REUTERS/Michaela Rehle

Reuters Financial Regulation Summit

23 MAY, 2016

REUTERS SUMMIT

FINANCIAL REGULATION SUMMIT 2016

EU watchdog lauds insurer moves to adapt business models By Jonathan Gould and Huw Jones

I nsurers are making progress in adjusting their business models to account for low interest rates and the complex new risk-capital

regime called Solvency II that took effect at the start of the year, the EU's top insurance regulator said. Insurers have also been diversifying their investment portfolios to obtain greater returns, while avoiding an alarming increase in the degree of risk, Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA), told Reuters in an interview. "We see an evolution; changing business models is more and more a part of discussions in the boards of companies," Bernardino said, adding that dividend policies were a concern at some insurers where these models were under stress.

The Solvency II rules, which came into force on Jan. 1, require insurers to overhaul the way they assess risks on their books and measure the capital required to cover obligations to policy holders often decades in the future. They are also forcing a revamp of life insurance products in many countries where policies included high guaranteed interest rates to customers. More changes are needed, Bernardino said. "There is urgency, especially for pockets of life insurance businesses based on hard guarantees," he said. "I'm more confident this year than last on the pace of change but does that mean everybody is already there? No." BIG SHIFTS European insurers were moving at different speeds and the market will

see big shifts in the coming five years, he said. "We need to see more simple, more standardized products, and value for money for consumers," he said. EIOPA is carefully monitoring the implementation of Solvency II in face of low interest rates, but there have been no surprises on insurers' capital positions, he said. Investor worries about insurers possibly needing to raise capital to meet Solvency II requirements hit stocks of some Dutch companies last year, prompting Delta Lloyd into a 650 million euro ($728 million) rights issue in March. Insurer Aegon on Monday said it was selling 3 billion pounds ($4.4 billion) of annuity liabilities to Britain's Legal & General Group, a move analysts said was probably driven by Aegon's desire to improve its solvency ratio.

The logo of Europe's biggest insurer Allianz SE is seen on the company tower at La Defense business and financial district in Courbevoie near Paris, France, March 2, 2016. REUTERS/Jacky Naegelen

FINANCIAL REGULATION SUMMIT 2016

Bernardino said analysts and investors must understand that there is no "magic number" for the regulatory Solvency Capital Requirement (SCR), which varies depending on the risk sensitivity of an insurer's business model to interest rates, insurance or credit risks. "The ones with more sensitivity will need to have more leeway on capital if they don't want to be close to the SCR," he said. "You can't say that just because some companies have the same number, they have the same level of risk," he added.

NEGATIVE RATES Some big insurers such as Allianz have reported Solvency II ratios at 200 percent or more of the SCR, underpinning expectations for big dividends or share buybacks. Bernardino said dividend policies were a concern mainly for insurers with stressed business models that needed to build resilience against volatile market conditions. "Overall, what I've seen on dividends and share buybacks, well, that is normal capital management; it is not for supervisors to get involved with those elements, provided that

companies have a robust solvency position," Bernardino said. Negative interest rates are exacerbating investment headaches for insurers, who in turn were now searching for assets with better returns than long-dated bonds, but this has not led to a dramatic increase in risk in investment portfolios. "We don't see herd behaviour. I welcome more diversification in investment portfolios. Diversification is something that always pays off at the end of the day," Bernardino said. ($1 = 0.8933 euros)

Need clarity on EU pensions deficit hit to stability: watchdog

By Jonathan Gould and Carolyn Cohn

G reater clarity is urgently needed on the extent of underfunding of corporate pensions in Europe and the

potential impact this could have on financial stability, a top EU financial regulator said. "Everybody is much more aware of the vulnerabilities now," Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA), said in an interview in Frankfurt for the Reuters Financial Regulation Summit. Negative interest rates are dragging down investment returns and raising concerns about the ability of companies' defined benefit pension programmes to pay what they promised to future retirees, Bernardino said. The problems facing pension funds are similar to those at life insurers who offered long-term guaranteed interest rate policies, but Europe's pensions market rules are more fragmented, with big differences between countries. Germany's financial watchdog warned this month that some of that country's pension funds may soon be unable on their own to fully meet their obligations, and the funds were

suffering more than insurers from low interest rates. "It is an urgent issue but I would not want to characterize it as a bigger or smaller one than the insurance sector," EIOPA's Bernardino said when asked if Germany's situation applied more broadly. EIOPA released the results of its first stress test for pension funds earlier this year, showing that even before it applied hypothetical shock scenarios, liabilities exceeded assets by about 428 billion euros ($480 billion) or 24 percent of total liabilities. That deficit ballooned to 773 billion euros under a severe adverse market scenario including a fall in asset prices and interest rates, as well as an increase in inflation rates. Many companies in Britain and other countries are closing defined benefit schemes already to new employees, and pensions can complicate plans for strategic realignments, such as at steelmakers Tata and ThyssenKrupp. While pensions deficits might be a slow-burn problem, complacency was not an option, Bernardino said. "We think the commitments in the defined benefit plans in Europe should be valued according to a more realistic basis and that this should be transparent both to companies and employees, to help foster a proper dialogue on the sustainability of these

promises," he said. "We need timely adjustments, not just 'kicking the can down the road'," he said. EIOPA's next pensions stress tests, due in 2017, will look more closely at pension plan sponsors and the impact of their actions more broadly. "Fact is, there are only two solutions: either sponsors put in more money, or you reduce the pension benefits," he said. "If they (sponsors) have to add more to their funds, this could have implications for the economy and financial stability," Bernardino said. Financially weak companies in low growth economies might find it especially hard to stump up the cash needed to fill their pensions coffers, but both EIOPA and national supervisors needed better information on the scope of the problem before seeking remedies. "We need clarity before solvency," Bernardino said.

"It is an urgent issue but I would not want to characterize it as a bigger or smaller one than the insurance sector," - Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority

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Blockchain sends banking regulators back to basics By Huw Jones and Michelle Price

T he 'fintech' sector hoping to revolutionize finance with the adoption of blockchain, or distributed

ledger technology, is forcing global financial regulators to start looking at whether they need to change the rules governing markets and banking. Regulators are now asking whether the blockchain computing process, which underpins the digital currency bitcoin, will have an impact on how they protect consumers and keep the financial system stable if something goes wrong, the Reuters Financial Regulation Summit heard this week. Using cryptographic algorithms including digital signatures, blockchain keeps track of and verifies transactions, adding new transactions in blocks to the chain of all previous transactions. This electronic ledger can be shared

across a network but records of the transactions already verified cannot be tampered with or revised. The technology is now being promoted as a potentially "disruptive" force that could reduce the role of banks in making payments and change the way trades in financial instruments are cleared and settled, affecting market transactions worth trillions of dollars annually. "How does it affect not only things we care about but built the (regulatory) regime around ?" Andrew Bailey, deputy governor of the Bank of England and Britain's top banking regulator said. "As regulators we need to be managing the change without killing it," he said. International regulatory body the Financial Stability Board, has already been working on a study to determine whether innovations like blockchain pose any sort of threat to the stability of the financial system and what risks

need addressing. The findings, yet to be published, are keenly awaited by the sector as they will have a bearing on any new national rules. Much of the concern boils down to what is genuinely new, and how financial markets might change, along with the roles of banks. "One of the issues that will emerge is broadly how to define a bank," said Stefan Ingves, chairman of the Basel Committee of the world's banking regulators. "If you decide to draw a line between what you define as a bank and everybody else, what does that do to the structure of the banking sector? That is likely to be quite a hot topic for many years to come," said Ingves, who is also governor of Sweden's central bank. IS FINTECH SYSTEMIC? So far regulators have been largely hands off given the tiny sums fintech

A Bitcoin (virtual currency) paper wallet with QR codes and a coin are seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, May 27, 2015. REUTERS/Benoit Tessier/File Photo

FINANCIAL REGULATION SUMMIT 2016

Steven Maijoor, Chair of the European Securities and Markets Authority, attends a policy dialogue during the Asian Financial Forum in Hong Kong, China January 18, 2016. REUTERS/Bobby Yip

development investment represents compared with the billions of dollars invested by mainstream banking in their payments and IT systems. Consultant EY said UK fintech investment totalled 524 million pounds ($765 million) in 2015, compared with 1.4 billion pounds in New York, 3.6 billion pounds in California, 388 million pounds in Germany, and 198 million pounds in Australia. But politicians in countries with major financial centres like Britain, Singapore and the United States also don't want them falling behind in adopting new technology to secure jobs and tax revenues. And any problems on the way could be a catalyst for regulatory change, though the U.S. Treasury stopped short of proposing new rules after irregularities surrounding $22 million in loans at peer-to-peer lender Lending Club Corp this month.

Meanwhile China, which is investing heavily in fintech has been grappling with a series of peer-to-peer lending scams that have seen investors defrauded of billions of dollars. "The more we can help key decision-makers and regulators just simply even understand what's being developed, it's going to be hugely important as they can provide the appropriate measures to make sure we don't have systemic risk issues," said Alex Scandurra, chief executive of Stone & Chalk, the Australian fintech development hub in Sydney. "Taking China out of the picture, I'd laugh at anyone who says fintech is posing right now any material risk in any market," Scandurra said. The widespread use of blockchain in trade finance or clearing and settling trades is typically viewed as being five to 10 years away from mainstream adoption.

But if blockchain takes off, applying existing anti-money laundering, securities trading and consumer protection rules may be all that's needed for now, regulators said. "We should wait and see what uses the market is contemplating and whether that sort of use would imply the emergence of new risks," said Adam Farkas, executive director of the EU's European Banking Authority. Steven Maijoor, chairman of the EU's European Securities and Markets Authority said blockchain may offer quicker and cheaper settlement of trades but may pose risks concerning privacy and governance. ESMA will publish a discussion paper next month. "We need to be prepared in case blockchain is successful. It's important enough to look into it, but that's still very far away from saying this will be a new development," Maijoor said.

FINANCIAL REGULATION SUMMIT 2016

EU's smaller banks may skip "bail-in" requirements: Koenig By Francesco Guarascio and Huw Jones

S maller euro zone banks may not need to hold bonds that can be wiped out to plug losses in a crisis, the head of

the body responsible for resolving failed banks told Reuters. Elke Koenig, chair of the Single Resolution Board (SRB), also warned in an interview about the effect of low interest rates on banks and backed curbs on their holdings of sovereign debt. The SRB is responsible for deciding how much debt, known as MREL, the euro zone's main banks must hold on top of their capital buffers. This debt can be "bailed in" or written down if the bank gets into trouble to avoid taxpayers footing the bill. "When you consider we are setting MREL for the largest institutions in the banking union, it's fairly safe to

state that MREL of not less than 8 percent is probably the rule, it could even be beyond," Koenig told the Reuters Regulation Summit. On Wednesday, Reuters reported that draft legislation from the European Union's executive Commission on MREL will contain no minimum amount. But the MREL requirement for smaller banks could be below 8 percent because if they got into trouble, they could be closed down quickly and the deposits transferred to another lender, she said. "If you come to the conclusion that a bank, if it fails, goes under a normal insolvency procedure like in other industries, then the argument for MREL is getting very limited or disappearing because you would just unwind the institution," Koenig said. She said she would "personally sign

up" to the Bank of England approach which sets out three "buckets" for determining how much MREL a bank should hold. In the first bucket, banks with fewer than 40,000 accounts and that can be shut under normal insolvency rules won't have to hold MREL. Koenig said some banks under SRB supervision might be small enough to require only very limited amounts of MREL or none at all, a move that could reduce risks for shareholders and bondholders of smaller lenders. Last year hundreds of people in Italy lost their savings when retail bondholders' holdings were used to help bail out four small lenders. That led to calls for new bail-in rules to be adjusted so they did not inflict such large losses on ordinary retail investors. In setting up the appropriate MREL

European Union flags are reflected in a window at the headquarters of the European Central Bank in Frankfurt, Germany, April 21, 2016. REUTERS/Ralph Orlowski

FINANCIAL REGULATION SUMMIT 2016

for each bank under its remit, the SRB is also looking at the quality of banks' assets to be sure that a bail-in can take place quickly when required. For this purpose banks should hold a certain amount of junior debt, such as riskier bonds, that is easier to wipe out in case of resolution. "You can expect us to request a certain amount of MREL to be subordinated," Koenig said, stressing that "it must not be the entire amount and will depend on the individual institution." BREXIT AND OTHER RISKS In drawing up precautionary plans for possibly winding down some 140 lenders under its watch, the SRB is considering risks to banks' activities and profitability. One of these risks is low interest rates, Koenig said. The risks linked to a possible British vote to leave the EU are not currently

taken into account, but may become an issue after the June 23 referendum. "I would not think this is a very specific topic for now for us," Koenig said. Another risk facing euro zone banks in some member states is excessive exposure to sovereign debt of their own country, which is currently considered risk-free and subject to no holding limits. There was no such thing as a "risk-free asset," Koenig said. EU finance ministers, under pressure from Germany, are discussing options to limit banks' exposures to public debt or increase its cost. "To consider risk in sovereign bonds is acknowledging economic reality," Koenig said, supporting the bolder option of setting caps on sovereign holdings. "Concentration limits could be by far more powerful," as a tool to reduce sovereign risk, she said. Some euro

zone countries, including Italy and France, oppose such limits, fearing negative consequences on their banks' balance sheets and for bond markets. Koenig usually refrains from talking about specific countries and banks, but did not shun comments on Italy's newly-established Atlas fund - Atlante in Italian -, an initiative mostly funded by domestic private banks to bail out weaker Italian lenders and avert a wider crisis in the euro zone's fourth-largest banking sector. "The Atlante fund, as it is accumulating private money from very diverse sources, is and can be a good first step in a solution," Koenig said. The fund has become the majority owner of Banca Popolare di Vicenza immediately after its establishment, a move that the SRB will monitor, Koenig said.

A car sticker with a logo encouraging people to leave the EU is seen on a car, in Llandudno, Wales, February 27, 2016. REUTERS/Phil Noble

Brexit would damage EU capital markets union: watchdog By Huw Jones

A British exit from the European Union would damage the bloc's plans for a capital markets union

(CMU) designed to channel more cash into the economy, a leading EU regulator told the Reuters Regulation Summit on Wednesday. Britain votes on June 23 on whether to remain a member of the EU, but as the region's biggest financial centre, London is expected to play a central role in the CMU and be one of its biggest beneficiaries. The CMU seeks to enhance the ability of markets to raise funds for companies, such as by reviving securitisation or asset-backed market, and thereby reduce the region's heavy reliance on bank funding. "The capital markets union and the single market is all about size," Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA), told the summit. "From that perspective, it's extremely important that the UK remains and contributes to the capital markets union and the single market," Maijoor

said. "If the biggest capital market of the EU would not be part anymore of that CMU, obviously that would be detrimental and be a negative impact on the CMU, both for the UK as for the remaining financial markets," Maijoor said. On Monday, Bank of England Deputy

Governor Andrew Bailey told the summit that London had no "God-given" right to remain a top international financial centre if Britain left the EU. Supporters of Brexit have said that London would remain a major financial centre outside the bloc. Maijoor also said securities regulators

FINANCIAL REGULATION SUMMIT 2016

were holding talks about how to prepare for a potential British exit. "We are looking at what's happening in financial markets in the run up to the referendum, and this includes looking into currency markets, which have been affected," Maijoor said. Supervisors are watching how sterling is being affected by opinion polls, he said. Sterling hit a 2-1/2 week high against the euro on Wednesday after a poll showed support for Britain to stay in

the EU had risen to its highest in three months. "We are also doing scenario planning, how could this impact securities markets, and we are discussing this with my board members," Maijoor said. Adam Farkas, executive director of the European Banking Authority, ESMA's counterpart for the banking sector, told the summit the referendum was also being discussed by its members. "What we are looking at is what the

different outcomes would mean for integrity of the single market in banking in Europe," Farkas said. "We try to provide a platform, a table for the EU supervisors to discuss how they are preparing and how they are trying to ensure that banks are prepared for any eventuality. There is no sense of panic or complacency." The European Banking Authority is based in London and would have to relocate if Britain voted to leave the EU.

Basel says sovereign debt bank capital change could take By Huw Jones

F orcing banks to hold capital against holdings of their own government's debt would take years to agree and

implement, a top international regulator told the Reuters Regulation Summit. Some policymakers have criticised global banking rules that treat banks' sovereign debt holdings as "risk free", meaning no capital is needed to insure against default. A sharp deterioration in Greek, Irish, Portuguese and Spanish government bonds during the euro zone debt crisis showed that "risk free" sovereign debt can feed a "doom loop" to drag down lenders, critics have said.

The rules were written by the Basel Committee of banking supervisors from the world's main financial centres, which is studying whether changes are needed. The issue is politically sensitive in the euro zone as banks in countries where public coffers are under strain could switch to holding debt of healthier countries to ease the capital burden. "If it works out according to plan, we will put out a paper in one form or another for consultation towards the end of the year," Basel Committee Chairman Stefan Ingves told the Reuters summit. The consultation would take several months, followed by reflection, he said.

Basel is already implementing several major reforms between now and 2019, many of which are being phased in gradually to give banks time to adjust. "It's hard to tell, but if you use these other projects as examples then implementing any changes to the global rules for how to treat sovereign exposures would take a number of years," said Ingves, who is also governor of Sweden's central bank. "First you need to get agreement on what to do and that takes quite a lot of work. Then you need to agree on definitions and reporting, and then you actually have to agree on when to implement things and that usually takes a while," Ingves said. The Group of 20 economies (G20), which applies Basel's rules, agreed earlier this year that further Basel reforms should not significantly add to banks' capital burden. EU financial services chief Jonathan Hill has said he won't propose changes to the bloc's bank capital rules on "risk-free" sovereign debt until there is agreement in Basel. Instead, EU states may limit how much sovereign debt banks can hold as an interim measure. Bank of England Deputy Governor Andrew Bailey told the Reuters Summit he expects the risk-free rule to be changed, but over time. "My best guess is that over time a regime change will occur. For the moment we have tools to manage it at the domestic level. It's not going to move that quickly," Bailey said.

The HSBC building (2nd R) is seen in the Canary Wharf business district of London November 13, 2009. REUTERS/Luke MacGregor

FINANCIAL REGULATION SUMMIT 2016

OCC warns U.S. banks exposed to 'froth' in apartment By Lisa Lambert and Carmel Crimmins

C redit risk is growing in U.S. commercial real estate with some banks exposed to "froth" in the apartment

market in New York, Boston, Washington D.C. and San Francisco, a top U.S. banking regulator said on Monday. The Office of the Comptroller of the Currency (OCC), which supervises large national banks, wants lenders to tighten up loan terms to property developers and it recently reissued its guidance on how banks should approach commercial real estate lending. "That was meant to flag the issue for the banks so they can take corrective action now on their own before going through any type of examination cycle," Comptroller Thomas Curry told the Reuters Financial Regulation Summit in Washington D.C. "The actual loan terms and covenants are weakening," he said. He added that he did not expect the market to go into free fall despite rising vacancies and overbuilding in some cities. "We are keeping a watchful eye. We don't necessarily expect to have the bottom fall out as it did in other areas during the recession," Curry said. The OCC took banks to task about their energy loans after noticing an uptick in lending to oil and gas firms two years ago. Curry said he hopes that a twice-yearly review of their portfolios, due to be published in the coming months, will show that they have tightened up terms. Under pressure from the OCC and falling energy prices, U.S. banks have cut loans to oil and gas producers and hiked their provisions for potential losses from souring credits. Banks have also cut back on loans to highly indebted companies, known as leveraged lending, after a regulatory crackdown in recent years. But there has been an increase in bank loans to nonbank institutions such as hedge

funds, insurers, mortgage originators and investment banks, which then use the funds for direct lending or securitization. Curry said the OCC wanted to examine the links between banks and non-bank lenders, often referred to as "shadow banks". "And that's really something that as part of our on-site bank examination process we're looking to get behind at individual banks: what's actually happening," he said. LET'S TALK ABOUT FINTECH Curry has been vocal about the need for regulators to embrace the growing financial-technology sector, ranging from online lending to digital currencies. The OCC oversees the national bank chartering system so it theoretically has the power to designate fintech firms as banks and bring them into the federal regulatory regime. Curry said he was open to the possibility. "Internally we want to be open to rethinking things that we've reflexively said 'No' to or maybe made it so highly conditional it was an

effective 'No'," he said. "The message we're trying to give is... we're open to working through those things. We're not guaranteeing the result, but we're ready to talk and to think." A big part of the fintech world - so-called marketplace lenders which sell their consumer and small business loans on to investors - has been rattled this month by the resignation of the founder and chief executive of Lending Club Corp over alterations to the wording of some of the company's loans. Some institutional investors, a key source of funding, have become wary of buying loans. Curry said the episode showed the benefit of marketplace lenders, once known as peer to peer lenders, teaming up with traditional banks. "If you have secure and reliable sources of funding and you have a capital base to absorb potential credit losses you don't have that type of volatility," he said. "I would only speculate that, you know, partnerships or other types of relationships with traditional banking organizations may make more sense from a strategic standpoint."

The geometric VIA W57 residential project along the Hudson River is seen in the Manhattan borough of New York City, November 22, 2015. REUTERS/Rickey Rogers

FINANCIAL REGULATION SUMMIT 2016

BlackRock sees defies for investors, boards on cyber risks By Michelle Price

I nvestors are facing major challenges in assessing cyber security risks because companies are wary of disclosing breaches

fearing they could make them more vulnerable, according to BlackRock's head of investment stewardship for Asia Pacific. Over the past two years the world's largest asset manager has stepped up pressure on companies to ensure they have robust procedures in place for managing cyber risks, but it is tough to engage boards on this sensitive issue, Pru Bennett told the Reuters Financial Regulation Summit. "Disclosure is a challenge for companies on cyber security. It could attract attention. We’re not pushing for disclosure, but who has responsibility and where in

the board does the accountability lie. The most important thing is to keep up to date. "It’s a real challenge for boards, there’s no question about it, and it's a challenge for us as well in engaging with boards on the issue." The global financial system is still reeling nearly two months after a still-unidentified group was able to use malware to hack the SWIFT bank messaging network and steal $81 million from the Bangladesh central bank. The February heist prompted Mary Jo White, chair of the U.S. Securities and Exchange Commission, to warn on Wednesday that cyber security is the biggest risk facing the financial system. Bennett said cyber security had become a corporate governance concern for investors and that boards

needed to ensure companies have controls in place to keep on top of the risks. "I'm not saying every board has to have a cyber expert, but if you’ve got competent people who understand the issues, can listen to an expert, assimilate that information, and make decisions accordingly, that’s what we want on the board," Bennett told the summit in Hong Kong. In many Asian markets, issuers are required to provide only minimal information on their board members, but BlackRock has been pushing for greater disclosure on board members' experience and skill sets. Bennett suggested that listing rules in the region should be changed to require companies to provide this extra information. "I think that is a fairly simple and quite unobjectionable change."

People wearing balaclavas are silhouetted as they pose with a laptops in front of a screen projected with the word 'cyber crime' and binary code, in this picture illustration taken in Zenica October 29, 2014. REUTERS/Dado Ruvic

FINANCIAL REGULATION SUMMIT 2016

Futures regulator targets cyber security, automated trading By Lisa Lambert

T he U.S. Commodity Futures Trading Commission plans to finalize rules on cyber security, automated trading

and position limits this year, as it tidies up final requirements related to the Dodd-Frank financial reform law, its chairman said on Thursday. The CFTC has been examining the thoroughness of cyber security at exchanges and other entities it oversees, and uncovered unspecified deficiencies at some, said Chairman Timothy Massad at the Reuters Financial Regulation Summit. It is encouraging boards of directors to scrutinize technology practices and policies more closely, he added. "Cyber is the biggest threat facing financial markets today," he said, echoing comments earlier in the week from Securities and Exchange Commission Chair Mary Jo White. Cyber security has become an increasingly pressing issue for a wide range of entities in recent years. Big banks, retailers and payment processors have battled breaches or attempted breaches into customer data. A few months ago, a Los Angeles hospital said it paid hackers $17,000 in ransom to regain control of its computer systems. Even regulators grapple with cyber

incursions, as evidenced by the recent heist involving the Federal Reserve Bank of New York and Bangladesh's central bank. The CFTC has been monitoring its own systems for cyber threats, Massad said, noting the agency received one of the top ratings for its security practices from a government monitor. Technology can present other risks in the form of automated trading, which represents 60 to 70 percent of the markets the CFTC regulates, Massad said. The commission proposed a rule in November requiring some proprietary traders to register with it and setting standards for algorithmic trading systems. It hopes to have the rule finalized by year end, he said. Massad also said the CFTC has focused on catching bad actors who try to "spoof" markets by putting in bids for trades they intend to cancel. Its several enforcement cases on spoofing have acted as a deterrent, but the agency is still monitoring markets closely for similar activity, he said. The commission also aims to finish work on limiting the positions that traders can hold in commodity markets as a way to head off oil and gas hedging abuse.

In February, the process hit a bump when an industry-led panel told the commission the limits would only hurt investors. With oil prices slowly recovering from recent historic lows, the urgency to approve the limits may be easing, as well, but the CFTC remains committed to addressing excessive speculation and market manipulation, Massad said. DEFENDING DODD-FRANK The CFTC has spent almost six years writing and implementing new financial regulations stemming from Dodd-Frank, including the creation of clearinghouses for the now-$181 trillion derivatives market. Massad was asked what he thought of comments by politicians who want the law dismantled. In short, Massad said, that idea does not make sense. "So, we're going to go back to the bilateral opaque dark world of swaps without central clearing?" he asked. "We're going to, what, bring back the Office of Thrift Supervision? Are we going to lower deposit insurance back down to $100,000? Are we going to eliminate the orderly liquidation authority so the federal government can bail out institutions? I mean, come on. If you go through the specifics, it doesn't make any sense."

U.S. Commodity Futures Trading Commission Chair Timothy Massad is interviewed at the Reuters Financial Regulation Summit in Washington, US May 19, 2016. REUTERS/Gary Cameron

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Swift code bank logo is displayed on an iPhone 6s on top of Euro banknotes in this picture illustration made in Zenica, Bosnia and Herzegovina. REUTERS/Dado Ruvic/File Photo

SEC says cyber security biggest risk to financial system By Lisa Lambert and Suzanne Barlyn

C yber security is the biggest risk facing the financial system, the chair of the U.S. Securities and Exchange

Commission (SEC) said on Tuesday, in one of the frankest assessments yet of the threat to Wall Street from digital attacks. Banks around the world have been rattled by a $81 million cyber theft from the Bangladesh central bank that was funneled through SWIFT, a member-owned industry cooperative that handles the bulk of cross-border payment instructions between banks. The SEC, which regulates securities markets, has found some major exchanges, dark pools and clearing houses did not have cyber policies in place that matched the sort of risks they faced, SEC Chair Mary Jo White told the Reuters Financial Regulation Summit in Washington D.C. "What we found, as a general matter so far, is a lot of preparedness, a lot of awareness but also their policies and procedures are not tailored to their particular risks," she said. "As we go out there now, we are pointing that out." White said SEC examiners were very pro-active about doing sweeps of broker-dealers and investment advisers to assess their defenses against a cyber attack.

"We can't do enough in this sector," she said. Cyber security experts said her remarks represented the SEC’s strongest warning to date of the threat posed by hackers. A former member of the World Bank’s security team, Tom Kellermann, who is now chief executive of the investment firm Strategic Cyber Ventures LLC, called it "a historic recognition of the systemic risk facing Wall Street." BROKEN WINDOWS Under White, a former federal prosecutor, the SEC introduced an initiative called "broken windows" designed to crack down on small violations of SEC rules to deter traders and others from larger transgressions. But critics have questioned whether the initiative, similar to one used by former New York City Mayor Rudy Giuliani in his crackdown on crime in the city, is an effective use of the agency’s limited resources. The policy has been applied to instances of “rampant non-compliance” involving serious, significant rules, White said, noting that she considers the initiative a huge success. For example, the SEC brought three groups of cases in a key area, the prohibition against short selling

ahead of an IPO by individuals who then participated in the IPO, since 2013, she said. Each year, there have been fewer cases, with the most recent number at around 12, White said. GAAP VS. NON-GAAP Also on Tuesday, the SEC released guidance about how certain accounting practices could potentially mislead investors that White called "consequential." Companies are increasingly using non-Generally Accepted Accounting Principles, or non-GAAP, to report earnings, permitting them to back out certain expenses from earnings figures, such as non-cash costs. But critics say the practice can also mislead investors by creating a rosier picture of a company’s profits. The SEC’s current rules allow companies to report with figures that do not comply with GAAP, as long as certain conditions are met and White said the guidance spells out those conditions, such as a requirement that “the GAAP measure has to be of equal or greater prominence than non-GAAP." Non-GAAP "is not supposed to supplant GAAP and obviously not obscure GAAP," she said. She declined to say if the SEC is considering enforcement actions against companies that might be misleading investors with non-GAAP, but noted the SEC would not hesitate to bring one if it uncovered an “actionable violation.” For months now, the SEC has only had three commissioners, down from its full complement of five, and the U.S. Congress has stalled on confirming two nominees. "We're really functioning on all cylinders," White said, ticking off a list of projects the commission has recently completed. She added that, to comply with rules on meetings and disclosures, commissioners typically meet one-on-one. "If there are only three of you, it's shorter-circuited to some degree," she said. "There are some advantages, too."

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U.S. watchdog probes financial regulatory structure By Lauren Tara LaCapra and Lisa Lambert

A federal watchdog agency is examining whether financial regulators are doing enough to collaborate

and share information to prevent another economic crisis, a senior agency official told Reuters on Wednesday. As part of its investigation, the U.S. Government Accountability Office is considering whether some regulators ought to be merged to function better, Orice Williams Brown, managing director of financial markets and community investment at the GAO, told the Reuters Financial Regulation Summit in Washington. The GAO, a nonpartisan investigative arm of Congress, does not have subpoena or regulatory powers, but its studies can be influential. "July will be, I think, six years out from Dodd-Frank and there are still real questions about the regulatory structure and if we have fully addressed some of the blind spots," she said. For instance, Brown noted that regulators like the Securities and Exchange Commission and the Commodity Futures Trading Commission have overlapping duties regulating certain markets while the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have overlapping duties with depository institutions. In some cases, an investment product can cut across multiple regulators' jurisdictions, but is analyzed by each through a narrow lens, she said. Multiple regulators overseeing the same thing can be beneficial if they act as backstops to one another and provide different viewpoints, Brown said. But it becomes a risk when they do not share information or take responsibility to act. In particular, the Financial Stability Oversight Council has a systemic risk committee whose members can be limited in the type of information they are able to share with others. "That just raises real questions," she said. "If there is something going on

in some particular segment of the market, is that information then being shared broadly enough to know if it's a more pervasive issue?" Brown also noted that the Office of Financial Research and a special research division of the Federal Reserve are at times analyzing the same topic without appropriate coordination. And while the Office of Financial Research may spot serious systemic risks, it has no authority to act. Instead, it refers its findings to regulators in hopes they will prevent a calamity. "It's as if you get an email...and it's been addressed to five people and everybody assumes that somebody else is going to respond," she said. Separately, the GAO has expanded an investigation into whether the Federal Reserve has been too soft on Wall Street banks. The GAO has decided to also examine whether the FDIC and OCC have fallen victim to "regulatory capture," a form of government failure, which will be released separately. Reuters first reported on the investigation in March. UPCOMING REPORTS The GAO's investigative work focuses on how public funds are used. Some of its ongoing research projects are required by law, but many others come at the request of prominent

lawmakers. Brown detailed a wide range of topics the agency is investigating. This summer, it expects to publish a report on regulatory stress tests of big banks, and another on how the government has used fines collected from banks related to the mortgage crisis. In the fall, it will release a follow-up investigation into the SEC's personnel management practices, something it also examined in 2013. Next year the GAO will release a report on a requirement that banks own stock of local Federal Reserve banks, which in turn pay dividends to owners. It is also investigating the structure of the U.S. housing finance system, including the federal government's ongoing conservatorship of Fannie Mae and Freddie Mac. Other reports will examine whether the Federal Reserve's role in payments systems presents a conflict of interest, how the Office of Financial Research is using its resources, and the reduction of banking services along the Southwest border, Brown said. Reports will also examine the decision by regulators to limit the scope of derivatives rules, and a Fed regulation that limits transactions in certain savings and money-market accounts to six per month that is poorly understood by consumers, Brown added.

The Managing Director (Financial Markets and Community Investment) of the U.S. Government Accountability Office Orice Williams Brown is interviewed at the Reuters Financial Regulation Summit in Washington, U.S. May 18, 2016. REUTERS/Gary Cameron

FINANCIAL REGULATION SUMMIT 2016

Credit risks persist, especially in energy: U.S. monitor By Lisa Lambert and Lauren Tara LaCapra

C redit risks continue to mount in the U.S. financial system, even in the energy sector which recently saw some

improvement, the head of the agency focused on the country's financial stability said on Wednesday. In December, the Office of Financial Research said high rates of borrowing by businesses had elevated credit risk to a level possibly hazardous to the U.S. financial system's health. Five months later, the office's director, Richard Berner told the Reuters Financial Regulation Summit in Washington they "have mounted a little bit" since then. "The fundamentals are still that growth is very slow in many parts of the world and companies - particularly non-financial corporates here and in some emerging markets - have taken on more risk," he said. Berner added that typical recovery rates for defaulted debt "are in the neighborhood of 30 to 50 percent"

but "we saw them come down a lot in the first quarter." That could possibly shock investors expecting to recoup money when loans go sour. The energy sector remains a credit risk, too, despite rising oil prices. Companies may still not generate the income needed to service high levels of debt they took on in recent years. "The cash flows that they now can expect are better than when oil was, you know, 25 bucks for a short period of time, so that's a lot better," he said. "But the fact is that the debt didn't go away." Banks that lend to energy producers have mostly managed for risks, he added. "Have they managed for them sufficiently? I think you'd have to look bank by bank," Berner said. "The important point is that the bulk of those loans weren't made by banks. They were made in the securities markets, in the capital markets." U.S. crude oil prices have recovered from a 12 year low around $26 a

barrel last December to nearly $50 this week. SECURITIES LENDING REPORT DUE The Office of Financial Research, created by the Dodd-Frank Wall Street reform law of 2010, will soon release a report on securities lending, Berner said, adding current gaps in data "prevent us from making a reasoned and analytical assessment of where the risks might." It is also looking at whether clearing houses for swaps could create "contagion risk," he said. Regulators are working toward stress testing central counterparties along the same lines as banks, which much show how they could withstand hypothetical situations without government assistance. Debate revolves around whether "stress tests should be uniform" or "tailored to the bespoke kinds of risks" in individual clearing houses, he said. "The answer is both."

A general view shows the Philadelphia Energy Solutions petroleum refinery in Philadelphia, Pennsylvania. REUTERS/Tom Mihalek

FINANCIAL REGULATION SUMMIT 2016

Hong Kong regulator to begin review of data privacy laws By Michelle Price

H ong Kong will begin a review of its data privacy rules over the next 18 months, with a view to

potentially updating them in line with technological developments and changes in European regulation, the territory's privacy regulator said. Hong Kong's data privacy legislation was drawn-up nearly 20 years ago and based at the time on European Union law, but recent changes to the EU framework and a technology-driven explosion in personal data may mean the current rules need to change, Stephen Wong Kai-yi, Privacy Commissioner for Personal Data, told the Reuters Financial Regulation Summit on Friday. "Now you have all these

developments we'd like to study the impact this might bring to our current legislation." The EU began an overhaul of its data privacy rules in 2012 to give citizens greater control over their personal data, and to simplify the rules for businesses. The new EU new regime is due to come into full effect in 2018. "It's not just a matter [of] protecting individuals, we would like to protect the interests of commercial enterprises," said Wong, adding that the regulator would propose legislative changes if appropriate. Hong Kong's data privacy laws are relatively strict, but a review of the regime would help to account for changes in technology and developments in international data privacy law that have occurred since

they were last tweaked in 2012. Recent enforcement actions brought last year by the Office of the Privacy Commissioner for Personal Data, most notably against Hong Kong corporate governance activist David Webb, have prompted concerns that the law is being used to restrict media freedom in the territory. Speaking at the summit, Wong denied that this case could have adverse implications for media freedoms. He said it had "no impact at all on the right to republish or to express a view" and that the law provided certain exemptions for media outlets. "But I would like to stress that there is a misconception that the use of personal data from the public domain is free for all other sorts of uses, but that is not true," he said.

HKEX considering broader rules on reverse takeovers By Elzio Barreto and Michelle Price

H ong Kong's stock exchange may implement stricter rules to prevent companies sidestepping scrutiny of

reverse takeovers (RTOs) and backdoor listings as part of a broad review of listing rules in the city, a top bourse official said. Exchange officials have held talks with market regulator Securities and Futures Commission and started discussions within its own listing committee on the issue, David Graham, chief regulatory officer and head of listing at the Hong Kong Exchanges & Clearing Ltd (HKEX), told the Reuters Financial Regulation Summit on Thursday. Proposed changes could be put for consideration with market participants later this year, although no time table has been set. HKEX published revised rules in 2014 and 2015 to make it harder for companies to find an easy way to list through local shell companies with large asset injections or large cash injections. But RTOs become harder to track when they're done in smaller increments

over a longer period of time, Graham said. "We're looking at, going forward...whether we draft a broader anti-avoidance provision, which would give us the tools to try and capture those types of activities as well," said Graham. The HKEX is also looking to toughen its stance on companies with long trading suspensions, he added. Only 54 out of nearly 1,900 companies listed on the main board and the Growth Enterprise Market (GEM) of the exchange have had their trading suspended for three months or longer, but such suspensions impact the market's quality, Graham said. While previously the exchange would give those companies "quite a bit of latitude" with the timing to start a delisting process, that may be about to change. "What we're going to consider, recognising this is an issue in the market, is we will take a more robust approach, which means we're going to more readily press the button to start a delisting process than we have historically," Graham said. As part of a review of the GEM board, the exchange may look at eligibility requirements for listings, including

increasing the minimum number of independent shareholders or requiring companies to also sell shares in a retail tranche during initial public offerings, Graham said. Other potential changes could also involve rules for companies looking to shift their listing from the GEM to the main board.

A flag displaying the logo of the Hong Kong Exchanges and Clearing Limited flies beside a Chinese national flag in Hong Kong. REUTERS/Bobby Yip

FINANCIAL REGULATION SUMMIT 2016

New rules and codes to boost Asian corporate governance By Michelle Price

A sia has seen vast improvement in corporate governance over the past two years as regulators and

securities exchanges tighten rules to boost company performance, raise investor confidence and guard their reputations. Markets including Hong Kong, Japan, Singapore, South Korea, Taiwan and Thailand have been getting tough on rogue firms and introducing stewardship codes to encourage engagement between companies and investors, exchange chiefs and investors told a Reuters Financial Regulation Summit. Hong Kong and Singapore, two of the region's largest financial centres, for instance have tightened listing and takeover requirements, and have stepped up enforcement after instances of erratic price movements sparked fear of manipulation in both markets. Currently under discussion are stringent new rules on long-suspended companies and backdoor listings, and a review of Hong Kong's Growth Enterprise Market, David Graham, chief regulatory officer and

head of listing at Hong Kong Exchanges and Clearing Ltd (HKEX), told the summit on Thursday. "In the last 18 months we've been much more focused on listed company activity. We are looking to make sure we have quality companies and we have a quality regulatory system," said Graham. Singapore Exchange Ltd (SGX), which was criticized for its handling of a penny stocks scandal in 2013, has stepped-up scrutiny of companies on its market and is reviewing their compliance with the state's corporate governance code. Results are expected in coming weeks, its chief regulatory officer said at the summit. "All these are long-term measures designed to improve the quality of the market," Tan Boon Gin said. Several markets are also falling in line with international standards on stewardship, with Hong Kong and Japan introducing codes to encourage investors to engage more actively with companies. Regulators in South Korea, Taiwan and Thailand are drafting similar codes. Pru Bennett, head of investment stewardship for BlackRock Inc in Asia, said these codes were starting to

make a difference, especially in Japan where companies wanting to engage with the world's largest asset manager have grown to 300 per year from 100 over the past two years. "Japan is definitely changing and making progress," Seth Fischer, chief investment officer at Hong Kong-based activist hedge fund Oasis Management told the summit on Friday, saying it had become far easier to secure meetings and engage with company management. "The tone of meetings we are having is different, and they are taking action." To be sure, many markets in the region still have a long way to go before they fall in line with corporate governance standards in London or New York. While activist investors have been upping campaigns in Asia, BlackRock's Bennett said traditional institutional shareholders also had to "step up" and engage more with company boards to explain why they require more disclosures and how they use such information in valuation models. "Institutional shareholders have a responsibility to contribute to that culture of change and not just rely on the regulators," she said.

Commercial buildings are seen at the financial Central district in Hong Kong August 17, 2010. REUTERS/Bobby Yip

FINANCIAL REGULATION SUMMIT 2016

"If the allegations are extremely wide-ranging then we are prepared to consider an extended trading halt in order for (the company) to have a fulsome response to the allegations." - Tan Boon Gin, SGX's chief regulatory officer

SGX seeks timely disclosure from cos. under market scrutiny By Anshuman Daga and Saeed Azhar

S ingapore wants listed companies that are the target of anonymous research reports or short-

sellers to quickly disclose information in order to address investor concerns, a senior official of the Singapore Exchange (SGX) said. Home to about 770 listed companies, Singapore has seen some high-profile firms pressured by short sellers who have questioned their accounts, triggering a fall in their share prices. Last year, Noble Group was thrust in the spotlight after Iceberg Group alleged it was inflating its assets by billions of dollars, a claim that Noble rejected. And earlier, Olam International was attacked by Muddy Waters but it stood by its accounts. "The main issue that we have is the shock and awe impact of the short-selling report that we need to mitigate quickly," Tan Boon Gin, SGX's chief regulatory officer, told the Reuters Financial Regulation Summit on Thursday.

SGX has already signalled to companies that if they do not have enough time to respond to such reports, they should call a trading halt to give themselves time to respond to the allegations, said Tan, without naming any firm. "If the allegations are extremely wide-ranging then we are prepared to consider an extended trading halt in order for (the company) to have a fulsome response to the allegations." Unlike other major financial markets, SGX runs the bourse and is also the main stock market regulator. It is in turn regulated by the central bank, the Monetary Authority of Singapore. The exchange, which has faced criticism for its handling of a penny stocks scandal in 2013, has taken several steps in a bid to shore up investor confidence after trading volume plunged. SGX introduced circuit breakers, imposed a minimum trading price of S$0.20 to dampen excessive speculative trading, set up independent groups to vet listings and strengthened its enforcement

actions. "All these are long term measures designed to improve the quality of the market," said Tan, who had a 10-year stint investigating securities cases at Singapore's white collar crime unit and the central bank, before joining the SGX in June. "What we want to see is confidence in the listings, which is why everything that we have done so far is to increase trust and confidence in the quality of listings." While SGX has built up a fast-growing derivatives business, it is struggling to attract new listings, with Hong Kong Exchanges & Clearing grabbing the lion's share of the region's big-ticket listings.

An office worker walks past a logo of the Singapore Stock Exchange (SGX) outside its premises in the financial district of Singapore April 23, 2014. REUTERS/Edgar Su

FINANCIAL REGULATION SUMMIT 2016

Australia watchdog to publish fintech "sandbox" proposal in June By Swati Pandey and Michelle Price

A ustralia's securities regulator is set to publish a proposal next month to allow financial technology

companies to start operating without a full license, one of the agency's top executives said on Wednesday. The potential new rules would create a controlled environment, or "sandbox", to allow start-ups to launch in the market with restricted authorisation before being granted a full license, Cathie Armour, a commissioner at the Australian Securities and Investment Commission (ASIC), told the Reuters Financial Regulation Summit. "We are going to issue a public consultation on some potential adjustments to the regulatory framework which might be of particular help to fintech businesses. They'll obviously have regulations imposed on them but, potentially, for

a limited period of time, some aspects of regulation will not be imposed just to allow experimentation." ASIC is exploring how it could use waivers and no-action notices to implement the sandbox framework, which ASIC hopes to get up and running by the end of the year, said Armour. ASIC has been drafting the proposal in consultation with fintech experts, including Alex Scandurra, CEO of Sydney fintech hub Stone & Chalk. "We are exploring the opportunity to create a sandbox that allows start-ups to validate, rapidly prototype and engage with various customer groups prior to having to engage in a formal licensing process," Scandurra told the summit. Many fintech business models do not easily fit into the existing license-based financial regulatory framework operated in many countries, making it tough for start-ups to become

established and sparking calls for regulators to provide more clarity on the rules for fintech services. The U.K. Financial Conduct Authority (FCA) said last year it would launch a regulatory "sandbox" for fintech firms to create a safe space in which authorised firms can experiment to validate their business models. Under that programme, which opened to applicants last week, fintech firms which meet certain FCA criteria will be granted "restricted authorisation" by the FCA to test their ideas without fear of prosecution if they break the FCA's rules. "We've looked at what the FCA's proposal is and we're looking to do something much more far-reaching," said Scandurra. Australia wants to develop Sydney as a fintech hub similar to Silicon Valley and has announced tax breaks for early-stage investments as well as a visa scheme for entrepreneurs to attract talent.

A bell used for official ceremonies hangs from a wall inside the Australian Securities Exchange in Sydney, March 17. REUTERS/David Gray

FINANCIAL REGULATION SUMMIT 2016

Australia regulator says in advanced stages of rate-rigging probe By Swati Pandey and Michelle Price

A ustralia's markets watchdog is in the advanced stages of an investigation into the fixing of benchmark interest

rates in which it has already hauled two of the country's major banks to the courts, a top official said on Wednesday. The Australian Securities & Investments Commission (ASIC) launched two separate court actions against ANZ Banking Group and Westpac Banking Corp earlier this year for allegedly fixing the bank bill swap reference rate (BBSW), an allegation both banks have rejected. "We are in advanced stages of our investigation in relation to the other organisations that we were looking at but we haven't formed any conclusions at this stage," ASIC commissioner Cathie Armour told the Reuters Financial Regulation Summit. "We are very keen to complete this

process and come to a conclusive view on the outstanding investigations," she said, but did not give a timeframe for the investigation to be completed. The BBSW is the primary interest rate benchmark used in Australian financial markets to price home loans, credit cards and other financial products worth trillions of dollars. ASIC, which is Australia's corporate, markets and financial services regulator, will also publish a report by July on equity research independence and will seek industry feedback before introducing definitive guidance, Armour told the summit held at the Reuters office in Sydney. The regulator is looking to eliminate the conflicts of interest that can emerge when analysts or, the bank they work for, participate in deals involving companies they cover. "The plan is to get some feedback on what we've found and think about

whether we need to introduce some more definitive guidance." Late last year, ASIC asked UBS Australia's securities arm to take remedial steps at its Australian research house following an investigation into its control and compliance practices. The investigation was triggered by allegations that UBS, who was advising the partial sale of an electricity network in the country's biggest ever privatisation, removed negative parts of a supposedly independent analyst report after the state's government ordered it to do so. UBS had declined to comment at the time. Regulators in United States and Europe have tightened the screws on equity research over the past decade, amid fears analysts had been pressurised to provide favourable research in order to win business.

The Australian Securities & Investments Commission commissioner Cathie Armour speaks during an interview . REUTERS/David Gray

FINANCIAL REGULATION SUMMIT 2016

Market surveillance a constant challenge: FINRA By Chuck Mikolajczak

S urveillance of markets for illegal trading practices has become more difficult as technology evolves and

manipulation strategies can stay one step ahead of regulators, according to an executive at Wall Street's self-funded watchdog. Tom Gira, executive vice president for market regulation at the Financial Industry Regulatory Authority (FINRA) said at the Reuters Financial Regulation Summit on Tuesday he worries that as the agency discovers problematic trading patterns, bad apples in the market may adjust their strategies to stay a step ahead. Gira also said he wants to obtain futures trading data so the agency can engage in more cross-product investigations. "I worry what we find there is going to be the tip of the iceberg," he said. With the recent release of the first monthly report cards to member firms that deal with market manipulation, FINRA hopes to better shine a spotlight on and discourage illegal

practices such as spoofing, or layering. Spoofing involves faking orders for a security to deceive the market by creating the illusion of demand. The report cards are based on the watchdog's "cross-market" program, which monitors trades across stock exchanges. Gira told Reuters reporters that trading patterns unusual enough to trigger an alert to regulators make up as much as 1 percent of trades, and FINRA monitored some 50 billion trades a day. "We’ve found people are getting more sophisticated, there is sort of a cat and mouse game where the firms can get picked off with multiple strategies," Gira said. FINRA is also starting to compile what it terms "cross-product patterns" comparing trading across different investment products, such as equities and options. That data could point to cases of using a layering technique to advantage the option and interfere with the price in that market. Gira also said he hopes the hotly

debated proposal to let U.S. stock exchanges delay order responses by less than a millisecond, paving the way for "Flash Boys" heroes IEX Group to become an exchange, moves forward next month, "in the interest of allowing innovation to continue to exist," echoing earlier comments from FINRA head Robert Ketchum. IEX says it slows orders by 350 millionths of a second to prevent predatory traders using high-speed technology from picking up on trading signals and electronically front-running investors' orders, a practice termed latency arbitrage. Author Michael Lewis chronicled IEX's efforts in his book, "Flash Boys: A Wall Street Revolt." The proposal has drawn criticism from industry participants and market operators, including the head of Nasdaq Inc, who said approval of the interpretation would greatly complicate the market and that exchanges would respond by creating thousands of new ways to execute orders. A ruling on the proposal is expected in mid-June.

A sign for the Financial Industry Regulatory Authority (FINRA) is seen outside the offices in New York's financial district July 22, 2015. REUTERS/Brendan McDermid

FINANCIAL REGULATION SUMMIT 2016

Asset managers do not need new liquidity safeguards By Huw Jones

A sset managers do not need new safeguards at this point to cope with a decline in liquidity that has

contributed to sharp swings in bond markets, a senior European Union regulator said. Steven Maijoor, chairman of the European Union's European Securities and Markets Authority (ESMA), said the structure of bond markets had changed due to technology advances, lower levels of activity by banks and the increased presence of asset managers. "Yes, liquidity has changed. To say this now requires another policy, that is too early to say," he told the Reuters Financial Regulation Summit on Wednesday. His view contrasts with central bankers who want to bring in new rules for asset managers to safeguard financial stability. A drop in liquidity in U.S. Treasuries and German government bonds, for example, has made it harder for asset

managers to sell bonds when they need to. As a result, central bankers have called for new rules on liquidity management and leverage at asset managers. The Financial Stability Board (FSB), which coordinates regulation for the Group of 20 economies (G20) and is headed by Bank of England Governor Mark Carney, will make global policy recommendations by September. FSB recommendations are not legally binding. Markets regulators are less eager to jump in. Maijoor is just back from a meeting in Peru of IOSCO, the global umbrella body for securities regulators, which discussed bond market liquidity and asset managers. Last year, IOSCO, an FSB member, scuppered FSB plans to deem asset managers "systemic" and therefore face tougher scrutiny, saying funds do not pose the same risks as banks. "It's too early to say that we need to change redemption mechanisms or the liquidity management tools at investment funds," Maijoor said. EU-regulated mutual funds have a

good track record in managing liquidity, and it was too early to reform the EU's new regime for alternative investments like hedge funds, Maijoor said. "What we should do is collect more data on asset managers in the EU ... to get a better understanding of what they are doing before (we take) the next step and say this should be regulated differently," Maijoor said. He predicted that this sort of debate between central bankers and markets watchdogs over regulation policy will happen more often. "Maybe the way you look at stability issues in banking is not the right template for looking into stability issues in the securities market," Maijoor said.

For more stories: >> EU in quandary over rules to encourage smaller banks

>> Conduct message not getting through at UK banks: BoE's Bailey

>> London's future as finance hub at risk outside EU: BoE's Bailey

>> Canada regulator pushes back on tougher capital demands

>> India central bank to keep reviewing banks' asset quality

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"Yes, liquidity has changed. To say this now requires another policy, that is too early to say," - Steven Maijoor, chairman of the European Union's European Securities and Markets Authority