La Commissione Europea ha posto di recente l’attenzione ad una molteplicità di interessanti tematiche.

In primis, come evidenziato sul proprio sito, l’European Commission consults on the measures necessary for a new EU framework for Crisis Management in the Banking Sector.

The European Commission has adopted a Communication on an EU framework for crisis management in the banking sector. The purpose of the Communication is to consult as widely as possible on a broad range of issues aimed at safeguarding financial stability and the continuity of banking services in a cross border banking crisis. The Communication sets out questions on the tools that the Commission considers would be necessary for an EU crisis management framework. These tools range from “early intervention” action by banking supervisors aimed at correcting irregularities at banks, to bank resolution measures which involve the reorganisation of ailing banks, , to insolvency frameworks under which failed banks are wound up. The Commission’s consultation will last for three months, and will be followed by a public hearing to present the results and set out the Commission’s intentions.

Internal Market and Services Commissioner Charlie McCreevy said: “The crisis has shown clearly that Europe needs a crisis management framework which mirrors the cross-border nature of financial markets. We must also recognise that no bank will ever be immune to failure. We need a robust set of arrangements which will allow a possible failure to be detected and averted, if at all possible and if not, then the bank should reorganise or wound down. This should be managed in a way that does not threaten the financial system and which minimises the costs for European taxpayers. A clear framework to manage cross-border banking crises is, therefore, an essential complement to our work on supervisory reform.”

The financial crisis has highlighted the importance of putting in place effective cross-border arrangements to handle banking crises. There have been a number of high profile banking failures over the past 18 months (Fortis, Lehman Brothers, Icelandic banks) which revealed serious shortcomings in the existing arrangements.

The Commission takes the view that the existing arrangements are clearly insufficient to stabilise and control the systemic impact of cross border financial institutions and that a new legal framework needs to be put in place. A new framework should equip authorities with the right tools and provide the legal certainty to handle cross-border banking failures, in ways that minimise costs to taxpayers and allow even the largest banks to fail without damaging financial stability.

The Commission’s consultative Communication adopts a broad ranging approach to the complex and interlinked issues surrounding crisis management:

• Under “early intervention” (i.e. when the ailing institution is still a going concern and when supervisory intervention can still remedy the situation) the Communication considers the need for new supervisory tools, possibilities to transfer assets between different legal entities and across borders within a group, and the feasibility of wind-down plans.
• Under “bank resolution”, consideration is given to the need for new re-restructuring tools and a framework to support their use in a cross-border context. Views are also sought on the challenges facing stakeholders in banks such as shareholders and creditors could be best addressed in an EU crisis management framework, especially with respect to changes to insolvency and company law.
• The important question of how bank resolution measures need to be financed is raised with a clear preference for private sector solutions, but recognising that inevitably burden sharing between Member States needs to be addressed.
• Under “insolvency” consideration is given to the need to harmonise existing insolvency procedures in order to facilitate the winding up and re-organisation of cross-border banking groups.

At this stage, the Commission is consulting stakeholders (e.g. public authorities including finance ministries, company law and insolvency experts, the banking industry, bank customers, shareholders and creditors) before coming forward with concrete policies and proposals. The Commission views such a consultation as an essential first step in preparing the ground for what will be an important new policy area. A public hearing will be organised in February 2010.

Vedi anche il COMMISSION STAFF WORKING DOCUMENT sul IMPACT ASSESSMENT

Al fine di una migliore comprensione di quanto precede, si riportano di seguito le Frequently Asked Questions pubblicate sul sito della Commissione. 

Why is a new crisis management framework needed for the EU?

The recent crisis has exposed a clear gap in the EU regulatory framework covering the banking sector. Although much has been accomplished in recent years to ensure adequate capitalisation and prudential supervision of EU banks and to strengthen protection of depositors, far less has been achieved in the area of crisis management. In 2008, Member State authorities and Central Banks signed a Memorandum of Understanding on cross-border financial stability, setting out detailed arrangements for more effective cooperation in the event of a cross-border crisis. However the arrangements are voluntary, and do not provide an adequate legal framework to support reorganisation at a cross-border level. The Commission considers that in light of recent experiences, a more binding framework is necessary. The consultative Communication sets out the range of issues that will need to be considered to provide realistic alternatives to bailing out banks with public funds. The overriding aim is to put in place a framework that will allow a bank to fail - whatever its size - while ensuring the continuity of essential banking services, and minimising the impact of that failure on the financial system. This is essential to avoid the ‘moral hazard’ that arises from the perception that some banks are too big to fail.

Why didn’t the EU have the necessary framework in place before the crisis?

Until recently, many felt that arrangements should only be national, especially if there was a risk that there would be budgetary implications and in view of the close connection of crisis resolution measures with national insolvency regimes in many Member States. However, the experiences of the recent crisis have strengthened the case for action at EU level since they demonstrated clearly that the absence of adequate arrangements can result in ad hoc national solutions which might ultimately prove more costly for national taxpayers.

What issues does the crisis management Communication cover?

The Communication reviews the measures that might be needed at all stages of the failure of a bank.

• Early intervention covers actions by banking supervisors aimed at restoring the stability and financial soundness of an institution when problems are developing, together with intra-group asset transfer between solvent entities for the purposes of financial support. These actions would be taken before the threshold conditions for resolution are met, and before the institution is or likely to become insolvent.
• Resolution covers measures that should be available to national resolution authorities to manage a crisis in a banking institution, to contain its impact on financial stability and, where appropriate, to facilitate an orderly winding up of the whole or parts of the institution. The Communication does not prescribe what authorities should be responsible for deciding on and applying resolution measures in Member States, but discusses what measures are needed and how national actions can be coordinated or integrated when applied to a cross-border group. One option considered is coordination by an EU resolution authority.
• Insolvency covers reorganisation and winding up that takes place under the applicable insolvency regime. The Communication asks what changes are necessary to insolvency law to support resolution measures, and whether greater coordination or integration of insolvency regimes is needed to deal with the reorganisation or winding up of cross-border groups.

Is this work intended to solve the current crisis?

The current crisis has called for extraordinary measures to be taken in order to avert a potential meltdown of the European banking industry. The decisive actions taken by Member States, in cooperation with the European Commission, have succeeded in stabilising financial markets. The measures considered in the Communication are aimed at the management of future crises. Early supervisory intervention should assist in averting preventable bank failures, while an EU resolution framework would equip national authorities with adequate tools to manage the consequences of failures that could not otherwise be avoided.

Resolution measures may interfere with the rights of shareholders and creditors. How does the Communication propose to deal with this?

Bank resolution tools that involve transfer of assets may interfere with the rights of stakeholders (creditors and shareholders), and any EU resolution framework would need to incorporate adequate safeguards to protect those interests.

For example, EU law contains a number of mandatory requirements that confer rights on shareholders. These include pre-emption rights, and the requirements that any increase or reduction of issued share capital is approved by the shareholders’ general meeting. In addition to this, any transfer of ownership or assets of an ailing bank must comply with shareholders’ right to property under the European Convention on Human Rights. A balance needs to be struck between protecting the legitimate interests of shareholders and enabling resolution authorities to intervene quickly and decisively to restructure a failing institution or group to minimise contagion and ensure the stability of the banking system in affected Member States. Where rights granted by EU law are affected, an EU resolution framework would also have to contain appropriate mechanisms for redress and compensation.

EU law does not currently specify the rights of creditors in the context of bank insolvency. Appropriate safeguards under a bank resolution framework might include compensation mechanisms to ensure that no creditor is left worse off than it would have been had the bank under resolution been wound up under the applicable insolvency law.

Who will pay the costs of a cross-border crisis?

The Communication addresses the issue of financing resolution measures. The emphasis is on avoidance of public sector bail-outs and on facilitating private sector solutions, such as the purchase of the whole or parts of a failing bank by another institution. Various possibilities are considered, such as putting in place a framework for intra-group financial support, or the possible involvement of deposit guarantee schemes in the financing of resolution measures. However, there is also recognition that use of public funds may be unavoidable at some stage of a resolution, and that progress is needed in clarifying how the potential costs of managing a crisis in a cross-border bank would be shared between affected Member States. Work is currently underway on burden sharing in a working group of the Economic and Financial Committee.

What resolution tools will be needed, and how will that affect national systems?

As the Communication is consultative, the question of what tools will be needed as part of a cross-border crisis management framework remains open at this stage. There are significant differences between the existing tools and systems for crisis management across Member States. A recent study by the IMF has suggested that authorities should at least have powers to facilitate or effect private sector acquisitions, transfer business to a temporary structure (such as a “bridge bank”) or to separate clean and toxic assets between “good” and “bad” banks through a partial transfer of assets and liabilities. However, the Communication also notes that some Member States currently deal with failing banks using other measures, such as the appointment of a ’special administrator’ under adapted national insolvency regime. It seeks views on the suitability of these, or other measures, for an EU bank resolution framework.

The Communication focuses on crisis management for cross-border banking groups, and on the need for systems which allow measures to be applied in a consistent and timely manner.

What kinds of financial institution would be covered by an EU regime?

The Communication focuses principally on crisis management in the banking sector. This focus is justified by the special nature of banks - their unique role as providers of credit, deposit-takers and payment intermediaries - which give rise to particular problems and public policy objectives in the event of a bank failure. However, it also asks whether the scope of a resolution framework should be wider and cover other kinds of financial institution, such as investment firms. Banking groups often include such institutions, and their failure may pose systemic risks to the financial system, as the collapse of Lehman Brothers clearly demonstrated. The Communication recognises that different kinds of crisis management measures may be necessary to address the specific risks to market stability represented by other types of financial institution.

How does this relate to discussions at international level?

Discussions have taken place on crisis management in a number of international fora (G20, Financial Stability Board, Basel Committee). There is broad recognition that the problems of cross-border banking groups extend beyond the EU, and many significant financial groups are global in their organisation. While certain of the problems which need to be addressed are the same - for example, the difficulties of cooperation and coordination, information sharing, the lack of effective tools, the need for better advance planning, the territorial scope of national insolvency regimes when applied to a group - there are nevertheless significant distinctions between the progress that can be reasonably expected at international level and what can be achieved within the EU. The depth of integration of both banking business and the legal framework at European level both allows and requires greater cooperation and convergence in order to develop a more robust framework to underpin the Internal Market.

Would a requirement for cross-border groups to prepare “living wills” help authorities to manage a cross-border banking crisis?

There are currently no harmonised powers for supervisors to require banking groups to prepare contingency and resolution plans, often referred to as “living wills”. The idea is that systemically important cross-border financial institutions could be required to produce detailed plans to facilitate, in a period of severe financial stress or instability, the preservation of the firm as a going concern, the continuity of its financial infrastructure services, and the rapid resolution or winding down where necessary of the institution (or part of the institution). Work by national and international regulatory bodies on this subject is still at an early stage, and further analysis will be needed to assess whether a requirement for institutions to maintain detailed and up-to-date plans would be realistic, the implications of such plans for group structures and their usefulness for authorities as tool both for ongoing supervision and for crisis management.

La Comissione Europea è poi intervenuta sui derivati, comunicando che: Commission sets out future actions to strengthen the safety of derivatives markets

The European Commission has adopted a Communication for ensuring efficient, safe and sound derivatives markets. The Communication sets out future policy actions to increase transparency of the derivatives market, reduce counterparty and operational risk in trading and enhance market integrity and oversight. They follow the stakeholder consultation launched with the Communication in July ( IP/09/1083 ) and the public hearing in September. The Commission will come forward with legislative proposals in 2010. These proposals will be in line with the G20 Pittsburgh statement and will be accompanied by a thorough impact assessment. In order to avoid any risk of regulatory arbitrage and to ensure a global consistency of policy approaches, the Commission stands ready to work with authorities around the world when finalising the proposals.

Internal Market and Services Commissioner Charlie McCreevy said: “This Communication marks a paradigm shift away from the traditional view that derivatives are financial instruments for professional use and thus require only light-handed regulation. The Commission proposes a comprehensive approach that will ultimately enable markets to price risks properly. We cannot afford another situation where the risks of the financial sector are ultimately borne by the taxpayer.”

This Communication lays out the Commission’s future policy actions. It builds on the Commission’s July Communication ( IP/09/1083 ) and the subsequent stakeholder consultation and high-level conference.

The future policy actions will:

• Reduce counterparty risk by (i) proposing legislation to establish common safety, regulatory and operational standards for central counterparties (CCPs), (ii) improving collateralisation of bilaterally-cleared contracts, (iii) substantially raising capital charges for bilaterally-cleared as compared with CCP-cleared transactions, and on top of this (iv) mandate CCP-clearing for standardised contracts;
• Reduce operational risk by promoting standardisation of the legal terms of contracts and of contract-processing;
• Increase transparency by (i) mandating market participants to record positions and all transactions not cleared by a CCP in trade repositories, (ii) regulating and supervising trade repositories, (iii) mandating trading of standardised derivatives on exchanges and other organised trading venues, and (iv) increase transparency of trading as part of the review of the Markets in Financial Instruments Directive (MiFID) for all derivatives markets including for commodity derivatives;
• Enhance market integrity and oversight by clarifying and extending the scope of market manipulation as set out in the Market Abuse Directive (MAD) to derivatives and by giving regulators the possibility to set position limits.

The Commission will now start the process of drafting legislation, notably by launching impact assessments, in order to come forward with ambitious legislation to regulate derivatives in 2010.

The market for derivatives is global. To ensure an ambitious and convergent international regulatory outcome, the proposals are in line with the objectives agreed at the G20 meeting of 25 September 2009. The Commission intends to further develop the technical details in cooperation with its G20 partners in order to ensure a coherent implementation of these policies across the globe and thus avoid regulatory arbitrage. Such cooperation is particularly important with the US, which is also in the process of designing a new approach to derivatives markets.

Background

Derivatives play an important role in the economy but are associated with certain risks. The financial crisis - notably the events surrounding Bear Sterns, Lehman Brothers and AIG - has highlighted that these risks are not sufficiently mitigated in the OTC part of the market. In view of the central role played by derivatives markets in the financial crisis, on 3 July 2009 the Commission published a Communication on ensuring the efficiency, safety and soundness of derivatives markets, accompanied by a Commission Staff Working Paper and a Consultation Paper. The consultation resulted in over 100 replies, and 450 participants attended a high-level conference on 25 September in Brussels. The July Communication announced operational conclusions for the end of October, which is the subject matter of the present communication.

 Anche in questo caso, la Commissione ha pubblicato le Frequently Asked che si riportano di seguito:

GENERAL APPROACH

You propose a comprehensive solution for all derivatives markets. Does that not ignore the different risk of different asset segments?

The various derivatives market segments differ in their characteristics, namely in terms of risk, operational arrangements and market participants. At first sight, a market segment specific regulatory approach could therefore seem warranted. However, the boundaries between market segments are blurred, as any derivative contract can be partitioned and reconstructed into different but economically equivalent contracts. Therefore, an asset-specific policy approach would enable market participants to exploit differences in rules to their advantage. The Commission accordingly believes that a comprehensive policy on derivatives is necessary to address the current market failure in the most efficient way.

Moreover, the effect of the policy proposals depends on the effectiveness of current risk mitigation infrastructures. In asset segments where e.g. CCP clearing is already up and running, the effects will be more limited.

What measures exactly is the Commission proposing?

The Commission’s objectives are to reduce counterparty credit and operational risks, increase transparency and to strengthen market integrity and oversight. To that end, the Commission proposes a package of actions that will be developed into legislative proposals in 2010.

• To reduce counterparty credit risk, the Commission will (i) propose legislation to establish common safety, regulatory and operational standards for central counterparties (CCPs), (ii) improve collateralisation of bilaterally-cleared contracts, (iii) substantially raise capital charges for bilaterally-cleared as compared with CCP-cleared transactions, and on top of this (iv) mandate CCP-clearing for all standardised contracts.
• To reduce operational risk, the Commission will work with industry to promote standardisation of the legal terms of contracts and of contract-processing.
• To increase transparency, the Commission will (i) mandate that positions and all transactions are recorded in trade repositories, (ii) regulate and supervise trade repositories, (iii) mandate trading of standardised derivatives on exchanges and other organised trading venues, and (iv) increase pre- and post-trade transparency as part of the upcoming review of the Markets in Financial Instruments Directive (MiFID) for all derivatives markets including for commodity derivatives.
• To enhance market integrity and oversight, the Commission will propose clarifying and extending the scope of the Market Abuse Directive (MAD) to derivatives and by giving regulators the possibility to set position limits.

GLOBAL COOPERATION

Will the Commission consult with other jurisdictions when finalising its proposals?

Yes. The market for derivatives is global, and regulatory arbitrage must be excluded. The Commission wants to ensure a robust and convergent international regulatory outcome. T he proposals are therefore in line with the objective outlined in the G20 meeting of 25 September 2009 .

In order to ensure an ambitious and coherent implementation of these policies across the globe, the Commission intends continue to develop its policy in this area in close cooperation with its G20 partners, and in particular with the US, which is also in the process of designing a new approach to derivatives markets.

COUNTERPARTY CREDIT RISK

What is a Central Counter-party (CCP)?

A CCP is an entity that interposes itself between the counterparties to a transaction, becoming the buyer to every seller and the seller to every buyer.

Why does the Commission propose to mandate more collateral? Aren’t current collateral levels sufficiently high?

No. There is a considerable amount of uncertainty surrounding the current level of collateralisation. Moreover, recent studies, notably by the ECB, highlight that current collateral levels are lower than previously thought. It is therefore necessary to require financial firms to supply both initial margin and variation margin when entering into a bilateral deal OTC.

Why is it necessary to further strengthen the favourable regulatory capital treatment of CCPs? Isn’t a zero-rating enough?

The current treatment has not provided a sufficient incentive to take up CCP clearing irrespective of the benefits. It is therefore necessary to strengthen the differentiation to ensure that the rules properly distinguish between, on the one hand, the lower counterparty credit risk of contracts that are cleared on a CCP, and the higher counterparty credit risk of those where clearing is done bilaterally.

Why do you propose to mandate CCP clearing on top of capital charges?

Capital charges will provide the necessary incentives toward standardisation and CCP clearing. In order to ensure that the G20 deliberations are respected, the Commission decided to mandate the use of CCPs for standardised products.

How will you implement the mandate to clear standardised contracts on CCPs?

When developing its detailed proposals, the Commission will work with its partners in the G20, and notably the US, to achieve ambitious solutions to the practical issues related to making the requirement operational. This involves, in particular, defining which contracts can be regarded as standardised for central clearing. The Commission will undertake a rigorous impact assessment before finalising its proposals. The impact assessment will take due account of all the costs and benefits, including the impact on competitiveness.

OPERATIONAL RISK

Why does the Commission propose to work with industry to reduce operational risk? Does this not duplicate ongoing global efforts to the same effect?

The Commission considers that more collective action is needed by market participants to increase standardisation so as to reduce operational risk. Therefore, the Commission will further build on the success of the Derivatives Working Group and set ambitious European targets, with strict deadlines, for legal- and process-standardisation. This complements global actions, as the focus will be to ensure that global efforts take due account of European specificities so as to deliver full benefits also in Europe.

TRANSPARENCY

What are trade repositories?

A trade repository collects data on contracts traded in one or more segments of the OTC derivatives markets. Through a trade repository one can therefore obtain information on, for example, the number of outstanding contracts, the size of outstanding positions in a particular contract, the exposures of a particular institution, etc. This contributes to improve the level of transparency and knowledge of both supervisors and the public. A repository can also provide other services (e.g. facilitate settlement and payment instructions), thus improving operational efficiency. A trade repository exists for CDS in the form of the Trade Information Warehouse, operated by the US Depository Trust and Clearing Corporation (DTCC).

Do you require trade repositories to be located in Europe?

No, provided that (i) third country repositories are subject to comparable regulation and supervision and (ii) European regulators have unfettered access to the information stored at repositories in third countries. Should such access not be achieved, the Commission will encourage the creation and operation of European-based trade repositories.

Why do you propose to extend post-trade transparency to OTC derivatives? Will it not reduce liquidity?

Derivatives trading can take place on many types of venues, ranging from on-exchange to OTC. This competition is beneficial, provided that the price discovery function for the derivatives market as a whole is supported and information asymmetries are minimised. To achieve that it is necessary to extend transparency requirements to OTC trading as well. However, the increased transparency obligations will need to be measured so as to mitigate any excessive negative side-effects on liquidity.

What is an organised trading venue?

An organised trading venue is a venue where trades are executed in an automated manner according to pre-defined rules and where prices and other trade-related information are publicly displayed. According to the categorisation in the Markets in Financial Instruments Directive (MiFID), organised trading venues are regulated markets, multilateral trading facilities (MTFs) and systematic internalisers.

Why do you propose to mandate trading of standardised contracts on such venues?

This requirement is in line with the global principles agreed by the G20. In the EU, this implies ensuring that eligible trades for exchange-trading take place on organised trading venues, as defined by MiFID. Mandating trading on such venues, together with the introduction of transparency rules, will help to ensure greater efficiency in the trading of eligible products and ensure a consistent framework in how financial instruments, from equities to derivatives, are traded.

MARKET INTEGRITY AND OVERSIGHT

What is the purpose of giving regulators the power to set position limits?

Proposing these powers is part of the Commission’s efforts to improve pan-European supervision and oversight. The possibility to impose position limits is an important ancillary tool for supervisors to ensure the stability and soundness of markets. It allows them to limit the concentration of risk, excessive position taking and therefore counterparty risk. Especially in the field of commodity derivatives markets, it can also be a way to curb excessive price volatility, which distorts the orderly functioning of markets.

NON-FINANCIAL INSTITUTIONS

Why are non-financial institutions affected by the future policy actions?

Non-financial institutions are users of derivatives products and are therefore part of the web of mutual dependence. Inasmuch as non-financial firms have bought protection from a financial firm and in so doing have transferred their risks into the financial system, they have generally benefited from the underpricing of risk in the build-up phase of the crisis. Through the severe decline in economic activity, they have also fallen victim of the financial crisis.

Even though non-financial institutions’ use of derivatives is relatively small compared to financial users, history suggests that they may sometimes build up sizeable positions and hence be a risk to their counterparties and possibly to the system as a whole should they default. Non-financial institutions should therefore not be completely excluded from the scope of the forthcoming actions.

Moreover, a principle underpinning the Commission’s proposals is that the cost of strengthening the market infrastructure for OTC derivatives should be carried by those who directly enjoy the economic benefit from using derivatives and not taxpayers. This was not the case during this financial crisis and the Commission proposes to address this. Risk will have to be adequately priced. What the precise price will be, is part of the ongoing work and analysis that needs to be done to enable the Commission to define its proposals.

Non-financial institutions’ use of derivatives poses less of a risk to the financial system. Will this be taken into account when finalising the proposals?

In view of the different level of risk to the financial system associated with non-financial institutions’ use of derivatives, they may not be subject to exactly the same level of obligations as financial institutions. The Commission will take due account of the differences when finalising its proposals. However, although most non-financial institutions are not of systemic importance, legislation should not be undermined by loopholes.

Do these measures not risk hurting non-financial institutions’ competitiveness?

The financial crisis is already hurting ‘competitiveness’. Potential growth has declined from 1.8% p.a. on average 2000-2006 to 0.7% in 2009. Hence, the crisis has thrown back the Lisbon strategy’s objectives. The financial crisis has therefore amply illustrated how vulnerable the real economy is to financial instability and the enormous costs of mitigating the impact. Addressing the root causes for the financial crisis in order to provide a more stable financial foundation for the real economy is therefore a vital interest for us all, non-financial institutions included. Strengthening financial stability will make severe economic crises less likely in the future and put Europe on a more sustainable growth path.

Will European companies be disadvantaged vis-à-vis other countries?

No, the Communication states clearly the need for close cooperation with G20 partners. Also, the forthcoming proposals will be subject to rigorous impact assessments. The Commission will take full account of the impact of any proposal on Europe’s competitiveness.

Will companies still be able to hedge?

Yes. The Commission’s proposals do not limit the freedom to set the economic terms of derivative contracts. The Commission recognises the vital role of customised derivatives contracts traded OTC in hedging the risks that result from normal business operations. The Commission does neither propose to ban customised contracts nor to make them prohibitively costly. However, the function of prices to allocate resources must be restored: derivatives should be appropriately priced in relation to the risks they entail (including systemic risk), in order to avoid those risks being ultimately passed on to taxpayers.

Will hedging become more costly?

The Commission’s forthcoming proposals aim at better management of the risks of derivatives, hence there is an efficiency gain. Initially, however, traditional OTC trades (i.e. bilaterally cleared) are likely to become more costly. However, over time, as more contracts will get centrally cleared, the cost per contract is likely to fall, as economies of scale come into play.

Will financial firms pass on the costs to non-financial firms?

The fee a financial firm charges for a derivatives trade depends on whether its counterpart provides collateral or not. If not, the financial firm has to use its own capital to cover its exposure. This results in a higher fee.

Therefore, if non-financial firms provide no collateral, financial firms are likely to pass on some of their costs to them. However, derivatives markets are competitive and financial firms are unlikely to be able to pass on their costs in full. The measures proposed are also likely to increase competition as the reduction of counterparty credit risks through CCPs may allow smaller players to enter the field. Moreover, the Commission’s proposal to increase post-trade transparency is likely to further limit financial firms’ ability to pass on the costs. US experience from corporate bonds has shown that intermediation margins fall with more transparency.

NEXT STEPS

Legislation is announced for 2010. What are the next steps?

The Commission will now launch the impact assessments. It will take into account all stakeholders’ evidence about the potential impacts, in terms of costs and benefits, of the policy orientations set out below when preparing the impact assessment with a view to finalising its proposals.

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Infine, la Commissione Euripea ha pubblicato una Raccomandazione per semplificare  procedures for claiming cross-border withholding tax relief

The European Commission has adopted a recommendation that outlines how EU Member States could make it easier for investors resident in EU Member States to claim withholding tax relief on dividends, interest and other securities income received from other Member States. The recommendation also suggests measures to eliminate the tax barriers that financial institutions face in their securities investment activities while at the same time protecting tax revenues against errors or fraud. The recommendation is designed to provide guidance to Member States in how to ensure that procedures to verify entitlement to tax relief do not hinder the functioning of the Single Market.

Internal Market and Services Commissioner McCreevy said: “If we are serious about promoting cross-border investments in securities in the Internal Market, EU Member States will have to simplify their withholding tax relief procedures, so that foreign investors receive any tax refunds to which they are entitled more quickly and so that tax rules do not hinder financial institutions from getting involved in managing such cross-border investments.”

Taxation and Customs Commissioner Kovács said: “While it is true that complicated refund procedures may discourage cross-border investment, Member States must be allowed to have sufficient safeguards in place to protect their tax systems against errors and fraud. The recommendation contains solutions that are designed to balance these opposing concerns.”

The recommendation:

• encourages Member States to apply at source rather than by refund any withholding tax relief applicable to securities income under double taxation treaties or domestic law;
• encourages Member States to apply quick and standardised refund procedures where they cannot provide relief at source, for example because the investor has not provided all necessary information, and lists possible elements of such refund procedures;
• encourages Member States to accept alternative proofs of investors’ entitlement to tax relief besides certificates of residence ;
• suggests how Member States can involve financial intermediaries in making claims on behalf of investors and, in particular, how the procedures could operate where there is a chain of financial intermediaries, in different Member States, between the issuer of the securities and a beneficiary;
• encourages greater acceptance by Member States of electronic rather than paper information;
• suggests that Member States could apply a risk-based approach to setting requirements of proof of entitlement to tax reliefs;
• suggests how Member States could set up single or joint audits or even external audits to investigate the compliance of financial intermediaries with obligations created in line with the recommendation;
• suggests follow-up discussions with Member States on the implementation of the Recommendation.
• encourages greater use of existing channels for exchange of information between Member States and the exploration of new channels.

Background

The tax laws of Member States usually provide for withholding taxes on dividend and interest income paid to non-resident investors. These withholding taxes are often reduced under Member States’ bilateral double taxation conventions, when the two treaty partner countries involved agree on sharing taxing rights. In certain circumstances, some Member States even unilaterally reduce withholding taxes or apply exemptions on securities income paid to foreign investors.

However, Member States’ procedures to verify claims for withholding tax reliefs are often so complicated and time consuming that investors may forego the reliefs to which they are entitled or even be discouraged from investing across borders. Furthermore, these procedures often do not take into account the present-day multi-tiered financial environment where there may be a chain of financial intermediaries, based in several countries, between the issuer of the securities and the investor. In fact, a study by the Commission services shows that the costs related to these present reclaim procedures are estimated to a value of € 1.09 billion annually whereas the amount of foregone tax relief is estimated at € 5.47 billion annually.

The amount of cross-border holdings within the European Union was 16.7 trillion dollars in 2006, composed of 6.4 trillion dollars in equity securities and 10.3 trillion dollars in debt securities. The European Union accounts for more than 50 % of the worldwide amount of such holdings, both with respect to the origin and the destination of the investments.

The recommendation is based on the (2006-2007) reports of the EU Clearing and Settlement Fiscal Compliance Experts’ Group (FISCO) ( IP/07/1569 ), follows upon an extensive stakeholders’ consultation and has been discussed on several occasions with the financial services industry and tax administrations in Member States.

Si riportano di seguito le Frequently Asked Questions su tale topic.

What is the recommendation designed to do?

The Recommendation aims to show EU Member States how they could simplify the procedures that they currently apply to verify investors’ entitlement to relief from withholding tax on cross-border securities income. The objective is both to facilitate investors who wish to invest across borders and to ensure that EU-based financial intermediaries can provide services freely across borders, as they are entitled to do under Article 49 of the EC Treaty. The Recommendation also suggests ways in which Member States could ensure that the proposed simplifications would not open their tax bases to errors or fraud.

What is the scope of the Recommendation?

The Recommendation applies to withholding taxes levied on securities income (mainly dividends and interest) that is sourced in an EU Member State, and that is paid to EU resident investors, via one or more financial intermediaries established in the EU or in an EFTA country that provides for a level of administrative assistance to other countries equivalent to that applicable by EU Member States under EU legislation.

Why is the Recommendation necessary?

Under the bilateral double taxation treaties that EU Member States have with each other, Member States generally agree to reduce source country withholding taxes on securities income, in order to share taxing rights between the two treaty partner countries. Some Member States even apply a reduced withholding tax or exemption on securities income paid to foreign investors under their domestic law where certain conditions are met. However, the procedures to reduce the withholding tax rates at the payment stage or to claim refunds of tax withheld are often so complicated and varied that investors do not bother claiming relief or refunds and may even be discouraged from investing abroad.

How would the Recommendation benefit investors?

The recommendation would benefit investors in the first place because it suggests that Member States should apply at source (i.e. at the time of payment of the securities income), rather than by refund, any withholding tax relief to which an investor is entitled.

Second, in cases where investors are not able to obtain withholding tax relief at source , the recommendation encourages Member States to apply quicker and simpler tax refund procedures, including the following elements:

• permission for any authorised financial intermediary in a custody chain to submit refund applications on behalf of the investors;
• use of a single contact point for the introduction and handling of all the refund applications and publication of the relevant information on refund procedures on a website;
• use of common formats for refund applications, and permission to file them electronically;
• refunding in a reasonable period of time, i.e. normally within 6 months;
• allowing investors and financial intermediaries to provide alternative proofs to certificates of residence in connection with their claims.

Explain in more detail what the Recommendation suggests with regard to certificates of residence

It can take tax authorities some time to issue formal certificates of residence to taxpayers and even then the certificates are usually time-limited in validity. This can make it difficult for taxpayers who wish to use these certificates to claim withholding tax relief from a tax authority of another Member State. The Recommendation therefore suggests that, for the purposes of claims for withholding tax relief, tax authorities should consider whether alternative proofs that the taxpayer is resident where he says he is resident would be acceptable and sufficiently risk-proof. Such alterative proofs could include self-certification by the investor and/or residence documentation gathered by financial intermediaries (sometimes referred to as “Know Your Customer” rules). For instance, when an investment firm provides investment advice and discretionary portfolio management to its clients, it is required under Article 19 (4) of the Market in Financial Instruments Directive 2004/39/EC of 21 April 2004 ( IP/07/1625 ) to obtain information about its clients/investors. The Recommendation suggests that tax authorities might, in particular, find these alternative proofs sufficient in the case of small claims, for example claims of less than €1,000.

How would the Recommendation benefit financial intermediaries?

The Recommendation proposes that Member States should allow foreign financial intermediaries to become involved in providing withholding tax relief services in the Single Market. Currently many Member States only allow resident financial intermediaries to provide such services. The Recommendation suggests that foreign financial intermediaries in a custody chain should, subject to authorisation by the source Member State, be allowed to take part in the relief procedures by acting as “withholding agents” or as “information agents”. “Withholding agents” would be able to grant withholding tax relief at source by deducting the amount to be withheld. “Information agents” would provide information on the correct rate of withholding tax applicable to given investments up the custody chain so as to reach the withholding agent.

The Recommendation also suggests that financial intermediaries should only have to pass on “pooled” withholding tax rate information (i.e. information in a format which groups securities income according to the withholding tax rate applicable without identifying the owners of the securities) to the next financial intermediary in a custody chain. Providing information in a pooled format would lead to important savings for all parties concerned and would eliminate the competition and data protection concerns that financial intermediaries would have about passing client information to other financial intermediaries.

Would the Recommendation if implemented create administrative problems and tax revenue risks for Member States?

No, it should not do so.

First, the Recommendation should, if applied by Member States, lead to savings for tax administrations by reducing the administrative costs involved in processing refund applications and issuing certificates of residence.

Second, the Recommendation envisages that only authorised financial intermediaries should be able to take part in the simplified procedures. Member States could lay down conditions and obligations for the authorisation of financial intermediaries, such as, for example, making them liable for under-withholding of taxes. These conditions and obligations would, of course, have to be proportionate and non-discriminatory in order to allow foreign financial intermediaries to benefit fully from the freedom to provide services guaranteed under Article 49 of the EC Treaty. Member States may also withdraw authorisation from non-compliant financial intermediaries.

Third, the Recommendation suggests procedures that Member States could set up in order In order to monitor authorised financial intermediaries’ compliance with their obligations (e.g. single or joint audits by the tax authorities of the source Member States, that of the Member States where the financial intermediary is established or by external auditors).

Fourth, while proposing the pooled information system described above so as to protect the commercial interests of financial intermediaries, the Recommendation also suggests a system to ensure that Member States have the information they need to know that the right rate of withholding tax was applied to all payments made from that country to investors in other EU Member States. The Recommendation proposes that, where there is a chain of financial intermediaries, the financial intermediary closest to the beneficial owner would be made responsible for reporting payments to that beneficial owner, annually or on request, to the source Member State.

How does the Commission intend to follow up on this recommendation?

The Commission suggests follow-up discussions with Member States in a Working Party, in order to examine in detail the ideas set out in the Recommendation and to consider other possible ways to improve withholding tax relief procedures.

The Commission may also launch further related initiatives at a later stage, notably in order to develop new channels of information exchange between Member States as well as to suggest common conditions and obligations, for example regarding liability for under-withholding of tax, to be met by authorised intermediaries. In addition, the Commission’s proposals for improving mutual assistance in the tax area and mutual assistance in the recovery of taxes (COM/2009/28 and COM/2009/29) ( IP/09/201 ), which are currently under discussion in the Council, should, if adopted by Member States, help to ensure that the simplifications suggested under the Recommendation do not lead to losses of tax revenues through evasion or error.

What is the origin of this initiative?

The problems with withholding tax relief procedures were first highlighted in 2001 by the Giovannini Group that advised the European Commission on financial market issues. The Group identified 15 barriers to the integration of EU securities post-trading systems, including the fact that financial intermediaries established within the EU were not allowed to offer withholding agent services in all of the Member States, which it listed as “Giovannini barrier 11″. The EU Clearing and Settlement Fiscal Compliance Experts’ Group (FISCO), that was created in March 2005 and met until 2006, had as one of its key issues the resolution of Giovannini Barrier 11. FISCO examined the withholding tax relief procedures in the various Member States and came up with suggestions on how to improve these procedures in a report in 2007 ( IP/07/1569 ) . These suggestions are reflected in the present recommendation that has been drawn up following lengthy consultations with Member States.

Over the past years there has been a growing interest in this topic, stimulated also by ongoing discussions at the Organisation for Economic Cooperation and Development (OECD) on improving procedures for tax relief for cross-border investors.

Are Member States likely to agree to follow the Recommendation?

We believe so. Some have, in fact, already have procedures in place that are along the lines being proposed in the Recommendation. This is the case, in particular, for the Czech Republic, Finland, France, Ireland, Germany, the Netherlands, the Slovak Republic and Sweden. The results in these countries from the steps taken to simplify withholding tax relief procedures appear to have been positive, not just for non-resident investors but also for the tax administrations and financial intermediaries.

Is any estimate available of the costs or savings that would result from the implementation of the Recommendation?

Some rough estimates carried out within the Commission are that improved tax procedures would increase EU GDP by € 3.4 billion or 0.028% per year compared to a situation where no tax relief at source or quick refund procedures are available (or more than € 37billion over a 10 year period with an assumed 2 % growth rate of real GDP).

Why a Recommendation rather than a proposal for a Directive?

The Commission believes that a non-legally-binding Recommendation is the appropriate tool. Member States have already moved in the direction proposed in the Recommendation and there are also international moves along these lines. The Commission welcomes this trend and aims with this Recommendation to stimulate the debate further, share information on best practices and provide a forum for further discussion.