New financial regulations: what is their impact on banking and financial services? Can they meet business needs?

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1 New financial regulations: what is their impact on banking and financial services? Can they meet business needs? Luxembourg Bankers Association The ABBL Benoit Sauvage Senior adviser financial market regulations Sungard 1 st July 2015

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3 New regulatory approach Typical day Bad days Good Days Regulatory trigger OR Regulatory trigger

4 The regulatory agenda A massive amount of regulations Most of which is still coming There was a need to: Reassess risk management And to inflict pain Measures may be divided into 2 camps: Pure prudential measures (CRD/CRR, banking Union, bank resolution ) New markets organisation (MIFID, EMIR, MAR, PRIIPS, AIFMD, UCITS, CSD-R ) Regulation structurally changed the rules of the game

5 New set of issues All regulations are coming at the same time, resources glut With CRD/CRR (LCR ratio) banks have harder time focusing on commercial activities EMIR created a framework for OTC derivatives clearing but still not really live and concentrates risks on a hand few of CCPs MIFID II creates equity like markets for all instruments, but then who will trade bonds? MAR creates the concept of intent of abuse of markets

6 The context has changed The new normal is: deep, harmonised, ultra prescriptive regulations and high fines for breaches But the more details the easier business processes can be automated Specifically in Luxembourg, rules change also opened new business perspectives

7 In the meantime Banks and financial firms focused on meeting the new standards ABBL with EY evaluated the cost to simply comply to regulations to about 1% of GDP Technology evolved dramatically, digital services/offers are the norm Many requirements are complex because current systems are not ready, legacy costs are heavy on organisations P&L (myopia and use of jargon may not help)

8 and at the same moment The time has come for new business models based notably on regulations Identify key points in the value chain How much value can be derived from big data analysis (client profile ) Banks are complex industries/organisations Clients are readier than ever to use web solutions Nimbler actors without legacy costs may jump on specific areas of business And the new context is a winner takes all

9 Just imagine What could Facebook business model be in finance? Highly complex products/services Provide estate planning/do asset management Customised services They may build on: A massive amount of information New approach to costs of set up With the high degree of regulatory prescriptions have largely automated processes across the EU They may forge partnership with 1 or 2 key providers. Will their business rely on retrocessions?

10 Some examples Client information Complex to change in heavy machinery, what would you do if you start from clean page Derivatives trading Dealing OTC derivatives offered bespoke solutions to clients, but today need to go on markets (and clear), thus a new service (which clients may use without intermediaries) Advising under MIFID II may be costly and legally risky, what if you have perfect profile from third party? Or the comfort of automated processes?

11 Managing interactions Regulations will force a major rethink of business models: Be it from issuing securities (T2S and CSD-R), trading (notably MIFID II SI rules and non-equity trading: EMIR-MIFID-CRD) to adjusting your business model to best manage capital structure (CRD/CRR) and to ensure an optimisation of margins (EMIR-CRD) The question is: what is my true business model? Managing clients (which ones) Managing assets (treasury for the group or external) Be the super custodian Be a champion of IT

12 Is there life after regulations?

13 The good news The current EU Commission is willing to come with plans Deploy a capital market union as alternative to bank only financing (CMU Capital Market Union) Deploy a digital strategy Deploy a retail client strategy Deploy funding (although with much leveraged) And above all the mood has changed

14 Conclusion Some huge challenges are at the corner Need to think strategically not only within the current borders, but considering new entrants, new opportunities And then keep fingers crossed for the unexpected (UK/Greece)

15 THANK YOU, QUESTIONS? Luxembourg Banker s Association The ABBL Benoit Sauvage Senior adviser financial market regulations sauvage@abbl.lu