I’ve been spending too much time recently thinking about the financial transaction tax (FTT), the proposal for which is rumbling through the Brussels process under the enhanced cooperation rule. What the latter means is that at least nine member states must be behind a proposal for it to be implemented. At present there are 11 and one of the interesting points to muse on is whether there could actually be at least three member state defections. Metaphors about rats and sinking ships might spring to mind but they would be inappropriate.

I am suffering quite strong pangs of déjà vu, having looked back at the testimony I gave to ECON in the European Parliament in February 2012. The arguments I tried to make then are now being much more widely heard. I suggested that this was a taxation proposal that falls wide of the mark, in that the economic burden will in fact be borne by consumers and the real economy rather than the banks. I was at pains to stress that the core political objective, which then as now is to recover for the taxpayer some of the cost of bailing out the financial system, is one that I and almost everybody must consider reasonable and right. The only problem of course is that the tax fails to make the banks pay. This is all very reminiscent of the much more recent realisation that bail-in has to be a necessary part of saving banks.

Tomorrow evening I’ll be participating in a seminar in Brussels to discuss FTT. Unlike my appearance at the European Parliament, when I was surrounded by so much political hostility that I seemed to be in a minority of one, the audience tomorrow should be much more friendly: it is largely made up of representatives of member states that are not FTT enthusiasts. The even better news is that Germany (an FTT supporter) is to be well represented, which is encouraging as that member state must surely be one where common-sense could still prevail (if the little local difficulty of impending elections can be overcome).

Pondering the FTT issues, one nuance rather amuses me and I thought it worth recording.

The political grandstanding around FTT makes the argument about payback from the banks to recompense taxpayer costs. A laudable objective and as implied above, one that I essentially support. All except the banks will pay for FTT and in practice this means all of us, including our pension funds. Do I exaggerate? Maybe just a little, but surely neither the banks’ shareholders nor their employees (through salary and bonus) will carry the cost of the tax.

Amidst all the fire and brimstone associated with political debate about FTT, what the politicians have chosen to overlook is what is arguably a much more serious aspect of the banking system. That is that much of the economic behaviour of banks looks distinctly oligopolistic. I’m sure that most individuals would agree that they are subject to a less than truly competitive market in their dealings with banks. And companies too most often feel that their broader business relationships with banks – whilst often valued and supportive – are perhaps characterised by a lack of true competition. Less self-evident perhaps during those glory days when markets such as London were absurdly over-banked.

A further nuance in this situation is that if the FTT proposal is implemented, it will surely do considerable damage to the business models of FTT zone banks, as well as potentially to all banks within the European Union. So far from implementing a strongly based taxation model that will generate the recompense sought by the politicians, the outcome could be a tax carried by the banks’ customers, enfeebled EU banks and a stimulus to the rest of the world watching with considerable glee as a purely political agenda is pursued here in Europe.


As followers of the EACT will know we have been very engaged with Brussels on the post-crisis financial regulatory agenda for nearly three years now. It has been a hugely fascinating and I believe productive time for us. We can claim a direct role in winning support for the exemption of corporates from the most controversial impact of the derivatives regulation; this outcome is immensely significant for the ability of the ‘real economy’ to allocate funds to working capital and productive investment, rather than to holding those funds to meet possible future margin calls as a result of having to use central clearing houses for derivative positions.

The battle has now moved on to the EU’s implementation of Basel III through the capital requirements directive and regulation (CRD IV and CRR). As I write this is a very live issue and will continue to be so for many months if not well into 2013 – but I can say that there are indications that in the European Parliament, Council and increasingly amongst Member States there is an acceptance that there is a real question over the way Basel III (and CRR) imposes ‘punitive’ CVA charges on uncleared derivatives. Our objective is to ensure that EMIR and CRR work consistently, thereby preserving the economic importance of EMIR’s exemption of the legitimate risk-mitigating use of derivatives by the real economy to offset financial risk arising in the business.

The harder we (and treasury associations and companies) work to present the position of the end users in debate about the financial regulatory impact, the greater seems to be the risk that we are malignly alleged to be the mouthpieces of the banks. I find this dispiriting, as it suggests that educating the authorities in Brussels and elsewhere on how financial regulation impacts the real economy remains work in progress and is certainly not complete.

To underline the EACT’s independence from the banks this is a good opportunity to point out areas where we undoubtedly find ourselves on the side of the Brussels authorities and certainly not in the camp of the banks. When investment banks and market intermediaries abuse the market and/or infringe competition law, non-financial companies are among the first victims.

The Commission’s Competition Directorate is currently investigating wholesale financial markets through various means, including the now much publicised LIBOR case. These cases get all the EACT’s attention, and DG COMP’s cartel busters have our full support. If at some point banks are found guilty of any wrongdoing I am absolutely convinced that many EACT members’ companies will seek damages in court – that is their fiduciary duty; but in the short term we will also focus a lot of attention on how banks and market intermediaries have treated and charged the real economy, and on how they will do so going forward.

The Commission’s new Market Abuse directive and regulation proposals are also likely to get our open support. These provide for effective and reinforced administrative sanctions and for the harmonization of EU-wide rules to ensure that Member States adopt minimum criminal sanctions – extending to inciting, aiding and abetting insider-dealing and market manipulation, as well as attempts at these forms of market abuse. We are also likely to endorse the adoption of a horizontal regime for sanctions, as well as consistent application across the 27 Member States of the definitions of what constitutes market abuse and insider-dealing; we will not want to see any intra-EU legal loopholes.

So it should be clear to the Brussels authorities that it is unhelpful and dangerously misleading to portray the EACT and others as the agents of the banks. Those of us who have spent careers in and around corporate treasury will treat the suggestion as barely meriting mention and will be concerned that it should be given any credence in Brussels, at a time when it is so important that the financial regulatory agenda moves forward effectively.

No, I’m not trying to be facetious about the big sleep….oh well, maybe I am but only slightly so. I’ve not been travelling at all during August but to judge from the ‘out of office’ messages I’ve been receiving the three or four week August holiday is still being enjoyed by many across Europe. Now there are slight signs of an awakening; a stirring in the undergrowth of Europe as people return to their homes and their desks. I am again receiving emails with content rather than the dreaded message, the gist of which is ‘I’m off enjoying myself and no I really won’t be thinking about what’s on your mind..….and that state of wilful disinterest will prevail for several weeks’.

I should of course acknowledge that some political leaders have broken their holidays – for a day or two at least – to show a face to the media and suggest that the levers of power are indeed being pulled with authority from the beach or the mountains or, as is the case for most of my fellow countrymen, the Tuscan villa or the gite in France.

Meanwhile there is a huge crisis throughout Europe. About that I will not attempt to blog other than to suggest that, as a committed European but deep sceptic about the foundations of the eurozone, I am not the least bit surprised.

The EACT and the corporate community in Europe have their own treasury management crisis to handle. Actually the community has of course several to face but the one I am most preoccupied with today is the threat contained in the CRD IV proposals (already on the table) and the changes to MiFID (not yet published but due in the coming months). I blogged about this earlier and the threats I highlighted then have not gone away.
The EACT is sufficiently concerned about these threats that we are mobilising to produce once again an open letter to the EU Commissioners and others in Brussels. We have done this before; in January 2010 a similar open letter was signed by more than 160 European companies and I would like to think this acted as a catalyst for ensuring that a more sensible approach to the European regulation of derivatives (EMIR) has slowly emerged.

The focus of the new letter is not just on the risks that CRD IV and MiFID will undo all the good that was negotiated into the derivatives regulation through the corporate end user exemption. We particularly want the letter to highlight the continuing failure of Brussels to engage properly with the real economy in its approach to financial regulation. The voice of the financial sector has been powerful for too long, even if now seriously discredited in the eyes of politicians; this has encouraged what often looks like a blind eye approach to financial regulation, in which its impact on the real economy is relegated to become an afterthought.

In the US the Chairman of the Federal Reserve and the Acting Comptroller of the Currency have acknowledged that they cannot know the overall effect on the real economy of all the changes that are being made. I see no reason to expect the position in Europe to be very different. The real economy generates employment, drives the demand for productive investment and will always be critical to economic growth. The financial sector by contrast creates uncertain employment for many and has little interest in investment in good old-fashioned productive capacity. I won’t enter into the debate about the true value-added of much of the financial sector but you can probably surmise my views.

We are currently collating names for the open letter and I am hopeful that with the return from holidays underway we will have a powerful list capable of underlining to the Commissioners why a more open debate is still needed in Brussels on financial sector regulation.

How seriously is ESMA taking the impact on non-financial end users of the new financial regulatory regime on Europe? The answer now may be….not at all. Over the last few months ESMA has been considering who to appoint to the Securities and Markets Stakeholder Group, a new body established to ‘to help facilitate consultation with stakeholders in areas relevant to the tasks of ESMA’. I should at this stage declare an interest; I was a candidate for appointment, as were the group treasurers of some of the largest companies in Europe. Nobody from this group has been appointed.

You might well ask, how on earth can ESMA accomplish its difficult task to lead in the implementation of derivatives market regulation (EMIR, in Europe) unless it properly recognises three things:
– very material open issues in the implementation of the new regulation revolve around how non-financial end users should be treated;
– ESMA desperately needs good advice from those who are directly affected by the uncertainties (and potentially, the unintended consequences) of the new regulatory environment; and
– these markets would of course not exist were it not for the underlying risks being managed in the real economy by precisely those people who sought to sit on the advisory group.

I have to admit to being left almost wordless by what has happened. This seems to be a huge snafu on the part of the European Commission and ESMA. Of course, as in most sorry stories it actually gets worse. The background of the seven people appointed to ‘represent users of financial services’ are:
– an Italian trade association representing issuers (could be useful)
– a Portuguese ratings company
– a Spanish hedge fund
– EFRAG – an EU advisory group on financial reporting
– EFAMA – a European trade association representing asset managers
– a German bank (surely some serious mistake?)
– the Shell asset manager for its pension fund

Do we see the real economy – the widget manufacturers and service providers – in this list? Not at all.

To add insult to injury those selected to represent ‘financial markets participants’ are almost entirely drawn from clearing houses and exchanges, with just one banker (an ex-regulator) on this list.

It makes no sense to drag the real economy into financial markets regulation and then fail to invite a single treasurer to become a member of ESMA’s stakeholder group. Whilst that real economy, on which Europe depends for growth and employment, has never been the source of systemic risk it is profoundly impacted by the new regulatory environment.

We only (!) have to work our way through 977 amendments to the EMIR (derivatives regulation) proposal to understand whether corporate Europe has a good chance of retaining its ability to use derivatives to mitigate commercial risk without committing to cash collateralisation.  The key work on this is the task of the members of ECON and it’s difficult not to feel just a little sympathetic to those on that parliamentary committee who take their responsibilities seriously as they should.

Of course even if the passage of EMIR through ECON (and therefore the European Parliament) is smooth there are the still the bear traps about which I’ve previously blogged to be overcome.  In short order these traps are the process of ‘trialogue’ in Brussels, the rule-making by ESMA and of course the final outcome on Basel III.

The amendments themselves largely address the primary concerns we and individual corporates have been arguing in Brussels and Strasbourg over recent weeks.  We want a sensible approach to what ‘objectively measurable’ means; avoidance of ‘clearing shock’ (backloading); recognition of group financing activities and intra-group activities linked with mitigating external risk; practicality in defining how the clearing obligation can be both incurred and shed; acceptance that certain types of pension funds (as in the UK, Holland and Sweden) need the same treatment as their corporate sponsors; and finally a commitment not to allow CRD IV (leading to Basel III) to undo the advantages of the treatment of corporates in EMIR.

Key dates now are the debate in ECON on 4 April and their vote on 20 April.  There is speculation that this timetable will be unachievable and from leafing through those 977 amendments I must – as suggested above – feel just a little sympathetic.

Trialogue only starts after the completion of the work in the European Parliament and as I understand it could prove either smooth-going or be contentious and political if there are real differences coming to the fore between the three EU institutions whose job it is to make the trialogue work – the Parliament, Council and of course the Commission.

And then we have ESMA – charged amongst all its other roles with the rule-making on EMIR.  At least the most senior appointments in ESMA have been completed.  In the EACT we look forward to working with the team as far as we can and of course contributing to the consultations that will be launched over the next eighteen months.

The outcome on CRD IV / Basel III is the most difficult one to predict.  It is clear to me that there is considerable sympathy in Brussels for the position we have argued – which is that CRD IV (in the first place) should not undo the good work of the corporate ‘exemption’ in EMIR by mandating punitive capital requirements on uncleared, bilateral OTC transactions.  I won’t repeat the arguments here about financial sector systemic risk – or lack of it – associated with corporate risk mitigation.  We will continue to try to influence the Basel III outcome.  I am however by now a slightly battle-scarred if usually optimistic veteran of influencing in Brussels; it is dispiriting to be advised by those with much more experience that Basel is a tougher nut to crack!

This is the time of year when I often wonder whether I am the last person left standing; everybody else seems to have departed for the beach, the mountains, the little house in France…..  I am tempted – and yes, I’m giving in – to repeat that catch phrase from a wonderful comedy series on television here in the UK: ‘I don’t believe it’.

No, I mean what I say: I don’t believe it.  How can business and government in Europe be taken seriously when with the arrival of summer everything grinds to a halt?  I am told that Brussels is deserted and will remain so until late August.  I have no meetings there until early September.  A glance at the pricing (low) of Eurostar tickets to Brussels confirms that right now the train service from London is deprived of the support of its regular cohort of politicians and lobbyists shuttling to and from Brussels.

All this might just be trivially amusing, and no more than that, were the world we live in not such a serious and challenged place right now.  You might have been tempted to think that this very precariousness of our world would demand less time ‘on the beach’ and more time trying to restore things to what might be remembered as normality once upon a time.  But you would be wrong, apparently.

Inevitably the issue that continues to be of most concern to us in the EACT – the future regulation of derivatives – is at a crucial stage in its progress through Brussels.  And where are the bureaucrats and politicians who should be working on it?  For the most part, they also are on the beach so far as I can tell.  Brussels contacts report that there are ‘caretakers’ in charge of the Commissioners’ cabinets.  Amongst native English speakers the term caretaker suggests someone who opens and shuts the door and occupies much of the rest of the working day with a bit of desultory sweeping of the floors (the ‘concierge’ of those wonderful apartment blocks on Paris).  Maybe that is what is happening in Brussels right now.

There are rumours that deep in the heart of the Commission there remains through late July and August a small group of vacation-phobes, who are conspiring to rush through the regulation of derivatives whilst everybody else is assumed to be distracted by the pressure of taking a holiday.  The EACT will be vigilant (I am tempted to indulge myself and say that the A team chose not to go on holiday for this reason!) and will engage with the Commission once again as soon as their proposals emerge.  We are pleased that the signs are that key people in Brussels have listened to us; there appears to be a real concern to see that the final outcome does not do as much damage as the original proposals threatened to corporate risk management.

My vacation?  An extended one later in the year.  I’m sure nobody will notice.

Consultation closes at the end of this week on the European Commission’s approach to regulation of derivatives.  The EACT submission will be released in the next couple of hours and will then be available on our website.  Our position is clearly summarised in the submission:

– we favour transparency and support the ‘information threshold’ provided certain simple and pragmatic conditions are met;

– we think the clearing threshold is not just unnecessary but also systemically dangerous.  Instead of preventing the next crisis its implementation could trigger such a crisis; and

– there is a real threat of regulatory divergence with the US if the EU goes ahead as it proposes.  This will be detrimental to employment and growth in Europe and the EACT is clearly opposed to tolerating regulatory arbitrage.

We want to help the European Commission – which I perceive as struggling – so we offer an alternative solution, involving national supervisors and ESMA; we believe this would be both efficient and workable.

The campaign is of course by no means over.  We will await with interest the conclusions of the Commission in Brussels; but in the meantime the EACT is playing a key role in trying to ensure there is a systematic initiative to brief key EU stakeholders on the issues – so that even if the Commission fails to recognise what is at risk (if you’ll forgive the pun) at least the wider EU governance process will be aware and we hope supportive in the end.