Annual Conference 2011 Financial Regulation in a Global Market: Moving Beyond the State

The new architecture of the EU regulation

June 2011 Patrick StarkmanService des affaires internationalesDirection de la rgulation et des affaires internationales (DRAI)

P. StarkmanThe new EU framework for the regulation of the financial marketsThe European Parliament and the Council adopted legal texts setting up a reform of the EU framework for regulation/supervision of the financial system, aimed at eliminating deficiencies that were exposed during the financial crisis.

It adopted regulations establishing a European Systemic Risk Board (ESRB), which will provide macro-prudential oversight of the financial system, and three new supervisory authorities at the micro-financial level:European Banking Authority (EBA);European Insurance and Occupational Pensions Authority (EIOPA); European Securities and Markets Authority (ESMA). The ESRB and the EIOPA will be sited in Frankfurt, the EBA in London and the ESMA in Paris.

The new system is operational since 1 January 2011.

P. StarkmanEU regulation network

NSANSA = National Supervisory AuthorityNSAStakeholdersStakeholdersStakeholdersNSABoardof AppealNSAESRB

P. StarkmanEuropean system of financial supervisors (ESFS)Governors of the ECBsECB President and Vice-PresidentNational regulators+ 3 ASC + 1 ATC*

Chairs of the EU Authorities (EBA, EIOPA & ESMA)EU CommissionEuropean Systemic Risk Board (ESRB)++EBAESMANational banking supervisors

National insurance and pensions supervisorsNational securities markets supervisors recommendations + early risk warnings Micro-prudential Information/developments

EIOPA+Non-voting:One representative of the competent national supervisor(s) per Member State + EFC President *the Chair and the two Vice-Chairs of the Advisory Scientific Committee + the Chair of the Advisory Technical Committee.

P. StarkmanRelations between ESRB- ESAs and NSAsESRB to provide: Analysis, recommendation and warning

ESAs (ESMA, EBA, EIOPA) to provide information on firms and markets

National Supervisory Authorities to act or explain

P. StarkmanThe European Securities and Markets Authority (ESMA)

Replaces CESR

EU legal personality

Own budget : 60% provided by NSAs + 40% provided by EU

More expertise = more staff

P. StarkmanESMA objectivesHarmonise EU rules by setting-up a common EU rulebookDecide on the action to be taken by NSAs necessary to comply with EU lawsResolve disagreements between NSAsReinforce coordination between NSAs in emergency situation

P. StarkmanMain powers of ESMADraft binding technical standardsEnsure consistent application of EU laws by issuing binding decisionsBinding mediationBinding decisions in emergency situations Possibility to stop dangerous practices by issuing binding decisions

P. StarkmanUE rulebook: Parliament-Council directives and regulations + Regulatory Technical Standards + Implementing Technical Standards + Guidelines (if no rules)

P. StarkmanImpact of the new framework:ESMA / NSAsImplementation of EU rules EU single rulebook : 1) Parliament-Council laws + regulatory technical standards + implementing technical standards = less room for manoeuvre in the implementation of EU laws by NSAs2) less EU soft law (guidelines & recommandations + Comply or explain) more EU hard law 3) peer reviews => ESMA binding decision if Breach of Union Law by NSA (cf. waivers MiFID)

Supervision: Individual firm supervision remaining at the national level but:In day-to-day supervision: more coordination needed between NSAs or binding mediationMore coordination in emergency situations (avoiding isolated action or non-action)If NSA does not comply: Individual decision by ESMA addressed to financial market participant (including the cessation of any practice)2) Pan-european entities by nature directly supervised by ESMA:Credit rating agencies Trade repositories (EMIR currently discussed by EU Institutions) (+ cf. EU laws currently discussed by European institutions)

P. Starkman

Functioning

P. Starkman

THANK YOU for your attention

Sponsored by: Shell International B.V.

Session One - Panel Two

Financial Services Law:Supervisory Structure Does it Matter?

Chair: Clive Briault, Risk and Regulation Consulting Ltd

Speakers:Professor Kern Alexander, University of ZurichPatrick Starkman, AMF, FranceNick Weinreb, NYSE EuronextJane Welch, British Institute of International and Comparative Law

Financial Regulation in a Global Market: Moving Beyond The StateSupervisory Structure: Does It Matter?BIICL Annual Conference, 10 June 2011

Professor Kern Alexander, Member of the European Parliaments Expert Panel on Financial Services, and Chair for Law and Finance, University of Zurich, and Senior Research Fellow, Centre for Financial Analysis and Policy, University of Cambridge

*Lessons from the crisis

Institutions and market structuresPower of financial contagion in integrated global financial markets Policy analysisMarket-based financial regulatory models do not adequately monitor and control systemic risks Policy implementationOutdated regulation can exacerbate externalitiesFailure in UK, US and other G10 supervisors to give sufficient attention to safety and soundness issues

*

The Effectiveness of UK-style light-touch Principles-based Regulation?

The United Kingdoms experiment in a strategy of light touch regulation to attract business to London. away from New York and Frankfurt ended tragically. That should be a cautionary note for other countries deciding whether to try to take advantage of the rise in standards in the United StatesTimothy Geithner, US Secretary of the Treasury, 6 June 2011

*

US regulatory and supervisory practices were suspect as well

In 2003, then-Vice Chairman of the Federal Reserve Roger W. Ferguson praised the truly impressive improvement in methods of risk measurement and management and the growing adoption of these technologies by mostly large banks and other financial intermediaries. (The Future of Financial Services - Revisited, 8 Oct 2003)

Alan Greenspan believed in self-regulation. It is critically important to recognize that no market is ever truly unregulated, . . The self-interest of market participants generates private market regulation. Thus, the real question is not whether a market should be regulated. Rather, the real question is whether government intervention strengthens or weakens private regulation. Government Regulation and Derivative Contracts (Feb 1997)

* US & EU Institutional regulatory settings

Supervisory Structure the US experienceMultiple regulators justified as creating checks and balances to keep agencies from becoming arbitrary or inflexible. The current structure provides banks with a method . . . of shifting their regulator, an effective test that provides a limit on the arbitrary position or excessively rigid posture of any one regulator. The pressure of a potential loss of institutions has inhibited excessive regulation and acted as a countervailing force to the bias of a regulatory agency to overregulate. - Alan Greenspan (1994)Some US regulators (OTS and OCC) were funded by industry assessments from institutions they regulated. As a result, the larger the number of institutions that chose these regulators, the greater their budget

US Fed Lite Programme (1999)Light-touch regulation and supervision of Financial Holding Companies Intent was to eliminate excessive or duplicative regulation across a FHCs subsidiaries and across financial sectorsHowever, Fed Lite made it difficult for any single regulator to reliably see whole picture of activities and risks of large, complex banking institutions. Ben Bernanke, evidence before the FCIC Complex regulatory and institutional structure made it difficult for anyone regulator, including the Fed, to identify excessive risks and unsound practices building up in non-bank subsidiaries of financial holding companies, such as Citigroup and Wachovia.

*

US has a fragmented structure for financial regulation and supervisionThere was an absence of a governing body to oversee the various agenciesVulnerability to gaps and oversight failuresDodd-Frank creates Financial Stability Oversight Council (the Council) to oversee financial institutionsThe Council: chaired by Treasury Secretary. Voting members consist of heads of Treasury, Federal Reserve, OCC (Comptroller), SEC, CFTC (futures), FDIC (Deposit Insurance), Federal Housing Finance Admin, National Credit Union Association, & Bureau of Consumer Financial Protection, and an independent member with insurance expertise appointed by president. Non-voting members: Office of Financial Research, Director of Federal Insurance Office, a state insurance commissioner and state securities commissioner Purpose: identify and respond to risks to US financial stability arising from large interconnected financial institutions and outside financial sector Collect information, direct financial research, monitor regulatory proposals, facilitate info sharing among federal and state agencies

Dodd-Frank Act - Major changes in agency oversight (Title III)Fed will regulate thrift holding companies & subsidiaries. Continue to regulate state member banks OCC will regulate national banks and federal thrifts of all sizesFDIC will regulate state thrifts of all sizesOTS eliminated and functions shifted to Fed, OCC or FDIC SEC require registration of investment advisers who manage over $100 million of hedge fundsCreate Office of National Insurance (in Treasury)Create Office of Credit Rating agenciesBureau of Consumer Financial Protection (in Fed)

Financial Stability Oversight Council

15 members Membership FRB, FDIC, Treasury, SEC, OCC, CFTC, & FHFAIdentify gaps in regulation and provide a forum for discussion of cross cutting issuesCoordinate macro-prudential systemic views of other regulatorsIdentify institutions practices and markets that create potential systemic risksSynthesize perspectives of various functional regulatorsFederal Reserve Board main systemic risk regulator of financial institutions (Financial Holding Companies) with excess of $50 billion assets.Authority to recommend firms that will be subject to Tier 1 FHC supervisionSystemic regulator (FRB) required to consult with the council in setting prudential standards for Tier 1 FHCs.Issues:Agencies serve as check and balance to systemic regulator?How agencies discharge responsibilities in globalised financial markets and adequately coordinate with other national/EU authorities?

*Global reform agenda macro-prudential supervision

Global consensus on need for more effective, better coordinated macro- and micro-prudential regulation and supervision Oversight of systemic risk has to be globally co-ordinated Systemic risk oversight bodies: international, regional, nationalGlobal: Financial Stability Board (FSB)EU: European Systemic Risk Board (ESRB) UK: Financial Policy Committee of Bank of England USA: Federal Stability Oversight CouncilSwitzerland: systemic risk oversight committee (FINMA and Swiss National Bank) France: Council on Financial Regulation and Systemic Risk

*G20 and Financial Stability Board InitiativesThe G20 Washington Action Plan and the London & Pittsburgh Summit Statements on strengthening the financial systemFSFs April 2008 and 2009 Reports FSB principles for cross-border cooperation on crisis managementG-20/FSB protocol to establish colleges for all major cross-border financial institutionBasel Committee membership increased to 20 (Australia, Brazil, China, India, Korea, Mexico and Russia) Macro prudential to complement micro prudential regulation

*The Financial Stability Board: in briefFSB (global systemic risk)FSB G20 mandate to promote global financial stabilityMembers: developed countries and large developing countries national financial authorities (central banks, regulatory and supervisory authorities and ministries of finance) international financial institutions standard-setting bodiescommittees of central bank experts FSB mandate includesAssessing vulnerabilities, and identifying and overseeing action needed to address them; Collaborating with the IMF to conduct early warning exercises FSB soft institutional structure and no binding powersFlexibility/speed evident in response to crisis in 2009 Impact?Obligations on membersFSB members produce almost 90% of world GDP: leading by examplePeer reviewsImplementation & follow upTransparencyNaming and shamingAccountability and legitimacy concerns?

European System of Financial SupervisionEuropean Systemic Risk Board (ESRB)[Chair elected by ESRB Board]

Members of ECB/ESCB General Council (with alternatives where necessary+

Chairs ofEBA, EIOPA & ESMA

+

EuropeanCommission

Information on micro-prudential developmentEarly risk warningEuropean Supervisory Authorities (ESAs)

European BankingAuthority (EBA)

EuropeanInsuranceOccupationalPension Authority(EIOPA)EuropeanSecurities & Markets Authority (ESMA)

National BankingSupervisorsNational InsuranceSupervisorsNational SecuritiesSupervisorsMacro-prudential supervisionMicro-prudential supervision

*What role for international law?

Financial globalisation requires international standards/rules - how voluntary?What international legal relevance? The governance gap in international norm setting and the challenge for efficient international financial regulation the dominance of the G10/G20?What supervisory structure for global governanceInternational norms must be effective, accountable and legitimateK. Alexander et al., Global Governance of Financial Systems (OUP, 2006)

*European Commission Augur projectWhat global financial regulation will look like in 2025?

G20/FSB/IMF regime build on existing international regime muddling through Regional groupings of states EU, NAFTA, Mercosur, Asian groupingsA return to the primacy of nation statesFurther consolidation of the existing international regime through the creation of a World Financial Organisation What institutional structure of international financial regulation/supervision?


Session One - Panel Two

Financial Services Law:Supervisory Structure Does it Matter?

Chair: Clive Briault, Risk and Regulation Consulting Ltd

Speakers:Professor Kern Alexander, University of ZurichPatrick Starkman, AMF, FranceNick Weinreb, NYSE EuronextJane Welch, British Institute of International and Comparative Law


Chair: Ros Wright CB, QC, Fraud Advisory Panel

Speakers:David Clark, City of London PoliceStephen Gentle, Kingsley Napley LLPGlyn Powell, Serious Fraud Office Carlo van Heuckelom, Europol

Session Two - Panel One

EU Law: Combating Cross-Border Financial Crime in the EU

Europol AML Disposition Carlo van HeuckelomHead of Unit O3 - Criminal Finances and Technology

*Number of disclosed SARs in the EU

*Conversion rate

*Conversion rate

Chart1

ATAT

9.19

72.777.9

100100

3.94.9

100100

13.77.5

7.814.4

3.43.2

100100

GRGR

2.87

IEIE

ITIT

06.5

118.6

0.30.6

30.738

19.921.3

0.40.7

46.552.2

11.525.4

35.541.8

22.435.9

ESES

10.617.3

UKUK

34.1

2006

2007

Conversion rate (%) in 2006 and 2007

Number of STR 06,07

20062007

AT691108557%

BE99381283029.1%

BG37443115.2%17

CY17920413.9%9

CZ34802048-42%

DK876134953.9%

EE26015272102%

FI99751765877%

FR12047124813.6%

DE100519080-9.7%

GR

HU94751045610.3%

IE10403111457.1%

IT11339117723.8%

LV318403987725.2%

LT153115-24.9%

LU574646

MT7863-19.3%

NL17286521404032.2%

PL4884825653-47.5%

PT58472423.9%

RO31962574-19.5%

SK1571194323.6%

SI16519218.5%

ES2251278323.6%

SE63536040-5%

UK2130002080002.4%

HR28912858-1.2%

565798601319

Conversion rate

STRs disclosedSubmitted for inv.Conversion rate (%)Overall rate

200620072006200720062007LEGEND

AT6911085ATdecrease

BE9938128309121166BE9.19increase

BG374431272336BG72.777.9no change

CY179204179204CY100100no numbers availabe

CZ34802048137102CZ3.94.911Police FIU

DK87613498761349DK10010012Administrative FIU

EE26015272358397EE13.77.54Hybrid

FI9975176587792548FI7.814.41Judicial

FR1204712481411410FR3.43.2

DE100519080100519080DE100100

GRGR

HU947510456273735HU2.87

IE1040311145IEno analysts

IT1133911772inconclusive answerinconclusive answerIT

LV318403987738102625LV11.96.5

LT1531151710LT118.6

LU57464624LU0.30.6

MT78632424MT30.738

NL1728652140403453145656NL19.921.3

PL4884825653198190PL0.40.7there is a middle step called analytical proceedings before info is submitted to PP

PT584724272378PT46.552.2

RO31962574369656RO11.525.4

SK15711943558813SK35.541.8

SI1651923769SI22.435.9

ES22512783ES

SE635360406761045SE10.617.3

UK213000208000UK

HR2891285887120HR34.1

56579860131954829679179.611.2

Charts

Charts

ATAT

9.19

72.777.9

100100

3.94.9

100100

13.77.5

7.814.4

3.43.2

100100

GRGR

2.87

IEIE

ITIT

06.5

118.6

0.30.6

30.738

19.921.3

0.40.7

46.552.2

11.525.4

35.541.8

22.435.9

ESES

10.617.3

UKUK

34.1

2006

2007

Conversion rate (%) in 2006 and 2007

1085691

128309938

431374

204179

20483480

1349876

52722601

176589975

1248112047

908010051

GR

104569475

1114510403

1177211339

3987731840

115153

646574

6378

214040172865

2565348848

724584

25743196

19431571

192165

27832251

60406353

208000213000

28582891

2007

2006

Number of STRs disclosed in 2006 and 2007

*Financial intelligence led policingPotential entries in AWF SUSTRANS after transferral to prosecutorial bodies

STRs disclosed20062007

565.798601.319

54.82967.917

STRs Submitted for investigation20062007






DCI David ClarkEconomic Crime DirectorateCity of London Police

International co-operationPolice to Police Liasion:-This is one of the best sources of assistance to law enforcement

EGMONT Group:-Set up in 1995 is effectively a number of national Financial units which assist in analysing and disseminating financial information

CARIN: ( Camden Assets Recovery Inter Agency Network)A network of Law enforcement and judicary - experts in the field of asset tracing, freezing, seizure and Confiscation

Eurojust:European Union body est in 2002 to assist member states in investigation and prosecution of Serious cross border organised crime

Crime (International Co-Operation ) Act 2003Governs the way evidence is obtained from overseas

UK Hungarian CaseLaunder of $1 Million USD from UK to Hungary

Bank account first compromised in UK - Defendant arrested and sentenced in UK

CONFISCATION Proceedings halted in UK as Defendant did not have control of Asset / funds ( which had been transferred to a Company in Hungary)

UK RESTRAINT Proceedings Proceeds of Crime Act 2002 are unsuitable as no asset under control of individual (Restraint is for a person and not the asset)

Letters from UK Judge requesting repatriation of monies held NO LAWFUL standing outside the UK

CIVIL RECOVERY Proceedings under Proceeds of Crime Act 2002 are ineffective as the funds belonged to a victim ( UK Bank)

CIVIL ACTION by the Bank only solution as UK LE powers ineffective.

Op Athabasca Money LaunderingInternational football match-fixing case, UK brokerage being utilised between Organised crime group based in central Europe and Far east illegal betting sindicate.

3 ILORs 2009-2010 sent to COLP Money Laundering Team by German Police who had jurisdiction of the case

Two search warrants executed 2009 & 2011 and substantial computer evidence recovered.

Also discovered links to Finland on analysis of the evidence.

Op Athabasca - FrustrationsTime delays of UKCA processing the request for allocation

Legal issues with 1st warrant led to undue delays to authorise 3rd ILOR

Delays in visit to Finland to retrieve time critical intelligence due to need for ILOR.

Time taken to organise a JIT meeting.

Analytical Work File - EuroPolEuropean response to Payment card and ATM fraud, based at the Haag. Expert meetings every six months of representatives from all member states.

AWF maintained intelligence database, into which member states feed their intelligence and which is then analysed and disseminated to member states.

Uk NFIB is the leading contributor of intelligence to the AWF pool of intelligence.

AWF Terminal also co-ordinate and supply analytical and operational support to member states.

Potential Improvements to AWF

The system is occasionally bureaucratic, with intelligence flows sometimes becoming delayed due to it having to be passed via International Desks. This could be improved by a series of single points of contact (SPOCs) for each country, with International desks being included at the same time.

An international alert system of images may prove to be very beneficial.

Op DarkCross Boileroom investigationSpanish led pro-active intervention into boiler room fraud in Palma, Majorca.

7 Adresses searched simultaneously with UK assistance on 24th May11 after Urgent request from Spanish National Fraud squad. Police to Police basis utilised.

17 suspects arrested of which 15 were British Nationals.

Investigation of fraud and money laundering continues with Spanish retaining the jurisdiction.

All in custody in spain pending the trial.

Potential issues remainingEurojust 29th June for JIT proposal.

Jurisdiction?

Intercept evidence?

Asset recovery Victim First?

Giovanni Di StefanoA 4-year investigation into allegations of fraud committed by Giovanni Di Stefano

He was suspected of falsely purporting to be a lawyer which enabled him to represent individuals and receive financial remuneration.

For a number of years he resided in Rome and in order to bring a UK prosecution, a European Arrest Warrant was applied for.

18 offences were agreed and this formed the basis of the EAW for submission to the Italian authorites.

..Until he was identified in Spain.

Giovanni Di Stefano - ContdOnce EAW was successfully granted, a diffusion notice was sent out. This notice empowers overseas law enforcement to arrest and detain the subject.

This process was swift. The Spanish authorities acted upon the diffusion notice within 48 hours of EAW being granted. Mr Di Stefano was located and detained.

Strict timescales were set which required a close working relationship with Spain.

Further hurdles were overcome to accommodate the medical issues of the suspect before he was conveyed back to the UK 3 weeks later.

The case is now before the UK courts for prosecution.

Thank you for listening.







Chair: Dirk Hudig, FIPRASpeakers:Diane Coyle OBE, Enlightenment Economics and Former Advisor to the UK Treasury Christian Ahlborn, Linklaters LLPFod Barnes, OxeraSession Three - Panel One

Competition Law: Competition Policy, State Aid & Financial Institutions

If you only have a hammerThe Role of Competition Policy before, during and after the Financial Crisis

Christian Ahlborn BIICL/Financial Regulation in a Global MarketMoving Beyond the State

10 June 2011

*OverviewSome preliminary pointsCompetition policy and the Financial CrisisState aid policy and the Financial CrisisCompetition policy after the Financial CrisisConclusions

*Some Preliminary Points

*Some Preliminary Points (1) Conceptual clarificationsCompetition policysupply side issuesproblems of market powerConsumer policydemand side issuesproblems of transparency / lack of information

Regulationfundamental issues of market failurewhich require permanent supervision

*Some Preliminary Points (2)The beauty of hindsight and the fallacy of inevitability:Pre 15 September 2008, the Great Recession was a possibilityPost 15 September 2008, the Great Recession is seen as an inevitabilityDistortion of views and the fallacy of inevitabilityMoral hazard vs. mis-assessment of riskGovernment intervention regarding credit supplyReliance on wholesale funding

*Competition Policy and the Financial Crisis

*Key elements of the Financial CrisisGlobal financial imbalancesUS monetary policyIncreasingly risky lending policyFalse assessment and lack of transparency of risksBreakdown of inter-bank trustDramatic reduction in credit availabilityPart 1Part 2Part 3Abundance of cheap moneyIncreased reliance on wholesale fundingCollapse of US sub-prime asset marketsCollapse of wide range of asset marketsSpreading exposure to risky lending practices to banks in current account surplus countries

*Competition Policy as Contributor?Global financial imbalancesUS monetary policyPart 1Part 2Part 3Problems of macroeconomic policyAsian countries learning from previous financial crises (just not the right lessons)Chinas exchange rate policyUS monetary policy

Dysfunctional competition (we will come back to Part 2)Bank run in the shadow banking sectorRegulatory issuesIncreasingly risky lending policyFalse assessment and lack of transparency of risksBreakdown of inter-bank trustDramatic reduction in credit availability

*Dysfunctional competition (1)in the mortgage markets:complex products/inappropriate risk modelsinappropriate bonus systemslack of internal monitoring and supervisionshift to originate to distribute modeluninformed buyers (Dsseldorf)reliance on rating systemsin the market for credit ratings:credit rating agencies paid by financial institutions insufficient information

*Dysfunctional competition (2)Key factors:lack of transparencyasymmetric informationdistorted incentivesineffective governanceConsequences:excessive supply of creditexcessive entryProblems not normally addressed by competition policy:issues of market powerinsufficient supply of goods or services

*State aid and the Financial Crisis

The Role of State Aid ControlContrary to common perception, state aid has not resulted in significant distortion of competitionmoral hazardcrowding out harm to competitors incentives to compete shifting an unfair share of the burden . . . to other Member StatesPositive impact in relation to testing of viabilityNegative impact in relation to compensatory measuresbehavioural remedies balance sheet reductionfringe divestments core divestmentsLessons learnt

*Competition Policy after the Financial Crisis

Role of Competition Policy after the Financial CrisisStrong signals from certain competition authorities to intervene in financial markets:EU: CDS inquiryUK: OFT, ICB, TSC etcJustification for antitrust interventionPreventative measure against future crises (including moral hazard)Additional competition concerns as a result of the financial crisis?state aidincrease in concentration Competition concerns pre-financial crisis consumer inertia

Competition Issues in the Financial Sector (1)Issue 1: Consumer Inertia Due toinsufficient (helpful) informationother switching costs Possible solutionsbetter informationreduction of switching costs (e.g. number portability)nudging of customers change of pricing model (free banking)Increased choice of supply does not solve the issue

Competition Issues in the Financial Sector (2) Issue 2: increased concentrationDue to take-overs (e.g. LTSB/HBOS) and exitsAbsolute concentration levels not particularly high HHI: 1830 for PCA (up from 1290)largest player: LBG with 25% in PCA (post-divestment) far below normal merger control intervention Possible solutions break up increase in state aid divestments Potentially high costs with uncertain outcome

Competition Issues in the Financial Sector (3)Issue 3: Moral hazard (too big to fail)How many banks are not too big (or too inter-connected)?Possible solutionsliving wills CoCosimproved state aid rules Beyond state aid rules, not clear that competition policy has a role to play

Competition Policy and Prudential RegulationCompetition policy not part of the tool kit to ensure stability of the financial regulation Complex inter-relationship between competition policy and prudential regulation Competition and stability not mutually exclusive Competition in financial markets is important . . .. . .but if prudential regulation gets it wrong, then competition makes matters worseLaw of unintended consequences: hospital pass for ICBPriorities are important Fix prudential regulation first Then deal with competition issues

*Conclusions

*Conclusion Just because we have a hammer, does not turn all problems into a nail; in fact there are relatively few nails in the financial sectorDysfunctional competition in financial markets were a major factor in the financial crisisbut competition policy does not have the tools to deal with the problemsFocus should be on prudential regulationCompetition policy may need to develop tools to deal with demand side problems (in certain markets only)State aid policy needs to be improved


Chair: Dirk Hudig, FIPRASpeakers:Diane Coyle OBE, Enlightenment Economics and Former Advisor to the UK Treasury Christian Ahlborn, Linklaters LLPFod Barnes, OxeraSession Three - Panel One

Competition Law: Competition Policy, State Aid & Financial Institutions


Chair: Dr Duncan Fairgrieve, British Institute of International and Comparative Law

Speakers:John Biggins, Centre for Regulation & Governance, UCDDr Iwa Salami, University of East LondonLorenzo Sasso, PhD Candidate, LSE & Nicolette Kost de Svres, UNSW & NYSE Euronext

Session Four - Panel Two

International and Comparative Law Aspects of Financial Regulation

John BigginsBlanaid ClarkeColin ScottUCD Centre for Regulation & Governance

The IssueA transnational private regulatory regime has been prevalent in OTC derivatives markets since the 1980s International Swaps and Derivatives Association (ISDA) has issued boilerplate contracts enforceable in particular courts (NY, London)SWAPS Code, Master Agreements 1987, 1992 and 2002Credit support annex, definitions etcQuestion is whether this regime can be conceptualised as a purely self contained private contract based regime? Could there be normative and practical regulatory blind spots, especially in light of recent reform proposals in the US and EU?

Derivatives What are they? Have probably been used since at least 2000 B.C.Are bets on stock, commodities, weather etc without physically owning the underlyingCounterparties agree to pay or receive currency, dependant on whether or not some extrinsic, uncertain event occurs in future (Lynch 2011)Hedging theoretically beneficial in risk allocationSpeculator with speculator trading more problematic. Zero sum or negative sum game. On average speculators will lose (Lewis 2010)May be considered analogous to traditional forms of gambling (Stout 1993-2011, Lynch 2011, Hazen 2005)Exchange traded and over the counter (OTC)

2000-2008 What Happened?After years of uncertainty lobbying (e.g. G30) and the Greenspan doctrine heralded CFMA 2000, exempted OTC derivatives from regulation in the US while also rendered court enforceable. Old common law rule superseded UK FSMA 2000 mostly applicable general regulation (e.g. insider trading, market abuse)Although specific regulation for non sophisticated investors in OTC derivatives markets (risk warnings), mostly carrying over from the FSA 1986. But caveat emptor for eligible counterparties (Awrey 2011)Explosion in OTC derivatives transactionsA network of anchors for global capitalism replacing the Gold Standard? (Bryan & Rafferty 2006) Although there were other regulatory influences (Basle, IAS etc). Most importantly ISDA product based regulation

Market ActorsDerivatives Exchangeslisting & tradingrulesOTC Derivatives Regulatory Space - Problems with ContractsMarket Actorscontracts

ISDAMarket ActorsDerivatives Exchangesconsultationmember-shipmaster agreementslisting & tradingrulesOTC Derivatives Regulatory Space A Simple Standards Process?Market Actorscontracts

ISDAMinisters/LegislatureAgenciesCourtsMarket ActorsDerivatives Exchangesconsultationmember-shipmaster agreementsModel netting legislation (c. 40 March 2011)Legal ProfessionopinionsOpinions:Netting and collateral (c. 50)dispute resolutionlisting & tradingrulesOTC Derivatives Regulatory Space Contracts Plus?Market Actorscontracts

Netting and Opinions So What?Payment netting permits efficient transaction management between counterparties producing daily settlement figuresBut most important category is close out netting, permitting one single settlement figure on termination event or event of defaultClose out netting can conflict with the spirit and substance of bankruptcy lawsNow enjoys safe harbour under Chapter 11 in US. Controversial systemic risk arguments. Also UK and elsewherePosition was less clear in other jurisdictions and legal traditionsNetting opinions also important, especially where netting legislation does not exist. Similarly collateral opinions

ISDA In the National States Embrace ISDA is not an SROBut is also not a self contained private ordering regime similar to those described by Lisa Bernstein (1992, 2001) and Robert Ellickson (1986) eitherPerhaps the posting of collateral from the outset may obviate the requirement for interpersonal trust to maintain relationships between contracting parties (Riles 2008)Most significant, ISDA does not systematically reject state made law, it systematically embraces it in order to shore up its otherwise private contract based regime, for example through transposition of netting protection Governments transpose ISDA norms into national law but without mentioning ISDA itself. A sign that ISDA standards are very strong (Partnoy 2007)

Implications of the ISDA regime The ISDA regime appears efficient, at least for the dealers. Members actively choose to use Master AgreementFrom legitimacy standpoint could be seen as a form of technocratic expertise which is frequently mirrored by the role of independent experts public policy making (Cafaggi, Scott & Senden 2011)Or negotiated governance. In public/private policy making public acceptability might derive from a variety of sources. Efficacy and aggregate accountability(Freeman 2000)In Ireland, the netting law was debated in parliament anyway, at least implicating democratic legitimacy (Schwartz 2002)In fact the very legitimacy of the concept of the State, understood through its monopoly in norms production, may demand actively assimilating such private norms rather than allowing them to operate as autonomous law (Michaels 2003)

Implications of the ISDA Regime BUT it is not settled that close out netting exemptions are socially optimal, benefits may be largely internalised to derivatives dealers (Bergman et al. 2004).May be potential for serious negative externalities through increased systemic risk (Lubben 2010, 2009; Bliss & Kaufman 2005)And in the case of purely speculative derivatives trading, whether netted and collateralised or not, we have observed the fallout for net social welfare in the wake of the GFC So the State legally shoring up activities which are analogous to straightforward gambling offers a legal respectability which may be highly questionable in a normative senseTherefore, the ability of powerful actors such as ISDA and their members to have their norms enshrined, which may not align with voter interests, may represent a manifestation of a democratic market failure (Benvenisti 1999)

ISDAMinisters/LegislatureAgenciesCourtsMarket ActorsDerivatives Exchangesconsultationmember-shipmaster agreementsmodel legislationLegal Professionopinionsopinionsregulatory oversightdispute resolutionlisting & tradingrulesregulatory rulesOTC Derivatives Regulatory Space Regulation Displacing Contracts?Market Actorscontracts

Private Regulation Forgotten But Not Gone?In the wake of the Global Financial Crisis it was decided to increase public oversight of OTC derivativesUS Wall Street Reform and Consumer Protection Act EU Market Infrastructure Regulation/MiFID ReviewAim to push much pre-existing OTC derivatives trading on to designated contracts markets or swap execution facilities, through CCPs and to record trades through trade repositories. Mostly EU/US. Not a significant imperative in Australia and Singapore. Canada on provincial basis (Quebec) New relationships, old outcomes? (accountability, governance)ISDA at the forefront working with legislatorsImplications? Adapting private legal devices? (Braithwaite 2011)






Financial Regulation in Emerging Economies in Africa Taking a Leaf from Financial Regulation in Advanced Economies or not?Dr Iwa SalamiUELBIICL Annual Conference 10 June 2011

IntroductionThis presentation covers the following:

Brief assessment of the integration of Africa in the global financial market

The effect of the recent financial crisis on African Emerging Markets

The case for a regional approach to regulation using the New EU Financial Regulatory Framework

Concluding remarks

The Integration of Africa in the Global Financial Market

Africa was previously absent from the international financial market (excluding South Africa)

Weak financial regulatory regimes Failure to implement international financial standardsPoor institutions and lawsPoor enforcement mechanismsWeak economies /bad governance

ChangesSouth AfricaHas been a great player in the international financial market for yearsThe JSE has about 90 percent of the combined market capitalization of the entire continent.

NigeriaIn 2007 Nigeria became very active in the international financial market

Ghana Also became active in 2007The best performing capital market in the world in 2008 per Bloomberg

Kenya Fairly nascent capital markets but increase in foreign portfolio investments in the stock market from foreign financial institutions before the crisis

Reason for changes

High rate of return relative to mature markets Opportunities for risk diversification Opportunities to partake in country prospects and seek out undervaluation in specific sectors Increased growth prospectsGrowth trends are not synchronized with advanced economies

The Effect of the Recent Financial CrisisFrenetic capital flights (South Africa and Nigeria)

Falling equity markets and capital flow reversals (South Africa and Nigeria)

Scarce external financing for corporations and banks (South Africa and Nigeria)

Postpone planned borrowing from the international financial market (Ghana and Kenya)

Weak Regulatory Frameworks worsened the Impact of the CrisisCommon Challenges

Weak supervisory frameworksWeak enforcement of banking and securities regulationPoor corporate governance (banks and in companies)Poor disclosure

Strengthened regulatory regime would boost investor confidence and return into the market in the aftermath of the crisis

The Case for a Regional Approach to Regulation using EU Financial Regulatory Framework

Case for regional approach as countries have been unable to implement international standards

All countries belong to a REC South Africa (SADC)Nigeria (ECOWAS WAMZ)Ghana (ECOWAS WAMZ)Kenya (EAC, COMESA)

African integration inspired by European integration frameworkFree Trade AgreementCustoms UnionCommon marketsMonetary Union

Most African RECs adopt the EU Treaty Framework WAEMU, ECOWAS, COMESA, EAC, SADC

New EU Financial Regulatory Framework

European Systemic Risk Board (ESRB) (highest level)ECB Governor chair

European System of Financial Supervisors (ESFS) (middle level) (comprise of the 3 ESAs)European Banking AuthorityEuropean Insurance and Occupational Pensions Authority and European Securities and Markets Authority

National Supervisory Authorities (the lower level)National Banking Supervisors, National Insurance Supervisors and National Securities Supervisors (overseen by the European System of Financial Supervisors (ESFS))

EU financial regulatory framework requires:

Strong adherence to regional treaties and instrumentsEffective coordination among national supervisorsStrong domestic financial regulatory authoritiesStrong domestic financial regulation

Not likely that the framework would be adequate to current stage of development in regulatory framework

Varied framework for financial regulation among RECs

RECS with monetary Unions or MU agendasWAEMU, CEMAC, ECOWAS-WAMZRECs without ongoing Monetary Union agendaEAC, SADC, COMESANo organised African-wide coordinated effortA 2010 AfDB report sets out stages for achieving financial integration within RECs

Concluding remarks: Pragmatic approaches to regional financial regulation in AfricaStrengthening the regional frameworkThe general REC legal and institutional framework Framework for economic integrationFramework for financial integration

Strengthening domestic frameworkStrengthening domestic legal frameworkStrengthening domestic financial regulationIncluding enforcementCorporate governanceDisclosure standards

For further study seeAfrican Development Bank, Financial Sector Integration in Three Regions in Africa How Regional Financial Integration Can Support Growth, Development, and Poverty Reduction African Development Bank 2010

Salami, I. (2010) The Financial Crisis and a Regional Regulatory Perspective for Emerging economies in Africa Journal of International Banking Law and Regulation Volume 25, Issue 3: 128 139.Salami, I. (2008) Devising a Governance Structure for the African Union African Journal of International and Comparative Law, Volume 16, No 2: 262 -273.Salami, I. (2008) Banking Harmonisation in an African Context, Journal of Banking Regulation, Volume 9, No 3: 187195.Salami, I. (2008) The Global Credit Crunch Impact on Emerging Economies, Butterworths Journal of International Banking and Financial Law, Volume 34, No 4:201 -202.






The new institutional Framework of European Financial Markets: A real improvement or small political step forward? ESMAs Legal powers

Nicolette KOST DE SEVRES and Lorenzo SASSOFriday, June 10th 2011British Institute of International and Comparative Law*

I. THE NEW EUROPEAN SYSTEM OF FINANCIAL SUPERVISORS Context

How does a new financial supervisory structure fit in the present context in Europe?

Recent financial crisis and new challenges for the stability of the global financial and economic systems : G20 recommendations to assess Systemic Risk

MiFID Regulation: one of the most important legal reforms applying to Financial Markets of the EU. MiFID has a direct legal impact in the creation of a fragmented market, and therefore creates a competitive environment between Market participants

Need for a centralized Credit Rating Agencies mechanism

Kost De Sevres, N. and Sasso. L., Esma's Legal powers, june 2011*

I. THE NEW EUROPEAN SYSTEM OF FINANCIAL SUPERVISORS ()A. Steps that led to the creation of ESMA:

October 2008: EC mandates the Larosire Group

February 2009: Larosire Report is submitted to the EC. It is the first and most important international integration of Financial Markets in Europe

September 2010: EC approves legislation creating a new European System of Financial Supervision (ESFS)

January 1, 2011: ESMA is established legally as an independent EU Authority and becomes fully operational.

Kost De Sevres, N and Sasso. L., Esma's Legal powers, june 2011*

a) Remodeling of the structure

- From Committees to EU AuthoritiesCESR becomes ESMA, CEBS becomes EBA, CEIOPS becomes EIOPARole of the ESRB - note that ESBR has no legal personalityMICRO-PRUDENTIAL OVERSIGHT vs. MACRO-PRUDENTIAL RISK ASSESMENT: a collaboration between the bodies : advice/warnings vs. information exchange


b) Regulation establishing ESFS and ESMA

REGULATION (EU) No 1092/2010 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board

REGULATION (EU) No 1095/2010 OF THE EUROPEAN PARLIAMENT AND THE COUNCIL of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC


c) From CESR to ESMA: roles and responsibilities

CESR

Advisory body to the ECCoordinated activities between national securities regulatorsGeneral oversight of the implementation of European Legislation in member states

ESMA

EU Authority with Legal personalityAccountable to the EP and E councilAll previous tasks/powers of ESMAPower to develop rules for Europes securities marketsPower to impose specific restrictions on market participantsSupervision of CRAs


B. THE LEGAL POWERS AND STRUCTURE OF ESMAa) ESMAs governance structureKost De Sevres, N and Sasso. L., Esma's Legal powers, june 2011*

B. THE LEGAL POWERS AND STRUCTURE OF ESMA ()b) Tasks and PowersKost De Sevres, N and Sasso. L., Esma's Legal powers, june 2011*

C. SUPERVISION OF CRAs

Unique role of Credit Rating Agencies (CRAs)CRAs lack of liabilityNew Regulation for CRAs: REGULATION (EU) No 513/2011 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 11 May 2011 amending Regulation (EC) No 1060/2009 on credit rating agencies


C. SUPERVISION OF CRAs ()Kost De Sevres, N and Sasso. L., Esma's Legal powers, june 2011*

C. SUPERVISION OF CRAs () ESMAs specific powers towards CRAs:Necessary powers to carry out an effective supervision over CRAsRequire CRAs and all persons involved in rating activities to provide all necessary informationExamine records, data, procedures (incl. telephone and data)ask for an oral explanation, interview or summoncarry out on-site inspections at the premises of CRAsImpose a sanction if breach of the CRA Regulation (ranging from temporary prohibition of issuing ratings, suspension of the use of the credit ratings or withdrawal of registration) Request Commission to impose on a fine if CRA has intentionally or negligently committed a breach of the Regulation. Kost De Sevres, N and Sasso. L., Esma's Legal powers, june 2011*

D. LEGAL, ECONOMIC AND POLITICAL IMPLICATIONSa. Potential structural, legal and technological challenges

Market participants: RegulatorsExchanges/MTFsFinancial Intermediaries

Asymmetry of technology between participants:Financial Intermediaries are technologically ahead of many Market participants as Regulators until now only looked at their respective markets.Regulators need to increase their supervisory tools in order to follow the Market.Kost De Sevres, N and Sasso. L., Esma's Legal powers, june 2011*

D. LEGAL, ECONOMIC AND POLITICAL IMPLICATIONS ()Criticisms , challenges and achievementsESMAs PowersESMAs nomination processChallenges of the new CRAs RegulationESBRs issues of legal certainty and powers


Thank you - MerciKost De Sevres, N and Sasso. L., Esma's Legal powers, june 2011*







Annual Conference 2011

Financial Regulation in a Global Market: Moving Beyond the State

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Annual Conference 2011 Financial Regulation in a Global Market: Moving Beyond the State