This update summarises current regulatory developments in the European Union and supranationally, and in the UK and certain other jurisdictions focusing on the investment funds and asset management sectors, during the past month.
EU AND SUPRANATIONAL REGULATORY DEVELOPMENTS
European Council Meetings
European Council met on 1 and 2 March 2012. During the meeting of the Member States adopted the Fiscal Compact which will now go forward for ratification. On financial services reform, the Council called for, amongst other things:
EMIR and the CRA2 to be adopted as rapidly as possible; CRD4 to be agreed by June 2012; MiFID2 and MiFIR to be agreed by December 2012; The Commission will also be considering the possible strengthening of the current legal framework relative to executive pay and work on the FTT is to be carried forward.
The European Commission's draft Regulation on improving securities settlement in the EU and on central securities depositories
The Commission, it will be recalled, is seeking to complete the EU regulatory framework for securities, as part of its efforts to create a sounder financial system. Two of the three main steps are already in progress, with trading being delivered through MiFID and clearing through EMIR. The final stage in the process to be addressed is settlement, where concerns have been raised at the absence of an efficient single internal market. Remaining barriers have resulted in a fragmented market which is viewed by the Commission not only as inefficient but which also increases the risks associated with cross border transactions.
The above proposed Regulation was published by the Commission on 7 March 2012 and aims to set up a common regulatory framework for central securities depositories ("CSDs"). This will include bringing more safety and security to securities settlement, shortening the settlement time process, together with minimising settlement failures.
Included in the proposal are the following key elements:
the settlement period will be harmonised and set at a maximum of two days after the trading day for securities traded on stock exchanges or other regulated markets; penalties will be applied to market participants who fail to deliver their securities on the agreed date and participants will be required to buy in those securities in the market and deliver them to their counterparties; issuers and investors will be required to keep a record for virtually all securities, and to record them in CSDs if they are traded on stock exchanges or other regulated markets; CSDs will have to comply with strict organisational, conduct of business and prudential requirements to ensure their viability and the protection of their users and will also have to be authorised and supervised by their national competent authorities; CSDs which are authorised will be granted a passport to provide their services in other Member States; users will be able to choose between all thirty CSDs in the EU; and CSDs in the EU will have access to any other CSDs or other market infrastructures such as trading venues or central counterparties, in whichever country they are based. This proposal is now with the Council and European Parliament for negotiation and adoption.
EMIR – Joint Discussion Paper from the ESAs
It will be recalled that agreement was reached in trialogue in-mid February 2012 on the proposal for a Regulation on OTC derivatives, central counterparties and trade repositories ("EMIR"). Following concern expressed at the tight timescale for production of the technical standards, ESMA has now secured a three month extension with a new deadline of 30 September 2012.
A joint discussion paper on regulatory technical standards in this area was published on 6 March 2012 by the three European Supervisory Authorities (ESMA, EBA and the EIOPA). This focuses on risk mitigation techniques for OTC derivatives that are not cleared by a central counterparty. (Under EMIR, powers were delegated to the Commission to adopt Regulatory Technical Standards ("RTSs") on the level of capital and collateral that counterparties to derivatives transactions need to maintain, the type of collateral and segregation arrangements and on the procedures to apply an intragroup exemption.)
Separately the EBA has also published a discussion paper on draft RTSs on capital requirements for CCPs on 6 March 2012, under the EMIR. The EBA is seeking stakeholders' views on this issue with the understanding that the European Commission, the European Parliament and the Council of the European Union reached a political agreement on EMIR in their trialogue meeting on 9 February 2012.
In developing its proposal, the EBA has considered the draft principles for financial markets infrastructure consulted on by the Committee on Payment and Settlement Systems ("CPSS") and IOSCO in March 2011. Its considerations are also based on the Capital Requirements Directive (2006/48/EC and 2006/49/EC) (the "CRD"). The EBA's approach will result in capital requirements that are at least equal to those resulting from the CPSS-IOSCO principles.
The EBA's preliminary view is that a CCP's capital, including retained earnings and reserves, should be at all times at least equal to the higher of the following two amounts:
the CCP's operational expenses during an appropriate time span for winding-down or restructuring its activities; and the capital requirements for those risks that, according to EMIR, must be covered by appropriate capital. The EBA believes that risk exposures and capital requirements should be calculated using approaches applicable to banks under the CRD. Capital held under international risk-based capital standards should be included as appropriate to avoid double regulation.
The EBA's paper closes for comments on 2 April 2012. The EBA will then conduct a public consultation before submitting the draft RTSs to the Commission.
BIS working paper on collateral requirements for centrally cleared OTC derivatives
On 6 March 2012, the Bank for International Settlements ("BIS") published a working paper on collateral requirements for mandatory clearing of over-the-counter (OTC) derivatives. (As a result of the G20 commitment that all standardised OTC derivatives should be cleared with central counterparties ("CCPs") by the end of 2012, the volume of central clearing of bilateral derivatives contracts is set to rise.)
The authors of the BIS paper estimate the amount of collateral that prudent CCPs should require to clear safely all interest rate swap and credit default swap ("CDS") positions of the major derivatives dealers. Their findings include:
major dealers already have sufficient unencumbered assets to meet initial margin requirements, although some may need to increase their cash holdings to meet variation margin calls; a default fund worth only a small fraction of dealers' equity appears to be sufficient to protect CCPs against almost all potential losses that could arise on default of one or more dealers; and concentrating clearing of OTC derivatives in a single CCP could economise on collateral requirements without detriment to the robustness of central clearing. (The requirement for mandatory clearing of OTC derivatives will be imposed in the EU by the EMIR on which in February 2012, the European Parliament, the Council of the European Union and the European Commission appear to have reached agreement.)
The deadline for responses to the BIS consultation is also early in April 2012. Draft technical standards will subsequently be included in a consultation paper which is expected to be published in the summer of 2012.
The proposed FTT: ECOFIN review of progress and update
It will be recalled that in September 2011, the Commission published a proposal for a EU Financial Transaction Tax (the "FTT"). The proposed FTT would be levied on transactions of shares and bonds at 0.1% and derivatives at 0.01% which were carried out by financial institutions where at least one of the parties to the transaction was established in the European Union.
EU Finance Ministers met on 13 March 2012 to discuss the progress made on the FTT. The Danish Presidency noted that they had speeded up discussion of the file and the working group had now completed a first technical reading of the proposal but that further technical discussion would be needed to address issues raised, including the tax base, the structure of tax rates and the person liable to the tax, the impact on the economy, the risk of relocation, and enforcement of the tax vis-à-vis non-EU financial institutions. Commissioner Semeta confirmed that the Commission would provide further analysis on these issues.
Several Member States (Luxembourg, Malta, Sweden, Italy, the Czech Republic, and the Netherlands) restated their concerns regarding the impact of the FTT on competitiveness and growth and agreed that further analysis was required to respond to the concerns raised so far.
There was a consensus that agreement among all 27 member states would be preferable and therefore it would be expedient to begin looking at alternatives that are acceptable to all member states. Finland proposed that the Presidency and the Commission to look at alternatives and present a compromise proposal at the June ECOFIN meeting. France supported this and suggested that the tax that is currently being Introduced in France could serve as a model. Sweden agreed that alternatives should be looked at but warned that there is strong opposition in Sweden to European taxes with any revenues therefrom going towards the European budget.
In conclusions, the Presidency called on the Commission to provide further analysis of:
the impacts of the proposal on the economy and competitiveness; the amount of tax the financial services industry already contributes; the cost of new and proposed regulations on the financial services industry (EMIR, CRD4, etc); and alternative proposals (The Finance...