Financial services updater

12 March 2012

Contacts

Related services

Key industry sectors

Introduction

Welcome to the latest edition of our financial services newsletter.

Highlights this week include:

  • Commission acts to increase the safety and efficiency of securities settlement in Europe
  • Finalised guidance: Transaction Reporting User 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

Clearing & settlement

Commission acts to increase the safety and efficiency of securities settlement in Europe

The European Commission has issued a legislative proposal in the form of a draft Regulation which is intended to harmonise both the timing and conduct of securities settlement in Europe and the rules governing central securities depositories (CSDs) which operate the infrastructure enabling settlement.

The Commission has proposed this legislation on the basis that while generally safe and efficient within national borders, cross-border settlement presents higher risks and costs for investors.

The Commission believes that it is important to have a harmonised set of measures across Europe for settlement as well as for the institutions responsible for settlement, the CSDs. CSDs are currently regulated at national level but lack a common set of prudential, organisational and conduct of business standards at European level.  

The Commission argues that these problems are important and need to be solved, as cross-border transactions in Europe continue to increase and CSDs become increasingly interconnected. These trends are expected to accelerate with the advent of Target2 Securities (T2S), a project launched by the Eurosystem to provide a common technical platform for securities settlement in Europe, which is scheduled to start in 2015.

The key elements of the proposal are:

  • The settlement period will be harmonised and set at a maximum of two days after the trading day for the securities traded on stock exchanges or other regulated markets (currently two to three days are necessary for most securities transactions in Europe).
  • Market participants that fail to deliver their securities on the agreed settlement date will be subject to penalties, and will have to buy those securities in the market and deliver them to their counterparties.
  • Issuers and investors will be required to keep an electronic 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. They will also have to be authorised and supervised by their national competent authorities.
  • Authorised CSDs will be granted a passport to provide their services in other Member States.
  • Users will be able to choose between all 30 CSDs in Europe.
  • CSDs in the EU will have access to any other CSDs or other market infrastructures such as trading venues or central counterparties, whichever country they are based in.

View Commission acts to increase the safety and efficiency of securities settlement in Europe, 7 March 2012

View Commission proposal on improving securities settlement in the EU and on central securities depositories FAQs, 7 March 2012

View Proposal for a Regulation on improving securities settlement in the European Union and on central securities depositories and amending Directive 98/26/EC, 7 March 2012

T2S online - winter 2012 edition

Target2 Securities (T2S) is a project launched by the Eurosystem to provide a common technical platform for securities settlement in Europe, which is scheduled to start in 2015.

The European Central Bank (ECB) has now published the winter 2012 edition of the T2S OnLine Quarterly Review. The Review starts with an editorial by Jean-Michel Godeffroy, Chairman of the T2S Programme Board, who discusses what it will mean to be part of the T2S community for those central securities depositaries and central banks that will soon enter into a contractual agreement regarding T2S with the Eurosystem.

The Review then provides:

  • Information on how the members of the TS2 community will cooperate.
  • A description of the T2S planning, monitoring and reporting framework.
  • A general update on the progress made by T2S over the last few months.
  • An interview with two T2S Network Service Providers, SWIFT and a consortium composed of SIA and Colt who discuss their motivation in becoming part of the T2S project, their offers for prospective T2S customers and the next steps of their preparation for T2S.

View T2S online - winter 2012 edition, 6 March 2012

Collateral requirements for mandatory clearing of over-the-counter derivatives

The Bank for International Settlements (BIS) has published a working paper produced by Daniel Heller and Nicholas Vause which concerns collateral requirements for mandatory central clearing of over-the-counter derivatives. Views expressed in the working paper are the authors and not necessarily of the BIS.

View Collateral requirements for mandatory clearing of over-the-counter derivatives, 6 March 2012

Joint Discussion Paper on Draft Regulatory Technical Standards on risk mitigation techniques for OTC derivatives not cleared by a CCP under the Regulation on OTC derivatives, CCPs and Trade Repositories

The European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority (together the ESAs) have published a discussion paper on draft regulatory technical standards (RTS) under the proposed Regulation on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories (EMIR).

The discussion paper follows the political agreement reached by the European Commission, the European Parliament and the Council of the EU, in relation to EMIR, during the Trilogue meeting on 9 February 2012.

Under Articles 6 and 8 of EMIR, the ESAs are required to draft RTS specifying the requirements on risk mitigation techniques for OTC derivative contracts not cleared by a CCP. The purpose of the discussion paper is to set out the ESA’s preliminary views on this topic and to gather the stakeholders’ opinions at an early stage in the process.

The discussion paper contains:

  • Preliminary considerations regarding collateral (margin) and capital requirements.
  • Potential options regarding combinations of collateral and capital requirements.
  • The application of variation and initial margins.
  • Information on identifying eligible collateral and collateral valuation.
  • Potential issues related to transactions with counterparties outside of the EU.
  • Risk management procedures, operational processes for the exchange of collateral and minimum transfer amounts as well as intra-group exemptions.
  • A data request for the cost-benefit analysis.

Comments on the discussion paper should be submitted by 2 April 2012.

View Joint Discussion Paper on Draft Regulatory Technical Standards on risk mitigation techniques for OTC derivatives not cleared by a CCP under the Regulation on OTC derivatives, CCPs and Trade Repositories, 6 March 2012

EBA Discussion Paper on Draft Regulatory Technical Standards on the capital requirements for CCPs under the draft Regulation on OTC derivatives, CCPs and Trade Repositories

The European Banking Authority (EBA) has published a discussion paper on draft regulatory technical standards (RTS) under the proposed Regulation on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories (EMIR).

Under Article 12 of EMIR the EBA is required to draft RTS on the capital requirements that a CCP should meet. The purpose of the discussion paper is to set out the EBA’s preliminary views on these issues and to gather stakeholders’ opinions at an early stage in the process.

The EBA states that its preliminary view is that the capital of a CCP, including retained earnings and reserves, should be at all times at least equal to the higher of: (1) the CCP’s operational expenses during an appropriate time span for winding-down or restructuring its activities; and (2) the capital requirements for those risks that according to EMIR must be covered by appropriate capital.

The EBA also states that risk exposures and capital requirements should be calculated using the approaches set out for banks in the Capital Requirements Directive. Also, any capital held under international risk-based capital standards should be included to avoid double regulation.

Comments on the discussion paper should be submitted by 2 April 2012.

View EBA Discussion Paper on Draft Regulatory Technical Standards on the capital requirements for CCPs under the draft Regulation on OTC derivatives, CCPs and Trade Repositories, 6 March 2012

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Capital adequacy

Compromise proposal - CRD IV

The Danish Presidency of the Council of the EU has published compromise proposals for the proposed CRD IV Directive and the proposed Capital Requirements Regulation.

The compromise proposals have been prepared following discussions at working party meetings in January and February 2012.

View Compromise proposal - CRD IV Directive, 1 March 2012

View Compromise proposal - Capital Requirements Regulation, 1 March 2012

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FSA Handbook

Policy Statement 12/04: Protecting with-profits policyholders

The FSA has published Policy Statement 12/04: Protecting with-profits policyholders (PS12/04).

PS12/04 reports on the main issues arising from Consultation Paper 11/5: Protecting with-profits policyholders (CP11/5) and publishes final rules which come into effect on 1 April 2012. In CP11/5 the FSA set out proposals for a range of changes to its rules and guidance concerning the operation of with-profits funds, primarily in chapter 20 of the Conduct of Business sourcebook. The FSA consulted on changes in several areas including:

  • The fair treatment of with-profits policyholders generally and in mutually-owned long-term insurance funds specifically.
  • Conflicts of interest.
  • The terms on which firms should write new business.
  • The effect of material reductions in new business.
  • Market value reductions.
  • Strategic investments.
  • Charges.
  • Excess surplus.
  • Reattributions.
  • The role of independent judgment including with-profits committees and other aspects of corporate governance.

View Policy Statement 12/04: Protecting with-profits policyholders, 7 March 2012

Consultation Paper 12/05: Quarterly consultation paper No. 32

The FSA has published Consultation Paper 12/05: Quarterly consultation paper No. 32 (CP12/05). In CP12/05 the FSA sets out proposed miscellaneous amendments to the Handbook. The FSA proposes amendments to:

  • The qualification standards that advisers have to meet as part of the Retail Distribution Review (RDR) (Chapter 2).
  • Clarify the liquidity rules in the Prudential sourcebook for Banks, Building Societies and Investment Firms (BIPRU) and the liquidity reporting rules in the Supervision manual (SUP) (Chapter 3).
  • Implement the Significant Risk Transfer (SRT) into the trading book, to ensure that firms comply with the SRT requirements (Chapter 4).
  • Increase consumer protection for self-invested personal pensions (SIPPs) by modifying pension scheme disclosures in the Conduct of Business sourcebook (COBS) (Chapter 5).
  • Achieve a single regulatory regime for all credit unions in the UK by making minor amendments to the Credit Unions New sourcebook (CREDS) (Chapter 6).
  • Clarify when related party relationships arise between issuers and investment banks undertaking certain transactions, where shares are held for a short period and to cease providing individual guidance on a ‘no names’ basis (Chapter 7).
  • The Collective Investment Schemes sourcebook (COLL) and other areas of the Handbook to allow the FSA to authorise another two legal forms of collective investment scheme: a co-ownership scheme and a limited partnership scheme (Chapter 8).

The deadline for comments on CP12/05 is as follows:

  • Chapter 2 by 6 April 2012.
  • Chapters 3 to 8 by 6 May 2012.

View Consultation Paper 12/05: Quarterly consultation paper No. 32, 7 March 2012

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Insurance

Payment protection insurance customer contact letters

The FSA has published a guidance consultation concerning payment protection insurance customer contact letters.

In the draft guidance the FSA refers to letters or other types of communications (made in a durable medium) used to contact consumers to ask them to respond if they would like their sale to be reviewed as ‘PPI consumer contact letters’ (PPI CCLs). The draft guidance sets out the FSA’s view of what a PPI CCL should contain, and how it should be presented so that it is clear, fair and not misleading.

The draft guidance also sets out the FSA’s view of how its rules on complaint handling and the time limits on a consumer making a complaint are relevant to PPI CCLs. It also covers some other relevant obligations such as record keeping.

View Payment protection insurance customer contact letters, 6 March 2012

View FSA publishes guidance consultation to help firms provide redress to victims of PPI mis-selling, 6 March 2012

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Market abuse

Three arrested in FSA insider dealing investigation

The FSA has issued a press release stating that, with the assistance of Cheshire and Lancashire Constabularies, it has executed three search warrants at premises in Northwich and Rossendale.

Three individuals, two men and a woman have been arrested and are currently in custody to be questioned in connection with an investigation into insider dealing.

View Three arrested in FSA insider dealing investigation, 1 March 2012

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Money laundering

Best Practices Paper on Recommendation 2: Sharing among domestic competent authorities information related to the financing of proliferation

The Financial Action Task Force (FATF) has published a best practices paper on Recommendation 2 of the FATF Recommendations entitled Sharing among domestic competent authorities information related to the financing of proliferation.

A key purpose of the paper is to provide guidance on the sharing of information between anti-money laundering / counter-terrorist financing authorities and authorities responsible for combating weapons of mass destruction proliferation.

View Best Practices Paper on Recommendation 2: Sharing among domestic competent authorities information related to the financing of proliferation, 7 March 2012

Common understanding between Member States on third country equivalence under the Anti-Money Laundering Directive

The European Commission has published a revised version of a list which sets out those third countries that are considered to have equivalent anti-money laundering/counter terrorist financing (AML/CFT) systems to those in the EU under the Third Money Laundering Directive (TMLD).

The third countries listed are: Australia, Brazil, Canada, Hong Kong, India, Japan, Korea, Mexico, Singapore, Switzerland, South Africa and the United States.

However, the list does not override the need to continue to operate the risk-based approach. The fact that a financial institution is based in a third country appearing on the list only constitutes a refutable presumption of the application of simplified client due diligence. In addition, the list does not override the obligation under Article 13 of the TMLD to apply enhanced customer due diligence measures in all situations which by their nature can present a higher risk of money laundering or terrorist financing, when dealing with credit and financial institutions, as customers, based in an equivalent jurisdiction.

View Common understanding between Member States on third country equivalence under the Anti-Money Laundering Directive, 5 March 2012

Statement on money laundering controls in overseas jurisdictions

HM Treasury has issued a Financial Sector Advisory Notice regarding the risks posed by unsatisfactory money laundering controls in a number of jurisdictions.

The Notice is split into two parts:

  • Part A covers jurisdictions with ongoing and substantial money laundering and terrorist financing risks. The jurisdictions mentioned are: Iran, The Democratic People’s Republic of Korea, Bolivia, Cuba, Ethiopia, Ghana, Indonesia, Kenya, Nigeria, Myanmar, Pakistan, Sao Tome and Principe, Sri Lanka, Syria, Tanzania, Thailand and Turkey.
  • Part B covers jurisdictions with strategic deficiencies in their anti-money laundering/counter terrorist financing regime, which have developed an action plan with the Financial Action Task Force. The jurisdictions mentioned are: Algeria, Angola, Antigua and Barbuda, Argentina, Brunei Darussalam, Cambodia, Kyrgyzstan, Mongolia, Morocco, Namibia, Nepal, Nicaragua, Sudan, Tajikistan, Turkmenistan, Trinidad & Tobago, Venezuela, Zimbabwe, Bangladesh, Equador, Philippines, Vietnam and Yemen.

View Statement on money laundering controls in overseas jurisdictions, 5 March 2012

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Regulation and compliance

Technical features of the Legal Entity Identifier (LEI)

The Financial Stability Board (FSB) has published a note on the technical features of its legal entity identifier (LEI).

The note sets out the work of the LEI expert group in developing a global framework for the LEI. The expert group’s work is continuing under five work streams, which are: governance; operational model; scope, confidentiality and access; funding; and implementation and phasing.

The FSB states that the expert group has made significant progress in identifying the key issues and developing framework solutions, which will be presented to FSB by the end of April. This will enable the FSB to meet the G-20 mandate provided at the Cannes Summit.

View Technical features of the Legal Entity Identifier (LEI), 7 March 2012

Finalised guidance: Transaction Reporting User Pack

The Transaction Reporting User Pack (TRUP) provides firms with guidance on the transaction reporting obligations that come from the Markets in Financial Instruments Directive (MiFID) which were implemented through chapter 17 of the Supervision manual.

On 11 November 2011, the FSA conducted a consultation concerning possible amendments to the second version of TRUP (published in September 2009). The consultation closed on 24 November 2011.

Following the consultation the FSA has now published a new version of the TRUP (version 3). The new version is effective immediately. The purpose of the new version of the TRUP is to:

  • Update the document to remove historical information that is no longer relevant.
  • Update references and incorporate guidelines published by the Committee of European Securities Regulators.
  • Incorporate guidance published elsewhere and guidance issued since version 2 of the TRUP.
  • Provide clarification on areas raised by firms and trade bodies and where it is helpful in assisting the FSA to conduct its market abuse monitoring.

View Finalised guidance: Transaction Reporting User Pack, 1 March 2012

Finalised guidance: Thematic overview: Regulated covered bond regime

The FSA has published finalised guidance concerning its minimum expectations regarding the regulated covered bond regime (RCB regime). The guidance covers the scope and depth of engagement with the programme by the person who signs the annual confirmation of compliance, the content of management information and the appropriateness of systems and controls.

View Finalised guidance: Thematic overview: Regulated covered bond regime, 6 March 2012

MoU between the FSA and the Department of Enterprise, Trade and Investment in Northern Ireland

The FSA has published a memorandum of understanding (MoU) between itself and the Department of Enterprise, Trade and Investment in Northern Ireland (DETI).

The MoU sets out the role of each body and how they will work together where necessary as a consequence of The Financial Services and Markets Act 2000 (Permissions, Transitional Provisions and Consequential Amendments) (Northern Ireland Credit Unions) Order 2011.

The MoU is intended to support joint working arrangements between the FSA and the DETI which satisfy the statutory responsibilities of each body in relation to the transfer of regulatory responsibility for Northern Ireland credit unions. It builds on an earlier pre-transfer co-operation agreement letter and sets out the main categories for the continuing post-transfer joint working arrangements.

View MoU between the FSA and the Department of Enterprise, Trade and Investment in Northern Ireland, 2 March 2012

FSA Enforcement

The former finance director of an insurance company, Royal Liver Assurance Limited ("RLA") has been fined £109,000 and prohibited for entering into unauthorised contracts with a company controlled by a former employee in breach of Statement of Principle 1. The director sought to conceal from RLA's board payments to the employee and also falsified the signature of RLA's CEO. The fine was reduced from £1 million due to financial hardship and the fine is to be paid in instalments over 12 months.

View FSA Final Notice - George McGregor, 8 March 2012

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Securities

Final report: ESMA’s technical advice on possible delegated acts concerning the revised Prospectus Directive

On 20 January 2011, the European Securities and Markets Authority (ESMA) received a mandate from the European Commission to provide technical advice on possible delegated acts concerning the revised Prospectus Directive (PD). In relation to the issues on which technical advice was requested, the mandate comprised of the following sections:

  • 3.1 - Format of the final terms to the base prospectus (Article 5(5)).
  • 3.2 - Format of the summary of the prospectus and detailed content and specific form of the key information to be included in the summary (Article 5(5)).
  • 3.3 - Proportionate disclosure regime (Article 7).
  • 3.4 - Equivalence of third country financial markets (Article 4(1)).
  • 3.5 - The consent to use a prospectus in a retail cascade (Articles 3 and 7).
  • 4 - Review of the provisions of the Prospectus Regulation (Articles 5 and 7).
  • 5 - Comparative table of the liability regimes applied by the Member States in relation to the PD.
  • 6 - ESMA received a letter from the Commission extending the scope of the mandate to also include convertible bonds.

Following receipt of the mandate, ESMA published a consultation paper covering sections 3.5 and 4 of the mandate. On 26 January 2011, it launched a call for evidence. The deadline for responding to the call was 25 February 2011.

ESMA has now published final advice consisting of a combined document that comprises both its feedback statement (FB) and its final technical advice (TA) for both section 3.5 (the consent to use a prospectus in a retail cascade) and section 4 (review of the provisions of the Prospectus Regulation) of the mandate.

The Commission is under the obligation to adopt delegated acts by 1 July 2012 in relation to the areas covered in sections 3.1 and 3.2. Due to the need to provide market actors with legal clarity by 1 July 2012 and in light of the importance of areas covered in sections 3.3, 3.5 and 4, the delegated acts dealing with these matters should be published in the Official Journal of the EU by 1 July 2012.

ESMA will now start delivering the advice on section 5 which will involve a comparative table recording the liability regimes applied by the Member States in relation to the PD. However, in relation to the work on section 3.4, the criteria to be applied in assessing the equivalence of a third country financial market is postponed due to the on-going review of the Transparency Directive, Market Abuse Directive and the Markets in Financial Instruments Directive.

View Final report: ESMA’s technical advice on possible delegated acts concerning the revised Prospectus Directive, 29 February 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:

  • 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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  • Publications

    Blog: AIFM Directive - 2011

    Please be advised that this blog is no longer in use and has been replaced by our online technical resource “AIFMD expert”.

    2011

    Blog: MiFID review

    The Markets in Financial Instruments Directive (MiFID) entered into force in November 2007.

    March 2011