Update

European Regulation

	Bank of International Settlements ("BIS")

Following its previous Consultation Paper published in June 1999, the BIS issued a further proposal in January 2001 on a new Capital Adequacy framework for comment by 31 May this year. In due course, these proposals will be incorporated into the European Commission's review of Regulatory Capital Requirements for EU credit institutions and investment firms which will, in turn, result in modifications to the proposed Prudential Sourcebook. The FSA has recognised the need to coordinate implementation of the new UK capital requirements with those issuing from the EC and has delayed the publication of its Consultation Paper on the Integrated PSB until later in the year (April). FOA will coordinate its response to the BIS proposals with other interested Trade Associations.

	Prudential Supervision of Conglomerates

As part of its Action Plan to implement the Framework for Financial Markets, the EC published a proposal for a Directive on the prudential supervision of financial conglomerates requesting responses by 10th February 2001. The proposal is aimed at coordinating the supervision of groups providing financial services in different financial sectors including at least one undertaking engaged in insurance activity. (Any member wishing to make representations on these proposals should contact David Stuart).

	The Regulation of Alternative Trading Systems (ATSs)

The Financial Services Authority (FSA), the Forum for European Securities Commissions (FESCO) and the European Commission (EC) are all currently considering how they should adapt Europe's collective and individual regulatory regimes to cater for new trading platforms or "Alternative Trading Systems". For example, the FSA will shortly be issuing a summary of the responses they have received to their Discussion Paper entitled "The FSA's Approach to Regulation of the Market Infrastructure"; FESCO have set out a number of proposals in its paper "The Regulation of Alternative Trading Systems in Europe" and the EC Green Paper, Proposing Revisions to the Investment Services Directive, includes views on a range of issues relating to ATSs, including the continued appropriateness of the current definition of what is a "regulated market".

The absence of an appropriate regime has led to the majority of ATS providers to seek registration/authorisation as either "investment firms" - a regulatory category which, in general, appears to best suit their business models - or as investment exchanges or "regulated markets". The FOA has argued strongly for continuance of the option for ATSs to register either as investment firms or exchanges and, while that is the trend in the papers referred to above, it is likely that ATSs which elect for authorisation as investment firms will have to meet additional regulatory requirements.

Accordingly, a meeting with ATS providers was held in order to determine whether there was a need for the FOA to influence the thinking of the regulators in this area. The meeting concluded that there was such a need and so now the FOA is planning to implement a programme of appropriate initiatives.

Any FOA member with a particular interest or who wishes to provide input into this topic is invited to contact Hugo Jenkins or Anthony Belchambers to see how they might participate in the work programme over the next six months.

It is anticipated that FESCO will consult formally on more details for proposals for regulation of ATSs sometime in March 2001.

	Review of Investment Services Directive

FOA is compiling its draft response to the Green Paper on "Upgrading the Investment Services Directive" and the Commission's Communication on "The Application of Conduct of Business Rules under Article 11 of the Investment Services Directive". As part of its response, the FOA has already met with Commission officials and, at the end of January, with the MEPs appointed as Rappoteurs and shadow Rappoteurs to review the Green Paper and the Communication. This last meeting was hosted by the European Parliamentary Financial Services Forum of which the FOA is a founding member and was attended by the FOA in its capacity as a member of the Advisory Committee. Issues covered included:

- the need for no major changes to the ISD, but rather the introduction of enhancements;
- the need for a stronger imperative on member states to take account of the professional nature of investors in developing regulatory standards;
- the introduction of "state of origin" regulation in its entirety to the provision of wholesale services as a matter of urgency (with any deferment in the provision of retail services being subject to "sunset" provisions which, for online trading purposes, should accord with implementation dates of the E-Commerce directive;
- in connection with ATSs, the need to preserve, so far as possible, the status quo with any additional regulatory requirements being kept to a minimum and

(a) applied only to those "organised systems" which clearly are replica exchanges;
(b) are flexible and graduated according to the individual trading systems risk, client base, functionality and products;
(c) be sensitive to the need to maintain ATS cost effectiveness and international competitiveness;

- The need to review FESCO's proposed categorisation of investors investments, particularly in relation to large corporate customers.

Further meetings have been put in place with Fabrice Demarigny, Secretary General of FESCO and with Commission officials to address these issues.

In defining its draft response to the Green Paper and the Commission's Communication, the FOA will be circulating a first draft to the Compliance Committee and will be securing the input of a number of exchange providers of "organised systems" (including ATSs).

	The Committee of Wise Men

The FOA has already submitted its own response to the well-received Interim Report of the Committee (see FOA web site); has met with Sir Nigel Wicks, the UK member of the Committee; and has participated in a joint wholesale market response to the Committee's Interim Report.

The Final Report is due in March 2001 and is likely to put forward detailed practices and procedures for putting the recommendations of the Interim Report into effect. The FOA will be participating actively in an European Parliamentary Forum Financial Services meeting in March which is to be attended by Baron Alexandre Lamfalussy (and at least one other member of his Committee) to discuss the findings of the Final Report.