The Changing FinancialLandscape andthe regulatory responseThe Changing FinancialLandscape andthe regulatory response
Eddy WymeerschEddy Wymeersch
Chairman of the Committee of European Securities SupervisorsChairman of the Committee of European Securities Supervisors
Committee of European Securities Regulators
16 June, 2008
1. What is keeping regulators busy thesedays? The market turmoil !1. What is keeping regulators busy thesedays? The market turmoil !
Failure in all steps in the systemFailure in all steps in the system
Mortgage brokersMortgage brokers
O & D model without risks for the originatorO & D model without risks for the originator
Securitisation: as a change in the bankingmodelSecuritisation: as a change in the bankingmodel
Repackaging without information about thecontent/changing contentRepackaging without information about thecontent/changing content
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1. What is keeping regulators busy thesedays? The market turmoil ! (2)1. What is keeping regulators busy thesedays? The market turmoil ! (2)
CRAs: too much involved in the processCRAs: too much involved in the process
Investors: absence of due diligence: relying on CRA onlyInvestors: absence of due diligence: relying on CRA only
–no knowledge of products–no knowledge of products
–no regular pricing in the market–no regular pricing in the market
–no adequate pricing of risk–no adequate pricing of risk
SupervisorsSupervisors
–no consolidated view–no consolidated view
–reliance on “true sale” transfer–reliance on “true sale” transfer
–limited view on liquidity–limited view on liquidity
–warning were not heeded–warning were not heeded
SystemSystem
–OTC trading without price disclosure–OTC trading without price disclosure
–post trading clearing and contract transfer–post trading clearing and contract transfer
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2. Regulatory responses: numerousresponses with coordination2. Regulatory responses: numerousresponses with coordination
FSF: macro prudential business lineFSF: macro prudential business line
–Strengthened prudential oversight of capital, liquidityand risk management–Strengthened prudential oversight of capital, liquidityand risk management
–Enhancing transparency and valuation–Enhancing transparency and valuation
–Changes in the role and uses of credit ratings–Changes in the role and uses of credit ratings
–Strengthening the authorities’ responsiveness to risks–Strengthening the authorities’ responsiveness to risks
–Robust arrangements for dealing with stress in thefinancial system–Robust arrangements for dealing with stress in thefinancial system
IOSCO: Reports on Subprime + Changing toCRA codeIOSCO: Reports on Subprime + Changing toCRA code
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2. Regulatory responses: numerousresponses with coordination (2)2. Regulatory responses: numerousresponses with coordination (2)
Basel: securitisation + definition of capitalBasel: securitisation + definition of capital
–Enhancing various aspects of the Basel II Framework,including the capital treatment of complex structuredcredit products, liquidity facilities to support asset-backed commercial paper (ABCP) conduits, and creditexposures held in the trading book. At the same time,the Committee notes the importance of promptimplementation of the Basel II framework, as this willhelp address a number of the shortcomings identifiedby the financial market crisis–Enhancing various aspects of the Basel II Framework,including the capital treatment of complex structuredcredit products, liquidity facilities to support asset-backed commercial paper (ABCP) conduits, and creditexposures held in the trading book. At the same time,the Committee notes the importance of promptimplementation of the Basel II framework, as this willhelp address a number of the shortcomings identifiedby the financial market crisis
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2. Regulatory responses: numerousresponses with coordination (3)2. Regulatory responses: numerousresponses with coordination (3)
Basel: securitisation + definition of capitalBasel: securitisation + definition of capital
–Strengthening global sound practice standardsfor liquidity risk management and supervision,which the Committee will issue for publicconsultation in the coming months–Strengthening global sound practice standardsfor liquidity risk management and supervision,which the Committee will issue for publicconsultation in the coming months
–Initiating efforts to strengthen banks' riskmanagement practices and supervision relatedto stress testing, off-balance sheet management,and valuation practices, among others–Initiating efforts to strengthen banks' riskmanagement practices and supervision relatedto stress testing, off-balance sheet management,and valuation practices, among others
–Enhancing market discipline through betterdisclosure and valuation practices–Enhancing market discipline through betterdisclosure and valuation practices
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2. Regulatory responses: numerousresponses with coordination (4)2. Regulatory responses: numerousresponses with coordination (4)
CESRCESR
–CRA report + monitoring proposal–CRA report + monitoring proposal
–Valuation–Valuation
–Post trade transparency in non equity(CDS i.e.)–Post trade transparency in non equity(CDS i.e.)
US: Paulson report : institutional +operational changesUS: Paulson report : institutional +operational changes
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2. Regulatory responses: numerousresponses with coordination (5)2. Regulatory responses: numerousresponses with coordination (5)
EU: CRDEU: CRD
i.large exposures,i.large exposures,
ii.hybrid capital instruments,ii.hybrid capital instruments,
iii.supervisory arrangements,iii.supervisory arrangements,
iv.the waivers for banks organised in networksandiv.the waivers for banks organised in networksand
v.adjustments to certain technical provisionsv.adjustments to certain technical provisions
IIF and other private organisations = valuation IIF and other private organisations = valuation
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3. Global issues3. Global issues
3.1. Mutual recognition3.1. Mutual recognition
–Offering products on markets of other states–Offering products on markets of other states
–Generally applicable in the EU: directives + freedomof capital–Generally applicable in the EU: directives + freedomof capital
–Worldwide: mostly local detailed conditions apply–Worldwide: mostly local detailed conditions apply
–MR: equivalence of the regulatory and supervisorysystem as a whole:–MR: equivalence of the regulatory and supervisorysystem as a whole:
no need for individual authorisation procedureno need for individual authorisation procedure
–Requires analysis of equivalence of the systems–Requires analysis of equivalence of the systems
–Poses questions of equivalence of practices andapplications: enforcement is issue with US–Poses questions of equivalence of practices andapplications: enforcement is issue with US
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3. Global issues (2)3. Global issues (2)
Status:Status:
–contacts by US with AUS and with CDN–contacts by US with AUS and with CDN
–preliminary US with EU : Commission determinespolitical conditions–preliminary US with EU : Commission determinespolitical conditions
Role of CESRRole of CESR
–analysis of the overall equivalence of regulatorysystems–analysis of the overall equivalence of regulatorysystems
–determining criteria for evaluation of Recognition–determining criteria for evaluation of Recognition
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3. Global issues (3)3. Global issues (3)
3.2. IFRS3.2. IFRS
–Will become global standard–Will become global standard
adopted by EU + EU companies in USadopted by EU + EU companies in US
–Global after acceptance by US (08?), Japan,India and others–Global after acceptance by US (08?), Japan,India and others
–Who decides: IASB and monitoring byInternational bodies–Who decides: IASB and monitoring byInternational bodies
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3. Global issues (4)3. Global issues (4)
3.3. Trading markets3.3. Trading markets
a)New landscapea)New landscape
–linkages between exchanges: NYSE/Euronext,NASDAQ/OMX, LSE/Borsa Italiana:–linkages between exchanges: NYSE/Euronext,NASDAQ/OMX, LSE/Borsa Italiana:
economies in IT, attractive listingseconomies in IT, attractive listings
–New trading platforms: Chi-X, Turquoise, ...–New trading platforms: Chi-X, Turquoise, ...
–New clearing organisations: US DTCC–New clearing organisations: US DTCC
–Settlement: concentration at Euroclear; T2S–Settlement: concentration at Euroclear; T2S
–Less dual listing, but multiple trading: arbitrage–Less dual listing, but multiple trading: arbitrage
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3. Global issues (5)3. Global issues (5)
b) Effects for the investorb) Effects for the investor
–Better prices? Performing discovery systems will be needed–Better prices? Performing discovery systems will be needed
–Better execution: not only prices but costs, immediacy etc.–Better execution: not only prices but costs, immediacy etc.
–Supervision: challenges–Supervision: challenges
Integrate different markets: TREMIntegrate different markets: TREM
Better cooperation among supervisors: CESR -Pol Better cooperation among supervisors: CESR -Pol
–Post-trade transparency on non-equity markets–Post-trade transparency on non-equity markets
Bond markets: little information for smaller investorsBond markets: little information for smaller investors
Other products: CDO? CDS? : at present OTC, no disclosureOther products: CDO? CDS? : at present OTC, no disclosure
–standardization, post-trade–standardization, post-trade
–Policies: free initiative, non-public venues–Policies: free initiative, non-public venues
But for public investor: transparency and subject to marketabuseBut for public investor: transparency and subject to marketabuse
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4. European initiatives: numerous workstreams4. European initiatives: numerous workstreams
4.1. Securities4.1. Securities
- CRA- CRA
- Valuation- Valuation
- non-equity- non-equity
- deposit insurance- deposit insurance
- burden sharing- burden sharing
- UCITS- UCITS
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4. European initiatives: numerous workstreams4. European initiatives: numerous workstreams
4.2 Corporate Governance4.2 Corporate Governance
No European corporate governance code tobe expectedNo European corporate governance code tobe expected
Specific issues to be addressedSpecific issues to be addressed
- Shareholder rights directive- Shareholder rights directive
- "One share, one vote" study- "One share, one vote" study
- Conflicts of interest- Conflicts of interest
- Empty voting: not urgent- Empty voting: not urgent
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