EUU, Alm.del - 2015-16 - Bilag 329: Notat og høringssvar vedr. samlede effekter af den finansielle regulering indført siden finanskrisen

Europaudvalget 2015-16
EUU Alm.del Bilag 329
Offentligt

Jonathan Hill

Commissioner for Financial Stability,

Financial Services and Capital Markets Union

European Commission

MINISTER FOR BUSINESS AND

GROWTH

Slotsholmsgade 10-12

1015 Copenhagen K

Denmark

Dear Commissioner Hill,

Thank you for the opportunity to respond to the consultation on the cumu-

lative effects of financial regulation adopted as a follow-up to the finan-

cial crisis.

Following the financial crisis, rulemaking within financial services has

been conducted at a rapid pace with significant reforms being passed in

all key areas. Denmark has been and continues to be a strong supporter of

these reforms which ensure that we now have a more resilient EU finan-

cial sector.

That being said, I believe it is important that EU legislation strikes the

right balance between risk reduction and enabling growth. Therefore, I

am very supportive of the Commission's review of the cumulative effects

of this regulation which should identify potential unintended consequenc-

es, overlaps and excessive administrative burdens.

In addition to our responses to the specific questions, which you will find

in Annex 1, I should like to point to a few issues of a more general nature.

First, I see a risk that very detailed rules without sufficient room for the

specificities of different banking models might impede the diversity of the

banking models in Europe. A “one-size-fits-all” approach risks undermin-

ing well-functioning national models such as the Danish mortgage credit

system. To this effect, appropriate discretion and national options should

be upheld in the regulation in order to retain the necessary flexibility for

Member States to respond effectively to country-specific circumstances.

Secondly, I firmly believe that unnecessary regulatory burdens should be

avoided. The rules should fit to the relevant financial institutions thus

avoiding e.g. reporting obligations which are not proportionate compared

to the risk profile. Reporting requirements should be limited to need-to-

have instead of nice-to-have and there should be sufficient time for finan-

cial actors to implement new systems.

3 February 2016

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Thirdly, in regard to rules affecting the financing of the economy and

supporting growth, it seems that both existing rules and the expectation

among financial actors of rules to come have an effect on market liquidi-

ty. As banks adapt to new and potential future rules such as the liquidity

coverage ratio (LCR), the leverage ratio and the net stable funding ratio

(NSFR), there is a risk that market liquidity has been and further will be

reduced. The impact on market functioning is important to keep in mind

when assessing the legislation put in place. This aspect needs to be con-

tinuously monitored.

Fourthly, high levels of investor and consumer protection should continue

to be sought. At the same time, however, I would urge that various infor-

mation requirements vis-á-vis consumers are carefully calibrated to fulfil

their purpose of informing consumers succinctly while avoiding infor-

mation overload or disproportionate requirements. Consumer testing of

future rules should be an integral part of the process.

Finally, looking ahead, some of the proposals which the Commission has

indicated will be proposed in the near future should have a clear rationale

and bring added value. New rules should be carefully assessed and should

contribute to financial stability, employment and growth. A large part of

the new regulatory regime has not been fully implemented and we have

yet to see and assess its full effects. We acknowledge that there might be

a need for further risk reduction as will be discussed in the newly estab-

lished Council Ad Hoc Working Group on Strengthening of the Banking

Union. However, the need for new legislative initiatives should be as-

sessed in light of experiences with the current regulatory regime.

As you are aware, and as we discussed when we last met, the Danish gov-

ernment has particular concerns with regard to the Basel standards. The

leverage ratio – if set too high – risks affecting low-risk business models.

It would imply a movement away from risk based capital requirements to

non-risk based. Equally, the NSFR, if not implemented in the right way,

risks not taking into account the low risk embedded in the Danish system.

Also, a revised standardised approach for credit risk and new capital

floors based on the standardised approach risk having a negative effect on

low risk business models. More generally, proposals to implement global

standards in the EU should continue to take into account European speci-

ficities, including well-functioning national business models.

In terms of process, I would stress that rules and requirements to the larg-

est degree possible should be agreed in the text negotiated between the

Council, the Parliament and the Commission (level 1). Only non-essential

issues of technical nature should be delegated to the Commission or the

European Supervisory Authorities (level 2 and 3) in order for the Council

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and the European Parliament to carry out its policy-making and coordi-

nating functions as laid down in the Treaties. The desire for rapid finalisa-

tion of negotiations should not be at the expense of thorough level 1-

regulation

Simultaneously, it is important to take into account that level 2 acts di-

rectly affect implementation of the primary legislation (level 1) and there-

fore enough time should be left for implementation of the primary legisla-

tion to take into account the subsequent level 2 acts. This should be seen

as an important component of the Commission’s better regulation agenda.

I would suggest that this exercise of reviewing the post-crisis regulation

should be followed up in a few years’ time when all rules have been im-

plemented and we have an even clearer picture of their effect. It will be a

continuous work to ensure that we have a set of rules, which support

sound risk taking and best support financial stability, economic growth,

job creation and the Single Market.

As always, I am at your disposal for any questions or comments that you

might have. I look forward to a continuous fruitful dialogue on these is-

sues.

Best regards,

Troels Lund Poulsen

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Annex 1

The text below follows the structure of the Commission consultation with

answers being provided to the questions posed under the various head-

ings of the consultation where relevant from a Danish point of view.

SSUE

1 – U

NNECESSARY REGULATORY CONSTRAINTS ON FINANCING

Example 1: Ensuring financing to small and medium-sized enterpris-

es SMEs

To which Directive(s)/Regulation(s) do you refer in your example?

CRR

Please provide us with an executive summary of your example:

SMEs represent a large part of European businesses and thus play a cru-

cial role in supporting growth and job creation in the EU. When SMEs

experience difficulties accessing finance it has an impact on the European

economy as such. Therefore, it is important that the Commission in cur-

rent and future financial regulation considers the impact on SMEs.

The capital requirements deduction introduced in CRR, Article 501, is

currently under review with an upcoming report from EBA followed by a

report by the Commission before June 28 2016. From a Danish perspec-

tive these analysis on both the evolution of the lending trends and condi-

tions for SMEs as well as the effective riskiness of SME lending is much

welcomed in order to progress the discussion on SME financing.

SSUE

2 – M

ARKET LIQUIDITY

Example 1: Impact on market liquidity of current and new regulation

To which Directive(s)/Regulation(s) do you refer in your example?

CRR/CRD IV

Please provide us with an executive summary of your example:

The introduction of new regulatory measures developed to strengthen the

banking sector's ability to absorb shocks arising from financial and eco-

nomic stress could possibly affect market liquidity.

It is important to stress that the new rules have been introduced in order to

enhance the resilience of banks. Greater resilience at the individual bank

level reduces the risk of system wide shocks and increases financial sta-

bility. All together this leads to better functioning financial markets.

However, the impact on market functioning is important to keep in mind

when assessing the consequences of the new regulation.

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A wide range of regulatory measures can influence market liquidity. Ac-

cording to the financial industry there are signs in the market that the ex-

isting LCR requirement and the adjustment to the expected future lever-

age ratio are reducing market liquidity. There is still no firm evidence

regarding causality, but the first indications seem to point in the direction

that both existing and future rules lead to portfolio shifts and changes in

risk taking. Especially for large banks with many different types of finan-

cial transactions these adjustments are substantial. As banks adapt to the

new rules there is a concern that it may have a negative impact on some

markets where liquidity could be reduced.

For example, the new LCR requirement aims to reduce the liquidity risks

of banks. Therefore, it differentiates between asset classes as some types

of assets are regarded as being more liquid than others. Banks are re-

quired to hold a liquidity buffer and the composition of this should fulfill

specific requirements. As a consequence, banks increasingly prefer hold-

ing assets that have the most favorable treatment in relation to the LCR

requirement and therefore they tend to buy and hold these assets, which in

turn could reduce market liquidity in other assets.

The LCR could also affect the liquidity in the repo market, ie. example 2

below.

Furthermore, the costs of holding inventories in relation to repo activities

might rise due to the leverage ratio requirement being priced in. This is

due to the fact that holding inventories leads to an increase in total assets

which in turn increase the costs associated with the leverage ratio re-

quirement correspondingly. The leverage ratio is calculated by dividing

the Tier 1 capital by total consolidated assets and since size of the repo

book affects the total consolidated assets it therefore affects the required

amount of Tier 1 capital.

A balance between financial stability and market functioning is important

to keep in mind when assessing the consequences of new rules. For a

transitional period some volatility in market liquidity is expected as banks

and financial markets adapt to new requirements. However, when newly

adopted rules are reviewed and new rules considered it should be moni-

tored that they do not have a disproportionately negative impact on finan-

cial markets in the longer term.

Example 2: LCR repo adjustment of the liquidity buffer

To which Directive(s)/ Regulation(s) do you refer in your example?

CRR/CRD IV

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Please provide us with an executive summary of your example:

The LCR has introduced a liquidity buffer in order to ensure that a credit

institution has an adequate stock of unencumbered liquid assets. The LCR

requires the liquidity buffer to be diversified by setting limits on the pro-

portion of different classes of asset which may be included herein. When

calculating these limits, an institution’s current holdings of liquid assets

are adjusted to take into account any changes of asset holdings that will

occur over the coming 30 days, due to already known contractual com-

mitments in the form of secured funding transaction. This is primarily

done to ensure, that institutions cannot circumvent the limits to particular

classes of assets set in the LCR, by entering into short term secured fund-

ing contracts, giving them cash or government bonds in exchange for as-

sets from lower liquidity categories in the LCR. Hence, any assets re-

ceived in secured funding transactions with a maturity of less than 30

days, are removed from the current asset holdings, when the limits to

classes of assets or caps are calculated.

In this calculation, it is implicitly assumed that any cash funds, which an

institution receives from these short term secured funding transactions,

are all placed in the liquidity buffer as cash. Hence when the limits to

classes of assets are set, an amount equivalent to the sum of the cash that

is part of the short term secured funding transactions, which the institu-

tion has entered into, is subtracted from the current holdings of level 1

assets. This is regardless of whether the cash received has actually been

placed in the liquidity buffer as cash.

The different classes of assets, which the short term secured funding

transactions are based on, are however not treated equally. For secured

funding transactions where the collateral exchanged is a level 1 non-

covered bond asset, for example a government bond, the net effect of this

adjustment is zero. This is because these assets are placed in the same

asset class as cash in the LCR buffer, hence both parts of the transaction

are corrected for in the same asset class resulting in a net zero impact.

However, for secured funding transactions based on all other classes of

assets, the effect is negative since the subtraction of cash is not equaled

by the addition of assets in the same class of assets in the liquidity buffer.

Here the collateral is instead added to one of the other asset classes in the

liquidity buffer, or kept out entirely, if the collateral is a not defined as a

liquid asset in the LCR. This calculation means that repo transactions

with level 1 covered bonds and level 1 government bonds are not treated

equally. Hence the short term repo trading with level 1 covered bond col-

lateral is disincentivized. The calculation favors repo markets based pri-

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marily on government bonds over repo markets based primarily on cov-

ered bonds.

In Denmark specifically, covered bonds are used more frequently as repo

collateral than government bonds due to the large and liquid Danish cov-

ered bond market. Moreover, the repo market enhances the market liquid-

ity of the Danish covered bond market by allowing market participants to

not only trade covered bonds outright, but also use these as collateral in

secured financing transactions. Therefore, the adjustment made to the

liquid assets holdings in the LCR for short term repos based on covered

bonds can have a very significant impact on the liquidity buffer of Danish

credit institutions and hence their LCR. As a consequence repos will not

contribute to market liquidity to the same extent as they did before the

implementation of the LCR

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

To avoid this unintended effect, we suggest that:



The calculation of the repo adjustment as defined in article 17 of the

LCR regulation is changed such that only assets, which are actually

placed in the institution’s liquidity buffer, are subtracted if acquired

through short term repo financing.

Example 3 Transparency and quoting obligations MiFIR

To which Directive(s)/ Regulation(s) do you refer in your example?

MiFIR

Please provide us with an executive summary of your example:

Too extensive transparency and quoting obligations in MiFIR risk ham-

pering the secondary markets. As a consequence of MiFIR, market mak-

ers are requested to make their deals public together with the prices they

are willing to pay. In other words, market makers are obliged to expose

their trading interests and positions to such an extent that their market

making activities become unprofitable.

Market makers serve a critical role in financial markets by providing li-

quidity to facilitate market efficiency and ensuring that both sides of the

financing market are able to meet. This is not least the case in smaller

financial markets such as the Danish. Disincentivising market making,

thus, goes against the ambition of increased use of capital markets as a

source of funding.

It is therefore important to ensure that the quoting obligations and pre-

and post-trade transparency requirements for market makers are below

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order and transaction sizes that will expose their trading interests and po-

sitions to a point where their market making activities become unprofita-

ble. Also, market makers should be given enough deferral time to manage

the risks following from their market making activities before the publica-

tion of the relevant transactions.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

To ensure that market liquidity is not hampered, we suggest that:



The thresholds for quoting obligations and pre- and post-trade trans-

parency requirements set in the regulatory technical standard regard-

ing non-equity transparency which is not yet adopted by the Commis-

sion should be lower than those proposed by ESMA in the draft regu-

latory technical standard with the possibility to raise the thresholds on

the basis of annual reviews by ESMA.



The deferral period determined in the regulatory technical standard

regarding the non-equity transparency shall be revised so as to allow

market makers to manage risk better.

SSUE

3 – I

NVESTOR AND CONSUMER PROTECTION

Example 1: Secure relevant information to consumers and retail in-

vestors

To which Directive(s)/ Regulation(s) do you refer in you example?

All directives and regulations obliging financial institutions to disclose

specific information to consumers and retail investors, including the

Packaged Retail Investment and Insurance-based Investment Products

(PRIIPs) regulation, Mortgage Credit Directive (MCD) and UCITS.

Please provide us with an executive summary of your example:

Regulations and directives in the financial area often contain obligations

for financial institutions to disclose specified information to consumers

and investors. MCD, UCITS and PRIIPs are examples of pieces of EU

legislation, which contain such information requirements for consumers

(MCD) and retail investors (PRIIPs/UCITS).

MCD obliges creditors to provide consumers with a standardized infor-

mation sheet (ESIS). The purpose is to give consumers a standardized

document for comparing different loan offers. The form of the ESIS has a

fixed structure with mandatory text and required information in order for

the consumers to compare different products – also across borders.

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PRIIPs requires a person that provides advice on, or sells, a packaged

retail investment and insurance-based investment products (PRIIP) to

provide retail investors with a key information document (KID). This

document is a standardized information sheet with the purpose of ena-

bling retail investors to understand and compare the key features and risks

of the PRIIP. Equally, UCITS contains an obligation for UCITS-

investment funds to provide a key investor information document (KIID)

with the same aim of ensuring a better understanding of the content of the

products and facilitate comparisons between products.

Information requirements according to European legislation have grown

over the last decade. To ensure the best possible consumer protection, it is

important to constantly ensure that rules entitle consumers to get exactly

the information they need. A high level of consumer protection requires

that consumers are well informed in order to enable them to make rational

choices.

However, it is equally important to find the right balance between provid-

ing relevant information to consumers and retail investors while avoid

creating an information overload. Information overload will risk having

the exact opposite effect than the intended, because consumers will ignore

the information in the first place and not try to understand it at all. Regu-

lations and directives with disclosure requirements also place large ad-

ministrative burdens on financial institutions. It is therefore of the utmost

importance that the information requirements in fact meet the needs of

consumers and are used by consumers.

Also, it is important that the documents are not unnecessarily comprehen-

sive. The ESIS e.g. constitutes around 11 pages. Such an excessive and

complicated document might in fact be an obstacle to many consumers.

Finally, it is important that the documents are to the largest degree possi-

ble aligned in order to ensure both the best possible overview and ability

to compare products for retail investors as well as to reduce administra-

tive burdens for issuers (in cases where they overlap). As both the KIID,

the KID as well as the prospectus summary (currently under review in the

Prospect Regulation proposal) serves the same basic purpose, issuers and

investors would benefit from a higher degree of alignment. Such an

alignment should naturally respect the specificity of the different products

and thus the different information needs retail investors might have.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to ensure relevant information to consumers and retail investors

and avoid unnecessary administrative burdens, we suggest that any forth-

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coming revisions or new regulations in consumer and retail investor relat-

ed legislation should:



Include consumer and retail investor testing to ensure that all infor-

mation requirements are fitted to fulfill their purpose, e.g. whether

consumers and retail investors do in fact read the required infor-

mation or only part of it and whether all of the existing information

requirements are needed.



Take into consideration whether the information provided for the

consumer and retail investors could be fully digitized whereby skip-

ping the obligation to provide paper copies.



Evaluate the current information sheets required in accordance with

PRIIPs, UCITS and the upcoming Prospectus Regulation in order to

ensure a greater alignment between these.

As for MCD specifically, we suggest that:



The use of ESIS should be taken into careful examination in order to

review whether the structure and/or content of ESIS provide consum-

ers with optimal information relevant to them or whether improve-

ments to ESIS can be made.

SSUE

4 – P

ROPORTIONALITY

PRESERVING DIVERSITY IN THE

FINANCIAL SECTOR

Example 1: New rules should take into account diversity in business

models

To which Directive(s)/ Regulation(s) do you refer in your example?

CRR/ CRD IV

Please provide us with an executive summary of your example:

From the Commission Communication from 24 November 2015 it is clear

that the Commission is intending to introduce the NSFR, the leverage

ratio and the TLAC in the EU legislative framework. Also, we understand

that a revised standardised approach, new capital floors and a fundamen-

tal review of the trading book might be included in the revision of

CRR/CRD IV as well.

From a Danish perspective, the main priority is to ensure that the initia-

tives on which we have already agreed work. Furthermore, we should not

introduce more legislation before it has been thoroughly analyzed whether

it is needed and if we achieve the right policy mix regarding financial

stability and growth and job creation.

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Furthermore, we cannot commit to implementing Basel Committee pro-

posals such as TLAC, NSFR, leverage ratio, capital floors and review of

the trading book before a proper discussion at EU-level has taken place. It

is important that these issues are discussed through the ordinary EU legis-

lative process in order to get the right calibration of the initiatives. Special

care needs to be taken in regard to European specificities.

In this regard, several of the proposed initiatives from the Basel Commit-

tee can have a severe negative impact on the Danish mortgage credit insti-

tutions.

For an example, the NSFR in the Basel committee’s definition will have

some undesired consequences on specialised business models like Danish

mortgage credit institutions. Following this, we stress the importance of

acknowledging that bonds with embedded extension triggers – such as the

Danish mortgage bonds with a soft bullet structure – are stable funding in

an NSFR perspective. The soft bullet structure of Danish mortgage bonds

ensures funding of the assets for its entire term as the bond will be ex-

tended if it cannot be refinanced under ordinary terms. Therefore we be-

lieve that these bonds are qualified as stable funding as defined in the

Basel NSFR.

In the same vein, as a potential leverage ratio per definition would not

take into account risk, low-risk business models are more likely to be

bound by a leverage ratio if the ratio is set too high. This would entail that

Danish mortgage credit institutions are more likely to be restricted by a

leverage requirement as these institutions have primarily low-risk assets

on their balance sheet. The same problem occurs with the new capital

floors. Depending on the exact implementation of TLAC in EU law, the

TLAC might pose difficulties for Danish mortgage credit institutions as

well, as these institutions are exempted from the MREL in the BRRD.

When discussing these new initiatives at EU level it is important that the

business model of specialised institutions is carefully taken into account.

Example 2: Maintaining different approaches to asset encumbrance

To which Directive(s)/Regulation(s) do you refer in your example?

CRR and BRRD within

Please provide us with an executive summary of your example:

Asset encumbrance is defined differently in various parts of the new

rules. One definition is used in the LCR calculation, while the asset en-

cumbrance reporting (ie. CRR, article 100 and the related implementing

act, (EU) 2015/79) and the BRDD define it in another way.

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Going forward, it is important to maintain the different approaches, which

recognize that different forms of asset encumbrance are relevant in differ-

ent contexts. An asset, which is encumbered in the very broad sense de-

fined in the asset encumbrance reporting framework, is not necessarily

encumbered in a manner that inhibits it from being used to generate li-

quidity, which is the concern of the LCR.

Furthermore, if the Commission should decide to create a requirement

limiting the level of asset encumbrance in credit institutions based on a

very broad definition of encumbrance, it is important to recognize that the

high levels of encumbrance of Danish mortgage credit institutions do not

lead to structural subordination of simple creditors such as depositors, and

hence a limit on asset encumbrance in these cases is not relevant. Danish

mortgage banks use a direct pass through model in financing the mort-

gage loans as they do not take deposits.

SSUE

5 – E

XCESSIVE COMPLIANCE COSTS AND COMPLEXITY

Example 1: Proportional prudential requirements for investment

firms

To which Directive(s)/ Regulation(s) do you refer in your example?

CRR/CRD IV

Please provide us with an executive summary of your example:

There is currently work ongoing in EBA and the Commission assessing

whether the current prudential requirements applicable to investment

firms laid down in CRR/CRD IV are appropriate or whether they should

be modified and if so, how.

The first report has been sent from EBA to the Commission with a rec-

ommendation to simplify the prudential regime for investment firms and

to develop a more proportionate and risk-based regime. Denmark sup-

ports this approach due to the significant differences among investment

firms. This includes size (from 2 employees to a large number of employ-

ees), level of risk exposures the investment firms have (regarding for ex-

ample market and credit risk) and the type of clients (retail clients or more

professional clients).

It is necessary to make a distinction between investment firms, for which

prudential requirements equivalent to the ones in force for credit institu-

tions are necessary (the systemic and “bank-like” investment firms), and

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investment firms, which are neither systemic nor “bank-like”, for which

specific requirements that are more relevant could be developed.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to ensure proportionality, we suggest:



Developing a lighter regime for smaller investment firms including

fewer reporting requirements. Such a regime for smaller investment

firms could amongst other things consist of e.g.:

an exemption from the requirements regarding liquidity in part

six of the CRR,

an exemption for smaller investment firms regarding inclusion of

interim or year-end profits in Common Equity Tier 1 capital

without the prior permission of the competent authority.

Example 2: Proportional reporting obligations

To which Directive(s)/ Regulation(s) do you refer in your example?

EMIR

Please provide us with an executive summary of your example:

EMIR requires that all counterparties, active and inactive, that are in-

volved in a derivative transaction, which has not yet matured, have to

report the details of the transaction to a trade repository in order to allow

for a comprehensive overview of the market and assessing systemic risk

in regard to both CCP-cleared and non-CCP-cleared derivative contracts.

The reporting obligations entail several types of costs. This includes costs

to the Legal Entity Identifier (LEI) -distributor (both a one-time amount

and an ongoing subscription), costs to the entity which performs the re-

porting on behalf of the non-financial counterparty and costs to legal and

economic advice.

For a small non-financial counterparty that has entered into a single con-

tract for hedge reasons and has made this contract before EMIR went into

force and which is not active on the market nor will be active on the mar-

ket (“inactive” non-financial counterparties), the reporting obligation

seems inappropriately burdensome and expensive.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to ensure reporting obligations are not excessive, we suggest that:



The reporting obligations for “inactive” non-financial counterparties

should be optional, as long as the derivative contract is entered into

before EMIR. If the counterparty decides to become active again,

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hence become active after the implementation of EMIR, the counter-

party should be covered by the reporting obligations in EMIR.

Example 3: Requirements should be relevant

To which Directive(s)/Regulation(s) do you refer in your example?

Solvency II

Please provide us with an executive summary of your example:

Parts of Solvency II is unnecessarily complex, and in some areas there is

a mismatch between the stipulated requirements and the ensuing supervi-

sion vis-à-vis the companies and the value added in respect of policyhold-

er protection.

Solvency II contains a revision clause. The focus of such a revision

should be on ensuring the potential of achieving the objectives of the reg-

ulation in a less burdensome way. This could e.g. be done by introducing

opportunities to make use of eased or simpler ways to fulfill require-

ments, e.g. in relation to small or less complex companies. An evaluation

of the administrative burdens for the financial companies would be useful

with a view to the revision.

To this end, we would highlight a few examples: The SCR standard for-

mula as well as the discount rate curve for calculating the technical provi-

sions are unnecessarily complex and a less complex formula and curve

should be considered. The requirements on e.g. internal audit cause diffi-

culties and heavy burdens to small companies and a possibility to make

exemptions based on proportionality could be considered. Finally, report-

ing requirements cause heavy burdens to especially small companies and

a possibility to make exemptions based on proportionality could be con-

sidered

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to avoid excessive compliance requirements and unnecessary

complexity, we suggest an evaluation of at least the following:



The SCR standard formula,



The discount rate curve for calculating the technical provisions,



The requirements on internal audit,



The reporting requirements.

SSUE

6 – R

EPORTING AND DISCLOSURE OBLIGATIONS

Example 1: Clarity of relevance regarding reporting is needed

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To which Directive(s)/ Regulation(s) do you refer in your example?

AIFMD

Please provide us with an executive summary of your example:

According to AIFMD, alternative investment fund managers (AIFMs)

shall regularly report to the competent authorities of their home Member

State. The reporting frequency and the information to be provided are set

out in Annex IV of Regulation 231/2013. The competent authority of the

home Member State shall ensure that the Annex IV reporting is made

available to competent authorities in other relevant Member States, ES-

MA and the ESRB.

Many AIFMs have been struggling with the reporting obligations set out

in Annex IV and how to interpret the specific reporting criteria.

ESMA has provided guidelines regarding the reporting obligations, but

they are not nearly specific enough and do not explain in detail which

information should be reported. Experience shows that without proper

guidelines, the AIFMs find the reporting requirements unclear. This re-

sults in incorrect reporting or simply lack of reporting due to misinterpre-

tation. It is a burden to the AIFMs to achieve the necessary level of un-

derstanding in order to report the correct information to the competent

authorities. This undermines the quality of the reported data and makes it

less useful for analysis of market developments.

AIFMs subject to article 3(d) of AIFMD (sub-threshold AIFMs) are also

subject to reporting obligations set out in Annex IV, although these

AIFMs are not subject to supervision. It seems unnecessarily burdensome

for the sub-threshold AIFMs to be subject to extensive reporting require-

ments since these are not used in any supervisory process.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to use the reported information for analysis, we suggest that:



More specific guidelines regarding the Annex IV-reporting require-

ments are required, so that the AIFMs easily and efficiently can

achieve and file the correct information.



The reporting obligations for sub-threshold AIFM’s should be recon-

sidered and more specific information regarding use of these report-

ing should be available.

Example 2: Better framing of reporting obligations

To which Directive(s)/Regulation(s) do you refer in your example?

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EMIR and MiFIR

Please provide us with an executive summary of your example:

EMIR requires that all counterparties involved in a derivative transaction

have to report the details of the transaction to a trade repository. The re-

porting includes 59 fields of information about the trade. Several of these

fields may be interpreted differently by the different counterparties.

The trade repositories reporting system for EMIR is perceived extensive

and complex. The different interpretations and the extent of the data to be

reported lead to a high degree of unmatched reports from counterparties.

The quality and usability of the received data for the competent authority

is therefore questionable. Consequently, care must be taken to ensure that

future reporting requirements are well framed. This is in particular the

case in relation to MiFID II and MiFIR with regard to the transaction re-

porting and data collection obligations (data related to transparency and

best execution).

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to ensure more proportionate reporting obligations, we suggest

that:



The fields to be reported in EMIR, article 9, and MIFIR, article 22,

26 and 27 should not be too comprehensive and have a clear defini-

tion, both regarding the reporting format and which details to be re-

ported, so it is possible to harmonize and aggregate data.



The competent authorities and ESMA should develop systems that

can receive the data, and the industry should have time to test against

this system.

Example 3: Streamlining, and ensuring the relevance of reporting

requirements

To which Directive(s)/ Regulation(s) do you refer in your example?

EMIR and MiFIR/MiFID II

Please provide us with an executive summary of your example:

Under EMIR, the set-up and specification of trade reporting have in many

cases been finalised late in the law making process leaving a limited

amount of time for the industry to implement the changes needed. Also,

the guidance provided to understand the trade reporting regime and tech-

nical details on how to fill in different fields have been accompanied by

frequent changes and additions. For the industry, besides the initial cost of

introducing a new reporting system, there is an extra cost incurred by fre-

quent changes to the system.

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There is a risk that similar problems will arise under MiFIR/MiFID II

with regard to the collection of data for the purposes of transaction report-

ing, transparency and best execution. The amount of fields to be reported

are very extensive and the time available for the industry to implement

the changes short. Also, ESMA and the competent authorities have to

develop complex systems that can receive the data and these systems have

to be tested. This could lead to challenges similar to the ones under EMIR

with frequent changes and short deadlines to be met and expensive and

complex systems where the quality and usability of the received data are

questionable.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order ensure that reporting requirements are relevant and proportionate,

we suggest that as any new rules and legislation should be led by the fol-

lowing guidance principles:



The reporting requirements for the relevant financial actors in the EU

should be limited to need-to-have instead of nice-to-have (at level 1, 2

and 3),



The reporting requirements should be less burdensome with fewer and

less complex data points to fill in,



The industry should be given sufficient time for the implementation

process,



There should be a quality and relevance check of the proposed fields

by the industry and authorities in order to reduce the number of sub-

sequent changes/additions.

Example 4: Avoiding excessive reporting requirements on remunera-

tion

To which Directive(s)/ Regulation(s) do you refer in your example?

CRR/CRD IV

Please provide us with an executive summary of your example:

CRD IV introduced a new remuneration regime which included compre-

hensive reporting requirements. At this point it is still too early to assess

the impacts, costs and benefits of the provisions.

We have not yet seen the full potential and consequences of the provi-

sions provided by the directive. Consequently the Commission consulta-

tion on the remuneration rules recently finalised were perhaps premature.

That being said, we generally believe that the level of detail in the remu-

neration provisions causes great administrative challenges for the sector.

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Any alterations should therefore be focused on simplifying the regulation

thus making it less administrative burdensome.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to ensure that reporting requirements are relevant and propor-

tionate, we suggest that:



The Commission initiates another review of the effectiveness of the

remuneration rules once they have been in force for a longer period of

time with an emphasis on reduction of burdens.

SSUE

10 – L

INKS BETWEEN INDIVIDUAL RULES AND OVERALL CUMULATIVE IMPACT

Example 1: Rules of CCR applicable to UCITS management compa-

nies and alternative investment fund managers

To which Directive(s)/ Regulation(s) do you refer in your example?

CRR, UCITS and AIFMD

Please provide us with an executive summary of your example:

It follows from references in UCITS and AIFMD that the rules in articles

25-88 of CRR regarding the elements of own funds are applicable to

UCITS management companies and alternative investment fund managers

(fund management companies).

The rules are designed to mitigate the risks connected with the activities

carried out by credit institutions and investment firms. Fund management

is the main activity of fund management companies. Such activities may

not be carried out by credit institutions or investment firms, cf. UCITS

and AIFMD.

The risks connected to fund management activities are not the same as the

risks connected to the business of credit institutions and investment firms,

and the activities of the fund management companies are not as complex

as those of credit institutions or investment firms. The different risk expo-

sure of fund management companies is also underlined by the fact that

UCITS and AIFMD set out capital requirements which have been tailored

to fit the risk exposure of fund management companies.

Accordingly, the application of the own funds rules (Articles 25-88 of

CRR) for fund management companies seems to be unnecessarily burden-

some and should be reviewed so they are proportionate related to the risks

concerned UCITS and AIFMD.

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If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to avoid unnecessary administrative burdens, we suggest that:



A revision of articles 25-88 of CRR so for fund management compa-

nies so as to ensure a better alignment with UCTIS and AIFM.

The references in questions from UCITS and AIFMD to CRR can be

found in articles 2(1)(k), 2(1)(l) and 2(6) of UCITS and articles 4(1)(s),

4(1)(ad) and 4(2) of AIFM.

Example 2: Exemption for non-financial counterparties regarding

fully backed bank guarantee

To which Directive(s)/Regulation(s) do you refer in your example?

EMIR

Please provide us with an executive summary of your example:

In accordance with Article 46 paragraph 1 of EMIR a CCP may accept

bank guarantees as collateral when the guarantee is issued on behalf of a

non-financial counterparty.

The conditions under which commercial bank guarantees may be accept-

ed as collateral is specified in the Commission delegated regulation

153/2013. One of the requirements is that a bank guarantee must be fully

backed by highly liquid collateral. The requirement for a guarantee to be

fully backed by collateral in the delegated regulation makes it more or

less impossible to actually use bank guarantees as collateral. And in our

view the wording goes beyond the wording of Article 46 in EMIR.

A temporary exemption is allowed for clearing of power and gas deriva-

tives (Article 62). This exemption will however end on the 15 March

2016. When the exemption ends, non-financial clearing members will be

required to use cash, highly liquid securities or fully backed bank guaran-

tees as collateral for CCP clearing of power and gas derivatives.

If the current exemption is allowed to expire, clearing of power and gas

derivatives contracts will become more expensive for non-financial mar-

ket participants when this specific requirement enters into force. We fear

that, as a consequence of higher costs of clearing, market participants will

turn to less transparent non-cleared OTC trading. Non-financial counter-

parties that are managing risks directly related to their commercial activi-

ty will not be subject to mandatory clearing under EMIR. Hence, it is ex-

pected that they will be sensitive to economic incentives. In other words,

this will – contrary to the purpose of EMIR - increase counterparty risks

and reduce transparency in the market.

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The reason behind the political agreement to allow the use of bank guar-

antees as collateral from non-financial counterparties was to avoid forcing

the transparent energy markets into a less transparent market where deriv-

ative contracts will not be cleared through a CCP. This should be clari-

fied.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order avoid any disruption to the market stability, we suggest that:



It is clarified - either in EMIR or in delegated regulation 153/2013 -

that the use of bank guarantees as collateral from non-financial coun-

terparties should be possible on more appropriate terms by clarifying

that the aim behind this possibility was to avoid forcing the transpar-

ent energy markets into a less transparent market where derivative

contracts will not be cleared through a CCP.

SSUE

14 – D

EFINITIONS

Example 1: A new two-tier definition of covered bonds

To which Directive(s)/ Regulation(s) do you refer in your example?

Solvency II, CRR and UCITS

Please provide us with an executive summary of your example:

Covered bonds are treated and defined differently in Solvency II and

CRR.

In Solvency II covered bonds are defined in terms of UCITS 52(4) and

have preferential capital requirements when covered bonds have an exter-

nal credit rating of at least AA-.

In CRR/CRD IV covered bonds are defined in article 129 and get a pref-

erential treatment when they comply with UCITS 52(4), have an external

rating of at least AA- and if extra collateral is added when loan-to-value

(LTV) exceeds certain limits.

As mentioned in the Danish response to the covered bonds consultation,

having a new single legal definition of covered bonds could be a useful

element in ensuring the “covered bonds brand” while at the same time

ensuring the role of covered bonds as e.g. instruments to place funds or

handling liquidity risks. Such a definition would set out common stand-

ards where only covered bonds meeting the requirements in the given

definition could make use of the term covered bonds.

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When deciding on the specific elements of a covered bonds definition,

Denmark would favour of a two-tier definition. This would include a

broad basic definition of covered bonds plus an additional set of criteria

giving the latter some more preferential treatment than covered bonds

which only comply with the broad definition. Such a two-tier definition is

already the case today with a broad basic definition of covered bonds as

set out in article 52 (4) of the UCITS Directive plus an additional set of

criteria as set out in article 129 of the CRR giving the latter some more

preferential treatment than covered bonds which are only UCITS-

compliant.

The LTV limit requirement in CRR (not present in UCITS) means that

specialised institutions are required to fund additional cover assets (typi-

cally government bonds or other non-mortgage CRR eligible assets) when

property prices are decreasing to the extent that the LTV-limits are ex-

ceeded.

If we take Denmark as a case, this would mean that in certain very

stressed scenarios - although such a situation has never materialized in

Denmark - it may turn impossible for the Danish mortgage credit institu-

tions to continue to fund additional cover assets and it is in this situation

imperative that the issued covered bonds remain UCITS-compliant as

well as the institutions can continue to fund the real economy with only-

UCITS-compliant covered bonds.

Therefore, a two-tier definition is preferred.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to ensure the role of covered bonds as e.g. instruments to place

funds or handle liquidity, we suggest that:



There should be a new two-tiered legal definition of covered bonds

with a broad basic definition of covered bonds (UCITS) plus an addi-

tional set of criteria (CRR) giving the latter a more preferential treat-

ment.

Example 2: Alignment of definitions of short sale

To which Directive(s)/ Regulation(s) do you refer in your example?

Short selling regulation (SSR) and MiFIR

Please provide us with an executive summary of your example:

The definitions of short selling in SSR and MiFIR differ. According to

SSR, the relevant time to calculate short selling is at midnight at the end

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of trading day. In MiFIR, short selling is calculated at the time of execu-

tion of the transaction.

The difference in definitions might pose problems for the market partici-

pants. As an example, if there is a first sale of a government bond and

immediately after a similar-sized buy of the same instrument, this would

result in a short sale reporting according to MiFIR, but would not be cal-

culated as a short sale according to the short selling regulation.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to enforce clarity and reduce administrative burdens, we suggest

that:



The definition of short sale should be the same in both the short selling

regulation and in MiFIR.

SSUE

14 – R

ISK

Example 1: Technical solutions for CCP’s

To which Directive(s)/Regulation(s) do you refer in your example?

EMIR

Please provide us with an executive summary of your example:

EMIR introduces the obligation to clear certain classes of OTC deriva-

tives in CCPs that have been authorized (European CCPs) or recognized

(non-EU CCPs) under the EMIR framework. EMIR gives rise to some

practical complications and unintentional discrepancies for e.g. insurance

companies using derivatives when mitigating investment risks.

One of these is the fact that insurance companies encounter difficulties in

meeting variation margin requirements of central counterparties in respect

of transactions subject to mandatory clearing under EMIR because CCPs

- for now - only accept cash. Insurance companies offering life insurance

have to invest in the best interest of the insured. Since investing in cash is

not in the best interest of the insured, insurance companies do not hold

much cash and would therefore have to make use of e.g. the repo market

in order to fulfill their variation margins in cash.

Another issue arising from the EMIR regulation is the fact that the con-

tracts, which insurance companies enter into with CCPs, have shown to

include terms that allow for the CCP to terminate the contract. This leaves

insurance companies with very little incentive to actually reduce risks

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through OTC derivatives since the uncertainty related to the possible ter-

mination is inconsistent with the need to reduce investment risks.

It is important that the OTC derivatives are handled in a proper manner

e.g. by requiring central clearing in order to make the over the counter

market on OTC derivatives safe and sound. However, it is equally im-

portant to have a proper balance between rules and a well-functioning

market in mind when accessing consequences of new rules. It seems that

the rules on clearing obligations for OTC derivatives have led to the be-

fore mentioned unintentional discrepancies on companies e.g. insurance

companies that have to enter into agreements with CCP’s on central clear-

ing. As described above this poses a potential problem. Therefore, it

needs to be closely monitored if the possibility of termination is used and

if so, this possibility should be deleted in order to maintain the investment

in OTC derivatives.

If you have suggestions to remedy the issue(s) raised in your example,

please make them here:

In order to ensure the proper level of risk aversion, we suggest that:



The CCPs should be obliged to develop technical solutions for the

transfer by pension scheme arrangements of non-cash collateral as

variation margins under EMIR even after 2017. Furthermore, if the

CCP’s do not take the required steps, the exemption under article

89(1) should be made permanent in order to avoid the adverse effect

of centrally clearing derivative contracts on the retirement benefits of

future pensioners.



More certainty related to the timeframe and the assurance of the con-

tract entered into with the CCP is needed. It should be followed close-

ly if the possibility of termination is used and if so, it should no long-

er be possible to delete in order to maintain the investment in OTC

derivatives.