The regulatory perimeter is expanding to encompass previously unregulated sectors as a result of the crisis coming in part from the activities of the so-called “shadow banking sector”.
The Financial Stability Board (FSB) has issued a report outlining the progress it has made regarding the development of measures to improve the monitoring and regulation of shadow banking. The FSB has identified key risk factors which shadow banks should be assessed against including leverage and maturity transformation and intends to conduct annual monitoring exercises from 2012 onward to identify global risks and trends in shadow banking. The FSB has also launched workstreams for five areas of shadow banking where the need for further regulation has been identified. The 'other shadow banking entities' and 'securities lending and repos' workstreams will report their progress and recommendations to the FSB by September 2012 and end-2012 respectively: all other workstreams will report to the FSB by July 2012. The International Organization of Securities Commissions (IOSCO) published its final report on “Principles for the regulation and supervision of commodity derivatives markets” in September 2011. The Principles aim to ensure a globally consistent approach to the oversight of commodity derivatives markets and cover the design of physical commodity derivative contracts, intervention and enforcement powers that should be available to market authorities and improving price discovery and transparency. Additionally, in October 2011 IOSCO finalised its policy recommendations on addressing the impact of technological changes on market integrity and efficiency, which largely focus on high frequency trading and algorithmic trading. IOSCO is currently investigating markets in exchange traded funds (ETFs) and other products including exchange traded notes (ETNs) and exchange traded vehicles (ETVs). The investigation is largely focussed on transparency issues and potential risks to financial stability, with a consultation report expected in Q1 2012. Additionally the Basel Committee on Banking Supervision (BCBS) is currently consulting on “Principles for the Supervision of Financial Conglomerates” which includes supervisory powers and responsibilities, corporate governance and risk management and capital adequacy and liquidity.
In Europe, the Alternative Investment Fund Managers (AIFM) Directive was adopted in December 2010 and will impose registration, reporting and initial capital requirements on fund management firms including most hedge fund managers. The European Securities and Markets Authority (ESMA) submitted technical advice on delegated acts to the European Commission (EC) in November 2011 and is expected to publish a consultation on draft regulatory technical standards in Q1 2012. The EC have also issued a proposal for a European Market Infrastructure Regulation (EMIR), which will introduce mandatory clearing of certain standardised derivatives contracts as well as imposing authorisation and regulatory requirements on central counterparty clearing houses (CCPs) and trade repositories. The proposal is expected to be adopted in Q1 2012. In October 2011, an agreement was reached on Short Selling regulation (SSR), which will restrict uncovered sales of Sovereign Credit Default Swaps (CDS), introduce disclosure requirements for large short positions and give ESMA powers to temporarily ban short sales. ESMA is currently consulting on technical standards for SSR which is expected to come into effect in November 2012. Additionally, the EC is currently consulting on an integrated European market for card, internet and mobile payments. The green paper identifies gaps between current market practices and a fully integrated payment system. The EC is expected to announce its next steps by mid 2012 and any legislative proposals, if applicable, would be published by Q1 2013. The paper builds on the foundations laid by the Single European Payment Area (SEPA) regulation which is expected to enter into force in Q1 2012.
In the UK, the Financial Services Authority (FSA) has issued a discussion paper on the implementation of the AIFM Directive. A consultation paper outlining the FSA’s proposed policy position and new rules regarding the AIFM Directive is expected in late 2012.