Hearing - proposed standards for alternative trading systems

We refer to your letter of 22 June 2001 in which you invite us to comment on “Proposed Standards for Alternative Trading Systems” set out by FESCO (The Forum of Securities Commissions).

The background for the proposed standards seems to be the developing of new trading systems which are not so far regulated by law and that the regulatory authorities fear those new systems do not give the desirable protection of investors and could damage the market integrity. We are, of course, in principle in favor of the general objectives of investor protection and market integrity. We notice as well that the proposed standards by and large are in accordance with the ISD, with which investment firms have to comply.However, we are rather uncertain about the scope of those proposed standards in relation to Norwegian law and the economic and other consequences for the market participants. We are pleased that FESCO express that the standards must not unnecessarily hinder financial innovation, limit the competition and impose unreasonable costs.
 

We shall not comment in detail on the proposed standards, but will in the following give some general remarks, which we think that primarily the national supervision authority in Norway, Kredittilsynet, should take into consideration.

As far as we know, for the time being, it does not exist in Norway any Alternative Trading Systems that qualify for the definition given on page 6 in the document. For this reason, among other things, it is difficult for FNH (The Norwegian Financial Services Association) to have strong and clear opinions on the proposed standards’ impact on the securities trading markets in Norway, if any impact at all. Securities trading is already subject to comprehensive regulation mainly through The Securities Trading Act and The Stock Exchange Act. We understand that the proposed standards are meant to fill a non regulated gap, but we must admit that we have some problems to identify the area of business to which the standards will apply. 

We learn from the proposed definition that an ATS is not regulated as an exchange.

However, if we look at the definition of investment services given in Section 1-2 no 1 of Securities Trading Act, we may well consider an ATS providing services quite similar to investment services. Accordingly it is natural that the rules of Securities Trading Act will apply to such services. That means among other things that Section 9-1 Organization of activities and Section 9-2 Rules of good business conduct will apply to an ATS, confer that the ISD (Investment Services Directive) is implemented through the mentioned act. On that background one may wonder if there is a real need for those proposed standards in addition to the existing regulation.

The new Norwegian Stock Exchange Act entails an institution that organizes or operates a market for financial instruments in which a basis is laid for trading through regular public price quotation, without securities etc., being admitted to official listing with the requirements thereby entailed by EU directives etc., must have a license as an Authorized Market Place. In our opinion it seems that an ATS according to its broad definition is quite similar to an authorized market place. We think that Kredittilsynet should examine and clarify the relationship between an ATS and an authorized market place. If an ATS in fact will be regulated as an authorized market place with legal requirements similar to those of an exchange, it doesn’t seem to be a need for those proposed standards from FESCO. In any case Kredittilsynet should make a closer examination of the requirements according to Norwegian legislation compared with the proposed standards of an ATS.

It is important for investment firms, to whom the standards are addressed, to know their obligations in relation to both law and such standards like this. We think Kredittilsynet should in a better way communicate to what extent and how they intend to use the proposed standards while supervising investment firms and other financial institutions.

Without, as mentioned above, going into detail, several of the standards seem to be rather trivial and must of course be complied with by a serious business. This applies for instance to standard number 2 , 3 and 7. Other standards seem to impose extensive disclosure requirements on investment firms, for instance standard number 4. But if it is so, as we assume, that many of the standards are already covered by Norwegian legislation, the standards will not have much impact on the Norwegian market.

Yours sincerely,

Finance and Legal department

Stein Sjølie                                                                                             

Director                                                                                       

Arne Johan Hovland

Senior Advisor