2 Financial services: securities financing
transactions
| Committee's assessment
| Legally and politically important |
| Committee's decision | Not cleared from scrutiny; further information requested
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| Document details | (a) Draft Regulation to make securities financing transactions more transparent (b) Impact assessment to accompany the draft Regulation (c) European Central Bank Opinion of the draft Regulation to make securities financing transactions more transparent:
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| Legal base | (a) Article 114 TFEU; co-decision; QMV
(b) and (c) —
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| Department | HM Treasury
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| Document Numbers | (a) (35780), 6020/14 + ADD 1, COM(14) 40
(b) (35829), 6860/14 + ADDs 1-3, SWD(14) 30
(c) (36228), 11921/14, —
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Summary and Committee's conclusions
2.1 In January the Commission presented a draft Regulation
aimed at increasing transparency of certain financial transactions
outside the regulated banking sector. We have been keeping this
document under scrutiny whilst awaiting developments in Council
negotiations on a number of issues. The European Central Bank
has issued an Opinion on the draft Regulation in which it seeks
to influence and inform the negotiations and outlines alternative
drafting in the areas where it has suggested a different approach.
The Government has told us that it welcomes many of the views
expressed in the Opinion and we have asked to be informed about
how the Opinion is playing into Council consideration of the draft
Regulation.
2.2 The Government now reports on developments on
the issues, tells us that the Presidency is expected to seek agreement
on a general approach shortly and asks us to clear the documents
from, or waive, scrutiny, in order that it may support the General
Approach.
2.3 Although we are grateful to the Government
for the information it now gives us, we do not wish to be rushed
into considering it so late before the possible adoption of a
General Approach. So we do not yet grant clearance of the documents
from, or waive, scrutiny. Rather we will deliberate further and
decide on whether to end scrutiny at our next meeting.
Full details of the documents:
(a) Draft Regulation on reporting and transparency of securities
financing transactions: (35780), 6020/14 + ADD 1, COM(14) 40;
(b) Commission Staff Working Document: Impact Assessment accompanying
the draft Regulation on structural measures improving the resilience
of EU credit institutions and the draft Regulation on reporting
and transparency of securities financing transactions: (35829),
6860/14 + ADDs 1-3, SWD (14)30; (c) European Central Bank Opinion
on a draft Regulation on reporting and transparency of securities
financing transactions: (36228), 11921/14, COM(14) 40.
Background
2.4 Shadow banking can be described as non-bank credit
activity conducted by entities that are outside the regulated
system, for example accepting funding with deposit-like characteristics,
performing maturity and/or liquidity transformation, undergoing
credit risk transfer and using direct or indirect financial leverage.
2.5 In 2012 the Commission conducted a consultation
on shadow banking[10]
and the Liikanen Report or Report of the European Commission's
High-level Expert Group on Bank Structural Reform, which recommended
actions in five areas, including mandatory separation of proprietary
trading and other high-risk trading and strengthening bank governance
and control of banks, was published.[11]
In September 2013 the Commission followed up these matters with
a Communication summarising work it had undertaken so far and
setting out possible further actions in this area, including legislative
proposals.[12]
2.6 In January the Commission presented the draft
Regulation, document (a), aimed at increasing the transparency
of certain transactions outside the regulated banking sector.
It provides a set of measures aiming to enhance regulators' and
investors' understanding of securities financing transactions.
The purpose of this proposal is to prevent banks from attempting
to circumvent the rules proposed within another, complementary,
draft Regulation concerned with structural measures to improve
the resilience of EU credit institutions, by shifting parts of
their activities to the less-regulated shadow banking sector.[13]
2.7 When we first considered this proposal, in March,
we said that it appeared, if it were enacted in the way the Government
wished, that it would be useful in making the securities financing
transactions aspect of shadow banking more transparent. So we
kept the document under scrutiny and looked forward to hearing
what progress the Government was making in Council working group
discussion on the issues which had been mentioned to us. We had
yet to have that news, but in June the Government drew our attention
to Justice and Home Affairs (JHA) issues it had identified in
the draft Regulation. We reminded the Government that we do not
accept the contention that an opt-in choice exists irrespective
of whether the Commission has chosen a JHA legal base for a proposal
— if it believes there is a JHA issue the Government needs
to seek a JHA legal base.
2.8 In October we considered the European Central
Bank's Opinion on the draft Regulation, document (c). Overall,
the Bank considered the proposed new rules may play an important
role in enhancing financial stability in the EU and made a number
of specific comments. We heard that the Government welcomes many
of the views expressed in the Opinion and that, in particular,
it agrees that work on the Regulation should take account of developments
at the Financial Stability Board (FSB)[14]
level. We asked that when the Government reported to us on how
negotiations on the draft Regulation were progressing that it
should also tell us how the Opinion was playing into them.
The Minister's letter dated 2 November 2014
2.9 In her letter of 2 November the Economic Secretary
to the Treasury (Andrea Leadsom) reports that:
· negotiations have developed quickly at
Council working level;
· following a working group on 27 October,
the Government expects the Presidency to circulate a compromise
text which meets most of the UK's negotiating aims, and similarly
has the broad support of other Member States; and
· in the days following this meeting discussions
have suggested that the Presidency will look to table a General
Approach for agreement in the very near future, and possibly as
soon as a COREPER meeting of 12 November.
2.10 Saying that she now writes to give us as full
an update as possible, the Minister reminds us that the Government's
objectives are to ensure that the proposal is aligned with the
recommendations of the FSB, to promote international consistency,
that reporting requirements are proportionate and workable, that
overlaps with other relevant pieces of regulation such as the
European Market Infrastructure Regulation (EMIR) are taken into
account and careful consideration of the use of delegated and
implementing acts. She tells us that there has been considerable
progress in these areas and the discussions have been informed
by the views of supervisors, including the European Central Bank,
and of ongoing work by the FSB, which identified some further
types of transactions to be included within the scope of the proposal.
2.11 The Minister explains that:
· the content of the proposal has been brought
into alignment with the FSB recommendations, in particular with
respect the definitions of re-hypothecation and re-use;
· as a result of discussions, the latest
compromise text available has introduced a number of measures
that will improve the workability of reporting and transparency
requirements, building on the experience of EMIR implementation;
· this includes meaningful transition periods
after reporting requirements are finalised, so that market participants
have time to make the arrangements necessary to comply with the
legislation, introduction of some narrowly and clearly defined
exemptions, practical arrangements to avoid duplicate reporting
requirements and tightening of the definition of securities financing
transactions to provide legal certainty as to which transactions
are subject to reporting;
· the use of delegated acts has been closely
scrutinised, with a number of Member States, including the UK,
expressing concerns that in some instances the Commission proposal
would provide excessive discretion to amend fundamental components
of the proposed Regulation through the use of delegated acts;
and
· as a result, the latest text has significantly
constrained the Commission's discretion with regard to the ability
to exempt counterparties from the reporting requirements and to
amend the definition of what constitutes a securities financing
transaction.
2.12 Referring to the European Central Bank suggesting,
in its Opinion on the draft Regulation, that certain additional
restrictions should be introduced as part of the proposal, the
Minister says that:
· this is not an issue that was discussed
substantively in the Council working groups; and
· if the possibility of introducing additional
restrictions is considered in later stages of negotiations this
will require thorough consideration by the Government.
2.13 The Minister tells us also of some developments
on consideration of this dossier by the European Parliament, saying
that:
· she understands that Renato Soru, an Italian
MEP from the Progressive Alliance of Socialists and Democrats
group, has now been appointed as rapporteur for this matter and
that the European Parliament intends to hold a first exchange
of views in early November;
· she expects European Parliament deliberations
to take some months; and
· at this stage she has no indication of
the European Parliament's views of the draft Regulation.
2.14 Finally the Minister expresses the hope that:
· her information will help us in continuing
effectively to scrutinise these proposals on which the UK has
secured a number of positive outcomes; and
· we are able to clear the documents from,
or waive, scrutiny to allow the Government to support a General
Approach that is positive for the UK.
Previous Committee Reports
Thirty-eighth Report, HC 83-xxxv (2013-14), chapter
5 (5 March 2014), Second Report, HC 219-ii (2014-15), chapter
5 (11 June 2014) and Thirteenth Report, HC 219-xiii (2014-15),
chapter 20 (15 October 2014).
10 (33781), 7988/12: see HC 428-lviii (2010-12), chapter 6
(25 April 2012) and HC 86-vi (2012-13), chapter 12 (27 June 2012). Back
11
See http://ec.europa.eu/internal_market/bank/docs/high-level_expert_group/report_en.pdf. Back
12
(35297), 13426/13: see HC 83-xx (2013-14), chapter 24 (6 November
2013). Back
13
(35781), 6022/14 + ADD 1: see Thirty-eighth Report, HC 83-xxxv
(2013-14), chapter 6 (5 March 2014) and Second Report, HC 219-ii
(2014-15), chapter 5 (11 June 2014). Back
14
See http://www.financialstabilityboard.org/. Back
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