Corporate & Securities Law

By Jim Hamilton

The new Commissioner for the Internal Market, Michel Barnier, wants to act quickly on the comprehensive overhaul of EU financial regulation and harmonize it internationally. In remarks to the EcoFin Council, he said that one immediate priority is to equip the EU with an effective system for regulating hedge funds and other alternative investment funds.

The Commission has proposed the Directive on Alternative Investment Managers, which is now before the European Parliament. Commissioner Barnier urged swift approval of the Directive, noting the G-20?s commitment to the regulation of hedge funds and other alternative investment vehicles.

The proposed Directive on Alternative Investment Fund Managers, centered on enhanced disclosure and effective risk management, is designed to create a comprehensive and effective regulatory framework for hedge and private equity fund managers at the European level. The proposed Directive would impose regulatory standards for all alternative investment funds within its scope and enhance the transparency of the activities of the funds towards investors and public authorities.

The Commissioner also urged quick action on the regulation and standardization of derivatives and the development of central clearing parties for derivatives products. This type of regulation is essential for financial stability, he said. At his confirmation hearings before the European Parliament, Mr. Barnier said that he would propose a coherent legislative framework to the Commission for the regulation of OTC derivatives, as well as for post-trade activities and infrastructure, including a legislative proposal on indirectly held securities.

He wants to revise the Markets in Financial Instruments Directive (MiFID), with the aim of strengthening transparency on financial markets, in particular for alternative platforms. Commissioner Barnier also wants to improve risk management and internal controls at financial institutions

Another strong priority in the coming months will be to execute the G-20?s vision of ensuring the convergence of accounting standards at an international level. To this end, regulators must find the right balance between a faithful representation of a company?s financial situation and wider financial stability. The Commissioner also said that rules on dynamic provisioning must be adopted. Dynamic provisioning permits more mechanical increases to loan loss reserves based on loan growth rather than measures of projected loss.

More broadly and importantly, the EU?s reform effort must be harmonized with the reform legislation of the US and other jurisdictions in order to prevent regulatory arbitrage. In his view, it is imperative to establish common rules at an international level that guaranty the solidity of the financial sector and do not worsen pro-cyclicality. No jurisdiction can go it alone, he emphasized, rather there must be a shared commitment to regulatory reform. Pro-cyclicality is the term given to the exacerbation of fluctuations on volatile markets by, among other factors, bank capital requirements, accounting standards, and remuneration schemes.

With the G-20 emphasizing the need for a global regulatory response to the financial crisis, Mr. Barnier is aware of the challenges of globalization and the need to craft a harmonized cross-border response. In earlier remarks, he has noted that not long ago financial exchanges were nation-centric and, in all countries, capital exchanges were forbidden or restricted and the approval of the Ministry of Finance was needed before any capital could leave or enter a country. Noting that change now happens very quickly and abruptly, he recognizes the need for new paradigms and thus a need for a new governance.

Commissioner Barnier will implement stronger rules on corporate governance, especially measures to move executive compensation to long-term value creation and less risk taking. He also supports targeted measures to strengthen the responsibility and the independence of management boards. The new Commissioner intends to issue a report on corporate governance, containing proposals for remedying the weaknesses revealed by the crisis, particularly involving the eradication of abusive executive remuneration practices and policies. Also, a report on the application of the Transparency Directive will be published shortly, possibly followed by proposed amendments.

The Commissioner also intends to submit a proposal creating a legal framework for crisis management and resolution, including a resolution fund, that would reinforce and harmonize the regulation of financial groups in terms of equity and liquidity and the financial stability of each Member State and of the Union as a whole. Recently, in an effort to end too big to fail, the US House passed legislation creating a resolution authority and a resolution fund paid for by assessments on systemically risky financial firms.

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Full post as published by Jim Hamilton's World of Securities Regulation on February 18, 2010 (boomark / email).