Benefits and unintended consequences of financial markets reform

fo ke an enc e d t c e rm s i al s B an e u d n e co n i f n n o i t s t m f f eq e s re ar in u nd s ht n e g a iv si m ut y In o c e fr e v ex r su Sponsored by: Benefits and unintended consequences of financial markets reform Contents Executive summary Introduction Regulation on the radar 21 Regulatory pros and cons Overall expectations of regulatory impact vary 11 OTC derivatives overhauled 17 Corporate responses 19 The bottom line 21 Potential consequences 23 Appendix: survey results 24 © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform Executive summary In response to the 2008 financial crisis and the world recession that followed, central bankers, regulators and governments have drafted numerous regulatory reforms and measures designed to minimise risk and maximise consumer protection in the global financial system In order to investigate the potential impact of these new regulations on businesses, the Economist Intelligence Unit, on behalf of Lloyds Bank Wholesale Banking & Markets, surveyed over 450 senior executives from different companies and also conducted interviews with experts Key findings include: Companies are aware of and worried about regulatory changes—but are not prepared One-half of respondents cite regulation as one of their main concerns, alongside the global economic crisis (58%) and the euro zone crisis (54%)—far ahead of other issues such as availability of finance More than three-quarters (77%) of respondents believe that their boards are aware of the impact of changes in regulation on their company, but only 61% feel prepared About this report In June and July 2012 the Economist Intelligence Unit, on behalf of Lloyds Bank Wholesale Banking & Markets, surveyed 454 senior executives in order to explore what companies think about the current regulatory landscape as well as how these firms are planning ahead to handle the impact of future regulation Respondents were drawn from Europe (60%), Asia-Pacific (20%) and North America (20%), and were divided into financial services (44%) and non-financial services companies (56%) In addition, in-depth interviews were conducted with three experts from leading financial companies Our thanks are due to the following for their time and insight (listed alphabetically): Jessica Ground, UK bank analyst at Schroders Ricky Maloney, head of treasury processing at Ignis Asset Management Mark Stancombe, head of client management at Insight Investment The report was written by Faith Glasgow and edited by Monica Woodley of the Economist Intelligence Unit © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform There is concern that new regulation will hinder growth and innovation More than one-half (51%) are concerned that planned financial regulation will impact on growth in their industry, while 44% expect it to affect innovation UK and US companies are somewhat more anxious (54 and 53% respectively) about the negative impact of the new regulations than either European or Asia-Pacific companies (46 and 48% respectively) Companies expect a significant impact on profitability Overall, two-thirds (68%) of respondents anticipate a significant or fundamental impact on the profitability of their financing and riskmanagement models, although some regulations cause notably more concern than others Almost three-fifths (58%) expect at least significant effects as a result of Basel III, compared with only 35% as a consequence of the Vickers Report The cost of compliance is the greatest worry Almost three-fifths (59%) of respondents see the increased costs of complying with the new regulations as the biggest threat, but the rising costs of obtaining funding (39%) and implementing information technology systems (25%) are also concerns Companies are contemplating a range of responses The most popular plan, selected by 42% of respondents, is to change their company’s corporate finance or risk-management model But significant numbers are also thinking of relocating or changing their legal structure (26%), looking for alternative funding (27%), reducing their use of derivatives (25%) or seeking alternative service providers (24%) © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform Introduction As a result of the 2008 financial crisis and consequent world recession, central bankers, regulators and governments have drafted a raft of new regulations to better protect and stabilise the global financial system The reforms have several broad aims, but include (among others) measures to boost surveillance, raise bank capital adequacy standards, reduce risk in over-the-counter (OTC) derivative activity and remove opportunities for regulatory arbitrage among non-bank lenders (known as “shadow banking”) Some of the reforms, such as Basel III and the International Financial Reporting Standards (IFRS), will be implemented globally Others are regional directives; thus, the Markets in Financial Instruments Directive II (MiFID II), the European Market Infrastructure Regulation (EMIR) and Solvency II affect the EU, while the US financial landscape will be reshaped by the Dodd-Frank reforms and the Foreign Account Tax Compliance Act (FATCA) Then there are national reforms; for example, the UK is introducing its own regulatory banking requirements as a result of the Vickers Report (See box below for a brief explanation of each regulation.) Financial regulation definitions: Basel III: global agreement on bank capital adequacy and market liquidity risk IFRS: creating a single set of enforceable and globally accepted international financial reporting standards MiFID II: far-reaching legislation designed to modernise, make more transparent and harmonise the EU securities markets; it is likely to affect everyone involved in the EU industry EMIR: an EU directive providing for a harmonised regulatory framework for OTC derivatives Solvency II: EU directive requiring greater capitalisation for insurance companies, which is expected to push them towards more risk-averse investment strategies Dodd-Frank: wide-ranging US reforms, including bank and insurance company capital requirements but also regulation of hedge funds FATCA: US legislation requiring US taxpayers to report to the Internal Revenue System (IRS) specific foreign financial assets over a certain threshold It also requires foreign financial institutions to report similar information to the IRS on companies operating in the US Independent Commission on Banking (ICB, known as the Vickers Report): UK banking reform proposals including ringfencing of personal and SME deposits from wholesale and institutional operations © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform Although companies have always had to take into account the changing requirements of the regulators, both the pace and the scale of these overhauls is unprecedented Moreover, they have major implications for non-financial as well as financial corporations For example, the cost of borrowing will rise as banks’ lending spreads to customers are pushed up by the banks’ obligation to provide greater capital adequacy In addition, the introduction of reporting obligations and central clearing for OTC derivatives will increase transactional costs for both financial and nonfinancial firms that use derivatives to hedge their costs or for other purposes This report examines the views on new regulations of financial and non-financial companies around the world, including how important these firms think regulatory reform is in the current global economic climate, in addition to how prepared they are for those changes that will affect them directly and others that may have an indirect impact on their bottom line © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform Regulation on the radar It is clear that the regulatory overhaul is a major source of uncertainty for companies worldwide When asked to identify up to three macro issues currently giving their business most cause for concern, one-half of them cite regulatory changes, with only the global economy (58%) and the euro zone crisis (54%) scoring higher Responses vary regionally, however European companies are primarily focused on regional problems and are less troubled by the impact of regulation (only 41% cite it)—perhaps also because they are already well used to a steady stream of EU directives By contrast, regulatory change is the single biggest headache for North American corporates, with 61% identifying it as a concern As might be expected, there are also clear differences in perspective between financial services (FS) companies and non-financials Only 36% of non-FS respondents see regulation as a major issue For them, sales-driven considerations such as lack of consumer demand (30%) is well over twice as significant as it is for financials (12%) By contrast, regulatory change tops the list of worries for FS respondents, cited by over twothirds (68%) Chart Q What you see as the biggest issues facing your company today? (% of respondents, by sector) FS Lack of industrial/economic growth/investment Non FS 23 26 Eurozone crisis 62 47 Lack of confidence 24 27 Availability of finance 15 25 Regulatory changes 68 36 Lack of (consumer) demand 12 31 Global economic uncertainty 58 58 Source: Economist Intelligence Unit survey, July 2012 © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform Chart Q What you see as the most important issues facing your company today? % of respondents, by region North America Mainland Europe UK Global economic uncertainty Asia-Pacific 55 55 56 Lack of (consumer) demand 19 21 24 Regulatory changes 61 41 48 Availability of finance 21 17 53 26 19 Lack of confidence 23 27 27 26 Eurozone crisis 44 57 48 Lack of industrial/economic growth/investment 21 Other 66 27 60 27 25 27 3 Source: Economist Intelligence Unit survey, July 2012 Ricky Maloney, head of treasury processing at understand the implications of the regulations: the UK-based Ignis Asset Management, foresees more than three-quarters (77%) of respondents Category Category Category Category Category “severe difficulties” in regard to the OTC derivatives say that their board of directors is up toCategory speed6 with market changes, in the current economic climate the impact of the new regulations on their “Governments and regulators have contradictory company But that does not necessarily translate strategic goals, in that they are removing liquidity into confidence that they are actually taking from the markets by way of increased margin and action, with only 61% believing that most or all of capital requirements, while at the same time trying the necessary preparations have been made, and to stimulate economic growth,” he notes almost one in ten (8%) of respondents perceiving At the corporate level, there seems to be their company as unprepared reasonable confidence that senior directors at least Chart Q Do you agree or disagree with the following statements? (% respondents) Strongly/somewhat agree Neutral Somewhat/strongly disagree My company is prepared for the impact of planned financial regulations 61 31 Our board is aware of how planned financial regulations will impact our company 77 18 Source: Economist Intelligence Unit survey, July 2012 Category Category © The Economist Intelligence Unit Limited 2012 Category Category Category Category Benefits and unintended consequences of financial markets reform Although companies have little choice but to take some kind of action in response to the changes, most—and especially FS companies—have serious misgivings about the wider impact on economic growth and innovation One in two companies (51%) overall, and 64% of FS respondents, expect growth in their industry to be inhibited as a result of reduced market liquidity and increased trading costs Again, there is some regional differentiation, with European firms notably less fretful than those based in other areas about the impact of regulations on growth—again perhaps reflecting the fact that regulatory issues are to some extent eclipsed by the fragility of the euro zone economy and the need for far-reaching political and economic solutions It is also rather more worrisome for UK and US companies than for those based in Europe or Asia: 54% of UK firms are downbeat about prospects for growth, compared with 46% of European firms Jessica Ground, UK bank analyst at the Londonheadquartered Schroders, makes the point that unilateral regulation is a real worry for the City “For global markets such as financial services, human capital is very transferable The system did need substantial reform but with international consensus; the danger is of jurisdictions acting independently of each other and capital just moving away.” She points to the UK’s unilateral plans for bank ring-fencing and France’s proposed transaction tax as examples of regulation that could leave countries seriously vulnerable to lost business Chart Q Do you agree or disagree with the following statement? “I worry that planned financial regulations will inhibit growth in my industry” (% respondents, by region) Strongly/somewhat agree Neutral Somewhat/strongly disagree Asia-Pacific 48 36 16 UK 54 33 13 Mainland Europe 46 26 28 North America 53 33 15 Source: Economist Intelligence Unit survey, July 2012 Category Category © The Economist Intelligence Unit Limited 2012 Category Category Category Category Benefits and unintended consequences of financial markets reform Regulatory pros and cons Only 5% of respondents see no threat to their company as a result of the new regulatory regime; most are troubled by the various costs of implementation The biggest issue by far is the impact of increased compliance costs, which concerns 59% of respondents overall and more than 70% of large companies with annual revenue of more than US$10bn (see chart 4) However, rising funding costs (39%) and information technology (IT) costs (25%) are also concerns FS companies are even more focused on compliance costs (see chart 5) “The FS industry is underestimating the longterm costs of compliance—there will be problems down the line with the amount of work for compliance departments and the extent of reporting involved,” comments Schroders’s Ms Ground “The trouble is that additional regulation is Chart Q What are the biggest potential threats to your company from planned financial regulations? (% of respondents, by company size in USD revenue) Between $500m and $1bn Increased cost of funding 37 Between $1bn and $10bn 39 39 Increased cost of compliance 52 Increased cost of hedging risk 70 57 17 16 16 Increased IT costs 23 29 23 Difficulty in securing banking products or services we need 12 12 13 Restrictions on where we can operate 10 I don’t see any potential threats Don’t know 1 More than $10bn 22 26 Source: Economist Intelligence Unit survey, July 2012 Category Category © The Economist Intelligence Unit Limited 2012 Category Category Category Category Benefits and unintended consequences of financial markets reform OTC derivatives overhauled Looking specifically at the potential impact of the EMIR and Dodd-Frank regulations governing OTC derivatives trading, one clear conclusion from the survey is that companies not fully understand how the new regime will affect them That problem is echoed by Ms Ground at Schroders, who observes: “Companies don’t have a good grip on what’s involved, beyond the headlines.” Thus, less than one-half (47%) of respondents consider themselves reasonably au fait with the impact of the new rules, although the biggest corporates (with annual revenue of US$10bn or more) are more up to speed, with 55% stating that they understand the impact of the new rules Interestingly, the smallest category of firms surveyed ($500m-1bn in annual revenue) is close behind them at 53%—it is the medium-sized businesses that seem to be lagging most However, many companies are clearly taking measures to get a better grasp on the likely implications Around 44% of respondents are taking advice from external institutions such as banks or clearing houses as to how their business will be affected, while some, including Ignis Asset Management, are going further and recruiting expert staff to deal with the changes Overall, there is little difference between financials and non-financials in terms of understanding But those top-line figures mask disparities between different subgroups For example, asset managers are likely to be well aware of the implications for their institutional clients Insight Investment, for example, uses interest rate and inflation derivatives markets to manage the solvency risk of its pension fund clients, enabling them to reduce the volatility and protect the solvency of their pension schemes “The centralised clearing proposals, combined with the current market-standard clearing mechanisms, would significantly raise the long-term cost of Chart 16 Q Do you agree or disagree with the following statement? “We understand what will be required of our company under Dodd-Frank/EMIR” (% of respondents, by company size in USD revenue) Between $500m and $1bn Strongly/somewhat agree 37 Neutral 30 21 Somewhat/strongly disagree 17 Between $1bn and $10bn 15 © The Economist Intelligence Unit Limited 2012 27 26 More than $10bn 55 53 36 Source: Economist Intelligence Unit survey, July 2012 Benefits and unintended consequences of financial markets reform Chart 17 Q Do you agree or disagree with the following statement? “We have assessed the regulatory impact and this will makes it more expensive and/or difficult to hedge risk.” (% of respondents, by region) North America Strongly/somewhat agree Mainland Europe UK Asia-Pacific 37 45 41 63 Neutral 44 38 34 28 Somewhat/strongly disagree 20 17 25 Source: Economist Intelligence Unit survey, July 2012 providing pension benefits,” Insight’s Mr the Dodd-Frank and EMIR proposals, just under Stancombe warns one-third (30%) of respondents (or 42% of North There is some disagreement as to how far the American firms) are campaigning or consulting OTC derivatives market reforms will make it more with politicians, trade bodies or regulators to try costly or difficult to hedge risk Almost one-half and get the regulations modified Interestingly, (48%) of respondents think that there will be some 36% are not interested in further change negative impact North American respondents are OneCategory particular concern is the difficulty of Category Category Category Category Category most pessimistic: almost two-thirds (63%) believe extending the reach of these derivatives reforms that their ability to hedge will suffer as a beyond their home jurisdiction, such as to overseas consequence of the Dodd-Frank reforms offices of domestic companies “Extra-territoriality Against that, almost one-fifth (18%) of those or crossborder application of Dodd-Frank and EMIR surveyed think that there will be little impact on is a real sticking point and regulators on both sides costs or access to the market, with smaller companies of the Atlantic have really struggled to come up (23%) feeling markedly more positive than with an appropriate framework thus far,” businesses of US$15bn or more in revenue (12%) comments Mr Maloney from Ignis Asset Although there is significant unhappiness about Management Chart 18 Q Do you agree or disagree with the following statement? “We are consulting politicians/regulators/trade bodies (either nationally and/or EU) for changes to Dodd-Frank/EMIR” (% of respondents) Strongly/somewhat agree 30 Neutral 34 Somewhat/strongly disagree 36 Source: Economist Intelligence Unit survey, July 2012 18 © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform Corporate responses What kind of action are companies taking, or considering, in response to the regulatory changes? The most popular option by some way is to adapt their existing finance or risk-management strategy to the requirements of the new regime Over two-fifths (42%) of respondents intend to make such changes However, a number of alternatives have significant support, including Chart 19 Q Are you actively considering or progressing with any of the following to mitigate the impact of upcoming financial services regulation? (% of respondents, by region) North America Mainland Europe UK Changing/ reducing use of derivatives Asia-Pacific 34 29 17 24 Centrally clearing derivatives 13 21 23 20 Changing my financing and/or risk management model 40 39 43 44 Becoming part of a co-operative bank with other corporates 10 12 Seeking funding from different providers 22 29 24 30 Changing service providers 26 33 12 27 Re-locating or changing the legal/ regulatory structure of my organisation 17 33 20 33 None of the above 26 20 29 19 19 © The Economist Intelligence Unit Limited 2012 Source: Economist Intelligence Unit survey, July 2012 Benefits and unintended consequences of financial markets reform finding other sources of funding (27%), physically relocating (26%), reducing the use of derivatives (25%) and changing service providers (24%) Interestingly, European companies seem reluctant to consider any of these alternatives, particularly a switch of service providers (12%) and changes to the way they use derivatives (17%) Almost three in ten (29%) of European respondents claim that they would take “none of the above” measures By contrast, both UK and US firms appear much more prepared to vote with their feet: one-third of British companies are ready to switch to new service providers, while physical relocation and switching funding are also high on the list for both countries Looking at the difference between FS and nonFS companies, it seems that financials are considerably more willing than their non-FS counterparts to reduce the use of derivatives (30% versus 21%); indeed, this is the second most popular option among FS respondents Similarly, FS firms are more prepared to make use of centralised derivatives clearing: 26% of financials said that they have taken or are considering this option, compared with 15% of non-financials However, notes Mr Maloney at Ignis Asset Management, regulation is likely to stimulate innovation in financial products “It is widely expected that the market in general will move away from such heavy OTC use…We expect to see new products entering the market which, while having the same risk-management characteristics as clearable swaps, are neither clearing eligible nor subject to higher capital charges.” Chart 20 Q Are you actively considering or progressing with any of the following to mitigate the impact of upcoming financial services regulation? (% of respondents, by sector) FS Changing/ reducing use of derivatives Non FS 30 21 Centrally clearing derivatives 26 15 Changing my financing and/or risk management model Becoming part of a co-operative bank with other corporates 48 36 Seeking funding from different providers 23 30 Changing service providers 24 24 Re-locating or changing the legal/ regulatory structure of my organisation None of the above 28 24 21 26 Source: Economist Intelligence Unit survey, July 2012 20 © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform The bottom line The survey makes clear that different companies expect to be spending very different amounts on the costs of implementation, although as might be expected there is some correlation between expenditure and company size Thus, 20% of respondents overall anticipate bills of less than £500,000 (approx USD$810,000) over the next 12 months as a result of the regulatory changes, but in the smallest category (US$500m-1bn in annual revenue) that proportion rises to 37% At the other end of the spectrum, another 20% of respondents, and one-third (31%) of firms worth over US$10bn, expect to spend more than £10m (approx USD$16m) to cover the cost of increased financial regulation It also becomes more difficult to quantify the total anticipated spend for the biggest companies: a further 31% said that they could not put a figure on the likely cost of moving into line with the new regime “I have already seen eye-watering sums, running to many millions, spent by the big banks— and over the medium term those figures are likely to become really massive,” says Ms Ground of Schroders How will these costs be dealt with? It is hard to escape the conclusion that, in most cases, clients Chart 21 Q Approximately how much will you be spending in the next 12 months to cover the cost of increasing financial regulation (e.g IT, people, loss of sales, management time)? (% of respondents, by company size in USD revenue) Between $500m and $1bn £0 to 0.5m £0.5 to 1m 15 £1m to 5m 11 15 £10m+ 37 17 16 31 Cannot quantify 19 Don’t know 21 More than $10bn 16 £5m to 10m Between $1bn and $10bn 29 30 © The Economist Intelligence Unit Limited 2012 Source: Economist Intelligence Unit survey, July 2012 Benefits and unintended consequences of financial markets reform will ultimately pick up the tab for increased regulation Mr Stancombe at Insight Investment says that his company “would not expect to pass on the implementation costs to establish the infrastructure to support the new regulatory requirements,” although he points out that clients will see costs such as transaction charges rise as a consequence of the changes, and these are passed directly on to investment clients But for other commentators, all costs are bound to be shouldered by end users “Either consumers will pay in the end, or firms will stop offering products that involve increased compliance,” 22 asserts Ms Ground Looking at the derivatives landscape, Mr Maloney at Ignis Asset Management suggests that the costs will be so great that a significant shift is likely to occur within the FS industry, as asset managers have to re-evaluate how far the increased costs of hedging using derivatives offset the benefits of the hedge “One would expect end users to take comfort in having their assets in a well-regulated product—but at what cost? I expect there to be further public discomfort once the true costs of these reforms trickle down into end-user returns,” he adds © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform Potential consequences The 2008-09 global financial crisis and subsequent serious failures of the banking system to regulate itself have resulted in general consensus that farreaching reforms are both necessary and inevitable As Ms Ground from Schroders observes: “There has been a culture of excessive risk-taking and poor financial products, and substantial reform had to take place And a lot of this regulation is good: it means more capital is backing the system, leverage ratios are controlled and there is greater transparency and regulation of counterparty contracts.” Mr Stancombe at Insight Investment agrees that the fundamental principles underpinning derivatives market reform are laudable “Increased market transparency to regulators and systemic risk reduction have the potential to deliver greater security for market participants and wider stakeholders,” he notes But there is widespread concern over authorities’ swift moves to regulate in many areas at once Says Ms Ground: “They have tightened all the regulations at once, without a clear understanding of the unintended consequences and costs.” One of those unintended consequences may be that asset managers decide that it is no longer financially viable to use derivatives to hedge risk “The underlying risk will clearly continue to exist, but will be borne by a group of people less equipped to manage it,” Mr Stancombe warns Even if that does not happen, adds Ignis Asset Management’s Mr Maloney, “the market consensus is that performance returns will be compromised as a result of the tremendous additional costs 23 involved.” Moreover, there is a further risk that the derivatives market will become concentrated within a handful of the biggest clearing houses “If a major crisis occurs and banks begin to fail again, how will this huge concentration of risk be managed without systemic impact?” Two-thirds (68%) of those surveyed anticipate a significant or fundamental impact on the profitability of their financing and riskmanagement models, while more than one-half (51%) of respondents are concerned that planned financial regulation will impact on growth in their industry and 44% expect it to affect innovation That effect could be made worse for some countries if there is not sufficient regulatory collaboration and consensus between jurisdictions— in the face of regulatory threats, capital may well migrate to other relatively “light-touch” jurisdictions As the survey shows, that is clearly an option being considered by both financial and non-financial companies of all sizes It is particularly attractive to the biggest corporates, one-third of which would seriously consider relocating In short, it is very difficult to say whether the benefits of the forthcoming regulatory overhauls will outweigh the negatives, as we have not been here before The regulators are keen to close the many loopholes and skewed systems that led to previous systemic failures—but neither they nor anyone else can anticipate what the full consequences of the new regulatory regime will be in terms of its impact on companies and economies © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform Appendix: survey results Percentages may not add to 100% owing to rounding or the ability of respondents to choose multiple responses What you see as the most important issues facing your company today? Select up to three (% respondents) Global economic uncertainty 58 Eurozone crisis 54 Regulatory changes 50 Lack of confidence 25 Lack of industrial/economic growth/investment 24 Lack of (consumer) demand 23 Availability of finance 20 Other Do you agree or disagree with the following statements? Rate on a scale of to where is strongly agree and is strongly disagree (% respondents) Strongly agree Strongly disagree Our board is aware of how planned financial regulations will impact our company 33 43 18 My company is prepared for the impact of planned financial regulations 18 43 31 71 I worry that planned financial regulations will inhibit growth in my industry 21 30 30 14 I worry that planned financial regulations will inhibit innovation in my industry 17 24 27 © The Economist Intelligence Unit Limited 2012 31 19 Benefits and unintended consequences of financial markets reform What are the biggest potential benefits to your company from planned financial regulations? Select up to two (% respondents) Better transparency of risk 42 More stable financial markets 41 Increased market (pricing) transparency 30 Reduced counter-party/credit risk 29 I don’t see any benefits 13 Don’t know What are the biggest potential threats to your company from planned financial regulations? Select up to two (% respondents) Increased cost of compliance 59 Increased cost of funding 38 Increased IT costs 25 Restrictions on where we can operate 19 Increased cost of hedging risk 16 Difficulty in securing banking products or services we need 13 I don’t see any potential threats Don’t know Please assess the impact of the below regulations on your company (% respondents) Low impact (impacts profit of our financing and risk management model) Medium impact (Significantly impacts profit of our financing and risk management model) High impact (Fundamentally challenges viability of our financing and risk management model) Don’t know Not applicable Basel III 26 35 24 10 Dodd-Frank (OTC) 26 30 14 11 18 EMIR (OTC) 30 27 11 16 16 MIFID II 24 34 13 15 14 13 14 Solvency II 24 32 18 Vickers Report (ICB) 27 25 10 20 18 Compound Impact of all Regulatory Change 19 25 41 © The Economist Intelligence Unit Limited 2012 27 Benefits and unintended consequences of financial markets reform Do you agree or disagree with the following statements on the regulatory impact on the use of derivatives? Rate on a scale of to where is strongly agree and is strongly disagree (% respondents) 1Strongly agree Strongly disagree We understand what will be required of our company under Dodd-Frank/EMIR 12 35 30 16 We are speaking with appropriate institutions (e.g service providers, banks and clearing houses) to assess the impact of Dodd-Frank/EMIR on our company 13 31 33 15 We have assessed the regulatory impact and this will makes it more expensive and/or difficult to hedge risk 12 35 35 11 We are consulting politicians/regulators/trade bodies (either nationally and/or EU) for changes to Dodd-Frank/EMIR 12 18 34 20 16 Are you actively considering or progressing with any of the following to mitigate the impact of upcoming financial services regulation? Select all that apply (% respondents) Changing my financing and/or risk management model 42 Seeking funding from different providers 27 Re-locating or changing the legal/ regulatory structure of my organisation 26 Changing/ reducing use of derivatives 25 Changing service providers 24 Centrally clearing derivatives 20 Becoming part of a co-operative bank with other corporates None of the above 24 How has the the availability of the following services changed since the introduction of new financial regulations post-financial crisis? (% respondents) Less available No change More available Don’t know Risk Management 15 38 42 Funding Solutions 42 39 12 Cash Management 22 51 18 Trade Finance 27 46 12 15 How has the shift in pricing (and therefore attractiveness) of the following services changed since the introduction of new financial regulations post-financial crisis? (% respondents) More expensive No change Less expensive Don’t know Risk Management 56 30 10 Funding Solutions 58 29 Cash Management 38 45 12 Trade Finance 36 26 © The Economist Intelligence Unit Limited 2012 39 18 Benefits and unintended consequences of financial markets reform Approximately how much will you be spending in the next 12 months to cover the cost of increasing financial regulation (e.g IT, people, loss of sales, management time)? (% respondents) £0 to 5m 20 £0.5m to 1m 13 £1m to 5m 14 £5m to 10m £10m+ 13 Cannot quantify 26 Don’t know What are your company’s annual global revenues in US dollars? What is your job title? (% respondents) (% respondents) Board member Less than $500m Between $500m and $1bn 32 Between $1bn and $5bn 27 Between $5bn and $10bn 10 Between $10bn and $15bn More than $15bn CEO/President/Managing director CFO/Treasurer/Comptroller 18 CIO/Technology director Other C-level executive 25 13 SVP/VP/Director 24 Head of Business Unit Head of Department Manager 14 In which region are you personally located? Other (% respondents) Western Europe 54 Asia-Pacific 20 North America 20 Eastern Europe Latin America Middle East and Africa 27 © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform In which country are you personally located? What is your primary job function? (% respondents) (% respondents) United Kingdom Finance 31 34 United States of America Strategy and business development 14 16 India General management 12 Canada Risk 12 Australia Marketing and sales Netherlands IT Switzerland Operations and production France Customer service 2 Singapore Information and research 2 Germany Supply-chain management 2 Italy Legal 2 Austria R&D 2 Belgium Human resources China Procurement Spain Other Poland Denmark Finland Hong Kong Ireland Sweden Turkey Indonesia Luxembourg New Zealand Russia Ukraine 28 © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform What is your primary industry? (% respondents) Agriculture and agribusiness Automotive Chemicals Construction and real estate Consumer goods (excluding retail) Education Energy and natural resources Financial services: Bank 22 Financial services: Insurance company Financial services: Asset manager Financial services: Other financial services Healthcare services IT and technology 12 Logistics and distribution Manufacturing Media and entertainment Pharmaceuticals and biotechnology Professional services Retail 29 © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the Cover: Shutterstock information, opinions or conclusions set out in the white paper 30 © The Economist Intelligence Unit Limited 2012 London 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8476 E-mail: london@eiu.com New York 750 Third Avenue 5th Floor New York, NY 10017 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 E-mail: newyork@eiu.com Hong Kong 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com Geneva Boulevard des Tranchées 16 1206 Geneva Switzerland Tel: (41) 22 566 2470 Fax: (41) 22 346 93 47 E-mail: geneva@eiu.com [...]... Limited 2012 Benefits and unintended consequences of financial markets reform What is your primary industry? (% respondents) Agriculture and agribusiness 2 Automotive 1 Chemicals 2 Construction and real estate 2 Consumer goods (excluding retail) 4 Education 1 Energy and natural resources 5 Financial services: Bank 22 Financial services: Insurance company 8 Financial services: Asset manager 6 Financial. .. services: Other financial services 8 Healthcare services 2 IT and technology 12 Logistics and distribution 2 Manufacturing 7 Media and entertainment 2 Pharmaceuticals and biotechnology 2 Professional services 9 Retail 3 29 © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial markets reform Whilst every effort has been taken to verify the accuracy of this information,... 3 Category 4 Category 5 Category 6 Benefits and unintended consequences of financial markets reform ICB (Vickers Report) UK banking -reform proposals including ring-fencing of personal and SME deposits from wholesale and institutional operations Across the board, 35% of companies (rising to 43% among UK respondents) anticipate significant implications as a result of the ICB recommendations, which are... of financial markets reform 7 Potential consequences The 2008-09 global financial crisis and subsequent serious failures of the banking system to regulate itself have resulted in general consensus that farreaching reforms are both necessary and inevitable As Ms Ground from Schroders observes: “There has been a culture of excessive risk-taking and poor financial products, and substantial reform had to... the impact of planned financial regulations 18 43 31 71 I worry that planned financial regulations will inhibit growth in my industry 21 30 30 14 4 I worry that planned financial regulations will inhibit innovation in my industry 17 24 27 © The Economist Intelligence Unit Limited 2012 31 19 5 0 Benefits and unintended consequences of financial markets reform What are the biggest potential benefits to... Intelligence Unit Limited 2012 27 8 5 Benefits and unintended consequences of financial markets reform Do you agree or disagree with the following statements on the regulatory impact on the use of derivatives? Rate on a scale of 1 to 5 where 1 is strongly agree and 5 is strongly disagree (% respondents) 1Strongly agree 2 3 4 5 Strongly disagree We understand what will be required of our company under Dodd-Frank/EMIR... Source: Economist Intelligence Unit survey, July 2012 Benefits and unintended consequences of financial markets reform 3 Overall expectations of regulatory impact vary Most respondents (68%) are bracing themselves for significant or even game-changing effects on their financial and risk-management strategies as a consequence of the new regulatory landscape, with UK companies expecting to be hardest hit.. .Benefits and unintended consequences of financial markets reform Chart 6 Q What are the biggest potential threats to your company from planned financial regulations? (% of respondents, by sector) FS Increased cost of funding Non FS 37 40 Increased cost of compliance 74 48 Increased cost of hedging risk 12 20 Increased IT costs 29 22 Difficulty... costs of hedging using derivatives offset the benefits of the hedge “One would expect end users to take comfort in having their assets in a well-regulated product—but at what cost? I expect there to be further public discomfort once the true costs of these reforms trickle down into end-user returns,” he adds © The Economist Intelligence Unit Limited 2012 Benefits and unintended consequences of financial. .. Limited 2012 Benefits and unintended consequences of financial markets reform MiFID II Far-reaching legislation designed to modernise, make more transparent and harmonise the EU securities markets; it is likely to affect any firm involved in the EU industry Just under one-half (47%) of respondents foresee a significant or greater impact; once again, Europe is fairly in line with the rest of the world, ... Limited 2012 Benefits and unintended consequences of financial markets reform Introduction As a result of the 2008 financial crisis and consequent world recession, central bankers, regulators and governments... Category Benefits and unintended consequences of financial markets reform ICB (Vickers Report) UK banking -reform proposals including ring-fencing of personal and SME deposits from wholesale and institutional... Category Benefits and unintended consequences of financial markets reform Chart Q Please assess the compound impact of all regulatory change (% of respondents, by sector) FS Low impact (impacts profit