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A European single market in
banking
Chryssa Papathanassiou Securities Settlement Systems Policy Division
Directorate General Payment Systems and Market Infrastructure
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Overview
1. Lamfalussy Process
-- banking; and
-- payment and settlement systems
2. Focus on main elements for smooth functioning of payment and securities clearing and settlement systems
-- Some examples of the EU choices
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Main elements on banking
1. Regulatory Convergence = Legislation is developed by means of the
-- Lamfalussy Process (2001)
---Level 1 measures in FSAP
---Level 2 with 3 regulatory committees
2. Supervisory Convergence
-- Consistent and equivalent transposition of Levels 1 and 2 by Level 3
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Financial Services Action Plan: 1999
Level 1: Basic policy choices consisting of a Commission proposal submitted to the Council and the European Parliament for adoption by co-decision
Level 2: Commission drafts legislation on detailed technical measures prepared by regulatory committees
New Lamfalussy Process
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New Lamfalussy Process
Level 3: enhanced cooperation and networking among EU supervisors/regulators
Level 4: coordinated enforcement, by the Commission to enforce Community law, underpinned by enhanced cooperation between Member States and their regulatory authorities. Not dealt with in this presentation.
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Key measures of the FSAP - Level 1
1. Banking Supervision- Amendment of capital framework for banks and
investment firms (by 31.12.2006) proposed by the Commission on 14.7.2004. Following the Lamfalussy process. Technical rules under Level 2.
- Re-organisation and winding up of credit institutions (2001/24)
- Pursuit and prudential supervision of e-money (2000/46)
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Cross-sectoral issues:
Directive 2002/87/EC on supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate. Should be implemented by Member States by August 2004.
--Prudential requirements for financial groups with insurance plus at least one of the two, banking and securities.
--Supervisory cooperation.
Key measures of the FSAP - Level 1
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2. Payment/settlement systems- Commission Communication on clearing and
settlement
Eurosystem responded positively- Directive on financial collateral arrangements- Commission Communication on single market for
payments
Key measures of the FSAP - Level 1
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Level 2
The Commission and Member States experts agree on Level 2 legislation for technical measures
--Committees assist the Commission in adoption of technical details (e.g. Directives on Markets in Financial Instruments, Market Abuse, Transparency). This is the so-called comitology procedure.
--ECB has an observer status
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Lamfalussy Approach: the new organisational structure for level 2 and 3
Banking European Banking Committee (EBC)
Committee of European Banking Supervisors (CEBS)
Securities/investment funds
European Securities Committee
(ESC)
Regulatory Committees
(High-level representatives
of Member States)
Committee of European Securities Regulators
(CESR)
Supervisory Committees
(Representatives
of supervisors/regulators)
European Insurance and Occupational Pensions Committee
Insurance and pension funds
Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS)
Financial conglomerates
European Financial Conglomerates Committee
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Financial Supervision : Level 3
Supervisory convergence
Level 1 and 2 legislation is transposed consistently into national laws with the help of =>
Committees (CEBS, CESR)
-- which promote consistent implementation of EU Directives at the national level;
-- cooperate and exchange information at normal times and in crises.
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Level 3
Examples:
-CEBS: expected consistent implementation of Basle II (pillar 2 of the framework and validation of banks’ internal ratings-based IRB approaches).
-ESCB/CESR standards for securities clearing and settlement in the EU
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I. Main elements on payment/settlement systems
II. The case of insolvency
III. Contractual and statutory protection
IV. Examples of the EU choices
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I. Main elements for payment/settlement systems
Payment systems rely on: licensing of credit institutions and investment
firms that participate in payment and securities settlement systems;
enforceability of agreements establishing rights and obligations of system operators, participants and customers of banks that participate in a payment system;
enforceability of netting and finality when there is an insolvency;
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banking and central banking law; final settlement and insolvency law; laws governing collateral arrangements; laws supporting electronic processing/New
technologies (e-money); legal framework of the payment system should be
evaluated in other relevant jurisdictions as well.
I. Main elements for payment/settlement systems
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Securities Settlement Systems rely on: laws and rules supporting holding, transfer,
pledging and lending of securities;protection of customer assets against custodian’s
insolvency; immobilisation or dematerialisation; enforceability of netting, finality, securities
lending, Delivery Versus Payment; realisation of collateral;
I. Main elements for payment/settlement systems
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priority of system’s and participants’ claims against collateral posted by a participant;
certainty regarding rights and interests held through a system.
I. Main elements for payment/settlement systems
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Collateral
Netting
Finality
Legal certainty in all relevant jurisdictions for:
I. Main elements for payment/settlement systems
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II. The case of insolvency
Main effect: the pari passu treatment of creditors, i.e. equal treatment of creditors.
As a result, many jurisdictions prohibit set-off after the opening of insolvency. Certain transactions may be reversed if occurred during a time period laid down in the law before the opening of insolvency (“suspect period”).
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II. The case of insolvency
An administrator can perform contracts that are favourable to the bankruptcy estate and set aside others (cherry-picking).
Secured creditors are satisfied first from the security interest; the rest of the bankruptcy estate is divided pro rata among unsecured creditors.
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II. The case of insolvency
Transfers, Netting and Collateral in the framework of systems deviate from the principle of pari passu treatment of creditors in insolvency.
Even if they are provided for in a contract, they cannot be valid and enforceable.
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There is a need for protection from the powers of the insolvency court and administrator.
Because only in this way one can avoid spill-over effects of a participant’s failures being transmitted to other participants (contagion across markets) and, to the extent that these may endanger the stability of financial markets, systemic risk.
II. The case of insolvency
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III. Contractual and statutory protection
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III. Contractual and Statutory Protection
-by drafting contractual provisions (e.g. using master agreements)
and
-by enacting statutory rules ensuring the enforceability of the contractual provisions in the
case of bankruptcy.
How to create legal certainty?
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Statutory protection:
by changing the substantive law itself and
by determining which law applies to rights and obligations in a particular arrangement (provisions of conflicts of law, as opposed to substantive law)
III. Contractual and Statutory Protection
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Abolition of ‘zero-hour rule’:Insolvency proceedings shall not have
retroactive effects on rights and obligations of participants in a system
earlier than the opening of insolvency proceedings
III. Contractual and Statutory Protection
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Validity and enforceability of
collateral arrangements
In case of default, as agreed by the parties, a collateral taker may realise the collateral securities:
by sale or appropriation and by setting off their value
against, or applying it in discharge
of, the relevant financial obligations.
III. Contractual and Statutory Protection
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IV. Examples from the EU legislation
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Consolidated Banking Directive 2000/12/EC Restricts the business of deposit taking to credit
institutions. Financial institutions owned by credit institutions are
free to provide their services in all Member States. No single licence for financial institutions owned by
other entities than credit institutions. Issuing of e-money is restricted to credit institutions,
including e-money institutions (E-money Directive)
IV. Examples from the EU legislation
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IV. Examples from the EU legislation
S e ttle m e n t F in a lity D ire c tive C o lla te ra l D ire c tive
W in d ing U p D ire ctive fo r c re d it in s titu t io ns In so lve ncy R e g u la tion
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R ights in securities as co llate ra l:law o f country w here account,reg is ter, o r C SD are located
(PR IM A ru le )
Inso lvency law o f partic ipant's incorpora tioncannot be contractua lly exc luded because
it is ius cogens =>pub lic in terest o f pari passu trea tm ent o f cred ito rs
R ights and ob liga tions to the system :law that governs the system
Settlement Finality Directive:
minimises conflicts of law
IV. Examples from the EU legislation
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Collateral Directive: protects financial collateral
for certain legal entities (narrower than SFD)
cash
(Art. 2.1(d))
evidenced in writing or equivalent manner
or book entry
(Art. 1.5)
financial instruments (Art. 2. 1 (e)).
IV. Examples from the EU legislation
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Winding Up Directive: Law agreed by the parties in the contract (lex contractus) governs inter alia:
Nettingagreements
(Art. 25)
Set-off(Art. 23)
Repurchase agreements
(Art. 26)
IV. Examples from the EU legislation
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The law of the place where the asset is located (lex rei sitae) governs inter alia:
Securities given as collateral
to a system:
law of the system,the registry or
the location of the securities account
(Prima rule Art. 24)
IV. Examples from the EU legislation