Following the ECOFIN meeting of finance ministers today and the announcement that a political agreement has been reached on the Risk Reduction Measures (RRM) package, Michael Lever, Head of Prudential Regulation, said: On unlocking progress towards a Banking Union: “We welcome today’s political agreement on the package of banking and resolution measures which represent an important further step towards reducing risks in the banking system and avoiding national taxpayer funded bailouts. Together with already significant strengthening of banks’ balance sheets, including substantial reductions in the stocks of non-performing loans, these improvements should enable further progress to be made towards the completion of Banking Union. This should include the establishment of a credible backstop for the Single Resolution Fund, which we encourage EU leaders to support during their next summit, and the delivery in the coming months of a European Deposit Insurance Scheme.” But barriers remain: “Unfortunately, the risk reduction measures have failed to remove barriers to the free-flow of capital and liquidity across the EU, or even within the Banking Union. And in some areas, such as requirements for fully propositioned internal MREL, new barriers have been put in place which are not in keeping with the broader objectives of Banking Union. On making Banking Union a reality: “While we appreciate the need to introduce all major elements of the RRM package into the EU framework in a timely manner, it is regrettable that in some areas, barriers to full integration remain and that the agreement does not include commitments to review and remove these regulatory obstacles. We call on Member States to support the next Commission in making Banking Union a reality”. – Ends –

Following the publication of the Commission’s NPLs stocktake today, Michael Lever, Head of Prudential Regulation, at AFME, said: “AFME welcomes the progress that has been made to date on the European Commission’s legislative initiatives on NPLs. Reducing the level of NPLs on European banks’ balance sheets will free up capacity to support customers and economic growth. Such action will also lower overall risk in the banking sector which is a pre-requisite for the much-needed completion of Banking Union. It is therefore very encouraging to see that the level of NPLs has fallen by around a third since 2014 .” “Nevertheless, further work remains to be done. In particular, it is important to ensure that the Commission’s initiatives for reducing the future build-up of NPLs are consistent with and complementary to those made by other regulatory bodies, especially the ECB.” “With regard to provisioning for NPLs in future, AFME welcomes many of the changes made by legislators as an improvement to the Commission proposal. These changes will give more flexibility to how the ‘backstop’ provisions are applied and provide room for supervisors to set stricter provisioning requirements if necessary.” “Similarly, more progress is required on measures intended to further develop the secondary market for NPLs., Lawmakersshould consider the appropriate scope to make sure that the proposed measures both reduce the level of NPLs on European banks balance sheets, and also help to increase the trading market for NPLs in Europe.” – Ends –

Following the publication of the Commission’s progress report on Capital Markets Union today, AFME Chief Executive, Simon Lewis, said: “Building an ambitious Capital Markets Union together with a Banking Union remains essential to strengthening the EU financial system. It is important to redouble efforts on the priority dossiers now before the end of this legislature in order to send a strong signal of commitment to developing Europe’s capital markets. We therefore welcome the Commission’s call for action on this important project.” AFME’s priority dossiers include: Insolvency reform Directive – completing inter-institutional negotiations with a view to delivering successful legislation that supports more harmonised and efficient insolvency regimes across the EU. ESAs review – delivering key reforms, including the provision of regulatory forbearance powers to the ESAs, the reform of the ESAs Level 3 process (including Q&As), the extension of the transition period of the Benchmark Regulation in respect of critical and non-critical benchmarks, and appropriate measures on prudential and Anti-Money Laundering supervision for financial institutions in the EU. Secondary markets for NPLs – achieving progress on measures intended to further develop the secondary market for NPLs. Sustainable finance – while we urge progress on this file, it is important that key developments, such as a taxonomy for sustainable investments and rules establishing and governing the provision of low carbon indexes, are not rushed. Investment Firms Review – ensuring that a new prudential regime tailored to the specificities of investment firms is achieved without creating unintended consequences for larger banking groups. – Ends – Notes to editors: AFME recently published a report tracking the progress to date of the Commission’s Capital Markets Union project through seven key performance indicators identifying what further work needs to be done: https://www.afme.eu/globalassets/downloads/publications/afme-cmu-kpi-report-4.pdf

The Association for Financial Markets in Europe (AFME) has today published an updated version of its Due Diligence Questionnaire (DDQ) which harmonises and simplifies the process of completing questionnaires for global custodians, sub custodians and banks that hold client money. The aim of the document, now in its third iteration, is to reduce time and resources used by market participants to complete the annual due diligence process. The AFME Due Diligence Questionnaire Task Force, comprised of approximately twenty Network Managers, diligently reviewed submissions proposed throughout the year by market participants. Alan Cameron, Head of Market Strategy-Brokers, at BNP Paribas Securities Services and Chair of the AFME Due Diligence Questionnaire Task Force, commented: “Our thanks are due to the many throughout our industry who have contributed to the 2019 version. We are delighted that the AFME DDQ is being used so extensively. The 2019 version includes extended sections on Client Money and Corporate and Social Responsibility, as requested by many AFME members.” AFME encourages the broadest use of this DDQ. It is available to all, free of charge, on AFME’s website: https://www.afme.eu/globalassets/downloads/standard-forms-and-documents/AFME-PTD-Due-Diligence-Questionnaire-2019-Final-Jan-2019.docx – Ends –

Following the ratification of the Withdrawal Agreement and Political Declaration on the future relationship at the EU Summit in Brussels today, Simon Lewis, Chief Executive of AFME, said: “The withdrawal agreement has passed another important political hurdle today with the agreement of the European Council. Agreeing the final deal in the coming weeks will be crucial to provide much-needed certainty on a transition period. In the meantime, it remains critical to continue work to mitigate cliff-edge risks in a no deal scenario.” “The political declaration for the future relationship for financial services rightly identifies the need for a stable relationship with close regulatory and supervisory cooperation. We also welcome the commitments to greater transparency and consultation in the equivalence process; and the aim to finalise equivalence assessments well in advance of the end of 2020.”

Following the publication of the Withdrawal Agreement this evening, Simon Lewis, Chief Executive of AFME, said: “Today’s progress in the negotiations is a significant step forward. Finalising the agreement as soon as possible is important to provide certainty on a transition period and ensure an orderly withdrawal process.” “Progress also appears to have been made on the declaration for the future relationship for financial services. We welcome the commitments to a continuing close and structured regulatory and supervisory cooperation and commencing equivalence assessments as soon as possible.” “Pending ratification by the European Council and the UK and European parliaments, it is still important for the Commission and Member States to clarify steps to mitigate cliff edge risks in a no deal scenario.” – Ends –

New report explores potential compliance challenges and how they could be addressed. The Association for Financial Markets in Europe (AFME)and EY have today published a new report considering the role of the compliance function within wholesale investment banks and the potential challenges and changes it faces in its structure and approach. The report, entitled “The Scope and Evolution of Compliance” outlines the key considerations for banks’ compliance functions as they seek to adjust and enhance their roles in response to the changing nature of the business and regulatory expectations. James Kemp, a Managing Director at AFME, said: “Against a backdrop of significant regulatory change and conduct issues, expectations for compliance functions have never been higher.Where previously advising on regulatory requirements and monitoring adherence to company policies formed the core of a Compliance Officer’s role, teams are also increasingly expected to take a more strategic and proactive role in anticipating and managing risk. The compliance function needs to be able to evolve and adapt in response to these changes and this report sets out the possible active steps that banks can take to do so.” Stuart Crotaz, Financial Services Partner at EY, said: “The message from the market is clear – it has never been a more challenging time to be in compliance. Yet this also brings opportunity as boards and regulators increasingly promote the need for a forward-looking compliance team who can provide a broader view on the management of regulatory risk in an increasingly technological world. The speed of that change and the increasing importance of data and analytics means that compliance needs to keep evolving.” Challenges currently facing compliance teams are driven by: Evolution of relationship with the first line of defence;Compliance has evolved from a quasi-legal function to one that is more focused on the identification and measurement of risks. Nonetheless, compliance has continued to fulfil many of its traditional roles, such as setting standards through policies, advising the business on regulatory requirements and monitoring for compliance with policies and standards. Getting the balance right between ensuring sufficiently independent monitoring oversight is conducted while still providing day-to-day advice is a challenge, particularly with a finite number of resources. The speed and automation of processes;Compliance reporting is largely manual and as a result resource-heavy and time-consuming. However, compliance must keep up to speed with an ever-increasing use of automated trading platforms, algorithmic trading, a variety of different communications media, and the increasingly complex transactions and structures being developed by the business. There is risk inherent in these new processes and compliance officers need to understand these new technologies. The increased accountability demands on senior managers.In order for senior managers to fulfil their Senior Managers and Certification Regime (SMCR) responsibilities, compliance officers must provide a sufficiently holistic view of risk. This means they need the analytical tools to be effective in forming a broader and more strategic view of the compliance profile in their organisations. To address these challenges, the report discusses possible resources and models for compliance. Conclusions: There is an opportunity for compliance to transition from its traditional role into one that provides enhanced strategic advice to senior management. This includes increased oversight of 1st Line Control Function surveillance and testing as a 2nd Line Control Function, greater use of business data to analyse and provide insights to senior management on changing risks and controls, and a greater influence on the management of the regulatory risk framework as a whole. Compliance will become more data and technology dependent as budget challenges and operating effectiveness encourage innovation-driven transformation. But, people and human judgement remain important. In order for compliance to transition to a different operating model there should be a shift towards it being a data user, not a data generator. Fundamentally, compliance should take a step back and look to use and leverage all streams of data (transactional, behavioural and social) to identify risks and act as an independent overseer and advisor. Clickhereto download the full report. – Ends –

Capital Markets Union is making progress but political momentum vital to tackle remaining obstacles The full report can be downloaded here. Press release available in French, German,Italian and Spanish. AFME, in collaboration with 9 international organisations and trade associations representing global and European capital markets stakeholders, has today published a new report tracking the progress to date of the European Commission’s flagship Capital Markets Union (CMU) project through seven Key Performance Indicators (KPIs). The reportwas authored by AFME with the support of the Climate Bonds Initiative (CBI), as well as European trade associations representing: business angels (BAE, EBAN), fund and asset management (EFAMA), crowdfunding (ECN), retail and institutional investors (European Investors), stock exchanges (FESE), venture capital and private equity (Invest Europe), and pension funds (Pensions Europe). The report entitled, ‘Capital Markets Union: Measuring progress and planning for success', is the first publication in what will be an annual series which will regularly review developments in the CMU project and identify what further work needs to be done. The report is also the first country-by-country comparison of individual EU Member State progress against the CMU’s objectives. Simon Lewis, Chief Executive of AFME, said: “Three years on from the launch of the Capital Markets Union Action Plan, and with the end of the Juncker Commission approaching, this report provides a timely opportunity to review the progress that has been made to date on achieving the CMU’s vital aims. Our findings show that the CMU will be a long-term project; it is not about hitting targets in the short-term but about ensuring that this important project is fit for purpose. With a myriad of challenges currently facing Europe’s capital markets, we must not lose sight of the importance of an effective CMU for the future of Europe.” The seven KPIs assess progress in the following CMU policy priority areas: Market Finance indicator: how easy it is for companies to enter & raise capital on public markets; Household market investment indicator: to what extent retail investment is being fostered; Loan transfer indicator: to what extent banking capacity is supporting the wider economy; Sustainable Finance indicator: to what extent long-term investments in infrastructure and sustainable investment are being made; Pre-IPO Risk Capital indicator: how well start-ups and non-listed companies are able to access finance for innovation; Cross-border finance indicator: to what extent cross-border investment is being facilitated; Market depth indicator: measuring the depth of EU capital markets. Among the report’s key findings: Europe continues to over rely on bank lendingEuropean companies continue to over rely on bank lending, with 86% of their new funding in 2017 coming from banks and only 14% from capital markets. The availability of pools of capital in Europe has shown encouraging improvements in most EU countries in recent yearsThe amount of household savings invested in capital markets instruments (i.e. equity shares, investment fund shares, bonds, insurance and pensions) has increased from 108% of GDP in 2012 to 118.2% of GDP in 2017. However, Europe still lags behind US on investing savings in capital markets.The average EU household accumulates savings at around twice the rate as the US, but the stock of household savings held in capital markets instruments represent 1.18 times the annual income (as measured by GDP), compared with 2.9 times the annual GDP in the United States. Europe is a global leader in sustainable financeOver 2% of Europe’s bonds (government, municipal, agency, corporate, securitisations, and covered bonds) issued in 2017 were labelled sustainable, up from 0% just five years ago and compared with less than 1% in the US in 2017. There is more risk capital available for European SMEs to finance their growthThe annual amount of pre-IPO risk capital investments into SMEs by venture capital and private equity funds, business angels and through equity crowdfunding has increased in Europe from €10.6bn in 2013 to €22.7bn in 2017. However, risk capital investments remain low relative to GDP and there is still a significant gap compared with the US (€132.4bn in 2017, or 0.8% of GDP vs 0.15% of GDP in the EU). European capital markets are showing an encouraging trend towards greater integrationSince the aftermath of the financial crisis after the repatriation of some market activities and funding to home countries. Our indicators show growing intra-EU activity between EU Member States in private equity, M&A transactions, debt issuance, and cross-border holdings of portfolio assets. However, intra-EU integration remains below pre-crisis levels suggesting there is more progress is needed towards a fully integrated capital market. Fewer loans are being converted into capital markets instrumentsRecent years have shown a decline in the transformation of loans into tradeable securities like covered bonds, securitisation, or loan portfolio transactions. Issuance of securitised products in Europe remains subdued, although 2018 year-to-date placed issuance volumes are encouraging. Market depth in Central and Eastern European (CEE) has improved slightlyCentral and Eastern European (CEE) capital markets are converging with those of the rest of Europe, but at a slow pace. EU 28 Country performance A comparison of the 28 EU Member States and their individual performance against each indicator was conducted. Among the key findings: The UK and Ireland lead the EU countries in terms of providing new funding for non-financial corporations (NFCs) with over 25% of total new funding raised from markets. Meanwhile, Slovenia, Slovakia, Malta, Cyprus, and Bulgaria had no NFC bond or equity issuance in 2017. Denmark has improved the most among all EU countries in the last five years in terms of the accumulation of household savings in capital markets instruments, due to greater pension coverage and higher savings rates. Germany, Luxembourg and Austria meanwhile have comparably higher savings rates than the rest of the EU, but households invest savings in conservative non-capital markets instruments such as cash and bank deposits. Spain, Italy, Ireland, Greece, and Portugal (high-NPL countries) are in the top seven EU nations in the loan transfer index in 2017, suggesting an encouraging trend towards using market instruments to dispose distressed assets. The Netherlands, France and Sweden are the leading EU nations in sustainable finance with over 3% of bonds issued in 2017 classified as sustainable. Lithuania had the highest indicator value in 2017 of almost 10%, but this reflects a single bond. Estonia, Denmark and the UK lead by availability of risk capital for SMEs. Estonia has a prominent amount of business angel investment, while Denmark and the UK have more diversified sources of risk capital from private equity and venture capital. Luxembourg, the UK, and Belgium rank as the most interconnected capital markets with the rest of the EU. Luxembourg’s lead is due to its fund and bond issues held within the EU, and a prominent share of their total private equity activity invested in companies in other EU countries. The UK and Luxembourg are the most globally interconnected European capital markets. The UK has a particularly prominent role in intermediating global flows of FX and derivatives trading, cross-border holdings of equity shares, and facilitating public equity raising by non-EU companies. The Czech Republic is the deepest capital market in CEE. In 2017, the Czech Republic was the second-most active primary market for equity and bonds in CEE after Poland; it had the highest recovery rate for business insolvency; and was among the top 3 CEE countries with the largest accumulation of savings in market instruments (as % GDP). Page 42 of the report shows a table ranking all 28 Member States in order of progress against each indicator. – Ends –

Clickhereto download the full report. Click here to download the press release in French. The Association for Financial Markets in Europe (AFME)and PwC have today published a new report on current trends in technology and innovation and their impact on the investment bank of the future. The report, entitled ‘Technology and Innovation in Europe’s Capital Markets’ examines the key trends which are expected to impact the industry over the next five years, providing a vision for the future and identifying the implications for the industry and for future policymaking. James Kemp, a Managing Director at AFME, said: “At a time when the industry continues to experience economic pressures, a new regulatory framework and ever-increasing client expectations, our latest report shows that new technologies and innovation will be a significant force in reshaping the industry.” “While 95% of our survey respondents identified the opportunity for cost reduction as the most important driver for the adoption of technology, only 28% felt that the current investment allocated to this strategic change was sufficient.” “Policymakers and regulators have a key role to play in promoting innovation and supporting the adoption of new technologies, whilst ensuring that future regulatory frameworks maintain a level playing field and ensure financial stability.” Isabelle Jenkins, Partner at PwC, said “Our report shows that new technologies will drive changes across investment bank functions, their workforce, and industry partnerships. Success will depend on the ability of investment banks to achieve long-term benefits from new technologies by prioritising investment, looking to collaborate where possible, identifying and developing the skills needed, and building a culture for innovation.” The report was developed through a survey of representative banks on AFME’s Technology and Operations Committee and supported by additional research from PwC. Among the key findings from the report are: Technology is one of the most powerful levers banks have to address potential disruption, tackle existing industry challenges and to deliver future opportunities. There are four core technologies - Data & Analytics, Cloud Computing, Artificial Intelligence (AI) and Distributed Ledger Technology (DLT) – which have the potential to transform banks and the industry; A clear data management strategy is an immediate priority as it is the enabler for the four core technologies identified. However, across industry, there are varying levels in the maturity of how data is currently being managed and the approaches to realise its future value; Significant implementation of Distributed Ledger Technology (DLT) remains a longer-term priority based on the current complexity of bringing large-scale enterprise and industry solutions to market, as well as integration with legacy systems, and considerations for data privacy and cybersecurity; 90% of survey respondents believed the impact of new technologies on the workforce will lead to business and IT skills merging and future roles becoming more relationship focused. Competition for future skills will be high, requiring banks to both invest in re-skilling the existing workforce and driving cultural change to attract new talent; New technologies will shape investment banks to be increasingly automated, data-led, open and agile and connected into a wider pool of technology and service providers; Banks, policymakers and regulators must keep pace with new technologies to balance the potential risks and cybersecurity concerns they may introduce. Any future regulatory frameworks should be applied with a proportionate and principles-based approach, but at the same time ensure a level-playing field that creates an open, competitive and sustainable market for technology and innovation. – Ends –

Commenting on the UK Government’s paper outlining preparations for the financial services industry in the event of a no-deal Brexit scenario, Simon Lewis, Chief Executive, said: “The consequences of a no-deal Brexit scenario could mean prolonged disruption to the smooth functioning of Europe’s capital markets, which would affect investors, borrowers and savers across Europe and beyond. The financial services industry is keen to see both negotiating parties agree on a deal which locks in an agreement on a transition period and the future trading relationship in order to minimise the risks to financial stability.” – Ends –