Theme A. Rules Affecting the Ability of the Economy to Finance Itself and Grow

Date29/1/16

SSDA Response to the European Commission consultation: “Call for evidence: EU regulatory framework for financial services”

Theme A. Rules affecting the ability of the economy to finance itself and grow

Issue 1 – Unnecessary regulatory constraints on financing

Example 1 for Issue 1 (Unnecessary regulatory constraints on financing)*

To which Directive(s) and/or Regulation(s) do you refer in your example? *

(If applicable, mention also the articles referred to in your example.)

EMIR

Equivalence and reciprocity

MiFID II

Equivalence and reciprocity

Please provide us with an executive/succinct summary of your example:

The lack of international harmonisation of requirements and the slow process of recognition of third countries constituteunnecessary constraints what regards financing opportunities for European companies. Different requirements on global markets, such as the OTC derivatives markets, lead to additional regulatory burdens which if avoided would make markets more efficient. In addition, timely and predictable equivalence determination of the regulatory and supervisory arrangements with third countries are essential to achieve the legal certainty that capital market participants need to trade and offer trading services.

Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.)*

Two examples of the above are i) EU has still not, to our understanding, recognized risk mitigation techniques for non-centrally-cleared OTC-derivatives transactions, and ii) central banks outside of the EU are not excluded from EMIR in any business they conduct, including business included in their policy mandate.

If you have suggestions to remedy the issue(s) raised in your example, please make them here:

Improve the international coordination of regulatory reforms. The equivalence between a considerable number of relevant EU and foreign legislations should be achieved within a reasonable period of time.

Issue 2 – Market liquidity

Please specify whether, and to what extent, the regulatory framework has had any major positive or negative impacts on market liquidity. Please elaborate on the relative significance of such impact in comparison with the impact caused by macroeconomic or other underlying factors.

Example 1 for Issue 2 (Market liquidity)*

To which Directive(s) and/or Regulation(s) do you refer in your example? *

(If applicable, mention also the articles referred to in your example.)

MiFID II/MiFIR

Please provide us with an executive/succinct summary of your example:

Certain parts of MiFID II/MiFIR risk, depending on the exact calibration and implementation, having negative effects on market liquidity for non-equities instrument. Transparency- and quoting obligations apply to so-called liquid instruments, but the liquidity calibrations are too far-reaching. A substantial number of illiquid instruments will incorrectly be deemed liquid (“false positive”). This will compromise the functioning of the secondary markets which will not only be negative for investors, who face difficulties to manage their portfolios if liquidity decreases and spreads widens, but also to the detriment for issuers on the primary market, i.e. corporates, governments due to the increasing cost of capital. The quoting obligation applies according to ESMAs proposal up to very large sizes which exposes market makers to undue risk.

Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.)*

The decrease in liquidity for non-equity markets has been illustrated in a number of reports, for example “Global financial markets liquidity study”, PwC 2015.

If you have suggestions to remedy the issue(s) raised in your example, please make them here:

Ensure that only truly liquid instruments are deemed liquid by introducing proper liquidity test as stated at level 1.

Ensure that the quoting obligation and pre-trade transparency requirement are below sizes that expose market makers and systematic internalisers to undue risks. Also, we do not believe that an instrument that is traded only 2 times a day on average is liquid. Instead, a liquid markets should be deemed to exist for a bond if the bond trades at least 50 days a quarter, 250 times a quarter (an average number of 4 trades per day and on average EUR 5M nominal per day). Also, regarding the denominator for threshold calculations, do not exclude transactions below EUR 100000 as that would exclude institutional trades and thereby distort the thresholds.

Example 2 for Issue 2 (Market liquidity)*

To which Directive(s) and/or Regulation(s) do you refer in your example? *

(If applicable, mention also the articles referred to in your example.)

CRR/CRD4

BRRD

Bank Structural Reform

Please provide us with an executive/succinct summary of your example:

Generally, the introduction of new regulatory measures in CRR/CRD4 and BRRD have put constraints on banks’ ability to provide liquidity to the market and act as market makers. A lack of risk capacity and repo capacity among market participants has also contributed to reducing market liquidity. In general, the sales opportunity for bonds have deteriorated.

Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.)*

The decrease in liquidity for non-equity markets has been illustrated in a number of reports, for example “Global financial markets liquidity study”, PwC 2015.

If you have suggestions to remedy the issue(s) raised in your example, please make them here:

Regulation must be fit for purpose. Many capital related regulations have generally served to disincentivize many trading activities, without recognition of whether such trading activities serve a meaningful purpose to the greater economy (e.g. market making) or is undertaken purely for short-term financial gain. While Capital regulation may not be the place to incorporate such distinctions, it must be considered in any policy framework that market making activities benefit the great economy and should be incentivised, whereas proprietary trading for short-term profit risking depositors’ monies, is distinctly different.

Issue 3 – Investor and consumer protection

Please specify whether, and to what extent, the regulatory framework has had any major positive or negative impacts on investor and consumer protection and confidence.

Example 1 for Issue 3 (Investor and consumer protection)*

To which Directive(s) and/or Regulation(s) do you refer in your example? *

(If applicable, mention also the articles referred to in your example.)

MiFIDII

PRIIPS

IDD

MCD

Please provide us with an executive/succinct summary of your example:

It is too early to verify any major impacts on investor protection, since EU regulation such as the Markets in Financial Instruments Directive (MiFIDII), Insurance Distribution directive (IDD), the regulation on Packaged retail and insurance-based investment products (PRIIPs), Payments Account Directive (PAD) and Mortgage Credit directive (MCD) has not yet been implemented in the Member States.

A problem is however that EU regulations covering investor protection for different types of investment products and service provider are not harmonised. The same types of products can have different rules. MIFIDII and IDD for example contain partially overlapping provisions on the same investment products and contradicts one another.

Another example of inconsistency is rules on cross selling of financial products. Such rules exist in for example MiFIDII, Mortgage Credit directive, IDD, Payment Accounts directive. Rules have been drafted in different times and in different regimes, although the products sold together might be covered by several directives.

Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.)*

There are different investor protection rules (conduct of business rules and in particular conflict of interest rules) in MiFIDII and IDD. Inducements from third parties to independent advisors are for example not allowed in MiFIDII, but allowed in IDD. This will lead to the consequence that there are prescribed different investor protection if the customer buys an investment product via a bank or an investments product with an insurance wrapper, an insurance investment product via an insurance company. The insurance client will have less investor protection than the bank client.

If you have suggestions to remedy the issue(s) raised in your example, please make them here:

Identify all conflicting investor protection rules in the field of financial services and agree/decide on common investor protection principles.

The SSDA believes that in order to keep a strong UCITS brand and to increase retail participation in UCITS it is important that the implementation of the provisions in MiFIDII about ‘conflict of interest rules’ does not lead to a European wide total ban of inducements for advising and selling investment products such as UCITS and Structured products. We fear that a ban will lead to less investment choice, in particular regarding cross-border offers, and that fewer retail investors will be given advice.

Restrictions on inducements could also lead to increased prices for financial advice which would potentially deter customers from seeking advice and acquiring financial products. Furthermore, bans on commission payments could distort the competition among different types of distributors of financial products.

Example 2 for Issue 3 (Investor and consumer protection)*

To which Directive(s) and/or Regulation(s) do you refer in your example? *

(If applicable, mention also the articles referred to in your example.)

MiFIDII

PRIIPs

Prospectus Directive

Please provide us with an executive/succinct summary of your example:

Regulatory disclosure requirements (disclosure of costs and risks) in existing legislation are contradictory, for example the disclosure rules in PRIIPs, MiFID and Prospectus Directive. The relation between the KID and the prospectus summary under regulation 809/2004 is missing.

Information given to retail investors should be concise, consistent and clear. Focus should be on the quality of the information, not the quantity. Conflicting obligations might end up confusing the customer. These kind of detailed and overlapping obligations also make it difficult to use electronic channels in selling products.

Our general view is that firms should be provided as large amount of flexibility as possible in terms of cross-referencing and relying on information provided under other legislations, in order to avoid duplication – or even triplication – of information and thereby ensuring that important pieces of information actually is noticed and understood by the investor.

Another related issue is the channel used for distribution of the PRIIP. Different regulatory requirements may allow slightly different methods for providing the information required.

To summarize: the largest amount of flexibility is welcome but due to operational setups and regulatory requirements it may not be possible to leverage from such flexibility.

On the specific relation to MiFIDII the SSDA would like to emphasize the great importance of ensuring that the information provided in the KID is sufficient from a MiFIDII disclosure perspective. In particular, the SSDA supports the view that a distributor should be able to rely on any information provided by the product manufacturer in the KIID, prospectuses or the KID.

Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.)*

The SSDA prefers the EU regulations concerning Key Information documents as defined in UCITSV and PRIIPS Regulation and streamlined with the provisions in the Prospectus Directive. We fear that the PRIIPs regulation will create unnecessary administrative burdens and red tape for the manufacturer of a KID.

PRIIPs implementation should be coordinated with MiFID II due to the overlaps in the legislation and for this reason we would encourage a postponement of PRIIPs to align the entry into force with MiFID II and to allow a coordination of the legislative acts.

If you have suggestions to remedy the issue(s) raised in your example, please make them here:

Issue 4 – Proportionality / preserving diversity in the EU financial sector

Are EU rules adequately suited to the diversity of financial institutions in the EU? Are these rules adapted to the emergence of new business models and the participation of non-financial actors in the market place? Is further adaptation needed and justified from a risk perspective? If so, which, and how?

Example 1 for Issue 4 (Proportionality / preserving diversity in the EU financial sector)*

To which Directive(s) and/or Regulation(s) do you refer in your example? *

(If applicable, mention also the articles referred to in your example.)

EMIR

Please provide us with an executive/succinct summary of your example:

EMIR has been adopted with the primary objective to reduce systemic risk on the OTC derivatives markets. At the same time, however, EMIR does to a large extent not distinguish between those actors that are systemically important and those that are not. Rather, to a large extent, requirements are the same. In a number of ways, EMIR therefore introduces requirements that are disproportionate for smaller actors and as such, constitutes a barrier to entry for smaller actors (see also our answer to Issue 9).

EMIR is burdensome for NFCs and the benefits of including these in the scope of EMIR do not seem necessary in order to reduce systemic risk. The reporting obligation for small and medium sized firms with very few transactions is an unnecessary, excessive obligation. The timely confirmation, portfolio reconciliation, dispute resolution and portfolio compression are also disproportionally cumbersome for small firms in light of the nature and size of trades these firms conduct which discourage such firms from hedging risks inherent to the business.

For small financial counterparties with only small exposures for mostly hedging purposes the requirements are equally burdensome and compliance with them for these smaller entities is not likely to matter for reducing systemic risk which is the intention of the regulation.

In a similar vein, the LEI obligation iscomplicated and costly for many firms, and the benefits of smaller firms having one, does in our view not outweigh the costs. Rather, the requirement risk disincentivizing these firms form hedging risks.

Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.)*

The EU regime is far more burdensome for small banks than in other major jurisdictions. Some companies will not hedge risk via derivatives.

If you have suggestions to remedy the issue(s) raised in your example, please make them here:

Theme B. Unnecessary regulatory burdens

Issue 5 – Excessive compliance costs and complexity

In response to some of the practices seen in the run-up to the crisis, EU rules have necessarily become more prescriptive. This will help to ensure that firms are held to account, but it can also increase costs and complexity, and weaken a sense of individual responsibility. Please identify and justify such burdens that, in your view, do not meet the objectives set out above efficiently and effectively. Please provide quantitative estimates to support your assessment and distinguish between direct and indirect impacts, and between one-off and recurring costs. Please identify areas where they could be simplified, to achieve more efficiently the intended regulatory objective.

Example 1 for Issue 5 (Excessive compliance costs and complexity)*

To which Directive(s) and/or Regulation(s) do you refer in your example? *

(If applicable, mention also the articles referred to in your example.)

EMIR

MiFIDII/MiFIR

MAD/MAR

Reporting requirements

Please provide us with an executive/succinct summary of your example:

Reporting obligations have increased substantially due to diverse regulation that affects the entire financial sector. To the extent that the data collected provide authorities with increased possibilities to oversee and supervise relevant risks, increased reporting requirements are good. However, at this juncture, there is a questions mark as to whether the sum of all data collected improves the possibilities to do meaningful analysis.