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Member of the European Commission responsible for Internal Market and Services

Financial regulation: how to achieve global convergence

Eurofi High Level Seminar

Copenhagen, 29 March 2012

Ladies and gentlemen,

In September 2010, I came to the Eurofi conference to present our financial regulation roadmap.

One and a half years later, we have delivered.

We are changing the face of European financial markets:

  • Following the Larosière report, we set up three new European supervisory authorities for banks, markets and insurance and pensions.

  • We now have tough rules for hedge funds, private equity and credit rating agencies.

  • We have the world's strictest legislation on bankers' bonuses.

  • And we have, only a few days ago, reached agreement on central clearing and reporting of all OTC derivative trades.

All these steps are essential if we are to learn the lessons from the crisis.

It is also a precondition for growth. Making sure that the financial sector provides a solid base from which companies can expand their business, innovate and export.

In the single market and to the rest of the world.

National responses alone would lead us nowhere.

We need an integrated market. A stronger single market for financial services. For economic efficiency. For a good allocation of capital. And for investors to have a greater choice.

An integrated market not only within the EU, but worldwide.

But if the crisis has taught us only one thing, it is that financial markets are interconnected and need real regulation and supervision.

Integration will only work if global markets go hand in hand with effective regulation and supervision.

To achieve this, we need global coordination of regulatory reform and international convergence. This does not mean that the rules should or can be the same everywhere. We all need to take into account local differences.

But global businesses should be able to carry out their activities worldwide without too much regulatory overlap.

This is also one of the reasons for our strong commitment to the G20 agenda.

The international convergence we need is more advanced in some areas than in others. Let me mention some examples:

  • On the one hand, we have made real progress on the regulation of OTC-derivatives. And the Basel 3-agreement will make sure that banks are subject to similar rules wherever they do are established.

  • But on the other hand, there is no international consensus yet on the right model for insurance supervision.

  • The appropriate regulatory framework for short selling or for alternative investment funds is a matter of ongoing debate.

  • And there is certainly no global agreement on how to regulate bankers' bonuses.

This is why we need to speed up global consistency and convergence. Let me mention two points in this context:

1. First, what our businesses need most is a level-playing field.

This means working with our key partners.

It is why I have been to the US five times in the last two years. To China twice and once to Japan.

I want to make sure that the rules introduced in other jurisdictions move in the same direction as ours.

Of course, the United States and their implementation of the Dodd-Frank Act and of the Basel 2.5 and Basel 3 agreements are of particular importance to us. The same is true for the application of international accounting standards.

We meet and discuss all these matters. And I am particularly pleased with our cooperation with the American regulators on OTC-derivatives and new market developments such as high frequency trading.

But we also need to work together to ensure convergence on measures that go beyond our current agenda:

  • Shadow banking is an example. We need to be ready to act. Europe is participating fully in the global discussions. And we have just launched a public consultation. This is not to say that all shadow banking is bad. It is not. But we have to ensure that we have the right regulatory tools in place.

  • Another key issue is structural measures for banks. An intelligent and efficient separation of risks is a global challenge. We have just set up the high level group chaired by Mr Liikanen to look into this issue. The Group will deliver its report at the end of the summer.

Establishing a level playing field also means being attentive to unintended consequences of regulation in other jurisdictions. That is why we are taking a close interest in the Volcker rule. We fully share the objective of better separating risks. This is why I appointed the Liikanen Group. But our position is clear: it is not acceptable that American rules have such a great effect on other nations and foreign capital markets without any international co-ordination.

I brought this up with Ben Bernanke when we met last month.

Ladies and gentlemen,

Where a level-playing field does not exist, we still need to address both "underlaps" and "overlaps".

Regulatory diversity must not create loopholes which undermine the effectiveness of our regulation. Nor must it lead to market fragmentation and disintegration.

That leads me to my second point:

2. We need to ensure effective recognition of other jurisdictions' rules and supervision.

The best way to avoid overlap would be common agreements between the EU and key jurisdictions on the recognition of each others’ regulatory and supervisory systems. I know that this approach can be a lengthy process.

But I do think it is a way we must explore. We should work towards a transatlantic financial alliance with the US to stimulate our financial integration. Financial exchanges between the US and the EU still account for 80% of global trade.

In the absence of such agreements, we believe that equivalence is the right approach.

Equivalence is a tested concept in EU law. It allows for the co-existence of different national standards. It is not a requirement of identity, but of comparability.

The concept is simple and fair: Provided that the regulatory framework and the supervisory arrangements in a third country are judged equivalent to those in Europe, the operator concerned will be treated as if it was a European entity. To mention one example, this approach allows ratings issued by credit rating agencies outside Europe to be used by EU entities.

The equivalence approach ensures that operators are subject to only one rule, implemented by the home country supervisor. It avoids double requirements, which are costly for operators, and make supervision difficult.

It is a means for the EU to stay open to the rest of the world.

If there is no equivalence, the fall-back solution is to apply all the relevant EU rules. This is not about restricting choice or creating barriers. It is the regulatory approach chosen by many foreign jurisdictions. And it is the only way to ensure a Europe which remains open but is safe for investors too.

Ideally though, the equivalence approach is better as less onerous for the financial sector.

Ladies and gentlemen,

Let me now give you my answer to three questions which keep coming up on equivalence.

1. First: Should treatment of third country operators be a matter of European interest, or should we leave this to Member States?

I am convinced that this is a matter of European interest, for two reasons.

First, third country operators complain about the burdens and costs involved in complying with different legal requirements in each Member State. We have a single market, but it remains closed to these firms.

It is also a disadvantage for us. It limits the possibilities for investments in the EU and reduces the choice for EU investors.

Second, we may need a common voice to achieve the necessary degree of cooperation from some third country jurisdictions.

2. Second: Should equivalence be applied on a mutual basis?

What I mean is: Should the EU not consider a third country as equivalent if it does not apply a similar approach?

This is a hot political issue.

However I think that we achieved a very good compromise in the recent EMIR negotiations.

The final text requires third countries to have an effective equivalent system for the recognition of third country CCPs. This is not a legalistic approach, it is an outcome based system.

This ensures that jurisdictions which admit third country operators on the basis of fair but stringent criteria can be equivalent. And this is fully in compliance with our international obligations.

As I mentioned earlier, ensuring fair treatment of our industry abroad is an important concern for the Commission. In the same way as we want to offer, in Europe, fair treatment of industry from other countries.

3. Third: How far have we progressed on the implementation of a common approach for third country operators?

Equivalence decisions have been taken in the accounting and audit area.

And the principle of equivalence is incorporated in the Solvency II framework for insurance supervision.

I already mentioned Credit Rating Agencies: ESMA considers the regulatory framework of Japan, Australia, Canada, Hong Kong, Singapore, and most recently also the US, as stringent as the EU regime. The Commission has adopted the first formal equivalence decision for Japan, and assessments on the jurisdictions

The system works. Without the disruptions some companies had feared.

One last word on MiFID, which is still being negotiated:

Today third country investment firms are subject to 27 different national regimes if they want to do business in the single market.

Our intention is to open the whole EU market to third country investment firms, as more competition leads to better and more efficient services and to further innovation.

But the provision of investment services and activities is a sensitive area. Where the safety of investors also matters. It is why the opening of the single market has to be balanced with reasonable requirements. In practice, the Commission proposed the following:

  • An equivalence approach will apply for firms that want to actively market themselves in an EU Member State.

  • However, passive marketing by third country firms to EU clients would not be subject to the new regime. When EU investors take the initiative to seek services from third countries, we don't want to restrict their choice.

  • When retail clients are involved, stricter rules, such as establishment and supervision in the EU, will be required.

MiFID is now being discussed in the European Parliament and the Council. The Commission is taking a pragmatic role in the discussions.

Ladies and gentlemen, to conclude:

I know that some people want an Omnibus directive to ensure a coherent treatment of third country issues across all our legislative proposals.

But I am convinced that our existing approach, while is differentiated, is extremely coherent.

The rules might sometimes be different but that is for good reasons. CCPs are different from rating agencies which are different from hedge funds and investment firms.

We now rely on the co-legislators to keep our proposals, especially MIFID, as consistent as possible. This is essential if we are to ensure effective regulation and close supervisory oversight in open and integrated global financial markets.

Thank you for your attention.

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