When it comes to influencing the direction
of regulatory reform in Europe, France has a leading role.
Indeed, the Autorité des
Marchés Financiers (AMF) identified the problems
posed by money market funds (MMFs) and exchange traded funds
(ETFs) long before they became key issues on the international
And France is now witnessing a unique phase in global economic
history. Banks are scrambling to meet new recapitalisation
requirements imposed to stave off another financial crisis, the
eurozone is entrenched in a debt crisis and, with the seemingly
unstoppable rise of the Chinese super-power in the
east, the world economic order looks set to change
Against a backdrop of so much uncertainty, IFLR took the
opportunity to speak with Edouard Vieillefond, the managing
director in charge of the regulatory policy and international
affairs division of the French regulator. It was a chance
for Vieillefond to set the record straight on the views of the
AMF, one of the key players on the international stage at this
In the first of IFLRs exclusive
two-part interview, the French regulator discusses everything
from the huge changes in financing economy and what he has
learnt from the eurozone crisis, to whether he worries about
unintended consequences of regulation.
Most European banks are on
course to implement Basel III ahead of schedule. Do you think
we run this risk of going overboard with financial
The consequences of Basel III will be crucial for
everyone. It will mean big changes in the way the European
economy is financed. Sometimes there are complaints about the
unintended consequences of regulation. We should be reasonable:
taken individually, most of the post-crisis measures such as
Basel III are justified.
Lets remember what happened and the
reasons why we are asking for more capital and more liquidity.
There wasnt enough capital, probably not enough liquidity
and there was insufficient collateral in transactions. Today
banks have two constraints: capital and liquidity. In future,
they will have three, with collateral soon to be added to the
list thanks to rules such as Emir [the European market
But we probably need to be mindful at the
cumulative consequences of all regulations and take into
account the overall regional effect of MiFID II [markets in
financial instruments directive], Emir, Basel III, and Solvency
II for the insurance sector.
Banks should avoid deleveraging at the
expense of the economy. Instead, they should seek where
possible to use other tools to reinforce their capital.
According to the European Banking Authority (EBA), around 80%
of bank restructuring in Europe is carried out not through
deleveraging but through the addition of more capital, the
transformation of hybrid products into equity, selling
non-strategic assets and so on.
We need to find the right balance between
risk and reward and keep in mind that the financing of the
economy will shift to equities and long-term products. We
therefore need to keep investors interested in buying equities
and bonds. That is
especially important since more activity will
happen through markets than before because there will be less
What are your priorities
In Europe and France, we implemented what we agreed on
banks, on OTC derivatives, on securitisation and so on. This is
far from being the case everywhere.
Peer pressure, from the Financial
Stability Board (FSB) or the International Monetary Fund (IMF)
through financial sector assessments, is needed to promote full
implementation and ensure that all countries implement the new
principles well. We also need to ensure that we have the
maximum degree of harmonisation at the international level to
avoid loopholes and regulatory arbitrage.
As a market regulator, we have to adopt a
macro-economic perspective. We are not only here to warrant the
investors protection from the micro-economic point of
view, or simply to detect any market abuse or mis-selling. We
also have to make sure that markets, banks and the investment
service providers are servicing the economy as a whole.
And finally, we still have some progress
to make on risk prevention and risk management. Traditionally,
before the 2007/2008 crisis, this was considered a mission for
banking regulators only. Detecting and preventing systemic
risks is a new IOSCO [international organisation of securities
commissions] standard for securities market regulators. Its important for
us to be forward-looking in our supervision so that we can help
in the prevention and resolution of any future crises.
What challenges do you
expect to face in the coming 12 months?
In the very short-term, we must deal with the risks
now posed by the situation in Europe. We need to be present to
help at the juncture we now face in the region. We must know
whats happening to be in a position to correct it if
necessary, using our emergency powers given for example by the
regulation on short selling and credit default swaps.
We need to continue strengthening our
enforcement processes. The 2010 banking and financial
regulation law gave us new powers such as the right of appeal
when the enforcement committee takes a decision in
contradiction with that proposed by the AMF board. Its
important to give investors confidence that the markets are
One of the most important challenges
coming up regarding regulation will be the revision of
MiFID. We need to
be sure that financial products, when sufficiently standardised
and liquid, are negotiated on true multilateral and transparent
platforms so that the price formation process is optimised. We
need to be sure that there is more transparency pre- and post-
trade. Exceptions to this principle must remain exceptions.
Dark pools, over the counter (OTC) trades
should be the exception. Broker Crossing Networks or organised
trading facilities (OTF) should not be considered as an
equivalent of true multilateral platforms, such as regulated
markets and MTF, because they have discretionary rules and they
therefore do not offer a similar degree of price formation
How do you deal with the
huge amount of scrutiny around your work? In particular, how do
you balance the need to act quickly with the need to be
Regulation tends to happen slowly. It requires
political agreement and technical work. That being said, in
terms of practical day-to-day supervision, its possible
to act more quickly when necessary. We have demonstrated this
on a number of occasions, for instance with our work relating
to short selling. We are closer to the markets, post-market
infrastructures and the financial entities we regulate.
If ever we think the existing regulatory
framework is not sufficient to monitor a product or market, we
now have increased powers to make the necessary changes. One of
the new principles imposed by Iosco obliges us to check the
scope of our own powers and to ask for more if there is a
loophole or any regulatory black zones. Its a far more
anticipatory process than it was a few years ago, when
securities markets regulators based their work on existing laws
and regulation without really challenging them.
How would you evaluate the
AMFs efforts in enhancing existing regulatory frameworks
since the crisis?
There are a lot of different issues at stake, but I
think the outcome has been good. In 2009 we published our
strategic plan. This contained three priorities: investor
protection, more risk surveillance and contributing to the
development of the financial centre.
On investor protection, weve been
instrumental in changing the view on complex ucits
[undertakings for collective investment in transferable
securities]. As little as three years ago, it was taboo to
consider that some ucits might be complex. This is no longer
the case: MiFID II will insert this idea.
Another crucial point for us is that the
voice of France and the AMF is now heard on the international
stage. Through our
annual mapping exercise that identifies potential areas of
future risk, we have stressed many of the problems raised by
money market funds [MMFs], exchange traded funds [ETFs] and so
on. They are now very important issues on the international
agenda. Of course
we werent alone in bringing those issues to the table,
but we were among the strongest advocates for dealing with
What key lessons have you
learnt from the eurozone sovereign debt crisis?
From the regulators point of view, information
is crucial. This is especially true for the OTC derivatives
Lets take the Greek sovereign debt
and credit default swaps as an example. We had to know who
We have a better picture now, certainly
much better than it was five years ago. But its still
insufficient. We need to put in place trade repositories and
all the G20 orientations in terms of clearing. Of course we
cant control the macro-economic parameters. Its up
to other authorities to decide on macro-economic policy. But in
terms of monitoring the markets, we do have a role to play.
We also should move quickly towards a
macro-prudential approach. This will be the case for banks with
CRD IV. But some provisions are still needed for central
counterparties and maybe even for other market infrastructures.
There are a number of macro prudential tools at the disposal of
securities regulators, such as capability to restrict
short-selling, to prohibit products or to intervene on
How do you think AIFMD
will impact the way that the European hedge fund industry
We hope that more regulation, especially in terms of
reporting, depositaries and leverage assessment, will mean less
systemic risk. That was the original purpose of the G20
statement and of the directive, which is finally more a
competition directive, or an internal market directive.
The European passport, available for
European asset managers from July 2013, will mean more
competition on the alternative investment fund dedicated to
professional investors. From 2015, this passport will be
extended to third countries. Asset managers will probably be in
a position to choose where they want to be located, both for
themselves and for their funds. The AMF has just published a
stakeholders committee report dealing with the
orientations we must follow for the implementation of the
AIFMD. We are
trying to take advantage of the change to review our regulatory
framework so that it can be more business friendly, while
maintaining a high level of protection for investors.
What do you think of the
FSBs involvement in market regulations at the
The FSB has changed with the crisis. The Board plays a crucial
organisational role, setting timetables and identifying
priorities. And down-stream a new aspect it
checks that the measures requested are well implemented.
The FSB shouldnt be in competition
with the Basel Committee or Iosco; it shouldnt supersede
standard setters, unless there is no standard setter. On
remunerations and banks, for example, the FSB issued its own
recommendations because nobody else was there to do it.
How do you think the role
of regulators has changed since the crisis?
In three years, their role has changed a great deal.
Iosco, for example, has new remits: financing the economy,
a risk-based approach and having a say in the systemic risk
debate, checking the scope to avoid loopholes. Market
regulators are now entering these new spaces which would have
been completely unbelievable before the crisis five years
Their scope has been widened a lot. They
deal with all financial instruments, such as equities, bonds,
structured products, and derivatives, whether they are listed
or not, whether they are sold to the public, traded on
exchanges or not.
Securities markets regulators are much
tougher on enforcement now. We have widened our scope to OTC
derivatives and to commodities. So there is a huge change which
creates a need for additional resources. We need to grow to
cope with these new missions.
When you say you need to
grow as regulator, do you mean in terms of hiring more
Yes, we are doing that. At the end of 2008, the AMF
employed 390 people. We are now at around 450. It will be 470
by the end of this year.
And do you have the same
problem in France as in the UK that it can be difficult to
recruit talent capable of dealing with such high level issues?
It is difficult, there are questions related to
remuneration and also, in France, the public-private bridge
responds to strict ethical rules. But we do succeed in
recruiting high-level people. A remuneration gap
exists, but its balanced out by visibility and
experience. Of course, with small units like the AMF, the
turnover every five years or so is a challenge.
IFLR also spoke with Vieillefond on how
shadow banking activity should be supervised. At a
time when there is widespread confusion and disagreement on how
to regulate such a systemically important sector,
Vieillefonds frank and detailed responses are refreshing.