The last weeks of 2017 were significant for the pan-European wholesale financial markets industry. Two major pieces of regulation reached their final stages. The first was the global agreement of the final Basel 3 package of proposals, effectively marking the end of the post-crisis overhaul of the regulatory framework. At the same time, banks were also putting finishing touches to their preparations for the implementation of the Markets in Financial Instruments Directive (MiFID II/MiFIR) which went live on 3rd January. This far-reaching regulation – while rightly improving trading transparency in certain areas – has been costly and complex for all types of market participants. While further adjustments will inevitably be appropriate, the near-term focus will be on the collection and transmission of significant new reporting data, so authorities and participants can evaluate its impact. With an extensive pause in regulation now in prospect for 2018 we are moving into a new phase which will focus on the implementation of agreed rules and a comprehensive assessment of what has gone before. So, in many ways 2017 marked an important milestone for the industry. Through the collaborative efforts of regulators, rule makers, supervisors and the industry itself we now have substantially stronger banks, greatly improved market infrastructures and a highly resilient financial system capable of absorbing shocks greater than those that we saw ten years ago. 2017 also ended with positive news on Brexit as the negotiators agreed that discussions on transition could commence in the New Year and the UK Prudential Regulatory Authority provided clear and helpful guidance on the treatment of third country branches and subsidiaries post-Brexit. The wholesale banking industry and its clients now have the chance to address the forthcoming challenges in a considered, strategic way, without having to rush key decisions. Brexit will of course continue to be a key focus for the coming year, but another major challenge will be to raise the average levels of European wholesale banks’ profitability so that it consistently and materially exceeds their cost of equity. The industry will continue to experience some downward pressure on returns as agreed regulation is implemented and it will need to focus on how it compensates for this and other competitive and macro pressures, including through embracing both the revenue and cost potential benefits of digitalisation and financial technology. Certainly, digitalisation is already beginning to transform the landscape of wholesale financial markets. The ubiquity of Cloud-based technologies, for example, is making more efficient and flexible data management an essential tool for banks, which also offers extensive cost-reduction benefits for both retail and wholesale markets participants. This will enable the industry to address common challenges which, in turn, will encourage investors to see banking as an attractive sector. Digitalisation can also play an important role in one of Europe’s major ongoing projects: the Capital Markets Union, where European Commission officials are already working with some smaller Member States on using new technology to open up and expand their local capital markets’ activity to boost economic growth. This includes, for example, the use of crowdfunding and other alternative funding tools, and the future use of block chain technologies in post-trading. Digitalisation will of course bring challenges, which will need appropriate investor and consumer protection as new changes are introduced. A first important regulatory hurdle for 2018 will see the implementation of the General Data Protection Regulation (GDPR) across Europe, which will have implications for current and future technology. However, one of the main challenges facing the industry will be the growing threat and severity posed by Cybersecurity, as our digital connectivity continues to increase. Therefore, ten years after the Financial Crisis, 2018 will be the first year of relative regulatory stability for some time, in which the industry can continue its focus on innovation on behalf of its customers while tackling the technological and structural challenges which will drive the long-term success of the sector. Banks will further embrace the benefits of technology to deliver real benefits for customers, shareholders and businesses throughout Europe. This piece was originally published in The Telegraph on 6 January 2018

A decade after the financial crisis, Europe’s financial markets are at a critical juncture. A concerted global programme of regulatory and systemic change means significant progress has been made on building a stable and resilient financial system. The EU’s latest banking reform package: the Risk Reduction Measures (RRM) marks an important step towards completing such efforts. At the same time, the EU is also pursuing an ambitious agenda for Europe’s capital markets to develop and flourish. Its Capital Markets Union (CMU) initiative is crucial for boosting growth and channelling investment into the real economy. However, as AFME’s latest report, The links between the Risk Reduction package and the development of Europe’s capital markets highlights, ongoing banking reforms need to be considered in the light of how they are likely to impact the wider economy. Without a more granular understanding of the impact of some of the proposals on day-to-day commercial activities there is a significant risk that businesses, investors and governments will find it more difficult to access essential capital markets services. Real economy access to capital markets To take one example, European manufacturers – particularly exporters to international markets –are exposed to many different cost variations, such as exchange rate changes or fluctuations in the underlying cost of energy or raw materials. Being able to hedge such risks is essential for them to manage their business. Therefore, it is important that policymakers ensure that capital and liquidity requirements applied to derivatives, used to assist these hedging activities, are proportionate to the risk they involve. Punitive treatment of derivatives could end up indirectly harming exporters by limiting the availability of vital instruments or increasing their cost. For pensions funds, efficient and easy access to equities markets is a key priority. Over the long term, returns on equities exceed those available on other major asset classes, making them a core holding in many pension funds with 46% of pension assets globally invested in equities. Pension funds often invest in equity markets via “equity swaps” – a contract with a bank where the fund receives a return linked to the performance of an individual stock, or basket of stocks. This is often more efficient than investing directly in individual stocks or indices and allows funds to access a wider range of markets, achieve greater diversification and potentially higher returns. Appropriate regulatory treatment of these transactions in the new funding rules is crucial for ensuring access to good investment opportunities and to promote deeper and liquid equity markets. Let’s also not forget how much is at stake for EU governments. Public spending (on health, education, infrastructure, etc.) relies on well-functioning and liquid government bonds markets. Government bonds also play an important role in financial markets - as a safe investment for investors to diversify risks and for use as collateral to support borrowing. For the market to function well, it is essential that banks’ activities (as primary dealers and market-makers for such instruments) are not treated punitively and dis-incentivised. There is a danger that requirements in the Risk Reduction Measures – as currently drafted – could result in lower liquidity levels and ultimately higher funding costs for all EU governments. Striking the right balance on financial stability and capital markets growth Clearly, the success of further developing Europe’s capital markets will depend, in part, on the fair and proportionate application of banking reforms. The final rules must ensure financial stability while also enabling the banking sector to support the economy To be clear, the industry fully supports the post-crisis regulatory repair programme and its key objectives. However, we need to strike the right balance. Regulation must not prevent the financial sector from providing the liquidity and investment needed to drive Europe’s economic growth.

Recent cyberattacks, such as the October 2017 Swift attack, show how vulnerable financial firms across the globe are to the machinations of hackers. The attack saw Taiwan’s Far Eastern International Bank reportedly lose about $60 million after malware planted on the bank’s servers and a Swift terminal (used for international bank transfers), allowed money to be siphoned off to fraudulent accounts in the US and Asia. Although most of the funds are now said to have been recovered, it demonstrates how bold hackers are becoming in the tactics they will use. The very real problem that cybersecurityposes is only going to grow as our lives become increasingly dependent on technology, and systems become more interconnected. By 2020 the number of connected devices – from smartphones and tablets, to autonomous cars and smart home devices – is set to reach 20 billion across the globe, according to research from technology consultancy Gartner. Such an environment creates a plethora of opportunities for hackers to infiltrate and exploit weaknesses. Financial firms, as operators of critical and global infrastructure, are not only exposed to some of the greatest cybersecurity risks this interconnected environment creates, they are (and must by necessity be) at the forefront of efforts to tackle them. They are key for ensuring financial stability. Financial firms are taking the risk seriously – but is that enough? Financial services are ahead of many sectors in terms of their cybersecurity efforts. For instance, PWC’s 2017 Global State of Information Security Survey showed that cybersecurity spending by financial firms has increased by 67% since 2013. Regulators across multiple jurisdictions are also taking an increasing interest in what preventative measures financial firms are taking. Penetration testing and red team testing, where firms simulate cyberattacks on their own systems in order to identify vulnerabilities, are now standard practice across the industry. It’s a positive step that exercises like these are happening but these efforts can create new challenges. For instance, how can firms ensure that these complex and costly tests don’t create their own security issues? Simulating an attack creates the risk of accidentally causing a system failure and, while tests are happening, it risks distracting firms from tackling genuine cyberattacks – especially if multiple regulators are asking firms to conduct different tests. In the wrong hands, the results are also effectively a blueprint for how to hack into a bank’s systems and highly sensitive data. That is why firms and regulators must take a joined-up approach to this issue. Global and cross sector co-operation is crucial for effectiveness Firms must have robust and well-considered cyber policies and procedures that cover all aspects of their operations. Regulators must also take a global view on supervision. Given the fact that financial firms typically operate across multiple jurisdictions, complying with different regulations can create quite a headache. We need to avoid a situation where firms are being pulled in multiple directions in order to fulfil different requirements – this can impact efforts to tackle real and emerging cybersecurity threats. Additionally, there is also a relatively limited pool of experts to help firms with these issues, so they need to be deployed in an effective way. In 2016, members of the Global Financial Markets Association, an association of three of the world’s leading financial trade associations (including theAssociation for Financial Markets in Europe, AFME), worked together to create a global framework for how to conduct penetration testing, to help both firms and regulators tackle these issues. The framework establishes key principles and best practice standards, to guide firms on how to approach cybersecurity and also give regulators oversight of the process. This is a good starting point and discussions are being held at global and at European level to get buy-in from industry, policymakers and regulators. But efforts to share best practice must also stretch beyond financial services. As our world becomes more interconnected it is vital that knowledge and expertise is shared between different sectors. Taking a siloed approach leaves everyone more vulnerable – a cyberattack on one sector can easily be replicated elsewhere. A good example of a combined effort is the European Cybersecurity Organisation and the public-private partnership it signed last summer. This promising initiative brings together firms from across industries, research institutions as well as policymakers and administrators from European member states to work collectively on cybersecurity, and aims to generate €1.8 billion in cybersecurity investment. Coordinated efforts like this must be encouraged, and expanded, as we go into the future. Cybersecurity is an issue that requires engagement and pressure from all of us in the industry to ensure best practice is shared and a coherent approach is taken. Cybersecurity is self-evidently a global threat and therefore requires a genuinely global response. It is also an issue that will require constant attention in order to tackle this ever-evolving threat. This article was originally published by Banking Technology on 05 December 2017

Buzzwords such as “FinTech” and “RegTech” are routinely bandied around today’s financial services industry, but to many their exact meaning is unclear. Is the industry changing so radically that the human component is to be extinguished by technology? What is the future of the compliance function, and in particular the Chief Compliance Officer (CCO)? In the face of such rapid change, trying to predict what the compliance function in banks will look like in five years’ time requires an even larger than normal crystal ball, but we can see some trends, and make some predictions. Compliance teams will be no less importantIt is generally now understood that the obligation of ensuring employees maintain good conduct, behave ethically, and comply with law and regulation rests foremost with the business (the so-called “first line of defence”). Where there is a breach of regulation, regulators look first to the business leader for an explanation. In the UK, and in some other common law jurisdictions, this concept of senior management responsibility is enshrined in law.However, the business relies heavily on the compliance function to interpret regulation, to advise the business on implementing it, and to manage relationships with regulators. That’s not going to change, in fact the function is likely to be increasingly important, for the reasons given below. Compliance headcounts will decrease, but they certainly won’t disappearIn recent years, with the spate of anti-money laundering (AML) sanctions and market abuse enforcement actions, and the FX and LIBOR scandals, compliance teams have seen a significant increase in staffing. Adding to the staffing pressure, some banks have increased “know your customer” (KYC) staff tenfold in recent years. But many of these routine monitoring and surveillance roles are now either being moved out of compliance or replaced by technology. However, importantly, technology cannot completely replace judgement and expertise – particularly as compliance becomes increasingly global.Harmonisation of conduct regulation across the EU is patchy, and globally minimal, despite the best efforts of IOSCO. KYC obligations are different everywhere. Compliance managers therefore require expertise not only in the jurisdiction in which they work, but in the jurisdictions where the businesses that they monitor function. Utilities and algorithms can analyse a new client’s litigation and regulatory past, the CVs of the Politically Exposed Persons (PEPs) who are on its board, and the sources of funds of its shareholders. But the judgment call of whether it is safe to take that client on cannot be automated. The role of technology in compliance will increaseIn the future, technology will be a critical component of the compliance function. The days of young compliance officers manually analysing gigabytes of chat messages and email traffic are in the past. Although the technology does not yet exist for quick and effective analysis of phone calls for conversations that might indicate market abuse, it will come. Behaviour engines will provide real-time employee surveillance, using organisational psychology and baseline behavioural profiles to try to spot potential fraudsters and market abusers before they create a problem.Technology will also help business to address legacy issues, reducing inefficiencies. For example, many banks have separate compliance systems for market abuse and AML monitoring, because systems were put in place at different times, inherited following a merger, or implemented in haste in response to regulatory pressure. Technology can help ensure banks have a properly integrated system to deal with data. Wider roles will be assigned to the compliance functionTechnology’s increased role in the business will actually necessitate the redistribution of human roles to the compliance function from other areas of the business, such as front office, operations, IT and legal. These roles include those with responsibilities for data protection/data privacy, compliance with competition law, and for monitoring algorithms. In some banks compliance already manages these functions, and others will almost certainly follow. The skill set of the compliance team therefore will be wider Potential personal liability of compliance officers will be much higherAs the role of the compliance department becomes increasingly important, CEOs will rely ever more on advice from the CCO, in the same way they rely on the general counsel for legal advice. Adding to the importance of the role are the regulatory obligations placed on the compliance function. In the US and the UK – though not, yet, in the EU 27 – personal liability can quite easily be attached to the CCO. The trend towards monitoring will mean the CCO will have much higher potential personal liability in the future. Will their compensation be commensurately higher? This article was originally published by Financial News on 18 September 2017

In today’s digital world, the most valuable commodity may not be something you can physically trade, yet its use and how it is regulated affects everyone. The commodity is data. However, the digital transformation of our world brings the risk of increasingly sophisticated cybercrime. This year’s NotPetya cyberattack on global companies like Maersk as well as the Ukrainian Government is just one example, and it put a spotlight on protection of consumer data. It is against this backdrop that new EU rules which govern the maintenance and ownership of data are set to come into effect. The General Data Protection Regulation (GDPR) provides a common framework for the use of personal data in Europe. In particular, it has far reaching implications for banks, which handle and store vast amounts of data. Failure to meet its requirements will come with potentially hefty penalties. Adding to the urgency, firms face a tight deadline to meet its requirements as it comes into effect in May 2018. The GDPR poses several regulatory challenges that are unique to the financial services industry which, if left unaddressed, could make it practically impossible for financial services firms to comply with the new regime by the May deadline. Yet, if policymakers can clarify the grey areas, with some preparation, firms could actually benefit from earlier implementation of some of the GDPR requirements, and at the same time, provide greater protection and better services to clients. GDPR another obstacle in an already complex system In January 2018, banks will face new specific data requirements under the second Markets in Financial Instruments Directive (MiFID II). MiFID II will affect how the industry records and stores communications, requiring all communications, including personal data, that could lead to transactions to be stored for up to five years. Yet, when the GDPR comes in, merely 4 months later, personal data should only be kept for as long as is necessary. How will banks comply with both the GDPR and MiFID II? Questions like this will require clear guidance from regulators and then will take time for compliance departments to resolve. Policymakers need to identify the areas of cross-over of such huge pieces of regulation, and provide clarity, or compliance will likely be hampered. The Financial Action Task Force has recently highlighted the link between data protection and countering financial crime, stating that information-sharing is critical for combatting crime. But such information sharing will breach the GDPR rules unless national authorities utilise Article 23 of the GDPR which allows for countries to issue guidance permitting institutions to share information for purposes of national security. But this has the potential to create fragmentation for financial services firms operating in multiple jurisdictions. It is essential that regulators provide clarity on how firms can maintain compliance on this point. A further example of a pending regulation which must be clarified in relation to the GDPR, the European Commission’s proposal for an ePrivacy Regulation, also has the potential to present challenges. It is essential that as this proposal develops that it follows the GDPR in respecting privacy while allowing data processing for legitimate reasons. Brexit adds another level of uncertainty to the mix. The GDPR will come into effect 10 months before the UK leaves the European Union, and thus the UK will need to be fully compliant with the Regulation. The UK Government recently released a statement of intent to continue to comply with the regime and translate the GDPR into UK law. However, whether the UK regime will be determined equivalent at the time of departure from the EU is uncertain. Financial services firms would benefit from greater certainty surrounding this point. There is no doubt that additional conflicting issues and concerns with the GDPR are likely to emerge as the industry works out how to implement the regulation, transparency and consultation with industry will be essential as the European Data Protection Board (EDPB) finalises its guidelines for implementing the GDPR. A further example of a pending regulation which must be clarified in relation to the GDPR, the European Commission’s proposal for an ePrivacy Regulation, also has the potential to present challenges. It is essential that as this proposal develops that it follows the GDPR in respecting privacy while allowing data processing for legitimate reasons. Brexit adds another level of uncertainty to the mix. The GDPR will come into effect 10 months before the UK leaves the European Union, and thus the UK will need to be fully compliant with the Regulation. The UK Government recently released a statement of intent to continue to comply with the regime and translate the GDPR into UK law. However, whether the UK regime will be determined equivalent at the time of departure from the EU is uncertain. Financial services firms would benefit from greater certainty surrounding this point. There is no doubt that additional conflicting issues and concerns with the GDPR are likely to emerge as the industry works out how to implement the regulation, transparency and consultation with industry will be essential as the European Data Protection Board (EDPB) finalises its guidelines for implementing the GDPR. Today’s regulatory implementation, tomorrow’s opportunity Providing clarity on the points made above would ease implementation of the GDPR and would add value to firms who would benefit from early compliance with the regulation. The GDPR is not the only new regulation which is aimed regulating the evolving financial services industry. Another new EU directive, the Payment Services Directive (PSDII), is intended to improve outcomes for consumers by requiring financial services firms to open their data and payments infrastructure to promote increased competition. PSDII, which will apply from January 2018, actually provides an opportunity for the financial services industry. This directive should allow innovative banks to improve their customer experience, increasing value to corporate customers. At first, the aims of PSDII could appear to be contradictory to the GDPR, but they are not in conflict with one another, as the treatment of data under PSDII is still subject to GDPR requirements. Clearly early compliance with the GDPR presents an opportunity. Change doesn’t stop here: regulating for future success The GDPR will not be the last regulatory change necessary to meet the needs of Europe’s changing digital economy. The financial services industry, along with the technology providers that service it, continuously innovate, and regulators must keep pace with this change, providing European consumers with safety and new services as well. Regulators need not face this challenge alone; the financial services industry can provide consultative expertise so that policy outcomes strike the right balance between innovation and protection. One notable example, where regulators have successfully sought industry input, is the European Commission’s consultation paper on ‘Fintech: a more competitive and innovated financial sector.’ This sort of approach to regulatory change marks a significant step for policymakers and the industry, allowing them to explore together how technology can continue to support a stable, competitive and innovative role for capital markets. The brave new world of data presents many challenges for the financial services industry and regulators alike, but if the right approach to regulating technological change is taken, Europe will continue to be a globally leading centre in the future. This article was originally published by EurActiv on 6 September 2017

Europe has 23m small and medium-sized enterprises. They are the backbone of the European economy, accounting for 99pc of all companies in the EU and 67pc of employment. That amounts to approximately 58pc of gross value added in the non-financial economy.And yet, as a Boston Consulting Group (BCG) report commissioned by AFME reveals, however much disruption Brexit may cause, it won’t necessarily be big business which suffers the most, but ratherthe small and medium businesses who will be propping up our post-Brexit economy. This applies to SMEs in the rest of the EU as well as in the UK.We came to this conclusion after analysing how companies and investors in the current EU28 could be affected by the impact of a hard Brexit on the wholesale banking services they consume. BCG’s researchers spoke to more than 62 chief executives and treasurers of corporates, investment firms and SMEs, along with 10 industry associations which represent a wide range of companies and sectors. What was striking from the responses was that SMEs could find themselves the hardest hit unless they take action now. There are three reasons for this.First, the banking-related effects of a hard Brexit could lead to a higher cost of capital for SMEs and more restricted access to wholesale banking services. While the exact figures will vary, there is a real risk of fragmentation unless industry and policymakers can work together for a solution that benefits EU businesses and consumers.Secondly, while the scale and bargaining power of individual large corporates and investors mean that many of them would be able to navigate the wholesale banking impacts of a hard Brexit, SMEs would undoubtedly find it harder. That’s because not only are SMEs more likely to find their access to wholesale banking services restricted, but the cost of making adjustments – such as forming new banking relationships – can be material for them. SMEs tend to choose a local bank and stay loyal to them. In fact, 60pc of SMEs currently only use one bank for their business banking because of higher costs and greater difficulty than large corporates when building new relationships.In the event a local UK bank chooses notto establish a subsidiary in the EU27, or that a hard Brexit results in banks having to change their services for existing customers, developinga new banking relationshipcould be time-consuming, taking anywhere from six months to replicate what SMEs currently do in the UK.Thirdly – and crucially given the above – 55pc of the SME participants who commented in the report admitted that they had made no plans so far for Brexit. Worryingly, the assumption from corporates – small and large – is that their banks will continue to provide financing and be there in the same guise. Some 44pc of the SMEs interviewed expect their banks to absorb any additional costs caused by Brexit.However, this may be overly optimistic. Theloss of passportingmay cause some banks operating through a UK banking licence to withdraw from the EU27, reducing the capital available to companies and investors. Other banks are likely to use subsidiaries to maintain cross-border operations, but this could be costly. We cannot presume that the plumbing underpinning the banking system will continue to function seamlessly. The most likely result is that the European financial and banking markets become less integrated – ultimately limiting access to markets and raising costs.To mitigate such adverse effects of Brexit on end users, our interviewees made a number of suggestions. These included a transition period to give banks and their clients time to adjust, as well as “grandfathering” of existing contracts in order to minimise the legal and operational disruption to banks and their clients.Above all, businesses told us that they want the status quo preserved. The majority hope Brexit negotiations will result in similar levels of access to and costs of wholesale banking services as they have today. They feel strongly that the political negotiations should keep in mind the impact of Brexit on real economy end users. The continued stability of pan-European capital markets and future economic growth depend on it.This article was originally published byThe Telegraph on 4 April 2017

The European Post-Trade environment has changed significantly in the last decade. Competition, innovation and consolidation have been the main drivers for this development, together with the harmonisation project undertaken by the European Central Bank as part of its T2S platform. But challenges remain in removing outstanding barriers to safe and efficient post-trade in Europe. Before the 2007-2008 financial crisis, European post-trade reform focused on efficiency gains through voluntary harmonisation and standardisation, aiming to remove the Giovannini Barriers (the barriers identified as preventing efficient EU cross-border clearing and settlement) which date back to 2001. The deluge of regulation, including EMIR and CSDR, has helped but also presented some unintended consequences.While much progress has been made, the post-trade landscape in Europe is still characterised by diversities and fragmentation that cause inefficiency and risk. Some of the issues originate from existing Giovannini Barriers or new barriers that have emerged due to new products and technologies.The European Commission’s Capital Markets Union (CMU) programme therefore provides a good opportunity to dismantle these remaining barriers. Safe, integrated, harmonised and efficient post trading systems are an enabling element in the context of the CMU Action Plan, i.e. creating more opportunities for investors, connecting financing to the real economy, fostering a stronger and more resilient financial system, deepening financial integration and increasing competition.But the challenges must also be recognised in legislation so that policymakers’ support can be translated into meaningful, co-ordinated action on the ground. This includes the need to harmonise operational processes, changes at market infrastructure level and regulatory requirements. Much of the low-hanging fruit has been picked and we are now left with the potentially thorny areas which require public sector intervention.As such, AFME supports the following barriers to be prioritised: Tax: the effective implementation of simplified withholding tax relief procedures. Asset Servicing: the comprehensive implementation of the market standards for corporate actions processing and for general meetings in all markets. Legal: securities law reform that reduces and eliminates operationally relevant legal uncertainties, including an insolvency framework that comprises financial markets intermediaries, enforceable close-out netting and internationally harmonised conflict of law rules. We welcome the latest consultation by the European Commission on this topic. Reporting: alignment and harmonisation of regulatory reporting requirements at European and national levels. Access rights: removal of legal and regulatory obstacles that prevent end investors from being able to access the services they need, and prevent intermediaries from providing those services. Asset segregation: consistent and coherent regulation that is characterised by a balance between safety and efficiency. The safety and efficiency of European post-trade markets could be further improved by a joint effort undertaken by governments, regulators and market participants in a staged approach. Helpfully, the European Post Trade Forum (EPTF), set up by the European Commission in early 2016 to support it in the CMU project, provides the basis for a successful and targeted cooperation between public authorities and the private sector. The EPTF’s objective is to review the developments in post-trading in order to promote more efficient and resilient markets in the EU. As the industry seeks to further integrate Europe’s capital markets and move toward a more stable financial market in 2017, it will be important to encourage the adoption of more common European Union standards. Later this year, as a result of the EPTF work, we expect to see further proposals from the Commission. To achieve a low-risk and low-cost post trading environment in Europe, infrastructure service providers must compete in a harmonised operational, legal and regulatory environment offering safe, innovative and low cost services to all users on a non-discriminatory basis. What Europe needs is a clear vision for its post-trading landscape and a coherent strategy for delivering this goal.On 18 May 2017, AFME will be hosting the tenth edition of its annual Post-Trade Conference in London, click here for more information and to register.This article was originally published by Global Investor Group on 27 April 2017

Over the past 25 years, the European Single Market has helped to transform Europe’s economies, creating jobs and raising incomes across the continent. From the outset, the Single Market project promoted closer economic integration and specialisation within key industries to deliver its gains. For the UK, the prospect of Brexit will reverse this dynamic over time. And while the continuing EU Member States should generally see less impact, some sectors where the UK is currently a leading producer will inevitably suffer the knock-on effects. The capital markets are an obvious example. By some estimates, two-thirds of EU capital markets business is conducted in the UK. This pattern of activity has developed over decades and there is a growing realisation that the market capacity currently based in the UK cannot be quickly rebuilt in neighbouring financial centres. The European Commission has made clear that Brexit adds to the urgency of building a Capital Markets Union (CMU). However, it is equally clear that CMU is a long-term project and that existing capacity must be managed carefully while capital markets continue to develop in the EU27. Brexit is not a zero-sum game for Europe’s capital markets. Two essential public goods, financial stability and market efficiency, are at stake. However, safeguarding these aims during Brexit will not be easy. Given the fixed two-year timescale under Article 50, market participants are already having to make key decisions amid deep uncertainty. The actions of wholesale banks, their clients and supervisory authorities merit close attention and support. Each group faces important decisions, which in turn shape the choices available to other parties. For wholesale banks, adapting to Brexit may involve establishing or expanding entities in the EU27 or the UK; obtaining licensing and approvals; putting in place capital and funding; finding people and premises; building out technology; and integrating with market infrastructure. The transformation process will be particularly stretching for banks which currently use the UK as a European hub. Today these banks account for more than half of all capital markets revenue in the EU. Brexit will require supervisory capacity to follow a changing pattern of capital markets and banking business. For some authorities, this will mean new firms and new risks to supervise and a far higher workload overall. Collectively, Europe’s supervisors will face a major challenge to ensure that sufficient resources and expertise are in place to provide timely approvals and maintain rigorous, common regulatory standards. The European Central Bank (ECB), as the single supervisor of banking union, is already preparing. So too are the European Securities and Markets Authority and national regulators. Brexit also brings uncertainty for corporates and investors who depend on wholesale banking services, particularly those holding (or planning to hold) long-dated contracts such as swaps, loans and credit lines. The risk is that after Brexit, a bank which had signed a contract could no longer lawfully perform the services it had promised. Moreover, corporates may be uncertain whether they can or should rely on a single European hub for capital raising and advisory services. Given the scale and complexity of the practical challenges ahead, AFME – as the voice of Europe’s capital markets – is calling on policymakers to help guide the Brexit implementation process to an orderly outcome. The support that is needed is effective coordination, regulatory flexibility and enough time. With close coordination, policymakers can provide certainty on key questions including how regulations will be applied and the range of interim business models that will be acceptable post-Brexit. Helpfully, the ECB is starting to communicate its expectations to the market on the latter point. We would encourage supervisors to build up and pool resources and to intensify information sharing during the planning and implementation phases of Brexit. Flexibility also matters. For example, some national regulators are already seeking to accelerate their licensing approval processes or taking account of prior approvals from the UK and EU27 authorities for risk models. A further aspect requiring flexibility will be continuity of contracts. For example, it will be impractical for firms to fully unwind swaps books held in UK entities or to novate all trades to a new EU-based entity. It will be much safer to find a way to continue through existing contracts. The final essential requirement is time. Transformation programmes for wholesale banks are long and complex. A recent study by PwC, commissioned by AFME, suggests that affected banks will require three further years after the negotiations to fully adapt to Brexit. Phased implementation of Brexit will be essential. And the sooner that phasing-in is confirmed then the smoother the adjustment process will be. Industry will do all it can to continue to serve clients and keep the capital markets working well. However, with the scale of the challenge ahead, we will need the support and guidance of Europe’s politicians and policymakers to help ensure success. This opinion originally appeared in Börsen-Zeitung on 5 April 2017

In February 2015, the EU embarked on one of its most ambitious initiatives to date: The Capital Markets Union or “CMU”. The main aim? Unlocking funding for Europe’s much-needed growth. Two years on from the launch of this flagship programme and some are beginning to sow seeds of doubt that it may not manage to be completed, given the speed of the progress made and particularly following the UK’s decision to leave the EU.But this makes it even more important to complete the CMU project. Indeed, the European Commission is now gearing up to announce the findings of its mid-term review. And while there is still much work to do, there is one crucial issue which especially requires the project’s momentum to be maintained: addressing Europe’s lack of risk capital.Among the 23 million small and medium-sized enterprises (SMEs) in Europe, only a fraction are high-growth companies, quick to grow, invest, create jobs and become leaders in their respective markets. For example, in Belgium, young small firms represent 17% of total employment, but 41% of total job creation, according to Belgium’s Federal Planning Bureau. Yet, start-ups, scale-ups and high growth companies struggle to access the risk capital they need to survive and grow and that’s a problem. While some sources of capital, such as crowdfunding and business angels, are becoming more accessible, the crux of the problem remains the “entrepreneurship gap” between the EU and other large economic blocks, notably the US. If companies do not have the understanding of, or are unwilling to, tap capital markets to fund their growth, it will be difficult for the EU economy to break out of its current sluggish pattern.Pinch pointsAs AFME shows in a new report entitled The Shortage of Risk Capital for Europe’s High Growth Businesses, one area where Europe is lagging far behind the US and Asia is in terms of the number and value of unicorns. (Not the mythical variety, but high-growth, venture capital-backed companies with valuations of more than $1bn.) For example, Uber ¬¬- the most valuable venture-backed private company in the US - is worth $68 billion while Europe’s most valuable unicorn, Spotify, is worth just $8.5 billion, according to Dow Jones VentureSource.The EU’s fragmented internal market is partly to blame. The sheer complexity of different rules, taxes and standards across the 28 Member States hamper young businesses seeking to scale up across borders. Establishing a single EU framework for start-ups, with standardised rules across countries, would help to remove this barrier.Fragmentation also occurs within the business environment in Europe. According to the European Commission’s Regional Innovation Scoreboard, Southern Germany, Southern England and the Nordic regions, as well as Paris and Berlin are among the most innovative locations while Southern Europe and Central Eastern Europe continue to heavily rely on more traditional bank finance. While many existing SMEs use bank loans as an appropriate source of financing, high-growth or innovative businesses have different needs and require risk capital to grow.The high-growth period is a critical time where companies burn cash and have to find the capital to invest in research, the numerous organisational changes, marketing and staff numbers required to sustain the growth.But fragmentation is not the only challenge in Europe. There is a lack of awareness among Europe’s entrepreneurs and “family and friend” investors about the benefits of risk capital at the seed stage of development. Although many entrepreneurs turn to bank loans or take loans from family and friends when they need cash, in many cases risk capital in the form of equity or quasi-equity is more suitable for young businesses without dependable cash flows or assets. But the willingness in Europe to use these products is significantly different to the US. As a result, many equity products in Europe are underused. The development of private individual investments from so-called business angels or crowdfunders would help young businesses to get the necessary capacity for building their products at the earliest stage of investments and at the same time contribute to an entrepreneurial culture of private individuals. Institutional investors could also be put to work by scaling-up the venture capital industry which is a pre-requisite for the development of high-growth companies. VC funds do not deploy enough investments to businesses that desperately need this money, especially in later stages where important investments need to be done in their value chain and to hire, develop perfected products and expand internationally. Other financing roads could be investigated. Venture debt, for example, is relatively new but poorly understood financing method. Venture debt provides customised debt financing for young and innovative venture-backed companies as an interim financing method to grow operations before having another venture capital financing round. As such, promoting and increasing awareness of this financing route could significantly help the growth of Europe’s innovative businesses.The bottom line is start-ups with long-term prospects, a relevant business plan and management team should seek large amounts of start-up funds - ideally equity or quasi-equity– to really boost their chances of success.Building on recent initiativesThe CMU Action Plan states that “so far, external equity funding for SMEs is rather limited in Europe”. EU policymakers are undoubtedly aware of the challenges they face and have their work cut out. In fact, there have been many constructive initiatives to increase access to finance for SMEs. Recent examples are the launch the Start-Up and Scale-Up initiative and the expansion of the Investment Plan for Europe – which also provides significant support in terms of risk capital via the European Investment Fund (EIF) - unlocking €75bn for SMEs, the review of the Prospectus Regulation to improve larger SMEs’ access to capital markets, the review of the securitisation framework and the launch of the European Venture Capital Funds (EuVECA) regulation.But further flagship initiatives for unlocking risk capital across Europe, covering the various investment stages and sectors are much-needed. A good starting point could be for policymakers to create a high-level group, including all the stakeholders involved in pre-IPO finance to review all the different challenges and opportunities surrounding the funding escalator.If Europe’s high growth businesses are going to be competitive on the global stage, momentum on the Capital Markets Union project has to be a priority. A version of this op-ed appeared in Handelsblatt on 7 March 2017. AFME’s report, “The Shortage of Risk Capital for Europe’s High Growth Businesses” can be downloaded here

Today (13 June 2016) sees securitisation debated in the European Parliament for the first time since 2009, during the aftermath of the financial crisis. On the agenda are the European Commission’s proposals to implement “simple transparent and standardised” – or "STS" – securitisation, which aim to make securitisation an effective funding channel for the European economy. Securitisation has certainly received a bad rap over the years. A recent letter to the European Parliament from a group of academics goes to show just how poorly understood asset-backed securities continue to be and that the memory of the financial crash pervades in the institutional memory. Yet, in its simplest form, securitisation is no more than a financing and capital management tool, with the positive potential to boost both credit and growth. Unlike in the US sub-prime market, securitisation in Europe has performed well, and now the new STS proposals provide investors with even greater protections against the mistakes of the past. Disappointingly, it now looks like some legislators and commentators continue to fight old battles which will add further delay in passing STS into law. This is despite EU national governments quickly agreeing on the proposals late last year. While it is understandable that some MEPs may be cautious, given securitisation’s association with US sub-prime mortgages, are such distractions justified? Lessons learned almost a decade on from the crisis Europe today already has the toughest regime in the world for regulating securitisation. Since 2011 we have had strong regulations which have implemented the lessons of the financial crisis: the risk retention “skin in the game” rules, as well as requirements for transparency and disclosure to enable investors to better undertake due diligence. No other forms of fixed income investment – many much riskier than AAA-rated securitisations – are subject to these special requirements. European securitisation has also performed extremely well through and since the crisis. Unlike US residential mortgage-backed securities (“RMBS”) which suffered a 25.8% default rate from 2007 to the end of 2015, most European asset classes experienced only tiny levels of defaults: only 0.16% over the same period for European RMBS. This is acknowledged by many regulators and policymakers, and even by many opponents of securitisation’s revival. Securitisation needs to be restored to health not for its own sake, but as a means to an end: Europe is crying out for growth and the longer the delay the longer it will be before securitisation can play its part by providing incremental funding to the real economy, risk transfer out of our banking system and wider and deeper capital markets creating high quality and yield-rich investment opportunities. Europe stands to benefit most The benefits of reviving securitisation in Europe are clear. Securitisation acts as a bridge from balance sheets to the capital markets and helps to transform illiquid assets into liquid, transferable securities. For SMEs, securitisation can help provide finance at all stages of the supply chain. Not only direct loans to SMEs but also leases, trade receivables and sales finance lending all support the SME sector. Also, by helping banks transfer risk, securitisation frees up space on bank balance sheets for further lending, including to SMEs. Securitisation of all asset types therefore supports economic activity, both directly and indirectly. But the longer it takes to adopt the STS framework, the worse the problem will become. European securitisation issuance has already fallen from €400bn in 2007 to just over €80bn in 2015. High capital charges and harsh treatment under liquidity rules are at the root of this bleak picture – with costs for holding securitisation paper several times higher than other similarly-rated products. As a result, new issuance levels continue to be low, participants are exiting the market and each month brings news of further losses of institutional, human and intellectual capital. As the market shrinks, it is harder and harder for market participants, and especially underwriters and investors, to justify the investment they need to maintain to play a full and prudent role in the securitisation market – especially when bank structural reform and other regulatory changes are also hitting the bottom line of banks. Postponing STS will only intensify these problems. As Commissioner Jonathan Hill said, “Every extra day that this proposal takes to pass into law is one more day of a missed opportunity for growth.” The road ahead Our task in the coming months will be to continue to challenge the remaining negative perceptions surrounding securitisation, and continue to explain, as clearly as we can, the benefits it provides to Europe’s real economy: incremental funding, risk transfer to support and strengthen our banks and a bridge to wider and deeper capital markets. We are making good progress. Most European policymakers and regulators strongly agree that securitisation should be a key component of the Capital Markets Union initiative. For those who remain cautious, we urge them to take reassurance from the strong performance of European securitisation through and since the crisis, and the robust framework of regulation already in place for many years. The Commission’s proposals for STS securitisation provide yet more protection, and while issues of detail need to be worked through there is simply no evidence to justify not moving forward in a positive spirit. Unjustified distractions which create new barriers to STS securitisation will serve only to weaken Europe’s capital markets and restrict their ability to help restore growth throughout the continent. For the sake of Europe, now is the time for action, not delay.