1. 1
“Making sense of the Maze”
Workshop Talk by Martin Moloney, Head of Markets Policy Division, 2012 IFIA Conference
12th
September 2012
Thank you, I am very pleased to be here today and I would like to thank IFIA
for their invitation to speak to you on what is a very relevant topic at this point
in time.
Indeed it might be said that if you feel confused about the current state of play
in the development of financial services regulation, if you are disorientated, if
you are unsure where matters stand then ….you are right, or at least, you are in
good company. It is difficult, it is confusing, it does involve a lot of uncertainty.
It’s not just you.
I hope to look at these issues from a slightly different aspect than is usual to try
to help this workshop to throw some new light on the issue of how new
regulations are emerging and how we all cope with that process.
Rather than walking you through one or other of the regulatory proposals which
happen to be well advanced at this point in time, I want to introduce this
workshop today by focusing on the policy-making, legislative and regulatory

2. 2
process we are currently operating in. I want to link the unique features of that
process to the challenges you are all facing in tackling the burden of regulatory
change that is facing industry in Europe and elsewhere in the world.
Two notable points caught my eye in a recent speech made by the European
Commissioner for the Internal Market and Services, Michel Barnier titled
“Making financial centres contribute to the wider economy”1
.
The first point he made was to emphasise that the regulatory change programme
currently being undertaken in the EU is “is part of a joint, international effort to
stabilise the financial sector”.
Secondly he highlighted that the Commission is aware of the pressures facing
industry, and that they are aiming to calibrate the proposals in a careful way to
be bearable to industry and support the real economy.
I will come back in a minute to why some people might be a little sceptical
about his second point, namely the process for calibration of regulatory
measures to be bearable.
1
Speech by Commissioner M. Barnier European Financial Centre Roundtable: "Making financial centres
contribute to the wider economy"
http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/12/589&format=HTML&aged=0&language
=EN&guiLanguage=fr

3. 3
CONSISTENCY OF REGULATORY INNOVATION
But it is worth pausing for a moment on the first of his points just to look at how
the international effort is being coordinated. This is a key point for international
financial services operations.
It seems to me there are two somewhat contradictory observations to make: on
the one hand, in many areas, the consistency of the outcomes is extraordinary
and in some ways maybe even a little unprecedented. On the other hand, there
undoubtedly are key pressure points where, from the perspective of industry
(and indeed regulators) coordination still falls short of the ideal. Let me look at
two points:-
i) Has international coordination actually happened over the last three
years?
ii) When the outcome of regulatory innovation is not internationally
consistent, what are proving to be the options?

4. 4
I want to emphasise firstly the really important effect of common goals set by
the G20 which have given coherence to the whole international debate. I would
draw your attention to some key G20 high level conclusions at its meetings in;
 Pittsburgh (2009) which called for derivative instruments that traded
OTC to be moved onto organised venues,
 Seoul (2010) where it was agreed to endorse the Basel III regulations by
January 2019 and
 Cannes (2011) where it was decided to strengthen regulation of shadow
banking and also implement IOSCO measures on HFT.
It’s important to acknowledge that these G20 goals are not just issued out of the
blue. The role of the FSB and IOSCO has been critical to the process.
The FSB was established by decision of the London G20 summit in 2009. Its
establishment is probably the most significant development in the architecture
of international cooperation since the establishment of the WTO in 1995.

5. 5
The G-20 has given a mandate to the Financial Stability Board (FSB) to
examine different aspects of financial markets and make proposals to improve
financial stability.
One current area of FSB work which is relevant to many here can be used to
illustrate one of the main sources of understandable confusion. The FSB is
driving reform in the area of Shadow Banking. Probably the key workstream in
this respect is that the FSB has sought and is soon to get advice from IOSCO on
issues such as effective segregation of client assets, identifying global
systematically important non-bank financial entities (non-bank G-SIFIs).
Separately the FSB has its own workstream examining Securities lending and
Repos from a Financial Stability perspective. IOSCO is also working for the
FSB on putting forward policy recommendations on reducing susceptibility of
money market funds to runs. All this work is due by the end of this year.2
Why this can seem confusing is that many of you will also recall that the EU
Commission recently completed a public consultation on the same issues and
may follow up with legislation, either in UCITS VI or elsewhere.
2
http://www.financialstabilityboard.org/publications/r_120619a.pdf

6. 6
What is not clear to many is which is the real debate – the G20 debate, the
IOSCO debate, the FSB debate, the EU Commission debate, the parallel debates
in the SEC and in the UK? They are running in parallel. In each the objectives
or the focus seems to be slightly different. Indeed part of the debate seems to be,
what is the debate about!
Without wanting to predict where matters will end up, it seems to me that a
sensible outcome would be that as IOSCO feeds its views to the FSB and the
FSB advises the G20, then we can expect to see the debates in the EU and the
US on shadow banking become more focused and structured than they have
been. Objectives and options will be more clearly defined, the challenges in
achieving something approaching mutually consistent frameworks across the
Atlantic will come to seem less insurmountable.
If I am proved right about how the shadow banking debate will evolve, it is only
because it will have followed what is becoming a pattern.
Let me give you another example of parallel debates resolving themselves. In
the case of that 2009 Pittsburgh target in relation to OTC derivative trading that
I mentioned earlier, it is remarkable, , given the timeline and the complexity of

7. 7
the task at hand, how closely the legislative processes have converged in the
end. Even more remarkable is the conspicuous absence of a centralised steering
committee to achieve that outcome.
The three main pillars of the worldwide new regime have turned out to be the
Dodd Frank Act, EMIR and the IOSCO principles for financial markets
infrastructures. These are dated July 2010, March 2012 and April 2012
respectively. In other words, they were developed in parallel, and without
formal centralised coordination.
Granted, the EMIR process is not complete. Many critical issues have been left
to detailed rules still to be produced. But can I suggest that we see a pattern – a
transformative objective, a complex multi-faceted debate, false starts and then
the emergence of a workable model which, with some variations, gets adopted
in different jurisdictions.
I suspect that crucial to achieving consistency have been two elements:
international fora, such as the OTC derivatives regulatory forum and CPSS-
IOSCO, where issues could be debated and agreed amongst regulators and
policy makers in an often informal setting, and the fact that the people attending

8. 8
them were the same people influencing or drafting legislation or regulation in
their home jurisdictions. What we see is a mixture of parallel policy debates,
informal contacts across jurisdictions and reference back to a common G20
agenda. This is what ultimately delivered the level of consistency we have seen.
But while this approach gives us an increased assurance of trans-Atlantic
consistency, it is certainly no guarantee. Jurisdictions and Unions retain their
sovereignty and discretion. Consistency remains challenging and is often the
last challenge resolved, if resolved. I don’t want to suggest that policy makers
will always muddle through to a common position. Indeed there are some areas
where the approaches being taken are just not equivalent. In relation to the
matters covered by the Vickers Report, the UK appears to be going its own way.
There is no equivalent in Europe to the Volcker Rule – although we await the
Liikanen report on European Bank Structural Reform which is due to report
soon.
But what I do want to suggest is that the confusing complexity of the policy
debate with multiple strands overlapping, policy questions not always being
considered in a sequential and orderly way, with reports being published you

9. 9
didn’t even know had been commissioned and so on….I want to suggest that
this confusing complexity in the debate is contributing to the emergence of
more consistent outcomes.
That might seem like a paradoxical thing to argue. Everyone speaking at the
same time rarely leads to a good outcome. But at this point in time, it seems,
somehow, that it may be helping this process.
If that is so, it is at a cost. It is undoubtedly more difficult for industry to
intervene efficiently in such free-flowing and apparently unstructured debate. It
is more difficult for you to understand when a critical issue for you is being
seriously considered and to know how you can intervene. Considering that
further might be a suitable topic for discussion here today.

10. 10
THE ROLE OF EQUIVALENCE
Having looked at the complex, organic way international consistency is
emerging, we have to recognise that consistency is certainly not assured. The
G20-based process will not always work. The key sovereignty rests with
parliamentary and governmental bodies and they will take the decisions they
separately think right. Differences will continue, with impacts for businesses
operating in multiple jurisdictions. Where that occurs, what do you do then if
you are a participant in or, indeed, a regulator of commercial activity that is
intrinsically cross-border? I want to suggest that equivalence of differing
regimes and cooperation arrangements becomes a key issue.
Let me draw your attention to the Third Country Regime for Europe as
proposed in MiFID II. The proposed Third Country Regime is an attempt by the
Commission to harmonise the way MiFID equivalent firms from Third
Countries access European markets, rather than the current process of 27
member States having their own regimes. The original proposal from the EU
Commission was strikingly radical – to allow third country firms from countries
whose regulatory regime had met a reciprocal equivalence test, to set up

11. 11
branches in one EU country and trade across Europe. Parliament has also
supported a harmonised regime. But working out equivalence for the trading
partners of Europe is a difficult challenge and member States are very conscious
of the problems. The intense debate around the MIFID II third country regime
proposals is a powerful example of the issues that arise when equivalence tests
are brought in because international consistency has not proven to be a practical
solution.
Equivalence is also a critical issue under the AIFMD. The AIFMD provides for
a number of situations where entities located in third countries can be engaged
by EU AIFMs to carry out investment management. Once the passport for non-
EU entities is introduced, which should be decided in 2015, non-EU AIFMs will
be permitted to manage EU AIFs and to market EU and non-EU AIFs within the
EU.
I anticipate that after 2015, the role of ESMA in determining equivalence, as
provided for in the AIFMD, will be a major focus of attention. For now, it is not
establishing the equivalence which is the initial challenge, cooperation
agreements are the issue. Cooperation agreements must be in place between the

12. 12
relevant EU Member State and third country with the aim to ensure that
European authorities can carry out their supervisory duties properly in
accordance with the AIFMD. The cooperation arrangements must cover
matters such as the exchange of information between authorities and the ability
to obtain necessary information and carry out on-site inspections where needed.
The cooperation arrangements will be in the form of a memorandum of
understanding (MoU) signed by the relevant EU competent authorities and their
third country counterpart. The challenge is the short timeframe for these
cooperation agreements to be put in place (the AIFMD becomes effective on 22
July 2013). The solution has been to give ESMA a mandate to centrally
negotiate multi-lateral memoranda of understanding with third countries on
behalf of each EU Member State.
Interestingly, the most critical comments about AIFMD have sometimes relied
on the idea that the third country access AIFMD affords creates unacceptable
potential for regulatory arbitrage, if Europe also sets its regulatory standards at a
very different level from others. Similar points have been made in relation to the
equivalence framework in EMIR, which I won’t go into today.

13. 13
My overall message in relation to equivalence and cooperation as a substitute
for or complement to mutually consistent regulatory regimes is to urge you to
focus on this issue. The relevant provisions can seem a minor part of any EU
legislative proposal, but they are increasingly centre stage. If equivalence tests
and cooperation arrangements can work, many of the issues which could arise
for business in the absence of even more robust international consistency of
legislative frameworks, will be manageable. Industry could do worse than
focus their scarce policy resources on encouraging a robust legal framework for
international coordination between regulators as well as legislators.

14. 14
CONCLUSION ON INTERNATIONAL COORDINATION
My conclusion, having observed all that, is that a new pattern of enhanced
international coordination has emerged, but it is fragile and makes industry
involvement in the policy formulation process more difficult. What we are
seeing is high level coordination to establish principles. In the sovereign sphere,
there is no ostensible coordination, but many of the agents are the same as those
who were involved in the first phase of the work. Therefore, each jurisdiction or
region, is posing itself the same questions, informed by the G20/FSB/IOSCO
deliberations. What is actually emerging is similar but not identical
architectures. Equivalence tests and frameworks applied at the regulator level
are then a potentially critical last piece of the jigsaw.
The result is not an assurance of international consistency and coordination, but
it is a process that looks for opportunities for international coordination. There
is a lot of noise in the system. In practice, the IOSCO/FSB debate is often
going on at the same time as the EU and US legislative debates. So the high
level debate around principles does not always come chronologically before the
legislative debate. Also, in practice, there is often a separate, dynamic debate

15. 15
going on in the UK that many in this jurisdiction would be conscious of and if
you looked around the world, you would find similar parallel debates in Canada,
Australia, Singapore, Hong Kong and so on. In each of those fora, there are
research papers, industry submissions, accountancy firm polls, public
consultations. It is inevitable that this will seem like a babel of voices and ideas.
What gives some confidence that out of this myriad of debates a similar set of
approaches will evolve is often the simple fact that in key areas the G20 has
provided guidance and there is a strong overlap in the people engaging in these
different debates.

16. 16
A BEARABLE CHANGE AGENDA?
Let me come back then to Michel Barnier’s second point, namely the calibration
of regulation so as not to impose indigestible requirements.
When Commissioner Barnier talks about calibrating regulation to be bearable,
he is actually talking about the highly structured process the EU goes through to
develop legislation. I think the legitimate question to put is whether the
legislative processes are there to aid the major EU institutions in finding the
bearable rate of change?
There is a sense, which I hear sometimes, that the process of developing this
new regulatory framework is not always seen as entirely satisfactory.
It is true that all this crisis-driven legislation is proving a baptism of fire for the
new legislative process post-Lisbon. The role of the European Parliament in Co-
Decision with the European Council along with the Level II powers of the EU
Commission and the European Supervisory Authorities, especially ESMA, has
added further complexity to the legislative process at a time of significant
legislative change.

17. 17
Let me highlight three points:
o the expanding role of parliament,
o the role for the new ESAs, the three European regulatory bodies and
o the new role of the EU Commission.
I think all three of these points are worthy of the attention of industry.
CO-DECISION
The new European legislative process post-Lisbon has resulted in a greater
involvement of the Parliament in the legislative process. The Co-Decision
process where both Council and Parliament come to individual common
positions on Directives/Regulations prior to negotiating with one another, has
added a complexity to the process. Ultimately, the process aims to merge these
views into a consensus during Trilogue discussions between the Council,
Commission and the Parliament. Trilogue has become critical to EU legislation.
Parliament rapporteurs such as Sharon Bowles and Marcus Ferber have become
key figures in the process. The development of a unified view within the
Parliament has become an important part of the process. Differences of opinion

18. 18
between Council and Parliament (e.g. on the definition of what constitutes high-
frequency trading and 3rd
Country Regimes) are an important issue in finalising
any EU legislation. Key stakeholders are increasingly aware of the effectiveness
of lobbying MEPs as well as the Commission itself, competent authorities and
EU Council Members.
To provide you an on-going example of what is at stake in this process I will
refer to the current negotiations on MiFID/MiFIR, one of the many dossiers we
are supporting the DoF on. Since the proposal was published then the Council
has been holding a number of Working Groups to try to agree a common
position on the text. The Parliament through the ECON Committee has been
engaged in a similar process.
The proposal contains a number of controversial parts. It is worthwhile to
mention a number of them so as to give you an insight on the degree of
deliberation that is required within both entities to come to a common position
and then the complexity of the agenda for negotiation between them.
For example, MiFID aims to grasp the nettle by introducing a definition of high-
frequency trading and ensuring that high-frequency traders are caught under its

19. 19
remit and will therefore need authorisation. One aim here is to prevent a ‘flash
crash’ type event happening in Europe by placing systems and controls
requirements on HFT firms, however the argument continues over whether the
positives of HFT outweigh the negatives.
Also, OTC derivatives are being included in pre and post-trade transparency
rules as part of the process of moving such trading onto organised venues. The
issue here is how do you determine an appropriate level of pre & post-trade
transparency for instruments such as Interest Rates Swaps that are not as liquid
or transferable compared to equities?
Corporate Governance proposals are more detailed than in the original MiFID
and are being aligned closely with CRD IV. This includes a limitation on the
number of non-executive positions held and requirements to ensure senior
management have the required experience and knowledge to work effectively.
A controversial issue with some member states is the increased powers for
ESMA. These include product intervention powers and the ability to enforce
position limits on commodity derivatives. A number of members States suspect
that these powers might be more effectively used if they were given to the

20. 20
national competent authorities. MiFIR also formalises the product intervention
powers across Europe and allows competent authorities to intervene if there are
financial stability issues. The same is true for the ESMA product intervention
powers.
THE IMPORTANCE OF LEVEL II
But even when issues such as these have all been resolved then, it is
increasingly true that the process doesn’t end just because Parliament and
Council agree the final text. Level II rules have become absolutely critical. The
old phrase ‘the devil is in the detail’ was never better illustrated than by the EU
legislative process as it now stands.
The establishment of the European Supervisory Authorities (that is the
European Banking Authority, the European Insurance and Occupational
Pensions Authority and the European Securities and Markets Authority) now
means there is further important negotiations between member States after the
Directive/Regulation being agreed.

21. 21
Part of the ESAs mandate is to participate in the Level II process and draft
technical standards or provide advice for/to the European Commission that
would form part of the implementing Level II legislation.
It has surprised many people that the process involves a significant EU
Commission discretion in relation to delegated acts, to the extent of having
significant capacity to vary from ESMA advice and to do so without any further
checks on or reviews of their conclusions. One example, you will be aware of is
the now anxiously awaited AIFMD Level II.
The process being operated is set out in a couple of places, but mainly in Article
290 of the Treaty for the Functioning of the European Union (TFEU). It is a
critical part of Lamfalussy’s recommendations for making the legislative
process more adaptable and quicker. Unlike in the case of preparing technical
standards, Level II delegated acts are decided by the Commission, with ESMA
providing technical advice only. The process is relatively new .The Council and
the Parliament can only reject the whole proposal not just parts of the Delegated
Act. This places a new kind of power in the hands of the EU Commission.

22. 22
It is important to note the assurances the EU Commission have given on this
process. In a communication from the Commission3
it has stated it “intends
systematically to consult experts from the national authorities of all the Member
States, which will be responsible for implementing the delegated acts once they
have been adopted.” Also the Commission will at the end of the consultations
“inform the experts of the conclusions it believes should be drawn from the
discussions, its preliminary reactions and how it intends to proceed.”
This role for the EU Commission is one important feature of the EU legislative
process now. Another issue arising from the extensive reliance on Level II
measures is the expanded potential for staggered commencement. We have
faced this recently in the case of EMIR with the staggered implementation of
differing parts of the Regulation. The Regulation was published in the Official
Journal on the 27th
July this year and nominally came into effect on the 16th
August. This was despite a large number of Level II measures that have not
been fully drafted and may not be in place until the end of March next year.
Given the details that will be covered in those Level II measures, this has
3
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL
Implementation of Article 290 of the Treaty on the Functioning of the European Union
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2009:0673:FIN:EN:PDF

23. 23
resulted in significant uncertainty within industry on the reporting requirements
for transactions.
To summarise: co-decision, EU Commission final say in certain areas of rule
making and complex staggered implementation timetables linked to multiple
Level II measures. These are now central features of the EU process which can
cause confusion and catch people off-guard who have not adapted to this new
reality.

24. 24
Conclusion – How to Respond?
To conclude, as I stated at the start of my speech, “if you feel confused, if you
are disorientated, if you are unsure where matters stand then ….you are
right….” We are observing an ever more complex, international multi-layered
process for developing regulatory innovations in which consistency of approach
is always at stake and within the EU, a more structured legislative process with
more agents and more options. How do we respond to this?
While this is all confusing, we must not forget the rationale for this tsunami of
regulation, the financial crisis. Since the start of the crisis five years ago, growth
remains weak in all major economies despite significant fiscal programmes and
responsive monetary policy. Due to the damage inflicted on the financial system
and in particular the banking system, credit remains difficult to find for existing
and new firms.
Therefore, we need to accept the underlying imperative for all this work and
respond by adapting to it. From a Central Bank of Ireland perspective, we have
been determined to adapt to this new reality. We have significantly increased
our internal communications with a range of seminars to assist Central Bank

25. 25
staff in keeping up with the aspects of the regulatory agenda of most relevance
to them. We have increased our participation within international organisations
such as IOSCO where we are now involving ourselves in five different Standing
Committees.
Also we remain heavily involved in the work of EBA, EIOPA and ESMA. In
the Markets area, we have staff on all ESMA Standing Committees with a
number involved in Operational Working Groups in areas such as Investment
Management, Corporate Finance and Secondary Markets. Our representatives
will have roles in drafting Technical Advice or providing expert advice on
Delegated Acts on a number of the Directives/Regulations I have mentioned
today. We are also promoting secondment of staff to the ESAs, including
ESMA.
Our public conference earlier this year was a reflection of all that work and
sought to bring a sense of what is going on to the Irish industry. We were,
needless to say, delighted to have all the Chairs of the ESAs there as well as
Adair Turner and Emil Paulus from the EU Commission, in addition to a range
of other speakers.

26. 26
We believe this level of engagement is important going forward and helps
achieve a more balanced outcome for the regulatory proposals in Europe.
By the same token, I hope it will not seem presumptuous if as my final point I
try to re-pose in a form focused on you, the kinds of questions we have had to
ask ourselves and are still struggling with about how well we are positioned and
how well we are adapting to the demands of the regulatory maze referred to in
the title of this workshop
For example, the simple question:
Do you have a way to get clear, information at an early stage about what the
realistic options for policy change are amid all the noise of the regulatory policy
debate?
Who do you rely on for information – conferences? newsletters? Accountancy
firms? Head office policy units? Is what they tell you verbose? Is it insightful?
Alarmist ? Unclear? Strategic?

27. 27
What are your goals in relation to the policy formation process – are you always
a passive consumer or are you sometimes aiming to influence the outcome ?
Occasionally? Selectively? Always?
What would be your strengths in the process if you did participate? Do you have
information that could influence the outcome if you got it into the process?
How good are you at identifying the best point to enter the debate or do you
intervene only when a policy decision is too far advanced? As a result are you
always climbing up hill to influence the outcome? What can you do about that?
If you are aiming to influence the outcome, it’s probably because one of the
realistic options impacts my business model – are you allied with others who
have a similar business model? Or are you dependent on persons who don’t
share your business model issues at this point?
Are you considering sufficiently seriously the option of changing the business
model and the opportunities created by the proposed new regulatory approach?
How good are you at identifying when the debate is over and making the
transition to planning the implementation?

28. 28
It’s not for me to do that balance sheet for industry. Indeed my posing these
questions definitely does not imply any criticism. . But it seems to me there
have been few periods of time when adapting to regulatory change has been so
challenging and therefore few periods when you could more usefully take a
strategic look at how you organise your involvement in the process, no matter
how well you may have done that in the past or be doing it now.
Thank you.