## cr17308

## Source details

**Canonical URL:** [cr17308](https://www.imf.org/-/media/files/publications/cr/2017/cr17308.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2017/cr17308.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2017/cr17308.pdf.json)

---

### EXECUTIVE SUMMARY
- Sweden has large and diverse securities markets where services can be easily provided on a cross-border basis.
- Nasdaq Stockholm is part of the global Nasdaq group and operates as the hub of Nasdaq’s Nordic operations.
- Trading in Swedish issuers’ shares is fragmented across European trading venues and over-the-counter (OTC), with Nasdaq Stockholm holding a less than 50 percent market share.
- Remote members account for more than two-thirds of the value of equity trading on Nasdaq Stockholm.
- The number of foreign investment funds sold in Sweden exceeds the number of domestic funds.
- Both domestic and foreign firms actively seek to benefit from the passports provided under EU legislation, highlighting the importance of robust home country regulation and supervision and vigilance about potential cross-border spillovers.
- Finansinspektionen (FI) faces challenges in this complex operating environment, particularly for the Consumer Protection and Markets areas that have primary responsibility for regulation and supervision of securities markets.
- FI should review the Consumer Protection area’s activities to assess where the current consumer protection focus should be complemented with explicit consideration of financial stability risks.
  - Fund supervision has recently addressed issues with potential financial stability implications, such as valuation of investment fund assets and liquidity risk management of corporate bond funds.
  - It is important to apply financial stability thinking explicitly across the Consumer Protection area when supervisory priorities are set.
- Improvements in data availability and better analysis tools would improve FI’s ability to analyze risks and plan supervisory activities.
  - Current data challenges relate to the format of some reporting and the delay in implementing the reporting requirements under the Alternative Investment Fund Managers Directive (AIFMD).
  - Solving these reporting challenges is a precondition for building sufficient tools to conduct regular and ad hoc analyses to target supervisory activities and assess financial stability risks.
  - FI and the Riksbank are encouraged to seek ways to enhance authorities’ cooperation in data collection and analysis.
- FI should be able to acquire a suitable automated market surveillance system to effectively supervise cross-market and cross-border trading in the current fragmented trading environment.
- Consumer Protection’s inspection program uses both off-site and on-site activities and has emphasized thematic off-site inspections recently.
  - FI needs to ensure that important findings are followed up with targeted supervisory and, if necessary, enforcement action at individual firms.
  - Effectiveness would be enhanced by developing additional tools to communicate promptly the general findings and recommendations of thematic inspections to all supervised entities and, where relevant, to the public.
- Enhancements to cross-border supervisory cooperation and active participation in ESMA are necessary complements to FI’s domestic supervisory program.
  - Continue to build closer cooperation with FI’s key foreign counterparts, in particular in the Nordic region and Luxembourg.
  - The Nordic cooperation in Nasdaq Nordic supervision is an encouraging model to follow.
  - FI should actively raise issues for discussion at ESMA to enhance EU level convergence to avoid regulatory arbitrage.

### KEY RECOMMENDATIONS
- Consumer Protection Area
  - Develop additional tools to communicate promptly the general findings and recommendations of FI’s thematic inspections to all supervised entities and, where relevant, to the public (FI). Priority: Medium. Timing: NT.
  - Review the Consumer Protection area’s activities to assess where the current consumer protection focus should be complemented with explicit consideration of financial stability risks (FI). Priority: High. Timing: NT.
- Fund Management
  - Assess the risks from the use of related party depositaries and consider requiring additional safeguards accordingly (MoF, FI). Priority: Medium. Timing: I.
  - Ensure that important thematic review findings are followed up with targeted firm level supervisory and, if necessary, enforcement action (FI). Priority: High. Timing: C.
  - Strive to undertake joint supervisory activities with foreign regulators on management companies with significant cross-border management of funds, when either the management company or fund is domiciled in Sweden (FI). Priority: High. Timing: NT.
  - Seek synergies between authorities in the collection of fund management related data (FI, Riksbank). Priority: Medium. Timing: MT.
  - Improve the availability of data on cross-border management of investment funds (FI). Priority: High. Timing: NT.
  - Increase regular and ad hoc analyses of the UCITS and AIFM reporting to better target supervisory activities and analyze financial stability risks (FI). Priority: High. Timing: NT.
- Investment Services
  - Incorporate banks’ investment services more explicitly into Consumer Protection area’s risk classification of firms (FI). Priority: Low. Timing: I.
  - Consider moving the responsibility for the financial and capital adequacy analysis of investment firms to the Bank area where the primary expertise lies (FI). Priority: Low. Timing: NT.
- Market Surveillance
  - Assess the appropriate market surveillance role for Nasdaq Stockholm in light of ongoing changes in market structure and competition (MoF, FI). Priority: Medium. Timing: C.
  - Finalize the proposal on the allocation of responsibility for IFRS supervision to reduce the risk of weakening the quality of supervision (MoF). Priority: High. Timing: I.
  - Ensure that FI’s budget enables it to acquire a suitable automated market surveillance system to effectively undertake its market surveillance responsibility in increasingly fragmented and electronic markets (MoF, FI). Priority: High. Timing: I.
- Timing codes: C=continuous; I=immediate (within one year); NT=near term (1-3 years); MT=medium term (3-5 years).

### MARKET STRUCTURE AND FUND STATISTICS (end-2015 / sample periods)
- Trading and market participation
  - Nasdaq Nordic: all Nasdaq Nordic financial derivatives trading takes place in Nasdaq Stockholm.
  - Nasdaq Stockholm accounts for more than half of Nasdaq Nordic's equity trading.
  - Trading on Nasdaq Stockholm is dominated by remote members, with the market share of Swedish firms reaching only one-third of the value of trading.
  - Less than 50 percent of trading in Swedish issuers' shares takes place on Nasdaq Nordic, with the rest primarily on U.K. trading venues and OTC.
  - For January 1, 2015 to July 31, 2016 the trading distribution in Swedish issuers’ shares was:
    - Nasdaq Stockholm 46.04
    - BATS (U.K.) 31.18
    - Turquoise (U.K.) 5.82
    - UBS MTF (U.K.) 1.20
    - Posit (Ireland) 1.02
    - Acquis (U.K.) 0.51
    - Instinet Blockmatch (U.K.) 0.36
    - Liquidnet (U.K.) 0.22
    - Aktietorget 0.18
    - Equiduct (Germany) 0.04
    - Sigma-X (U.K.) 0.03
    - NGM 0.03
    - Smartpool (U.K.) 0.01
    - Burgundy 0.01
    - OTC 1 13.33
    - Total 100.00
  - Note on OTC: market share includes off-book and SI trades Fidessa reports under those RMs and MTFs that do not conduct any order book or auction trading in Swedish issuers’ shares; off-book and SI trades reported under RMs and MTFs that also conduct order book trading are included in those venues’ market share.
  - Equity derivatives trading of Nasdaq Nordic: approximately 97 percent of these trades take place in derivatives whose underlying instruments are shares issued by a Swedish company.
- Investment funds and AUM
  - Swedish UCITS: 578 total UCITS (end-2015).
    - 35 UCITS managed by non-Swedish management companies.
    - 50 Swedish UCITS management companies manage the remainder.
    - Total AUM of Swedish UCITS: SEK 2,259 billion at end-2015.
      - SEK 227 billion of this were managed by foreign management companies, primarily Nordea Funds with AUM of SEK 212 billion.
  - Swedish AIFs: 338 Swedish AIFs at end-2015.
    - 255 were special funds.
    - AUM of Swedish special funds: SEK 497 billion at end-2015.
      - SEK 16 billion were managed by other EEA AIFMs.
    - 75 Swedish authorized AIFMs managed the remainder.
    - There were 55 registered Swedish AIFMs; data on the AUM of the AIFs managed by them is not yet available.
  - Swedish management companies’ estimated AUM of foreign UCITS they managed: SEK 400 billion at end-2015.
  - Swedish AIFMs need to report the AUM of the foreign AIFs they manage per AIFMD reporting requirements, but reported data is not yet of sufficient quality to present estimates on the value of those funds.
- Cross-border management and marketing (end-2015)
  - At end-2015, notifications had been made for the cross-border marketing of 920 UCITS and 555 EEA AIFs in Sweden.
  - FI had approved EEA AIFMs to market 87 non-EEA AIFs to Swedish professional investors (end-2015).
  - Non-EEA AIFMs had permission to market a total of 483 EEA and non-EEA AIFs to Swedish professional investors (end-2015).
  - FI had approved the marketing of 30 AIFs to non-professional investors that are equivalent to Swedish special funds or admitted to trading on an RM (end-2015).
  - FI had approved only 4 approvals to market certain closed-ended AIFs to semi-professional investors (end-2015).

### SUPERVISION: ORGANIZATION, RESOURCES, AND APPROACH
- Consumer Protection area (FI)
  - Responsible for supervision of investment funds and their managers.
  - Total number of staff is currently 82.
  - Staff turnover in the Consumer Protection staff is 16 percent.
  - Staff has on average slightly above 4 years of experience at FI.
  - Divisions and staffing:
    - Fund Supervision: 7 staff members (primary supervision)
    - UCITS Law: 7 staff members (applications for authorization of managers, approval of fund rules, notifications)
    - AIFM Law: 8 staff members (applications for authorization of managers, approval of fund rules, notifications)
  - Supervisory strategy:
    - Risk-based supervision prioritizing firms/markets/products posing highest risk to financial system and/or consumers.
    - For fund managers the risk classification uses AUM as the main classification criterion.
    - “Comprehensive” supervision: each supervised entity should be subject to at least one supervisory activity over a three-year period.
    - Reactive/event-driven supervision when events manifest.
  - Supervisory activities in 2013–2015:
    - Thematic inspections on global exposures of UCITS; valuation and liquidity risk; depositaries; conflicts of interest; measurement of liquidity risks in corporate bond funds; delegation of risk management and compliance functions.
    - “In total FI’s investigation touched 90 UCITS management companies and 16 AIFMs in 2013-2015.”
  - Communication and cooperation:
    - FI occasionally communicates general findings (special events, Customer Protection report, sectoral reports) but market participants would benefit from broader sharing of inspection findings and recommendations.
    - Cross-border cooperation facilitated by MoUs and a Nordic Working Group (NWG) on AIFMD and UCITS Directive (Sweden, Denmark, Norway, Finland); NWG meets normally twice a year.
  - Recommendations:
    - Review Consumer Protection area activities to incorporate explicit financial stability considerations.
    - Allocate resources to targeted follow-up supervisory and enforcement activities as needed.
    - Increase cross-border supervisory cooperation, particularly with Nordic regulators and authorities in jurisdictions where Swedish managers domiciled funds (notably Luxembourg).
    - Consider additional ways to communicate general findings and recommendations (newsletters, supervisory releases, press releases).
- Markets area (FI) and Nasdaq Stockholm supervision
  - FI’s Markets area responsible for supervision of Nasdaq Stockholm.
  - Total number of staff is currently 60.
  - Staff turnover in the Markets staff is 28 percent.
  - Staff has on average slightly over 2 years of experience at FI.
  - Most supervision of Nasdaq Stockholm conducted jointly with other Nordic FSAs by a dedicated team.
  - Joint supervision features:
    - Annual joint risk assessment and supervision plan.
    - Joint inspections/supervisory reviews on DMA and sponsored access, outsourcing, cyber security, access to market data.
    - Quarterly Nordic FSAs supervisory team meetings.
    - Nasdaq Nordic informs all FSAs about trading system incidents and provides reports.
  - Assessment: Nordic FSAs have a robust joint supervision program, complemented with local activities; resource constraints occasionally cause delays.

### MARKET SURVEILLANCE, RULES, AND DISCIPLINARY ARRANGEMENTS
- Exchange rule review and coordination
  - FI reviews Nasdaq Stockholm’s rules and procedures for compliance with the Securities Market Act (SMA) and expects to be informed of changes before adoption.
  - Nordic coordination on Nasdaq Nordic Member Rules (NMR) occurs, but coordination on listing/admission and issuer disclosure is limited due to differing national frameworks.
- Nasdaq Nordic market surveillance responsibilities
  - Nasdaq Nordic exchanges coordinate market surveillance extensively and may outsource certain activities; justification rests on shared trading engine, market surveillance system, market functionalities and trading rules.
  - Trading surveillance:
    - Nasdaq Stockholm’s trading surveillance responsible for real-time market surveillance on all Nasdaq Nordic exchanges (except commodity derivatives trading in Norway).
    - Suspicious trading is scrutinized by Nasdaq Stockholm and forwarded to relevant exchange surveillance units; each exchange reports suspected misconduct to its competent authority.
    - Nasdaq Stockholm must report suspected market abuse to FI.
    - In 2015, Nasdaq Stockholm referred 40 suspected insider trading cases and 30 suspected market manipulation cases to FI.
    - Each local exchange performs real-time market surveillance on an ad hoc or rotating basis to maintain knowhow and business continuity.
- Issuer and member surveillance
  - Nasdaq Stockholm’s issuer surveillance: verifies compliance with listing requirements and SMA disclosure requirements; broader responsibilities include takeover rules and surveillance of companies’ compliance with IFRS.
  - The final government inquiry report (SOU 2015:19) proposed responsibility for IFRS supervision be given to FI; legislative changes delayed and the issue remains open.
  - Member supervision: Nasdaq Stockholm admits unregulated members; number currently is 16, all except two are remote members.
  - MiFID II will limit RMs’ ability to admit members other than authorized investment firms and banks; high-frequency algorithmic trading firms will require authorization as investment firms; direct electronic access to a regulated market can be provided only by members that are investment firms or banks.
- Dealing with disorderly trading
  - NMR and MiFID/SMA grant exchanges rights to suspend/limit trading, limit electronic connections, limit number/volume of trades, close electronic connections, and halt trading for specific instruments; volatility guards and auction mechanisms available.
  - Primary exchange suspending trading must notify other Nasdaq Nordic exchanges and FI; ESMA’s SARIS is used to share suspension/restoration information across EEA competent authorities.
- Disciplinary framework
  - Nasdaq Nordic exchanges operate independent disciplinary procedures with possible sanctions: reprimands, fines, temporary or permanent expulsion (members); warnings or license withdrawal (brokers); reprimands, fines, or delisting (issuers).
  - Disciplinary committee required to obtain a statement from FI before taking disciplinary actions against an issuer or market participant under FI’s direct supervision (not required for non-Swedish issuers and members).

### REPORTING, DATA QUALITY, AND ANALYTICAL CAPABILITIES
- UCITS and AIFM reporting (formats and purposes)
  - UCITS management companies: comprehensive periodic reporting including quarterly report for management company (profit and loss, balance sheet, AUM, number of clients, capital requirement compliance); quarterly report for each Swedish UCITS with NAV by unit holder category, value of transactions, aggregated holdings; quarterly report on each UCITS’s holdings with instrument/asset level portfolio information; annual reports by management company on derivatives and risk estimation; annual and semi-annual reports for each UCITS.
  - AIFMs: periodic (quarterly, half-yearly or annual) report by authorized Swedish AIFMs on each AIF they manage and by non EEA-AIFMs on each AIF they market in Sweden (AIFMD Article 24 transparency reporting); annual report by registered Swedish AIFMs on main instruments and exposures; FI may request additional information and quarterly list of all AIFs an AIFM manages.
  - Additional national reporting for AIFMs managing special funds or marketing AIFs to retail investors: quarterly reports for each AIFM that manages a special fund and quarterly report for each such fund; quarterly report for each AIFM that manages an AIF marketed to retail investors; annual and semi-annual reports for each special fund.
  - Main purposes: ensure compliance with capital requirements, collect information for official financial market statistics, source for inspections.
- Data format and quality issues
  - Reports are submitted in PDF format which limits analytical use: “Neither one of the above reports can be easily used for analysis, since the reports are submitted in PDF format.”
  - FI implemented a system to receive Article 24 reports, forward them to ESMA, and perform analyses; first two parts operational since Q2 2015.
  - FI is working on improving quality of reported data and “cleaning the end-December 2015 data that covers all Swedish authorized and registered AIFMs.”
  - FI does not systemically collect information on Swedish UCITS management companies’ cross-border management of funds—this gap should be addressed.
  - FI needs to complete quality controls of AIFMD data and ensure access to AIF data collected by other EEA authorities, especially given significant marketing of non-EEA AIFs in Sweden.
- Analytical systems and transaction reporting
  - MiFID transaction reporting framework:
    - Investment firms and banks executing transactions in financial instruments admitted to trading on an RM must report transaction details to their competent authority at the latest by the close of the following working day.
    - The competent authority receiving transaction reports must submit them to ESMA so they can be forwarded to the competent authority of the most relevant market in terms of liquidity.
    - For shares and equity derivatives, the competent authority of the country where the (underlying) share was first admitted to trading would typically receive all transaction reports (example: FI would receive all transaction reports for trading in Swedish listed companies’ shares and related equity derivatives, wherever in the EEA this trading takes place).
  - FI’s current analytical tools are relatively rudimentary; the most significant obstacle to effective use of transaction reporting data is the lack of a sufficient analysis system.
  - FI informed the MoF in May 2016 of an additional budget need to acquire a new system.
  - Basic functionalities required of such a system include the ability to:
    - Recreate trading patterns.
    - Visualize the relationship between trading and price sensitive information.
    - Compile reports as a basis for further investigations.
  - Policy recommendation: sufficient budget should be allocated to FI to acquire a suitable automated market surveillance and analysis system; an automated system is required by the IOSCO Principles and necessary to leverage EU transaction reporting requirements and MiFID II enhancements for identifying cross-market and cross-border abuses.

### DELEGATION, DEPOSITARIES, AND SAFEGUARDING FUND ASSETS
- Delegation of investment management
  - EU and IOSCO requirements emphasize preventing the manager becoming a letter box entity, retaining delegator responsibility, and disclosure to investors on delegation arrangements.
  - UCITS Directive and AIFMD set delegation limits and approval/notification requirements; delegation to depositary or depositary's delegate for portfolio or risk management is prohibited.
  - Swedish implementation:
    - FI’s Regulations require management company to notify FI at least one month before planned delegation; FI can require amendments to delegation agreements.
    - FI’s Regulations require FI to be notified before delegation arrangements become effective for AIFMs.
    - “FI’s Regulations ensure its ability to supervise any delegated activities and in practice delegation takes place only to a limited extent.”
    - “Swedish fund managers do not typically delegate fund management related activities to foreign firms.”
    - FI has not yet approved delegation of portfolio management or risk management related to financial instruments to other than supervised entities. For risk management of other assets than financial instruments, such as real estate and property, FI has approved delegation to undertakings that do not meet the criteria on authorization and supervision.
  - Additional requirements for non-EEA delegation: written cooperation agreement between relevant competent authorities required; FI has signed AIFMD MoUs with relevant non-EEA countries.
- Depositary requirements and safekeeping
  - UCITS Directive and AIFMD require appointment of a depositary for each UCITS and AIF; depositary generally must have registered office or branch in the same country where the fund is domiciled.
  - Swedish legislation currently permits only credit institutions to act as UCITS depositaries; this approach is maintained in the legislative proposal for transposition of the UCITS V Directive.
  - Contrary to UCITS Directive, investment firms can act as the depositary of any AIF and certain other entities can act as depositary of particular types of closed-ended AIFs.
  - EU directives and IOSCO require segregation, record keeping, depositary independence, limited delegation for safekeeping, delegate prudential regulation and periodic audit, and depositary liability for loss of financial instruments held in custody.
  - The transposition of the UCITS V Directive is important; “The law transposing the UCITS Directive will enter into force on November 1, 2016.”
  - Recommendation: “Further enhancements to the depositary independence requirements would be beneficial.” FI should initiate discussions with management companies on compliance and consider additional safeguards along the lines proposed by IOSCO.

### CONCLUSIONS AND POLICY RECOMMENDATIONS
- Nasdaq Stockholm market surveillance role
  - Nasdaq Stockholm currently performs issuer surveillance, member supervision, trading surveillance, and related disciplinary activities.
  - Ongoing and planned changes affecting this role:
    - IFRS supervision may be transferred out of Nasdaq Stockholm.
    - The inability to have unregulated members after the transposition of MiFID II reduces Nasdaq Stockholm’s responsibility for member supervision.
    - Increasing fragmentation of trading will force FI to adopt a larger role in trading surveillance.
  - Policy recommendation:
    - The Ministry of Finance (MoF) and FI should continue to assess the appropriate market surveillance role for Nasdaq Stockholm given changes in market structure and competition.
    - A prompt decision on the allocation of responsibility for IFRS supervision is important to reduce the risk of weakening the quality of supervision.
- Surveillance capabilities and international cooperation
  - IOSCO Principles expect continuous monitoring, automated systems to identify unusual transactions, arrangements to monitor cross-market trading, cooperation with foreign regulators, regular review of surveillance capabilities, and collective steps to strengthen cross-border surveillance.
  - Given trading fragmentation, complementing Nasdaq Nordic surveillance with FI’s own surveillance is necessary.
  - The current EU transaction reporting requirements and MiFID II enhancements provide a good basis for identifying cross-market and cross-border abuses—contingent on adequate analysis systems.
- Reporting and data priorities
  - Complete quality controls of AIFMD data and ensure access to AIF data collected by other EEA authorities.
  - Improve availability of data on cross-border management of investment funds and consider changing reporting formats away from PDF to enable analytical use.
  - Seek synergies between FI and the Riksbank in the collection and analysis of fund management related data.
  - Increase regular and ad hoc analyses of UCITS and AIFM reporting to better target supervisory activities and analyze financial stability risks.

*IMF staff report (information current as of September 2016).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### cr17308 - EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY
- Sweden has large and diverse securities markets where services can be easily provided on a cross-border basis.
- Nasdaq Stockholm is part of the global Nasdaq group and operates as the hub of Nasdaq’s Nordic operations.
- Trading in Swedish issuers’ shares is fragmented across European trading venues and over-the-counter (OTC), with Nasdaq Stockholm holding a less than 50 percent market share.
- Remote members account for more than two-thirds of the value of equity trading on Nasdaq Stockholm.
- The number of foreign investment funds sold in Sweden exceeds the number of domestic funds.
- Both domestic and foreign firms actively seek to benefit from the passports provided under EU legislation, emphasizing the importance of robust home country regulation and supervision and vigilance about potential cross-border spillovers.
- Finansinspektionen (FI) faces challenges in this complex operating environment, particularly for the Consumer Protection and Markets areas that have primary responsibility for regulation and supervision of securities markets.
- FI should review the Consumer Protection area’s activities to assess where the current consumer protection focus should be complemented with explicit consideration of financial stability risks.
  - Fund supervision has recently addressed issues with potential financial stability implications, such as valuation of investment fund assets and liquidity risk management of corporate bond funds.
  - It is important to apply financial stability thinking explicitly across the Consumer Protection area when supervisory priorities are set.
- Improvements in data availability and better analysis tools would improve FI’s ability to analyze risks and plan supervisory activities.
  - Current data challenges relate to the format of some reporting and the delay in implementing the reporting requirements under the Alternative Investment Fund Managers Directive (AIFMD).
  - Solving these reporting challenges is a precondition for building sufficient tools to conduct regular and ad hoc analyses to target supervisory activities and assess financial stability risks.
  - FI and the Riksbank are encouraged to seek ways to enhance authorities’ cooperation in data collection and analysis.
- FI should be able to acquire a suitable automated market surveillance system to effectively supervise cross-market and cross-border trading in the current fragmented trading environment.
- Consumer Protection’s inspection program uses both off-site and on-site activities and has emphasized thematic off-site inspections recently.
  - FI needs to ensure that important findings are followed up with targeted supervisory and, if necessary, enforcement action at individual firms.
  - Effectiveness would be enhanced by developing additional tools to communicate promptly the general findings and recommendations of thematic inspections to all supervised entities and, where relevant, to the public.
- Enhancements to cross-border supervisory cooperation and active participation in ESMA are necessary complements to FI’s domestic supervisory program.
  - Continue to build closer cooperation with FI’s key foreign counterparts, in particular in the Nordic region and Luxembourg.
  - The Nordic cooperation in Nasdaq Nordic supervision is an encouraging model to follow.
  - FI should actively raise issues for discussion at ESMA to enhance EU level convergence to avoid regulatory arbitrage.

### Key Recommendations (Table 1: Sweden: Main Recommendations on Regulation and Supervision of Cross-Border Securities Activities)
- Consumer Protection Area
  - Develop additional tools to communicate promptly the general findings and recommendations of FI’s thematic inspections to all supervised entities and, where relevant, to the public (FI). Priority: Medium. Timing: NT.
  - Review the Consumer Protection area’s activities to assess where the current consumer protection focus should be complemented with explicit consideration of financial stability risks (FI). Priority: High. Timing: NT.
- Fund Management
  - Assess the risks from the use of related party depositaries and consider requiring additional safeguards accordingly (MoF, FI). Priority: Medium. Timing: I.
  - Ensure that important thematic review findings are followed up with targeted firm level supervisory and, if necessary, enforcement action (FI). Priority: High. Timing: C.
  - Strive to undertake joint supervisory activities with foreign regulators on management companies with significant cross-border management of funds, when either the management company or fund is domiciled in Sweden (FI). Priority: High. Timing: NT.
  - Seek synergies between authorities in the collection of fund management related data (FI, Riksbank). Priority: Medium. Timing: MT.
  - Improve the availability of data on cross-border management of investment funds (FI). Priority: High. Timing: NT.
  - Increase regular and ad hoc analyses of the UCITS and AIFM reporting to better target supervisory activities and analyze financial stability risks (FI). Priority: High. Timing: NT.
- Investment Services
  - Incorporate banks’ investment services more explicitly into Consumer Protection area’s risk classification of firms (FI). Priority: Low. Timing: I.
  - Consider moving the responsibility for the financial and capital adequacy analysis of investment firms to the Bank area where the primary expertise lies (FI). Priority: Low. Timing: NT.
- Market Surveillance
  - Assess the appropriate market surveillance role for Nasdaq Stockholm in light of ongoing changes in market structure and competition (MoF, FI). Priority: Medium. Timing: C.
  - Finalize the proposal on the allocation of responsibility for IFRS supervision to reduce the risk of weakening the quality of supervision (MoF). Priority: High. Timing: I.
  - Ensure that FI’s budget enables it to acquire a suitable automated market surveillance system to effectively undertake its market surveillance responsibility in increasingly fragmented and electronic markets (MoF, FI). Priority: High. Timing: I.
- Timing codes: C=continuous; I=immediate (within one year); NT=near term (1-3 years); MT=medium term (3-5 years).

### INTRODUCTION
- Purpose: Review the functioning and effectiveness of the regulation and supervision of cross-border securities activities in Sweden using IOSCO Principles and Standards as benchmarks.
- Focus: Fund management, investment services, and market operators — the most relevant securities activities from a financial stability perspective.
- Most regulatory framework in these areas is based on EU legislation, with some national discretion. The note describes and evaluates the relevant EU framework and additional Swedish requirements.
- Many Nordic and foreign financial sector firms have concentrated Nordic operations in Sweden; Swedish securities markets have high participation from elsewhere in the EU.
  - All Nasdaq Nordic financial derivatives trading takes place in Nasdaq Stockholm.
  - Nasdaq Stockholm accounts for more than half of Nasdaq Nordic's equity trading.
  - Trading on Nasdaq Stockholm is dominated by remote members, with the market share of Swedish firms reaching only one-third of the value of trading.
  - Less than 50 percent of trading in Swedish issuers' shares takes place on Nasdaq Nordic, with the rest primarily on U.K. trading venues and OTC.
  - Anecdotal evidence suggests cross-border provision of investment services focuses on institutional investors.
- Fund management services are increasingly provided on a cross-border basis.
  - By AUM of SEK 2,259 billion at end-2015, the Swedish UCITS market is the sixth largest in the EU.
  - Swedish management companies also manage funds domiciled abroad, particularly in other Nordic countries and Luxembourg.
  - Sweden permits a significant number of non-EEA domiciled AIFs to be marketed to Swedish investors, contrasting with many other EU member states that apply significant restrictions.

### CROSS-BORDER MANAGEMENT AND MARKETING OF INVESTMENT FUNDS — A. Market Structure
- Regulatory distinctions
  - EU framework distinguishes UCITS and non-UCITS (AIFs); UCITS require authorization, regulation of AIFs is left to national discretion.
  - Swedish UCITS Act requires FI to approve UCITS’ rules if they are reasonable for unitholders.
  - Special funds (a Swedish AIF format) must be contractual funds; their rules and amendments must be approved by FI.
    - Special fund format is typically chosen to enable deviations from some UCITS requirements (e.g., risk diversification or use of leverage) and may allow less frequent redemptions than UCITS.
    - Deviations from UCITS must be highlighted in special fund rules.
    - Only special funds and certain other AIFs can be marketed to investors other than professional investors.
- IOSCO expectations
  - IOSCO Principles expect regulatory systems to require investment funds, especially those offered to retail investors, to comply with clear criteria for initial approval and continuing operation and for regulators to have clear responsibility and powers for authorization.
  - Sweden’s approach of subjecting UCITS and special fund rules and marketing to retail investors to FI’s approval complies with IOSCO requirements.
- Authorization and registration
  - UCITS management companies must be authorized; AIFMs must be authorized or registered.
  - A firm managing a UCITS must be authorized as a UCITS management company; firms performing risk management or portfolio management for an AIF must be authorized or registered as an AIFM.
  - AIFMD requires full authorization only for AIFMs managing AIFs whose total AUM exceed the AIFMD Article 3 threshold; sub-threshold AIFMs only need to be registered.
  - In Sweden, only authorized AIFMs are permitted to manage special funds.
- Depositary requirements
  - UCITS Directive and AIFMD require appointment of a depositary for each UCITS and AIF.
  - A depositary must generally have its registered office or a branch in the same country where the fund is domiciled.
  - The competent authority of the UCITS home country must approve the depositary for each fund.
  - Swedish legislation currently permits only credit institutions to act as UCITS depositaries; this approach is maintained in the legislative proposal for transposition of the UCITS V Directive.
  - Contrary to the UCITS Directive, investment firms can act as the depositary of any AIF and certain other entities can act as depositary of particular types of closed-ended AIFs.
- Statistics and market composition (end-2015)
  - Swedish UCITS: 578 total UCITS.
    - 35 UCITS managed by non-Swedish management companies.
    - 50 Swedish UCITS management companies manage the remainder.
    - Total AUM of Swedish UCITS: SEK 2,259 billion at end-2015.
      - SEK 227 billion of this were managed by foreign management companies, primarily Nordea Funds with AUM of SEK 212 billion.
  - Swedish AIFs: 338 Swedish AIFs at end-2015.
    - 255 were special funds.
    - AUM of Swedish special funds: SEK 497 billion at end-2015.
      - SEK 16 billion were managed by other EEA AIFMs.
    - 75 Swedish authorized AIFMs managed the remainder.
    - There were 55 registered Swedish AIFMs; data on the AUM of the AIFs managed by them is not yet available.
  - Swedish management companies’ estimated AUM of foreign UCITS they managed: SEK 400 billion at end-2015.
  - Swedish AIFMs need to report the AUM of the foreign AIFs they manage per AIFMD reporting requirements, but reported data is not yet of sufficient quality to present estimates on the value of those funds.

*Source: IMF staff report (information current as of September 2016).*

### Box 1. Main Investment Fund Types in Sweden

### Box 1. Main Investment Fund Types in Sweden

### Fund categories and legal framework
- All Swedish investment funds fall into one of two categories: UCITSs or AIFs (EU UCITS Directive and AIFMD).
- The UCITS Directive requires an UCITS to be authorized; AIFMD applies to the manager (AIFM) rather than the fund.
- Swedish regulatory framework requires the rules of certain AIFs, so called special funds, to be approved by FI.

### Main fund types, legal form, managers and depositaries (as presented)
- UCITS
  - Legal form: Contractual fund
  - Manager: Swedish or EEA UCITS management company
  - Depositary: Swedish credit institution or a Swedish branch of an EEA credit institution
- AIF — special fund marketed to retail investors
  - Legal form: (special fund)
  - Manager: Authorized Swedish or EEA AIFM
  - Depositary: A Swedish credit institution or investment firm, a Swedish branch of an EEA credit institution or investment firm, or an authorized UCITS depositary
- AIF admitted to trading on a regulated market (or equivalent) marketed to retail investors
  - Legal form: No restrictions on the legal form
  - Manager: Authorized Swedish or EEA AIFM
- AIF marketed to semi-professional or professional investors
  - Legal form: (various)
  - Manager: Authorized or registered Swedish or EEA AIFM

- Footnoted clarifications preserved exactly:
  - "According to the law transposing the UCITS V Directive, the requirement for a depositary to be a credit institution will be maintained in Sweden."
  - "An EEA AIFM also requires FI’s authorization to manage a Swedish special fund. This requires, among others, that the AIFM’s home member state authorization permits it to manage funds similar to special funds and that the AIFM’s legal form is a limited company."
  - "In addition, for closed-ended AIFs that comply with the conditions in Art. 21(3)(3) of the AIFMD (e.g., private equity and real estate funds) the depositary may be an entity that carries out depositary functions as part of its professional or business activities. It is subject to a EUR 125,000 capital requirement."
  - "In practice most are contractual funds or limited companies."
  - "Semi-professional investors are investors that commit to investing at least EUR 100,000 and have separately stated that they are aware of the risks associated with the envisaged investment."

### Cross-border management of investment funds
- Regulatory basis and principles:
  - Both UCITS Directive and AIFMD permit cross-border management of investment funds within the EEA subject to a notification procedure.
  - IOSCO Principles recognize cross-border management subject to sufficient cooperation between home and host regulators.
- Observed cross-border activity and structure:
  - One Swedish UCITS management company has established a branch in another EEA country (Denmark).
  - There are 16 branches of EEA UCITS management companies and two branches of EEA AIFMs in Sweden.
  - "Relatively limited cross-border management of Swedish UCITS and AIFs from abroad."
  - Cross-border management from Sweden of foreign funds is relatively common; potential increase if foreign subsidiaries are converted to branches.
- Non-EEA considerations:
  - EEA AIFMs can manage non-EEA AIFs subject to Article 34 conditions of the AIFMD; if such AIFs are not marketed in the EEA, certain AIFMD requirements (depositary Article 21 and annual report Article 22) need not apply.
  - "Only one Swedish AIFM manages a non-EEA AIF."
  - Swedish AIFMA does not permit a non-EEA AIFM to manage local AIFs.
- Policy note:
  - "The Swedish legislation aims at enhancing investor protection by prohibiting cross-border management of Swedish AIFs."

### Cross-border marketing of investment funds
- Notification and approvals:
  - Foreign UCITS and certain foreign AIFs can be marketed to Swedish investors after appropriate notification.
  - At end-2015, notifications had been made for the cross-border marketing of 920 UCITS and 555 EEA AIFs in Sweden.
  - Marketing of certain AIFs to professional investors under NPPR requires FI’s approval (non-EEA AIFs and EEA AIFs managed by non-EEA AIFMs).
    - At end-2015, FI had approved EEA AIFMs to market 87 non-EEA AIFs to Swedish professional investors.
    - Non-EEA AIFMs had permission to market a total of 483 EEA and non-EEA AIFs to Swedish professional investors.
  - FI had approved the marketing of 30 AIFs to non-professional investors that are equivalent to Swedish special funds or admitted to trading on an RM (end-2015).
  - FI had approved only 4 approvals to market certain closed-ended AIFs to semi-professional investors (end-2015).
- Structural impediments and planned legislative change:
  - Having unit classes denominated in two or more different currencies is currently difficult in practice because Swedish law does not permit hedging the currency risk of the unit class denominated in a different currency than the fund's base currency.
  - The final report of the government inquiry on investment fund legislation (SOU 2016:45, June 2016) proposes amending legislation; proposed entry into force date: January 3, 2018.
- Policy rationale:
  - "The Swedish legislation requires FI’s approval for the marketing of all AIFs that are not subject to the AIFMD notification procedure." FI’s approach is designed to ensure risks to Swedish investors can be contained and complies with IOSCO requirements.

### Delegation of investment management
- IOSCO and EU requirements:
  - IOSCO Principles require rules to prevent the manager becoming a letter box entity; the delegator remains responsible; disclosure to investors on delegation arrangements.
  - UCITS Directive allows member states discretion on delegation; prevents delegating to depositary or any person with potential conflicts of interest; delegate required to be authorized for asset management and prudentially supervised.
  - AIFMD includes more detailed requirements: AIFM must provide detailed description of delegation structure; subject to home country authority approval, AIFM can delegate portfolio or risk management to a person not authorized for asset management (subject to limits); sub-delegation requires consent and notification; delegation to depositary or depositary's delegate is prohibited for portfolio or risk management.
- Swedish implementation and practice:
  - FI’s Regulations include additional requirements: management company must notify FI at least one month before planned delegation; FI can require amendments to delegation agreements.
  - FI Regulations require FI to be notified before delegation arrangements become effective for AIFMs.
  - "FI’s Regulations ensure its ability to supervise any delegated activities and in practice delegation takes place only to a limited extent."
  - "Swedish fund managers do not typically delegate fund management related activities to foreign firms." When delegation to foreign firms occurs, FI conducts the same review as for delegation to a Swedish firm.
- Additional requirements for non-EEA delegation:
  - Written cooperation agreement between relevant competent authorities required covering access to information, on-site inspections, and enforcement cooperation; FI has signed AIFMD MoUs with relevant non-EEA countries.
- Exact practice note:
  - "FI has not yet approved delegation of portfolio management or risk management related to financial instruments to other than supervised entities. For risk management of other assets than financial instruments, such as real estate and property, FI has approved delegation to undertakings that do not meet the criteria on authorization and supervision."

### Safekeeping and segregation of fund assets
- IOSCO Principles and EU directives:
  - IOSCO Principles require adequate segregation and independent depositaries; identification of client assets; segregation from assets of manager, custodian, other funds/clients.
  - AIFMD and UCITS V Directive include segregation and safekeeping/record keeping requirements; financial instruments that cannot be physically delivered must be registered in a segregated financial instruments account in the name of the fund or fund manager.
  - In Sweden, enhanced requirements will apply to UCITS after transposition of UCITS V Directive on November 1, 2016.
- Depositary independence and delegation:
  - AIFMD and UCITS V Directive include general requirements on depositary independence; functional and hierarchical separation required where depositary carries out other potentially conflicting tasks.
  - Delegation by depositary permitted only for safekeeping tasks; delegates providing sub-custody for financial instruments must be subject to effective prudential regulation and external periodic audit.
  - Segregation requirements apply to delegated safekeeping: delegate must segregate assets of depositary’s clients from its own and keep necessary records enabling immediate identification.
- Liability and insolvency:
  - AIFMD depositary liability: depositary generally remains liable for any loss of financial instruments held in custody; must return identical instrument or corresponding value unless loss due to external event beyond reasonable control.
  - UCITS V Directive does not allow discharge of liability when safekeeping duties have been delegated and requires that in event of insolvency of depositary or delegate, UCITS assets held in custody are unavailable for distribution among creditors.
- Swedish supervisory activity and recommendations:
  - FI conducted thematic inspections on depositaries in 2009–2013 focusing on organization and monitoring activities.
  - "The transposition of the UCITS V Directive is important ... The law transposing the UCITS Directive will enter into force on November 1, 2016."
  - Recommendation: "Further enhancements to the depositary independence requirements would be beneficial." FI should initiate discussions with management companies on compliance and consider additional safeguards along the lines proposed by IOSCO.

### Supervision: organization, resources and supervisory approach
- Organization and staffing:
  - FI's Consumer Protection area is responsible for supervision of investment funds and their managers.
  - "The total number of staff is currently 82."
  - "The turnover in the Consumer Protection staff is similar to FI average: 16 percent."
  - "Staff has on average slightly above 4 years of experience at FI."
  - Divisions involved:
    - Fund Supervision: 7 staff members (primary supervision)
    - UCITS Law: 7 staff members (applications for authorization of managers, approval of fund rules, notifications)
    - AIFM Law: 8 staff members (applications for authorization of managers, approval of fund rules, notifications)
- Supervisory strategy and activities:
  - FI’s supervision strategy is risk-based, prioritizing firms/markets/products posing highest risk to financial system and/or consumers; risk assessment and risk classification process used.
  - For fund managers the risk classification uses AUM as the main classification criterion.
  - FI applies "comprehensive" supervision—each supervised entity should be subject to at least one supervisory activity over a three-year period—and reactive/event-driven supervision when events manifest.
  - Examples of supervisory activities in 2013–2015 included thematic inspections on global exposures of UCITS; valuation and liquidity risk; depositaries; conflicts of interest; measurement of liquidity risks in corporate bond funds; delegation of risk management and compliance functions.
  - "In total FI’s investigation touched 90 UCITS management companies and 16 AIFMs in 2013-2015."
- Communication and cooperation:
  - Observation: "Market participants would benefit from broader sharing of inspection findings and recommendations." FI occasionally communicates general findings (special events, Customer Protection report, sectoral reports) but broader and timelier channels are encouraged.
  - Cross-border cooperation: limited to date but facilitated by MoUs and a Nordic Working Group (NWG) on AIFMD and UCITS Directive (Sweden, Denmark, Norway, Finland). NWG meets normally twice a year.
- Recommendations:
  - FI should review Consumer Protection area activities to complement consumer protection focus with explicit consideration of financial stability risks.
  - Continue to allocate resources to targeted follow-up supervisory and enforcement activities as needed.
  - Increase level of cross-border supervisory cooperation, particularly with Nordic regulators and authorities in jurisdictions where Swedish managers domiciled funds (notably Luxembourg).
  - FI is encouraged to consider additional ways to communicate general findings and recommendations from supervisory activities (newsletters, supervisory releases, press releases).

### Reporting, analysis and data quality
- UCITS and AIFM reporting requirements (overview):
  - UCITS management companies: comprehensive periodic reporting including quarterly report for management company (profit and loss, balance sheet, AUM, number of clients, capital requirement compliance); quarterly report for each Swedish UCITS with NAV by unit holder category, value of transactions, aggregated holdings; quarterly report on each UCITS’s holdings with instrument/asset level portfolio information; annual reports by management company on derivatives and risk estimation; annual and semi-annual reports for each UCITS.
  - AIFMs: periodic (quarterly, half-yearly or annual) report by authorized Swedish AIFMs on each AIF they manage and by non EEA-AIFMs on each AIF they market in Sweden (AIFMD Article 24 transparency reporting); annual report by registered Swedish AIFMs on main instruments and exposures; FI may request additional information and quarterly list of all AIFs an AIFM manages.
  - Additional national reporting for AIFMs managing special funds or marketing AIFs to retail investors: quarterly reports for each AIFM that manages a special fund and quarterly report for each such fund; quarterly report for each AIFM that manages an AIF marketed to retail investors; annual and semi-annual reports for each special fund.
- Uses and limitations:
  - Main purposes: ensure compliance with capital requirements, collect information for official financial market statistics, source for inspections.
  - Reports are submitted in PDF format which limits analytical use: "Neither one of the above reports can be easily used for analysis, since the reports are submitted in PDF format."
  - Reports are shared with the Riksbank and Statistics Sweden.
- AIFMD transparency reporting system implementation:
  - FI implemented a system to receive Article 24 reports, forward them to ESMA, and perform analyses; first two parts operational since Q2 2015.
  - FI is working on improving quality of reported data and "cleaning the end-December 2015 data that covers all Swedish authorized and registered AIFMs."
  - Planned uses: early warnings of substantial leverage, liquidity mismatch and significant decrease in AUM; implement a new working process for monitoring systemic risk including information sharing and cooperation with different authorities; use reported information in consumer protection inspections.
- Data gaps and recommendations:
  - FI does not systemically collect information on Swedish UCITS management companies’ cross-border management of funds—this gap should be addressed.
  - FI should enhance use of reported data for regular and ad hoc analyses to identify potential systemic risks from fund management activities.
  - Consider whether PDF reporting format is optimal; seek efficiencies through changes in reporting formats and cooperation between authorities (FI and Riksbank).
  - FI needs to complete quality controls of AIFMD data and ensure access to AIF data collected by other EEA authorities, especially given significant marketing of non-EEA AIFs in Sweden.

*Source: UCITS Act, AIFMA; Box 1 text in cr17308 - Box 1. Main Investment Fund Types in Sweden*

### 100. The regulatory requirements on outsourcing by market operators in Sweden are

### 100. The regulatory requirements on outsourcing by market operators in Sweden are

### Outsourcing regulation and risks
- The regulatory requirements on outsourcing by market operators in Sweden are comprehensive.
- FI supervises Nasdaq Nordic’s compliance with these requirements jointly with the other Nordic FSAs.
- The requirements cover cross-border outsourcing, which is important for Nasdaq Nordic exchanges.
- The complexity of Nasdaq Group’s legal structure and the specific risks in outsourcing important functions on a cross-border basis, particularly to unregulated entities, make assessments challenging.
- Recommendation: FI should continue to closely monitor developments in this area and assess their impact on the efficiency and integrity of the Swedish market, as appropriate.

### Supervision — Organization and resources
- FI’s Markets area is responsible for the supervision of Nasdaq Stockholm, with objectives to secure efficient securities markets that have a high degree of confidence, sound price formation, and high level of transparency.
- Responsibilities include institutional oversight of Nasdaq Stockholm and other operators of trading and post-trading infrastructures, market monitoring, prospectus approval, and anti-money laundering.
- Total number of staff is currently 60.
- Staff turnover in the Markets staff is 28 percent.
- Staff has on average only slightly over 2 years of experience at FI.
- Most supervision of Nasdaq Stockholm is conducted as part of overall supervision of Nasdaq Nordic exchanges, undertaken jointly with other Nordic FSAs by a dedicated team composed of representatives of each Nordic FSA.
- A few FI staff from Infrastructure Supervision and Market Monitoring Divisions participate in Nasdaq Nordic supervision, supported on legal issues by the Equity Markets Law Division.

### Supervisory approach and activities
- IOSCO Principles require a regulator to have an inspection program and oversight mechanisms to verify an exchange’s compliance with statutory or administrative responsibilities.
- The Nordic FSAs prepare a joint risk assessment and supervision plan on the Nasdaq Nordic exchanges.
  - The annual risk assessment identifies risks and ranks them based on impact and probability; this forms the basis for the annual joint supervision plan.
- Joint inspections/supervisory reviews during the last three years covered topics including: direct market access (DMA) and sponsored access, outsourcing, cyber security, and access to market data (ongoing).
- The Nordic FSAs’ supervisory team meets quarterly; generally one half of each meeting is internal and the other half is devoted to a meeting with Nasdaq Nordic.
- Ongoing supervision largely happens jointly: the Nordic FSAs exchange information frequently and endeavor to form common opinions and make joint decisions.
- Joint ongoing supervision has addressed market microstructure initiatives (routing strategies, order types, auction arrangements, anonymity, market making/liquidity provision arrangements, establishment of a dark pool).
- The Nordic FSAs have requested follow-up reporting to monitor volumes and participating investment firms after market functionality changes.
- Nasdaq Nordic informs all FSAs about trading system incidents and provides an explanatory report after each incident closes; a summary of all incidents during the quarter is submitted to each Nordic FSA’s quarterly meeting.
- Regular local-level meetings: FI’s quarterly meetings with Nasdaq Stockholm have a fixed agenda including market surveillance updates, member and issuer surveillance cases, Nasdaq Stockholm’s strategy, financial situation, governance and control functions, market functioning, and incidents.
- Ongoing supervision addressed the split of Nasdaq Stockholm into two legal entities (one operating the exchange and the other operating the CCP).
- Assessment: The Nordic FSAs have a robust joint supervision program, complemented with local activities. Risk assessments are well-considered. While resource availability occasionally leads to delays, the joint supervision team has largely been able to promptly address acute supervisory issues.

### Review of rules
- IOSCO Principles require a regulator to review exchange rules, be informed of securities to be traded, and review or approve listing/admission to trading rules; amendments to rules should be provided to or approved by the regulator.
- FI reviews that Nasdaq Stockholm’s rules and procedures are compliant with the Securities Market Act (SMA).
  - This review is not based on any direct obligation under current legislation but follows from the general requirements of the SMA on listing/admission to trading, issuer disclosure, trading, and membership/access.
  - FI expects Nasdaq Stockholm to inform and seek FI’s view about any changes to exchange rules and procedures before adoption.
- The Nordic FSAs aim to coordinate views on market model changes underlying Nasdaq Nordic rule changes depending on the type of changes.
  - Nasdaq Nordic Member Rules (NMR) apply to all Nasdaq Nordic exchanges; changes to membership requirements and related processes generally require coordination.
  - Because regulatory frameworks and listing processes differ between Nordic countries, coordination on listing/admission and issuer disclosure has been limited.
- Conclusion: Nordic FSAs’ cooperation and FI’s role ensure significant issues in Nasdaq Nordic’s rules can be appropriately addressed; approach complies with IOSCO Principles.

### Cross-border market surveillance — Market structure
- Trading in Swedish issuers’ shares is very fragmented. For January 1, 2015 to July 31, 2016 the trading distribution was:
  - Nasdaq Stockholm 46.04
  - BATS (U.K.) 31.18
  - Turquoise (U.K.) 5.82
  - UBS MTF (U.K.) 1.20
  - Posit (Ireland) 1.02
  - Acquis (U.K.) 0.51
  - Instinet Blockmatch (U.K.) 0.36
  - Liquidnet (U.K.) 0.22
  - Aktietorget 0.18
  - Equiduct (Germany) 0.04
  - Sigma-X (U.K.) 0.03
  - NGM 0.03
  - Smartpool (U.K.) 0.01
  - Burgundy 0.01
  - OTC 1 13.33
  - Total 100.00
- Note on OTC: In addition to OTC trades reported to trade data reporting systems, the market share of OTC trading here includes off-book and SI trades Fidessa reports under those RMs and MTFs that do not conduct any order book or auction trading in Swedish issuers’ shares. Off-book and SI trades that Fidessa reports under RMs and MTFs that also conduct order book trading have been included in their market share.
- Equity derivatives trading of Nasdaq Nordic is concentrated on Nasdaq Stockholm.
  - Approximately 97 percent of these trades take place in derivatives whose underlying instruments are shares issued by a Swedish company.

### Nasdaq Nordic exchanges’ market surveillance
- IOSCO Principles require market operators to have reliable arrangements for monitoring, surveillance, and supervision of the trading system and its members, mechanisms to identify and address disorderly trading conditions, and to consider limits on outsourcing key market surveillance functions where outsourcing would impair statutory responsibilities.
- MiFID and the Swedish SMA require RM and MTF operators to conduct market surveillance and establish effective arrangements and procedures ensuring members comply with RM rules.
  - RM operators must report significant rule breaches, disorderly trading conditions or potential market abuse to the RM’s competent authority.
  - SMA requires an exchange to have an independent surveillance function and a disciplinary committee.
  - SMA requires monitoring that:
    - Financial instruments fulfill listing and admission to trading requirements.
    - Issuers fulfill disclosure obligations.
    - Trading and price formation occur in compliance with legal requirements and good market practice.
    - Trading participants comply with membership/access requirements.
- In practice, Nasdaq Nordic exchanges coordinate market surveillance responsibilities extensively, including outsourcing certain activities, justified by shared trading engine, market surveillance system, market functionalities and trading rules.

### Issuer surveillance
- Nasdaq Stockholm’s issuer surveillance verifies prospective issuers’ compliance with listing requirements, monitors ongoing compliance, and monitors Swedish issuers’ compliance with SMA disclosure requirements and Nasdaq Stockholm’s own rules.
- Foreign issuers must comply with home country disclosure requirements in addition to Nasdaq Stockholm’s rules.
- If issuer surveillance detects breaches, it must report them to FI.
- Nasdaq Stockholm’s responsibilities are broader than in many countries because Swedish legislation assigns the exchange responsibility to monitor compliance with takeover rules and perform surveillance of companies’ compliance with IFRS.
  - The final report of the government inquiry on changed disclosure requirements (SOU 2015:19) proposed that responsibility for IFRS supervision should be given to FI.
  - Related legislative changes were initially supposed to enter into force on January 1, 2016, but submission of the legislative proposal has been delayed due to other priorities; the issue remains open.

### Member supervision
- Access to RMs and MTFs is subject to criteria derived from MiFID: access must protect orderly functioning of the market and investors’ interests.
- MiFID permits RMs and MTFs to admit as members or participants other persons that are fit and proper, have sufficient trading ability and competence, adequate organizational arrangements, and sufficient resources.
- Nasdaq Stockholm admits unregulated members; the number currently is 16. All except two are remote members.
- MiFID II significantly limits RMs’ ability to admit members other than authorized investment firms and banks:
  - High-frequency algorithmic trading firms will require authorization as investment firms.
  - Direct electronic access to a regulated market can be provided only by members that are investment firms or banks.
  - These changes will require Nasdaq Nordic exchanges to change membership criteria.
- NMR contain harmonized membership requirements for all RMs operated by Nasdaq Nordic exchanges.
  - When a firm applies to become a member, it chooses the exchanges for which it is applying; application is reviewed centrally under coordination of Nasdaq Nordic Member Services, but each exchange makes its own formal decision.
- Nasdaq Nordic exchanges conduct reviews of members’ compliance with NMR:
  - Reviews include periodic monitoring of compliance with NMR membership criteria and ad hoc reviews focused recently on DMA and sponsored access requirements.
  - All unregulated members are subject to a review once a year.
  - A random set of regulated members is reviewed every year such that each regulated member is reviewed at least every five years.

### Trading surveillance
- Some trading surveillance activities are centralized.
- Nasdaq Stockholm’s trading surveillance is responsible for real-time market surveillance on all Nasdaq Nordic exchanges, with the exception of surveillance of commodity derivatives trading in Norway.
  - When Nasdaq Stockholm trading surveillance detects suspicious trading, it first scrutinizes it; suspicious cases are forwarded to the surveillance unit of the relevant exchange for investigation.
  - Each exchange is responsible for reporting suspected misconduct to its competent authority.
  - Nasdaq Stockholm must report suspected market abuse to FI.
  - In 2015, Nasdaq Stockholm referred 40 suspected insider trading cases and 30 suspected market manipulation cases to FI.
- Note: Each local exchange also performs real-time market surveillance for all Nordic markets on an ad hoc or rotating basis to maintain knowhow and business continuity.

### Dealing with disorderly trading conditions
- MiFID requires RMs and MTFs to ensure fair and orderly trading and efficient execution of orders, maintain sound technical systems, and have effective contingency arrangements for disruptions.
- RMs and MTFs must comply immediately with any instruction from the competent authority to suspend or remove a financial instrument from trading and be able to do it themselves if an instrument no longer complies with rules.
- NMR section on extraordinary measures gives exchanges the right to take measures when circumstances (market disturbances, communication interruptions, technical disruptions) affect trading operations, including:
  - Suspending and limiting trading operations.
  - Limiting the number of electronic connections per member.
  - Limiting the number or volume of trades or orders through electronic connections.
  - Closing one or more electronic connections.
  - Measures can be taken with respect to all trading, a particular market, market segment, instrument, DMA, sponsored access, algorithmic trading or a particular member.
  - Primary exchange may halt trading in an individual instrument due to insufficient or unequal public access to issuer information or other issuer-related reasons.
  - Volatility guards may automatically halt trading followed by an auction period before resuming continuous trading.
- Nasdaq Stockholm’s authority to suspend trading is set out in the SMA:
  - A trading suspension may be imposed when there is a clear risk that trading will not be carried out on equal terms or not based upon sufficient information.
  - Nasdaq Stockholm must immediately inform FI when trading has been suspended and provide the reason and is obliged to disclose the suspension.
- Information on trading suspensions is shared between Nasdaq Nordic exchanges and competent authorities:
  - NMR requires the primary exchange suspending trading to notify other Nasdaq Nordic exchanges where the instrument is admitted.
  - MiFID requires it to inform FI, which is obliged to inform other EEA countries’ relevant competent authorities.
  - ESMA and EEA national competent authorities share information on all suspensions through a system operated by ESMA (Suspension and Restoration Information System, SARIS).
  - Except where it could cause significant damage to investors’ interests or orderly market functioning, competent authorities receiving notification about a suspension decision by another authority must also suspend trading of that instrument in trading venues in their jurisdiction.

### Disciplinary activities
- Nasdaq Nordic exchanges have their own disciplinary rules and procedures, which operate independently.
- If Nasdaq Stockholm Surveillance suspects breaches of NMR or Nasdaq Stockholm’s rules, it reports to the disciplinary committee which decides on sanctions.
- Potential sanctions:
  - For members: reprimands, fines, temporary or permanent expulsion.
  - For brokers: warnings or temporary or permanent license withdrawal.
  - For issuers and parent companies: reprimands, fines, or delisting.
- The disciplinary committee is required to obtain a statement from FI before taking disciplinary actions against an issuer or market participant under FI’s direct supervision.
  - This requirement does not apply to non-Swedish issuers and members, though Nasdaq Stockholm may consult foreign supervisory authorities.
- For minor breaches, Nasdaq Stockholm may handle matters itself and issue a non-public reprimand.

*Source: cr17308 (excerpt).*

### Conclusions and Recommendations

### Conclusions and Recommendations

### Nasdaq Stockholm market surveillance role
- Nasdaq Stockholm currently performs issuer surveillance, member supervision, trading surveillance, and related disciplinary activities.
- Ongoing and planned changes affecting this role:
  - IFRS supervision may be transferred out of Nasdaq Stockholm.
  - The inability to have unregulated members after the transposition of MiFID II reduces Nasdaq Stockholm’s responsibility for member supervision.
  - Increasing fragmentation of trading will force Finansinspektionen (FI) to adopt a larger role in trading surveillance.
- Policy recommendation:
  - The Ministry of Finance (MoF) and FI should continue to assess the appropriate market surveillance role for Nasdaq Stockholm given changes in market structure and competition.
  - A prompt decision on the allocation of responsibility for IFRS supervision is important to reduce the risk of weakening the quality of supervision.

### IOSCO Principles and Standards on market surveillance
- Key obligations and capabilities expected of regulators under IOSCO:
  - Continuous monitoring of trading that triggers inquiry whenever unusual and potentially improper trading occurs.
  - An automated system that identifies unusual transactions on authorized exchanges and regulated trading systems.
  - Sufficient arrangements to monitor and/or address cross-market trading.
  - Sufficient cooperation and information sharing arrangements with relevant foreign regulators where there are foreign linkages, substantial foreign participation, or cross-listings.
  - Regular review and updating of surveillance capabilities, including systems, tools and surveillance staff skills, particularly with respect to technological changes.
  - Collective work and steps to strengthen cross-border surveillance capabilities.
- IOSCO references cited in source: Principle 36, Key Issues 2-4 and Key Questions 3-5; Principle 12, Key Question 2; and Technological Challenges to Effective Market Surveillance: Issues and Regulatory Tools.

### MiFID transaction reporting framework and implications
- MiFID obligations:
  - Investment firms and banks providing investment services that execute transactions in financial instruments admitted to trading on a regulated market (RM) must report transaction details to their competent authority at the latest by the close of the following working day.
  - The competent authority receiving transaction reports must submit them to ESMA so they can be forwarded to the competent authority of the most relevant market in terms of liquidity (as defined in the MiFID Implementing Regulation).
  - For shares and equity derivatives, the competent authority of the country where the (underlying) share was first admitted to trading would typically receive all transaction reports.
  - Example outcome: FI would receive all transaction reports for trading in Swedish listed companies’ shares and related equity derivatives, wherever in the EEA this trading takes place.
- Assessment of current capabilities:
  - The most significant obstacle to effective use of transaction reporting data is the lack of a sufficient analysis system.
  - FI’s current tools are described as relatively rudimentary.
  - FI informed the MoF in May 2016 of an additional budget need to acquire a new system.
  - Basic functionalities required of such a system include the ability to:
    - Recreate trading patterns.
    - Visualize the relationship between trading and price sensitive information.
    - Compile reports as a basis for further investigations.
- Policy recommendation:
  - It is recommended that sufficient budget be allocated to FI to enable it to acquire a suitable automated market surveillance and analysis system.
  - An automated system is required by the IOSCO Principles and is necessary to leverage EU transaction reporting requirements and MiFID II enhancements for identifying cross-market and cross-border abuses.

### Trading fragmentation and complementary surveillance
- Finding:
  - Trading in Swedish issuers’ shares is very fragmented.
  - It is necessary to complement the market surveillance conducted by Nasdaq Nordic with FI’s own surveillance.
- Rationale:
  - The current EU transaction reporting requirements and exchange of transaction reports between competent authorities, together with MiFID II enhancements, provide a good basis for identifying cross-market and cross-border abuses—contingent on adequate analysis systems.

### AIFM reporting and transparency (key elements and thresholds)
- Reporting frequency and thresholds:
  - AIFMs whose AIFs’ AUM exceed EUR 500 million but do not exceed EUR 1 billion report on a half-yearly basis.
  - AIFMs whose AIFs’ AUM exceed EUR 1 billion report on a quarterly basis.
  - An AIFM subject to the half-yearly reporting obligation still has to submit quarterly reports for each AIF whose AUM exceed EUR 500 million.
  - An AIFM has to submit only annual reports for each unleveraged AIF that invests only in unlisted companies and issuers in order to acquire control.
- Reporting content for authorized Swedish AIFMs and above-threshold non-EEA AIFMs (per AIF):
  - Main instruments, markets, exposures and concentrations (AIFMD Article 24(1)) — required where indicated.
  - Instruments traded, turnover, illiquid assets, risk profile, risk management, asset categories and stress tests (Article 24(2)) — required where indicated.
  - Overall level of leverage, leverage breakdown (borrowing and embedded leverage), reuse of assets, five largest borrowing sources on each AIF that employs leverage on a substantial basis (Article 24(4)) — required where indicated.
- Selected cross-border marketing approval and compliance requirements (summary of stipulated conditions):
  - FI approval under Swedish NPPR is required in various non-EEA and some EEA scenarios, subject to compliance with specified AIFMD Articles and AIFMA provisions.
  - Conditions commonly include compliance with AIFMD Articles 22-24 and, where relevant, Articles 26-30; cooperation arrangements for systemic risk oversight; anti-money laundering measures; and tax information exchange agreements complying with the OECD Model Tax Convention on Income and on Capital.
  - For non-EEA AIFs, a “depositary light” regime applies where the depositary only has to carry out cash flow monitoring, safekeeping and certain monitoring tasks.
- Definitions and clarifications provided in source:
  - A special fund equivalent requirements and definition elements (sole objective, risk-spreading, redemption rights, KIID provision).
  - Closed-ended AIF definition: an AIF with no redemption rights exercisable during at least five years from the initial investment and that generally invests in issuers or unlisted companies to acquire control.

*IMF Staff: Conclusions and Recommendations (cr17308 - Conclusions and Recommendations)*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17308.pdf_