Download EU single market in banking

TAIEX Conference, EU single market in banking, Ankara, 1 March 2005
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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
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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
TAIEX Conference, EU single market in banking, Ankara, 1 March 2005
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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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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 codecision
Level 2: Commission drafts legislation on detailed
technical measures prepared by regulatory
committees
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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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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.
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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
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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
Regulatory Committees
(High-level representatives
of Member States)
Banking
Securities/investment
funds
Insurance and pension
funds
Financial conglomerates
European Banking Committee
(EBC)
European Securities Committee
(ESC)
European Insurance and
Occupational Pensions
Committee
Supervisory Committees
(Representatives
of supervisors/regulators)
Committee of European Banking
Supervisors (CEBS)
Committee of European Securities Regulators
(CESR)
Committee of European
Insurance and Occupational
Pensions Supervisors
(CEIOPS)
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
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I.
Main elements on
payment/settlement systems
II. The case of insolvency
III. Contractual and statutory
protection
IV. Examples of the EU choices
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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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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.
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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;
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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.
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I. Main elements for payment/settlement systems
Legal certainty in all relevant jurisdictions for:
Collateral
Finality
Netting
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II. The case of insolvency
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II. The case of insolvency
 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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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.
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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.
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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.
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III. Contractual and statutory
protection
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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.
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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)
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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
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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.
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IV. Examples from the EU legislation
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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 (Emoney Directive)
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IV. Examples from the EU legislation
Settlement Finality Directive
Collateral Directive
Winding Up Directive for credit institutions
Insolvency Regulation
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IV. Examples from the EU legislation
Settlement Finality Directive:
minimises conflicts of law
Rights in securities as collateral:
law of country where account,
register, or CSD are located
Rights and obligations to the system:
law that governs the system
(PRIMA rule)
Insolvency law of participant's incorporation
cannot be contractually excluded because
it is ius cogens =>
public interest of pari passu treatment of creditors
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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)
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IV. Examples from the EU legislation
Winding Up Directive: Law agreed by the parties in
the contract (lex contractus) governs inter alia:
Netting
agreements
(Art. 25)
Set-off
(Art. 23)
Repurchase
agreements
(Art. 26)
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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 or
the location of the
securities account
(Prima rule Art. 24)
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