1. Welcome to Euro Shorts, a short briefing on some of the week’s developments in the
financial services industry in Europe.
If you would like to discuss any of the points we raise below, please contact me or one of
our other lawyers.
Claire Cummings
020 7585 1406
claire.cummings@cummingslaw.com
www.cummingslaw.com
EU bonus cap
The European Commission has asked the BoE to explain how new allowances in
UK bankers’ pay comply with the EU bonus cap. It is reported that UK banks are
expected to raise the non-bonus part of remuneration with monthly or quarterly
allowances; under EU rules, bonuses cannot exceed fixed salary, or double this
amount with shareholder approval, and so the Commission has demanded that
the PRA clarify the allowances. The UK is currently challenging the bonus cap
in the ECJ, arguing that it goes beyond EU powers and will push up fixed pay,
creating a risk that banks will not be able to cut costs quickly if the markets are
in trouble. The bonus cap is due to come into effect in 2015.
EMIR
Regulators are said to be concerned that the market is not ready for next week’s
approaching deadline for the start of mandatory reporting under EMIR.
According to some estimates, a little over 8% of the region's derivatives users
have so far registered for the preliminary legal entity identifier (LEI) that will
allow them to report their over-the-counter and listed trades. Regulators have
sought to engage with as many bodies as they can and to hold seminars and other
events, but there is a recognition that reaching all of the targeted institutions will
be a challenge.

2. PE guidelines for good practice reporting
The Guidelines Monitoring Group published an updated version of its guidelines
on good practice reporting by private equity portfolio companies under the
Walker Guidelines. The substantive content of the guidelines remains unchanged
from the version issued in March 2012, but do, however, include updated
examples of reporting drawn from portfolio companies' accounts over the last
two years that the GMG considers to represent good practice. The group notes
that the annual report when taken as a whole should be considered fair, balanced
and understandable to a user of the accounts. In relation to the definition of a
portfolio company for the purposes of the reporting guidelines, the group is
currently reviewing whether the transaction size criteria should be lowered to
bring more portfolio companies into scope and any changes will be announced
during 2014.
Crowdfunding
IOSCO has published a working paper on the risks and benefits of crowdfunding
i.e. peer-to-peer lending and equity crowdfunding. The report provides a global
overview of the crowdfunding industry, together with a mapping exercise of the
global regulatory landscape. It seeks to identify investor protection issues and to
determine whether crowdfunding poses a systemic risk to the global financial
sector. The main risks set out in the report are: default risk, platform risk, fraud
risk, illiquidity risk, risk of cyber attack, lack of transparency and disclosure
risks and the risk of investor inexperience. The report concludes that FR
crowdfunding does not currently present a systemic risk to the global financial
sector, although it does pose problems for investor protection that need to be
addressed. The paper states that the views expressed in it are those of IOSCO's
research department and do not necessarily reflect the views of IOSCO or its
members.
Stress tests for EU banks
The European Banking Authority has announced the details of the stress tests it
will be subjecting 124 major EU banks to this year. Although precise terms of
the tests have yet to be announced, the EBA has said that they would involve
credit risk, market risk, sovereign risk, securitisation and the cost of funding. The
objective of the stress tests is to assess the resilience of financial institutions in
the EU to adverse market developments and assess the potential for systemic risk
to increase in situations of stress. In order to pass the tests, banks will need their
main measure of capital to be above 8% and 5.5% in the most stressed scenarios.
Amongst the banks taking part are Barclays, HSBC, RBS, Santander, Deutsche
Bank and the Lloyds Banking Group.

3. European Parliament votes to adopt CSMAD
The European Parliament has voted to adopt the proposed Directive on criminal
sanctions for insider dealing and market manipulation (CSMAD). The CSMAD,
together with the proposed Regulation on insider dealing and market
manipulation (MAR), make up the MAD II legislative proposals that will replace
the Market Abuse Directive (MAD). The European Commission has published a
set of FAQs on CSMAD. The Council of the EU will now formally adopt the
text of the CSMAD proposal at a future meeting. Member States will have two
years to implement the Directive after publication in the OJ, which is expected in
June 2014.
Financial Transaction Tax
The European Commissioner for tax has urged Parliament to push through the
implementation of the FTT, amid fears that the 11 Member States have become
susceptible to vested-interest groups. Algirdas Semeta said that Parliament has
already presented viable concessions to the tax, including the removal of the tax
on real economy transactions and intra-group transactions and that supporters of
the FTT must adapt to the reality and determine what can be achieved.
Germany's top two governing parties have indicated that they are prepared to
accept a tax on stock trades as part of a move toward a broader FTT. The move
could bolster Germany's goal of partnering with France to get Spain and Italy to
implement the tax. Efforts to reach a compromise have been given additional
impetus by Greek’s assumption of the Presidency, as it is in favour of the FTT.
EU and US to co-operate on derivatives reform
The EU and the US regulators have pledged to work more closely together on
reforming the derivatives market. The EU and US are putting into effect a host of
measures to reform the financial industry and have agreed to try to minimize the
divergence on margin requirements, particularly once new international
standards have been widely adopted. According to reports this week, it appears
that the EU is nearing agreement with the US to grant EU swap-trading
platforms a reprieve from the Dodd-Frank Act rules, which are due to come into
effect next week.

4. Government response to failed ECJ challenge on short selling
The UK government has responded to the ECJ judgment on its challenge to
ESMA’s powers under the Short Selling Regulation. It states that it is
disappointed that the ECJ has not upheld the UK's legal challenge, as the
government has consistently said it wants tough financial regulation that works,
but powers conferred on EU agencies must be consistent with the EU treaties,
and ensure legal certainty. It confirmed that the ruling bears no impact on the
day-to-day application of the Short Selling Regulation and that it has no
implications for other legal challenges made by the UK relating to financial
services regulation.
UK falls to 19th in PwC ‘premier league’
The UK is struggling to stay in the premier league of countries ranked by PwC
after suffering more grievously than other countries. PwC’s Escape index placed
the UK 19th, which is down seven places from its pre-financial crisis position.
According to PwC, the UK has had relatively low GDP per capita growth and
high inflation since the crisis, although both of these improved last year. The
league table is headed by Sweden, Switzerland and Singapore and is based on a
range of yardsticks, such as economic, political, social, technological and
environmental indicators of success.
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www.cummingslaw.com
7 February 2014