REGULATION IN CAPITAL MARKETS

1
REGULATION IN CAPITAL MARKETS

• Nicholas Child
• October 2007

2
REGULATION IN CAPITAL MARKETS

• The extent of regulation in Europes capital
  markets
• The here-and-now eg MiFID, Prospectus Directive,
  Transparency Directive, Market Abuse Directive.
• Citis approach to regulatory and legal
  compliance in this sector

3
Concussion

• Gordon McQueen Don Revie

4
Compare and contrast

• The 10 Commandments contain 297 words. The Bill
  of Rights is stated in 463 words. Lincoln's
  Gettysburg Address contains 266 words.
• MiFID 31,491 words
• MAD 7,426 words
• Prospectus Directive - 15,991 words
• Transparency Directive 15,198 words

5
Some random quotes

• Too often in the past, Brussels has given
  the impression of regulating first and asking
  about the impact later John Hutton Secretary
  of State for Business, Enterprise and Regulatory
  Reform
• But our system of regulation must keep up with
  this. If it fails to keep up, it will hold back
  economic expansion. We need financial market
  regulation that works at national and European
  level. John Bruton - EU ambassador to the US
• Before the beginning of great brilliance and
  beauty there must be complete chaos I-Ching
  Chinese book of changes

6
MiFID - Strategies for Implementation

• Project governance for wholesale firms may
  differ, but in general probably includes
• Governance structures
• Executive Committee
• Steering Committee
• Working Groups
• Project Managers
• Global Manager
• Business/Product Managers
• Technology Manager
• Legal/Compliance Managers

7
MiFID - Strategies for Implementation (continued)

• Workstreams
• Topical (best execution, suitability, etc.)
• Product
• Geographic
• Players
• Legal/compliance
• Technology
• Operations (including account handling and
  confirmations)
• Business unit managers
• Product managers
• Transactional/advisory/research personnel

8
MiFID - Strategies for Implementation (continued)

• Strategies may differ
• Assume the worst and build for it
• Assume the best and build for it
• Try to follow a rational approach to minimise
  sunk costs but to be in substantial compliance
• Build further post 11/1 as needed
• Home regulator comfortable with strategy?

9
MiFID

• How will Equities market fragment?
• What will be effect of changed trade Reporting
  methods?
• How will Exchanges react?
• How will we demonstrate Best Execution?
• Will our Transaction Reporting solutions work?
• Still scope for implementation issues in some
  countries

10
Prospectus Directive

• Has the Directive achieved a pan-european
  capital market?
• Passporting in practice
• Additional notifications or filings
• CESR FAQ on Prospectus Directive
• Market has adapted to Directive but practice
  differs in many countries causing problems
  and increased costs.
• ESME report 5 September 2007

11
Transparency Directive

• Periodic Financial Reporting
• Shareholder disclosure
• Helpful clarity in UK regarding collateral
  holdings, stock lending and market making
• Definitions conflict between PD and TD
• Differences of interpretation and implementation
  across EU.

12
Market Abuse Directive

• Lack of harmonisation
• More requests for data
• No feedback, no understanding
• Complication of dual reporting SOCA/FSA
• ESME report 6 July 2007

13
Citi Approach to regulation

• Initial awareness of new legislation
• Organise a few committees
• Socratic debate
• Alert business users
• Deal with aftermath
• Attempt to make the structure work
• Lobby regulator for changes
• .initial awareness of new legislation

14
Sales and Trading Compliance

• 23 staff, 20 in London 3 in Belfast.
• London staff based on trading floor. One member
  of team covers Operations and
  Technology Issues
• Advisory Function
• New laws and regulation transaction specific
  assistance policy and procedural advice
  regulatory interface systems and controls RCSA
• Policy Function
• Regulation and FSA Conduct of Business Rules
• Surveillance, Monitoring and Reporting Function
• Independent team, specific reports, primary focus
  position monitoring and regulatory disclosures.
  Also cover Regulatory Enquiries.
• Training Function
• business specific training on annual basis
  provide directed training at business programs
  mixture of web based and face to face.

15
How we manage Compliance

• RRI Regulatory Risk Inventory
• RRM Regulatory Risk Matrix
• RCSA Regulatory Control Self Assessment
• CTA Control Testing and Advisory
• ARR Audit Risk and Review

16
Staying up to date

• European Securities Markets Expert Group (ESME)
• LIBA/BBA group meets Pre-ESME meetings to to
  discuss matters of UK interest.
• Legal and Government Relations Committee
• Involvement with LIBA/BBA working groups
• Working closely with FSA, Takeover Panel
  building a relationship
• Working closely with exchanges regular contact.
• Using external sources - Outside Counsel,
  Complinet etc
• Peer groups regular meetings of Compliance
  Officers for FI and Equities,
• Obviously reading the FT everyday!

17
The Future?

• Absolute plethora of new regulation in Financial
  services sector over last 15 years.
• Time needed to adjust and hone those regulations
  new EU approach?
• Whilst there are new regulations coming in , e.g.
  SEPA, nothing on same scale as MiFID
• Maybe recent market events mean a focus away from
  Conduct of Business regulation and more focus on
  liquidity and capital regulation?