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.

	Proposal for revising the Investment Services Directive

The revised ISD will enlarge the scope of the Directive (e.g. by including investment advice and commodity derivatives); address market infrastructure issues (e.g. regulation of Alternative Trading Systems, internalised orders i.e. orders traded away from the regulated market); revise the framework for business conduct rules; establish high level principles for regulated markets; and address clearing and settlement access rights.

So far as scope is concerned, the FOA continues to lobby hard for a more pragmatic approach to the inclusion of commodity derivatives, particularly with regard to the capital regulation of participants in the nascent power and gas markets. The FOA has addressed this issue with DG TREN, DG Markets and MEPs and has raised the issue with German and Swedish officials and, in late November, will be discussing it with the Greek Ministry of Finance (NB Greece will assume the Presidency in January 2003).

With regard to internalisation, the FOA and a number of other trade associations have commissioned a report from Ruben Lee which reviews current academic research into the subject and concludes generally that there are no substantive reasons why, if appropriately regulated, internalisation should not be fully accepted as a valid alternative methodology for executing customer orders.

It is anticipated that the Commission will produce its revised proposal by the end of November/early December after which it will be considered by the European Parliament and the Council in anticipation of a common position being finalised at the end of 2003.

	Market Abuse

The proposal for a directive on market abuse continues to raise concerns. These have been exacerbated by CESR's proposed Advice to the Commission on Level 2 implementing measures, which have been the subject of consultation. The FOA's response covered a wide range of issues. Of particular concern is the use of "diagnostic flags" and "factors" (the difference between the two not being entirely clear) which, in a number of cases referred to normal market activity, but which were described as creating a strong implication of the presence of market abuse. The breadth of the "factors", taken together with the fact that no weight is given at all to "factors" such as the existence (or not) of legal purpose, wrongful intent, recklessness or appropriate systems and controls, suggest that the Advice is little more than a charter for giving maximum flexibility to the enforcement function of the regulatory authorities (who wrote the Advice) rather than a balanced attempt to deliver legal predictability or market certainty/confidence (itself a UK regulatory objective) to market users.

The FOA continues to be concerned over the application of anti-insider dealing provisions to commodity derivatives bearing in mind that no justification has been produced for such an approach and it continues to be unclear as to what kind of wrongful market activity would be covered by such provisions that would not otherwise be addressed by anti "front running"/market manipulation provisions. Some flexibility is given to the definition of accepted market practice, but this is likely to vary from member state to member state (i.e. not be consistent across product lines), but also may be the subject of change by those regulatory authorities which wish to impose compulsory disclosure of information. The position remains unclear and is not helped by the fact that the secondary definition of insider dealing (i.e. the one that applies to commodity derivatives) does not (despite considerable efforts to secure change) require the information to have a significant impact on price, unlike the main definition. The FOA hopes that this matter will be addressed in Level Two.

CESR is holding an open meeting in Paris on Level Two Advice on 21 November.