Latest EU Presidency Compromise Text on Benchmark Regulation

Presidency of the Council of the EU published its latest compromise proposal on the proposed Regulation on indices used as benchmarks in financial instruments and financial contracts on 8th December.

There are many interesting additions, too many to summarise, but to whet your appetite consider these:

  • The text foresees that some benchmarks may not continue once the regulation comes into force and thus some long term contracts will require transitional provisions to survive.
  • ‘Transparency of methodology’ does not mean that the formula must be published
  • The term ‘critical benchmarks’ should be defined according to the value of the financial instruments and funds referencing the benchmark across all indices (think about the reporting implications!).

It will be discussed at a meeting on 12 December 2014. Find it here.

Bank Regulation squarely hitting the bottom line for NFCs – Updated

The European Banking Authority (EBA) is meeting in London today and will review the Credit Valuation Adjustment (CVA) capital charge exemption for exposure non-European corporates that Europe granted its banks in 2013.  The exemption has the effect of making it cheaper for banks to trade derivatives with corporates, but is at odds with the Basel III text and the practice in the US.  This exemption currently applies to trades with  all NFCs, European or not, but the European Capital Requirements Regulation (CRR) insists on a review for non-European counterparties specifically.   NFC treasurers and CFOs should watch carefully to see whether the EBA wants to hold the status quo, penalise non-European corporates, or even follow Basel III and penalise all NFCs!

Update 8th December: The EBA went for the nuclear option on 5th December and recommended removing the CVA exemption for both European and third country NFCs. Better start lobbying the European Commission, could be money well spent!

MiFID2 Jigsaw – article in Energy Risk

Useful summary on the actual and potential impact of MiFID2 on commodity trading firms by Stella Farringdon of Energy Risk today.  MiFID2 changes the definition of ‘Financial Instrument’ which affects not only which business is regulated under MiFID itself, but also has a cascading impact on other European legislation like EMIR and CRDIV.  There is a lot of detail still to emerge in the definitions, exemptions and application of the rules, but if you need a place to start, here it is.

Surveillance Whack-a-Mole


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Leader Change Thyself

Leo Tolstoy, the Russian novelist, famously wrote, “Everyone thinks of changing the world, but no one thinks of changing himself.”  This is a good maxim to remember when considering how to respond to the next wave of compliance challenges.  The alternative may be to find yourself playing what Amazon sells as a ‘fast and fun pre-school game’.

Why do Anything?

If public scandals are insufficient call to action,  European Union regulatory edicts like the Market Abuse Regulation (MAR) and the Regulation on Energy Market Integrity and Transparency (REMIT) are bringing surveillance still closer to the fore for capital markets and energy traders alike.  The industry is investing billions in reporting transactions to regulators under EMIR and, despite the undoubted data quality issues, the experience of MiFID suggests that it won’t be all too long before the regulators start levying small fines for lack of operational reporting compliance and, shortly after that, larger fines for malfeasance in insider trading and market abuse, based on the new transparency.  Fines are already staggering on both sides of the Atlantic so there is plenty of justification for action.

Technologists, lawyers and consultants are circling the scene anticipating rich pickings in programme management, data integration, and exciting applications for new technologies like Big Data, natural language search and analytics.

It does not stop at fines however, indeed Mark Carney, Governor of the Bank of England said “The repeated nature of these fines demonstrates that financial penalties alone are not sufficient to address the issues raised. Fundamental change is needed to institutional culture, to compensation arrangements and to markets.” See here.  For front office executives and compliance officers this new focus of regulators on leadership, culture and accountability raises the personal stakes involved.  Leaders are expected to know what their organisation is doing, how it does business, and to ensure dealings are fair and transparent as well as, of course, legal.

There is a Problem

In my discussions with various compliance officers and technology managers the picture is however confused and there is a lack of clear direction. There are several barriers to decisive action.

On one hand is a degree of procrastination.  I hear that ‘It is not explicitly clear in REMIT that participants need an internal capability’, ‘I think the regulators have bigger fish to fry so I will wait’, ‘The MAR Level 2 text is not final, and the inclusion of the word “automated” is in review’. This is not altogether unreasonable, such reasoning served participants fairly well for EMIR Transaction Reporting, which turned out to be much delayed and finally easier than many feared, although many are also now experiencing the pain of living with last-minute, quick-fix solutions and industry utilities whose solutions are less robust than had been hoped for, leaving staff taxed with manual and uncertain processes.

On the other hand there is a real question of prioritisation.  Financial services firms are certainly under attack from many sides; for benchmark abuse in the world of interest rates and FX, but also for miss-selling of products, be it interest rate hedging products, predatory consumer lending, money laundering and issues with algorithmic trading strategies and tactics.  At what point does your compliance and control strategy begin to resemble a game of whack-a-mole?

The picture is hardly clearer for oil and gas firms, mining, and energy utilities.  Country and person-specific sanctions, embargoes,  dealings with foreign government officials, extra territorial bribery and corrupt practices legislation all reach into the same budget pockets as MAR and REMIT, and are each deserving, involving potential personal sanctions for executives as well as crippling potential financial sanctions.

When and Where Should you Start?

It was refreshing this week to meet with a firm whose approach was holistic and based on first principles of good business practice in addition to simply box-ticking against what I call the ‘N Commandments’ (‘thou shalt not…’). This would seem likely to serve well in the face of the inevitable uncertainty and changing priorities, and offer some flexibility by way of varying budget over a multi-year investment.

Senior executives sponsorship is not only a critical hurdle to sanctioning budget to start, it is crucial to the success of the wider programme for the reasons Mark Carney outlined.  How many organisations can muster the budget to start the journey soon is a question of how great are the challenges of institutional culture.  If management is ready, it is safe to start.  If not, you could find yourself playing that ‘fast and fun pre-school game’.

Welcome to Bramley Partners!

Welcome to our new website.  We’ll be using it to help potential and current customers keep in touch with the services we offer and the thoughts that we have on industry trends relevant to trading in both capital markets and the world of commodities, particularly energy trading and risk management.  We hope you find what we have to say enjoyable and stimulating, and welcome you to respond with your comments and feedback.