European Union: Financial Markets Newsletter - November 2011


Financial law changes effective 1 January 2012

  • Licence requirements for investment objects, securities and participation rights: the threshold for exemption from the licence requirement is raised from EUR 50,000 to EUR 100,000 per investment object, security or participation right.
  • PMP: the threshold for qualifying as a professional market party is raised from EUR 50,000 to EUR 100,000.
  • Wild West sign: offerors of securities that are exempt – pursuant to section 5:3 paragraph 1 FMSA – from the prohibition on offering securities to the public without an approved prospectus, must use a mandatory exemption notice (the mandatory texts and symbols can be found on the website of the AFM). No exemption notice is required for offers to qualified investors.

Bill introducing special measures against financial undertakings ("Intervention Act")

The Dutch government believes it has insufficient tools to deal with problems in the financial sector. Bankruptcy is often the only available outcome. This is why the government is proposing to extend and strengthen its powers to intervene in financial undertakings. A bill to that effect was recently submitted to the Second Chamber of the Dutch parliament.

The bill introduces two categories of measures:

  • The first category relates to timely and efficient liquidation of failing banks or insurers. The bill gives the Dutch Central Bank (DNB) the power to draw up a plan behind the scenes for the transfer of deposits, other liabilities or assets, or shares to a private third party. This third party could be a bridge institution. DNB could also seek a court decision ordering a transfer scheme, emergency scheme or bankruptcy. A request to order a transfer scheme must be accompanied by the transfer plan. A request for an emergency scheme or bankruptcy may be filed without the plan. After the court order, the transfer plan is implemented by the transferor, the emergency administrator or the bankruptcy trustee.
  • The second category of measures is intended to safeguard the stability of the financial system as a whole. To that end, the bill grants two special powers to the Minister of Finance: the power to intervene in the internal affairs of a financial institution and the power, where necessary, to take over ownership. These two powers may only be exercised in the exceptional situation that there is a serious and immediate risk to the stability of the financial system.

To ensure and improve the effectiveness of the proposed measures, the government is also proposing to limit counterparties in exercising certain rights after one of the above measures has been put in place (i.e. rights arising from events of default or notification events).

Last, the bill contains provisions on the financing of the deposit guarantee system and an amendment of the Banking Act in connection with Emergency Liquidity Assistance.

Bill on funding of financial supervision

This bill provides how the costs of the AFM and DNB are financed. It will replace the funding system that has been in place since 2004. The proposed system is based on a fixed government contribution to the costs of financial supervisors. To control public spending, the contribution will no longer be linked to the actual development of the costs, but to the scope available in the Minister of Finance's budget. How costs of the supervisors are passed on to the financial sector will also change. Regulated institutions will be divided into categories and a percentage-based share in the funding for each category will be set for a period of five years.

In his explanation to the bill, the Minister has given three reasons for changing the system:

  • more clarity is needed on how the costs of supervision are divided between government and the financial sector
  • the new system will reduce fluctuations in the annual charges
  • the changes will help to simplify and streamline legislation and regulations on the financial management at the supervisory bodies

A disadvantage of the new system for the financial sector is a likely increase in costs.

Bill limiting liability of financial supervisors

Legislation currently in force provides no special liability regime for financial supervisors. Their liability is assessed on the basis of the general liability rules of the Dutch Civil Code. The government believes that for DNB and the AFM to duly carry out their supervisory roles, an explicit statutory limitation of liability is needed. A bill to that effect was recently submitted to parliament. Under the bill, liability is limited to wilful misconduct and gross negligence. This creates a higher liability threshold for financial supervisors without completely excluding recourse by injured parties.

Government proposes ban on bonuses at state-aided financial institutions

The government wants to introduce legislation prohibiting financial institutions supported by public funds from paying out variable remuneration (bonuses) to their directors. Under the proposal, the other fixed elements of directors' remuneration would be frozen. Percentage-based increases of those elements would be permitted provided that the increases apply equally to all other employees of the institution.

These proposals concern both new and existing cases of state funding. For existing cases there are transitional provisions that take into account to what extent the new rules were foreseeable by the institution and its directors. The transitional provisions do not apply to any new aid required before the rules take effect. As announced by the Minister of Finance to the Dutch parliament on 6 October 2011, the ban on bonuses applies to all institutions receiving state aid after that date.

Consultation on consumer credit agreements, purchase financing, and loans

As a follow-up to the implementation of the Consumer Credit Directive, the Minister of Public Security and Justice is holding a consultation on new civil law provisions on consumer credit agreements, purchase financing and loans. The consultation ends on 1 December 2011.

AFM publications

Guidelines on active and passive investment in the interest of the client

These AFM guidelines aim to encourage financial institutions to make the customer's interests the central focus. Financial institutions should be aware that active investment is not necessarily better than passive investment, and vice versa. In addition, they should only offer investment products that add value. The guidelines also contain recommendations on the information that must be provided to customers.

Updated prospectus reference tables

The prospectus reference tables, to be submitted with the draft prospectus, were recently updated by the AFM. The tables indicate where the requisite information can be found in the prospectus. The tables now also indicate what ESMA information can be consulted to comply with certain sections of the tables. In addition, the AFM has revised the layout of the tables to improve clarity on what is required.

The AFM has also included new tables on its website for specialist issuers such as shipping or real estate companies. If an issuer is a "specialist" issuer based on the Prospectus Directive and ESMA's recommendations, the applicable reference table must be completed.

AFM introduces Notified Prospectuses Register

This register contains a list of prospectuses approved by other authorities and notified to the AFM. It enables investors to check if a (foreign) issuing institution is authorised to offer its products. Where possible, the register refers to the online register of the competent authority that has approved the prospectus, where the prospectus can be downloaded.

Use of base prospectus for new tranche of securities previously issued under a prospectus that is no longer valid

The AFM has published "points to consider" in connection with the use of a base prospectus in this situation. Base prospectuses often allow a new tranche of securities to be issued under another (base) prospectus. If a new tranche is issued, the old prospectus is normally no longer valid. The new base prospectus, however, often contains terms and conditions which differ slightly from the original terms and conditions. For the securities to be fungible (interchangeable), the terms and conditions of old and new tranches have to be identical. For that reason, the original conditions, rather than the terms and conditions in the new base prospectus, are declared applicable to the new tranche. As this may cause problems, the AFM has issued points to consider when using the base prospectus in these situations.


European Commission makes MiFID II proposals

The European has put forward proposals to revise the Markets in Financial Instruments Directive (MiFID). The proposals consist of a directive and a regulation. The key elements are:

  • Organised Trading Facilities (OFTs) will be brought within the regulatory framework of the MiFID
  • New safeguards are introduced for algorithmic and high frequency trading ("flash trading").
  • The transparency of trading activities in equity markets will be improved; exemptions would only be allowed in certain circumstances. The new rules also introduce a transparency regime for trade in non-equities markets.
  • Supervisors will be able to ban specific products, services or practices if they jeopardise investor protection, financial stability or the orderly functioning of the markets. There will be stronger supervision of commodity derivatives markets.
  • Stricter requirements will be set for portfolio management, investment advice and the offer of complex financial products. Independent advisers and portfolio managers will be prohibited from making or receiving third-party payments or other monetary gains. Rules on corporate governance and managers' responsibility are introduced for all investment firms.
  • The revised MiFID will also apply to the trade in emission allowances.

Proposed modernisation of Transparency Directive

The European Commission has published proposals for amendment of the Transparency Directive. The main changes are:

  • The requirement to publish quarterly financial reports will be abolished for all listed companies. This should lead to cost-savings and discourage short-termism on financial markets.
  • Investors will have to notify all financial instruments of similar economic effect as holdings of shares. This should prevent them from secretly building a controlling stake in a listed company ("hidden ownership"). According to the Commission, such practices can give rise to market abuse, low levels of investor confidence and misalignment of investor intentions.
  • A system of country-by-country reporting (CBCR) will be introduced to increase transparency of payments (taxes, royalties and bonuses) made by oil, gas, mining and logging industries to their host governments worldwide. The current system is based on a single set of information at a global level and does not show a company's financial impact in each host country. The new system would apply to EU privately owned large companies, or companies listed in the EU, that are active in the extraction or logging industry.
  • The new rules will also apply to trade in emission allowances.

The Transparency Directive covers only listed companies. As some of the proposed amendments are relevant to non-listed companies, the European Commission has proposed corresponding amendments of the Accounting Directives.

European Commission proposes new rules on market manipulation and insider dealing

The European Commission has published a proposal for a regulation to replace the Market Abuse Directive. The new regulation is designed to strengthen supervisors' investigative and sanctioning powers, to help fight market abuse in the commodities and derivatives markets, and promote that regulation keeps up with market developments. The key changes are:

  •  The scope of the rules will be extended to financial instruments that are only traded on new platforms such as multilateral trading facilities and organised trading facilities, and also to over-the-counter trade.
  • The proposal clarifies which high-frequency trading strategies (HFT) fall under the prohibition against market manipulation.
  • The regulation extends the options of reporting suspect transactions to suspect non-executed orders and OTC transactions. Supervisors will have the power to require telephone or data traffic records from telecommunications operators or inspect private documents if there is a reasonable suspicion of insider dealing or market manipulation. Supervisors will also have the power to enter private buildings, provided that they have prior judicial authorisation.
  • The regulation obliges the member states to offer protection to whistle-blowers and sets common rules to encourage reporting of market abuse.
  • "Attempt at market manipulation" is introduced as a new criminal offence.  
  • The new rules also apply to trade in emission allowances.

Finally, the Commission has published a proposal for a directive obliging member states to provide for criminal sanctions for insider dealing and market manipulation. The directive contains definitions of insider dealing and market manipulation. When committed intentionally, both should be regarded as criminal conduct. The member states have to ensure that the criminal sanctions they impose are effective and proportionate and provide an adequate deterrent. In addition, criminal sanctions will have to be imposed for inciting, aiding and abetting market abuse or attempted market abuse.

New rules for short selling and credit default swaps

The European Parliament, the Council and the Commission have reached agreement in the trilogue on a Regulation on Short Selling and Credit Default Swaps. The European Parliament and the Council still need to adopt the regulation. The regulation is expected to enter into force in November 2012.

Practical arrangements for late implementation of UCITS IV

ESMA has published practical arrangements to address the situation that the revised UCITS Directive has not yet been implemented in all member states.

European Banking Authority publications

  • EBA publishes follow-up review of banks' transparency in their 2010 Pillar 3 reports
  • EBA details the EU measures to restore confidence in the banking sector

Basel Committee on Banking Supervision publications

IOSCO publications

International publications October 2011

Journal of International Banking Law and Regulation

  • Credit Rating Agencies and Regulatory Reform: The Case of Moody's Investors services / Horatio M. Morgan – JIBLR volume 26 issue 9, p. 389 e.v.
  • The Impact of Basel III on Commodity Trade Finance: Legal and Regulatory Aspects / Gilles Thieffry – JIBLR volume 26 issue 9, p. 455 e.v.
  • The Credit Crunch and Islamic Finance: Shari'ah-compliant Finance against the Backdrop of the Credit Crisis / Reinout Wibier, Omar Salah – J.I.B.L.R. issue 10, p. 509 e.v.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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