Financial Services Quarterly Report - Asia

June 24, 2014

A review of recent developments in the international financial services industry, including:

  • Hong Kong’s Long-Awaited FATCA Announcement
  • Key Considerations When Launching a Fund on a Third-Party UCITS or AIFMD Compliant Platform
  • The Volcker Rule: Overview and Recent Developments Affecting Banking Entities, Funds and Securitization Vehicles
  • EMIR for AIFMs: Application to Offshore Funds with European Investment Managers 
  • Update on the EU’s Proposed Financial Transactions Tax
  • A Flexible Capital Raise: Shelf Registration Statements For Closed-End Funds

 

Hong Kong’s Long-Awaited FATCA Announcement

With deadlines looming, Hong Kong’s government announced on May 9th a much-anticipated agreement with the United States regarding the U.S. Foreign Account Tax Compliance Act. Without this intergovernmental agreement (IGA), some Hong Kong financial institutions faced an uncertain road to FATCA compliance. The announcement of the IGA, along with other temporary compliance relief from the U.S. Internal Revenue Service, eases some of FATCA’s most pressing tasks. But Hong Kong financial institutions still have work to do. This article discusses both the recent relief as well as the remaining deadlines.

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Key Considerations When Launching a Fund on a Third-Party UCITS or AIFMD Compliant Platform

The use of established third-party platforms has become increasingly popular for asset managers launching UCITS-compliant funds in recent years. The indicators are that this trend is likely to be even more pronounced among managers seeking to establish alternative funds in compliance with the AIFMD. This sector has grown massively in recent years as the cost and complications involved in a new launch have expanded – and as managers have sought to access new markets for distribution through the use of more complex on-shore regulated products, rather than the traditional offshore routes previously favoured. 

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The Volcker Rule: Overview and Recent Developments Affecting Banking Entities, Funds and Securitization Vehicles

Following years of incubation, in December 2013, five U.S. regulatory agencies approved a final rule implementing the so-called “Volcker Rule” enacted in the Dodd-Frank Act. At a basic level, the Volcker Rule is intended to limit risks to the financial system that Congress believes may be created by: (i) proprietary trading operations of insured depository institutions, foreign banking entities with certain U.S. operations, and the affiliates of the foregoing entities through a set of “proprietary trading restrictions;” and (ii) investments and certain relationships between banking entities and private equity and hedge funds through a set of “covered fund restrictions.”

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EMIR for AIFMs: Application to Offshore Funds with European Investment Managers

Investment funds registered in Europe have been directly subject to the European Markets Infrastructure Regulation, Europe’s regulatory reform of its derivative markets, since it came into force in 2013. From 22 July 2014, investment funds registered anywhere else in the world but whose manager is in Europe and authorised under the Alternative Investment Fund Managers Directive will also be subject to EMIR. The focus of investment managers in Europe for the past twelve months has been on preparing for AIFMD. Attention should also be given to EMIR.

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Update on the EU’s Proposed Financial Transactions Tax

The Court of Justice of the European Union recently issued a decision rejecting the UK government’s initial legal challenge against the proposed introduction in Europe of a financial transactions tax (FTT) – a tax to be levied at fixed low rates on certain transactions involving financial instruments such as shares, bonds and derivative contracts. The following week, 10 of the 11 EU Member States that have been supporting the FTT issued a joint declaration re-stating their determination to “finalize viable solutions” for the FTT by the end of 2014 and to commence the “progressive implementation” of the tax by 1 January 2016.

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A Flexible Capital Raise: Shelf Registration Statements For Closed-End Funds

Exchange-listed closed-end investment companies have historically faced challenges in raising additional capital after their initial public offering due to the structure of such funds and certain limitations imposed by the Investment Company Act of 1940. There are a greater number of options for raising capital available to closed-end funds that trade at a premium to their NAV. However, maintaining a trading premium is far from straightforward, and is often beyond the fund manager’s control. Closed-end fund managers must act strategically to take advantage of trading premiums when they occur. One option a closed-end fund can use to raise capital is a shelf registration statement.

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Living with the Volcker Rule

Five federal U.S. agencies approved final rules implementing the Volcker Rule (Regulations) on December 10, 2013. Banking entities have until July 21, 2015 to conform their activities and investments to the requirements of the Regulations. Dechert has established a web page to help clients respond to issues that the Volcker Rule will raise for current and future operations as well as the opportunities it may provide for other market participants.

 

AIFMD Resources: Cutting Through the Noise

Dechert has established a web page that provides tools for navigating the EU Alternative Investment Fund Managers Directive, including reference guides, legal updates and video briefings. The AIFMD is the most significant EU regulation of the alternative investment funds industry in recent times. The AIFMD will affect a wide range of asset managers, not just traditional hedge and private equity managers, whether they are based within or outside the EU.