Financial Services Europe And International Update - November 2011 / Issue 14

This update summarises current regulatory developments in the European Union, the UK and internationally, focussing on the investment funds and a set manager and related sectors, during the past three weeks.

EUROPEAN UNION AND INTERNATIONAL REGULATORY DEVELOPMENTS

The EU's Transparency Directive: European Commission Proposal for an Amending Directive

At the end of October 2011, the European Commission published the provisional text of a proposal for a directive to amend the Transparency Directive.

The proposed Directive makes a number of changes to the regime for the notification of major holdings, including that the regime be extended to include direct and indirect holdings of financial instruments with economic effects similar to holdings of shares and entitlements to acquire shares whether or not they give right to a physical settlement. Other proposals include the removal of the requirement to publish interim management statements and enhanced powers for competent authorities to impose sanctions and measures for breaches of the transparency regime.

BCBS Consultation on Capitalisation of Exposures to CCPs

On 2 November 2011, the Basel Committee on Banking Supervision ("the Basel Committee") published a second consultation on the capitalisation of bank exposures to central counterparties ("CCPs") (BCBS206).

The proposals developed by the Basel Committee require banks to more appropriately capitalise their exposure to OTC derivatives and create incentives for banks to increase their use of CCPs. This includes efforts to ensure that the exposure of banks to CCPs are adequately capitalised. The proposals cover both capital requirements for default fund exposures and trade-related exposures to CCPs.

The Basel Committee carried out an initial consultation on this topic in December 2010. Its second consultation takes account of the responses received to the earlier consultation, as well as the results of various impact assessments. The Committee also consulted closely with the Committee on Payment and Settlement Systems and the International Organisation of Securities Commissions (IOSCO).

The Basel Committee seeks comments on the proposed rules text by 25 November 2011. It then aims to finalise the rules and to publish the results of its quantitative impact studies at the end of 2011 and expects that the rules will be implemented in its member jurisdictions by January 2013.

Financial Stability Board Recommendations on Shadow Banking

At the end of October 2011, the Financial Stability Board (the "FSB") published a report setting out its recommendations on strengthening the oversight and regulation of shadow banking. In November 2010 the G20 had called for the FSB to provide these recommendations and in April 2011, the FSB published a background note setting out its initial thinking.

This report now sets out the FSB's recommendations and high-level principles relating to:

the approach that authorities should take towards monitoring the shadow banking system and, in particular, identifying shadow banking activities that may cause systemic risks; and the design and implementation of regulatory measures intended to address the risks posed by the shadow banking system. The report also provides details of future work on the regulation of shadow banking which the FSB, the Basel Committee and IOSCO will carry out during 2012.

For the purposes of monitoring shadow banking activities, the FSB recommends that national supervisory authorities should cast the net wide and consider all non-bank credit intermediation to ensure that all areas are monitored where shadow banking-related risks to the financial system might arise. Once this has been done the authorities should narrow their focus for policy purposes to the sub-set of non-bank credit intermediation where there are:

developments that increase systemic risk involving four key risk factors: maturity transformation, liquidity transformation, imperfect credit risk transfers; and/or leverage; or indications of regulatory arbitrage undermining the benefits of financial regulation. The FSB's report also sets out high-level principles on which authorities should base their monitoring frameworks. It intends to conduct annual monitoring exercises to assess global trends and risks in shadow banking, with the results reported annually to the G20 and at the FSB's plenary sessions.

The FSB also recommends high-level principles that regulators should apply when designing and implementing regulatory measures for shadow banking to address the risks identified in the monitoring process and details the initial recommendations for further work on specific measures for regulating the shadow banking system, which include:

Regulation of banks' interactions with shadow banking entities: the Basel Committee on Banking Supervision will examine enhanced consolidation for prudential regulatory proposes, concentration limits and large exposure rules, risk weights for banks' exposures to shadow banking entities and the treatment of implicit support and...