Europe’s New Post-Trade Infrastructure Rules. ECMI Policy Brief No. 20, 8 November 2012

After more than a decade of indecision, the EU is finally now set to implement a consistent regulatory architecture for clearing and settlement. Following the agreement on a European market infrastructure Regulation (EMIR), the European Commission has proposed harmonised rules for centralised settlement depositaries (CSDs), while the European Central Bank is moving forward with its plans for a central eurozone settlement engine. This paper analyses three components of the new post-trade infrastructure measures: 1) the regulatory framework for and supervision of central counterparties under the new EMIR legislation, 2) the authorisation requirements of trade repositories and 3) the draft CSD Regulation and the progress with the ECB’s Target 2 Securities project. It then discusses the impact of the new rules, and argues that, analogous to the unexpected impact of MiFID on trading infrastructures, a similar EMIR revolution may be on its way

The Euro Prisoner's Dilemma. ECMI Commentary No. 32, February 2012

The last intergovernmental agreement among 25 countries and the ESM Treaty will set the ground for greater institutional coordination on fiscal policies among euro area member states. None of these decisions, however, will be able to pull the euro area out of this crisis. The eurozone is trapped in a classic prisoner’s dilemma. The break-up of the euro remains unlikely but the exit strategy will continue to be led by a sequence of rational (but sub-optimal) decisions, which will make the process long and painful

Light and shadows in Europe’s new Action Plan for Capital Markets Union. ECMI Commentary No. 40/5 October 2015

The European Commission’s Action Plan consists, in a nutshell, of a short list of technical proposals and a longer one of (rather general) potential actions. Overall, the plan indeed proposes to achieve some short-term objectives, such as a reduction of listing costs for SMEs, but it lacks long-term vision. The plan bundles actions under rather generic objectives of long-term finance or cross-border investing. Improving the informational infrastructure (e.g. accounting standards, company data) and cross-border enforcement of rules is left to vaguely defined future actions, but these constitute the core of the capital markets infrastructure. Without a well-defined set of measurable objectives, the whole plan may lose political momentum and become an opportunity for interested parties to cherry pick their pet provisions. Building a single market, i.e. removing cross-border obstacles to capital circulation, is too challenging a task to simply appear as one of many items on a long list of general objectives, which incidentally do not include institutional reform. The ultimate risk is that the Commission may just miss a unique opportunity to revamp and improve the financial integration process in Europe after almost a decade of harmful financial retrenchment

The ‘Visible Hand’ of the ECB’s Quantitative Easing. CEPS Working Document No. 407/May 2015

Quantitative easing à la ECB has produced so far an impact on long-term nominal rates through ex ante channels: signalling channels, term duration channels, and risk premia channels. The term duration channel will also lead to a lengthening of the average maturity of government debts, with possible implications for fiscal policy. The ECB’s determination to buy government bonds in a fragmented market with a low net supply may also produce an ex post impact, during the actual asset purchases, but less on nominal rates and more on financial plumbing, as recent volatility suggests. As the effects of scarce supply in collateral markets are felt, repo rates remain well below zero. Lower supply and limited re-usability of high quality collateral, capped by regulatory requirements, is a constraint on market liquidity and compresses dealers’ balance sheets. By keeping a depressed yield curve and asset prices high, QE may also accelerate the consolidation of both traditional and capital-market based (dealer) bank business models. What is less clear is how these changing business models will interact with the sharp rise of the asset management industry in the aftermath of the crisis, which raises questions about the implications for global collateral flows and deposit-like funding channels

Harmonising Insolvency Laws in the Euro Area: Rationale, stocktaking and challenges. CEPS Special Report No. 153, December 2016

There are four distinct areas where harmonising national insolvency frameworks could improve the functioning of the single market and the stability of the euro area. Early restructuring of businesses, bank resolution, cross-border insolvency and management of non-performing loans rely on common features of local insolvency frameworks, which can affect their legal certainty and operation. To promote a more entrepreneurial spirit, a pan-European framework for the early restructuring of businesses could offer a true second chance for entrepreneurs. To benefit from a capital markets union, insolvency frameworks would also need to remove sources of cost unpredictability in cross-border insolvency procedures, which are often hidden in national insolvency laws or are not sufficiently dealt with in the current EU framework. Moreover, measures to harmonise insolvency laws could have positive impacts on the banking union, and particularly those harmonising the hierarchies of claims could strengthen the functioning of the resolution mechanism. The diffusion of best practices in credit recovery procedures could help to improve the management of non-performing loans by fostering liquidity in secondary markets. In addition, this report contributes to defining areas for further action, such as the opening and governance of proceedings and reliefs

1. The Market for Subprime Lending: a Law and Economics Analysis of Market Failures and Policy Responses. 2. Legal and economic approach to tying and other potentially unfair and anticompetitive commercial practices: focus on financial services. 3. Shaping Reforms and Business Models for OTC Derivatives Markets: Quo Vadis?

1. The supreme mortgages market. Main determinants of the borrower's choice to get in a subprime mortgage. The incentive structure of intermediaries: moral hazard and adverse selection. Some responses: how does the policy-maker shape the subprime market. 2. The competition policy dimension of tying and other potentially unfair commercial practices. Tackling tying and other potentially unfair commercial practices in consumer policy. Measuring the impact of tying and other potentially unfair practices in the retail financial services sector: a multi-stage test. 3. Setting the scene. Size and shape of the OTC derivatives market. Legal and economic views of growth and concentration. The nature of OTC derivatives transactions. Shedding lights on the OTC derivatives’ chain value: a costbenefit analysis. OTC derivatives markets and the financial crisis. Legislative actions in EU and US. Perspectives for over-the-counter derivatives market: four scenarios.1. The supreme mortgages market. Main determinants of the borrower's choice to get in a subprime mortgage. The incentive structure of intermediaries: moral hazard and adverse selection. Some responses: how does the policy-maker shape the subprime market. 2. The competition policy dimension of tying and other potentially unfair commercial practices. Tackling tying and other potentially unfair commercial practices in consumer policy. Measuring the impact of tying and other potentially unfair practices in the retail financial services sector: a multi-stage test. 3. Setting the scene. Size and shape of the OTC derivatives market. Legal and economic views of growth and concentration. The nature of OTC derivatives transactions. Shedding lights on the OTC derivatives’ chain value: a costbenefit analysis. OTC derivatives markets and the financial crisis. Legislative actions in EU and US. Perspectives for over-the-counter derivatives market: four scenarios.LUISS PhD Thesi

Legal and Economic Approach to Tying and Other Potentially Unfair and Anticompetitive Commercial Practices: Focus on Financial Services

2This paper analyses the economic and legal aspects related to practices such as tying, bundling and other potentially unfair commercial practices widely used in the financial services industry. Authors draw special attention to the European financial services market. Their law and economics approach aims at illustrating the rationales for applying both antitrust and consumer protection legislation to the practices subject to analysis in this paper and observed in the retail financial services market. The author explores the main findings of the legal and economic theory as regards the applicability of antitrust rules to the practices at hand, and the possibility to treat new commercial practices under antitrust law. The paper then illustrates the economics of tying, bundling and other unfair commercial practices from a consumer policy perspective, and reports some empirical data on switching costs and patterns of consumer behaviour in retail financial services and in other sectors of the economy. Cognitive biases that may cause irrational behaviours in judgement and decision-making processes of a retail consumer are widely assessed. Finally, the author proposes a new multi-stage test for the joint assessment of selling practices under competition and consumer policy.openopenAndrea Renda; Diego ValianteRenda, Andrea; Diego, Valiant

The OTC derivatives markets after financial reforms. CEPS ECMI Commentary No. 36, May 2014

Over the past five years, over-the-counter (OTC) derivatives markets have received heightened regulatory attention, due to their opaqueness, size and interconnectedness, with a view to improving the robustness, safety and resilience of this market segment. There has been continued progress in the follow-up to the G-20 commitments, with the EU (EMIR, MIFID II, CRD/CRR IV, MAD) and the US (Swap Execution Facility or SEF, Title VII of Dodd-Frank Act, Basel III) leading in the implementation timelines and capturing approximately 80-90% of the overall market. Based on the data compiled for the yearly ECMI Statistical Package, this commentary provides a snapshot of the current status of the global OTC derivatives markets by: i) identifying general trends over the past decade, ii) looking at the changes in the market structure (instruments and participants), iii) estimating the uncollateralised derivatives exposure and iv) examining the relationship between OTC derivatives and exchange-traded derivatives (ETD)

A Life Cycle Approach to Investor Protection. ECMI Working Paper No. 1/September 2014

The market for investment products, including both securities and investment funds, is fraught with difficulties for consumers in terms of the ease of comparing products, trust in suppliers and consumer satisfaction. A comprehensive approach to investor protection, developed around the lifecycle of a financial product, may offer the investor greater protection during an investment’s life span. This paper proposes a new approach to investor protection, building on a review of major market failures affecting the origination, distribution and sale of financial products and based on a review of the relevant scientific literature and country experiences. The application of a ‘know-your-product’ principle at origination, a narrower ‘default rule’ for best execution and an ex-ante distinction between advice and ‘information-only’ services are among the options discussed in this paper to enhance the investor protection framework over the lifecycle of a financial product

Europe’s Untapped Capital Market: Rethinking integration after the great financial crisis. Final report of the European Capital Markets Expert Group. Task Force Report, February 2016

In December 2014, ECMI and CEPS formed the European Capital Markets Expert Group (ECMEG) with the aim of providing a long-term contribution to the debate on the Capital Markets Union (CMU) project, proposed by the European Commission. After an intensive, year-long research effort and in-depth discussions with ECMEG members, this final report aims to rethink financial integration policies in the European Union and to devise an EU-wide plan to remove the barriers to greater capital markets integration. It offers a methodology to identify and prioritise cross-border barriers to capital markets integration and provides a set of policy recommendations to improve its key components: price discovery, execution and enforcement of capital markets transactions