Politics

Short-selling banned

On 2 July the Bundestag decided on a ban on naked short-selling of shares and government bonds of Euro countries. Financial actors are accordingly in future to trade only with shares, government bonds and credit insurances that they themselves own or have borrowed.

More rights for investors

Shareholder association Deutsche Schutzvereinigung für Wertpapierbesitz (DSW) has taken a stance in a position paper on the Act to strengthen investor protection and improve the functionality of the capital market. In it the DSW welcomes the fact that banks and financial-services providers will in future have to register their consultancy with the Federal Institution for Financial Services Oversight (BaFin), though the distinction between consultants and providers of investment products is vague. The consultancy ought accordingly to be arranged according to a private-investor model and not the sales model chosen. Creeping up on firms, as in the Conti/Schaeffler and VW/Porsche cases, is not regulated clearly in the Act. All that is mentioned is financial instruments and other instruments that would become subject to disclosure if positions in shares were built up. The ban on naked short-selling is seen by the shareholder protection association as sensible; all the same, the DSW has reservations since in practice the determination of such naked short-selling is hard, and BaFin possibly does not possess adequate powers of intervention. The introduction of a product information sheet (PIB) for financial consultancy to private customers was sensible; however, there should also be rules on the content of it. Otherwise, there would be a threat that investment consultancy would become too costly and that credit institutions would continue to withdraw from consultancy, as they already did after the duty to keep a record. There can in future be no consultancy on any form of investment for which there is no such PIB. That meant that there was already a selection beforehand as to which products consultancy could still be offered on. The removal of the short statutory limitation periods in prospectus liability met a long-standing demand of the DSW. By setting the period of liability at six months, or the 100 days proposed by the DSW for ad hoc disclosures and quarterly reports, the legislator was on the right path. The possibility allowed of withdrawing shares in open real-estate funds and the notice periods introduced of 6 to 24 months were also welcome. Private investors should, however, be able without termination to call back an amount of €100,000, the DSW advises. The shareholder protectors are also calling for direct liability of members of company bodies, the setting-up of a register of complaints and thus a possibility for model cases and the extension of the Freedom of Information Act to BaFin.

BaFin publishes MaComp

On 7 June in a circular BaFin summarized its considerations to date on the good-conduct obligations under the Securities Trading Act (WpHG) and supplemented them with new regulations. The circular, entitled “Minimal requirements and further obligations on conduct, organization and transparency duties pursuant to §§31 ff. (MaComp)” fleshes out the conduct, organization and transparency duties under the WpHG where there are credit or securities transactions with customers. BaFin had previously found in numerous talks with the compliance officials of various institutions that the compliance function was often not equipped in accordance with its importance and that compliance employees could not ensure that the company was complying with the provisions of the WpHG. In the circular, inter alia the duties of the compliance function, the processes in which the compliance function is to be incorporated and the organizational setup, design and technical requirements on employees are explained. Additionally, the circular also contains explanations on best execution and on the monitoring of employee transactions and publicity.

Is a national financial-market transaction tax coming?

Neither the G8 nor the G20 summit in Canada brought the necessary breakthrough in financial market regulation. The Heads of State postponed agreement on broad outline conditions to the summit in November in Seoul, South Korea. That meant an end to the hopes of German Chancellor Angela Merkel to be able to introduce a bank levy and a financial-market transaction-cost tax at G20 level. As well as Canada, Australia and Brazil, other G20 States also came out against a bank levy at international level. The 27 EU Heads of State have already come out in principle in favour of a European regulation. In the case of the financial-market transaction tax Germany might be going it alone: in the recent savings package, receipts from the taxation of financial transactions are already pencilled in as from 2012 at 2 billion euros a year.

The German government wants to get rid of bank shares

On 23 June the German cabinet set about setting up a seven-member advisory committee to work out a strategy for the government to get rid of its holdings in crisis banks like Commerzbank, Hypo Real Estate, Aareal Bank and WestLB. Federal Finance Minister Wolfgang Schäuble (CDU) then appointed (alongside the chairman, Bonn law professor Daniel Zimmer) Werner Brandt, professor Claudia-Maria Buch, Hans Georg Fabritius, professor Martin Hellwig, Hans-Hermann Lotter and professor Hanno Merkt to the body. One representative each of the Federal Finance Ministry, the Federal Institute for Financial Market Stabilization, the Federal Ministry for the Economy and the Federal Ministry of Justice can take part in the meetings, but without vote. The body is to present recommendations by the end of the year on how to get out of the holdings.

Panic brake usual in Germany

In connection with the “panic brake” introduced by US securities regulator SEC, the Munich stock exchange points out that such systems have long been in use in Germany. Thus, in the Max-One trading system operated by the Bavarians since 2003, for all securities traded there is a dynamic and a static price corridor, monitored at each price setting. Additionally, the size of the spread on the reference market is also verified. “If the difference between the money and paper rate on the reference market for the share is too big,” says Manfred Schmid, head of market control, “the transaction is automatically interrupted.” As an additional monitoring body, an account taker checks the figures for plausibility.

EU wants to regulate bankers’ bonuses

EU parliamentarians in the Economic and Finance Committee have produced a list according to which at least 40% of a bonus payment to a bank employee is to be payable at earliest after five years. In order to create incentives to long-term, sustainable business practice, cash payments are to be limited to six percent of the total amount. The variable parts are according to the list not to exceed the whole of the fixed salary. At the end of June parliament, in negotiations with the Commission and the Member States, nonetheless yielded a bit. The compromise secured provides for no statutory upper limit to bonuses. Each bank is now to ensure a healthy relationship between fixed salary and bonuses. However, a maximum of 30% of the bonuses are to be distributed in cash, and payments are to be spread over several years. Parts may also be withheld. If as expected the European Parliament agrees to the proposal in early June, the rules could enter into force in 2011.

Reform of financial supervision postponed

At the meeting of G20 finance ministers in Busan, South Korea, in early June, finance minister Wolfgang Schäuble (CDU) and Bundesbank head Axel Weber postponed their financial oversight reform project for later consideration, with no date set. There were more important problems, said the statement by the two of them. Priority went to international negotiations on regulating finance markets and bringing forward the Basel-III reform; financial-market supervision in Germany was more of a medium-term project. Originally, a ministerial draft of it was supposed to be presented before the summer pause in early July. Financial Times Deutschland writes that Schäuble now wants first to await the introduction of European monitoring structures and then tackle the national regulation. It is controversial how powers will in future be distributed between the Federal Institution for Financial Services Oversight (BaFin) and the Bundesbank. The Bundesbank fears for its independence in this connection.

Female quota ought to rise

In order to increase the proportion of women in leadership positions, the Corporate Governance Commission at the end of May incorporated a passage into the voluntary Code to the effect that companies ought regularly to report on progress with a self-set female quota in the company. That meant that initially a statutory regulation has been skilfully avoided; the pressure to include women more is, however, being built up still further. While Federal Minister of Justice Sabine Leutheusser-Schnarrenberger welcomed this voluntary aspect of equal rights and rejected a statutory regulation at this time, Federal Minister for the Family Kristina Schröder raised a sword of Damocles: an Act with clear quotas would come, unless the proportion of women in management ranks rose to 20% in an overall average of branches, the lady minister threatened.

Stress test to be locked away?

The heads of the 16 big German banks were surprised by a change in opinion by Bundesbank president Axel Weber. At the end of June, together with the head of the Federal Institute for Financial Services Oversight (BaFin), Jochen Sanio, he had invited the CEOs of the biggest German banks to Frankfurt for a meeting to get them to agree to new EU stress tests. After the meeting they indicated that they were in principle ready to take part in the tests on a basis of Europe-wide uniform rules. While the European association of financial overseers CEBS wants to make the total findings of the latest stress tests on European banks completely open, Weber has now retreated from this position at the meeting, and come out in favour of only partial disclosure. This is a turn on his part, since in mid-June he was still backing the plans of the EU and the federal government. The CEBS wants to restore transparency and thus trust to banks through full disclosure. The banks are however afraid that information that has so far been kept hidden could attract speculators. The timetable has today provided for disclosure of the findings in July; however, many details are still unclear. The tighter tests are supposed to check scenarios in which write-downs are made from investments hitherto regarded as safe. If core capital then falls below 6%, banks could be obliged to accept state aid. The EU already presented a first stress test on 22 banks in early October 2009, though only as a summary.