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2009, the year which followed the collapse of Lehman Brothers was one of intense reflection during which all the players concerned, both public and private, became aware that the world in general and the finance sector in particular would never be as we once knew them. The players devoted themselves to understanding the situation revealed by the financial and economic crisis in order to draw lessons from it and to define new principles, which should in the future underlie the establishment of a new world order.
It was during that year that the G20 decided in Pittsburgh to set up a framework for supervising financial institutions which represent systemic risk and for managing cross-border failures (resolutions). The
framework also included reforming clearing practices so as to increase financial stability and improve the efficiency of the OTC derivative markets, strengthening capital and liquidity requirements imposed on financial institutions in order to limit excessive leveraging effects and reduce the effects of economic cycles. It was at this time that the
US began its work on the Dodd Franck Act and a number of European reforms were initiated such as the introduction of a new European system of supervision, EMIR (the compensation of financial transactions and the organisation of OTC derivative markets) and
AIFM (alternative investment fund management). These initiatives also coincided with the revisions of the MiFID (investment
services) and of the CR Directive (capital requirements).
In parallel with these initiatives there was widespread awareness in Europe of the need to reform the regulatory framework and the post-trade European market. This justified, in particular, the pursuit of
restructuring projects such as T2S (TARGET2- Securities, the Pan-European securities settlement platform) and CCBM2 (single management platform for Central Bank collateral).
2010 was a year of intense regulatory activity during which
the European authorities prepared many texts. 2010 was however marked by few formal adoptions of directives or regulations. For all that, the will to succeed was obvious, particularly in the course of
2011, thus reflected in the provisional schedules submitted by the European Commission, as [we referred to in February
2011->article541].
Where do we stand one year later? It must be noted that although the activity in European institutions has remained very intense, few new texts have been effectively adopted and published in the Official Journal. The best is therefore yet to come.
Let us review the main initiatives which SGSS is monitoring:
EMIR (European Market Infrastructures Regulation)
This text was proposed by the European Commission (EC) on 15th
September 2010 and the objective for the end of the year 2010 was
adoption in April 2011, with the regulation to come into force during
the second half of 2012. At the end of 2011, it was clear that the
complexity of the subjects being considered and the need to ensure
the consistency of the European text with its American equivalent
somewhat delayed the progress of the work in the EC. The new
schedule specifies adoption at the start of 2012, followed up with
work by ESMA aimed at compiling the technical standards and
proceedings by the end of June 2012.This would enable the
regulation to come into effect before the end of 2012, in line with the
schedule set by the G20.
Regulation of short selling and certain aspects of Credit Default Swaps
The text, which was approved by the European Parliament on 15th
November 2011, must now be formally adopted by the European
Council in order to come into effect in November 2012, the date
currently set.
The objective of this regulation is to build a preventive framework
(made of permanent measures complemented by temporary
measures that can be activated by the competent authorities), that
is rational (the draft does not question the benefits that short selling
can provide in normal market conditions and exempts certain
activities) and harmonised, aimed at regulating the short selling of
shares and of sovereign debt, as well as the use of CDS’s. Such a
framework is only meaningful if it is accompanied by; a
strengthening of the powers assigned to the competent local
authorities and to ESMA, and by an increase in transparency, which
is necessary for the exercise of their function. The text therefore
specifies the roles of the various competent authorities and stresses
the need for cooperation between them.
text deals with short selling from two aspects: a declarative
(potentially public) obligation and the obligation to have taken all the
necessary steps in order to enable the settlement of the sale on time. With regard to CDS’s, it prohibits “naked” short selling.
The text also requires the Central Counterparties (CCP) to put in place penalties on settlement fails and a harmonised Buy-in procedure
(triggered 4 business days after the intended settlement date). It should be noted that this proposal is in line with the one contained in the draft regulation on Central Depositaries (CSD’s). Moreover, it is not the only instance of a connection between the proposals in EC
texts. The earmarking of short selling orders, which was envisaged in this regulation for a while, seems to have been finally abandoned in favour of the marking of transactions which could be easily achieved using Transaction Reporting as specified in the future MiFIR regulation.
CSD Regulation (Central Securities Custodians)
The main objective of the text is to harmonise the regulatory
framework applying to CSD’s in Europe, which is completely new.
Furthermore, it deals with various harmonisation topics, particularly
relating to T2S, like Settlement Disciplines and settlement cycles.
The work had begun with discussions amongst the Member States
on 15 July 2010. The proposed text was to be published on 30
November 2011. This publication will undoubtedly be deferred to
the beginning of 2012. At that date the co-decision (trilogues) phase
will begin. The regulation can then be voted on in the following 12
months, before ESMA devotes itself to producing the many
application decrees specified by the text. On this basis, it is
envisaged that the regulation will come into force in 2014.
SLD (Securities Law Directive)
You will remember that the main objectives of this directive, which
has now been in discussion for several years, are to facilitate crossborder investments by tackling the heterogeneity of the securities
laws and the rules for the conflict of laws that apply in Europe, but
also to support the harmonisation work in progress on corporate
actions. This follows the example of many other harmonisation
projects being conducted in the post-market area, intending to
facilitate the implementation of the T2S project. At the end of the
year 2010, it had been indicated that a proposal in this domain was
expected in June 2011. Today a date is no longer indicated and the
EC’s financial regulation programme for 2012 makes no reference to
it…
MiFID II (Markets in Financial Instruments Directive)
The Markets in Financial Instruments Directive, or MiFID, came into
effect in November 2007. It governs investment services in the
financial instruments field (such as brokerage, advice, dealing,
portfolio management, subscription services, etc.) supplied by the
banks, and the functioning of regulated markets and other trading
platforms (referred to as “multilateral trading facilities”).
has kept to its commitment and both a directive proposal and a
regulation proposal have been submitted for consultation on
20October 2011. The aims of these proposals are to make the
financial markets more efficient, more resilient and more transparent,
but also to strengthen investor protection. The new regulation will
expand its cover to the trading platforms which were not regulated
hitherto. It will harmonise the rules that apply to regulated markets
and MTFs and will set up a framework regulating algorithmic trading
activity. It will also increase the transparency of market participants
trading equities and introduce new transparency regime for bonds,
structured products and derivatives. It will then strengthen the role
and the powers of the regulatory authorities, especially in terms of
regulation and supervision of activities on commodities. Lastly, the
revised MiFID will define stricter requirements for portfolio
management, investment advice and offers of complex financial
products like structured products.
The proposal has been transmitted to the European Parliament and
to the European Council. The legislative process should last more
than a year, definitive publication of the texts being forecast for the
third or even fourth quarter of 2013. Transposition of the Directive
should occur in the Member States by the end of 2015. As the
regulation is not by nature a text subject to transposition, it could
see its application delayed to the Directive’s transposition date for
reasons of consistency.
AIFM Level 2 Measures (Execution measures of the Directive on managers of alternative investment funds)
The AIFM Directive was published on 1 July 2011 in the Official
Journal of the European Union. Beyond the rules applicable to fund
managers, the AIFM Directive (and its implementing measures)
regulates in detail the missions of the alternative investment fund depositary by defining its functions relating to cash monitoring,
assets in custody (a broad definition has been adopted, bringing
back into the field of custody, in particular, financial instruments
registered or held directly or indirectly in the name of the depositary),
record keeping and depositary oversight duties. The directive also
establishes a principle of liability in the case of the loss of assets by
the depositary or one of its sub-custodians. The entity can only
exonerate themselves in case of an external event beyond its
reasonable control (limited cases like sovereign acts or natural
disasters) or, in the case of insolvency, only if the local insolvency law
does not recognise the effects of the segregation of assets.
The AIFM Directive will have to be transposed in all Member States
by 22 July 2013. In parallel, the European Commission has
launched the legislative process for the level 2 measures by asking
ESMA for its technical advice, which was delivered on 16 November
2011. The Commission foresees the definitive adoption of the level
2 measures in July 2012 with transposition in July 2013, at the same
time as the framework Directive.
UCITS V (Consultation of the European Commission on the custodian function and the remuneration of managers)
In December 2010, the European Commission launched a
European consultation in order to clarify the UCITS depositary’s
regime and that of the remuneration of UCITS managers. Since that
date, the work on the AIFM directive has taken precedence over that
of UCITS V and an alignment of the two texts in terms of the
functions and responsibility of the depositary has been firmly
envisaged by the European Commission.
If alignment is confirmed, the provisions of the AIFM Directive and in
particular its future implementing measures should be found in the
future text on UCITS V. One new item should be introduced: minimum sanctions for managers who do not play the game and therefore contravene European legislation.
Certain rumours mention a possible expansion of the field of
application of UCITS V to eligible assets and to complex/noncomplex
UCITS’s, which would be likely to delay the publication of
the draft directive. But that has not been confirmed by the European
Commission. For the time being, UCITS V is the order of the day for
the 2012 EC’s work programme and an initiative concerning the
subjects mentioned above (depositaries, remuneration of managers
and sanctions) should emerge during 2012.
SOLVENCY II (Directive on the solvency of insurance companies)
On 16 November 2011, EIOPA (European Insurance and
Occupational Pensions Authority), officially confirmed the deferral for
one year of the new prudential rules issued in the Solvency II
Directive.
accepted that the Directive be applied gradually, i.e. that the Member States should transpose the Directive before 1 January 2013, the
new regime would only fully apply to insurers from 1st January 2014.
You will remember that the objective of Solvency II is to better adapt
the solvency requirements for insurance and reinsurance companies
to the real economic risks incurred by their activity (like the CRD
adopting the provisions defined by the Basle Committee for banks).
Despite this deferral, the schedule remains tight. EIOPA hopes that
the Omnibus 2 Directive which is to partially modify the Solvency
Framework Directive can be voted on during the first half of 2012,
given that EIOPA intends to launch in parallel in May 2012 a
consultation on the Solvency II application measures.
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