CPSS IOSCO Report on Principles for Financial Market Infrastructures

The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the
International Organization of Securities Commissions (IOSCO) issued final version of their new Principles for financial market infrastructures (PFMI report).

The PFMI report replaces the CPSS and IOSCO’s previous standards for systemically important payment systems, central securities depositories, securities settlement systems (SSSs), central counterparties (CCPs) and trade repositories (TRs) (collectively FMIs), namely:

- Core principles for systemically important payment systems (CPSIPS), issued in 2001;
- Recommendations for securities settlement systems (RSSS), also issued in 2001; and
- Recommendations for central counterparties (RCCP), issued in 2004.

In March 2011, CPSS and IOSCO published a draft version of the new principles in a consultative document. CPSS and IOSCO received 120 comment letters on the consultative document. The comments were detailed and constructive and were generally supportive of the principles. However some noted various areas for potential improvement, including greater clarity in some areas and more specificity on the application of the principles to certain types of FMI.

The PFMI report harmonises and, where appropriate, strengthens the previous international standards. It also incorporates additional detailed guidance for over-the-counter (OTC) derivatives CCPs and TRs. In general, these new standards are expressed as broad principles in recognition of FMIs’ differing organisations, functions and designs and the range of ways potentially available in relation to some issues to achieve a particular result.

In some cases, however, the PFMI report does incorporate a specific quantitative minimum requirement (such as in the credit, liquidity and general business risk principles) to ensure a common base level of risk management across FMIs and countries.

In addition to the new principles themselves, the PFMI report also outlines the general responsibilities of relevant authorities for FMIs in implementing these standards. CPSS and IOSCO members will strive to adopt the new principles by the end of 2012 and put them into effect as soon as possible. FMIs are expected to observe the principles as soon as possible.

Thai Regulator Proposed Regulations of Offer for Sale of ASEAN Collective Investment Scheme

The Securities and Exchange Commission, Thailand allows offer for sale of ASEAN Collective Investment Scheme (“ASEAN CIS”) to non-retail investor in Thailand within first half of 2012. This is under the Implementation Plan for ASEAN Capital Markets Integration in 2015 aiming at facilitating cross-border securities offerings in the region, strengthening potential of ASEAN capital markets and providing more alternatives to non-retail investor in Thailand. In addition, offer for sale of ASEAN CIS to retail investor will be allowed by the end of this year. 

Criteria for CIS to be offered will include (1) offer must be made only to institutional investor and high net worth investor with specified investment experience, financial status or income, (2) CIS operator must be subject to supervision of ASEAN capital market regulator which is a member of International Organization of Securities Commissions (IOSCO) and Signatory A of IOSCO MMOU concerning Consultation and Cooperation and the Exchange of Information, (3) CIS operator must appoint licensed securities broker as selling agent and (4) selling agent must comply with specified criteria including distribution of offering circular (fact sheet) prepared in Thai.  

The draft regulation includes qualifications of CIS to be offered to non-retail investor in Thailand, conditions relating to offer of CIS, duty of selling agent as well as procedure for filing of application for inspection on qualifications of CIS and allocation of quota for offshore securities investment. Stakeholders and the interested public are welcome to submit comments through the website until April 24, 2012.

Malaysia Issued Regulation of Shape and Structure of Financial Statements Announcement of Insurance and Reinsurance Company

The Capital Market Supervisory Agency in Malaysia and the Institute Finance issued regulations related  to insurance business, namely Chairman of Bapepam-LK Regulation of Shape  and Structure of Financial Statements Announcement Insurance and Reinsurance Company.

The background of the drafting of the Chairman of Bapepam-LK Regulation are:

The need for transparency (disclosure of information) a better idea of the condition an financial  performance of insurance companies and reinsurance companies.

Chairman of the enactment of the Capital Market Supervisory Agency and Financial Institution  PER-06/BL/2011 number of Form and Structure Reports and Announcements Report Business  Insurance and Reinsurance business with Sharia resulting need fo adjustments to the Directorate  General of Financial Institutions Decree No. Kep 4033/LK/2004 about the shape and composition as well as the Insurance Business Reports and Form Announcement of Financial Structure of Insurance and Reinsurance Compan and the Director General of Financial Institutions  Kep-390/LK/2005 Number Guidelines for calculation of Financial Soundness and Structure  Reports and Form Finance For Non PT Insurance Company, as amended by regulatio Chairman of  the Board of Supervisors Mo dal Market and Financial Institutions No. Per-09/BL/200 on the  amendment to the Director General of Financial Institutions No. Kep 390/LK/2005 Guidelines for  Calculation and Forms of Financial Soundness an Structure of the Financial Statements for  Non-Insurance Company PT.

The implementation of Statement of Financial Accounting Standards (SFAS) No. 1 of the  Presentation Financial statements result in the need for adjustments to the shape and arrangement financial statements of insurance companies and reinsurance companies.

The shape and arrangement of the announcement of annual financial statements of insurance companies and reinsurance companies set out in appendix Chairman of Bapepam-LK Regulation.

These include the shape and arrangement of the announcement to:
a. Insurance companies and reinsurance companies with conventional principles;
b. Insurance companies and reinsurance companies with the conventional principles who has a business unit of insurance with Islamic principles;
c. Life Insurance Company with conventional principles;
d. Life Insurance Company with the conventional principle that has a business unit of insurance with Islamic principles;
e. Life Insurance Company with the conventional principle that market insurance products That Associated with an Investme

SEBI Amended Equity Listing Agreement

Ministry of Corporate Affairs vide Notification dated February 28, 2011 has revised the format for disclosure of Balance Sheet under Schedule VI of the Companies Act, 1956.

Pursuant to the same, it has been decided to carry out consequential amendments to Clause 41 of the Listing Agreement regarding interim disclosure of financial results by listed entities to the stock exchanges, which has been drawn from the format under Schedule VI of the Companies Act, 1956. Accordingly, the format for the said disclosure has been given in the circular.

The above shall be applicable for financial year ended on March 31, 2012 for all filings made after the date of this circular.

SEBI Issued Guidelines for Business Continuity Plan (BCP) and Disaster Recovery (DR)

Securities and Exchange Board of India (SEBI) issued Guidelines for Business Continuity Plan (BCP) and Disaster Recovery (DR). 

SEBI stated that in the event of disaster, the disruption in trading system of stock exchanges / depository system may not only affect the market integrity but also the confidence of investors. In order to address this issue, the current BCP - DR setups of some of the stock exchanges having nation-wide terminals and depositories were examined by the Technical Advisory Committee of SEBI (TAC). Based on the recommendations of TAC, the broad guidelines for BCP - DR are given below:

i. The stock exchanges and depositories should have in place Business Continuity Plan (BCP) and Disaster Recovery Site (DRS) so as to maintain data and transaction integrity.

ii. Apart from DRS, stock exchanges should also have a Near Site (NS) to ensure zero data loss.

iii. The DRS should be set up sufficiently away, i.e. in a different seismic zone, from Primary Data Centre (PDC) to ensure that both DRS and PDC are not affected by the same disasters.

iv. The manpower deployed at DRS / NS should have similar expertise as available at PDC in terms of knowledge / awareness of various technological and procedural systems and processes relating to all operations such that DRS / NS can function at short notice, independently.

v. Configuration of DRS / NS with PDC:

a) Hardware, system software, application environment, network and security devices and associated application environments of DRS / NS and PDC should have one to one correspondence between them.
b) Exchanges / Depositories should have Recovery Time Objective (RTO) and Recovery Point Objective (RPO) not more than 30 minutes and 4 hours, respectively.
c) Solution architecture of PDC and DRS / NS should ensure high availability, fault tolerance, no single point of failure, zero data loss, and data and transaction integrity.
d) Any updates made at the PDC should be reflected at DRS / NS immediately (before end of day) with head room flexibility without compromising any of the performance metrics.
e) Replication architecture, bandwidth and load consideration between the DRS / NS and PDC should be within stipulated RTO and ensure high availability, right sizing, and no single point of failure.
f) Replication between PDC and NS should be synchronous to ensure zero data loss. Whereas the one between PDC and DR and between NS and DR may be asynchronous.
g) Adequate resources (with appropriate training and experience) should be available at all times to handle operations on a regular basis as well as during disasters.

vi. DR Drills / Testing

a) DR drills should be conducted on quarterly basis. In case of exchanges, these drills should be closer to real life scenario (trading days) with minimal notice to DR staff involved.
b) During the drills, the staff based at PDC should not be involved in supporting operations in any manner. To begin with, initial three DR drills from the date of this circular may be conducted with the support of staff based at PDC.
c) The drill should include running all operations from DRS for at least 1 full trading day.
d) Before DR drills, the timing diagrams clearly identifying resources at both ends (DRS as well as PDC) should be in place.
e) The results and observations of these drills should be documented and placed before the Governing Board of Stock Exchange / Depositories. Subsequently, the same along with the comments of the Governing Board should be forwarded to SEBI within a month of the DR drill.
f) The system auditor while covering the BCP – DR as a part of mandated annual system audit should also comment on documented results and observations of DR drills.

vii. BCP – DR Policy Document

a) The BCP – DR policy of stock exchanges and depositories should be well documented covering all areas as mentioned above including disaster escalation hierarchy.
b) The stock exchanges should specifically address their preparedness in terms of proper system and infrastructure in case disaster strikes during business hours.
c) Depositories should also demonstrate their preparedness to handle any issue which may arise due to trading halts in stock exchanges.
d) The policy document and subsequent changes / additions / deletions should be approved by Governing Board of the Stock Exchange / Depositories and thereafter communicated to SEBI.

The Alternative to Shareholder Class Actions: The SEC Blocks Arbitration without any Explanation

Present Blog is the gist of an Article published April 1, 2012 on Wall Street Journal Hal Scott And Leslie N. Silverman.

Last month, the Securities and Exchange Commission rejected attempts by the Carlyle Group, and proposals by stockholders of Pfizer and Gannett, to mandate arbitration rather than litigation in disputes between investors and management. The SEC gave no explanation for its action on Carlyle (related to an upcoming public offering), and it said opaquely the Pfizer and Gannett proposals might violate the securities laws.

Arbitration has opponents inside the agency, of course, and among plaintiffs lawyers. They claim stockholders will receive less for management wrongdoing, and that this will lead to less deterrence of such wrongdoing. But this argument ignores some important facts. And it does not address the problem identified by the Committee on Capital Markets Regulation—that securities class-action litigation may be the most burdensome feature of U.S. capital markets.

From 2000 through 2011, the total value of all U.S. securities class-action settlements was approximately $64.4 billion, according to NERA Economic Consulting. These settlements do little to accomplish the class action's traditional goals of compensation and deterrence. Unlike mass tort litigation, securities class actions involve stockholders who are often both plaintiffs and investors in the defendant corporation. The suits are invariably settled before trial, generally for pennies on the dollar. Small investors recover so little they often do not bother to file for their money: 40%-60% of settlement funds generally go unclaimed, according to research prepared for the Committee on Capital Markets. Regardless, plaintiffs attorneys take up to 35% of the total settlement.

The lawsuits do little to deter wrongdoing. The stockholders funding a settlement generally have no knowledge of management misdeeds—they simply held the wrong stock at the wrong time. Managements—the actual wrongdoers and proper objects of deterrence—rarely pay a dime, as the corporation's directors' and officers' insurance picks up the settlement cost. 

Real deterrence comes from whistleblowers and the media, whose reports of fraud send share prices plunging. Deterrence also comes from the strongest public-enforcement system in the world—administered by the Department of Justice, the SEC and the state officials.

Securities class actions undercut the competitiveness of the U.S. capital markets. Plaintiffs attorneys have demonstrated a clear tendency to target the largest public companies, and because insurance firms will not provide settlement coverage over a few hundred million dollars, public companies face substantial risk. Further, foreign corporations are reluctant to list and trade here, while private U.S. corporations have grown wary of going public.

In 2011, 7% of U.S. companies that did go public did so abroad. They were no doubt motivated in part by the litigiousness they can avoid under the Supreme Court's decision in Morrison v. National Australia Bank (2010), which does not permit securities claims by private plaintiffs for shares purchased or sold on a foreign exchange. Historically, it was almost unheard of for American companies to go public outside the U.S.

It does not have to be this way. Companies and their stockholders have recently begun exploring mechanisms by which disputes must be settled in individual, private arbitration, taking advantage of the lower costs and quicker results such arbitration affords. They are following the national policy in favor of arbitration embodied in the Federal Arbitration Act of 1925 and confirmed by the Supreme Court in AT&T Mobility v. Concepcion (2011), which struck down a California anti-arbitration law. Other important Supreme Court cases include Rodriguez de Quijas v. Shearson American Express (1989), which held that arbitration does not violate federal securities laws that prohibit waivers of substantive rights guaranteed by law, such as anti-fraud provisions.

Despite arbitration's endorsement by Congress and the Supreme Court, the SEC has rebuffed efforts to substitute arbitration for securities class actions. So in the recent cases cited above, investors—prospective, in the case of Carlyle, and existing, in the case of Pfizer and Gannett— were deprived of the opportunity to decide upon the dispute-resolution procedure they preferred.

The SEC prides itself on ensuring that U.S. markets are transparent, but in ruling out arbitration it has said no without any explanation. The matter deserves a fair hearing.

CSA and IIROC Implement a Dark Liquidity Framework in Canada

The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) are implementing a new regulatory framework for the use of orders entered without pre-trade transparency (dark orders). 

The CSA, the council of the securities regulatory authorities of Canada’s provinces and territories, co-ordinates and harmonizes regulation for the Canadian capital markets. 

IIROC is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.

To implement the framework, amendments have been made to National Instrument 21-101 Marketplace Operation and to the Universal Market Integrity Rules (UMIR), approved by the CSA on March 30, 2012. The framework is comprised of the following key elements: 

• Visible order priority –Visible orders will have execution priority over dark orders on the same marketplace at the same price; 
• Meaningful price improvement – In order to trade with a dark order, smaller orders must receive a minimum level of price improvement, which is defined as one trading increment or half a trading increment for securities with a bid-ask spread of one trading increment; and 
• Minimum size – IIROC has the ability to designate a minimum size for dark orders. It is not doing so at this time, but the CSA and IIROC will monitor market developments closely to consider whether and when IIROC should implement a minimum size. 

Effective October 10, 2012, the UMIR provisions will introduce a comprehensive and proactive regulatory approach to safeguard the price discovery process in Canadian equity markets. 

“The Canadian capital markets are developing rapidly and it’s incumbent on regulators to set high standards to ensure these changes are in the best interests of investors and the markets,” said Bill Rice, Chair of the CSA and Chair and CEO of the Alberta Securities Commission. “This new regulatory framework strikes an appropriate balance that will allow for continued innovation while maintaining fair and efficient capital markets.” 

“The new rule framework recognizes the increasing use of dark liquidity and balances displayed and dark liquidity for healthy price discovery,” added Susan Wolburgh Jenah, IIROC President and Chief Executive Officer. “These proposals are intended to ensure Canadian equity markets continue to evolve in a fair and competitive manner that strengthens market integrity and investor protection.” 

The initiative follows extensive consultations with industry and stakeholders that began in 2009. The rules are designed to enable institutional traders to continue to execute large orders with minimal market impact, while ensuring that investors with smaller orders receive meaningful price improvement when they trade with dark orders. 

A copy of IIROC’s Notice of Approval “Provisions Respecting Dark Liquidity” is available here at IIROC.