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On publishing the report CESR’s Expert Group Chairman, Lamberto Cardia noted ‘The report finds that abusive business practises which exploit the mutual funds for the benefit of some privileged investors (such as late trading or market timing) are rare in Europe. Nevertheless, the findings of the investigation also suggest that improvements should be made to internal processes of management companies and they must rise to the challenge. Supervisors will certainly be focusing in on this aspect looking ahead to ensure high level of investor protection in the European investment funds.’
CESR members conducted extensive investigations to assess whether mis-practices were prevalent in Europe’s investment fund industry, following the US regulatory authorities’ findings in autumn 2003, in which they found evidence of abusive practices in the US mutual fund market. The conclusion that there is little evidence of these practices occurring in Europe, is encouraging, however, this should not lead to complacency. Indeed, a key finding of the investigation was that internal processes of the management companies should be improved as this may be a source of potential weakness in the future which could lead to cases of mis-practices developing.
Therefore, whilst the findings of CESR members suggested these abusive practises of late trading or the abusive use of ‘market timing’ have not been common in Europe, CESR members have nevertheless chosen to take a proactive stance to try to hinder these types of mis-practises emerging in the future on the basis of this investigation, by tackling this question of internal controls as well as reviewing other measures.
In particular, CESR members have taken action to develop supervisory programmes and tools to increase their monitoring of potential cases of mis-practises, such as developing programmes geared to identifying samples of transactions to review, which may indicate potential signs of late trading and market timing. Secondly, CESR members have initiated regulatory changes or, in some cases where appropriate, amended processes to reform the functioning of the collective investment management activity to avoid the possibilities of mis-practises. Such changes include requirements concerning the internal control mechanisms of fund management companies, and the way in which forward pricing and fair value approaches are used in the valuation of assets of investment funds. A summary of the actions taken by each CESR member following the findings of the investigation are included in the annex of the report.
Background
- The preparation of this report has been undertaken by the CESR Expert Group on Investment Management, which is chaired by Mr Lamberto Cardia, Chairman of the Italian securities regulator, the Commissione nazionale per le società e la Borsa (CONSOB). A permanent member of the CESR Secretariat, Mr Jarkko Syyrilä assists the Chairman and acts as rapporteur of the Expert Group.
- Late trading can be described to be an activity, where the fund manager accepts to receive and carry out subscription or redemption orders from certain investors after the deadline set for these transactions in the regulations of the jurisdiction in question or in the fund rules. This gives them the opportunity to utilize information received after the fund is closed and that has an influence on the market.
- Market timing refers to practises where investors place trades (subscription or redemption orders) for unit prices determined with stale prices of the funds assets which do not fully reflect recent market movements. Inefficiencies in investment fund pricing are exploited by the practise of short term buying and selling of investment fund units. Market timers can use the information about market movements which are not reflected in the previous unit price to predict the movement of the following day’s price to advantageously buy or sell units.
- CESR is an independent Committee of European Securities Regulators. The role of the
Committee is to:
- Improve co-ordination among securities regulators;
- Act as an advisory group to assist the EU Commission, in particular in its preparation of draft implementing measures in the field of securities;
- Work to ensure more consistent and timely day to day implementation of community legislation in the member states.
- The Committee was established under the terms of the European Commission’s decision of 6 June 2001 (2001/1501/EC). It is one of the two committees envisaged in the Final Report of the group of Wise Men on the regulation of European securities markets. Baron Alexandre Lamfalussy chaired this group. The report itself was endorsed by the European Council and the European Parliament. The relevant documents are available on the CESR website.
- Each Member State of the European Union has one member on the Committee. The members are nominated by the Member States and are the Heads of the national public authorities competent in the field of securities. The European Commission has nominated the Director General of the DG Market, as its representative. Furthermore, the securities authorities of Norway and Iceland are also represented at a senior level.
