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
claire.cummings@cummingslaw.com
www.cummingslaw.com
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
www.cummingslaw.com
24 January 2014