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Graham Bishop's Personal Overview
The mundane practicalities of making re-vamped financial systems work are now crowding out political visions. These problems are already impacting two areas:
• MiFID compliance is now becoming a real issue and a survey by Handysoft suggests that two-thirds of EU financial institutions will not be ready on time, including nearly a third of UK firms. But the good news is that there is a polarisation occurring between those who believe it is a business opportunity, rather than just a compliance exercise. This sorry state of affairs can hardly surprise governments as only the UK, amongst the states with major financial markets, has transposed MiFID – according to the FBE. However, reporting transactions are a key part of MiFID and CESR is now under pressure to finalise its rules quickly, following its consultation.
• SEPA is another area where the industry is extremely concerned about the continued absence of a definitive legal framework. But the recent “trialogue” between Parliament, Council and Commission seems to have produced a solution to the stumbling block about capital requirements for payments firms – by permitting national discretions.
T2S continues in the news and ECOFIN welcomed the ECB’s decision only to take a final decision after further extensive consultations with all players. But Council has requested regular reporting back to its specialist committees and several professional associations have also weighed in with demands for close involvement of the banking industry. With that caveat, they are now strongly supporting the concept, but competition issues may yet become involved as DG Competition has pointed out that public institutions are not exempt from competition rules. However, the ECB has set out a timetable for consultations – starting in April – that should assuage the fears.
With the EU-US Summit now looming, transatlantic relations are likely to come to the fore in several areas:
• The SEC still plans to begin accepting financial reports from foreign firms that use international accounting methods, eliminating the need for the firms to use U.S. standards. The changes are on track to begin in 2009 and don't depend on eradicating differences between US GAAP and IFRS. One problem for regulators is that the international standards are relatively new and companies are still getting used to them, so the SEC stressed the need for those using the new international accounting to demonstrate that it is a single, uniform standard, not a "multiplicity" of standards.
• Another goal is to enhance co-operation between the PCAOB and European auditor oversight bodies by advancing collaborative efforts in 2007 and then moving toward full mutual reliance by 2009. Increased cooperation and reliance on the home-country regulator’s work would save resources and reduce regulatory overlap, as well as strengthen global confidence in audited financial statements. However, the principle of equivalence can also be applied in the field of EU-US cooperation on audit regulation so the starting point for cooperation between oversight bodies should be the home country principle. Accordingly, the EU and US agreed to launch roadmap discussions on equivalence of their respective auditing systems to have, by 2009, inspections of audit firms carried out by their home country public oversight body - and not by host country inspections, which are legally and organisationally cumbersome.
The financial stability implications of hedge funds are another area for transatlantic discussion and Commissioner McCreevy told the US Chamber of Commerce that much of this is already being observed by supervisors, like central banks, and by prime brokers themselves. Later, in Dublin, McCreevy told the private equity industry that he has ruled out additional EU regulations and that he will not “change the nappies” of banking regulators. However, in the first indication that the UK government believes some action may be needed, Britain’s private equity groups are being told that they should come forward with proposals that would lead to greater disclosure of their activities in an effort to boost public confidence in what they do.
UCITS received much attention and the Commission adopted a Level 2 implementing Directive providing guidance on whether new financial instruments can be included in investment funds, and on how host country authorities should exercise limited scrutiny powers when UCITS are notified for sale in their country. The Commission has specified criteria for assessing whether different types of financial instrument are eligible for inclusion in UCITS funds. Complementing this, CESR published its final Level 3 guidelines on eligible assets. All these measures will help remove uncertainty as to whether UCITS can properly invest in categories of financial instruments, including transferable securities, money market instruments, derivative instruments on financial indices.
In a White Paper on possible changes to the UCITS Directive, the Commission raised issues such as how to facilitate cross-border marketing of funds, build scale and liquidity by supporting fund mergers and asset pooling, allow fund managers to manage funds domiciled in another Member State and simplify and improve product disclosures. It also addressed the issue of strengthening supervisory cooperation mechanisms. EFAMA welcomed this, saying it is particularly pleased by the fact that the Commission’s orientations provided for new legislation covering all priorities of the industry. The UK’s IMA also welcomed the Commission's draft and is particularly concerned to ensure that the provisions relating to the management company passport will deliver the desired efficiencies. Existing rules have not stopped national regulators from imposing additional requirements.
CESR published responses on non-equities markets transparency and major professional associations made it clear that they do not see evidence of a market failure that would warrant legislation, especially as MiFID has not even come into force yet.
Graham Bishop
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