Regulatory update

This regulatory update covers major new regulatory requirements and substantial developments that affect the investment management industry.

§ SOLVENCY II IMPLEMENTATION MEASURES

On 24 August 2010, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published the main spreadsheet to be used by solo undertakings and groups to complete the fifth and final Quantitative Impact Study (QIS5) exercise in August and November 2010. A report on the results is expected to be published in April 2011. The report is a means of providing quantitative input to the finalisation of the level 2 implementation measures for the Solvency II framework directive.

https://www.ceiops.eu/consultations/qis/quantitative-impact-study-5/index.html

§ REGULATION ON OTC DERIVATIVES IN THE EU

On 15 September 2010, the European Commission put forward a proposal for bringing more safety and transparency to the over-the-counter (OTC) derivatives market. The commission proposes that information on OTC derivative contracts should be reported to trade repositories and be accessible to supervisory authorities. More information will also be made available to all market participants. Further, the commission proposes that standard OTC derivative contracts be cleared through central counterparties (CCPs) to reduce the counterparty credit risk. The regulations described in this proposal, once approved, are to take effect from end 2012.

http://ec.europa.eu/internal_market/financial-markets/derivatives/index_en.htm

§ EU SHORT-SELLING PROPOSALS DRAW MIXED REACTIONS FROM INDUSTRY

A legislative proposal put forward by the European Commission (EC) on 15 September 2010 would give the incoming European Securities and Markets Authority (ESMA) permission to make public short-selling positions that exceed 0.5% of a company’s market value. Additionally, the new pan-European institution, which assumes its supervisory duties in January, would have permission to ban short-selling for three-month periods, curb naked short-selling and regulate the derivatives market more tightly. However, the International Securities Lending Association (ISLA) has claimed the EC’s proposals are too stringent and would threaten market efficiency. ISLA said that while it supported transparency measures that create disclosure symmetries with long positions, the commission's proposed public disclosure threshold of 0.5% for short sales was too low.

http://www.ipe.com/news/eu-short-selling-proposals-draw-mixed-reactions-from-industry_36858.php

§ PROPOSAL FOR IMPROVED FINANCIAL REPORTING OF LEASES

On 17 August 2010, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) published proposals to improve the financial reporting of lease contracts. The proposals aim at greatly improving the financial reporting information available to investors about the financial effects of lease contracts. The proposals would result in a consistent approach to lease accounting for both lessees and lessors and also provide more complete and useful information to investors and other users of financial statements. The proposals are developed based on the responses to an earlier discussion paper issued in March last year by the organisations. IASB and FASB are planning roundtable discussions on the proposals with the following schedule: London – Friday 17 December 2010, Hong Kong – Monday 20 December 2010, Chicago, Illinois – Wednesday 5 January 2011, Norwalk, Connecticut – Thursday 6 January 2011.

http://www.ifrs.org/Current+Projects/IASB+Projects/Leases/ed10/Ed.htm

§ PROPOSAL FOR IMPROVED FINANCIAL REPORTING FOR INSURANCE CONTRACTS

There have been activities in the joint project on financial reporting on insurance contracts conducted by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB). The objective of this joint IASB/FASB insurance contracts project is to develop common, high-quality guidance that will address recognition, measurement, presentation, and disclosure requirements for insurance contracts (including reinsurance), even if the contracts are not issued by an insurance entity. Specifically, the project is intended to improve, simplify and converge the financial reporting requirements for insurance contracts and to provide investors with decision-useful information. The deadline for comments on the IASB exposure draft for phase II of IFRS 4, published in July, was 30 November 2010. The deadline for comments on the FASB discussion paper published 17 September, is 15 December 2010. IASB and FASB are planning roundtable discussions on the exposure draft of IFRS 4 with the following schedule: Tokyo – Thursday 9 December 2010, London – Thursday 16 December 2010, Norwalk, Connecticut – Monday 20 December 2010.

http://www.ifrs.org/Current+Projects/IASB+Projects/Insurance+Contracts/Insurance+Contracts.htm

§ IMPACT OF THE US DODD-FRANK ACT ON CORPORATE GOVERNANCE (US)

Although much of the voluminous Dodd-Frank Act focuses on the regulation of financial institutions, there are also sections that address executive compensation and corporate governance provisions, which apply to a majority of US publicly traded companies. (Smaller companies may be exempt from some provisions.) The Dodd-Frank Act may have a significant effect on how management and compensation committees design executive compensation programmes and allow shareholders to provide input on executive compensation arrangements. The legislation also has implications for companies’ corporate governance policies, including committee structures and the amount of influence that shareholders may have in director elections.

http://www.corpgov.deloitte.com/binary/com.epicentric.contentmanagement.servlet.Content
DeliveryServlet/USEng/Documents/Deloitte%20Periodicals/Hot%20Topics/Dodd-Frank%20Act_Deloitte%20HotTopics_SpecialEdition_Aug%202010.pdf

§ NEW INVESTMENT ROADMAP PUBLISHED IN MOVE TOWARDS ISO 20022 STANDARD FOR FINANCIAL SERVICES MESSAGING

FIX Protocol Ltd. (FPL), Financial Products Markup Language (FpML), International Securities Association for Institutional Trade Communication (ISITC), Society for Worldwide Interbank Financial Telecommunication (SWIFT), XBRL (extensible business reporting language) and the Financial Services Division of SIIA (FISD) have published their updated Investment Roadmap. The purpose of the roadmap is to provide market participants with consistent direction when using financial services messaging standards. The roadmap is laying the foundation for a move to a common business model based on ISO 20022 while allowing the respective standards organisations to maintain their current business protocols.

http://www.isda.org/media/press/2010/press101210.pdf

§ BASEL COMMITTEE DELIVERS BANKING INDUSTRY REFORM PROPOSALS TO G20

Following up on the G20 summit of 2009, the Basel Committee has concluded its hearings and analysis with respect to fundamental reforms of the international banking sector (and by extension, their investment banking functions), commonly known as BASEL III. Key elements include raising the quality of capital to cover potential losses, significantly upgraded risk management capabilities with respect to trading, liquidity, and counterparty exposure, as well as minimum capital and liquidity standards. The committee is also working with the Financial Stability Board to address the risks of systemic banks. On 12 September 2010, the governors and heads of supervision agreed that systemically important banks should have loss-absorbing capacity beyond the minimum standards of the Basel III framework. The committee’s reforms will transform the global regulatory framework and promote a more resilient banking sector. The committee’s work concludes that the transition to stronger capital and liquidity standards is expected to have a modest impact on economic growth. Moreover, the long-run economic benefits substantially outweigh the costs associated with the higher standards. Going forward, the committee will concentrate its efforts on the implementation of the Basel III framework and related supervisory sound practice standards.

http://www.bis.org/publ/bcbs179.pdf