What is MIG?
The Markets Infrastructure Group (MIG) provides clients involved in brokerage and market infrastructure with access to a group which focuses specifically on their area of business.
Every month MIG publishes an updater which covers the latest regulatory developments that affect those involved in brokerage and market infrastructure. Welcome to the May 2012 edition of the MIG updater.
- FSB letter to G20 finance ministers and central bank governors regarding progress of financial regulatory reforms
- ESMA speech - Shaping the future of Europe’s financial markets
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Clearing & settlement
Eurosystem signs T2S Framework Agreement with first CSDs
On 8 May 2012, the European Central Bank (ECB) announced that the Eurosystem and nine European central securities depositories (CSDs) had signed the T2S Framework Agreement (the Agreement). The CSDs that signed the Agreement were:
- Bank of Greece Securities Settlement System – BOGS (Greece).
- Clearstream Banking AG (Germany).
- Depozitarul Central S.A. (Romania).
- Iberclear (Spain).
- LuxCSD S.A. (Luxembourg).
- Monte Titoli S.p.A. (Italy).
- National Bank of Belgium Securities Settlement System – NBB-SSS (Belgium).
- VP LUX S.á.r.l. (Luxembourg).
- VP Securities A/S (Denmark).
The ECB stated that further CSDs are expected to sign the Agreement in June 2012. It also confirmed that the T2S project is now more than halfway to delivery and is expected to go live in 2015.
View Eurosystem signs T2S Framework Agreement with first Central Securities Depositories, 8 May 2012
ECB decision on the establishment of the TARGET2-Securities Board
On 1 May 2012, the decision of the European Central Bank (ECB) which established the Target2-Securities (T2S) Board was published in the Official Journal of the European Union.
The decision stated that the T2S Board will be a streamlined management body of the Eurosystem with the task of developing proposals for the ECB’s Governing Council on key strategic issues and executing tasks that are assigned to it. The decision also confirmed that the T2S Board will begin its work in July 2012.
The Annexes to the ECB decision contained:
- The T2S Board’s mandate, including its objectives, responsibilities, tasks, composition, working procedures and budget (Annex 1).
- The rules and procedures of the T2S Board (Annex 2).
- The code of conduct for the members of the T2S Board (Annex 3).
- The procedures and requirements for the selection, appointment and replacement of the T2S Board non-central bank members.
View Decision of the ECB on the establishment of the TARGET2-Securities Board, 1 May 2012
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Finalised guidance 12/14: Transaction reporting of strategy trades
On 16 May 2012, the FSA published finalised guidance concerning transaction reporting of strategy trades. The guidance applies to exchange traded strategy trades whereby two or more legs that are dependent on each other are executed simultaneously. The guidance applies to transaction reports submitted to the FSA. All transactions that include the combined execution of multiple legs should be reported with each reportable leg as an individual transaction to the FSA. The guidance is effective from 15 August 2012.
The FSA also published a summary of the feedback it received to its earlier guidance consultation. As a result of the feedback received the FSA made a number of changes to the guidance including:
- Replacing the term “Stock Contingent Trade” with “strategy trades” in paragraphs 1.1, 1.4 and 1.6.
- Adding the words “exchange traded” to emphasise the scope of the guidance.
- Rephrasing (but retaining the same meaning) of the example provided to improve clarity and offer better distinction between the two exchanges used in the example as they have similar names.
View Finalised guidance 12/14: Transaction reporting of strategy trades, 16 May 2012
Finalised guidance on the practice of ‘Payment for Order Flow’
On 14 May 2012, the FSA published finalised guidance which set out its view on payment for order flow (PFOF) arrangements. The FSA defined PFOF arrangements as an arrangement whereby a broker receives payment from market makers in exchange for sending order flow to them.
The finalised guidance set out:
- The practice of PFOF and its possible advantages and disadvantages.
- The rules contained in the Conduct of Business (COBS) sourcebook and the Senior Management Arrangements, Systems and Controls sourcebook (SYSC) that are relevant to the practice of PFOF.
- Guidance on the consistency of the practice of PFOF with the relevant COBS and SYSC provisions.
- Why this issue is separate from that of the fee schedules of trading platforms.
The FSA confirmed that PFOF arrangements create a clear conflict of interest between the clients of the firm and the firm itself. Therefore, this type of arrangement is unlikely to be compatible with the FSA’s inducements rule and possibly the best execution rules. However, the FSA does not prohibit payments from a market maker to a broker, provided that all three tests of the inducements rule are satisfied, and that both the best execution and the conflicts of interest rule are complied with.
The FSA also distinguished between payments made in the inter-dealer broker market and other circumstances where a broker operating on a regulated market acts on behalf of a client. These other circumstances amount to a PFOF arrangement and must comply with the COBS rules and ensure that any conflicts are managed in accordance with SYSC.
The FSA also published a summary of the feedback received to its October 2011 guidance consultation on PFOF.
View Finalised guidance on the practice of ‘Payment for Order Flow’, 14 May 2012
View Summary of feedback received, 14 May 2012
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FSA fines Habib Bank AG Zurich £525,000 and money laundering reporting officer £17,500 for anti-money laundering control failings
On 15 May 2012, the FSA announced its decision to fine Habib Bank AG Zurich (Habib) £525,000 and its former Money Laundering Reporting Officer Syed Itrat Hussain £17,500 for failing to take reasonable care to establish and maintain adequate anti-money laundering (AML) systems and controls.
During its investigation, the FSA found that Habib maintained a high risk country list which excluded certain high risk countries on the basis that it had group offices in them. However, Habib’s local knowledge of these countries did not negate the higher risk of money laundering that they presented.
The FSA published the Final Notices of Habib and Hussian on its website.
Tracey McDermott, acting FSA Director of Enforcement and Financial Crime, stated that:
"Firms must take a dynamic approach to assessing money laundering risk so they can adapt to the ever-evolving risks of financial crime. It is a basic requirement that firms know their customers and understand the risks they pose. The requirement for enhanced due diligence recognises that some customers present a greater risk of money laundering than others and that firms therefore need to do more to identify, manage and control that risk. Habib fell short in this regard".
View FSA fines Habib Bank AG Zurich £525,000 and money laundering reporting officer £17,500 for anti-money laundering control failings, 15 May 2012
View FSA Final Notice - Habib Bank AG Zurich, 15 May 2012
View FSA Final Notice - Syed Itrat Hussain, 15 May 2012
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Regulation and compliance
Final communiqué - Meeting of G20 finance ministers and central bank governors
On 19 April 2012, the G20 finance ministers and central bank governors issued a final communiqué following their meeting in Washington DC.
The communiqué looked ahead to the G20 leaders’ summit which will be held in Los Cabos, Mexico on 18 and 19 June 2012 and the work scheduled to be finalised for that summit.
In the communiqué G20 finance ministers and central bank governors:
- Reaffirmed their commitment to common global standards by pursuing the financial regulatory reform agenda.
- Welcomed the Financial Stability Board (FSB) progress report on strengthening the oversight and regulation of the shadow banking system.
- Supported the work coordinated by the FSB to provide safeguards supportive of a global framework for central counterparties (CCPs) as an important element in achieving the agreed over-the-counter (OTC) derivatives reforms, so that authorities can make informed decisions on the standards and requirements of CCPs to meet by end 2012 their commitment that all standardised OTC derivatives be centrally cleared in CCPs with the appropriate safeguards.
- Supported the work of the FSB on the global governance framework for the legal identifier and looks forward to its recommendations in June on establishing a global LEI system.
- Supported work on developing for consultation, internationally consistent standards on margining for non-centrally cleared OTC derivatives by June 2012.
View Final communiqué - Meeting of G20 finance ministers and central bank governors, 19 April 2012
FSB letter to G20 finance ministers and central bank governors regarding progress of financial regulatory reforms
On 16 April 2012, the Financial Stability Board (FSB) published a letter to G20 finance ministers and central bank governors concerning the progress of the financial regulatory reforms agreed by G20 leaders at Cannes. The letter covered a number of areas including:
- Strengthening the oversight and regulation of shadow banking activities. The FSB has put on track a number of initiatives including developing, with other standard setting bodies, regulatory recommendations: (i) to mitigate the spill-over effect between the regular banking system and the shadow banking system; (ii) to reduce the susceptibility of money market funds to “runs”; (iii) to assess and mitigate systemic risks posed by other shadow banking entities than money market funds; (iv) to assess and align the incentives associated with securitisation to prevent a repeat of the creation of excessive leverage; and (v) to dampen risks and pro-cyclical incentives associated with securities lending and repos that may exacerbate funding strains at times of shocks to confidence. A full set of recommendations will be issued by the end of 2012.
- Creating continuous markets - OTC derivatives reforms. The FSB noted that work is well advanced to establish a safe environment for clearing over-the-counter (OTC) derivatives through a global framework of central counterparties. The FSB is also on course to meet the mandate from the G20 leaders’ summit in Cannes to provide recommendations on the governance framework for a global legal entity identifier to the G20 summit in Los Cabos, as well as providing proposals for the implementation of the system.
- Timely and consistent implementation of reforms. The FSB will report to the G20 summit in Los Cabos on progress across the range of reforms. The reporting will include separate progress reports on the three priority areas where the reforms are most advanced (Basel III, OTC derivatives and compensation practices), together with an overview progress report.
View FSB letter to G20 finance ministers and central bank governors regarding progress of financial regulatory reforms, 16 April 2012
ESMA speech - Shaping the future of Europe’s financial markets
On 11 May 2012, the European Securities and Markets Authority (ESMA) published a speech given by its Executive Director, Verena Ross, entitled Shaping the future of Europe’s financial markets.
Ross’ speech is set out under the following headings:
- ESMA’s role in the new EU framework. Ross states that ESMA has two key aspects to its mission as an organisation: the building of a "single rulebook" for the regulation of the EU’s financial markets and ensuring its consistent application at national level.
- Development of a single rulebook. Ross explained that in terms of the development of a single rulebook for Europe, ESMA took on its new role as EU securities markets standard setter with clear responsibilities for the development of technical standards and advice for new, or soon to be revised, pieces of legislation. In particular over the last year ESMA produced the first technical standards (for credit rating agencies and short selling) but also conducted significant preparatory work for devising the standards for the European Market Infrastructure Regulation (EMIR).
- Supervisory convergence. Ross acknowledged that while the single rulebook will be the basis of achieving supervisory convergence, having a single legal text does not actually achieve convergence in implementation and actual regulation on the ground. She stated that supervisory convergence is still very much “work in progress” but describes a number of work streams through which ESMA has worked on achieving a common approach to regulation. This included issuing opinions on the treatment of sovereign debt under IFRS and conducting peer reviews of national authorities’ activities.
- Direct supervision. Ross noted that beyond supervisory convergence, ESMA has been given responsibility to directly supervise a number of cross-border market players. She states that bringing credit rating agencies under the umbrella of EU supervision is a milestone achievement. From 2013 ESMA will also take on direct supervisory responsibility for trade repositories under EMIR.
- Key priorities for 2012. Ross explained that ESMA will work on establishing harmonised binding implementing measures in different areas such as EMIR, the Alternative Investment Fund Managers Directive and the revised Prospectus Directive. She stated that EMIR will dominate ESMA’s agenda for the next 6 months, with a consultation paper in June and final standards due to be delivered by the end of September.
- ESMA’s stakeholders - national regulators, market players and investors. Ross reminded her audience that while it may be the national tendency to see rules and regulations emanating from Brussels as an attempt to stifle the UK’s financial services sector, they should view its consultative process as an opportunity to contribute to the development of the European regulatory system.
- ESMA’s role in international cooperation. Ross stated that global leaders have established common objectives at the G20 level and regulators have set up a number of international groups aimed at providing international consistency the different regimes. Ross further stated that at the end of the process there must be reliance on equivalence and co-operation among authorities.
View Shaping the future of Europe’s financial markets, 11 May 2012
ESMA publishes its 2012 Regulatory Work Programme
On 7 May 2012, the European Securities and Markets Authority (ESMA) published its 2012 Regulatory Work Programme.
The aim of the work programme is to provide information on the planned technical standards, technical advice and guidelines and recommendations that will be issued by ESMA in 2012.
The accompanying press release stated that the work programme was based on the ESMA 2012 Work Programme which was published on 4 January 2012. However, this version provides a more detailed outline of ESMA's individual work streams. Key work streams relate to the Regulation on short selling and certain aspects of credit default swaps, the European Market Infrastructure Regulation and the Alternative Investment Fund Managers Directive.
View ESMA publishes its 2012 Regulatory Work Programme, 7 May 2012
Call for evidence on transaction reporting
During the course of 2012 the European Securities and Markets Authority (ESMA) intends to proceed with an initiative of preparing guidelines on harmonised transaction reporting under the Markets in Financial Instruments Directive (MiFID), which will also include, among others, an update of the guidance issued by ESMA’s predecessor, CESR, entitled How to report transactions on OTC derivative instruments.
On 7 May 2012, ESMA issued a call for evidence in relation to transaction reporting. ESMA has published this call for evidence in order to provide an opportunity to interested parties to comment on this initiative. The deadline for responding to the call for evidence is 4 June 2012.
View Call for evidence on transaction reporting, 7 May 2012
MPs announce terms of reference for corporate governance and remuneration inquiry
On 28 April 2012, the House of Commons' Treasury Select Committee published the terms of reference for a new inquiry into corporate governance in systemically important financial institutions.
Andrew Tyrie MP (Committee Chairman) commented:
“The Committee will seek to address, among other things, why it was that so many experienced and technically competent non-executives - the cream of British corporate life - appeared to be asleep in some of the boardrooms of our major financial firms.
"In systemically risky institutions, it is particularly important to find a way to encourage more constructively engagement with shareholders on crucial governance issues, including risk and remuneration.
“We will look at whether, and if so how, they can and should do more. Rightly, shareholders have shared the blame and the losses.
“When it came to the destruction of major banks, the taxpayer also lost out, making corporate governance a crucial issue of public and Parliamentary concern."
View MPs announce terms of reference for corporate governance and remuneration inquiry, 28 April 2012
ISDA position paper on MiFID/MiFIR: The OTF and SI regime for OTC derivatives
On 2 May 2012, the International Swaps and Derivatives Association (ISDA) published a position paper concerning its views on the European Commission’s MiFID review proposals regarding the Organised Trading Facility (OTF) and the Systematic Internaliser (SI) regime. In the paper the ISDA made the following points:
- The Commission’s approach that the trading obligation should only capture clearing eligible and sufficiently liquid contracts was endorsed.
- The establishment of the OTF category (and the discretion afforded to the operator of an OTF) was welcomed, but the ISDA has reservations about the fact that the derivatives trading obligation promotes multilateral trading systems above bilateral ones, even when the latter offers equivalent levels of transparency.
- Clarity is needed as to the relative roles of regulated trading venues, systematic internalisation and pure bilateral over-the-counter trading.
- The treatment of block trades in derivatives is crucial and that it is appropriate, and in many cases necessary, for such transactions to occur on a bilateral basis, which currently does not appear to be possible under the proposals.
- The SI regime for ‘non-equities’ should operate at the level of liquid instrument to ensure consistency with the approach to pre- and post-trade transparency and the approach to the equities regime.
- More broadly, the Commission’s approach to ‘non-equities’ markets poses a challenge given the differences between asset classes within the non-equities category, such as derivatives and fixed income, with significant differences between them in terms of quoting practice, pricing conventions and levels of automation of trading.
View ISDA position paper on MiFID/MiFIR: The OTF and SI regime for OTC derivatives, 2 May 2012
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Invitation to buy-side regulatory workshop
The coming months will see the buy-side readying itself for a number of key regulatory developments, both in the UK and in Europe.
To help asset managers, custodians, administrators and other buy-side players prepare for the new regulatory requirements to be introduced by the Alternative Investment Fund Managers Directive (AIFMD), the review of the Markets in Financial Instruments Directive (the MiFID Review), the Regulation on OTC Derivatives, Central Counterparties and Trade Repositories (EMIR) and other initiatives, Norton Rose LLP’s financial services group is running its 2012 workshop on managing regulatory change.
This workshop will take place on Thursday 12 July 2012 at 2.30pm. It is designed to look at the practical issues for the industry, identifying the key regulatory changes and how you can plan for and implement them.
If you can not access this link, please copy and paste the address below into your web browser.
40 minute briefing series - May to September 2012
We are pleased to announce that the invitation for the next series of 40 minute briefings is now available.
If you can not access this link, please copy and paste the address below into your web browser.
Financial services regulatory products: Phoenix, Pegasus and OTC Oracle
Having difficulty keeping up with the pace of the Government's regulatory reform proposals?
Phoenix is our new financial services product that is an online resource designed to help those who are starting their UK regulatory reform projects. It sets out the latest developments and timing of the Government's reform programme plus the key resource papers from the Treasury, Bank of England, FSA and the ICB. The latest Norton Rose LLP briefing notes, videos and webcasts are also available.
The Phoenix main page can be found here.
Behind the curve on the MiFID review?
We have launched a second online resource product called "Pegasus". Pegasus is a new financial services product that is an online resource designed to assist those starting work on MiFID review projects.
The Pegasus main page can be found here.
G20 commitment on clearing
Our third online resource product is OTC Oracle. OTC Oracle is designed to assist clients track the implementation of the G20 commitment to have all standardised OTC derivatives traded on exchanges or electronic trading platforms, where appropriate, and cleared through CCPs by the end of 2012. OTC Oracle sets out the latest developments and timing plus the key resource papers from each of the EU, Canada, Hong Kong and Singapore.
The OTC Oracle main page can be found here.
Financial services Fireside Fridays
Please click on the links below:
- FSA Business Plan - 2012/13 (27 April 2012)
- EMIR Part II (5 April 2012)
- Twin Peaks - The FSA operational changes (16 March 2012)
- AIFMD Update (2 March 2012)
- EMIR (17 February 2012)
- AIFMD Update (3 February 2012)
- The regulatory year ahead (20 January 2012)
- The regulatory year in review (16 December 2011)
- MiFID review and third country issues (25 November 2011)
- The MiFID Review (21 October 2011)
- The regulatory regime for energy and commodity companies (7 October 2011)
- The final report of the Independent Commission on Banking (23 September 2011)
Financial services & markets webinars
We are currently experiencing significant changes in the European financial services regime that could have a particular impact on both financial firms and non-financial firms that trade energy, commodities and emissions. To assist our clients we have produced a series of short webinars which will look at the forthcoming regulatory changes and their impact on the financial regulation of trading.
Financial services webcasts
Please click on the links below:
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