05 May 2011

Summary record of the 73rd meeting of the European Securities Committee

ESC and  Expert Group of the ESC

The Commission services updated the ESC Members on the role of the ESC in relation to the adoption of implementing acts under Article 291 of the TFEU. The representative of the Commission services also clarified the process for the adoption of the delegated acts under Article 290 of the TFEU and the consultation with experts appointed by the Member States in accordance with Declaration 39 on Article 290 of the TFEU.

The representatives of two Members States asked the Commission services to be regularly updated on the developments concerning the further definition of the detailed process for the adoption of delegated acts and implementing acts respectively under Articles 290 and 291 of the TFEU.

Securities Law Directive

The Commission services updated the ESC Members on the activities in the area of post-trading and the intention to present several proposals before the summer. The feedback from the two public consultations launched by the Commission services and the input of the Legal Certainty Group proved very helpful and called for improved clarity in respect with cross-border holding and disposition of securities, and with the applicable law. The Commission services also indicated that the choice of a Directive might be likely due to the need for flexibility when implementing the rules. A "functional approach" will be adopted in order to avoid changes to national property regimes. The Commission services' intention is not to harmonise the property laws of Member States but to limit itself to setting out what the effects of that law need to be to exercise cross-border holding and disposition rights.

One delegation welcomed this project and stressed its economic impact. It also pointed to the need for legal certainty in respect with the substance of rights in a holding chain. Another delegation held the view that the obstacles are of a legal nature, i.e harmonisation of civil law or applicability of private international law when choosing the applicable law. This delegation also believed that the Commission should not depart from the Geneva Securities Convention and asked the Commission services about their view on this. A delegation agreed with the fact that this proposal has an important economic objective. Two delegations stressed that the objective of this legislation should be to ensure the integrity of the system. The integrity of financial markets is linked to the protection of investors. The Commission services assured the delegations that they will remain consistent with general approach the Geneva Convention while trying to take into account some EU specificities. The Commission services agreed that this proposal's objective is twofold economic and legal.

On Central Securities Depositaries, the Commission services acknowledged that CSDs are a growing concern as well as their systemic importance. The Commission's aim is to regulate them properly as important amounts of capital are held in European CSDs. Discussions between Member States took place the previous day on this subject.

Directive 2009/44/EC

The Commission services explained the current state of play as regards the transposition of the Directive 2009/44/EC amending the Settlement Finality Directive and the Financial Collateral Arrangements Directive, to strengthen the protection of settlement systems and financial collateral arrangements. The Directive should have been transposed by all Member States by 30 December 2010. However, only eleven Member States had, by mid-March 2011, informed the Commission services of transposition of the Directive, fully or partly, and provided their legal texts to be examined.

The Commission is planning to (around 23rd of March 2011) provide a "mise en demeure" /letter of formal notice 258(ex 226) of Non Communication to all of those Member States that not yet informed of fully transposition of the Directive. If Member States have still not provided this information within two months of the date of the "mise en demeure", the Commission will, as usual, go ahead to those with an "avis motive"/ reasoned opinion.

The Commission services highlighted that it is very urgent that all Member States that already have transposed the Directive 2009/44/EC immediately inform the Commission of this measure. In case some Member States have difficulties in transposing this Directive into national legislation, the Commission services asked the Member States whether they wanted the Commission to arrange a meeting on guidance on how to transpose this Directive.

Some Member States informed that transposition was underway. However, in one of the Member States, the Directive could be fully transposed, for technical reasons, in June 2011.

The Commission thanked the Member States for valuable information and asked those Member States that wanted the Commission to arrange a meeting on guidance on how to transpose the Directive, to reply by 1 of April 2011.

Transparency Directive

The Commission services provided the ESC members with an overview of the results, from the public consultation on modernisation of the Transparency Directive (Directive), published in December 2010. The Commission services also presented some of the policy options currently being considered for the purposes of the impact assessment to amend the Directive. The presentation was supported by a Working Paper distributed to the ESC Members. The options presented in the working document focused on: 1) the attractiveness of the regulated capital markets for smaller listed companies; 2) improving the transparency regime around major holdings of voting rights.

The Commission services confirmed that the proposals for the modification of the Directive should be presented in October 2011.

Concerning the attractiveness of the regulated capital markets for smaller listed companies, several options were presented for comments 1) abolish the mandatory obligation for the publication of quarterly financial information/ interim management statements; and 2) extend the deadline for publishing the half yearly reports to 3 months after the end of the respective reporting period. The option whether to apply these proposals to smaller listed companies only or all listed companies was also left open for discussion. Member States recognised merit in the rationale behind the proposals however there was varying levels of support for the proposals.

MiFID

Commission services gave an overview of the replies to the recent public consultation on MiFID. Member State respondents had expressed general support but requested clarification on a number of objectives and details regarding key points. Market participants had more diverse views, expressing either support or opposition regarding individual measures depending on their role in the markets. A discussion paper was circulated in advance of the meeting in order to provide clarifications on four topics where several Member States had expressed reservations in the consultation and to allay concerns expressed by some that proposals were being developed in a hurried fashion and with a lack of transparency. In this regards, Member States were asked to signal further topics for a follow-up discussion at the ESC of 13 April.

Regarding the idea of introducing a broad new venue-category (Organised Trading Facilities OTFs), many Member States requested further clarity on what entities or trading models should be covered. Only one Member State preferred as flexible a concept as possible. Several others indicated a preference for examining whether existing venue-definitions could instead be adjusted to capture the targeted practices. They warned against giving rise to new opportunities for regulatory arbitrage and recalled the importance of aligning transparency a far as possible between venues.

As for the approach suggested in the consultation for enacting the G20 commitment of moving trading of standardised derivatives onto organised trading platforms where appropriate, three delegations took the floor. One agreed with the need to introduce, in addition to clearing-eligibility, a criterion of sufficient liquidity to be met by the instrument, before requiring trading on organised venues, and noted that the EU should be aware of the absence of total alignment in current US proposals (i.e. between the Commodity Futures Trading Commission and Securities and Exchange Commission). Another said it was unclear what benefits trading on organised venues would bring which would complement those achieved by more central clearing and reporting to trade repositories. One delegation asked whether the suggested approach was consistent with the Commission's proposal on OTC derivatives, central counterparties and trade repositories.

Concerning pre-trade transparency in non-equity markets, two Member States urged avoiding one-size-fits-all approaches, especially in the case of instruments issued in smaller currencies and markets. Two others signalled scepticism with stricter disclosure obligations of OTC quotes. One was supportive of obligations in line with best practices but also cautioned against uniform approaches.

The fourth topic concerned the suggested introduction of a pan-EU third country regime. One delegation strongly opposed a regime not based on an assessment of strict equivalence. Another cautioned against setting any barriers to investment from outside the EU. One Member State said that EU investor protection rules should apply to any non-EU providers thus granted access. ESMA was supportive that there be access on a firm-basis and not automatic per jurisdiction, and noted the importance of considering what access is available for EU firms to third countries in return.

Commission services replied on the various points, stressing that final decisions had not yet been taken but that it was imperative to deliver swiftly on all aspects of the ongoing financial reform. The discussion today and on 13 April were vital stepping stones in the process but the timetable did not allow setting up a dedicated Member States' working group. Most issues had also been discussed and consulted upon at length by CESR in 2009-2010. Considering a question from one delegation on reporting requirements under MiFID and in newly proposed energy legislation (Regulation for Energy Market Integrity and Transparency), Commission services assured that coordination, coherence, and the avoidance of gaps or overlaps was fully taken into account.

PRIPs

The Commission services debriefed ESC Members on the consultation on PRIPs. The policy work will build on the outcomes of the consultation which broadly confirmed the envisaged approach of the Commission to developing product disclosures for PRIPs. For the disclosure workstream on PRIPs legislative proposals are foreseen for July 2011.

UCITS V

The Commission services presented Member State representatives with updates concerning the announced review of the UCITS Directive ('UCITS V'). The initial scope of the review had been to align UCITS depositary functions and manager remuneration practices with the rules of the AIFM Directive. Consistently with analogous amendments to related measures in the EU financial services acquis, the scope has recently been expanded to include administrative sanctions. The proposal should be published after the summer and before the end of the year. The Commission services stressed that the inclusion of sanctions into the UCITS proposal reflected the contents of the Communication of December on reinforcing sanctioning regimes in the financial services sector. Finally, the services announced the importance of gathering views directly from ESC Members on the future sanctioning regime via a questionnaire.

On depository functions, the services pointed out that, although the scope of the review was consistency with the AIFM Directive rules, a more stringent regime for UCITS was warranted by the retail nature of the investors the directive seeks to protect. In this sense, a departure from the AIFM regime shall take the form of a stricter liability regime for depositaries in case of failures or losses (including those arising from sub-custody networks).

Some Member State representatives voiced concerns over the limited extent of the review, wondering why other items had been excluded. In this respect, the Commission's services highlighted that the issues reviewed were the most pressing, with sanctions requiring immediate attention to ensure consistency with other related Community measures. Furthermore, given the state of implementation of the 'UCITS IV' Directive, caution needed to be exercised by not introducing too many new items ahead of the implementation deadline of July 2011. Outstanding issues required further debate and more time was needed for the previous 'UCITS IV' amendments to settle.

As to sanctions, a number of Member State representatives inquired about the need to introduce sanctions into the AIFM regime as well, in line with the Commission service's justification for the UCITS review. Moreover, one representative inquired as to the level of harmonisation the 'UCITS V' review would consider with regard to sanctions. Finally, the services were asked to elaborate on the contours of the future sanctioning regime for UCITS. The Commission's services indicated the possibility of eventually introducing sanctions for the AIFM regime through the review of UCITS. Also, the directive, in line with the Commission Communication, would follow a sector-specific minimum harmonisation approach. As to the further details of the envisaged sanctioning regime, the services reiterated that sanctions would be solely administrative in nature and that the envisaged relative impact assessment would fully reflect those guidelines set out in the Communication.

AIFMD - Level 2

The Commission services debriefed the ESC about the state of play with regard to the about 50 level 2 measures in the Directive on Managers of Alternative Investment Funds (AIFMD). It has requested CESR/ESMA advice on the implementing and delegated acts on 2 December 2010. The deadline for this advice has now been set for 16 November 2011. In its request the Commission also encourage CESR to consider the parallel development of some of the technical standards and guidelines they are invited to produce by the AIFMD as some of them might be very useful for Member States in the implementation of the Directive into national law or should even be in place already at the end of the transposition period.

ESMA has set up four Task Forces to draft the advice. It has also established an ambitious consultation programme which started with a Call for Evidence and open hearing on the Commission request in January 2011, includes several targeted consultations or workshops by the Task Forces and will conclude with an eight week consultation on the draft advice in July/August 2011.

Member States inquired about which Task Force would deal with issues related to third countries and pointed out that while UCITS level 2 might be a good starting point for many of the issues it would not suffice to take account of all the different business models and investment strategies of AIF. Industry was very concerned about the advice not sufficiently differentiating between types of AIF/AIFM.

ESMA explained that the OWG would already deal with issues of supervisory cooperation on a permanent basis for UCITS, therefore no dedicated TF would be needed to deal with the issue of cooperation with third countries. Furthermore, ESMA thanked the Commission for the extension of the mandate by two months as this additional time was badly needed. ESMA also informed that due to the immense workload at ESMA work on guidelines had not started yet as the advice on level 2 measures would have priority. With respect to quarterly financial information, only two Member States would agree with the option to remove the obligation to present quarterly financial statements for all listed companies and 1 Member State was open for discussion on this issue. These Member States were in favour of removing the legal obligation to publish quarterly financial information and leaving it at the discretion of the market to impose standards where considered appropriate. 8 Member States were against any of the options regarding the suppression of quarterly reporting as they consider that it would diminish investor protection. ESMA was also against any possibility to suppress quarterly reports.

Several Member States and ESMA were open to discuss the proposal to extend the deadline for publishing half yearly reports to three months for all listed companies. However other Member States were concerned that the proposal could be detrimental to the objective of the Directive as it could lead to circulation of potentially outdated information.

In general, Member States considered that no distinction should be made between the sizes of the companies in order to determine their disclosure requirements as it would potentially lead to increasing the already existing divergences in the market and could be damaging for investors' protection. The majority of Member States stated that if either policy option was put forward, it should apply to all companies listed in the regulated markets.

Concerning the proposals to improve the transparency regime around major holdings of voting rights, the Commission services explained the necessity to extend the notification requirements to all instruments of similar economic effect to holding shares and entitlements to acquire shares and to achieve a further harmonisation in this area. The working document presented options to determine a method of aggregation of financial instruments giving access to shares, including cash settled derivatives, with holdings of shares. One option followed the recommendation from ESMA (formerly CESR) – to create a notification system with four different baskets that would trigger an obligation to disclose the holdings of the four baskets when the threshold for any of the baskets was reached. The alternative option was to introduce a broad definition of financial instruments in Article 13 of the Directive to include all instruments of similar economic effect to holding shares and entitlements to acquire shares and to create a notification system with three different baskets.

The majority of Member States recognised the need to modify the Directive in this respect and include cash settled derivatives into the notification requirements. They also agreed that a maximum harmonising methodology of aggregation would improve the application of the Directive by Member States, however they did not all agree on the method of aggregation. ESMA's suggested approach received the most support. One Member State advised that it will send through an alternative approach and that it preferred the three baskets approach.

Some Member States will submit a formal view on the policy options by sending further comments to the Commission services.

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