Including updates on the Single Resolution Mechanism and FX market investigations


Political agreement on SRM

The Single Resolution Mechanism (SRM) is the second pillar of the Eurozone's Banking Union, providing an essential complement to the Single Supervisory Mechanism (SSM) whereby the ECB will take over the supervision of Eurozone banks from 4 November 2014.

The SRM establishes a mechanism designed to ensure efficient and prompt resolution of banks from countries participating in the SSM (Eurozone banks and others which opt into the mechanism), based on the Bank Recovery and Resolution Directive which provides a common foundation for bank recovery and resolution throughout the European Union. It is designed to provide a single process and backstops for dealing with the failure of any SSM banks.

Following agreement on their separate negotiating positions in December 2013, the European Parliament and the ECOFIN Council launched the three-way ‘trilogue’ negotiations with the European Commission in early January. These negotiations were intense and difficult but were completed following a marathon negotiating session overnight from the 19 to 20 March 2014. The text now is expected to be voted and adopted by the European Parliament on 15 April, and formally adopted by the ECOFIN Council shortly thereafter. We currently expect publication in the Official Journal and entry into force mid-summer 2014.

Compromises reached during these last negotiations should improve the way the mechanism operates:

  • clarification that the ECB (in its role as the SSM) will be the primary “triggering authority” for a bank resolution process (i.e. deciding whether a bank is failing), although the new Resolution Board “may also play a role if the ECB is reluctant or hesitates to act"
  • decision-making processes particularly of the proposed Resolution Board have been streamlined to improve efficiency and promptness of resolution
  • the single resolution fund (SRF), intended to provide the backstop for bank rescues after bail-in, will be allowed to borrow in the markets to "increase its firepower"
  • mutualisation of the SRF across the Eurozone countries will happen faster, with 40% to be mutualised in first year, 20% in second year, and the remaining 40% in equal proportions over a further 6 years (previously, mutualisation was to occur evenly at 10% per year over 10 years).  The target size of the fund remains unchanged at approximately €55bn (1% of covered deposits). The mutualisation process will be governed by an Intergovernmental Agreement (IGA) between participating countries.

With the legislation now entering its final stages, attention can turn to the practicalities of setting up the ERM within a short timeframe. The SRM itself will be a separate legal entity (EU agency) located in Brussels. Permanent board members need to be identified and recruited, along with the body of supporting staff. Premises have to be identified; operating budgets need to be put in place. The SRM is intended to be operational from 1 January 2015, just under two months after the SSM takes over direct supervision of systemic banks in the Eurozone.

In parallel, the practice details supporting the IGA need to be defined and implemented. The Council has also confirmed that participating countries are to continue work on a common backstop during the Fund’s transitional period. 


F(i)X market investigations

Regulators in Europe, Asia and US are investigating allegations that senior traders exchanged market sensitive information to manipulate intra-day FX rate setting, known as “fixings”. Investigators are looking for evidence of market abuse and market misconduct within banks and potential collusion between banks.

Regulators internationally are scrutinising FX trading in London, which accounts for 40% of the daily £5.3tn global spot FX market. Reports claim that 12-15 London banks have undertaken internal investigations and begun disciplining senior trading staff. The total cost of the FX investigations and enforcement actions is expected to reach £20-30bn according to press reports, substantially larger than LIBOR scandal (£6bn). The investigations are likely to result in regulators adopting new rules and standards governing the benchmark setting.

With the integrity of UK and European markets and the quality of regulatory supervision already cast in doubt by the LIBOR rate fixing scandal, claims of widespread FX market corruption and weak supervisory controls risk further damage trust in the financial markets.

On 16 October 2013, the UK Financial Conduct Authority (FCA) confirmed that it is investigating the FX market, prompting other regulators to commence investigations into dealings by their regulated market participants. The FCA has reportedly assigned 50 staff to investigate the FX market and has set up a team to coordinate with investigations being conducted by US, Hong Kong and Swiss authorities. In the US, the Department of Justice, Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) have all launched investigations. News on 5 March 2014 that the BoE had suspended a senior foreign exchange official resulted in the Parliamentary Treasury Committee calling in BoE officials for an explanation on 11 March.

The fallout from these investigations will be huge. The Financial Times (FT) reported that leading European FX dealing banks have set aside €8.5bn - 10.6bn for FY 2014-15, in addition to €16.4bn that they set aside during FY 2013.

Banks have reportedly deployed more than 500 staff on internal investigations and have already suspended or fired more than 25 dealing staff. US firms caught up in the investigation are also reported to be undertaking internal investigations and considering accruing funds toward legal costs.

An entire sub-industry centred on investigating the allegations is forming to meet the demand. The FT estimates up to 1,000 external professional support staff have been engaged by firms and that internal and external investigations are expected to cost “several hundred million dollars”. The number of firms and volume of communications that will need to be reviewed is enormous. UBS alone estimates that its personnel send 12m emails each day. Firms are using sophisticated data analytics and forensic practices to focus on rate manipulation, rogue trading and trader fraud.

In the wake of the LIBOR rate-fixing scandal international standard setters and regulators introduced new rules governing benchmark setting. The European Commission has proposed a regulation to govern benchmark setting (COM(2013) 641 final) and last year the European Supervisory Authorities jointly published a final report containing principles for setting benchmarks in the EU (ESMA/2013/659). The principles will be reviewed later this year and are expected to be broadened to address FX rate setting.

The FSB, which is chaired by Governor Carney, formed a working group of regulators and central banks in 2013 to review the governance, reliability and transparency of benchmarks setting. On 14 February 2014, the FSB announced that it had established a new sub-group on Foreign Exchange Benchmarks. The group is chaired by Guy Debelle from the Reserve Bank of Australia and Paul Fisher. The group will undertake a review of FX benchmarks and analyse market practices. The FSB expects to deliver its conclusions and recommendations at the G20 Brisbane Summit in November 2014.