Editorial. An action plan to protect investors

Transcription

1 No15 1 st quarter 2010 Financial Regulation newsletter Contents 03 CORPORATE FINANCE AND DISCLOSURE RULES n AMF recommendations for rearing 2009 financial statements n AMF 2009 reort on cororate governance and internal control and reort on executive comensation n Transfer from Euronext to Alternext ASSET MANAGEMENT n AMF working grou on asset management regulation n Imlementing measures for the UCITS IV Directive n A joint AMF-ACP unit to suervise marketing n CESR s work on regulating money market funds INTERMEDIATION AND MARKETS n CESR work on short selling regulation n MiFID review: work by CESR n Chevalier reort on oil markets n MiFID review: work at national level KEY ISSUE The deositary: a key layer in fund investor rotection INTERVIEW D. HOENN AND J.-P. PINATTON An efficient secondary bond market is a key driver of investor confidence and ultimately hels comanies raise cash SCIENTIFIC ADVISORY BOARD Scientific Advisory Board conference: Regulation: how to deal with changes in equity markets AGENDA INTERNATIONAL REGULATORY AGENDA Editorial An action lan to rotect investors When the AMF launched the Better Regulation initiative in 2006, it adoted the rincile that investor rotection was not at odds with a cometitive financial centre. Quite the contrary: the two objectives are comlementary and mutually reinforcing. Regulation hels to maintain a sound legal framework for financial activities, bolster investor confidence and if the right balance is struck contribute to the oerational erformance of market articiants. At the same time, a cometitive financial centre is one that maintains its regulatory sovereignty and can have its say in the international arena. Nearly three years later, when unveiling its new strategy roosals, the AMF reaffirmed more strongly than ever the imortance of efforts to encourage the cometitiveness of the French markets. Imrove conditions for the listing of foreign comanies. In 2008 the segment of the regulated market reserved for rofessional investors established its lace in the stockmarket ecosystem. Paris enhanced its aeal, esecially to foreign comanies, by streamlining and shortening the rosectus review rocedure and scraing the requirement to translate informational documents into French. And by confining the sale of securities to rofessionals only, it avoided any imact on retail investor rotection.

2 Editorial Edouard Vieillefond The AMF and Paris Eurolace combined their efforts to steer rimary bond issuance back to the French market. Tailor market rules to small and midsized comanies. Alternext set itself aart from other venues from the outset. It combines the flexibility of rules tailored to medium-sized comanies with a determination to aly rules to combat market abuse a key condition for strengthening investor confidence (though not mandatory under Euroean law). Other examles of the ongoing effort to rovide smaller firms with an otimal source of financing include amending the offering regime on Alternext, in liaison with the finance ministry, facilitating and regulating transfers from Euronext to Alternext, and raising awareness of the secial features of midcas at Euroean level, esecially during the review of the Prosectus and Transarency directives. Revive the bond markets. Building on measures to simlify and clarify its osition on debt security rosectuses, the AMF and Paris Eurolace combined their efforts to steer rimary bond issuance back to the French market. The aim now is to entrench that movement and, in line with the Hoenn-Pinatton reort, to work with the industry on measures to relaunch the secondary bond market. Encourage asset management business. Subsequent to the Better Regulation aroach, which radically simlified administrative formalities, accelerated basic rocedures and introduced electronic filing of authorisation alications, the AMF has embarked on a new hase. A working grou co-chaired by Jacques Delmas-Marsalet and Jean-Pierre Hellebuyck on arrangements for transosing the UCITS IV Directive is due to reort on the attractiveness of the French regulatory framework for asset management and to mull future develoments. Here, too, a combination of this aroach and a tightening of marketing controls should ultimately make the overall regulatory system more effective. New markets, new challenges. The AMF is also concerned with future issues in market regulation. The best illustration of that concern is the regulation of trading and ost-trade infrastructures. The AMF is heavily involved in discussions on develoing clearing houses and trade reositories, a key issue not only for the cometitiveness of France and the organisation and oeration of its markets, but also for financial stability. The AMF is also utting considerable efforts into the debate on new markets, notably those for commodities such as oil and carbon. n Edouard Vieillefond Managing Director Regulation Policy & International Affairs Division 02 ISSUE 15 1 st QUARTER 2010 FINANCIAL REGULATION NEWSLETTER

3 AMF 2009 reort on cororate governance and internal control and reort on executive comensation News Cororate finance and disclosure rules Transfer from Euronext to Alternext The Small and Midsized Business Act No of 19 October 2009 rovides the ossibility for a comany listed on a regulated market to aly for its securities to be admitted to trading on Alternext, as initially romoted by an AMF working grou. The regulatory framework for the transfer mechanism is based on the following requirements, among others: the issuer s market caitalisation must be less than 1 billion; a general meeting of shareholders must be held at least two months before the roosed transfer to vote on the lan; and the issuer has to ublish two news releases to exlain the reasons for and consequences of the transfer (legal, financial, accounting, etc.), both for shareholders and for the ublic, along with a rovisional timetable. In addition the Act rovides that the legislation governing ublic offers and major holdings that alies on regulated markets will continue to aly to transferees for three years. The AMF released its 2009 reort on cororate governance and internal control on 8 December. The findings of the cororate governance analysis were encouraging and ointed to a steady imrovement in French firms ractices in this area. However, the study revealed that more rogress needed to be made in terms of defining the status of indeendent directors and introducing regular assessments of the board s work. The analysis of internal control ractices showed that most comanies used the AMF reference framework as a tool for managing internal control. Here again though, there is room for rogress, for instance in the descrition of risk management rocedures. For 2010 comanies are encouraged to refer to the findings of the AMF working grou on audit committees, due to be ublished in the summer. In addition to the recommendations to listed comanies, the reort identified four areas for consideration that industry associations should incororate into their own analyses: the concets of indeendence and financial or accounting exertise, the role and comensation of indeendent directors, and the balance between indeendence and exertise for indeendent directors; boardroom diversity and multile directorshis; the stability of cororate governance structures; and the transarency of information included in the rules of rocedure. The AMF has ublished a sulement to its July 2009 reort on executive comensation in listed comanies. Based on its findings, the AMF concludes that one year after industry associations ublished their recommendations, major French comanies have made genuine rogress in reorting their executive comensation arrangements. It was noted, however, that some comanies had not adoted all the recommendations in this area. This romted the AMF to ublish a series of observations to imrove comanies enforcement of the AFEP/MEDEF s recommendations. It seems that some of the oints set out in the AFEP/MEDEF code also need to be clarified to resolve any ambiguities concerning mandatory disclosures. The AMF also suggests that the cororate governance code should be amended so that the exercise of all stock otions granted to senior executives, or the vesting of all bonus shares, is subject to internal erformance conditions as well as to external erformance criteria where this is feasible and relevant. Additional disclosure efforts should also be made by comanies not alying some of the AFEP/MEDEF recommendations. AMF 2009 reort on cororate governance and internal control (in French only) Reort on the comensation of executives of listed comanies and the imlementation of AFEP/MEDEF recommendations (in French only) AMF recommendations for rearing 2009 financial statements The AMF wants to draw listed comanies attention to two sets of issues. First, it wants them to consider the imact of the crisis on the valuation of their financial instruments and commitments, and how deteriorating economic conditions could affect other key financial statement items. The second set of issues is the quality of the information used in resenting the comany s annual erformance and cash osition: changes in the scoe of consolidation, and new standards or interretations. In December 2009 the AMF udated its guide to rearing registration documents, articularly its recommendations on resentation of risk factors, executive comensation disclosures, the deiction of main businesses and markets, and the descrition of ownershi structure. At the beginning of February 2010 it also ublished two new recommendations, one on results announcements by listed comanies, the other on the resentation of valuation and risk assessment data for these comanies roerty assets. Guide for comiling registration documents - regulations in force and AMF interretations and recommendations (in French only) Texts > Access by category of text > AMF recommendations ISSUE 15 1 st QUARTER 2010 FINANCIAL REGULATION NEWSLETTER 03

4 News Asset management AMF working grou on asset management regulation An AMF working grou chaired by Board members Jean-Pierre Hellebuyck and Jacques Delmas-Marsalet has been set u ahead of the entry into force of the UCITS IV Directive in order to examine France s regulatory aroach to asset management. The issue at stake is to maintain a high level of investor rotection while making French markets more cometitive. Four technical grous are rearing a reort that will be submitted to the Board in the second half of 2010 and then ut out to consultation. It has already become clear that, going forward, the regulator s task of overseeing roducts and market articiants will be comlicated by the new cross-border oortunities ushered in by the directive. One ossible resonse could be closer suervision of the way that French and foreign investment funds are marketed. Another idea to consider is that increasing the attractiveness of French markets, both for articiants and for roducts, would ultimately deliver better rotection for the country s retail investors. The working grou may also come u with an action lan to romote the France s markets internationally. Imlementing measures for the UCITS IV Directive The overhaul of the UCITS Directive entered a crucial hase on 17 November 2009 when UCITS IV was ublished in the Official Journal of the Euroean Union. The new directive, which comes into force in member states on 1 July 2011, calls for the Euroean Commission to adot the relevant technical imlementing measures by 1 July In February 2009 the Commission asked CESR for advice on these measures, which relate to the management comany assort, the Key Investor Document (KID), master/feeder structures, cross-border mergers and the notification rocedure. CESR issued its advice in late The Euroean Commission has announced lans to adot an imlementing directive on measures for the management comany assort (excet for the suervisory cooeration asect, to be covered by a regulation), a regulation on imlementing measures for the KID; and an imlementing directive for measures relating to mergers, master/feeders, and the notification rocedure, aart from the notification letter and attestation, which will be addressed in a regulation. Euroean Commission website > Revision of the UCITS Directive A joint AMF-ACP unit to suervise marketing The reform of the French system of financial suervision, enshrined in the executive order of 21 January 2010 establishing the Autorité de contrôle rudentiel (ACP), strengthens cooeration between the ACP and the AMF. The two authorities have set u a joint unit to suervise financial roduct marketing and ensure that banks, insurance comanies, asset managers and other market articiants meet their obligations toward their clients. The remit of the joint AMF-ACP unit is to: romote a coordinated olicy on marketing suervision: without rejudice to their resective resonsibilities, the ACP and AMF will coordinate their suervisory riorities rior to imlementation, devise joint controls and analyse the lessons to be learned from the controls; set u a system for monitoring roduct develoment and financial advertisements; create a common oint of entry for consumer queries. Executive Order of 21 January on the merger of the banking and insurance suervisors (in French only) CESR s work on regulating money market funds The financial crisis had a heavy and destabilising imact on money market funds, romting examinations at both domestic and international level of their regulatory regimes. In the United States the SEC ublished on 27 January 2010 a reform involving stricter investment rules for money market funds and enhanced disclosure of ortfolio comosition. In France, following the consultation closed on 15 Aril 2009, the AMF lans to introduce a stricter definition of the assets eligible for acquisition by schemes classified as money market funds as well as more stringent rules on marketing and investor reorting. At Euroean level CESR organised a ublic consultation, which ended on 31 December 2009, concerning the criteria to be met by funds seeking a money market classification. The AMF has ublished the findings of its work in the form a osition, which it will advocate in connection with CESR s work on this issue, due to be finalised by the end of first-half SEC Aroves Money Market Fund Reform to Better Protect Investors AMF osition on CESR s work on classifying money market funds (in French only) 04 ISSUE 15 1 st QUARTER 2010 FINANCIAL REGULATION NEWSLETTER

5 News Intermediation and markets CESR work on short selling regulation MiFID review: work by CESR CESR is continuing its work on the MiFID review, mainly through two standing committees (Secondary Markets, and Intermediaries and Investor Protection) with the aim of submitting its final advice to the Euroean Commission in July The Standing Committee on Secondary Markets is working in articular on the organisation of re-trade and ost-trade transarency requirements and on balanced cometition between different order execution methods and venues. It will ublish its roosals and otions shortly in a consultation aer. At the same time the committee is working on an issues aer, also scheduled for consultation, dealing with different asects of market microstructure, such as the imact of high frequency trading. The final advice submitted to the Euroean Commission will also include roosals on the transarency of bond markets and derivatives. The agenda of the standing committee on intermediaries includes best execution, the information on execution quality rovided by trading latforms, rules on tied agents, hone recordings, comlex and non-comlex roducts, and the various otions made available to member states by the directive. CESR organised a consultation in 2009 on roosals for establishing a harmonised an-euroean regime for the disclosure of net short ositions. Under the roosals, such ositions would have to be reorted to the regulator if they exceed an initial threshold of 0.1% and then to the market if they exceed 0.5%. A reort ublished on 2 March 2010 retains the broad outlines of the initial roosals but raises the initial threshold to 0.2% of the issued share caital. It also states that those regulators which already have the legal ower to imlement a regime would begin doing so without waiting for Community legislation. The AMF and the French ublic authorities are currently looking into the rocess and timetable for transosing the CESR system. At the same time a CESR taskforce under the ausices of the Market Integrity Standing Committee has set out to clarify a number of technical rovisions, in articular the method for calculating short ositions, to ensure that member states imlement the regime in a harmonised manner. Chevalier reort on oil markets The oil market working grou chaired by Professor Jean-Marie Chevalier resented its reort to Christine Lagarde on 9 February. The AMF, the Banque de France, Total and Société Générale all contributed to the roceedings. Focusing on the interaction between oil rice volatility and the strategies of financial institutions, the reort also resents the discussions now underway at international level to imrove the functioning of the oil market, and sets out 20 or so roosals, articularly in the area of market regulation. When the ongoing ublic consultation closes, the finance ministry will select the recommendations it wishes to lace before the Euroean Commission. In its reort the grou noted that oil markets are exosed to otentially systemic risk, largely as a result of industry concentration, the increasing resence of financial institutions and the growing volume of over-the-counter derivatives. Elsewhere the reort recommends that the guidelines laid down by the G-20 in 2009 for financial derivatives, such as standardisation and centralised clearing of derivatives contracts and registration in a central reository, ought to aly to all financial commodities markets. Reort of the working grou on oil markets (in French only) MiFID review: work at national level Pierre Fleuriot submitted his reort on the review of the Markets in Financial Instruments Directive (MiFID) on 17 February. He had been commissioned by the finance minister, along with Olivier Pouart-Lafarge and Jean-Pierre Hellebuyck, to reflect on this issue and lace articular emhasis on equity market organisation. The reort gives a mixed assessment of the entry into force of MiFID and goes on to make several recommendations. Regarding the waiver of re-trade transarency requirements, it suggests introducing a minimum order size for dark multilateral trading facilities that work with imorted rices. On the subject of ost-trade transarency, the reort stresses the need to imrove the quality of ublished data, reduce deferred ublication, and imrove clarity and access to information through a consolidated database. The cometitive framework in which the various latforms oerate needs to be ugraded by aligning organisational requirements, strengthening transarency requirements for systematic internalisers and creating a secial status for crossing networks. Another of the reort s recommendations is to bolster the role of the future Euroean Securities and Markets Authority so that it can adot binding standards. Press release from Christine Lagarde on the MiFID review ISSUE 15 1 st QUARTER 2010 FINANCIAL REGULATION NEWSLETTER 05

6 Key Issue The deositary has two main tasks, both in general terms and under the UCITS Directive (85/611/EEC), namely safeguarding fund assets and suervising any transactions that affect them. That a deositary may entrust some or all of the assets under safekeeing does not relieve it of its resonsibilities. For that reason, the deositary function is vital to the rotection of a fund s assets and hence its investors. The deositary: a key layer in fund investor rotection Under French law, with a view to rotecting retail investors, all deositaries are subject to the same obligations in terms of asset safekeeing and oversight of the decisions taken by the collective investment schemes, whether UCITScomliant or not (with the excetion of French-domiciled hedge funds, for which the resonsibility regime may be adjusted). For funds marketed to retail investors, the deositary s obligations In France, investors consider the UCITS deositary as nothing less than an insurer and resonsibilities are interreted strictly so that it is always required to return the assets it safekees, even if they have been entrusted wholly or artially to a third arty. Thus in France, investors consider the UCITS deositary as nothing less than an insurer that shields their assets from custody risk. The collase of Lehman Brothers and the Madoff fraud underscored the imortance of the deositary function for rotecting investors. And it has highlighted shar differences in the way that member states interret the tasks and duties of UCITS deositaries. Recent events have ointed u a blatant lack of cross-euroean harmonisation These events have ointed u a blatant lack of harmonisation of the deositary function within the Euroean Union (EU). It emerged that member states did not even share a common understanding of the role, obligations and resonsibilities of UCITS deositaries, hence the existence of different liability rules deending on where the fund was domiciled. For instance, whereas some member states including France consider that the deositary is liable for returning the assets it holds in safekeeing, even if it has subcustodied them wholly or in art, other states consider that this liability is extinguished if the deositary has roerly carried out its duties when selecting and overseeing the subcustodian. These major interretational differences were further highlighted in the review carried out in 2009 by the Euroean Commission, in association with the Committee of Euroean Securities Regulators (CESR), concerning the transosition of UCITS Directive rules 06 ISSUE 15 1 st QUARTER 2010 FINANCIAL REGULATION NEWSLETTER

7 on deositaries into member states domestic legislation. This lack of harmonisation is articularly alarming because it is harmful not just to investors but to deositaries themselves. Since it was introduced 25 years ago, the UCITS brand has been considered by investors, esecially retail investors, as a hallmark of quality and an assurance that their investments would be well managed. In general, investors are convinced that they can recover the assets they have invested in a UCITS, one of the founding rinciles of which is that investors may redeem shares or units on request, regardless of the member state in which the fund is domiciled. This exlains why, with the Madoff affair, many investors were disoriented after having acquired shares or units in UCITS domiciled in member states that took a different view of the deositary s obligations and resonsibilities. This was articularly the case where funds had subcustodied some of their assets to an entity in the BMIS grou. The fact that the duties, obligations and resonsibilities of UCITS deositaries have no clear, recise definition which member states could construe and enforce in exactly the same way is also a source of legal uncertainty for the Euroean deositary industry. At resent, deositaries are unable in ractice to identify the risks they face when safekeeing assets and suervising UCITS since these risks vary according to how each member state interrets deositary liability. In consequence, deositaries are exosed to legal risk with regard both to UCITS and to their investors. Clarifying their duties, and hence their resonsibilities, at Euroean level would give them greater security and allow them to take the measures needed to revent and deal with the oerational risk involved in their business. Ultimately, this would certainly imrove investor rotection. Clarifying their duties, and hence their resonsibilities, at Euroean level would give them greater security The harmful consequences of this lack of harmonisation have highlighted the urgent need for investors, the industry and the regulators resonsible for enforcing Euroean legislation to clarify and harmonise the UCITS deositary function. Overarching need to clarify and harmonise the deositary function without delay The French authorities have always been deely concerned by the absence of harmonisation of the UCITS deositary function and its imact on investor rotection in the EU. The AMF Chairman therefore alerted the French finance minister to the roblem in the wake of Lehman and Madoff in ISSUE 15 1 st QUARTER 2010 FINANCIAL REGULATION NEWSLETTER 07

8 Key Issue The minister, in turn, referred the matter in January 2009 to Charlie McCreevy, the EU Commissioner resonsible for the internal market and services. Resonding to the French authorities, CESR set u a working grou chaired by the AMF and tasked with submitting suggestions to the Euroean Commission for harmonising the UCITS deositary function. In arallel the Euroean Commission launched a consultation in June 2009 to determine whether the rovisions on deositary liability in the Fund managers might take advantage of these oortunities to engage in regulation shoing and ot for member states whose legislation may be less restrictive, articularly as regards deositary liability. draft directive on alternative investment fund managers (AIFM), ublished in Aril 2009, should be extended to UCITS deositaries. Predictably, the consultation concluded that the UCITS deositary regime needed to be clarified in order to maintain trust in the brand. While most member states agree on the need for harmonisation, it is esecially urgent now because of the transosition of UCITS IV, which ermits cross-border mergers, the creation of master/ feeder structures, assorting of management comanies and the like. Fund managers might take advantage of these oortunities to engage in regula- tion shoing and ot for member states whose legislation may be less restrictive, articularly as regards deositary liability. Desite the consensus on harmonising the deositary function, member states have yet to agree on the method. The French authorities consider that swift action is needed to rotect investors, and they therefore recommend using the AIFM Directive, the draft of which is currently under discussion and contains measures alicable to the deositaries of alternative investment funds (defined in the draft as any fund that is not a UCITS). For France, amending the UCITS deositary regime via a legal vehicle such as the AIFM Directive would have at least two advantages, namely seed the directive could be voted this year and the ossibility of rofiting from the work already accomlished through Euroean discussions on the subject of deositaries. There is no substantive reason why the deositary function in an alternative investment fund should differ significantly from that in a UCITS, excet on the issue of liability where custody is outsourced. By contrast, if the deositary function were to be regulated through a future UCITS V Directive, harmonisation would be ostoned and may even be held u by discussions on other issues that are bound to arise in the meantime. Moreover, the UCITS V otion would create two arallel deository regimes in Euroe, one for UCITS, the other for alternative investment funds. Proosal for a Directive on Alternative Investment Fund Managers 08 ISSUE 15 1 st QUARTER 2010 FINANCIAL REGULATION NEWSLETTER

9 Harmonising the deositary function also imlies that member states agree on the recise meaning of the deositary s safekeeing and suervision duties and the related obligations (esecially the requirement to segregate the fund s assets from the deositary s own assets and to return them); they must also agree on the issues of status and liability, notably if custody is totally or artially delegated the key question here being the return of the assets or if custodied assets are reused. Ongoing discussions on the draft AIFM Directive show that agreement could easily be reached on defining custody duties and clarifying the deositary s suervisory duties and even its status. (On the latter oint the French authorities recommend that the deositary should be an investment firm or credit institution within the meaning of revailing EU directives.) However, reaching an agreement on deositary liability, whether for a UCITS or for an alternative fund, will certainly be a more delicate matter. Bringing member states to an agreement on a high level of investor rotection As already mentioned, the French authorities have adoted a strict aroach to the deositary s obligations, both for UCITS and for non- UCITS (with the excetion of Frenchdomiciled hedge funds), articularly the requirement to return the assets it safekees either directly or through a third arty. Although this aroach rotects investors, some consider that it uts deositaries at serious risk because they may be forced to return assets to investors in funds where custody has been outsourced to a subcustodian that defaults. The otential imact on the deositary s financial strength should not be overlooked because the amounts at stake can be substantial. Moreover, it seems that only a few member states share such a strict osition. Discussions are underway at Euroean level with a view to bringing member states to a satisfactory agreement that ensures a high level of investor rotection while accommodating the concerns and sensibilities of all interested arties. Regarding the liability of deositaries of alternative investment funds, the French authorities take a favourable view of the ossibility for a deositary to limit its liability contractually and in recise conditions, notably as regards due diligence and investor disclosure argue forcefully that the UCITS deositary regime should be harmonised quickly, using the AIFM Directive, and in the best ossible conditions. This means reconciling the need to rotect UCITS assets, and thus their investors, with the flexibility needed to carry on a deositary business. The reutation of the UCITS brand, articularly outside Euroe, deends on a successful outcome. n The French authorities will continue to argue forcefully that the UCITS deositary regime should be harmonised quickly requirements, if it subcustodies some or all the fund s assets. Be that as it may, what matters is that custody risk should be addressed through recise investor reorting requirements (ossibly using the new Key Investor Document), whatever the tye of fund. Given the imortance of this issue for investors and for the level of retail investor rotection in Euroe, the French authorities will continue to ISSUE 15 1 st QUARTER 2010 FINANCIAL REGULATION NEWSLETTER 09

10 Interview An efficient secondary bond market is a key driver of investor confidence and ultimately hels comanies raise cash In the reort of the working grou they co-chaired, Dominique Hoenn and Jean-Pierre Pinatton outline several courses of action for encouraging better disclosure and greater liquidity in the secondary bond market. What was the urose of your reort on the secondary bond market? J.-P. Pinatton: The reort examines the workings of the secondary bond market, articularly in the aftermath of the 2008 credit shock, and looks at ways to imrove liquidity in terms of both market structure and information for articiants. Dominique Hoenn, member of the AMF Board Jean-Pierre Pinatton, member of the AMF Board The secondary bond market In what ways does the bond market differ from the equity market? D. Hoenn: What characterises the bond market is firstly that the securities issued by an issuer are not fungible with each other, which automatically reduces the total issuance amount and imlicitly their liquidity, and secondly that investors often tend to buy a bond and hold it to maturity. Taken together, these two factors mean that the secondary market is structurally underactive. Liquidity is rovided by market makers, chiefly banks and intermediaries. The bulk of 10 ISSUE 15 1 st QUARTER 2010 FINANCIAL REGULATION NEWSLETTER

11 trading takes laces over the counter, with a small fraction being handled by trading latforms. J.-P. Pinatton: It s imortant to stress that the secondary bond market does not oerate on a continuous basis, unlike the equity market. In concrete terms, what haened on bond markets in 2008? D. Hoenn: Before summer 2007, bond markets were highly liquid, with a large number of articiants roviding both liquidity and information. Even without mandatory ost-trade transarency, articiants were able to get an idea of the rices of the bonds they were holding and find buyers who would urchase the aer on good terms. J.-P. Pinatton: When the subrime crisis broke in 2008, bond market liquidity dried u, artly because traders were wary of certain stocks, and the number of market makers lummeted, even though a growing number of brokers were handling a substantial ortion of trading. Moreover, information on rices was scarce because of the It s imortant to stress that the secondary bond market does not oerate on a continuous basis, unlike the equity market. We need to determine, in association with the ECB, what constitutes an abnormal market situation which, would allow for banks urchases to be automatically refinanced. lack of market makers (or the widening of their bid/offer sreads). This information deficit was aggravated by the fact that the rimary market, which under normal conditions rovides indicative rice levels, was almost non-existent. And the credit derivatives market, hitherto considered as a reliable benchmark, decouled from the cash market. As a result, investors went from having abundant rices and fairly good information to an almost total lack of rices and scant information, just when they were being forced to sell off assets and value their funds daily. What have you roosed? We have made four main roosals: J.-P. Pinatton: The secondary bond market needs to be more transarent. To that end, the AMF should suort at Euroean level the introduction of ost-trade disclosure. This confidence-building factor is key to the functioning of the market and consequently its liquidity. The real issue, though, is the actual degree of transarency because buyers and sellers do not want to divulge their identity for each and every trade. It is imortant not to be dogmatic on this issue. D. Hoenn: Under normal circumstances, liquidity is rovided by banks. But in June 2008, faced with a strong selloff, they had neither the caital nor the financing to act as counterarties. To avoid a reeat of this situation we need to determine, in association with the ECB, what constitutes an abnormal market situation which, were it to arise, would allow for banks urchases to be automatically refinanced. In addition, issuers could ask their banks to commit to making a market for a limited eriod on certain bonds should the need arise. Several solutions have been considered, notably creating a system for identifying and hallmarking bonds that may attract a broader investor constituency. At the same time, it is imortant to ensure that investors do not shun bonds that have not received this hallmark J.-P. Pinatton: Another ossibility would be to introduce a systematic liquidity agreement for issues aimed chiefly at retail investors. ISSUE 15 1 st QUARTER 2010 FINANCIAL REGULATION NEWSLETTER 11

12 Scientific Advisory Board Scientific Advisory Board conference: Regulation: how to deal with changes in equity markets The Markets in Financial Instruments Directive (MiFID), which came into force in November 2007, was an evolutionary milestone for securities exchanges. Like the Regulation National Market System in the United States, MiFID embodied the determination of regulators to organise cometition between trading venues in an effort to cut costs and ultimately imrove the financing of national economies. More generally, it rounds off two decades of exchange re organisation, with the introduction of market oerators, the sread of electronic orderbooks and other key develoments. Researchers have been investigating this field, which they call market microstructure. As the Euroean Commission reares to reort on the effects of market fragmentation, a number of factors need to be taken into account simultaneously, such as the develoment of dark ools, and algorithmic and high frequency trading. To weigh u the costs and benefits that the new regulatory framework entails for stakeholders, its role needs to be examined recisely in light of the foregoing develoments, striing out transitory effects arising from events such as the financial crisis. The AMF and financial market organisation Against this backdro, the Autorité des marchés financiers has decided as it did ahead of the adotion of MiFID to devote the annual conference of its Scientific Advisory Board to the toic of market organisation and the resulting challenges for regulators. The 2010 academic sessions will address the issues of high-frequency algorithmic trading and the tradeoff between liquidity and transarency. They will culminate in a debate between market ractitioners, including reresentatives of regulators, regulated markets, financial intermediaries and investment funds. AMF Agenda 27 May Scientific Advisory Board conference 4 June AMF-NYSE Euronext seminar: Heling small and midsize businesses gain access to the market 16 June Publication of the AMF annual reort International regulatory agenda 6 May Plenary meeting of the Committee of Euroean Securities Regulators (CESR) 6-10 June 35 th Annual Conference of the International Organization of Securities Commissions 14 June Plenary meeting of the Financial Stability Board Financial Regulation Newsletter Publication manager: Christine Anglade-Pirzadeh Editorial Manager: Edouard Vieillefond Contacts: Communication Deartment. Tel.: +33(0) contact@ amf-france.org Design, roduction: avantgarde Tel.: n ISS: in rogress Photos: F. Dunouau, M. Labelle Financial Regulation Newsletter rovides an overview of current regulatory issues. It is not exhaustive and cannot substitute for a detailed reading of the laws and regulations it reviews. Financial Regulation newsletter ISSUE 15 1 st quar ter 2010