Category Archives: Financial Services: Transactions in Securities

For many companies, securities are an essential source of finance. To ensure that such investments are effective and transactions secure, the European Union imposes common operating conditions on investment bodies. European legislation thus aims to create a single market for investment, in particular by harmonising and improving procedures relating to investment funds.
There are also measures relating to the transparency of operations and mechanisms for addressing the risk of abuse or protecting shareholders in the event of investment bodies defaulting.

Internal Market

Internal Market

Internal Market Contents

  • Internal market: general framework
  • Living and working in the internal market: Free movement of people, asylum and immigration, free movement of workers
  • Single Market for Goods: Free movement of goods, technical harmonisation, product labelling and packaging, consumer safety, pharmaceutical and cosmetic products, chemical products, motor vehicles, construction, external dimension
  • Single market for services: Free movement of services, professional occupations, services of general interest, transport, Information Society, postal services, financial services, banks, insurance, securities markets
  • Single market for capital: Free movement of capital, economic and monetary union, economic and private stakeholders, fiscal aspects, combating fraud, external relations
  • Businesses in the internal market: Company law, public procurement, intellectual property

See also

Living and working in the internal market.
Overviews of European Union: Internal market.
Further information: the Internal Market and Services Directorate-General of the European Commission.

Market abuse

Market abuse

Outline of the Community (European Union) legislation about Market abuse

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Market abuse

Document or Iniciative

Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse) [See amending acts].

Summary

This Directive aims at preventing market abuse in order to preserve the smooth functioning of European Union financial markets.

This Directive does not apply to transactions relating to:

  • monetary policy, exchange rates or public debt management by a Member State;
  • the European System of Central Banks;
  • national central banks.

Conditions for the prohibition of market abuse

Market abuse may arise in circumstances where investors have been unreasonably disadvantaged, directly or indirectly, by others who:

  • have used information which is not publicly available (insider dealing);
  • have distorted the price-setting mechanism of financial instruments;
  • have disseminated false or misleading information.

This type of conduct can undermine the general principle that all investors must be placed on an equal footing.

The Member States therefore prohibit any person possessing information from:

  • disclosing privileged information to any other person outside the scope of the exercise of their employment;
  • recommending any other person to acquire or dispose of financial instruments to which that information relates;
  • engaging in market manipulation.

These prohibitions do not apply either to trading in own shares in “buy-back” programmes or to the stabilisation of a financial instrument.

Managing information from the issuers of financial instruments

The issuers of financial instruments must publish information which concerns the said issuers as soon as possible and post it on their website. If an issuer discloses privileged information to a third party in the exercise of his duties, he must make public disclosure of that information.

Issuers must also draw up a list of persons in their employment who have access to privileged information.

The European Securities and Markets Authority (ESMA) may draft technical norms for implementation aimed at ensuring that acts adopted by the Commission are applied under uniform conditions.

Cooperation

The Directive requires each Member State to designate a single regulatory and supervisory authority with a common minimum set of responsibilities. These authorities use convergent methods to combat market abuse and should be able to assist each other in taking action against infringements, particularly in cross-border cases. The administrative cooperation procedure followed could in particular help to combat terrorist acts. The competent authorities are to collaborate with the ESMA.

Penalties

The same form of wrongful conduct shall incur the same penalty in each of the Member States.

If a competent authority adopts an administrative measure or penalty, it must inform the ESMA. If said penalty concerns an investment firm authorised pursuant to the Markets in Financial Instruments Directive (MiFiD), the ESMA shall add a reference to that penalty in the register of investment firms.

References

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2003/6/EC

12.4.2003

12.10.2004

OJ L 96, 12.4.2003

Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Directive 2008/26/EC

21.3.2008

OJ L 81, 20.3.2008

Directive 2010/78/EU

4.1.2011

31.12.2011

OJ L 331, 15.12.2010

Successive amendments and corrections to Directive 2003/6/CE have been incorporated in the basic text. This consolidated version is for reference purpose only.

Related Acts

Directive 2008/26/EC of the European Parliament and of the Council of 11 March 2008 amending Directive 2003/6/EC on insider dealing and market manipulation (market abuse), as regards the implementing powers conferred on the Commission [Official Journal L 81 of 20.3.2008].

Commission Directive 2004/72/EC of 29 April 2004 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards accepted market practices, the definition of inside information in relation to derivatives on commodities, the drawing up of lists of insiders, the notification of managers’ transactions and the notification of suspicious transactions [Official Journal L 162, 30.04.2004].
This Directive defines the criteria to be taken into account when evaluating market practices for the purpose of implementing Article 6(10) of Directive 2003/6/EC. The practices of market participants must comply with the principles of fairness and efficiency in order to protect the integrity of the market. These practices must not compromise the integrity of other European Union markets that are linked to it.

Commission Directive 2003/124/EC of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards the definition and public disclosure of inside information and the definition of market manipulation [Official Journal L 339, 24.12.2003].
This Directive fixes the detailed criteria for determining information that must be deemed to be of a precise nature and likely to have a significant effect on prices. In addition, it specifies a series of factors that are to be taken into consideration in determining whether specific behaviour constitutes market manipulation. Regarding issuers, it lays down the means and time-limits for public disclosure of inside information and the precise circumstance in which they are authorised to delay such public disclosure in order to protect their legitimate interests.

Commission Directive 2003/125/EC of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards the fair presentation of investment recommendations and the disclosure of conflicts of interest [Official Journal L 339, 24.12.2003].
This Directive fixes the rules for the fair presentation of investment recommendations and the disclosure of conflicts of interest. It draws a distinction between persons producing investment recommendations (who must meet stricter standards) and those disseminating recommendations made by third parties. Under Article 6 of the Directive on market abuse, this second implementing Directive must take into account the rules, including self-regulation, governing the profession of journalist. This means that the highly specialised subcategory of financial journalists who produce or disseminate investment recommendations must respect certain general principles. Nevertheless, protective measures are provided for and the use of self-regulatory mechanisms is authorised in order to determine how those basic principles must be applied. The aim of this arrangement is to preserve the freedom of the press while protecting investors and issuers against any risk of market manipulation by journalists.


Another Normative about Market abuse

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic

Internal market > Financial services: transactions in securities

Market abuse (Proposal)

Plan to harmonise national rules on UCITS depositaries

Plan to harmonise national rules on UCITS depositaries

Outline of the Community (European Union) legislation about Plan to harmonise national rules on UCITS depositaries

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Plan to harmonise national rules on UCITS depositaries

The European Commission would like to reduce the divergences that exist between the national rules governing depositaries entrusted with the safe keeping of assets on behalf on investors in undertakings for collective investment in transferable securities (UCITS) * such as unit trusts, common funds and SICAVs. By following a step-by-step approach, the Commission, in cooperation with the national regulators, intends to facilitate the cross-border activity of such UCITS. There are four main areas of action: prevention of conflicts of interest, clarification of the depositary’s liability, convergence of national prudential rules, and moves to enhance invstor transparency and information. UCITS are established in all Member States and their assets total some four thousand billion euros.

Document or Iniciative

Commission Communication to the Council and the European Parliament of 30 March 2004 on “Regulation of UCITS depositaries in the Member States: review and possible developments” [COM(2004) 207 final – Not published in the Official Journal].

Summary

In response to the conclusions of the Economic and Financial Affairs Council in June 2001 calling on it to prepare a report on the regulation of UCITS * depositaries and on the need to amend such regulation, the Commission is examining the existing legal framework. It notes that there are significant differences between Member States as regards, for example, minimum capital requirements, statutory and regulatory obligations, and the liability regimes for depositaries.

If cross-border activity is to expand, these rules must be harmonised. Fund managers and supervisory authorities will want to know exactly the resources and liabilities of depositaries established in other Member States before they are authorised to do business. In addition, investors will need to be better informed.

Favouring a step-by-step approach, the Commission is planning to entrust to regulatory experts in the European Union (EU) four areas of work for the period 2004-06: to promote better prevention of conflicts of interest; to clarify the extent of the depositary’s liability; to promote convergence of prudential requirements, notably those relating to capital and to the taking-up and exercise of the function of depositary; to tighten the standards on investor transparency and information.

The Commission states that a chapter on depositaries will initially be attached to its overall UCITS report under Directive 2001/108/EC in 2005. This chapter will specify to what extent EU legislation on the relationship between fund manager and depositary will have to be strengthened and what degree of harmonisation is needed as regards the typology of eligible depositary institutions and, consequently, their missions and resource requirements. A subsequent report reviewing progress is to be adopted in 2006. It will also evaluate whether is a need to legislate at Community level in order to create a fully-fledged European passport for expanding the cross-border activity of depositaries.

Better prevention of conflicts of interest

Conflicts of interest arise when the interests of investors are not the prime concern of the depositary or fund manager. The Commission is proposing measures to strengthen convergence of the relevant national rules. Such convergence will relate notably to the list of the functions that the fund manager can delegate to the depositary and, conversely, the list of the functions that the depositary may delegate.

Clarification of the extent of the depositary’s liability

The differences in the level and extent of the depositary’s liability are a major obstacle if there is to be a high level of investor protection throughout the EU and if the scope for depositaries to engage in cross-border activities is to be expanded. The Commission thus regards it as essential that there should be a common reading of the main task of the depositary, namely asset safe keeping, and of the specific control duties assigned to the depositary.

Convergence of prudential requirements

The prudential rules governing the taking-up and pursuit of the activity of depositary differ significantly between Member States as there is no common European definition of eligible institutions. The Commission is proposing to align these rules more closely, particularly those relating to capital requirements, by identifying a specific group of institutions subject to prudential supervision.

Enhancement of transparency and investor information

The Commission identifies the areas where public information standards should be strengthened: organisation of the depositary’s tasks, measures to prevent conflicts of interest, the depositary’s liability and all the costs connected to his services.

Background

This communication is in response to the remit assigned to the Commission in June 2001 by he Economic and Financial Affairs Council. The approach it advocates is based on an extensive survey and on an Internet consultation in the autumn of 2002 concerning the different national rules impeding the development of the internal market in the case of UCITS depositaries. The survey identified major disparities between national rules that help to explain the current fragmentation of the market (in virtually 95% of cases UCITS depositaries are national institutions). The internet consultation revealed significant differences in connection, for example, with minimum capital requirements, statutory obligations and the extent of the depositary’s liability. For there to be a genuine internal market in depositaries’ services, these rules need to be brought into line.

Alongside the fund and its manager, the UCITS depositary is the third pillar of the European UCITS system set up by Directive 85/611/EEC.
In 2001 the EU adopted two other UCITS Directives amending Directive 85/611/EEC (one focuses on the instruments in which funds may invest and the other on management companies, thereby setting in place a “European passport” scheme).

Key terms used in the act
  • UCITS: Depending on the jurisdiction, UCITS can be constituted either under the law of contract (as common funds) or trust law (as trusts) and also under statute, i.e. in corporate form (as investment companies). The Directive may refer to both non-corporate forms under one designation, e.g. as common funds or unit trusts. Importantly, some Member States’ legal frameworks are limited to common funds, i.e. all their UCITS are without legal personality and depend on a designated external fund manager (a management company).
  • UCITS depositary: Directive 85/611/EEC (as amended) defines it simply as an entity entrusted with specific prudential missions and subject to a number of other general provisions. The UK regulatory designation is twofold, according to whether these missions have to be achieved with regard to unit trusts (by a “trustee”) or with regard to an investment company (by a “depositary”). However, for the reader’s convenience, only the term “depositary” has been used in this communication.
    It should also be noted that the specific regulatory meaning of the designation “UCITS depositary” is precisely based on the peculiar nature of these missions and obligations and, more generally, of the provisions drawn up under UCITS national regulation from Community law. The scope of the concept of “safekeeping” of assets, to which it is particularly related, has thus to be considered in this specific context.
  • UCITS fund manager: This may be either a “management company” or a “self-managed investment company”. Unlike common funds or unit trusts, corporate UCITS, i.e. investment companies, may bring together a vehicle (the fund) and a fund management capacity into the same entity. Directive 2001/107/EC defines them as “investment companies which have not designated a management company” in their instruments of incorporation, i.e. self-managed investment companies. In this Communication, most of the remarks concerning the “fund manager” or “management company” should also be deemed to apply to self-managed investment companies, except that these may not receive any task under a delegation mandate, e.g. from the depositary.

Action plan for clearing and settlement

Action plan for clearing and settlement

Outline of the Community (European Union) legislation about Action plan for clearing and settlement

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Action plan for clearing and settlement

The European Commission has adopted a Communication on an action plan to create a genuine single market in securities in the European Union and to make cross-border clearing and settlement effective, safe and efficient at European level.

Document or Iniciative

Communication from the Commission to the Council and the European Parliament of 28 April 2004 on “Clearing and Settlement in the European Union – The way forward” [COM(2004) 312 final – Not published in the Official Journal].

Summary

“Clearing and settlement” refers to the full set of arrangements required to finalise a securities or derivatives transaction. This process comprises several stages, each carried out by a different institution.

In this Communication the Commission sets out its objectives in detail and proposes specific measures for achieving an integrated, efficient and safe market for securities clearing and settlement.

The current arrangements for finalising transactions are considered to be efficient at national level but very inefficient at a cross-border level.

The inefficiencies at EU level are due to:

  • a lack of global technical standards;
  • the coexistence of differing business practices;
  • inconsistent fiscal, legal and regulatory underpinnings.

As a result of these inefficiencies, cross-border clearing and settlement is more costly, complex and less safe than at purely domestic level. This situation is no longer acceptable at a time when a single European market in financial services is being created and when investment strategies are increasingly based on pan-European sectoral conditions.

Given recent developments such as the introduction of the euro and improvements in information technologies, the number and the relative importance of cross-border transactions have increased. As a result, the strains on and the expectations from clearing and settlement arrangements have also increased. Clearing and settlement service providers therefore need to enhance performance, reduce costs and establish a pan-European presence. Similarly, regulators and supervisory authorities are improving the clarity and homogeneity of standards for clearing and settlement systems, and updating their supervisory methods in order to meet the challenges posed by safety requirements and market developments.

The Giovannini Group has produced two reports on the main barriers related to the fragmentation of the European clearing and settlement markets and the resulting inefficiencies. The “Giovanni Barriers” are classed as technical or market-practice barriers, legal barriers and barriers related to tax procedures, namely:

  • diversity of IT platforms and interfaces;
  • restrictions on the location of clearing or settlement;
  • national differences in rules governing corporate actions;
  • differences in the availability or the timing of intra-day settlement finality;
  • impediments to remote access;
  • national differences in settlement periods;
  • national differences in operating hours/settlement deadlines;
  • national differences in securities issuance practice;
  • restrictions on the location of securities;
  • restrictions on the activity of primary dealers and market-makers;
  • withholding tax procedures disadvantaging foreign intermediaries;
  • tax collection functionality integrated into the settlement system;
  • national differences in the legal treatment of securities;
  • national differences in the legal treatment of bilateral financial clearing;
  • uneven application of conflict-of-law rules.

It is in the light of these barriers to the integration of the clearing and settlement market that the Commission underlines its concrete objectives and initiatives. The main aim is to achieve a safe and efficient European clearing environment which ensures a level playing field among the different providers of the services in question. In order to achieve this objective, the Commission proposes:

  • to liberalise and integrate existing securities clearing and settlement systems, particularly by providing access rights at all levels and removing barriers to cross-border clearing and settlement;
  • to remove restrictive market practices and to monitor industry consolidation in accordance with the requirements of competition policy;
  • to adopt a common regulatory and supervisory framework that ensures financial stability and investor protection, leading to the mutual recognition of systems;
  • to implement appropriate governance arrangements so as to address national authorities’ concerns regarding the way in which clearing and settlement infrastructures operate.

The Communication proposes that a framework Directive on clearing and settlement be drawn up. The Directive would grant rights of access to infrastructures and would define the conditions for their exercise, thereby facilitating EU-wide liberalisation. Developing the cross-border clearing and settlement system will involve national authorities cooperating more closely in order to achieve effective cross-border regulation and supervision. As a result, it is important to determine which authority is responsible for regulating and supervising cross-border clearing and settlement activities. The Directive will therefore establish a regulatory framework and lay down a common set of high-level principles that will ensure greater legal certainty and guarantee a level regulatory playing field. Finally, the Directive will lay down appropriate governance rules for clearing and settlement entities, namely:

  • accounting separation;
  • unbundling.

The Commission also proposes to set up an advisory and monitoring group (CESAME) composed of experts from public and private bodies, and tasked with improving coordination between public- and private-sector bodies (such as the ESCB and CESR) and with creating the necessary synergy to remove certain Giovannini barriers for which the private sector will be responsible. Given that there may be diverging interests among different market participants, this working group, operating as a forum, will aim to convince the markets of the need both for particular action and for an overall approach. It will also inform the public on the state of the reforms. Finally, it will liaise with the groups of experts that will tackle the legal barriers and the barriers related to tax procedures in conjunction with the Group of 30 and other international bodies so as to ensure that European initiatives are consistent with those developed at international level.

Furthermore, the Commission proposes to tackle legal and tax barriers. The smooth running of the clearing and settlement system depends on the soundness of the legal system on which it is built. The legal framework must be clear, reliable, coherent and predictable in its interpretation and implementation. The Giovannini group has identified the main important barriers to further integration:

  • uneven application of national conflicts-of-law rules;
  • different legal systems;
  • different treatment of bilateral netting among Member States;
  • the absence of an EU-wide framework for treating interests in securities;
  • national disparities as to the moment a purchaser is considered to be the owner of a security for the purposes of corporate actions.

The current legal framework already addresses some of these issues. The Settlement Finality Directive and the Financial Collateral Arrangements Directive, for example, deal with issues such as the legal treatment of netting and conflicts of law.

However, there are other legal barriers, particularly the absence of an EU-wide framework for the treatment of interests in securities held with an intermediary. Securities are increasingly held and transferred on the basis of book entries. When dematerialised securities are represented exclusively by a book entry in an account held by an intermediary, it is necessary to determine the nature of the investors’ rights and the legal interpretation, which can vary from one Member State to another. It is also important to determine the legal framework which applies to transfers of rights in respect of indirectly held securities.
In addition, the issues of how to determine priorities between competing interests as recorded in the relevant accounts and how to avoid creditors attaching or claiming an investor’s right at a level in the chain of holdings higher then where such right is actually recorded or constituted need to be addressed.
Corporate action processing can vary in line with differences in national legislation. A specific example is the determination of the exact moment when a purchaser is considered to be the owner of a security for the payment of dividends. This date may vary depending on the legislation of the Member State in question.
Lastly, restrictions on the issuer’s ability to choose the location of its securities act as a further barrier to the integration of securities settlement systems.

The Giovannini reports also looked at taxation issues. Firstly, it was noted that there are procedures whereby only certain intermediaries are permitted to apply a reduction of the normal rate of withholding tax. For example, some Member States permit only institutions established on their territory withholding tax procedures. In other Member States, foreign intermediaries are allowed to operate these procedures, but on the condition that they appoint a local tax representative. A foreign operator is therefore prevented from operating on a cross-border basis or using the intermediary services of a securities settlement system. This limits competition in securities settlement, since market participants cannot choose the most efficient way of operating in other Member States.
Secondly, there are differences between Member States in collection and in granting relief from withholding tax. Even if investors can be granted partial or total relief from this tax, they may have to pay it before it can be reclaimed. Procedures vary between Member States and can be very complex, increasing the cost of cross-border settlement.

In order to deal with these legal and tax issues, the Commission is proposing to set up two groups of experts tasked with looking at the issues and studying the different systems in the Member States in order to assess whether they can be more closely aligned.

Competition policy must be consistently applied for clearing and settlement systems to be integrated. The Commission monitors mergers and acquisitions in this sector in order to ensure that there are no market restrictions and to establish ground rules for consolidation practices.

 

Credit rating agencies

Credit rating agencies

Outline of the Community (European Union) legislation about Credit rating agencies

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Credit rating agencies

Document or Iniciative

Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (Text with EEA relevance).

Summary

This Regulation aims at regulating the business of credit rating agencies with a view to protecting investors and European financial markets against the risk of malpractice. It lays down the conditions for issuing credit ratings, as well as rules related to registering and monitoring credit rating agencies.

Which credit ratings does the Regulation apply to?

This Regulation applies to credit ratings which are issued by credit rating agencies registered in the European Union (EC) and which are communicated to the public or distributed by subscription.

How are credit ratings used?

Credit ratings issued by credit rating agencies based in the EU are used by investors, borrowers, issuers and public administrations to help them make investment and financial decisions. These ratings may be used by the banks as a reference for calculating their capital requirements for solvency purposes or to help investors to assess the risks in their investment activity.

Two procedures allow the use, in the EU, of ratings issued by credit agencies established in third countries. Firstly, credit rating agencies have the option to give their endorsement to credit ratings issued outside of the EU, on the condition that:

  • the credit rating agency has carried out preliminary checks and can continue to demonstrate to the European Securities and Markets Authority (ESMA) that the credit ratings meet legislative requirements which are at least as strict as those applicable in the EU;
  • the ability of ESMA to assess and monitor compliance with the requirements is not limited;
  • the credit rating agency shall provide ESMA with all the information it requires;
  • the credit rating agency established in the third country is authorised or registered, and is subject to supervision, in that third country;
  • a cooperation arrangement has been concluded between ESMA and the relevant competent authority of the credit rating agency established in a third country.

Secondly, ratings issued by a small credit rating agency established in a third country, but not established in the EU, can be used in the European Union on the condition that:

  • the credit rating agency is authorised or registered in and is subject to supervision in that third country;
  • the Commission has adopted an equivalence decision recognising the legal and supervisory framework for ratings agencies in the third country;
  • the cooperation arrangements with the third country exist and are operational;
  • the credit ratings issued by the credit rating agency and its credit rating activities are not of systemic importance to the financial stability or integrity of the financial markets of one or more Member States;
  • the credit rating agency is certified in the Union.

Credit rating agencies may request certification from ESMA.

Under which conditions are credit ratings issued?

The issuing of credit ratings should not be affected by any conflict of interest or business relationship. In order to ensure this, credit rating agencies are subject to specific organisational and operational requirements. The administrative or supervisory board of the agency shall ensure independence of the rating process. It shall ensure that conflicts of interest are properly identified, managed and disclosed, and finally that the credit rating agency complies with the requirements of the Regulation. ESMA may however exempt a credit agency from certain requirements in view of the nature, scale and complexity of its business.

The methodologies of credit rating agencies and the descriptions of models and key rating assumptions, such as mathematical or correlation assumptions, are published in a manner permitting comprehensive review. In this way, agencies shall guarantee the quality of the credit ratings that they produce, and the transparency of methods used.

The credit rating agencies shall ensure regular monitoring of credit ratings and shall review this at least once a year. They shall produce general and periodic disclosures, as well as a transparency report. Agencies shall send data to ESMA on their past performance so that it can be made available to the public.

How is monitoring of credit rating activities carried out?

Credit rating agencies established in the EU must register with ESMA. They will send their application for registration to ESMA, providing, amongst other things, information on their headquarters, their legal status, their methods of issuing ratings and their policies and procedures on managing conflicts of interest. ESMA has 45 working days to examine their application.

In the case of an application for registration made by a group of agencies, ESMA decides whether to grant or refuse registration. In this case, it has 55 working days to reach a decision.

ESMA is responsible for drawing up guidelines in consultation with the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA). It is required to publish an annual report on the application of this Regulation.

ESMA carries out ongoing surveillance of credit rating agencies, particularly of their rating methodologies. It must not interfere with the content of the credit ratings or with the methodologies used by the credit rating agencies. If it identifies an infringement (listed in Annex III), ESMA appoints an independent investigator to open an inquiry, at the end of which a dossier is produced presenting his/her conclusions. ESMA then decides whether to fine the credit rating agency or to impose one of the following penalties:

  • withdraw the registration of the credit rating agency;
  • temporarily prohibit the agency from issuing credit ratings;
  • suspend the use of the credit ratings;
  • require the agency to stop the infringement;
  • issue public notices.

ESMA is required to cooperate with EBA, EIOPA and the competent authorities and sectoral competent authorities with regard to exchanging information. It has the right to send confidential information to the following bodies:

  • the central banks;
  • the European Central Bank;
  • the European Systemic Risk Board;
  • public authorities.

Context

The 2008 financial crisis and the absence of national regulations led the European Commission to establish common rules in order to better regulate the activities of credit rating agencies. In February 2009, the “Larosière” Expert Group highlighted the need to strengthen the framework for monitoring the financial sector, which enabled the creation of a European System of Financial Supervision (ESFS) comprising three European supervisory authorities and a Systemic Risk Board. The role of ESMA also enables the monitoring of credit rating agencies to be strengthened.

Key terms of the Act
  • Credit rating: an opinion regarding the creditworthiness of an entity, a debt or financial obligation, debt security, preferred share or other financial instrument, or of an issuer of such debt or financial obligation, debt security, preferred share or other financial instrument, issued using an established and defined ranking system of rating categories;
  • Credit rating agency: a legal person whose occupation includes the issuing of credit ratings on a professional basis;
  • Rating category: a rating symbol, such as a letter or numerical symbol which might be accompanied by appending identifying characters, used in a credit rating to provide a relative measure of risk to distinguish the different risk characteristics of the types of rated entities, issuers and financial instruments or other assets.

References

Act Entry into force Deadline for transposition in the Member States Official Journal
Regulation No 1060/2009

7.12.2009

OJ L 302 of 17.11.2009

Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal
Regulation No 513/2011

1.6.2011

OJ L 145 of 31.5.2011

Directive 2011/61/EU

21.7.2011

OJ L 17 of 1.7.2011

Fund mergers and master-feeder structures relating to undertakings for collective investment in transferable securities

Fund mergers and master-feeder structures relating to undertakings for collective investment in transferable securities

Outline of the Community (European Union) legislation about Fund mergers and master-feeder structures relating to undertakings for collective investment in transferable securities

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Fund mergers and master-feeder structures relating to undertakings for collective investment in transferable securities (UCITS)

Document or Iniciative

Commission Directive 2010/44/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure (Text with EEA relevance).

Summary

This Directive lays down provisions relating to the mergers of undertakings for collective investment in transferable securities (UCITS) and master-feeder structures within the framework of the Directive on the rules applying to UCITS. It forms part of the implementing measures of the latter instrument, which include Directive 2010/43/EU, Regulation (EU) No 583/2010 and Regulation (EU) No 584/2010.

UCITS mergers

In the case of a merger of a UCITS, the unit-holders * must be informed of the conditions of the merger and of its potential influence on the receiving UCITS. The unit-holders shall receive other information including in particular:

  • their rights before and after the proposed merger takes effect;
  • a comparison of charges, fees and expenses for both UCITS;
  • whether the management or investment company of the merging UCITS intends to undertake any rebalancing of the portfolio * before the merger takes effect;
  • details concerning any accrued income in the respective UCITS.

The merging and receiving UCITS shall provide unit-holders with information on the approval procedure for the proposed merger and the date at which the merger is to take effect.

Key investor information of the receiving UCITS shall be provided to the unit-holders of the merging and receiving UCITS.

Master-feeder structures

Agreements and internal conduct of business rules between feeder UCITS and master UCITS

The master UCITS shall provide the feeder UCITS with:

  • a copy of its fund rules or instruments of incorporation and key investor information;
  • information on the delegation of investment management and risk management functions to third parties;
  • internal operational documents.

In addition, the master UCITS shall provide certain information with regard to the basis of investment and divestment:

  • a statement of which share classes of the master UCITS are available for investment by the feeder UCITS;
  • the amount of charges and expenses to be borne by the feeder UCITS;
  • the terms on which any initial or subsequent transfer of assets in kind may be made from the feeder UCITS to the master UCITS.

Procedures in the case of liquidation of the master UCITS

Where the feeder UCITS intends to invest at least 85% of its assets in units of another master UCITS, it shall provide:

  • its application for approval of that investment;
  • its application for approval of the proposed amendments to its fund rules;
  • the amendments made to its key investor information.

Where a feeder UCITS intends to convert into a non-feeder UCITS, it shall provide:

  • its application for approval of the proposed amendments to its fund rules;
  • the proposed amendments to its key investor information.

Where a feeder UCITS wishes to be liquidated, it shall provide notification of this intention.

The competent authorities shall be responsible for informing the feeder UCITS if it intends to invest at least 85% of its assets in units of another master UCITS or if it intends to convert into a non-feeder UCITS. This should take place 15 days after receipt of the documents. Once the feeder UCITS has obtained approval from the competent authorities, it shall inform the master UCITS.

Procedures in the case of merger or division of the master UCITS

The feeder UCITS shall provide the competent authorities with its application for approval in the following cases:

  • where it intends to continue to be a feeder UCITS of the same master UCITS;
  • where it intends to become a feeder UCITS of another master UCITS;
  • where it intends to convert into a non-feeder UCITS;
  • where it intends to be liquidated.

As with the liquidation procedure, the competent authorities shall inform the feeder UCITS 15 days after the documents have been received. Once the feeder UCITS has obtained approval from the competent authorities, it shall inform the master UCITS.

The law of the Member State applying in the case of liquidation, merger or division shall also apply to information sharing between the two depositaries.

Key terms of the Act
  • Unit-holder: any natural or legal person holding one or several shares in a UCITS.
  • Rebalancing of the portfolio: a significant modification of the composition of the portfolio of a UCITS.

Reference

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2010/44/EU

30.7.2010

30.6.2011

OJ L 176 of 10.7.2010

UCITS: organisational requirements and rules of conduct

UCITS: organisational requirements and rules of conduct

Outline of the Community (European Union) legislation about UCITS: organisational requirements and rules of conduct

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

UCITS: organisational requirements and rules of conduct

Document or Iniciative

Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (Text with EEA relevance).

Summary

This Directive is an implementing measure of the Directive on the rules applying to UCITS. It specifies the organisational requirements with which management companies managing UCITS must comply, as well as rules of conduct and rules on handling conflicts of interest. Furthermore, the Directive establishes requirements concerning the risk management process for UCITS.

Entities concerned by the Directive

This Directive applies to:

  • management companies which manage UCITS;
  • depositaries;
  • investment companies that have not designated a management company.

Administrative procedures and control mechanism

Management companies have a duty to:

  • implement decision-making procedures, and an organisational structure;
  • ensure that information is transmitted to the relevant persons * in the proper way;
  • implement appropriate internal control mechanisms;
  • maintain records of their business and internal organisation.

Management companies must safeguard the security, integrity and confidentiality of information.

They must put in place operational accounting procedures in such a way that all assets and liabilities of the UCITS can be directly identified at all times. The accounting procedures must be in accordance with the accounting rules of the UCITS’ home Member States.

As regards internal control mechanisms, the senior management of management companies are responsible for general investment policy. They oversee the approval of investment strategies for each UCITS.

Management companies must ensure permanent compliance. This consists of evaluating the adequacy and effectiveness of the measures taken to address any failures of the management company in complying with its obligations. Compliance also consists of advising and assisting the persons responsible for carrying out the services and activities of the management company. This work is to be carried out by a person designated for this purpose.

Management companies shall be responsible for maintaining a risk management function at all times, independently of operational units, in particular responsible for:

  • implementing the risk management policy and procedures;
  • ensuring compliance with the UCITS risk limit system;
  • providing advice to the board of directors as regards the identification of the risk profile of each managed UCITS;
  • reviewing and supporting the arrangements and procedures for the valuation of over-the-counter (OTC) derivatives.

Management companies shall put in place a procedure to prevent certain relevant persons * from:

  • performing a personal financial transaction or advising another person to perform such a transaction;
  • divulging information that might influence the behaviour of other persons as regards the choice of their transactions.

Portfolio transactions must be recorded in order facilitate future reconstructions of the details of the order, as must be subscription and redemption orders. These records are then to be retained for at least five years.

Conflict of interests

The following situations may lead to conflicts of interest, where:

  • the management company is likely to make a financial gain, or avoid a financial loss, at the expense of the UCITS;
  • the management company has an interest in the outcome of a service provided to the UCITS or another client which does not share the interests of the UCITS;
  • the management company has an incentive to favour the interest of another client;
  • the management company carries out the same activities for the UCITS as for another client;
  • the management company receives money, goods or services illegally.

Management companies are therefore obliged to define in writing an effective policy as regards conflict of interest, which preserves the independence of the relevant persons.

Rules of conduct

Management companies must treat UCITS unit-holders * fairly. Where they have carried out a subscription or redemption order for a unit-holder, they must send the unit-holder notice containing in particular the following information:

  • the management company identification;
  • the name of the unit-holder;
  • the date and time of receipt of the order and method of payment;
  • the date of execution;
  • the UCITS identification;
  • the number of units involved.

Management companies are not permitted to carry out a UCITS order in aggregate with an order of another UCITS or another client or with an order on their own account.

Risk management

Management companies must implement an operational risk management policy. They are to calculate the global exposure of the UCITS once a day.

Key terms of the Act
  • Relevant person: in relation to a management company shall mean a director, partner or equivalent, or manager of the management company, an employee of the management company, as well as any other natural person whose services are placed at the disposal and under the control of the management company and who is involved in the provision by the management company of collective portfolio management, or a natural person who is directly involved in the provision of services to the management company under a delegation arrangements to third parties for the purpose of the provision by the management company of collective portfolio management.
  • Unit-holder: any natural or legal person holding one or more units in a UCITS.

Reference

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2010/43/EU

30.7.2010

30.6.2011

OJ L 176 of 10.7.2010

Alternative Investment Fund Managers

Alternative Investment Fund Managers

Outline of the Community (European Union) legislation about Alternative Investment Fund Managers

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Alternative Investment Fund Managers

Document or Iniciative

Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (Text with EEA relevance).

Summary

This Directive aims at framing the activities of managers * of Alternative Investment Funds (AIFs) *. The goal is to create an internal market for these managers whilst putting in place a harmonised regulatory framework.

The Directive does not apply to:

  • holding companies;
  • institutions for occupational retirement provision;
  • supranational institutions;
  • national central banks;
  • national, regional and local governments;
  • employee participation systems or employee savings schemes;
  • securitisation special purpose entities.

Conditions for the authorisation of AIFMs

Alternative Investment Fund Managers (AIFMs) are entrusted with the portfolio management and risk management of AIFs. They may additionally perform duties of administration and marketing.

In order to carry out their activities, AIFMs must apply to the competent authorities of their home Member State for authorisation, and provide information concerning:

  • the persons conducting the business of the AIFM;
  • the identities of the AIFM’s shareholders and direct or indirect members;
  • a programme of activity;
  • remuneration policies and practices;
  • arrangements made for the delegation to third parties of AIFM functions.

They must also submit information on the AIFs they intend to manage, namely:

  • investment strategies;
  • where the AIF is established if the AIF is a feeder AIF*;
  • the rules or instruments of incorporation;
  • arrangements made for the appointment of the depositary.

Where the AIFM is an internally managed AIF, it must have an initial capital of at least EUR 300 000, whereas an external manager of AIFs must provide capital of at least EUR 125 000.

Operating conditions for AIFM activities

AIFMs entrusted with portfolio management are not permitted to invest all or part of the client’s portfolio in units or shares of the AIFs they manage. They must comply with the Directive on investor-compensation schemes. They may delegate their duties provided that they notify the competent authorities of their home Member State.

Remuneration policies practised by AIFMs must not encourage excessive risk taking. The European Securities and Markets Authority (ESMA), in cooperation with the European Banking Authority (EBA), ensures that remuneration practices comply with the principles laid down in:

  • Annex II to this Directive;
  • the Recommendation on remuneration policies in the financial services sector.

AIFMs must separate in functional and hierarchical terms risk management tasks from operational units, and from portfolio management. At least once a year, they must scrutinise the risk management systems put in place.

AIFMs must adopt procedures which enable them to monitor the AIF’s liquidity risk and guarantee the compliance of the liquidity profile of the investments of the AIF. AIFMs are to conduct stress tests regularly.

AIFMs are to put in place appropriate and coherent valuation procedures. AIFMs must comply with the law of the country in which the AIF is established, with respect to asset valuation and the calculation of the net asset value per unit or share of the AIF.

For each AIF that they manage, AIFMs shall appoint a single depositary, the main task of which is to monitor the AIF’s cash flow. The depositary may be:

  • a credit institution established in the EU pursuant to the Directive relating to the taking up and pursuit of the business of credit institutions;
  • an investment firm established in the EU and subject to the requirements of the Directive on capital adequacy;
  • another type of entity subject to prudential regulation and permanent supervision. Additional criteria may be laid down by the competent authorities in Member States.

Transparency requirements

AIFMs are to publish an annual report for each financial year for each of the AIFs they manage and for each of the AIFs they market, no later than 6 months following the end of the financial year. The annual financial report shall be published pursuant to the Directive on the transparency of information.

Vis-à-vis investors, AIFMs must make the following information available to them, namely:

  • a description of the AIF’s investment strategy and objectives;
  • a description of all fees, charges and expenses;
  • a description of the main legal implications of the contractual relationship;
  • the identity of the AIFM, the AIF’s depositary and auditor;
  • the identity of the prime broker.

In addition, AIFMs must periodically disclose to investors:

  • the percentage of the AIF’s assets subject to special arrangements;
  • any new arrangements for managing the liquidity of the AIF;
  • the current risk profile of the AIF.

The competent authorities of the AIFM’s home Member State must also be kept abreast of the principal markets and instruments where they trade on behalf of the AIFs they manage.

AIFMs managing specific types of AIF

This Directive distinguishes two types of AIFMs:

  • AIFMs managing leveraged AIFs (leverage is the effect on financial yield of different extents of the use of debt): the competent authorities of the AIFM’s home Member State must use the information that the AIFM provides in order to determine whether leverage contributes to increasing systemic risk in the financial system. In return, the AIFMs must demonstrate that the leverage limits set for each AIF they manage are reasonable.
  • AIFMs managing AIFs which acquire control of non-listed companies and issuers (control shall mean more than 50 % of the voting rights of the companies): AIFMs must notify the following of the acquisition of control:

    1. the non-listed company;
    2. the shareholders of the non-listed company;
    3. the competent authorities of the home Member State of the AIFM.

Rights of EU AIFMs to market and manage AIFs

AIFMs may market units or shares of any AIF that they manage. In that case, they must notify the competent authorities of their home Member State in respect of each AIF that they intend to market. The documentation to be provided is set out in Annex IV.

Specific risks in relation to third countries

AIFMs are permitted to manage third country AIFs which are not marketed in the EU provided that certain rules are complied with and that cooperation arrangements are in place between the competent authorities of the home Member State of the AIFM and the supervisory authorities of the third country where the AIF is established.

Key terms of the Act
  • AIFMs: legal persons whose regular business is managing one or more AIFs.
  • Alternative investment funds (AIFs): collective investment undertakings, including investment compartments thereof, which raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors and are not subject to the Directive on undertakings for collective investment in transferable securities.
  • Feeder AIF: an AIF which:
    1. invests at least 85 % of its assets in units or shares of another AIF (the “master AIF”);
    2. invests at least 85 % of its assets in more than one master AIF where those master AIFs have identical investment strategies;
    3. has otherwise an exposure of at least 85 % of its assets to such a master AIF.

Reference

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2011/61/EU

21.7.2011

22.7.2013

OJ L 174 of 1.7.2011

Markets in financial instruments

Markets in financial instruments

Outline of the Community (European Union) legislation about Markets in financial instruments

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Markets in financial instruments (Proposal)

Admission of securities to official stock-exchange listing and information to be published on those securities

Admission of securities to official stock-exchange listing and information to be published on those securities

Outline of the Community (European Union) legislation about Admission of securities to official stock-exchange listing and information to be published on those securities

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Admission of securities to official stock-exchange listing and information to be published on those securities

Document or Iniciative

Directive 2001/34/EC of the European Parliament and of the Council on the admission of securities to official stock exchange listings and on information to be published on those securities [See amending acts].

Summary

Context

In line with the objectives pursued by the Financial Services Action Plan (FSAP), this Directive aims to consolidate the existing measures concerning the conditions for admission of securities to official stock-exchange listing and the financial information that listed companies must make available to investors. The existing measures are:

  • Council Directive 79/279/EEC coordinating the conditions for the admission of securities to official stock-exchange listing;
  • Council Directive 80/390/EEC coordinating the requirements for the drawing up, scrutiny and distribution of the listing particulars to be published for the admission of securities to official stock-exchange listing;
  • Council Directive 82/121/EEC on information to be published on a regular basis by companies the shares of which have been admitted to official stock-exchange listing;
  • Council Directive 88/627/EEC on the information to be published when a major holding in a listed company is acquired or disposed of.

The rules must also be flexible, minimal and partial in order to allow firms with increasing financial requirements to have access to liberalised capital markets.

Consequently, over and above the consolidation provided for by Directive 2001/34/EC, the modernisation and harmonisation of securities markets with a view to achieving a genuine capital market means both stepping up and simplifying requirements, thereby helping to promote consistency and guarantee investor protection. To this end, Directives 2003/71/EC and 2004/109/EC continue the consolidation process initiated by Directive 2001/34/EC, primarily by harmonising the conditions for the provision of information regarding requests for the admission of securities to official stock-exchange listing and the information on securities admitted to trading.

The coordination introduced by the Directive concerns all securities for which admission to official listing is requested and those admitted, irrespective of the legal nature of their issuer. However, certain exemptions are possible in the case of securities issued by non-member countries or their regional or local authorities, by public international bodies, by the European Central Bank and by the central banks of Member States.

In order to protect investors, information on the financial circumstances of the issuer and details of the securities must be disclosed. More specifically, in the case of securities for which admission to official listing is requested, the information required is published in a prospectus.

The coordination of requirements for the drawing-up, approval and distribution of this prospectus, a sort of “single passport” for issuers, is ensured by its mutual recognition. That said, such mutual recognition does not in itself confer the right to admission to official listing.

The information provided to investors must be minimal, sufficient, regular, adequate and international:

  • minimal since Member States may find it useful to establish non-discriminatory minimum quantitative criteria which issuers must meet in order to benefit from the possibilities for exemption provided for in the Directive; this does not rule out the right of Member States to impose stricter rules should they so wish;
  • sufficient to ensure that investors possess the relevant information;
  • regular so that investors are supplied with appropriate information throughout the entire period during which the securities are listed; irrespective of whether the information is provided in the form of an annual financial report, a half-yearly report or interim management statements, it must accurately reflect the current situation and prospects of the issuer;
  • adequate in that investors must be informed by shareholders of “major” holdings of changes in those holdings;
  • international since the principle of equivalence in respect of the disclosure requirement also applies to issuers located in non-member countries.

In order to simplify access to the prospectus and the information and, in the process, increase harmonisation of securities markets, the home Member State, i.e. the country where the issuer has its registered office, is the sole base for provision of the documents.

Moreover, the need for consistency and efficiency in relation to publication and disclosure of the information militates in favour of the use of a common language, be it a language accepted by the competent authorities of the home and/or host Member State(s) or a language that is customary in the sphere of international.

Directive 2005/1/EC brings an end to the Contact Committee and replaces it with the European Securities Committee.

Reference

Act Entry into force Deadline for transposition in the Member States Official Journal
Directive 2001/34/EC [adoption: codecision COD/2000/0174] 26.07.2001 OJ L 184 of 06.07.2001
Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal
Directive 2003/71/EC [adoption: codecision COD/2001/0117] 31.12.2003 01.07.2005 OJ L 345 of 31.12.2003
Directive 2004/109/EC [adoption: codecision COD/2003/0045] 20.01.2005 20.01.2007 OJ L 390 of 31.12.2004
Directive 2005/1/EC [adoption: codecision COD/2003/0263] 13.04.2005 13.05.2005 OJ L 79 of 24.03.2005