Wednesday, April 30, 2014

Supreme Court Oral Argument in Argentina Bond Case Emphasizes that, while it is about Asset Discovery, it is also about a Sovereign

In a case involving the assets of a foreign state, Argentina, being subject to discovery by hedge funds and other creditors in a federal court, U.S. Supreme Court oral argument appeared sympathetic to the asset discovery concerns of the judgment creditors, while at the same time some Justices emphasized that this case is about the scope of discovery against a foreign sovereign, not a private debtor.
The Court is reviewing a Second Circuit ruling that post-judgment discovery under FRCP 69 in aid of enforcing a judgment against a foreign state can be ordered with respect to all assets of a foreign state regardless of their locations or uses. (Republic of Argentina v. NML Capital Ltd., Dkt. No. 12-842).
Edwin Kneedler, U.S. Deputy Solicitor General, argued that the sweeping discovery order sustained by the Second Circuit in a case in which hedge funds and other judgment creditors were seeking discovery against the assets of Argentina based on the sale of bonds establishes a federal district court in the United States as a clearinghouse for all of Argentina's assets and transactions throughout the world the contrary to both the Foreign Sovereign Immunities Act and principles of comity and reciprocity. Responding to a question from Justice Scalia on the broadness of the scope of discovery, the official said  that discovery cannot extend to property outside the United States.

Similarly, Jonathan Blackman argued for the Republic of Argentina that the sweeping worldwide forensic examination of foreign state property that the court of appeals approved targets sovereign property that the FSIA makes categorically immune from the process of U.S. courts. This far exceeds the enforcement powers of U.S. courts, he added, asking somewhat rhetorically how it can be appropriate for a U.S. court to be asking a foreign state to turn over information about property beyond the execution powers of the court.

Justice Kennedy noted that the discovery is about assets that can be executed on  but that are in other countries. The Deputy Solicitor General noted that the Government’s  position is a categorical one and based on reciprocity in that the U.S. would be very concerned about a foreign court setting itself up as a clearinghouse for all U.S. assets around the world.

Justice Scalia was surprised that foreign countries have not filed amicus briefs in this case if these issues so 
gravely affect their jurisdictions and the positions of all foreign sovereigns. He found it extraordinary that not one foreign sovereign filed an amicus brief with the Court supporting the Government’s position. Why aren’t they here as amici?, queried the Justice. Foreign sovereigns file amicus briefs all the time with the Court on issues concerning their prerogatives, he added,  and if this is as horrific as the Government is painting it to be, why has the Court not heard from them..

Theodore Olson, representing the creditors, said that the case is not about execution, but about  information. The federal Rules of Civil Procedure were not displaced by the Foreign Sovereign Immunities Act, he argued, and all we're talking about here is information. The context of this case is that Argentina was able to sell bonds and raise money in the U.S. capital markets only by agreeing to be bound by U.S law and the judgments of U.S. courts, and by waiving sovereign immunity and consenting to attachment in aid of execution. He added that many debtors move assets around to avoid judgments.
But Justice Ginsburg emphasized that this is a sovereign, not a private debtor, and the Foreign Sovereign Immunities Act provides immunity from execution except when we are dealing with commercial property in the U.S. 

The statute starts with a blanket immunity against execution for the foreign sovereign, said the Justice, and then says that there is an exception for property in the U.S. The Justice also noted that the vast majority of the bondholders settled with Argentina. Yes they did, agreed Mr. Olson, because anybody who has ever litigated against Argentina knows that it probably may be less costly to just give in on whatever terms Argentina offers. But the fact is that these are debts undeniably owing and sovereign immunity was waived by Argentina.

Justice Ginsburg noted that this argument goes to execution and FSIA says nothing about discovery. Mr. Blackman said that FSIA delineates the bounds of permissible discovery when it delineates the universe of executable property.



Justices Breyer and Scalia said that when you read FRCP 69 on obtaining discovery, you can obtain it in aid of judgment or execution as provided in the rules. So, you look to the rule on discovery, the reasoned, which is certainly broad enough to encompass this situation. For example, said Justice Breyer, on the back of a bond Argentina said that it waived sovereign immunity, thus allowing for execution in the U.S. It does, in fact, say nothing about discovery in aid of execution.  The rules do, he emphasized.

Tuesday, April 29, 2014

Changes Proposed to U.K. Corporate Governance Code Focus on Going Concern and Compensation

The U.K. Financial Reporting Council has proposed major change to the U.K. Corporate Governance Code around risk management, going concern and remuneration. The Code is on a comply or explain basis and is usually reviewed by the FRC every two years with a full consultation on all proposed changes. The Consultation would amend the Code to place greater emphasis on ensuring that remuneration policies are designed with the long-term success of the company in mind, and that the lead responsibility for doing so rests with the remuneration committee. Companies should put in place arrangements that will enable them to recover or withhold variable pay when appropriate to do so, noted the FRC, and should consider appropriate vesting and holding periods for deferred remuneration.

Companies would also be required to explain when publishing results how they intend to engage with shareholders when a significant percentage of them have voted against a shareholder resolution. In addition, companies would be required in their financial statements to disclose whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties to their ability to continue to do so. On the risk management front, companies would be required to robustly assess their principal risks and explain how they are being managed and mitigated.

Companies would also have to state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate. It is expected that the period assessed will be significantly longer than 12 months. Also, companies would have to monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report.

Commenting on the consultation, FRC CEO Stephen Haddrill noted that the role of the board is to ensure the sustained success of their company and exercise responsible stewardship on behalf of their shareholders. To do this effectively they need to understand and manage the risks to the future health of the company. The remuneration of executives on the Board must also incentivise them to put the company’s well-being before their own. These proposals, which reflect the views of investors and others on earlier consultations, are intended to encourage boards to focus on the longer-term, and increase their accountability to shareholders.”

IASB Member Outlines New Approach to Accounting for Derivatives Risk

It is imperative that financial reporting provide more clarity around risk management activities, said IASB Member Steve Cooper, adding that managing risks, such as interest rate risks, on a continuous and dynamic basis is one of the key elements of financial risk management. In recent remarks, he referenced the just published IASB Discussion Paper on Accounting for Dynamic Risk Management, which explores the accounting aspects of dynamic risk management and discusses preliminary views on a new accounting approach for derivatives hedging that may improve financial reporting in this area. The particular focus of the white paper is the management of interest rate risk by banks; however, it also applies to other dynamic risk management activities in other industries, for example, commodity price risk.

Developing a new approach does not mean that current accounting practices are necessarily failing investors, he pointed out. IFRS already includes a general hedge accounting model, which provides for the fair value and cash flow hedge accounting with which most investors will be familiar. The model has recently been improved through the new financial instruments Standard IFRS 9. However, even the general hedge accounting approach has limitations in which risk management practices are more complex and the risks being hedged are more dynamic

For example, IFRS currently does not require fair value measurement for many of the assets and liabilities that create risk exposures that may be hedged by derivatives. For example, banks’ loans and deposits are generally measured at amortized cost. The accounting focuses on the net interest income generated over the life of the instruments rather than changes in value.

However, the fair value measurement of derivatives and the cost cost-based measurement of bank loans and deposits do not sit well together when the objective of holding those derivatives is to manage the interest rate risks of that business activity. This is when hedge accounting becomes necessary to provide investors with clear, transparent information about the related activity.

The general hedge accounting model of IFRS 9 can be applied to dynamic risk management and, in many cases, is adequate to enable the economics of the activity to be faithfully reflected in financial statements. However, applying the general hedge accounting model to risks managed dynamically can present challenges and complexity for preparers, he noted, and can result in financial statements that are difficult for investors to understand. There are also certain dynamic risk management activities that are difficult to reflect properly in financial statements and that may consequently result in volatility that is not reflective of the underlying situation. It is for these reasons that the IASB is considering an alternative accounting approach.           

Portfolio Revaluation Approach. The paper suggests a new method of accounting for dynamic risk management called the Portfolio Revaluation Approach (PRA). The aim of the PRA is to provide an alternative to the present general hedge accounting model that will be easier for preparers to apply and that will better represent and be more consistent with risk management activities, resulting in better information for investors

The PRA involves identifying a portfolio of exposures that is subject to dynamic risk management, and remeasuring these for the risk being managed. For a bank this could be a portfolio of loans and deposits. This is not a full fair value approach, as only one component of changes in value would be recognized in the revaluation adjustment. For example, for dynamic interest rate risk management only changes in value of the loan or deposit due to the hedged benchmark interest rate risk component would be included in the revaluation.

Other components of the change in fair value including credit risk, expected credit losses and other components of the credit spread such as liquidity are not included in the adjustment This revaluation adjustment is the reported in profit or loss together with the full fair value changes of the derivatives that the bank is using to manage that risk.

There are two key advantages of this approach over the general hedge accounting model. One is that the PRA can be more easily applied to open portfolios. The second is that the PRA would enable entities to better reflect their dynamic risk management practices in their financial statements. In general, the PRA is designed to result in a recognition and measurement approach that better reflects the economics of risk management, to provide for a presentation that shows how dynamic risk management has impacted net interest income for the current period and to separate this impact from the ineffectiveness of risk management and the financial effect of risks that are unhedged.

Sunday, April 20, 2014

European Parliament Enhances Mutual Fund Regulation with Passage of UCITS V

Small investors will be better protected against mutual funds and other investment funds that take excessive or unnecessary risks with their money under legislation approved by the European Parliament. Amendments to the Undertakings for collective investments in transferable securities (UCITS V) Directive clarify who is liable for mismanagement of funds and tailor the compensation of fund managers to encourage them to take reasonable risks and a long-run view. Funds that gather assets from small investors and pool them to buy bonds, shares or other financial products currently manage around 85 percent of the European investment fund sector's assets. The legislation was approved by 607 votes to 28, with 34 abstentions.

E.U. Commissioner for the Internal Market said that the legislation will considerably strengthen the protection of investors vis-à-vis managers of UCITS funds and their depositaries. It will also ensure that managers who break the law will be sanctioned in an appropriate way.

To clarify who is responsible for small investors' funds, the legislation requires UCITS fund or UCITS fund managers to appoint a single independent depositary with sufficient funds of its own to oversee investor payments to the fund and act as a custodian of its assets. No management company should act as both a management company and depositary.

Depositaries will be required not to act without authorization and will have to keep investors' money clearly separate from their own assets. They will be barred from investing these funds on their own account. Depositaries will also be deemed liable for any loss of assets, even if they delegate custody of them to a third party.

Fund managers will be required not to take investment risks beyond what is accepted by their UCITS investors. At least half of the variable part of their remuneration will be paid in the assets of their UCITS, unless the management of UCITS accounts for less than half of the total portfolio.

Payment of at least 40 percent of variable remuneration will be deferred for at least 3 years. Where the variable share of remuneration is particularly high, at least 60 percent of this share is to be deferred, to encourage managers to take a long-run view.

The measure directs the European Securities and Markets Authority (ESMA) to issue guidelines on to whom in the company the pay policy applies.

Legislation Setting Position Limits and Curbing High Frequency Trading Passes E.U. Parliament

The European Parliament passed legislation that will, for the first time in the E.U., impose regulation on high frequency algorithmic trading that relies on computer programs to determine the timing, prices or quantities of orders in fractions of a second. Any investment firm engaging in such trading will have to have effective systems and controls in place, such as circuit breakers to stop the trading process if price volatility gets too high. In addition, investment firms which provide direct electronic access to a trading venue will be required to have in place systems and risk controls to prevent trading that may contribute to a disorderly market or involve market abuse.

To minimize systemic risk, the algorithms used will have to be tested on venues and authorized by regulators. Moreover; records of all placed orders and cancellations of orders would have to be stored and made available to the competent authority upon request. The vehicle to accomplish these changes was legislation amending the Markets in Financial Instruments Directive (MiFID II).

Also for the first time, the legislation empowers authorities to limit the size of a net position which a person may hold in commodity derivatives, given their potential impact on food and energy prices. Under the new rules, positions in commodity derivatives traded on trading venues and over the counter would be limited, to support orderly pricing and prevent market distorting positions and market abuse. The European Securities and Markets Authority (ESMA) is authorized to determine the methodology for calculating these limits, to be applied by the competent authorities.

Position limits will apply to energy derivatives, such as those related to coal or oil, that are not currently regulated at the E.U. level, with transitional arrangements in place to ease the impact which will be reviewed by January 2018.

In order to avoid penalizing those who need to use commodity derivatives to manage non-financial businesses effectively, position limits would not apply to positions that are objectively measurable as reducing the risks directly related to the commercial activity.

MIFID II increases equity market transparency and for the first time establishes a principle of transparency for non-equity instruments such as bonds and derivatives. For equities a double volume cap mechanism limits the use of reference price waivers and negotiated price waivers (4% per venue cap and 8% global cap) together with a requirement for price improvement at the mid-point for the former.
Large-in-scale waivers and order management waivers remain the same as under MiFID I. As enacted, MiFID II also broadens the pre- and post-trade transparency regime to include non-equity instruments, although in view of the specificities of non-equity instruments, pre-trade transparency waivers are available for large orders, request for quote and voice trading. Post trade transparency is provided for all financial instruments with the possibility of deferred publication or volume masking as appropriate.

The measure also enhances the effective consolidation and disclosure of trading data through the obligation for trading venues to make pre- and post-trade data available on a reasonable commercial basis and through the establishment of a consolidated tape mechanism for post-trade data. These rules are accompanied by the establishment of approved reporting mechanism (ARM) and authorized publication arrangement (APA) for trade reporting and publication.

Directive Requiring Disclosure of Non-Financial and Diversity Information Approved by E.U. Parliament

The European Parliament enacted legislation amending the Accounting Directives to require the reporting of non-financial information, such as board diversity, in large company accounts. Companies concerned will need to disclose information on policies, risks, and results regarding environmental matters, social and employee-related aspects, respect for human rights, anti-corruption, and diversity on boards of directors. The new rules will only apply to large companies, defined as those with more than 500 employees, noted E.U. Commissioner for the Internal Market Michel Barnier, because the costs for requiring small- and medium-size enterprises to apply the rules could outweigh the benefits.

Broadly, the European Commission believes that non-financial reporting is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection. It also helps in monitoring a company’s performance and its impact on society.

The Directive provides for further work by the Commission to develop guidelines in order to facilitate the disclosure of non-financial information by companies, taking into account current best practice, international developments and related EU initiatives.

Comply-or-explain. The new measures will require big companies in the E.U. to issue a statement annually relating to environmental, social, and employee-related matters, respect for human rights, anti-corruption, and bribery matters.

The statement will have to include a description of the policies, outcomes, and the risks related to those matters. A company that does not pursue policies in relation to these matters would have to explain why this is the case.

Importantly, as part of the corporate governance statement the company would have to describe its diversity policy for the management and supervisory boards with regard to aspects such as age, gender, and educational and professional background.

Companies are left with significant flexibility under the legislation because of the comply-or-explain modalities. For instance, companies will not be required to have a boardroom diversity policy, but when they do not have such a policy, companies will have to explain. This requirement is in keeping with the comply-or-explain rubric used in E.U. member states’ corporate governance codes. Under the comply-or-explain rubric, the explanation about why a company does not have a boardroom diversity policy cannot be boilerplate, but rather must be a meaningful, substantive, and differentiated explanation.
Companies will not be required to disclose information that is not relevant or not necessary for an understanding of a company’s development, performance, or position. This is no box-checking exercise, emphasized the Commission, rather this is about disclosing material, useful, and valuable information for proper management and understanding of a company.

E.U. Parliament Enacts Orderly Resolution Authority Similar to Dodd-Frank Title II

The European Parliament has enacted legislation establishing a single resolution mechanism to orderly resolve failed and failing financial institutions and investment firms. The resolution authority is backed by an appropriate resolution funding arrangement and a robust decision-making process. A single resolution fund would be constituted to which all the financial institutions in the participating European Union Member States would contribute. The orderly resolution regime would enter into force on January 1, 2015, while bail-in and resolution functions would apply one year later, as specified under the Recovery and Resolution Directive. The legislation was approved by 584 votes to 80, with 10 abstentions.

The legislation creates a resolution regime similar to that created in Title II of the Dodd-Frank Act, with a main exception being that Dodd-Frank did not set up an pre-existing resolution fund. But like Dodd-Frank, the Directive would allow authorities to put financial institutions into an orderly resolution in which their critical functions would be preserved by, for example, a sale to a third party or the creation of a bridge bank, while the non-critical parts of the failed institution would be wound down.

E.U. Commissioner for the Internal Market Michel Barnier noted that in the case of a cross-border failure of a major financial firm, the single resolution mechanism will be more efficient than a network of national resolution authorities, and it will help avoid risks of contagion. While the single resolution mechanism might not be a perfect construction, he continued, it would allow for the timely and effective resolution of a cross-border financial institution, thus meeting its principal objective.

Resolution Board. Centralized decision-making would be built around a strong Single Resolution Board (Board) and would involve permanent members as well as the European Commission, the Council, the European Central Bank (ECB), and the national resolution authorities. In most cases, the ECB would notify the Board, the Commission, and the relevant national resolution authorities that a financial institution is failing. If the Board finds that there is a systemic threat and no private sector solution in sight, it would adopt a resolution scheme including the relevant resolution tools and any use of the resolution fund.

The Commission is responsible for assessing the discretionary aspects of the Board's decision and endorsing or objecting to the resolution scheme. The Commission's decision is subject to the Council’s approval or objection only when the amount of resources drawn from the single fund is modified or if there is no public interest in resolving the financial firm. Where the Council or the Commission object to the resolution scheme, the Board would have to amend the resolution scheme, which the national resolution authorities would then implement. If resolution entails state aid, the Commission would need to approve the aid prior to the Board’s adoption of the resolution scheme.

The concept of bail-in is enshrined in the resolution legislation, which means that shareholders and creditors, primarily bondholders, will be first in line to absorb losses the financial firm could incur, before outside sources of finance may be called upon.

Resolution Fund. The resolution fund has a target level of €55 billion and can borrow from the markets if decided by the Board in plenary session. The Board would own and administrate the fund. The single fund would reach a target level of at least one percent of covered deposits over an eight-year period. During this transitional period, the single fund would comprise national compartments corresponding to each participating member state.

The resources accumulated in those compartments would be progressively mutualized over a period of eight years, starting with 40 percent of these resources in the first year. The regulations would govern the establishment of the single fund, its national compartments, and decisions about its use. An inter-governmental agreement, which the participating member states established in the single resolution mechanism, will provide for transferring national funds towards the single fund and for activating the mutualization of the national compartments.

Saturday, April 12, 2014

South Carolina and 20 Other States Ask Supreme Court to Allow Asset Discovery in Argentina Bond Case

In a case involving the assets of the Republic of Argentina being subject to creditors, the State of South Carolina and 20 other states urged the U.S. Supreme Court to reject the argument that foreign sovereigns are not subject to post-judgment discovery under FRCP 69 despite a prior waiver of sovereign immunity unless the creditor identifies the assets in advance. In their amicus brief, the states argued that requiring creditors to identify assets available to satisfy a judgment before obtaining discovery would effectively deprive them of any realistic opportunity to conduct asset discovery. Doing so would unduly impede enforcement of foreign sovereign debt obligations and further encourage sovereign debtors to remove attachable assets from the United States. Thus, the states asked the Court to protect the bargained-for rights of investors in foreign sovereign debt by holding that the Foreign Sovereign Immunities Act (FSIA) does not limit post-judgment asset discovery under Rule 69. The Court is reviewing a Second Circuit ruling that post-judgment discovery in aid of enforcing a judgment against a foreign state can be ordered with respect to all assets of a foreign state regardless of their location or use. Oral argument is set for April 21. Republic of Argentina v. NML Capital Ltd, Dkt. No. 12-842. Amici are States that have invested billions of dollars in foreign sovereign debt through their public pension funds. Those investments will be seriously jeopardized and State budgets may be severely impacted as a result if the Court accepts the proposition urged by the Republic of Argentina that foreign sovereigns may attract investors with the false promise that their debts will be enforceable in U.S. courts, only to change the rules and thwart enforcement when it comes time to collect on those debts. By waiving sovereign immunity, the foreign sovereign agrees to subject itself to judicial process in a U.S. court, pursuant to the Federal Rules of Civil Procedure. That includes post-judgment discovery under Rule 69. Many foreign sovereigns, particularly those with emerging economies or troubled financial pasts, are able to access affordable capital from U.S. investors, only if they agree to waive sovereign immunity and thereby allow their debts to be enforced in a U.S. court. That is precisely what the Republic of Argentina did here, said amici.

FCA Brings First Enforcement Action for Manipulation of U.K. Government Bonds

The U.K. Financial Conduct Authority has banned a bond trader from the industry and fined him £662,700 for deliberately manipulating a UK government bond. This is the FCA’s first enforcement action for attempted or actual manipulation of the government bond market. The FCA described the bond trader’s actions as "particularly egregious", falling far below the standards of integrity expected of FCA approved-persons. The investigation found this was the action of one trader on one day, and there is no evidence of collusion with traders in other firms. The bond trader agreed to settle at an early stage of the investigation, thereby qualifying for a 30 percent discount. Without this discount, the FCA would have imposed a fine of £946,800. The FCA found that the bond trader intended to sell his holding, worth £1.2 billion, to the Bank of England for an artificially high price during quantitative easing operations. His conduct was a clear case of market manipulation, said the FCA, designed to secure the price of the relevant bonds at an abnormal or artificial level. The FCA further found that the trader deliberately traded in an aggressive style when purchasing the bond, which gave a false or misleading impression as to the price of the bond and secured the price of the bond at an abnormal or artificial level. This was not trading for a legitimate reason or in accordance with accepted market practices. Indeed, the FCA found that the trading in the bond constituted market abuse in that it was behavior consisting of effecting transactions or orders to trade, otherwise than for legitimate reasons and in conformity with accepted market practices, which gave a false or misleading impression as to the price of the bond and secured its price at an abnormal or artificial level within the meaning of Sections 118(5)(a) and (b) of the Financial Services and Markets Act of 2000. Tracey McDermott, the FCA Director of Enforcement, said that the bond trader’s abuse took advantage of a policy designed to boost the economy with no regard for the potential consequences for other market participants and, ultimately, for tax payers. Fair dealing is at the heart of market integrity, she emphasized, and this enforcement action sends a clear message about how seriously the FCA views attempts to manipulate the market.

Senate Legislation Would Clarify Dodd-Frank Leverage and Risk-Based Requirements

Senator Susan Collins (R-ME) has introduced legislation, S. 2102, that would clarify the leverage and risk-based requirements of the Dodd-Frank Act. Senator Collins is the author of Section 171 of Dodd-Frank, which is aimed at addressing the too big to fail problem by requiring large financial holding companies to maintain a level of capital at least as high as that required for community banks, equalizing their minimum capital requirements, and eliminating the incentive for financial institutions to become too big to fail. Section 171 allows the federal regulators to take into account the distinctions between banking and insurance, and the implications of those distinctions for capital adequacy. While it is essential that insurers subject to Federal Reserve Board oversight be adequately capitalized on a consolidated basis, noted Senator Collins in recent testimony before the Senate Subcommittee on Financial Institutions, it would be improper, and not in keeping with Congressional intent, for federal regulators to supplant prudential state-based insurance regulation with a bank-centric capital regime for insurance activities. Indeed, she affirmed that nothing in Section 171 alters state capital requirements for insurance companies under state regulation. The Collins legislation would add language to Section 171 to clarify that, in establishing minimum capital requirements for holding companies on a consolidated basis, the Federal Reserve is not required to include insurers so long as the insurers are engaged in activities regulated as insurance at the state level. The legislation also provides a mechanism for the Federal Reserve, acting in consultation with the appropriate state insurance authority, to provide similar treatment for foreign insurance entities within a U.S. holding company where that entity does not itself do business in the United States. In her testimony, Senator Collins pointed out that does not, in any way, modify or supersede any other provision of law upon which the Federal Reserve may rely to set appropriate holding company capital requirements.

Senate Legislation Would Enhance Disclosure Around Municipal and Corporate Debt Securities

Bi-partisan legislation introduced by Senator Mark Warner (D-VA) would enhance the disclosure to investors in municipal and corporate debt securities. The bill is co-sponsored by Senator Tom Coburn (R-OK). The Bond Transparency Act, S. 2114, would amend the Exchange Act to provide that a broker, dealer, or municipal securities dealer that effects a riskless principal transaction must disclose to the customer, in writing, at or before the time of completion of the transaction, the amount of the difference between the customer's purchase price and the broker's, dealer's or municipal securities dealer's purchase price; or the customer's sale price and the broker's, dealer's, or municipal securities dealer's sale price. The Act would define a riskless principal transaction to mean a transaction in which a broker, dealer, or municipal securities dealer receives a customer order to buy or sell any municipal securities and, after receiving the customer order, buys the municipal securities from, or sells the municipal securities to, another person, while acting as principal for its own account, to complete the customer order; and any other transaction the SEC identifies by rule as a riskless principal transaction.

U.K. FCA Chief Says Behavioral Economics Is a Game Changer

The U.K. Financial Conduct Authority has embedded behavioral economics in its regulation of the financial markets, according to FCA Chief Executive Martin Wheatley. There is now little doubt that behavioral economics could have a profound impact on many of the most serious challenges facing regulators and policymakers today. The FCA is already seeing significant possibilities across a range of UK markets. There is also opportunity for behavioral economics to support more specific issues like complexity; consumer inertia; marketing and the impact of firm communications to consumers. In recent remarks, The FCA is active in all these areas, he noted, using behavioral analysis to help collect better management information. Behavioral economics is quickly becoming a game changer, he noted, not just for firms and investors, but potentially for the shape of regulation for many years to come. The FCA is interested in its potential to change corporate behavior or help investors consumers as well as for the opportunities it offers for self-reflection. One of the areas the FCA is investigating is whether behavioral economics can offer the FCA insights into how individuals within organizations behave and respond to regulation. This goes to learning about the way the FCA intervenes within markets. It could help answer the question of whether day-to-day interventions, which the FCA relies on, are as effective as the agency imagines them to be.

ESMA Proposes Standards Under Revised Transparency Directive

The European Securities and Markets Authority (ESMA) has proposed standards under the revised Transparency Directive, particularly around shareholdings notification requirements. ESMA also sets out the proposed content of an indicative list of financial instruments which should be subject to the notification requirements laid down in the Directive, and outlines the processes for updating that list. ESMA considered whether the 5 percent notification threshold should only be used to disclose Article 9 and 10 holdings or if this should also include holdings of Article 13 financial instruments. According to the first alternative, two separate buckets of up to 5 percent each would exist; one consisting of Article 9 and 10 shares and another with Article 13 financial instruments. Thus, a credit institution or investment firm could hold as a market maker or in its trading book a combined position in a share of up to the double of the actual respective threshold. According to the second alternative, all Article 9, 10 and 13 holdings should be aggregated in a single bucket up to the 5 percent threshold.