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OVERSIGHT

REGULATORY UPDATE

Facing the Assaultof Regulation

Welcome to this, the first edition of Oversight, a new SIX Securities Services quarterly publication, on the regulatory challenges facing our business.  Life is becoming more difficult for all of us, on a number of counts. First, in response to the financial crisis, the G-20 will leave no stone unturned to ensure that every part of the financial system is regulated in some way, including market infrastructure. The European Union agrees with this, and so, second, this edition covers no fewer than four separate initiatives potentially affecting not only our regulatory requirements, but also our business and stakeholder relationships. The European Market Infrastructure Regulation is familiar, because it proposes tighter control of OTC derivatives, together with some potential impacts on clearing. Third, this assault occurs at multiple levels. International standard setters such as the BIS are revising relevant, particularly risk and oversight, standards, and this will undoubtedly impact Swiss domestic regulation, notably with the Swiss National Bank and FINMA. We also sense that the environment is somewhat more difficult for Finanzplatz Schweiz itself and there seems to be less goodwill in Brussels towards us.

Oversight is just one response to this regulatory assault; keeping stakeholders and partners informed. Another is the appointment of a new Head of Market Policy for SIX Securities Services, and better co-ordination at SIX Group level of our communication with politicians, regulators and the financial industry at large. So, we are tailoring our approach and business strategies accordingly. This publication will hopefully allow you to frame your own activities going forward.

Thomas ZeebChief Executive Officer

> Target 2 Securities

> The EU Legislative Programme

> Changes in the EU Institutional Landscape

> A round-up of CPSS – IOSCO Initiatives

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Welcome to Oversight - our quarterly update on market policy developments and the regulatory landscape. If you would like to subscribe to this newsletter electronically please send an e-mail to oversight@six-group.com

OversightBrought to you by SIX Securities Services.

Target 2 Securities (T2S)The T2S project grinds on, although it has now been delayed for a further year. Pricing is clearer, but the position of CHF entry still has to be determined.

The EU Legislative Programme on Market InfrastructuresThe EU is initiating a substantial legislative programme, impacting on all value chain segments. We are watching the developing CSD Regulation closely and EMIR also has some undesirable facets

As clients know through recent presentations, a key SIX Securities Services concern is how the Swiss market might interface with T2S in the future, and particularly the issue of how CHF liquidity should be handled, and repos managed, in the system. As you probably know, SIX Securities Services has analyzed a number of options, and has presented these to the market over the past 6 months. A critical future date will be the conclusion of a Framework Agreement by participating CSDs with the ECB by the end of 2011, so we expect to be clearer by then about the Swiss National Bank’s intentions. In other respects we have continued to meet with the ECB in the CSD Contact Group, notably discussing future governance arrangements. A further recent change in the timetable of the project has been the ECB’s announcement of a year’s delay in the start date, to September 2014. In its report “Halfway to Delivery”, the ECB also has updated its pricing plans: it envisages charging €0.15 per DvP settlement transaction. This estimate is based on the inclusion of non-euro currencies, such as the CHF and GBP.

Review of MiFID Securities Services’ interest in the revision of the Markets in Financial Instruments Directive relates to the capacity of changes at the top of the value chain impacting further down in clearing and settlement. At the time of writing, the Commission’s has just issued

T2S: A critical future date will be the conclusion of a Framework Agreement by participating CSDs with the ECB by the end of 2011

If you would like to find out more, please contact: Stefan Truffer, Head of Settlement and Safekeeping (Stefan.Truffer@six-group.com or +41 62 311 6330)

Segment of the Value Chain

TradingClearingSettlementUnderpinning Law

Measure

Review of MiFIDEMIRRCSDSecurities Law Directive

Proposed (published)

July 2011September 2010June 2011April 2011

Adopted (EU legislative passage completed)

End - 2013 ?End - 2012Mid - 2013 ?Mid - 2013 ?

a consultative paper (CP), which we are examining. The Consultative period runs to 2 February, which is short enough, given the Christmas holidays. As widely trialed, with the Committee of European Securities Regulators (CESR) already having exposed, through

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consultation, some issues such as client classification, high frequency trading, sponsored access and fee structures, the CP also covers the consolidated tape, pre- and post-trade transparency (to embrace additional classes of assets such as ETFs and Depositary Receipts), commodity derivatives and the regulation of exchange competitors such as MTFs, dark pools, crossing networks and systematic internalisers. The CP also proposes additional powers for the securities regulator, ESMA, in relation to prohibiting products which threaten systemic stability.

European Market Infrastructure Regulation (EMIR)As noted in the preface to this edition, EMIR has two primary purposes: (i) regulation of OTC derivative markets; and (ii) introducing an EU regulatory framework for CCPs. We focus primarily on the latter. Before doing so, it is worth stressing that this Regulation will impact on Eurex, our joint venture with Deutsche Börse, but of course also presents opportunities (notably in consolidating trading, clearing and reporting classes of derivatives), as well as challenges. Like others, we wish to ensure that initiatives in this field are globally consistent. One major difference with the Dodd-Frank Act approach is that the latter envisages mandatory clearing for all OTC derivative classes, whereas the EU approach will focus on designation by ESMA (see below) of particular standardized OTC contracts. Turning to the part of the EU measure on the regulation and supervision of CCPs, there are three main areas of concern for x-clear: colleges, segregation of accounts, and grandfathering. As currently delineated, x-clear operations in the EU will continue to be permitted, but subsequent new business will require de novo application and authorization in the relevant Member state. The Commission recently stated that it felt the Belgian Presidency had made good progress; a first stage political agreement at the level of the Member States is possible by the end of the year.  The European Parliament has recently appointed its Rapporteur (preparing its opinion) and we have had the opportunity via EACH to respond to some initial CCP and derivatives-related questions. The intention is for EMIR to enter into force by the end of 2012.  

EU Regulation on CSDs (RCSD)Through our membership of the European Central Securities Depositories Association (ECSDA), we have had sight of European Commission working documents currently being discussed by the Member States of the EU. The legislation, which will be an EU Regulation, looks set to cover authorization and supervision of CSDs, as well as the passporting of services, risk mitigation, access and inter-operability, and removal of barriers to business. A number of technical standards, impacting on the market, are also likely to be proposed.

These include mandating a pan-European settlement cycle (T+2), market discipline (settlement fails), and corporate action processing (notably voting rights). Apart from the absence of grandfathering provisions for non-EU CSDs, two further aspects also seem likely to have a major impact: as with EMIR, the Commission envisage mandating segregation of customer accounts. Second, it is also proposed that intra-day credit exposures between CSDs and market participants be fully collateralized (with the collateral also being subject to haircuts). The Commission are unequivocal that the RCSD has the potential to change the way in which CSDs in the EU do business and their positioning in relation to the value chain. Taken together with the transformational nature of T2S, major structural changes in this segment of the market could therefore be well on their way. A Commission consultative paper (to which we will be responding) is likely for end-December, and legislation is expected to be adopted (formally proposed in EU jargon) in the first week of June 2011. This is an important initiative affecting SIX SIS, and we will be updating readers on progress as we move towards a formal Commission proposal.

Securities Law DirectiveThe Commission published its Latest consultation document on 5 November. The consultation runs until 1 January 2011, and the Commission is then expecting to come forward with a proposal in April.  The substantive content of the consultative paper relates to three main issues:

a. the legal framework of holding and disposition of securities held in securities accounts, covering aspects belonging to the sphere of substantive law as well as conflict-of-laws;

b. the legal framework governing the exercise of investor’s rights flowing from securities through a “chain” of intermediaries, in particular in cross-border situations;

c. the submission of any activity of safekeeping and administration of securities under an appropriate supervisory regime;

This is an immensely complex topic, but if the law can bring clarity to, particularly, the application of the relevant law, e.g. in insolvency situations, then it will contribute to greater legal certainty. Our initial assessment is that introducing different concepts of holding or securities accounts could affect relationships along the value chain. Once the shape of the EU measure is clearer, we will be undertaking a cross comparison with FISA 2008. 

If you would like to find out more on EU market infrastructure legislation, please contact: Alex Merriman, Head of Market Policy (Alexander.Merriman@six-group.com or +41 44 288 4583)

Changes in the EU Institutional LandscapeThe New EU Supervisory AuthoritiesA major reshaping of the EU Financial Supervisory System is taking place. The European Economic and Financial Affairs Council (Ecofin) confirmed on 17th November an earlier agreement to set up a number of

New Commission Post-trading Advisory GroupsYet more bodies to deal with. The European Commission has revamped its industry advisory bodies. In terms of technical advice, both CESAME II (which advised on the dismantling of the Giovannini Barriers to efficient clearing and settlement in the EU) and the Monitoring Group on the Code of Conduct have been dismantled. The Commission constituted a new group: EGMI, which met in September and November. EGMI operates on the basis of allocating issues to pairs or trios of Group experts. Some recent outputs include papers on CSD issues, collateral, insolvency

and strengthening the safety and efficiency of the CCPs. On tax, the Commission has also reconstituted its FISCO Group and renamed it TBAG. It is in particular assisting the Commission with the implementation of the October 2009 Recommendation on Withholding Tax, as well as investigating further fiscal barriers.

If you would like to find out more about these EU aspects, please contact: Alex Merriman, Head of Market Policy (Alexander.Merriman@six-group.com or +41 44 288 4583)

Following the publication of revised Guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to OTC derivatives in April, the joint working group formed under the aegis of the Committee for Payment and Settlement Systems of the BIS and the Technical Committee of IOSCO is pursuing its work surrounding the safety features of CCPs, including default provisions and the management of credit, liquidity and contagion risk. In September, CPSS issued a further report on strengthening repo clearing and settlement, and followed this up with a financial stability-oriented report on “Market structure developments in the clearing industry: implications for financial stability”.

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pan-European entities (“ESAs”), which will undertake a number of functions in the further regulation (and some supervision) of EU institutions. The new ESAs are:   

Entity

European BankingAuthority (EBA)

European Securities &Markets Authority (ESMA)

European Insurance & Operational Pensions Authority (EIOPA)European Systemic Risk Board (ESRB)

Formerly

CEBS

CESR

CEIOPS

N/A

Coverage

Banking, PrudentialCapital

Investment firms, securities markets, inc. OTC, infrastructure, fund management (inc. hedge funds and private equity), CRAs, Trade repositories

Life & Non-Life Insurance, Re-insurance, Pension Funds

Financial Stability, financial risks, financial system connectivity and contagion

Directives/Regulations

Capital Requirements

MiFID, UCITS (1-4), Market Abuse, Prospectuses, Short Selling, EMIR, RCSD, SLD, AIFMD,

Solvency II, various Insurance and re-insurance, Insurance intermediariesNone

Seat

London

Paris

Frankfurt

Frankfurt (ECB)

A round-up Of CPSS – IOSCO InitiativesCentral banks and regulators have not been idle at the global level