% of corporate bond trades). However, the quality of the sovereign data set is materially worse than the corporate bond data set due to a high level of distortion caused by the inconsistent use of some flags, among other issues. This needs to be addressed by ESMA. The majority (60%) of government bond-related trades on EU venues are non-EU bonds from the US, UK and other countries. This means it is currently hard to have a clear view of the trading of EU-based issuers with the large amount of trading in the EU by non-EU issuers clouding the picture. AFME believes improvements could be made, for example, by narrowing the scope of MiFIR trade reporting to only cover EU-issuers, which would then be the basis on which deferrals should be calibrated. This re-focus would further support an EU fixed income consolidated tape focused on EU markets. Trade out times (the time it takes for a bank to move risk off its balance sheet) vary significantly for various issue and trade size categories, ranging from a few minutes to well over a year depending on the issue and trade size category.

The Association for Financial Markets in Europe (AFME) has today published a new paper “Open Finance and Data Sharing – Building Blocks for a Competitive, Innovative and Secure Framework”. This paper precedes the European Commission’s framework for data access in financial services which is due to be published in the coming months as announced by the EU’s chief of financial policy, Mairead McGuinness. Elise Soucie, Associate Director of Technology and Operations at AFME, said: “Open Finance in the EU’s data economy will transform the way banks share data with each other, and also with third-party providers, such as fintech companies. For financial services this could mean that access to new, broader data sets could enhance the way banks operate and encourage innovation across sectors. “But with innovation comes potential for unintended consequences such as sharing data with participants in other sectors who may already have a dominant share of both individual and corporate data and which could lead to monopolies and the exploitation of data. Therefore AFME has identified four key principles to help address these risks and to support policy makers in the development of a robust Open Finance Framework.” The paper identifies four key principles to support the development of a robust Open Finance Framework, including: A level playing field is crucial ​In order for an Open Finance Framework to flourish not only in financial services but across multiple sectors, there must be consistent and appropriate regulatory oversight. This consistency is key in order to both support innovation, but also to discourage monopolies, encourage competition and efficiency, and to lower costs for both corporate and retail customers, creating a robust and effective data economy. For this to occur, regulation must address risks consistently and market players must have consistent regulation if data is to be shared across the sectors. Interoperability and an appropriate level of standardisation A robust data economy and its positive long-term impacts will be supported by both interoperability and an appropriate level of standardisation on a global scale. Interoperability should also support a level playing field so that, if data is being shared outside the financial services sector, it is still subject to appropriate requirements and remains high quality and fit for purpose. Furthermore, any harmonisation would also need to occur across EU Member States, while also being complementary to global frameworks. This interoperability could be supported through a market-led forum that could support the implementation of both principle-based standards and technical and security standards where appropriate. An appropriate framework for compensation Compensation is important in order to ensure fair allocation of costs across the data value chain and to safeguard fair competition. Compensation, for infrastructure and provision of data services is also important to incentivise data holders to maintain a high level of quality and high functioning data sharing mechanisms. Ensuring that each type of data is supported by an appropriate data sharing infrastructure enables data to be fit for purpose and reliable when used. Data reliability also supports a robust data economy and mitigates risks to data integrity, data security, regulatory compliance and the accuracy of end products for both corporate and retail consumers. Clear liability provisions Liability provisions are important in order to provide legal clarity with respect to the access, processing, sharing, and storage of data. These provisions should be consistent with the GDPR and should also include specifications on redress and dispute resolution as well as consent mechanisms for consent beyond the usage of the data controller. In addition to the Open Finance Framework setting out liability provisions, it should also support and enable contractual agreements as these are crucial to fill any gaps in new use cases, or specialised scenarios which may require additional clarity on the legal, technical and other conditions governing data sharing. - ENDS - Note to the editor: This summer AFME responded to the European Commission’s targeted consultation on ‘Open Finance and Data Sharing in the Financial Sector’. Commissioner McGuinness’ announcement of the European Commission’s Expert Group on Open Finance builds on the European Commission’s efforts to gain cross-industry insight into the impact of data sharing.

The Association for Financial Markets in Europe (AFME) has today published a new paper discussing whether Europe should move to a one-day settlement cycle (known as T+1). In Europe, the current settlement cycle for most transactions in equities and fixed income markets is two business days (‘T+2’). The paper follows announcements by the US and other jurisdictions earlier this year of their intention to move to shorter settlement cycles. Pete Tomlinson, Director of Post Trade at AFME, said: “An industry move to T+1 would follow the historic trend towards shorter settlement cycles, and could result in reduced market risk and associated costs. However, a move to T+1 could be the most challenging migration yet because it would remove the only business day between trading and settlement, creating significant pressure on post-trade operations, particularly for global participants. The barriers to timely settlement in the current model need to be fully understood and addressed before Europe can move to T+1. A rushed or uncoordinated 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. For this reason, AFME is calling for an industry task force to be set up to conduct a detailed assessment of the benefits, costs and challenges of T+1 adoption.” The paper,“T+1 Settlement in Europe: Potential Benefits and Challenges”highlights the key benefits of moving to a shorter settlement cycle, including: Reduction of risk: shortening the number of days between trade execution and settlement will reduce counterparty, market and credit risk, especially during periods of high market volatility. Significant reduction of associated costs: by limiting firms’ open exposures over the settlement period, there will also be a reduction in margin requirements, allowing market participants to better manage capital and liquidity risk. Maintaining global alignment: given that some major jurisdictions will be adopting T+1, the end users of capital markets may benefit from Europe following the same approach. The paper also outlines the various barriers to overcome before such a migration can take place, including: Post trade activities compressed into shorter time frame: there would be significantly fewer hours between trading and the beginning of the settlement cycle for post-trade operational processes to take place. While it might be assumed that moving from two days to one day would reduce the available post-trade processing time by 50%, AFME actually estimates market participants will be moving from having 12 hours to 2 hours of post-trade operations time, an 83% reduction. Possible increase in settlement fails: the migration could also lead to an increase in the number of settlement fails in the market, which will incur cash penalties under Central Securities Depositories Regulation (CSDR) rules, as well as having capital impacts under Basel III requirements. Greater operational complexities for global participants: time zone differences will impact the possibility of same-day matching processes for investors from outside Europe, vastly reducing the time available to communicate and resolve any breaks or exceptions. This impact would be particularly significant on cross-currency transactions which have an FX component. Securities Lending impact: moving to a T+1 settlement cycle compresses the timeline to identify and recall securities, which could lead to breaks in the process, resulting in an increase in settlement fails and cash penalties unless there is a modification to existing processes, technology and overall behavioral changes. Impact for Exchange Traded Funds (ETFs) and Securities-based derivatives more pronounced: Due to the global composition of many ETFs, which contain underlying securities from several jurisdictions, this can often lead to settlement delays in a T+2 environment, due to time zone differences, market holidays and cross-border settlement complexity. These challenges would be even more pronounced in a T+1 environment. Challenges will also exist for securities-based derivatives with further assessment required to identify impacts to the swap lifecycle, such as margining calculation and collection. AFME’s paper strongly recommends that further cross-industry discussion is required to identify and quantify the benefits and challenges of moving to T+1 settlement. AFME cautions that a successful migration will require coordinated industry effort, from an initial impact assessment through to the development of a detailed implementation plan.

The 2022 Annual Review, "Strengthening the competitiveness of European financial markets", summarises AFME's work over the past year. Following recent economic events, capital markets have been through a period of instability, but have remained resilient. AFME'sworkhas focused on further strengthening capital markets to ensure they can support the real economy and end users of capital markets, including investors and savers.

European Benchmarking Exercise for Private Securitisations – Updated Report (H2 2021) This report is part of the European Benchmarking Exercise, a market-led initiative organised by AFME, EDW and TSI, and contains results from H2–2021. Its purpose is to further enhance the quality and usefulness of disclosure in the private cash securitisation market, both ABCP and non-ABCP, in the EU and the UK, in order to assist market participants and reassure supervisors. Synthetic securitisations and public ABS bonds are not in scope. It provides aggregated transaction-level data gathered from 12 banks (BayernLB, BNP Paribas, Commerzbank, Credit Agricole, DZ Bank, Helaba, HSBC, ING, LBBW, Natixis, RBI and UniCredit) across 6 countries (Austria, France, Germany, Italy, Netherlands, and the UK) on a voluntary basis. The report shows that non-public securitisation markets are an important source of financing for the real economy.The overall private securitisation market is estimated at least €184bn of total commitments, with the exercise-related dataset covering €65bn of those commitments. Private securitisations backed by trade receivables and auto loans or leasing make up around 78% of the market, of which 34% and 89% respectively are funded through syndicated transactions. AFME and TSI would like to thank all members who participated, and the EDW for their role in analysing and ensuring data quality. This report is the second in a series of such reports to be published regularly over time. For the European Benchmarking Exercise Report – H1 2021, please see here.

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.

AFME has today published a new guide, European SPACs: Guide to Regulatory Obligations. SPACs offer an alternative to traditional IPOs for companies going public, and they can be a better fit for certain companies. However, the structural requirements for SPACs are set by the individual EU-member states at the national level, in line with local listing rules or domestic corporate law, so there is little harmonization of the regulatory approach to SPAC transactions across the EU. Given how quickly the market is developing, market participants need to be able to track and align considerations related to SPACs, as well as to interpret existing and new pan-European (and national) regulatory frameworks. The purpose of this guide is therefore to assist AFME members in understanding those considerations and obligations when participating in SPAC transactions.