Systemic risk

• 23 July 2020

  MiFID - Secondary Markets

  The European Securities and Markets Authority (ESMA), the EUs securities markets regulator, has published today the MiFID/MiFIR Annual Review Report under Commission Delegated Regulation (EU) 2017/583 (RTS 2).

• This report lays down the thresholds for the liquidity criterion 'average daily number of trades' for bonds, as well as the trade percentiles.
• In the report, ESMA is suggesting to the European Commission to move to the next stage for:

  These measures are designed to increase the transparency available to market participants in the bond market.

• ESMA considers such move premature since the first annual transparency calculation for these non-equity instruments will only be published this year.

SPEECH

Building the Financial System of the 21st Century

Speech by Luis de Guindos, Vice-President of the ECB, at the 18th annual symposium on “Building the Financial System of the 21st Century: an Agenda for Europe and the United States” organised by the Program on International Financial Systems and Harvard Law School (by videoconference)

• In both the euro area and the United States, the pandemic and the related lockdown measures have led to stark economic contractions.
• These contractions have been shaped by key structural differences between the two financial sectors, requiring differentiated policy responses.
• Moreover, the shock is highlighting the importance of macroprudential policy in both the bank and non-bank financial sectors to safeguard a stable financial system.

The financial sector in the wake of the pandemic crisis and the policy response

• The financial system in the euro area is predominantly bank-based compared with the more market-based system in the United States.
• In fact, more than half of funding to non-financial firms in the euro area is channelled through banks.
• [1] At the same time, the euro area financial sector has increasingly begun to resemble its US counterpart over the past decade.
• The non-bank financial sector has seen exceptional growth: total assets of the sector doubled from 24 trillion in 2009 to 48 trillion in 2019.
• Thanks to the Basel III regulatory framework, banks entered this crisis with stronger capital and liquidity positions than they had before the global financial crisis.
• Their improved resilience has been central in enabling banks to weather the initial strain of the pandemic shock and continue funding the real economy.
• During this period, investment funds experienced exceptionally large outflows, similar in magnitude to those seen during the global financial crisis.
• [2] Timely monetary, prudential and fiscal policy supported near-term financial stability, but could not prevent the pandemic crisis from exacerbating medium-term risks to financial stability, to which I will turn next.

Looking ahead: challenges for the euro area banking sector

• The banking sector has proven to be resilient in the initial phase of the pandemic stress.
• But this is not to say that the sector will not face headwinds in the future.
• Such a sharp deterioration in profitability adds to the structural challenges already facing the euro area banking sector.
• The coronavirus pandemic could in fact represent an opportunity for the financial sector to adapt to this new environment more swiftly.

Looking ahead: challenges for the non-bank financial sector

• Turning to the non-bank financial sector, the early stages of the pandemic shock have shown how investment funds in particular can contribute to amplifying adverse market dynamics by increasing market volatility and price dislocations.
• [4] In my view, the increasing importance of the non-bank financial sector in the financing of the euro area economy calls for a stronger macroprudential framework for the sector.
• To date, the prudential policy framework for investment funds has primarily relied on ex-post liquidity management tools under asset managers.
• Leverage may also amplify procyclicality in the investment fund sector as it is an important factor in investors redemption decisions.

Conclusion

• SmartStream Technologies, the financial Transaction Lifecycle Management (TLM) solutions provider, today announced the launch of its Intraday Liquidity Stress Testing module, part of the TLM Cash and Liquidity Management suite of products.
• There is a clear need for banks to carry out stress testing to improve profitability and reduce operational effort to meet the regulatory requirements.
• The pandemic and the turbulent conditions have made this type of stress testing more essential and re-enforced the value of such a solution to banks.
• By simplifying the complex and time-consuming testing process, SmartStreams solution allows banks to run a variety of stress scenarios in a short space of time, which is critical.

• 17 July 2020

  MiFID - Secondary Markets

  The European Securities and Markets Authority (ESMA), the EUs securities markets regulator, published today an opinion providing guidance on pre-trade transparency waivers for equity and non-equity instruments.

• The document replaces the guidance of the Committee of European Securities Regulators and ESMAs opinions on waivers from pre-trade transparency under the Market in Financial Instruments Directive (MiFID) I.
• The guidance published today provides stakeholders with information on ESMAs assessment of features frequently encountered in the context of issuing opinions on waivers from pre-trade transparency over the last three years.
• Over the last three years, ESMA assessed more than 900 notifications for waivers from pre-trade transparency for equity and non-equity instruments.