Solvency II

As regards the welter of regulatory reforms that are afoot in the world of financial capital and liquidity, little press ink has been spilled on the new Solvency II regime. Solvency II will set out new, strengthened EU-wide requirements on capital adequacy and risk management for insurers with a view to reducing the likelihood of an insurer failing. Dull stuff, you may think.

In its current draft, however, it threatens to toss a grenade in an abstruse but highly lucrative niche of FIG funding - German registered bonds.

German insurance companies are a key buyer of bonds that are constituted in registered form, as opposed to bearer bonds. Bearer bonds are technically transferable through delivery of the bond itself. In practice, such bonds are locked in a vault with a custodian and interests in the bearer bond are transferred electronically through Euroclear and Clearstream. Registered bonds, in contrast, are constituted so that ownership is transferred through entries on a central register. In practice, therefore, little distinguishes the bearer bonds from registered bonds, although certain legal and tax consequences spin on the difference.

By virtue of a local accounting idiosyncracy, German insurance companies enjoy an economic advantage by investing in registered bonds. Under German GAAP, the bonds may be accounted for at amortised cost - whereas bearer bonds are normally marked-to-market, putting volatility into the profit and loss statement.

The loss of this accounting perq would be significant. There are over 500 insurance and pension funds in Germany with about eur540bn to invest in fixed income, of which eur300bn is invested in registered notes. It's a big industry.

So although the grenade is sitting on the draft statute books ticking away, it's unlikely that you'll see it detonate over the pink pages any time soon. That kind of financial clout at the heart of the EU is a powerful lobby. Expect the Solvency II threat to fizzle out before it becomes a mainstream newstory. But if it doesn't.....you read it here first.