New Financial Regulations In Europe After Financial Crisis Abhijeet Singhal

The New Wave of Regulations in Europe International Financial Markets Created by Abhijeet Singhal

Objectives
Reasons for Financial Crisis in the EU
How EU reacted to Financial Crisis
Financial Regulations Reforms in EU and its member countries
What is being considered within these regulations/ directives ?
Future Reforms in Financial Regulations
Challenges Ahead
Conclusion
References

Reasons for Financial Crisis
Real Estate Bubble in the US
Failure of Regulatory Bodies in
Stopping Excessive risk taking of Banks
Assessing Inter - Dependency of different markets & institutions
Understanding Innovative Financial Engineering such as Securitizations, Credit Risk transfer Collaterized Debt Obligations, Credit Default Swap etc.
Supervising of large complex financial firms and credit rating agencies
Compensation practices in Finance industries
Formulating the laws which can keep pace with time and the financial markets progress

How EU reacted to the Crisis
EU responses were slow when compared with the US in containing the crisis
Made way to contain impact of financial crisis
Short term measures such as banning of short selling and naked short selling etc.
Planned to bring changes in how markets are regulated and supervised in 2009 and 2010
Structural Reforms in Financial Bodies
Medium and long-term measures such as new Capital Requirements Directives, Market Abuse Directive revision etc.

Financial Regulations Reforms in EU
Capital Requirement Directive II, 2009
Targets Liquidity risk management
Binding originators of securitization products to retain its products’ 5% value “to keep them incentivized to continuously monitor credit risk”.
Regulations for Credit Rating Agencies (CRA), from 2009 onwards
To prevent conflict of interest – getting paid by issuer to getting paid by investors
To bring in liability for CRAs in analysis and ratings given to various financial products
Monitoring of CRAs by European Supervisory Authority – European Securities and Markets Authority (ESMA)

European Market Infrastructure Regulation (EMIR ), 2010
To stregthen stability within OTC derivative markets
Reporting obligation for OTC derivatives
Clearing obligation for eligible OTC derivatives
To standardise OTC derivative contracts
Market Abuse Directive (MAD)revision, (Securities market), 2010
Improved transparency and integrity of derivatives markets
Investor protection through strengthening effective enforcement against market abuse

Alternative Investment Fund Managers Directive (AIFMD), 2010
Brought Hedge funds and private equity under the supervision of EU regulatory body just as pension and mutual funds
Imposed limit to leverage for one time the amount of capital across a fund
Minimum own fund requirement of €125,000 for external managed and €300,000 for self-managed funds.

Central Counterparty Clearing (CCP) for OTC derivatives,2010
Prior to CCP, OTC derivatives were traded one to one between parties without any intermediary – increased risk exposure to banks
Mandatory to trade through CCP which reduces risks in case of defaults as CCP has to cover for the loss
Companies not covered under clearing will be subject to stricter reporting

Harmonization of key provisions of national deposit guarantee schemes, 2010
To prevent negative arbitrage arising out of different national deposit guarantee schemes
Protection of retail and small investors interests
Markets in Financial Instruments Directive (MiFID), review
To include newer trading platforms for regulation and bring more derivatives onto organized markets
Seek to increase transparency in pre- & post-trade market by stricter reporting

What is being considered within these regulations/ directives ?
Categorization of traders by type of regulated entity & by activity
Inclusion of trading entities, financial instruments and markets under financial supervision
Position reporting
Frequency of reporting
Time bound limits to reduce volatility in exchange markets
Credit Position limits
Individuals & Aggregate – Financial, index funds

Post Crisis - EU Financial Supervision Structure Macro-prudential supervision Micro-prudential supervision Source: De Larosière Report, February 2009. Members of ECB/ESCB General Council European Systemic Risk Board (ESRB) (Chaired by President ECB) Chairs of EBA, EIA & ESMA European Commission European System of Financial Supervision (ESFS) European Banking Authority (EBA) European Insurance Authority (EIA) European Securities and Markets Authority (ESMA) National Banking Supervisors National Insurance Supervisors National Securities Supervisors + + Information on micro-prudential developments Early risk warning

EU Financial Structural Reforms
Main Tasks of European Systemic Risk Council (ESRC)
Decide on macro-prudential policy
Provide early risk warning to EU supervisors
Compare Observations on Macro-economic and prudential developments
Main Tasks of European Supervisory Authorities (EBA, ESMA, EIA)
Legally binding mediation between national supervisors
Adoption of binding supervisory standards
Licensing and supervision of EU-wide institutions (e.g. CRA, post trading infra.)
Binding cooperation with ESRC to ensure adequate macro-prudential supervision
Main Tasks of national supervisors
Continue to fully responsible for day-to-day supervision of firms

Financial Reforms in Member Countries
Most of member countries tried to plug in holes in the regulations which to prevent systematic risk and put all financial institutions under strict monitoring and regulatory institutions.
Adherence to EU policies and directives
Convergence on idea of tighter inter-border financial markets control
Both Germany and the UK were taking actions in accordance with CRD.
The UK
Financial Service Authority (FSA) failed to regulate the market
Creation of Financial Policy Committee under Bank of England to deal with supervision and regulation compliance of the system as a whole.
Creation of Prudential Regulation Authority (PRA) to deal with regulating Financial institutions exposed to high risks
Creation of Financial Conduct Authority to handle issues related to financial institutions
FSA fears that too much interference in the markets will lead to exit of banks and financial companies
Germany
Putting restrictions on short selling after the crisis
Making banks to retain 5% more than CRD II to make them more accountable

Future Reforms
Focus on
Liquidity management – short and long term
Banking reforms – dependent on BASEL III
Remuneration structure in Finance sector
Monitoring and Supervision of Financial Institutions
CRD III (still being negotiated)
Remuneration principles to avoid excessive risk taking
To tighten up the way in which banks assess the risks connected with their trading book
New rules on highly complex financial products (more capital retainment to cover their risks)
Disclosure of securitizations for market confidence
CRD IV
Regulations on short selling
CRA regulations amendment

Challenges Ahead
Lack of consensus between government regulators and markets as nobody knows how to respond to this relationship
New regulatory bodies have no prior experience in handling regulation of such big market
Functioning of National supervisors would be affected with creation of ESA
Lack of single regulation body for supervision and monitoring across national supervisors
Inter-connectedness of financial markets with world markets demands efficient and fast actions in future crisis
Balancing financial market reforms and functioning of financial markets
Fighting financial traders lobby who wants to thwart interference of governments in markets

Conclusion
EU and member countries definitely have a more robust approach towards financial markets reform than before.
Continued and fast reforms keeping pace with the time and markets is necessary for preventing future crisis

References
EU financial regulatory reform: a status report- Nicolas Veron, Bruegel Policy contribution, Dec 2010
Capital Requirements Directive - Frequently Asked Questions, MEMO/09/335, 13 th Jul 2009
Report on The High-level group on Financial supervision in the EU chaired by Jacques de Larosiere, 25 th Feb. 2009
EU Commission (09/2010) Proposal for the regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, Brussels, European Union
Regulating the Financial Markets: Lessons, Challenges, and Prospects in the Aftermath of the World Crisis - Howard Davies - Director, LSE, 12 th Dec,2010
Commodity derivatives reform in Europe - Dr Julian Oram - World Development Movement, 15 th April 2011
The new wave of Regulations paper – Martin Pathan, 16 th Jun 2011
The MiFID Review – European Commission Consultation , Linklaters Stop Press, Dec 2010
Summary of the impact assessment , Regulation of the European parliament and of the council on OTC derivatives, CCP and trade repositories, Brussels, Sec (2010) 1059
Regulatory Reform: A Primer, Nouriel Roubini and Elisa Parisi-Capone, 06.25.09, on www.forbes.com
http://www.capital-requirements-directive.com/
http:// europa.eu/rapid/pressReleasesAction.do?reference=MEMO/10/659&format=HTML&aged=0&language=EN
http://www.financialstabilityboard.org
http://www.fsa.gov.uk /
http://www.bafin.de /
http://www.amf-france.org
http://www.ecb.int/home/html/index.en.html
http://ec.europa.eu/index_en.htm

Thank you

New Financial Regulations In Europe After Financial Crisis Abhijeet Singhal

by Abhijeet Singhal

Accessibility

Categories

Upload Details

Usage Rights

1 Embed 5

Statistics

New Financial Regulations In Europe After Financial Crisis Abhijeet Singhal Presentation Transcript