Regulatory update
This regulatory update covers major new regulatory requirements and significant developments that affect the investment management industry.
§ COMMISSION UNVEILS FINAL MIFID II PROPOSALS
On 20 October 2011, the European Commission published its long-awaited formal legislative proposals to amend the Markets in Financial Instruments Directive (MiFID II). MiFID II consists of two parallel pieces of legislation: a Directive repealing Directive 2004/39/EC, and a Regulation focusing primarily on all requirements relating to market and supervisory disclosure. The Commission, at the same time, issued its proposals for amending the EU’s market abuse regime. The original MiFID framework was geared towards improving market efficiency by breaking the dominance of national stock exchanges and enabling the development of new trading platforms. However, these changes coupled with technology advances, resulted in the fragmentation of market structures and data, and the financial crisis also surfaced other weaknesses in the regime. Therefore, MiFID II goes much further than the originally planned three-year refresh and, if enacted, will result in a ‘complete overhaul’ in the way in which financial markets operate, according to EU Internal Market and Services Commissioner Michel Barnier. It will bring light to many dark pools of liquidity and dark orders, regulation to high frequency trading, and an end to the ‘reign’ of over-the-counter (OTC) transactions. In addition to upgrading the current regime for equities markets, MiFID II proposes to extend this revised regime to a far wider range of product classes, including fixed-income products and derivatives, also covering commodities derivatives. It will pare down the existing exemptions from the regime so more financial market players will find themselves subject to the full regime. It will have significant strategic repercussions for firms undertaking investment business in all securities markets.
http://www.pwc.com/gx/en/financial-services/issues/regulation/european-fs-regulation-update/updates/october-25-2011.jhtml
§ IASB PROPOSES AMENDMENT TO THE ACCOUNTING FOR GOVERNMENT LOANS IN IFRS 1
On 20 October 2011, the International Accounting Standards Board (IASB) published for public comment a proposed amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. The proposed amendment sets out how a first-time adopter would account for a government loan with a below-market rate of interest when they transition to IFRSs. If adopted, this amendment would provide the same relief to first-time adopters as is granted to existing preparers of IFRS financial statements when applying IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. The exposure draft, Government Loans (Proposed amendments to IFRS 1), can be accessed via the ‘Comment on a Proposal’ section.
http://www.ifrs.org/News/Press+Releases/IFRS1+amendment+Oct+2011.htm
§ EU SHAKE-UP SEEN FOR RATING AGENCIES
Sweeping changes to regulation of credit ratings are to be proposed by the European Commission that would deal a blow to the business models of the big three agencies that issue them. Under one of the most contentious proposals, European regulators would be given powers to suspend credit ratings of countries undergoing bailouts. But that measure, seen as impractical by industry executives, is just one of many reforms sought by the European Commission. Among the changes, Brussels is also seeking to force issuers of financial products in Europe to regularly change the ratings agency they are using, in a bid to open up competition and avoid conflicts of interest. On top of restructuring the business practices of the industry, the reforms propose giving wide-ranging powers to the European Securities and Markets Authority (ESMA), the European markets regulator, to approve ratings methods and ban sovereign ratings in “exceptional situations”. ESMA would be able to suspend ratings of countries in bailout programmes so that adverse ratings are not issued at “inappropriate moments”. There is some confusion over how such a ban could be enforced, as ESMA would be unable to stop agencies outside the EU from issuing sovereign ratings on countries in bailout programmes. Credit ratings agencies are also likely to argue that a suspension would amount to a restriction of free speech as they consider their ratings to be opinions. The plan is the most intrusive and significant shake-up of the industry proposed by any international authority and will come as a shock to credit ratings agencies, which have become a favourite target of regulators since the 2008 financial crisis. The changes, if adopted by the European Parliament and EU member states, would also have a big impact on the customers of credit ratings agencies. Companies and banks issuing financial instruments will be required to obtain two ratings and will see the fees they pay published.
http://www.ft.com/intl/cms/s/0
§ EFAMA INVESTMENT MANAGEMENT FORUM
The European Fund and Asset Management Association (EFAMA) hosted an investment management forum titled ‘Challenges of the new regulatory and supervisory environment for the European investment management industry’ on 29-30 November in Brussels. The forum brought up topics like issues and priorities for the European investment management industry; the European Commission’s regulatory agenda; several panel discussions on hot issues with both EFAMA members and industry senior executives; and presentations by invited speakers.
http://www.efama.org/index.php?option=com_docman&task=doc_download&gid=1563&Itemid=-99
§ ASSESSING THE CUMULATIVE IMPACT OF EUROPEAN REGULATIONS
The Economic and Monetary Affairs Committee (ECON) of the European Parliament has published a study assessing the likely impact on how the most important regulatory changes in Europe will contribute to various objectives (such as transparency and increasing consumer confidence), together with a joint impact assessment on all the regulation coming down the pipeline. Both assessments are informed from relevant research and some new empirical work. Regulatory items covered included revisions to the Capital Requirement Directive (CRD IV), regulation of over-the-counter (OTC) derivatives, short selling and credit default swaps (CDS), MiFID and the Financial Transaction Tax (FTT). In terms of the joint impact assessment, while it is non-scientific, it does provide an interesting take on how even policymakers are unsure on how different regulations will interact with each other following their implementation. Overall, the study notes that the regulations above are likely to reduce procyclicality, internalise the social costs associated with bank failures and create a level playing field across the single market. However, the report concludes that, apart from the Reform of Deposit Guarantee Schemes (DGS) and Reform of Investor Compensation Schemes (ICS), none of the regulations will increase consumer confidence in financial markets in a meaningful way. Regulatory regimes are now in flux. How the most important rule changes will impact financial institutions, markets, customers and the real economy is a pressing issue for many stakeholders. Understanding the cumulative impact of regulations, and how they interact with each other, is even more relevant as financial institutions face a plethora of regulatory changes in the coming years. Financial planning and business model restructuring need to take account of all the regulatory (and accounting and legal) changes that face their operations. Having the correct structures in place to navigate regulatory change will not only result in cost efficiencies but it can also put financial institutions in a better position to capitalise on the opportunities that the regulatory changes will trigger.
http://www.pwc.com/gx/en/financial-services/issues/regulation/european-fs-regulation-update/updates/october-17-2011.jhtml#3
§ FSB PUBLISHES 2ND PROGRESS REPORT ON OTC DERIVATIVES MARKET REFORMS IMPLEMENTATION
The Financial Stability Board (FSB) has published its second six-monthly progress report on implementation of over-the-counter (OTC) derivatives market reforms. The report provides a detailed review of progress toward meeting the commitment of G20 leaders at the Pittsburgh 2009 summit that, by end-2012, all standardised OTC derivative contracts must be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties; that OTC derivative contracts be reported to trade repositories; and that non-centrally cleared contracts be subject to higher capital requirements. For each of the G20 commitments, the report provides an assessment of progress in the three key steps that need to be taken: the development of international standards and policy; the adoption of legislative and regulatory frameworks; and actual implementation through changes in market practices. The report notes that, as of now, with only just over one year until the end-2012 deadline for implementing the G20 commitments, few FSB members have the legislation or regulations in place to provide the framework for operationalising the commitments. While recognising the implementation challenges and the complexity of the needed laws and regulations, the report concludes that jurisdictions should aggressively push forward to meet the G-20 end-2012 deadline in as many reform areas as possible. Consistency in implementation across jurisdictions is critical, and it is understandable that smaller markets want to see what frameworks the USA and EU put in place when developing their own frameworks. Nevertheless, it is important that all jurisdictions advance development of their legislative and regulatory frameworks as far as they are able even before finalisation of the US and EU regimes, to be in a position to act expeditiously once rules are finalised in these two largest OTC derivatives markets.
http://www.financialstabilityboard.org/press/pr_111011b.pdf
§ BLUEPRINT FOR EUROPEAN CONSOLIDATED TAPE
The European Fund and Asset Management Association (EFAMA) has published a blueprint for the establishment and operation of a European Consolidated Tape (ECT). The ECT should, according to EFAMA, greatly improve the quality of over-the-counter (OTC) post-trade data; post-trade data from trading venues and OTC should be made available to the ECT through regulated channels; post-trade data should be unbundled from pre-trade data and standards for post-trade data feeds should be created and enforced; prices of standardised post-trade data feeds should be regulated; and a single official European Consolidated Tape should be created.
http://www.efama.org/index.php?option=com_docman&task=doc_download&gid=1444
§ ESMA PUBLISHES THIRD COUNTRY AIFMD CONSULTATION
The European Securities and Markets Authority (ESMA) has published a second consultation paper on the implementation of the AIFMD rules, this time looking specifically at third-country funds. In the consultation, ESMA sets out its draft advice on the supervision of alternative investment fund managers (AIFMs) in third countries. This includes suggestions on how to implement the rules on delegation to entities established in a third country and on the “general criteria for assessing equivalence of the effective prudential regulation and supervision of third countries in the context of depositaries”. Within the section of the consultation that looks at “delegation”, ESMA suggests that in order to comply with the rules of the AIFMD – specifically Article 20(1)(d) – a written agreement should exist between the regulator of the country from which the AIFM is based and the EU country into which it is passporting. Among other things, this agreement should include provisions which allow for site visits by the EU-compliant regulator, access to information on demand and assurance that action will be taken in cases where there has been a breach of regulation. The 30-page consultation document also explores a number of other areas, including the implementation of cooperation arrangements between EU and non-EU competent authorities, exchange of information between EU authorities and authorisation of member state AIFMs. ESMA is to produce a final recommendation to the European Commission on the implementation of AIFMD by 16 November 2011.
http://www.international-adviser.com/article/esma-publishes-third-country-aifmd-consultation
§ PERMANENT BAN ON NAKED SHORT-SELLING OF CDS BROKERED
The European Parliament and the Council of the EU have reached agreement on imposing a permanent EU-wide ban on naked credit default swaps (CDS) trading. The agreed curbs and limits in relation to the European Commission’s proposed regulation on short-selling and certain aspects of CDS will increase transparency and will also introduce restrictive rules on traders’ short-selling of bonds and shares which are admitted to trading on EU markets and in terms of buying credit insurance relating to EU sovereign debt. National regulators have the option to lift the ban temporarily in cases where its sovereign debt market ‘is no longer functioning properly’. While the suspensions are finite, the bans can be rolled over indefinitely and existing CDS positions can be grandfathered until they expire. For national regulators to invoke this ‘opt-out’ clause, they must submit a case to the European Securities and Markets Authority (ESMA) citing evidence of widening bond yield spreads, poor liquidity or exceptional market volatility. Under the proposals, ESMA will be given additional powers to act as an arbiter in instances where governments are seeking to introduce a short-selling ban and even require other authorities to introduce short-selling bans in stressed market conditions. This should allow for better coordination at the EU level in times of crisis, which was lacking following the collapse of Lehman Brothers in 2008. The deal arrived at by EU lawmakers followed a series of measures adopted by various EU members states such as Italy, Spain, Belgium and France, which on 25 August 2011 extended their bans or put in place an indefinite prohibition on short-selling, which ESMA reviewed and coordinated. The next step is for the Council and the European Parliament to ratify the agreement. The regulation is set to come into force in November 2012.
http://www.pwc.com/gx/en/financial-services/issues/regulation/european-fs-regulation-update/updates/october-25-2011.jhtml#2
§ PAN-EUROPEAN PENSIONS REGIME URGED AS WAY FORWARD
The European Commission (EC) should consider a pan-European pensions regime instead of individual national guidelines, Aon Hewitt has suggested. In its submission to the European Insurance and Occupational Pensions Authority (EIOPA), the consultancy argued that employers should be granted more freedom to design retirement programmes to better align them with their own corporate needs. It also urged the EC to reform the IORP directive to allow for a more business-friendly environment, guaranteeing the affordability of pension arrangements. Aon Hewitt’s submission to EIOPA follows its Call for Advice on changes to the IORP directive, with the UK’s National Association of Pension Funds having previously warned that the EC had failed to grasp the diversity of the European pensions system. The European Federation for Retirement Provision had also argued against the use of Solvency II as a basis for the new IORP directive, while warning against the use of the IORP label for the new east European pension systems, as it believes this could lead to further Hungary-style repossession of pension assets.
http://www.ipe.com/news/aon-hewitt-pan-european-pensions-regime-could-be-way-forward_41774.php
§ CEE COUNTRIES SEEN UNLIKELY TO COME UNDER IORP DIRECTIVE
The mandatory retirement pillars of central and eastern European (CEE) countries, as well as unfunded pension funds, will not be subject to a new IORP directive once the new draft is published, a member of the European Insurance and Occupational Pensions Authority (EIOPA) stakeholder group has predicted. Addressing the National Association of Pension Funds (NAPF) annual conference in Manchester, pensions lawyer Ruth Goldman gave her impressions of a recent meeting of the stakeholder group – where she represents occupational schemes – and criticised that the shift towards heavier regulation for funded schemes, with continued lack of regulation for unfunded pillars, made “absolutely no sense”. Highlighting some positive news, she also indicated that the European Commission was aware of the impact Solvency II would have on pension funds and their recovery plans, insisting there was sympathy for the situation in which this placed funds. Goldman, a partner at law firm Linklaters, said that her “steer” from EIOPA was that the mandatory pension pillars launched in CEE countries over the past decade or more would not fall under the new regime, due to a “strong political pushback”. The European Federation for Retirement Provision previously predicted that bringing the mandatory pillars under the IORP Directive would lead eastern European states to follow the Hungarian example of bringing private pension savings under control of the country’s treasury.
http://www.ipe.com/news/cee-countries-unlikely-to-come-under-iorp-directive-predicts-eiopa-stakeholder-member_42561.php
§ SEC FINALISES LARGE TRADER REPORTING LEGISLATION
In order to more closely monitor the activities of traders dealing in large volumes and/or market values in the US markets, the USA’s Securities and Exchange Commission (SEC) has passed a final rule whereby traders making in excess of US$20 million in trades per day/two million shares per day or US$200 million in trades/20 million shares in a calendar month must comply with more stringent reporting and disclosure guidelines.
http://www.sec.gov/rules/final/2011/34-64976.pdf
§ SEC PROPOSES RULE AS PART OF DODD-FRANK ACT SETTING LIMITS ON PROPRIETARY TRADING
The Dodd-Frank Act was enacted on July 21, 2010. Section 619 of the Dodd-Frank Act added a new section 13 to the Bank Holding Company Act of 1956 (‘BHC Act’) that generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (‘covered fund’), subject to certain exemptions. The new section 13 of the BHC Act also provides for non-bank financial companies supervised by the Board that engage in such activities or have such interests or relationships to be subject to additional capital requirements, quantitative limits, or other restrictions. Feedback from impacted stakeholders is solicited with a deadline of January 2012.
http://www.sec.gov/rules/proposed/2011/34-65545.pdf
§ AMERICAN CITIZENS ABROAD CALL FOR REPEAL OF FATCA
American Citizens Abroad, which calls itself “the voice of Americans overseas”, has written an open letter to US Treasury Secretary Timothy Geithner and other officials urging them to repeal the Foreign Accounts Tax Compliance Act (FATCA), saying it is “misconceived and will not attain its objectives.” “To the contrary, it leads to a two-tier banking system, which is self-defeating, as this creates a gaping loophole for those who wish to evade US taxes,” the Geneva-based ACA says in its letter. FATCA was passed in March 2010 as part of US efforts to crack down on the use of offshore accounts by US citizens to evade taxes. The act, which takes effect in 2013, has been criticised by spokesmen for many foreign financial institutions and even such firms as KPMG, who say it is likely to cause foreign businesses to avoid having any American clients at all, and for some investors to shun holding US assets. The letter goes on to call FATCA “dangerous for the US economy” because, ACA says, it will lead to “significant disinvestment out of the United States by foreigners” to the potential tune of “trillions of dollars”. It adds: “The FATCA requirement that 10% US ownership in a foreign non-listed company or partnership be reported to the IRS is shutting Americans out of partnerships and joint ventures with foreigners overseas. This will greatly handicap export development programs of small and medium-sized companies, as well as entrepreneurial activities of Americans on the worldwide scene.”
http://www.international-adviser.com/article/american-citizens-abroad-call-for-repeal-of-fatca
§ EFFECT ANALYSIS FOR IFRS 10 AND IFRS 11
The International Accounting Standards Board (IASB) has issued two reports on the effect analysis for IFRS 10 Consolidated Financial Statements, which also includes the effect analysis for IFRS 12 Disclosure of Interests in Other Entities, and the effect analysis IFRS 11. The effect analyses provide detailed insights into the potential impacts of the new requirements using case studies and other quantitative and qualitative material, as appropriate. The analysis is undertaken by identifying typical scenarios to highlight those areas where the most significant effects are expected from applying IFRS 10, IFRS 11, and IFRS 12 respectively.
http://www.ifrs.org/News/Announcements+and+Speeches/EffectanaIFRS10_11.htm
§ IFRS TAXONOMY INTERIM RELEASE FOR COMMON-PRACTICE CONCEPTS
On 1 September 2011, the IFRS Foundation, the oversight body of the International Accounting Standards Boards (IASB), completed the first part of its project to address requests by regulators and preparers for extensions to the full International Financial Reporting Standards (IFRS) XBRL Taxonomy. The IFRS XBRL Taxonomy is used to help those filing IFRS financial statements electronically to ‘tag’ the information with identification tags (called ‘concepts’ in an XBRL taxonomy). Currently, the IFRS taxonomy includes all core concepts included in IFRSs as issued by the IASB. However, preparers often need to provide more detailed financial information than is reflected in the core IFRS concepts. To ensure that those creating and using electronic filings do not need to create their own extensions to the IFRS taxonomy, the IFRS Foundation has created an ‘extension taxonomy’ by analysing and drawing from common practice.
http://www.ifrs.org/News/XBRL/taxonomy+2011+interim+release+common+practice.htm
§ ESMA’S POLICY ORIENTATIONS ON GUIDELINES FOR UCITS EXCHANGE-TRADED FUNDS AND STRUCTURED UCITS
Following the entry into force of the broader investment freedoms for UCITS under UCITS III and their further extension in the Eligible Assets Directive (2007/16/EC), UCITS funds started to implement new strategies, which are considered by some external stakeholders as innovative. It has often been suggested that by exploiting the new investment criteria and limits introduced by UCITS III, such funds pursue management strategies previously prohibited to them and more often associated with hedge funds. In certain cases, such funds may also be admitted to trading on some European regulated markets in the form of exchange-traded funds (ETFs). This discussion paper sets out ESMA’s policy orientations on possible guidelines on UCITS ETFs and structured UCITS, as well as examining possible measures that could be introduced to mitigate the risk that particularly complex products, which may be difficult to understand and evaluate, are made available to retail investors.
http://www.esma.europa.eu/data/document/2011_220.pdf
§ EUROPE REACTS TO FSA’S DELAY ANNOUNCEMENT
German Pillar II pension funds should get their own supervisory body, according to Peter Hadasch, board member at the association of German company pension schemes (VFPK). In the debate on Solvency II, the VFPK also demanded a clearer separation of regulations relating to occupational pension providers and those relating to insurers. Hadasch, who is also head of the Nestlé Pensionskasse in Germany, would even like to see the supervision of pension funds being separated from that of insurers. The rising level of European legislation to be integrated into the German regulatory framework would make it even more difficult for pension funds to identify the relevant passages. Like many industry representatives, Hadasch sees the danger of supervisors using insurance standards on insurance-based vehicles like Pensionskassen. He added that stakeholders such as unions and other employee representatives should be heard more by the German supervisor Bafin in discussions on guarantees, risks and safety in the second pillar. In Germany, Hadasch sees a “lack of clear separation” between the three pillars of the pension system. He argued that a strict definition of Pillar I as securing the bare minimum, Pillar II as enabling a certain standard of living, and the Pillar III as generating additional wealth would facilitate the separation of supervisory bodies.
http://solvencyiiwire.com/solvency-ii-news-europe-reacts-to-fsas-delay-announcement/3492
§ GERMANY’S PILLAR II PENSION FUNDS SEEN DESERVING THEIR OWN WATCHDOG
In order to more closely monitor the activities of traders dealing in large volumes and/or market values in the US markets, the USA’s Securities and Exchange Commission (SEC) has passed a final rule whereby traders making in excess of US$20 million in trades per day/two million shares per day or US$200 million in trades/20 million shares in a calendar month must comply with more stringent reporting and disclosure guidelines.
http://www.ipe.com/news/germanys-second-pillar-pension-funds-deserve-their-own-watchdog-vfpk_42427.php
§ REPORT ON THE CROSS-BORDER COOPERATION MECHANISMS BETWEEN INSURANCE GUARANTEE SCHEMES IN THE EU
The European Insurance and Occupational Pensions Authority (EIOPA) has issued a report to provide input to the European Commission’s policymaking on Insurance Guarantee Schemes (IGSs). The purpose of the report is to summarise the findings of a mapping exercise of the existing mechanisms for cross-border cooperation between Insurance Guarantee Schemes of EU member states and/or between Insurance Guarantee Schemes and national supervisory authorities, and to provide general recommendations to the European Commission in the area of cooperation between IGSs as well as between supervisors and IGSs.
https://eiopa.europa.eu/fileadmin/tx_dam/files/publications/reports/EIOPA%20Report%20on%20Cross%20Border%20Cooperation%20between%20IGS%20July%202011.pdf
