Post financial crisis, EU policymakers focused predominantly on shoring up the resilience of the financial system, improving the conduct of actors operating in it, and equipping supervisors and regulators with an appropriate toolbox to oversee the most critical aspects of the system. These efforts gave rise to an alphabet soup of behemoth legislative packages – e.g. EMIR (and its Refit), MiFID 2, CRR/CRD, BMR, MAR, and CRAR – many of which have had an impact on corporate treasury in one way or another.
Much of the policy agenda for the current EU policy cycle (2019-2024) will be initiated in the coming six to twelve months by the European Commission. Any Commission – barring crisis events requiring urgent policy action further down the line in a given mandate – tends to use the first year of its mandate for agenda setting purposes. This is for the simple reason that, due to the lengthy policy-making process at EU level, it is far more likely for policies that are proposed in this time window to be successfully concluded and signed onto the statute book before the end of the mandate. At the same time, the spectre of the negotiations on the future relationship between the EU and the UK, including on the terms of reciprocal market access for financial services, will likely continue to cast a long shadow.
On financial services, the scope of what the new European Commission wants to tackle is far wider than can be covered in this article. However, the issues treasurers ought to keep on their radars range from the implementation of the latest Basel standards for banks into EU law, revisions and a potential widening of the MiFID 2 framework, new corporate sustainability disclosures, and ongoing benchmark reform efforts, to more left field items such as integration of sustainability criteria in ratings, a push for a horizontal approach to cybersecurity across financial services, and further calibrations of the EU’s AML framework.
The EU’s banking agenda will become concrete very soon, with a legislative proposal implementing the latest Basel standards for banks into EU law expected for Q2 2020. Critical questions for treasurers that will need to be tracked closely throughout the legislative process are the preservation of the existing CVA exemption as well as the treatment of bank exposures to corporates across specialised lending including trade finance and lending to unrated corporates. In this context, it will be important to see to what extent the European Commission in its proposal will deviate from the standards proposed by the Basel Committee for Banking Supervision in order to avoid a significant increase in the capital that banks will need to hold against such exposures in Europe.
A strong push on the green agenda will see the finalisation of the EU’s sustainability taxonomy to classify which economic activities align with the EU’s definition of what should be considered sustainable. For non-financial companies this will likely include new disclosure requirements through a revision of the non-financial reporting directive (NFRD) to require corporates to disclosure a much larger range of information on the extent to which a company’s activities are in alignment with the EU’s taxonomy. One idea behind this is to provide institutional investors and buy-side firms with access to a wider pool of information to allow them to channel financial flows to those projects and companies that are most aligned with the EU’s objective of becoming the globally leading continent in combatting climate change. Another idea that is likely to resurface in this context is the creation of a green supporting factor for calibration of bank capital requirements to incentivise bank lending to green projects and companies. On the ratings side, we are likely going to see efforts by policy-makers to ensure a greater integration of environmental, social, and governance (ESG) criteria into credit ratings. As a result, a company’s climate footprint will increasingly become a determining factor when it comes to a company’s ability to tap into capital and debt markets.
In parallel to this, revisions of the MiFID 2 framework and the EU Benchmarks Regulation (BMR) will be initiated around Q3 2020. Within those revisions to MiFID, treasurers will need to watch out for recalibration of the transparency frameworks for shares and bonds as well as a potential widening of scope of EU trading obligations to cash markets. Another question that will likely resurface in a MiFID context is whether FX products should be more widely scoped into the trade transparency regime of MiFID. On the benchmarks front, the planned revision of the BMR is likely to focus on adjustments to the scope of the regime as well as the calibrations for critical benchmarks, but importantly also ensure a recalibration of the third country regime of the BMR. Revisions to the latter are critical to ensure that treasures will continue to be able to use third country indices – in particular in non-deliverable currencies – beyond the currently scheduled end of the transition period on 31 December 2021.
Finally, there will be a significant push for a consolidated data, cybersecurity and AML strategy. On data, expectations are pointing towards a horizontal data governance approach to facilitate broad-based data sharing. Partially this strategy will have the objective of strengthening not only business-to-government data sharing, but also business-to-business data sharing. Ultimately, financial services are likely to see an expansion of the notion of open-access that is already today contained in the PSD2 (Payment Services Directive) to a broader range of actors and services. For cybersecurity we are likely to see a much greater scrutiny by EU policymakers over outsourcing arrangement to third party (and non-EU) information and technology providers. At the same time, the European Commission is moving towards seeking to create a horizontal cybersecurity framework in financial services across all relevant legislative frameworks. Meanwhile shortcomings identified in the EU’s AML framework over the last couple of years are likely to result in an overhaul of EU AML rules in 2021 with a focus on consolidating supervision and enhancing KYC requirements for all obliged entities.
All of this means that even in the absence of a crisis, EU policymakers are in the process of launching an ambitious reform agenda across almost all segments of the regulatory framework for financial services. With all of the inevitable touchpoints this will have for corporate treasurers, it will remain as crucial as ever for treasurers to be a part of the policy dialogue.
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