Sharon Bowles MEP

Speech to the City of London Reception

Thank you very much for inviting me to address you. This is a City of London reception, and although I know the audience is wider it seems a good platform to explore the interaction of UK industry with the EU scene.

I was told to speak for 20 minutes, on the subject of new EU regulation. Last time I looked at the list of what is coming up I reckon it would take my 20 minutes to read it out.

In fact we have done an analysis of the workload of my committee, which is more than just financial markets although that is the most active area, and we have 3 times as much due in the next 18 months as we had in the whole of the last mandate. Put another way this is a factor of 10 increase, so as you all already know, this makes everyone extraordinarily busy.

There are a few other things that characterise our work right now. First, we are following a global agenda set by G20. It is true that a lot of what we are doing was already going to come up in reviews of the original Financial Services Action Plan. It is also true that a fair bit of the new markets legislation has been in place in the UK in some form or another, often for many years. So while many of you may be thinking its necessary to strap yourselves into a seat-belt ready for the French presidency of G20, my advice is to be ready to accept that when the EU - or the world - embarks on regulation that looks as if it has some ingredients that you know, it will inevitably be cooked a little differently. Don't send out the message 'we don't need this, we are all ok' and make negative vibes. Embrace the fact that you know what it is about, use your energy to engage positively in its necessary development instead of trying to resist or keep it identical to the recipe you already know.

A second thing that is different now, especially in Europe, is that safety now ranks higher than it did before, ahead of efficiency. Efficiency is no longer a sufficient reason for doing or not doing something, the safety argument must always be made.

The third difference now is that everyone is interested in the crisis and the steps taken in consequence. The crisis drives the rhetoric of many politicians because they are answering to their constituents, who also see the crisis through their own national lens. This can make it more complicated for those of us embedded in the detail, and perhaps the AIFM Directive (Hedge Funds and Private Equity) illustrates this well. Those countries that had no regulation of hedge fund managers or protection for retail investors find the media and public more interested in prohibitions. Asset stripping is a more sensitive issue in countries that fear covert operations but, unlike the UK, cling to the transparency directive 3% shareholder disclosure threshold rather than going lower and do not have disclosure limits for contracts of difference - which of course is a way in which positions for takeovers can be built up. Perhaps we should contemplate whether had the UK exported its view of regulation on this to the EU, the AIFM starting point might have been better.

Anyway, as it was the AIFM Directive was caught in every way: a bad basic draft, a symbolic clamping down coupled with impatience, and a fair degree of political dogma. The end appears to be in sight and it is certainly the case that a much more workable directive will result. As I have to chair what I hope will be the final trialogue tomorrow morning it may be diplomatic not to say any more other than that in the end I think you will see that the Parliament has made a big difference.

The Parliament also made a big difference to the supervision package that sets up the three EU authorities for banking, markets and insurance and occupational pensions, and the European Systemic Risk Board. However that is not the end of the story because the duties of the European agencies, and in particular the markets agency ESMA, will be populated by responsibilities that they are given in sectoral legislation. Already we have roles being given for direct supervision of credit rating agencies, responsibilities in the draft for European Markets Infrastructure Regulation relating to OTC clearing and repositories which is just starting its scrutiny by Parliament and Council, and ESMA also features in the AIFMD.

While on the subject of ESMA, many of you will know that I intervened in the debate in the UK over the reshaping of our own supervisory architecture to say, essentially, that it should as far as possible map on to the EU structures, and I was concerned this was not the case in the proposal in the consultation document. The logic as it appears to me from the European end is that wholesale markets should be kept together, indeed going further I would also say merging with the Financial Reporting Council which already covers two of the CESR committee subjects. Personally I believe we also have to establish further links, or at least more joined up thinking and cooperation, between corporate governance, audit and supervision, and of course this features as an issue in the Commission Green paper on corporate governance.

Having rolled all those things together, I am not convinced that retail and consumer protection fits comfortably with this markets authority because it might tend to be overshadowed by what many would see as the power issues, although it could be a separate subsection I suppose. My thought is that there may be a better way to combine retail issues with other aspects of consumer protection.

Earlier on I mentioned that the UK had a lot of markets regulation already and that I hoped its arrival on the European scene could be embraced as positive, so I thought it would be interesting to look at some of the upcoming legislation from this standpoint. Of course the crisis has moved everything up a notch and that has to be taken into account.

First up let's look at OTCs and commodities - by which I mean in a wider sense than EMIR.

1. Transaction reporting of OTCs such as CDS, Contracts for Difference, spread bets, options and futures has been done in the UK for 10 years, this also includes reports for instruments listed on AIM and Plus Markets. CESR recommended last month that the EU should adopt a similar approach, also requiring transaction reporting of instruments solely admitted to trading on MTFs. I went further in my intervention at the Commission Public Hearing on MiFID in September aiming for greater transparency in all classes, including a way to publish trades conducted away from exchanges and MTFs.

2. The UK cast a wider net for regulation of commodity derivative participants than was required under MiFID. This has been the case for 20 years. The EU is now catching up with the Commission considering the exemptions regime in MiFID for commodity derivative participants.

3. Position management has been done in the UK for at least 9 years, and for much longer on the LME. This is done by way of active management giving exchanges powers to intervene. The particular way in which the UK does it allows contract liquidity, as well as other factors to be taken into account at any point in time, such as the scale and nature of the participants involved, and the need to secure fair and orderly markets, which is not necessarily the case with a position limit regime. Recent CESR advice recommends that the focus ought to be on analysing whether exchanges and regulators have the power to manage positions over the life of contracts. I have also visited this subject several times too, indicating that an EU approach should be responsive, that decisions need to be taken close to the markets and not rigidly fixed in legislation that might be lengthy and complex to change.

4. Investment firms in the UK have been incentivised to publish data on Trade Data Monitors since November 2007 and CESR has recently recommended that the Commission adopt a pan-EU regime modelled on the UK Trade Data Monitors regime in order to improve the quality of post-trade transparency information and facilitate consolidation.

So, as I said, I know you are already complying in the UK and it is a bit of nuisance if the EU comes up with something that is 'same but different', but do engage positively.

I will turn now to some other familiar things that may well turn up in the MiFID review and which we have also been discussing in the Parliament in the Swinburne Report on market infrastructure, dark pools and so forth.

1. The UK made rules for sponsored access 2 years ago, setting out expectations for effective risk management by intermediaries and trading platforms - which means the UK were on the job from well before it was popular to be worried. I do have to say that personally I find differentiated access a bit hard to swallow in terms of non-discrimination, but certainly there need to be safeguards and we are suggesting this in the Swinburne report including a ban on flash orders.

2. The UK has also covered a wider range of products than is required under MiFID, such as insurance. Extension at the EU level in MiFID and PRIPS will tread similar ground.

UK has also had recording requirements for telephone and electronic communications and best practices for post trade transparency since last year - I see no reason why these too could not come your way soon in an EU wrapping, even if not on the agenda yet.

The list of UK aspects of regulation that will, could or should be exported to the EU is actually quite long so I will end with a final flourish suggesting enlargement in the scope and definition of market abuse, matters I mentioned in the context of the AIFM directive, and maybe even primary listing and sponsor regimes. As some of these arise, as I am sure they will, you have a lot of collective expertise, but returning to food analogies, saying 'here is one I baked earlier' will not suit EU tastes, and you must adjust your rhetoric to that if you want to lead in the debate rather than be seen as always hesitant and resisting, which to be fair to you is, I know, not actually the position that you always take.

The final subject that I want to touch upon is the wider international scene. Nobody can criticise the UK for not understanding this, but it is not a choice between international or European. They go together and it is valid to input directly to the international level and also via the European route.

Recently several of you will have noted that I have complained that the post crisis response has been too oriented to Western issues and that an opportunity to develop more understanding and trust with Asian banking and markets has not been taken. They have suffered our crisis only to have our solutions foisted upon them. Yet if we look closer some of them have been using the very type of macro-prudential tools that we now look to.

In Europe especially we would do well to take more notice, for we are not in a strong position with our fragmented market structure if we look to the future. The need to consolidate, to put aside localised short termism is real, unless we want to be on the sidelines in the future, dwarfed by US and Asian markets and taking their bidding. Perhaps here I could also mention that maybe the Bank of England could engage positively on Target 2 Securities for the same reason.

There are many more issues that we could touch upon: the impact of OTC clearing on insurance, pensions and hedging in general. Coupled with the emphasis on liquidity for all prudential purposes, and simultaneous tightening of definitions of hybrid capital instruments, it is making me ponder about who is going to be left investing in equities and corporate bonds.

It is important that the massive reform underway to regulation is done well, with an eye to the future, the big picture and the collective impact of our work. Industry has a part to play in that. The economy, jobs, pensions and Member State deficits will all be affected and reasoned arguments couched in those terms, rather than as threats, complaints or impact on bottom line profits, will be far more persuasive.

Thank you for listening, and if anyone has the stamina, I can take questions if I am allowed.

ENDS