RIVISTA TRIMESTRALE DIRITTO DELL ECONOMIA DIREZIONE SCIENTIFICA G. ALPA - M. ANDENAS - A. ANTONUCCI F. CAPRIGLIONE - R. MASERA - G.

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1 20 - n. ISSN: RIVISTA TRIMESTRALE DI DIRITTO DELL ECONOMIA RASSEGNA DI DOTTRINA E GIURISPRUDENZA DIREZIONE SCIENTIFICA G. ALPA - M. ANDENAS - A. ANTONUCCI F. CAPRIGLIONE - R. MASERA - G. MONTEDORO

2 RIVISTA TRIMESTRALE DI DIRITTO DELL ECONOMIA La Sede della Rivista è presso la Fondazione G. Capriglione Onlus, Università Luiss G. Carli, Viale Romania 32, Roma. Direzione Scientifica G. Alpa - M. Andenas - A. Antonucci F. Capriglione - R. Masera - G. Montedoro Direttore Responsabile F. Capriglione Comitato di Redazione A. Tucci - V. Lemma - E. Venturi Consulenza ICT ed Organizzativa N. Casalino I contributi pubblicati in questa Rivista potranno essere riprodotti dalla Fondazione G. Capriglione Onlus su altre, proprie pubblicazioni, in qualunque forma. Autorizzazione n. 136/2009, rilasciata dal Tribunale di Roma in data 10 aprile 2009.

3 S O M M A R I O PARTE PRIMA ARTICOLI RAINER MASERA, Towards a new regulatory and supervisory framework of the financial sector in Europe: role and contents of the AIFMD, with specific reference to Non-Listed Real Estate GIUSEPPE NICCOLINI, Sociale e parasociale nell iniziativa collettiva DOMENICO SICLARI, Norme d emergenza sui mercati finanziari e stato d eccezione conservativo VARIETÀ PASQUALE DE LISE, Note a margine del libro Mercati e Istituzioni in Italia di Enzo Cardi PARTE SECONDA NOTE ED OSSERVAZIONI A SENTENZA SIMONE MEZZACAPO, Raccolta del risparmio tra il pubblico Deposito Irregolare Servizi di pagamento Mandato di pagamento peer-to-peer lending (Tribunale Amministrativo Regionale per il Lazio, 12 dicembre 2009) ANDREA MIGLIONICO, Intermediazione finanziaria Obbligazioni Lehman Brothers - Valutazione di rating Rilevanza Inesistenza di valutazioni negative relative al titolo Inadeguatezza dell operazione Esclusione contratti di investimento immobiliare e la problematica dell offerta al pubblico (Tribunale di Venezia, 5 novembre 2009)... 82

4 TOWARDS A NEW REGULATORY AND SUPERVISORY FRAMEWORK OF THE FINANCIAL SECTOR IN EUROPE: ROLE AND CONTENTS OF THE AIFMD, with specific reference to Non-Listed Real Estate Funds* ABSTRACT: La crisi, finanziaria prima e reale poi, del ha posto in evidenza non solo gravi errori di politica economica, ma soprattutto la fragilità e l instabilità del sistema finanziario globale. L ottimistico presupposto che i mercati e gli operatori, in virtù della propria efficienza e razionalità, fossero sempre in grado di autoregolarsi ed auto-correggersi ha rappresento uno dei principali fallimenti sottostanti la crisi e ha indotto l esigenza di ripensare le regole del sistema. Il rischio, tuttavia, è che si cada nella pericolosa tentazione di produrre più regole, frammentando il quadro di riferimento e limitando la capacità innovativa, senza peraltro garantire una maggiore stabilità. Non occorrono più regole, ma migliori regole che siano convergenti e coerenti a livello internazionale e che si accompagnino ad una più efficace supervisione macro e micro prudenziale. La Proposta AIFMD della Commissione dell Unione Europea, che sarà discussa in Parlamento nei prossimi mesi, va in questa direzione. La finalità generale è quella di fornire un quadro di regole armonizzate per i gestori e le entità responsabili della gestione e dell amministrazione di fondi di investimento alternativi: si integrano sia le preesistenti Direttive MiFID e UCITS, garantendo la più ampia copertura degli operatori che possono originare un rischio sistemico, sia le proposte di revisione del sistema di vigilanza originariamente elaborate dal Gruppo de Larosière. SUMMARY: 1. Introduction and Summary Toward a new Framework of Financial Surveillance in Europe Lessons of 2007/09 crisis SIFIs and Systemic Risk Reform of the Risk Capital Standard (RCS) and SIFI s The crisis PMR process The Proposed Directive on Alternative Investment Fund Managers (Draft Directive on AIFM): context of the Proposal and complementary EU legislation DD on AIFM: area of application and grounds for DD on AIFM: sources of risk DD on AIFM: Subsidiarity, Proportionality and Instrument Brief overview of selective requirements of the DD European Real Estate Investment Alternatives The Expert Group on OEREF: some indications that should be preserved in the AIFMD Concluding remarks. (*) Testo predisposto per la Conferenza Internazionale INREV 2010, Venezia, Aprile. Desidero ringraziare, senza coinvolgere, Francesco Capriglione, Giancarlo Mazzoni, Antonella Pisano e Laura Segni, per utili commenti ed osservazioni.

5 109 Towards a New Regulatory and Supervisory Framework 1. The financial crisis, which began to unfold in the summer of 2007 in the United States, and led to the worst economic downturn after the Great Depression, brought to the fore great weakness in the system of financial surveillance worldwide. Macroeconomic imbalances were major underlying factors of the crisis, together with the uncritical celebration of the invisible hand, and of markets efficiency, rationality and self-corrective properties. The need was, therefore, recognized to bring together better understanding and adjustment of macroeconomic and financial issues. In particular, financial surveillance should be better designed and implemented around sustainable macroeconomic developments. It also became evident to all that the financial system is now intrinsically global. Fragmented, or even inconsistent, rules set at national level pose systemic dangers, because of the growing interconnectedness of financial markets, at world level and, even more so, within the EU. The coexistence of regulated and unregulated sectors created serious distortions, prompted regulatory arbitrage through financial innovations, and ignited the rapid growth of a parallel banking system. This, again, created systemic risk. The explosion of complex and opaque securitized markets, based on innovative OtC derivatives, notably credit default swaps, was the source of major shortcomings in the operation of the financial system. It also became clear what many had clearly explained in previous years, without being listened to: fundamental weaknesses were present in the design of the regulatory framework: the capital and accounting standard which interacted in imparting an excessive procyclicality; the inadequate assessment of liquidity risks and of dangerous levels of leverage; the lack of control on the operation of credit rating agencies; the wrong incentives in compensation schemes; the lack of checks and balances between risk takers and risk controllers. More generally, it became evident that the regulatory and supervisory nets should extend, in a proportional manner, to all intermediaries,

6 Rainer Masera 110 markets, operators, instruments and derivatives, which may have a systemic impact, even if they have no immediate links with the retail investors. The surveillance net should, therefore, cover both systemic institutions and systemic situations; there is the need of better, simpler and proportional surveillance, not more rules. Oversight of the parallel banking system is justified, beyond the distinction between retail and professional investors. In other words, consumer protection cannot any longer be immediately related to the caveat emptor principle. The parallel financial system, even without a deposit base, is very vulnerable to liquidity shocks. As the crisis showed, this can result in major adverse impacts on the real economy. As is argued in the first part ( 1-6) of this paper, the necessary and urgent redesign of the financial architecture in Europe can be summarized along four concurrent lines: (i) effective macrosupervision, through the creation of a European Systemic Board to assess and suggest corrective action in respect of systemic risks; (ii) improved microsupervision, based on the interplay of three European Authorities (Banking, Insurance, Securities and Markets) with national supervisors; (iii) regulatory repair, in particular to correct the failures of: the capital standard, the accounting standard, credit rating agencies, derivatives, corporate governance; (iv) the creation of a legislative framework with harmonized, proportional requirements on the overall financial system, to close the gaps in existing regulation. The second part ( 7-13) of the paper offers a specific analysis of the Draft Directive on Alternative Investment Fund Managers. The Draft Directive represents an important element of the creation of the overall harmonized, proportional legislative framework, indicated under (iv) above, with a view to extending appropriate regulation, supervision and

7 111 Towards a New Regulatory and Supervisory Framework oversight to all actors, activities and instruments that embed significant risks endangering the stability of the European financial system. The principle lines of action in this sector are represented by: the MiFID, providing harmonized regulation for investment services, based on the principles of the EU passport and maximum harmonization; the UCITS Directive aimed at improving the efficiency and the stability of the EU retail investment fund market, and the AIFMD itself, which: - introduces harmonized requirements for entities and operators engaged in the management, operation and administration of alternative investment funds; - allows alternative investment fund managers (AIFM) to provide services and market EU funds throughout the EU single market, subject to compliance with strict requirements. The AIFMD Directive sets requirements for all funds not regulated under the UCITS Directive. The sector includes hedge, private equity, commodity, infrastructure and real estate funds. The DD is considered according to the principles of subsidiarity and proportionality. Its main requirements are examined. To recall, the principal features are: (i) authorisations: to operate in the EU, fund managers would be required under the directive to obtain authorisation from the competent authority of their home member state. Once authorised, an AIFM would be entitled to market funds established in the EU to professional investors in any member state; (ii) risk management and prudential oversight: AIFM would be required to satisfy the competent authority of the robustness of their internal arrangements with respect to risk management, including liquidity risks. To support macro-prudential oversight, they would be required to disclose on a regular basis the principal markets and instruments in which they trade, their principal exposures and concentrations of risk;

8 Rainer Masera 112 (iii) treatment of investors: in order to encourage diligence amongst their investors, AIFM would be required to provide a clear description of their investment policy, including descriptions of the types of assets and the use of leverage; (iv) leveraged funds: the draft directive introduces specific requirements with regard to leverage, i.e. the use of debt to finance investment. Competent authorities would be empowered to set limits to leverage in order to ensure the stability of the financial system. AIFM employing leverage on a systematic basis would be required to disclose aggregate leverage and the main sources of leverage, and competent authorities would be required to share relevant information with other competent authorities; (v) AIFM acquiring controlling stakes in companies: the draft directive introduces specific requirements for AIFM acquiring controlling stakes in companies, in particular the disclosure of information to other shareholders and to representatives of employees of the portfolio company. It however avoids extending such requirements to acquisitions of SMEs, so as to avoid hampering start-up or venture capital; (vi) funds located in third countries: EU-based AIFM would be able to market funds located in third countries, provided that they comply with certain but not all provisions of the directive and the member state allows it. Non-EU AIFM would also be able to market funds established in third countries in an EU member state, provided that there is sufficient information for investors and competent authorities and there are appropriate cooperation arrangements between the competent authorities in the EU and those of the third country manager for the purpose of systemic risk oversight; (vii) optional exemptions for smaller funds: the draft directive gives member states the option not to apply the directive to

9 113 Towards a New Regulatory and Supervisory Framework smaller AIFM, namely funds with managed assets below EUR 100 million if they use leverage, and with assets below EUR 500 million if they do not. Smaller funds would however be subject to minimum registration and reporting requirements. In the second part of this paper, specific focus is set on Real Estate Investment Alternatives. The case is made for not losing sight, in the proposed Directive, of the specific recommendations made by the expert group on open-ended real estate funds, which in 2007 offered some useful indications on the regulation of this important sector. Finally, some concluding remarks are offered together with an assessment of the likely scenario and timetable of the EU decision making process. The danger of further delays is highlighted. 2. A new regulatory agenda to improve risk management, to reduce procyclicality, to strengthen transparency, and to get the incentives and corporate governance right. Strong and coordinated supervision based on the two macroprudential and microprudential pillars. An effective crisis management system to deal with systemic risk, based on the recognition that both institutions and situations, can produce adverse systemic impacts. The design of the new financial architecture in Europe to be consistent with global developments, and indeed lead international trends. To this end, Europe should intensify and coordinate its financial surveillance dialogue with key partner 1. The de Larosière Report 2 indicated that major underlying factors behind the crisis were represented by macroeconomic issues: excessive 1 See MASERA R., The interplay of macroeconomic and exchange rate policies, International Telematic Conference The prospects of the architecture of the International Monetary System and the role of Latin America: Dollar, Euro, Yen and other reserve currencies, G. Marconi University, Rome, DE LAROSIÈRE J., Report of the High Level Group on Financial Supervision in the EU,

10 Rainer Masera 114 credit creation, fiscal expansion and low interest rates, notably in the U.S., were accompanied by the accumulation of huge global imbalances. Domestic credit expansion in the U.S. was largely financed by massive capital inflows from major emerging countries, China in particular. By pegging its currency to the Dollar, China imported lax US monetary policies. American current account deficits of over 5% of GDP (or Dollar 700 billion a year) for a number of years, were reflected by similar surpluses in China (and other emerging economies). The Global Financial System (GFS) characterized by rapid financial innovation, which allowed to overcome regulatory prudential constraints permitted, because of the reserve role of the Dollar, to recycle emerging countries surpluses into U.S. government securities, through central bank interventions and sovereign wealth funds investments. In this environment of plentiful liquidity, complex financial instruments, engineered through the use of opaque OtC derivatives, led to an increase in leverage and more risky financial products in the GFS (See Figure 1). Figure 1 - GFS: main components. Instruments Operators Banks and other Intermediaries Micro prudential Supervision Macroprudential Supervision Derivatives Markets GFS Regulation Central Banks International Financial Institutions Payments, Clearing Settlement and Custodian systems Sovereign Wealth Funds European Commission, Brussels, 2009.

11 115 Towards a New Regulatory and Supervisory Framework Lack of transparency and inappropriate macro and micro supervision allowed the build up of a shadow banking system, which made it possible to spread risky financial products in international and domestic financial systems. This difficulties were heightened by the development of the Originate to Distribute (OtD) model in global financial institutions. The parallel global banking system encompassed hedge funds, funds of hedge funds, commodities funds, money markets funds and other funds, investment banks, off balance sheets items, special purpose vehicles, and mortgage brokers. With the benefit of the hindsight, it became therefore evident that the regulatory and supervisory nets should extend in a proportional manner to all intermediaries, markets, operators, instruments and derivatives, which may have a systemic impact, even if they have no direct links with the public at large. The surveillance net should, therefore, cover both systemic institutions and systemic situations. The need for surveillance in the parallel financial system is, therefore, justified beyond the distinction between retail and professional investors. In other words, consumer protection cannot any longer be immediately related to the caveat emptor principle. This is especially important since the parallel financial system, having no deposit base, is very vulnerable to liquidity shocks. As the crisis showed, this can result in major negative impacts in the real economy. The de Larosière Report indicated, therefore, four principle lines of actions: (i) regulatory repair, notably with respect to the shortcomings and failures of the faulty triad (the capital standard, the accounting standard and the operation of credit rating agencies); (ii) a comprehensive regulatory and an oversight system (based on the principles of proportionality and subsidiarity), which would extend to all actors, intermediaries, markets and activities that embed potential systemic risk;

12 Rainer Masera 116 (iii) the creation of a European-level financial microsupervisory framework, based on three Authorities, to oversee banks, insurances and securities and markets, respectively. These Authorities would replace the Lamfalussy Agencies 3 and would have formal decision making capabilities and binding powers. They would, therefore, represent the world first super national financial microsupervisors; Figure 2 - Traditional Ladder Lamfalussy Approach to Financial Surveillance in Europe. Economic Policy ECOFIN European Parliament European Commission Regulation Supervision European Commission European Parliament ECOFIN Level 2 and 3 Commitees National Authorities Level 3 Committees Lamfalussy Approach (iv) the creation of a European Systemic Board, largely coordinated by the European Central Bank, which would be responsible for the identification and monitoring of macrosupervisory risk and would have the duty of issuing specific recommendations for corrective actions also to policy makers (See Figures 2, 3 and 4). The legislation currently under consideration by the European Parliament and the European Council deals specifically with points (iii) 3 LAMFALUSSY A., Final report of the Committee of Wise Men on the regulation of European Securities Markets, Brussels, 2001.

13 117 Towards a New Regulatory and Supervisory Framework and (iv). The de Larosière Report was criticized by some as not sufficiently ambitious, but the current discussion appears to emasculate those proposals, to the extent of endangering the attempt to create a more integrated European financial supervisory framework. It is in this broad framework that the proposed Directive on Alternative Investment Fund Managers 4 should be set. The Directive complements the MiFID 5 and UCITS 6 Directives 7 and deals with point (ii) made above. It must, therefore, be seen in terms of the proposed legislative framework to introduce harmonized requirements on the overall financial system and to close the gaps in existing regulation. Figure 3 - New Diamond (de Larosière) Approach to Financial Surveillance in Europe. Economic Policy Regulation Macroprudential Supervision Microprudential Supervision As to point (i), a very significant amount of work is being undertaken by the competent Authorities at world and European-level, nota- 4 EUROPEAN COMMISSION, Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Found Managers, Brussels, EUROPEAN PARLIAMENT AND EUROPEAN COUNCIL, Directive 2004/39/EC on markets in financial instruments (MiFID), Brussels, EUROPEAN PARLIAMENT AND EUROPEAN COUNCIL, Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (Recast of the Directive 85/611/EEC), Brussels, A brief analysis of these directives is offered below in paragraph 3.1.

14 Rainer Masera 118 bly by the Basel Committee and by the IAS Board, to correct the deficiencies of the existing system 8. Figure 4 - A new European framework for safeguarding financial stability. Macro prudential supervision MIcro prudential supervision European Systemic Risk Board (ESRB) Chaired by President of ECB Members of ECB/ESCB General Council (with alternates where necessary) Information on micro prudential developments Chair of EBA, EIA + & ESMA + European Commission European System of Financial Supervision (ESFS) European Banking Authority (EBA) National Banking Supervisors European Insurance Authority (EIA) National Insurance Supervisors Early risk warning European Securities and Markets Authority (ESMA) National Banking Supervisors Main tasks of the European Systemic Risk Board: decide on macro prudential policy, provide early risk warning to EU supervisors, compare observations on macro economic and prudential developments and give direction on these issues. Main tasks of the Authorities: in addition to the competences of the existing level 3 committees, the Authorities would have the following key competences: (i) legally binding mediation between national supervisors, (ii) adoption of binding supervisory standards, (iii) adoption of binding technical decisions applicable to individual institutions, (iv) oversight and coordination of colleges of supervisors, (v) licensing and supervision of specific EU wide institutions (e.g. Credit Rating Agencies and post trading infrastructures), (vi) binding cooperation with the ESCR to ensure adequate macro prudential supervision, and (vii) strong coordinating role in crisis situations. Main tasks of national supervisors: continue to be fully responsible for day to day supervision of firms. 3. The principal lessons of the financial crises can be summarized as follows: (i) the market price is not always right (market failures); (ii) markets are not self regulating; (iii) market efficiency and investors rationality cannot be taken for granted; (iv) apparent advances in risk management were flawed; (v) corporate governance models were inadequate; (vi) GFS requires good regulation and effective supervision (Basel II, accounting standards and credit rating agencies - the 8 MAINO R., MASERA R. AND MAZZONI G., Reform of the Risk Capital Standard (RCS) and Systemically Important Financial Institutions (SIFIs), forthcoming, 2010.

15 119 Towards a New Regulatory and Supervisory Framework faulty triad - were affected by major weaknesses, notably their pro-cyclicality); (vii) liquidity and funding risks were inadequately treated by the Basel standard; (viii) prudential and capital requirements on individual institutions represent a necessary but not sufficient condition for financial stability. (ix) micro and macro prudential regulation and supervision must be coordinated to avoid fallacy of composition. The design of an improved system of financial surveillance cannot, however, be made in isolation. It is necessary to look into the global deep roots of the crisis and the complex interaction of market failures, inadequate corporate governance, global financial and monetary imbalances, poor macro and micro prudential oversight and inappropriate regulation. The fundamental underlying factors, which made the crisis possible, can be identified as: (i) excessive liquidity creation and the related too low interest rates, which prevailed, notably in the US, since the midnineties; (ii) the philosophy of efficient and self-corrective markets and intermediaries in the Global Financial System (GFS), with the consequent acritical support for financial innovation and deregulation; (iii) the perverse interaction of opaque, complex securitised instruments, Originate-to-Distribute (OtD) models in banking, and OTC derivatives; (iv) the difficulties in dealing with the crisis process of very large and complex financial institutions. 4. In the past 20 years, large complex cross-border financial intermediaries emerged by greatly and rapidly expanding their activities globally in corporate finance and investment banking activities for firms

16 Rainer Masera 120 and for their own account (notably, prop trading) and in private wealth management and insurance for households, at the expense of less lucrative traditional credit activity. Multi-activity financial groups (apparently) prospered. These institutions became so important and concentrated that, when the crisis came, they could not be allowed to fail, because of the negative externalities on the domestic and the world economy of their bankruptcy. With the benefit of hindsight, it is now clear that supervisory authorities, policy makers and political authorities must look, beyond idiosyncratic risk, also at the systemic risk to the broader financial system that certain very large financial firms (Systemically Important Financial Institutions SIFIs) pose, as witnessed by recent statements of President Obama. 5. The process of Basel II revision is based on the following lines: (i) strengthening the risk capture of the Basel II framework (in particular for trading book and off-balance sheet exposures); (ii) enhancing the quality of Tier 1 capital; (iii) building additional shock absorbers into the capital framework, that can be drawn upon during periods of stress and dampen pro-cyclicality; (iv) evaluating the need to supplement risk-based measures with simple gross measures of exposure in both prudential and risk management frameworks to help contain leverage in the banking system; (v) strengthening supervisory frameworks to assess funding liquidity for cross-border banks; (vi) strengthen risk management and governance practices; (vii) strengthening counterparty credit risk capital, risk management and disclosure;

17 121 Towards a New Regulatory and Supervisory Framework (viii) promoting globally coordinated supervisory follow-up exercises to ensure implementation of supervisory and industry sound principles. The Basel capital standard and internal risk models of the large banks were developed around the concept of idiosyncratic risk (capital cushions against unexpected loss, with a given degree of statistical confidence). A crucial question is whether the standard should cover also SIFI s. In other words, could and should the new system be redesigned to cover simultaneously for idiosyncratic and systemic risk, for instance by introducing appropriate capital surcharges for the latter type of risk? As indicated, one of the unresolved issues of the financial turmoil is posed by the critical size and the systemic implications of a financial institution entering a crisis situation, beyond which the institution is deemed to be too systemic to fail. This creates moral hazard because it (i) encourages higher riskprofile businesses and behaviour; (ii) distorts market and operators incentives to monitor the actions of such firms. More broadly, a properly functioning market cannot rule out the possibility of firms becoming insolvent and exiting the market. Instead, on the basis of experience in , SIFI s may expect that, in the resolution phase of a crisis, the home government prevents their failure by providing public money, to avoid the external diseconomies of a bankruptcy. This implies a major microprudential accountability issue: the supervisor would be ultimately required to activate taxpayers money, and cannot therefore be independent from the respective Treasury. A dilemma opens up: central banks may well have a Ricardian information advantage as microsupervisors of SIFI s, but this creates a conflict in terms of independence from Treasuries. A fundamental issue currently under debate is whether the desirable alignment of incentive structures and prevention of excessive risk taking should be sought by means of (i) an adaptation of the RCS,

18 Rainer Masera 122 through capital surcharges, or (ii) systemic insurance premiums to be paid as fees to a centralized Fund. An even more drastic approach consists in reinstating a Glass- Steagall distinction, as suggested by Volcker and Obama 9, and by limiting public guarantees to narrow banking institutions. 6. The neat separation of the various phases (prevention/management/resolution - PMR) of a banking crisis is more an academic exercise than a stylized fact. As the current crisis confirmed, the escalation from one phase to the other can be very rapid, in particular liquidity problems can transform themselves into a solvency issue. There is a logical and operational continuum between crisis prevention and the resolution phase for the negative outcomes. An appropriate framework must be built to deal with negative externalities of SIFI s, without offering an implicit guarantee that they would be saved in cases of crisis. As indicated, the ultimate responsibility for managing the resolution of banking crisis generally requires fiscal action. When taxpayers money is at stake, Government/Parliament responsibility is called for. At what stage of the crisis management process the Government (s) must be brought into the picture is an open question. In any event, microprudential supervisory authority needs to be aligned with fiscal responsibility. The home/host division of responsibilities has an obvious bearing on these issues. With no EU budget available and in sight, this represents a significant factor limiting the extent to which European national supervisors can devolve responsibility for the supervision of firms to a centralized body. In this respect, we are confronted with a major difference vis-àvis the US, whose implications must be brought to the fore 9 See

19 123 Towards a New Regulatory and Supervisory Framework The need for alignment of supervisory and fiscal responsibilities is one of the principal reasons why the de Larosière Report considered it inappropriate to entrust microprudential responsibilities to the ECB for large cross-border banks, in spite of some obvious pros. 7. The DD (DD1 published, nearly one year ago, on 30 April 2009) has arisen in the context of the financial crisis, which highlighted: i) the rapid transmission of risks from one sector to the entire financial system and ii) the interplay of systematically relevant situations (SRS) and systemically important financial institutions (SIFI) in creating conditions of vulnerabilities in the global financial system (GFS). As was indicated in section 2, the DD forms part of a broad European Commission (EC) programme to extend appropriate regulation, supervision and oversight to all actors, activities and instruments that embed significant risks endangering the stability of the GFS. Beyond reforms of the Capital and Accounting Standards for Financial Institutions, two other pillars of the EC programme are: (i) the MiFID, implemented on November 1 st 2007, provides harmonized regulation for investment services across the 30 Member States of the European Economic Area (the 27 EU Member States plus Iceland, Norway and Liechtenstein). MiFID is the main EU law introduced under the Lamfalussy procedure; it is based on the principles of the EU passport and maximum harmonization. It represents, therefore, an evolution of the traditional EU approaches of minimum harmonization and mutual recognition. Its specifically precludes gold-plating by Member States, with the view to fostering a common European level playing field. Mi- FID covers nearly all tradable financial products. Firms covered by MiFID are authorized and regulated in the home country, but can use the MiFID passport to provide services in all EU Member States;

20 Rainer Masera 124 (ii) the UCITS Directive aims at improving the efficiency and the stability of the EU retail investment fund market (totalling some Euro 5 trillion). The Commission adopted the Directive taking into account specific advice from the Committee of European Securities Regulators (CESR). It is based on legally binding guidance on both i) which new financial instruments can be included in investment funds, and ii) on how host countries can exercise limited scrutiny powers when UCITS are notified for sale in their country. These two elements imply a clear definition of the EU passport for retail investment funds. Key elements of this Directive, which is due to be implemented by Member States by July 2011, are as follows: - Management company full European passport: UCITS funds authorised in one Member State may be managed on a crossborder basis. This will be achieved through a system of mutual recognition and authorisation; - Fund mergers: two funds can merge into a single entity, irrespective of the location of the fund within the EU. This implies the definition of Master feeder structures to pool assets into a single master fund; - KID: a key information document replaces the simplified prospectus; - Supervisory cooperation: the Directive enhances the mechanism for supervisory cooperation with focus on the home country; - Risk management: following recommendations by the CESR Investment Management Expert Group, chaired by Lamberto Cardia, risk management principles have been defined to achieve proportionality, according to relevance, dimension, nature and complexity of risks.