Financial Crisis News Center

Barnier Named New EU Commissioner for Internal Market and Services

This story appeared in Jim Hamilton's World of Securities Regulation

At a time when European financial regulation is at the threshold of significant legislative overhaul, the new Commissioner for the Internal Market and Services will be Michel Barnier of France. Currently, Mr. Barnier is a member of the European Parliament. He will be joining the second Barrasso Commission at a momentous time for EU securities and banking regulation. He will replace Commissioner Charlie McCreevy, under whose remit the most sweeping changes in financial regulation were proposed, including the regulation of hedge funds, credit rating agencies, and systemic risk. Before joining the European Parliament, Mr. Barnier was a member of the Prodi Commission, serving as Commissioner for Regional Policy.

With the G-20 emphasizing the need for a global regulatory response to the financial crisis, Mr. Barnier is aware of the challenges of globalization and the need to craft a harmonized cross-border response. In earlier remarks, he has noted that not long ago financial exchanges were nation-centric and, in all countries, capital exchanges were forbidden or restricted and the approval of the Ministry of Finance was needed before any capital could leave or enter a country. Noting that change now happens very quickly and abruptly, he recognizes the need for new paradigms and thus a need for a new governance.

Key UK Committee Urges EU to Go Slow on Financial Stability Legislation

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The UK Treasury Committee has urged the European Union to take more time on legislation establishing a systemic risk regulatory framework centered on a new European Systemic Risk Board and new European Supervisory Authorities for banking and securities, replacing CESR and other Lamfalussy Level 3 committees. The UK Committee has concerns about the size and composition of the Board and unease about the power the European Supervisory Authorities would have to override the decisions of national regulators. Similarly, there are concerns that the European Commission will have unilateral power to declare an emergency, which will further empower the Supervisory Authorities to direct national regulators.

IASB Chair Charts Path to New Fair Value Standard; Rejects Interim Adoption of US Standard

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The IASB is on target to replace the fair value accounting standard embodied in IAS 39 with a new standard that will attain broad global acceptance. In remarks before the European Parliament’s Economic and Monetary Affairs Committee, IASB Chair David Tweedie said that the new fair value rules would be adopted after an extensive consultation that will take into account the views of all stakeholders, including the Committee, ECOFIN, central banks and regulators. The comment period on the proposed reform of IAS 39 has ended, said the Chair, and the IASB received letters from more than 200 individuals and organizations. Additional board meetings have already been held, and will continue to be scheduled as required to complete the project in time for the 2009 financial year.

European Union Amends Capital Requirements Directive to Strengthen Securitization

James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The Council of the European Union has amended the Capital Requirements Directive in an effort to enhance the originate and distribute model and strengthen securitization practices. The amendments enhance the due diligence and transparency obligations on the originators of securitization operations and on investors. Under the new regime, investors should be able to assess the risks involved in structured products otherwise than solely by the means of the ratings given by rating agencies. In order to encourage better risk assessment, a "skin in the game" amendment requires originators to retain on their balance sheets 5 % of risks transferred or sold to investors.

European Union Council Urges the Reduction of Pro-Cycality on Many Fronts

James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The Council of the European Union recently underscored the urgency of addressing the fact that the absence of counter-cyclical buffers and the lack of flexibility of accounting rules in allowing for through-the-cycle provisioning have been important factors in the amplification of the financial crisis. The Council announced its support for the introduction of forward looking provisioning, which consists in constituting provisions deducted from profits in good times for expected losses on loan portfolios, and which would contribute to limiting pro-cyclicality. Accounting standards, such as IFRS, currently do not allow for the recognition of expected losses. The IASB is expected to publish an exposure draft dealing with the provisioning issue, including consideration of an expected loss model, by October 2009.

Obama Administration Seeks Federal Regulation of Hedge Funds

James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The Obama Administration has asked Congress to pass legislation requiring SEC registration of advisers to hedge funds and other private pools of capital, including private equity funds and venture capital funds, with assets under management over a certain threshold. All such funds advised by an SEC-registered investment adviser should be subject to investor and counterparty disclosure requirements and regulatory reporting requirements.

Public Comments Support European Commission Proposal on Hedge Fund Regulation

James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter

There is a general consensus that hedge funds should be regulated as part of systemic risk regulation, according to public comments on the European Commission’s proposal to regulate hedge funds, but there is also a fear of regulatory arbitrage if such regulation is not global. There were 104 comments from a wide range of public authorities, financial organizations and investors. Although some prudential reporting to regulators is currently required, a large majority of commenters believe that regulators do not have enough information to monitor hedge fund trading activities. To that extent, transparency and disclosure by hedge funds to regulators should be improved and harmonized.

G-20 Endorses Consistent Systemic Financial Regulatory Reform; Financial Stability Board to Have Critical Role

James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

In their final communiqué, the G-20 leaders pledged to pass legislation reforming the financial regulatory system that is consistent across borders and based on high international standards. Yes, it is a global financial crisis, but the G-20 rejected the French President’s desire to have a global regulator that could reach into a country and direct its securities regulation. The United States will pass its own massive financial regulation legislation and the European Parliament will do the same for the EU. Will the legislation be similar? Yes, because the broad themes are the same: a systemic risk regulator; regulation of hedge funds, OTC derivatives, and credit rating agencies, and reform of executive compensation to base pay on performance, not excessive risk taking. Also, a new Financial Stability Board is charged with monitoring the national reform legislation for consistency.

European Commission Endorses High Level Group Blueprint for Financial Regulatory Reform

The European Commission has endorsed the key principles in the High Level Group’s broad blueprint for a complete overhaul of financial regulation in the European Union based on the twin pillars of harmonization and transparency. The Group envisions an EU systemic risk regulator, as well as a European Securities Commission and a European Banking Authority. The Group also recommended a complete evaluation of fair value mark-to-market accounting standards.

President Obama Calls for Complete Overhaul of U.S. Financial Regulation

In some of his strongest statements yet on the coming reform of financial regulation, President Barack Obama said that we have to completely update the 1930s regulatory system designed from the last great crisis. He stated that, among other things, regulatory reform must deal with a whole series of unregulated pools of capital outside of the current regulatory system. The remarks came at a joint press conference with U.K. Prime Minister Gordon Brown, who endorsed the President’s remarks. Regulatory reform must deal with the massive over-leverage and huge systemic risks taken by unregulated, as well as regulated, institutions, said the President. He also pledged to globally coordinate U.S. regulatory reform around a common set of principles, including transparency, accountability, and the regulation of systemic risk.

President Obama’s mention of unregulated pools of capital is an obvious reference to what many call the unregulated parallel banking universe of hedge funds and other entities. Recently, the European Commission endorsed the proportionate regulation of a "parallel banking system" consisting of hedge funds, mutual funds, investment banks, and off-balance sheet vehicles. The guiding principle under which this regulation should be conducted is whether a firm’s activities may have a systemic impact on the markets, even if they have no direct links with the public at large.