23 January 2018

Dear Sirs and Madams,

RE: Impact of Proposal Published by the European Commission on 23 November 2016 (the “EC Proposal”) to Amend Moratorium Powers under Bank Recovery and Resolution Directive 2014/59/EU (“BRRD”)

Following up on our 29 June 2017 letter (the “June Letter”),1 the undersigned Associations2 wish to provide data we have gathered that supports our continuing concerns with the EC Proposal to expand moratorium tools available under BRRD. The members of our Associations act as fiduciaries to pension funds, regulated funds, private funds, and other investors served by asset managers that in aggregate serve millions of individual investors. If adopted, the expanded moratorium powers would affect these individuals, more than our members, by (i) depriving investors of access to funds and investments during a moratorium, (ii) denying investors the benefit of the collateral associated with these investments, and (iii) possibly forcing the cessation of relationships with EU institutions to avoid these unnecessary risks.

We note the following key risks of expanding the moratorium powers, and offer data regarding the size of the relevant markets in Europe that may be impacted if pension funds, regulated investment funds, private funds and other investors on whose behalf asset managers act as fiduciaries determine not to enter into transactions with, custody with, or invest in EU banks as a result of an expansion of the proposed moratorium powers:3

• Regulated investment funds, such as UCITS and US mutual funds, may not transact with or invest in EU banks due to the significant compliance and regulatory risks raised by expanded moratorium powers. For example, certain regulated investment funds are subject to requirements regarding the liquidity of their investments. An extended stay may raise concerns regarding the ability of regulated funds to satisfy these liquidity requirements, as well as the ability of both EU and US money market funds (“MMFs”) to satisfy regulatory requirements limiting the maximum maturity of their investments.4 The loss of recourse to collateral caused by an extended stay also may raise concerns regarding the ability of US investment funds to comply with rules and positions of the US Securities and Exchange Commission (“SEC”) regarding securities lending transactions and reverse repurchase agreements (“reverse repos”). 5 If extended moratorium powers are added to BRRD, a regulated investment fund’s manager will need to consider these issues as it evaluates its current and future investments in, and transactions with, EU banks. The manager must consider worst case scenarios at the time of an investment, and cannot assume the ability to exit the position in advance of a moratorium being imposed.

o In terms of the size of the repo market involving EU banks, the International Capital Market Association’s European Repo Market Survey observed that the total value of repos and reverse repos outstanding on the survey date (June 7, 2017) was EUR 6.5 trillion.6 Of this, a significant percentage of these transactions are with buy side clients, providing significant liquidity to EU banks. This market would be threatened by expanded moratorium powers.

o US MMFs, while organized outside of the EU, currently have significant exposure to EU banks amounting to USD 583 billion, or 22 percent of US taxable MMFs portfolios, either involving repo transactions with EU banks or direct investments in securities issued by EU banks as of November 2017.7 Expanded moratorium powers would severely constrain the ability to effect
these transactions and investments.

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1 The Associations’ June Letter is available at: https://www.ici.org/pdf/30761a.pdf.

2 See end of letter for descriptions of each Association.

3 The survey data below for custodian services is from Funds Europe. The repo data is from data is from ICI tabulations of SEC form N-MFP. We note the impact of expanded moratorium powers would be greater, as they extend to derivatives generally.

4 These regulations require maturity to be determined based on when payments are due unconditionally and without optionality.

5 Registered US investment funds engaging in securities lending transactions must have the ability to terminate the loan at any time and recall the loaned securities within the ordinary settlement time. For a registered US investment fund to engage in reverse repos with a single issuer in an amount (when combined with the fund’s other holdings in the issuer) in excess of 5% of the fund’s assets (when combined with the fund’s other holdings in the issuer), the fund must ensure the obligation to repurchase is “collateralized fully.”

6 See International Capital Market Association, European Repo Market Survey (conducted June 2017, published October 2017), available at: https://www.icmagroup.org/Regulatory-Policy and-MarketPractice/repo-and-collateral-markets/icma-ercc-publications/repo-market-surveys/.

7 Please refer to https://www.ici.org/viewpoints/view_17_mmf_exposure for the details of these data points.