Markets and Companies Law Financial Markets Regulation Overview 2018/2019 1
Financial markets Financial markets are virtual places where investors meet to buy and sell financial instruments Financial instruments bought and sold on financial markets represent entitlement to companies equity or debt (such as stocks and bonds), to commodities (such as precious metals or agricultural goods) and other fungible items of value Financial markets aim at providing efficiency and liquidity at reasonably low transaction costs 2
Financial markets regulation Financial markets regulation aims at assuring proper access to markets, transparency of information, fair dealing, a degree of protection of weaker parties (cannot guarantee equal opportunities or protection from losses) Financial markets regulation is part of the financial sector regulation Financial sector regulation is commonly divided in three principal segments: 1) securities; 2) banking; 3) insurance 3
What is a securities market? The place (virtual) where securities are exchanged. Such securities have the common feature of being transferable (which degree of transferability?) Many kinds of securities: e.g. stocks, bonds, derivatives. They are differentiated by: a) return, b) risk, c) attached rights, d) duration The other common characteristic is that all are negotiable (i.e. admitted to trading) 4
Primary and secondary market (1 of 2) A primary market is where new securities are traded (sold or issued?) Companies, institutions and other entities obtain financing through equity or debt securities (equity vs. debt investors; price vs. principal amount and coupon; risk) Primary markets are facilitated by underwriting groups, which consist of investment banks setting an initial price range for a given security and then oversee its sale directly to investors 5
Primary and secondary market (2 of 2) A secondary market is where investors purchase securities or assets from other investors, rather than from issuing companies themselves. Stock exchanges, such as the NYSE, LSE and NASDAQ are primary and secondary markets In any secondary market trade, the cash proceeds go to an investor rather than to the underlying company/entity directly. Primary and secondary markets negotiate other securities as well, such as when funds, investment banks, or other entities purchase securitized mortgages from issuing lenders 6
Government securities What kind of financial products? Such instruments have a great significance for the economic policies of individual countries and the monetary policies chosen by central banks Primary markets (spread, duration) Secondary markets for the exchange of government bonds (e.g. MTS or the US government bond market) Most government securities do not have a specific purpose (however, e.g. war bonds ) Local municipalities may act as issuers 7
Regulated markets Regulated vs. non-regulated markets In regulated markets the exchange, issue and offering of securities is subject to specific regulation and under supervision by authorities appointed by the government (CONSOB in Italy, FSA in the UK or SEC in the USA ) Supervision vs. operations (delegated powers, separate roles/functions and overlapping) In non-regulated markets only general rules and principles apply in addition to contract based regulation (e.g. so-called over the counter transactions) 8
Market players Issuers, intermediaries, investors Issuers (see above) Types of regulation applying to issuers, general vs. specific Investors: different categories (professional/qualified vs. retail) What is investor protection? Different investors have different needs. How is this reflected in regulation? 9
Market players Intermediaries are regulated professionals that provide to customers services directly or indirectly connected with investments in financial products against payment of a fee. All intermediaries activities are highly regulated and subject to authorizations What are the activities of intermediaries? Who are the intermediaries customers? Which are the risks connected to the intermediaries activities Which are the types of rules that apply to intermediaries? 10
Markets Players Why is the role of intermediaries important? Some examples: (1) Investors do not have expertise, time or resources to understand and search market opportunities (advice) (2) Intermediaries promote offerings, which, without them, would have little chances of success (e.g. IPOs) (3) They create efficiencies in collective wealth management. 11
Markets Players Fund managers In Italy: SGR (create and manage investment funds) SICAV (Soc. 'Investimento a capitale variabile: it is a stock company with the sole purpose of collective investment of the invested capital) pension and insurance funds (collective investment entities which invest in securities OICVM). In the UK: asset management companies. Intermediaries become investors Clients money rules 12
The purpose of financial regulations (1 of 2) Fundamental purposes (public interest) Transparency Accuracy and fairness Stability, to safeguard investors and the public interest in the good functioning of the market Efficiency Liquidity Standards 13
The purpose of financial regulations (2 of 2) Non professional investors are rarely in a position to fully appreciate the value of the security. Similarly contracts which usually include a transfer of money as consideration for the expectation of a return. Ordinary legal instruments are insufficient: contracts are not drafted ad hoc and more often are standard forms and therefore good faith and accuracy are difficult to be implemented without a further public control. 14
Solutions (tentative) What instruments then to ensure the good running of the financial market? Maximum level of transparency and effective disclosure obligations. Creating rules (often also criminal) for market players to prevent: (i) conflicts of interest; (ii) market abuses; (iii) insider trading. Checks and controls on market entrance and credit requirements for market players. 15
Requirements for players acting in regulated markets Personal requirements of administrative bodies (professionalism, honorability, absence of criminal charges) Economic requirements (patrimonial ratios and capitalization thresholds, as well as minimum floating capital) Transparency requirements (disclosure of information on relevant transactions, financial statements and balance sheets) 16
Supervision and controls Prior to market access, regulators set criteria and requirements to be met by market players to access regulated markets Simultaneous, ad hoc agencies are required to monitor the implementation of the above conditions. Players are also under surveillance by supervising authorities in the performance of their daily operations Continuous, supervising authorities are entitled to carry out controls and inspections on regulated players at all times 17