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Euro shorts   24.01.14 including UK loses short selling challenge and MiFiD II exemption greeted with relief
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Euro shorts 24.01.14 including UK loses short selling challenge and MiFiD II exemption greeted with relief


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  • 1. Welcome to Euro Shorts, a short briefing on some of the week’s developments in the financial services industry in Europe. If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers. Claire Cummings 020 7585 1406 UK loses short selling challenge The EU Court of Justice has ruled against the UK’s attempt to limit the authority of the EU to ban short selling. In 2012, the EU passed a law giving ESMA the power to ban short selling if it considers that the practice threatens the stability of the EU financial system. The UK had challenged ESMA’s authority as a restraint on trade and argued that such measures interfered with the efficiency of the markets. The ECJ said the powers were “compatible with EU law” and dismissed the UK’s legal case in its entirety. LIBOR ICE Benchmark Administration Limited (IBA) has announced that it will take over as the new LIBOR administrator on 1 February 2014. The IBA recently received FCA approval to act as administrator. IBA takes over from BBA LIBOR Limited, which had been performing the role of interim benchmark administrator for LIBOR since April 2013. The appointment of a new administrator was one of the key recommendations of the Wheatley Review into LIBOR manipulation, which was published in September 2012. Meanwhile, two senior members of Angela Merkel’s party have called for changes to the setting and supervision of LIBOR, demanding better oversight and a new system for setting rates.
  • 2. UK growth forecast upgraded The IMF has upgrading its growth forecast for the UK in 2014 to 2.4%, the highest of any major European economy. Financial transaction tax The 11 Member States participating in talks on the FTT appear to be considering excluding sovereign bonds, repos, pension fund transactions and now derivatives and securitised debt from the levy. Several of the countries are concerned that the tax could disrupt their debt markets just as the Eurozone is starting to turn the corner. However, the EU’s top tax official has called on Member States not to dilute the proposals, suggesting instead that they could implement the plan more gradually. If bonds and the other asset classes are exempt, the FTT would effectively shrink to become a type of stamp duty on shares. EU bank bonus rules may be avoided According to the ratings agency, Fitch, banking industry pay will not fall when the EU bonus cap comes into effect. Fitch warned that an inconsistent approach in the enforcement of the cap, together with banks using loopholes to avoid paying lower bonuses, would mean that overall compensation levels are unlikely to decrease. Fitch used a survey carried out by BaFIN as an example, which found that many German banks were not properly identifying material risk takers, amid reports that some trading banks have increased fixed salaries and are considering additional share awards and allowances that do not count as salary bonuses. EMIR dispute The FCA and the European Commission are at odds over a loophole that allows swap users to leave certain FX derivatives unreported for the purposes of EMIR. In its national implementation of MiFID, the FCA excluded FX forwards, nondeliverable currency forwards and spot transactions for FX and commodities from the definition of a financial instrument. EMIR refers to the definition in MiFID when defining which derivatives need reporting under EMIR. This means that in the UK, these FX transactions are not considered derivatives for EMIR purposes. That said, it appears that UK counterparties will not necessarily take advantage of the loophole, as they do not see anything to gain in not reporting such trades.
  • 3. MiFID II exemptions greeted with relief The proposals under MiFID II to limit positions on commodity derivatives include two important carve-outs: (1) physically settled oil and coal derivatives contracts that are traded on OTFs are to be temporarily exempted for three and a half years after implementation of MiFID II; and (2) physically settled power and gas forwards are to be entirely exempted from the scope of MiFID II. The new rules were greeted with relief by European energy traders, although some felt that the exemption should have applied across all underlying commodities. The precise details of MiFID II will be fleshed out by ESMA and it is unlikely that any new rules will come into effect until at least 2015. MiFIR disclosure regime There are concerns that the disclosure rules for new derivatives trading platforms under MiFIR may end up looser than under US regulation, making it harder for the EU to argue for transatlantic equivalence. Although the final text of MiFIR is not yet available, it is understood that the waivers for OTFs survived the recent negotiations. This means that national regulators will be able to lift pre-trade disclosure requirements not just for block trades, as in the US, but also for transactions executed via voice or RFQ, which may be subject to lower size thresholds. The final thresholds for the waivers will be determined by ESMA in the level 2 text and individual EU Member States are unlikely to be granted equivalence until the details are clear. Warsaw stock exchange seeking partners The Warsaw Stock Exchange is aiming to be a dominant player in central Europe and is looking to merge with the Vienna Bourse this year as part of the plan. The WSE is seeking approval from its supervisory board to begin the second stage of talks, after its management board made a positive recommendation on a merger. The supervisory board is likely to decide in the coming weeks, but there is no indication on the timing of the merger should the talks go ahead. The chief executive officer of the WSE said the possible merger could be accompanied by a share issue by the Polish exchange.
  • 4. BBA urges closer ties with EU The British Bankers Association has recommended the UK to forge closer ties with, and devote more resources to the EU, to influence market reform and benefit the economy. This was stated against the backdrop of the government’s warning that the EU must reform if it wants the UK to remain a member. The BBA said that membership of the EU enhanced Britain’s ability to influence international negotiations and that the single market was a significant factor in London’s success as Europe’s financial centre and therefore of considerable value to the economy. Paris home for euro clearing house? The deputy CEO of Societe Generale has called for Paris to be considered as home to a euro-area clearing house for equity derivatives and other transactions. Mr Cabannes said that Paris was becoming marginalised as a market place and that if there were no strong market activities, it will be a major issue to finance the economy. Paris is losing ground to London as a trading venue and Mr Cabannes said that French banks are struggling to keep their market employees in Paris. Cummings Tel: + 44 20 7585 1406 Mob: + 44 7734 057 327 24 January 2014