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					                                                    MTS EU NEWSLETTER
                                                                           NOVEMBER 2010


 TABLE OF CONTENTS

 EU Public debt and deficit

 •   EU Finance Ministers outline a permanent mechanism to deal with the eurozone’s debt
     crisis
 •    Discussion on Eurobonds continues
 •    EU Finance Ministers agree on a €85 billion bail-out for Ireland
 •    November sees a large degree of uncertainty in the eurozone sovereign bond markets

 •    Discussions on the Regulation of Credit Rating Agencies
 EU Financial Markets Regulation

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


 Coming up




EU Public debt and deficit

EU Finance Ministers outline a permanent mechanism to deal with the
eurozone’s debt crisis
On 28 November the EU finance ministers approved the outline of a permanent system for
resolving Europe’s debt crisis which will be called the European Stability Mechanism. This
comes just six weeks after France and Germany released a joint statement which called for a
permanent mechanism for bailing out Member States. The European Commissioner for
Economic and Monetary Affairs, Olli Rehn, has stated that after 2013, private bondholders may
have to share the burden of restructuring eurozone sovereign debt. The IMF prefers Collective
Action Clauses in sovereign bonds which allow for a majority of bondholders to compel
restructuring. Commissioner Rehn stated that such Collective Action Clauses would apply to
euro area sovereign bonds from mid-2013.
On 16 – 1 7 December, the EU heads of state and government are due to formally agree to this
permanent crisis resolution mechanism which will involve a permanent intergovernmental facility
which will replace the €440 billion rescue fund in 2013.


Discussion on Eurobonds continues
While Eurobonds have not been mentioned as part of the European Stability Mechanism, as
discussed by the EU Ministers for Finance on 28 October, they are still an important point on the


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                              EU Affairs Update – Issue No. 1, 2009



agenda. In November the Group of Socialists and Democrats (S&D) in the European Parliament
and Luxembourg’s Prime Minister Jean-Claude Juncker who is also the head of the group of
eurozone countries, have called for the use of Eurobonds.
S&D released a statement on 25 November which called for the setting up of a stability agency
which would have the responsibility of issuing Eurobonds. They called for this system of debt
management to come under the same mechanism as the permanent mechanism for debt crisis
resolution.
Luxembourg’s prime minister has also called for Eurobonds to be used to finance the bailouts of
euro-governments which are deficit strapped. On 8 November he also called for MEPs to look
into the extent to which Eurobonds could be used for these means. The full outline of the
permanent crisis resolution mechanism in December will clarify the extent to which Eurobonds
will be used.


EU Finance Ministers agree on a €85 billion bail-out for Ireland
Following much speculation and extensive talks between the European Commission, EU
leaders and the IMF, on 28 October a €85 billion bailout plan on an average interest rate of 6%
was agreed for Ireland. This is due to run for 7.5 years and Ireland has been given until 2015 to
reduce its deficit to the eurozone acceptable level of 3%. The money will be split into €35 billion
for the reconstruction of the Irish banking sector and approximately €50 billion to cover the
deficit in Ireland’s public finances.
On 6 -7 December, the EU finance ministers are due to formally approve the policy conditions
which will attach to this bailout.


November sees a large degree of uncertainty in eurozone sovereign bond prices
November was a tense month on the bond markets as uncertainty grew regarding the measures
which would be taken to improve the imbalances in the finances of the eurozone countries.
Early in the month, borrowing costs for Ireland, Greece and Portugal rose sharply in response to
two important events: Firstly, German Chancellor Angela Merkel proposed that investors would
have to bear more of the losses in future state bailouts and secondly, the initial approval by
Finance Ministers of the Franco-German proposal to create a permanent bail-out mechanism.
The Commission has to give an outline on how this would operate in December. This along with
growing speculation that Portugal and Spain are also heading towards a bail-out has shaken the
markets and increased the cost of borrowing for the Greece, Ireland, Portugal and Spain.
As the month progressed the cost of borrowing continued to rise and on 11 November it
reached the highest point for Ireland since the creation of the single currency in 1999. Italy,
Spain and Portugal also felt the effects of uncertainties in the eurozone with high borrowing
costs. There was little change to the eurozone bond yields on 29 November following the Irish
bailout agreement which could be a sign of the uncertainty that still surrounds what is now going
to happen with Spain and Portugal.


Discussions on the Regulation of Credit Rating Agencies
On 22 November the European Parliament’s Economic and Monetary Affairs (ECON)
Committee voted in favour of a report on credit rating agencies which would bring them within
the supervisory remit of the EU’s new markets regulator, i.e. the European Securities and
Markets Authority, ESMA. MEP Jean-Paul Gauzès (France, Group of the European People’s
Party) who was the rapporteurs for this report stated that: "The path towards the better
supervision of credit rating agencies at European level is now open. These agencies, which
have been regulated by the European Union since 2009, will now be supervised by the
European Securities and Markets Authority (ESMA)".




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                               EU Affairs Update – Issue No. 1, 2009



This report will act as the basis for negotiations with the Council which started on 24 November.
The European Parliament will be looking to attain an agreement on the role of ESMA before it
becomes operational in January 2011.
CRA’s have been governed by European law since 2009 and this report looks at a revision of
Regulation 1060/2009. The changes proposed by this report would involve more control at a
European level.
The Commission has confirmed that they plan to release a legislative proposal and an impact
assessment in mid-2011. The European Parliament is writing up a report in parallel to the
European Commission’s drafting of this legislative proposal. They are both expected to reduce
reliance on credit rating agencies, increase competition in the area and reduce the possibility of
credit rating agencies being influenced by those who pay for their services.


EU Financial Markets Regulation

Proposal for short selling regulation under negotiation: application to sovereign
debt questioned by certain Member States
As reported, 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.
In short, the proposal contains a number of significant changes:
    •   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 market (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.
    •   The proposal aims to exclude market makers, the definition of which is still up for
        debate.
The Belgian Presidency has held a number of meetings with experts from the EU Member
States to discuss possible changes to the proposal. As mentioned before, 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.
The Belgian Presidency will not continue driving the negotiations between the EU Member
States in the Council of Ministers any further, but plans to hand over the file to the incoming
Hungarian Presidency (from January 1st).
The European Parliament ‘Rapporteur’ (draftsman) Pascal Canfin MEP, a French Green deputy
has now written his report. He proposes to include corporate bonds in the proposal. He also
wants to ban naked CDS trading, a position shared by the pointperson of the Social-Democrats’
point person Robert Goebbels MEP. He also proposes disclosure of leveraged long positions,
lending transactions, marking for OTC and talks of buy-ins for OTC transactions.  




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                                EU Affairs Update – Issue No. 1, 2009



Whether a majority other MEPs will agree with him remains to be seen and will surely be the
object of lobbying by interested parties. Other MEPs will now table their amendments, adding to
Canfin’s ideas, before January 11th. MEPs will vote on their amendments on 7 February, after
which they will go into negotiations with the Member States (who will be represented by the
Hungarian government).
Proposal for markets infrastructure under negotiation
The European Commission’s proposal for a Regulation for markets infrastructure (aimed at OTC
derivatives and clearing houses) is currently debated by Member States and the European
Parliament.
To recap, in short, the proposal contains the following:
    •   The Commission proposed that OTC trade data should be reported to trade repositories
        and be accessible to supervisory authorities. Trade repositories will be subject to
        oversight by the new EU Securities and Markets Authority, ESMA. Trade repositories
        will have to publish aggregate positions by asset class.
    •   To deal with counterparty credit risk, the Commission also proposed that standard OTC
        derivatives should be cleared through central counterparties (CCPs). To standardize
        derivatives, they will have to meet predefined eligibility criteria (e.g. sufficient liquidity). If
        a contract is not eligible and therefore not cleared by a CCP, different risk management
        techniques must be applied. This will include requirements to hold more capital, which
        will be proposed later this year as part of 4th Capital Requirements Directive.
    •   CCPs will be subject to business conduct rules and harmonised organisational and
        prudential requirements, including internal governance rules, audits and harmonized
        capital requirements (to be drafted by ESMA and decided by the Commission). They
        will demonstrate they have access to either central bank liquidity or “reliable”
        commercial bank liquidity.
The Belgian Presidency has held a number of negotiating meetings with experts from the
Member States’ Treasuries and plans to have two more of these in December. One of the main
proposals has been to eliminate the ‘OTC’ from the proposal, making it applicable to all
derivatives. It will report on progress later this month, but no deal between the Member States is
in sight in the short term. As with the short selling proposal, the incoming Hungarian Presidency
will continue the discussions in January.

In the European Parliament, Rapporteur (draftsman) Werner Langen MEP, a German Christian-
Democrat, has started reviewing the Commission proposal. His suggestions for amendments
will be known only in January. Parliament has asked a panel of experts to do a study comparing
the US and the EU proposals for derivatives and markets infrastructure.




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                           EU Affairs Update – Issue No. 1, 2009




                                     - COMING UP -

•   End of 2010: EC Consultation on the review of MiFiD

•   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 christiaan.smits@freshfields.com
                                       +32.2.504.76.28




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