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FSA publishes further analysis on systemically important banks and the cumulative impact of capital and liquidity reform
The Financial Services Authority (FSA) has today issued a discussion paper (DP) focusing on policy measures to address the problem of systemically important ‘too-big-to-fail’ banks. The paper also examines the trade-offs involved in increasing capital and liquidity requirements, and stresses the need to assess the cumulative impact of multiple reforms.
October 22, 2009-The paper identifies the dangers posed by those firms that are seen as too-big or too-interconnected-to-fail, or too-big-to-rescue. It describes the full range of policy options - including the creation of ‘narrow banks’ – in order to provide the basis for an informed debate, but also outlines the position which the FSA is currently proposing in international fora, namely that:
There is a strong case for applying some form of capital (and perhaps liquidity) surcharge internationally for systemically important banks; surcharges could be proportional to continuous and increasing measures of systemic importance, avoiding the dangers created by specific thresholds of systemic importance.
A capital surcharge could be combined with an approach to global banking groups which places greater emphasis on the standalone sustainability of national subsidiaries, with overt understanding that home country authorities will not be responsible for the rescue of entire groups. The more that groups are organised on this basis, the less the required surcharge at group level might need to be.
Action should be taken to reduce inter-connectedness in wholesale trading markets, with much over-the-counter (OTC) derivative trading moved to central counterparties (CCPs), and with effective collateral and margin call arrangements for bilateral trades which reduce the dangers of strongly pro-cyclical margin call effects.
Reform to trading book capital should significantly increase capital requirements and differentiate more strongly between basic market making functions which support customer service and riskier trading activities, with a bias for conservatism in relation to the latter.
Systemically important banks should be required to produce recovery and resolution plans (‘living wills’) which set out how operations would be resolved in an orderly fashion.
If supervision examination of these plans reveals serious obstacles to resolution, then steps will need to be taken to reduce or remove them – this could require restructuring certain parts of the group. Restructuring could include clear separation between retail deposit taking business and businesses involved in proprietary trading activities, with the latter able to fail even if the former were supported in crisis conditions.
The DP also stresses the need to assess the possible cumulative impact of multiple reforms to capital and liquidity regimes now being considered by international standard-setting bodies. It describes the case for significant increases in capital and liquidity requirements to reduce financial instability risks, while recognising the potential implications for lending volumes and the cost of credit intermediation. It considers methodologies which can help inform judgements on the trade-offs involved.
CESR starts consulting on inducements - good and poor practices
October 22, 2009--CESR issued today a consultation paper on inducements for which the Markets in Financial Instruments Directive (MiFID) sets out requirements for the receipt or provision by an investment firm of a fee, commission or non-monetary benefit.
The purpose of this consultation is to highlight some of the observed industry practices on the MiFID inducements rules and to provide investment firms with an understanding of how CESR views such practices. Throughout the consultation paper CESR has indicated what types of firm behaviour European securities regulators encourage and discourage.
This is expected to provide firms with a benchmark against industry compliance with the MiFID inducements rules, with the additional comfort of knowing whether European securities regulators encourage or discourage particular instances of firm behaviour.
The consultation is open until December 22.
View paper-Inducements: Good and poor practices
UK's Financial Services Authority Publishes Further Analysis On Systemically Important Banks And The Cumulative Impact Of Capital And Liquidity Reform
UK banks are taking decisive steps to restore confidence and to rebuild trust in their industry, a new BBA publication shows today.
October 22, 2009--Next Steps for Banking sets out how banks are working to meet the public expectation of change by overhauling their practices in conjunction with the Government, regulators and customers.
The publication aims to be an authoritative account of the actions the banks are taking to reform the industry and will be available as a downloadable part-work, with new chapters added every two weeks. The first two chapters, issued today, are Why Banking Matters and Banking Reform - the Next Steps.
Launching the publication, Angela Knight said:
"The banks are undertaking a vast amount of work to reform the financial system, much of it unobserved and unrecorded. This series sets out to detail the work that is being done at an unprecedented pace to reform the industry, and to inform the debate as to the kind of change we need going forward.
"It must be remembered that reform comes at a cost: we need an open and constructive discussion about how we can reconcile the need to restore stability with the need both to keep down the cost of funds and to ensure their continued availability. We believe the key to making the right changes is to base them on the banks who have managed well through the downturn.
"The debate on the future of the financial system is taking place right now across the world, among governments, regulators and central banks. Next Steps is our contribution to that debate."
first two chapters of Next Steps for Banking
Clearstream and Banque centrale du Luxembourg Collaborate on Collateral Management
October 22, 2009-Clearstream, the International Central Securities depository within Deutsche Boerse Group, and the Banque centrale du Luxembourg (BCL) are launching a new service allowing all Luxembourg based banks to optimise further their use of collateral to cover any operation with the Eurosystem via BCL.
Clearstream will act as a triparty agent for the banks looking to cover any operation with BCL. Through their securities account with Clearstream, the banks will manage one central, multi purpose collateral pool allowing them to not only cover their monterary policy operations but also to perform other operations necessitating collateral among which intraday credit operations in TARGET2, the real time gross settlement system for the euro.
Luxembourg based banks will benefit from the flexibility of Clearstream’s fully automated CmaX (collateral management eXchange) system. This includes automatic allocation of collateral, eligibility checks, substitutions of collateral, mark to market valuation, margin calls, re-use of collateral and reporting facilities.
Operationally, Banque Centrale de Luxembourg will communicate electronically to Clearstream the amount to be collateralized and Clearstream will ensure that eligible assets are pledged as collateral. Assets eligible at the European Central Bank and for which Clearstream already has “assessed links” (1) represent some 40,000 securities, 90% of the total number of eligible assets.
The financial crisis and the subsequent freeze on money markets have shed light on the importance of accessing central banks liquidity as well as on the crucial role of securities financing mechanisms and infrastructures which provide much of the liquidity to the world’s capital market. Since the beginning of the financial crisis, collateral managed by the Eurosystem has gone up from € 800 billion to € 1500 billion.
Clearstream pioneered the development of collateral management services, including triparty repo, in Europe by launching the world’s first such multi-currency service back in 1993. It now offers a wide range of collateral management services together with a suite of securities lending products under the name of Global Securities Financing (GSF) services. In the past weeks, GSF services have broken the €500 billion mark for monthly average outstandings (from € 400 billion a year ago), illustrating the growing importance of secured financing and the continued flight of collateral towards central liquidity pools at a time of market uncertainty.
(1) Background on assessed links. assessed links are contractual and technical arrangements for the transfer of securities involving between securities settlement systems which may be used in the collateralisation of the credit operations of the Eurosystem after an assessment has been carried out against the Eurosystem’s standards to ensure that the conditions set by the Governing Council have been met.
CESR consults on details for proposed registration and supervision of CRAs, feedback statement on CRAs repository published
October 21, 2009--CESR published today a feedback statement on its consultation for a central repository for credit rating agencies (CRAs) and issued a consultation paper detailing the proposed registration and supervision process for CRA in Europe.
The feedback statement provides a summary of the main suggestions received by CESR regarding the setting of common standards for presentation of historical and performance information and the potential output design of the repository along with an explanation of CESR’s decision on some of the most significant issues raised.
The purpose of the consultation document is to seek comments on the conclusions CESR has drawn for setting guidelines for the registration process, the functioning of colleges, the mediation protocol, the common standards on presentation of information for registration and endorsement (Annex II) and the information for the application of certification and for the assessment for CRAs systemic importance.
The consultation is open for comments until Friday, 30 November 2009.
View the consultation paper- Guidance on Registration Process, Functioning of Colleges, Mediation Protocol, Information set out in Annex II, Information set for the application for Certification and for the assessment of CRAs systemic importance
View the feedback statement-CESR’s consultation on CRAs Central Repository
SIX Group Sets New Standards With CONNEXOR® Reference Data Management System
October 21, 2009--Under the name CONNEXOR, SIX Group plans to expand its Web-based reference data infrastructure. Thanks to this new online platform, issuers can compile their reference data centrally in standardized form and then have it disseminated electronically to all stakeholder groups. As a result, CONNEXOR offers market participants greater efficiency, first-rate reference data quality and simplified comparability of financial products.
With CONNEXOR, SIX Group is introducing a massive expansion of its already well-established services in the area of Web-based reference and core data, thereby lending support to issuers, financial institutions, data vendors, clearing and settlement service providers, government authorities and investors in the efficient processing and utilization of securities-related reference data. For all users, this enhancement enables greater efficiency, the elimination of error sources, as well as the realization of considerable cost savings.
Automation and standardization
At the heart of this new Web-based CONNEXOR infrastructure lies the ability for issuers to compile and administer locally, in standardized digital form, all data pertaining to the lifecycle of a given financial instrument. The subsequent organization and dissemination of the reference data is accomplished fully automatically via standard interfaces for the attention of all stakeholder groups in the value chain associated with the security.
CONNEXOR therefore generates benefits for all parties involved:
CONNEXOR services for issuers facilitate cost-effective reference data management throughout the entire lifespan of a financial product.
Data vendors can use CONNEXOR to optimize sustainably the costs involved in procuring and maintaining reference data, while benefitting from the outstanding quality and significantly greater depth of that data.
The new platform offers investors and users realtime access to a vast store of reference data, right from the source, thereby simplifying the comparability of various financial products.
CONNEXOR is a service of SIX Swiss Exchange Ltd, SIX Exfeed Ltd, SIX SIS Ltd and SIX Telekurs Ltd, all of which are subsidiaries of SIX Group. Prior to the securities offering, CONNEXOR Numbering CONNEXOR® Numbering from SIX Telekurs enables issuers of financial instruments to obtain security numbers and ISINs in advance, fully automatically and regardless of time and place. As a result, the issuance process is accelerated. The security numbers and ISINs can be procured individually or for inventory purposes (pooling).
This service will become available as of 26 October 2009.
CONNEXOR at the Structured Products Fair 2009 (21-22 October) SIX Group is presenting the entire CONNEXOR system to the public at the Structured Products Fair 2009, Stand E1.
For further information on CONNEXOR, please visit: www.connexor.ch.
European Union: Competition is sharper but liquidity fragmented
October 21, 2009--It is hard to believe that a dry-sounding European Commission directive that came into force almost exactly two years ago could have had the effect on Europe’s equities markets that it has.
But the Markets in Financial Instruments Directive (Mifid) has resulted in some astonishing changes to the trading landscape – probably far beyond what its architects envisaged.
