Exclusive: France’s AMF reveals lessons learnt post-crisis

Author: Gemma Varriale | Published: 31 Jul 2012
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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 agenda.  
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 dramatically.
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 crucial juncture.
In the first of IFLR’s 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 regulation?
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.

Let’s remember what happened and the reasons why we are asking for more capital and more liquidity. There wasn’t 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 infrastructure regulation].

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 bank financing

What are your priorities going forward?
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 investor’s 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.  It’s 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 what’s 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. It’s important to give investors confidence that the markets are well regulated.

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 process transparency.

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 thorough?
Regulation tends to happen slowly. It requires political agreement and technical work. That being said, in terms of practical day-to-day supervision, it’s 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. It’s 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 AMF’s 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, we’ve 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 weren’t alone in bringing those issues to the table, but we were among the strongest advocates for dealing with them.

What key lessons have you learnt from the eurozone sovereign debt crisis?
From the regulator’s point of view, information is crucial. This is especially true for the OTC derivatives markets.

Let’s take the Greek sovereign debt and credit default swaps as an example. We had to know who owned what.

We have a better picture now, certainly much better than it was five years ago. But it’s still insufficient. We need to put in place trade repositories and all the G20 orientations in terms of clearing. Of course we can’t control the macro-economic parameters. It’s 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 collateral rules.

How do you think AIFMD will impact the way that the European hedge fund industry operates?
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 FSB’s involvement in market regulations at the moment?
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 shouldn’t be in competition with the Basel Committee or Iosco; it shouldn’t 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 ago.

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 people?
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 it’s 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, Vieillefond’s frank and detailed responses are refreshing. Here are his thoughts