The new framework on the use of derivative financial instruments and structured products for primary insurance companies and domestic pension funds, which the German financial supervisory authority (Bundesanstalt für Finanzdienstleistungsaufsicht - Bafin) brought forward in January, has entered into force as of August 30.
The guidelines on the use of derivatives and investment in structured products are intended for all companies which are admitted to the primary insurance business and will fall under the regulations for small insurance companies, as well as the German pension funds and pension funds framework.
The framework replaces the derivatives circular published in 2000 as well as the circular covering structured products since 1999. It also cancels Bafin's decision on the use of receiver forward swaps from 2005, inflation swaps from 2012, and quotas for pre-sales from 2013.
The new rules came into effect a few days before the German structured products association (Deutscher Derivate Verband - DDV) celebrated its 'Derivatives Day' which focused again on regulation, and saw its chief executive officer Hartmut Knüppel (pictured) criticising the lack of politicians who protect the 'freedom of investors'.
'Their mission statement is the needy and dependent investor, who is neither capable nor willing to make reasonable investments, and therefore has to be protected from the evil financial sector,' stated Knüppel in his opening speech which considered the entire regulatory overhaul as an attempt to 'protect the investor from bad investments' with a 'paternalistic human image' which contravenes the basic order of the market economy, 'where customers independently decide about products they buy'.
Under the new Bafin rules, insurance companies will be free to use derivative financial instruments and structured products within the framework of the regulatory requirements which have extended the scope of investment opportunities, and tightened the requirements for risk management. Bafin also told the German industry that since insurers and institutions for occupational retirement provisions fall within the scope of the European Market Infrastructure Regulation (Emir), the obligations under European law will apply to insurers and institutions for occupational retirement provisions in Germany.
Knüppel also criticised product bans, as they 'restrict the freedom of choice of investors and cut short market-based fundamentals' and appealed to the supervisory authorities to get on a 'diet' when it comes to regulation. 'To describe the securities in a transparent and comprehensible manner is the responsibility of the issuer and the securities dealer whereas the investor needs to inform himself about the risks and rewards of the products,' stated Knüppel, adding that 'the ever tightening corset of regulation will harm everyone. It harms investors who want to grow their investments and get more secure for the old age and it harms the entire society which has to jump in with its social system in the absence of old age provision.'
According to Lars Brandau (right), managing director at the DDV, the German trade body has promoted transparency and self-regulation for years through a number of initiatives. "This cannot be determined by a single project or measure," said Brandau. "[This is] about standardization, unification, training and education. The most important projects are certainly the uniform product classification, the fairness code, the unification of technical terms, the regular publication of statistics of all kinds, as well as training and educational initiatives in the form of roadshows, books, explanatory films, online tools and much more.'
Brandau pointed that Germany has the second biggest retail market for these products and the corresponding know-how. "Structured securities are mainly 'Made in Germany' products," said Brandau. "[This market] has been available to private investors for some 25 years [but] within the framework of the European regulatory efforts, however, things are coming up again and again. [These] come from relatively less large markets with a completely different investment approach and different products."
In addition, for many years, too many regulatory projects have been running side by side, which in case of doubt are mutually interrelated and overlap, according to Brandau. "Therefore, our demand is to put the existing regulations to the test before ever new ones are pushed forward," he said.
According to Brandau the structured products industry is still very young compared to others and will continue to develop and face major regulatory and market challenges and warned that political institutions have created entities whose task is "to constantly review products in the interest of the investors to be protected".
"The authorities will certainly continue to fulfil this task," said Brandau.
Bafin has announced a conference in preparation of the transposition of the requirements of the European Financial Markets Directive (Mifid 2) into German law and the revision of its Code of Good Practices.
Click in the link to read the Bafin circular (Circular - 08/2017 (VA) - in German)
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