Update

European Regulation

All FOA position papers and responses to consultation papers can be accessed from the FOA web site at www.foa.co.uk/regulation/reform_uk/fsa/index.jsp. Each FOA paper includes an executive summary of key points made in the relevant response. For this reason, these papers are not reproduced in this Update.

	Proposals for Revised Investment Services Directive: A Second Commission Consultation Paper

In its Response to the Commission's Consultation Paper, the FOA made the following general points:

- The proposed revised orientations put forward by the Commission for the ISD took meaningful account of industry responses to the first round consultation and has delivered a significantly better general balance between the needs of investor protection and market integrity and facilitating the international competitiveness of EU institutions.

- The Commission’s policy of facilitating competition for between all trading arrangements i.e. “regulated markets”, Alternative Trading Systems and internalisation is positive; but must be accompanied by open pan-EU access for all forms of execution venues.

- As regards transparency, the FOA supported the restriction to securities dealings and the deferred reporting of block trades, but argued against the perceived importance attached to pre-trade transparency, the rigid imposition of parity in transparency with relevant “regulated markets” and any regulatory constraint on the ability of reporting obligations to be met through the use of alternative “unconsolidated channels” (which may not necessarily be operated by a “regulated market”).

- With regard to internationalisation, the FOA supported the points made in the joint trade association paper “Innovation, Competition, Diversity, Choice – a European Capital Market for the 21st Century” (May 2002) to which the FOA was a contributor and which urged continued facilitation of internalisation. It also welcomed Euronext’s revised position in supporting “choice and innovation – including, for example, “internalisation” of securities trading within major investment banks” subject to suitable protections.

- With regard to Alternative Trading Systems, the FOA continues to urge that the definition should exclude purely crossing systems and that ATS's should not be subject to rigid parity with “regulated markets”.

- The FOA welcomed the Commission’s assurance that the capital adequacy treatment of investment advice will be commensurate with “the risk profile of investment advice”.

- With regard to the proposals to include commodity derivatives in the ISD, the FOA supported the provision of an “EU passport” for exchange and dealing etc. services in commodity derivatives, providing it was accompanied by proportionate capital treatment and exemptions for “ancillary” business and facilitation for commodity groups to use ISD licensed brokerage subsidiaries (i.e. the “with or through” an authorised institution exemption), together with including “arranging” as an authorisable activity (see above).

- The FOA supported the emphasis given to the need to differentiate between retail and professional clients and to secure state of origin regulation.

- The FOA restated its view that the drafting policy behind the revised text should be to restrict the ISD to matters of scope, core definitions and a framework of regulatory principles, leaving the detail to Level 2 and/or to CESR and the individual regulatory authorities, as appropriate.

	The Proposed Inclusion of Commodity Derivatives Within the ISD

The FOA’s overall position is summarised in paras 4.6 to 4.9 and in Annexes 2 and 3 of its response to the Commission’s second consultation on revising the ISD (referred to opposite).

More particularly, the FOA retained Clifford Chance to draft specific amendments designed to establish an appropriate basis for the inclusion of commodity derivatives; and KPMG to undertake an impact analysis of applying, in unamended form, the Capital Adequacy Directive (CAD) to commodity derivatives business. The KPMG analysis, together with an FOA supplementary paper on the need for exemptions and appropriate capital treatment which would avoid the potentially severe consequences that could otherwise materialise for business costs, risk management practices, market participation and liquidity and consumer prices, will be available from mid July.

The FOA is grateful to its various committees and many specialist organisations, including Euronext.liffe and the Corporation of London, who have supported or provided the information necessary to assist KPMG in compiling this report.

	Internationalisation

Members will no doubt be aware of the debate as to whether or not internationalisation is a legitimate means of executing customer orders and should or should not be facilitated by the Commission. While recognising that there are conflicts of interest and best execution issues (which are largely addressed already in existing member state/CESR business conduct rules), the FOA supports strongly the right of institutions to internalise their orders for reasons given in its response to the ISD consultation and, to that end, has been a contributor to the combined trade association paper “Innovation, Competition, Diversity, Choice – A European Capital Market for the 21st Century” (May 2002).

In addition, the FOA organised a high level industry/regulatory roundtable on 17th June, attended by US/UK regulators and the Commission to discuss a range of matters on which the industry had concerns, including transparency, internationalisation, the regulation of ATSs and some of the proposed revisions to the ISD.

	Member State Visits

The FOA has followed up its earlier meetings with the Danish Ministry of Finance and regulatory authority (Finanstilsynet) to discuss its concerns over the proposed constraints on internalisation, the need for a measured reaction to Enron and the basis of including commodity derivatives in the ISD.

With regard to use of the Uniform Give Up Agreement on the Italian Borsa, the FOA has met again with the exchange and is waiting for further information which will be circulated to members as soon as it is received.

The FOA has also pursued with the FSA the latest position regarding non-ISD business transacted cross-border with Italian counterparties with the FSA and put forward interim proposals to CONSOB for consideration.

Any member wanting further information on any of these items should contact Anthony Belchambers at the FOA.