Regulation & compliance
3115th Council meeting (provisional version)
The Council of the European Union (the Council) has issued a provisional version of a press release concerning its 3115th Council meeting which took place on 4 October 2011.
The press release contains the main results of the meeting which were:
- The Council agreed a general approach on a draft Regulation aimed at increasing transparency and reducing risk in the over-the-counter (OTC) derivatives market.
- The draft Regulation calls for reporting of all derivative contracts to trade repositories (i.e. central data centres) and the clearing of standardised OTC derivative contracts through central counterparties (CCPs), in order to reduce counterparty risk. This is aimed at preventing the default of one market participant causing the collapse of other market players, thereby putting the financial system at risk.
- The Council also approved the text recently voted by the European Parliament on a package of six legislative measures designed to strengthen economic governance in the EU.
- The Council adopted a recommendation on the nomination of Jörg Asmussen to the executive board of the European Central Bank, to succeed Jűrgen Stark.
- The Council adopted conclusions on climate finance, ahead of the UN conference in South Africa, at the end of November.
View Press Release - 3115th Council meeting (provisional version), 4 October 2011
ESMA publishes updated list of measures adopted by competent authorities on short selling
The European Securities and Markets Authority has updated its list of measures that Member States have taken on short selling. The update includes the measures taken by France, Greece, Italy and Spain.
View ESMA publishes updated list of measures adopted by competent authorities on short selling, 29 September 2011
Market Transparency - Does it prevent crisis?
The European Securities and Markets Authority (ESMA) has published a speech given by its chairman, Steven Maijoor. The speech is entitled Market Transparency - Does it prevent crisis?
At the start of his speech Maijoor explains the reasons why transparency is an essential ingredient of securities regulation and why it has been considered to be the traditional solution in response to market imperfections.
Maijoor states that from an economic perspective transparency has been traditionally identified as the basic solution to ensuring good functioning of financial markets. However, he also notes that transparency is not always sufficient on its own. Transparency represents the first layer of securities regulation but despite the overall benefits it can bring it is not considered to be in itself a sufficient tool to preserve and guarantee conditions of good market functioning. The increasing complexity of business, organisations, products, transactions, strategies and behaviours have raised concerns that have necessitated the adoption of other regulatory interventions to supplement the flow of information given to the market.
The second layer of regulation, remaining within the scope of securities legislation, typically ranges from requirements on the internal organisation of firms to conduct of business rules. Maijoor states that when regulators and legislators consider such measures a more demanding test should be passed before they are introduced.
Maijoor classifies these measures into two broad categories. The first category concerns measures that foster transparency (both to the public and to regulators), either to fill existing gaps or to tighten previous requirements. The second category, in addition to internal control requirements, consists of new measures aimed at further protecting retail investors, particularly tightening rules in the manufacturing of investment products and in the subsequent distribution phase. Maijoor states that ESMA is keen to promote increased transparency in financial markets both to the public and to regulators and, when adopting new transparency requirements, will ensure appropriate calibration to avoid negative consequences and unnecessary burden on the industry.
Regarding transparency to regulators, one general observation Maijoor makes is the relatively strong growth of information that ESMA needs to collect due to its new responsibilities, including ensuring stability, and the requirements to share information with national regulators and the European Systemic Risk Board.
Regarding transparency to the public Maijoor gives a number of examples including one which concerns investment management. He explains that ESMA recently issued a consultation on policy orientations regarding exchange traded funds and structured UCITS. ESMA plans to publish the draft guidelines for consultation by the end of this year.
When turning to the second category of regulatory measures, ESMA has envisaged a number of innovative tools, both in case of emergencies and in normal conditions when the good functioning of markets or the protection of investors is at stake. Maijoor explains that the distribution of investment products to retail investors represents an area where more rigorous intervention is expected and innovative powers have been granted to ESMA, like the one to adopt a ban of certain activities, including the selling of categories of products.
In the final part of his speech Maijoor covers transparency and accounting. In particular he mentions that ESMA is currently looking at how banks are applying IFRS for the valuation of sovereign debt. It is important for ESMA that financial institutions apply IFRS correctly, and are consistent in their valuations of sovereign debt exposures. This especially holds for upcoming financial statements.
View Market Transparency - Does it prevent crisis?, 29 September 2011
FG11/16-Dear CEO letters providing guidance on issues relating to remuneration
The FSA has published finalised guidance on issues relating to the Remuneration Code set out in chapter 19A of the Senior Management, Systems and Controls sourcebook (FG11/16).
FG11/16 comprises of Dear CEO letters that provide guidance on how the FSA will assess firms’ implementation of the Remuneration Code during 2011 and 2012. FG11/16 also provides guidance on:
- The definition of Code Staff.
- The use of long-term incentive plans.
- The use of non-share instruments in variable remuneration.
FG11/16 provides separate guidance for firms in proportionality Tier 1 and Tiers 2, 3 and 4 under the FSA’s General Guidance on Proportionally. This includes the following information:
- Firms in proportionality Tier 1. A Dear CEO letter for firms in this Tier, which sets out what the FSA expects from firms and clarifies guidance on a number of policy issues. The policy clarifications are contained in Annex 1 to the letter. The letter is accompanied by a template for self-assessment of compliance with the Remuneration Code and a Code Staff List for Tier 1 firms. The FSA expects firms to use the template to ensure that their remuneration policies, practices and procedures are clear and documented.
- Firms in proportionality Tiers 2, 3 and 4. A Dear CEO letter for firms in this Tier, which also sets out what the FSA expects from firms and clarifies guidance on a number of policy issues. The letter also states that a Remuneration Policy Statement template was published for these firms in April 2011 followed by further guidance in August 2011.
View FG11/16-Dear CEO letters providing guidance on issues relating to remuneration, 5 October 2011
Consultation Paper 11/19: Financial resources requirements for Recognised Bodies
The FSA has published Consultation Paper 11/19: Financial resources requirements for Recognised Bodies (CP11/19). In CP11/19 the FSA consults on modifications to the guidance it provides to Recognised Bodies, in relation to the financial resources it expects such bodies to hold to help mitigate its operational and other risks.
The background to CP11/19 is that the FSA has reviewed REC 2.3 to ensure that it remains appropriate to give full effect to the Recognition Requirements and, in the case of a UK Recognised Investment Exchange, that it continues to reflect the obligations of a Regulated Market under the Markets in Financial Instruments Directive. Also, the FSA believes that there is an opportunity to consider enhancing REC to help central counterparties prepare for their future obligations under the proposed European Markets Infrastructure Regulation.
In summary the FSA proposes certain amendments to REC to:
- Make it clearer what regulatory capital is for.
- Strengthen the ‘standard approach’ as an objective proxy for the cost of orderly closure by standardising the meaning of ‘operating expenses’.
- Set the ‘standard approach’ as a floor to the financial resources requirement, by not allowing alternative bespoke arrangements.
- Replace existing supervisory practices in relation to the use of a ‘liquidity buffer’ with specific risk-based processes, designed to ensure that a Recognised Body is adequately protected against business losses likely to arise in stressed but plausible market conditions.
- Introduce guidance on measuring group risk as a component of the financial resources calculation.
The deadline for comments on CP11/19 is 6 January 2012. The FSA expects to finalise the proposals in CP11/19 by making guidance in the first half of 2012.
View Consultation Paper 11/19: Financial resources requirements for Recognised Bodies, 5 October 2011
Credit creation and social optimality - a speech by Lord Turner
The FSA has published a speech that its Chairman, Lord Turner, gave at a European conference on banking and the economy at Southampton University. The speech is entitled Credit creation and social optimality. The FSA has also published a press release concerning the speech.
At the end of his speech Lord Turner provides a summary which states:
“We should be very cautious of expecting too much of macro-prudential policy: if it manages to dampen the excesses of the upswing of the credit cycle, that in itself will be a major achievement, making future downswings less harmful. But we certainly need to base macro-prudential policy and other aspects of policy on realistic assessments of the extent to which private credit creation processes can be relied upon to be socially optimal. The fundamental question which I asked was ‘how confident can we be that the quantity of bank credit supplied and demanded, and the allocation of that credit to different sectors or activities will be socially optimal, if we leave the credit creation and allocation process to free market mechanisms, subject only to the indirect levers of static prudential controls and to interest rate based monetary policy. The answer is not very confident. That implies that macro-prudential policy must be based on judgements about the optimal aggregate quantity of credit creation: and that we need to consider carefully how far we can and should make judgements about the economic value of different categories of credit, which in the recent past we have largely avoided.”
View Credit creation and social optimality - a speech by Lord Turner, 29 September 2011
View Credit creation and social optimality, 29 September 2011
Netherlands: Implementation of Consumer Credit Directive and UCITS IV
The Dutch Minister of Finance (Minister van Financiën) has published amendments to the Regulation on Implementing the Act on the Financial Supervision (Uitvoeringsregeling Wft) and the Exemption Regulation Act on the Financial Supervision (Vrijstellingsregeling Wft, the Exemption Regulation) (the Amendments). The Amendments relate to the implementation of the Consumer Credit Directive and the UCITS IV Directive into the Dutch Act on the Financial Supervision (Wet op het financieel toezicht, AFS). The amendments mainly relate to the removal of the definition of “effective credit reimbursement percentage” in the AFS and the introduction of a definition of “annual cost percentage”. Furthermore, the Exemption Regulation exempts licensed payment services providers that only offer credit from the obligation to obtain an additional licence for offering credit, as the licence requirements for both licences are identical.
The Amendment Regulation (in Dutch) can be found at:
For further information please contact Floortje Nagelkerke
Netherlands: AFM imposes fines for market manipulation
The Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) has imposed administrative fines to MF Global UK Limited (MF Global) and one of its employees for market manipulation.
The AFM imposed administrative fines on MF Global for a total of EUR 384,000. According to the AFM, an employee of MF Global drafted announcements that contained incorrect and misleading information on, amongst others, a possible issue of shares in Fortis Bank Nederland N.V (Fortis). The announcements included specific and detailed information and were presented as facts. After being distributed by several employees to global clients, the announcements were picked up by the media. Pursuant thereto, incorrect information became available to an even larger number of investors. This forced Fortis to publish two press releases announcing that no issue of shares was expected. The credibility of the announcements was strengthened by the commotion they caused on the financial markets in combination with MF Global’s solid reputation. According to the AFM, the actions of MF Global’s employees seriously harmed the confidence in the financial markets and may have consequently led to financial losses. The AFM decided that the actions of the employees could be attributed to MF Global.
The AFM also imposed administrative fines totalling EUR 24,000 to the employee that drafted and initially distributed the incorrect announcements.
The administrative fine to MF Global (in Dutch) can be found at:
The administrative fine to the employee of MF Global (in Dutch) can be found at:
For further information please contact Floortje Nagelkerke
Netherlands: EC requests the Netherlands to implement capital rules
On 29 September 2011, the European Commission issued a press release requesting the Netherlands (and Spain) to inform it within the next two months on the measures taken to implement the rules concerning capital adequacy for banks and investment firms as laid down in the Second Capital Requirements Directive (CRD II).
CRD II reinforces the stability of the financial system, reduces banks' risk exposure and improves the supervision of banks that operate in more than one Member State, to the benefit of citizens, businesses and the European economy as a whole. CRD II must be implemented in all Member States to ensure that the same high standards are applied across the EU and that no banks or investment firms operating in the EU benefit from any unfair competitive advantage. The deadline for implementing these rules was 31 October 2010.
The Netherlands has not yet adopted measures to implement CRD II but is due to do so at the end of 2011.
The Commission's request takes the form of a reasoned opinion. If the Dutch authorities do not notify the Commission on the necessary implementing measures within two months, the Commission may refer the Netherlands to the Court of Justice of the EU (the Court) and may request the Court to impose financial penalties.
The press release can be found at:
For further information please contact Floortje Nagelkerke
France: Banking and Securities regulators reconsider their position in respect of rolling spot forex contracts
Rolling spot forex contracts are financial contracts for differences allowing investors to take forex positions with a view to gaining exposure on an exchange rate between two currencies. Such contracts typically provide for settlement on a daily basis, yet in practice give rise to the rollover of positions. Rolling over a position allows for significant leverage, as investors can choose when to best close out their positions.
Rolling spot forex contracts appeared in France in 2006. The Prudential Supervision Authority’s (the ACP) predecessor banking regulator considered these transactions to qualify as “spot foreign currency transactions incorporating a credit element” on the basis that: (i) only a fraction of the underlying amount must be paid immediately on the conclusion of the contract by investors and; (ii) the balance of the said amount gives rise to an advance of funds by the investors’ counterparty. As a result, companies offering rolling spot forex contracts were required to be authorised as finance companies (sociétés financières). The latter is a sub-category of credit institutions which, unlike fully-fledged banks, are only entitled to conduct activities specifically referred to in their authorisation. Conversely, investment service status was not required as such contracts were viewed as spot contracts, which is a category exclusive of that of derivative financial instruments due to the brevity of the contractually agreed-upon term.
However, the entry into force of MiFID called this analysis into question, resulting in a joint position from the Securities Regulator (the AMF) and the ACP dated 31 May 2011. Among other criteria, the MiFID Implementing Regulation characterises a financial derivative instrument - as opposed to a spot contract - where, irrespective of its explicit terms, there is an understanding between the parties to the contract that delivery of the underlying [assets] is to be postponed and not to be performed within two trading days. Such feature was found to encapsulate rolling spot forex transactions that can be rolled over tacitly to the following day. As a result, rolling spot forex transactions should be regarded as financial instruments.
The AMF and the ACP consequently specified that such services may now only be offered by entities authorised to provide investment services (typically receipt and transmission of orders or execution of order on behalf of clients). In doing so the French regulators felt that they had moved closer to the position taken by the UK’s FSA and that such alignment was necessary for the efficiency of the cross-border passport procedure.
For further information please contact Roberto Cristofolini or Anselme Mialon.
Italy: Court decision likely to embolden local authorities to stop payments on derivatives
Italy’s highest administrative court (Consiglio di Stato) (the Court) recently issued a landmark judgement on the consequences of the overturning of a public authority decision to enter into derivative contracts and on the jurisdiction of Italian courts over disputes on the termination of such contracts as a result of the overturning.
Depfa bank and Dexia Crediop challenged the Province of Pisa decision to review its 2007 resolution with retroactive effect to restructure its debt, in relation to interest rate swap agreements. The resolution resulted in the termination of the derivative agreements.
The Province overturned its 2007 resolution pursuant to a procedure known as “self-review”, that can be undertaken when there are intervening reasons of public interest or for the purposes of a new assessment of the public interest, on the basis of which a decision by such public authority was adopted. Revocation of an act following self-review will mean that the act concerned no longer has legal effect.
In its judgement, the Court, in maintaining that the revocation of the 2007 resolution was lawful, agreed that such resolution breached the principle of economic convenience as it was adopted due to a lack of availability of significant information, in light of the existence of “implied costs” connected with the transaction, which, by their nature, could not have been taken into account by the local authority prior to the execution of the agreement, unless they had been disclosed by the banks.
Further, for the first time, the Court maintained that the overturning of a decision by the public authority to execute a certain contract, automatically terminated the ensuing agreement with retroactive effect, with the consequence that any loss in the underlying derivative would be cleared, without any detrimental effect to the public authority.
The Court also clarified another controversial issue on the correct exercise of jurisdiction, holding that the jurisdiction and choice of law clauses contained in swap agreements under which the contract was subject to English law and to the exclusive jurisdiction of English courts, could not operate to exclude the jurisdiction of the Italian courts to the extent that the dispute concerned the correct exercise of administrative powers, which falls outside the scope of matters that may be subject to a choice of law clause.
It is unclear whether this judgement represents an authoritative precedent which will be followed by other courts on similar cases. However, it is certain that it may have far-reaching consequences, leading to increased litigation if other local or public authorities follow the lead of the Province of Pisa and axe derivative contracts on the purported new assessment of public interest and of economic suitability of the agreement.
For further information, please contact Umberto Mauro and Nicolò Juvara.
Singapore: MAS proposes amendments to the regulatory regime for fund management companies
On 27 September 2011, the Monetary Authority of Singapore (MAS) issued a Consultation Paper on proposed enhancements and draft legislative amendments to give effect to the regulatory regime for fund management companies (the Consultation Paper).
Going forward, MAS proposes to introduce three classes of fund management companies (FMCs):
- Notified FMCs.
- Licensed Accredited/Institutional FMCs.
- Licensed Retail FMCs.
Under the new regulatory regime, conduct of business rules on independent custody, valuation and reporting and capital requirements will apply to all classes of FMCs. All FMCs will be required to build into their fund management operations a risk management framework and Notified FMCs will also be subject to independent annual audits.
MAS proposes to implement the new regulatory regime in early 2012.
For further information, please contact Daniel Yong, Ong Yu-En or Wilson Ang.
Singapore: Launch of Stewardship & Corporate Governance Centre
The new Stewardship and Corporate Governance Centre (the SCG Centre), supported by Temasek Holdings, was launched on 26 September 2011. The aim of the SCG Centre is to globalise best practices for directors in the West and the East.
The SCG Centre currently has three board members from Temasek but additional external directors will be added to reflect the SCG Centre’s role as a centre for all stakeholders in the region.
At the 8th Temasek International Panel 2011 where the SCG Centre was launched, the issue of short-termism was raised by panellists and the following observations were made:
- Sustainable healthy growth for the company should be ensured.
- Directors should have enhanced communication outside board meetings to identify problems and seek solutions.
- There can be mutual learning between the best practices in the East and the West as there is no superior structure.
- The notion that family-controlled or majority shareholder-controlled firms are inferior was challenged as companies with fragmented shareholdings have higher risk of short-termism.
For further information, please contact Daniel Yong, Ong Yu-En or Wilson Ang.
Australia: ASIC releases proposed good practice guidance on advertising financial products and advice services
On 30 August 2011, the Australian Securities and Investments Commission (ASIC) issued Consultation Paper 167: Advertising financial products and advice services (CP 167). CP 167 is intended to “assist promoters and publishers present advertisements that are accurate and balanced and that help investors and financial consumers make decisions that are appropriate for them”.
CP 167 follows on from a number of research projects commissioned by the ASIC into the role of advertising in investor and financial consumer decision-making. Among other things, it was found that advertising played a significant role in relation to investment decisions made by investors and financial consumers, who relied heavily on media sources (including internet, financial magazines, daily newspapers, television and radio programmes) to access information on investment opportunities.
Submissions in relation to CP 167 may be made to the ASIC by 25 October 2011. The ASIC expects to release a final regulatory guide by January 2012.
The Norton Rose Australia briefing note on CP 167 can be found here.
Australia: Investment Manager regime - draft legislation released
FIN 48 created a headache both for the offshore funds industry and the Australian Government as it saw many overseas investment funds shy away from Australian investments and the use of Australian investment intermediaries due to uncertainties in the application of Australia’s tax laws. In December 2010, the Assistant Treasurer announced that amendments to Australia’s tax laws (known as the Investment Manager Regime) would be introduced so as to address this issue. Further announcements regarding this issue and the measures to address it were made in January and May 2011.
On 16 August 2011, the Australian Government released exposure draft legislation to implement the Investment Manager Regime in two parts. The first part applies to income years up until 30 June 2011 (the FIN 48 measure) and the second applies from 1 July 2011 (the conduit income changes).
The Norton Rose Australia briefing note on FIN 48 can be found here.
Abu Dhabi: Implementation of best practice disclosure and transparency requirements for listed companies in the UAE
There has been a significant drive in the UAE in recent years to further advance and promote the adoption of best practice disclosure and transparency requirements for listed companies on the Abu Dhabi Stock Exchange (ADX), the Dubai Financial Market (DFM), Dubai Gold and Commodities Exchange and the Emirates Securities Market (together the Markets). The key stakeholder behind this drive has been the Emirates Securities and Commodities Authority (SCA) (the regulatory authority of the Markets).
The SCA introduced Disclosure Resolutions which set out continuing disclosure requirements and reporting obligations for listed companies and includes:
- That the listed company must immediately notify the SCA and the relevant Market of any “significant developments affecting the prices” of its securities. The relevant Market has the right to publish any statement concerning such information in the local press and any other media it deems appropriate. A listed company may, however, apply to the relevant Market for permission not to be required to announce confidential information (such as potential third party transaction discussions) provided there has not been any trading by its directors or managers on the basis of such information.
- That the listed company must also immediately notify the SCA and the relevant Market of any shareholders whose direct or indirect shareholding (together with their minor children) is equal to or more than 5 per cent of the company’s securities. The listed company must comply with this obligation every time the shareholding increases by each 1 per cent over and above the 5 per cent threshold.
To further enhance disclosure and transparency, the SCA signed an agreement on 25 September 2011 with ADX and DFM requiring listed companies to provide financial information in accordance with IFRS (by using the eXtensible Business Reporting Language (XBRL)). Previously, listed companies on ADX and DFM were required to provide financial information in accordance with the now dated International Accounting Standards. The SCA has stated that the IFRS standards will be rolled out over a period of time to allow listed companies sufficient time for the accounting transition.
XBRL is a standards-based way to communicate and exchange business information between business systems.
For further information or questions on the above, please contact Patrik Daintry.
Canada: New TSX proposals regarding election of directors of listed issuers
On 9 September 2011, the Toronto Stock Exchange (TSX) published proposed amendments to its Company Manual (the TSX Proposals). The TSX Proposals, if enacted, would require listed issuers to allow shareholders to vote for each director individually rather than for a slate of proposed directors, hold annual elections for all directors and disclose in the meeting circular if they have adopted a majority voting policy for directors at uncontested meetings.
The Norton Rose OR LLP briefing note on the TSX Proposals can be found here.
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