With the U.K. set to leave the European Union in March, Germany is becoming a more important center for financial institutions doing business in the EU. This raises the profile of BaFin, Germany’s main supervisor for the financial services sector.
BaFin is responsible for the supervision of a wide range of financial services, including capital markets, banking institutions and insurance. Within the capital markets sector, this includes oversight of the two main derivatives clearinghouses in Germany, Eurex Clearing and European Commodity Clearing, as well as one central securities depository, Clearstream.
In the following interview, Elisabeth Roegele, the deputy head of BaFin and the head of securities supervision, discusses BaFin’s efforts to help financial institutions based in London prepare to conduct their European business through affiliates in Germany. Roegele also provides some insights on BaFin's work in the specific area of securities markets and discusses BaFin's relationships with other regulators at the national and international level.
In her role at BaFin, Roegele works closely with state-level supervisors as well as with the Bundesbank and the Federal Ministry of Finance. On the international level, she is a member of the board of supervisors of the European Securities and Markets Authority and chairs ESMA's secondary markets standing committee, which focuses on the structure, transparency and efficiency of secondary markets for financial instruments. She is also a member of the board of the International Organization of Securities Commissions, the main standard-setting body for securities and derivatives markets worldwide.
MarketVoice: Can we talk a bit about your role at BaFin and your background?
Roegele: Firstly, perhaps I should point out that BaFin is an integrated supervisor. We are responsible for supervising insurance companies, banks and the capital markets. Since January 2018, we have also integrated the resolution authority responsible for the issue of bank resolution. We currently have 2,700 employees. More than 600 people are working in the area of securities supervision. We are not only securities supervisors; we are also responsible for consumer protection. A separate department has been set up for this purpose and organizationally we follow a so-called "One For All" approach. The Consumer Protection Department is not only focusing on the securities sector, but is also active for consumer protection in the areas of banking and insurance.
With regard to the supervision of exchanges it's a peculiarity of the German market that—due to the federal structure in Germany—there is responsibility at state level in terms of exchange supervisory authorities. On the other hand the clearinghouses and the central securities depository are supervised by BaFin.
Germany's Financial Marketplace: A Multi-Faceted Structure
MV: Can you talk about the German financial marketplace and how the structure compares with global markets?
Roegele: Aside from the fact that we monitor exchanges at the state level, a specific feature of the German financial marketplace is that we have more than 1,500 different banks and around 700 financial institutions that are under BaFin’s supervision. That includes over 400 savings banks (Sparkassen) and approximately 900 cooperative banks (Volksbanken and Raiffeisenbanken) and additionally many private banks. This makes the German market special in that we have such a large variety of banks. In my view that emerged as one of the stability factors during the financial market crisis. Of course, this heterogeneous structure is an essential criterion that has to be considered when setting up rules and also for the application of the rules. The principle of proportionality is very important here. We have to ensure that even small institutions have access to these regulations and are able to implement them.
MV: How is Germany compared to global markets?
Roegele: I think the German market is multi-faceted. We have two important clearinghouses. We have an important CSD [central securities depository]. We have important exchanges as well as a very strong retail market. Many major market participants are based in Germany. After the withdrawal of the U.K., we have to play an even more important role in the European financial market. We have many good examples of how all financial market players are represented, work together and constitute an important factor in the European economy.
MV: For global players who are making the move to Frankfurt, do you think that what BaFin offers in terms of English is practical and fit for purpose?
Roegele: First of all we offer a wide range of communication in English. We have placed all important information like application forms and explanatory information on BaFin’s website in English and communicate with applicants on a day to day basis in English. Secondly, we have set up so called “dedicated teams” to deal with the requests and application in English. However, when it comes to formal proceedings there is one restriction with respect to the communication in English: administrative acts, i.e. the formal decisions made by our authorities, need to be passed in German. The administrative courts in Germany only recognize the German language so it is vital that we continue to make critical decisions in German. However, any necessary cooperation beforehand will of course be provided in English.
MV: What about the structure of supervision and regulation? How does BaFin work with other regulators?
Roegele: With regard to the securities supervision, I would like to start on the national level with the eight exchange supervisory authorities. We cooperate with them very closely. I personally worked with the exchange supervisory authority in Hesse, and from that time I still have a very good relationship with my former colleagues which is more than beneficial for our cooperation. We also work closely with the Bundesbank to supervise banks and financial institutions. Here, too, as far as the securities sector is concerned, I can say that we enjoy a very good cooperation with the Bundesbank. We also should not forget the ECB, which of course continues to play a big role in terms of systemically relevant banks. On the European level we have a close relationship with the European Securities and Markets Authority (ESMA) and on the international level we are also a member of the International Organization of Securities Commissions (IOSCO) as well as of the Financial Stability Board (FSB).
BaFin also closely cooperates with the Federal Ministry of Finance with respect to organizational matters and supervisory tasks. BaFin advises the Ministry regarding emerging market developments and new regulatory proposals in all areas covered by BaFin’s supervision.
MV: How is BaFin involved in the discussions around legislative proposals from Brussels?
Roegele: As I just mentioned, we have a very good cooperation with the Federal Ministry of Finance which is also beneficial with respect to the legislative process at European level. It is important for us to know what the representatives of the Ministry have in mind when a regulatory proposal in the financial services area is drafted on the EU level, the so-called level 1 texts. Understanding the legislative aim of a level 1 text is an essential prerequisite for us in order to efficiently contribute to the drafting of Technical Standards, so-called level 2 acts at the ESMA level.
Brexit: Prepared for Last-Minute Rush
MV: What are your thoughts on Brexit and how BaFin plans to manage cliff edges?
Roegele: Of course, we are trying to do everything we can to prepare our institutions to avoid cliff edge effects. We have elaborated how the U.K. is preparing for Brexit. We have also investigated how the institutions from the U.K. providing services within Germany are prepared for the time after the exit. In this context, I would like to encourage U.K. institutions to contact us, we are open for questions from those institutions that are interested in continuing their business in Germany or in the EU27. Although the timeframe for such applications is very tight in case of a hard Brexit, we are willing to cooperate closely and try to do everything possible to enable the services to be provided continuously.
MV: In terms of calls by the German financial industry for an international financial center in Germany, what is BaFin doing to support this?
Roegele: As mentioned before, we have prepared a lot of useful information and specific brochures in English on our website. If financial institutions are interested in providing services in Germany, we have assembled our specialists in dedicated teams carrying out the individual licensing procedures. This allows these procedures to be completed as quickly as possible. So far, we have had very positive experiences and feedback with this approach of dedicated teams. However, what we are not aware of is whether there are further U.K. institutions that are interested in providing services in the EU 27 but are still waiting for a transitional period. These institutions might realize only in the very last moment that they need a licence in the case of a hard Brexit. In order to avoid this risk for the institutions, I encourage these companies to take action sooner rather than later.
ESA Review: One Size Does Not Fit All
MV: The ESA review is a hotly debated topic in Europe. What is your take on this review of the responsibilities of the European Supervisory Authorities, and ESMA in particular?
Roegele: I think, since its founding in 2011 ESMA has done a very important job to create the Single Rulebook. In the last two to three years we have started with the equally important work on supervisory convergence. I think we should wait and see how this work develops over the next few years before an overly complex “super supervisory authority” is established that might not be able to promote convergence more efficiently.
We believe in the member-driven set up of the European supervisory authorities as an indispensable pillar of their organization. We continue to adhere to the bottom-up approach that all 27 or 28 member states or supervisory authorities should contribute to. We cannot ignore the fact that we still have different financial markets and peculiarities or even special features within the national markets. We do not believe that a one-size-fits-all approach, which would necessarily come from a single supervisory authority, would be more beneficial for the European integrated market to develop and to bring the rules set forth in the Single Rulebook into action more efficiently. Of course, we understand that ESMA is best suited to take on tasks that relate to cross-border issues. Critical benchmarks are certainly an issue where ESMA can play a stronger role. On the other hand, for any tasks that require the knowledge of the specific mechanics of the national market, either on the side of the investor or the side of the issuer or distributor, we think that the national competent authorities are the ones to provide an effective and efficient supervision.
MV: What are the supervisory priorities of BaFin going forward?
Roegele: Of course, 2019 will also be dominated by Brexit. That's at the top of our agenda. The on-going implementation and the application of MiFID II and MiFIR remains an issue at national and European levels that we are monitoring closely, regarding the investor protection issues as well as regarding the issues around secondary markets.
MiFID Implementation: Need for Data
MV: What are your thoughts on MiFID III? Where do you see immediate and future changes?
Roegele: I think it would be premature to talk about MiFID III. The institutions [affected by MiFID II] have raised various concerns. For example, with respect to the requirements around telephone order execution, [they have said] certain practical problems occur if the costs have to be disclosed on the phone. In the area of the regulation of trading venues, concerns have been raised about the tick-size regime, the impact of systematic internalizers, the double volume cap mechanism and the role of periodic auctions, and finally the cost increases of data providers. These issues are all on our agenda. An essential prerequisite to analyse the impact of MiFID II/MiFIR is the data market participants provide us with. From this data we are able to draw up facts and figures and to get an impression of the real impact of the new legislative rules. MIFID II/MiFIR include review clauses, but only a fact based discussion can be a starting point for possible amendments.
