Saturday, June 29, 2013

Senate Housing Finance Reform Legislation Would Authorize President to Name Acting Director of new Federal Mortgage Insurance Corp.

Senators Robert Corker (R-TN) and Mark Warner (D-VA), key members of the Banking Committee, have introduced broad and sweeping bi-partisan legislation to completely overhaul the mortgage-backed securities markets and reform the government-sponsored enterprises. The Housing Finance Reform and Taxpayer Protection Act, S. 1217, which has garnered strong support from the securities industry, would create the Federal Mortgage Insurance Corporation (FMIC) as an independent federal agency to capitalize the housing finance system by separating credit risk from interest rate risk, and bringing in private capital to take on both.

The FMIC Director will be appointed for a five-year term by the President, with the advice and consent of the Senate. The FMIC Director will be a voting member of the Financial Stability Oversight Council. The Act authorizes a five-member FMIC board of directors. In what appears to be an obvious nod to the controversy surrounding the President's recess appointments of a NLRB members and CFPB Director Richard Cordray, the legislation specifically provides that, if the Senate has not confirmed an FMIC Director, the President is authorized to name an Acting Director. The President cannot name anyone Acting FMIC Director. The Act specifies that the Acting Director must either be the nominated Director-designate or a member of the FMIC board of directors. In either case, the Acting Director will have full statutory powers and duties until such time as the Senate confirms a Director.

U.K. FCA Charts New Philosophy of Judgment-Based, Real Time Financial Regulation

The main duty or Government remit of a securities regulator is to ensure that the financial markets work well for all the market participants, said Martin Wheatley, the Chief Executive of the U.K. Financial Conduct Authority. In recent remarks, he noted that the FCA has developed a forward-looking and judgment-based philosophy of financial regulation to ensure the well-functioning of the markets. The FCA will employ real time regulation  and eschew box-ticking and regulation based on historic data collection. The FCA espouses regulation that is outcome-based and employs the tactic of early intervention.
Mr. Wheatly clarified that a market that works well has to work for all players in the market. But it is not a market where consumers never lose money, he said, since markets are about risk and in the appropriate product, consumers may gain or lose. It is also not a market where firms never make money, since the provision of services is rarely free and firms have to be allowed to make a profit. Thus, a market that works well has profits for good firms and exits for bad ones, along with innovation and choice for consumers and good products that meet consumers’ needs and not bad products that simply obscure cost or risks
Specifically regarding the asset management industry, Mr. Wheatley pledged that the FCA will work closely with hedge fund managers and other asset managers in a productive, predictable and transparent relationship that supports growth by delivering innovation and valued services to clients. In practice, this means the FCA will work alongside all participants, including the Government and asset managers, to support the market and to allow asset managers to contribute to the economy. It also means the FCA should be easier to access and engage with in critical areas like fund authorization and implementation of a new policy like the E.U. Alternative Investment Fund Managers Directive (AIFMD).

Thursday, June 27, 2013

German Corporate Governance Code Commission Opposes Mandatory Say-on-Pay Legislation

The German Corporate Governance Code Commission opposes federal legislation mandating a binding annual shareholder vote on executive remuneration. In a statement, Commission Chairman Klaus-Peter Müller expressed doubt whether a decision made by the shareholders at the annual general meeting will prevent excessively high management board remuneration. The German Corporate Governance Code instead places emphasis on greater transparency and an improved basis for decisions by supervisory boards as a means of putting a stop to excesses in management board remuneration.

While further regulatory and legislative intervention in setting management remuneration may satisfy certain expectations in some quarters of society, noted the Chairman, it would place fetters on global companies. More broadly, Chairman Müller appealed to policy-makers to trust in the self-regulating force of the German Corporate Governance Code, adding that it is neither necessary nor desirable for every aspect of business life to be governed by binding legislation.

German companies operate under a two-tier system of corporate governance with a supervisory board with oversight power and a management board that daily runs the company. The aim of the German Corporate Governance Code is to make Germany's corporate governance rules transparent for both national and international investors, thus strengthening confidence in the management of German corporations. The German Corporate Governance Code is on a comply or explain basis under which public companies are required to declare annually whether or not they have complied with the recommendations of the Code.

Chairman Müller also voiced his objection to any attempt to adopt a global, or even an E.U., corporate governance code. Like legislation, he noted, a corporate governance code must take account of specific national factors. As it is, the differences in corporate governance across Europe shows that a European Code would not work, he opined.

That said, however, he emphasized that the Commission still has a goal of developing as much common ground as possible when it comes to good corporate governance. It must be made easier for global companies to meet the requirements expected of them with respect to good corporate governance. The discussion on board remuneration highlights the need for a greater consensus on what this constitutes. Currently, said the Chairman, there is no sufficient underlying international or European consensus on such issues.

He reasoned that, even if Germany were to enact the strictest remuneration legislation,
this would not have the slightest impact on salaries paid on Wall Street or in Silicon Valley or London. If greater restrictions were applied in Germany to management board remuneration compared with other countries, he cautioned, this would result in competitive distortion and the risk of the best minds, notably those with an international background, leaving the country.

House Panel Examines Dodd-Frank Orderly Liquidation Authority and TBTF

At a hearing examining Titles I and II of the Dodd-Frank Act and the attendant orderly liquidation authority for systemically important financial institutions, House Financial Services Committee Chair Jeb Hensarling (R-TX) said that there is a growing consensus that Dodd-Frank did not end too big to fail (TBTF) as applied to large, complex financial firms. Indeed, he noted that the Dodd-Frank Act codifies the TBTF doctrine. In this regard, he pointed to Section 113 of Dodd-Frank, which authorizes the Financial Stability Oversight Council to designate financial firms as systemically important financial institutions. In essence, said Chairman Hensarling, by designating a financial firm as a systemically important financial institution, the FSOC is designating the firm as TBTF.

The Committee’s Ranking Member, Rep. Maxine Waters (D-CA), noted that Title II of Dodd-Frank includes provisions that are supposed to prevent taxpayer-funded bail-outs. She pointed to Section 214(a), which provides that no taxpayer funds may be used to prevent the liquidation of any financial company under Title II. Section 214(b) requires that all funds expended in the liquidation of a covered financial company be recovered from the disposition of assets or through assessments on the financial sector. Section 214(c) provides that taxpayers shall bear no losses from the exercise of any authority under Title II.

Rep. Mick Mulvaney (R-SC) said that, despite Section 214, it appears that taxpayer funds could still be used in a Title II orderly liquidation. Asked by Rep. Mulvaney for his view, Dallas Fed President Richard Fisher noted that, if the reorganized firm cannot repay the Treasury for its debtor-in-possession financing, Section 214 says that the repayment should be clawed back via a special assessment on the company’s SIFI competitors. Since that assessment is then written off as a tax-deductible business expense by the assessed firm, thereby reducing revenue to the Treasury, Mr. Fisher contends that it is at taxpayer expense.

Rep. Patrick McHenry (R-NC) flatly stated that the Dodd-Frank Act did not end TBTF. He also noted that the FSOC has not identified new risks to the economy and the Federal Reserve Board has not made public how it would employ its new authorities to prevent a financial crisis. He also pointed out that the DOJ is reluctant to prosecute large financial institutions.

Rep. Carolyn Maloney (D-NY) emphasized that Dodd-Frank properly gave regulators a third option outside the previous binary choice for a failed financial firm of bankruptcy or a taxpayer bailout. This third option is the orderly liquidation authority in Title II, allowing the FDIC to wind down large financial firms.

In his testimony, Mr. Fisher argued that the Dodd–Frank Act, despite its best intentions, imposes a prohibitive cost burden on the non-TBTF financial institutions and needs to be amended. As soon as a financial institution is designated systemically important as required under Title I of Dodd–Frank, he noted, it is viewed by the market as being the first to be saved by the first responders in a financial crisis. In other words, said the Dallas Fed leader, these SIFIs occupy a privileged space in the financial system

In reality, rather than fulfill Dodd–Frank’s promise of no more taxpayer-funded bailouts, the Treasury will likely provide, through the FDIC, debtor-in-possession financing to the failed companies, he continued, thereby artificially keeping alive operating subsidiaries for up to five years, and perhaps longer. Under the single point of entry method being espoused by Treasury, the operating subsidiaries remain protected as the holding company is restructured. President Fisher described Title II of Dodd–Frank as a disguised form of taxpayer bailout that promotes and sustains an unnatural longevity for zombie financial institutions.

The Dallas Fed has a three-prong reform proposal to address the situation. First,  roll back the federal safety net of deposit insurance and the Federal Reserve’s discount window to where it was always intended to be, that is, to traditional commercial bank deposit and lending intermediation and payment system functions. Thus, the safety net would only be available to traditional commercial banks and not to the nonbank affiliates of bank holding companies or the parent companies themselves.

Second, customers, creditors and counterparties of all nonbank affiliates and the parent holding companies would sign a simple, legally binding, unambiguous disclosure acknowledging and accepting that there is no government guarantee backstopping their investment. Third, the largest financial holding companies would be restructured so that every one of their corporate entities is subject to a speedy bankruptcy process.

In her testimony, former FDIC Chair Shelia Bair strongly disagreed with the notion that Title II’s orderly liquidation authority enshrines the government bailout policies of 2008 and 2009. Dodd-Frank has abolished the implicit and explicit TBTF policies that were in effect before its enactment. To the extent that TBTF remains, she noted, it is because regulators have more work to do to ensure that financial firms go into orderly liquidation if they do fail and because markets continue to question whether government will follow through on Title II and allow a systemically important firm to fail.

There are some things that could be done to improve the orderly liquidation process, said the former FDIC Chair. For example, regulators should ensure that large, complex financial institutions have sufficient long-term debt at the holding company level. The success of an orderly liquidation authority using the Treasury’s single point of entry approach depends on the top level holding company’s ability to absorb losses and fund recapitalization of the surviving operating entities,   reasoned the former FDIC head. Currently, nothing requires that firms hold sufficient senior debt to meet this need.

Monday, June 24, 2013

House Panel Marks Up and Approves Legislation on Pay Ratios, Private Equity Fund Advisers, Uniform Fiduciary Standard and Mandatory Audit Firm Rotation

The House Financial Services Committee has marked up and approved four pieces of legislation dealing with mandatory audit firm rotation, exemption of private fund advisers, the Dodd-Frank pay ratio requirement, and the Department of Labor and SEC adoption of fiduciary standards for brokers and advisers.

The Committee approved by a vote of 52-0 legislation that would prohibit the mandatory rotation of independent outside audit firms and remove the threat of unnecessary compliance costs for public companies. Introduced by Rep. Robert Hurt (R-VA) and Rep. Gregory Meeks (D-NY), the Audit Integrity and Job Protection Act, H.R. 1564, would amend Section 103 of the Sarbanes-Oxley Act to expressly prohibit the PCAOB from requiring that the outside audits of a company’s financial statements be conducted by different audit firms on a rotating basis. The Act would also prohibit the Board from requiring that audits be conducted by specific auditors. This is bi-partisan legislation and is expected to be approved by the Committee after mark up and sent to the House floor.

The Committee’s Ranking Member, Rep. Maxine Waters (D-CA) has mixed feelings about H.R. 1564.  On the one hand, she does not believe that mandatory audit firm rotation would enhance auditor independence, but on the other hand she does not believe that Congress should micromanage the PCAOB.

Rep. Waters offered an amendment to H.R. 1564 that would sunset the prohibition on adopting mandatory audit firm rotation so as not to indefinitely constrain the PCAOB. The amendment would also require a study on the issue, updating the 2003 GAO study. Rep. Hurt opposed the amendment, stating that it would gut the bill and create uncertainty. Rep. Scott Garrett (R-NJ) proposed an amendment to the Waters Amendment that would eliminate the sunset provision, but retain the study. Rep. Hurt agreed to the compromise amendment as long as it specifically required the study to consider the costs of mandatory audit firm rotation. Rep. Waters agreed to the changes, indicating that cost considerations should be included in the amendment. The amendment requiring a study of mandatory audit firm rotation, updating the GAO 2003 study, was unanimously approved by voice vote.

The Committee also approved a bi-partisan bill, the Small Business Capital Access and Job Preservation Act, H.R. 1105, by a 38-18 vote, which would exempt advisers to certain private equity funds from the new SEC registration requirements imposed by Title IV of the Dodd-Frank Act. Specifically, H.R. 1105 exempts from SEC registration private equity fund advisers that have not borrowed and do not have outstanding a principal amount in excess of twice their funded capital commitments. The bill was introduced by Rep. Robert Hurt (R-VA), Jim Himes (D-CT), Scott Garrett (R-NJ), Chair of the Capital Markets Subcommittee.

The Committee also approved H.R. 1135, the Burdensome Data Collection Relief Act by a 36-21 vote. ponsored by Rep. Bill Huizenga (R-MI) and Chairman Garrett, the bill would repeal Section 953(b) of the Dodd-Frank Act. Section 953(b) requires public companies to calculate and disclose, in every filing with the SEC, (i) the median annual total compensation of all of its employees other than its chief executive officer, (ii) its chief executive officer’s annual total compensation, and (iii) the ratio of those two numbers. 

The Committee approved H.R. 2374, the Retail Investor Protection Act by a 44-13 vote. Sponsored by Rep. Ann Wagner (R-MO). The legislative prevents the Secretary of Labor from prescribing any regulation under the Employee Retirement Income Security Act of 1974 defining the circumstances under which an individual is considered a fiduciary until the date that is 60 days after the SEC issues a final rule relating to standards of conduct for brokers and dealers pursuant Section 913 of the Dodd-Frank Act.  Rep. Wagner said that Congress must act because the SEC and DOL are headed towards two separate  and massive rulemakings and the impact of this on retail investors has not been properly considered. The legislation says that the DOL must wait until the SEC acts before moving ahead. 

Fed Chair Says Volcker Rule Will be Finalized by Year-End

At a press conference following the recent  Federal Open Market Committee, Federal Reserve Board Chair Ben Bernanke said that regulators have made a good bit of progress on finalizing the Dodd-Frank Act Volcker Rule and he anticipates that being done this year. Conceding that it has taken time to do these regulations, he said that there are a number of reasons for that, including that they are inherently quite complicated. The Volcker Rule, for example, involves some very subtle distinctions between hedging and market making and proprietary trading. Another reason is that the Volcker Rule involves multiple agencies which have to coordinate, cooperate and agree on language. The SEC, CFTC, OCC, FDIC and the Fed are all coordinating on the Volcker Rule.

Chairman Bernanke also emphasized that federal regulators have to get the Volcker Rule right; and that means having extended comment periods, getting lots of information from the public and then reviewing those comments and doing all that can be done to ensure that the regulators are responsive to the many concerns and suggestions. The Volcker Rule is codified as Section 619 of the Dodd-Frank Act. 

Thursday, June 20, 2013

E.U. Council Reaches Agreement to Move Legislation Amending MiFID

After months of discussions, the Council of the European Union has reached agreement on legislation to amend the Markets in Financial Instruments Directive, 2004/39/EC, MiFID. The changes would reform OTC derivatives, regulate high frequency/algorithmic trading, enhance pre-trade transparency, and provide clear operating rules for all trading activities. The agreement paves the way for negotiations with the European Parliament on finalizing the legislation. The European Commission's overriding objective is to provide a single, predictable set of rules for firms operating throughout the EU and greater security for consumers buying investment services.

Specifically, the legislation would enhance transparency around dark pools and limit dark pool trading, which is trading where stocks are not traded in a lit order book. The legislation will provide a robust and efficient market structure with the introduction of a new type of trading venue, the Organized Trading Facility (OTF). It will facilitate better access to capital markets for small- and- medium sized enterprises and provide non-discriminatory open access to trading venues and central counterparties. The legislation will contain new safeguards to take account of technological developments such as high frequency algorithmic trading. There will be stronger investor protection under the amended Directive and new rules on corporate governance and managers’ responsibility. Importantly, the changes set up an enhanced framework for derivatives markets.

MiFID, which took effect on November of 2007, is a sweeping reform of financial services regulation in the European Union. MiFID is a far-reaching piece of legislation that sets out a comprehensive regulatory regime covering investment services and financial markets in the European Union. It contains measures which will change and improve the organization and functioning of investment firms, facilitate cross-border trading and thereby encourage the integration of EU capital markets. At the same time, it ensures strong investor protection with a comprehensive set of rules governing the relationship that investment firms have with their clients.

Wednesday, June 19, 2013

Bi-Partisan Senate Legislation Would Delink Federally Insured Banks from Derivatives Dealers and Other Non-Bank Subsidiaries as Part of TBTF

Bi-partisan legislation introduced by Senators Sherrod Brown (D-OH) and David Vitter (R-LA) seeks to end too big to fail and protect federally insured financial institutions from being linked to securities underwriters and derivatives dealers. The legislation would also require federal regulators to walk away from Basel III and create a new capital regime based on two comment letters sent by Senators Brown and Vitter. Regulators would institute new capital rules that do not rely on risk weights and are simple, easy to understand, and easy to comply with. However, regulators would still be able to use risk-based capital as a supplement for banks over $20 billion, if their supervisory authority proves insufficient to prevent institutions from over-investing in risky assets.

The Senators noted that risk-weighting can obscure banks’ true capital situations, distorting the views of markets and regulators, and undermining investor confidence. They said that Basel II relied on a risk-weighting system that inaccurately assigned safe ratings to mortgage-backed security collateralized debt obligations and credit default swaps that actually amplified risk instead of mitigating it.

Under the legislation, bank holding companies will be restricted in their ability to move assets or liabilities from non-banking affiliates to a banking affiliate within the bank holding company structure. This will ensure that the government safety net begins and ends at the commercial bank and other subsidiaries, such as insurance, securities underwriters, and derivatives dealers must fend for themselves. Similarly, the Federal Reserve and other banking regulators will be prohibited from allowing non-depositories access to Federal Reserve discount window lending, deposit insurance, and other federal support programs. According to the Senators, this will help reduce market expectations of financial assistance for large, complex financial institutions.

The legislation would ensure that financial companies operating under one holding company would be adequately capitalized, as would be required if they were stand-alone companies. The Senators said that the legislation would ensure that highly-leveraged lines of business do not threaten the well being of other affiliates or the entire enterprise. The Senators noted that former FDIC Chair Sheila Bair has said that creating stand-alone subsidiaries will make large, complex financial institutions easier to put into resolution if they run into trouble.

Securities Industry Reaction. SIFMA, commenting on the legislation, noted that, since 2008, Tier 1 capital has more than doubled, reaching an historic high according to the FDIC. In SIFMA’s view, this legislation would force financial institutions to raise capital excessively higher than current levels, which would limit an institution's ability to lend to businesses, hampering economic growth and job creation.

SIFMA noted that the Brown-Vitter measure calls for the U.S. to pull out of the Basel Committee framework. In SIFMA’s view, such a move would be an abdication of U.S. leadership, would undermine uniform global capital standards, and actually increase systemic risk by driving more business outside the U.S. and into the shadow banking sector.

The Dodd-Frank Act set forth a framework that would effectively address too-big-to-fail through new, heightened prudential and capital standards, said SIFMA, and the focus should be on completing the remaining rulemakings mandated by Dodd-Frank instead of enacting new legislation that would undermine the U.S.'s standing in the global financial system.

Senate Legislation Would Extend to Thrifts the JOBS Act Shareholder Thresholds for SEC Registration

Senators Pat Toomey (R-PA) and Mark Pryor (D-AR) have introduced bi-partisan legislation that would extend to savings and loan institutions the JOBS Act shareholder thresholds for SEC registration and deregistration. The Holding Company Registration Threshold Equalization Act, S.872, corrects the inadvertent omission of thrifts from the new shareholder thresholds contained in the JOBS Act and thereby effects Congressional intent. S. 872 is a companion bill to H.R. 801, which was recently unanimously reported out of the House Financial Services Committee to the House floor.

Currently, Section 601 of the JOBS Act raises the number of shareholders permitted to invest in a community bank before triggering SEC reporting and registration from 500 to 2000. It also requires termination of a security registration in the case of a bank or bank holding company if the number of holders of a class of security drops below 1200. S. 872 would extend these shareholder thresholds to savings and loan associations.

Rep. Ann Wagner (R-MO), a co-sponsor of the House legislation, noted that these JOBS Act provisions lift outdated burdens off of small lenders and help increase capital raising. She noted that many community banks have already taken advantage of the new shareholder threshold provisions. Thrifts were intended to be included in the new thresholds, she said, since they are regulated like banks and are subject to the same reporting requirements.

Sunday, June 16, 2013

House Passes Legislation Codifying Dodd-Frank Derivatives End User Exemption and Ending Indemnification

The House of Representatives has passed by an overwhelming bipartisan vote of 411-12 H.R. 634, the Business Risk Mitigation and Price Stabilization Act, which codifies an exemption for non-financial end users that use derivatives in their commercial businesses from the margin requirements of the Dodd-Frank Act. The House also passed, by a strong bipartisan vote of 420-2, the Swap Data Repository and Clearinghouse Indemnification Act, H.R. 742, which would ensure that U.S. and foreign regulators can share necessary swaps data to increase market transparency and facilitate global regulatory cooperation.

The Dodd-Frank Act requires swap data repositories and clearing organizations to make data available to foreign regulators. But, under Dodd-Frank, this data-sharing can happen only if foreign regulators agree to indemnify the U.S. entity and U.S. regulators for any corresponding litigation expenses that might arise. Foreign regulators have been unwilling or unable to agree to such indemnification agreements under their own legal structures. Agriculture Committee Chair Frank Lucas (R-Okla) has noted that some jurisdictions don’t have the concept of indemnification, so the indemnification provisions prevent the necessary data-sharing. To ensure that U.S. and foreign regulators have access to derivatives data, H.R. 742 would eliminate the indemnification provisions that would otherwise impede the necessary data-sharing arrangements.

Last year, the SEC recommended that Congress consider removing the indemnification requirement added by the Dodd-Frank Act. The indemnification requirement interferes with access to essential information, said Ethiopis Tafara, then Director of the SEC Office of International Affairs, including information about the cross-border OTC derivatives markets. In removing the indemnification requirement, Congress would assist the SEC, as well as other U.S. regulators, in securing the access it needs to data held in global trade repositories.

H.R. 634 ensures that end users can continue to use derivatives to hedge business risk, such as the cost of fuel. There is a broad consensus that Congress never intended for nonfinancial end-users to be required to post margin under Dodd-Frank. Legislative history indicates that Dodd-Frank intended to exempt end-users from margin requirements. However, there is regulatory uncertainty around the issue because, while the SEC and the CFTC would exempt end-users from margin, the Federal Reserve has issued regulations that would capture many end-users.

House Ag Committee Ranking Member Collin Peterson (D-Minn) said that the legislation was needed because the banking regulators, unlike the SEC and CFTC, ignored the will of Congress and required end-users to post margin. Rep. Mike McIntyre (D-NC) said that true end-users use derivatives to protect from losses and ensure stability and not to engage in speculation, adding that H.R. 634 will not apply to the major financial institutions. This is a critical bill, he emphasized, to ensure that the intent of Congress is not ignored

Senator Tom Udall Named to Appropriations Post Overseeing SEC and CFTC Funding

Senator Tom Udall (D-NM) has been named the Chairman of the Senate Appropriations Financial Services and General Government Subcommittee, which has jurisdiction over the annual funding for financial-related agencies including the Department of Treasury, the SEC, the CFTC and the Internal Revenue Service. In a statement, Senator Udall said that as Chairman he will work hard to support small businesses, expand rural broadband, protect consumers and ensure the safety of the financial markets. Senator Udall was named to oversee the SEC and CFTC funding by Chairwoman Barbara Mikulski (D-MD) of the full Senate Appropriations Committee.

House Passes Bi-Partisan Legislation Requiring Congruent SEC-CFTC Regulations on Cross-Border Derivatives Transactions

The House of Representatives passed the Swap Jurisdiction Certainty Act (HR 1256) by a bi-partisan vote of 301-124, which would direct the SEC and CFTC to adopt joint regulations on the oversight of cross-border derivatives transactions. The legislation is sponsored by Rep. Scott Garrett (R-NJ), Chair of the House Capital Markets Subcommittee. Chairman Garrett noted that H.R. 1256 brings additional transparency and clarity to the swaps market to benefit both consumers and taxpayers. Specifically, the legislation would require the SEC and CFTC to have identical cross-border derivatives regulations; would require a formal regulation to be issued; and would authorize the SEC and CFTC to regulate swaps transactions between U.S. and foreign entities, if the regulators are concerned about the importation of systemic risk.

If U.S. regulators get the cross-border application of Dodd-Frank wrong, warned Chairman Garrett, the swaps trade could move permanently to foreign jurisdictions, and end-users could see the costs of the financial tools they need to compete in a global marketplace dramatically increase. The Swap Jurisdiction Certainty Act will ensure that domestic and global swaps regulations are coherent and complementary, and it offers a common-sense approach with broad bi-partisan support, added Rep. Mike Conaway (R-TX), Chair of the House Commodities and Risk Management Subcommittee.

Full Agriculture Committee Chair Frank Lucas (R-OK) has noted that H.R. 1256 would also provide that no guidance from the Commissions in this area would have the force of law. Rep. David Scott (D-GA) said that the legislation addresses issues around the extra-territorial application of the Dodd-Frank Act. Non-U.S. persons would not be subject to the Dodd-Frank Act if, as determined by the Commissions, they are subject to an equivalent derivatives regulatory regime in a G-20 country. Chairman Conaway has noted that the bill allows the SEC and CFTC to designate other jurisdictions outside f the G-20 as equivalent and thus eligible for the exemption.

Rep. Jeb Hensarling (R-TX), Chair of the full Financial Services Committee, noted that ultimately H.R. 1256 will do two important things. First, it will tell the SEC and CFTC that they need to issue one joint rule when it comes to U.S. end-users being able to access global markets. Not one suggestion and one rule or two different rules, but one rule. Second, H.R. 1256 creates, with regard to the nine largest markets, a presumption that their regimes are broadly equivalent to the U.S. and not immediately deny access. Now at any given time, said Chairman Hensarling, if the CFTC and SEC come to the conclusion that these regimes are not broadly equivalent, that somehow they present risks to the U.S. economy, with the stoke of a pen they can change that presumption.

House Report No. 113-103 to accompany H.R. 1256 noted that Title VII of the Dodd-Frank Act seeks to regulate the over-the-counter derivatives market in much the same way that equities and futures exchanges are regulated. Because the OTC market is global, Title VII raises questions about the extent to which U.S. regulations will apply to swap and security-based swap transactions that take place outside the U.S.

According to the House Report, Title VII's plain language makes clear that Congress intended it to apply outside the U.S. only in certain limited circumstances. Section 722 of Dodd-Frank directs that provisions relating to swaps will not apply to activities outside the U.S. unless those activities have a direct and significant connection with activities in, or effect on, commerce of the United States or contravene anti-evasion rules promulgated by the CFTC.

The House report states that the comments and actions of U.S. regulators indicate that they are considering regulations that would result in Title VII being applied more broadly than Congress intended. Further, the Dodd-Frank Act requires both the CFTC and the SEC to issue rules on the extraterritorial scope of Title VII, creating the possibility of two different, potentially conflicting, regulatory regimes. To ensure that one rule is issued to govern the extraterritorial application of Title VII of the Dodd-Frank Act and to ensure that the CFTC and SEC focus their resources and regulatory efforts on jurisdictions that are not broadly equivalent with the U.S. swaps regime, the House passed the Swap Jurisdiction Certainty Act.

H.R. 1256 harmonizes the cross-border approaches by requiring the CFTC and SEC to jointly issue the same rule related to the cross-border application of the Dodd-Frank Act within 270 days of the bill's enactment. This joint rule would have to be promulgated in accordance with the Administrative Procedures Act. H.R. 1256 ensures that operating entities in foreign countries or administrative regions with broadly equivalent regimes for swaps will not be subject to U.S. rules. Finally, H.R. 1256 requires that the SEC and CFTC jointly provide a report to Congress if they determine that a foreign regulatory regime is not broadly equivalent to United States swap requirements.

Obama Administration Position. The Obama Administration issued a Statement of Policy opposing the passage of H.R. 1256. The Administration believes regulators should be given the time necessary to complete their work. The Administration consequently opposes passage of H.R. 1256, which would preempt ongoing work and slow the implementation of these vital reforms.

The Administration said that the Dodd-Frank Act puts in place a number of requirements that bring transparency to and enhance the stability of derivatives markets. These reforms will collectively strengthen the weak and outdated regulatory regime that played a significant role in the crisis that caused devastating damage to the U.S. economy. As part of the significant progress the SEC and CFTC are making with a number of derivatives-related reforms, emphasized the Administration, the regulators are already coordinating to address the issues raised in H.R. 1256, while taking into account the characteristics of the particular markets they regulate. Given these ongoing coordination efforts, passage of the bill would be premature and disruptive to the current and ongoing implementation of the reforms.

Tuesday, June 11, 2013

German Court Sentences Insider Trader to Five Years in BaFin Enforcement Action

In a trial concerning market manipulation and insider trading based on charges brought by the German Federal Financial Supervisory Authority (BaFin), a Regional Court (Landgericht) sitting in Munich handed down a prison sentence of five years and three months to the insider trader. The court also ordered the defendant to pay a fine of €3.5 million as restitution for injured parties. The Public Prosecutors’ Office in Munich continues its investigations into a number of other suspects that is believed to run into double figures. The action demonstrates the increasing attention that German authorities are giving to insider trading.

Together with others, the convicted businessperson committed fraud concerning a capital increase. He provided falsified bank confirmations to the responsible registration court thereby bringing about an incorrect registration concerning a capital increase. Subsequently, knowing that there had been no capital increase, the defendant carried out share transactions. By issuing contrary buy and sell orders, he generated a share price that did not correspond with the actual supply and demand of the shares. The trader was also involved with others in using false information to attract investors to a company. He used the demand generated by this action to sell his shares via his wife’s securities account and an investment firm.

Monday, June 10, 2013

FSOC Can Urge But Not Command

Recent commentary on the SEC's proposed reforms of money market fund regulation hinted that if the SEC's final regulations in this are not strong enough then the Financial Stability Oversight Council can step in and strengthen them. It is not clear and indeed is highly doubtful that the FSOC can enhance an SEC regulation that it finds wanting. While Senator Bob Corker (R-TN), one of the key authors of the Dodd-Frank Act that created the FSOC, has indicated that FSOC had the power to act on money market reform if the SEC did not act, it is unclear if that power would extend to augmenting SEC action. Indeed, FSOC urged the SEC to act since FSOC believes that the SEC is the appropriate body to act on money market fund reform. It is true that FSOC has a broad mandate to monitor and prevent systemic risks to the financial system, but it is arguable if that broad authority can be granularly applied to fine tune an SEC regulation.

When FSOC proposed a set of recommendations for market fund reform late last year, then FSOC Chair Treasury Secretary Tim Geithner noted that, if at any point the SEC has a majority to go forward, FSOC would suspend its work and let the SEC go forward. Indeed, he added, FSOC would prefer for the SEC to take this back and move forward. Fed Chair Ben Bernanke, an FSOC member, said that the SEC should make the ultimate regulations on money market reform.

At recent house hearings, Rep. Spencer Bachus (R-AL) lamented that FSOC does not seem to have the authority to mandate that the SEC and CFTC coordinate regulations on cross-border derivatives. FSOC can urge coordination but cannot command it. Senator Mark Warner (D-VA) has similarly expressed disappointment with FSOC's lack of authority to direct federal agenies to coordinate the regulatory implementation of Dodd-Frank.

In Letter to Congress, Business Roundtable Urges Congress to Include Financial Regulatory Arbitrage Issues in Trade Talks with E.U.

In a letter to the Chairs House Financial Services and Ways and Means Committees and the Senate Banking and Finance Committees, the Business Roundtable asked that issues around the negotiation of a comprehensive Transatlantic Trade and Investment Partnership (TTIP) agreement with the European Union (EU) should include regulatory arbitrage and regulatory dissonance issues. The TTIP has the potential to substantially boost economic growth and create U.S. jobs.

 Given the critical role that financial services plays in both the U.S. and E.U. economies, and the continuing prevalence of transatlantic barriers and insufficient regulatory coherence in the sector, said the Roundtable, the United States should include financial services market access and regulatory cooperation issues in the negotiations. The Roundtable warned that failing to do so would represent a significant missed opportunity for the United States. More generally, the TTIP is too big of an opportunity to exclude any sector from the negotiations.

For example, the negotiations will provide an opportunity to address market access barriers that keep U.S. businesses from enjoying full opportunities in Europe. They will also provide a forum to discuss new rules and mechanisms to enhance regulatory coherence and cooperation,

The business group urged Congress to support the negotiation of a comprehensive TTIP that covers all sectors of the economy, and to oppose any U.S. legislative or regulatory proposals that would take the nation in the opposite direction, thereby undermining the global competitiveness of large U.S. banks and U.S. companies that rely on their financing to do business around the world.

Thursday, June 06, 2013

House Panel Examines Role of Proxy Advisory Firms, Former SEC Chair Pitt Testifies

Hearings before the House Capital Markets Subcommittee revealed a growing consensus that proxy advisory firms have become the de facto standard setters for U.S. corporate governance and need to either adopt best practices and core principles or be regulated by the SEC. Subcommittee Chair Scott Garrett (R-NJ) emphasized that Congress must ensure that the proxy system works for US investors. The proxy system and the distribution of proxies have become quite complicated and many investors have come to rely exclusively on the recommendations of proxy advisory firms to vote their shares on proxy questions. Chairman Garrett analogized the growth in the influence of proxy advisory firms to the rise of the use of credit rating agencies before the financial crisis.

Proxy Advisory Firms. Chairman Garrett also mentioned that SEC staff interpretations have essentially allowed institutional investors to outsource their proxy voting duties to supposedly independent proxy advisory firms. The result is that proxy advisory firms currently wield an enormous amount of influence over the proxy voting process. The Chair also remarked on the conflict of interest issues around proxy advisory firms. They have no duty to provide advice in the best interests of shareholders and do not factor shareholder value into their recommendations. All that said, Chairman Garrett said that proxy advisory firms serve a valuable role in corporate governance, but should not be enshrined as sole guardians of proxy corporate governance.

Rep. Brad Sherman (D-CA) said that the real battle is between crony capitalism and free market capitalism, which demands that shareholders need good advice and freedom from frivolous lawsuits. Shareholders should not be deprived of proxy advice, he reiterated. Rep. Sherman fears that we are moving to the lowest common denominator on shareholder right, adding that Congress must ensure that shareholders have the information they need and have the protection that a well-drafted corporation statue can provide.

Rep. Robert Hurt (R-VA) noted that proxy advisory firms must be sufficiently transparent and accountable. As the SEC has acknowledged, he observed, there can be conflicts of interest when proxy advisory firms provide recommendations and other services, such as management consulting services.

Rep. David Scott (D-GA) said that, given the many recent failures of corporate governance, it is imperative that Congress examine all of the issues around which proxy advisory services make recommendations. He also queried why only two companies, ISS and Glass Lewis, handle 97 percent of the proxy advisory market. Rep. Scott is, like other members of the subcommittee, concerned about proxy advisory firms providing consulting services in addition to proxy voting recommendations, thereby leading to potential conflicts of interest. He questioned what policies and procedures proxy advisory firms employ to ensure that their recommendations are independent and not influenced by any consulting fees that they get from issuers. Rep. Scott further noted that the SEC has not taken any action in the wake of the staff study.

In his testimony, former SEC Chair Harvey Pitt said that proxy advisory firms exercise extensive but unfettered influence over corporate governance and indeed have become the de facto arbiters of U.S. corporate governance. They are powerful but unregulated, he added, and serious conflicts of interest permeate their operations.

Chairman Pitt emphasized that effective and transparent corporate governance encouraging meaningful shareholder communication is critical. Informed and transparent proxy advice can help corporate governance only if the advice being provided is solely motivated by the advancement of the economic interest of investors.

Eschewing federal regulation of proxy advisory firms, Chairman Pitt, testifying on behalf of the U.S. Chamber of Commerce, recommended the adoption of industry best practices and core principles. The Chamber has suggested best practices, he noted, and these are standards that the industry should embrace and follow. He urged the SEC and the institutional investor community to lend support to a code of best practices.

Chairman Pitt also testified that two 2004 SEC no-action letters, ISS and Egan-Jones, had the legal effect of permitting registered investment advisers to rely exclusively on a proxy advisory firm‘s general policies and procedures pertaining to conflicts of  interest, as opposed to any specific conflicts a proxy advisory firm might have with respect to a particular issue or a particular company about which the proxy advisory firm might make a recommendation to determine if the proxy advisory firm was independent and could be relied upon to cast a vote for the investment adviser, without the adviser being deemed to have violated Rule 206(4)-2 of the Investment Advisers Act or any other provision of the federal securities laws. Earlier this year at a Chamber event, Chairman Pitt had said that, taken together, the two no-action letters create a regulatory environment in which portfolio managers believe that if they outsource the proxy vote they have avoided major problems under Rule 206(4)-6 and their own fiduciary obligations.

Picking up on Chairman Pitt’s point that many institutional investors have essentially outsourced their proxy votes to proxy advisory firms, Chairman Garrett asked who is the fiduciary duty owed to, to which Mr. Pitt replied the fiduciary duty remains with the institutional investors. They cannot divest themselves of it, he said, adding that the NALs are the vehicle by which they try to outsource the duty. To Chairman Garrett’s question of whether the proxy advisory firm has a duty to investors, Mr. Pitt responded that the firms have a duty akin to fiduciary duty, a duty of truthfulness, which is not the same as a fiduciary duty.

Testifying on behalf of the Society of Corporate Secretaries and Governance Professionals, Darla Stuckey, referring to the SEC concept release, said that proxy advisory firms are one of the few participants in the proxy voting process that are not generally required to be registered or regulated by the SEC. There is no accountability by proxy advisory firms even though, given the current structure of the proxy system, they control anywhere from 20-40% of the vote collectively on routine matters at widely held companies. When proxy advisory firm recommendations come out, large blocks of votes are cast almost immediately in automated voting decisions. These ripple out both from clients that follow the main policy of each advisory firm, she noted, and those that have so-called custom policies that are tweaked based on simplistic mechanical inputs.

While proxy advisory firms are not beneficial owners of any company’s shares, reasoned the corporate secretaries society,  the two largest proxy advisory firms each effectively control a portion of the vote that is much larger than the Schedule 13D threshold (5%), and even larger than the 10% affiliate status threshold, yet they are not subjected to any kind of regulatory regime. The Society pointed out that proxy advisory firms may produce reports with material misstatements and omissions without any legal consequences for the firm.

Similarly, proxy advisory firms’ voting policies are also unregulated. There is no regulatory regime that governs the manner in which these firms develop their policies or form the recommendations they make. The policy development process at proxy advisory firms is not sufficiently transparent, contended the Society, and it is not clear who actually participates in the process.

The Society believes that proxy advisory firm voting influence undermines the integrity of the voting system for a number of reasons, including that proxy advisory firms are subject to conflicts of interest and make factual mistakes in their analysis, with the effect that their voting guidelines are erroneously applied to the company’s proposal and the voting recommendation is inaccurate. Proxy advisory firms are actually subject to four types of conflicts of interest, maintained the Society. The first occurs as a result of proxy advisory firms selling services to both institutional clients and issuers. The second conflict arises when proxy advisory firms make favorable recommendations on
proposals submitted by their own investor clients. The third conflict stems from proxy advisory firms’ interest in recommending certain proposals that are likely to expand their influence and future market. The fourth may arise when an owner of a proxy advisory firm takes a position on a proxy voting issue and the firm also issues a voting recommendation on that issue (this applies to Glass Lewis only since it is owned by a major public pension fund).

The Society recommended that proxy advisory firms be required to become registered investment advisors. In this way, the practices and procedures of such firms would be subject to SEC examination, which should provide additional discipline and accountability to the system. Once registered, proxy advisory firms would need to establish to an oversight authority that they are following their procedures and would need to provide factual support for the bases of their disclosures.

In his testimony, former SEC Chief Accountant Lynn Turner said that in today’s global markets an asset manager may invest in dozens of capital markets, and in thousands of public companies. For example, at Colorado PERA, the fund makes and manages
investments on a global basis in 7,000 to 8,000 companies. The proxies for these companies may involve the election of numerous directors, approval of compensation and acquisitions, shareholder initiatives submitted for shareholder approval, and any number of additional matters.

Many mutual or pension funds do not have unlimited staff who can read thousands of proxies and then research and submit an informed vote on the issues as required. Mr. Turner said that it would take well over a hundred staff, at a very significant cost to vote 8,000 proxies in a global market place. That would be a cost that would have to be passed on to investors, he noted, significantly increasing their fees, and reducing their investment returns, and ultimately, the amounts they are trying to save for retirement.
Instead, the funds rely, in part, on research they can buy from ISS and/or GL or others, along with their own research and proxy voting guidelines, to make a decision on how to vote.

Monday, June 03, 2013

Justice Goldberg Captured Essence of Business Judgment Rule in Tender Offer Advisory Committee Dissent

In a dissent  to the report of the SEC's Tender Offer Advisory Committee in 1983, former Supreme Court Justice Goldberg had some timely observations on the business judgment rule. Justice Goldberg said that assertions that golden parachutes are justified by the business judgment rule are without foundation because they are based upon a misconception of the rule. The business judgment rule was designed to safeguard not the personal interests of managers, he noted, but rather the good faith judgment of managers as to what is in the best interests of the corporation. Managerial judgment must and should not be affected or tainted by a conflict of interest. Simply put, the business judgment rule is fashioned to permit latitude to managers of corporations in the ordinary good faith conduct of business affairs in the interest of the corporation, where there is no self-dealing or other conflict of interest involved.

In Wake of SEC-FINRA Investor Alert, Senate Panel Launches Inquiry into Pension Stream Investments

In the wake of an SEC-FINRA Investor Alert about investments in pension streams, the Senate Labor and Pensions Committee began an inquiry focused on these investments and possible fraud. In a letter to the National Association of Attorneys General, Chairman Tom Harkin (D-Iowa) and Ranking Member Lamar Alexander R-TN) said that there may not be full disclosure around the practice of purchasing pension revenue streams. For example, while some of these arrangements come with very high fees, there is no clarity on whether these fees are fully disclosed.

There may also be requirements linking the purchase of pension revenue streams with the purchase of other financial products. More broadly, the Senators are concerned that innocent investors who purchase the rights to the pensions on a belief that they are worthy and legal investments are being misled or even defrauded by the brokers of these arrangements.

The letter is designed to elicit information on which companies are offering these investments and where the companies are incorporated, as well as details on how these arrangements are structured. The Senators also want information on whether and how many enforcement actions have been brought in this area.

Saturday, June 01, 2013

Bi-Partisan Senate Legislation Would Reform the Federal Regulatory Process

A bipartisan Senate bill would modernize the Administrative Procedure Act by strengthening cost-benefit analysis across all federal regulatory agencies, improving transparency in the rulemaking process, and providing a more rigorous examination of facts underlying the most expensive rules. The Regulatory Accountability Act, S. 1029, was introduced by Sens. Rob Portman (R-Ohio) and Mark Pryor (D-Ark). Senators Susan Collins (R-Me), Bill Nelson (D-Fla), Joe Manchin (D-WVa), Angus King (I-Me), Kelly Ayotte (R-NH), Mike Johanns (R-Neb), and John Cornyn (R-Tex) are original cosponsors of the bill. A bipartisan House companion bill,HR 2122, was introduced by Rep. Bob Goodlatte (R-Va) and Rep. Collin Peterson (D-Minn), Ranking Member on the Agriculture Committee.

The legislation would codify the duty of independent federal agencies, such as the SEC and the CFTC, to analyze the costs and benefits of new regulations. It would also require agencies to adopt the least costly or most cost-effective approach to achieve their objectives. To hold agencies accountable, the bill would permit a judicial check on an agency’s cost-benefits analysis of major regulations. This review would be deferential, but the courts would ensure that agencies do not rely on irrational assumptions or treat cost-benefit analysis as a mere afterthought.

Designed to open the regulatory process to greater transparency, the Act invites early public participation on major rules and requires agencies to disclose the data they rely upon. It also would ensure that agencies use sound scientific and technical data to justify new rules, in keeping with the President’s directive that agencies should use the best available science to craft regulations.

 The legislation would also require agencies to follow a more evidence-based approach in crafting regulations that will cost more than $1 billion annually. These high-impact rules are relatively rare (the White House identified seven in development last year), but the cost of getting them wrong is steep. The legislation would give stakeholders access to an agency hearing to test the key disputed facts underlying these rules. It will take some additional work on the front end, noted Sens. Portman and Pryor, but the result will be lower costs and more stable regulatory outcomes.

This legislation heeds President Obama’s recent call for public participation and open exchange before a rule is proposed. Prior to proposing any major rule, regulators would be required to issue a simple notice explaining the problem that they intend to address and inviting the public to submit information on the need for a new rule and potential options the agencies should consider before proposing a rule. To improve the quality of new rules, agencies would be required to use the best available scientific, economic, and technical information. The sponsors believe that this is consistent with the President’s statements in Executive Order 13563.

The legislation would also cut back on what the senators call the “misuse” of guidance documents, which are described as agency directives written outside the normal public process of notice and comment, while allowing their legitimate use to continue. Specifically, it would adopt the good-guidance practices issued in a final OMB bulletin on January 25, 2007, and ensure that agencies do not use guidance to skirt the public input required to write new rules.

The legislation builds well-recognized best practices for regulatory analysis, integrating cost-benefit analysis into each step of the rulemaking process, as well as judicial review, in the case of major rules. These principles are drawn from the long-standing, partisan executive-order framework created by the Reagan and Clinton Administrations and reaffirmed by President Obama in January 2011. Those principles would be made permanent, enforceable, and applicable to independent federal agencies, which are currently exempt.

The legislation requires the SEC, the CFTC, and other federal agencies to adopt the least-costly regulatory alternative that would achieve the policy goals set by Congress. It permits agencies to adopt a more-costly approach only if the agency demonstrates that the alternative is more cost-effective in the long term. This directive would reinforce the Executive Order 13563’s instruction to federal agencies to minimize regulatory costs and tailor regulations to impose the least burden on society.

For high-impact regulations, defined as those costing $1 billion or more a year, the cost of getting underlying facts wrong is substantial and warrants additional scrutiny, posited Sens. Portman and Pryor. The legislation would give parties affected by billion-dollar rules access to an administrative hearing to test the accuracy of the evidence and assumptions underlying an agency’s proposal. The scope of the hearing would be limited to disputed factual issues, which, if misapprehended by the agency, could impose unnecessary burdens on the economy.

Parties affected by major rules (those involve $100 million) would also have access to hearings, unless the agency concludes that the hearing would not advance the process or would unreasonably delay the rulemaking.

As a consequence of the administrative hearing, high-impact rules would bejudicially reviewed under a substantial-evidence review, which, while still highly deferential, allows judges reviewing these rules to ensure that agency justifications are supported byevidence that a reasonable mind could accept as adequate to support a conclusion based on the record as a whole. This standard would also apply to major rules that undergo the formal hearing procedure.

E.U. Court of Justice to Hear UK Challenge to E.U. Short Selling Directive

It is being reported that the E.U. Court of Justice is scheduled to hear the U.K. challenge to the Short Selling Regulation next month. The U.K. government has launched a judicial challenge to the E.U. Short Selling Regulation on the grounds that the Regulation bestows too much discretionary power on the European Securities and Markets Authority ESMA). In its complaint filed with the Court of Justice of the E.U., the U.K. noted that Article 28 of the Regulation gives ESMA intervention powers in exceptional circumstances, requiring ESMA to prohibit or impose conditions on the entry by persons into short sales or to require such persons to disclose such positions if the transactions pose a threat to the orderly functioning and integrity of the financial markets, or to financial stability with cross-border implications. The measures are valid for up to three months, but ESMA is empowered to renew them indefinitely. The measures prevail over any previous measures taken by a competent authority pursuant to the Short Selling Regulation. United Kingdom v. Council of the European Union, Case No. C-270/12.

The United Kingdom argues that Article 28 is unlawful because the criteria as to when ESMA is required to take action under the Article entail a large measure of discretion. giving ESMA a wide range of choices as to what measure or measures to impose and what exceptions to specify, and these choices have very significant economic policy implications.

The factors which ESMA must take into account contain tests which are highly subjective, said the U.K., and ESMA is empowered to renew its measures without any limit on their overall duration. Even if Article 28 did not involve ESMA in making macroeconomic policy choices, which it does, said the complaint, ESMA nonetheless has a broad discretion as regards the application of policy to any particular case.

Article 28 purports to empower ESMA to impose measures of general application which have the force of law, contrary to the previous decisions of the Court. Also, Article 28 purports to confer on ESMA a power to adopt non-legislative acts of general application, contended the U.K., whereas under organic E.U. law the Council of the European Union has no authority to delegate such a power to a mere agency. To the extent that Article 28 would be interpreted as empowering ESMA to take individual measures directed at natural or legal persons, it would be ultra vires.

Very importantly, the U.K. believes that Article 28 can be judicially severed from the remainder of the Short Selling Regulation, thereby leaving the remainder of the Regulation intact.

European Commission Directs ESMA to Propose Standards under EMIR by September 25

With the SEC having recently proposed regulations implementing the cross-border derivatives provisions of the Dodd-Frank Act, in a letter to ESMA Chair Steven Maijoor, Jonathan FaulI, Director General of the European Commission Internal Market, directed ESMA to propose standards implementing the cross-border provisions of Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) by September 25, 2013. In June 2012, ESMA decided to postpone the development of these standards, which deal with the application of EMIR to transactions between U.S. and other non-EU entities with a direct, substantial and foreseeable effect within the Union. Given the connection between these standards and the ongoing discussions with the SEC, CFTC and other international regulators on the coordination of the implementation of OTC derivative markets reforms, noted the Director General, it was indeed crucial to have more visibility about these developments before defining these standards, which will be part of the EU response to these international developments.

In accordance with E.U. legislation, the Commission may set a new time limit for the delivery of these standards. In the view of the senior official, the progress made in the international discussion over the past months in the framework of the OTC Derivatives Regulators Group permit setting a new deadline for the development of these standards. After consultation with ESMA staff, the end of September 2013 seems a realistic deadline.