ANNUAL · 2007 will be the year of the Review of the Lamfalussy process. Fundamental questions ... 6.4.1 CESR-Tech 6.4.2 Clearing and Settlement 6.4.3 ECONET 6.4.4 Investment Management

ANNUAL REPORT OF

THE COMMITTEE OF EUROPEAN SECURITIESREGULATORS (CESR)

TO

THE EUROPEAN COMMISSION

AND TO

THE EUROPEAN PARLIAMENT

THE ECOFIN COUNCIL

2006

2

CESR’s Members

3Foreword by the Chairman

Along with my colleague, Carlos Tavares,Vice-Chair of CESR, I am pleased to reportlast year’s activities of the Committee.

In 2006 CESR celebrated its 5th anniversary.Since its foundation, as the Forum of Euro-pean Securities Regulators (FESCO), thenumber of its Members has increased from15 (plus Iceland and Norway) to 27. The se-cretariat now consists of a highly motivated,multinational staff of 20.

Since its creation, CESR has kept up thepace. It is widely recognised as the centralcontact point on securities markets regula-tory issues. Through its consultations andpublic statements, it has strongly contribu-ted to making the regulatory process in Eu-rope more visible, more transparent andcloser to the regulated activities. Better re-gulation is strongly pursued.

The first phase of its existence mainlyconsisted of contributing to the regulatoryinitiatives of the Commission, advising onthe Level 2 implementing measures. Consi-derable efforts were made by all CESR Mem-bers and their staff to propose well thoughtthrough advice for regulations, while mee-ting the strict deadlines set by the Commis-sion. Its opinions are consideredauthoritative and mentioned in later inter-pretations of Directive provisions.

Now, CESR has entered into a new phase.

2007 will be the year of the Review of theLamfalussy process. Fundamental questionsabout the middle to long term developmentof the supervisory mechanism will have tobe dealt with in particular, including effi-cient decision making, measures to streng-then the convergence efforts, and developingoperational initiatives.

Institutional matters may need to be ad-dressed, such as the legal status of the Com-mittee within the European institutionalframework, and the Members’ relationshipwith their national mandate.

The Level 3 convergence exercisewill be pursued unrelentingly. Se-veral of the recommendations ofthe ECOFIN Council “Francq Re-port” have already been introdu-ced: the peer review panel and themediation protocol are in forcewhile work has started on delega-tion of supervisory tasks. Operatio-nal co-operation, based on networkingamong the Members, results in exchanginginformation and experiences on commonsubjects while databases (e.g. on marketabuse cases, or the application of IFRS)contribute to the creation of a commonbody of precedents.

The Committee and its Members remainfirmly committed to undertake these effortswith a view of making the markets in Eu-rope better integrated, more efficient, the-reby delivering a significant contribution toour populations’ overall welfare.

Last but not least, on behalf of all the Mem-bers of CESR, I would like to thank ArthurDocters Van Leeuwen and Kaarlo Jännäri,former Chair and Vice-Chair of CESR, fortheir outstanding contribution to the esta-blishment of CESR and the Single Marketfor financial services. I would also thank Ma-nuel Conthe, Marios Clerides, Virgilijus Po-derys, Jaroslaw Kozlowski, former CESRMembers for their significant contributionto the work of CESR, and Alexander Schaubformer Director-General, for Internal Mar-ket and Services, European Commission,and welcome and look forward to workingwith Georgios Charalambous, Anneli Tuo-minen, Vilija Naudsèdaitè, Stanislav Kluzaand Jörgen Holmquist, present Director -Ge-neral, for Internal Market and Services, Eu-ropean Commission.

Eddy WYMEERSCH

Foreword by the Chairman

4 Table of Contents

Pages

Foreword by the Chairman 3

Table of Contents 4

Market Participants Consultative Panel 5

Overall market trends and risks 10

Regulatory Harmonisation (Level 2) 205.1 • TRANSPARENCY 20

Supervisory Convergence (Level 3) 256.1 • POLICY 25

Second progress report to the Financial Services CommitteeIncreasing active dialogue and assisting the cross border retail investorDeveloping supervisory convergence through movement of staff and joint training

6.2 • MONITORING 286.2.1 Review Panel6.2.2 Credit Rating Agencies6.3 • OPERATIONAL 346.3.1 CESR-Fin 6.3.2 CESR-Pol6.4 • LEVEL 3 EXPERT GROUPS 456.4.1 CESR-Tech6.4.2 Clearing and Settlement6.4.3 ECONET6.4.4 Investment Management6.4.5 Mediation Task Force6.4.6 MiFID6.4.7 Prospectus6.5 • SUPERVISORY CONVERGENCE BEYOND CESR 636.5.1 Contacts with other Level 3 Committees6.5.2 EU/US 6.5.3 Other third country contacts

Accountability and reporting to the EU Bodies 737.1 • FINANCIAL SERVICES COMMITTEE (FSC) 737.2 • FINANCIAL STABILITY TABLE OF THE ECONOMIC AND FINANCIAL COMMITTEE (EFC/FST) 747.3 • ECON 75

Annexes 768.1 • AN ENHANCED CAPACITY EMBEDDED IN THE FOUNDING CHARTER 768.2 • CESR’S WORK PROGRAMME FOR 2007 778.3 • 2006 ANNUAL FINANCIAL STATEMENT 788.4 • STATISTICS ON MEETINGS 798.5 • CESR IN CONTEXT: CESR’S INTER-INSTITUTIONAL RELATIONSHIPS 808.6 • CESR’S SECRETARIAT 828.7 • LIST OF MEMBERS 84

Table of Contents

THIS REPORT COVERS THE WORK OF CESR FOR THE PERIOD JANUARY 2006 TO END OF JANUARY 2007

5Market Participants Consultative Panel

The Market Participants Consultative Panel(MPCP) met twice in 2006, on 14 June andon 18 October, and at both meetings the dis-cussions were facilitated by CESR’s Chair-man, Arthur Docters van Leeuwen. Themeeting on 18 October was a joint meetingwith CESR Members.

The following sections set out the main top-ics which were discussed at the two meetings.

Opening remarksIn his opening remarks the Chairman up-dated the members of the Panel on the de-velopments in the Transatlantic Dialoguewith particular regard to the work pro-gramme with the SEC. With regard to theSEC, two issues were flagged: the self-con-tained discussion about International Finan-cial Reporting Standards (IFRS) and theproposal on de-registration. On the post-ponement of the US GAAP/IFRS convergencetimetable, a formal decision is expected bythe EU Commission this summer. CESR willprepare a preliminary report for the EU Com-mission on the progress in the implementa-tion of the IFRS before the end of 2006. Afinal report is envisaged for 2007.

On de-registration, it was noted that theSEC-proposal of December 2005 would - inCESR’s view - not enlighten the reportingburden for companies which want to de-reg-ister, as much as hoped for.

Furthermore, the Chairman of CESR in-formed members of the Panel about the im-plications of a possible (Transatlantic)consolidation of stock exchanges. Whateverthe parties involved would be, the bench-mark would remain: the impact of such aconsolidation on fair and orderly organisedmarkets. The most involved regulators cur-rently identify and analyse the relevant is-sues (i.e. scope of activities, cascade effectsand application of other legislation). The im-portance of the competition-issue was un-derlined.

Finally, the Chairman underlined the majormilestone achieved in the dossier of super-visory convergence and the future of super-vision of EU financial markets by referringto the conclusions of the ECOFIN Councilon these matters in early May.

The role of CESR in protectingindividual retail investorsBased on experience in the UK, and in par-ticular the FSA-work on financial capability,John Howard presented the most relevant is-sues retail investors are dealing with whenshopping for financial services. While con-gratulating CESR on its continuous effortsto improve consumer representation (i.e. theRetail Investors Conference in Valencia,Spain on 28 November 2005, followed by anumber of hearings with retail investor as-sociations on MiFID and the TransparencyDirective etc), it was also noted that con-sumer organisations clearly have a lack of re-sources to contribute to the process. Effortsshould be done to enhance the level of rep-resentation of the retail investors’ voice inEurope. To overcome some of these difficul-ties, John Howard suggested that consulta-tions should be conducted in the variouslanguages and in a clear format.

According to John Howard, the relevant is-sues for retail investors vary from: qualifica-tion of products, status of advisors,execution-only, pre-contract documentation,suitability, and the handling of complaints.Particular attention should be paid to thephase of financial promotion, and particu-larly that taking place via electronic meansand cross-border. On the latter issue JohnHoward argued for a role of CESR to stream-line national systems, as current ombuds-man schemes and compensation schemesvary enormously across Member States. Themore integrated financial markets and har-monised rules across Europe are, the lessrisk for consumers would remain. With re-gard to the issue of suitability, risk ratings offinancial products would help and a plea wasmade for a strong role for CESR in this area.

Additionally, reference was made to the factthat recently - for the first time in the UK -traditional financial advertising was out-stripped by internet-advertising which mayalso provide challenges for regulators.

It was concluded that boosting retail investorconfidence in the area of protecting retail in-vestors, could be achieved by creating an un-derstandable, consistent approach which is

Market ParticipantsConsultative Panel

6 Market Participants Consultative Panel

easy to use. Criteria for adequate qualifica-tion of investors and correlation to categoriesof products should be developed; self regula-tory initiatives may be pursued. Further-more, information given to retail investorsshould be targeted, simple and timely.

In the subsequent discussion, some mem-bers of the Panel do expect positive impactson the position of retail investors by the en-tering into force of the MiFID at the end of2007; others considered that it is too early toassess the impact of MiFID. Other MPCPmembers mentioned the importance of con-sumer education, even though it was con-sidered to be only a partial solution.Members called for a mapping by CESR onthe various national educational efforts. Na-tional education systems should addressproblems of education on key economicprinciples.

It was also pointed out that a “one size fitsall approach” would be impossible to beachieved and that it could possibly drive outrisky products and innovation. The CESRChairman noted that education can only bea partial solution and will not solve every-thing. The Chairman concluded this sessionwith the suggestion to table the issue of con-sumer education for policy discussion at thenext Away Day of the CESR Members, par-ticularly in the light of the new countries’ ex-periences and cross-border evolutions. Thispoint will be re-discussed by the Panel in oneyear to monitor developments.

Consistency across financial sectorsDominique Hoenn introduced the discus-sion starting from the issues listed on thejoint working programme of CESR, CEBSand CEIOPS. In particular, he mentioned thefollowing issues which are deemed relevantacross the various financial sectors:

Financial Conglomerates: in banking/insur-ance: securitisation and the operational risknot taken into account in the insurance sector;

Substitute products: same rules should beintroduced on eligibility of products. A con-crete case was made where a re-structuredproduct was admitted to trading in one ju-

risdiction after being barred in another ju-risdiction for sale to retail investors;

Reporting requirements: provision of statis-tical data by financial firms without know-ing for what specific usage/purpose;

Internal Governance: what is significant hereis what kind of decisions should be taken andat what level (managing board level or su-pervisory board level?);

Crisis management: two types of crises canbe distinguished; crisis at a specific institu-tion and a market crisis.

The highest priority however, should begiven to (different) capital requirements forsubstitute products. Distortion of competi-tion should be avoided. He called for the cre-ation of a group of wise men to advise on ageneral prudential supervisory framework.

In the following discussion, members of thePanel strongly supported the co-operationbetween the 3L3 Committees. Level playingfield and consistency across sectors were con-sidered important objectives to be achieved,also in order to protect retail investors. Com-pliance and monitoring requirements andhedge funds were identified as issues for fur-ther work. Lars-Erik Forsgardh suggestedthe issue of taxation of shareholders to cre-ate awareness among Member States aboutthe negative effects of taxation.

In summarising this session, the Chairmanof CESR acknowledged the issue of capitalrequirements, but noted that this does fallwithin CESR’s remit. Concerns will be con-veyed to the competent authorities and theEuropean Commission. On substitute prod-ucts, the Chairman underlined the increasedawareness by the EU institutions aboutcross-sectoral effects of rules and regula-tions. On reporting requirements, it was em-phasised that not everything is known toCESR with regard to statistical output. Forthis reason, CESR needs to conduct surveysand gather evidence of problems signalled bymarket participants. He nevertheless noteda need for more pressure by the industry andcalled upon the industry to identify (and re-port) any idiosyncratic requirements. Fi-nally, the Chairman proposed to table the



issue of hedge funds for the joint meeting ofMPCP and CESR, mid-October 2006.

The future regulation of invest-ment management in EuropeFollowing a presentation by Jonas Romlin,the members of the Panel had a policy dis-cussion on the issues arising from the Ex-pert Groups’ reports on investmentmanagement with particular regard to hedgefunds activity. This discussion will helpCESR provide its input to the EuropeanCommission for the White Paper which waspublished in November 2006.

In his introductory remarks Jonas Romlinnoted that the asset management industry isaffected by a highly sophisticated range ofproducts. There is an increasing focus on ab-solute return and particularly the use of in-struments tracking benchmarks, includingproducts that are accessible to retail in-vestors, such as exchange traded funds(ETFs); this widens the gap between alphaand beta. There is also an increasing impor-tance of risk management and alternative in-vestments. From the perspective of endinvestors we can perceive an increasing at-tention to costs. As regards hedge funds, hementioned that classification of these in-struments is still unclear: ranging from newclasses of instruments, new strategies or newbusiness models. There is an extended use ofderivatives either to take risks or to hedgerisks. Finally Jonas Romlin mentioned that itis difficult to build index tracking funds.

In the following discussions members of thePanel noted that hedge funds do not give riseto investor protection concerns providedthat they are targeted at professional and so-phisticated investors (including pensionfunds and other institutional investors). Theproposal to establish a common Europeanprivate placement regime was supported.Competitive arbitrage between hedge fundsand mutual funds was also mentioned.

More information about their activities (suchas the degree of leverage) should be given tothe market to assess potential market impactand systemic risks. As regards the currentlevel of leverage in the market, it was not felt

to be excessive. Members of the Panel alsoconsidered that categorisation of hedge fundswould be an useful exercise for CESR. Risksof potential market abuses by hedge fundsshould be monitored particularly when hedgefunds are very closely related to issuers. It wasalso mentioned that the lack of standardisa-tion of certain aspects in the settlementprocess (in the absence of depositories andclearing houses) might pose some risks.

As regards the debate on the possible mod-ernisation of the UCITS Directive, it was con-sidered that mergers between funds do notfall under the regulatory questions; a basicframework for information concerningmergers should be established, to which na-tional specific requirements should be added.Key priorities have been identified in meas-ures to enhance industry’s efficiency (such ascross-border mergers, portfolio of manage-ment companies and pooling) and harmoni-sation of a private placement regime.

As regards supervision of cross-border assetmanagement, some members of the Panelfavoured the passport of the managementcompany, whilst for depositories it was feltto be more difficult.

Evaluation of implementation ofthe Market Abuse DirectiveFollowing a presentation by Rudiger vonRosen, the members of the Panel had a dis-cussion on aspects of implementation of theMarket Abuse Directive. This discussion willprovide input into the evaluation of the su-pervisory functioning of the MAD that CESRis currently conducting.

In his introduction Rudiger von Rosen sup-ported the CESR initiative to evaluate thefunctioning of MAD. He mentioned in par-ticular three critical aspects: a) directors’dealings, b) insiders’ list and c) costs. As re-gards the first point, he noted that thethreshold to notify directors’ dealings is toolow and it generates too much informationthat might become unnecessary. In relationto insiders’ lists he mentioned that the re-quirements should be less bureaucratic andfollow the normal behaviour of companies;in particular he mentioned that too many


8 Market Participants Consultative Panel


persons on the list can render the list un-helpful. He also called for equivalent imple-mentation across Europe.

In the discussion that followed, members ofthe Panel identified further key issues: thefact that the market abuse regime underMAD does not apply to unregulated markets,the treatment of ‘contracts for difference’ orcommodities contracts. Members of thePanel considered that this regime is essen-tial for the confidence in the market and thatenforcement actions and publicity of theseactions are important aspects of the regime.On directors’ dealings, some members of thePanel considered that the rule works effec-tively in many jurisdictions and it appears tobe a useful source for journalists. Othersraised the point that the scope of the obliga-tion is too wide, also covering related parties.There was no call to change the legislationbut rather, to find practical solutions to avoidexcessive burden; guidance may be devel-oped when necessary.

Clearing and SettlementFollowing a presentation by Jeffrey Tessler,the members of the Panel were invited tocomment on the recent way forward an-nounced by Commissioner McCreevy andhave a policy discussion on the role thatCESR could play.

In his introduction Jeffrey Tessler started bycomparing the costs of cross-border equitiestransactions in Europe and in the US. He alsomentioned how the project launched by theEuropean Central Bank on Target 2 Securi-ties might affect the system. Finally he notedthe difference between the activities of Cen-tral Securities Depositories (CSDs) and In-ternational Central Securities Depositories(ICSDs) and the impact of the initiative of theCommission on the industry code of conduct.

In the following discussion members of thePanel supported the clarifications about thedifferent activities performed by CSDs andbanks. However, in relation to the various ini-tiatives currently undertaken by the Com-mission and the ECB, it was felt that there isnot a clear picture yet about how these initia-tives will evolve. Supervision of Target 2 se-curities raised some questions. The approachof the code of conduct was supported, withparticular regard to the transparency ofprices.

CESR Work ProgrammeThe Chairman introduced the work pro-gramme of CESR by explaining the shift inemphasis from rule-making (as an advisorybody to the Commission) to operational mat-ters. In this context, he also mentioned thecriteria developed by CESR’s Priority TaskForce for the prioritisation of work. Mem-bers were invited to suggest any additionalareas of supervisory work which are not cov-ered in the current work programme. As re-gards the future Level 3 work under MiFID,members of the Panel mentioned the needto avoid gold-plating and the fact that Level3 measures should not represent anotherlayer of regulation. In response to this sug-gestion, the Chairman of CESR underlinedthe implicit role of avoidance of gold-platingin the current and future MiFID-work andthe extension of the role of the Review Panel.Some members also underlined that a flexi-ble approach to best execution should be en-visaged for inter-professional business. Somemembers of the Panel invited CESR to or-ganise training on MiFID regulation.

The detailed summaries of the discussionsare available on CESR’s website www.cesr.eu,in the section Market Participants Consulta-tive Panel.



In the course of 2006, five members of the Panel were chosen to be renewed. The current list of Members of the Market Participants Consultative Group is:

Mr John Howard, Chairman, Financial Services Consumer Panel

Dott Salvatore Bragantini, Vice-president, IW Bank

Dr Rolf E Breuer, Former Chairman of the Supervisory Board, Deutsche Bank AG

Mr Donald Brydon, Chairman London Metal Exchange and Director AXA Investment Managers

Professor Jarmo Leppiniemi, Representative of retail investors

Mr Peter Paul F. de Vries, Director, Association of Shareholders, Vice-President, Euroshareholders

Mr Jeffrey Tessler, CEO of Clearstream International S.A

Mr Dominique Hoenn, Deputy General Manager of BNP Paribas, Vice-Chair of the Supervisory Board of Euronext

Dr Buhl, Joint CEO of Wiener Börse AG and Member of Board of Directors of BudapestStock Exchange

Mr Julio Lage Gonzalez, International, Institutional relations, innovation and strategyareas, CAIXA

Mr Jonas Romlin, Head of Derivatives, SEB Asset Management

Dr Ruediger von Rosen, Managing Director of Deutsches Aktieninstitut

Dr Zoltan Speder, Vice-President and CEO of OTP Bank RT

Mr Theodoros Philippou, General Manager of the Institute of Certified Accountants inCyprus

Mr Tom Healy, Chief Executive of the Irish Stock Exchange

Ms Andrea Corcoran, (Observer), Managing Director, Promontory Financial Group LLC”

Salvatore Bragantini and Peter Paul F. de Vries saw their appointments renewed in 2006,and four new members of the Panel were appointed: Jarmo Leppiniemi, Jeffrey Tessler,Michael Buhl, and Tom Healy.

10 Overall market trends and risks

Overall market trends and risks

Output growthThe performance of the global economy hasremained strong, with most regions growingat, or above, expectations throughout 2006.The expansion proved particularly robust inemerging Asia and Latin America. However,the US economy slowed considerably overthe course of the year due to a weaker do-mestic housing market and high energyprices. Strong corporate balance sheets andtight labour markets were able to partly off-set the impact of the housing slowdown, butwith the US economy looking somewhatfragile towards the end of the year, this alsodampened global growth forecasts for 2007.The peak of the global economic expansionduring the present cycle may already havepassed, with the IMF expecting global GDPgrowth to moderate to 4.9% in 2007 from5.1% in 2006.

Source: DataStream, IMF, Oxford Economic Fore-casting UK Weekly Brief

Euro area economic growth accelerated to2.7% in 2006 from 1.4% in 2005, driven by arecovery in domestic demand on the back ofimproving labour markets and strong busi-

ness confidence. The pace of the economicupturn in 2006 exceeded investor expecta-tions, and was considerably more broad-based than in recent years, with the Germaneconomy, in particular, showing surprisingstrength. The rest of Europe, particularlyEastern Europe, also benefited from the in-crease in demand in the Euro area and con-siderable Foreign Direct Investment fromGermany. While some of the growth mo-mentum may carry over to 2007, the rate ofeconomic growth in the Euro area is ex-pected to moderate as higher interest rates,the stronger exchange rate, fiscal tightening(notably in Germany), weaker industrial out-put and the slower-growing US economybegin to weigh upon the economies of theregion. Furthermore, the overall global eco-nomic outlook will also be reliant on the per-formance of the Asian economies.

Exchange ratesOn foreign exchange markets, monetarytightening by the European Central Bank(ECB) contributed to a 4% appreciation ofthe trade-weighted euro exchange rate overthe course of 2006. In December 2006 theeuro reached a two-year high against thedollar, having appreciated by 12% over theyear. The pause in the US monetary-tighten-ing cycle removed some support from the USdollar, with the dollar weakness further com-pounded by investor concerns over the con-tinuance of the external financing of the UScurrent account deficit, which remains atrecord highs of around 6.6% of GDP.

Source: DataStream

Over the same period, the euro appreciatedby 12% against the Japanese yen. This oc-curred in spite of the Japanese economy out-performing expectations in 2006. The

This chapter gives a brief overview of major economic trends and risksin 2006, which can be interpreted as having had a significant impact

on the performance of European securities markets. During 2006, the global financial markets were characterised

by ample liquidity, low volatility, which remained at its recent historiclows, and increasing investor risk appetite. The markets were tested in

May/June, when concerns over the US economic outlook and increasing inflationary pressures in the major economies resultedin a sudden reversal of investor sentiment and a sell-off of higher-risk

assets, such as emerging-market debt and commodities. However, financial markets recovered relatively quickly and volatility

across markets returned back to its recent historic lows. While the global economic and financial conditions remained benignand are expected to remain so, geopolitical and event risk could still

pose challenges for the European economies.

-3

-2

-1

0

1

2

3

4

5

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006e

E u ro a re a U S J a p a n EU 2 5

GDP growth rates for the major world economies

1 .05

1 .1

1 .15

1 .2

1 .25

1 .3

1 .35

1 .4

Jan 05

Mar 05

May 05

Jul 0

5

Sep 05

Nov 05

Jan 06

Mar 06

May 06

Jul 0

6

Sep 06

Nov 06

120

125

130

135

140

145

150

155

160

USD/ EUR (LHS) JPY/ EUR (RHS)

USD / EUR & JPY / EUR Exchange Rates

11Overall market trends and risks


weakness of the yen can be partially ex-plained by the widening interest rate differ-ential between the two regions and thecontinuing popularity of the yen carry trade.

Inflation and interest ratesThe ECB continued to gradually raise inter-est rates during 2006 in response to increas-ing inflationary pressures. Official interestrates reached 3.5% in December 2006, rep-resenting an increase of 150bp over thecourse of the year. Improvements in labourmarkets in the Euro area and the long-termconvergence process across the accessioncountries supported demand for credit,which remained strong despite the tighter fi-nancial conditions. Inflation remained con-tained in 2006, reaching 2.2% in both theEuro area and the European Union. The ECBhas stated that it still views monetary policyas accommodative and has cited furthertightening will be necessary to maintainlong-term price stability.

Source: ECB Statistics

A strong global economy, high energy pricesand falling levels of spare capacity have alsocontributed to the build up of inflationarypressures in many other countries. The cen-tral banks of the US and UK continued towithdraw liquidity from the markets andnormalise interest rates during 2006. Manyemerging-market central banks also tight-ened monetary policy during 2006 to deterexchange-rate depreciation. The Bank ofJapan ended five years of its zero interest-rate policy by raising rates to 0.25% in July2006, but the weaker yen more than offsetthe restrictive impact of higher interest rateson monetary conditions in the country. Thepace of interest-rate tightening slowed to-wards the end of 2006 as many central banksjudged rates to be approaching their neutral

levels. However, while inflationary pressuresacross the major economies appeared to bemoderating, they remain at elevated levelswhich could increase the likelihood of fur-ther rises in interest rates in 2007.

Equity Markets Global equity markets enjoyed strong sup-port for most of 2006. Most markets haveshown a more upbeat performance, contin-uing the overall upward trend that prevailedthroughout 2005. During 2006 oil and com-modity prices continued to rise. This sparkedoff the initial concerns about increasing in-flation, higher interest rates and in somecases slowing growth prospects leading to aperiod of volatility in May and June 2006.

Source: Naftemporiki

As a result of the corrections experienced inthat period, some major equity marketsdropped back to the levels that they hadreached in the last quarter of 2005, which forsome of them implied losses of up to around20 percent from their recent peaks. Thoselosses were particularly steep in marketswhere strong gains had been recorded pre-viously, as in Japan or the Euro area.

In the course of these downward adjust-ments, volatility of major indices increasedsubstantially and continued to rise even aftermarkets had started to regain some strength.

Source: HCMC

0

1

2

3

4

5

6

7

Ja n-00 Jan-01 Jan-02 Jan-03 Jan-04 Ja n-05 Jan-06 Jan-07

(%)

Federal Funds Target Rate Bank of England Base rate

ECB Repo Rate (Bundesbank before 1999) BOJ uncollaterised Overnight middle rate

Official interest rates for selected world economies (2000-2006)

- 1 0

0

1 0

2 0

3 0

4 0

O ct - 0 5 D e c - 0 5 F e b - 0 6 A p r - 0 6 J u n - 0 6 A u g- 0 6 O c t - 0 6 D e c - 0 6

Difference from base date (%)

D J E ur o St o x x - 5 0 S& P 5 0 0 N ik k e i 2 2 5

Performance of Stock Markets in 2006(Base date : 3 October 2005)

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

O c t - 0 5 D ec - 0 5 F e b - 0 6 A p r-0 6 J un - 0 6 A ug- 0 6 O c t- 0 6 D e c - 0 6

D J E uro St o x x - 5 0 S& P 5 0 0 N ik k e i 2 2 5

Historical volatility(20 - day moving average)

%



Although equity markets suffered during theglobal May-June correction, they soon re-sumed their upward path and by early No-vember they were slightly above (with theexception of Japan) the levels recorded be-fore the downturn. Such developments havebeen supported by positive earnings reportsand a favourable growth outlook for theEuro area as well as a drop in oil prices,which relieved some concerns among mar-ket participants regarding upward pressureon inflation.

Initial Public Offerings (IPOs)In Europe, the main exchanges saw a rise inthe total capital raised through initial pub-lic offerings in 2006, despite large public-to-private deals such as VNU, the Dutch-listedmedia group.

Europe and Asia eclipsed North America inthe value of IPOs thanks to activity in emerg-ing markets. Six of the top 20 IPOs werefrom emerging markets.

An aspect highlighted in 2006 is that all overthe world, IPOs are getting bigger. Therecord number of billion dollar flotation —42 in total — pushed the funds raised bymeans of IPOs to $257.1bn, outperformingthe previous high of slightly more than$200bn in 2000. The year’s two biggest IPOswere Industrial & Commercial Bank ofChina (ICB) which raised $21.9bn and Bankof China, which raised $11.2bn. Rosneft,Russia’s state-backed oil group was thirdraising $10.7bn.

Measured by IPO proceeds, the LondonStock Exchange and Hong Kong Stock Ex-change both surpassed the New York StockExchange, the perennial leader for new list-ings, for the first time ever in 2006.

Source: Thomson Financial

According to data from Thomson Financial,offerings in the Financial, Energy and Powersectors accounted for 45.4% of total IPO vol-ume in 2006, compared to 32.5% in 2005.

However, there were also further signs ofblurring between the public and the privateequity markets as several private equity firmssought new capital by listing shares in theirown funds on stock exchanges.

Finally, de-listings also continued. The de-cline in the number of listed companies canbe attributed to a number of factors, includ-ing the loss of appeal of multiple listings, thede-listings by smaller companies, the re-structuring of international companies, thecross-border merger activity and the activityof private equity funds.

Bond Markets Bond markets have been fairly stable in theEuro area during the year, with generally lowvolatility, reflecting the positive macro-eco-nomic development. Nevertheless, duringthe turmoil on the equity markets in May andJune, there were some “flight to safety” ef-fects, meaning that demand on bonds lead tosomewhat falling yields during these months.These effects were however quite small.

The fall in the second half of 2006 in bondyields can mainly be explained by lower in-flation expectations, particularly in the US.The increase in short term interest ratesduring the year has lead to quite a pro-nounced flattening of the yield curve. In theUS, the yield curve has even become down-ward sloping. With the strong macroeco-nomic development, bond yields wereexpected to rise further, but there could havebeen demand factors, such as large invest-ments by pension funds and insurance com-panies, that have held yields down. Thesupply of bonds with very long maturitiesseems not to have grown enough to supportthe high demand.

Government bond yields generally increasedduring the first half of 2006, while fallingback during the second half of the year. Thegrowth rate of the amounts outstanding oflong-term government bonds was fairly sta-ble, with growth rates varying around 5%

1999 2000 2001 2002 2003 2004 2005 2006

40

35

30

25

20

15

10

5

0

New York (%)

London (incl AIM) (%)

Hong Kong (%)

% o

f Glo

bal P

roce

eds

(US

$ m

)

Global Initial Public Offering listings 1999-2006



annually during the last 10 years. Thegrowth rate dropped to about 3% in 2006,

reflecting a somewhat stronger fiscal posi-tion of governments in the Euro area.

Financial institutions have had a higher vol-ume of issuance. Outstanding amounts oflong term-bonds have grown about 10% formonetary financial institutions and almost30% for non-monetary financial corporations.

The corporate bond markets in the Euro areahave also been stable during the year. Therewas a slight increase in spreads after the pe-riod of volatility on stock markets in May andJune, but with small effects. Non-investmentgrade bonds have shown declining spreadsthroughout the year. In general, corporatesector indebtedness has increased. The de-clines in corporate spreads thus suggest thatthe search for yield by investors has contin-ued. Investors seem to have a positive out-look towards the European corporate sectorin general.

Source: Datastream

Gross issuance of corporate bonds increasedduring the first half of 2006. It was particu-larly high yield issuers (single A and below)that showed significantly growing volumes.However, volumes are still quite far from thehigh volumes of the last boom of the econ-

omy around the millennium shift. It is alsothe case that European corporate bond mar-kets have still not reached the level of devel-opment that exists in the US.

Derivatives Markets The volume outstanding of derivatives wentup sharply in 2006. This increase of deriva-tives markets activity confirms their contin-uing growth in recent years. Interest rateproducts account for the major part of thenotional amounts of both over-the-counter(OTC) and exchange traded derivatives. Onthe other hand, currency derivatives are stilla relatively small segment of the organisedderivatives market.

Notional amounts of all types of OTC deriv-atives in G10 countries increased by 23% to$350 trillion in the first half of 2006.

Source: BIS Quarterly Review, December 2006.

Growth in the market for OTC derivatives ac-celerated after more moderate rates of in-crease in the previous year (13% betweenDecember 2004 and December 2005). Theincrease was particularly strong in the mar-ket for OTC interest rate derivatives, wherethe volume outstanding rose by 24% reach-ing $262 trillion. Moreover, a robust activitywas recorded also in the foreign exchangemarket segment, where the notional amountgrew by 21% to $38 trillion. The dollar wasthe most important vehicle currency, giventhat 83% of all contracts had one leg de-nominated in US dollar, compared to 40%for the euro and 25% for the Japanese yen.Lastly, both commodity contracts and equityderivatives, which are included in the cate-gory of derivatives classified as “other” 1,grew at a slower pace (17% and 18% respec-tively).

Long term government bond yields

Slope of US yield curve (10 years minus 6 months rates)Slope of US yield curve (10 years minus 6 months rates)

Euro 10 years government bond yield US 10 years government bond yield

Source: Reuters EcoWin

feb05

apr jun aug okt dec06

feb apr jun aug okt dec07

-1

0

1

2

3

4

5

6

Long term government bond yields

0

20

40

60

80

100

120

140

J an-05 M ar-05 M ay-05 J u l-05 Sep -05 N ov-05 J an-06 M ar-06 M ay-06 J ul-06 Sep -06 N ov-06

A A A A A A BBB

Corporate bond spreads in the Euro-area.Average of all maturities

Bps

350.000

Amounts outsanding of OTC derivatives in G10 countries(Billions of US dollars)

Dec-98 Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 June-2006

300.000

250.000

200.000

150.000

100.000

50.000

0

interest rate contracts foreign exchange contracts other



The volume outstanding of derivative finan-cial instruments traded on exchange reached$75 trillion in September 2006, 31% higherthan nine months before.


Notional amounts of interest rate contractsincreased by a solid 30% to $68 trillion. Thevolume outstanding of futures and optionson stock indices grew sharply by 37% to $7trillion, while positions in foreign exchangecontracts expanded at a slower pace (20% to$208 billion). From June to September no-tional amounts of derivative financial in-struments slightly decreased by 10% mainlybecause of seasonal factors which influencedinterest rate contract dynamic. Credit de-fault swaps grew at a brisk pace in the firsthalf of 2006.


From December 2005 to June 2006 notionalamounts increased sharply by 46% to $20trillion. During the first half of 2006 creditdefault swaps with maturities up to one yearand over five years increased by more than50%, while contracts with maturities be-tween 1 year and five years grew by 23%. At

the end of June single-name contracts rep-resented the major part of credit defaultswaps (the volume outstanding was 68% oftotal notional amounts) and most singlename contracts were rated investment grade(67% of the volume outstanding). However,notional amounts of multi-name contractsincreased at a faster pace than single-namecontracts (86% compared to 33% in the firsthalf of 2006).

Commodity MarketsCommodity markets had a mixed year in2006. Non-energy commodities continuedtheir exceptionally strong performance andmany reached record prices in the first halfof the year, while energy commodities un-derperformed many other financial assets in2006. Like other financial markets, com-modity markets were shaken by the May andJune sell-off, which saw prices fall across thedifferent commodity classes. However, mostcommodity prices recovered quickly afterthe turbulence in the international financialmarkets calmed and continued to makestrong gains towards the end of the year.Commodity price volatility increasedmarkedly during the May and June turbu-lence but fell again in the autumn of 2006.

Source: Datastream

High historical returns attracted consider-able interest in commodity markets in 2006.This was demonstrated in both increasingparticipation from hedge funds and other in-vestment vehicles in the market as well asthe introduction of new products that wouldallow a wider variety of investors access tocommodity markets. Newer commodity

1 The category “other” includes equity-linked contracts, commodity contracts and positions reported by non-regular report-ing institutions.

2 Currency derivatives are not reported because in all the years they represent less than 1% of the total notional amount.

70.000

80.000

Amounts outsanding of Derivatives traded on exchange in G10 countries(Billions of US dollars)

Dec-98 Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Sept-2006

60.000

50.000

40.000

30.000

20.000

10.000

0

interest rate equity index

25.000

20.000

Dec-2004 Jun-2005 Dec-2005 Jun-2006

15.000

10.000

5.000

0

Amounts outsanding of credit default swap in G10 countries(Billions of US dollars)

Gingle-name instruments Multi-name instruments

0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

0

1 0 0

2 0 0

3 0 0

4 0 0

5 0 0

6 0 0

P re c io u s M e t a ls ( lh s) Ba se M e t a ls ( lh s) Ag ric u lt ura l p ro d u c t s ( lh s) En e rg y ( rhs)

Figure x. DJ AIG Commodity sub indicies

Jan

03

Apr

03

Jul 0

3

Oct

03

Jan

04

Apr

04

Jul 0

4

Oct

04

Jan

05

Apr

05

Jul 0

5

Oct

05

Jan

06

Apr

06

Jul 0

6

Oct

06

Jan

07



markets, such as markets for weather deriv-atives and carbon emissions continued to ex-pand in 2006. While many commodities havebeen traditionally traded mainly for com-mercial purposes, the use of commodity de-rivatives as financial instruments hasincreased. This means that in addition tophysical demand and supply pressures onprices, investor sentiment and speculativeactivity in futures markets is exerting in-creasing influence on prices. This has beenparticularly evident in energy markets,where speculative inflows of money and in-vestor demand for innovative products thatallow for access to the markets without theneed to hold the underlying commodity haveincreased volatility. The risks in commoditymarkets were illustrated by the $6 billionlosses and the collapse of Amaranth (a hedgefund that had made extensive bets on natu-ral gas swaps) in September 2006.

Oil and GasOil prices made gains in the first half of 2006,with benchmark crude West Texas Interme-diate reaching a nominal record of $78.4/bblin July due to heightened geopolitical pres-sures in the Middle East and supply disrup-tions around the world. This was relativelyshort-lived and from August onwards, oilprices weakened towards the end of the year.Natural gas prices appeared to diverge fromoil prices and front-month natural gas pricesfell by 44% over the year. This was largelydue to the commercial and industrial sub-stitution away from natural gas after therecord prices seen in 2005 after the US hur-ricane season. Higher inventories and unex-pectedly warm winter weather also reducedthe demand for natural gas. The weakness inoil prices was largely the result of moderat-ing concerns over geopolitical risk in key oil-producing countries, higher inventories andOPEC’s decision to not to go ahead withplanned production cuts. Despite the con-siderable weakening in oil prices, bench-mark crude continues to trade roughlydouble the price seen in 2003.

Industrial and Precious MetalsIndustrial metals prices grew by 64.3% in2006 on the back of growing demand for rawmaterials, particularly from China and therest of non-Japan Asia as part of their indus-trialisation process. Frequent strikes in sev-eral large mines around the world andconsiderable problems with ageing infra-structure resulted in supply disruptions,which added further increases in the prices.However, supply pressures have now moder-ated as many pending labour contracts havebeen settled, reducing the risk of strikes andallowing inventories to build up from theirrecord lows.

The prices of precious metals increased by21.2% in 2006. Gold has traditionally had anegative correlation with the US dollar andhas been viewed as an effective inflation-hedge and a medium of exchange in times ofgeopolitical or market turbulence. This rela-tionship appeared to re-establish itself in2006 and gold prices made gains when thedollar depreciated. Growing demand for pre-cious metals exchange-traded funds (ETFs)also contributed to investor interest in goldin 2006. Additional demand for gold was cre-ated by a desire by some central banks to in-crease their gold reserves and shift awayfrom US treasuries. Silver prices are closelycorrelated with gold prices and also madedramatic gains in 2006.

Agricultural commoditiesGains in the agricultural commodities sectorwere highly unevenly distributed. High en-ergy prices and increasing demand for ‘greenenergy’ made it economical to refine severalagricultural crops to ethanol. Ethanol-relateddemand was largely responsible for the 40%gain in corn prices in 2006. Drought and croplosses in major wheat-producing countriespushed up wheat prices (up 20%) over theyear, which increased demand for corn as analternative livestock feed and contributing tothe high corn prices. While grains generallyperformed extremely well, weakness in sugarprices pulled down the gains in Agriculturalsub-indices over the year.



Corporate Financing (M&A, Private Equity)

Mergers & AcquisitionsMajor merger deals have been a key catalystfuelling recent stock market gains. At theend of 2006, the global M&A activity reached$3,8 trillion , being the hottest year formergers and acquisition since 2000, the yearbefore the dotcom bubble burst, when ittopped at $3,4 trillion. The number of dealsannounced during the year reached 36,958a 37.9% increase from 2005.

Source: Dealogic. Numbers are in $trillion.

On the one hand the European markets havebeen opened up by the authorities easingmega-mergers to be completed, on the otherhand some countries adopted political meas-ures in order to protect companies beingidentified as targets for mergers and/or ac-quisitions mainly those of strategic impor-

tance (e.g.: in the utilities sectors). The num-ber of companies launching hostile bids rosedramatically across the globe up from 94hostile bids in 2005 to over 355 in 2006, ex-ceeding the previous record of 272 hostilebids in 1999.

Besides the growing portion of Europe withinglobal M&A transactions (in 2006 M&Atransaction registered in Europe amountedto $1.53 trillion, in America for $1.44 trillionand in Japan for $0.38 trillion), there areother features that distinguishes the presentgrowth from that of the year 2000.

Firstly, elite private investors buying upcompanies at a record pace is a new phe-nomenon. Historically the largest takeoverswere realised by publicly traded companies,but this year among the biggest deals werethat of numerous private-equity firms. Theseare generally close-ended investment firmsthat collect money from pension funds, col-lege endowments, wealthy individuals andother investors that are expecting double-digit returns on their investment.

Secondly, the present M&A boom can not betied only to a single sector, as was the casein the year 2000 with the telecoms sector.Now the leading sectors are finance, real es-tate, utilities and healthcare.

Finally, current deals are being paid for deci-sively in cash or funded with debt, as opposedto transactions using overvalued stocks oflow profit “new economy” companies. Ac-cording to Dealogic the cash transaction’sportion is significantly bigger than that ofcombined cash and stock deals, which mayincrease the chance of successful mergers, asin the case of banks willing to lend money tocash acquisitions. They usually closely exam-ine the proposed benefits of the deal beforeremitting any cash for the transaction.

Private EquityPrivate Equity provides capital or manage-ment expertise to companies in order to cre-ate value and subsequently, with a clear viewto an exit, generate capital gains after amedium to long term holding period. Themarket for Private Equity is characterised bya huge dynamism that is closely linked to

Target (country, sector) Acquirer (country, sector) Value (billion USD)

Bellsouth (America, AT&T (America, 89,4telecommunications) telecommunications)

Endesa (Spain, E.On (Germany, 71,3public utilities) public utilities)

Arcelor (Pan-European, Mittal (India, 43,6steel industry) steel industry)

Gaz de France Suez (Belgium-France, 40,9(France, public utilities) public utilities)

SanPaolo IMI Banca Intesa 37,6(Italy, bank sector) (Italy, bank sector)

Equity Office (America, Blackstone Group 36real estate handling) (America, private equity

America Telecom (Mexico, America Móvil (Mexico, 35,2telecommunications) telecommunications)

HCA (America, hospital Bain Capital 32,1operator) (America, private equity

BAA (Great Britain, Grupo Ferrovial 30,2airport operator) (Spain, real estate

Autostrade (Italy, Abertis (Spain, 28,2motorway operator) motorway operator)

4.5

1999 2000 2001 2002 2003 2004 2005 2006

4

3,5

3

2.5

2

1.5

1

0.5

0

Global M&A, activity (1999 – 2006), trillion USD

Some of the most significant offers announced in 2006

Source: Thomson Financial



global economic developments, in which pe-riods of strong growth and shrinkage taketurns. In the United States, the Private Eq-uity market traditionally consists mainly ofventure capital; while in Europe the PrivateEquity market is dominated by buy-outs andis rather strongly influenced by international(especially US) investors.

2006 was a year with marked heights andrecords for private equity. Interest rates con-tinued to be low by historical standards, ren-dering financing by leverage very attractive.In addition, banks were very willing to fi-nance private equity projects. The days oflow interest rates seemed to be drawing to aclose however, and private equity firms werefacing increasing debt levels. Therefore firmsalso sought to raise public money. KohlbergKravis Roberts (KKR) was the first privateequity firm to go public, with a $5 billionfund flotation in 2006.

Recent Private Equity Listings

Source: AFM

2006 saw many big takeovers, made possibleby higher leverage, larger fund raising andmore ‘club deals’. The value of worldwidepublic companies going private peaked in2006 at $150 billion. KKR beat its ownrecord and set a new standard for private eq-uity deals by joining a consortium to pur-

chase HCA, one of America’s largest hospitaloperators. This deal had a total value of $32,1billion. European sectors in which privateequity showed interest were especially tele-coms, technology and media. In telecoms,private equity was involved in about 40% ofthe deals in recent years.

In early 2006, the Danish phone companyTDC was acquired by a private equity con-sortium for €12 billion. The Spanish broad-caster Univision was acquired by aconsortium for €11 billion. The biggest pri-vate equity buyout also took place in themedia sector. The Dutch media firm VNUwas acquired for €8.6 billion by Alpinvest,the Carlyle Group and KKR are taken pri-vate. In the technology sector, Philips Semi-conductors was acquired by a private equityconsortium for €8 billion. Private equityfirms were also turning attention to Ger-many and Sweden. In Germany, an attemptby Bain Capital to acquire the German carparts supplier Continental failed.

All in all, private equity adds a dynamic ele-ment to the economy and it is a vital com-ponent of financial markets, capable ofinducing changes and structural improve-ments that are beneficial to companies andsociety as a whole. However, following itsmore prominent presence on financial mar-kets, concerns about the possible risks havealso been voiced in 2006. Private equity is,by nature, less transparent than other formsof equity and this is a cause of concern froma regulatory perspective. The prudential riskcaused by the current high leverage alsocalls for continued watchfulness.

Asset ManagementEurope has one of the most developed fundmanagement industries in the world and es-timates put total European assets undermanagement (AUM) for September 2006 atmore than €7 trillion3. This number repre-sents around 14.4%4 of the world's fundsunder management, a total that includes theinvestment fund industry, as well as assets

Company Value DateStock

Exchange

KKR (Private $ 5 billion May 3, AmsterdamEquity Investors, PEI) 2006

Apollo Group € 2 billion August 8, Amsterdam(AP Alternative Assets) 2006

Partners Group Global € 350 million Sept. 30, London

Opportunities Ltd. 2006

Doughty Hanson Expected Sept. 11,€ 1 billion 2006 Amsterdam

Listingdid not occur

CVC and AlpInvest Expected October 12, Amsterdam(Wavin) € 515 2006

€ 614 millionReceived

€ 371 million

3 €7,266bn according to EFAMA, Trends in European investment funds, 2006Q3, namely €5,727bn for UCITS investmentfunds and €1,539bn for non-UCITS investment funds.4 Based on AUM estimates from EFAMA and IFSL.



managed by insurance companies and pen-sion funds. While retail assets continue togrow, discretionary mandates on behalf ofpension funds, insurance companies, chari-ties and endowments, have been more chal-lenging. Indications are that traditionalmanagers are facing increased competitionfrom alternative providers such as hedgefund managers and private equity managerson the one hand, and from passive productscharging relatively low fees such as indextrackers on the other hand.

Some investors have recovered their confi-dence in the equity markets, along the tra-ditional pattern according to which net retailsales tend to follow market trends. Accord-ingly, sales in France exceeded €56bn lastyear, and €28bn in the UK. But as marketspass their pre-dotcom bubble peaks, memo-ries of the market downturn of the period2000-2003 remain and retail investors havebeen sensitive to the market downturn in thesecond quarter of the year, prompting in-creased sales in some markets.

Source: EFAMA

Some European countries, such as Germanyand Italy, have shown a trend of net redemp-tions in domestic fund sales. Those net re-demptions happened at a time when localequity markets were strongly rising, as shownby the gains of stock market indices. A possi-ble explanation for this could be the growth

of cross-border funds such as those classifiedas “international funds” by FERI-FMI5.Roughly 31.2% of funds fall into this categoryand their growth continues to be strong6. Themajority of these cross-border funds are beingdomiciled in Luxembourg and Ireland and the€250bn of net sales of UCITS recorded in thefirst three quarters of 2006 can, to a large ex-tent, be ascribed to them, as well as to Franceand the United Kingdom7.

A number of country specificities remain inthe European investment fund market, no-tably with regard to administrative and taxtreatments, and to the retail market distri-bution of investment funds8. As a trend, the“open architecture” distribution modelseems however to be slowly gaining groundin Europe9. The demand side of the market,also shows a number of country differences:formula-based funds, for example, remainlargely specific to some countries, as well asmoney-market funds (for which a significantmarket has only developed in France), ortracker funds which are mainly marketed ona few exchanges. This is also true with regardto the importance of invested amounts.

Hedge fundsThe significant growth in assets under man-agement (AUM) by hedge funds recorded in2006 came mainly on the back of inflowsclose to the previous record seen in 2004, asasset growth due to performance remainedsubdued. The 14% growth in 2006 of thewidely used CSFB Tremont index improvedon the gains of 8% made in 2005. It is thebest annual result since 2003 for hedgefunds, but does not compare favourably tothe +16.3% and +17.8% of the DJIA and DJSTOXX indices.

5 Such funds are mainly distributed in countries other than that in which they are registered.6 FERI-FMI, estimated net flows Jan-Nov 2006, Total Net Sales ex-Liquidity7 Actually, since a number of countries recorded negative net sales, these four countries recorded more than €250bn of net

sales.8 The recent European Commission White Paper on investment funds indicates that differences in cost levels across European

countries relate mainly to the costs of distribution and that this cost varies between a low of 46% in France to a high of 75%in Italy measured as a proportion of the management fee being used to meet distribution costs.

9 Source: McKinsey.10 For 2006Q3, HFR estimates assets managed by hedge funds worldwide at USD1,336.5bn, which includes USD499,6bn of

funds of hedge funds. Comparable figures for end-2005 were USD1,105.4bn and USD394.6bn.

2 058+12.9%

762+19.8%

1 226+2.2%

870+3.3%

94+19.9%

169+21.5%

0

2 5 0

5 0 0

7 5 0

1 0 0 0

1 2 5 0

1 5 0 0

1 7 5 0

2 0 0 0

2 2 5 0

2 5 0 0

E q uity fund s B a la nc e d fund s Bo nd fund s M o ne y -m a rk e tfund s

Fund s o f fund s O the r

b n E U R

Europe: Breakdown of UCITS assets by category in 2006 Q3 and change with regard to end-2005



Source: CSFB/Tremont

An important source of asset growth camefrom funds of hedge funds, which now ac-count for a significant part of hedge funds’AUM10.

Institutions are said to be the new source ofassets for hedge fund managers. In particu-lar pension funds are increasingly moving to“alpha“-generating strategies11 such ashedge funds. Indications are that overallpension fund allocation to this type of fund isincreasing. In 2006, 13% of European pen-sion funds invested in hedge funds12. In ad-dition, it appears that pension fund trusteesare allocating a greater proportion of theirassets to other alternative strategies includ-ing property and private equity.

European hedge fund managers are esti-mated to have accounted for roughly 26% ofglobal hedge fund assets in 2005 (US: ~62%,others: ~2%)13. In Europe, London has be-come the leading centre of European hedgefund management, with nearly 80% of Eu-ropean assets managed from the UK's capitaland AUM growing strongly.

Hedge funds are increasingly active in vari-ous asset markets, especially those withhigher risk potentials. According to a studyby Greenwich Associates, in September2006, the share of hedge funds in the dailytrade volume in credit derivatives was 58%,in high yield bonds 25%, and in non-per-forming loan trades 47% 14.

Amaranth Advisors LLC, a multi-strategyhedge fund lost an estimated $6.4 billion oninitial AUM of $9.2 billion in September 2006.The majority of the losses came from the en-ergy trading on natural gas swaps. The fundwas significantly leveraged and ran into trou-ble when it found itself on the wrong side ofthe natural gas market and was forced to un-wind most of its unrelated positions to satisfyits margin calls. Amaranth was unwound inan orderly fashion with minimal systemic im-pact, but has also raised questions aroundgovernance controls and risk management.

The concerns over risks posed by hedge fundactivities have led the G7 to address “hedgefunds transparency” on top of their agenda inthe first half of 2007. The Financial StabilityForum will present an update to its 2000 re-port on hedge funds to an International Mon-etary Fund meeting in April 2007 following arequest from the G7. The report would focuson “stress-testing“ and looking at how marketturbulence could affect banks and other fi-nancial institutions dealing with hedge funds.

11 'Alpha' is the return of an asset manager over-and-above its relevant market, or 'Beta'.12 European Asset Allocation Report 2006, Mercer Investment Consulting, September 2006.13 Eurohedge, September 2006 – the estimation is for mid 2005 and it is the latest published at the time of writing.14 “For hedge funds, fixed-income trading volumes soar, while costs take on new importance”, Greenwich Associates 2006.

Global hedge funds inflows 2000-2006

20 Regulatory Harmonisation (Level 2)

MA

ND

AT

E

Mandate of the Transparency Expert GroupIn July 2005, CESR received from the European Commission a mandate for technical advice on imple-menting measures concerning the storage and filing of regulated information.

The mandate contained three elements and invited CESR to provide:

a. By June 2006, an opinion for possible implementing measures on two preliminary issues relating to thearchitecture for the EU storage network: (a) the agreement on interoperability of the national Officially Ap-pointed Mechanisms i.e. how an agreement on technical requirements could allow technical interoperabil-ity of the national OAMs and (b) the cost and funding implications for the Member States arising out ofthe creation of the EU network.

b. By June 2006, technical advice on the role of the OAM for the central storage mechanism and on therole of the competent authority. More particularly, CESR was invited to determine the minimum qualitystandards the OAM will have to comply with, such as standards of security, of certainty as to the informa-tion source (authenticity), of time recording and of easy access by end users. In respect to the role of thecompetent authorities, CESR is invited to examine the power of the competent authorities in supervisingthe OAMs as well as their role in adapting the standards in case of technical developments.

Moreover, the same technical advice invited CESR to explore the issue of filing of regulated informationwith the competent authorities. More specifically to determine minimum quality standards to be compliedwith by the competent authorities, in particular in relation to security, certainty as to the informationsource and of time recording, and to determine whether the procedure of filing with the competent authoritycan be aligned with the procedure of filing with the OAM in order to avoid duplicate submission of the sameinformation.

c. By April 2006, an interim report regarding the cost of setting up and operating an OAM that would meetthe prescribed quality standards.

CESR’s advice was prepared by an expert group chaired by Carlos Tavares, Chairman of the PortugueseCMVM, and supported by a permanent member of the secretariat, Mina Filippa. From October 2006, a re-mote member of the secretariat, Anita Farkas, has been appointed CESR rapporteur on Transparency.

5.1 ◆ Transparency

Regulatory Harmonisation (Level 2)

Chair’s messageCarlos Tavares, Chairman of the CMVM, Portugal

“The availability of regulated information is critical for investor protectionas well as for the proper operation of the market and market efficiency. In-formation is indeed a key component for the evaluation of investment op-portunities in financial markets. The idea is that all regulated informationon listed companies should be accessed at affordable cost by all investorsthrough one or more officially appointed central databases in each country.

By interlinking these national repositories of regulated information, this information shouldalso become accessible to all EU investors irrespective of where they are situated.

During 2006, CESR has advised the European Commission on the minimum quality standardsof the national storage systems and on possible ways to create a viable and user friendly stor-age system at an EU level, taking into consideration at the same time, the cost implications ofsuch a structure. I think the EU network of national storage systems would be a key tool in theintegration of EU financial markets, fostering investor confidence. CESR should therefore en-deavour to facilitate the implementation of this EU network and has already taken steps in thisrespect. Looking ahead, another key task for CESR in the area of transparency will be to pro-mote consistency in the application of the level one and two Directives.

21Regulatory Harmonisation (Level 2)

A-CESR’s final advice and opinion on the storage and filing of regulated information

On 6 July 2006, CESR delivered its final ad-vice and its opinion on the storage and filingof regulated information, covering the min-imum quality standards of the national stor-age systems and its opinion on establishingthe interoperability amongst national stor-age systems (European Union network) (Ref.CESR/06-292). The information affected bythe Transparency Directive and these imple-menting measures includes price sensitiveinformation, regular financial reports, noti-fications for major holdings and, accordingto the Commission’s Mandate, prospectuses.

The issue of how such information is storedis crucial for the development of EU finan-cial markets. For the first time, there is a re-quirement to ensure that EU investors haveeasy access to information about all EU is-suers on a pan-EU basis, irrespective ofwhere they are located. This will enable in-vestors to better evaluate investment oppor-tunities and make informed assessments ofan issuer’s business performance and assets.The storage system is intended to become akey tool in the integration of EU financialmarkets, fostering investor confidence.

In accordance with the relevant mandate,CESR provided its advice and its opinion inrelation to both the development of the na-tional storage mechanisms and the creationof an EU network of these national mecha-nisms.

The content of CESR’s final advice and opin-ion reflected comments received during theconsultation on CESR’s draft technical ad-vice on the storage and filing of the regulatedinformation. The responses to this consulta-tion had been largely supportive of the CESRapproach. Moreover, it reflected commentsthat CESR received during the Investors’Hearing that it organised in March 2006(Ref. CESR/06-092), as well as the commentsof the Consultative Working Group onTransparency. CESR modified its advice inresponse to comments received as a result ofthe consultation and the investor hearing. AFeedback Statement describes fully how

CESR has adapted its advice in response tothese comments (Ref. CESR/06-293).

The CESR paper on storage encompassesCESR’s advice and CESR’s preliminary opin-ion and more particularly it contained fourparts, the main issues of which are analysedbelow:

CESR’s final advice on the minimum qual-ity standards of the national storage sys-tems

The first part of the advice related to the na-tional storage mechanisms called OfficiallyAppointed Mechanisms (the “OAM”). CESRsets out some minimum ‘quality standards’that such mechanisms would need to meet.The main standards proposed were:

– assurance of adequate security of the ITsystems such as, an effective validationprocedure, availability of the stored infor-mation, acceptance of waivers and recov-ery and back-up systems;



Transparency Directive – storage ofregulated information and filing of regulated

information (Ref. CESR/06-025)and (Ref. CESR/06-092)

Total number of responses: 35

Banking

Government, regulatory and enforcement

Insurance, pension & asset management

Investment services

Investor relations

Issuers

Legal and Accountancy

Others

PressRegulated markets, exchangesand trading systems

20%

2%2%

7%

16%16%

7%

7%

9%

14%




– certainty as to the information source andauthenticity of origin of the informationstored (authentication procedures);

– easy access by end-users, this includes forexample ensuring the search functions canoperate in different languages.

CESR’s opinion on establishing the inter-operability amongst national storage sys-tems (EU network)

The second part of the mandate dealt withthe architecture of the EU network of na-tional storage systems (national OAMs).

CESR also considered how a network modelcould be implemented. To this end, CESRdescribes three alternative approaches. Thefirst and preferred approach was based onthe development of a binding provision, bywhich the model of network would be de-fined and an oversight responsibility wouldbe assigned, Member States would ensurethat the OAMs to be appointed, abide by aninteroperability agreement and that co-ordi-nation was ensured. This structure will becomplemented with an interoperabilityagreement to be drafted by the competentauthorities and to be followed by the OAMs.According to the second approach, interop-erability could be achieved with stand aloneagreements among Member States alone andthe third possible approach proposed that in-teroperability could be achieved with standalone agreements between the OAMs them-selves.

CESR presented four possible network mod-els as a basis for its work on developing a sys-tem which could link the national OAMS.These models ranged from the most cen-tralised of systems to the least centralisedand could be summarised as follows:

• Model A: A Central Access Point (CAP)which is based on a central applicationserver, which collects the search requestscoming from a web page available to theusers and dispatches these requests to theOAM(s) of each Member State;

• Model B : A De-centralised system underwhich an application server is located ineach OAM;

• Model C: A Central list of issuers whichwould operate as if there is a central server

hosting an application, containing a com-plete list of issuers and the links to eachOAM holding information on that issuer;and,

• Model D: Basic Access Model which wouldrequire every national competent author-ity to publish on its website a list of hyper-links to every OAM in the EU.

Although CESR had not been mandated toopt for a preferred network model, CESR de-cided to express a preference for Model C,which was also the one that gathered mostsupport from consultees who provided viewson this issue. It is also the model that, in ac-cordance with preliminary cost estimates,has proved to have adequate functionalitieswith lower costs.

CESR also presented the possible content ofthe interoperability agreements, which willcover government and technical issues. Forthe more advanced network models, the tech-nical issues would be common reference dataitems, common interface and communicationstandards as well as common search keys.

CESR’s final advice on the technical issuesin relation to the role of the competent au-thority and on the standards of filing of theregulated information with the competentauthority

Finally, CESR’s paper also addressed a num-ber of technical issues regarding the role of thenational competent authority. In addition,CESR’s technical advice on the filing standardsof the regulated information with the compe-tent authority proposed standards in relationto security and certainty as to the informationsource and in relation to time recording, andexamined possible ways of aligning the filingwith the storage procedures.

B- CESR’s paper on Costs of thenational OAMs and of the EUnetwork

In May 2006, in response to the Commis-sion’s mandate on storage and filing of reg-ulated information, CESR presented apreliminary report in relation to both thecosts of setting up and operating nationalOAMs and costs in relation to networking allnational OAMs. These cost estimates are in-

23Regulatory Harmonisation (Level 2)

NEXTSTEPS

CESR will continue to follow theCommission’s activity on the is-sues of storage and filing of reg-ulated information.

Additionally, when more Mem-ber States implement the Trans-parency Directive, CESR willconsider whether Level 3 workshould be undertaken by theTransparency Expert Group andidentify the areas where thispossible work might need to bedeveloped.



tended to provide an indication of the orderof magnitude of such projects. These aresubject to certain assumptions further ex-plained in the paper and were based on thestandards for OAMs analysed in the final ad-vice on storage.

In relation to the national storage mechanism(OAM), the paper on cost issues contained:

a. The specific minimum quality standardsto be complied with by the national OAMshave been the basis for the cost evaluation.These included security standards, stan-dards of certainty as to the informationsource, standards of time recording andstandards of easy access by end-users. Itshould be noted that the cost estimatesprovided in the paper were based on thestandards for OAMs.

b. The assumptions and caveats of the costestimates in relation to the OAMs: Oneimportant assumption noted was that theOAMs will have to be set up from scratch.Therefore, the existing storage mecha-nisms have not been taken into accountfor the purposes of the evaluation.

c. The actual cost estimates for the settingup and operating a national OAM was pre-sented in the form of a table.

In relation to the EU network, the paper oncost issues contained:

a. The four possible network models (ModelsA to D) contained in CESR’s advice that areused as the basis for the cost evaluation.

b. The assumptions and caveats of the costestimates in relation to the network of na-tional OAMs

c. The actual cost estimates consisting of asummary cost estimate for all models.

C- Adoption of the Level 2 measures of the TransparencyDirective on dissemination,notification of major holdings,equivalence of reporting duties, interim financial information and election ofhome Member State

In June 2005, CESR submitted to the Com-mission its final Technical Advice on dissem-

ination of regulated information, notificationof major holdings of voting rights, equiva-lence of reporting duties, interim financialinformation and procedural arrangementsfor election of home Member State (Ref.CESR/05-407).

On the basis of the various elements ofCESR’s advice, the Commission presented itsdocument for the Level 2 Directive on theimplementing measures which was voted inthe meeting of the European SecuritiesCommission (ESC) on 17 November 2006and was passed by unanimity. CESR has ac-tively participated as an observer in thesediscussions and contributed to the discus-sion in the light of its advice.

D- Developments on storage ofregulated information

In November 2006, the Commission startedthe discussions with the Member States atthe ESC on the minimum quality standardsof the national storage mechanisms and onthe EU network that would connect them.CESR has actively participated in such dis-cussions, underlying that the impossibilityof achieving the final network in the shortterm might make necessary the establish-ment of an interim solution. During CESR’sChair’s meeting of January 2006, CESR dis-cussed the possibility of setting up an initiallow scale European network among nationalstorage mechanisms consisting of a com-mon website with the list of EU issuerswhich would include hyperlinks from eachissuer to its relevant storage mechanism.This website could be provisionally hosted byCESR on a voluntary basis.

A precondition for this provisional system towork is to make sure that the national stor-age mechanisms agree to provide CESR withthe lists of issuers and, more importantly, toupdate them on a regular basis.

At this stage, CESR needs clear formal sup-port from the Commission and from Mem-ber States in order to remain constantlyinvolved and committed to this process ofdeveloping a European network of nationalrepositories of financial regulated informa-tion. The DG Internal Market of the Euro-



pean Commission has expressed its prelimi-nary support for the interim solution de-scribed above.

E- First Implementation ForumCESR organised on 1 December 2006 an Im-plementation Forum of the Transparency Di-rective. The aim of that meeting was togather information at this stage of the stateof the implementation process in the Mem-ber States and also about some of the choicesmade or to be made by national legislators.Additionally, this exchange of informationcontributes to a consistent transposition of

the TD. Participants found the meeting veryuseful and agreed to consider the possibilityof organising another one in the future, inorder to share and to examine the experiencegained on the implementation of the TD.

Also, Members concurred on the need of fu-ture work at Level 3, as agreed by the formerTransparency Expert Group. This work willbe considered when the process of transpo-sition is more advanced, around the secondquarter of 2007, if agreed by CESR Members.

Statistics of the meetings

The Transparency Expert Group met fourtimes during 2006.


25Supervisory Convergence (Level 3)

Supervisory Convergence (Level 3)

6.1 ◆ Policy

Second progress report to the Financial Services CommitteeFollowing the ECOFIN endorsement on 5May 2006 of the FSC report on supervisoryconvergence (the so called Thierry Francq re-port), CESR provided the FSC with its sec-ond supervisory convergence report in whichthe following three specific obstacles to su-pervisory convergence were highlighted: (a)those areas where there is still a continuedlack of clarity regarding the supervisory au-thorities for the purposes of the TransparencyDirective; (b) the delay regarding the deci-sions about third country GAAP in particularUS GAAP ; and (c) the lack of harmonisationin the supervisory powers relating to thebreaches of the market integrity rules.

Increasing active dialogue andassisting the cross-border retailinvestorFollowing CESR’s consumer workshopwhich gathered investor associations andCESR experts on investor education in Va-lencia in November 2005, CESR has startedwork on developing a common portal of in-formation for the cross-border investor.

The facilitation and sharing of best practicesand experiences between Members, is key toproviding investors with a harmonised levelof protection and information throughoutEurope. As such, CESR has established a net-work of contacts in this area that Memberscan draw on, to gain or share information ongood practice.

In addition, CESR has sought to increase thevoice of retail investors in its development ofadvice. To this end CESR has reviewed howexpert groups engage retail investors duringthe preparation of advice and has sought toenhance CESR’s consultation practices in atangible manner to gain more input from re-

tail investors. This new practice was testedin relation to the development of CESR’s ad-vice on Transparency, and in particular in re-lation to Storage of Financial Informationwhich CESR thought would be an area ofparticular interest and impact on retail in-vestors. As such, CESR held a specific hear-ing for investors in March 2006, anddeveloped tailored questions for retail in-vestors on this issue. CESR Members wereasked to contact their national consumer as-sociation to establish if translations wereneeded and to explain the background andtechnical aspects of the paper. In addition,CESR sought in the Feedback Statement(Ref: CESR/06-293) to provide a particularresponse to the issues raised by retail in-vestors and illustrated how the expert grouphad amended its advice to reflect the valu-able input it had received. The hearing alsoprovided an opportunity for CESR to updateretail investor associations on the progressmade in relation to MiFID. The practice oftailored consultations of this kind will con-tinue, particularly where the issue has aclear impact on retail investors.

In addition, in response to comments madein Valencia, which suggested that retail in-vestor associations did not feel CESR had arole to provide education but that informa-tion would be useful, a small taskforce ofCESR Members has been set up to preparedraft proposals on information to be madeavailable to retail investors via a link fromnational securities supervisors’ websites to apage on CESR’s website, developed particu-larly with retail investors in mind. CESR hasalso agreed to hold at least one larger meet-ing with retail investors on a regular basis(every year or year and half).

Following the steps taken by CESR to in-crease the place of retail investor associa-tions in its work, the percentage of responsesfrom retail investor associations in the totalnumber of responses to consultations has in-creased from 1,7% in 2005 to 3,1% in 2006.This remains a low percentage, but CESRwill pursue its efforts to increase this in fu-ture consultations.

NEXTSTEPS

In 2007, CESR will continue to report to theFSC on the development regarding supervisoryconvergence, and will submit a package of con-tributions for the FSC’s discussions regardingthe Lamfalussy review.

26 Supervisory Convergence (Level 3)

other CESR Member for a short period tolearn specific skills, and would not lastmore than 3 months, mostly lasting 1week.

CESR’s website has a Members’ area where asection will be developed with information onvacancies and CESR Members. This HR sec-tion will aim to bring about greater trans-parency regarding the existing opportunitiesavailable for the staff of the Membersthroughout the CESR network. Staff will beable to find information regarding job vacan-cies currently being advertised by each mem-ber authority, core information regarding thebasis on which each CESR Member can em-ploy non nationals, along with informationon the structure of the authority, and basicinformation on cost of living and tax issues.

The HR taskforce met twice in 2006.

The Development of Joint TrainingThe three Level 3 Committees (CESR, CEBS,CEIOPS) have decided to establish a JointSteering Committee on training, which willapply a step-by-step procedure to outline allpotential options of a possible Europeancross-sector training framework. The Steer-ing Committee will be composed of Mem-bers of the three committees, eachcommittee designating two representatives.

Step 1: a comprehensive mapping of the po-tential demand for a primarily cross-sectoraltraining framework within the regulators ofthe three sectors, so as to prepare policy dis-cussion and decisions of the possible optionsfor the articulation of cross-sector and na-tional and EU training possibilities as well asthe governance structure, logistics and thefinancial parameters of the platform;

6.1 ◆ Policy


NEXTSTEPS

Further meetings will be held in order to finalisethe framework to be presented to the ECOFINin June 2007. A meeting with the extended HRnetwork, consisting of all CESR Members, willtake place in order to present the work of thetask force.

NEXTSTEPS

In order to ensure that meetings with the retailinvestors are very much focused on providinginput into streams of CESR’s work, the nextmeeting will be held in February 2007.

On this occasion, CESR will seek to gain inputfrom retail investors on CESR’s Level 3 workon MiFID; CESR’s work to review a simplifiedprospectus for UCITS; a review of the prospec-tus regime and how it is functioning since thenew Prospectus Directive was introduced.

Finally, CESR will seek to explain and discusshow CESR Members go about enforcing rulesand the work of CESR-Pol.

Developing supervisory convergence through movementof staff and joint trainingAs CESR has grown to 29 Members, the needhas been felt to strengthen the networkamongst the staff of CESR’s Members, boththrough training and greater movement ofstaff amongst the supervisors. This practicehas been encouraged by the ECOFIN Coun-cil Conclusions of 5 May 2006, which inorder to further converge practices amongstsupervisors requested that the three Level 3Committees report regularly on the progressmade to put in place, and to maintain, jointtraining and approaches to assist the move-ment of staff.

Movement of Staff

CESR has established a taskforce of humanresources (HR) experts to develop the essen-tial elements of the framework regardinghow to facilitate movement of staff betweenCESR Members.

Movement of staff could generally fall underthree main categories:

1) ‘Permanent moves’: staff who apply to an-other CESR Member and take either apermanent or on a ‘time limited’ contract;

2) ‘Secondments’: which involves staff whoundertake a specific role in another au-thority for no less than 6 months and upto 4 years;

3) ‘Short study visits’: this will involve a staffmember of one CESR Member visiting an-


6.1 ◆ Policy


Step 2 : the identification of all existing sup-ply in terms of training programmes at thenational or the international level, and withactive involvement of academics (proposedpartnerships) to cover all the needs,

Step 3: the first test seminars to be launchedand the structure and contents of themedium-term programme to be set up,

Step 4: the logistics and the budgetary as-pects of the framework.

NEXTSTEPS

By the first half of 2008, the Steering Com-mittee will deliver a report and a proposedway forward to be approved by the threeCommittees, including a precise framework.



6.2.1 – Review Panel

6.2 ◆ Monitoring

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Mandate of the Review PanelThe “Stockholm Resolution” adopted by the European Council on 23 March 2001 stated: ‘The Commit-tee of European Securities Regulators should also contribute to the consistent and timely implementationof Community legislation in the Member States by securing more effective co-operation between nationalsupervisory authorities, carrying out peer reviews and promoting best practice.’

To fulfil this important task, CESR established the Review Panel in March 2003. The Panel, chaired by theVice-Chair of CESR, Kaarlo Jännäri, and subsequently by Carlos Tavares, is a permanent group compris-ing the representatives of each CESR Member. The Review Panel is mandated to review the implementa-tion (day-to-day application) by all CESR Members of CESR standards and guidelines into national rulesand of EU legislation where requested by the European Commission.

Its recent work includes a survey conducted at the request of the European Commission, regarding im-plementation of the European Commission’s recommendations on UCITS, a review of the CESR StandardNumber 1 on financial information, a mapping exercise of the supervisory powers under the Market Abuseand the Prospectus Directives as well as the creation of the Protocol and the updating of the Methodologyof the Review Panel.

Chair’s messageCarlos Tavares, Chairman of the CMVM, Portugal, and Vice-Chairman ofCESR

“It has been another busy year for the Review Panel, whose importance inCESR’s work becomes more apparent as the transition from Level 2 to Level3 work continues.

The creation of the Protocol cements this important role and represents thecommitment that CESR has to facilitating supervisory convergence. As thenew Chair of the Review Panel I look forward to carrying on the solid and im-portant work that my predecessor Kaarlo Jännäri has done.”

During the course of the last year, the Re-view Panel met 5 times and completed itswork on four important areas: the review ofthe CESR Standard Number 1, the review ofthe implementation of CESR’s guidelines onthe transitional provisions amending theUCITS Directive, the mapping exercise onthe supervisory powers of the authoritiesarising out of the Market Abuse and theProspectus Directives and the Protocol andMethodology of the Review Panel. Moreover,the Review Panel started working on themonitoring of the implementation of CESR’sguidelines to simplify the notification proce-dure of UCITS.

1. Review of the Standard Number 1 on Fi-nancial Information

CESR agreed that the Review Panel shouldstart a review of the implementation of theCESR Standard No.1 on Financial Informa-tion (Ref. CESR/03-073) in CESR Members’jurisdictions before the summer of 2005. Inits meeting of 14 April 2005, the ReviewPanel set up an ad-hoc group, co-ordinatedby Mr Didier Niclaes from the Belgian CBFA,which developed the additional assessmentcriteria to be used in the exercise.

On 10 May 2006, CESR published a sum-mary of the self-assessments regarding the



6.2 ◆ Monitoring

implementation of Standard No. 1 on finan-cial information (Ref. CESR/06-185). Thefinal report on the review (Ref. CESR/06-181) was published on 2 August 2006, andsets out a full and comprehensive review ofCESR Members’ implementation of Stan-dard No. 1 by the Review Panel. The reviewreflects some changes in the conclusionsdrawn by CESR Members within the frame-work of their self-assessments.

2. Review of the implementation of CESR’sguidelines on the transitional provisionsof the amending UCITS Directive

On 23 May 2006 CESR published the resultsof an assessment of its Members’ implemen-tation of a number of CESR’s guidelines onthe transitional provisions of the amendingUCITS Directives (the “UCITS Guidelines”).The ‘UCITS Guidelines’ (Ref. CESR/04-434b)published in February 2005, were developedto converge the different administrativepractices that Member States had developeddue to ambiguities contained in the UCITSIII legislative texts. The review by Membersbegan in June 2005 and the review tookplace in three separate phases in accordancewith the different deadlines set out in theUCITS Guidelines themselves.

The first part of the assessment is a summaryreport which aims to facilitate readers in un-derstanding how Members have imple-mented the UCITS Guidelines (Ref.CESR/06-182). The second part of the infor-mation includes the Members own self-as-sessment of their implementation of theUCITS Guidelines which can be viewed‘country by country’ or ‘measure by meas-ure’ on CESR’s website by accessing thedatabase ‘Review Panel Assessments’. Howthe CESR Members’ have (or have not) im-plemented the relevant guideline is set outin the details of the self assessment.

The results of the review based on the self-as-sessments of Members, are very encourag-ing, in that:

• In relation to the first phase of the reviewregarding the transitional guideline con-cerning the availability of a simplifiedprospectus, the assessments show that thishas been implemented in almost all Mem-ber jurisdictions, with very few exceptions;

• In relation to the second phase of the re-view which focused on the treatment ofUCITS I funds of single fund structures au-thorised between 13 February 2002 & 13February 2004, and UCITS I umbrellafunds, the transitional guidelines have beenimplemented in all Member jurisdictions;

• In relation to the third phase of the reviewregarding Grandfathered UCITS I manage-ment companies managing “pass portable”UCITS III funds, the transitional guidelineshave been implemented in all Member ju-risdictions.

The Review Panel notes that it is necessary toexercise caution in drawing conclusionsfrom this review as many Members have notimplemented the guidelines by issuing anyspecific regulatory measures. Rather, inmany cases, implementation has taken placethrough the application of daily supervisorypractices, the effectiveness of which is notsomething that can be verified objectively bythe Review Panel.

For this reason, the Review Panel has rec-ommended that the home Member State au-thorities make sure that the practicalimplementation at the actual fund level is ef-fective, and has drawn to the attention ofCESR’s Investment Management ExpertGroup the need to follow up on the efficacyof the fund level implementation of the tran-sitional guidelines.

3. Mapping exercise of the supervisory pow-ers under the Market Abuse and theProspectus Directives

In 2006, the Review Panel was mandated byCESR to conduct a mapping exercise on thesupervisory powers that CESR authorities arevested with in accordance with the MarketAbuse Directive, the Prospectus Directive andtheir respective implementing measures.

Within the context of this exercise, the Re-view Panel prepared the following docu-ments that were approved by CESR:

• Two reports (one for the Market Abuse Di-rective and one for the Prospectus Direc-tive).

• Two executive summaries (one for theMarket Abuse and one for the Prospectusreport).



• Two excel files setting out in the form oftick boxes the supervisory powers of thecompetent authorities (one for the powerarising out of the Market Abuse Directiveand one for the powers arising out of theProspectus Directive).

These reports will be published during thecourse of 2007 and will contain the follow-ing sections:

a. Supervisory powers granted to the au-thorities

This section sets out what the powers ofCESR authorities are in relation to the pro-visions of the Market Abuse and the Prospec-tus Directives and their respectiveimplementing measures.

This section also describes how the powersare exercised by the authorities i.e. directly,in collaboration with other agencies, insti-tutions etc, with application to judicial au-thorities or whether these powers havedelegated these powers in accordance withthe provisions of the EU law. Moreover, thispart of the reports includes information onhow CESR authorities have implementedspecific provisions of the Directives in theeveryday execution of their tasks.

b. Issues of interest

This section includes a series of issuesdeemed to be of special interest concerningthe application of the Directives’ provisionsin practice.

Finally, the reports include a section regard-ing the progress that has been made sincethe last mapping exercise conducted byCESR in 2004 that was set out as an annex tothe Himalaya report (Ref. CESR/04 527b).

CESR will review the expansion of this exer-cise to other Lamfalussy Directives and theUCITS Directive.

4. The Protocol and the Methodology of theReview Panel

In accordance with the ratification of CESRPriority Task Force recommendations andthe agreement to further reinforce and up-grade the role of the Review panel, a Proto-col on the Review Panel was prepared andapproved by CESR Chairs. This Protocol isattached to CESR Charter and forms an in-tegral part of it. It sets out the principles ofthe Review Panel and more specifically itsrole, the purpose of its work, its tools andworking procedures as well as the commit-ments of CESR authorities to actively ensurethat the Review Panel fulfils its role.

The Methodology of the Review Panel wasupdated to be aligned to the Protocol and toreflect the experience gained by the ReviewPanel during its first few years. The Method-ology covers the self assessments and peer re-views to be undertaken by the Review Panel.It does not cover other tools to be used by theReview Panel such as mapping, surveys andselective reviews for which the Review Panelwill create methodologies in the future.

5. Simplification of notification proceduresfor UCITS

Following the publication in June of theCESR’s guidelines to simplify the notifica-tion procedure of UCITS (Ref: CESR/06-120b) and the agreement that monitoring ofthe implementation of these guidelineswould happen within a year, the ReviewPanel sent a questionnaire to the membersof the investment management group inorder to get a quick overview of what is thecurrent state of implementation of theguidelines in the different jurisdictions.

Statistics of the meetings

The Review Panel met five times during 2006.

NEXTSTEPS

Report to the Financial Services’ CommitteeThe Review Panel will prepare a separate report to be submitted to the Financial Services’ Committee (FSC) on the results of the mapping exerciseof supervisory powers under the Market Abuse Directive, the Prospectus Directive and their respective implementing measures. This report will formpart of CESR’s package of contributions to the Lamfalussy review.

Review of existing Standards, Recommendations and GuidelinesThere are in total 16 Standards, Recommendations and Guidelines some ofthem stemming back to 1999, the majority of which fall under the compe-tence of MiFID. During the course of the next year, the Review Panel willcommence a mapping exercise of all these existing CESR Standards, Rec-ommendations and Guidelines against the FSAP measures that either havealready or will in the coming year be implemented.

Simplification of notification procedures for UCITSA full review of the implementation of these guidelines will commence in thefirst quarter of 2007.

6.2 ◆ Monitoring



6.2 ◆ Monitoring

BackgroundOn 30 March 2005, at the request of the Eu-ropean Commission, CESR delivered its ad-vice (Ref. CESR/05-139b) regarding thepotential options to regulate credit ratingagencies (CRAs). In its advice, CESR pro-posed not to regulate the credit rating agen-cies industry at an EU level for the timebeing, and instead proposed that a prag-matic approach should be adopted to keepunder review how CRAs would implementthe standards set out in the IOSCO Code ofConduct. CESR therefore developed thisstrategy on the basis of voluntary participa-tion from CRAs. Moody’s, Standard andPoors’, Fitch Ratings and Dominion BondRating Service Limited are the CRAs thathave currently chosen to adhere to the vol-untary framework.

6.2.2– Credit Rating Agencies – Code of conduct

In summary, this framework includes threeelements: (i) an annual letter from each CRAto be sent to CESR, and made public, out-lining how it had complied with the IOSCOCode and indicating any deviations from theCode; (ii) an annual meeting between CESRand the CRAs to discuss any issues related toimplementation of the IOSCO Code; and (iii)CRAs would provide an explanation to thenational CESR Member where any substan-tial incident occurs with a particular issuerin its market.

In January 2006, the European Commissionpublished a Communication setting out itsapproach to credit rating agencies. In linewith the advice provided by CESR, the Com-mission concluded that at that moment nonew legislative proposals were needed. TheEuropean Commission considered that the

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Mandate of the Credit Rating Agencies Task ForceThe European Commission published on 27 July 2004 a call to CESR for technical advice on possiblemeasures concerning credit rating agencies that was submitted by 1 April 2005.

The work in this area was carried forward by a task force led by Ingrid Bonde, Director General of Fi-nansinspektionen, Sweden, and assisted by a member of the secretariat, Javier Ruiz del Pozo.

On 17 May 2006, CESR received a letter from the European Commission formally requesting CESR to re-port on credit rating agencies’ compliance with the IOSCO Code by the end of 2006.

Chair’s messageIngrid Bonde, Director General of Finansinspektionen, Sweden

“The voluntary framework of co-operation between CESR and Credit RatingAgencies has proved a successful way to move forward in an environmentwhere there is an absence of regulation. The extensive dialogue with CRAsand with market participants that CESR undertook before producing its re-port to the European Commission has had a very positive effect in assess-ing the real level of day- to-day compliance of the CRAs with the provisionsof the IOSCO Code. This work has proved to be satisfactory and CESR has

concluded that the codes of the four CRAs comply to a large extent with the IOSCO Code. How-ever, as there is still room for improvement, we intend to monitor closely the CRAs efforts to im-prove on those areas where a higher level of compliance or clarity would be desirable. Inaddition, we look forward to assess the impact of the new US legislation and the SEC imple-menting rules on the rating business in the European Union.”



existing financial services directives, com-bined with self-regulation by the CRAs onthe basis of the IOSCO Code, would providean answer to all the major issues of concernin relation to CRAs. However, the Commu-nication concluded that there was a need forthe Commission to monitor the global de-velopment of the rating business and forCESR to monitor compliance with theIOSCO Code and to report back to the Com-mission on an annual basis.

On 17 May 2006, CESR received a letter fromthe European Commission formally re-questing CESR to report on credit ratingagencies’ compliance with the IOSCO Codeby the end of 2006. In its formal letter theCommission requested CESR not only tocarry out the theoretical work of comparingcodes, but also to assess the level of day-to-day application of the IOSCO Code in prac-tice.

ProcessCESR set up a task force responsible for fol-lowing the steps outlined in CESR's volun-tary framework and for developing the reportto the Commission. The task force, which isthe same as the one that prepared the adviceto the Commission, has been chaired by In-grid Bonde, Director General of the SwedishFinansinspektionen and supported byRaquel García Alcubilla from the CESR sec-retariat. In addition, representatives fromthe Commission and from the Committee ofEuropean Banking Supervisors (CEBS) takepart in the task force as observers.

In June 2006, the task force held a meetingwith the CRAs to discuss further how thecodes were being applied in practice. Separatemeetings were held with each CRA and themembers of the CESR task force had the op-portunity to ask a number of questions to theCRAs’ representatives. Prior to the meeting,CESR wrote a letter to each CRA setting outthe questions that were to be raised on themeeting and asking for a written response.

In July 2006, following the steps outlined inthe voluntary framework, CESR publishedon its website the annual letters of disclosurefrom the CRAs on their compliance with the

IOSCO Code, together with a public state-ment with an update on CESR’s dialoguewith CRAs.

In addition, in July 2006 CESR published onits website an open survey (Ref. CESR/06-312) addressed to all market participantswith the purpose of gathering their experi-ence on the day-to-day application of theCRAs codes in practice. The period for com-ment ended on 15 September and CESR received 18 responses that can be viewed onits website.

CESR’s report In January 2007, CESR published its first re-port to the European Commission on thecompliance of the CRAs with the IOSCOCode (Ref. CESR/06-545).

The report provides a clear analysis of thecodes of the four CRAs that have chosen toadhere to the voluntary framework in rela-tion to the IOSCO Code. It includes in a col-umn format a comparison of the provisionsof the IOSCO Code with the correspondingones in the CRAs codes, indicating in thetable those measures where the CRAs havechosen to explain rather than comply, andincluding the CRAs' explanations. The table

6.2 ◆ Monitoring

Regulated markets, exchangesand trading systems

Questionnaire on day-to-day application of the IOSCO Code by the Credit Rating

Agencies (Ref. CESR/03-312)Total number of responses: 18

Banking


Issuers

Investment services

Others

11%

8% 11%

22%

17%33%



6.2 ◆ Monitoring

also provides for certain provisions some in-dications of how the measures are being ap-plied in practice.

In addition to the indications provided byCRAs on the practical application of the pro-visions included in the table, section III ofCESR’s report deals more specifically withthe practical aspects of the day-to-day appli-cation of the CRAs codes by including a sum-mary of the responses received to thequestionnaire prepared by CESR.

CESR’s conclusions are explained in the lastsection of the report. CESR considers thatthe CRAs codes comply to a large extent withthe IOSCO Code. There are, however, someareas or provisions where the CRAs codes donot comply. Some of these are of minor im-portance, because the CRAs achieve the de-sired outcome that the IOSCO Code aims at,without formally having provisions in theircodes that mirror the IOSCO Code. Never-theless, there are some areas, highlighted inthe last section of the report and mostly co-incident with those pointed out by marketparticipants, where the deviations are ofgreater importance. Some of them are com-mon to all four CRAs, and some of them arespecific to individual CRAs. In particular, thearea where all the CRAs seem to have diffi-culties in complying with the IOSCO Code,relates to the separation between the ratingservices and the ancillary services providedby the CRAs and the disclosure of unsolicitedratings.

While preparing its report, CESR closely co-ordinated with fellow regulators, especiallywith IOSCO, as it was also reviewing the im-

plementation by the CRAs of the IOSCOCode. IOSCO set up a taskforce to examinethe codes of conduct released by CRAs of allsizes and jurisdictions in response to theIOSCO Code and to determine whether anytrends exist with regard to non-complianceor consistent variations in interpretation byCRAs of what constitutes compliance.

IOSCO will publish a consultation paper withits initial review in February 2007. IOSCO’smain findings about the codes of the fourCRAs which are the object of CESR’s reportare basically consistent with CESR’s work.

Statistics of the meetingsThe Credit Rating Agencies task force metthree times during 2006.

NEXTSTEPS

CESR will continue its work during 2007 fol-lowing the voluntary framework of co-opera-tion with CRAs. In its next report, CESR willlook particularly into those issues identified inthe 2006 report as areas where there is stillroom for improvement to see whether therehave been any positive actions undertaken bythe CRAs.

Moreover, CESR also intends to assess in itsnext report the impact of the new US legisla-tion and the SEC implementing rules on therating business in the European Union.

In addition, CESR will continue its cooperationwith IOSCO, in particular in relation to thoseaspects mentioned in section IV of the report,which highlight areas where there might bescope for clarification of the IOSCO Code.



6.3.1 – CESR-Fin

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Mandate of CESR-FinCESR-Fin is a permanent Operational Group with the role of co-ordinating the work of CESR Members inthe area of endorsement and enforcement of financial reporting standards in Europe. CESR-Fin enablesCESR to play an effective role in the implementation and enforcement of IAS/IFRS in the European Union(EU) in the context of the EU’s new accounting framework that is compulsory for all European listed com-panies, as of 2005. This allows CESR to participate pro-actively through an engaged dialogue with all thekey policy makers involved throughout the European endorsement process, during the formation and im-plementation of the international accounting standards (IAS/IFRS).

Furthermore, CESR-Fin’s role is to assist CESR Members in delivering a co-ordinated and effective ap-plication of IAS/IFRS by EU listed companies, through the preparation of standards and guidelines on su-pervision and enforcement of financial reporting in Europe. CESR-Fin has also been tasked withmonitoring developments in Europe in the field of auditing.

CESR-Fin is chaired by Paul Koster, Member of the Board of the Dutch AFM, and supported by JavierRuiz del Pozo, Director of Financial Information at the CESR secretariat, and Marion Bougel-Bomtemps,Senior Officer.

Chair’s messagePaul Koster, Board Member at the Financial Market Authority (AFM), The Netherlands

“Since January 2005, International Accounting Standards (IAS/IFRS) havebeen adopted for all EU listed groups. CESR was closely associated to theprocess that led to the introduction of the standards in the EU, notablythrough its monitoring work on the development and adoption of the EUstandards, or with the publication of additional recommendations accom-panying the transition to IFRS. After the second year of IFRS accounts,

CESR-Fin’s main priority is to contribute to the consistent application of the standards. CESR-Fin has already taken the initiative to help with the development of robust and co-ordinated en-forcement across the EU by establishing a framework for discussion and information sharingamong European enforcement agencies (European Enforcers Co-ordination Sessions –EECS).In 2006 we have increased the number of meetings of the EECS and also we have seen a grow-ing use of the enforcement database created by CESR-Fin. I also think that the forthcomingpublication of the enforcement decisions included in the database will produce further benefitsfor harmonisation. Issuers, auditors and non EU enforcers will see which accounting treat-ments adopted by issuers are considered by EU enforcers as being within or outside the legalframework.

Discussion and analysis of enforcement decisions is the main CESR-Fin task, but the enforcers’sessions also enable us to identify issues which are not covered by the standards or which maybe affected by conflicting interpretations. The referral of these issues to the IASB or IFRIC, ifneeded, will further contribute to a proper implementation of IFRS in the EU.

Nevertheless our work to promote consistent application does not stop at the EU’s borders. Asconsistent application is a key condition for the lifting of the SEC’s reconciliation requirementof IFRS accounts to US GAAP, we have established in 2006 a regular dialogue with the SEC. Ihope our periodic exchanges of information with the SEC will contribute to achieve that goaland will help us to avoid conflicting regulatory decisions.”



6.3 ◆ Operational

In 2006, CESR-Fin revised its structure (Ref.CESR/06-117b), in order to be even more op-erational and ensure it is more efficient indealing with the new practical challengesfaced by securities regulators in the area offinancial reporting.

These new challenges included above all, thereinforcement of the co-operation amongEU national enforcers in the field of enforce-ment of compliance with IFRS (through theEECS). Furthermore, in considering its newstructure, CESR-Fin took into particularconsideration the need to work on the globalacceptance of IFRS financial statements pre-pared by EU issuers subject to supervision inEurope and outside Europe. CESR-Fin wasalso encouraged to deepen the relationshipwith securities regulators in major thirdcountries on financial reporting matters.

In 2006, CESR-Fin devoted a large part of itsattention to four main projects:

– The development of the European En-forcers Co-ordination Sessions and the de-velopment of the database of enforcementdecisions;

– The report on the first experience with theenforcement of compliance with the IFRSstandards;

– The CESR-SEC dialogue and co-operation;and

– The work necessary as a result of the Eu-ropean Commission’s new transitionalmeasures on the use of third country is-suers of information prepared under localor internationally accepted accountingstandards, published on 5 December 2006.CESR-Fin has produced guidance for itsmembers in order to ensure a consistentapproach towards third countries’ conver-gence programmes to IFRS during thenew transitional period.

Besides those major projects, CESR-Fin alsocontinued to follow the EU endorsement ofstandards/interpretations published by theInternational Accounting Standards Boards(IASB) and the International Financial Re-porting Interpretations Committee (IFRIC),as well as regulatory developments concern-ing auditors’ work. This entailed the main-tenance of structures within CESR-Fin for

the oversight of the standard settingprocesses in the area of financial reportingand to maintain or develop a closer relation-ship with relevant EU and international thirdparties such as the Accounting RegulatoryCommittee (ARC), Audit Regulatory Com-mittee AuRC, the European Financial Re-porting Advisory Group (EFRAG), theInternational Accounting Standards Board(IASB), the EU Accounting Roundtable, orthe International Auditing and AssuranceStandards Board (IAASB).

In addition, recent developments demon-strated the need for close co-operation be-tween securities regulators and auditregulators. CESR had a strong interest inbeing closely associated with the Europeanaudit regulators represented in the Euro-pean Group of Auditors Oversight Bodies(EGAOB) as well as with the recently estab-lished International Forum of IndependentAudit Regulators (IFIAR).

The European Enforcers Co-ordination Sessions (EECS)The core business of CESR-Fin is to promoteconvergence on the application of IAS/IFRSin the European Union.

Since 2006, the CESR database of enforce-ment decisions has been up and running. Inparallel, the European Enforcers Co-ordina-tion Sessions (EECS), which includes CESRand non-CESR members who have compe-tences in the enforcement of compliancewith IFRS, held 8 meetings devoted to dis-cussion of the decisions sent to the database,as well as emerging practical and technicalissues or cases that members encounter orare made aware of in the process of the sur-veillance of financial information. The groupalso held two joint sessions with representa-tives of the IFRIC/IASB.

The EECS also started working to put intoplace the necessary arrangements to startpublishing the enforcement decisions thatwere discussed in EECS, on the basis ofguidelines for publication which CESRMembers agreed on in January 2007. It wasdecided that all the decisions included in thedatabase will be published, unless:



– A similar decision has already been pub-lished by CESR, and publication of a newone would not add any substantial value tothe fostering of consistent application;

– The decision deals with a simple account-ing issue that, even having been consid-ered a material infringement, does not inof itself have any accounting merit;

– A particular EU National Enforcer, on agrounded and justified basis, believes thatthe decision should not be published;

– There is no consensus in the EECS to sup-port the submitted decision.

Publication of enforcement decisions will in-form market participants about which ac-counting treatments, as adopted by issuers,EU National Enforcers consider as comply-ing or not complying with the IFRS. Thismeans that the treatment adopted by the is-suer is considered as being within or outsidethe accepted range of possible treatments al-lowed by the standards. Such publication,along with the rationale behind these deci-sions will contribute to a consistent applica-tion of IFRS in the European Union. Finally,it may also facilitate wider consensus onIFRS matters by fostering public discussionand exchange of views with other interestedparties, namely issuers and auditors, on pub-licly disclosed enforcement decisions, whichwill help diminish the risk of divergent andunacceptable financial reporting treatments.The publication should take place aroundthe first quarter of 2007.

CESR’s report on the first experience with the enforcementof compliance with the IFRSstandardsIn March 2006, CESR-Fin started workingon a report on the first experience with theenforcement of compliance with the IFRSstandards. CESR hopes that this report willfurther promote the co-ordination of the en-forcement activities of its Members and willfacilitate the understanding of the enforce-ment of IFRS financial statements in the EU,especially in the context of the dialogue withthe US SEC and other third country en-forcers.

The main objective of the report is to provideinformation about the activities of CESR-Finand its members in relation to the enforce-ment of compliance with IFRS. Whilst the re-port will focus on the application andenforcement of IFRS, it is important to bearin mind that implementation of enforcementmechanisms is still in progress in many ju-risdictions and that enforcement of financialinformation is not a one-shot activity, but acontinuous process (sometimes spanned overseveral months or even years) requiring ef-fective professional judgment. CESR-Fin ex-pects to publish the report around mid 2007.

CESR – SEC co-operationCESR and the US Securities and ExchangesCommission (SEC) published on 2 August2006 a joint work plan (Ref. CESR/06-434)whose main focus is the application by in-ternationally active companies of US Gener-ally Accepted Accounting Principles (GAAP)and International Financial Reporting Stan-dards (IFRS) in the European Union and theUnited States, respectively.

The co-operation between CESR and theSEC on the application of US GAAP and IFRSin the European Union and the United Statesshould promote:

– The development of high quality account-ing standards;

– The high quality and consistent applica-tion of IFRS around the world;

– Full consideration of international coun-terparts’ positions regarding applicationand enforcement; and

– The avoidance of conflicting regulatory de-cisions on the application of IFRS and USGAAP.

As part of its regular review of corporate fil-ings, the staff of the SEC regularly reviewsissuers’ implementation of IFRS in theUnited States. CESR Members will also con-tinue to review US GAAP implementation byUS issuers in the EU. Under the work plan,these reviews might give rise to two types ofcommunication:

– Policy contacts: CESR and the staff of theSEC will share information about areas ofIFRS and US GAAP that raise questions in

6.3 ◆ Operational



6.3 ◆ Operational

Decision 2006/891/EC of 4 December 2006on the use by third country issuers of secu-rities of information prepared under inter-nationally accepted accounting standards.

These measures envisage a different treat-ment of such issuers before and after Janu-ary 2009:

– Transitional period until January 2009:During this phase, accounting frameworksother than IFRS, Canadian, Japanese or USGAAP may be used subject to certain con-ditions15. The decision to accept other ac-counting frameworks is the responsibilityof the competent authority, althoughrecitals in the two measures state that “Toensure consistency within the Community,CESR should co-ordinate the competentauthorities’ assessment as to whetherthose conditions are satisfied in respect ofindividual third country GAAPs”.

– After the transitional period, a third coun-try’s GAAP will be acceptable only if it wasdetermined equivalent to IFRS by the Eu-ropean Commission pursuant to their def-inition of equivalence which they willestablish by 1 January 2008. The Commis-sion will consult CESR on the appropri-ateness of the definition of “equivalence”,the “equivalence mechanism” and the ac-tual determination of the equivalence.

In September 2006, CESR-Fin started itswork in relation to the above mentionedmeasures:

To provide a list of GAAPs used by thirdcountry issuers in the EU;

To provide guidance on how individual com-petent authorities might decide during thetransitional period on a consistent basiswhich third country GAAPs might satisfy thetransitional requirements; and

When requested by the EC, to assist them indeveloping a definition of equivalence, amechanism for its determination and the ac-tual determination of equivalence.

terms of high-quality and consistent appli-cation.

– Individual case contacts: Where appropri-ate, CESR Members and the staff of theSEC will consult on issuer specific mattersregarding the application of US GAAP andIFRS in order to facilitate a solution thatcontributes to the consistent application ofUS GAAP or IFRS by companies that areboth listed in the EU and registered withthe SEC. This dialogue should avoid con-flicting regulatory decisions. Protocols forthe sharing of this confidential informa-tion between CESR Members and the staffof the SEC will be established.

The implementation of this work plan startedin 2006. The discussions took place princi-pally in two meetings, Washington on 25 Oc-tober 2006 and Paris on 4 December 2006.These meetings were devoted to reaching acommon understanding of the commitmentsof both parties under the work plan, espe-cially the interpretation of the events thattrigger communication on individual casesbetween the SEC and CESR Members. TheSEC and CESR are also discussing the stan-dard protocol that the SEC and the individualCESR Members would sign in order to per-mit the exchange of confidential information.Finally, the SEC and CESR-Fin exchangedviews on recurring accounting issues arisingfrom IFRS enforcement and policy develop-ments in the EU and in the US.

Equivalenceof third country GAAPThe Commission's measures on the use bythird country issuers of information pre-pared under local or internationally acceptedaccounting standards were published on 5December 2006. This can be found in theCommission’s Regulation 1787/2006 of 4 De-cember amending Commission Regulation809/2004 on prospectuses and Commission

15 According to Article 35.5A (c) of the Prospectus Regulation (and the similar provision in the Transparency Decision) theseconditions are:

(i) The third country authority responsible for the national accounting standards in question has made a public com-mitment, before the start of the financial year in which the prospectus is filed, to converge those standards with IFRS;

(ii) That authority has established a work programme which demonstrates its intention to progress towards convergencebefore 31 December 2008; and

(iii) The issuer provides evidence that satisfies the competent authority that the conditions in (i) and (ii) are met.



Statistics of the meetingsCESR-Fin met four times in 2006.

The EECS met eight times in 2006, and held two joint meetings with representatives of theIFRIC/IASB.

6.3 ◆ Operational

NEXTSTEPS

On 22 February 2007, CESR received the first request for advice from the European Commission onthird country GAAP.

The Commission has to report to the European Securities Committee and the European Parliament be-fore 1 April 2007 on the timetable envisaged by national accounting authorities of Canada, Japan andthe United States for the convergence. To this end, the Commission requests updates on the convergenceprogrammes in US, Japan and Canada as well as a list of the GAAP currently being used on EU mar-kets and a definition of equivalence. The deadline for submission to the Commission is 1 March 2007.

Also, CESR will have to advise by 1 May 2007 on a suitable mechanism for determining the equivalenceof a third country GAAP. This advice will not be an assessment of which GAAP are equivalent, but of themechanism, or procedure, for making that assessment.

Finally, CESR expects that the first publication of enforcement decisions would take place normally atthe end of the first quarter of 2007.



6.3 ◆ Operational

6.3.2 – CESR-Pol

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Mandate of CESR-PolCESR-Pol is a permanent operational group within CESR. It is made up of senior officials, from eachCESR Member, who are responsible for the surveillance of securities activities and the exchange of infor-mation. CESR-Pol’s purpose is to facilitate effective, efficient and pro-active sharing of information, inorder to enhance co-operation upon, and the co-ordination of, surveillance and enforcement activities be-tween CESR Members. CESR-Pol’s key objective is to make information flow across borders betweenCESR Members as rapidly as it would flow internally (in an authority) and, by so doing, to enhance thetransparency, the fairness and the integrity of European markets as a whole. The ability of CESR-Pol mem-bers to co-operate in the field of enforcement has been established by their signature of the CESR multi-lateral Memorandum of Understanding on the Exchange of Information and Surveillance of SecuritiesActivities (MoU) in January 1999.

CESR-Pol was mandated to promote closer co-operation and to ensure the consistent and effective appli-cation of EU key Directives, particularly the Market Abuse Directive (MAD). To this end, CESR-Pol is alsoentrusted by CESR Chairs (Ref. CESR/04-010c) to conduct Level 3 work in the area of the MAD.

As a result of the MAD work, CESR-Pol strives towards more operationality. It established a permanentsub-group, the Surveillance & Intelligence Group (S&I Group), which provides experts in the investiga-tion and enforcement of market abuse with a forum for sharing their experiences on the basis of individ-ual cases, and exchanging valuable information on methods and procedures used in day-to-day supervision.In addition, CESR-Pol has the capacity to create, on an ad-hoc basis, Urgent Issues Groups. These groupsare established when necessary, and allow the respective CESR-Pol members to co-ordinate and jointlyconduct investigations in urgent cases.

Kurt Pribil, Chief Executive Officer of the Austrian Financial Market Authority (FMA) was appointed Chair-man of CESR-Pol in September 2003. The group's work is supported by a member of the CESR secretariat,Angie Reeh-Schild.

Chair’s messageKurt Pribil, Chief Executive Officer of the Financial Market Authority(FMA), Austria

CESR-Pol is very often dubbed as “the heart“ - or less emotionally “the cen-tre“ - of the co-operation taking place among European regulators as weCESR Members are mandated by virtually all European Directives of theFinancial Services Action Plan (FSAP) to co-ordinate our efforts and to co-operate closely. Our overall goal is to achieve a level playing field for in-

vestment services and the requirements which apply to them across Europe to ensure sound andfair markets. It is clear to us that common objectives envisaged by the FSAP can only beachieved by close collaboration of the regulators within the European Economic Area (EEA)which should be built on trust and effective assistance and the active exchange of information.

Having said this, I very much appreciate the high level of team spirit and co-operation thattakes place within CESR-Pol. It is pleasing to see how full and frank exchanges of expertise andthe sharing of information is, in particular, the full discussions of findings of investigations,that are also of concern to other members, all of which have helped CESR-Pol achieve a greateroperational focus.

With the establishment of the S&I group and the intensive use of the newly invented instru-ments such as the Urgent Issues Group, and through in-depth discussions of cases at the ple-nary, CESR-Pol has become very operational in character. I believe we have made progressbeing in a good position to detect and deter market abuse across European borders and we willcontinue to pursue this direction.



One of CESR-Pol's key priorities also in 2006has been to achieve greater convergence in theapplication of the Market Abuse Directive atLevel 3 of the Lamfalussy process and to fostergreater co-operation in fighting market abuse.

The Market Abuse Directive:Public guidanceCESR-Pol's ad hoc MAD Level 3 draftinggroup prepared a 2nd set of guidance on theoperation of the Market Abuse Directive (Ref.CESR/06-562) which was launched for publicconsultation on 2 November 2006. Followingthe first two years of experience gained underthe new market abuse regime, CESR-Pol wasof the view that this was the right time to pro-vide further guidance to market participantsregarding common understandings devel-oped amongst supervisors with the intentionof achieving a convergent application of thelegal requirements on a day-to-day basis.

CESR-Pol has therefore developed in rela-tion to Articles 1-6 of the Directive, a draftcommon understanding amongst CESRMembers, regarding treatment of the fol-lowing aspects of the Directive and associ-ated issues concerning market abuse:

• What constitutes inside information?: Theguidance in this context gives further clar-ification on: ‘information of a precise na-ture’ as a term set out in the Directive;further guidance on information on mak-ing information public; amplifies what ismeant by the concept ‘information likelyto have a significant price effect’; a non ex-haustive list of purely indicative types ofevent or information which may constituteinside information. This guidance was de-veloped by drawing on the advice whichCESR provided to the Commission for theLevel 2 MAD implementing measures;

• When is it legitimate to delay the disclosureof inside information?: CESR-Pol provided afew indicative examples of the two circum-stances mentioned in Article 3 (1) where itprovides for the legitimate delay of disclo-sure of insider information. For example,the guidance provides indicative examplesin relation to: confidentiality constraints re-lating to competitive situations; product de-velopment; selling of major holdings in

another issuer; impending developmentsthat could be jeopardised by disclosure;

• When are client orders inside informa-tion?: Criteria have been drawn up whichcan be used in judging when the tests aremet. In addition, CESR-Pol produced indi-cators to assist CESR Members in deter-mining whether trading ahead of a clientorder has taken place;

• Insider lists in multiple jurisdictions: CESR-Pol members have recommended that a mu-tual recognition system shall be put in place(i.e. a competent authority would accept aninsider list maintained in accordance withthe rules of another CESR member).

The draft guidance had been discussed indepth with the European Commission whichhad been present during CESR-Pol’s meet-ing in Bratislava in October 2006. The Com-mission expressed appreciation forCESR-Pol’s draft guidance and contributeda few comments which were generally in-corporated. CESR Chairs approved the draftguidance in October 2006 and the guidanceis currently being finalised following theconclusion of the consultation process.

Call for evidenceThe work on MAD Level 3 guidance was in-tended to compliment the Call for Evidenceon the evaluation of the supervisory func-tioning of the EU market abuse regime (Ref.CESR/06-078) which was sent out in June2006 with a time span for responses until 31October 2006. The first one and a half yearexistence of the MAD had been considered asan excellent opportunity to consult with thepublic to hear views and experiences, bene-fits and eventually problems, with the newmarket abuse regime in Europe. Any recom-mendations on what issues further guidancewould be needed and proposals to overcomeany obstacles to efficient functioning of themarkets in accordance with the legal envi-ronment were welcomed. The goal of this ex-ercise was to maintain a general overview ofthe operation of the Directive and, if neces-sary, alerting CESR to the need to suggestchanges to the Directive or the Level 2 im-plementing measures or existing CESR stan-dards or even supervisory practices.

6.3 ◆ Operational



6.3 ◆ Operational

As part of the Call for Evidence on the func-tioning of MAD, CESR organised a publichearing on 17 October 2006, at CESR’spremises in Paris. At the hearing, marketparticipants indicated that they had not onlyfound the first set of CESR guidance issuedin May 2005 (Ref. CESR/04-505b) helpful,but also requested further guidance.

30 market participants responded in writingto the Call for Evidence. Many contributionsemphasised the burdensome nature of obliga-tions and elaborated on different implementa-tion as well as different application of the MADprovisions. Overall, further clarification wasrequested from CESR on issues which cameto light only during the day-to-day applicationof the provisions implementing MAD.

In deciding what to follow up from the Callfor Evidence, future work will be split intotwo strands: first, the work on Level 3 whereCESR can take action itself; and second, con-siderations concerning Level 1 and Level 2which lays in the responsibility of the Com-mission, the Member States, and the Euro-

pean Parliament. Taking into account theimportance of the MAD regime, CESR-Pol isof the opinion that the discussion should notbe structured along responsibility lines butrather deserves joining forces of all Euro-pean institutions involved in the Lamfalussyprocedure. Thus CESR-Pol will consider thesuggestions for changes and where a reviewof the provisions of the Directive or regula-tions seem to be necessary CESR will sug-gest to the Commission to examine theissues in question.

Members of CESR-Pol are currently priori-tising the issues flagged by market partici-pants to give the MAD Level 3 drafting groupbasic ideas to continue its work. CESR-Polwill produce a work programme to be postedon CESR's website to provide the industryfeedback.

Database for market abuse enforcement cases:In June 2006, CESR-Pol started a project toestablish a database for market abuse en-forcement cases. This project is intended tofulfil the mandate to undertake Level 3 workon the MAD and to develop a common un-derstanding among CESR Members of whatconstitutes market abuse.

The database will allow the central record-ing of enforcement decisions made/sanctionsimposed by CESR Members (and possiblynon-CESR members) in respect of breachesof the MAD with a view to assist regulators inapplying the provisions of MAD in a consis-tent and co-ordinated manner. The decisionto record the case in the database will betaken by the CESR Member who conductedthe investigation. For confidentiality con-cerns only CESR Members and specificallynominated staff of the CESR secretariat willbe granted access to the database.

The target date for the launch of the data-base is the end of 2007, provided the legaland technical requirements are fulfilled. Itmust be noted that CESR-Pol puts emphasison high quality and proper functionality ofthe MAD database rather than on meetingthe deadline by any means.

Call for evidence – Evaluation of the supervisory functionning of the EU market

abuse regime (Ref. CESR/06-078)Total number of responses: 32

Banking



Investment services

Issuers


Others

Regulated markets, exchangesand trading systems

16% 21%

3%

3%

13%

22%

3%

19%



Surveillance& Intelligence Group The work of the Sub-group of CESR-Pol, theSurveillance & Intelligence Group (S&Igroup), which was established in November2005, has successfully contributed to the op-erational approach of CESR-Pol aiming atachieving a convergent application of theMAD. The S&I group was set up to foster si-multaneous and comprehensive intelligencesharing and discussion of practical issues ofconcern arising in relation to day-to-day su-pervision of firms and markets.

The report of the Chair of the S&I group,Regina Schierhorn (BaFin), on the currentwork is a standing item on the agenda ofCESR-Pol's meetings. In 2006, the S&Igroup conducted several surveys among itsmembers to get a better picture of the legaland practical situation in the jurisdictionsinvolved, on issues of common concernssuch as: the management of trading halts;suspicious transaction reports; shareholderactivism; algorithmic trading and access tophone records.

At its December 2006 meeting in Paris,CESR-Pol approved the S&I group work pro-gramme for 2007. The established approachto prepare presentations on certain issues,which serve as a basis for an intense ex-change of practical experiences, has provento be successful and will be pursued further.Key elements of the work programme are:

a. Experiences with types of market abuseand possible consequences, i.e. insider

dealing rings and market abuse in shareswith low liquidity was given high priority;

b. Sharing information on working methods,e.g. on new investigation techniques or in-formation sources;

c. Issues of common concern, i.e. the han-dling of disclosure duties of market par-ticipants in order to profit from the safeharbours provided by EU-Regulation2273/2003 will be dealt with;

d. Discussion of cross-border cases in orderto alert other members of important de-velopments in the markets; and

e. Information on public guidance/guidelinesissued in Member States (standing point onthe agenda, for information purpose only).

Urgent Issues GroupsCESR-Pol had established the framework forUrgent Issues Groups, a mechanism de-signed in the course of MAD Level 3 work toachieve more operational functionality. Ur-gent Issues Groups are convened on an adhoc basis when necessary, and allowing therespective CESR-Pol members which areconcerned by alleged unlawful cross-borderactivities to co-ordinate and jointly conductinvestigations in urgent cases. So far, four adhoc Urgent Issues Groups have been estab-lished, and they have been working very ef-ficiently and successfully.

Amendment to the Terms of ReferenceIn May 2006 a revised version of the Terms ofReference (Ref. CESR/06-114) was approved

6.3 ◆ Operational

Investigations opened in 2006 for alleged market manipulation

Investigations opened in 2006 for alleged insider dealing

Number of requests for assistance in relation to investigating and taking enforcement action in the market abuse cases under CESR MoU sent to other CESR Members in 2006

Number of requests for assistance in relation to investigating and taking enforcement action in market abuse cases under the CESR MoU received from other CESR Members in 2006

STRs received in 2006

Investigations closed by cease of proceedings

Investigations closed by administrative measures

295

293

489

395

538

412

84

138Investigations closed by referral to criminal authorities/by taking criminal proceedings

CESR-Pol Enforcement Statistics



6.3 ◆ Operational

at the CESR meeting in Paris. The originalbasis for the organisational structure and theoperation of CESR-Pol which had been laidout in the Terms of Reference (Ref. CESR/02-070b) of June 2002 needed an adjustment toincorporate the structural changes of CESR-Pol such as the establishment of the S&Igroup and Urgent Issues Groups followingthe change of the legal environment withinEurope as well as the enhanced co-operationamong CESR-Pol members.

Co-ordination with other supervisory institutions Dialogue with IOSCO Standing CommitteeCESR-Pol as well as IOSCO SC 4 has con-ducted intensive work in the field of how toproceed with jurisdictions which are unableand/or unwilling to co-operate with foreignregulators. CESR-Pol provided input toIOSCO Standing Committee 4's work bysubmitting names of jurisdictions where thelegal and factual situation regarding co-op-eration and exchange of sensitive informa-tion gave reason for concerns. A survey wasconducted among CESR-Pol members to getan updated picture of the main jurisdictionswith which there have been issues concern-ing co-operation.

Co-operation with the CFTC:Following personal discussions between theChairman of the US Commodity FuturesTrading Commissions (CFTC), Reuben Jef-frey III, and the Chairman of CESR-Pol it wasagreed to intensify the communication be-tween the CFTC and CESR-Pol. On invitationof CESR-Pol Phyllis Cela, Director of the En-forcement Division of the CFTC, attended themeeting of CESR-Pol in Vienna in July 2006during which meeting there were frank dis-cussions and exchanges of views on enforce-ment matters and regulatory co-operation. Itis envisaged that CESR-Pol will continue itsdialogue with the CFTC and in particular, willmeet to share experiences regarding the en-

forcement of combined futures/cash transac-tions on bond markets in the future.

Dialogue with Liechtenstein: CESR-Pol has held close contacts with theregulator of Liechtenstein, the Finanzmark-taufsicht (FMA) Liechtenstein, in order tosupport its efforts to extend its ability to ex-change confidential information for law en-forcement purposes, including investigationsor administrative, civil or criminal proceed-ings, with European regulators. The new lawimplementing the MAD came into force inLiechtenstein on 1 February 2007. Formerimpediments in the law which hindered co-operation such as the requirement of dualcriminality and the 'principle of the long hand'were eliminated, and this aligns the regimemore closely with international standards.However, despite strong efforts of the FMALiechtenstein, for constitutional reasons theright of appeal available to the person whoseinformation and documents are the subject ofa request for assistance by a foreign regulatorhas not be abolished. However, the length oftime for this procedure has been shortened.The draft law was discussed at the CESR-Polmeeting in Paris in December 2006. Membersexpressed concerns that the new law may notbe considered sufficient to meet Europeanstandards for full co-operation and could notremove the obstacle to Liechtenstein's abilityto sign the CESR Memorandum of Under-standing (MoU). However, CESR-Pol would bewilling to provide the FMA Liechtenstein anyfurther assistance where requested to finallyachieve a level playing field concerning co-op-eration with CESR Members.

Statistics of meetings in 2006CESR-Pol convened four times and its sub-group, the Surveillance & Intelligencegroup, met three times during 2006 as wellas working on a virtual basis. In addition tothis, the Urgent Issues Groups and draftinggroups met separately.



NEXTSTEPS

The consultation period of the 2nd set of guidance on the operation of MAD will end on 2 February 2007.Any comments by market participants will be considered seriously to ensure that the guidance is ashelpful as possible to market participants and issuers, in complying with their obligations under theMAD regime.

CESR-Pol members are currently prioritising the issues flagged in the 'Call for Evidence' to give the MADLevel 3 drafting group, basic ideas to continue its work. CESR-Pol will produce a work programme tobe posted on CESR's website to provide the industry feedback.

Concerning the MAD Database for enforcement cases, the target date for the operation of such a data-base will be the end of 2007, subject to legal and technical prerequisites being met. More technicalwork has been undertaken in the preparation of a detailed Users’ Manual and test cases will be producedto make sure that the database functions properly when going ‘live’.

CESR-Pol will collaborate with the MiFID Expert Group on the convergent implementation of theMiFID in relation to the co-operation arrangements among EU regulators established within the Di-rective.

As a key aspect of CESR-Pol’s activities, CESR-Pol will continue to build on the close co-operation es-tablished amongst CESR Members on enforcement cases. In this context, Urgent Issues Groups will con-tinue to be convened as and when necessary.

CESR-Pol's subgroup on Surveillance & Intelligence (S&I group) will continue to act as a platform forthe exchange of intelligence and expertise in day-to-day supervision on the basis of concrete cases andwill provide the CESR-Pol plenary with the results of its deliberations.

Externally, CESR-Pol will also continue to establish and intensify bilateral contacts with non-CESRmembers who lack the ability and/or willingness to collaborate. CESR-Pol will also maintain closecontact with other bodies that are affected by similar issues pertaining to co-operation difficulties witha view to exchanging views and experiences on managing relationships with unco-operative jurisdic-tions.

It is envisaged that CESR-Pol organise a meeting with the US CFTC to share experiences regarding theenforcement of combined futures/cash transactions on bond markets.

6.3 ◆ Operational



6.4 ◆ Expert groups

6.4.1 – CESR-Tech

The first major IT project for CESR-Techdeals with the exchange of transaction re-ports between CESR Members in accordancewith Article 25 of the MiFID. This projectstarted in June 2006 and the exchangemechanism will be up and running in Au-tumn of 2007. Other activities includeddrafting CESR’s IT budget for 2007, as wellas the sign-off of various internal guidelinesfor the group and for projects working underits supervision.

The Transaction Reporting Exchange Mech-anism or the ‘TREM’ Project made goodprogress in 2006, despite the tight timetableand a number of difficult issues to solve. Theproject team working under the supervisionof the group specified the content of the re-ports to be exchanged between competentauthorities, started the setup of a hub to beused in the exchange and worked on variouspractical aspects of the exchange mecha-nism.

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Mandate of the CESR-TechCESR established CESR-Tech in May 2006 in order to strengthen its information technology governancestructure. This working group will enable CESR to work on IT related issues quickly, efficiently and in amanner that allows for necessary IT project management to be used for IT projects that CESR undertakesin conjunction with its Members. CESR-Tech is chaired by Hector Sants, Managing Director, Wholesale andInstitutional Markets at the UK FSA, and a member of the secretariat, Ari Voipio, IT Project Manager, whoalso acts as the rapporteur.

CESR–Tech is established to deal with any form of pan-EU IT project stemming from EU legislation (ei-ther current, or future) and any other area where CESR Members consider it necessary or useful to worktogether on IT issues.

CESR-Tech is composed of senior CESR representatives who have experience, knowledge and expertise inIT project management, financial markets, and supervisory related issues.

The main tasks of CESR-Tech are: • Allocation and use of IT budget on a ‘project by project’ basis; • Operational issues related to the management and running of IT projects; • Technical issues that arise during the course of specific projects; • Setting up of an operational working method necessary to achieve its objectives.

Chair’s messageHector Sants, Chief Executive Officer of the FSA, UK

The more operational nature of CESR is well demonstrated in the area of IT.CESR as an organisation faces new challenges as the operator of new Eu-rope-wide IT systems. This new role has been and still is, a learning processfor CESR. We have been forced to find new ways to co-operate and makedecisions and to share responsibilities. While this has been challenging attimes, it has already also proven to be rewarding as well.

As the chairman of CESR-Tech, I look confidently towards the future as wego forward and finalise the arrangements for the exchange of transaction reporting. The newTREM system will set a standard for future co-operation that I hope will bring benefits to theinvestors, the financial industry and the regulators all alike.



CESR-Tech launched in December a consul-tation on coding standards (Ref. CESR/06-648b) to be used in the exchange betweenCESR Members. The TREM system will beused only by CESR Members. It was, however,felt useful to consult the industry on this as-pect of the system since the choices for TREMinfluence the choices made and to be made byCESR Members with respect to the codingstandards in national transaction reporting.

The responses from the industry confirmedthe concept proposed but also flagged a num-ber of practical challenges in the use of theproposed coding standards. Many instru-ments lack ISIN codes, which CESR proposedto use for the identification of financial in-struments and the use of CFI code for theidentification of the type of an instrument isstill gathering pace. Many investment firmsneed to acquire BIC codes and there is also a

need to extend the coverage of MIC codes forthe identification of regulated markets andmultilateral trading facilities. The imple-mentation approach adopted will thereforehave to take account of these practical issues.

The main challenge to the project is the issueof instrument reference data. Each CESRMember potentially needs to identify androute to other CESR Members transaction re-ports on trades in any instrument admitted totrading in Europe. The default solution in theMiFID Level 2 Regulation Article 11 for thesourcing of instrument reference data fromthe regulated markets and individual CESRMembers proved to be impossible to deploy inthe available timeframe, and CESR thereforestarted to explore alternative interim solu-tions. The group also started a dialogue withFESE, the Federation of European SecuritiesExchanges, in order to co-operate and estab-lish a longer term solution.

The TREM project started to train CESRMembers for the use of the new system. Anexecutive briefing was held in November inParis. The purpose of the meeting was to briefCESR Members on the practical steps theyneed to take in order to connect their nationaltransaction reporting systems to TREM.

CESR-Tech prepared a report to the EUCommission on the arrangements for the ex-change of transaction reporting betweenCESR Members. The report was submittedat the end of January. It explains the overallarchitecture of TREM. The report details theremaining main challenges in the projectand explains the steps CESR planned to un-dertake in order to face them.

Statistics of meetingsCESR-Tech met six times during the courseof 2006 and there were a number of addi-tional meetings. The TREM project held sev-eral meetings in various compositionsthroughout the year.


Consultation on the use of reference data standard codes in transaction reporting (ref.

CESR/06-648b)Total number of responses: 19

Banking



Investment services

Others

Regulated markets, exchanges and trading systems

37%

5% 16%

5% 5%

32%




NEXTSTEPS

The TREM project will continue in 2007. The project will finalise the specifications of TREM, set up thehub for the exchange of information, identify a solution for instrument reference data and continuetraining CESR Members in TREM. The group will liaise with the industry in order to promote the useof standard codes and co-operate with the MiFID expert group on technical issues related to transac-tion reporting. TREM will be active by the end of 2007.

6.4.2 – Clearing and Settlement

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Mandate of the CESR/ESCB joint working groupAfter the publication of the CESR/ESCB “Standards for Securities Clearing and Settlement Systems in theEU” in October 2004, the Joint Working Group received the mandate from CESR/ESCB to continue itswork on the development of an assessment methodology, further work in the area of central counterpar-ties and the elaboration of a number of open issues, as announced in the introduction of the aforementionedStandards.

In view of the position of the EU institutions in this area, the announcement by the European Commis-sion in July of 2006 not to propose any specific EU-legislation in this area and the development of a Codeof Conduct by the relevant parties in the industry (covering issues such as price transparency, access andinteroperability),the activities of CESR/ESCB in this area were put on hold during 2006. After the adop-tion of the Code of Conduct in November 2006, which will gradually be implemented by 2008, CESR joinedthe Monitoring Group established by the European Commission, to review compliance with the Code ofConduct by the signatories.

NEXTSTEPS

CESR will remain in close contact with the European Commission in order to keep up to date with theon-going regulatory initiatives in the area of clearing & settlement. In this context, following indica-tions by the EU institutions, CESR has to consider if and how to resume its work on the CESR/ESCBStandards for Securities Clearing and Settlement.



ECONET’s report on “Financial stability is-sues related to key financial market infra-structures in the Credit Derivatives marketand other EU wholesale markets” was deliv-ered as part of CESR’s contribution to theSeptember 2006 Financial Stability Tablemeeting of the European Financial Com-mittee.

A subgroup on Impact Assessment (IA) wasset up in July 2006. The subgroup consistsof members of ECONET that are experts inthe field of IA in their national authorities.

CEBS and CEIOPS nominated representa-tives to the ECONET who participated in

both the ECONET and the IA subgroupmeetings.

Following its mandate, one of the tasks thatECONET undertook in 2006 was to reviewexisting IA methodologies regarding finan-cial regulation and supervision. ECONETconducted a survey of all CESR Membersthat apply impact assessment in the area offinancial regulation. The results showed thatone in three CESR Members had formallyadopted IA in their decision making processand that there was a high degree of com-monality in the IA methodologies used bythese Members.

6.4.3 – ECONET

Chair’s messageAlexis Pilavios, Chairman of the Capital Markets Commission, Greece

For a number of years an ad hoc CESR group of economists has met on anon regular basis, primarily for discussing inputs for the purpose of report-ing economic trends in the Securities Markets to the Financial StabilityTable of the Economic and Financial Committee. In line with the recom-mendations of the Priorities Task Force and in recognition of CESR’s moveto Level 3 work, it was considered necessary to change this group into amore structural one.

Following these recommendations, ECONET, which I have the pleasure to chair, was estab-lished in June 2006. Since then, the members of the group have dedicated a significant amountof work to facilitate the ability of CESR to meet its increasing number of reporting commitmentsto EU institutions that require input by financial economists on market trends, risks and sta-bility issues and to align CESR with the European Union’s commitment to a better regulationagenda that included impact assessments.


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Mandate of the ECONETECONET was established in June 2006 in order to facilitate the ability of CESR to meet an increasing num-ber of reporting commitments to European bodies that require the input of financial economists, and toevaluate and, as appropriate, develop CESR's approach to the use of impact analysis. This group is chairedby Alexis Pilavios, Chairman of the Hellenic Capital Markets Commission, and assisted by a member of thesecretariat, Alexandra Berketi.

The objectives of ECONET are to:

enhance CESR's capability to undertake economic analysis of market trends and key risks in the securi-ties markets that are, or may become, of particular significance for its Members;

review existing impact analysis methodologies regarding financial regulation and supervision, evaluate thefeasibility of developing such a methodology for use in CESR’s work, and if considered useful and neces-sary to develop practical impact analysis principles for use on a case by case basis by CESR.




A second study ECONET conducted was toevaluate the feasibility of developing an IAmethodology for use in CESR’s work and todevelop a number of issues linked to its pos-sible use. The results of this study showedamong other things that it was feasible to de-velop an IA methodology for CESR’s work,that there were in principle valuable rolesthat IA can play and that IA could be struc-tured as a practical and economical tool fo-cussed on questions that are important tothe work done by CESR.

Following this outcome, ECONET was man-dated in October 2006 by the CESR Chairsto develop practical IA guidelines. The DraftGuidelines were submitted in January 2007to CESR Chairs. It was agreed to test the ap-proach on the next CESR request for advicein order to refine and finalise them.

During 2006 ECONET discussed thoroughlywith the CEBS and CEIOPS the possibilitiesof a common 3L3 approach to IA. CEBS andCEIOPS followed closely ECONET’s work inthis area and as a result, the Draft Guidelinesare applicable to all EU Level 3 Committees.

Finally, ECONET was mandated and con-ducted preliminary research on the differenthedge fund classification systems currentlyadopted by the industry, and have draftedChapter 4 of this annual report.

Statistics of the meetings:ECONET has met four times since its estab-lishment in June 2006. ECONET’s subgroupon Impact Assessment (IA) has met six timessince its establishment in July 2006.

NEXTSTEPS

Reporting to European financial institutions:ECONET is expected to submit two reports to the Financial Stability Table (FST) of the European Fi-nancial Committee on topics mandated by the FST. These reports will mainly deal with current mar-ket developments and risks in the securities markets with a particular emphasis on the risks involvedin the hedge fund industry and in the structural developments in the markets. The reports are expectedto be delivered in March and August 2007 respectively.

ECONET’s work on Impact Assessment:ECONET will apply its draft IA methodology on the next CESR request for advice in order to refine andfinalise it. CESR, CEBS and CEIOPS will launch a consultation on the methodology itself.

Contribution to the Review of the Lamfalussy framework:ECONET will prepare a fact book on the European Market’s structure based on information received byCESR Members.

Hedge Fund Research:ECONET will continue exploring the possibility of assigning specific risk factors to hedge funds invest-ment strategies.



CESR contribution to the Commission White PaperThe Expert Group on Investment Manage-ment prepared CESR’s contribution to theCommission White Paper as well as a reac-tion to the European Commission’s industryreports (Ref. CESR/06-461d).

Eligible assets under the UCITSDirectiveCESR delivered its final advice on the clari-fications of definitions concerning the eligi-ble assets for UCITS on 26 January 2006 tothe European Commission after two roundsof consultation (Ref. CESR/06-005), together

with a feedback statement (Ref. CESR/06-013). The advice aims at providing fundmanagers and competent authorities withmore certainty as to whether certain finan-cial products are an eligible asset for UCITS.The advice seeks to provide the necessaryproduct innovation within UCITS whilst en-suring a high and consistent level of investorprotection across the EU.

When publishing CESR’s advice to the Eu-ropean Commission on clarification of thedefinition concerning eligible assets for in-vestments by UCITS, CESR concluded thatit looked to consider further whether deriv-atives of hedge fund indices can be deemed


6.4.4 – Investment Management

Mandate of the Investment Management Expert GroupThe work is carried forward by an Expert Group chaired by Lamberto Cardia, Chairman of the Italian se-curities regulator, the Commissione Nazionale per le Società e la Borsa (CONSOB). The Group is assistedby Carlo Comporti, deputy to the Secretary General, as interim rapporteur within the CESR secretariat.

The mandate (Ref. CESR/04-160) and work programme for the Group was approved by CESR in June2004. Drawing heavily on the responses from a consultation on “The role of CESR in the regulation andsupervision of UCITS and asset management in the EU”, and the needs expressed by market stakehold-ers, it was decided that the short-term priority of the group would be to focus on ensuring that the singlemarket on investment funds is fully functional.

Chair’s messageLamberto Cardia, Chairman of the CONSOB, Italy

“After an intense activity in improving the functioning of the current UCITSDirective, from the perspective of both eligible assets and the simplificationof the notification procedure, the Expert Group is now entering into an evenmore challenging phase, in parallel with the proposal for legislative changesanticipated by the Commission. In particular, the Group, under a specific re-quest from the Commission, will develop a new regime for the key infor-mation to be given to investors to replace the current simplified prospectus.

The Group will also start conducting operational sessions to improve the mutual understand-ing of day-to-day supervision with a view to achieving progressive convergence in this area, forwhich an Operational Task Force will take the necessary preparatory steps for the establishmentof a permanent forum where this important activity will be conducted.

I am sure that with these two initiatives the Expert Group will continue to provide importantinput to the fostering the functioning of the internal market for asset management in the in-terests of both the investors and the industry”.

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as eligible investments for UCITS. The rea-son was that the impact of such derivativesraised questions about the risk profile of theUCITS, and the ability of retail investors toassess this impact.

CESR published an Issues Paper CESR/06-530 on this topic in October 2006. Throughthe publication of this paper, CESR requestedadditional input into the debate on eligibleassets under the UCITS Directive in relationto the inclusion of hedge fund indices.Through this Issues Paper CESR indicates itsdesire to ensure that the full breadth of viewsand opinions that market participants and re-tail investors hold on this issue are fullyheard before reaching any formal conclusion.

The decision to explore more thoroughly theissues arising from the potential inclusion ofhedge fund indices in UCITS, should be seenin the wider context of CESR’s final advice tothe European Commission on eligible assets,which set out in detail its views on the crite-ria that should be met by a financial index inorder for it to be an eligible investment. In de-veloping the advice and the two rounds ofconsultation CESR analysed many of the

comments received, which suggested thathedge fund indices should also be consideredby CESR as an eligible underlying asset for de-rivatives. However, given the complexities ofhedge fund indices and the fact that they arestill developing, CESR concluded that furtherwork was necessary.

Guidelines to simplify the notifi-cation procedure of UCITSIn order to simplify access by investors to in-vestment funds created under the UCITS Di-rective in the EU Single Market, CESR issuedon 29 June 2006, guidelines to facilitate thecross border notification of UCITS (Ref.CESR/06-120b), together with a feedbackstatement (Ref. CESR/06-301).

Within the boundaries of the existing legalframework of the acquis communautaire ofthe UCITS Directive, the guidelines havetried to address several of the requests forsimplification of the cross border notifica-tion process, proposed by market partici-pants.

The following key issues were included inthe final text of the guidelines:

• UCITS can submit the notification letter ina language common in the sphere of in-

CESR Issues Paper – Can hedge fund indices be classified as financial indices for the purpose of UCITS? (Ref. CESR/06-530)


Banking



Investment services


Others

Total number of responses

49% 12%

2%

21%

4% 2%

10%

Second consultation regarding CESR’s guidelines for supervisors regarding the

notification procedure according to Section VIII of UCITS (Ref. CESR/06-120)


Banking


Investment services

Total number of responses

13%

26%

11%

50%



NEXTSTEPS

Following its Green Paper on the enhancement of the EU framework for investment funds, the Euro-pean Commission adopted its White Paper in November 2006, containing actions for future develop-ments in the area of investment management. Following this document CESR adopted a revised WorkProgramme of the Expert Group that includes two new projects: the establishment of an OperationalTask Force and the work in the area of Simplified Prospectus under a request from the Commission.

Finally, the Expert Group on Investment Management will finalise its views on hedge fund indices.


ternational finance to the Host competentAuthority where this is not contrary to thedomestic legislation or regulations;

• Once a complete notification has beenfiled, the notification procedure shouldpossibly be reduced as an average to ashorter period than the maximum twomonths allowed. The Host Member StateAuthority shall inform the UCITS aboutthe incompleteness and missing informa-tion and documents as soon as possibleand in any case, within one month fromthe date of the receipt of the incompletenotification;

• In order to simplify practices and reducecosts, Competent Authorities will rely onself-certification of copies of original attes-tations by the notifying UCITS, the origi-

nal attestation should include an Englishversion to be provided by the UCITS.

Regarding new sub-funds, which are addedto the umbrella fund with the intention to bemarketed in the Host Member State, wherethe marketing arrangements are already fa-miliar to the Host country Competent Au-thority, CESR has agreed that the necessarytime for the Host Authority to check shouldbe significantly less than the two-month pe-riod. To simplify the processing by the HostCompetent Authority of the notification ofumbrella funds with a large number of sub-funds to be marketed, CESR recommendsthat umbrella funds with a large number ofsub-funds should have one full prospectus.



During the course of 2006 and in line withthe ECOFIN conclusions, CESR finalised andput in place its mediation mechanism whichis set out in the form of a Protocol that is at-tached to the CESR Charter. The generalmechanism is based on, and incorporates,the specific mediation mechanism whichCESR-Pol developed for market abuse en-forcement cases as stipulated in Article 16(4) of the Market Abuse Directive in March2005.

The finalisation of the mechanism follows aconsultation paper that was published in theautumn of 2005 (Ref. CESR/05-483c), anopen hearing and a meeting with mediationexperts. The mediation Protocol and Feed-back Statement (Ref. CESR/06-287b) was

published in August, and the mediation taskforce was disbanded following completion ofits work. The last step in the process was put-ting together a list of mediation experts fromwhich the gatekeepers will select panel-lists/mediators as and when the need to doso arises. The mechanism will enable thenetwork of regulators to deal with potentialdisputes in an efficient, fair and confidentialmanner.

Key features of the mechanism are set out inthe Protocol on CESR’s mediation mecha-nism (Ref. CESR/06-286b), and include:

• a “comply or explain“ approach by Mem-bers to both a request for mediation and itsoutcome;


6.4.5 – Mediation Task Force

Mandate of the Mediation Task ForceCESR established a Task Force on Mediation, which was chaired by Manuel Conthe, Chairman of the Span-ish Securities Commission (Comisión Nacional del Mercado de Valores) and with the mandate to developa proposal for a general CESR mediation mechanism. The Task Force was composed of members fromeleven CESR Members, and the European Commission also participated. The work was supported by Geral-dine Levy, Director at the CESR secretariat.

The objective of such a mediation mechanism is to facilitate the rapid, effective and balanced solution todisputes between CESR Members, in order to facilitate convergence at Level 3 and the fair implementationand application of CESR measures and EU law. The mechanism proposed had to ensure that the compe-tence of the Commission was fully respected, and that it did not interfere with the respective roles of theCommission and the European Court of Justice in the interpretation and enforcement of EU law.

Chair’s messageManuel Conthe, Former Chairman of the CNMV, Spain

“An important step in achieving supervisory convergence and building an ef-fective network was successfully taken when the mechanism was finalisedand adopted by CESR in the summer of 2006.

The mechanism has been up and running since September 2006, and wehave a sound and robust list of mediation experts ready and waiting for thefirst case. Although there have been no mediation cases to date, I am con-fident that when used it will be a successful tool through which conflicts be-

tween CESR Members can be resolved in a constructive and efficient manner.

I am delighted that the task force’s hard word has also paid off in terms of the use of the mech-anism as the basis for the creation of similar mechanisms by CESR’s sister Lamfalussy Com-mittees CEBS and CEIOPS.”

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• market participants’ ability to bring issuesfor mediation to the attention of the rele-vant competent authority;

• a flexible approach to dispute resolutionthrough the use of either an evaluative orfacilitative procedure depending on thepreferences of the parties;

• confidentiality; • rapidness and efficiency of the procedure.

The mechanism includes a number of pro-cedures through which: • the appropriateness of an issue for media-

tion can be assessed;• potential disagreements of the parties to

either the initial assessment of the suit-ability of the case for mediation or its out-come can be dealt with in a speedy, fair andefficient manner;

• conflicts of interests of gatekeepers, panelmembers and mediators are dealt with;

• the European Commission is consulted fortheir views on conflicts of interpretation ofEU legislation;

publication of outcomes in the form of re-ports and summaries to enhance supervisoryconvergence or provide guidance to author-ities or market participants has been intro-duced.

Strict timeframes have been introduced intoall aspects of the procedure to ensure thatcases do not take any longer than six monthsmaximum to resolve, but can also be com-pleted within six weeks. It is anticipated thata case will normally take around 3-4 monthsdepending on its complexity and the num-ber of embedded appeal procedures that getused.

NEXTSTEPS

In accordance with Article 12 of the Mediation Protocol, publication of reports or summaries on ananonymous basis of mediated outcomes will be made public if, such publication is considered by CESRto encourage supervisory convergence or provide guidance to authorities or markets participants. Therewere no mediation cases during the course of 2006.




6.4.6 – MiFID

Chair’s messageArthur Philippe, Director and member of the Management Board at theCommission de Surveillance du Secteur Financier, Luxembourg, Chairof the Expert Group in 2006

“MiFID represents a big challenge for all actors: industry, investors and reg-ulators. The MiFID Expert Group will take the necessary steps to facilitate thesmooth implementation of the new measures by November 2007. Continu-ous and open dialogue with market participants is instrumental in achievinggood results; for this reason we have strengthened the ways of conducting

this dialogue through a newly established Consultative Working Group, a more structured dia-logue with representatives of retail investors and open consultations.

The MiFID Expert Group will facilitate achieving common views on the way in which the ruleswill be implemented; in so doing I am confident it will represent and meet the high expectationsthat are put on CESR to develop convergence of regulatory responses across Europe.”

Mandate for the MiFID Level 3 Expert GroupIn the light of the changing emphasis of CESR’s work on MiFID, which is now focused on ensuring aseamless application of the rules across Europe by its Members, CESR has decided to dissolve the previ-ous three Expert Groups and the MiFID Steering Group which prepared and submitted its Level 2 techni-cal advice on implementing measures.

In its place, CESR has established a new single 'MiFID Level 3 Expert Group' that will undertake work todeliver supervisory convergence in the day-to-day application of the legislation (i.e. Level 3). This grouphas been chaired during the course of 2006 by Arthur Philippe, Director and member of the ManagementBoard at the Commission de Surveillance du Secteur Financier, Luxembourg’s securities supervisor. Thesecretariat’s rapporteur for this group is Carlo Comporti, Deputy to the Secretary General at CESR and Di-rector of Markets and Intermediaries.

There are two working sub-groups reporting to the MiFID Level 3 Expert Group:

– the ‘Intermediaries Sub-group’, has been chaired by Antonio Carrascosa, Director General at the Comi-sion Nacional del Mercado de Valores (CNMV), Spain's securities supervisor. The rapporteur of the ‘In-termediaries Sub-group’ is Diego Escanero, Senior Officer at the CESR secretariat;

– the ‘Markets Sub-group’, chaired by Hans Wolters, Head of Policy at the Autoriteit Financiele Markten,Holland's securities supervisor. The rapporteur of the ‘Markets Sub-group’ is Jari Virta, Senior Officerat CESR secretariat.

CESR has also formed a MiFID Consultative Working Group which draws together technical experts fromthe markets and industry practitioners with expertise in the various sectors covered by MiFID to provideadvice on the technical practicalities of the guidance developed under the work programme. A list of itsmembers is available on CESR's web page.

Finally, a number of MiFID Implementation fora have been organised to enable the exchange of informa-tion between Members on the practical implementation of MiFID across Europe to take place.

To date CESR has held three meetings of the MiFID Level 3 Expert Group, six meetings of the Interme-diaries Sub-group and 5 meetings of the Markets Sub-group.

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Following the European Securities Commit-tee and EU Parliament approval of the draftLevel 2 implementing measures, CESR hasshifted its attention to ensuring that day-to-day application of the MiFID, which was tobe transposed by Member States by January2007 and will apply by November 2007, takesplace in a convergent manner amongst su-pervisors across Europe.

The first step in this process was a consulta-tion issued on 6 July 2006 (Ref. CESR/ 06-413) which proposed the details of CESR’swork programme for a new MiFID ‘Level 3’Expert Group. A revised version of the workprogramme, focussing on the activity of theGroup up to November 2007 was then ap-proved at the CESR meeting in Paris on 19October 2006, taking into account both theresults of public consultation and input fromthe MiFID Consultative Working Group.

The work programme concentrates on keyissues that need to be addressed before theapplication of the new measures. It concen-trates on the operational aspects that ariseas a consequence of the provisions of the Di-rective and its implementing measures, andin identifying practical solutions to address

the regulatory changes. It also includes areasof work that will originate from the Com-mission as contribution to the reviews underArticle 65 of MiFID. Finally, it includes areasof joint work conducted with the other Level3 Committees (CEBS and CEIOPS) on out-sourcing and internal governance.

More specifically, CESR has identified fourcategories of ‘Level 3’ work under MiFID, onwhich it would be helpful for supervisors toensure convergence in their practices. Theseinclude:

• Technical issues of operational importancewhere consistent implementation of theLevel 1 and Level 2 legislative texts need tobe achieved before their implementation inorder to provide market participants withpan-European strategies with greater cer-tainty. These issues broadly relate to thefunctioning of the passport of investmentfirms and regulated markets. Areas of workinclude, for example, calculations relatingto market transparency (such as the defi-nition of liquid shares and “block sizes”)and publication and consolidation of mar-ket transparency information;

• Other issues of a technical and operationalnature, aimed at ensuring a convergentimplementation of MiFID, which do not allnecessarily need to be tackled before thedate of implementation of the new legisla-tive framework. Amongst such issues, pri-ority is given in the work programme to‘best execution’ where for example, it maybe considered useful to develop a conver-gent view amongst supervisors on, the bestexecution requirement for non-equitymarkets in particular and, clarifying inter-pretations of the execution performancewhich is also identified;

• Work to foster greater cross-sector con-vergence is also proposed and will be con-ducted with CEBS and CEIOPS. Examplesof such work include outsourcing and a re-view of internal governance of intermedi-aries to ensure there is no unnecessaryduplication;

• A number of reports or reviews are also an-ticipated in the MiFID legislative texts, forexample, a review of the possible extension


CESR’s Work Programme on MiFID Level 3 work (Ref. CESR/06-413)


Banking


Investment services

Issuers

Investor relations

Others Regulated markets, exchanges and trading systems

47%

22%

16%

3% 3%

3% 6%



of the pre- and post-trade transparencyregime to transactions in classes of finan-cial instruments other than shares.

6.4.6.1. IntermediariesWork that has been undertaken to date hasfocussed on the following issues:

Record KeepingOn 20 October 2006, CESR published forconsultation a draft recommendation of alist of minimum records that competent au-thorities are required to develop in accor-dance with Article 51(3) of the Level 2Implementing Directive. The objective wasto achieve consistency in the list. The con-sultation period closed on 27 November2006. In January 2007, CESR approved afinal recommendation (Ref. CESR/06-552c)to its Members which sets out the content ofthe list of minimum records together with afeedback statement offering some explana-tions on CESR's final approach to some ofthe most significant issues raised in the con-sultation (Ref. CESR/07-085).

Passporting Passporting was identified as one of the keypriorities of the work programme, to allowfor both the smooth functioning of therights set forth under the Directive, and asmooth transition from the current Invest-ment Services Directive to the new MiFIDregime. CESR published a public consulta-tion paper on 15 December 2006. The con-sultation period closes on 9 February 2007.The paper sets out a number of practical pro-posals and questions for a common approachon the notification procedures under Articles31 and 32 of MiFID as well as proposals onthe future collaboration between home andhost authorities that will be necessary inorder to ensure that supervision of cross-border activities under the Directive is clear,efficient and effective. Taking into accountthe proposals in the consultation paper, to-gether with stakeholder responses, CESR in-tends to issue recommendations to itsMembers that will set out a common ap-proach to practical and operational aspectsrelated to the functioning of the passport ofinvestment firms.

InducementsCESR published a public consultation paperon the 22 December 2006. The consultationperiod closes on the 09 February 2007. Tak-ing into account the proposals in the con-sultation paper, together with stakeholderresponses, CESR intends to issue guidelinesthat will set out a common approach to theinducements regime under MiFID.

Best ExecutionCESR approved the publication of a publicconsultation paper on best execution on 31January 2007. The paper sets out a numberof practical proposals and questions for acommon approach with respect to the prac-tical aspects of the best execution require-ments under MiFID. Taking into accountthese proposals, together with stakeholderresponses, CESR intends to issue recom-mendations to its Members.

As regards the work conducted jointly withCEBS and CEIOPS, it is worth mentioningoutsourcing and internal governance.


Consultation on the list of minimum records in Article 51 (3) of the MiFID

Directive (Ref. CESR/06-552) Total number of responses: 32

Banking


Investment services

Issuers



Others

9% 38% 6%

3%

9%

19%

16%




OutsourcingThis work was finalised by the publication ofthe CEBS guidelines on outsourcing on 14December 2006, these guidelines apply onlyto credit institutions. A joint report was pre-pared to map different requirements acrossthe sectors and to promote further conver-gence. The objective was to foster conver-gence in the application of differentrequirements across the sectors.

CEBS and CESR have worked closely to-gether to ensure that the proposed guidelinesare consistent with the regulatory frameworkdefined by the MiFID and its application tocredit institutions. There will not be furtherwork undertaken by CESR in this area untilafter MiFID's implementation date.

Internal GovernanceThe work within the context of mapping therequirements included in various Commu-nity laws, including, in particular, the Capi-tal Requirement Directive and the MIFID,has progressed during 2006.

6.4.6.2. MarketsThe work of the Markets sub-group coveredthree areas: (i) work facilitating the opera-tion of MiFID market transparency regime;(ii) some (non-technical) aspects on trans-action reporting; and (iii) work relating tothe Commission's forthcoming report on thepossible extension of market transparency tofinancial instruments other than shares.

Market data consolidationBased on public consultation CESR approvedin January 2007, Level 3 Guidelines and Rec-ommendations on Publication and Consoli-dation of market data (Ref. CESR/07-043)

Transaction reportingIn the context of the overall CESR work ontransaction reporting the Expert Group actsin full co-ordination with CESR-Tech and itsTREM project. There are three layers of workthat have been identified and allocated ac-cording to the following criteria:

– who should report and to whom; this ques-tion relates to the scope and is addressed

in a consultation paper approved in Janu-ary 2007;

– what should be reported; this refers to thenational systems of transaction reporting;

– how reports should be exchanged betweencompetent authorities; this refers to theTREM project details of which are set outin Section 6.4.1 of Chapter 6.4 of this an-nual report.

On transaction reporting the sub-group hasaddressed some non-technical issues whichhave been evaluated as crucial for thesmooth operation of the reporting system. Aconsultation paper was approved in January2007 (Ref. CESR/07-047).

Non-equities transparency

Based on Article 65 of the MiFID, the Com-mission shall submit reports to the Euro-pean Parliament and the Council on thepossible extension of the scope of theMiFID’s pre and post-trade transparency re-

Call for evidence on the consolidation of market transparency data

(ref. CESR/06-134) Total number of responses: 31

Banking

Individuals


Investment services

Investor relations

Issuers

Press

Others

Regulated markets, exchanges and trading systems Government, regulatory and enforcement

27%

6%

3% 3% 3% 10% 6%

6%

3% 33%




NEXTSTEPS

The MiFID ‘Level 3’ Expert Group aims to facilitate a smooth and consistent implementation of thenew regime. In addition to the proposed work programme which is developed for this purpose, theMiFID Expert Group will also foster supervisory convergence by providing a close network of colleagueswhich will enable Members to seek each other’s advice and share their experience in respect to opera-tional issues arising out of the implementation of MiFID, where it is necessary to address certain issuesat a European level.

With a view to encouraging consumers to participate in its work, on 12 February 2007 CESR will hosta Consumer Day where representatives of national and European consumer associations are invited toshare their views on the Inducements and Passporting consultation papers.

The Intermediaries sub-group will continue its work on passporting (with the objective of developing aprotocol for co-operation between competent authorities particularly for supervision of EU branches),inducements, and best-execution.

The Markets sub-group will continue its work on transaction reporting and evaluate the comments re-ceived during the public consultation. The sub-group will also prepare an internal guide for CESR Mem-bers on the calculation and publication of MiFID market transparency data. Finally, the sub-group willprepare the response to the mandate from the Commission on bond market transparency. This workwill include a public consultation in spring and a final response to the Commission by the end of June.

quirements, to financial instruments otherthan shares. As part of its preparation for thereport, the Commission has asked CESR foradvice. The first part, including some factualinformation on the operation of bond mar-kets was delivered in the autumn of 2006.Based on an additional request CESR hasstarted broader work. A call for evidence willbe published in February 2007 (Ref.CESR/07-108).

6.4.6.3. Implementation foraThe MiFID Level 3 Expert Group has organ-ised three sessions of the implementationfora, to share experiences on the practicalimplementation of the MiFID. The meetingshave been devoted to discussing:

• initiatives undertaken by CESR membersat national level to approach implementa-tion of the MiFID;

• sharing of information about the parts inthe Directive where there are discretionsor options for Member States or Compe-tent Authorities;

• sharing of information about powers andresources of Competent Authorities andpossible use of delegation by CompetentAuthorities, where allowed by the Direc-tive;

• internal questionnaire on transaction re-porting;

• sharing of information about the imple-mentation of Article 4 of the Level 2 Di-rective;

• sharing of information about programmesof internal and external training and edu-cation and other communication pro-grammes.

The next meeting will take place in 2007,when the transposition and implementationof the MiFID will be at a more advancedstage.

Statistics of meetingsIn 2006, CESR has held three meetings ofthe MiFID Level 3 Expert Group, six meet-ings of the Intermediaries Sub-group andfive meetings of the Markets Sub-group.



6.4.7 – Prospectus

Mandate of the Prospectus Contact GroupTo ratify the work conducted during 2005 by CESR prospectus experts, the Committee set up on 19 Jan-uary 2006 a Prospectus Contact Group and issued the mandate this group will follow. The Prospectus Di-rective and the Commission’s Regulation on prospectuses became effective on 1 July 2005. Regulators andmarket participants are facing many application and operational issues arising from the implementation ofthis new legal framework. This is compounded by the fact that the Prospectus Directive is a maximum har-monisation Directive and that the scope for interaction between competent authorities has increased be-cause of the passport. It is therefore essential to have convergent application amongst the competentauthorities. CESR considers that in order to achieve such convergence it is necessary to hold practical andoperational meetings of prospectus contact experts to discuss specific implementation and application is-sues and, to the extent possible, agree common solutions. A Prospectus Contact Group was therefore setup to fulfil this objective.

Chair’s messageGérard Rameix, Secretary General of the AMF, France

“CESR has been very active in the area of Prospectus over the last four yearsby providing advice to the European Commission on the implementingmeasures of the Prospectus Directive and producing Level 3 recommenda-tions for the consistent application of the Prospectus legislation.

After completion of these tasks, there has been a strong call from marketparticipants for the establishment within CESR of a method of exchangingviews on implementation problems and ideas, and the development and

sharing of daily operational and supervisory best practices between Members.

To cater for these demands, CESR has continued its work through the Prospectus Contact Groupthat has concentrated the efforts of competent authorities to ensure supervisory convergencein the application of the new legal framework on Prospectuses that became effective on 1 July2005. This group has focused on the simplification of procedural aspects for the correct func-tioning of the passport, but has also made an important effort to reach and publish commonapproaches on the practical aspects put forward by market participants and regulators.

The positive response from market participants to the Q&A on prospectus that we have pub-lished and the demands for a continuous update of this guide, highlights the relevance of CESR’swork to effectively reduce divergent practices in Member States and foster a proper and con-sistent implementation of the European legislation on Prospectus.

To add to this work, the Prospectus Contact Group has undertaken the challenging task of pro-ducing a report on the evaluation of the practical functioning of the Prospectus Directive andRegulation. In this report we will identify obstacles and divergent practices that pose a risk forthe proper functioning of the single market and, where needed, propose solutions.”

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BackgroundCESR has been very active in the area ofprospectus over the last four years, provid-ing the European Commission (Commis-sion) with technical advice on theimplementing measures of the ProspectusDirective. CESR completed this initial workin 2003 and continued its activity in this areaduring 2004 to ensure the consistent appli-cation of the Prospectus legislation. To thisend, the CESR expert group prepared a setof recommendations (Ref. CESR/05-054b)which gave guidance on how to produce aprospectus. In addition, in 2005, CESR de-livered its advice to the Commission on howto deal with those circumstances where thehistorical financial information to be in-cluded in the prospectus might not suffi-ciently reflect the issuer’s whole businessthroughout the required period (“complexfinancial histories”). In a parallel manner,CESR Members have been co-ordinatingprocedures to assist a seamless operation ofthe passport and to deliver supervisory con-vergence. These have contributed to thesmooth functioning of the passport since 1July 2005.

The Prospectus Directive and the Commis-sion’s Regulation on prospectuses becameeffective on 1 July 2005. During the course ofthe 2005 and 2006, regulators and marketparticipants have responded to practical ap-plication and operational issues arising fromthe implementation of this Communityframework into national law. The need for a‘common approach’ is compounded by thefact that the Prospectus Directive is a maxi-mum harmonisation Directive and that thescope for interaction between competent au-thorities has increased because of the pass-port that it provides for issuers. It istherefore essential for CESR Members toachieve convergence in their approaches.

Publication of Q&A on prospectusesTo this end, prospectus experts from CESRMembers have been holding practical andoperational meetings to discuss specific im-plementation and application issues and, tothe extent necessary, agree on common so-

lutions. This Expert Group is chaired byGérard Rameix, Secretary General of theFrench Autorités des Marchés Financiersand supported by Javier Ruiz del Pozo, Di-rector of Financial Information at the CESRsecretariat, and Raquel García Alcubilla,Senior Officer. The European Commissionalso participates at the meetings of the groupas an observer.

The work of this group materialised in July2006, when CESR published a guide for mar-ket participants (Ref. CESR/06-296d).

This ‘Q and A’ guide that CESR Members de-veloped, establishes a convergent responsefrom all EU securities supervisors to com-monly asked questions on the day-to-day ap-plication of the EU legislation regarding thepreparation of prospectuses. It focuses on re-sponses to queries that are likely to have anEU-wide impact on market participants orend users, and therefore on the smooth func-tioning of the Single Market. Some of theagreements aim at facilitating the correctfunctioning of cross-border offers (for exam-ple, information from the issuers to hostcompetent authorities or passport of the sup-plements). The rest are responses to ques-tions on the application of the legislation thathave been arising frequently in most Mem-ber States (for example, how to treat em-ployee share option schemes, free offers orinterpretation on the historical financial in-formation to include in the prospectus).

CESR does not intend to issue new stan-dards, guidelines or recommendations onprospectuses. Rather, the purpose of thispublication is to provide quick answers tothe questions market participants channel tothe relevant CESR Members and/or to CESRsecretariat. The common approachesreached are not set in stone. The Group op-erates in a way that will enable it to react ef-ficiently if any aspects of the published‘common positions’ needs to be modified oradapted for greater clarity.

The European Commission Services haveprovided very useful input on some of thequestions discussed in the paper. However,these views do not bind the European Com-




mission as an institution, which will be en-titled to take a different position.

Report on the evaluation of thepractical functioning of the Prospectus Directive and Regulation In addition to this effort to achieve and pub-lish common approaches, the ProspectusContact Group has been working on a reportthat seeks to identify any practical day-to-daydifficulties encountered with the passportand other relevant provisions of the Prospec-tus Directive. The objective of the report is toidentify obstacles to the fluid functioning ofthe passport and divergent practices in Mem-ber States that pose a risk for the properfunctioning of the single market.

To seek input from market participants,CESR published a call for evidence (Ref.CESR/06-515) in November 2006 and re-ceived around 40 responses. Those that are

public can be viewed on CESR’s website. Inaddition, an open hearing was held in Janu-ary 2007.

CESR’s report will analyse the responses re-ceived from market participants and will in-clude proposed solutions to the issues whereaction is needed.

Statistics of the meetingsThe Prospectus Contact Group met threetimes during 2006 (and once in January2007).

Call for evidence on the supervisory functioning of the Prospectus Directive

and Regulation (Ref. CESR/06-515)Total number of responses: 41

Banking


Issuers


Others

Regulated markets, exchanges and trading systems

24% 12%

17%

10%

17% 20%

NEXTSTEPS

The CESR group will continue to meet regularlyto discuss the questions that might be raised bymarket participants. (CESR has set up a specificemail address to receive these questions: [email protected]). The pace of the future publicationswill depend on the amount of new questions iden-tified and how long it takes to analyse the issuesand to develop common positions.

CESR intends to publish its report on the super-visory functioning of the Prospectus Directiveand Regulation around June 2007.

In addition, now that the Prospectus Regulationhas been amended to include an additional pro-vision to deal with issuers having a complex fi-nancial history, CESR will assess what Level 3work is needed in respect of the requirements re-lating to complex financial histories.

The Prospectus Contact Group is chaired byGérard Rameix, Secretary General of the AFM,France, and supported by Raquel Garcia, seniorofficer at the CESR secretariat.




6.5.1 – Contacts with other Level 3 Committees

6.5 ◆ Supervisory Convergence beyond CESR

In 2006 the Committee of European Securi-ties Regulators (CESR), the Committee of Eu-ropean Banking Supervisors (CEBS) and theCommittee of European Insurance and Oc-cupational Pensions Supervisors (CEIOPS)had agreed on a joint Work Programme,which was published in February 2006 andbuilt on the Joint Protocol signed by the threeCommittees on 24 November 2005.

The objectives of the co-operation betweenthe three Committees are set out in the JointProtocol and include (i) sharing informationin order to ensure compatible sector ap-proaches are developed; (ii) exchanging ex-periences which can facilitate supervisors’ability to co-operate; (iii) producing jointwork or reports to relevant EU institutionsand committees; (iv) reducing supervisoryburdens and streamlining processes; and (v)ensuring the basic functioning of the threeCommittees develops along parallel lines.

In light of the need for convergence acrosssectors wherever possible and appropriate,and given the increasing importance of mar-ket integration and cross-sector business ac-tivities within the EU, the objective of theWork Programme is to make supervisory co-operation transparent across financial sec-tors and to enhance the consistency betweenthe sectors so that work done in one finan-cial sector is coherent with the work devel-oped in the others.

The Committees have established liaisons forthe daily contacts that take place betweenthe Committees, as well as specific contactpersons for each of the different workstreams set out in the 3L3 Work Pro-gramme.

The secretariats and chairs of the Commit-tees meet on a regular basis. During thecourse of 2006 there were three 3L3 secre-tariats and three 3L3 chairs meetings.

The work done under the 3L3 Work Pro-gramme 2006 can be divided into four sec-tions as (A) joint work, (B) consistencyprojects, (C) reports to EU institutions and(D) information exchange:

A – Joint work 1. Financial conglomeratesThe work on financial conglomerates is ledby CEBS and CEIOPS, with CESR partici-pating as an observer. Preparations werestarted by the Committees in late 2005 toform an Interim Working Committee on Fi-nancial Conglomerates (IWCFC), whichcame into being in early 2006. It was chairedby Prof. Arnold Schilder (CEBS Member)and Vice-Chaired by Michel Flamée (CEIOPSMember). The decision to set up this Com-mittee involved the EU supervisors in bank-ing and insurance in the three Level 3Committees, the European Commission andthe finance ministries in the European Fi-nancial Conglomerates Committee (EFCC).The EFCC needs expert input on financialconglomerates issues to feed its discussionsfor example when reviewing the FinancialConglomerates Directive (FCD). The Euro-pean Commission confirmed in a letter tothe IWCFC Chair in November 2006 its ex-pectations of the IWCFC to address theunique challenges posed by conglomerates.

The Committee’s work focuses on the con-sistent implementation of the FCD, lookingat the convergence of national supervisorypractices on issues such as the assessment ofcapital requirements, and tackling issues re-lated to the identification, co-operation andco-ordination requirements.

The IWCFC met on three occasions in 2006,with a first meeting in May 2006. Most of theCommittee’s work in 2006 has led to ex-changing information arising from the way




the FCD has been implemented in the dif-ferent Member States. In addition the Com-mittee has been working on two draft Callsfor Advice from the European Commissionand the EFCC. These cover an investigationinto the eligibility of capital in the differentsectors, and a joint exercise on the arrange-ments for supervision in the USA andSwitzerland.

The work of the Committee resulted in Jan-uary 2007 in the publication of IWCFC’s re-port on eligibility of capital instruments. Thereport analyses the main similarities and dif-ferences of the characteristics of regulatorycapital for a bank, an investment firm and aninsurance entity. The IWCFC found thatmost eligible capital instruments - althoughnamed differently - are in fact common inthe banking and insurance sectors and sharethe same core characteristics. However thereare important differences as well, which canbe explained by the differences in the natureof business of each sector, or by differencesin the calculation of eligible capital elementsand the way they are taken into account atgroup level.

The IWCFC has a full Work Programme for2007. In 2007 it will analyse the impact andconsequences that any differences in the sec-tor rules on eligible capital elements mighthave for the supervision of financial con-glomerates. In 2008 it plans to deliver an-swers in the form of a roadmap on that issue.By end 2007 the Committee will also providethe European Commission with some tech-nical analysis on the arrangements for con-solidated supervision of financialconglomerates in the US and in Switzerland.Thirdly, the Committee will work on theidentification of conglomerates and the useof the waiver provided by Article 3.3 of theFCD. Fourthly, the Committee will work onco-operation arrangements between author-ities involved in the supervision of each fi-nancial conglomerate. Finally, the IWCFCwill start to work in detail on the key risksfor conglomerates, such as concentrationrisk and intra-group transactions. Through-out, it will continue its dialogues alreadyopened with the industry, such as presenta-tions and case studies.

2. Joint definitions of standards,guidelines and recommendationsThe three Committees aimed at aligning thecommon application of the terms used to de-scribe Level 3 measures, namely “standards,guidelines and recommendations” in each ofthe Committees. During the course of thiswork, it became apparent that due to thelegal limitations inherent in the use of Level3 measures and the varying historical tradi-tions of how these terms have been appliedin each of the respective Committees, theterms are actually interchangeable in andacross the sectors. As such, the Committeeshave agreed that an attempt to harmonisethe use of the terms would not have addedvalue, though a description of their use andexpected effect would. The results of thiswork are attached as annex [XX] to this an-nual report.

B – Consistency projects to reduce supervisory burdensand streamlining processes.

1.Outsourcing The joint work that the Committees under-took to ensure that to the greatest extentpossible there would be consistency andalignment between the outsourcing rules setout in the MiFID Level 2 measures, and theCEBS Level 3 guidelines on outsourcing, hasbeen completed following the adoption ofthe MiFID regulation in August 2006 andCEBS publication of its guidelines in De-cember, including a table of the mapping ofthe compatibility of the sector work.

2. Supervisory co-operationThe secretariats of the three Committeeshave been working on a comprehensive re-port comparing the regulatory approachesand co-operative arrangements in place be-tween the various supervisors. This will helpshare information on methods and practicesacross the sectors. The report is due to be fi-nalised during the first half of 2007.

3. Reporting requirements The three Committees issued a question-naire to a number of conglomerates in the




EU with the objective of identifying possibleinconsistencies between sectors in the appli-cation of reporting requirements in the EU.The responses to the questionnaire are beinganalysed and the results will be presented inthe first half of 2007. As a first impression, itis noted by the respondents that overlap ona cross sector basis is not the main issuewhen looking at reporting requirements.

4. Internal governance During the course of 2006, the 3L3 Com-mittees have been examining the internalgovernance rules that exist within the threesectors. The analysis is being debated by themembers of the three Committees, both re-garding the similarities and the differencesin sector requirements and guidelines. It isanticipated that during the second half of2007, the three Committees will decide whatfurther work in this area should be done.

5. Substitute productsFollowing from developments in the area ofMiFID, the Committees have increased theirco-operation on the issue of substitute prod-ucts, i.e. products which have essentially thesame characteristics for clients, but are is-sued by institutions regulated in differentsectors. There can be ‘conduct of business’concerns as well as different burdens if thereis no level playing field regarding the re-quirements to provide e.g. information toclients. This work will continue into 2007,based on a cross sector survey amongst su-pervisors on the approach to substitute prod-ucts at a domestic level, and on the issuessupervisors should look into at an EU level.

C – Reports to the European Institutions

Financial market trends andcross sector risksAs set out in other sections of this report thethree Committees have contributed to thework of the Economic and Financial Com-mittee‘s Financial Stability Table (EFC/FST)through the meetings this Committee heldin April and September.

For the April 2006 EFC/FST meeting, thethree Committees prepared a cross-sectorreport on cross-sector aspects regarding thefunctioning of bond markets in the Euro-pean Market. The report, which was very wellreceived, dealt with the bond markets pri-mary and secondary markets and raised anumber of points highlighted by market par-ticipants who had participated in the whole-sale day arranged by CESR in February 2006.

For the September 2006 Financial StabilityTable the three Committees provided theFST with an annual cross sector report onrisks. The first part of the report dealt withconglomerates and the second part of the re-port dealt with possible regulatory arbitragebetween the insurance and banking sectorsderiving from the application of IFRS. Forthe same meeting, the Committees also pro-vided a survey on EU approaches to supervi-sion of offshore financial centres.

In addition to the above, the Committeesalso commented jointly on proposals madeby EU institutions where felt necessary andappropriate. The three Committees sent ajoint technical letter to the European Com-mission in September 2006 regarding theproposal to amend the procedural rules andevaluation criteria for the prudential assess-ment of acquisitions and increase of share-holdings in the financial sector. Followingthe letter, changes to the proposed directiveswere made.

During the course of 2006, the Commissiongave the three Level 3 Committees a man-date to work on issues relating to the 3rdAnti-Money Laundering Directive (Directive2005/60/EC). A cross-sector Task Force onAnti-Money Laundering issues has been setup by the three Committees, under thechairmanship of the CEBS Secretary Gen-eral. A cross-sector mandate was agreed byall Committees in the autumn. The Com-mittees will conduct a stocktaking of the re-sponsibilities of EEA financial supervisors,survey practical issues facing supervisors,and provide expert input into the contribu-tions that the EU Committee of the Preven-tions of Money Laundering and TerroristFinancing (CPMLTF) will request from thethree Committees.



D - Information exchangeIn addition to the items covered under sec-tions A, B and C of the 3L3 Work Programmethe Committees have exchanged informa-tion on all issues set out under this section ofthe Work Programme, which is resulting in

benefits such as identical or similar develop-ments in areas such as peer review, impactassessment and mediation, as well as in theabovementioned work on substitute prod-ucts and on the cross sector changes to di-rectives on acquisitions.


NEXTSTEPS

The analytical reports on Supervisory Co-operation, Reporting requirements and Internal Governancewill be finalised during the first half of 2007, following which a decision regarding how to proceed inrelation to these areas will be made.

In 2007 the Committees will continue and strengthen their common work according to the new 3L3Work Programme 2007 (Annex [x]). The work will be very heavily focused on the Lamfalussy reviewthat takes place in 2007, which will require considerable common work in relation to the reports thatthe three Level 3 Committees will produce, and the May 2006 ECOFIN conclusions.

The three Level 3 Committees will also endeavour to define a more strategic view of their commonwork and will during the course of the spring hold a meeting of a joint 3L3 strategic task force with aview to establishing a common longer term perspective on 3L3 work.



This 3L3 work programme for 2007 is developed inaccordance with the Joint Protocol of 24 November2005. The items included have been selected on thebasis of a “significance test” based on three criteria:CESR, CEBS and CEIOPS agreed to focus theirjoint work only on those topics for which a) there isa high risk of disruptive regulatory arbitrage, b)cross-sector co-operation can deliver obvious gainsin the effective conduct of supervisory activities,and c) co-operation between the three Committeescould bring about a real efficiency gain. In the workprogramme some issues are referred to as “prior-ity”, meaning that they will be treated as especiallyimportant and will be done in 2007. The Commit-tees may find other areas of common concern dur-ing the course of the year, depending (inter alia) onchanges in the markets and regulatory initiativesand the results of analytical reports which are cur-rently being prepared.

A- Joint WorkThis section of the work programme sets out workwhich is to be carried out jointly by the three Com-mittees, and which should result in joint output.

1. Financial Conglomerates (priorityissue)

The joint Interim Working Committee on FinancialConglomerates (IWCFC) will focus on the identifi-cation and mapping of conglomerates and on theframework and process for supervisory co-opera-tion.

Technical input to the Commission will be providedin the area of capital requirements for financial con-glomerates, focusing on (a) a comparison of sec-toral rules for eligibility of capital instruments, (b)an analysis of the consequences of the sectoral rulesfor the supervision of financial conglomerates, (c)recommendations relevant to the supervision of fi-nancial conglomerates.

In close connection with related work for banking,the IWCFC will also provide technical analysis ofthe equivalence of third countries supervision, fo-cused in particular on Switzerland and the UnitedStates.

2. IntegrityThe Committees will work jointly to ensure consis-tency of approaches in the prevention of moneylaundering and Terrorist financing (AML/CFT) andin the approach to Off-Shore Centres and non-co-operative jurisdictions (OFCs).

• AML/CFT: the Committees will support conver-gence of supervisory practices in the implemen-tation of Directive 2005/60/EC (so-called ThirdAnti-Money Laundering Directive). In particular,they will conduct a mapping of responsibilities,resources and instruments of national authorities– by mid-2007 – and a survey of practical issuesemerging in the implementation of the Directive– by late 2007.

• The Committees will jointly work to fulfil thetasks included in the terms of reference of the Fi-nancial Stability Table of the EFC. In the course of2007 they will develop sector specific databases fa-cilitating the exchange of supervisory informationconcerning OFCs. The Committees will also startexploring possible approaches for the supervisionof financial business in such jurisdictions, focus-ing in particular on internal governance issues.This work, to be conducted in close connectionwith global forums such as the Financial StabilityForum, will extend into 2008.

3. Joint overview of ‘fit and proper’ criteria on managers

The Committees will review the “fit and proper” cri-teria for managers across the sectors with a view tohave a clear benchmark for convergence of super-visory practices when new legislation in the area ofcross-border mergers is in place. This is a priorityproject, but the precise timing will be defined withreference to the finalisation of the review of rele-vant Community legislation.

B- Consistency projects to reduce supervisory burdens andstreamline processes

This section of the work programme sets out map-ping and comparison of sector work projects thataim at streamlining processes and developing con-

3L3 Work Programme 2007




sistent approaches across sectors. This might leadto future joint initiatives. A number of tasks havebeen introduced under this heading which can bederived from the implementation of the so calledFrancq report, endorsed by ECOFIN in their con-clusions of 5 May 2006.

1. 3L3 Consistency on Francq reportissues (priority issues)

The 3L3 Committees will actively co-operate to en-sure consistency of approaches in the implementa-tion of the ECOFIN recommendations on financialsupervision (so-called Francq recommendations).In particular, close connections will be establishedbetween sector work on:

• Efforts to enhance a common supervisory culture(training, staff exchanges, etc.)

• Peer review and mediation • Better regulation, with a particular focus on im-

pact assessments• Delegation of tasks

2. Own funds (priority issue)Following the comparison of capital elements eli-gible for (and deductible from) own funds of banks,investment firms and insurance companies, the 3L3will analyse in 2007 the impact of the differencesand consider how relevant issues can be addressed.

3. Finalisation and follow up to other analytical work from2006 (priority issue)

In the first quarter of 2007 the Committees willcomplete analytical reports on:

• Internal governance• Reporting requirements• Supervisory co-operation• Substitute products and related level playing field

issuesThe reports should serve as the basis for a first analy-sis by the three Committees, assessing whether thereare different approaches, highlighting where eachCommittee might benefit from experience gained inother sectors, and checking whether further detailed

analysis and/or cross-sector harmonisation aredeemed useful.

In particular – following the initial work - the issueof the selling and marketing of substitute products(financial instruments, bank saving products, andinsurance saving products) may require joint workin a manner to be defined under heading A duringthe course of 2007.

For more detailed information, reference is madeto the 3L3 Work Programme 2006.

4. Commodities firms’ supervision -possible 3L3 item

The CEBS’ review of prudential supervisory prac-tices and prudential risks that arise from conductof commodities business advice on commoditiesfirms, will be finalised in 2007. As a contributionfrom CESR is expected within the framework of thecall for evidence on commodities firms recently is-sued by the Commission, CEBS and CESR will co-operate closely to ensure consistency of approachesin this area. CEIOPS will continue to liaise withCEBS and CESR in view of its work on Solvency II.

C- Reports to European Institutions

1. Financial market trends, cross sec-tor risks/ convergence (priority sub-ject)

On cross sector risks and on cross sector conver-gence, the Committees will continue to reportjointly to European institutions and/or EU com-mittees, such as the ECON Committee of the Euro-pean Parliament, the Financial Stability Table of theEFC or the Financial Services Committee (FSC).

2. 3L3 joint Annual Report/mediumterm agenda

A joint 3L3 report for 2007 will be prepared for theFSC, including a backward looking section on theresults already achieved under the Joint Protocoland the 3L3 Work Programme 2006, and a forwardlooking section to identify a 2/3 years’ work agendaand priorities.

16 Final Report of the Committee of Wise Men on the Regulation of European Securities Markets (Brussels, 15 February 2001),http://europa.eu.int/comm/internal_market/securities/docs/lamfalussy/wisemen/final-report-wise-men_en.pdf, page 37f




D- Information points for the exchange of experiences

On the following issues the Committees will ex-change information on their respective work inprogress, with the aim of identifying the need forany further specific action. Need for such informa-tion may be on a continuous basis or on an ad-hocbasis.

1. Solvency II/Basel II2. Enforcement of IFRS3. Audit Committee representation 4. Deposit insurance/Investor compensation/In-

surance guarantee5. Mutual Funds/Hedge Funds 6. External Credit Assessment Institutions/Credit

Rating Agencies7. Clearing and settlement8. IT data sharing arrangements, including shar-

ing of set-up and maintenance costs. 9. Crisis Management

Draft 3L3 Secretariats’ Note as annexto the 3L3 Section of 2007 AnnualReports

Use of 3 Level 3 Definitions - ‘Stan-dards’, ‘Guidelines’, ‘Recommendations’CEBS, CEIOPS and CESR (the 3L3 Committees)issue Standards, Guidelines and Recommendationsfor their financial services sectors.

In doing so they fulfil a core function set for them.The Lamfalussy report16, now covering the securi-ties, banking, insurance and occupational pensionsfinancial sectors, provides their key objective as “togreatly improve the common and uniform imple-mentation of Community rules” and that therefore,they should:

– “produce consistent guidelines for the adminis-trative regulations to be adopted at the nationallevel;

– issue joint interpretative recommendations andset common standards regarding matters not cov-ered by EU legislation – where necessary, thesecould be adopted into Community Law througha Level 2 procedure;

– compare and review regulatory practices to en-sure effective enforcement throughout the Unionand define best practice;

– periodically conduct peer reviews of administra-tive regulation and regulatory practices in Mem-ber States, reporting their results to theCommission and to the ESC.”

It is clarified that “the outcome of this work wouldbe non-binding although clearly it would carry con-siderable authority.” This applies to each of thethree titles, so that the use of any of them wouldhave that effect.

The 3L3 Committees have their own individual con-stitutional Charters. Their financial sectors have sec-tor-specific law, regulation, rules and practice. Thereis some crossover, yet there are consequential differ-ences between the sectors as to purposes and mean-ings.

To clarify, and help distinguish where there is EUsupervisory cross-sector convergence, the 3L3Committees have jointly reached an understandingregarding the future use of the titles ‘Standards’,Guidelines’ and ‘Recommendations’, for their pub-lications:

• The titles will continue to be used for those Level3 publications which aim to achieve the commonand uniform implementation of Communityrules.

• The 3L3 Committees’ choice between the threetitles may be sector-specific.

• The 3L3 Committees may therefore use the titleseither independently of each other, without sub-jecting them to 3L3 parallel use, or jointly witheach other, for example to reflect some 3L3 par-allel use.

• The titles will be used for publications linked tofuture peer pressure, where possible and useful,supported by a Level 3 Committee mechanism,for example peer review or mediation.

• If a 3L3 Committee does not need a particulartitle, it need not use that title at all.

• Publications which do not have the aims statedabove, should be given different titles from these,such as Reports, Q&A’s, Agreements executed byall Members, Speeches, or Press Statements.




6.5.2 – EU/US dialogue SECThe Committee of European Securities Reg-ulators (CESR) and the US Securities andExchanges Commission (SEC) establishedon 2 August a joint work plan. The work planis the direct result of the December 2005meeting between CESR’s Chairman, ArthurDocters van Leeuwen and Christopher Cox,Chairman of the US SEC, at which they em-phasised their desire to build on the dialoguebetween CESR and the SEC in a concreteand practical manner.

The work plan will serve to guide the CESR- SEC Dialogue in the immediate future. Themain focus of the work plan is the applica-tion by internationally-active companies ofUS Generally Accepted Accounting Princi-ples (GAAP) and International Financial Re-porting Standards (IFRS) in the EuropeanUnion and the United States, respectively. Inaddition, the staff of CESR and the SEC willforge a closer dialogue on the modernisationof financial reporting and disclosure infor-mation technology, and regulatory platformsfor risk management.

It is expected that the close co-operation be-tween the staff of CESR and the SEC on theapplication of US GAAP in the EuropeanUnion and IFRS in the United States willpromote:

• the development of high quality account-ing standards;

• the high quality and consistent applicationof IFRS around the world;

• full consideration of international coun-terparts’ positions regarding applicationand enforcement; and

• the avoidance of conflicting regulatory de-cisions on the application of IFRS and USGAAP.

In practical terms, as part of its regular reviewof corporate filings, the staff of the SEC willreview issuers’ implementation of IFRS in theUnited States. Staff of CESR Members willalso continue to review US GAAP implemen-tation by US issuers in the European Union.Under the work plan, the output of these re-views will be used in the following ways:

• The staff of CESR-Fin, the expert groupwithin CESR focused on financial report-ing, and the staff of the SEC, will share in-formation about areas of IFRS and USGAAP that raise questions in terms ofhigh-quality and consistent application ofthese standards.

• Where appropriate, the staff of CESR Mem-bers and the staff of the SEC will consulton issuer-specific matters regarding theapplication of US GAAP and IFRS in orderto facilitate a solution that contributes tothe consistent application of US GAAP orIFRS by companies that are both listed inthe EU and registered with the SEC.

These two levels of discussion will help en-sure that high standards are maintained andconsistent financial reporting is achieved.

The first meeting between the SEC andCESR-Fin representatives took place inWashington on 25 October. Paul Koster,Chair of CESR-Fin, led a delegation of CESR-Fin representatives to discuss with the SECthe practical arrangements necessary to startsharing the information at the two levels de-scribed above.

A delegation of staff from the Office of theChief Accountant of the SEC attended theCESR-Fin meeting of CESR in December2006.

NEXTSTEPS

Protocols for the sharing of confidential infor-mation between the staff of CESR Members andthe staff of the SEC are currently being finalisedand will be put in place between SEC and indi-vidual CESR Members. The process of developingand agreeing the separate protocols will startduring the first half of 2007.

Meetings between CESR and the SEC will con-tinue in accordance with the provisions of thework programme.

It is anticipated that work on the modernisation offinancial reporting will continue during the courseof 2007, on the assumption that the necessarystrategic choices in relation to the storage of fi-nancial information within the EU have beenmade.

Work will also begin on risk management prac-tices in accordance with the third item in thework plan.




CESR - CFTC Task ForceTo enhance transparency in the transatlanticderivatives business, a joint task force of reg-ulators from the Committee of European Se-curities Regulators (CESR) and the U.S.Commodity Futures Trading Commission(CFTC) has published ‘Frequently AskedQuestions’ in the form of “online guides” forconducting derivatives business in the USand the European Union (EU). These guidesinclude country specific information regard-ing regulation and supervision in the US andin Europe, with information provided byCESR Members in Germany, Ireland, Lux-embourg, the Netherlands, Poland, Swedenand the UK. Further country profiles havebeen added since the first publication, andprofiles for other European countries willcontinue to be added on an ongoing basis.

The publication of these guides marks thefirst step in addressing the proposals articu-lated in the joint work programme and an-nounced on 28 June 2005, by the CFTC andCESR. The joint task force from the CFTCand CESR was established in June 2005 toimplement the proposals set out in the workprogramme. The priorities identified are in-tended to enhance transparency and clarityof regulatory developments in the US andEurope, and to simplify access and recogni-tion procedures.

The online guides are intended to be practi-cal in nature and are divided into sections foreach category of user: exchanges, invest-ment services and end-users. In addition,the guides provide useful contact details forspecialists within the authorities and links todetailed information (including rules) appli-cable in the US and in each Member State.General information on the regulators, ex-changes, clearing organisations, investment

services, and how to find information aboutthe end-users in each jurisdiction is also pro-vided. The country profiles may be accessedthrough the CFTC’s and CESR’s websites or,via the web pages of the individual EU na-tional supervisors.

The initiatives proposed under the jointwork programme, of which country profilesform a part, are intended to facilitate transat-lantic derivatives business, and reflect con-siderable industry input. In particular, thework programme was developed after aRoundtable with US and EU practitionersand a public comment period which tookplace in early 2005. As such, the work pro-gramme incorporates the views and priori-ties identified by organised derivativesmarkets, intermediaries and end-users fromthe United States and the European Unionconcerning practical operational issues thatthey encounter when conducting transat-lantic business in exchange-traded deriva-tives and related transactions. The objectiveof this dialogue has been to promote the es-tablishment of a transatlantic business envi-ronment that will ensure, to the extentpossible, that compatible business and regu-latory initiatives can be developed andadopted.

On 13 October, the CESR secretariat was vis-ited by the CFTC Chairman Reuben Jeffreyand the head on international affairs JackieH. Mesa to discuss the current work plan anda possible need to update it.

NEXTSTEPS

A letter will be sent to the participants of the 2005roundtable in order to ascertain the need to up-date it.





6.5.3 – Other third country contactsMeeting with the Swiss FederalBanking Commission – SFBCCESR, represented by Arthur Docters vanLeeuwen , Kaarlo Jännäri, Kurt Pribil, Fab-rice Demarigny and members of the secre-tariat, met on 18 October 2006 withChairman Eugen Haltiner, Vice-ChairmanJean-Baptiste Zuferey and a group of otherhigh-level representatives of the SFBC.

CESR and the SFBC had a fruitful exchangeof information regarding the possibility ofthe SFBC to assist CESR Members with in-formation in market integrity cases.

CESR visit to Russian securities authority In September, Arthur Docters van Leeuwenand Fabrice Demarigny visited the Russiansecurities supervisor, FFMS Federal Finan-cial Markets Services, and two Russian Ex-changes, the Moscow Interbank CurrencyExchange (MICEX) and Russian Trading Sys-tem (RTS).

The visit marked a continuation of the con-tacts between CESR and the Russian au-thorities, which visited the CESR secretariatin 2005.

73Accountability and reporting to the EU Bodies

Accountability and reporting to the EU Bodies7.1 ◆ Financial Services Committee (FSC)

The Financial Services Committee (FSC) isan EU Council Committee that gathers to-gether representatives of the EuropeanUnion’s Finance Ministries. CESR partici-pates on an observer basis at these meetings.

In February an FSC subgroup chaired byThierry Francq published its report on fi-nancial supervision which includes a num-ber of recommendations on convergenceand cooperation, to which CESR providedinput during the course of 2006.

In May, ECOFIN endorsed the report of thesubgroup, providing a strong political signalthat the findings and recommendations ofthe report had the necessary political back-ing. The report included a number of rec-ommendations regarding the supervisory

convergence tools that are necessary to beput in place by set deadlines in order to makesupervisory convergence a reality. The re-port’s recommendations have driven a lot ofCESR’s Level 3 work during 2006 and will bea significant part of CESR’s 2007 work plan.

As mentioned above under 6.1 CESR pro-vided the FSC with its second progress re-port on supervisory progress in June of 2006.

NEXTSTEPS

In 2007 CESR will continue to report to the FSCon the development regarding supervisory con-vergence, and will submit a package of contribu-tions for the FSC’s discussions regarding theLamfalussy review

74 Accountability and reporting to the EU Bodies

Accountability and reporting to the EU Bodies

The Economic and Financial Committee isa Committee with high level representativesfrom the Ministries of finance, chaired by MrXavier Musca. The EFC holds in its FinancialStability Table format (FST) two meetingseach year – in April and September. In 2006,CESR contributed to the discussions held atboth of these meetings.

For the April meeting of the FST, CESR con-tributed to the discussions with a report oncross-sector aspects regarding the function-ing of bond markets in the European Union.CESR’s report was based upon the input re-ceived both from CEBS and CEIOPS (CESR’scounterparts in banking and insurance) aswell as a group of private sector participantsin a CESR wholesale day held in Paris in Feb-ruary 2006. The report, which was very wellreceived, dealt with the primary and second-ary markets of bonds and also raised a num-ber of aspects highlighted by market

participants during the CESR wholesale dayheld in February 2006.

CESR also provided the FST with a report onmajor trends, developments and risks in theEU securities markets during the second halfof 2005 and the first months of 2006.

For the September FST, CESR and the otherLevel 3 Committees provided the FST withthe Level 3 Committees’ yearly report oncross-sector risks. The report contained asection on conglomerates and a further sec-tion on possible regulatory arbitrage be-tween the insurance and banking sectorsderiving from the application of IFRS.

The 3L3 Committees also further providedthe FST with a report on a survey done onthe supervision of off-shore financial centres(OFCs). This report contained an update ofthe stock take that the 3L3 Committees un-dertook in 2005.

7.2 ◆ Financial Stability Table of the European Financial Committee (EFC/FST)

NEXTSTEPS

CESR will continue to report to the EFC twice a year. Following reports delivered to the EFC in August,the next report will be submitted for the spring Financial Stability Table. (For more details see ECONETSection 6.4.3 of Chapter 6.4 of this annual report) and it will identify major trends, developments andrisks in the EU securities markets and hedge funds classification methodologies. A further report whichwill be presented in September 2007 which will cover the subjects of cross-sector risks and Offshore Fi-nancial Centres (OFCs).

In addition 2007, will be marked by the Lamfalussy review which will end with the Ministers’ discus-sion in the ECOFIN in December. These discussions will be prepared by the EFC/FST. CESR will con-tribute to these discussions during the course of the year.

75Accountability and reporting to the EU Bodies

Accountability and reporting to the EU Bodies

7.3 ◆ The European Parliament - ECON

In 2005, CESR and the European Parliamentagreed that CESR’S accountability to the Eu-ropean Parliament should be strengthened.Details of this accountability frameworkwere published in a press release in Septem-ber 2005. CESR and the European Parlia-ment have agreed that:

– CESR notifies ECON of all working man-dates and keeps ECON informed of workcarried out at Level 3 of the Lamfalussyprocedure;

– CESR makes ECON an official recipient ofthe key letters and other documents thatCESR sends to the Commission and theCouncil;

– CESR submits periodic written reports tothe European Parliament on its activitiesand the progress achieved on supervisoryconvergence;

– CESR provides the European parliament atan early stage with information on key is-sues and work likely to have a legislativeimpact; and that

– CESR participates in a parliamentary hear-ing at least twice a year.

During 2006, CESR has appeared in front ofthe European Parliament on several occa-sions:

• Paul Koster, Chairman of CESR-Fin ap-peared before ECON twice:– On 20 June 2006 he reported on the

work of CESR-Fin in relation to three is-sues:He outlined the key principles set out inCESR’s advice on the equivalence of re-porting standards to those of IFRS re-porting standards, he also brieflytouched upon the issue of the 2009equivalence requirement and the workthat CESR is doing together with SEC onthe IFRS and US GAAP.

– On 12 September 2006 he spoke again inECON on the issue of equivalence andthe postponement decision (until 2009)and the issue of equivalence of thirdcountry GAAPs.

• Carlos Tavares, Chairman of the Trans-parency Expert Group visited the ECON on4 July 2006 where he presented CESR’s ad-vice to the Commission in relation to theTransparency Directive and commented onthe Commission’s proposed implementingmeasures for the Directive, and those areaswhere the Commission's proposals devi-ated from CESR’s advice.

• Arthur Docters van Leeuwen appeared on19 December 2006 in a hearing before theECON. The CESR Chairman outlined in aspeech the developments of CESR duringthe last year and reported on changes toCESR’S charter, to the changes of CESRinto a more operational organisation, todevelopments on important issues likeMiFID, Clearing and Settlement and cross-sector 3L3 work. Arthur Docters vanLeeuwen took questions from the MEP’s ofthe ECON dealing with a wide range ofsubjects including MiFID and its imple-mentation, the issue of hedge funds, andsupervisory convergence.

NEXTSTEPS

CESR will during the course of 2007 continue tomeet its accountability obligations to ECON.

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Following the successful finalisation of thelegislative and regulatory phase of the Fi-nancial Services Action Plan (FSAP), CESRhas decided to shift its priorities to more op-erational tasks so as to deliver effective su-pervisory convergence across the EU. Thispolicy orientation was confirmed in theCommission’s White Paper (White Paper onFinancial Services Policy 2005-2010, De-cember 2005) and by the recent ECOFINConclusions of 5 May 2006 (8500/06). TheEU institutions and CESR recognise that thecontinued success of the FSAP is now de-pendent upon an intensification of supervi-sory convergence. CESR has responded witha number of changes to the way that it nowworks in order to become more operationalin nature and to function as a cohesive net-work of supervisors who act in a convergentmanner. The key rationale of the change inCESR’s profile is developed in its recent su-pervisory convergence report to the FSC(Ref. CESR/06-259b).

In order to further embed this new dimen-sion, for the first time since its creation in2001, CESR is amending its Charter (Ref.CESR/06-289c) to include:

• a more straightforward decision makingprocedure, including the possibility to vote(Art 5.5, 5.6 and 5.7);

• a mediation mechanism between Membersto facilitate a rapid outcome (Art 4.4 andspecific protocol);

• the integration of the Review Panel intothe Charter, which will permit a morethorough cross examination on the way inwhich Members apply the new legal frame-work (Art 4.3. A specific protocol will bepublished in the next months);

• a commitment to respect data protectionrules when developing databases (Art 5.2);

• greater legal certainty of confidentiality toallow the secretariat to fully assist theMembers on operational issues (Art 7.4).

8.1 ◆ An enhanced capacity embedded in the founding Charter

8.1 –

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In 2007, all Directives adopted under the Financial Services Action Plan will be im-plemented and functioning. This will be thecase in particular for the Transparency Di-rective in January and the MiFID in Novem-ber. Accordingly, as can be seen in thedetailed Work Programme set out below,practical day-to-day application and opera-tional co-operation will be the key focus ofCESR’s activities in 2007.

As regards markets and intermediaries,MiFID represents the most significant evo-lution for the EU Single Market for financialservices. To be smoothly implemented, thisDirective will require significant efforts fromall parties. In order to assist the industry intheir preparation for the new regime, CESRwill provide guidelines on the manner inwhich supervisors intend to apply certainprovisions of the Directive where more pre-dictability is expected. The intention is toprovide such common approaches suffi-ciently in advance so as to allow enough timefor market participants to adopt their sys-tems and procedures. In fact, EU supervisorsand CESR are equally pressed to adapt theirsystem to properly fulfil their tasks in thenew environment. Transaction reporting isone example: the Members of CESR mustput in place or adapt the national transac-tion reporting systems, and CESR has to es-tablish an IT data sharing system for themto exchange the transaction reports neededfor their supervisory tasks. This will requiresignificant financial and human resourcesfrom all parties.

The area of investment management will alsobe high on CESR’s agenda as the Commis-sion will propose a targeted modernisation ofthe UCITS directive and CESR Members in-tend to put in place more operational co-op-erative tools to converge in practice.

During the course of 2007, CESR will evalu-ate the functioning of the Prospectus Direc-

tive and the first year of applica-tion of the IFRS Regulation. Inboth cases, CESR will put inplace mechanisms to facilitateimplementation by making pub-lic common approaches or deci-sions in a reactive manner toanswer market participants’needs for clarification. In addition,CESR stands ready to follow-up its’ variousproposals of advice to the Commission re-garding the Transparency Directive and, inparticular, on storage of regulated informa-tion.

To facilitate a more straight forward accessto regulatory and supervisory informationnecessary for the smooth implementationand day-to-day application of the FSAP di-rectives, the CESR website will be signifi-cantly redesigned.

A key event in 2007 will be the evaluation ofthe Lamfalussy approach. CESR intends tocontribute actively to this process by meas-uring the progress achieved, fostering su-pervisory convergence (mediation, ReviewPanel, exchange of staff, common training,etc.) and defining a common view of super-visory needs beyond 2007.

Finally, high tribute should be paid to theMembers of CESR that have accepted to sig-nificantly increase the resources of the secre-tariat for 2007, at a time when they are all alsounder heavy pressure to implement the FSAPdirectives. Accordingly, the current premiseswill be extended to accommodate five newpermanent staff and a significant amount willbe invested in IT projects. All the members ofthe secretariat should also be warmly thankedfor their high quality work in preparing andimplementing CESR’s decisions.

(The detailed work programme Ref 06-627can be viewed on the CESR web site :www.cesr.eu)

8.2 ◆ CESR’s work programme for 2007

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Profit and loss (Revenues and expenses)

As at December 31, 2006 (In Euros) 31/12/2006 31/12/2005

REVENUES

Contributions from Members 2 450 001 2 400 000

Annual conferences 0 -9 000

Profit on marketable securities 60 507 39 135

Other 2 779 4

Total revenues 2 513 287 2 430 139

EXPENSES

Salaries and employee benefits 1 382 796 1 162 285

External staff 308 299 307 873

Rental 457 052 448 249

Travelling 185 307 199 527

Office supplies 17 662 12 698

Organization and follow up of meetings 38 399 32 965

Telecommunications 39 532 32 724

Transportation and communication expenses 0 0

Printing 20 500 22 969

Computer & IT development 13 718 50 931

Professional fees 63 071 57 305

Depreciation of fixed assets excluding computer 35 268 31 533

Miscellaneaous 4 690 11 293

Total expenses 2 566 293 2 370 352

Excess of revenues over expenses -53 007 59 788

8.3 ◆ 2006 Annual Financial Statement

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8.4 ◆ Statistics on Meetings

Group Meetings in 2006

CESR 5

Expert Groups

• Transparency 4

• Credit Rating Agencies Task Force 3

• ECONET 4

– Impact Assessment (IA) 6

• Clearing and Settlement 0

• Mediation Task Force 0

• MiFID Level 3 Expert Group 3

– Intermediaries 6

– Markets 5

• Prospectus Contact Group 3

• CESR-Tech 6

Permanent Groups

• CESR-Pol 4

– CESR-Pol Surveillance & Intelligence Group 3

• CESR-Fin 4

– EECS 8

– EECS meetings with IFRIC/IASB 2

Markets Participants Consultative Panel 2

Review Panel 5

Public Hearings 6

A great deal of work was carried out via conference calls, emails and other means of commu-nication.

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8.5 ◆ CESR in context: CESR’s inter-institutionalrelationships

European Parliament

European Commission

FSC ESC

• Inter Institutional Monitoring Group (IIMG)

• Financial Stability Table (EFC/FST)

• European Central Bank (ECB)/ European System of Central Banks (ESCB)

• Committee of European Banking Supervisors (CEBS)

• Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS)

• Banking Supervision Committee

• US SEC • US CFTC

(BSC)

Economic and Monetary Affairs Committee (ECON)

• European Securities Committee (ESC)

• Financial Services Committee (FSC)

• Accounting Regulatory Committee (ARC)

• European Financial Reporting Advisory Group (EFRAG)

• Audit Regulatory Commitee (ARC)

Givesevidence

Observer status

Reports/gives advice

Close working links

ECOFIN

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The Secretariat of CESR visiting the house of Jean Monnet.

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8.6 ◆ CESR’s Secretariat

Fabrice DemarignySecretary General

• Jorge FernandesSenior IT Expert

• Elena MunozSenior IT Expert

• Eeva-Liisa TuovinenSenior IT Expert

• Nicolas VasseSenior IT Expert

• Set-up and running of TREM• Development and

implementation of IT systems

• IT Data sharing projects• Secretariat of CESR -Tech

• Solveig KleivelandJunior CommunicationsOfficer

• Joseph MifsudCommunications Officer

• tbaJunior Officer

• Internet/Extranet• Press, Communications• Annual report, Confe-

rences/Speeches• Training of supervisors• Exchange of staff

Investment Firms • Diego Escanero

Senior Officer• tba

Junior Officer

• Investment services• Rules of conduct• Organisational requirements• Conflicts of interest• Reporting requirements

Financial Markets• Jari Virta

Senior Officer

• Regulated markets• MTF• Pre/post trade transparency

Clearing & Settlement• Wim Moeliker

Senior Officer

• Follow-up of Standards• Liaison with ESCB, ECB,

BSC, CEBS, G30• Liaison with CESAME

Investment Management• Patrice Debono

Senior Officer• Richard Stobo

Junior Officer

• Application of UCITS directives

• Supervisory convergence• Asset management

modernisation

Market Integrity/ CERS-Pol• Angie Reeh-Schild

Senior Officer

• Application of MAD• Secretariat of CESR-Pol• MiFID enforcement matters• Cooperation mediation/

database

External relations• Jacob Lönnqvist

Senior Officer

• Relations with the EU Parliament

• Preparation of meetings ofEU Committees

• Coordination with CEBS and CEIOPS (3L3)

• Relations with Non-EU counterparts (inc. SEC &CFTC)

• Coordination with CEBS and CEIOPS (3L3)

Legal Analysis and Review Panel• Mina Filippa

Legal Advisor• tba

Junior Officer

• Review Panel• Legal analysis and support• General legislative work• Company law/

corporate governance• Mediation

Financial Markets Analysis• Alexandra Berketi

Economist

• Monitoring Integration• Assessment market

evolutions• Contribution to EFC /

Stability Round Table• Cost/benefit analysis

methodology

Communication and Common Supervisory Culture Victoria Powell, Director

ITAri Voipio, Director

Horizontal Coordination Geraldine Levy, Director

Markets and IntermediariesCarlo Comporti, Director

Deputy to the Secretary GeneralCarlo Comporti

Management office, Budget,Plenary, Market Participants Consultative Panel

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8.6 ◆ CESR’s Secretariat

• Rebecca Ball, Assistant to the Secretary General• Samia Mehdi, Assistant• Karim Abdelali, Logistics

Accounting/CESR-Fin• Marion Bougel-Bomtemps

Senior Officer• tba

Accounting Officer

• Enforcement of FRS/Database• Endorsement of IFRS• Audit• Liaison with ARC, EFRAG,

AURC and EGAOB• Equivalence of GAAPs

Prospectus, Takeover Bids, Credit Rating Agencies• Raquel Garcia

Senior Officer

• Offering and listing prospectus• Supervisory convergence• Takeover bids• Credit rating agencies

Transparency• Anita Farkas

Senior Officer

• Dissemination and storing of regulated information

• Periodic financial information• Shareholdings

Financial InformationJavier Ruiz, Director

CESR11-13, avenue de Friedland75008 Paris – FranceTel : +33 1 58 36 43 21Fax : +33 1 58 36 43 30Email : [email protected]

2007

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8.7 ◆ List of Members

COMMISSION BANCAIRE, FINANCIERE ET DES ASSURANCES/COMMISSIE VOOR HET BANK-, FINANCIE- EN ASSURANTIEWEZEN/KOMMISSION FÜRDAS BANK, FINANZ- UND VERSICHERUNGSWESENRue du Congrès 12-14, BRUXELLES 1000, BELGIUMMember: Mr Jean-Paul SERVAIS (Chairman of the management committee)Telephone: +32 2 220 5211 - Fax: +32 2 220 5817CESR’S contact person: Mr Jean-Michel VAN COTTEM(Deputy Director)Telephone: +32 2 220 5404 - Fax: +32 2 220 5424Web site: http://www.cbfa.be

FINANCIAL SUPERVISION COMMISSION33, Shar Planina Street, SOFIA 1303, BULGARIAMember: Mr Apostol APOSTOLOV (Chairman)Telephone: +359 2 9404999 - Fax: +359 2 8294324CESR’S contact person: Ms Nina KOLTCHAKOVA (Director International Cooperation & Public Relations)Telephone: +359 2 9404601 - Fax: +359 2 9802647Web site: http://www.fsc.bg

CZECH NATIONAL BANKNa Prikope 28, 115 03, PRAHA 1, CZECH REPUBLIC Member: Mr Pavel HOLLMANTelephone: +420 224 411 111 - Fax: +420 224 414 230 CESR’S contact person: Mr Karel JURAS Telephone: +420 224 412 389 - Fax: +420 224 414 230Web site: http://www.sec.cz

FINANSTILSYNETGl. Kongevej 74 A, 1850 FREDERIKSBERG C, DENMARKMember: Mr Henrik BJERRE NIELSEN (Director General)Telephone: +45 33 55 82 82 - Fax: +45 33 55 82 00CESR’S contact person: Mr Stig NIELSENTelephone: +45 33 55 83 42 - Fax: +45 33 55 82 00Web site: http://www.ftnet.dk

BUNDESANSTALT FÜR FINANZDIENSTLEISTUNGSAUFSICHT (BaFin)Lurgiallee 12, 60439 FRANKFURT AM MAIN, GERMANYMember: Mr Jochen SANIO (Chairman)Telephone: +49 228 4108 1612 - Fax: +49 228 4108 1550CESR’S contact person: Mr Philipp SUDECK (Head of International Coordination)Telephone: +49 228 4108 3209 - Fax: +49 228 4108 63299Web site: http://www.bafin.de

FINANTSINSPEKTSIOON/ESTONIAN FINANCIAL SUPERVISION AUTHORITYSakala 4, 15030 TALLINN, ESTONIAMember: Mr Raul MALMSTEIN (Chairman of the Management Board)Telephone: +372 668 0500 - Fax: +372 668 0501CESR’S contact person: Mr Kaido TROPP (Member of the Board)Telephone: +372 668 0500 - Fax: +372 668 0501Web site: http://www.fi.ee

EPITROPH KEFALAIAGORAS/CAPITAL MARKET COMMISSION (CMC)1 Kolokotroni and Stadiou Street, ATHENS - 105 62,GREECEMember: Dr Alexis PILAVIOS (Chairman)Telephone: +30 210 337 7237 - Fax: +30 210 337 7265CESR’S contact person: Ms Eleftheria APOSTOLIDOU (Director, Directorate of International and Public Relations)Telephone: +30 210 337 7215 - Fax: +30 210 337 7210Web site: http://www.hcmc.gr

COMISIÒN NACIONAL DEL MERCADO DE VALORES(CNMV)Paseo de la Castellana, 19, 28046 MADRID, SPAINMember: Mr Carlos ARENILLAS (Vice-Chairman)Telephone: +34 91 585 1500 - Fax: +34 91 585 1675CESR’S contact person: Mr Antonio MAS (Director of International Relations)Telephone: +34 91 585 1624 - Fax: +34 91 585 4110Web site: http://www.cnmv.es

AUTORITÉ DES MARCHÉS FINANCIERS (AMF)17 place de la Bourse, 75082 PARIS CEDEX 02, FRANCEMember: Mr Michel PRADA (President)Telephone: +33 1 53 45 60 00 - Fax: +33 1 53 45 61 00CESR’S contact person: Mr Xavier TESSIER (Director of the International Affairs Division)Telephone: +33 1 53 45 63 56 - Fax: +33 1 53 45 63 50Web site: http://www.amf-france.org

FINANCIAL REGULATORPO BOX 9138, College Green, DUBLIN 2, IRELANDMember: Mr Patrick NEARY (Chief Executive)Telephone: +353 1 410 4000 - Fax: +353 1 410 4900CESR’S contact person: Mr Patrick NEARY (Chief Executive)Telephone: +353 1 410 4000 - Fax: +353 1 410 4900Web site: http://www.financialregulator.ie

FINANCIAL SUPERVISORY AUTHORITYSudurlandsbraut 32, 108 REYKJAVÌK, ICELANDMember: Mr Jónas Fr. JÓNSSON (Director General)Telephone: +354 525 2700 - Fax: +354 525 2727CESR’S contact person: Mr Jónas Fr. JÓNSSON (Director General)Telephone: +354 525 2700 - Fax: +354 525 2727Web site: http://www.fme.is

COMMISSIONE NAZIONALE PER LE SOCIETA E LABORSA (CONSOB)Via G.B. Martini, 3, 00198 ROMA, ITALYMember: Mr Lamberto CARDIA (Chairman)Telephone: +39 06 847 7233 - Fax: +39 06 847 7470CESR’S contact person: Ms Nicoletta GIUSTO (Director of International Relations)Telephone: +39 06 847 7381 - Fax: +39 06 847 7763Web site: http://www.consob.it

CYPRUS SECURITIES AND EXCHANGE COMMISSIONStasicratous 32, 1306 NICOSIA, CYPRUSMember: Mr Georgios CHARALAMBOUS (Chairman)Telephone: +357 22 875 475 - Fax: +357 22 754 671CESR’S contact person: Mrs Liana C. IOANNIDOU (Officer)Telephone: +357 22 875 475 - Fax: +357 22 754 671Web site: http://www.cysec.gov.cy

FINANSU UN KAPITALA TIRGUS KOMISIJA/FINANCIALAND CAPITAL MARKET COMMISSIONKungu iela 1, Riga, Latvia, LV-1050Member: Mr Janis BRAZOVSKIS (Deputy Chairman)Telephone: +371 777 4800 - Fax: +371 722 5755CESR’S contact person: Ms Jelena LEBEDEVA (Head of the Bnaking and Securities Market Division)Telephone: +371 777 4832 - Fax: +371 722 5755Web site: http:///www.fktk.lv

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LIETUVOS RESPUBLIKOS VERTYBINIU POPIERIUKOMISIJA/LITHUANIAN SECURITIES COMMISSION23 Konstitucijos Av., VILNIUS 2600, LITHUANIAMember: Ms Vilija NAUSÈDAITÈ (Chairman)Telephone: +370 5 272 50 91 - Fax: +370 5 272 50 89CESR’S contact person: Ms Kristina JANCIAUSKAITE (Chief specialist)Telephone: +370 5 271 49 17 - Fax: +370 5 272 50 89Web site: http://www.lsc.lt

COMMISSION DE SURVEILLANCE DU SECTEUR FINANCIER (CSSF)L- 2991 LUXEMBOURGMember: Mr Arthur PHILIPPE (Director)Telephone: +352 26 25 1 200 - Fax: +352 26 25 1 601CESR’S contact person: Mr Claude SIMON (Head of International and Policy Issues)Telephone: +352 26 25 1 200 - Fax: +352 26 25 1 601Web site: http://www.cssf.lu

PÉNÜGYI SZERVEZETEK ÁLLAMI FELÜGYELETE(PSZAF)/HUNGARIAN FINANCIAL SUPERVISORY AUTHORITYKrisztina krt. 39, 1013 BUDAPEST, HUNGARYMember: Mr István FARKAS (Chairman of the Board)Telephone: +36-1 489 9200 - Fax: +36-1 489 9202CESR’S contact person: Mr ÁrpÁd KIRÁLY (Head of International Affairs Department)Telephone: +36-1 489 9280 - Fax: +36-1 489 9222Web site: http://www.pszaf.hu

MALTA FINANCIAL SERVICES AUTHORITY (MFSA)Notabile Road, ATTARD, MALTAMember: Prof. J.V. BANNISTER (Chairman and President)Telephone: +356 21 44 11 55 - Fax: +356 21 44 11 88CESR’S contact person: Mr Andre CAMILLERI (Director General)Telephone: +356 21 44 11 55 - Fax: +356 21 44 11 88Web site: http://www.mfsa.com.mt

AUTORITEIT FINANCIËLE MARKTEN (AFM)PO BOX 11723, 1001 GS AMSTERDAM, NETHERLANDS (The)Member: Mr Paul KOSTER (Commissionner)Telephone: +31 20 707 2000 - Fax: +31 20 797 3800CESR’S contact person: Mr Frank DANKERSTelephone: +31 20 707 2000 - Fax: +31 20 797 3800Web site: http://www.afm.nl

KREDITTILSYNETP.O. Box 100 Bryn, Østensjøveien 43, 0611 OSLO 6, NORWAYMember: Mr Eirik BUNÆS (Deputy Director General)Telephone: +47 22 93 98 20 - Fax: +47 22 93 99 95CESR’S contact person: Ms Kristin LUNDTelephone: +47 22 93 98 36 - Fax: +47 22 93 99 95Web site: http://www.kredittilsynet.no

FINANCIAL MARKET AUTHORITY (FMA)Praterstrasse 23, A-1020 VIENNA, AUSTRIAMember: Mr Kurt PRIBIL (Executive Director)Telephone: +43 1 24959 5000 - Fax: +43 1 24959 5099CESR’S contact person: Mrs Andrea KURAS-EDERTelephone: +43 1 249 59 4201 - Fax: +43 1 249 59 4099Web site: http://www.fma.gv.at

POLISH FINANCIAL SUPERVISION AUTHORITY (FSA)Pl. Powstanców Warszawy 1, 00-950 Warszawa, POLANDMember: Dr Stanislaw KLUZA (Chairman)Telephone: +48 22 33 26 801 - Fax: + 48 22 33 26 602CESR’S contact person: Mr Adam BLASIAKI (Public Relations and International Cooperation Office)Telephone: +48 22 55 60 487 - Fax: + 48 22 33 26 602Web site: http://www.knf.gov.pl

COMISSÃO DO MERCADO DE VALORES MOBILIÁRIOS(CMVM)Avenida da Liberdade 252, 1056-801 LISBOA, PORTUGALMember: Mr Carlos TAVARES (Chairman)Telephone: +351 21 317 7080 - Fax: +351 21 317 7093CESR’S contact person: Mr Paulo CÂMARA (Head of International Relations Office)Telephone: +351 21 317 7060 - Fax: +351 21 353 7077/8Web site: http://www.cmvm.pt

ROMANIAN NATIONAL SECURITIES COMMISSION(CNVM)/ COMISIA NATIONALA A VALORILOR MOBILIARE DIN ROMANIA2, Foisorului Street, sector 3, Bucharest, ROMANIAMember: Mrs Gabriela Victoria ANGHELACHE, Ph. D(President)Telephone: + 4021 326 67 09 - Fax: + 4021 326 68 48/49CESR’S contact person: Ms Raluca Tariuc (Director)Telephone: + 4021 326 67 75 - Fax: + 4021 326 68 48/49Web site: http://www.cnvmr.ro

AGENCIJA ZA TRG VREDNOSTNIH PAPIRJEV/SECURI-TIES MARKET AGENCYPoljanski nasip 6, 1000 LJUBLJANA, REPUBLIC OF SLOVENIAMember: Mr Miha JUHART (Chairman)Telephone: +386 1 2800 400 - Fax: +386 1 2800 430CESR’S contact person: Ms Sabina BESTERTelephone: +386 1 2800 400 - Fax: +386 1 2800 430Web site: http://www.a-tvp.si

NÁRODNÁ BANKA SLOVENSKA (NBS)/NATIONAL BANKOF SLOVAKIAImricha Karvaša 1, 813 25 BRATISLAVA, SLOVAK REPUBLICMember: Mr Jozef MAKÚCH (Member of the Board)Telephone: + 4212 5787 2042 - Fax: + 4212 5787 1106CESR’S contact person: Ms Eva SVETLOSAKOVATelephone: + 4212 5787 3350 - Fax: + 4212 5726 8500Web site: http://www.nbs.sk

RAHOITUSTARKASTUSSnellmaninkatu 6, PO BOX 159, 00101 HELSINKI, FINLANDMember: Ms Anneli TUOMINEN (Director General)Telephone: +358 10 831 51 - Fax: +358 10 831 53 02CESR’S contact person: Mr Jarmo PARKKONEN (Deputy Director General)Telephone: +358 10 831 52 55 - Fax: +358 10 831 52 30Web site: http://www.rahoitustarkastus.fi

FINANSINSPEKTIONENSveavägen 167, PO BOX 6750, SE- 113 85 STOCKHOLM,SWEDENMember: Ms Ingrid BONDE (Director General)Telephone: +46 8 787 8000 - Fax: +46 8 241335CESR’S contact person: Mr Erik SAERS (Head of Market Conduct)Telephone: +46 8 787 80 31 - Fax: +46 8 24 13 35Web site: http://www.fi.se

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FINANCIAL SERVICES AUTHORITY (FSA)25 the North Colonnade Canary Wharf, LONDON E14 5HS,UNITED KINGDOMMember: Mr Callum McCARTHY (Chairman)Telephone: +44 207 066 3000 - Fax: +44 207 066 1011CESR’S contact person: Mr David MANNING (International Strategy and Policy Co-ordination and EU Affairs)Telephone: +44 207 066 2336 - Fax: +44 207 066 3099Web site: http://www.fsa.gov.uk

EUROPEAN COMMISSIONBâtiment Breydel 11/56 rue de la loi, 200 BRUSSELS 1049,BELGIUMMember: Mr Jorgen HOLMQUIST (Director General - DG Internal Market)Telephone: +32 2 295 0778 - Fax: +32 2 296 3924CESR’S contact person: Mr David WRIGHT (Director - Financial Markets)Telephone: +32 2 295 8626 - Fax: +32 2 299 3071Web site: http://www.europa.eu.int/comm


Documents

ANNUAL · 2007 will be the year of the Review of the Lamfalussy process. Fundamental questions ... 6.4.1 CESR-Tech 6.4.2 Clearing and Settlement 6.4.3 ECONET 6.4.4 Investment Management