The Global Financial Markets Association (GFMA) and the International Capital Market Association (ICMA) have today published a report, The GFMA and ICMA Repo Market Study: Post-Crisis Reforms and the Evolution of the Repo and Broader SFT Markets, which assesses the impact of post-crisis regulation on the functioning of the global repo and securities financing transactions (SFT) markets. The report provides a broad account of the global repo market’s operation during the crisis and analyses the subsequent regulatory reforms. It finds that they have had a profound impact on banks’ SFT businesses with a significant increase in capital requirements, which could detrimentally impact the securities lending market and the way the repo market functions under stressed scenarios. This assessment is followed by an analysis of how changes in the cost of SFTs have affected banks’ product offerings and client choices, as well as how volatility in some repo markets has impacted the selection of IBOR (Interbank Offered Rate) replacement rates. The report includes primary research in the form of qualitative and quantitative analysis. The qualitative analysis consists of a survey on the current and future states of the repo markets, completed by 33 senior front office staff from major dealer banks across the globe. The quantitative impact study (QIS) assesses the impact of the proposed minimum haircuts for SFTs, which were introduced as part of the Basel III framework in 2017 in order to limit leverage banks provide to the non-bank sector. The QIS aims to establish if this framework will lead to unintended consequences by further contracting banks’ SFT markets participation. Kenneth E. Bentsen, Jr, CEO of GFMA, said: “Repos and other SFTs play a critical role in the global financial system and support the real economy in many different ways. Therefore, it is essential that the SFT markets function smoothly during both normal and stressed times. Our report’s findings suggest the need for several policy revisions and that further work needs to be conducted in recalibrating the global prudential standards, without sacrificing safety and soundness, to ensure better functioning of the repo and broader SFT markets for the benefit of the wider global economy.” Godfried De Vidts, Chair of the ICMA European Repo and Collateral Council, said: “It is clear that regulation is a key driver of changes in the way the repo and broader SFT markets operate today and how they will evolve in the near future. While the markets have thus far proved resilient, they are still some way from reaching a new normality, with regional markets at different stages of that evolution reflecting divergent implementation of regulatory reforms on different timelines, and the impact of future regulatory reforms remains a key concern. Hence it is important to conduct review of the coherence and calibration of the post-crisis regulatory framework, particularly pertaining to how it impacts the repo market, and to ensure that any proposed further reforms are subjected to robust impact analysis.” Recommendations: The report makes several recommendations to review the post-crisis regulatory framework, particularly pertaining to how it impacts the repo market, including that: The FSB and Basel Committee on Banking Standards should review the coherence and calibration of the post-crisis regulatory framework, particularly pertaining to how it impacts the repo market. The treatment of repo transactions backed by the highest quality government bonds should be reviewed in order to ensure that the private sector market has the capacity to absorb QE unwind and to operate without significant reliance on central banks during normal and stressed market conditions. The minimum SFT haircuts regime should be reviewed in line with policy objectives to address unregulated markets in order to avoid significant disruptions to the repo and securities lending market. – Ends –

AFME welcomes today’s Euro Summit agreement to provide a backstop to the existing Single Resolution FundOliver Moullin, Head of Recovery & Resolution, said: “Today’s agreement to provide a backstop to the SRF by 2024 at the latest is a further step to reinforce thecredibility of the Single Resolution Mechanism. Nevertheless, the governance arrangements need to be clear,effective and efficient enough to ensure the backstop can be reliably operationalised if needed. Alongside theSRF, it is important to make progress on the provision of liquidity in resolution and reducing fragmentationwithin the Banking Union.”

Simon Lewis, Chief Executive of AFME, said: “Deep and integrated European markets that allow cross-border trading to take place between the EU and third countries are of vital importance for a healthy European economy that promotes economic growth. Therefore, any fragmentation of Europe’s stock market risks negative implications for corporates and investors across the EU. “In this respect, the current uncertainty surrounding the Swiss equivalence determination is a regrettable situation for European equities markets and does not benefit market participants, least of all European end-investors. “The optimal resolution would therefore be for both sides to reach an agreement as soon as possible.” - ENDS -

Following the ECOFIN meeting of finance ministers today and the announcement that a political agreement has been reached on the Risk Reduction Measures (RRM) package, Michael Lever, Head of Prudential Regulation, said: On unlocking progress towards a Banking Union: “We welcome today’s political agreement on the package of banking and resolution measures which represent an important further step towards reducing risks in the banking system and avoiding national taxpayer funded bailouts. Together with already significant strengthening of banks’ balance sheets, including substantial reductions in the stocks of non-performing loans, these improvements should enable further progress to be made towards the completion of Banking Union. This should include the establishment of a credible backstop for the Single Resolution Fund, which we encourage EU leaders to support during their next summit, and the delivery in the coming months of a European Deposit Insurance Scheme.” But barriers remain: “Unfortunately, the risk reduction measures have failed to remove barriers to the free-flow of capital and liquidity across the EU, or even within the Banking Union. And in some areas, such as requirements for fully propositioned internal MREL, new barriers have been put in place which are not in keeping with the broader objectives of Banking Union. On making Banking Union a reality: “While we appreciate the need to introduce all major elements of the RRM package into the EU framework in a timely manner, it is regrettable that in some areas, barriers to full integration remain and that the agreement does not include commitments to review and remove these regulatory obstacles. We call on Member States to support the next Commission in making Banking Union a reality”. – Ends –

Following the publication of the Commission’s NPLs stocktake today, Michael Lever, Head of Prudential Regulation, at AFME, said: “AFME welcomes the progress that has been made to date on the European Commission’s legislative initiatives on NPLs. Reducing the level of NPLs on European banks’ balance sheets will free up capacity to support customers and economic growth. Such action will also lower overall risk in the banking sector which is a pre-requisite for the much-needed completion of Banking Union. It is therefore very encouraging to see that the level of NPLs has fallen by around a third since 2014 .” “Nevertheless, further work remains to be done. In particular, it is important to ensure that the Commission’s initiatives for reducing the future build-up of NPLs are consistent with and complementary to those made by other regulatory bodies, especially the ECB.” “With regard to provisioning for NPLs in future, AFME welcomes many of the changes made by legislators as an improvement to the Commission proposal. These changes will give more flexibility to how the ‘backstop’ provisions are applied and provide room for supervisors to set stricter provisioning requirements if necessary.” “Similarly, more progress is required on measures intended to further develop the secondary market for NPLs., Lawmakersshould consider the appropriate scope to make sure that the proposed measures both reduce the level of NPLs on European banks balance sheets, and also help to increase the trading market for NPLs in Europe.” – Ends –

Following the publication of the Commission’s progress report on Capital Markets Union today, AFME Chief Executive, Simon Lewis, said: “Building an ambitious Capital Markets Union together with a Banking Union remains essential to strengthening the EU financial system. It is important to redouble efforts on the priority dossiers now before the end of this legislature in order to send a strong signal of commitment to developing Europe’s capital markets. We therefore welcome the Commission’s call for action on this important project.” AFME’s priority dossiers include: Insolvency reform Directive – completing inter-institutional negotiations with a view to delivering successful legislation that supports more harmonised and efficient insolvency regimes across the EU. ESAs review – delivering key reforms, including the provision of regulatory forbearance powers to the ESAs, the reform of the ESAs Level 3 process (including Q&As), the extension of the transition period of the Benchmark Regulation in respect of critical and non-critical benchmarks, and appropriate measures on prudential and Anti-Money Laundering supervision for financial institutions in the EU. Secondary markets for NPLs – achieving progress on measures intended to further develop the secondary market for NPLs. Sustainable finance – while we urge progress on this file, it is important that key developments, such as a taxonomy for sustainable investments and rules establishing and governing the provision of low carbon indexes, are not rushed. Investment Firms Review – ensuring that a new prudential regime tailored to the specificities of investment firms is achieved without creating unintended consequences for larger banking groups. – Ends – Notes to editors: AFME recently published a report tracking the progress to date of the Commission’s Capital Markets Union project through seven key performance indicators identifying what further work needs to be done: https://www.afme.eu/globalassets/downloads/publications/afme-cmu-kpi-report-4.pdf

The Association for Financial Markets in Europe (AFME) has today published an updated version of its Due Diligence Questionnaire (DDQ) which harmonises and simplifies the process of completing questionnaires for global custodians, sub custodians and banks that hold client money. The aim of the document, now in its third iteration, is to reduce time and resources used by market participants to complete the annual due diligence process. The AFME Due Diligence Questionnaire Task Force, comprised of approximately twenty Network Managers, diligently reviewed submissions proposed throughout the year by market participants. Alan Cameron, Head of Market Strategy-Brokers, at BNP Paribas Securities Services and Chair of the AFME Due Diligence Questionnaire Task Force, commented: “Our thanks are due to the many throughout our industry who have contributed to the 2019 version. We are delighted that the AFME DDQ is being used so extensively. The 2019 version includes extended sections on Client Money and Corporate and Social Responsibility, as requested by many AFME members.” AFME encourages the broadest use of this DDQ. It is available to all, free of charge, on AFME’s website: https://www.afme.eu/globalassets/downloads/standard-forms-and-documents/AFME-PTD-Due-Diligence-Questionnaire-2019-Final-Jan-2019.docx – Ends –

Following the ratification of the Withdrawal Agreement and Political Declaration on the future relationship at the EU Summit in Brussels today, Simon Lewis, Chief Executive of AFME, said: “The withdrawal agreement has passed another important political hurdle today with the agreement of the European Council. Agreeing the final deal in the coming weeks will be crucial to provide much-needed certainty on a transition period. In the meantime, it remains critical to continue work to mitigate cliff-edge risks in a no deal scenario.” “The political declaration for the future relationship for financial services rightly identifies the need for a stable relationship with close regulatory and supervisory cooperation. We also welcome the commitments to greater transparency and consultation in the equivalence process; and the aim to finalise equivalence assessments well in advance of the end of 2020.”

Following the publication of the Withdrawal Agreement this evening, Simon Lewis, Chief Executive of AFME, said: “Today’s progress in the negotiations is a significant step forward. Finalising the agreement as soon as possible is important to provide certainty on a transition period and ensure an orderly withdrawal process.” “Progress also appears to have been made on the declaration for the future relationship for financial services. We welcome the commitments to a continuing close and structured regulatory and supervisory cooperation and commencing equivalence assessments as soon as possible.” “Pending ratification by the European Council and the UK and European parliaments, it is still important for the Commission and Member States to clarify steps to mitigate cliff edge risks in a no deal scenario.” – Ends –

New report explores potential compliance challenges and how they could be addressed. The Association for Financial Markets in Europe (AFME)and EY have today published a new report considering the role of the compliance function within wholesale investment banks and the potential challenges and changes it faces in its structure and approach. The report, entitled “The Scope and Evolution of Compliance” outlines the key considerations for banks’ compliance functions as they seek to adjust and enhance their roles in response to the changing nature of the business and regulatory expectations. James Kemp, a Managing Director at AFME, said: “Against a backdrop of significant regulatory change and conduct issues, expectations for compliance functions have never been higher.Where previously advising on regulatory requirements and monitoring adherence to company policies formed the core of a Compliance Officer’s role, teams are also increasingly expected to take a more strategic and proactive role in anticipating and managing risk. The compliance function needs to be able to evolve and adapt in response to these changes and this report sets out the possible active steps that banks can take to do so.” Stuart Crotaz, Financial Services Partner at EY, said: “The message from the market is clear – it has never been a more challenging time to be in compliance. Yet this also brings opportunity as boards and regulators increasingly promote the need for a forward-looking compliance team who can provide a broader view on the management of regulatory risk in an increasingly technological world. The speed of that change and the increasing importance of data and analytics means that compliance needs to keep evolving.” Challenges currently facing compliance teams are driven by: Evolution of relationship with the first line of defence;Compliance has evolved from a quasi-legal function to one that is more focused on the identification and measurement of risks. Nonetheless, compliance has continued to fulfil many of its traditional roles, such as setting standards through policies, advising the business on regulatory requirements and monitoring for compliance with policies and standards. Getting the balance right between ensuring sufficiently independent monitoring oversight is conducted while still providing day-to-day advice is a challenge, particularly with a finite number of resources. The speed and automation of processes;Compliance reporting is largely manual and as a result resource-heavy and time-consuming. However, compliance must keep up to speed with an ever-increasing use of automated trading platforms, algorithmic trading, a variety of different communications media, and the increasingly complex transactions and structures being developed by the business. There is risk inherent in these new processes and compliance officers need to understand these new technologies. The increased accountability demands on senior managers.In order for senior managers to fulfil their Senior Managers and Certification Regime (SMCR) responsibilities, compliance officers must provide a sufficiently holistic view of risk. This means they need the analytical tools to be effective in forming a broader and more strategic view of the compliance profile in their organisations. To address these challenges, the report discusses possible resources and models for compliance. Conclusions: There is an opportunity for compliance to transition from its traditional role into one that provides enhanced strategic advice to senior management. This includes increased oversight of 1st Line Control Function surveillance and testing as a 2nd Line Control Function, greater use of business data to analyse and provide insights to senior management on changing risks and controls, and a greater influence on the management of the regulatory risk framework as a whole. Compliance will become more data and technology dependent as budget challenges and operating effectiveness encourage innovation-driven transformation. But, people and human judgement remain important. In order for compliance to transition to a different operating model there should be a shift towards it being a data user, not a data generator. Fundamentally, compliance should take a step back and look to use and leverage all streams of data (transactional, behavioural and social) to identify risks and act as an independent overseer and advisor. Clickhereto download the full report. – Ends –