The new governance structure has been developed to oversee and manage the operational, regulatory and technological elements of the transition.

Due to the ‘significant’ interconnectedness within the EU capital market, a coordinated approach across the EU, involving authorities, market participants, financial market infrastructures and investors, is desirable, according to the watchdogs.

Among the key elements the governance model seeks to establish is an industry committee, made up of senior leaders and representatives from market players.

This committee will be chaired by Giovanni Sabatini, who has previously served as a member of the European Economic and Social Committee and held roles within International Organisation of Securities Commissions (IOSCO), European Banking Federation (EBF) and European Central Securities Depositories Association (ECSDA).

The governance model also seeks to establish various technical workstreams, focused on the technological adaptations needed to accommodate the transition to T+1.

The watchdogs added that two more general workstreams will also be established to review the scope and the legal and regulatory aspects of these adaptations.

Lastly, a coordination committee will be established, chaired by ESMA and with representation from the EC, the ECB and the chair of the industry committee.

This committee will be tasked with ensuring coordination between the authorities and the industry, advising on any issue that may occur during the transition.

The first meeting of the coordination committee is scheduled for 6 February.

ESMA has suggested 11 October 2027 as the optimal date for the transition to T+1 in the EU, aligning with the UK’s proposed switch and today, 23 January, Switzerland also announced plans to move to T+1 in October 2017, with the date now being a consensus between the EU, Switzerland and the UK.

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Following a mid-term review launched earlier this year, the EC has vowed to increase ESMA’s authority in order to “promote the effectiveness of consistent supervision across the EU and beyond.”  

Such a move would, according to the EC, ensure that a single set of rules is implemented in a uniform way across the single market.

The Commission also pledged to strengthen ESMA’s ability to identify and address weakness in national supervision as well as identify areas where the authority’s direct supervision may be required.

Other takeaways from the review include assessing the case of an EU licensing and passporting framework for FinTech activities.

This is part of the EC’s wider plan assessing how FinTech can contribute to capital markets through “data-driven solutions in asset management, investment intermediation and product distribution.”

In addition, a securitisation package, initially proposed in June last year, has been agreed by co-legislators.

It is hoped the package will free up capacity on banks’ balance sheets which could provide an additional €100 billion of funding to the European economy. 

“The CMU remains at the heart of our efforts to boost European investment and create jobs and growth,” said Valdis Dombrovskis, EC vice-president responsible for financial stability, financial services and CMU.

“As we face the departure of the largest EU financial centre, we are committed to stepping up our efforts to further strengthen and integrate the EU capital markets. This review makes clear the scale of the challenge and we count on the support of the European Parliament and member states to rise to it.”

Initially proposed in 2015 CMU had sought to harmonise a number of EU processes and introduce mechanisms by which to boost non-bank lending into the real economy. 

Experts had acknowledged it would take time to push through but engagement with the EC by the financial services industry had been positive. 

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Last week the European Commission began its process to ‘fast-track’ adoption of initial margin rules. If approved by the EU Parliament, the rules could go live by mid-November, instead of January 2017.

However this could prove problematic to banks, according to Scott O’Malia, CEO of the International Derivatives and Swaps Association (ISDA).

“Many banks enforce an end-of-year code freeze that prevents them from making any changes to systems and models,” says O’Malia in an online blog.

“Introducing far-reaching margin rules during this freeze could pose risks. Worryingly, it could hamper the ability of banks to make fixes to newly installed collateral systems and processes if something goes wrong.”

O’Malia says he is in favour of a mid-January implementation date for Europe, which would allow banks to finish its ‘code freeze’ and any emergency IT fixes.

He also warned that the initial margin rules must come into force prior to the variation margin rules which go live globally in March 2017.

“This deadline will affect a much wider universe of firms, and will involve thousands of counterparties having to make changes to thousands of outstanding collateral agreements at once,” he adds.

“This on its own will pose major resource issues for the industry. If combined with the delayed European phase-one requirements, it could stretch capacity to breaking point.”

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The three regulators rejected a proposal from the European Commission to remove concentration limits when posting initial margin for uncleared OTC derivatives.

The regulators included the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and the European Security and Markets Authority (ESMA).

“These [concentration limits] are crucial for mitigating potential risks pension funds and their counterparties might be exposed to,” stated the regulators.

The concentration limits require pension funds to hold a broader pool of sovereign government bonds and currencies when posting collateral.

The EC proposed to remove these limits as it would increase costs and force pension funds to enter into riskier “foreign currency transactions.”

The amendment from the EC comes six months after a group of Europe’s largest fund managers urged the Commission to review the implications the rules will have on pension funds.

However, the ESAs maintain that, with reference to covered bonds, conditions listed in the EC’s guidelines would lead to ranking of derivatives counterparties after bond holders.

They also stated that more clarity should be brought to the application of the rules for transactions concluded with third party and non-financial counterparties. 

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