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									                                                             EU NEWSLETTER
                                                                             OCTOBER 2010


 EU Public debt and deficit

 •    Commission proposes legislation as part of the Economic Governance Package
 •    EU leaders to discuss the Economic Governance Task Force Report

 •    Franco - German proposal to start a permanent EU system to handle financial crises not
      met with open arms
 EU Financial Markets Regulation

 •    European Finance Ministers failed to agree a common approach to bank levies and
      financial transaction taxes, Commission suggest a financial activities tax
 •    European Commission marks upcoming review of MiFiD by organizing a Hearing for
      stakeholders, moves towards increased transparency to be expected
 •    EU Institutions close to reaching agreement on AIFM Directive

 •    Proposal for short selling regulation debated: application to sovereign debt questioned by
      certain Member States

 Coming up

EU Public debt and deficit

Commission proposes legislation as part of the Economic Governance Package

In the frame of the ongoing developments in the area of economic governance, the European
Commission presented proposals for 1 directive and 5 regulations on September 29th.
This package overhauls the Stability and Growth Pact and makes excessive government debt a
punishable offence. Olli Rehn, EU Commissioner for Monetary Affairs, has stated that new
mechanisms are needed to tackle lax policies. Furthermore, he affirmed that sanctions should
become the norm if countries repeatedly break the rules.
Here is a brief summary of the proposed legislation:
     1. The proposed Regulation on the Strengthening of the Surveillance of Budgetary
        Positions and the Surveillance and Coordination of Economic Policies calls for more
        careful fiscal policy making and necessitates the accumulation of capital during good
        economic times.
     2. The proposed Regulation on Speeding up the Excessive Deficit Procedure puts national
        debt at the centre and forces countries to reduce excess borrowing by 5% per year
        once it is over 60%.

                               EU Affairs Update – Issue No. 1, 2009

    3. The proposed Regulation on Macroeconomic Imbalances focuses on dangerous
       policies at national levels and scores member states’ progress. Alert levels are also
       provided for and the indicators which will be followed are house prices, private debt
       levels, net foreign assets and unit labour costs.
    4. The proposed Regulation on Sanctions for Excessive Deficits provides that sanctions
       will come in phases moving from an interest bearing deposit to a non-interest bearing
       deposit of 0.2% GDP. When a country does not follow EU recommendations they will
       have to pay a fine. The only way that a fine can be avoided is by raising a blocking
       qualified majority of member states.
    5. The proposed Regulation on Corrective Measures for Excessive Macroeconomic
       Imbalances provides that non-compliant states will have to pay 0.1% GDP if they fail to
       comply with recommendations.
    6. The proposed Directive on Requirements for Budgetary Frameworks outlines statistical
       norms which should apply to the tidying up of the accounts of Member States. This will
       involve spending plans being drawn up three years in advance and growth forecasts will
       have to be realistic.
The Economics Committee in the European Parliament will begin its consideration of these
documents on October 26th. The Member States in the Council will also start to examine these
proposals. The exact timeline has yet not been specified but Van Rompuy, the President of the
Council, has called for the fast adoption of the proposals.

EU leaders to discuss the Economic Governance Task Force Report
The European Council will meet on October 28th and 29th to discuss the proposals which are
currently on the table regarding economic governance. The Economic Governance task force,
under the direction of Council president Van Rompuy, published its report on October 21st. The
proposals are largely in-line with the abovementioned legislative proposals. The task force
report acknowledges that secondary legislation is necessary to implement these changes and
has called on the parties to use the fast-track adoption method.
The sanctions proposed by the task force are both financial and reputational in nature. The
reputational sanctions would involve surveillance by the Commission of national practices and
publication of the findings.
The ultimate aim of the proposals of this task-force is that by 2013, all national fiscal frameworks
will be compliant. The areas in which such compliance should be in effect are (i) public
accounting systems and statistics, (ii) numerical rules, (iii) forecasting systems, (iv) effective
medium-term budgetary frameworks, (v) adequate coverage of general government finances.

Franco - German proposal to start a permanent EU system to handle financial
crises not met with open arms
On October 18th France and Germany released a joint statement which called for more national
controls over the sanctioning process, a permanent mechanism for bailing out Member States
and France has backed Germany’s proposal to change the Lisbon Treaty to allow the
suspension of voting rights for culpable states. However, such a treaty amendment would result
in ratification in all Member States and another referendum in Ireland. Therefore treaty
amendments do not have a large amount of support within the Council.
This proposal has not been met with open arms in the European Commission either where the
Budget Commissioner Lewandowski has warned against creating a permanent bail out
mechanism. The reason for this is that the guarantees which are currently in place, which
amount to €110 billion, are raised by the issuing of bonds which are in turn guaranteed by the
EU budget. Therefore, any increase in the sale of bonds would have a direct effect on the
exposure of the EU budget.
The European Central Bank (ECB) has a very pro-European stance to economic governance
and has recently called for the Commission to have the same power with regard to fiscal policy

                               EU Affairs Update – Issue No. 1, 2009

as it has with competition policy. A spokesperson for the ECB president Jean-Claude Trichet
stated on October 21st that the President did not support the French-German as the ECB
supports semi-automatic sanctions which would be stricter in nature. Furthermore, it does not
want a permanent system for bailing out bankrupt countries.

EU Financial Markets Regulation

European Finance Ministers failed to agree a common approach to bank levies
and financial transaction taxes, Commission suggests a financial activities tax
On October 18th, EU Finance Ministers met in the ECOFIN Council to again discuss bank levies
and financial taxes. The German and French government jointly invited the Belgian Presidency
of the EU to table financial transaction taxes this for a serious debate earlier this year.
Even though there are a number of EU Member States who have introduced plans for bank
levies, overall agreement on a common approach is still missing – which means the EU will not
be able to speak with one voice on the issue at the upcoming G20 meetings. Certain Member
States want to use the proceeds of the levies to finance ex ante funds, to deal with future crises.
Other Member States, including the UK, prefer to use the money to strengthen their own
Similarly, a number of Member States favour a financial transaction tax, to deal with the effects
of the banking bailouts. The European Commission has been careful to stress that is “neutral”
on the idea, even though it also stated that bank levies and FTT “are not mutually exclusive”.
Any Commission proposal on a financial transaction tax would need unanimity amongst the
Member States to pass. This seems unlikely now: a handful of other countries, including the UK,
used the September 7th meeting to voice their opposition to any such proposal.
In response to this, in a Communication on 7 October the Commission has now stated its
preference for a ‘financial activities tax’, which would be levied on profits and remuneration.
“Following in-depth analysis of possible options for taxing the financial sector, the Commission
is of the opinion that the FAT would be the best instrument for an appropriate taxation of the
financial sector and the need to raise new revenues in the EU.” Member States have backed
the general approach of the Commission, which would lead to legislative proposals before the
summer of 2011. What this will mean in practice however, will depend a lot on the detail of
those proposals.

European Commission marks upcoming review of MiFiD by organizing a Hearing
for stakeholders, moves towards increased transparency to be expected
On September 20th, the European Commission organised a 2-day public Hearing for all
stakeholders on its planned review of the Markets in Financial Instruments Directive. In
November, the Commission will publish its long awaited public consultation on the review. In Q1
of 2011, it will come forward with proposal for an overhaul of MiFiD.
The Commission used the meeting to table a number of the topics it will focus on in the review,
amongst which:
    •   Ensuring transparency and efficiency are balanced in trading of financial instruments,
    •   Changes in market structure and competition between trading venues, including
        regulation of MTFs and BCNs,
    •   Improving market data consolidation: provisions on the establishment of a consolidated
    •   Investor protection,
    •   Application of MiFiD to trading in derivatives.
At the Hearing European Internal Market Commissioner Barnier lamented the opacity of
fragmented markets. Carlos Tavares, Chair of CESR, warned against regulatory arbitrage by

                               EU Affairs Update – Issue No. 1, 2009

MTFs and defended the supervisors’ MiFiD advice to the Commission on trading in bonds and

EU Institutions still trying to reach agreement on AIFM Directive
Member states and MEPs are close to brokering a deal on the AIFM Directive proposal, which
aims to increase the transparency of alternative investment funds, force them to retain capital
and use depository banks. MEPs and the Belgian Presidency of the EU will meet with the
Commission on 26 October to try and break a months-long deadlock. The main point of
discussion on the 26th is be the final outstanding point of controversy: treatment of third country
The leading MEP, French Christian-Democrat Gauzès has said he is confident that the
Parliament will be able to vote on a deal at its next Plenary session in Strasbourg on 10

Proposal for short selling regulation under negotiation: application to sovereign
debt questioned by certain Member States
The European Commission’s proposal for a Regulation on Short Selling and ‘certain aspects of
Credit Default Swaps’ is currently in negotiations between the Member States. The European
Parliament will start looking at it with a first exchange of views in its Economic Committee on 8
The proposal contains a number of significant changes:
    •   Upon publication, the Commission stated naked short selling can lead to settlement
        failure. It has not proposed that to enter a short sale, an investor must have borrowed
        the instruments concerned, entered into an agreement to borrow them, or have an
        arrangement with a third party to locate and reserve them for lending so that they are
        delivered by the settlement date [at the latest 4 days after the transaction]. Trading
        venues must ensure that there are adequate arrangements in place for buy-in of shares
        or sovereign debt, as well as fines and a ban on short selling, where there is a
        settlement failure.
    •   With the proposal, the Commission further aims to enhance transparency by requiring
        that all orders on trading venues be flagged as 'short' if they involve a short sale.
    •   Investors will have to disclose significant net short positions in shares to regulators if
        they hold more than 0.2% of issued share capital, and to the market if they hold more
        than 0.5%.
    •   The new EU Securities and Markets Authority (ESMA) will coordinate supervisory action
        when necessary, amongst others to prevent market turmoil, by restricting or even
        banning short selling, in certain exceptional circumstances. In line with the new
        supervision framework outlined above, ESMA will have the possibility, when an
        emergency situation has been declared, to restrict or prohibiting short selling itself.
The Commission has stated that especially for sovereign bonds, regulators “will be better able
to detect possible risks to the stability of markets by receiving data on short positions, including
those obtained through sovereign CDS.” The proposal aims to exclude market makers.
Interestingly, a number Member States are now questioning the application of the regulation to
sovereign bonds. The Commission is said to want sovereign bonds within the scope of the
regulation, precisely because they were the original political motivation for the initiative. This
might lead to Member States pushing to curtail ESMA’s power to ban short selling of sovereign
bonds. It will take at least several months before we have clarity on the final text of the new

                           EU Affairs Update – Issue No. 1, 2009

                                     - COMING UP -

•   End of 2010:EC proposal for a reviewed Securities Law Directive

•   End of 2010: EC proposal for a reviewed Market Abuse Directive

•   Beginning of 2011: EC proposal for CRD IV, the Capital Requirements Directive that
    will transpose Basel III into EU legislation

•   Beginning of 2011: EC proposal for a reviewed MiFiD

•   March 2011: EC Directive Proposal on Bank Resolution, alongside Directive
    proposals on Shareholder Rights and Audits

•   June 2011: EC Directive proposal for regulation of Central Securities Depositaries

•   Before summer 2011: EC proposals for financial activities tax

                                       For further information, please contact:

                                       Christiaan Smits


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