European Commission Public Consultation on Green Paper on Corporate governance in financial institutions and remuneration policies

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1 September 2010 European Commission Public Consultation on Green Paper on Corporate governance in financial institutions and remuneration policies Reply from NASDAQ OMX The NASDAQ OMX Group, Inc. delivers trading, exchange technology, listings and other public company services and post-trading services across six continents. It lists approximately 3,700 companies from 50 countries and from all industry sectors. NASDAQ OMX offers various capital raising and trading solutions to companies around the globe, including its U.S. listings market, NASDAQ OMX Nordic, NASDAQ OMX Baltic, First North, U.S. 144A, NordPool and N2EX. NASDAQ OMX Nordic and Baltic include exchanges in Helsinki, Copenhagen, Stockholm, Iceland, Tallinn, Riga and Vilnius. NASDAQ OMX offers trading across multiple asset classes including equities, derivatives, debt, commodities, structured products and ETFs. NASDAQ OMX also offers posttrading services in the form of central counterparty derivatives clearing. NASDAQ OMX Group technology supports the operations of about 70 exchanges, clearing organizations and central securities depositories in more than 50 countries. NASDAQ OMX appreciates the opportunity to comment on the European Commission s Green Paper on corporate governance in financial institutions and remuneration policies. As we respond from the perspective of a financial institution that is not a bank but still have certain interests on the topics of this consultation, we do not respond to each question but anyway provide our input. We provide comments below from the perspective of a business group that operates business within as well as outside Europe. Within Europe we are regulated by MiFID. We operate regulated markets and an MTF. In addition we operate a back office service under a MiFID investment service license. We also operate a central clearing house and CSDs. Furthermore, the perspective of listed companies is relevant for us. None of the businesses we operate is a bank operation. Nevertheless, as the Commission s Green Paper as well as for instance the Commission s recommendation on remuneration policies in the financial services sector include the businesses we operate, we see a need to comment on the Green Paper.

2 We agree that good corporate governance is crucial. This is true for any type of company, financial or non-financial, listed or non-listed, large or small, in any sector. Good corporate governance tailored to the specific situation of each company, thereby taking into account the responsibilities and accountabilities of the parent company in relation to the needs and the complexities of each company group, should provide the best opportunities for both stability and growth. Any measures considered by the Commission need to be based on these foundations. It is important that the measures that finally will be proposed by the Commission correspond to the shortcomings they aim to address. We note that the Commission has a focus on banks. At the same time, the Green Paper also uses the term financial institution and looks at legislation applicable to other types of financial institutions than banks, such as MiFID. It seems it must be clarified what shortcomings in which type of institutions should be addressed and then the necessary legislative changes to the relevant pieces of legislation should be considered. Otherwise there is a risk that the legislative measures taken will have unintended and negative consequences for other types of financial institutions than those aimed for. One example of how different types of institution are regulated in different ways is the currently ongoing work to develop EU legislation for clearing houses (EMIL). The managing of risks is a basic feature of the business model of clearing houses. Risk management of clearing houses will however be subject to specific legislation within EMIL. This is an example of separating the regulating of a specific type of entity taking account of its specificities instead of applying the same principles as for other types of financial institutions. Similarly, market operators, as well as other types of financial institutions need to be looked at separately when it comes to regulating corporate governance, including risk management, depending on the type of the business they operate. All types of financial institutions are already under requirements with the aim of ensuring good corporate governance. There are rules on conflicts of interest, risk management, fit and proper assessments of the ownership and management of firms, etc. We recognize the observations described under section 3.6 regarding the role of supervisors. Before imposing stricter rules it must be investigated to what extend deficiencies may be remedied with better supervision. Unless there is not appropriate supervision, there is a clear risk that more rules will not bring the intended improvement. In relation to supervision, we want to underline the need for supervisory cooperation across borders. Today many financial institutions operate businesses in several Member States and the company structures cut across borders. These company groups are faced with and manage corporate governance issues across borders. The same approach needs to be taken by supervisors. Supervisors in different countries need to ensure they apply the same rules to the same company groups in the same way. As recognized in the Green Paper, MiFID includes provisions on corporate governance aspects like conflicts of interests, and exchanges are within the scope of these provisions. We are however keen to ensure that these rules apply equally across borders. We also encourage coordination with non-eu jurisdictions, primarily the US. 2(7)

3 Lastly, we wish to underline that the same business needs to be under the same regulatory requirements, coupled with the same supervisory scrutiny, in order to provide for a level playing field. This applies to provisions on corporate governance as well as other regulatory requirements. For instance, MTFs may according to MiFID be, and are, operated by exchanges as well as investment firms/banks. This is a reality that needs to be recognized in the crafting of rules as well as in the enforcement of these rules. General question 1: Interested parties are invited to express whether they are in favour of the proposed solutions concerning the composition, role and functioning of the board of directors, and to indicate any other measures they believe would be necessary. NASDAQ OMX: Any measures need to take into account the size, nature and complexity of each company, as rightly pointed out in the Green Paper. This makes it inappropriate to impose strict rules on for instance the composition of a board, the competences and the number of parallel board seats accepted for each board member. We believe that the already existing rules in MiFID article 9 and 10 include rules intended to achieve the same results as mentioned in the questions. Those rules also require the competent authorities to intervene should the management of firms, including the composition of the board, not live up to sufficient standards. We believe that progress would be made if supervisors exercised those duties more actively. This includes the provisions in MiFID article 10 on cooperation among supervisors. For firms operating across borders such streamlining of interpretation and application as regards entities within the same company group is essential. Otherwise one company may be faced with different supervisory approaches to the same situation in different countries. Ensuring a harmonized approach towards firms that are in competition is also necessary in order to ensure a level playing field. As regards the proposals for specific committees, reports and procedures (especially questions ), such measures also seem inappropriate to include as compulsory requirements. There are already similar requirements that should be sufficient, such as the annual report and the audit report. General question 2: Interested parties are invited to express whether they are in favour of the proposed solutions regarding the risk management function, and to indicate any other measures they believe would be necessary. NASDAQ OMX: Risk management is a crucial function in each financial institution. Deficiencies may be fatal for the firm itself and for some firms it may also have consequences for the stability of the financial system as a whole. The solutions proposed are tailored for the situations of banks and it must again be recognised that the descriptions in the Green paper of failures of the risk management function are not equally appropriate for all types of financial institutions. Rules on the risk management function need to allow 3(7)

4 room for adaptation to the specific situation of each company. This applies to issues such as organisation and reporting lines as well as to IT systems and specific reports. In addition we also note that the governing of the risk committee in central clearing houses is expected to be subject to specific regulation in the coming legislation on CCPs (EMIR). The Commission needs to take this into account when working on proposals for risk committees in financial institutions broadly. Supervisors should have, and at least in MiFID already have, powers to intervene if the risk management of a firm does not live up to necessary standards. Such supervisory reviews must be closely adapted to the conditions of the firms. This is why we also question the relevance of introducing rules on such details as the IT systems of a firm. Generally, we also underline that national company law already includes principles on the division of responsibilities and reporting lines between various functions in a company, such as the managing director, the board, board sub-committees, shareholders, etc. As we understand it, the Green paper does not purport to also reform company law. Any measures considered on the risk management function should be drawn up so as to not intervene in, but rather to complement, national company law. General question 3: Interested parties are invited to express whether they are in favour of the proposed solutions concerning the role of external auditors, and to indicate any other measures they believe would be necessary. NASDAQ OMX: We hesitate on the appropriateness of strengthening the role of the auditors role in relation to the function of the supervisory authorities. The auditors act on the assignment of the shareholders. Their duties are separate from those of the financial supervisory authorities. It would be unreasonable to assign to the auditors a duty to take into account supervisory missions such as systemic stability. What could be considered however is to improve the transparency on a company s risk management function by elaborating rules on to what extent and how information on the company s risks and risk management function should be disclosed to the shareholders and to the markets (in case of a listed company). To the extent this information must be included in the annual report it would then be the duty of the auditors to also express an independent opinion on whether a company s disclosure is correct. General question 4: Interested parties are invited to express whether they are in favour of the proposed solutions concerning the role of supervisory authorities, and to indicate any other measures they believe would be necessary. NASDAQ OMX: From the perspective of a company group that is regulated by MiFID, it seems to that the duty for supervisors to intervene to check and correct the functioning of a firm already exists. There may be more to be done as regards resources to actually exercise these duties and also as regards the harmonization of the interpretation and application of these rules across the EU. The same applies to the fit and proper test of 4(7)

5 directors, at least from the experience in the jurisdictions where we operate business in the Nordics. The role of the supervisors should be the same in all sectoral legislation. We strongly agree with the Commission s observation that supervisory cooperation of cross-border financial institutions needs to be strengthened. It must be recognized that not all cross-border financial institutions are subject to supervisory cooperation in the form of colleges. Cooperation must be strengthened beyond colleges. There must be sufficient powers and duties for supervisors to cooperate regarding cross-border firms. General question 5: Interested parties are invited to express their view on whether they consider that shareholder control of financial institutions is still realistic. If so, how in their opinion would it be possible to improve shareholder engagement in practice? NASDAQ OMX: Active shareholders are beneficial for the sound development of any company in that a dialogue between the company and its shareholders provides a good basis for appropriate decision making. We note that the Shareholders Rights Directive aims at improving the conditions for shareholders to be active. In addition, we observe from our jurisdictions in the Nordics that there are concrete examples of shareholders successfully opposing to proposals put forward by the boards in the larger Nordic banks. Against this background, we are not convinced there is an urgent need to produce further rules in this area on a European basis. Nevertheless, in any possible initiatives going forward, in order to not inappropriately discourage institutional investors willingness to provide capital via ownership of financial institutions, it would be important to ensure not only a harmonized European approach but indeed global alignment. Otherwise there is a risk that financial institutions in different part of the world may be unduly disfavored as regards access to capital. General question 6: Interested parties are invited to express their opinion on which methods would be effective in strengthening implementation of corporate governance principles? NASDAQ OMX: We reiterate that what is important is that each financial institution has an appropriate risk management and overall governance, which supports the sound development of the company and which does not encourage excessive risk taking that may impact the stability of the financial system. There may indeed be a need for enhanced implementation of the corporate governance principles that already exist in both general company law, in specific financial market law as well as in non-binding recommendations and codes. We however see an important role for supervisors to more actively enforce the rules that already apply. We believe there is room for achieving enhanced and more harmonized implementation in this way, and this is relevant also for any types of rules that may come in the future. Enhanced enforcement will support the route to a more level playing field. Unless implementation and enforcement are further enhanced and harmonized, the benefit of more rules will be limited. We also reiterate that any new rules 5(7)

6 aiming at enhancing corporate governance and its implementation must be drafted to be complementary to the existing company law. General question 7: Interested parties are invited to express their views on how to enhance the consistency and effectiveness of EU action on remuneration for directors of listed companies. NASDAQ OMX: We question the relevance of addressing the issue of remuneration for directors in listed company in the same context as that of curbing excessive risk taking in banks. We share the comments in the Commission Staff Working Document section 1.2 that the scope to be addressed in this work stream should be limited to the financial sector. We also remain convinced that rules on remuneration of directors in listed companies are best placed in recommendations or codes rather than in binding legislation, thus allowing to take into account the size, nature and complexity of each company. On the size of a company, we especially want to underline that depending on at what stage in the growth and maturity process a company is, very different remuneration policies may be most suitable. Improved transparency could nevertheless be strived for. We however believe that the focus for the way forward should be on ensuring application of the rules that already are in place. Today, NASDAQ OMX has taken on a role of monitoring that issuers comply - or explain - with the corporate governance code (including provisions on remuneration) in place. EU should look at ensuring that there is the same level of monitoring of this across the EU in order to defend a level playing field. To conduct this activity there should be a responsible agency appointed, be it a supervisory authority, an exchange or another body dedicated for this purpose. As regards taxation, what needs to be discussed at EU level is how favourable tax treatment impacts companies equal opportunities to grow and create jobs. When companies in different Member States have different opportunities to attract the necessary competence, this does not give all companies opportunities for growth and creation of jobs. General question 7a: Interested parties are also invited to express their views on whether additional measures are needed with regard to the structure and governance of remuneration policies in the financial services. If so, what could be the content of these measures? NASDAQ OMX: Remuneration policies should be in line with the long term interests of each company, they should support proper risk management and not encourage short-term profits and excessive risk taking that may have negative impacts on the stability of the financial system. Looking back at the financial crisis, it is our observation that remuneration policies seem to have contributed to the crisis by encouraging excessive risk taking. However, we are not convinced remuneration policies broadly in all types of financial firms are to blame, because risk taking varies greatly among types of firms. 6(7)

7 Remuneration policies need to allow adaptation to the specific needs of each company as regards size, nature and complexity. They need to be looked at in combination with other governance aspects, importantly risk management, and supervisors need to take an overall view. Again, it is crucial is that supervisors take the same approach across borders in their reviews of corporate governance of firms, including remuneration policies. Otherwise this will have negative impacts on the level playing field. Also, as more and more firms operate business across borders, it would be both costly and unwanted if different remuneration policies would have to be applied to different parts of the business. This would not only cause costs and unnecessary administrative burden, but it would also not support a comprehensive approach to corporate governance within one company group. What is stated in this paragraph on harmonization across borders is valid within the EU as well as on a global level. As the intention with possible further regulatory interventions regarding remuneration policies is to curb excessive risk taking, the scope for remuneration policies should only be those employees that have a concrete impact on the risk profile of each financial institution. Regulating broader categories of employees would not bring benefits for the stability of the financial system. Lastly, we note that the coming legislation on clearing houses (EMIR) is already expected to address the issue of remuneration. General question 8: Interested parties are invited to express whether they agree with the Commission's observation that, in spite of current requirements for transparency with regard to conflicts of interest, surveillance of conflicts of interest by the markets alone is not always possible or effective. NASDAQ OMX: It seems that rules on conflicts of interests should be as similar as possible across sectors, i.e. in MiFID, CRD, UCITS and Solvency 2. However, irrespective of which piece (or pieces as the case may be for company groups) of legislation that is applicable the principles must allow an application that is adapted to the conditions of each company. From the aspect of a company group that is regulated by MiFID, it also seems that supervisors already have the powers to intervene should a company not handle conflicts of interests appropriately. This should obviously be the case across all sectoral legislation and it must be ensured that supervisors in all Member States take the same approach in the application of such rules. 7(7)