EUROGROUP CONSULTING in regulation€¦ · EUROGROUP CONSULTING is able to support you in your...

Overview of the main European regulations

October 2012

EUROGROUP CONSULTING in Banking and Finance regulation

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EUROGROUP CONSULTING is able to support you in your regulatory compliance issues through its European presence, its detailed industry knowledge and its coordinated research and publication activities

BASEL III

CRD IV MIFID I

MIFID II

TARGET 2

ISAE 3402 / SSAE

Directive on Mortgages

EMIR PRIPS

FATCA

UCITS IV

UCITS V

AIFMD

Dodd-Frank Act

Coverage of the competence centre „Regulation Watch“

Permanent monitoring of upcoming regulations and new developments at regulator and marketplace level

Constant business input coming from our local business relations to give an overall and detailed European picture

Experts mobilized all over Europe

Update on regulations at each step

• Detailed impact assessments, by activity with a business more than a pure regulatory angle

• Opinions / points of view • General literature on the topic

• Exploratory meeting/ questions • Help all through the assignments • Experts working cross-border

• Compliance project sizing • Market practices • Possible strategic orientations

An added value for our customers

Studies and publications

To assist our clients in their increasing needs to address regulatory concerns, EUROGROUP CONSULTING has structured a competence center

Summary

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1. Overview of the main European regulations

2. Our approach & experience

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Introduction – Getting to a more stable market place

• One of the consequences of the financial crisis is the demand for stricter regulation on a European and global level securing a safer financial market place with less systemic risks in the future. Several regulations are on their way requiring the financial industry to rethink their business and to put in place measures demanding an enormous amount of resources.

• The main goals of these new regulations are to pursue more customer protection and to provide for a securer and more transparent financial system

• New regulations will further reshape businesses and require actors of the financial service industry to allocate resources to:

comply to new rules impacting their existing processes and operational procedures: like providing more information to clients, use of central counterparties for a large mount of products, increased need of capital, ...

review their business strategy: questions regarding the profitability of products and services, new opportunities as well as market position changes.

• This document will provide you with a snapshot overview of the major European legislations that are in discussion in the financial industry.

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Implementation timeline – a dense implementation schedule for 2012 and 2013 requiring action now

Provisional peak of workload in compliance projects

2011 2012 2013 2014 . . .

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MIFID II (EU)

AIFMD (EU)

EMIR (EU)

Regulation text into force Consultation FATCA (US)

Dodd-Frank Act (US) Gradual implementation

Regulation text into force

Directive on credit related to residential property (EU)

Central Securities Depositories (EU)

Basel III (Int’l) / CRD IV (EU) Adoption / Level 2 measures/ Preparation of implementation Gradual implementation

UCITS V (EU) Proposal

PRIPS (EU) Proposal

Split Retail / CIB (EU) Consultation

Directive on clearing and settlement (EU) Consultation

Consultation / Proposal Adoption / Level 2 measures / Preparation of implementation

Regulation text into force

Proposal Adoption / Level 2 measures / Preparation of implementation Regulation text into force

Consultation / Adoption Adoption / Level 2 measure / Preparation of implementation Regulation text into force?

Financial Transaction Tax Consultation / Adoption Adoption / Level 2 measure / Preparation of implementation Regulation text into force?

Consultation / Proposal Adoption / Level 2 measures/ Preparation of implementation Regulation text into force

Adoption / Level 2 measures / Preparation of implementation Regulation text into force

Adoption / Level 2 measures / Preparation of implementation

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Origin Basel III: Basel Committee on banking supervision

CRD IV: European Commission

Legislative timing Final text for capital requirements (July 2011)

Implementation date 2013-2019

Geographic scope G20 Countries (Basel III), European Union (CRD IV)

Impacted business segments

Retail Banking

Consumer Finance

Private Banking

Asset Management

Commercial Banking

Investment Banking

Securities Services

Payments

Digest “Basel III” and “Capital Requirement Directive IV“ (CRD IV)

Main changes Consequences for financial institutions

• Strengthening of equity capital: Increase in tier1-capital, conservation buffer und countercyclical buffer

• Capital requirements for derivatives: Additional capital requirements related to “counterparty credit risks”

• Liquidity requirements: additional requirements to hold liquid assets

• Leverage-Ratio: Containing the limit of indebtedness by defining an upper limit of the leverage ratio (ratio of regulatory capital requirements in respect to balance sheet total)

• Publication: Higher publication standards

• Decrease in profitability (RoE) of financial institutions and potentially question the use of pursuing certain capital intensive activities

• The need of additional capital buffers will lead to a decrease in dividends and bonuses

• The importance of external ratings will decrease with the use of leverage ratios

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Origin European Commission

Legislative timing • 10/2011: legislative proposal

• Mid 2012: adoption by EU parliament

• Sept 2012: technical standards ESMA

Implementation date Early 2014

Geographic scope European Union


Retail Banking

Consumer Finance

Private Banking

Asset Management

Commercial Banking

Investment Banking

Securities Services

Payments

Digest of “Markets in Financial Instruments Directive II“ (MIFID II)


• Stricter surveillance of trading platforms, including trading platforms of financial institutions

• Stricter rules for the use of trading algorithms and high frequency trading

• Increased transparency obligations : enlargement of financial products scope (commodities, derivatives contracts and structured products) and stricter rules for dark trading

• More intervention power for regulators

• Investor protection: new requirements for investment advise, recording obligations, inducement fees

• Institutions running internal matching platforms will need to create Organised Trading facilities to transact client trades with similar requirements as exchanges.

• Use of a central counter party for OTC transactions will require new operational processes and a review of collateral needs

• Stronger information and documentation obligations towards regulators and clients

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Legislative timing • 12/2011: In consultation

• Beginning 2012: Adoption in EU Parliament

Implementation date

2013



Retail Banking

Consumer Finance

Private Banking

Asset Management

Commercial Banking

Investment Banking

Securities Services

Payments

Digest “UCITS V” (Undertakings of Collective Investment in Transferable Securities V)

Consequences for financial institutions

• Standardization of Europe-wide NAV (net asset value) calculation, limitation of responsibility transfer to sub-custodians

• Extended liabilities in case of negligence of depositary bank, enlarged possibilities of legal claim for investors

• Stronger surveillance of depositary banks through regulation authorities and auditors

• Prevention of conflicts of interests within depositary banks

• Harmonization of UCITS-Funds providers’ remuneration systems with the aim to reduce high-level risks

• Strengthening of risk management, as all risks except the market risk should be controlled and monitored

• Custody services will have to perform new obligations like the control of contracts (Collateral Management, Securities Lending, …)

• Sub-custodians will be closer controlled, e.g. regarding the consequent custody of asset separation

• Strengthening of risk prevention and higher equity capital needs in order to cover extended liabilities

• Improved rules of behaviour, extended responsibility and documentation obligations towards regulators and external inspectors

Main changes

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Legislative timing • 11/2010: EU-Parliament

• 12/2011: Level 2 measures

Implementation date 2013



Retail Banking

Consumer Finance

Private Banking

Asset Management

Commercial Banking

Investment Banking

Securities Services

Payments

Digest “Alternative Investment Fund Managers Directive” (AIFMD)


• Certification of AIFM by the national regulators

• Strengthening of risks and liquidity management

• Establishment of an independent trustee to operate solely in the interests of the clients – regarding custody

• Evaluation of assets by an independent appraiser at least once a year

• Increased transparency obligations towards clients and regulators

• Sales of AIF are limited to institutional investors, but national exceptions are possible

• Various types of investment funds are impacted: special funds, open real estate funds, close-end funds, private equity and hedge funds

• Consequences are diverse as special funds and open real estate funds are already highly regulated whereas close-end funds and private equity funds are not – e.g. close-end funds obligations:

• Development of risk management/ liquidity management systems

• Organisation of the trustee function independently

• Publication of the company report within 6 months

• Annual appraisals for shipping, wind parks, real estate

• Organisational efficiency and process adaptations…

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Legislative timing • Q3 2012: Legislative text

• Q4 2012: technical standards expected

Implementation date

July 2013



Retail Banking

Consumer Finance

Private Banking

Asset Management

Commercial Banking

Investment Banking

Securities Services

Payments

Digest “European Market Infrastructure Regulation” (EMIR)

Main changes Consequences for financial instutions

• Compulsory clearing of OTC derivatives and standardised derivatives by central counterparty clearing houses (CCPs)

• Compulsory reporting of all derivatives transactions to trade repository (retroactive if applicable)

• Mandatory clearing of standardised OTC and exchange-traded derivatives through central counterparties (CCP)

• Strengthened risk management obligations for OTC derivatives not cleared through a CCP

• Mandatory reporting of all derivative transactions to a trade repository

• Higher transaction costs

• Higher administrative costs

• Default risk of CCP / clearing broker

• Impact on balance sheet and P&L

• Additional need of collateral

• Adaptation of processes and organization structures

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Origin United States of America

Legislative timing • 21st July 2010: execution

• Consecutive implementations

Implementation date Implementation ongoing

Geographic scope USA


Retail Banking

Consumer Finance

Private Banking

Asset Management

Commercial Banking

Investment Banking

Securities Services

Payments

Digest “Dodd-Frank Wall Street Reform and Consumer Protection Act” especially Title VII on OTC Derivatives (Dodd-Frank Act; DFA)

Main changes

• Mandatory reporting to FSOC (Financial Stability Oversight Council) if balance sheet greater than 50 bill. USD

• Mandatory clearing through central counterparties for all clearable derivative transactions

• Limitation of proprietary trading (Volcker Rule)

• Mandatory reporting of all derivative transactions to a trade repository

• Centralising derivatives trading through electronic platforms

• Limitation of the business operations of financial institutions in USA

• Higher transaction costs

• Higher administrative expenses

• Adaptation of processes and organizational structures

• Impacts on balance sheet and P&L (potential profit loss)

• Default risk of CCP / clearing broker

Consequences for financial institutions

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Origin United States of America

Legislative timing • Work in progress

• Updated version to be published in Nov 2012 (‘Final Regulations’)

Implementation date July 2013 (to be confirmed)

Geographic scope Worldwide


Retail Banking

Consumer Finance

Private Banking

Asset Management

()

Commercial Banking

Investment Banking

Securities Services

Payments

Digest “Foreign Account Tax Compliance Act” (FATCA)


• Foreign financial institutions (FFIs) must enter into a contractual relationship with US tax authorities (IRS – Internal Revenue Service) to identify potentially US taxable clients (individuals and Legal Entities), provide periodic reporting of accounts and US related revenues and apply a withholding tax on ‘recalcitrant’ clients i.e. those not agreeing to exchange of information with the IRS

• Information duty: bank clients have to share with their financial institute if they are taxable in the US and banks have to disclose this information to IRS

• Withholding tax (WHT): Clients and Financial Institutions which do not cooperate have to pay a 30% tax on all income coming from US-sources and later also on all gross proceeds of assets producing such income

Consequences on how banks worldwide do their business with potentially US taxable clients:

• Need to conduct due diligence process for client identification (screening of new clients, diligent reviewing of existing relationships: Individuals’ accounts >1mn USD: manual review of existing account info; Legal Entity accounts > 250k USD detailed review of e.g. existing Beneficial Owner info)

• New reporting requirements (client data, gross proceeds, income…)

• Participating FFIs have to withhold on payments to non participating FFIs and recalcitrant clients (timeline tbc)

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Legislative timing • March 2011: proposed by Commission

• Level 2 measures still awaited

Implementation date January 2014



Retail Banking

Consumer Finance

Private Banking

Asset Management

Commercial Banking

Investment Banking

Securities Services

Payments

Digest “Directive on credit agreements relating to residential property”


• Minimum requirements imposed to provide the service for credit / non-credit institutions and credit intermediaries

• Review of pre-contractual processes (including communication to the customers) to ensure appropriate information disclosed to the consumer, and products fit to customer’s needs – notably through creditworthiness assessments

• Harmonization of computation rules of the APRC

• Implementation of a new service of “advice” to the consumer requiring enough products considered

• Provisions to incentivize sales forces and distributors in a way that ensures customer’s interests are protected

• Need to conduct due diligences and controls on distributors

• All fee schedules have to be reviewed to ensure there is no conflict of interest through commissioning...

• Adaptation of pre-contractual processes and IT tools - highly impacted by the MIFID- or Consumer Credit-like directive - enacting in processes and IT what usually results from pure advice

• Variable remuneration will also need to be reviewed in keeping with the requirements on incentives

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Legislative timing • March 2012: proposed by Commission

• Level 2 measures still awaited

Implementation date January 2015?



Retail Banking

Consumer Finance

Private Banking

Asset Management

Commercial Banking

Investment Banking

Securities Services

Payments

Digest “Central Securities Depositories Directive” (CSD)


• Common definition of a CSD and services to be provided by a CSD: settlement, exclusively pure banking activities

• Generalization of requirements (on the basis of equivalence) to non-EU CSDs to ensure level-playing field

• Alignment of settlement period at T+2 of the execution

• Requirement to implement buy-in procedures in case of failure to deliver on time, within 4 days of the intended settlement date (i.e. T+6)

• Equal access from issuers to CSDs, subject to acceptance

• Easier access in-between CSDs, and between CSDs and other market infrastructures

• Securities to be represented in book-entry forms instead of paper

• Easier cross-border operations, to be linked to T2S, in the context of harmonization of both rules (CSD Directive) and operations (Target 2 Securities)

• For all the intermediaries, revision of the internal procedures and IT system, in order to compress the elapsed time between order execution and settlement (due the alignment to T+2)

• Need for segregation of the activities where CSDs currently offer banking-type services (eg. Clearstream, Euroclear Bank). This will ensure level-playing field while at the same time impact both operational and business models

• Higher requirements on non-EU CSDs

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• Residence principle: taxation of financial transactions involving at least one party located in a Member State and a financial institution established in a MS

• Issuance principle: all financial instruments and underlying instruments are in the scope of the FTT, if issued by a legal entity registered in a MS - except lending and borrowing activities of private household and primary markets

• Ownership principle: the FTT is applicable when there is a transfer of ownership on the financial instruments

• A single minimum tax rate should apply within each category of transactions: 0.1% for shares and bonds and 0.01% for derivative agreements

• Institutions and persons liable for payment of FTT must provide necessary information for its computation

• Distortions, loss of competitiveness for financial institutions in the scope if the FTT is not adopted in the 27 Member States

• Potential relocation of some activities outside the EU or on unregulated places to reduce the fiscal burden

• Erosion of marginal profit caused by higher transaction costs associated with lower assets prices, especially regarding high frequency trading

• Increase in the cost of capital and decrease in the lending capacities of banks which can affect liquidity

• Implementation, compliance and administrative costs associated to the computation and levying of FTT


Legislative timing • Adopted by European Parliament

• Enhanced cooperation in several EU countries

Implementation date 1st January 2014



Retail Banking

Consumer Finance

Private Banking

Asset Management

Commercial Banking

Investment Banking

Securities Services

Payments

Digest ”FTT – Financial Transaction Tax”


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Settlement intermediary

Broker (ISP) Liable custodian

Settlement agent (EOCF member)

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Euroclear France

A local analysis of regulation – ”Financial Transaction Tax” the example of France

The Financial Transaction Tax, entered into force in French law on August 1st 2012

FTT process – the ISP declares and pays the tax to EOC France

Without an ISP in the chain, the custodian declares and collects the FTT

LAW PROVISIONS FOR GENERAL CASE

The ISP:

• Calculates the FTT (0,1% of average purchase price) and gives the beneficial owner confirmation of executed orders

• Determines if there is exemption of FTT or not

• Gives delivery instructions to the settlement agent of the ordering party

The settlement agent:

• Achieves the accounting of FTT and gives a settlement confirmation to the ISP

• Gives delivery instruction including FTT to EOC France

ASSESSMENT OF THE OPERATIONAL IMPACTS

• Modification of the order book:

Creation of a system to calculate the FTT

Communication of information on the exempted operations

• Modification of the reference data to identify the taxable ISIN codes

• Set-up o a specific accounting scheme for FTT

• Modification of the operation book to integrate the amount of FTT on the trade ticket

SPECIFIC CASES

• SRD: FTT applies on transactions having the same settlement and trading date

• Corporate actions: newly issued shares are exempted

• Corporate actions events: have to de declared

• Free of payment transactions: out of scope

• Foreign currency transactions: the negotiation rate of the day can be used to calculate the FTT

• Derivatives products: FTT does not apply on acquisition of positions on future or options

• Depository receipt: out of scope

Scope of the FTT

Product scope

Financial instruments listed on regulated markets, issued by companies:

• with headquarters located in France

• With a capitalization exceeding € 1 bn on the 1st of January of the underlying fiscal year

Institution scope

Investment Services Providers (ISP): Asset managers, Brokers , Custodians, Euroclear

Service scope

3 types of financial transaction tax:

• a tax on acquisitions of French stocks and financial instruments issued by companies with a capitalization of more than € 1 bn

• a tax on the operations of high-frequency trading (HFT) by mean of automated devices, characterized by the sending, modification and cancellation of successive orders in less than one second

• a tax on naked sovereign credit default swaps (CDS) transactions Declares and pays the tax

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Eurogroup publishes regularly white papers on new European regulations

EUROGROUP CONSULTING publishes impact assessments on the main regulations monitored. For instance:

• Basel III, regulation overview and impact on the banking business, April 2011

• Impact assessment of the proposed European Regulation on the Central Securities Depositories (CSD), May 2012

• MIFID II whitepaper, November 2011

• Impact assessment on the Directive on credit agreement relating to residential property, March 2012

• Financial Transaction Tax in France white paper (FTT), based on AFTI white paper, July 2012

• Anticipating the future of the funds industry, assessment of the impact of the UCITS IV Directive, December 2010

Our most recent publications

All our publications are available upon request

Our Regulation Watch Competence Center is producing insights of regulations

Summary

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1. Overview of the main European regulations

2. Our approach & experience

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Basel III / CRD IV

MIFID II

UCITS V

AIFMD

EMIR

FATCA

…

Retail Banking Private Banking

Corporate and Investment

Banking

Asset Management and

Servicing …

Pan-European Competence Centre „Regulation Watch“ • European and national

studies on regulatory topics (MIFID II, UCITS IV, …)

• European-wide research on regulatory issues

• Publications on the consequences of regulatory initiatives

• Benchmarks on different approaches to comply with the regulatory requirements

• Impact analysis for different regulatory initiatives

EUROGROUP CONSULTING project approaches • Quick-check: Analysis of how far a financial institution is prepared for the different regulatory requirements • Feasibility study : Analysis of opportunities / threats • Implementation: Concrete project approaches to comply with the regulative requirements

(adjustment of organisation, IT-systems, risk management, …)

Business-oriented approach to regulatory issues: • New requirements • Strategic analysis (opportunities, threats)

Far from a pure legal analysis, EUROGROUP CONSULTING’s value comes from our ability to analyze regulatory initiatives from a business and client point of view

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The "Regulation - Quick Check" delivers within 4 weeks a concrete target plan for your bank referring to your compliance with the Regulation requirements

phase 1 “Impact"

phase 2 "Vision"

• Short analysis of the initial situation

• Comparison with requirements of the regulation

• Identification of the main fields of action including priorities

• Development of solutions / alternative solutions for the prioritized areas

• Assessment of the alternative solutions

• Definition of Regulation target plan

• Description of the implementation requirements and interdepen-dencies

• Detail of the different measures

• Development of the action programme

phase 3 "Action Programme"

Output

• Impacts of your concrete regulatory obligations

Output

• Target plan for the realization of your Regulation compliance

Output

• Action programme including timeline and responsabilities

approx. 1 week approx. 1-2 weeks

"Regulation - Quick Check"

approx. 1-2 weeks

Project example

The "Quick Check" approach shows within 4 weeks the different subject areas you will need to address to comply with the new regulation

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Clients we help… … on a wide variety of regulatory issues or related

Compliance with new regulations, e.g: • Basel III • Basel II • MIFID I

Standards and marketplace projects • Euroclear projects: ESES, fund platform • TARGET 2, SEPA • IAS/IFRS • SWIFT

Assignments including a regulatory part • Creation of regulated activities • International development • Outsourcing of activities

Assignments for regulators and market actors • Creation / reform of market infrastructure • Delegated controls • Internal organization

Organization and optimization of Compliance / Audit functions

We assist a large variety of clients to address their compliance and business concerns

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The Art of getting thorough grasp of our clients’ stakes, constantly adapting to their unique and local cultures anticipating the changes and challenges they are faced with: these are our strengths, what make us unique. This is also our unfailing commitment to our clients.

EUROGROUP CONSULTING Network in a glance

EUROGROUP CONSULTING Network is a purposefully European and independent consulting network. We provide support to our international and national clients in their endeavours to tackle a wide array of business concerns and to fulfil their overall strategic ambitions.

We believe that people in organizations are capable of achieving far more than they think is possible. We believe that connecting HEARTS and MINDS of people is the distinctive factor in achieving lasting effect and “passionate” work environments. We believe that knowledge and experience is a necessity, but the connection with the human factor will make the difference.

THIS IS THE ART OF MOBILIZATION

Wh

y?

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www.eurogroupconsulting.com

July 2012

EUROGROUP CONSULTING HOLDING TOUR VISTA 52/54 QUAI DE DION BOUTON 92806 PUTEAUX CEDEX FRANCE TEL.: + 33 (0)1 49 07 57 00 - FAX: +33 (0)1 49 07 57 57 WWW.EUROGROUPCONSULTING.COM

Aachen Amsterdam Barcelona Bucharest Brussels Casablanca Dubai Dublin Frankfurt Hamburg Houston Istanbul Lisbon London Luxembourg Madrid New York Paris Rome Stockholm Stuttgart Toronto Vienna Warsaw Zurich

Joseph Florentin Partner Paris Mob.: +33 6 07 86 86 23 E-mail: [email protected]

Christian Jensen Senior Manager Frankfurt Mob.: +49 1 70 79 69 193 E-mail: [email protected] Yvette Roozenbeek

Director Paris Mob.: +33 6 46 43 77 18 E-mail: [email protected]

contact us :

Robert Maxim Managing Partner Bucharest Mob.: +40 744 55 73 20 E-mail: [email protected]

EUROGROUP CONSULTING in regulation€¦ · EUROGROUP CONSULTING is able to support you in your...

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