Subject: Traders fear threat of political agendas - FT
From: "Michael Andrews" <[email-masked]>
To: "Devon Archer" <[email-masked]>, "Curtis Hastings" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Hunter Biden" <[email-masked]>, "Neil Callahan" <[email-masked]>
Date: Wed, 5 Jan 2011 12:30:55 -0500

Traders fear threat of political agendas

By Nikki Tait in Brussels
Published: January 4 2011 20:09 | Last updated: January 4 2011 20:09
Radical changes to Europe’s system of supervising its banks, insurers  
and securities markets, taking effect this week, are central to plans  
by the European Union to bolster financial regulation and oversight in  
the 27-country bloc.

The creation of four new pan-European agencies is aimed at helping to  
prevent a repeat of the region’s financial crisis. But the new  
supervisory bodies are being watched warily by traders and executives  
in the City of London, Europe’s biggest financial centre.

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London’s fear is that the new entities’ job of drawing up common,  
harmonised rules for the finance sector and protecting it from  
systemic problems will be overtaken by political agendas, and that the  
bodies will not appreciate sufficiently the need to keep Europe  
competitive with other global financial centres.

“It’s an unsettling process. A single market [for financial  
services] is a good thing . . .  But people need to be close to  
the markets they’re regulating,” says Barney Reynolds, head of the  
financial regulatory group at the law firm Shearman & Sterling in  
London.

The concern, he adds, is that the agencies may follow “a moralistic  
political agenda”, rather than conduct a “dispassionate technical  
exercise”.

On Tuesday, the European Commission hailed the creation of the new  
regulators as a “turning point in financial supervision in Europe”,  
saying they would strengthen a system whose weaknesses had been laid  
bare by the financial crisis. In the process, they will also make  
Europe’s financial sector more attractive to investors and more  
competitive, it said.

The four new agencies comprise three European supervisory authorities  
(ESAs) to oversee the banking, insurance and securities markets  
sectors, together with a broader European Systemic Risk Board (ESRB),  
which will warn about dangers building in the financial system.

The European Banking Authority (EBA) will be based in London; the  
European Securities and Markets Authority (ESMA) in Paris; and the  
European Insurance and Occupational Pensions Authority (EIOPA) in  
Frankfurt.

All three are being created from existing pan-European  
“committees”, which are made up of national regulators from the 27  
EU member states and function on a co-operative basis. By contrast,  
the new authorities will have more powers – including the ability to  
override national authorities in emergency situations – and greater  
resources in terms of staff and finance.

Officials involved say it may take a few months before staffing is  
complete. The final appointment of the new chairmen at the ESAs is not  
expected until early spring, although rounds of interviews were  
conducted before Christmas

But the ESAs are expected to have about 150 staff in total in 2011 and  
cost about €40m ($53m) to run. That staffing should then double  
during the next four years – although it will remain a pale shadow of  
some national supervisors. The UK’s Financial Services Authority, for  
example, employs more than 3,000.

The ESAs are expected to line up their new powers quickly: ESMA, for  
example, plans to hold a board meeting next week.

EU policymakers have already stacked up tasks for the new authorities.  
One of the first jobs for the EBA will be to oversee a new, and  
hopefully more convincing, set of stress tests for European banks,  
which Brussels would like to begin in February.

That process of building up the ESAs’ responsibilities is likely to  
accelerate through this year. At least a dozen significant legislative  
proposals for the financial services sector are due to be released in  
2011. Most will give specific rule-making rights to the ESAs.

That means City institutions and their advisers will need to keep a  
close watch on Brussels, but also on Paris, Frankfurt and London, as  
they try to guard against excessive regulation.

“Unless you’re keeping a hawk-eye, you blink and miss things,”  
warns Mr Reynolds.

The new watchdogs

Securities and markets based in Paris: The European Securities and  
Markets Authority has a full plate. Charged with harmonising  
regulation of shares, bonds and other financial instruments, it has  
also been given responsibility for several fresh areas of regulation,  
including the new directive on hedge funds and private equity,  
oversight of credit rating agencies and new rules on over-the-counter  
derivatives. It will also tackle the first big update of the markets  
in financial instruments directive and create rules against market  
abuse and insider dealing.

Banking based in London: The European Banking Authority will have an  
early chance to gain, or lose, credibility, when it administers a new  
round of stress tests of the continent’s banks, as early as next  
month. The EBA’s predecessor entity was criticised for not running  
more robust tests last summer. The criticism was borne out in November  
when two Irish lenders required state bail-outs. The authority will  
also play an important role in determining how Europe adopts  
international regulatory standards on capital and liquidity.

Insurance and pensions based in Frankfurt: The European Insurance and  
Occupation Pensions Authority’s big task is to complete and implement  
a new set of capital rules for the insurance industry. The so-called  
Solvency II rules, which have attracted heavy criticism from the  
industry, are designed to improve alignment of the capital that  
insurers hold with the risks they take. The rules are complicated and  
require more sophisticated modelling and management techniques than  
many insurers, or their regulators, currently use.