1.1 Shareholder claims against
insolvent companies - Implications of the Sons of Gwalia
decision
On 29 January 2009, the
Corporations and Markets Advisory Committee (CAMAC) released
its report 'Claims by shareholders against insolvent
companies: implications of the Sons of Gwalia
decision'.
The report responds to a request for
advice on the effect of the High Court decision in Sons of
Gwalia Ltd v Margaretic [2007] HCA 1 (Sons of
Gwalia).
While recognising that the decision has significant
implications, including for providers of corporate debt
finance as well as the conduct of external administrations,
CAMAC has not recommended action to overturn its
effect.
The High Court held, in effect, that a
claim by a shareholder for loss to the value of shares caused
by failure of the company to inform the market would rank
equally with the claims of other unsecured creditors in an
external administration. It was not a claim in the
shareholder's 'capacity as a member of the company', which
would be postponed behind claims by unsecured
creditors.
While clarifying the law, it brought
into focus the largely unanticipated conflict between the
provision to shareholders of statutory remedies for corporate
misconduct and the traditional notion of shareholder interests
being postponed behind those of conventional unsecured
creditors in a liquidation.
The views of
respondents to CAMAC's earlier discussion paper were polarised
on the question whether the current position should be
maintained or changed.
The Committee as a whole is not persuaded of the need for
change in the legal position. Any move to curtail the rights
of recourse of aggrieved shareholders where a company is
financially distressed could be seen as undermining
legislative initiatives to provide shareholders with direct
rights of action in respect of corporate misconduct.
In effect, the facilitation of private remedies
has added to the enforcement armoury, encouraging self‑help by
affected parties to complement the role of the regulators in
relation to corporate disclosures. Shareholders and creditors
share an interest in the promotion of an efficient and
informed market.
The Committee acknowledges the
possible consequences of Sons of Gwalia for companies seeking
funds in the unsecured debt market and in the rehabilitation
of financially distressed companies. The High Court decision
has provided a measure of certainty and it is likely that
changes have already occurred as the market has adapted to the
legal environment.
The Committee recognises that
shareholder claims may add to the complexity of corporate
external administrations. It has proposed measures to assist
with those claims:
- a standardised proof of debt form for claims by
aggrieved shareholders, which administrators may choose to
use in making a 'just estimate' of the value of those
claims;
- a rebuttable presumption that a determination in one
proceeding of a question of fact common to other aggrieved
shareholder claims applies in any subsequent proceedings;
and
- giving the court a general power to make orders in a
liquidation, which would cover creditors' meetings and the
determination of shareholder claims.
The Committee also provided advice on the following options
if, notwithstanding its view, some change to the present
position were considered necessary:
- postpone all, or some, claims by aggrieved shareholders
behind claims by conventional unsecured creditors;
- maintain those claims as creditor claims but subject
them to a monetary cap; and
- prohibit claims by aggrieved shareholders altogether.
CAMAC considered possible measures to assist aggrieved
shareholders if their current rights, as recognised in Sons of
Gwalia, were postponed. It did not favour the introduction, by
legislation, of a fraud on the market principle (which would
overcome the need to prove reliance on a corporate
misrepresentation) in the context of claims by aggrieved
shareholders against insolvent companies.
The report
also recommended:
- abrogation of the rule in Houldsworth's case, which in
some cases prohibits claims by shareholders who have
purchased shares from the company, rather than from a third
party; and
- that shareholders making claims as members of a company
in liquidation, for unpaid dividends for example, should
not, on that basis, receive information or be able to vote
as creditors.
The report is available on the CAMAC website.
1.2 EU Commission adopts measures
to strengthen financial markets supervisory committees
On 26 January 2009, the European Commission
adopted a set of decisions to strengthen the supervisory
framework for EU financial markets, in order to improve
supervisory cooperation and convergence between Member States
and to reinforce financial stability. Under the new rules, the
three committees that supervise, respectively, the securities,
banking and insurance sectors will benefit from a clearer
operational framework and more efficient decision-making
processes. In addition, the Commission proposes that these
committees, as well as key bodies involved in the
standard-setting process for financial reporting and auditing
at both EU and international level, should be provided with
financial support from the EU budget so that they can achieve
their objectives as rapidly and efficiently as possible.
The proposal for financial support now passes to
the Council and the European Parliament for
consideration.
The Commission has revised the Decisions
establishing the EU Committees of Supervisors (CESR, CEBS and
CEIOPS), setting up a clearer framework for the activities of
the Committees and reinforcing current financial stability
arrangements.
The new Decisions contain a
non-exhaustive list of tasks that the Committees are expected
to perform and enhance the role of the Committees as regards
the safeguarding of financial stability. In order to improve
the decision-making process of the Committees, the Decisions
introduce qualified majority voting when consensus cannot be
reached. Members who do not follow measures adopted by the
Committees must be prepared to present the reasons for this
choice. The measures adopted by the Committees remain
non-binding.
The proposals are available on the
European Commission website.
1.3 European financial integration
report
On 19 January 2009, the European
Commission released its European Financial Integration Report
(EFIR) - an annual analysis of the integration in the EU
financial sector and its effects on competition, efficiency,
financial stability and competitiveness. EFIR also includes a
progress report on EU financial services policy achievements
in 2008.
The report is available on the European Commission website.
1.4 Margin lending
reforms
On 18 January 2009, Senator Nick
Sherry, Australian Minister for Superannuation and Corporate
Law, announced that the Government's Financial Services
Working Group has begun consultations with industry on a new,
national margin lending regulatory regime, which will include
new short form, plain English product disclosure
documents.
Last year, the Council of Australian
Governments (COAG) agreed to the transfer of margin lending
regulation from the states to the Commonwealth. As a result,
margin lending will be included in Chapter 7 of the Corporations Act as a financial product by
1 July 2009.
This will mean that all margin lending
providers will have to:
- have an Australian Financial Services Licence (AFSL);
- comply with general conduct standards, including the
requirement to deal with investors efficiently, honestly and
fairly;
- undertake appropriate disclosure to an investor,
including provision of a Product Disclosure Statement (PDS),
a Statement of Advice (SOA) and ongoing reporting;
- have adequate arrangements for the management of
conflicts;
- ensure representatives are adequately trained and
competent to provide those services; and
- be subject to enforcement measures regarding market
manipulation, false or misleading statements, inducing
investors to deal using misleading information, and
engagement in dishonest, misleading or deceptive conduct.
All margin lending providers will also be subject to
responsible lending conduct provisions as part of broader
consumer credit reforms covering all credit providers.
1.5 Basel Committee on Banking
Supervision announces enhancements to the Basel II capital
framework
On 16 January 2009, the Basel
Committee on Banking Supervision issued a package of
consultative documents to strengthen the Basel II capital
framework. These enhancements are part of a broader effort the
Committee has undertaken to strengthen the regulation and
supervision of internationally active banks in light of
weaknesses revealed by the financial markets crisis.
The proposed changes to capital requirements cover:
- trading book exposures, including complex and illiquid
credit products;
- certain complex securitisations in the banking book
(e.g. so-called CDOs of ABS); and
- exposures to off-balance sheet vehicles (i.e.
asset-backed commercial paper conduits).
The Committee is also proposing standards to promote more
rigorous supervision and risk management of risk
concentrations, off-balance sheet exposures, securitisations
and related reputation risks. Through the supervisory review
process, the Committee is promoting improvements to valuations
of financial instruments, the management of funding liquidity
risks and firm-wide stress testing practices.
In addition, the Committee is proposing enhanced disclosure
requirements for securitisations and sponsorship of
off-balance sheet vehicles, which should provide market
participants with a better understanding of an institution's
overall risk profile.
The Committee proposes that the capital requirements for
the trading book be implemented in December 2010 while the
other improvements, including those related to risk management
and disclosures, be introduced by the end of 2009.
These proposed changes are part of the Committee's broader
work program, as set out in its 20 November 2008 press
release, to strengthen in a fundamental way bank capital
adequacy, risk management and supervision. In particular, this
includes assessing ways to mitigate procyclicality, for
example, by promoting capital buffers above the regulatory
minimum that can be drawn upon during periods of stress. These
efforts are in support of the April 2008 recommendations of
the Financial Stability Forum and the G20's November 2008
action plan.
1.6 PWG private-sector committees
finalise best practices for hedge funds
On 16
January 2009, the US Department of the Treasury announced that
the two private-sector committees established by the
President's Working Group on Financial Markets (PWG) have
released their finalised sets of best practices for asset
managers and hedge fund investors in an effort to increase
accountability for participants in this industry.
The
PWG originally tasked the committees, selected in September
2007 and comprised of asset managers and investors, with
collaborating on industry issues and developing best
practices. The committees released their draft best practices
in April 2008, and provided a public comment period.
The committees amended the reports in certain respects to
further the fundamental goal of the best practices and to
clarify parts of the report.
The final best practices
for the asset managers call on hedge funds to adopt
comprehensive best practices in all aspects of their business,
including the critical areas of disclosure, valuation of
assets, risk management, business operations, compliance and
conflicts of interest.
The final best practices for
investors include a Fiduciary's Guide, which provides
recommendations to individuals charged with evaluating the
appropriateness of hedge funds as a component of an investment
portfolio, and an Investor's Guide, which provides
recommendations to those charged with executing and
administering a hedge fund program if one is added to the
investment portfolio.
The committees' work was based
on the PWG's Principles and Guidelines Regarding Private Pools
of Capital issued in February 2007, which sought to enhance
investor protections and systemic risk safeguards. The PWG
includes the heads of the US Treasury Department, the Federal
Reserve Board, the Securities and Exchange Commission and the
Commodity Futures Trading Commission.
The report is
available on the PWG website.
1.7 Group of Thirty - Financial
reform report
On 15 January 2009, the Group of
30 published a report titled "Financial Reform: A Framework
for Financial Stability". The Group of Thirty, established in
1978, is a private, non-profit, international body composed of
senior representatives of the private and public sectors and
academia. It aims to deepen understanding of international
economic and financial issues, to explore the international
repercussions of decisions taken in the public and private
sectors, and to examine the choices available to market
practitioners and policymakers.
The report
addresses flaws in the global financial system and provides 18
specific recommendations to: improve supervisory systems by
redefining the scope, boundaries, and structure of prudential
regulation; enhance the role of the central banks; improve
governance practices and risk management; address
pro-cyclicality via capital and liquidity standards; enhance
accounting practices; strengthen the financial infrastructure;
and increase coordination internationally.
The
report is available on the Group of Thirty website.
1.8 FSA confirms extension of short
selling disclosure regime
On 14 January 2009, the UK Financial Services Authority
(FSA) confirmed that it will extend its disclosure obligation
for short selling of stocks in UK financial sector companies
until 30 June 2009. The decision follows strong support
for the proposals on which the FSA consulted last week.
Disclosure of a net short position in the stock of a UK
financial sector company will continue to be required once a
position reaches 0.25% of a relevant firm's issued share
capital. However, from 16 January 2009, further disclosure is
only required if a short position changes by a further 0.1% of
issued share capital (i.e. at 0.35%, 0.45% etc).
The FSA plans to issue a further consultation paper with
proposals on longer-term options for a short selling regime
within a few weeks.
Further information is
available on the FSA website.
1.9 European Commission launches
consultation on review of the Prospectus
Directive
On 9 January 2009, the European
Commission launched a consultation on its review of the
application of the Prospectus Directive, including some
proposals to improve and simplify this Directive. The
Prospectus Directive aims to ensure that investors are
provided with clear and comprehensive information when making
investment decisions. The Commission now wishes to assess the
potential impact of its proposals and the merit of any
alternative approaches.
The Directive introduced
a "single passport for issuers", making securities available
to investors either through a public offer procedure or by
admitting their shares to trading. This means that once
approved by the regulatory authority in one Member State, a
prospectus then has to be accepted everywhere else in the EU.
In order to ensure investor protection, that approval is
granted only if the prospectus meets common EU standards for
what information must be disclosed and how.
The
Commission has identified some elements in the Directive that
may create in practice unnecessary burdens and unjustified
costs for companies and intermediaries. The consultation paper
explains these issues and suggests measures to address the
problems identified. The issues include:
- definition of qualified investors;
- revision of exempt offers ('retail cascade' issue and
employee shares schemes);
- revision of annual disclosure obligation;
- time limit for exercise of right of withdrawal; and
- certain thresholds of the Directive.
The consultation paper also considers issues that have been
brought to the Commission's attention but that are not
included at this stage in the draft proposals. The Commission
would like to receive contributions and suggestions from
stakeholders on these issues, including:
- effectiveness of the prospectus summary;
- disclosure requirements for offers with Government
guarantee schemes; and
- disclosure requirements for small quoted companies and
for rights issues.
The consultation paper is available on the European Commission website.
1.10 FSA clarifies disclosure
requirements for directors
On 9 January 2009, the UK Financial Services Authority
(FSA) clarified its disclosure requirements for directors who
grant security over their shareholdings.
The
Model Code (an Annex to the Listing Rules), is specific that a
director intending to use shares of a company as security
requires clearance from the company before doing so but does
not mandate disclosure to the market. The FSA can see no
basis on which a director could legitimately avoid seeking
clearance where his or her shares are to be used as collateral
for a financing transaction. The FSA expects listed
issuers to deal with breaches of the Model Code by their
directors.
Grants of security over
shareholdings also fall within the Disclosure and Transparency
Rules (DTR). Persons discharging managerial
responsibilities ("PDMRs"), such as directors, and their
connected persons should therefore disclose such transactions
to their companies, which in turn should make disclosure to
the market.
However the rules in DTR are derived
from the EU Market Abuse Directive which does not define
specifically which transactions fall within its disclosure
requirements. As a result, there are different practices
in different European markets in respect of the disclosure of
granting of security over shares. The FSA acknowledges
that this has led to a degree of uncertainty among market
practitioners in London about the exact requirements.
The FSA has therefore concluded that it will not pursue any
enforcement action for cases where directors and their firms
have not hitherto made the necessary DTR disclosures.
Following this clarification, the FSA expects all outstanding
disclosures to be made by 23 January 2009.
The
statement is available on the FSA website.
1.11 Report on reform of US
financial regulation
On 8 January 2009,
the US Government Accountability Office (GAO) published a
report titled "Financial Regulation: A Framework for Crafting
and Assessing Proposals to Modernize the Outdated US Financial
Regulatory System".
The report observes that the
US and other countries are in the midst of the worst financial
crisis in more than 75 years. While much of the attention of
policymakers understandably has been focused on taking
short-term steps to address the immediate nature of the
crisis, these events have served to strikingly demonstrate
that the current US financial regulatory system is in need of
significant reform. To help policymakers better understand
existing problems with the financial regulatory system and
craft and evaluate reform proposals, the GAO report (1)
describes the origins of the current financial regulatory
system, (2) describes various market developments and changes
that have created challenges for the current system, and (3)
presents an evaluation framework that can be used by Congress
and others to shape potential regulatory reform efforts.
According to the report, several key changes in
financial markets and products in recent decades have
highlighted significant limitations and gaps in the existing
US regulatory system.
- Firstly, regulators have struggled, and often failed, to
mitigate the systemic risks posed by large and
interconnected financial conglomerates and to ensure they
adequately manage their risks. The portion of firms
operating as conglomerates that cross financial sectors of
banking, securities, and insurance increased significantly
in recent years, but none of the regulators is tasked with
assessing the risks posed across the entire financial
system.
- Secondly, regulators have had to address problems in
financial markets resulting from the activities of large and
sometimes less-regulated market participants - such as
nonbank mortgage lenders, hedge funds, and credit rating
agencies - some of which play significant roles in today's
financial markets.
- Thirdly, the increasing prevalence of new and more
complex investment products has challenged regulators and
investors, and consumers have faced difficulty understanding
new and increasingly complex retail mortgage and credit
products. Regulators failed to adequately oversee the sale
of mortgage products that posed risks to consumers and the
stability of the financial system.
- Fourthly, standard setters for accounting and financial
regulators have faced growing challenges in ensuring that
accounting and audit standards appropriately respond to
financial market developments, and in addressing challenges
arising from the global convergence of accounting and
auditing standards.
- Finally, despite the increasingly global aspects of
financial markets, the current fragmented US regulatory
structure has complicated some efforts to coordinate
internationally with other regulators.
The report is available on the GAO website.
1.12 Principles for sound stress
testing: Basel Committee issues consultative
paper
On 6 January 2009, the Basel Committee
on Banking Supervision (BIS) issued the consultative paper
'Principles for Sound Stress Testing Practices and
Supervision'.
The paper presents sound principles for
the governance, design and implementation of stress testing
programs at banks. It addresses weaknesses in stress testing
exposed by the financial crisis. These include the
underestimation of the potential severity and duration of
stress events and the insufficient identification and
aggregation of risks on a firm-wide basis.
The paper
sets expectations for the role and responsibilities of
supervisors in reviewing firms' stress testing practices and
emphasises that a sound stress testing program should:
- be directed by the board and senior management;
- provide forward-looking assessments of risk;
- complement information from models and historical data;
- be an integral part of capital and liquidity planning;
- guide the setting of a bank's risk tolerance; and
- facilitate the development of risk mitigation or
contingency plans across a range of stressed conditions.
The paper is available on the Bank for International Settlements
website.
1.13 Study says improve do not
suspend fair value accounting standards
On 30
December 2008, the US Securities and Exchange Commission (SEC)
delivered a report to Congress mandated by the Emergency
Economic Stabilization Act of 2008 that recommends against the
suspension of fair value accounting standards.
Rather,
the report by the SEC's Office of the Chief Accountant and
Division of Corporation Finance recommends improvements to
existing practice, including reconsidering the accounting for
impairments and the development of additional guidance for
determining fair value of investments in inactive markets,
including situations where market prices are not readily
available.
As mandated by the Act, the report
addresses the following six key issues:
1. the effects of such accounting standards on a financial
institution's balance sheet;
2. the impacts of such
accounting on bank failures in 2008;
3. the impact of such
standards on the quality of financial information available to
investors;
4. the process used by the Financial Accounting
Standards Board in developing accounting standards;
5. the
advisability and feasibility of modifications to such
standards; and
6. alternative accounting standards to
those provided in such Statement Number 157.
Among key
findings, the report notes that investors generally believe
fair value accounting increases financial reporting
transparency and facilitates better investment
decision-making. The report also observes that fair value
accounting did not appear to play a meaningful role in the
bank failures that occurred in 2008. Rather, the report
indicated that bank failures in the US appeared to be the
result of growing probable credit losses, concerns about asset
quality, and in certain cases, eroding lender and investor
confidence.
The Emergency Economic Stabilization Act of
2008 directed the SEC, in consultation with the Board of
Governors of the Federal Reserve System and the Secretary of
the Treasury, to study mark-to-market accounting standards as
provided by the FASB Statement of Financial Accounting
Standards No 157, Fair Value Measurements. The Act, which was
signed into law on 3 October, required that the study be
completed within 90 days.
While the report does
not recommend suspending existing fair value standards, it
makes eight recommendations to improve their application,
including:
Development of additional guidance and other tools for
determining fair value when relevant market information is not
available in illiquid or inactive markets, including
consideration of the need for guidance to assist companies and
auditors in addressing:
- How to determine when markets become inactive and
whether a transaction or group of transactions are forced or
distressed;
- How the impact of a change in credit risk on the value
of an asset or liability should be estimated;
- When should observable market information be
supplemented with and/or reliance placed on unobservable
information in the form of management estimates; and
- How to confirm that assumptions utilized are those that
would be used by market participants and not just a specific
entity.
Enhancement of existing disclosure and presentation
requirements related to the effect of fair value in the
financial statements.
Educational efforts including those to reinforce the need
for management judgment in the determination of fair value
estimates.
Examination by the FASB of the impact of liquidity in the
measurement of fair value, including whether additional
application and/or disclosure guidance is warranted.
Assessment by the FASB of whether the incorporation of
credit risk in the measurement of liabilities provides useful
information to investors, including whether sufficient
transparency is provided currently in practice.
The report also recommends that FASB reassess current
impairment accounting models for financial instruments,
including consideration of narrowing the number of models
under US GAAP. The report finds that under existing accounting
requirements, information about impairments is calculated,
recognized and reported on basis that often differs by asset
type. The report recommends improvements, including: reducing
the number of models utilized for determining and reporting
impairments, considering whether the utility of information
available to investors would be improved by providing
additional information about whether current declines in value
are consistent with management expectations of the underlying
credit quality, and reconsidering current restrictions on the
ability to record increases in value (when market prices
recover).
The report is available on the SEC website.
1.14 APRA revises audit
requirements for ADIs
On 23 December 2009,
the Australian Prudential Regulation Authority (APRA) released
a revised prudential standard on audit requirements for
authorised deposit-taking institutions (ADIs).
The
revised Prudential Standard APS 310 Audit and Related Matters
follows consultation with the audit profession and the
industry. Its aim is to ensure that APRA is provided with
independent advice from an ADI's auditor in relation to its
operations and risk control environment, as well as assurance
that data provided to APRA are reliable.
Key
requirements of the prudential standard include:
- ADIs must formally appoint an auditor for prudential
purposes (which can be the same as the auditor employed for
financial statement audits);
- the appointed auditor must meet APRA's fit and proper
and independence requirements;
- the level of assurance required from the audit is
dependent upon the nature and source of data collections
being audited; and
- ADIs will continue to provide a risk management
declaration endorsed by the Board of the ADI and the Chief
Executive Officer.
The prudential standards will take effect for financial
years beginning on or after 1 January 2009.
The
Standards and Guidance Notes are available on the APRA website.
1.15 IASB provides update on steps
taken in response to the global financial
crisis
On 19 December 2008, the
International Accounting Standards Board (IASB), announced the
steps it has taken as part of its response to the global
financial crisis to address recommendations made by
the G20 leaders in November 2008:
- Improved accounting for off balance sheet items;
- New disclosure requirements related to impairment;
- Acceleration of efforts to address broader issues of
impairment on a globally consistent basis:
- Ensuring consistent treatment of accounting for
particular credit-linked investments between US generally
accepted accounting principles (GAAP) and International
Financial Reporting Standards (IFRSs);
- Ensuring embedded derivatives are assessed and separated
if financial assets are reclassified; and
- Considering fully other issues related to financial
instruments, including the fair value option, raised at the
recent series of round tables in London, New York and Tokyo.
These decisions taken by the board follow earlier action
detailed below:
- an IASB amendment to permit reclassifications of
financial assets under certain circumstances (13 October
2009);
- proposals to enhance disclosures of financial
instruments (15 October 2009);
- publication of guidance for the application of fair
value in illiquid markets (31 October
2009); and
- the establishment of a joint Financial Crisis Advisory
Group, chaired by Harvey Goldschmid, a former commissioner
of the US Securities and Exchange Commission, and Hans
Hoogervorst, chairman of the Netherlands Authority for the
Financial Markets. This group will meet several times in the
first quarter of 2009.
Further information is available on the IASB
website.
1.16 CESR to consult on non-equity
markets transparency
On 19 December
2008, the Committee of European Securities Regulators (CESR)
published a consultation paper on the transparency of
non-equity markets (Ref. CESR/08-1014). Given the recent
market crisis, the consultation seeks to gather views that
will assist CESR in analysing the role of trade transparency
on markets for corporate bonds, structured finance products
and credit derivatives. In relation to corporate bonds, the
objective of CESR's work is to review whether CESR's
conclusions on trade transparency in bond markets, published
in August 2007 (Ref. CESR/07-284b), remain appropriate in
light of the experiences from the recent market turmoil.
Regarding structured finance products and credit
derivatives, the key question CESR seeks to consider is the
extent to which post-trade information plays a role to support
price formation, reinforce valuation practices and provide
supplementary information about the scale of credit risk
transfers.
(a) Transparency of corporate
bond markets
In its advice to the
European Commission on trade transparency in the non-equity
markets (Ref. CESR/07-284b) in August 2007, CESR noted that it
had not seen evidence, at that stage, of a market failure in
relation to trade transparency which would have warranted
mandatory transparency for bonds. However, CESR concluded that
some re-distribution of the existing transparency information
could be useful to help retail participants and noted that
there were some market led initiatives that, once in place,
should be evaluated to establish if these had addressed
potential concerns. Given the recent financial crisis, CESR
decided however to re-evaluate these conclusions as a matter
of urgency and consequently, in its consultation paper notes
that it is not of the view that insufficient post-trade
transparency was the key reason behind the problems of the
corporate bond market, nor does it believe that additional
post-trade transparency would be able to solve these problems
as a singular measure.
However, CESR believes that
there would be value for market participants in receiving
access to greater post-trade information. CESR notes that it
is willing to explore with market participants whether
additional post-trade transparency could play a role in
supporting a return to more normal market conditions in the
corporate bond markets and be of value thereafter.
CESR is therefore seeking to hear from market
participants, as to whether they share this view and whether
they consider that an approach which distinguishes between the
needs of participants active in the wholesale market from
those active in retail market might be appropriate.
Market participants are also asked to provide
their views on the sufficiency of trade information available
on corporate bond markets, and in particular whether more
trade information would be required in order to comply
effectively with best execution requirements. Furthermore, in
this context, CESR is also seeking to identify the experience
of market participants who use the US Trade Reporting and
Compliance Engine (TRACE) and to establish what conclusions,
if any, can be drawn from this.
CESR has also
analysed the existing market-led solutions and noted that they
focus on aggregated and delayed data and have a limited
coverage in terms of issues and transactions covered as well
as institutions providing the data. However, at this stage
CESR considers that market-led solutions in this area could
still be appropriate provided that they can deliver an
adequate level of post-trade transparency in a timely manner
and are subject to close external monitoring.
(b) Transparency of structured finance
product and credit derivatives
markets
In order to analyse whether a
post-trade transparency regime could be envisaged for
structured finance products and credit derivatives, the
consultation paper describes the main characteristics of those
markets, providing background on the recent turbulence and
highlighting the expansion of new financing techniques based
on securitisation. CESR is of the opinion that post-trade
information plays a role in these markets, although CESR notes
that insufficient post-trade transparency may not have been
the key reason behind the recent market turmoil and additional
post-trade transparency would not be able to solve the
different problems experienced in the structured finance
market as a single measure on its own. However, the
appropriate level of transparency should be calibrated taking
into account the relevant instruments, their trading methods
as well as market participants active in the markets for these
instruments. In light of the above, CESR is particularly
interested in receiving the views of market participants on
any specific technical, market impact or efficiency reasons
that might limit the introduction of a post-trade transparency
framework for these instruments.
Consequently,
CESR puts forward a number of questions in order to further
develop its conclusions on the extent to which post-trade
information plays a role to support price formation, reinforce
valuation practices and provide supplementary information
about the scale of credit risk transfers for Asset Backed
Securities, Collateral Debt Obligations, Asset Backed
Commercial Papers and Credit Default Swaps in Europe's
secondary markets.
CESR invites responses to the
consultation paper on the CESR website.
1.17 FSA to explore more widely
the issue of consumer responsibility
On 19 December 2008, the UK Financial Services Authority
(FSA) published a discussion paper on consumer responsibility
to explore what steps the regulator or others could take to
help consumers understand and protect their own best interests
more effectively.
The protection of consumers is one of the
FSA's four statutory objectives, and the regulator adopts a
two-pronged approach to achieving its consumer protection and
consumer awareness objectives:
- it sets, monitors and enforces standards for firms; and
- provides - or require others to provide - education,
information and advice for consumers.
While the FSA has no power to impose responsibilities on
consumers, it is required by law to consider the general
principle that consumers should take responsibility for their
decisions when setting its consumer protection agenda.
To this end, the discussion paper aims to provoke debate
and bring greater clarity to the FSA's approach to consumer
responsibility.
The discussion paper is
available on the FSA website.
1.18 European Commission launches
public consultation on hedge funds
On 18
December 2008, the European Commission launched a public
consultation on policy issues arising from the activities of
the hedge fund industry, in view of developing appropriate
regulatory initiatives. A significant part of global hedge
fund assets are managed and administered in Europe.
This consultation is part of the Commission's
comprehensive review of regulatory and supervisory
arrangements for all financial market actors in the European
Union, which is to be finalised in 2009 upon consideration of
the report of the High Level Expert Group chaired by Jacques
de Larosière. It also responds to the recent reports by the
European Parliament, which raise a number of concerns that
have come into sharper international focus as hedge funds
have, like many other financial actors, been heavily affected
by the current financial crisis.
Issues
addressed by the consultation
Views and
evidence are sought in the following areas, so as to guide on
appropriate regulatory initiative:
- Systemic risks. The consultation
invites views on whether existing systems of
macro-prudential oversight are sufficient to allow
regulators to monitor and react to risks originating in the
hedge fund sector and transmitted to the wider market
through counterparties, including prime brokers, and through
the impact on asset prices.
- Market integrity and efficiency. The
consultation asks whether and under what circumstances the
activities of hedge funds pose a threat to the efficiency
and integrity of financial markets.
- Risk management. The consultation asks
whether public authorities should concern themselves more
with the way in which hedge funds manage the risks to which
they and their investors are exposed, value their asset
portfolios and manage any potential conflicts of interest.
- Transparency towards investors and investor
protection. The consultation invites views on
whether hedge fund investors are adequately protected and
receive the information required for sound investment
decisions.
The consultation document is available on the European Commission website.
1.19 COAG decision on directors'
liabilities
On 18 December 2008, Senator
Nick Sherry, Australian Minister for Superannuation and
Corporate Law, announced that the Council of Australian
Governments (COAG) has agreed to progress increased
harmonisation of the laws on company director
liability.
The Ministerial Council for Corporations
(MINCO) will now examine the imposition of personal criminal
liability for corporate fault and the contribution this makes
to the goal of a seamless national economy, including
nationally consistent regulation.
Specifically
COAG has referred this issue to MINCO with guidance in the
form of the following principles:
- where companies contravene statutory requirements,
liability should be imposed in the first instance on the
company itself;
- personal criminal liability of a corporate officer for
the misconduct of the corporation should generally be
limited to situations where the officer encourages or
assists the commission of the offence (accessorial
liability); and
- in exceptional circumstances, where there is a public
policy need to go beyond the ordinary principles of
accessorial liability, a form of deemed liability could be
imposed on a corporate officer only using a 'designated
officer' approach (for minor offences) or a 'modified
accessorial' approach (for more serious offences).
MINCO will report back to COAG with its recommendations for
harmonisation and reform by mid-2009.
In addition,
Treasury has completed a survey on directors in conjunction
with the Australian Institute of Company Directors to assess
the impact of corporate laws that impose personal liability on
directors.
Nearly 100 directors of
S&P/ASX-200 companies participated and full survey results
can be found on the Treasury website. The survey results will be
assessed as part of the COAG process.
1.20 EU legislative initiatives in
response to the financial turmoil
On 15
December 2008, the House of Lords' European Union Committee
published a report titled 'EU Legislative Initiatives in
Response to the Financial Turmoil'. The report outlines the
European Commission's recent regulatory/legislative proposals
and proposed changes to supervisory structures in response to
the financial crisis. It also sets out the views of the UK
government and the FSA on these proposals. The matters dealt
with in the report include: reform of the supervisory
frameworks; the capital requirements directive; deposit
guarantee schemes; and rules on credit ratings
agencies.
The report is available on the House of Lords website.
1.21 IFAC paper highlights roles
of regulators and profession in standard-setting
process
In December 2008, the
International Federation of Accountants (IFAC) published a
policy position paper describing and explaining the
international standard-setting process, particularly for
International Standards on Auditing (ISAs). The paper
'International Standard Setting in the Public Interest',
explains how responsibility is shared between public and
private sector organizations to produce high quality standards
that are in the public interest. The paper identifies the
underlying principles of legitimacy, independence,
accountability, transparency and performance that are the key
to a successful standard-setting process, and it describes how
the structures and processes of the independent
standard-setting boards in the areas of international
auditing, ethics and accounting education are consistent with
these principles.
The paper is available on the
IFAC website.
1.22 Asset managers address
over-reliance on credit ratings
In
December 2008, the European Fund and Asset Management
Association (EFAMA), the European Securitisation Forum (ESF)
and the Investment Management Association (IMA) jointly
published the "Asset Management Industry Guidelines to Address
Over-Reliance upon Ratings", providing guidance for asset
managers on the responsible use of ratings for securitisation,
structured finance and structured credit
products.
The Guidelines have been produced as a
response to the call of the Financial Stability Forum (FSF)
for investors to address their over-reliance on ratings and to
review their standards of due diligence and credit analysis
when investing in structured credit products.
The Guidelines are available on the EFAMA website.
