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TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 0 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 1 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 2 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 3 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 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 4 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 5 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 6 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 7 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 8 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 9 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 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 10 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 11 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 12 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 13 I. Main elements TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 14 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 15 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 16 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 17 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 18 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 19 II. The case of insolvency TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 20 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”). TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 21 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 22 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 23 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 24 III. Contractual and statutory protection TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 25 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 26 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 27 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 28 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 29 IV. Examples from the EU legislation TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 30 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) TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 31 IV. Examples from the EU legislation Settlement Finality Directive Collateral Directive Winding Up Directive for credit institutions Insolvency Regulation TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 32 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 TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 33 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 34 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) TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 35 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) TAIEX Conference, EU single market in banking, Ankara, 1 March 2005 36