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Financial Sector Assessment Program Update: Detailed Assessment of Observance on IOSCO Principles and Objectives of Securities Regulation
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This paper provides an assessment of the level of implementation of the International Organization of Securities Commissions (IOSCO) Principles in Sweden’s securities market. The assessment has identified several significant weaknesses in the scope and effectiveness of securities market regulation. The Executive Board recommends licensing of insurance intermediaries under the Securities Market Act (SMA). The government should also reconsider its policy of attaching specific short-term project requirements to parliament’s annual budget allocation for Finansinspektionen (FI) initially and during the course of the financial year.

Abstract

This paper provides an assessment of the level of implementation of the International Organization of Securities Commissions (IOSCO) Principles in Sweden’s securities market. The assessment has identified several significant weaknesses in the scope and effectiveness of securities market regulation. The Executive Board recommends licensing of insurance intermediaries under the Securities Market Act (SMA). The government should also reconsider its policy of attaching specific short-term project requirements to parliament’s annual budget allocation for Finansinspektionen (FI) initially and during the course of the financial year.

I. Introduction

1. An assessment of the level of implementation of the International Organization of Securities Commissions (IOSCO) Principles in Sweden’s securities market was conducted March 9–21, 2011 as part of the Financial Sector Assessment Program (FSAP) by Richard Britton, an external technical expert employed for this purpose by the IMF. An initial IOSCO assessment was conducted in 2001. At that time several significant weakness in the scope and effectiveness of securities market regulation were identified. Since then the legislative framework has been expanded, strengthened and set out in greater detail, primarily as a result of Sweden’s implementation of a large volume of directives, regulations and recommendations under the European Union (EU)’s financial services action plan intended to make a single European capital market a practical reality. The improved ratings in this assessment reflect those changes

II. Information and Methodology Used for the Assessment

2. The assessment was conducted based on the IOSCO Principles and objectives of securities regulation and its methodology adopted in 2003 and updated in 2008.1 In June 2010 IOSCO approved a revision to the IOSCO Principles, which mainly resulted in the addition of nine new Principles. Recently a draft methodology has been circulated to IOSCO Committees for review. It is expected to be endorsed at the IOSCO Annual General Meeting in April 2011. It would therefore have been inappropriate to have assessed the jurisdiction under the draft methodology Nevertheless, FI agreed to hold exploratory discussions on the status of implementation of the new principles. A summary of such discussions is included as an Appendix I to this assessment.

3. The assessor relied on (i) a self-assessment developed by the FI; (ii) the review of relevant laws, and other relevant documents provided by the FI; (iii) its staff and other public authorities, in particular representatives of the Ministry of Finance (MoF); as well as (iv) meetings with market participants, including banks, investment firms, fund managers, and market operators. The assessment also benefited from two recent academic reports on the resources of FI and shareholder voting rights in Sweden.2

4. The assessor wants to thank the FI for its full cooperation as well as staff’s willingness to engage in very candid conversations regarding the regulatory and supervisory framework in Sweden. Particular thanks go to Lennart Torstensson, who coordinated meetings and participated in the discussions with unfailing insight and good humor. The assessor also wants to extend his appreciation to all other public authorities and market participants with whom he met.

III. Description of the Regulatory Structure

5. The structure of financial regulation in Sweden is based on the unitary model in which a single administrative authority is responsible for licensing and supervising all entities engaged in the business of providing financial services. This is established in the Financial Supervisory Authority Instructions Ordinance (2007) and the Instructions Ordinance (2009). The FI is responsible for supervision, regulation and licensing of financial markets and financial firms. It is also charged with coordinating supervision as regards anti-money laundering and combating the financing of terrorism (AML- CFT). Section 2 of the Ordinance requires the FI to promote a stable and sound financial system and Endeavour to ensure solid consumer protection in the financial system. It has a particular responsibility for monitoring and analyzing developments in the area of its responsibility with a view to detecting risks of instability in the financial sector which could adversely affect the functioning of the Swedish financial system; in which case, it must notify the government. It must also ensure that its rules and processes are cost effective and easy for citizens and companies to understand and follow.

6. Other bodies have specific responsibilities under the law. They share these with, and cooperate with, the FI.

7. The Riksbanken’s (RB) mission, apart from its monetary policy objectives, is to promote a safe and efficient payment mechanism which is closely integrated with the clearing and settlement systems of the securities and derivatives markets supervised by the FI. The RB also has an overarching responsibility for the development of the financial system as a whole, with a focus on institutions, markets and infrastructure of importance to financial stability, and to present its views to Government on risks and inefficiencies in the financial system. In exceptional circumstances, the RB is also able to provide special liquidity assistance to financial companies that are under the supervision of FI.

8. The Swedish National Debt Office (NDO) is the support authority under the Government Support to Credit Institutions Act. This entails responsibility for entering into support agreements with FI and RB and administrative duties relating to the support provided on the basis of this Act. The SNDO also manages the deposit insurance and investor compensation systems.

9. The Swedish Consumer Protection Agency (CPA) is a state agency whose task is to safeguard consumer interests; this includes responsibility for investigation and taking action against unfair marketing practices with respect to financial products.

10. The Swedish National Economic Crime Bureau (NECB) is the prosecuting authority for a range of securities markets offences. FI is not a criminal prosecutor and therefore when it receives suspicious trade reports (STR) or other evidence that a criminal offence may have been committed it forwards these to the NECB.

11. As a unitary regulator the FI licenses and regulates all entities operating in the Swedish financial markets including banks, securities firms, insurance companies, fund managers, exchanges and clearing, and settlement bodies. This is done on the basis of periodic reporting by licensees and on-site inspections. The FI analyses the financial position of individual licensees, can mandate remedial action and impose sanctions when necessary. It also identifies and analyses trends in the financial market as a whole. The FI is divided into four operational departments: (i) Legal, (ii) Markets, (iii) Insurance and Investment Funds, and (iv) Banks and Investment Firms. Each department is divided into several units. The Legal Department handles permits/licenses and notifications. The FI does not have a freestanding Enforcement Department. In recent years it has adopted a more risk based supervisory approach particularly as regards large complex groups.

12. The ordinance contains several provisions aimed at fostering cooperation and consultation among the various statutory bodies by imposing specific responsibilities on the FI. In practice this has been translated into the signing of many MoUs and letters of intent with authorities in Sweden, in the EEA and beyond.

13. The framework for the securities markets rests in the definition of a list of activities that are subject to authorization or licensing. Those activities include: (i) offering of securities to the public; (ii) the provision of investment services and activities;3 (iii) the management of collective investment schemes (CIS); and (iii) the operation of a regulated market (RM). These have been transposed into domestic legislation by the government to fulfill Sweden’s obligations as a member of the EU.

14. The definitions of securities business (and securities) are found in the Markets in Financial Instruments Directive (MiFID) which came into force in 2007. MiFID is but one of a large number of pan EU directives, regulations, and recommendations introduced in the last decade which have sought to create a single European market in financial services. Almost every aspect of the legislative and regulatory framework which is subject to this assessment (with the exception of the FI’s fining powers), has been introduced, modified or reviewed for compliance following the introduction of a pan-EU directive or regulation.

15. National differences remain however. Some directives are so-called “minimum harmonization” measures which enable national authorities, within limits, to exceed the requirements. Some are “maximum harmonization” measure which are intended to prevent Member States from “gold plating” the directive. Others will have embedded within them optional exemptions. Transposition of directives into national law can also produce divergences, by accident or design; and the EU Commission’s record of pursuing all but the most egregious cases is not good. The EU Commission has attempted to operate more by regulation, which becomes national law directly, (i.e., without transposition), but the areas in which it has the power to do this are somewhat narrow).

16. Although in the last decade more powers have accrued to the FI, though legislative change, self regulation remains an important part of the regulatory structure in securities markets. In particular the role of the dominant stock and derivatives exchange, NASDAQ OMX, remains significant, particularly as regards the supervision of listed companies. Another self regulatory body, the Swedish Securities Council (SSC) acts in takeover situations using powers delegated to it by FI.

IV. Market Structure

17 At the end of 2009, 255 companies were listed on NASDAQ OMX Stockholm Only those limited companies with at least SKr 500,000 in capital may offer their shares for public trading. Public companies listed on NASDAQ OMX Stockholm may also be quoted on the Nordic list, which quotes public companies listed on the stock exchanges in Helsinki, Copenhagen and Iceland.

18. The Nordic list represents a harmonization of the listing requirements of the four countries. To be listed on NASDAQ OMX Nordic, the expected market value of the shares must be not less than EUR one million. Further requirements are that the ownership must be sufficiently widely held and that the business must have existed for a sufficiently long period (at least three years) and must show stable profitability, or have financial resources to cover operations for at least twelve months.

Table 1.

Sweden: Share Ownership Structure of Swedish-Listed Companies as of December 2009

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Source: “Ownership of shares in companies quoted on Swedish exchanges, December 2009,” Statistics Sweden.

A. Intermediaries

19. As of February 2011, there were 89 banks and savings banks and 135 investment firms authorized to carry on securities business. All were located in Sweden. A majority of the Swedish banks are licensed for securities business, and the four large Swedish banks are a dominant force on the securities market. With only a few exceptions, the “nonbank” securities firms are relatively small and in most cases privately owned. Total assets for securities firms amounted to around SKr 16 billion, assets under management (AUM) SKr 28 billion and capital SKr 4 billion. The business of providing investment advice is an activity that requires a license as a securities firm. In Sweden, (in contrast to many other countries), very few firms offer investment advice as their sole activity. Instead, they generally offer a varying combination of securities services.

B. Collective Investment Schemes

20. After a dip in 2008, AUM have rebounded strongly to a record level of SKr 1.706 trillion at the end of 2010. There are 921 CIS under management of which 519 are Undertakings for Collective Investment in Transferable Securities (UCITS) and 400 are special funds. They are managed by 105 authorized firms of which, 82 are fund management companies and 23 are investment firms. There are also 3977 foreign CIS authorized in Sweden under the UCITS based legislation and two specialized funds integrated into the Swedish State Pension System. AUM in these two categories are not included in the table below. Most of the major fund management companies have significant operations in Luxemburg where most of their non-Swedish targeted funds are licensed.

Table 2.

Sweden: Collective Investment Schemes

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Source: Swedish Investment Funds Association (Fondbolagen Forening).

C. Markets

21. NASDAQ OMX Stockholm is the dominant stock exchange and marketplace for Swedish shares although its market share has declined sharply in the last two years. NASDAQ OMX Group, Inc. is a United States (U.S.) public company that owns and operates the U.S. NASDAQ stock market, two U.S. exchanges, a Gulf State exchange and seven European stock and derivatives exchanges in the Nordic and Baltic regions under the OMX brand. It is currently the sixth largest trading venue in Europe.4 Supervision of its global business places a premium (and cost) on the FI securing close and cooperative relationships with fellow regulators wherever NASDAQ OMX operates an exchange or MTF.

22. All trading on NASDAQ OMX Stockholm is conducted through its members. The members consist of securities companies and banks which are licensed by FI to engage in securities trading. Members also include remote members, (i.e., foreign companies that engage in securities trading in Sweden from abroad). NASDAQ OMX Stockholm has 113 share trading members. In principle, non-financial companies and branches of foreign companies can be members of the stock exchange. At present, however, there are no members in this category in NASDAQ OMX Stockholm. Share trading on NASDAQ OMX Stockholm takes place electronically through the matching of orders in a central limit order book (CLOB).

23. The majority of share trading is conducted in electronic trading systems belonging to a stock exchange or a multilateral trading facility (MTF). It is also possible to trade shares outside these systems. A portion of the trading that takes place outside these systems is conducted in accordance with NASDAQ OMX Stockholm’s regulations and is reported to NASDAQ OMX Stockholm as normal stock exchange transactions. The rest is regarded as over the counter trading (OTC). Bond trading in Sweden is largely conducted by telephone while in the foreign exchange market about 85 percent of the spot trade in SKr by primary dealers is done through electronic platforms. Interbank trading in foreign exchange derivatives on the other hand is mostly not electronic.

24. Supported by its dominant role in cash equity trading in Sweden, most of the trading in equity derivatives takes place under the auspices of the NASDAQ OMX derivatives markets (DM). In addition to derivatives linked to individual shares, options and futures linked to NASDAQ OMX’s own stock indices are traded on the exchange. DM also provides clearing for the derivatives traded on its exchange and for certain OTC derivatives that are not listed for trading.

Table 3.

Sweden: Equity Trading on NASDAQ OMX, 2009

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Table 4.

Sweden: Total Turnover of Standardized on-Exchange Contracts, January–October, 2010

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Source: NASDAQ OMX Stockholm.

25. In addition to NASDAQ OMX Stockholm, Nordic Growth Market (NGM) and Burgundy have also been licensed by FI to operate as stock and derivatives exchanges in Sweden. There are also three MTFs in Sweden: First North, Nordic MTF, and Aktietorget. Swedish shares that can also be traded on overseas MTFs, such as Chi-X Europe, that have specialized in providing a marketplace for shares that are already listed on a stock exchange and thereby fulfill the listing requirements. Data from Thomson Reuters indicates that 42 percent of Swedish equity trading took place outside NASDAQ OMX in February 2011.

26. Competition in the provision of trading venues has intensified since 2007. MiFID ended the monopoly of trading of shares in domestic companies granted by many EU governments to established domestic exchanges. This has resulted in several new providers achieving significant market shares.5 The resulting downward pressure on exchange trading fees has undoubtedly been beneficial to investors, although exchanges have been more successful than expected in maintaining supernormal profits. The absence of a “last trade tape” and consolidated “best bid and offer” on the U.S. model have also increased search costs for institutional investors seeking to obtain “best execution.” The European Commission is seeking to resolve these problems in its current “MiFID review.”

V. General Preconditions for Effective Securities Regulation

27. There are a number of general preconditions necessary for the effective regulation of securities markets that appear to be in place in Sweden. There are no significant barriers to entry and exit for market participants. Competition is encouraged and foreign participation is welcomed. The legal and accounting system supports the implementation of effective regulation of market participants. The commercial law is up-to-date, and so are corporate governance standards. The legislation regarding insolvency is sophisticated although there are issues concerning the enforcement of market contracts entered into in the period immediately after insolvency is declared. The regulators have legally enforceable powers of decision and action. The taxation framework is supportive of the operations of the industry in the jurisdiction.

VI. Main Findings

A. Principles for the Regulator (Principles 1–5)

28. Although FI is a unitary regulator, FI has to regulate the three major sectors of financial services, banking, securities and insurance under several separate statutes. While each act may be clear when considered in isolation, there can be problems at the interfaces which can create risks to investors though this is a matter of the effectiveness of enforcement of the law rather than gaps between laws, FI is highly accountable. Restrictions on operational independence arise from the imposition of mandatory special requirements during the course of a financial year and its reliance for 85 percent of its funding on Parliament. Although staff resources have increased in recent years they remain insufficient for current and predictable future work; turnover, particularly of experienced staff, is high. There are rules in place for dealing with the regulator that are intended to ensure procedural fairness, as required by the Principle; the structure of FI is well described and the processes are reasonably transparent. In practice the process of representation prior to the imposition of a major sanction such as license revocation may need enhancement. The Board and staff of FI are subject to the highest professional standards and these are appropriately monitored.

B. Principles for Self Regulation (Principles 6–7)

29. Self regulation has a long history in Sweden and still has a far greater role here than in many other European countries. Although the powers of the FI over exchanges have been strengthened since the 2001 FSAP there are still limitations in FI’s ability to secure changes in certain rules and processes it believes to be necessary short of the threat of the imposition of significant sanctions. Despite being regarded as self regulatory bodies, (in that they are not government authorities but exist in the private sector) the listing rules of securities exchanges and the power to make them are set out in the law. As a result, in this part of their business model the accountability of securities exchanges to FI, the statutory regulator, is unclear.

C. Principles for Enforcement (Principles 8–10):

30. FI has a comprehensive range of inspection, investigation, surveillance and enforcement powers and where it has delegated powers ((e.g., to the Swedish Securities Council regarding takeovers) that has been done with the appropriate degree of oversight and review. Scarce resources limit the capability to carry out effective enforcement and compliance activities thereby limiting the ability of FI to ensure compliance or detect breaches. The interface between supervision and enforcement does not recognize the different skill and mind sets required. The maximum amount licensees and others can be fined is too low and there have been cases where the FI’s use of its statutory discretion not to fine a fund manager which has remedied a breach indicates a significant weakness in FI’s use of administrative sanctions.

D. Principles for Cooperation (Principles 11–13)

31. FI and other government authorities have fundamental obligation to share information including with foreign regulators. There are appropriate confidentiality provisions in the law and the gateways through these appear effective. FI has more than 40 active MoUs and Letters of Intent with foreign authorities. As a result of a very recent change in the law (March 1, 2011) FI can now share information with foreign counterparts even if the alleged conduct is not such that it would constitute a breach of Swedish law if conducted within Sweden. Previously this issue was an impediment to sharing information with foreign regulators. As a result of the change FI reapplied to become a full signatory to the IOSCO Multilateral Memorandum of Understanding (MMoU). This was granted in April 2011. FI has extensive powers to assist foreign regulators with information held by FI. It also has extensive powers to access information held by other entities.

E. Principles for Issuers (Principles 14–16)

32. Because the listing rules of NASDAQ OMX and the other securities exchanges derive directly from statute, FI has little influence over the conduct of listed companies except via seeking to ensure that the exchanges interpret and enforce their listing rules appropriately. The provisions whereby a company can keep confidential information it would otherwise be required to make public lack specificity. NASDAQ OMX (currently the dominant exchange for listed companies) claims that its criteria for granting exceptions are very narrow. The maximum of 120 days for filing annual reports, while it may the EEA standard is slow by comparison with some other advanced markets where 90 or 75 days is the norm. There is high level of protection for securities holders in Swedish company law and via implementation of EU directives on takeovers and shareholder rights. Sweden applies the “comply or explain” approach with regard to corporate governance of public companies. The governance code is updated by a private sector body which has self regulatory elements. Although the existence of classes of shares with multiple voting rights renders some major companies largely immune from hostile takeovers bids, these arrangements are transparent to incoming minority shareholders. Although the conduct of takeovers is governed by stock exchange listing rules, another self regulatory body, the Swedish Securities Council, operating under delegated powers from FI (and subject to its oversight), plays a role in enforcing the rules and granting exemptions. Company boards have to represent the interests of all shareholders equally and there are limits to their use of defense mechanisms to thwart a hostile bid. Accounting and auditing standards are high. The supervision of auditors and auditing standards is the responsibility of a government authority, the Supervisory Board of Public Accountants. Sweden has adopted the International Federation of Accountants (IFAC) International Standards on Auditing (ISA). Independence of auditors is required under the Auditors Act and Swedish Auditing Standards (RS) which are based on the ISA standard but with some enhancements. Group accounts (and those of listed companies) must be prepared according to International Financial Reporting Standards (IFRS) as adopted by the EU. Other companies may use a mix of IFRS and Swedish GAAP. The reason for this lies in the tax system. The Swedish Accounting Standards Board is responsible for interpreting the latter. Although standards as regards companies listed on an RM are set by the Swedish Financial Reporting Board, enforcements of elements of the regime is the responsibility of the relevant stock exchange. This looks unsound in a market where for-profit exchanges have begun to compete for listings. The position is currently under review in the MoF.

F. Principles for Collective Investment Schemes (Principles 17–20)

33. FI has inadequate resources to effectively supervise fund management companies and insurance intermediaries who market CIS. The department finds it difficult to do more than 10 AMC specific on-site inspections a year. The last comprehensive survey (three years ago) discovered a level of non-compliance which suggests many breaches go undiscovered unless investors complain. Insurance intermediaries are in practice largely unsupervised for this business. They are not required to provide quarterly reports, require no capital but carry PII; the department relies on customer complaints to indicate problems. Too much reliance is placed on a legal requirement for licensees self-reporting breaches or the external auditor doing so. There is evidence that this system has not been working as was intended and the FI has begun to explore mechanisms by which it might be improved Sweden has seen the emergence of a category of fund salespersons that has unexpectedly been able to exploit an element of the Swedish interpretation of the UCITS directive whereby Sweden has implemented a set of rules that allows for marketing in the sense of advertising of a CIS with no requirement to obtain a license in advance. The unregulated nature of this business means that there are no safeguards as to the quality or suitability of funds sold as would apply to properly notified or licensed fund sales. To clarify that this is not the intention of the rules Sweden plans shortly to strengthen the wording of the IFA, such that any kind of marketing of a CIS in Sweden will require a notification or license. Due to resource constraints FI is unable to be fully effective in supervising compliance with its asset segregation rules. Recent cases highlighted breaches extending, in one case, over several years. FI’s policy as regards use of its fining powers do not appear sufficient to act as a deterrent to major fund managers and custodians. Disclosure requirements are as in the UCITS III and appear sufficient. There will be new rules, and additional obligations on the boards of UCITS management companies with the implementation of UCITS IV in July 2011. On unlisted securities FI has issued guidance imposing a special duty of care on fund managers. Valuations should be carried out by independent and competent persons according to consistently applied and pre-defined principles. Under this guidance it would not be appropriate that the valuation be performed by the person or persons responsible for the management of the fund. There are appropriate regulations governing the treatment of pricing errors and suspension of redemptions.

G. Principles for Intermediaries (Principles 21–24)

34. The number of staff carrying on prudential and in particular conduct of business supervision is insufficient. Applicants for a license are only subject to an on-site inspection if their business is sufficiently large and complex that physical Chinese walls are an issue. The six major firms are seen by the prudential supervisors at least annually and often quarterly; the remainder are seen once in 2.5 years. Conduct of business supervisors do no on-site inspections except for cause or as part of “themed” projects. Within the limits set by the number of staff, inspections and examinations appear thorough. Pre-visit planning is detailed and objective based. Feedback to firms itemizes problem areas comprehensively and action is required and followed up. The department has introduced a risk based supervision approach to make the best use of limited resources. There is a problem in the interface between the SMA and the Insurance Intermediation Act which create risk to retail investors. Unless licensed under the more rigorous requirements of the SMA an insurance intermediary is not permitted to give investment advice on shares, bonds structured products or other complex financial instruments but some are doing so. FI has recently initiated a full review of its relevant regulations. This review covers the full regulation of insurance intermediaries, not only the ancillary service of selling investment funds. The project is looking for ways to tighten the application procedure and to come up with suggestion for necessary changes in the overall regulation.

35. There are initial and ongoing minimum capital requirements with which market intermediaries must comply. These requirements are harmonized at the EU level under the Capital Requirements Directive, (CRD). These have been fully transposed into Swedish law via the Capital Adequacy and Large Exposures Act (2006). The requirements set out in the IOSCO Principle appear to be present. An intermediary is required to have an adequate management and organizational structure and adequate internal controls. An intermediary is required to have senior management that is of sufficiently good repute and sufficiently experienced. The senior management is primary responsible for ensuring that an intermediary complies with its legal obligations. An intermediary is required to maintain, monitor and regularly evaluate its procedures and systems; to have an internal audit function and to appoint an independent external auditor. An intermediary is required to self-report problems to FI and the external auditor has an obligation to report any problems discovered on the audit of the intermediary. The effectiveness of this last requirement is in doubt, which, as a result of one large case, has stretched the supervision resources even farther than normal. The appropriate agreements are in place to deal with a failure of an intermediary. FI, RB, and the MoF have signed a MoU regarding crisis management. FI is a signatory to the MoU on cooperation between the financial supervisory authorities, central banks, and finance ministries of the EU on cross-border financial stability. With regards to Swedish financial institutions with significant activities in other countries, such as Nordea Bank and NASDAQ OMX, there are MoUs on supervision with other relevant jurisdictions within Sweden and in the Nordic area. Although NASDAQ OMX is now owned by the second largest stock market operating group in the U.S., FI does not have a formal MoU with the U.S. Securities and Exchange Commission (SEC). Regular scenario/stress test situations are carried out together with RB. Such work has also been carried out at the Nordic level.

H. Principles for Secondary Markets (Principles 25–29)

36. In comparison with securities exchanges in most of Europe and indeed globally, securities exchanges in Sweden have a wide self regulatory remit. In recent years FI’s powers over exchanges have been significantly strengthened. The authorization provisions currently applied to trading systems operated by some of the large banks do not fully meet the IOSCO Principle regarding transparency. Although FI reviews the trading rules of a securities exchange for compliance with the SMA and its regulations, the FI does not review and analyze the performance of trade matching or execution algorithm of automated trading systems. As for the transparency of markets generally there are challenges across Europe as markets fragment and a variety of trading platforms are developed. Sweden does not appear to derogate from the current MiFID pre and post trade transparency regime. The rating recognizes the concerns identified in Sweden and elsewhere as part of the current MiFID review on specific elements in the current regime.

37. Overall it appears that although the NECB has a good record in successfully prosecuting those cases it brings to court, the current regime has only limited deterrent effect in applying dissuasive sanctions for criminal offences such as insider dealing. In this context Sweden has implemented the Market Abuse Directive. Elsewhere, in securing market integrity and minimizing systemic risk Sweden has implemented the relevant EU directives such as the Settlement Finality Directive. Large Exposures are dealt with in the Capital Adequacy and Large Exposures Act to which all banks and market intermediaries are subject. FI does not itself monitor open positions but has the right to require full information about positions from the central securities depository (CSD), central counterparty (CCP), and licensed firms. The market authorities have powers to take action under their rules and regulations if necessary.

38. Although the CSD was not assessed FI has observed that since 2001 the clearing and settlement system for cash bonds and equities on NASDAQ OMX has been radically improved to take account of the IMF assessment at the time by introducing a gross rather than net settlement system. It is now owned by Euroclear, one of the two Europe based International Central Securities Depositories (ICSD). There is a CCP for top tier stocks, the European Multilateral Clearing Facility (EMCF), based in the Netherlands. FI has a MoU on this arrangement with the Dutch regulator.

Table 5.

Sweden: Summary Implementation of the IOSCO Objectives and Principles—Detailed Assessment

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Table 6.

Sweden: Recommended Action Plan to Improve Implementation of the IOSCO Objectives and Principles

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Authorities’ Response to the Assessment

39. The Swedish authorities appreciate the work carried out by the IMF in assessing Sweden against the IOSCO principles. Overall, the authorities agree with the mission’s assessment, and consider many of the recommendations valuable to improve the regulation and supervision of the securities markets.

VII. Detailed Assessment

40. The assessment of the country’s observance of each individual Principle is made by assigning to it one of the following assessment categories: fully implemented, broadly implemented, partly implemented, not implemented and not applicable. The IOSCO Methodology provides a set of assessment criteria to be met in respect of each Principle to achieve the designated benchmarks. The Methodology recognizes that the means of implementation may vary depending on the domestic context, structure, and stage of development of the country’s capital market and acknowledges that regulatory authorities may implement the Principles in many different ways.

  • A Principle is considered fully implemented when all assessment criteria specified for that Principle are generally met without any significant deficiencies.

  • A Principle is considered broadly implemented when the exceptions to meeting the assessment criteria specified for that Principle are limited to those specified under the broadly implemented benchmark for that Principle and do not substantially affect the overall adequacy of the regulation that the Principle is intended to address.

  • A Principle is considered partly implemented when the assessment criteria specified under the partly implemented benchmark for that Principle are generally met without any significant deficiencies.

  • A Principle is considered not implemented when major shortcomings (as specified in the not implemented benchmark for that Principle) are found in adhering to the assessment criteria specified for that Principle.

  • A Principle is considered not applicable when it does not apply because of the nature of the country’s securities market and relevant structural, legal and institutional considerations.

Table 7.

Sweden: Detailed Assessment of Implementation of the IOSCO Principles

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Appendix: Status of Implementation of the New IOSCO Principles—A Discussion

The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate

41. This is a fundamental part of FI’s mandate. According to the 2009 Ordinance which gives high level and continuing instructions to FI it has a particular responsibility for monitoring and analyzing development in the area of its responsibility. If the authority sees a risk that instability in the financial sector could adversely affect the functioning of the Swedish financial system, FI should notify the Government. Furthermore it is required to cooperate with the RB and the Swedish Civil Contingencies Agency on issues relating to the Crisis Management and Enhanced Preparedness Ordinance.

The Regulator should have or contribute to a process to review the perimeter of regulation regularly

42. FI has an explicit obligation to address these matters as part of the 2009 Ordinance that FI must promote a stable and sound financial system and Endeavour to ensure solid consumer protection in the financial system.

The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed

43. There are numerous references in the law and FI regulations to the requirements on licensees, including securities exchange, to identify, properly manage and disclose conflicts of interest. As such this is a core element of FI’s licensing and supervisory work.

Auditors should be subject to adequate levels of oversight

Auditors should be independent of the issuing entity that they audit

Audit standards should be of a high and internationally acceptable quality

44. FI notes that the three new Principles on Auditors are essentially an unbundling of accounting and auditing standards in the current version of the Principles. As such it was assessed here and Sweden was rated as meeting the required standard. FI does not believe that application of the new draft Methodology would lead to any change in that. Please see the discussion under Principle 16 above.

Credit Rating Agencies (CRAs) should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision

45. CRAs are subjected to registration and oversight pursuant to the EU Regulation on CRAs (Regulation (EC) No 1060/2009). Such Regulation is directly applicable to the national European member states. The Regulation stipulates that the oversight of CRAs and supervision of compliance of the Regulation is performed by the competent authorities of the concerning Member. There are no CRAs in Sweden. According to FI, the trend among CRAs, presumably caused by pan EU regulation, is to concentrate their business in one or two locations. London is generally the preferred choice.

Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them

46. FI notes that to date IOSCO has only provided one example of such an entity and notes that such an entity would have to be licensed as an investment firm under the SMA and have received an ancillary permission from FI to carry on the business of providing investment research and financial analysis or other forms of general recommendations relating to transactions in financial instruments. Such a firm is covered by the law and FI Regulations covering conflicts of interest and general guidelines relating to investment recommendations directed at the general public.

47. Should a company wish to provide only such ancillary services as described above it could not be licensed under the SMA. However, such a company would be subject to FI Regulation. FI is required to supervise such companies under the Financial Instruments Trading Act 1991. The regulations cover requirements that the person producing, and with responsibility for, the investment recommendations, be identified, requirements on the presentation of such recommendations, requirement regarding conflicts of interest and requirements on the dissemination of investment recommendations produced by a third party. The issues related to risk are assessed as part of the FI’s normal risk assessment process.

Regulation should ensure that hedge funds and/or hedge fund managers/advisers are subject to appropriate oversight

48. Hedge funds and their managers are not subject to a customized regime nor has Sweden (like IOSCO) attempted to define a hedge fund. Instead such funds and their managers fall within the regime for special funds, (i.e., non-UCITS). The current licensing regime for special funds and their managers, as described in the current IOSCO Principles 17-20 on CIS applies. FI believes that the current regime is compliant with the new methodology.

1

In 2008 IOSCO only updated the footnotes of the methodology.

2

A Report on the Mandate, Structure and Resources of the Swedish Financial Supervisory Authority, Professor Howell E. Jackson, November 2010 and Efficiency of Share Voting Systems—Report on Sweden, Eckbo, Paone, Urheim, August 2010.

3

Providing an investment service includes: (i) to receive and forward, in the pursuit of a profession or business, client orders with regard to financial instruments; (ii) to execute, in the pursuit of a profession or business, orders with regard to financial instruments for the account of those clients; (iii) to manage an individual’s capital; (iv) to provide advice with regard to financial instruments in the pursuit of a profession or business; (v) to underwrite or place financial instruments when they are offered on a firm commitment basis, in the pursuit of a profession or business; and (vi) to place financial instruments when they are offered without a firm commitment basis, in the pursuit of a profession or business. Performing an investment activity includes: (i) acting for its own account, in the pursuit of a profession or business; and (ii) operating a MTF, in the pursuit of a profession or business.

4

Behind Euronext, Chi-X Europe, LSE, Deutsche Börse, and Borsa Italiana.

5

As noted in Footnote 1 Chi-X Europe has become the second largest trading venue in Europe in three years. In the Nordic region Burgundy has gone from zero to 4.4 percent market share in February 2011 in less than two years.

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