Financial Services Europe And International Update - January 2012 / Issue 1

Author:Mr Martin Day and Richard Frase


This update summarises current regulatory developments in the European Union and the UK focusing on the investment funds and asset management sectors, during the past four weeks.


ESMA 2012 Work Programme

On 4 January 2012 ESMA published its 2012 work programme.

ESMA has the following seven areas as its key priorities for 2012:

the proposed Regulation on over-the-counter derivative transactions, central counterparties and trade repositories (EMIR); financial consumer protection; harmonisation of supervisory practices; credit rating agency regulation and supervision; the proposals to revise MiFID; the Alternative Investment Funds Management Directive (2011/61/EU); and the proposed Regulation on short selling and certain aspects of credit default swaps. The Danish Presidency's Work Programme to 30 June 2012

On 6 January 2012, the Danish Presidency of the Council of the EU published its work programme for the six-month period to 30 June 2012. This will focus on:

achieving consensus in the Council on the European Commission's proposed revision of capital and liquidity requirements for credit institutions (CRD IV); working towards a common European framework for crisis management in the financial sector, (such as early intervention and prevention relating to ailing banks) the Commission is expected to publish legislative proposals shortly, following its January 2011 consultation on a possible EU framework for bank recovery and resolution; achieving consensus in the Council on the proposed CRA III Regulation; prioritising negotiations with the European Parliament on the proposed Regulation on OTC derivative transactions, central counterparties and trade repositories (EMIR); progressing work on legislative proposals to amend the Markets in Financial Instruments Directive (2004/39/EC) ("MiFID") and the Market Abuse Directive (2003/6/EC); and improving the protection of European consumers in the financial sector. Guidelines on Systems and Controls for Highly Automated Trading

On 22 December 2011, the European Securities and Markets Authority ("ESMA") published its final report on guidelines on systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities (the "guidelines"). The report contained feedback to the July 2011, consultation by ESMA.

The guidelines cover:

the operation of an electronic trading system by a regulated market or a multilateral trading firm ("MTF"); the use of an electronic trading systems, including trading algorithms, by investment firms for own account dealing or for the execution of orders on behalf of clients; and the provision of direct market access or sponsored access by an investment firm as part of the service of the execution of orders on behalf of clients. The guidelines will also have implications for firms not authorised as market operators or investment firms under the Markets in Financial Instruments Directive (2004/39/EC) ("MiFID"). These include firms which sell electronic trading systems to market operators or investment firms, or act as the outsourced providers of such systems, or provide connectivity services to investment firms when accessing trading platforms. The guidelines will also affect firms exempt from MiFID which trade on own account and access trading platforms directly as members, participants or users, or through direct market access or sponsored access.

The guidelines will become effective one month after they have been published by national regulators on local websites. Market participants will need to comply with the guidelines by 1 May 2012.

ESMA Consultation on MiFID Compliance Function Requirements

MiFID requires investment firms to implement a series of systems and controls aimed at securing a robust governance framework, with a clear organisational structure and lines of responsibility, and effective risk management and compliance processes. This includes policies and procedures to ensure regulatory compliance and the establishment of a compliance function. On 22 December, ESMA published a consultation on certain aspects of MiFID compliance functions. ESMA is concerned that compliance risk can take second place to other risk areas within an investment firm and this can lead to the deficient implementation of appropriate compliance processes. Accordingly, the compliance function should have a more prominent role within investment firms.

In accordance with Regulation 1095/2010 establishing ESMA, the consultation sets out draft guidelines on the compliance function provision in Article 13 of MiFID and Article 6 of the MiFID Implementing Directive (2006/73/EC.) Specifically the guidelines focus on:

the responsibilities of the compliance function for monitoring, reporting and advising; and the organisational requirements of the compliance function for the standards of effectiveness, permanence and independence. The consultation closes on 24 February 2012. (ESMA will consider the responses it receives to the consultation in Q1 of 2012 and expects to publish a final report and guidelines in Q2 of 2012).

ESMA Consultation on MiFID Suitability Requirements

Also on 22 December 2011, ESMA published a consultation on guidelines on certain aspects of MiFID's suitability requirements.

Article 19(4) of MiFID requires that when providing investment advice or portfolio management services, investment firms must ensure that the specific transaction to be recommended or entered into is suitable for the client in question. ESMA is concerned that recent evidence...

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