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previous Greek officials have indicated that it could be for €2 billion of five-
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UK expected to raise rates in...
US proposes threshold conditions for European swap platforms
According to reports, the CFTC is preparing to impose additio...
Plans for EU bank structure rule challenged
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Euro shorts 04.04.14 including ECB leaves interest rates unchanged and greece returns to the bond markets

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Euro shorts 04.04.14 including ECB leaves interest rates unchanged and greece returns to the bond markets

  1. 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 ECB leaves interest rates unchanged The European Central Bank has kept its benchmark interest rate at a record low of 0.25%, as widely expected. This was despite the fact that inflation in the currency bloc fell to a five year low in March. This week figures showed inflation continued to fall in March to 0.5%, well below the ECB's target of 2%. March was the sixth month that inflation in the eurozone was trapped in what ECB President Mario Draghi has called "the danger zone" below 1%. While the ECB was not expected to cut interest rates, analysts suggested it might adopt less conventional measures to boost the eurozone economy and it appears that the ECB has taken a step towards quantitative easing as the President was at pains to emphasise the ECB’s willingness to act if inflation stayed low. Crucially, even the German Bundesbank chief Jens Weidmann, who is on the ECB's Governing Council, has accepted that QE might be needed. Greece returns to the bond markets Greece is anticipating issuing debt within the next three months, encouraged by bond yields at a four-year low and the finalisation of the long-awaited deal with the EU and IMF. The Greek finance minister has said that its first foray into bond markets after a four-year exclusion will be on a ‘trial and error’ basis, but expects that the country will be able to fund itself unaided from 2016. He declined to comment on the amount of its first bond issue, but
  2. 2. previous Greek officials have indicated that it could be for €2 billion of five- year bonds. UK expected to raise rates in spring 2015 The City of London and the financial markets expect the first interest rate rise to come sometime during spring 2015. According to Ian McCafferty of the Monetary Policy Committee, the MPC is well aware of the particular sensitivities in the economy starting from the current low rate of 0.5% and expects to see rates rise only gradually. Mr McCafferty also repeated recent views from Bank of England Governor Mark Carney and fellow MPC member David Miles that interest rates are unlikely to return to their pre- crisis average in the coming years. Mark Carney has this week refused to rule out a rise in interest rates before next May's general election, saying that the date of the election was irrelevant to when the Bank raises rates, insisting that there were no timing conditions attached to its thinking on rates. He said that the Bank was clear that rate rises will happen independent of the political cycle and would only rise when the economy was performing closer to full capacity. FATCA deadline approaches for Cayman funds The deadline for Cayman funds to register with the IRS to become FATCA compliant is fast approaching, despite its extension this week. Cayman has opted for the Model 1IGA with the result that Cayman funds, as foreign financial institutions (FFIs) have to register with the IRS by 5 May and provide information on US account holders. The deadline has been extended by the IRS this week from the previous deadline of 25 April. The FATCA regime imposes 30% withholding on payments to FFIs that have failed to register and supply such information. Registration is critical because prime brokers and others that the IRS will have act as withholding agents do not want to be found failing to withhold on a FFI that is not compliant with FATCA. From some counterparties' perspectives, an FFI's global intermediary identification number, received upon registration, is the only assurance that the FFI is deemed compliant.
  3. 3. US proposes threshold conditions for European swap platforms According to reports, the CFTC is preparing to impose additional conditions on European swaps trading platforms while granting them relief from certain US rules. The proposed framework would give clearing houses outside of the US a set of thresholds to reach that would allow the firms to substitute home country compliance for CFTC compliance. This would allow the firms to avoid onerous registration and reporting requirements. Comments from acting chairman Mark Wetjen indicate that a decision could come before the end of April. Just prior to the comments, the CFTC extended no-action relief to Frankfurt-based Eurex Clearing, allowing the firm to continue clearing swaps for US entities until the end of 2014 without registering as a derivatives clearing organisation under CFTC rules. Housing boom could pose threat to UK economy Deutsche Bank has warned that rising housing prices, the strengthening of the pound and a rise in interest rates could threaten the recovery of the UK economy. Deutsche Bank has brought forward its expectations for the BoE to increase interest rates starting from May 2015 and expects rates to rise more than 1% by the end of next year. Taken together with the end of cheap money on global capital markets, the housing market could collapse as the influx of foreign buyers, considered responsible for the recent London boom, dries up. The BoE’s FPC has said that it will remain vigilant to emerging vulnerabilities and would take ‘proportionate and graduated action if warranted’. CCP risk fears double According to a survey by Depository Trust and Clearing Corporation (DTCC), the number of industry participants worried about risk in central counterparties (CCPs) with the onset of central swaps clearing has doubled. The survey, published last week by the DTCC, has found 18% of respondents, up from 8% in 2013, fear clearing houses may become single points of failure in a similar way to banks’ housing of swaps positions they were unable to unwind during the financial crisis. The 2014 survey is the second annual systemic risk questionnaire the DTCC has compiled and was based upon 218 responses from DTCC clients including broker-dealers, banks, buy-side firms, and this year also included responses from regulators and academics.
  4. 4. Plans for EU bank structure rule challenged EU finance ministers have challenged aspects of the EU’s plans to set out structure rules for about 30 of the EU’s largest banks, stating that the rules could harm lending to businesses. The proposal, presented in January, would ban the bloc’s most systemically important lenders from proprietary trading and hand regulators the power to split them up according to EU-level standards. Michel Barnier has said that blueprint is a “cornerstone” of the EU’s fight against too-big-to-fail lenders that has dominated his five-year tenure. According to reports, Germany, France, Sweden, Poland and the Czech Republic were among countries to take issue with parts of the blueprint during discussions in Athens this week. Cummings Tel: + 44 20 7585 1406 Mob: + 44 7734 057 327 www.cummingslaw.com 4 April 2014

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