On Friday 25 June 2015, at a public hearing, the EBA published its long-awaited response to its consultation earlier this year on “simple standard and transparent” (“SST”) securitisations. There was much to welcome in the proposals, and AFME is encouraged that this is a big step forward. First, on regulatory capital for bank investors, the EBA proposed a new and reduced calibration: halving the p parameter and a reduction in the floor to 10 percent for senior investment under IRBA and SA approaches. More detailed work is required fully to quantify the implications, and issues remain around how much the requirements continue to depart from capital neutrality, but these seem to be changes which go in the right direction. Second, the announcement of proposals for a “qualifying” regime for certain types of asset backed commercial paper (“ABCP”) was also welcome – and a pleasant surprise as we did not expect a set of detailed proposals for ABCP quite so soon. This was unfortunately tempered by the limitation of the “qualifying ABCP” regime to assets with a maturity of less than one year, thereby ruling out auto loans – an important asset class in Europe – but we hope there will be scope for further discussion of this issue. Lastly, the EBA also indicated that while synthetic securitisations remained out of scope it was open for further discussion on this. In previous submissions, AFME has repeatedly stressed that synthetics have an important role to play in supporting financial stability and increasing banks’ ability to fund the real economy. They do this by helping banks free up regulatory capital, particularly for assets such as SME loans. SME loans require large amounts of capital when held on bank balance sheets, and can be more challenging to securitise as cash transactions. The EBA rightly stated that more analysis was required here, and AFME looks forward to continuing to engage constructively on this topic. The EBA plans to confirm last Friday’s announcement in a more detailed report to be issued in early July. Formally, this is a response to the Call for Advice by the European Commission in January 2014, at which level any further discussion will need to take place. It is also important not to forget the global aspect. We await eagerly the conclusions of the Basel – IOSCO Task Force on Securitisation Markets, which undertook a similar consultation on “simple transparent and comparable” securitisation earlier this year and which we also expect to report shortly. The European securitisation market urgently needs regulatory reform to recover. While encouraged by these positive developments and the continuing engagement provided by the authorities we urge swift action to turn these into real regulations on the ground. These should provide a balanced and prudent framework that will once again encourage issuance of and investment in qualifying securitisation to help fund the real economy, strengthen Europe’s financial system and provide an important pillar to support capital markets union.

June saw the publication of the Final Report of the Fair and Effective Markets Review (FEMR). The report had three clear aims: 1) to assess existing FICC market operations; 2) to establish how to restore trust in the markets; and 3) initiate a global debate on issues and standards. The Final Report is the result of extensive industry consultation exploring the root causes of misconduct in FICC market, the preventative measures regulators and the industry have already put into place, and whether there is still more to be done. This consultation period resulted in almost 1000 pages in responses from both global banks and smaller institutions, alongside feedback from infrastructure providers and public interest groups. In the report, 21 recommendations for improved conduct and individual accountability are made. These include the need for tougher standards in the FICC markets and criminal sanctions for misconduct. There is also a call on senior leaders to shape conduct from within organisations, alongside a focus on regulators and firms taking a more forward-looking approach in identifying and mitigating risks at an earlier stage. Enforcement will come from the extended Senior Management Regime. FEMR reflects Bank of England Governor Mark Carney’s call for ‘global standards for global markets’, with several of the report’s recommendations requiring coordination at an international level with bodies such as the International Organisation of Securities (IOSCO). Already FX committees in the US, Japan, Canada, Australia, ECB, Singapore and Hong Kong have expressed support for the report’s recommendations. AFME has been closely involved at all stages in this process since FEMR’s inception 12 months ago by the Bank of England, HM Treasury and Financial Conduct Authority (FCA). The Bank of England named AFME Chair Frédéric Janbon as a member of its steering committee, together with AFME Board member Michael Cole-Fontayn and GFMA Chair Samir Assaf. In addition, the review's fixed income, rates and product expert group was chaired by AFME Board member Peter Nielson of RBS, while James Kemp, Managing Director of GFMA’s Global FX division, chaired the expert group for currencies. The next step will for the industry and regulators to work together in determining the best way to implement these recommendations before the review’s chairs provide a full implementation report to the UK Chancellor of the Exchequer and the Governor of the Bank of England by June 2016. Dialogue between the two groups is already underway. For example, the GFMA FX division and FCA hosted a highly successful roundtable involving around 50 major banks to discuss the authorities FX remediation programme – a first for the industry. FEMR has already received substantial cross-sector support from the industry, including from our members. We look forward to building on the industry’s constructive relationship with the authorities to ensure the smooth implementation of FEMR’s recommendations, both domestically and, where applicable, internationally. This is the start of a new era where we have the chance to impact, advance and drive fairer and more effective global markets. How the industry has changed will now, in part, be measured by how successfully individual institutions adhere to FEMR’s recommendations on standards.

AFME strongly supports the European Commission’s capital markets union (CMU) initiative. A capital markets union is vital in securing the main aims of the new Commission: creating jobs and restarting growth and investment, as well as to improve the functioning of the European financial sector. The banking system and the capital markets are the twin engines which finance the European economy. An important lesson is that before the crisis the EU economy was too reliant on its banking system and we have continued to pay the price through a slow recovery and continued falls in lending. Today, many businesses – particularly smaller and midcap companies – lack suitable funding options to support their growth – particularly risk capital and committed long-term funding. The CMU initiative should address this funding challenge by providing firms with a greater range of financing tools and ensuring access to a wider and deeper pool of potential investors. In our response to the Commission's CMU consultation, we have emphasised some important themes for the Commission to address: First – there needs to be a focus on equity markets and on building an equity culture; Second – we agree with other industry partners on the key concept of the ‘funding escalator’: providing the right tools to fund companies at different stages of growth; Third – we need efficient and liquid secondary markets. We must preserve the essential function of market-making; Fourth – the international dimension – CMU should make capital market flows easier both into and out of Europe; Fifth – the CMU project needs to be a demonstration of better regulation in action. Finally, an overarching point: CMU needs to be ambitious. It needs to be a transformative project and it needs to be coherent. We think it makes sense to set the goals for CMU early in the process, rather than having to retrofit them further down the line. In order to deliver the growth and jobs that Europe needs, we have to move from policy to practical implementation. Many market participants, including AFME, have also put forward practical proposals that can be implemented and help build a capital markets union. Examples of the initiatives are: the work done by the Pan-European Private Placement Working Group, led by ICMA and which is a cross-industry group that has developed a guide and standard documentation for an EU-wide private placement regime; the work of the joint working group with banks, infrastructure investors and law firms that has produced a detailed guide for issuers and investors on how to use capital markets sources in order to finance infrastructure projects. This guide will be published shortly; a practical guide, which AFME is about to publish, for distribution to European SMEs on sources of bank and non-bank finance. These work-streams are first steps that the industry is taking in turning recommendations into practical changes which will have a real and beneficial impact on providers and users of funding in Europe. Turning to the Commission's agenda, we welcome the early priorities which have been outlined for CMU. Taking these priorities forward will need a partnership between industry and policymakers at EU and national level. But besides new initiatives, the Commission should also consider the impact of legislative proposals that are already in the pipeline on the development of CMU – in terms of funding costs, the level of investment, or the impact on market liquidity. The potential benefits of a capital markets union to Europe’s firms and investors are huge. Growth cannot be taken for granted and new jobs and start-ups are not guaranteed. The right financial environment is vital. So now is the time to develop an ambitious vision and a stretching set of goals for CMU.

We have recently replied to the European Commission’s carefully thought-out and constructive consultation document ‘An EU framework for simple, transparent and standardised securitisation’. The paper is a clear indication that the Commission recognises the positive benefits of securitisation for the functioning of the financial markets. The seven years that have passed since the onset of the financial crisis have provided strong evidence of how well most European securitisations have performed, and we are pleased to respond comprehensively and constructively. The Commission’s work is the culmination of a long process of steadily building positive support for the rehabilitation of ‘qualifying securitisation’ so it can play a key role in a capital markets union. It is therefore disappointing that the Joint Committee of the European Supervisory Authorities (‘ESAs‘) has published recommendations that single out securitisation and which, if implemented, will have precisely the opposite effect and hinder the recovery of Europe’s securitisation markets. The recommendations focus on due diligence and disclosure. We fully support thorough and clear disclosure and the Joint ESAs’ calls for greater harmonisation and consistency, especially across different types of investors. However, our members are very concerned that there has been no consultation with issuers to determine the practical feasibility of implementing the recommendations, and that there will be a myriad of grey areas around enforcement issuers and regulators will need to resolve. These new proposals also appear only a matter of months after the Commission and ESMA published supposedly final ABS disclosure requirements in the regulatory technical standards for CRA 3. In mandating so many new qualitative and quantitative disclosure requirements, the recommendations go far beyond both the information and tools that are reasonable and legitimate for an issuer to provide on the one hand, and the amount of disclosure investors need to perform their due diligence and analysis, on the other. Additionally, they create uncertainty around originator liability under securities laws, which could discourage issuers from using securitisation altogether. It is difficult to understand why this excessive focus on disclosure in securitisation persists. The historical reality is that disclosure in qualifying securitisation in Europe has always been robust – before, through and since the crisis. It is even better today following new regulations and the pro-active engagement of our members in various market-led and regulatory-led initiatives. Revival of the European securitisation markets is not being prevented by lack of disclosure. The problems are overly harsh capital and liquidity requirements, and the lack of a level playing field with covered bonds – of which this singling out of securitisation is only the latest example. While we support the Joint ESAs’ call for greater clarity and consistency in European ABS disclosure, most investors in European ABS find current standards of disclosure more than acceptable. Adding stricter, more onerous requirements that may be difficult for issuers to comply with, and which investors neither need nor want, will only hinder the revival of securitisation. To the extent there remains areas for improvement, we will of course continue to engage with investors and others to address them.

The European Union is facing a growth crisis: output is flat, unemployment remains high and investment is falling. Even though, as widely expected, the European Central Bank (ECB) is to begin full-on quantitative easing, it will not be enough. What Europe needs is a new growth model to put its underemployed resources to work - labour, capital and entrepreneurship - to generate jobs and growth for citizens across the continent. The financial sector will be central to this economic revitalisation, and we are at a crucial point in the process - the shaping of the proposal by the new President of the European Commission, Jean-Claude Juncker, for the creation of an EU Capital Markets Union (CMU).When CMU was announced by the new Commission, the idea was short on detail. As it begins to be fleshed out, we urge the Commission to listen to the industry to make sure the project goes in the right direction to maximise its potential for European Growth. It is encouraging that the ECB president, Mario Draghi, has urged a swift move to CMU. The Commission has also given some welcome hints as to its priorities: promoting securitisation and private placements, and encouraging the development of long-term investment funds.We expect more detail shortly, as Jonathan Hill, EU Commissioner for Financial Services, issues a CMU Green paper. We urge the commission to be ambitious, and tackle the big strategic issues, such as reform of Europe's insolvency laws or the impact of over-regulation on growth. CMU should aim at a manageable number of high-impact initiatives - each designed to deliver maximum economic benefits. Complementary objectives AFME proposes three complementary objectives for CMU. First, encouraging more efficient and liquid markets for the issuance of financial instruments. A range of reforms should be pursued to promote the issuance of capital markets instruments - particularly by small to medium-sized enterprises and mid-cap firms. This will help broaden and deepen Europe's capital markets and increase the choice for issuers and investors. Industry initiatives on high-quality securitisation and Private Placement should be complemented by a review of regulation, especially capital requirements. There should also be a review of the tax regime for SME equity finance to promote equity issuance by European firms. Second, harnessing long-term savings to promote investment. CMU should improve the incentives for both institutional and retail investors to make long-term investments in Europe's capital markets. The priority reforms are to calibrate appropriately the capital framework for institutional investors; to achieve greater harmonisation of EU insolvency rules; to maintain an economically viable model for capital markets research; and to widen product choice for investors. Third, promoting open, integrated capital markets infrastructure. Market infrastructure is a key enabler of CMU, supporting pan-European issuance, investment, trading and risk management. Priority reforms include: closer integration of clearing and settlement systems; passing a new securities law to clarify collateral ownership; removing barriers to cross-border collateral use; and ensuring broad and affordable access to market data. Changing attitudes to capital markets Beyond the detail, the CMU initiative signals a welcome change of tone in the Commission's attitude to the wholesale financial markets. There is growing recognition that wholesale banks and markets can provide part of the solution to the growth problems faced by the Eurozone.But Europe's financial sector is still rebuilding after the crisis. Furthermore, while regulatory reform has made the financial system much safer, it has also reduced the capacity to fund growth, both through banks and the capital markets. Advancing CMU in this environment will not be easy, but it is achievable. However, Europe should not also have to digest further bank structural reform, which would fragment markets and reduce liquidity. We therefore call on the Commission to demonstrate an unequivocal commitment to CMU, and to jobs and growth, by reassessing its position on this file. Over the next five years, AFME is committed to helping Europe's policymakers achieve a capital markets union. If we can forge a strong, positive partnership to deliver CMU, the rewards for Europe will be substantial: deeper, more diverse capital markets, a more stable financial system; and, above all, new businesses, new investment and new jobs. CMU is an exciting opportunity that we must seize.