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A European single market in banking

A European single market in banking. Chryssa Papathanassiou Securities Settlement Systems Policy Division Directorate General Payment Systems and Market Infrastructure. Overview. 1. Lamfalussy Process -- banking; and -- payment and settlement systems

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A European single market in banking

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

  2. A European single market in banking Chryssa Papathanassiou Securities Settlement Systems Policy Division Directorate General Payment Systems and Market Infrastructure TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

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

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

  5. New Lamfalussy Process • 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 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

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

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

  8. Key measures of the FSAP - Level 1 • 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. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  9. Key measures of the FSAP - Level 1 • 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 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

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

  11. Lamfalussy Approach: the new organisational structure for level 2 and 3 Regulatory Committees (High-level representatives of Member States) Supervisory Committees (Representatives of supervisors/regulators) European Banking Committee (EBC) Committee of European Banking Supervisors (CEBS) Banking European Securities Committee (ESC) Securities/investment funds Committee of European Securities Regulators (CESR) Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) European Insurance and Occupational Pensions Committee Insurance and pension funds European Financial Conglomerates Committee Financial conglomerates TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

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

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

  14. I. Main elements on payment/settlement systems II. The case of insolvency III. Contractual and statutory protection IV. Examples of the EU choices TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  15. I. Main elements TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

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

  17. I. Main elements for payment/settlement systems • 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. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  18. I. Main elements for payment/settlement systems • 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; TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  19. I. Main elements for payment/settlement systems • priority of system’s and participants’ claims against collateral posted by a participant; • certainty regarding rights and interests held through a system. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  20. I. Main elements for payment/settlement systems Legal certainty in all relevant jurisdictions for: Collateral Finality Netting TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  21. II. The case of insolvency TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  22. II. The case of insolvency • Main effect: the pari passutreatment 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”). TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  23. II. The case of insolvency • 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. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  24. II. The case of insolvency • 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. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  25. II. The case of insolvency • 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. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  26. III. Contractual and statutory protection TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  27. III. Contractual and Statutory Protection How to create legal certainty? • -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. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  28. III. Contractual and Statutory Protection • 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) TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  29. III. Contractual and Statutory Protection 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 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  30. III. Contractual and Statutory Protection 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. TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  31. IV. Examples from the EU legislation TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  32. IV. Examples from the EU legislation • 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) TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  33. IV. Examples from the EU legislation TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  34. IV. Examples from the EU legislation Settlement Finality Directive: minimises conflicts of law TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  35. IV. Examples from the EU legislation Collateral Directive: protects financial collateral for certain legal entities(narrower than SFD) financial instruments (Art. 2. 1 (e)). cash (Art. 2.1(d)) evidenced in writing or equivalent manner or book entry (Art. 1.5) TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  36. IV. Examples from the EU legislation • Winding Up Directive: Law agreed by the parties in the contract (lex contractus) governs inter alia: Nettingagreements(Art. 25) Repurchase agreements (Art. 26) Set-off(Art. 23) TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

  37. IV. Examples from the EU legislation • 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 orthe location of the securities account(Prima rule Art. 24) TAIEX Conference, EU single market in banking, Ankara, 1 March 2005

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