Explanatory Memorandum to COM(2011)652 - Markets in financial instruments and amendment of Regulation [EMIR] on OTC derivatives, central counterparties and trade repositories

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dossier COM(2011)652 - Markets in financial instruments and amendment of Regulation [EMIR] on OTC derivatives, central counterparties and trade ...
source COM(2011)652 EN
date 20-10-2011
1. CONTEXT OF THE PROPOSAL

The Markets in Financial Instruments Directive (MiFID), in force since November 2007, is a core pillar in EU financial market integration. Adopted in accordance with the 'Lamfalussy' process i, it consists of a framework Directive (Directive 2004/39/EC) i, an implementing Directive (Directive 2006/73/EC) i and an implementing Regulation (Regulation No 1287/2006) i. MiFID establishes a regulatory framework for the provision of investment services in financial instruments (such as brokerage, advice, dealing, portfolio management, underwriting etc.) by banks and investment firms and for the operation of regulated markets by market operators. It also establishes the powers and duties of national competent authorities in relation to these activities.

The overarching objective is to further the integration, competitiveness, and efficiency of EU financial markets. In concrete terms, it abolished the possibility for Member States to require all trading in financial instruments to take place on specific exchanges and enabled Europe-wide competition between traditional exchanges and alternative venues. It also granted banks and investment firms a strengthened 'passport' for providing investment services across the EU subject to compliance with both organisational and reporting requirements as well as comprehensive rules designed to ensure investor protection.

The result after 3.5 years in force is more competition between venues in the trading of financial instruments, and more choice for investors in terms of service providers and available financial instruments, progress which has been compounded by technological advances. Overall, transaction costs have decreased and integration has increased i.

However, some problems have surfaced. First, the more competitive landscape has given rise to new challenges. The benefits from this increased competition have not flowed equally to all market participants and have not always been passed on to the end investors, retail or wholesale. The market fragmentation implied by competition has also made the trading environment more complex, especially in terms of collection of trade data. Second, market and technological developments have outpaced various provisions in MiFID. The common interest in a transparent level playing-field between trading venues and investment firms risks being undermined. Third, the financial crisis has exposed weaknesses in the regulation of instruments other than shares, traded mostly between professional investors. Previously held assumptions that minimal transparency, oversight and investor protection in relation to this trading is more conducive to market efficiency no longer hold. Finally, rapid innovation and growing complexity in financial instruments underline the importance of up-to-date, high levels of investor protection. While largely vindicated amid the experience of the financial crisis, the comprehensive rules of MiFID nonetheless exhibit the need for targeted but ambitious improvements.

The revision of MiFID therefore constitutes an integral part of the reforms aimed at establishing a safer, sounder, more transparent and more responsible financial system working for the economy and society as a whole in the aftermath of the financial crisis, as well as to ensure a more integrated, efficient and competitive EU financial market. i It is also an essential vehicle for delivering on the G20 i commitment to tackle less regulated and more opaque parts of the financial system, and improve the organisation, transparency and oversight of various market segments, especially in those instruments traded mostly over the counter (OTC) i, complementing the legislative proposal on OTC derivatives, central counterparties and trade repositories i.

Targeted improvements are also required in order to improve oversight and transparency of commodity derivative markets in order to ensure their function for hedging and price discovery, as well as in light of developments in market structures and technology in order to ensure fair competition and efficient markets. Further, specific changes to the framework of investor protection are necessary, taking account of evolving practices and to support investor confidence.

Finally, in line with the recommendations from the de Larosière group and the conclusions of the ECOFIN Council, i the EU has committed to minimise, where appropriate, discretions available to Member States across EU financial services directives. This is a common thread across all areas covered by the review of MiFID and will contribute to establishing a single rulebook for EU financial markets, help further develop a level playing field for Member States and market participants, improve supervision and enforcement, reduce costs for market participants, and improve conditions of access and enhance the global competitiveness of the EU financial industry.

As a result, the proposal amending MiFID is divided in two. A Regulation sets out requirements in relation to the disclosure of trade transparency data to the public and transaction data to competent authorities, removing barriers to non-discriminatory access to clearing facilities, the mandatory trading of derivatives on organised venues, specific supervisory actions regarding financial instruments and positions in derivatives, and the provision of services by third-country firms without a branch. A Directive amends specific requirements regarding the provision of investment services, the scope of exemptions from the current Directive, organisational and conduct of business requirements for investment firms, organisational requirements for trading venues, the authorisation and ongoing obligations applicable to providers of data services, powers available to competent authorities, sanctions, and rules applicable to third-country firms operating via a branch.

Contents

1.

RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS



The initiative is the result of an extensive and continuous dialogue and consultation with all major stakeholders, including securities regulators, all types of market participants including issuers and retail investors. It takes into consideration the views expressed in a public consultation from 8 December 2010 to 2 February 2011 i, a large and well-attended public hearing was held over two days on 20-21 September 2010 i, and input obtained through extensive meetings with a broad range of stakeholder groups since December 2009. Finally, the proposal takes into consideration the observations and analysis contained in the documents and technical advice published by the Committee of European Securities Regulators (CESR), now the European Securities and Markets Authority (ESMA) i.

In addition, two studies i have been commissioned from external consultants in order to prepare the revision of MiFID. The first one, requested from PriceWaterhouseCoopers on 10 February 2010 and received on 13 July 2010, focused on data gathering on market activities and other MiFID related issues. The second, from Europe Economics mandated on the 21 July 2010 after an open call for tender, received on 23 June 2011 focused on a cost benefit analysis of the various policy options to be considered in the context of the revision of MiFID.

In line with its 'Better Regulation' policy, the Commission conducted an impact assessment of policy alternatives. Policy options were assessed against different criteria: transparency of market operations for regulators and market participants, investor protection and confidence, level playing field for market venues and trading systems in the EU, and cost-effectiveness, i.e. the extent to which the options achieve the sought objectives and facilitate the operation of securities markets in a cost effective and efficient way. Overall, the review of MiFID is estimated to generate one-off compliance costs of between €512 and €732 million and ongoing costs of between €312 and €586 million. This represents one-off and ongoing cost impacts of respectively 0.10% to 0.15% and 0.06% to 0.12% of total operating spending of the EU banking sector. This is far less than the costs imposed at the time of the introduction of MiFID. The one-off cost impacts of the introduction of MiFID were estimated at 0.56% (retail and savings banks) and 0.68% (investment banks) of total operating spending while ongoing compliance costs were estimated at 0.11% (retail and savings banks) to 0.17% (investment banks) of total operating expenditure.

2.

LEGAL ELEMENTS OF THE PROPOSAL



4.

3.1. Legal basis


The proposal is based on Article 114 i of the TFEU which provides a legal basis for a Regulation creating uniform provisions aimed at the functioning of the internal market.

While the Directive deals mainly with the access to economic activity of businesses and is based on Article 53 TFEU, a need for a uniform set of rules on how these economic activities are conducted warrants the use of a different legal basis allowing for the creation of a Regulation.

A Regulation is necessary to grant specific direct competences to ESMA in the areas of product intervention and position management powers. For the fields of trade-transparency and transaction reporting the application of rules often depends on numeric thresholds and specific identification codes. Any deviation on the national level would lead to market distortions and regulatory arbitrage, preventing the development of a level-playing field. The imposition of a Regulation ensures that those requirements will be directly applicable to investment firms and promotes a level-playing field by preventing diverging national requirements as a result of the transposition of a Directive.

The proposed Regulation would also indicate that investment firms to a large extent follow the same rules in all EU markets, stemming from a uniform legal framework which will enhance legal certainty and ease the operations of firms active in various jurisdictions considerably. A Regulation would also enable the EU to implement any future changes more quickly, as amendments can apply almost immediately after adoption. That would enable the EU to meet internationally agreed deadlines for implementation and follow significant market developments.

5.

3.2. Subsidiarity and proportionality


According to the principle of subsidiarity (Article 5.3 of the TFEU), action on EU level should be taken only when the aims envisaged cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the EU.

Most of the issues covered by the revision are already covered by the current legal MiFID framework. Further, financial markets are inherently cross-border in nature and are becoming more so. The conditions according to which firms and operators can compete in this context, whether it concerns rules on pre and post-trade transparency, investor protection or the assessment and control of risks by market participants need to be common across borders and are all at the core of MiFID today. Action is now required at European level in order to update and modify the regulatory framework laid out by MiFID in order to take into account developments in financial markets since its implementation. The improvements that the directive has already brought to the integration and efficiency of financial markets and services in Europe would thus be bolstered with appropriate adjustments to ensure the objectives of a robust regulatory framework for the single market are achieved. Because of this integration, isolated national intervention would be far less efficient and would lead to the fragmentation of the markets, resulting in regulatory arbitrage and distortion of competition. For instance, different levels of market transparency or investor protection across Member States would fragment markets, compromise liquidity and efficiency, and lead to harmful regulatory arbitrage.

The European Securities and Markets Authority (ESMA) should also play a key role in the implementation of the new legal proposals. One of the aims of the creation of the European Authority is to enhance further the functioning of the single market for security markets; new rules at Union level are necessary to give all appropriate powers to ESMA.

The proposal take full account of the principle of proportionality, being adequate to reach the objectives and not going beyond what is necessary in doing so. It is compatible with the proportionality principle, taking into account the right balance of public interest at stake and the cost-efficiency of the measure. The requirements imposed on the different parties have been carefully calibrated. In particular, the need to balance investor protection, efficiency of the markets and costs for the industry has been transversal in laying out these requirements. For instance, regarding the new transparency rules that could be applied to bonds and derivatives markets, the revision advocates for a carefully calibrated regime that will take into consideration the specificities of each asset class and possibly each type of derivatives.

6.

3.3. Compliance with Articles 290 and 291 TFEU


On 23 September 2009, the Commission adopted proposals for Regulations establishing EBA, EIOPA, and ESMA. In this respect the Commission wishes to recall the Statements in relation to Articles 290 and 291 TFEU it made at the adoption of the Regulations establishing the European Supervisory Authorities according to which: 'As regards the process for the adoption of regulatory standards, the Commission emphasises the unique character of the financial services sector, following from the Lamfalussy structure and explicitly recognised in Declaration 39 to the TFEU. However, the Commission has serious doubts whether the restrictions on its role when adopting delegated acts and implementing measures are in line with Articles 290 and 291 TFEU.'

7.

3.4. Detailed explanation of the proposal


3.4.1. General – level-playing field

A central aim of the proposal is to ensure that all organised trading is conducted on regulated trading venues: regulated markets, multilateral trading facilities (MTFs) and organised trading facilities (OTFs). Identical pre and post trade transparency requirements will apply to all of these venues. Likewise, the requirements in terms of organisational aspects and market surveillance applicable to all three venues are nearly identical. This will ensure a level playing field where there are functionally similar activities bringing together third-party trading interests. Importantly however, the transparency requirements will be calibrated for different types of instruments, notably equity, bonds, and derivatives, and for different types of trading, notably order book and quote driven systems.

In all three venues the operator of the platform is neutral. Regulated markets and multilateral trading facilities are characterised by non-discretionary execution of transactions. This means that transactions will be executed according to predetermined rules. They also compete to offer access to a broad membership provided they meet a transparent set of criteria.

By contrast, the operator of an OTF has a degree of discretion over how a transaction will be executed. Consequently, the operator is subject to investor protection, conduct of business, and best execution requirements towards the clients using the platform. . Thus, while both the rules on access and execution methodology of an OTF have to be transparent and clear, they allow the operator to perform a service to clients which is qualitatively if not functionally different from the services provided by regulated markets and MTFs to their members and participants. Still, in order to ensure both the OTF operator's neutrality in relation to any transaction taking place and that the duties owed to clients thus brought together cannot be compromised by a possibility to profit at their expense, it is necessary to prohibit the OTF operator from trading against his own proprietary capital.

Finally, organised trading may also happen by systematic internalisation. A systematic internaliser (SI) may execute client transactions against his own proprietary capital. However, an SI may not bring together third party buying and selling interests in functionally the same was as a regulated market, MTF or OTF, and is therefore not a trading venue. Best execution and other conduct of business rules would apply, and the client would clearly know when he is trading with the investment firm and when he is trading against third parties. Specific pre-trade transparency and access requirements apply to SIs. Again, the transparency requirements will be calibrated for different types of instruments, notably equity, bonds, and derivatives and apply below specific thresholds. Any trading on own account by investment firms with clients, including other investment firms, is thus considered over-the counter (OTC). OTC trading activity which will not meet the definition of SI activity, to be made more inclusive through amendments to implementing legislation, will have to be non systematic and irregular.

3.4.2. Extension of transparency rules to equity like instruments and actionable indications of interests (Title II, Chapter 1 – Articles 3-6)

The key rationale for transparency is to provide investors with access to information about current trading opportunities, to facilitate price formation and assist firms to provide best execution to their clients.MiFID has established transparency rules, both pre and post trade that apply to shares admitted to trading on regulated markets, including when those shares are traded on an MTF or over the counter (OTC).

The proposed provisions first extend the transparency rules applicable by these shares to equity like instruments such as depository receipts, exchange-traded funds, certificates and other similar financial instruments issues by companies. These instruments are similar to shares and should therefore be submitted to the same transparency regime. The extension of the transparency requirements will also cover actionable indications of interests (IOIs). This will avoid that IOIs can be used to provide information to a group of market participants while excluding others.

8.

3.4.3. Increased consistency in the application of waivers to pre trade transparency for equities markets (Article 4)


The proposed provisions aim at making the application of the pre trade transparency waivers more consistent and more coherent. The reasons for applying these waivers to the obligation to publish in real time current orders and quotes are still valid; the large in scale operations for instance deserve special treatment to avoid having too large a market impact when executed. However, the calibration, actual content and consistent application need to be improved. Therefore, the proposed provisions will oblige the competent authorities to inform ESMA about the use of the waivers in their markets and ESMA will issue an opinion on the compatibility of the waiver with the requirements established in this Regulation and prospective delegated acts.

3.4.4. Extension of transparency rules to bonds, structured finance products and derivatives (Title II, Chapter 2 – Articles 7-10)

The provisions extend the principles of transparency rules up to now only applicable to equity markets to bonds, structured finance products, emission allowances and derivatives. This extension is justified by the fact that the existing level of transparency of these products which are, in most cases, traded OTC is not always considered sufficient.

The provisions lay out new requirements for both pre and post trade transparency on these four groups of instruments. The transparency requirements will be identical across the three trading venues, Regulated Market, MTF and OTF, but they will be calibrated according to the instruments traded. Waivers will be defined in delegated acts.

For regulated markets, the transparency requirements will extend to bonds, structured finance products, emission allowances and derivatives admitted to trading. For MTFs and OTFs they will extend to bonds and structured finance products admitted to trading on a regulated market or for which a prospectus has been published and to emission allowances and derivatives traded on MTFs and OTFs.

Regarding the pre trade transparency requirements, competent authorities will first be able to use a waiver for specific type of instruments based on market model, liquidity or other relevant criteria. They will also be able to apply a set of different waivers to exempt some transactions from the transparency requirements. In both cases, as for equities, competent authorities will have to notify to ESMA the intended use of the waivers and ESMA will issue an opinion on the compatibility of the waiver with the legal requirements. The format and level of detail of the pre trade information to be provided as well as the exception and waivers to these requirements will be defined in delegated acts.

As for post trade transparency, the proposed provisions set the possibility for deferred publication in certain cases, depending on the size or type of transactions. Similarly to pre trade, the scope of the information as well as the conditions for deferred publication will be set by delegated acts.

3.4.5. Increased and more efficient data consolidation (Title II, Chapter 3 – Articles 11, 12)

The area of market data in terms of quality, format, cost and ability to consolidate is key to sustain the overarching principle of MiFID as regards transparency, competition and investor protection. In this area, the proposed provisions in the Regulation and the Directive bring in a number of fundamental changes.

In the Regulation,, they will contribute to reducing the cost of data by requesting trading venues, that is regulated markets, MTFs or OTFs to make post trade information available free of charge 15 minutes after the execution of the transaction, to offer pre- and post-trade data separately, and by giving the possibility to the Commission to clarify by delegated acts what constitutes a reasonable commercial basis.

This Regulation also requires investment firms to make public trades executed outside trading venues via Approved Publication Arrangements which will themselves be regulated in the Directive. This should significantly improve the quality of OTC data and consequently facilitate its consolidation.

3.4.6. Transparency for investment firms trading OTC including systematic internalisers (Title III – Articles 13-20)

In order to sustain a level playing-field, support market-wide price discovery, and protect retail investors, specific transparency rules for investment firms acting as a systematic internaliser are proposed. The existing transparency rules for systematic internalisers will apply to shares and equity-like instruments, while new provisions would be introduced for bonds, structured finance products admitted to trading on a regulated market or for which a prospectus has been published, emission allowances and derivatives which are clearing-eligible or are admitted to trading on a regulated market or are traded on an MTF or an OTF. In addition, for shares and equity-like instruments, a minimum quote size is introduced, and two-way quotes are required. Post-trade transparency rules identical to those applicable to on-venue trades are proposed to apply to all shares including equity-like instruments, as well as to bonds and structured finance products for which a prospectus has been published, to emission allowances and to derivatives which are admitted to trading on a regulated market or traded on an MTF or OTF, as well as derivatives which are clearing-eligible or are reported to a trade repository.

3.4.7. Transaction reporting (Title IV – Articles 21-23)

Transaction reporting under MiFID enables supervisors to monitor the activities of investment firms and ensure compliance with MiFID and to monitor for abuses under the Market Abuse Directive (MAD). Transaction reporting is also useful for general market monitoring. The provisions which are put forward will improve the quality of transaction reporting in a number of aspects.

All transactions in financial instruments will need to be reported to competent authorities, except for transactions in financial instruments which are not traded in an organised way and are not susceptible to market abuse and cannot be used for abusive purposes. Competent authorities will have full access to records at all stages in the order execution process, from the initial decision to trade, through to its execution.

First, the amendments create a new obligation for regulated markets, MTFs and OTFs to store order data in a manner accessible to supervisors for at least 5 years. This will allow competent authorities to monitor for attempted market abuse as well as order book manipulation. The stored information will need to contain all information also required for the reported transactions, notably including identification of the client, and of the persons responsible for the execution of the transaction, for instance the traders, or computer algorithms.

Second, the scope of transaction reporting which was up to now limited to financial instruments admitted to trading on a regulated market, including transactions in such instrument executed outside the market, will be substantially extended and thus aligned with the scope of market abuse rules. The only instruments escaping the requirement will be (i) the instruments not admitted to trading nor traded on an MTF or OTF, (ii) the instruments whose value does not depend on that of a financial instrument admitted to trading or traded on an MTF or OTF, (iii) the instruments the trading of which cannot have an impact on an instrument admitted to trading nor traded on an MTF or OTF.

Third, the provisions will improve the quality of the reporting by on the one hand, providing for better identification of the clients on whose behalf the investment firm has executed the transaction and the persons responsible for its execution, and on the other hand, requesting regulated markets, MTFs and OTFs to report details of transactions executed by firms which are not subject to the general reporting obligations. Furthermore, in terms of quality, the proposed provisions will require the reporting to be done through reporting mechanisms approved, pursuant to the Directive, by competent authorities.

In order for transaction reports and stored order information to identify the client and those responsible for the transaction's execution, including computer algorithms, investment firms will need to pass this information on when sending an order to another firm. They will also have the option to report an order as if it were a transaction in case they do not wish to pass this information to other firms.

Fourth, for cost and efficiency purposes, double reporting of trades under MiFID and the recently proposed reporting requirements to trade repositories (EMIR) should be avoided. Therefore, trade repositories will be required to transmit reports to the competent authorities.

Last, if these changes should prove to be insufficient to achieve a complete and accurate overview of trading activity and individual positions, a review clause stipulates that 2 years after the entry into force of the regulation the Commission may introduce measures to require reporting by investment firms to go directly to a system appointed by ESMA.

9.

3.4.8. Trading of derivatives (Title V - Articles 24-27)


As part of the significant efforts underway to improve the stability, transparency and oversight of OTC derivatives markets, the G20 has agreed that trading in standardised OTC derivatives should move to exchanges or electronic trading platforms where appropriate.

Consistent with the requirements already proposed by the Commission (EMIR) to increase central clearing of OTC derivatives, the proposed provisions in this Regulation will require trading in suitably developed derivatives to occur only on eligible platforms, that is regulated markets, MTFs or OTFs. This obligation will be imposed on both financial and non financial counterparties exceeding the clearing threshold in EMIR. The provisions leave to the Commission and to ESMA through technical standards the task of defining the list of derivatives eligible to such obligation, taking into consideration the liquidity of the specific instruments.

3.4.9. Non-discriminatory clearing access (Title VI – Articles 28-30)

In addition to requirements in Directive 2004/39/EC that prevent Member States from unduly restricting access to post trade infrastructure such as central counterparty (CCP) and settlement arrangements, it is necessary that this Regulation removes various other commercial barriers that can be used to prevent competition in the clearing of financial instruments. Barriers may arise from central counterparties not providing clearing services to certain trading venues, trading venues not providing data streams to potential new clearers or information about benchmarks or indices not being provided to clearers or trading venues.

The proposed provisions will prohibit discriminatory practices and prevent barriers that may prevent competition for the clearing of financial instruments. This will increase competition for clearing of financial instruments in order to lower investment and borrowing costs, eliminate inefficiencies and foster innovation in European markets.

10.

3.4.10. Supervision of products and positions (Title VII, Articles 31-35)


Further to the Council conclusions on strengthening EU Financial supervision (10 June 2009), there has been widespread agreement that the effectiveness of supervision and enforcement needs to be increased and competent authorities need to be equipped with specific new powers in the wake of the crisis, especially in terms of being able to scrutinise products and services being offered.

First, the proposed amendments will greatly increase the supervision of products and services by introducing the possibilities on the one hand, for competent authorities to set permanent bans on financial products or activities or practices with coordination by ESMA, and on the other hand, for ESMA to also temporarily ban products, practices and services. The ban could consist of a prohibition or restriction on the marketing or sale of financial instruments or on a certain practice or on persons engaged in the specific activity. The provisions set specific conditions for the activation of both of these bans, which can notably happen when there are concerns on investor protection, or threats to the orderly functioning of financial markets or stability of the financial system.

Second, in complement to the powers proposed in the revised Directive that give the possibility to competent authorities to manage positions including setting up position limits, the proposed provisions in the Regulation introduce a role for ESMA to coordinate the measures taken at national level. It also gives ESMA specific powers to manage or limit positions for market participants. The proposed provisions set precise conditions for this to happen notably in terms of a threat to the orderly functioning of markets or delivery arrangements for physical commodities, or to the stability of the financial system in the Union.

11.

3.4.11. Emission allowances (Article 1)


Unlike trading in derivatives, spot secondary markets in EU emission allowances (EUAs) are largely unregulated. A range of fraudulent practices have occurred in spot markets which could undermine trust in the emissions trading scheme (ETS), set up by the EU ETS Directive i. In parallel to measures within the EU ETS Directive to reinforce the system of EUA registries and conditions for opening an account to trade EUAs, the proposal would render the entire EUA market subject to financial market regulation. Both spot and derivative markets would be under a single supervisor. MiFID and the Directive 2003/6/EC on market abuse would apply, thereby comprehensively upgrading the security of the market without interfering with its purpose, which remains emissions reduction. Moreover, this will ensure coherence with the rules already applying to EUA derivatives and lead to greater security as banks and investment firms, entities obliged to monitor trading activity for fraud, abuse or money laundering, would assume a bigger role in vetting prospective spot traders.

3.4.12. Provision of investment services by third country firms without a branch (Title VIII – Articles 36-39)

The proposal creates a harmonised framework for granting access to EU markets for firms and market operators based in third countries in order to overcome the current fragmentation into national third country regimes and to ensure a level playing field for all financial services actors in the EU territory. The proposal introduces a regime based on a preliminary equivalence assessment of third country jurisdictions by the Commission. Third country firms from third countries for which an equivalence decision has been adopted would be able to request to provide services in the Union. The provision of services to retail clients would require the establishment of a branch; the third country firm should be authorised in the Member State where the branch is established and the branch would be subject to EU requirements in some areas (organisational requirements, conduct of business rules, conflicts of interest, transparency and others). Services provided to eligible counterparties would not require the establishment of a branch; third country firms could provide them subject to ESMA registration. They would be supervised in their country. Appropriate cooperation agreement between the supervisors in third countries and national competent authorities and ESMA would be necessary

3.

BUDGETARY IMPLICATION



The specific budget implications of the proposal relate to task allocated to ESMA as specified in the legislative financial statements accompanying this proposal. Specific budgetary implications for the Commission are also assessed in the financial statement accompanying this proposal.

The proposal has implications for the Community budget.