Financial services updater - international edition

2 April 2012

Contacts

Introduction

Welcome to the latest international edition of our financial services updater.

Highlights this week include:

  • Draft ECON report - recast MiFID
  • Policy Statement 12/06: The CASS Resolution Pack

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

Banking

Financial Policy Committee statement

On 16 March 2012, the interim Financial Policy Committee (FPC) met and discussed its advice to the Treasury regarding the macro-prudential tools over which the statutory FPC should have powers to direct action by the proposed new regulatory authorities, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

Building on earlier discussions about macro-prudential tools in September 2011, the interim FPC agreed to advise the Treasury that, in order to meet its proposed objective, the statutory FPC should initially have powers of direction over the following tools:

  • The countercyclical capital buffer.
  • Sectoral capital requirements.
  • A leverage ratio.

In addition to banks, the range of institutions to which these tools would apply could include building societies, investment firms, insurers and a variety of funds and investment vehicles. The interim FPC also agreed that it was minded to advise the Treasury that the statutory FPC should have powers of direction over a time-varying liquidity tool, but it could not sensibly specify the form that this tool should take until the international micro-prudential standards in this area had been agreed.

The interim FPC further agreed that it might be useful for the statutory FPC to have powers of direction in respect of the terms of collateralised transactions by financial institutions. However, it concluded that this tool should be reconsidered once international discussions had progressed further.

The interim FPC agreed that powers of direction over disclosure requirements would be desirable but that it could be difficult to meet the test set by the Treasury.

The interim FPC also noted that while powers of direction over loan to value (LTV) and loan to income (LTI) restrictions could be beneficial for financial stability, use of these tools would require a high level of public acceptability. Other tools, such as the ability to vary sectoral capital requirements, might be able to achieve at least some of the same financial stability benefits. The interim FPC agreed that it should not advise the Treasury that the statutory FPC be given power of direction over such tools at this time, but it encouraged further debate of that possibility and that these tools may be appropriate after further analysis and reflection.

At its meeting the interim FPC also considered the outlook for financial stability, including progress in implementing its previous recommendations. The interim FPC noted that immediate financial market tensions had subsided somewhat but the overall outlook for financial stability remained fragile. The interim FPC remained concerned that capital was not yet at levels that would ensure resilience in the face of prospective risks and noted that the ability to make further progress via greater restraint of cash distributions was limited. The interim FPC therefore advised banks to raise external capital as early as feasible.

View Financial Policy Committee statement from its policy committee meeting, 16 March 2012

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Clearing and Settlement

Clamping down on the derivatives trade

The European Parliament has announced that it has adopted the European Market Infrastructure Regulation (EMIR). The draft Regulation had been provisionally agreed by negotiators from both the European Parliament and the Council of the EU in February 2012.

View Clamping down on the derivatives trade, 29 March 2012

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Collective investment schemes

IOSCO publish updated systemic risk data requirements for hedge funds

The Technical Committee of the International Organization of Securities Commissions (IOSCO) has published an updated list of categories of data for the global collection of hedge fund information which it believes will assist in assessing possible systemic risks arising from the sector.

The revised list reflects the minimum that the Task Force on Unregulated Financial Entities (Task Force) will collect for the next IOSCO hedge fund survey. The list is not a comprehensive list and regulators are not restricted from requesting additional information at a domestic level, based on their legislative and/or regulatory requirements.

View IOSCO publish updated systemic risk data requirements for hedge funds, 22 March 2012

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FSA Handbook

Handbook Notice 118

The FSA has published Handbook Notice 118.  This Handbook Notice introduces the FSA Handbook and other material made by the FSA Board under its legislative powers on 21 March 2012. On that date the FSA Board made changes to the Handbook in nine instruments which:

  • Make minor administrative corrections to the Handbook, none of which represents any change in FSA policy.
  • Make periodic fee rates for the FSA and set the Financial Services Compensation Scheme (FSCS) management expense levy limit for 2012/13, and amend the fee data reporting in the Retail Mediation Activities Return.
  • Set the levies and fees for the FSA for 2012/13.
  • Correct a drafting omission, change the realisation requirements for the use of central bank facilities and amend the actions a firm must take with regard to its individual liquidity guidance or simplified buffer requirement.
  • Make minor changes to the advisor charging regime under the Retail Distribution Review.
  • Update the Handbook to reflect the Department of Work and Pensions abolition of contracting out of the state second pension.
  • Ensure that employers’ liability registers and tracing office databases are established and maintained at a sufficiently high level of accuracy and completeness to support tracing of employers’ insurers by claimants.
  • Apply parts of the Handbook to credit unions in Northern Ireland, creating as far as possible a single regulatory regime for credit unions in the UK.
  • Align the winding up rules for investment companies with variable capital with those for authorised unit trusts, assist fund managers in their determination of eligible investments for an authorised fund and implement the provisions of the UCITS IV Directive.

There have also been changes outside the Handbook. The Perimeter Guidance manual has been amended to update and clarify guidance for alternative debentures, regulated mortgage contracts, home reversion plans and sale and rent back agreements.

View Handbook Notice 118, 22 March 2012

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Market abuse

European Parliament plenary session on MAD review

The European Parliament has updated its legislative observatory procedure files concerning the legislative proposals revising the Market Abuse Directive.

Both procedure files indicate that the European Parliament will consider the legislative proposals in plenary session from 22 to 23 October 2012.

View Legislative observatory - Financial supervision: insider dealing and market manipulation, 27 March 2012

View Legislative observatory - Financial supervision: criminal sanctions for insider dealing and market manipulation, 27 March 2012

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Regulation & compliance

Draft ECON report - recast MiFID

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has published a draft report on the proposed recast Markets in Financial Instruments Directive (MiFID).

The draft report contains a draft European Parliament legislative resolution setting out amendments to the proposed Directive. The report also contains an explanatory statement by ECON rapporteur, Markus Ferber, which sets out his position on the proposal. Key points in the explanatory statement include:

  • Ferber supports the European Commission’s proposal to extend the scope of MiFID and limit the exemptions. To ensure that the exemptions are not misused Feber proposes a reporting obligation for persons to explain why their activity is ancillary to their main business.
  • Ferber supports the aim of strengthening the regulatory framework for investor protection. However, he is not in favour of the proposed new obligation to specify whether investment advice is independent and if it is based on a broad or a more restricted analysis of the market as restricting the use of the word “independent” may mean that other forms of advice have a negative connotation. Ferber has chosen more neutral wording and proposes that clients should be informed before investment advice is given if there have been third party payments and if the advice is given on a limited number of instruments. Ferber also states that clients should be informed about the frequency of the periodic assessment of the suitability of financial instruments. Portfolio managers should also not be prohibited from accepting inducements but any acceptance of an inducement should be fully transparent.
  • Ferber introduces a new obligation that investment firms shall, when designing a new product, specify a target group within the retail or professional client category and ensure that the product is designed to meet those customers’ needs and marketed to clients within the target group. Ferber believes that information which has to be obtained about clients should also contain information about the clients’ risk tolerance.
  • Ferber questions whether the creation of a new category of organised execution venue, the Organised Trading Facility (OTF), is the right way to capture organised venues which are not caught by the existing categories (Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) and Systematic Internalisers (SIs)). To avoid new loopholes being created Ferber proposes to limit the OTF category to non-equities, and consequently adjusts the review clause to ensure that the need for, and effect of, this new category is reviewed.
  • Ferber notes that the proposals contain specific obligations imposed on anyone who is carrying out algorithmic trading whilst defining algorithmic trading broadly. Ferber suggests a more differentiated approach and proposes definitions for high frequency trading and a high frequency trading strategy to identify a particular subset of algorithmic trading, and in addition a ban of direct electronic access.
  • Ferber acknowledges the Commission’s proposals for RMs, MTFs and OTFs to ensure that they are resilient in extreme market conditions and that they have in place proper circuit breakers and business continuity arrangements. Ferber welcomes this approach but makes three proposals to strengthen it. First, to slow down trading and order flows he proposes that all orders should be valid for at least 500 milliseconds. Second, for all trading venues there should be parameters for halting trading which should be reported to competent authorities and the European Securities and Markets Authority should publish these on its website. Third, to require trading venues to ensure their fee structures contain higher fees for placing an order which is cancelled than for an order which is executed and higher fees for market participants who place a high ratio of cancelled orders.
  • In relation to corporate governance Ferber seeks to strengthen the rules for management bodies of trading venues and proposes that one person should not be able to hold more than one executive or two non-executive directorships at the same time, although the ability to combine executive and non-executive directorships within the same group is retained.
  • Ferber is uncertain of the benefits of labelling some markets as SME growth market and proposes that the concept should at least be based on the standard EU definition of SMEs.
  • Ferber generally welcomes the Commission’s approach that all trading venues on which commodity derivative contracts are traded should adopt position limits or alternative arrangements in order to ensure the proper functioning of the market. However, Ferber believes that some adjustment is necessary in that the use of controls on positions should be an addition, not an alternative, to the use of position limits. However, in setting such limits Ferber believes that there should be differentiation between positions related to commercial activity as regards to commodity and other positions.
  • Ferber welcomes the data consolidation proposals where all firms would have to publish their trade reports through Approved Publication Arrangements but points out that all information should be treated on a non-discriminatory basis.
  • In relation to the third country regime proposed by the Commission, Ferber replaces "third country investment firm" with "third country financial institution".

View Draft ECON report - recast MiFID, 26 March 2012

Draft ECON report - MiFIR

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has published a draft report on the proposed Markets in Financial Instruments Regulation (MiFIR).

The draft report contains a draft European Parliament legislative resolution setting out amendments to the proposed Regulation. The report also contains an explanatory statement by ECON rapporteur, Markus Ferber, which sets out his position on the proposal. Key points in the explanatory statement include:

  • Ferber questions whether the creation of a new category of organised execution venue, the Organised Trading Facility (OTFs), is the right way to capture organised venues which are not caught by the existing categories.
  • Ferber proposes to define ”bilateral” and “multilateral” system more clearly in order to achieve a precise distinction between bilateral and multilateral trading and to ensure that market participants are subject to the proper rules.
  • Ferber believes that the provisions concerning access to market infrastructure could give rise to problems through liquidity fragmentation or if interoperability were involved. He states that supervisors therefore need to be able to intervene to prevent these problems materialising, as was recognised in the European Market Infrastructure Regulation.
  • Ferber is in favour of measures which increase transparency and supports the MiFIR requirements extending pre- and post-trade transparency to equity like products and non-equities.
  • Ferber welcomes the proposed obligations in relation to transaction reporting which includes a new requirement for Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) and OTFs to keep data on orders so that it is accessible to supervisors for at least 5 years.
  • Ferber notes that competent authorities could set permanent bans or restrictions on financial products or activities or practices coordinated by the European Securities and Markets Authority (ESMA). In addition ESMA can temporarily ban or restrict products, practices and services.
  • However, Ferber questions whether the possibility to ban products or services only ex-post is enough to ensure financial market stability or investor protection and therefore proposes two additions. First, that ESMA or competent authorities should not only monitor financial instruments but additionally investment products which also include structured deposits. Second, in addition to the possibility to impose bans or restrictions on products which have already been marketed, ESMA or competent authorities should also be able to impose restrictions or prohibitions on a precautionary basis before an investment product or financial instrument is placed on the market. In addition, ESMA and competent authorities should give notice if they intend to ban an investment product or financial instrument on a precautionary basis so that changes to the respective instrument or product can be made within a certain time limit.
  • Ferber reduces the number of delegated and implementing acts on the basis that the major political decisions have to be taken within the ordinary legislative procedure by the European Parliament and the Council of the EU, and specifies the periods for ESMA to draft the requested regulatory standards.

View Draft ECON report - MiFIR, 27 March 2012

European Parliament plenary session on MiFID review

The European Parliament has updated its legislative observatory procedure files concerning the legislative proposals revising the Markets in Financial Instruments Directive (MiFID).

Both procedure files indicate that the European Parliament will consider the legislative proposals in plenary session from 22 to 23 October 2012.

View Legislative observatory - Financial supervision: markets in financial instruments (recast), 27 March 2012

View Legislative observatory - Financial supervision: markets in financial instruments; OTC derivatives, central counterparties and trade repositories, 27 March 2012

ECB opinion on the (i) MiFID review (ii) EMIR (iii) MAD review

The European Central Bank (ECB) has published an opinion on:

  • A proposal for a Directive on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council.
  • A proposal for a Regulation on markets in financial instruments and amending Regulation on OTC derivatives, central counterparties and trade repositories.
  • A proposal for a Directive on criminal sanctions for insider dealing and market manipulation.
  • A proposal for a Regulation on insider dealing and market manipulation.

View ECB opinion on the (i) MiFID review (ii) EMIR (iii) MAD review, 22 March 2012

Regulation on short selling and certain aspects of credit default swaps

There has been published in the Official Journal of the European Union the Regulation on short selling and certain aspects of credit default swaps. The Regulation comes into effect on 1 November 2012.

View Regulation on short selling and certain aspects of credit default swaps, 24 March 2012

ESMA reviews pre-trade transparency waivers to ensure consistent MiFID application

The European Securities and Markets Authority (ESMA) has published a revision of its waiver document which provides information on the pre-trade transparency of trading systems already set up in the EU and informs on the compliance of such systems with the Markets in Financial Instruments Directive (MiFID).

The revised document extends the scope of the previous version to pre-existing systems by including many of EU operating systems and functionalities where an order which is sent to a Regulated Market or a Multilateral Trading Facility is not subject to any pre-trade transparency, even where such a situation was not supported by an explicit waiver.

The revised document covers a total of 19 additional functionalities. In addition, it also includes a new entry about a proposal for a reference price system considered as non-MiFID compliant.

View ESMA reviews pre-trade transparency waivers to ensure consistent MiFID application, 26 March 2012

Discussion Paper - An overview of the proxy advisory industry

The European Securities and Markets Authority (ESMA) has published a Discussion Paper which covers the development of the proxy advisory industry in Europe.

The purpose of the Discussion Paper is to give an overview of ESMA’s understanding of the functioning of the proxy advisory industry in Europe and to gain evidence on the extent to which market failures may exist in practice that are related to the activities of proxy advisers in Europe. The Discussion Paper focuses on the state and structure of the proxy advisors market in Europe, the methodologies used by proxy advisors, and on discussing the main concerns that have been expressed.

The potential policy options in the Discussion Paper range from taking no action to recommending the introduction of formal legislative measures.

ESMA will consider the feedback to the Discussion Paper and expects to publish a Feedback Statement in Q4 2012. The Feedback Statement will set out ESMA’s view on whether there is a need for policy action in this area.

View Discussion Paper - An overview of the proxy advisory industry, 22 March 2012

Meeting of the European Systemic Risk Board

The European Systemic Risk Board (ESRB) has issued a press release following a meeting of its General Board.

Commenting on the current situation the ESRB states that since the last General Board meeting in December 2011, it has observed signs of stabilisation in the EU economy and an improvement in the situation of financial markets, notably in response to the measures adopted by central banks, the agreement on the fiscal compact and the progress made in fiscal consolidation and economic reforms in many countries.

View Meeting of the European Systemic Risk Board, 22 March 2012

ESMA's report on the supervision of credit rating agencies

The European Securities and Markets Authority (ESMA) has published a report which provides an overview of its supervisory activity on credit rating agencies (CRAs) registered in the European Union.

The report also summarises the results of ESMA’s first examination of the three groups of registered CRAs (Fitch Ratings, Moody’s Investors Services, and Standard & Poor’s Rating Services).

View ESMA’s report on the supervision of credit rating agencies, 22 March 2012

Your questions on MiFID - Definitions (binary options trading companies)

The European Commission has added a further answer to its Your questions on MiFID web page. The answer relates to a question submitted concerning whether binary options offered by Binary Options Trading Companies are within the scope of MiFID.

View Your questions on MiFID - Definitions (binary options trading companies), 28 March 2012

Financial Services Bill 2010 - 2012

On 22 March 2012, the Financial Services Bill (the Bill) received its final sitting in the Committee stage of the House of Commons. The Committee stage comprised sixteen sittings from 21 February 2012 to 22 March 2012. A number of amendments have been made to the Bill and a new version has been published on Parliament’s website.

The Bill will now pass to the Report stage in the House of Commons. The date for the Report stage is due to be published on Parliament’s website shortly.

View Financial Services Bill 2010 - 2012, 22 March 2012

View Financial Services Bill (as amended in Public Bill Committee), 22 March 2012

Q&A for PSD clients enquiring about the system move from TRS to GABRIEL

The FSA has traditionally used the TRS system to collect both product sales data (SUP16) reports and markets transaction (SUP17) reports.

Following the sale of markets reporting to the London Stock Exchange the FSA concluded that SUP16 reporting should be collected using the FSA’s strategic data collection system GABRIEL. The TRS system will be decommissioned after the move over to GABRIEL.

The FSA has now published a Q&A for product sales data clients who are enquiring about the system move from TRS to GABRIEL.

View Q&A for PSD clients enquiring about the system move from TRS to GABRIEL, 26 March 2012

Policy Statement 12/06: The CASS Resolution Pack

The FSA has published Policy Statement 12/06: The CASS Resolution Pack (PS12/06).

In PS12/06 the FSA sets out final rules requiring in-scope firms to maintain and be able to retrieve a CASS Resolution Pack (CASS RP). The CASS RP contains documents and records that would help an insolvency practitioner return client money and safe custody assets (client assets) more quickly following an investment firm failure.

The requirement to maintain a CASS RP applies to firms, to which either or both of chapter 6 and chapter 7 of the Client Assets sourcebook (CASS) applies by virtue of their holding client assets such as brokers, investment banks and custodians. These firms are classified as CASS small, medium or large. The rules do not apply to a firm to which CASS 6 applies merely because it is a firm that arranges safeguarding and administration of assets. Also, insurance intermediaries subject to CASS 5 will not be subject to the CASS RP requirement.

Firms have until 1 October 2012 to comply with the CASS RP rules.

The FSA states that the CASS RP is an initial step in a wider review of the client assets distribution regime. The FSA is continuing its intensive and intrusive approach to supervising firms to ensure that deficiencies in CASS compliance are identified and rectified. The recent introduction of the CASS operational oversight responsibility and Client Money and Asset Return help with this.

View Policy Statement 12/06: The CASS Resolution Pack, 26 March 2012

The Financial Services (Omnibus 1 Directive) Regulations 2012

There has been published The Financial Services (Omnibus 1 Directive) Regulations 2012 (the Regulations) together with an explanatory memorandum.

These Regulations make certain amendments to existing legislation to implement in part the Omnibus 1 Directive. In particular the Regulations amend:

  • The Financial Services and Markets Act 2000 to set out some of the circumstances in which information must be provided to one of the European Supervisory Authorities (ESAs), some of the circumstances in which one of the ESAs may settle a disagreement between competent authorities and to provide a definition of two of the ESAs.
  • The Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001 (the Gateway Regulations) to ensure that there are no legal obstacles to the information sharing obligations set out in sectoral legislation.

View The Financial Services (Omnibus 1 Directive) Regulations 2012, 27 March 2012

FSA review into anti-bribery and corruption systems and controls in investment banks and proposed new guidance for all firms

The FSA has published the findings of a thematic review into anti-bribery and corruption (ABC) systems and controls in investment banks. In particular the FSA found a number of common weaknesses in firms in that:

  • Most firms had not properly taken into account the FSA’s rules covering bribery and corruption, either before the implementation of the Bribery Act or after.
  • Nearly half the firms sampled did not have an adequate ABC risk assessment.
  • Management information on ABC was poor, making it difficult for the FSA to see how firms’ senior management could provide effective oversight.
  • Only two firms sampled had either started or carried out specific ABC internal audits.
  • There were significant issues in firms’ dealings with third parties used to win or retain business.
  • Though many firms had recently tightened up their gifts, hospitality and expenses policies, few had processes to ensure gifts and expenses in relation to particular clients/projects were reasonable on a cumulative basis.

In light of the findings from the thematic review the FSA is consulting on proposed amendments to the regulatory guide entitled Financial crime: a guide for firms.

View FSA review into anti-bribery and corruption systems and controls in investment banks and proposed new guidance for all firms, 29 March 2012

View Anti-bribery and corruption systems and controls in investment banks, 29 March 2012

Anti-bribery and corruption systems and controls: Proposed guidance and amendments to “Financial crime: a guide for firms”

The FSA has published a guidance consultation concerning changes it proposes to make to the regulatory guide entitled Financial crime: a guide for firms (FC Guide).

The guidance consultation is in response to the findings of the FSA’s thematic review into anti-bribery and corruption systems and controls in investment banks.

The FC Guide sets out the FSA’s expectations of firms’ financial crime systems and controls and provides examples of the steps firms can take to reduce the risk of being used to further financial crime.

View Anti-bribery and corruption systems and controls: Proposed guidance and amendments to “Financial crime: a guide for firms”, 29 March 2012

Finalised guidance: Simplified advice

The FSA has published finalised guidance concerning simplified advice. The finalised guidance is intended to reduce any perceived regulatory uncertainties that may be discouraging firms from offering simplified advice services. It outlines how the regulatory regime applies to such processes, and the FSA’s expectations of such services, focusing on the issues raised by the industry.

The finalised guidance is structured as follows:

  • Section 1 contains the introduction.
  • Section 2 provides an overview of the guidance.
  • Section 3 outlines the background to the guidance, including the FSA’s regulatory approach.
  • Section 4 covers certain aspects of the regulatory regime for advising on investments, and provides additional guidance on specific rules for simplified advice.
  • Section 5 summarises some of the high-level standards and guidance which firms should pay particular regard to when designing and delivering simplified advice, and considers what these standards mean for both the design of the advice process itself and for choosing or developing an appropriate product suite.

View Finalised guidance: Simplified advice, 29 March 2012

FSA enforcement

The FSA has publicly censured two Glasgow based credit unions. The FSA states that Pollok Credit Union jeopardised its own solvency, and therefore the interests of its members, by making large loans to a non-member while Shettleston and Tollcross Credit Union made loans to its directors on terms better than those available to its wider membership.

View FSA publicly censures two Glasgow credit unions, 26 March 2012

View Final Notice - Pollock Credit Union Limited, 26 March 2012

View Final Notice -Shettleston and Tollcross Credit Union, 26 March 2012

France: New disclosure rules for cash-settled derivatives and enhanced flexibility of share buy-back programmes on NYSE Alternext Paris

A new piece of legislation was promulgated on 22 March 2012. From a financial services perspective, the legislation introduces amendments to disclosure rules for cash-settled derivatives and share buy-back programmes on NYSE Alternext Paris.

Amendment to disclosure rules for cash-settled derivatives

Under existing rules, thresholds for disclosure of shareholdings are calculated irrespective of cash-settled derivatives. Only when a threshold must be disclosed, cash-settled derivatives are also declared separately at the time of the disclosure of the threshold (without being aggregated to the threshold disclosed).

The position has been the subject of an ongoing debate since 2008, when a report from the industry commissioned by the French securities regulator (the Autorité des marchés financiers or AMF) advocated the opposite position, namely that cash-settled derivatives be treated as shares owned for threshold crossings disclosure purposes.

This new provision is due to take effect on 1 October 2012 and provides that cash-settled derivatives that have a similar economic effect to holding shares must be aggregated to shares actually held for the purposes of calculating thresholds to be disclosed. The new provision leaves it to the AMF Rulebook to specify how “similar economic effects” should be construed.

In addition, the statement of intent with regard to the following 6 months with respect to the investor’s holding in a company, to be filled in by the investor whose interest exceeds a threshold of 10%, 15%, 20% or 25% of the shares or voting rights of a company will now include information as to the investor’s intentions as to whether settlement of the agreements or financial instruments to which he is a party will be settled by cash-settlement or physical delivery. Such investors will be required to update the information if a change occurs.

Share buy-back programmes on NYSE Alternext Paris

Rules relating to share buy-back programmes available to issuers listed on NYSE Alternext Paris (the French market for medium-sized companies, which does not qualify as a “regulated market”) have been amended by the new legislation.

Under previous legislation, in contrast to companies listed on a regulated market (NYSE Euronext Paris), companies listed on NYSE Alternext Paris could implement a share buy-back programme only for liquidity purposes (by way of entering into a liquidity contract with an investment firm). As a result of the new provisions (which are to take immediate effect), companies listed on NYSE Alternext Paris may now engage in share buy-back transactions in a wider range of cases.

It is worth noting that EU rules provide for a number of safe harbours from liability for market manipulation and the AMF provides for a number of accepted market practices for issuers engaged in share buy-back programmes. It is not fully clear at this stage whether these rules will be made available to NYSE Alternext Paris listed issuers, and the AMF is therefore expected to clarify its position.

This new legislation will open up new options for companies listed on NYSE Alternext Paris, such as issues of certain types of equity-linked instruments exchangeable for existing shares (e.g. OCEANE, OBSAAR, ORNANE) or transactions providing for the physical delivery of the issuer’s existing own shares (e.g. public offers to acquire shares).

For further information please contact Roberto Cristofolini or Anselme Mialon

Italy: Proposal to recognise a new “admitted market practice” on bond buy-back at pre-determined conditions

CONSOB, the Italian Securities and Exchange Authority, recently published a consultation document on the recognition of “admitted practice” under article 1 of Directive 2003/6/CE of a market practice concerning bond buy-back at pre-determined conditions. This practice consists of a buy-back of bonds at conditions specified in an offering document, operated by an investment firm (so called “price maker”) appointed by an issuer in order to protect the value of the securities concerned in the event that the credit rating of the issuer worsens.

When the conditions set out in the offering document are satisfied, the price maker in charge of the buy-back will re-purchase a portion (normally between 10% and 40%) of the securities initially issued on the market at a price, calculated on the basis of the spread implied in the yield-to-maturity offered to bond investors at the time the securities were issued.

The recognition of this market practice was encouraged by Assosim, the Italian broker dealers Association, in consideration of its widespread use and of the risk for price makers to incur in market manipulation infringements.

According to the consultation document, in order to fall within the perimeter of the “admitted market practice”, several operating and transparency requirements have to be satisfied, including but not limited to:

(i) The buy-back shall take place on all markets in which the securities are admitted to trading.

(ii) Firms are required to insert buy orders at the conditions predetermined in the offering document.

(iii) The procedure adopted by the firm in the pricing of the bonds should be pre-determined and allow the determination of the credit spread. With respect to transparency requirements, investors should be adequately informed in a clear and transparent manner about the buy-back conditions and procedure, including the indication of the maximum securities that will be brought back. CONSOB will also require that a warning be given to investors that market prices of the bonds may be significantly influenced by the buy-back activity, and that, once the activity stops, the price of the securities will reflect market conditions, and it could be lower than the price indicated in the proposals made in accordance with the pre-determined conditions as set out in the offering documents.

CONSOB views the above market practice favourably particularly as it believes that it enhances investor protection, particularly in relation to retail investors who are often unable to make an adequate assessment of the pricing of the issuer’s credit rating.

The consultation closes on 30 April 2012.

For further information or guidance, please get in touch with your regular Norton Rose Group contact Nicolo Juvara or Davide Nervegna.

Italy: CONSOB Consultation Paper on the CONSOB Regulation of the Issuers and CONSOB Regulation on the Markets

In the course of 2011, following the financial crisis, the Italian Securities and Exchange Authority, CONSOB, started and directed a process to study and revise certain regulations in order to revise provisions which would favour access to the market by companies and investors.

As a result, the first set of amendments which were aimed at reducing the administrative and economic burdens on the market (Deliberation no 18079, January 2012) were approved earlier this year. In late 2011, CONSOB conducted further work with a view to amending certain provisions in connection to issuers and the market for the purposes of: (i) maintaining an adequate level of national regulation when compared to European regulation; (ii) simplifying the requirements in connection with the status of a “company listed on a regulated market” in order to reduce procedural costs, and to maintain an efficient level of control of the market in order to protect the rights of the investors. 

Following this work CONSOB published, on 22 March 2012, a consultation paper proposing further amendments to the CONSOB Regulations of the Issuers (IR) and to the CONSOB Regulation on the Markets (MR). The deadline for comments on the consultation paper is 23 April 2012.

The main amendments proposed are, inter alia, the following.

(i) Amendment of the definition criteria for the issuers of financial instruments widely distributed among the public

Increased threshold (from 200 to 500) in the number of shareholders and bondholders for the applicability of the regime of the so called “Issuers of financial instruments widely distributed among the public”, enhancing the effectiveness of the diffusion of the financial instruments amongst the public. Further, with respect to companies issuing bond securities, it is required that such issue has a nominal value equal to or above EUR 5 million.

Therefore the proposed definition criteria is intended to streamline and reduce the regulatory regime applicable to the current number of companies that will no longer fall into the definition.

(ii) Public offerings

Reduction to EUR 100,000 (from EUR 250,000) of the minimum subscription for the application of the exemption from the publication of a prospectus in public offers involving: a) open-ended collective investment undertakings; and b) financial products issued by insurance companies. An identical reduction has also been proposed for the exemption to launch a takeover bid or tender offer, by the issuer, aiming to acquire or offer units of investment schemes or financial products issued by insurance companies. The proposed changes will serve a double purpose: (i) align the IR with the Prospectus Directive as amended; and (ii) extend the application of the regime on tender and exchange offers also to investment schemes and offers of financial products issued by insurance companies.

Moreover, in order to deal with the issue of so called “splitting”, the consultation paper proposes to extend the publication exemption of an offering document, to the event of exchange offers of securities with: (i) a value of no less then EUR 50,000 and; (ii) the bondholders, who did not reach the amount of bond required for the exchange, are provided with a money consideration.

(iii) Shareholders’ rights

In light of the current reduction in capitalization and market volatility, the consultation paper amends the criteria for the calculation of the percentage requested for the submission of the lists of candidates for appointment to the board of directors: (a) variation of the capitalization parameter to EUR 1 billion; and (b) subsequent variation of the percentage for the list’s submission: 1% for the companies whose capitalization is between EUR 1 billion and EUR 15 billion, and 2.5% for companies whose capitalization is less than EUR 1 billion, with no variation for the other thresholds of 1.5% and 2%.

Moreover, in order to guarantee greater fairness amongst shareholders and to encourage IPOs, companies intending to go public may adopt as reference criteria for the submission of lists, and up until the second renewal term of the managing boards, a percentage of share capital ownership equal to 2.5% with no regard to the capitalization.

(iv) Information duties

To achieve maximum harmonization on obligations concerning ownership structure, so as to lighten regulatory requirements on investors the consultation paper proposes a simplification of the disclosure procedure of significant holdings as follows:

  • Removal of the communication duties on the significant holding as per article 117 IR, which are additional to the ones pursuant to the Transparency Directive (35, 40, 45, 75%).
  • Extension of the application of the significant holdings regulation to all parties (EU and non-EU) which perform asset management activities, with the extension of the exemption from the communication of the significant holdings between 2% and 5% in order to allow the application to non harmonized close ended collective investment undertakings.
  • Streamlining of the disclosure obligations of fiduciary companies, to the sole circumstance of the trustees exercising discretionally the right of vote on the registered shares.
  • New exemption for the temporary acquisition of shares below the threshold of 5% by qualified investors.

In light of the above amendments, it is clear that the intention of the consultation paper is the simplification and harmonization of procedures in order to make entry to the market easier and more affordable.

For further information or guidance, please get in touch with your regular Norton Rose Group contact Nicolo Juvara or Davide Nervegna.

Italy: Definition of professional clients applicable to governmental entities and bodies

After a consultation process which followed a number of financial disruptions involving governmental and local authorities investing in complex financial instruments and derivatives, a Ministerial Decree has been published in the Italian Official Gazzette (the Decree). In the Decree the Italian Ministry of Economy and Finance has laid down the eligibility criteria for public entities and bodies to qualify as professional clients pursuant to the Italian Consolidated Law on Finance (Legislative Decree 24 February 1998, n. 58) which implements the Markets in Financial Instruments Directive.

According to the Decree, public entities and bodies which are considered as “professional clients” by operation of law are:

  • The Italian Government
  • The Bank of Italy.

Moreover, the following governmental entities and bodies can be treated as professional clients upon request:

  • Regions.
  • Autonomous Provinces of Trento and Bolzano.
  • Other territorial entities and bodies such as, inter alia, municipalities, other local councils and communities, consortia established between governmental and local authorities.
  • National and regional non-territorial public entities provided that all of the following conditions are met: (i) the entities’ revenues, reported in the last approved financial account, are higher than EUR 40 million; (ii) the entity has completed transactions on financial markets of an aggregate value higher than EUR 100 million in the course of the last three years; (iii) the personnel in charge of the financial management of the entity holds adequate competences, skills, knowledge and experience in respect of investment services (including collective portfolio management) and financial instruments.

The process for being up-graded to professional client requires several stringent steps to be complied with by both the client and the intermediary- including, inter alia: (a) a written request of the client; (b) a statement of the personnel from the appropriate officer, in charge of the entity’s financial management, declaring that he holds adequate competences, skills, knowledge and experience; (c) a written awareness declaration from the client on the loss of protection due to the up-grading as professional client; and (d) an assessment by the intermediary that the above requirements (including items (i) to (iii)) are fulfilled.

The Ministerial Decree was expected by market operators for some time and entered into force on 22 March 2012.

For further information or guidance, please get in touch with your regular Norton Rose Group contact Nicolo Juvara or Davide Nervegna.

Netherlands: Amendments to Decree on public offers

On 9 March 2012, the Dutch Minister of Finance (Minister van Financiën, the Minister) published amendments to the Decree on public offers Wft (Besluit openbare biedingen Wft). The amendments introduce the so-called ‘shut up or put up-rule’. Pursuant to this rule, a target company can request the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) to instruct a potential bidder to make a public announcement within a period of six weeks whether or not it intends to make a public offer for the target company. If this announcement is not made within the specified in time, the potential bidder is not allowed to announce a voluntary bid on the target company within the next nine months. If, within the six week period, the potential bidder announces that it will not be making an offer for the target company, the potential bidder is not allowed to announce a voluntary bid for the target company within the next six months. The Minister intends that the amendments will enter into force on 1 July 2012.

The amendments to the Decree on public offers (in Dutch) can be found here

For further information please contact Floortje Nagelkerke

Netherlands: AFM imposes fine for market manipulation

On 9 March 2012, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) announced that it had imposed fines totalling EUR 96,000 on Mr. Homburg for market manipulation. Mr. Homburg was interviewed and made some references to the shares of the listed company Homburg Invest. Mr. Homburg was a director and major shareholder of Homburg Invest at the time of the interview.

The price of Homburg Invest’s shares increased, ultimately by 38%, in the days following the interview. After the press release was published, the price dropped again to a level that was lower than before the broadcast of Mr. Homburg’s interview.

According to the AFM, Mr. Homburg spread information in the aforementioned interview that sent an incorrect and misleading signal in relation to the price of shares in Homburg Invest and therefore, Mr. Homburg violated the prohibition on market manipulation.

The decision of the AFM to impose a fine on Mr. Homburg (in Dutch) can be found here

For further information please contact Floortje Nagelkerke.

Netherlands: AFM imposes fine on BRSG Advisors SA for market manipulation

On 23 March 2012, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) announced that it had imposed a fine of EUR 240,000 on BRSG Advisors SA (BRSG) for market manipulation.

In December 2009, a Dutch bank made a so-called claim emission. Pursuant to this claim emission, existing shareholders were attributed one right (claim) to acquire new shares in a specific share swap. During the subscription period, claims could be traded on NYSE Euronext and arbitration between the Dutch bank’s shares and the claims was possible.

According to the AFM, BRSG simultaneously made buy orders in claims and sale orders in the Dutch bank’s shares during at least four days in opening or closing auctions. BRSG made these orders in such proportions that the bought claims matched the number of sold shares after the swap. Therefore, BRSG arbitrated in these auctions between the shares and claims. Also, before the arbitration transactions, BRSG put in large buy orders in the claims that it cancelled within five seconds before the opening or closing auction. As a result, the theoretical opening price of the claims decreased pursuant to which the arbitration possibilities between the claims and the shares became advantageous. In the auctions that followed, BRSG made positive results.

According to the AFM, the buy orders that BRSG put in and cancelled in the described manner, gave a misleading signal as to the demand for claims at that time. The AFM stated that BRSG did not sufficiently prove that it had justified reasons for putting in and cancelling the buy orders. Therefore, according to the AFM, BRSG violated the prohibition on market manipulation.

The decision of the AFM to impose a fine on BRSG (in Dutch) can be found here

For further information please contact Floortje Nagelkerke.

Netherlands: Registration offerors of investment objects

On 1 January 2012, the threshold for the exemption from the licence requirements for offering investment objects and participation rights in investment funds was increased from EUR 50,000 to EUR 100,000. As of that date, entities that offer, manage or perform investment objects or offer participation rights in denominations of less than EUR 100,000 must have a licence. A transitional regime applies to entities that offered, managed or performed investment objects in denominations between EUR 50,000 and EUR 100,000 before 1 January 2012 and who still manage or perform the related agreements.

Under the transitional regime, existing offerors must have notified the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) before 1 February 2012 of their intention to apply for a licence. Following this notification, the AFM included them in a new register. Only entities that are included in the new register can benefit from the transitional regime. Entities that can benefit from the transitional regime must apply for a licence from the AFM before 1 September 2012.

As of 8 March 2012, the AFM published the new register on its website.

The registration (in Dutch) by the AFM can be found here.

For further information please contact Floortje Nagelkerke.

Singapore: Amendments to the Singapore Code on Takeovers and Mergers

On 23 March 2012, the Monetary Authority of Singapore (MAS) issued a revised Code on Takeovers and Mergers (Code). The key changes to the Code are consistent with international best practice and include:

  • Codifying existing practices.
  • Keeping pace with market developments (e.g. clarifying the application of the Code to real estate investment trusts and business trusts, and when a derivative transaction is subject to the mandatory takeover rules).
  • Enhancing disclosures (e.g. requiring the offeror to disclose his shareholdings which have been charged as security, borrowed or lent).
  • Providing greater flexibility (e.g. providing exemptions to shareholders from the requirement to make a mandatory offer as a result of a company share buy-back).

The amendments will take effect on 9 April 2012.

For further information, please contact Daniel Yong or Wilson Ang.

Singapore: Proposed changes to registration of negotiated large trades

SGX is consulting the public on the following proposed changes for negotiated large trades (NLTs) in the derivatives market:

  • New functionality to enable registration of NLTs through the QUEST Application Programming Interface (API) - providing an alternative to the existing eNLT system and offering more convenience to market participants whose order management system is already connected to the SGX trading engine via API.
  • Extension of registration hours on the eNLT system to 8.00 p.m. for all SGX-DT contracts - allowing market participants greater flexibility to execute their options strategy and futures hedges and bringing SGX-DT in line with the current NLT registration practice on SGX AsiaClear.

The changes are intended to be implemented in the third quarter of 2012.

For further information, please contact Daniel Yong or Wilson Ang.

Hong Kong: Takeover Code amended

The Hong Kong Codes on Takeovers and Mergers and Share Repurchases were amended on 23 March 2012. The main amendment was to the property valuation requirements, which now only apply to takeover offers where the offeror is an "interested party". There were also other minor changes, including some affecting placing and top‑up transactions.

For further information, please contact Charlotte Robins.

Hong Kong: Detailed proposals for trust law reform released

On 22 March 2012, the Financial Services and the Treasury Bureau of the Hong Kong Government released a consultation paper seeking comments on the detailed legislative proposals for the reform of Hong Kong trusts law. The proposals encompass amendments to the Trustee Ordinance to bring Hong Kong’s regulatory regime in line with other comparable common law jurisdictions (such as the UK and Singapore) and to cater for the needs of modern-day trusts.

If implemented, the proposals will provide clarification of trustees’ duties and powers, including imposing a statutory duty of care on trustees and improving the law relating to delegation of trustee duties. The proposals also provide for better protection of beneficiaries’ interests (including a mechanism under which beneficiaries may remove trustees) and make various modernisation suggestions, including one to abolish the rule against perpetuities.

The deadline for comments on the proposals is 21 May 2012.

For further information, please contact Charlotte Robins.

Hong Kong: New short position reporting regime to become effective June 2012

Hong Kong’s new Securities & Futures (Short Position Reporting) Rules and the related Securities & Futures (Offences and Penalties) (Amendment) Regulation 2012 were gazetted on 23 March 2012 and will be brought into effect on 18 June 2012.

The new legislation requires a person who has a net short position in specified shares which equals or exceeds a certain threshold, to report that position to the SFC. Failure to report is a criminal offence.

For further information, please contact Charlotte Robins.

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Retail

Consultation Paper 12/07: Financial Services Compensation Scheme: changes to the Compensation sourcebook

The FSA has published Consultation Paper 12/07: Financial Services Compensation Scheme: changes to the Compensation sourcebook (CP12/07).

In CP12/07 the FSA proposes certain changes to the rules set out in the Compensation sourcebook (COMP) that deal with the operation of the Financial Services Compensation Scheme (FSCS).

The FSA is seeking to make certain changes that are intended to help the FSCS when the value of a claimant’s investment is uncertain. The FSA proposes to give the FSCS some additional flexibility in appropriate circumstances to pay full compensation where, under present rules, consumers would have to wait an excessively long time to receive full compensation.

The FSA also notes that in other cases the cost to the FSCS of assessing a claim may exceed the compensation due. It believes that a proportionate approach is to give the FSCS the ability (similar to the approach for deposits) to pay compensation without a full investigation if the costs of investigation are disproportionate to the benefits. The FSCS would also need to be satisfied that this was reasonably in the interests of levy payers. The FSA proposes that the FSCS should be able to take this approach to defaults that occurred before or after the rule change comes into effect.

The FSA also proposes other changes to streamline the FSCS’s claims handling including simplifying eligibility criteria. The changes include removing the requirement for an application form, giving the FSCS the option of taking an automatic assignment of a claimant’s rights against the failed firm, and paying compensation for a shortfall in client money to a firm that has taken over the business of the failed firm.

The FSA also discusses the need to ensure that, within the existing framework for protecting policyholders, its rules would be workable in practice in the event of an insurer, in particular a life insurer, failing.

However, the FSA is not proposing new rules or guidance in relation to insurers. But it hopes that feedback will inform any future consideration of the desirability of changing the existing rules.

The deadline for comments for most of the proposals in CP12/07 is 26 June 2012. However, CP12/07 includes a proposal to remove the FSCS’s telephone number from the information deposit-takers must give depositors. The consultation period for this proposal is 26 April 2012 and subject to feedback the FSA plans to make rules for this change in May 2012. The FSA intends to provide feedback on all the proposals by the end of September 2012.

The FSA also aims to publish an initial Consultation Paper in the first half of 2012 on the funding arrangements of the FSCS as part of the FSCS Funding Model Review.

View Consultation Paper 12/07: Financial Services Compensation Scheme: changes to the Compensation sourcebook, 27 March 2012

FG12/09: Retail Product Development and Governance - Structured Product Review

The FSA has been aware for some time that structured products have been rising in popularity and it is concerned that the growing number of structured product sales, as well as increasing product complexity, is placing a strain on firms’ systems and controls. A lack of robustness in firms’ product development and marketing processes can increase the risk of poorly designed products and lead to mis-selling, or mis-buying by consumers.

Between November 2010 and May 2011, the FSA assessed seven major providers of structured products. The review specifically assessed how firms were designing structured products, identifying their target markets, and how they handled post-sales responsibilities. In November 2011 the FSA published a guidance consultation based on its structured products review. The guidance consultation closed on 11 January 2012.

The FSA has now published finalised guidance on its structured products review. The finalised guidance sets out the FSA’s expectations about product development and how firms bring to market retail structured products. The focus on the earlier stages of the product life-cycle, in line with the new more interventionist approach to regulation that the proposed Financial Conduct Authority (FCA) will adopt, demonstrates that the FSA is already seeking to identify potential consumer detriment at a far earlier stage.

In the finalised guidance the FSA focuses on the key issues of governance which arise in the development and marketing of structured products. By governance the FSA covers systems and controls in relation to product design, product management and distribution strategies. The FSA’s work last year focused on product providers, and it did not assess sales processes or the quality/suitability of individual sales, nor did it include distributors in the review. The FSA states that it will be doing further work on these issues in 2012.

The FSA states that the key finding from its review last year was that, while firms had taken on board many of the messages on treating customers fairly, there were still weaknesses in product governance arrangements. Overall, firms still focused too much on their commercial position, potentially at the expense of consumer outcomes.

The FSA also states that whilst the publication sets out guidance for provider firms on the development of structured products, it may also be relevant to other retail products with appropriate modifications. This is on the basis that most firms have told the FSA that they apply the same governance principles, and follow the same or similar procedures, for all new product types.

Whilst the finalised guidance covers product governance and treating customers fairly, the FSA also reminds firms of other relevant obligations.  In particular the FSA reminds firms of:

  • Its publication Treating Customers Fairly and UK Authorised Collective Investment Scheme Managers.
  • The obligation to produce a prospectus. The FSA discusses the requirement for a prospectus in Annex 3 of the finalised guidance.

View FG12/09: Retail Product Development and Governance - Structured Product Review, 23 March 2012

FOS plans and budget for 2012/2013 - finalised and approved

The Financial Ombudsman Service (FOS) has set its operational budget for 2012/2013 at £191.1 million. The FSA has also approved the operational budget. The budget means that for the third year running the FOS will be able to freeze both the case fee and the total levy. The budget will be funded by a combination of levies and case fees paid by financial businesses.

The standard case fee for 2012/2013 will remain at £500. Financial businesses will be charged this case fee only for the fourth (and any subsequent) case during the year. However, the FOS is also introducing a new supplementary case fee of £350 for PPI mis-selling complaints. This will be payable when the FOS formally takes on a complaint involving PPI mis-selling but it will be charged only when businesses have more than 25 of these cases a year.

The FOS has also published a summary of the feedback received to its earlier consultation regarding its proposed plans for 2012/2013. It also explains how it will proceed in light of that feedback.

View FOS plans and budget for 2012/2013 - finalised and approved, 27 March 2012

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Seminars

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.

http://www.nortonrose.com/invitations/2011/your-guide-to-the-key-regulatory-challenges-in-2012-60409.aspx

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:

  • Twin Peaks - The FSA operational changes (16 March 2012)
  • AIFMD Update (2 March 2012)
  • EMIR (17 February 2012)
  • 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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