As every year, the Swiss Financial Market Supervisory Authority FINMA has released its annual report, which summarizes the authority’s regulatory and supervisory activity during the past calendar year. This survey highlights a number of points of particular interest from a capital markets law perspective.
By Roland Truffer (Reference: CapLaw-2023-26)
1) The FINMA’s Annual Report and other periodic reporting
Article 9 (1)(f) of the Financial Market Supervision Act (FINMASA) requires the board of directors of FINMA to draw up an annual report and submit it to the Federal Council for approval prior to publication. Furthermore, pursuant to article 22 (1) FINMASA, FINMA is mandated to inform the general public at least once each year about its supervisory activity and practices. The FINMA’s Annual Report responds to both these requirements and is, thus, an instrument of its accountability to the political authorities as well as of information of the general public about its activity. It is usually published in late March or early April of the following year (this year, with a press release dated 27 March 2023).
Besides the Annual Report and its (formally separate) annual accounts, FINMA periodically issues other publications, such as an annual ‘Risk Monitor’, an ‘Insurance market report’ and a ‘Resolution report’ (online only). Further information is systematically published on the authority’s website throughout the year, such as information on enforcement cases (short case reports, selected rulings, and court decisions; the annual publication of a separate ‘Enforcement Report’ has been discontinued), as well as – pursuant to a statutory mandate in article 49 of the Insurance Supervision Act – a database of court decisions on private insurance law.
2) Selected highlights of the Annual Report 2022 from a capital markets perspective
a) China-Switzerland Stock Connect
The SIX Swiss Exchange entered into a ‘China-Switzerland Stock Connect’ agreement with the stock exchanges of Shanghai and Shenzhen, which promotes the listing in Switzerland of Global Depositary Receipts (GDRs) based on shares of Chinese issuers with a primary listing on one of those Chinese stock exchanges (and, at least in theory, also vice versa). Amendments were made to the SIX Swiss Exchange’s regulations to facilitate such listings; these amendments had to be approved by FINMA (p. 48 ff. of the Annual Report). GDR listings require a prospectus to be published in compliance with Swiss (or equivalent foreign) law and result in the application of the SIX Swiss Exchange’s requirements of management transaction reporting, periodic financial reporting (including interim reports) and ad hoc publicity; on the other hand, corporate governance reporting and Swiss shareholding disclosure and takeover rules do not apply. The revised regulations entered into force on 25 July 2022, and instantly sparked a series of listings (cf. Schneiter, Listing and Trading of GDRs on the SIX Swiss Exchange …, CapLaw-2022-35). To ensure supervisory co-operation, FINMA signed a co-operation agreement with the China Securities Regulatory Commission (CSRC) (p. 73).
FINMA notes that, in the course of the approval process for the revised stock exchange regulations, it required amendments to safeguard investor protection, such as the disclosure in the prospectus of information about the depositary, the GDRs and the deposit agreement (rights of investors, insolvency protection, risk associated with the design), and the separate holding of underlying shares in safe custody to enable their segregation in favor of investors in the event of the depositary’s default (p. 50).
b) No licensed DLT trading facilities as yet (but a ‘classical’ stock exchange for tokens)
Since 1 August 2021, the Financial Market Infrastructure Act (FMIA) has provided for the possibility to obtain a license to operate a ‘DLT trading facility’ (articles 73a ff. FMIA; introduced by the Federal Act of 25 September 2020 on the Adaptation of Federal Law to Developments in Distributed Ledger Technology). Unlike the situation for traditional trading venues, the law allows a DLT trading facility to also provide clearing, settlement and/or custody services. FINMA notes that there has been interest from market participants in this new type of license, but that no license has as yet been granted (p. 18 f.). During 2022, FINMA reports that it was in dialogue with ten project initiators, but did not receive any formal license applications. FINMA mentions that where a potential licenseholder would operate a trading facility and provide settlement services, but the actual custody of the traded assets would take place on a public blockchain and therefore without any determinable operator, the licenseholder would be expected to regularly check the correct functioning of the public blockchain.
Meanwhile, FINMA had in 2021 granted infrastructure licenses of a more ‘classical’ type to SDX Trading AG (as a stock exchange) and SIX Digital Exchange AG (as a central securities depository), who were established within the SIX group for the trading of DLT assets (‘tokens’). Under their respective license types, the infrastructures may only admit supervised financial institutions as participants, while a DLT trading facility would be permitted to also admit other persons, including end clients (article 73c (1)(e) FMIA).
c) Enforcement action against a non-licensed entity for different types of market manipulation
FINMA briefly mentions, in the 2022 Annual Report (p. 3: “2022 in milestones”), the case of Blackstone Resources AG, on which further information was published in a media release of 12 April 2022. Blackstone is not an entity licensed by FINMA, but its shares were (until 2022) listed on the SIX Swiss Exchange. FINMA conducted an enforcement proceeding against Blackstone and one of its directors based on its role in enforcing the administrative (as opposed to the penal) provisions against market abuse (articles 142 f. FMIA), which apply to all market participants. In its decision, FINMA found that Blackstone had indeed committed instances of market manipulation. The case is interesting because the findings comprise not only cases of manipulative trades (on which the media release gives few details), but also of the less-known variant of market manipulation by dissemination of misleading information (article 143 (1)(a) FMIA: “… publicly disseminates information which […] gives false or misleading signals regarding the supply, demand or price of securities …”). In particular, Blackstone was found to have announced that it had made a large private placement of its shares at a price equivalent to a multiple of the prevailing stock price, but failed to disclose that the private investor involved was one of the company’s directors, and to have claimed that the transaction had generated net proceeds for the company, although no new funds were in fact raised. Blackstone, reportedly, is challenging FINMA’s enforcement decision in court; the case thus continues.
d) Status of recovery and resolution planning across sectors
FINMA reports that in 2022, for the first time, the recovery plans of the systemically important financial market infrastructures SIX x-clear AG and SIX SIS AG (as required by article 24 (1) FMIA) were approved without conditions (p. 63 ff.). In the banking sector, the ‘Swiss emergency plans’ of the (then) two global systematically important banks (G-SIBs) (outlining how they would ensure uninterrupted continuity of the systemically important functions for Switzerland in a crisis) were deemed effective, and their global resolvability further improved. On the other hand, FINMA considered in early 2022 that the emergency plans of the three domestic SIBs – PostFinance, Raiffeisen and Zürcher Kantonalbank – were not ready for implementation, because none of them had reserved sufficient gone concern capital (an assessment reversed, in the case of Raiffeisen, in FINMA’s press release of 26 April 2023). Insurers, finally, will first become subject to a formal requirement of recovery planning (for insurance groups and, if so directed by FINMA, economically significant individual insurance companies) under the revised rules of the Insurance Supervision Act that will come into effect on 1 January 2024. FINMA has done preparatory work and held discussions with insurers in view of the future law, as well as setting up international crisis management groups (as they already exist for the G-SIBs and for SIX x-clear AG) for those insurers who have international activities (p. 65).
e) IOSCO supports the establishment of the International Sustainability Standards Board (ISSB)
In its capacity as the Swiss securities regulator, FINMA is represented in the International Organization of Securities Commissions (IOSCO). In 2021/2022, IOSCO supported the establishment of the International Sustainability Standards Board (ISSB), which is associated with the IFRS Foundation, and monitored the development of the ISSB’s first two draft disclosure standards, pertaining to climate and to general sustainability disclosure (p. 72). Initiated at the COP 26 conference, the ISSB aims to develop global standards for sustainability reporting, thus countering the fragmentation of respective national and international initiatives. Some prior initiatives, such as the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation, were consolidated into the ISSB. Its disclosure standards are to be known as “IFRS-S” standards.
3) Outlook
Overall, the FINMA’s Annual Report 2022 gives the impression that last year was not an excessively eventful one for the regulator, at least in the field of capital markets. Because it is limited to occurrences in 2022 and does not contain any ‘events after the reporting period’ section, the Annual Report 2022 is silent on the build-up to and implementation of the UBS-Credit Suisse merger announced on 19 March 2023. Detailed reporting on that event, as well as FINMA’s thoughts on the lessons to be learnt from it, may be expected to feature prominently in the next Annual Report.
Roland Truffer (roland.truffer@advestra.ch)