Welcome to the latest edition of our financial services updater.
Highlights this week include:
- EP-Council deal on rules for a safe and transparent derivatives market
- RDR: Is your firm on track?
ARROW visit coming up? It is important that firms properly prepare themselves for an ARROW visit. There are many ways in which we can assist in this preparation to ensure that the process runs smoothly. For further information please contact either Jonathan Herbst or Peter Snowdon.
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EBA publishes a consultation paper on draft ITS on reporting of large exposures
The CRD IV proposals set out prudential requirements for institutions which are expected to be applicable as of 1 January 2013. The proposed Capital Requirements Regulation (CRR) contains in a number of Articles specific mandates for the European Banking Authority (EBA) to develop draft implementing technical standards related to supervisory reporting requirements.
The EBA has published a consultation paper concerning a draft implementing technical standard on reporting of large exposures (the Consultation Paper).
The draft implementing technical standard is requested under Article 383 of the proposed CRR and represents an addendum to the proposed implementing technical standard on supervisory reporting requirements which the EBA published on 20 December 2011.
The purpose of the draft implementing technical standard is to implement uniform reporting requirements which are necessary to ensure fair conditions of competition between comparable groups of credit institutions and investment firms.
The deadline for comments on the Consultation Paper is 26 March 2012.
View EBA publishes a consultation paper on draft ITS on reporting of large exposures, 13 February 2012
EBA Board makes its first aggregate assessment of banks’ capital plans
The European Banking Authority (EBA) has published its preliminary assessment of banks' capital plans that were submitted in response to the EBA's recommendation on recapitalisation.
The EBA’s recommendation was adopted on 8 December 2011, and called on Member State supervisory authorities to require banks included in its sample to strengthen their capital positions by building up an exceptional and temporary capital buffer against sovereign debt. In addition, banks are required to establish an exceptional and temporary capital buffer to ensure that the Core Tier 1 capital ratio reaches 9% by 30 June 2012.
The preliminary assessment shows that, in aggregate, the shortfalls that were identified are expected to be met through direct capital measures, which are not viewed as having a negative impact on lending into the real economy.
The EBA states that an in-depth analysis of the viability of the plans will be undertaken by Member State supervisory authorities. Banks should receive clear guidance from national supervisory authorities in early March. The EBA will undertake its next EU-wide stress test in 2013.
View The EBA’s Board of Supervisors makes its first aggregate assessment of banks’ capital plans, 9 February 2012
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Collective investment schemes
Potential of venture capital in the EU
The European Parliament's Committee on Industry, Research and Energy has published a study entitled Potential of venture capital in the European Union.
The study provides an overview of the venture capital industry in the EU and the barriers which prevent further development. In addition, the study makes suggestions for policy initiatives that may help to diminish these barriers.
The study states that venture capital investments in the EU have positively affected companies' growth, productivity, and innovation over recent years. However, it should be noted that the extent of these effects are contingent on the type of venture capital fund involved. It also acknowledges that although venture capital activity was affected by the global financial crisis, venture capital investors have helped their companies combat the negative consequences.
The main barriers within the industry are identified as being: a shortage of venture capital supply; a shortage of venture capital demand; and thin markets. In relation to supply, the study confirms that there are very few large institutional investors active within the EU, and those that are active, avoid the venture capital industry as a result of low returns. In relation to demand, some of the possible reasons for low returns are: low levels of R&D expenditure; harsh penalisation of bankruptcy; cultural attitudes towards entrepreneurship and risk taking; and low mobility. In addition, the study states that because the regulatory framework varies from Member State to Member State, the venture capital market is highly fragmented.
View Potential of venture capital in the EU, 9 February 2012
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Clearing & settlement
EP-Council deal on rules for a safe and transparent derivatives market
On 9 February 2012, the European Parliament published a press release announcing that it has reached an agreement with the Council of the European Union and the European Commission on the proposed European Market Infrastructure Regulation (EMIR).
The new Regulation puts into effect G20 commitments to have all standardised over-the-counter (OTC) derivatives contracts cleared through a central counterparty (CCP) in the EU by the end of 2012 and is part of the worldwide effort to reduce counterparty and operational risk in the OTC derivatives market, which was identified as a contributing factor to the global financial crisis.
Werner Langen MEP, EMIR's rapporteur, stated that the agreement is a "big step towards a more transparent and safe market for OTC derivatives".
The press release sets out the key elements of the agreement, including:
- Obligatory clearing for OTC derivatives. OTC derivative contracts will need to be cleared through CCPs.
- Obligatory reporting for all derivatives. All derivative contracts will need to be reported to central data centres (known as trade repositories).
- A strong role for ESMA. This provides for binding mediation by ESMA in disputes between national authorities regarding authorisation of CCPs.
- Recognition of third country CCPs. CCPs from third countries will gain recognition if the legal regime in the particular third country provides an effective equivalent system for recognition.
The agreement now requires final approval from the European Parliament and the Council of the European Union. The legislation will then enter into force 20 days after publication in the Official Journal.
View EP-Council deal on rules for a safe and transparent derivatives market, 9 February 2012
MiFID/MiFIR and transparency for OTC derivatives
The International Swaps and Derivatives Association (ISDA) has published a paper which describes the nature of trading structure and liquidity formation in over-the-counter (OTC) derivatives markets and the implications for framing pre-trade transparency obligations under the MiFID review proposals.
In summary the ISDA makes the following points:
- Exchange trading relies on the existence of large number of buyers and sellers.
- OTC derivatives are traded infrequently. Trading is overwhelmingly bilateral.
- Pre-trade transparency differs according to the nature of a given trading model.
- Pricing is very competitive for liquid OTC derivatives products.
- Pre-trade transparency should be calibrated by trading model.
- Request for Quote trading systems should be adequately accommodated.
- The systematic internaliser (SI) regime is inconsistent in respect of different asset classes.
- The SI regime could undermine liquidity provision and the quote sharing obligation should be removed.
- Effective price formation can be supported through better targeted measures, specifically a requirement that firms establish quoting policies.
The ISDA recommends:
- Redrafting or replacing Article 7 of the proposed Markets in Financial Instruments Regulation (MiFIR) to accommodate trading systems other than order book systems without relying on the waiver process.
- Removing the quote-sharing obligation from Article 17 of MiFIR and put in place measures that support competitive pricing.
View MiFID/MiFIR and transparency for OTC derivatives, 15 February 2012
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EIOPA’s action plan for colleges 2012
The European Insurance and Occupational Pensions Authority (EIOPA) has published its 2012 action plan for supervisory colleges (the Action Plan).
The Action Plan contains:
- Action points for colleges which have not been constituted until now or which have not fulfilled EIOPA's 2011 action plan for colleges.
- Action points for all colleges.
- A task for the group supervisor.
EIOPA has also published a report on the functioning of colleges and the accomplishments of its previous action plan. This report also explains the priorities and tasks for colleges in 2012. EIOPA states that the main targets for 2012 are to:
- Drive the internal model pre-application process and preparation for the implementation of Solvency II.
- Enhance effective and regular information exchange in colleges.
View EIOPA’s action plan for colleges 2012, 13 February 2012
View Report on the functioning of colleges and the accomplishments of the 2011 action plan, 13 February 2012
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Regulation & compliance
Consultation on ESMA’s draft technical advice on possible delegated acts concerning the Regulation on short selling and certain aspects of CDS
In November 2011 the Council of the European Union and the European Parliament voted on a Regulation on short selling and certain aspects of credit default swaps (the Regulation). The Regulation will soon be published in the Offical Journal and should be applicable from 1 November 2012.
The Regulation requires the European Securities and Markets Authority (ESMA) to submit technical standards to the European Commission by 31 March 2012. In addition, ESMA received a letter from the Commission on 24 November 2011 requesting technical advice on all delegated acts contained in the Regulation by the same deadline.
ESMA has now published a consultation paper concerning the technical advice that it proposes to give on possible delegated acts contained in the Regulation (the Consultation Paper). The Consultation Paper is set out as follows:
- Section I specifies the definition of when a natural or legal person is considered to own a financial instrument for the purposes of the definition of short sale.
- Section II relates to the net position in shares or sovereign debt covering the concept of holding a position, the case when a person has a net short position and the method of calculation of such a position including when different entities in a group have long or short positions or for fund management activities related to separate funds.
- Section III sets out the advice on the cases in which a credit default swap (CDS) transaction is considered to be hedging against a default risk or the risk of a decline of the value of the sovereign debt and the method of calculation of an uncovered position in a CDS.
- Section IV defines the initial and incremental levels of the notification thresholds to apply for the reporting of net short positions in sovereign debt.
- Section V specifies the parameters and methods for calculating the threshold of liquidity on sovereign debt for suspending restrictions on short sales of sovereign debt.
- Section VI sets out ESMA’s proposal of advice on what constitutes a significant fall in value for various financial instruments and also specifies, in the form of a draft regulatory technical standard, the method of calculation of such falls.
- Section VII specifies the criteria and factors to be taken into account by competent authorities and ESMA in determining when adverse events or developments arise.
The deadline for comments on the Consultation Paper is 9 March 2012. ESMA will be holding an opening hearing on 29 February 2012.
View Consultation on ESMA’s draft technical advice on possible delegated acts concerning the Regulation on short selling and certain aspects of credit default swaps, 15 February 2012
Call for evidence for fundamental review - Financial Conglomerates
The European Commission has published issue 8 of its financial conglomerates newsletter. In this newsletter, the Commission has published a call for evidence in relation to its fundamental review of the Financial Conglomerates Directive.
The Commission invites any stakeholder interested in the supervision of large complex financial groups in Europe to respond to this call for evidence before 19 April 2012.
View Call for evidence for fundamental review - Financial Conglomerates, 9 February 2012
Council of the EU publishes delegated Regulation regarding fees charged by ESMA to CRAs
Under Article 19 of the Regulation on credit rating agencies, the European Commission is required to adopt a Regulation by delegated act regarding the fees to be charged by the European Securities and Markets Authority to credit rating agencies.
On 8 February 2012, the Council of the European Union published the text of the delegated Regulation, which was agreed on 7 February 2012. The delegated Regulation will enter into force on the third day following its publication in the Official Journal.
View Council of the EU publishes delegated Regulation regarding fees charged by ESMA to credit rating agencies, 8 February 2012
Credit default swap spreads and systemic financial risk
The FSA has published a consumer research paper entitled Credit default swap spreads and systemic financial risk (the Research Paper). In this Research Paper Stefano Giglio of Harvard University discusses a method to measure the joint default risk of large financial institutions (systemic default risk) using information in bond and credit default swap prices.
View Credit default swap spreads and systemic financial risk, 13 February 2012
High frequency trading and its impact on market quality
The FSA has published a consumer research paper entitled High frequency trading and its impact on market quality (the Research Paper). In this Research Paper Jonathan Brogaard of the University of Washington examines the impact of high frequency trading on the US equities market.
View High frequency trading and its impact on market quality, 13 February 2012
Systemic sovereign credit risk: Lessons from the US and Europe
The FSA has published a consumer research paper entitled Systemic sovereign credit risk: Lessons from the US and Europe (the Research Paper). In this Research Paper Andrew Ang and Francis Longstaff of the University of California study the nature of systemic sovereign credit risk using credit default swap spreads for the US Treasury, individual US States and major Eurozone countries.
View Systemic sovereign credit risk: Lessons from the US and Europe, 13 February 2012
Update on changes to FSA's approved persons regime
The FSA has provided an update on its website regarding the approved persons regime.
The FSA states that it is committed to extending the approved persons regime to those selling mortgages. However, at present it is focusing on delivering the UK's two new regulatory bodies: the Prudential Regulation Authority and the Financial Conduct Authority (FCA). Therefore, it will not be able to deliver the changes to the approved persons regime until the new FCA is established.
The FSA confirms that it will be implementing the changes as soon as practically possible and that it will ensure that firms have enough time to make the necessary arrangements.
View Update on changes to our approved persons regime, 13 February 2012
Regulating certain bidders in auctions of EU emissions allowances
HM Treasury has published a consultation paper entitled Regulating certain bidders in auctions of EU emissions allowances (the Consultation Paper).
The Consultation Paper sets out proposed implementing Orders and amendments to existing financial services legislation to implement elements of the EU regulatory framework applicable to certain bidders in Government auctions of aviation and phase III EU emissions allowances under the EU Emissions Trading System (EU ETS).
Implementing the changes will result in the creation of a new regulated activity under the Financial Services and Markets Act 2000 (FSMA). In most cases this will lead to the FSA having to authorise relevant persons who wish to bid in auctions of emissions allowances irrespective of the permissions or exemptions that they current hold. This will involve amending secondary legislation made under FSMA and some minor additions to the Act itself.
The deadline for responding to the Consultation Paper is 10 April 2012.
View Regulating certain bidders in auctions of EU emissions allowances, 14 February 2012
FRC publishes paper on its comply or explain approach to Corporate Governance
The Financial Reporting Council (FRC) has published a paper entitled What constitutes an explanation under comply-or-explain?
The paper is based on discussions between senior company and investor representatives facilitated for the FRC by the London Business School. The purpose of the discussions was to encourage a greater understanding that would reduce the incidence of insubstantial explanations and bolster the operation of the comply-or-explain approach.
The paper states that a large majority of companies who do not comply with one or more provisions of the UK Governance Code (the Code) do provide a full explanation of their reasons. However, a minority do not and the purpose of the paper is to help address this by setting out what practitioners expect.
The paper notes that the starting point should be an improvement in the general quality of disclosure around corporate governance and a clear explanation by each company of how its governance arrangements support its business model.
Key elements of an explanation should include:
- The background.
- A clear rationale for the deviation which is specific to the company.
- An indication as to whether the deviation from the Code’s provisions is limited in time.
- A statement of what alternative measures the company is taking to deliver on the principles set out in the Code and mitigate any additional risk.
View FRC publishes paper on its comply or explain approach to Corporate Governance, 15 February 2012
Topps Rogers Financial Management (Topps Rogers) has had its Part IV permission cancelled and has been fined £97,600 for failures to comply with Principles 3 (Management and control) and 9 (Customers: relationships of trust) of the FSA’s Principles for Businesses in connection with its investment business in the period from May 2004 to June 2010. Topps Rogers failed to take reasonable care to ensure that its recommendations relating to UCIS were suitable for its customers. Topps Rogers also failed to establish and implement adequate compliance arrangements over its business. The FSA considers the impact of these failures to be serious. Topps Rogers promoted to and advised 94 customers to invest over £12 million in UCIS, either directly with UCIS providers or indirectly through a self invested personal pension or a wrap platform. It did so without proper regard to the section 238 restriction. Consequently, customers might have received unsuitable advice or made unsuitable investments in UCIS
View Final Notice - Topps Rogers Financial Management, 13 February 2012
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RDR: Is your firm on track?
The FSA has published a guide for firms entitled RDR: Is your firm on track? The guide is intended to help firms implement the requirements of the Retail Distribution Review (RDR), check their progress, identify any gaps, and prioritise and plan their next steps.
The guide covers the following areas:
- Professionalism. The FSA provides information on appropriate qualifications, gap fill and the statement of professional standing. In particular, the FSA reminds firms that retail investment advisers must meet the new standards of professionalism by the end of 2012.
- Independent and/or restricted advice. This includes guidance for firms on how to choose and implement a service model. The FSA states that just because a firm is independent now does not mean that it will meet the new RDR definition of independent.
- Fees and business models. The FSA sets out the new fee-based adviser charging model and reminds firms that they must have an adviser charging model in place from 31 December 2012.
In addition, the guidance provides sample action plans to help firms implement the RDR requirements.
View RDR: Is your firm on track?, 10 February 2012
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CLLS Regulatory Law Committee comments on CP11/27 - PDMR transactions: Guidance on the role of brokers
The Regulatory Committee of the City of London Law Society (CLLS) has published its response to the FSA's consultation on PDMR transactions and the role of brokers, which was set out in Consultation Paper 11/27: Quarterly Consultation (No.31) (CP11/27).
In CP11/27, the FSA proposed changes to the Code of Market Conduct (CoMC), to clarify that passing inside information about the fact that a person discharging managerial responsibilities (PDMR) was selling stock to potential buyers is prima facie market abuse in the form of improper disclosure. The FSA also set out one instance where such a disclosure would be acceptable (the proposed exemption).
The CLLS agreed with the FSA's general approach to the proposed exemption. However, it is concerned that the FSA is not proposing any form of corresponding exemption for prospective purchasers of such stock.
View CLLS Regulatory Law Committee comments on CP11/27 - PDMR transactions: Guidance on the role of brokers, 2 February 2012
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FSA managing director, Margaret Cole, to leave this year
The FSA has issued a press release stating that its managing director, Margaret Cole, will leave the organisation later this year. Cole will remain in her role until the end of March, prior to the creation of twin peaks within the FSA on 2 April. She will then be on gardening leave until 31 August 2012 but may represent the FSA during that time on issues not related to individual regulated firms or ongoing investigations.
View FSA managing director, Margaret Cole, to leave this year, 15 February 2012
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40 minute briefing series - January 2012 to April 2012
We are pleased to announce that the invitation for the next series of 40-minute briefings is now available.
If you cannot access this link, please copy and paste the address below into your web browser.
Financial services regulatory products: Phoenix and Pegasus
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.
Financial services Fireside Fridays
Please click on the links below:
- 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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