taiex conference, eu single market in banking, ankara, 1 march 2005 0

TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

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2 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

A European single market in

banking

Chryssa Papathanassiou Securities Settlement Systems Policy Division

Directorate General Payment Systems and Market Infrastructure


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Overview

1. Lamfalussy Process

-- banking; and

-- payment and settlement systems

2. Focus on main elements for smooth functioning of payment and securities clearing and settlement systems

-- Some examples of the EU choices


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Main elements on banking

1. Regulatory Convergence = Legislation is developed by means of the

-- Lamfalussy Process (2001)

---Level 1 measures in FSAP

---Level 2 with 3 regulatory committees

2. Supervisory Convergence

-- Consistent and equivalent transposition of Levels 1 and 2 by Level 3


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Financial Services Action Plan: 1999

Level 1: Basic policy choices consisting of a Commission proposal submitted to the Council and the European Parliament for adoption by co-decision

Level 2: Commission drafts legislation on detailed technical measures prepared by regulatory committees

New Lamfalussy Process


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New Lamfalussy Process

Level 3: enhanced cooperation and networking among EU supervisors/regulators

Level 4: coordinated enforcement, by the Commission to enforce Community law, underpinned by enhanced cooperation between Member States and their regulatory authorities. Not dealt with in this presentation.


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Key measures of the FSAP - Level 1

1. Banking Supervision- Amendment of capital framework for banks and

investment firms (by 31.12.2006) proposed by the Commission on 14.7.2004. Following the Lamfalussy process. Technical rules under Level 2.

- Re-organisation and winding up of credit institutions (2001/24)

- Pursuit and prudential supervision of e-money (2000/46)


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Cross-sectoral issues:

Directive 2002/87/EC on supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate. Should be implemented by Member States by August 2004.

--Prudential requirements for financial groups with insurance plus at least one of the two, banking and securities.

--Supervisory cooperation.



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2. Payment/settlement systems- Commission Communication on clearing and

settlement

Eurosystem responded positively- Directive on financial collateral arrangements- Commission Communication on single market for

payments



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Level 2

The Commission and Member States experts agree on Level 2 legislation for technical measures

--Committees assist the Commission in adoption of technical details (e.g. Directives on Markets in Financial Instruments, Market Abuse, Transparency). This is the so-called comitology procedure.

--ECB has an observer status


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Lamfalussy Approach: the new organisational structure for level 2 and 3

Banking European Banking Committee (EBC)

Committee of European Banking Supervisors (CEBS)

Securities/investment funds

European Securities Committee

(ESC)

Regulatory Committees

(High-level representatives

of Member States)

Committee of European Securities Regulators

(CESR)

Supervisory Committees

(Representatives

of supervisors/regulators)

European Insurance and Occupational Pensions Committee

Insurance and pension funds

Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS)

Financial conglomerates

European Financial Conglomerates Committee


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Financial Supervision : Level 3

Supervisory convergence

Level 1 and 2 legislation is transposed consistently into national laws with the help of =>

Committees (CEBS, CESR)

-- which promote consistent implementation of EU Directives at the national level;

-- cooperate and exchange information at normal times and in crises.


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Level 3

Examples:

-CEBS: expected consistent implementation of Basle II (pillar 2 of the framework and validation of banks’ internal ratings-based IRB approaches).

-ESCB/CESR standards for securities clearing and settlement in the EU


I. Main elements on payment/settlement systems

II. The case of insolvency

III. Contractual and statutory protection

IV. Examples of the EU choices


I. Main elements


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I. Main elements for payment/settlement systems

Payment systems rely on: licensing of credit institutions and investment

firms that participate in payment and securities settlement systems;

enforceability of agreements establishing rights and obligations of system operators, participants and customers of banks that participate in a payment system;

enforceability of netting and finality when there is an insolvency;


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banking and central banking law; final settlement and insolvency law; laws governing collateral arrangements; laws supporting electronic processing/New

technologies (e-money); legal framework of the payment system should be

evaluated in other relevant jurisdictions as well.



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Securities Settlement Systems rely on: laws and rules supporting holding, transfer,

pledging and lending of securities;protection of customer assets against custodian’s

insolvency; immobilisation or dematerialisation; enforceability of netting, finality, securities

lending, Delivery Versus Payment; realisation of collateral;



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priority of system’s and participants’ claims against collateral posted by a participant;

certainty regarding rights and interests held through a system.



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Collateral

Netting

Finality

Legal certainty in all relevant jurisdictions for:



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Main effect: the pari passu treatment of creditors, i.e. equal treatment of creditors.

As a result, many jurisdictions prohibit set-off after the opening of insolvency. Certain transactions may be reversed if occurred during a time period laid down in the law before the opening of insolvency (“suspect period”).


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An administrator can perform contracts that are favourable to the bankruptcy estate and set aside others (cherry-picking).

Secured creditors are satisfied first from the security interest; the rest of the bankruptcy estate is divided pro rata among unsecured creditors.


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Transfers, Netting and Collateral in the framework of systems deviate from the principle of pari passu treatment of creditors in insolvency.

Even if they are provided for in a contract, they cannot be valid and enforceable.


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There is a need for protection from the powers of the insolvency court and administrator.

Because only in this way one can avoid spill-over effects of a participant’s failures being transmitted to other participants (contagion across markets) and, to the extent that these may endanger the stability of financial markets, systemic risk.



III. Contractual and statutory protection


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III. Contractual and Statutory Protection

-by drafting contractual provisions (e.g. using master agreements)

and

-by enacting statutory rules ensuring the enforceability of the contractual provisions in the

case of bankruptcy.

How to create legal certainty?


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Statutory protection:

by changing the substantive law itself and

by determining which law applies to rights and obligations in a particular arrangement (provisions of conflicts of law, as opposed to substantive law)



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Abolition of ‘zero-hour rule’:Insolvency proceedings shall not have

retroactive effects on rights and obligations of participants in a system

earlier than the opening of insolvency proceedings



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Validity and enforceability of

collateral arrangements

In case of default, as agreed by the parties, a collateral taker may realise the collateral securities:

by sale or appropriation and by setting off their value

against, or applying it in discharge

of, the relevant financial obligations.



IV. Examples from the EU legislation


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Consolidated Banking Directive 2000/12/EC Restricts the business of deposit taking to credit

institutions. Financial institutions owned by credit institutions are

free to provide their services in all Member States. No single licence for financial institutions owned by

other entities than credit institutions. Issuing of e-money is restricted to credit institutions,

including e-money institutions (E-money Directive)



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S e ttle m e n t F in a lity D ire c tive C o lla te ra l D ire c tive

W in d ing U p D ire ctive fo r c re d it in s titu t io ns In so lve ncy R e g u la tion


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R ights in securities as co llate ra l:law o f country w here account,reg is ter, o r C SD are located

(PR IM A ru le )

Inso lvency law o f partic ipant's incorpora tioncannot be contractua lly exc luded because

it is ius cogens =>pub lic in terest o f pari passu trea tm ent o f cred ito rs

R ights and ob liga tions to the system :law that governs the system

Settlement Finality Directive:

minimises conflicts of law



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Collateral Directive: protects financial collateral

for certain legal entities (narrower than SFD)

cash

(Art. 2.1(d))

evidenced in writing or equivalent manner

or book entry

(Art. 1.5)

financial instruments (Art. 2. 1 (e)).



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Winding Up Directive: Law agreed by the parties in the contract (lex contractus) governs inter alia:

Nettingagreements

(Art. 25)

Set-off(Art. 23)

Repurchase agreements

(Art. 26)



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The law of the place where the asset is located (lex rei sitae) governs inter alia:

Securities given as collateral

to a system:

law of the system,the registry or

the location of the securities account

(Prima rule Art. 24)


taiex conference, eu single market in banking, ankara, 1 march 2005 0

Documents

fsap level

codecision level

key measures

european single market

detailed technical measures

european parliament

commission proposal

commission drafts legislation