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Photographer: Bloomberg Daybreak

Photographer: Bloomberg Daybreak

You can almost hear the relief in Brussels that the latest financial crisis, the blowup of Bill Hwangs family office Archegos, has passed it by. That doesnt mean the next one will.

The European Union is eager to take work from the City of London after Brexit, but it needs toappreciate that greater exposure to the financial sector means bigger risks. Europes approach of setting up finance hubs in several locations will magnify the dangers rather than prevent them.

As with the 2008 Lehman Brothers collapse, the splintered approach to trying to manage themassive margin call on Archegosmade matters worse.Deutsche Bank AGdodged this bullet (mimicking Goldman Sachs Group Inc. and others) by a swift disposal of $4 billion of available-for-sale collateral from its prime brokerage exposure to Hwang.Credit Suisse Group AG and Nomura Holdings Inc.were less fortunate. Two of Japans megabanks have also revealed exposure. The collateral they hold may now both be much lower in value and less liquid, takingmuch longer to offload, with commensurate larger losses.

The scale of the Archegos blowup looks manageable for the finance system, even if does leave a few bank victims, but imagine something similar happening in the infinitely bigger interest-rate market at some point.And then imagine clearing houses in different European cities trying to manage the fallout collectively.

While there were reported attempts to broker a club deal on Archegos and to undertakea collective controlled explosion of the positions, trust among the investment bankerswas absent. It became devil take the hindmost. Its for exactly this reason that centralized clearing houses evolved afterthe Lehman debacle to pool the counterparty risks of dealing securities across the financial system.

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The London Clearing House, part of the London Stock Exchange Group Plc, clears more than 90% of global interest-rate swaps because centralizing the risk makes it simpler to assess. The EUs desire to see not just euro-denominated clearing but muchof the wider financial activity in Europe switch away from London will have consequencesfor financial stability. A future crisis would be far harder to unravel if exposures between banks weretied up in several different clearing exchanges.

Which clearing house would have the rights to which collateral? Have no lessons been learnedfrom the collapses of Lehman orMF Global, which have tied up conflicted assets for over a decade?There are even echoes of the LTCM collapsenearly a quarter of a century ago.

There are sound reasons why London has become the European financial center. That doesnt mean some business, and particularly control of European government debt,shouldnt naturally drift across to the continent, but it does come with concomitant risks which need tobe addressed.Could the EU handle another large-scale financial crisis if it cant even agree how to distribute vaccines?

With lockdowns imposed again across the EU, a stuttering vaccine rollout and a potential block to Europes pandemic recovery fund from the German constitutional court, there are warning signs something ECB Chief Economist Philip Lane outlined in a recent blog. The prospect of another test of Italian bond yields is always present.

While the Archegos margin call was in the tens of billions of dollars, there are many trillions of euros of interest-rate exposure in the EU, much of it at negative yields. Taking back control of your financial system means being able to take the rough with the smooth. A disparate approach might failthat test.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:Marcus Ashworth at mashworth4@bloomberg.net

To contact the editor responsible for this story:James Boxell at jboxell@bloomberg.net

Before it's here, it's on the Bloomberg Terminal.

Read the original post:
Archegos Carries Explosive Warning For European Union's Financial Ambitions - Bloomberg

The bolder Turkish President Recep Tayyip Erdoan gets, the quieter the European Union (EU).

The conclusion of last weeks EU summit showed, as last year under the German Presidency, that when it comes to Turkey, geopolitics and migration have pushed human rights off the EUs priority list.

Despite the Erdogan government using courts to silence and detain journalists, opposition politicians and anyone regarded as a critic by bringing bogus terrorism charges, or applying new laws to stifle free speech and target civil society, the EU treats human rights as secondary.

President Erdogans government recently doubled down attacks by withdrawing from a treaty combatting violence against women and moved to close down the second-largest opposition party in parliament. But EU leaders barely blinked.

They should urgently review their approach if they dont want to lose leverage on rights and credibility among those in Turkey who seeks a better and more democratic future.

First, talks with Turkish counterparts should clearly lay out the severity of the human rights situation in Turkey and be backed up by public statements on the same. The examples of the EUs top diplomat deleting a mild reference to rule of law when due to speak beside the Turkish foreign minister, or the EUs top officials Ursula Von Der Leyen and Charles Michel not even bringing it up, are shameful recent instances of appeasement.

Second, they should press Turkey to comply with its basic international law obligations. The refusal to comply with the European Courts rulings to release philanthropist Osman Kavala and politician Selahattin Demirta should lead to serious consequences. Finally the EU should give little weight to a vague human rights action plan until Turkey demonstrates its judiciary is not a weapon of repression.

Visible progress on human rights should be a prerequisite for any move to open discussions on a modernized Customs Union. Its now, before talks start, that Turkey should understand that progress is not possible without concrete measures to ensure an independent judiciary and democratic, accountable institutions that are essential for good relations with Europe.

EU leaders hope for more stable and reliable relations with Erdogans government should not mean giving up on all possibility of a rights-respecting Turkey. An EU positive agenda that ignores human rights isnt positive at all when it flouts EU values and fails Turkeys citizens.

Continued here:
Time to Focus on Human Rights in EU's Turkey Agenda - Human Rights Watch

Written by David Hutt

The EU has earmarked millions of euros for supporting climate friendly development in Southeast Asia. But the EUs climate diplomacy in the region is up against economic growth fueled by dirty energy.

After the European Union became a strategic partner of the Association of the Southeast Asian Nations (ASEAN) bloc in December 2020, both blocs pledged to make climate change policy a key area of cooperation.

The EU, already the largest provider of development assistance to the ASEAN region, has committed millions of euros to various environmental programs.

This includes 5 million ($5.86 million) to the ASEAN Smart Green Cities initiative and another 5 million towards a new means of preventing deforestation, called the Forest Law Enforcement, Governance and Trade in ASEAN.

Along with multilateral assistance, the EU also works with individual ASEAN member states on eco-friendly policies like Thailands Bio-Circular-Green Economic Model and Singapores Green Plan 2030.

For years, the EU has been working on climate action in Southeast Asia by organizing dialogues and technical assistance projects. Igor Driesmans, the EUs ASEAN ambassador recently said the two blocs would soon start a dedicated dialogue on clean energy transition.

However, Brussels faces an uphill struggle to turn around the regions environmental policy.

The EU has been somewhat proactive in engaging with Southeast Asia on tackling climate change, but overall Southeast Asia is going in the wrong direction in many areas on climate change, Joshua Kurlantzick, senior fellow for Southeast Asia at the Council on Foreign Relations, told DW.

Five ASEAN states were among the fifteen countries most affected by climate change between 19992018, according to the Climate Risk Index 2020.

Southeast Asias coal-powered economies

As a fast-developing region, where economic growth, urbanization and domestic consumption rates are expected to spike in the coming decades, Southeast Asias energy demand is projected to grow 60% by 2040.

This will contribute to a two-thirds rise in CO2 emissions to almost 2.4 gigatons, according to the Southeast Asia Energy Outlook 2019.

Of the numerous environmental problems facing the region, perhaps the most consequential is the continuing uptake of coal for electricity generation, said Nithi Nesadurai, the regional coordinator of Climate Action Network Southeast Asia.

This is contributing to rising emissions and does not augur well for the region, even as the share of renewable energy in the energy mix increases at marginal levels, he told DW.

Southeast Asia is one of the few areas of the world where coal usage has increased in the past decade. In 2019, the region consumed around 332 million tons of coal, nearly double the consumption from a decade earlier, according to the International Energy Agency (IEA).

Of that, Indonesia accounted for 42% and Vietnam nearly a third. In 2019, the regions imports of thermal coal rose by 19% compared with the previous year, according to an IEA report.

Energy generated from coal doubled in the Philippines between 2011 and 2018, when it accounted for 53% of energy consumption, according to the countrys Department of Energy.

Coal is expected to account for more than 50% of Vietnams energy supply by 2030, the World Coal Association, an industry body, predicts.

Even Laos, which has built hundreds of hydropower dams over the past decade, saw coal-fired energy production rise from almost nothing to 10,000 GWh in 2017.

In February, Laos deputy minister of energy and mines, Daovong Phoneke, announced that two new coal-fired energy plants, with investments worth up to $4 billion, will open by the end of the year, mostly to export energy to neighboring countries.

According to a study published in November in the journal of Energy and Climate Change, coal-fired energy will overtake natural gas as the main power source in the ASEAN region by 2030. And by 2040 it could account for almost 50% of the regions projected CO2 emissions.

Is the EU ignoring coal in Southeast Asia?

However, coal-fired power production is rarely, if ever, mentioned by the EU in its climate policy in Southeast Asia.

After the second EU-ASEAN High-Level Dialogue on Environment and Climate Change in November, a post-dialogue statement by the two blocs did not reference coal-fired energy. Neither is coal mentioned in detail in the Blue Book 2020, a 47-page guide that lays out EU-ASEAN partnership.

The mix of a strong research base, policy advice, feasibilities for collaboration, and access to finance should help them to cope with the transition, said Driesmans, the EU ambassador, referring to the ASEAN blocs climate change activity.

As part of the forthcoming dialogue on Clean Energy between the EU and ASEAN, we hope to be able to support ASEAN in its energy transition, including all relevant aspects: renewable energy, energy efficiency, grid integration, climate finance and coal phase out., he added.

The EU tends to take a more subtle approach. The EU-Vietnam free trade agreement, which came into effect last year, commits Vietnam to making efforts towards renewable energy production but there is no explicit mention of limiting its coal-fired energy consumption.

The EU should be more proactive in trying to help Southeast Asian states wean themselves off of coal-fired plants, said Kurlantzick. Of course, this is on the Southeast Asian states as well, and also on China, which is essentially exporting coal-fired plants, he added.

Big money in dirty energy

Indeed, if the EU takes a strong forceful stance on coal consumption in the region, it could spark anger from the main exporters of the commodity, China, India and Australia.

Brussels climate change policy in the region has already been met with resistance.

Indonesia last year initiated proceedings at the World Trade Organization against the EUs phased ban on palm-oil imports. Brussels contends the ban is to protect the environment, but Indonesia, the worlds largest palm oil producer, says it is mere protectionism.

Malaysia, the worlds second-largest palm oil producer, has vowed to stand with Jakarta in its battle against the EU.

In the latest State of Southeast Asian survey, published in February by Singapores ISEAS-Yusof Ishak Institute, some 43% of respondents said they trusted the EU because of its stance on the environment, human rights, and climate change.

However, 15.1% said they distrusted the EU for this reason, believing its environmental policy could threaten their countrys interests and sovereignty.

The other problem for the EU is that it risks accusations of hypocrisy if it takes too forceful a stance on coal-fired energy production in Southeast Asia.

It must show leadership by example. It cannot pressure countries in Southeast Asia to shift away from coal when it is struggling to do the same in some countries in the EU, said Nesadurai, from Climate Action Network Southeast Asia.

Production and consumption of coal have dropped massively in the EU in recent decades. Hard coal consumption fell from 300 million tons in 1999 to 176 million tons in 2019, roughly half of the Southeast Asian coal consumption rate that year, according to EU data.

But Poland and the Czech Republic remain dependent on coal-fired energy production, although the former contributed to almost 95% of the EUs total hard coal production by 2019. And, according to the International Energy Agency, Southeast Asia and Europe each accounted for around 11% of the worlds thermal coal imports in 2019.

I think Southeast Asian countries would welcome [more] EU aid, said Kurlantzick. But I dont know that they are going to change their reliance on coal fired plants.

See the article here:
Can the European Unions climate change plan work in Southeast Asia? - The Indian Express

The European Union's markets watchdog said on Tuesday it has fined credit ratings firm Moody's 3.7 million euros ($4.35 million) for breaching rules including the failure to disclose conflicts of interests.

All the breaches resulted from negligence on the part of the company, the European Securities and Markets Authority (ESMA) said, adding that the fine was for five Moody's entities based in France, Germany, Italy, Spain and Britain.

ESMA said Moody's had inadequate internal policies and procedures to manage shareholder conflicts of interest. The breaches took place between 2013 and 2017, it said.

"ESMA found that MIS (Moody's Investors Service) had no intent to infringe the EU regulation and there was no impact on the quality of any ratings," a Moody's spokesperson said in an e-mailed statement to Reuters.

Moody's, one of the three largest credit ratings agencies alongside S&P Global and Fitch, added that the regulator had recognised the steps it has taken to prevent similar infringements in the future.

ESMA said the breaches were of a rule that prevents agencies from issuing ratings on companies in which they own 10% or more of its shares, or where they have a board position.

"ESMA believes it is crucial, to ensure independent good quality ratings and to protect investors, that (ratings agencies) carefully identify and subsequently eliminate or manage and disclose conflicts of interest to avoid interference by shareholders with the rating process," the watchdog said.

Read more from the original source:
European Union fines Moody's for failing to disclose conflicts of interests - Economic Times

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Produced for LexisPSL Banking & Finance and in partnershipwith Alexander Collins and Nick Shiren ofCadwalader, Wickersham & Taft LLP

This Practice Note describes the position as at January 2021

The risk retention requirement currently applicable in the EUand the UK consists of obligations on:

This is explained in more detail below.

The objective of the risk retention requirement is to create analignment of interests between those of the suppliers of asecuritisation, ie sponsors, originators and original lenders, andthose of investors. It is sometimes referred to as the requirementfor 'skin-in-the-game'.

The introduction of the risk retention requirement reflected thecriticism of the securitisation markets following the globalfinancial crisis. There was widespread concern about the'originate to distribute' model in which banks did not holdthe loans that they originated, but repackaged and securitisedthem. It was thought by global policymakers that some of theparticipants in the securitisation chain were incentivised toengage in behaviour which, while furthering their own interests,was not in the interests of others in the securitisation chain orof the broader market. In the 'originate to distribute'model lenders did not have an incentive to apply stringent creditgranting standards, since they knew that the related risks wouldeventually be sold to third parties. A consequence of thesemisaligned incentives or conflicts of interest led to a weakeningof due diligence along the securitisation chain. This resulted inpoorly-underwritten assets being securitised by originators andthose securities being bought by investors who did not alwaysunderstand the extent of the risks that they were acquiring. TheG20 Leaders' statement from the 2009 Pittsburgh Summittherefore recommended that securitisation 'sponsors ororiginators should retain a part of the risk of the underlyingassets, thus encouraging them to act prudently'.

A 5% risk retention requirement was first introduced in the EU(including, at the time, the UK) by way of the Capital RequirementsDirective II to new securitisations issued on or after 1 January2011. These provisions were superseded by an equivalent requirementin the Capital Requirements Regulation (EU) No 575/2013 (EU CRR) andsimilar to those in the EU CRR, in the Solvency II regime inrelation to insurers and in the Alternative Investment FundManagers Directive (AIFMD) regime in relation to certainalternative fund managers.

Commission Delegated Regulation (EU) No 625/2014 (the CRR RiskRetention RTS) supplements and provides further detail in respectof the risk retention requirement in the EU CRR by way ofregulatory technical standards including providing further detailon the modes of risk retention, the fulfilment of the retentionrequirement through a synthetic or contingent form (eg a totalreturn swap (TRS)), and on multiple originators, original lenders,or sponsors.

The European Commission (EC), following review of the variousrequirements applicable to EU securitisations, published Regulation (EU) 2017/2402 on 28 December 2017(the EU Securitisation Regulation) and an accompanying Regulationamending the EU CRR (the EU CRR Amendment Regulation). Theseregulations entered into force on 17 January 2018, superseding theEU CRR, Solvency II and AIFMD risk retention requirements, largelycombining requirements applicable to EU investors and creating newrequirements in respect of originators, sponsors or originallenders of EU securitisations, and applicable to securitisations,the securities of which are issued (or where no securities areissued, the securitisation positions of which are created) on orafter the application date of 1 January 2019.

Article 6(7) of the EU Securitisation Regulation requires theEuropean Banking Authority (EBA) to develop draft regulatorytechnical standards (Securitisation Regulation RTS) to specify ingreater detail the risk retention requirement including themodalities of retaining risk, the measurement of the level ofretention, the prohibition of hedging or selling the retainedinterest and the conditions for retention on a consolidated basis.On 31 July 2018, a final draft of the Securitisation Regulation RTSwas published by the EBA. However, the draft SecuritisationRegulation RTS have not yet been adopted by the EC. Thetransitional provisions of the EU Securitisation Regulation providethat until the draft Securitisation Regulation RTS apply,originators, sponsors or the original lender shall apply ChaptersI, II and III and Article 22 of the CRR Risk Retention RTS tosecuritisations the securities of which are issued on or after 1January 2019.

To view the article in full including references click here.

Reprinted from: LexisNexis |March 24, 2021

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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