Compliance in Progress Summary
The Italian securities market, as other European markets, is a bank-dominated industry. Pursuant to Legislative Decree No. 58 of 1998 (Consolidated Law on Financial Intermediation), the National Commission for Listed Companies and the Stock Exchange (CONSOB) and the Bank of Italy (BoI) share responsibility for securities regulation under a functional approach to supervision. According to a 2006 International Monetary Fund's (IMF) Detailed Assessment of Italy's compliance with the International Organization of Securities Commission's (IOSCO) Objectives and Principles of Securities Regulation, securities market regulation and oversight is very strong in Italy. Twenty-five of the IOSCO Principles were found to be fully implemented, three principles were broadly implemented, and two were considered to be not applicable. However, the IMF report identifies a few areas that still require action. In particular, the CONSOB and the BoI need to include markets and market operators in their on-site inspection plans. The CONSOB should also ensure that information from the wholesale market is timely and effectively integrated with that from the retail market. Furthermore, disclosure requirements should be extended to non-listed debt instruments issued by banks. At the time of the IMF's 2006 assessment, the Italian legal framework needed to be harmonized with the EU Prospectus Directive No. 2003/71/EC. Effective April 24, 2007, the EU Prospectus Directive was implemented in Italy. In addition, the Italian Stock Exchange, which is one of the three market operators in Italy, merged with the London Stock Exchange in 2007.
General Overview
According to recent publications like a 2009 International Monetary Fund’s (IMF) Article IV Consultation report and both 2009 and 2010 US Department of Commerce (DoC) Country Commercial Guide reports, although impacted by the financial crisis, Italy’s financial sector has remained strong. Per the 2009 IMF report, none of Italy’s institutions failed or fell short on their obligations, possible because of intense “monitoring and disclosure” (p. 8) of risk exposure in its financial markets, particularly the banking sector. Similarly, the 2010 DoC report attributes Italy’s financial sector resilience to “conservative lending practices and a lower degree of exposure to the instruments and markets most affected by the global financial turbulence” (p. 114). The 2009 IMF’s Article IV report notes that although the financial system has been resilient and well supervised, there are weaknesses that threaten its soundness. These include liquidity and funding; capital, regional exposures, and cross border regulatory risk. The IMF warns that if the financial crisis further worsened, Italy’s financial sector weakness is likely to increase. The 2009 Article IV report recommends that Italy foster international cooperation to strengthen cross border supervision and its crisis resolution practices. In addition, regulatory and general supervision should be further strengthened, while effort at achieving transparency and consumer protection should be intensified. The IMF proposes that “the next Article IV Consultation be held on the regular 12-month cycle” (p. 4).
In February 2006, the IMF conducted a Detailed Assessment of Italy's compliance with the International Organization of Securities Commission's (IOSCO) Objectives and Principles of Securities Regulation, as background documentation to the Financial Sector Assessment Program (FSAP) with Italy in 2004. The report concludes that securities market regulation and oversight practices are very strong, and that the general preconditions to effective securities regulation appear to be in place. Full compliance was achieved with twenty-five of the thirty IOSCO Principles, two principles were found to be broadly implemented, and the other two were considered to be not applicable. Finally, Principle 30 on clearing and settlement systems was assessed as part of another IMF's 2006 Detailed Assessment of Monte Titoli's Observance of the Committee on Payment and Settlement Systems (CPSS)/ IOSCO's Recommendations for Securities Settlement Systems. Monte Titoli is Italy’s Central Securities Depository that caters to Italian financial instruments, including government bonds. However, the IMF report identifies a few areas that still require action. In particular, the National Commission for Listed Companies and the Stock Exchange (CONSOB) and the Bank of Italy (BoI), the joint regulators of the securities sector, should include markets and market operators in their on-site inspection plans. In order to strengthen the supervision of the government securities market, the CONSOB should ensure that information from the wholesale market is timely and effectively integrated with that from the retail market. Disclosure requirements should also be extended to non-listed debt instruments issued by banks.
Italy's system of securities regulation is a component of the supervisory framework for the financial services sector that is organized around four independent authorities, namely the Supervisory Authority for Private Insurance Undertakings and Insurance Undertakings of Public Interest (ISVAP) for the insurance industry, the Supervisory Authority for Pension Funds (COVIP) for pension funds, the BoI for the banking industry, and the CONSOB, together with the BoI, for the securities industry. Legislative Decree No. 58 of 1998 (Consolidated Law on Financial Intermediation) sets out the institutional framework for the regulation and supervision of the Italian securities market. The Consolidated Law on Financial Intermediation establishes in detail the powers of both regulators and the activities they may perform, and identifies the persons and entities subject to their respective supervision. The Consolidated Law on Financial Intermediation was amended by the Law on Market Abuse No. 62 of 2005, which implements the EU Market Abuse Directive No. 2003/6/EC. At the time of the FSAP in 2004, the Italian legal framework needed to be harmonized with the EU Prospectus Directive No. 2003/71/EC. Effective April 24, 2007, the EU Prospectus Directive was implemented in Italy. A 2009 Institute of International Bankers’ (IIB) Global Survey states that, the Italian securities market has seen a number of legislative developments regarding the regulation and supervision of securities firms. These include: (1) the 2009 Decree of the Ministry of Economy and Finance (MEF) No. 29 regulating non-bank financial intermediaries (in accordance with articles 106, 107, 113, and 115 of the Banking Law), containing provisions aimed at limiting the range of activities that the above-mentioned firms may perform (granting loans, foreign exchange brokerage, providing payment services, acquisition of holdings); (2) BoI’s provisions of May 2009 on non-bank financial intermediaries, which also regulate the methods for enrolling and cancelling firms operating in the financial sector, their methods for verifying that the requirements imposed on company executives and shareholders of firms operating in the financial sector are met, as well as new disclosure requirements with respect to company executives and firms operating in the financial sector; and (3) the regulation of derivatives and securities products, as well as the requirements relating to disclosure, margin, listing on exchanges and registration. According to a 2009 Shearman and Sterling Law Firm article entitled, “The Italian Parliament Adopts New Laws Making Hostile Takeovers More Difficult and Costly,” Italy enacted Legislative Decree No. 5 on Economic Incentives, which will assist listed companies to defend themselves from hostile takeovers. The Law entered into force on April 12, 2009, and amends “the Italian tender offer law; the disclosure requirements with regard to material shareholding in listed companies in Italy, as well as the rules governing the treasury stock of Italian companies” (p. 1), notes the artcile.
According to the IMF's 2006 report, the CONSOB and the BoI share responsibility for securities regulation under a functional approach to supervision, and are required to cooperate in a coordinated manner in the areas in which they share authority. The MEF website also mentions that the MEF is the law making body, and part of its duties is to supervise the financial markets and lending sector. The IMF 2006 report remarks and emphasizes that, while in specific cases both the BoI and the CONSOB are required to submit secondary regulation to the MEF, and consult with one another or even act jointly in areas where they share authority, “there does not appear to be any interference in the ability of either regulator to operate independently without external political interference or interference from commercial or other sectoral interests” (p. 6). In addition, the CONSOB has been given more resources and powers to act independently from the MEF, under Law on Savings No. 262 of 2005, which entered into force in January 2006. Italy’s CONSOB is an ordinary member of the IOSCO, and a full signatory to the IOSCO Multilateral Memorandum of Understanding (MMoU). The IOSCO MMoU is based on the thirty IOSCO Principles adopted in 1998 and the experience gathered by securities regulators in using bilateral Memoranda of Understanding (MoUs). The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU.
As noted in the IMF's 2006 report, the Italian securities market, as other European markets, is a bank-dominated industry. The Italian Stock Exchange (Borsa Italiana) is entrusted with regulatory and market management powers over listed companies, and owns a majority share in the Monte Titoli and the Italian Clearing House (CC&G S.p.A). As of 2003, according to the IMF's 2006 report, three market operators were authorized to manage regulated markets in Italy, namely the Borsa Italiana, the Electronic Trading Platform for Government Bonds (MTS S.p.A), and the Regulated Exchange (TLX S.p.A). As noted on its website, the MTS S.p.A, founded in 1988 and privatized in 1997, provides wholesale electronic trading of Italian government bonds, and other types of fixed income securities. The operator is supervised by the MEF, the BoI, and the CONSOB. The control of MTS S.p.A has recently been transferred to Euronext and Borsa Italiana. According to its website, the TLX S.p.A, created in 2002 and in operation since January 2003, organizes and manages markets for the trading of financial instruments aimed at the investment needs of non-professional investors. The TLX S.p.A. is fully owned by Italian banks.
Per the 2009 DoC report, Borsa Italiana is relatively small, with less than 300 companies; making it an inadequate source of capital for most Italian firms. In 2007, the Borsa Italiana merged with the London Stock Exchange. The Borsa Italiana established two new market segments devoted to smaller companies, namely the STAR segment in 2001 and the Mercato Expandi in 2003. As noted on Borsa Italiana's website, the STAR segment (segment stocks conforming to high requirements) is the segment dedicated to mid and small cap companies, which conform to stringent levels criteria, in terms of corporate governance and liquidity. Conversely, the Mercato Expandi (expanding market) is a market designed for small sized companies which have decided to increase their capital on the Italian stock exchange. Italy’s capital market is open to foreigners, but although the latter have access to credit instruments in the markets, equity capital, per the 2009 DoC report, is difficult to acquire. This is due to the “relative underdeveloped capital market” (p. 121) as well as businesses having a preference for credit financing. The World Federation of Exchanges (WFE) website lists the market capitalization of the Borsa Italiana at USD 602.7 billion in January 2010. The total number of companies listed on the Borsa Italiana is 296 as of January 2010, with a large majority (291) being domestic companies.
The Principles
FC1. The responsibilities of the regulator should be clear and objectively stated.
This principle is implemented, as stated in the IMF's 2006 report. The Consolidated Law on Financial Intermediation sets out the institutional framework for the regulation and supervision of the Italian securities market. According to the IMF's 2006 report, the CONSOB and the BoI share responsibility for securities regulation under a functional approach to supervision, and are required to cooperate in a coordinated manner in the areas in which they share authority. The Consolidated Law on Financial Intermediation establishes in detail the powers of both regulators and the activities they may perform, and identifies the persons and entities subject to their respective supervision. The CONSOB is principally in charge of ensuring investor protection, market transparency, and proper conduct of business by intermediaries, whereas the BoI focuses on matters relating to risk limitation, financial stability and capital adequacy of intermediaries. The BoI is also responsible for the wholesale government securities market, although CONSOB has the authority to regulate and monitor market abuse on the wholesale market.
FC2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.
This principle is implemented, according to the IMF's 2006 report. The independence of the CONSOB and the BoI is provided under the Consolidated Law on Financial Intermediation. The IMF report notes that while the CONSOB receives around 30 percent of its funds from the State's budget, it manages its budget autonomously. Conversely, the BoI is self-funded, and its independence is provided under the European Union's Maastricht Treaty. While, in specific cases, both authorities are required to submit secondary regulation to the MEF, and consult with one another or even act jointly in areas where they share authority, "there does not appear to be any interference in the ability of either regulator to operate independently without external political interference or interference from commercial or other sectoral interests" (p. 6) the IMF report emphasizes. Pursuant to the Law on Savings No. 262 of 2005, which entered into force in January 2006, the CONSOB was given more resources and powers to act independently from the MEF.
FC3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
This principle is implemented, as stated in the IMF's 2006 report. The Consolidated Law on Financial Intermediation sets out the institutional framework for the regulation and supervision of the Italian securities market. The IMF report notes that the CONSOB and the BoI "share responsibility for securities regulation under a functional approach" (p. 7). Furthermore, the IMF report adds, the Consolidated Law on Financial Intermediation "establishes in detail the powers of both regulators and the activities they may perform, and identifies the persons and entities subject to their respective supervision" (p. 7). The CONSOB is principally in charge of ensuring investor protection, market transparency, and proper conduct of business by intermediaries, whereas the BoI focuses on matters relating to risk limitation, financial stability and capital adequacy of intermediaries. The BoI is also responsible for the wholesale government securities market, although CONSOB has the authority to regulate and monitor market abuse on the wholesale market.
FC4. The regulator should adopt clear and consistent regulatory processes.
This principle is implemented, as noted in the IMF's 2006 report. The CONSOB and the BoI have adopted rules concerning their internal organization, and the procedures to be fulfilled in carrying out their activities. Furthermore, both authorities consult the market and interested parties on a regular basis and prior to adopting regulations.
FC5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.
This principle is implemented, as stated in the IMF's 2006 report. Per the same report "legal and regulatory requirements exist with the aim of ensuring the proper use of information obtained by employees in the course of their professional activities, the confidentiality of information obtained, and the prohibition on any misuse of information" (p. 8). Furthermore, both the CONSOB and the BoI have enacted regulations concerning employees' conduct.
II6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.
This Principle is not applicable as the Italian regulatory framework does not make use of self-regulatory authorities.
II7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.
See Principle 6.
FC8. The regulator should have comprehensive inspection, investigation and surveillance powers.
This principle is implemented, according to the IMF's 2006 report. The CONSOB and the BoI have extensive powers to request information and conduct inspections on regulated entities without prior notice. Pursuant to the Consolidated Law on Financial Intermediation, the CONSOB also has similar powers over non regulated entities. Regarding market supervision and surveillance, the CONSOB performs daily surveillance of the regulated markets it authorizes through an electronic surveillance system. Conversely, the BoI monitors the wholesale government securities market through an intra day surveillance of liquidity indicators, and periodical analysis to evaluate market trends. Information on transactions carried out in the wholesale market is then transferred and stored into CONSOB's own database.
FC9. The regulator should have comprehensive enforcement powers.
At the time of the FSAP in 2004, the enforcement powers of the CONSOB and the BoI were limited by the fact that they could not impose pecuniary sanctions as well as by the limited amount of the sanctions. Both aspects have since been addressed through the adoption of the Law on Market Abuse No. 62 of 2005. This principle is implemented, as stated in the IMF's 2006 report, and the legal framework provides the CONSOB and the BoI with extensive powers to enforce compliance with securities laws and regulations, including precautionary measures, corrective measures, and administrative sanctions. Per the same report, the CONSOB "can order the market operator of the regulated markets to suspend trading in any security, prohibit the trading of securities on non-regulated markets, and has the power to suspend or prohibit the public offering of the securities of an issuer" (p. 9). According to a 2008 CONSOB annual report, the CONSOB enforced 136 disciplinary measures for non-compliance with the regulations of the Consolidated Law on Financial Intermediation and related enactment regulations. Conversely, per a 2008 BoI annual report, the BoI conducted analysis in that year focusing on the market crisis impact “on capital adequacy and where necessary” (p. 180) called on firms to take appropriate corrective measures.
CP10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
According to the IMF's 2006 report, this principle is broadly implemented. At the time of the FSAP in 2004, enforcement powers of the CONSOB and the BoI were limited by the fact that they could not impose pecuniary sanctions as well as by the limited amount of the sanctions. Both aspects have since been addressed through the adoption of the Law on Market Abuse No. 62 of 2005. The IMF’s 2006 report notes that to ensure the proper functioning of the market, the Italian supervisory framework still needs to be complemented with on-site inspections "to achieve a more thorough and effective supervision of critical aspects such as the reliability and effectiveness of the organizational structure, systems and procedures and internal controls designed by the market operator" (p. 10). While market operators are required to submit reports in this area, it is important that the CONSOB and the BoI do not exclusively rely on the operators' reports, and conduct independent verifications of such critical aspects through on-site inspections. Although the CONSOB monitors the markets in a timely fashion to detect unusual or suspicious transactions, it does not monitor the wholesale government securities market on a real time basis. In order to effectively supervise the government securities market on issues of market manipulation and investor protection, the IMF report emphasizes the need for CONSOB "to adequately integrate the information it receives on the wholesale government bonds market with the information it collects on the government securities retail market" (p. 10). Furthermore, disclosure of investor complaints could be substantially improved by establishing a separate and extensive report with detailed information on the activities performed by the CONSOB. The Italian authorities, including the CONSOB and the BoI, however, feel that Italy has fully implemented this principle, because in essence, the regulator is not required by the IOSCO to have plans for on-site inspections of markets and market operators included in their annual supervisory plans. Other than that, the regulators have the requisite tools and mechanisms in place to conduct effective surveillance of the markets and market operators, the authorities contend. Further, the real time monitoring of the government securities retail market by the CONSOB “constitutes an additional input fur the purposes of detecting problems in price formation in the government bonds market” (p. 24), the IMF notes. The 2008 CONSOB annual report mentions that the CONSOB conducted 48 meetings (both formal and informal) with investment companies, and formally requested for 55 data and information from investment companies.
FC11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
This principle is implemented, as stated in the IMF's 2006 report. Pursuant to the Consolidated Law on Financial Intermediation, the CONSOB and the BoI are required to cooperate effectively in line with an internal protocol covering the terms of their cooperation. The Law also strengthens confidentiality provisions related to the information obtained by the CONSOB through international cooperation. The CONSOB and the BoI cooperate with other supervisory authorities, including the ISVAP, the COVIP, and the Foreign Exchange Office (Ufficio Italiano dei Cambi, or UIC) replaced by the Financial Intelligence Unit (Unità di Informazione Finanziaria, or UIF) in 2008. While a protocol existed between the UIC and the CONSOB, there were no formal agreements between the CONSOB and ISVAP or COVIP. In this regard, consideration should be given to establish protocols with the domestic supervisors. The IMF report notes that external approval is not needed to exchange information with foreign counterparts. Both the CONSOB and the BoI are legally empowered to use their powers at the request of their foreign counterparts. Pursuant to the Consolidated Law on Financial Intermediation, the CONSOB has the authority "to carry out inspections within Italian territory on behalf of competent authorities of EU member states and jurisdictions outside the EU" (p. 11) the IMF report emphasizes. The CONSOB is a full signatory to the IOSCO MMoU. The IOSCO MMoU is based on the thirty IOSCO Principles adopted in 1998 and the experience gathered by securities regulators in using bilateral Memoranda of Understanding (MoUs). The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. Being a signatory to the MMoU implies that the IOSCO screening committee considers the country's legal framework to be compliant with IOSCO Principles 11, 12, and 13 and that the country’s securities regulator has therefore the legal capacity to share supervisory information with and provide assistance to its foreign counterparts.
According to the 2008 CONSOB annual report, the CONSOB worked with other EU supervisory bodies, as well as authorities of other countries in 2008. Per the report, the CONSOB “issued 113 requests for cooperation, 42 of which [were] to verify compliance with short sales ban, and 52 in suspected insider trading and market manipulation cases” (p. 122). The CONSOB also received 48 requests from other supervisory bodies to cooperate in areas covering professional experience requirements, and verification of integrity of employees of supervised institutions. Furthermore, the CONSOB participated in activities within the EU, the Committee of European Securities Regulators (CESR), and the IOSCO, among other international bodies.
FC12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.
This Principle is implemented, and the MoUs are easily accessible on the CONSOB website, as stated in the IMF's 2006 report. According to the IMF's 2006 report, the BoI has also signed bilateral MoUs with its main European counterparts, and is a signatory to the CESR MoU on the Exchange of Information and Surveillance of Securities Activities. Also, see Principle 11.
FC13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.
See Principle 11.
FC14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors' decisions.
At the time of a 2005 IMF's report on Selected Issues, disclosure and financial reporting requirements applicable to listed companies in Italy were quite rigorous, particularly in comparison with other European countries. However, pecuniary and administrative sanctions that could be imposed on issuers or management for breaches of these requirements remained limited in practice. Moreover, the CONSOB could not impose penalties directly, but had to act through the MEF. Pursuant to the Law on Savings No. 262 of 2005, which entered into force in January 2006, the CONSOB was given more resources and powers to act independently of the MEF. According to the IMF's 2006 report, this principle is implemented. The majority of the rules applicable to public offerings are contained in the Consolidated Law on Financial Intermediation, as well as CONSOB regulations. Italian listed companies are required to prepare quarterly, semi-annual and annual reports, and publish financial statements on an annual basis. Furthermore, both EU Directives and Italian legislation require individual and consolidated financial statements of listed companies to be audited by an external auditor. However, disclosure requirements needed to be extended to non-listed debt instruments issued by banks. The IMF 2006 report noted that the current legal and regulatory framework would be revised to transpose and implement the EU Prospectus Directive No. 2003/71/EC. Effective April 24, 2007, the EU Prospectus Directive was implemented in Italy. The 2008 CONSOB annual report states that supervision regarding supervised entities’ compliance with corporate disclosure obligations was very intense in 2008. The CONSOB requested for 656 data and information submissions under Article 115 of the Consolidated Law on Financial Intermediation, which included 132 meeting requests with legal representatives and 168 requests for information to be published.
FC15. Holders of securities in a company should be treated in a fair and equitable manner.
This principle is implemented, as stated in the IMF's 2006 report. Per the report, the Civil Code and CONSOB regulations guarantee the fair and equal treatment of shareholders, and require members of the Board of Directors, Board of Statutory Auditors, as well as general managers of the company "to carry out their duties with due diligence and to be liable for losses arising from the failure to fulfill their responsibilities" (p. 13). With respect to listed companies, the Consolidated Law on Financial Intermediation requires listed issuers to guarantee the same treatment to all holders of identical financial instruments. In practice, however, legal protection for minority shareholders was not fully realized, according to the IMF's 2005 report on Selected Issues, as collective action of minority shareholders for misrepresentation against the members of the Board of Directors was unlikely. According to the CONSOB chairman’s speech included in the 2008 annual report of the regulator, Italy’s corporate governance mechanisms are inefficient, leading to the spread of the financial crisis. The chairman’s speech also highlighted the disinterest of shareholders to exercise their rights “towards management, administration and control bodies” (p. 13). Per the speech, corporate governance systems need to be improved, and the role of shareholders’ meetings and independent committees in defining management remuneration and incentive policies needs strengthening as well. The speech also mentions that Italy’s corporate governance rules and practices needs to further converge with EU standards. Implementation of the Shareholders’ Rights Directive will likely improve the “timing and quality of pre-meeting disclosures, and the methods for attending in person or proxy” (pp. 13-14). Currently, however, Italy limits minority shareholders’ active participation at meetings. The chairman in his speech indicated that review of the Corporate Governance Code will be significant in demonstrating response to issues that emerge from the financial crisis. It will also “define stricter principles on central topics such as transparency of director independence requirements” (p. 14), the speech notes.
As stated by a 2009 CFA Institute report, amendments to the Consolidated Law on Financial Intermediation made in 2008, contributed to increased shareholder protection in Italy. The amendments resulted in a requirement for the bylaws of all Italian issuers to “now include specific processes that ensure equitable appointments to the board of directors” (p. 49), the report notes. Company bylaws are now required to contain directions stating that at least one member is elected from the minority slate, and that minority candidates must not be in any way linked with shareholders representing the majority slate. According to the 2009 Shearman & Sterling’s article, the new Italian Law on Economic Incentives outlines provisions concerning mandatory tender offers. The law states that any person holding over 30 percent of shares in a listed company may increase their holdings by up to 5 percent without launching a mandatory tender offer on the remaining shares in issuance.
FC16. Accounting and auditing standards should be of a high and internationally acceptable quality.
This principle is implemented, according to the IMF's 2006 report. Furthermore, national accounting standards, which are enacted by the Organismo Italiano di Contabilità (OIC), are high and broadly in line with the International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board. Provisions for regulating the accounting and auditing profession in Italy were among the strongest in Europe, as stated in the IMF's 2005 report on Selected Issues. The audit quality assurance system of the CONSOB to oversee the work of the auditing firms was also quite comprehensive.
Per a regulatory and standard-setting framework assessment published by the Consiglio Nazionale dei Dottori Commercialisti e Degli Esperti Contabili in 2005, the CONSOB has an adequate mechanism in place to recommend, and enforce compliance with accounting and auditing standards for listed entities. The CONSOB can further request disclosure of additional information, and require issuers to restate their financial statements. Beginning in 2005, pursuant to Legislative Decree No. 38 of that year, Italian listed companies are required to prepare their consolidated financial statements using IFRSs. As for individual company accounts, CONSOB regulations mandate the use of IFRSs and national accounting standards. According to a 2009 report by PricewaterhouseCoopers, Italy was planning on achieving partial convergence with IFRSs in the second half of 2009. As of March 2010, there are no updates as to whether the convergence was effected.
FC17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.
This principle is implemented, as noted in the IMF's 2006 report. The Italian regulatory framework sets specific authorization standards for both CIS and CIS operators. The authorization to manage CIS is based on the fulfillment of a set of criteria, including capital adequacy, integrity and experience requirements, and adequacy of internal controls and management systems. According to the IMF report, the CONSOB and the BoI share oversight of CIS and CIS operators. The BoI is in charge of authorization of CIS, as well as financial stability of CIS and CIS operators, whereas the CONSOB is responsible for matters regarding transparent and proper conduct of CIS operators and CIS public offerings. While examination of CIS is part of CONSOB's annual inspections, BoI's monitoring of CIS activities is mainly performed through analysis of CIS reports submitted on a regular basis.
FC18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.
This principle is implemented, as stated in the IMF's 2006 report. Requirements for the legal form and structure of CIS are provided under rules and prospectus of the CIS, both of which are subject to authorizations procedures. Furthermore, the custody of assets of CIS is entrusted to depositary banks, which are subject to the regular supervision of the BoI.
FC19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investors interest in the scheme.
This principle is implemented, according to the IMF's 2006 report. CIS operators, including asset management companies, are subject to periodic reporting, and are required to prepare a comprehensive prospectus that allows investors to evaluate the proposed investment. The IMF report notes that the content of the prospectus is in line with EU legislation.
FC20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.
This principle is implemented, as stated in the IMF's 2006 report. Pursuant to the Consolidated Law on Financial Intermediation, the BoI, after consultation with the CONSOB, establishes the criteria or methods for valuing CIS assets and calculating net asset value. External auditing firms of the CIS are further required to verify compliance with the valuation rules. According to the IMF report, valuation criteria follow national generally accepted accounting standards, and are consistent with IFRSs.
FC21. Regulation should provide for minimum entry standards for market intermediaries.
This principle is implemented, as noted in the IMF's 2006 report. The Consolidated Law on Financial Intermediation establishes the general rules concerning the authorization and licensing of market intermediaries. CONSOB and BoI regulation establish more detailed requirements for, respectively, investment firms and banking institutions providing investment services. Furthermore, the CONSOB and the BoI can revoke a license when they consider that the investment firm or bank does not meet the minimum requirements. The IMF report notes that Italian legislation in this area is in line with EU Directives, including the EU Directive No. 2004/39/EC on Markets in Financial Instruments (MiFID) and the EU Consolidated Banking Directive No. 2000/12/EC. The EU Consolidated Banking Directive has since been recast as the EU Capital Requirements Directive. According to a 2008 study by the Studio Legale Beltramo law firm, Legislative Decree No. 164 of 2007 has been enacted to transpose MiFID into Italian law. The CONSOB has also adopted the new 2007 regulations No. 16190 and No. 16191 regarding intermediaries and financial markets respectively.
FC22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.
This principle is implemented, as stated in the IMF's 2006 report. The IMF report notes that current prudential requirements are more stringent than those required by European legislation, including the EU Capital Requirements Directive No. 2006/48/EC and No. 2006/49/EC. In addition, per the IMF report, "intermediaries are required to comply with supervisory capital requirements, whose amount depends on the nature and the level of the risk incurred" (p. 16), and to submit sufficient data to the CONSOB and the BoI to verify their compliance with the requirements. The IMF report notes that investment firms may adopt internal models to calculate the capital requirements for market risk subject to the approval of the BoI.
FC23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.
This principle is implemented, according to the IMF's 2006 report. Market intermediaries are required to act in a transparent manner, and with due diligence in the interest of their customers and the integrity of the market. Furthermore, in order to mitigate conflicts of interest, market intermediaries are required to implement adequate measures to prevent inappropriate information exchange between different departments of the firm that need to be separated. In addition, CONSOB regulation requires market intermediaries to establish specific procedures to deal with customer complaints. In this regard, "customers are entitled to take legal action for damages relating to the provision of financial services" (p. 17) per the IMF report.
FC24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.
This principle is implemented, as noted in the IMF's 2006 report. Pursuant to the Consolidated Law on Financial Intermediation, and Legislative Decree No. 385 of 1993 (Banking Law), per the same report, "competent authorities may suspend the management of a market intermediary as a matter of urgency and appoint a provisional administrator to take over their management" (p. 18). Furthermore, in the case of insolvency, the MEF, upon proposal of the CONSOB or BoI, "may issue a decree withdrawing authorization to carry on business, and ordering the compulsory liquidation of the firm" (p. 18), the IMF notes.
FC25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.
This principle is implemented, as stated in the IMF's 2006 report. The CONSOB is the competent authority for authorizing and regulating markets and trading systems. Provisions concerning the authorization of exchanges and trading systems, as well as the recognition of foreign markets are established under the Consolidated Law on Financial Intermediation. Per the same report, the CONSOB monitors compliance with CONSOB regulations, and can require that market operators amend market rules. Per the IMF report, markets rules, which are approved by the CONSOB and adopted by market operators, refer to "conditions and procedures for admission, exclusion and suspension of market participants to and from trading" (p. 19). The CONSOB, together with the BoI, check that market rules comply with regulation enacted by the MEF. Upon proposal of the BoI and after consultation with the CONSOB, the MEF may require that market operators amend market rules.
CP26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.
This principle is implemented, as stated in the IMF's 2006 report. The CONSOB is the competent authority for authorizing and regulating markets and trading systems. Provisions concerning the authorization of exchanges and trading systems, as well as the recognition of foreign markets are established under the Consolidated Law on Financial Intermediation. Per the same report, the CONSOB monitors compliance with CONSOB regulations, and can require that market operators amend market rules. Per the IMF report, markets rules, which are approved by the CONSOB and adopted by market operators, refer to "conditions and procedures for admission, exclusion and suspension of market participants to and from trading" (p. 19). The CONSOB, together with the BoI, check that market rules comply with regulation enacted by the MEF. Upon proposal of the BoI and after consultation with the CONSOB, the MEF may require that market operators amend market rules.
FC27. Regulation should promote transparency of trading.
This principle is implemented, as stated in the IMF's 2006 report. Pursuant to the Consolidated Law on Financial Intermediation, per the same report, market operators are required to establish "comprehensive procedures for the verification, publication and dissemination of prices to market participants and the public" (p. 20). Furthermore, market rules promoting transparency of trading have to be approved by the CONSOB. Standards of transparency are also high in the wholesale government securities markets and alternative trading systems.
FC28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.
This principle is implemented, as stated in the IMF's 2006 report. The disciplinary framework with regards to market manipulation and insider trading was strengthened as a result of the adoption of the Law on Market Abuse No. 62 of 2005, which establishes a wide range of penal sanctions. The Law also includes administrative sanctions to be applied by CONSOB for both types of conducts. Per the same report, while CONSOB monitors the markets in a timely fashion to detect unusual or suspicious transactions, it does not monitor the wholesale government securities market on a real time basis. In order to effectively supervise the government securities market on issues of market manipulation and investor protection, the IMF report emphasizes the need for CONSOB "to adequately integrate the information it receives on the wholesale government bonds market with the information it collects on the government securities retail market" (p. 21).
FC29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.
This principle is implemented, as stated in the IMF's 2006 report. Large exposures are monitored by authorized intermediaries, clearing houses and market operators, under the ultimate responsibility of the BoI and the CONSOB. Through the internal system of the Italian Clearing House, the BoI monitors large exposures of the clearing houses' participants on the proprietary and customers' accounts. Per the same report, the CONSOB, in agreement with the BoI, establishes the regulation with respect to the insolvency of market participants of the clearing house. To this end, the CONSOB and the BoI have concluded MoUs to cooperate and exchange information with domestic and foreign regulators. Within the EU, the Settlement Finality Directive No. 98/26/EC establishes the procedures to communicate an insolvency of a clearing house participant.
CP30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.
This Principle was assessed as part of the IMF's 2006 Detailed Assessment of Monte Titoli's Observance of the CPSS/IOSCO Recommendations for Securities Settlement Systems. According to the Detailed Assessment, Italy observes 18 out of 19 CPSS/IOSCO Recommendations, including the principle relating to supervisory oversight and clear regulatory framework for the securities clearing and settlement systems. Italy, however, only broadly observed one Recommendation pertaining to the security and reliability of the systems and the identification and minimization of the operational risks in the systems through contingency plans and backup facilities. In particular, testing of the risk control measures did not include market participants and the disaster recovery, system continuity, and contingency arrangements were not externally audited. Also ,the CONSOB and the BoI were advised to have direct access to the SIA, the company to which the MT has outsourced its IT system and its day-to-day operation, to ensure that all the above mechanisms were in place and adequate. The IMF, in its CPSS/IOSCO assessment, did acknowledge that the regulators were taking steps to strengthen risk management in the systems that take into account the above recommendations. Per the same report, the tasks and the role of the CONSOB and the BoI with respect to securities clearing and settlement activities are clearly defined in the laws and regulations. Monte Titoli was founded in 1978, and since 1986 has been the Italian Central Securities Depository for all Italian financial instruments.
According to the 2009 IIB report, the European Central Bank (ECB) launched a system called the TARGET 2-Securities in July 2006. This new system, integrated with the TARGET2 platform, is to create a single securities system at the EU level. Per the IIB report, TARGET2 will also serve to connect a network of national central securities depositaries, to offer a centralized settlement service for all transactions performed in the euro area. The IIB report further states that the ECB has asked national depositories to take part in the project, and expects TARGET2-Securities system to take effect in 2013. The IIB report remarks that Italian banks strongly favor this initiative, but will support it only if representatives from the banking sector are made part of the team that defines the operating features of the new system. The 2008 CONSOB annual report mentions that market operators embarked on some initiatives to implement the standardization of post-trading services, to foster interaction between the central counterparties, as well as to implement the provisions of the Code for Clearing and Settlement. The Code was signed by the EU’s trading and posting-trading systems. The 2008 annual report further states that in February 2008, the “’Rules for central depository, settlement and clearing house services and related management companies’” (p. 101) was issued by the BoI and CONSOB.
