Investment Funds Update: Europe - Issue 6, 2015
Dechert's investment funds update discusses the key legal and regulatory updates for the funds industry from the primary European asset management centres and fund domiciles.
Requirement for a Local Centralizing Agent in France
France recently amended its AIFMD regulations with respect to the requirement for AIFMD-authorized asset managers to appoint a local centralizing agent (correspondant centralisateur) in connection with marketing AIFs in France. In early June, the General Regulations of the Autorité des Marchés Financiers were amended to limit this requirement to the following situations:
- Marketing of EU AIFs to non-professional clients in France with a passport.
- Marketing of non-EU AIFs in France without a passport.
- Marketing of EU AIFs in France without a passport.
Effectively, this amendment removes the local centralizing agent requirement only for EU fund managers marketing EU AIFs in France to professional investors with a passport.
Publication of Several Professional Guides by the AFG
The Association Française de la Gestion Financière (AFG) published three professional guides on 30 June 2015. The guides detail good practices for management companies when entering into agreements with distributors. Two guides provide specific recommendations for distribution agreements entered into with (i) a Prestataire de Services d’Investissement or (ii) a Conseiller en Investissements Financiers. The third guide provides clarifications on the differences between the existing French intermediaries (agent lié, PSI, CIF, IAS…).
Performance of French Private Equity Funds at the end of 2014 According to the AFIC
The Association Française des Investisseurs pour la Croissance (AFIC) published its annual report on 25 June 2015. The report, prepared with EY, looks at the net performance of French private equity at end 2014.
Finance Ministry Proposes Changes to Banking Act (Kreditwesengesetz)
According to the draft bill, certain types of unsecured claims against "credit institutions", as defined by the European Union capital requirement regulation (so-called CRR institutions), are subordinated in the event the bank concerned becomes insolvent. With the "bailing-in" of certain categories of claims, the legislation would subordinate the claims of senior unsecured bondholders to other unsecured claims, including claims based on unsecured deposits, derivatives and certain structured bonds that have been combined with derivatives. The purpose of the proposed German legislation is to implement Regulation (EU) No. 806/2014 which provides that creditors shall be required to bear losses equivalent to 8% of a bank's liabilities before governmental rescue funds are made available.
German Federal Council Passes Retail Investors Protection Act
The German Federal Council approved the Retail Investors Protection Act on 12 June 2015 which will enter into force in the near future. The Act is designed to improve investor protection and the transparency of offerings on the unregulated market. The new legislation, which is subject to parliamentary approval, will, inter alia, expand the prospectus requirement for certain (unregulated) financial instruments, introduce marketing provisions for offerors and introduce a special regime for crowdfunding structures.
The German Finance Ministry has also published a FAQ on the new legislation (in German)
BaFin Postpones Annex IV Reporting Date for AIFs and AIFMs
In May 2015, BaFin again postponed the first reporting date for AIFMs and individual AIFs according to section 35 KAGB due to technical issues with the ESMA system. The first reporting date is now expected to be in August 2015. BaFin has also updated its reporting test system and is expected to update its Guidance Notice on section 35 KAGB.
New Law Passed to Implement Transparency Directive Amending Directive
The German Government proposed a draft bill on 29 April 2015 to implement Directive 2013/50/EU which amends the EU Transparency Directive. It includes, inter alia, amendments to the requirement to disclose voting rights arising from holdings of financial instruments that have a similar economic effect to holding the underlying shares.
German Investment Fund Statistics
The German Investment Fund Association, BVI, issued its latest investment statistics report in June 2015. The report is dated 30 April 2015 and gives an overview of the net assets and net sales within the German investment fund and asset management markets. The statistics are broken down by asset class and provider. They provide information on net assets and net inflows of investment funds and assets outside investment funds.
Central Bank Update Concerning Fund Management Company Boards
The Central Bank has published a document in relation to Fund Management Company Boards including a feedback statement on CP86 and a new consultation on delegate oversight Guidance as well as publication of new guidance regarding organisational effectiveness and directors time commitments.
Central Bank Issues Updated Q&A Concerning the Companies Act 2014
The Central Bank has issued an update in relation to the Companies Act 2014 confirming that it will not require UCITS management companies, alternative investment fund managers, AIF management companies, fund administrators, depositaries and investment firms which are companies to convert to Designated Activity Companies (‘DACS’) on the basis of its view that corporate structuring is a matter for each entity.
Revised UCITS Q&A Issued
The Central Bank published a fifth edition of the UCITS Q&A on 12 June 2015. The UCITS Q&A, which sets out answers to queries likely to arise in relation to UCITS in order to assist in limiting uncertainty, has been updated to address disclosure of past performance in KIIDs relating to the period prior to when an entity redomiciled to Ireland.
Updated AIF Rulebook Issued
The Central Bank published the latest version of the AIF Rulebook on 12 June 2015, which is the Central Bank’s rulebook in relation to AIFs and which contains chapters concerning Retail Investor AIF, Qualifying Investor AIF, AIF Management Companies, Fund Administrators, Alternative Investment Fund Managers and AIF Depositaries.
Updated Q&A for the AIF Rulebook Issued
The Central Bank published a thirteenth edition of the AIFMD Q&A on 12 June 2015, which sets out answers to queries likely to arise in relation to the implementation of the AIFMD and which is published in order to assist in limiting any uncertainty until definitive positions and practises are finalised. Existing responses have been revised and a new query addressed.
Suspension from Trading of Certain Financial Instruments Apropos Greece
Following a decision of the Hellenic Capital Market Commission (HCMC), the competent authority of Greece, to suspend the trading of certain securities and related financial instruments, the Commission de Surveillance du Secteur Financier (CSSF) has requested the suspension of the financial instruments issued by certain entities from trading on the regulated market of the Luxembourg Stock Exchange.
ALFI Response to EBA Consultation Paper Regarding the Limits on Exposures to Shadow Banking Entities
The Association of the Luxembourg fund industry (ALFI) responded to the European Banking Authority (EBA) consultation paper on draft guidelines on the limits on exposures to shadow banking entities.
ALFI 2020 Ambition Unveiled: Serving Investors and the Economy
In a recent press release, the Association of the Luxembourg Fund Industry (ALFI) unveiled its ambitions for the next four years. ALFI’s key objectives include (i) the promotion of practices that align the interests of investors and industry, (ii) the articulation of the essential role of investment funds for the global economy, (iii) connecting investors with worldwide market opportunities, (iv) ensuring Luxembourg remains the fund centre of choice for asset managers and (v) stimulating innovation, research, education and talent development.
CSSF Circular Regarding ESMA Guidelines on Application of Definitions: MiFID-Commodity Derivatives
CSSF circular 15/615 transposes the “Guidelines on the application of the definitions in Sections C6 and C7 of Annex I of Directive 2004/39/EC (MiFID) (ESMA/2015/675)”, published on 6 May 2015, into Luxembourg regulations. The guidelines relate to the application of the definitions of commodity derivatives and their classification under points 6 and 7 of Section C (Financial Instruments) of Annex I of MiFID, transposed into Luxembourg legislation by the law of 13 July 2007 on markets in financial instruments. The guidelines clarify the definitions of commodity derivatives and aim to ensure a common, uniform and consistent application of MiFID and Regulation (EU) No 648/2012 (EMIR), as well as other directives and regulations that rely on the MiFID definitions of financial instruments.
FCA and PRA Finalise New Remuneration Code for “Dual-Regulated” Firms
The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published a joint policy statement (FCA PS15/16 and PRA PS12/15) on 23 June 2015, with final remuneration rules for firms that are "dual-regulated" by the FCA and PRA – i.e., banks, building societies and certain investment firms which deal as principal and have been formally designated by the PRA as dual-regulated.
The new rules came into effect on 1 July and are set out in a new remuneration code in (SYSC 19D) in the FCA and PRA handbooks and include certain changes to deferral and clawback of variable remuneration (i.e. bonuses). The joint policy statement also included consequential changes to the other remuneration codes – i.e. SYSC 19A for IFPRU investment firms, SYSC 19B for Full-scope UK AIFMs and SYSC 19C for BIPRU firms – new proportionality guidance for dual-regulated firms under SYSC 19D. Because the remuneration requirements for dual-regulated firms and for IFPRU investment firms arise under the new Capital Requirements Directive (CRD IV) which came into effect on 1 January 2014, the remuneration code for dual-regulated firms in SYSC 19D imposes similar requirements to the remuneration code for IFPRU investment firms in SYSC 19A.
FCA Proposes Scrapping Certain New RDR Rules for Nominees
The FCA published a consultation paper on 22 June 2015, proposing to revoke certain new rules and guidance in its Conduct of Business sourcebook (COBS 14.4) that are scheduled to come into force at the end of 2015. The new rules were adopted in August 2011 as part of the FCA’s Retail Distribution Review (RDR) and would require certain nominee companies (called “intermediate unitholders” in the rules) to notify the underlying beneficial owners of units in FCA authorised funds when the fund manager issues certain fund information and voting rights. The proposals were intended to give consumers who invest in funds on an intermediated basis the same rights as those who invest in funds directly.
The proposal to revoke these new rules before implementation has arisen because of concerns about their implementation and because the FCA is planning the following two separate pieces of work that are likely to affect their rationale:
- A discussion paper on improving firms' communications with consumers (which is due to be published shortly).
- A market study on asset management (which will start later in 2015).
The FCA intends to reconsider the substance of the rules and guidance in COBS 14.4 in 2016 in the light of feedback from the discussion paper, a consultation on removing specific disclosures, and any issues emerging from the market study.
Responses to the consultation are requested by 17 July 2015.
FCA Responds to European Commission Capital Markets Union (CMU) Green Paper
On 27 May 2015, the FCA published its response to the European Commission's February 2015 green paper on building a capital markets union (CMU).
The FCA’s response set out a number of overarching perspectives that the FCA considers critical to enable the development of CMU to be as effective as possible. These are:
- Greater supply of investor finance will require appropriate investor protection. The FCA believes there is no trade-off between measures to promote market access and investor protection; rather, they go hand in hand.
- Focus on effective implementation of existing and already planned legislation. There is already a substantial body of legislation promoting a single capital market in Europe, and so the main building blocks are already in place.
- More consistent supervision within the current framework could bring significant benefits. The functioning of integrated capital markets requires consistent application and supervision of the single rulebook across member states.
- Legislate only where necessary and embed the better regulation agenda. The EU better regulation approach should underpin the completion of the existing legislative programme and new initiatives.
- Embrace the opportunities of new technology and potential gains from effective competition. Actions to facilitate digitalisation to respond to investor preferences and give investors greater control over their investments should be encouraged. However, digitalisation also provides challenges, particularly around security, data protection, investor protection and maintaining fair competition, which need to be addressed.
- European markets need to be embedded in a globally competitive landscape. The FCA believes that steps to attract capital should not be limited to the EU. Action should be taken to ensure that the EU is an internationally competitive and attractive place to invest. The Commission should therefore ensure that EU legislation as far as possible is aligned with wider global standards.
The FCA also set out priorities for action that it believes should be important elements of the CMU action plan. These relate to enhancing the supply of investor finance and demand for capital.
UK Wholesale Financial Markets - Final Report Published
The Fair and Effective Markets Review (FEMR) was established by the UK Chancellor of the Exchequer in June 2014 to conduct a comprehensive and forward-looking assessment of the way wholesale financial markets operate, help to restore trust in those markets in the wake of a number of recent high profile abuses, and influence the international debate on trading practices.
On 10 June 2015, the FEMR published its Final Report, setting out 21 recommendations to:
- Raise standards, professionalism and accountability of individuals
- Improve the quality, clarity and market-wide understanding of Fixed Income, Currency and Commodities (FICC) trading practices.
- Strengthen regulation of FICC markets in the United Kingdom.
- Launch international action to raise standards in global FICC markets.
- Promote fairer FICC market structures while also enhancing effectiveness.
- Promote forward-looking conduct risk identification and mitigation.
The FEMR’s Chairs will provide a full implementation report to the Chancellor of the Exchequer and the Governor of the Bank of England by June 2016.
EUROPEAN UNION LEGAL DEVELOPMENTS
AIFMD – AIMA and EFAMA Comment on EBA Consultation on Draft Guidelines on Remuneration Policies for AIFMs
AIFMD – AIMA and EFAMA Comment on EBA Consultation on Draft Guidelines on Remuneration Policies for AIFMs
Capital Markets Union – Further Progress and EU Commission’s Response
Jonathan Hill, EU Commissioner for Financial Services, Financial Stability and Capital Markets Union gave a speech on 8 June 2015 on the next steps to build the Capital Markets Union. Hill emphasised that the Capital Markets Union should increase access to finance for SMEs, create greater opportunities for retail investors and dismantle obstacles to cross-border investment.
The European Commission published all responses received to its earlier consultation on Building a Capital Markets Union on 10 June 2015.
EMIR - New Authorised Trade Repository and Second Consultation on Margin Requirements for Non-Centrally Cleared Derivatives
ESMA published an updated list on 3 June 2015 of authorised trade repositories which are authorised under EMIR. This latest update includes ICE Trade Vault Europe Ltd. which has extended its services to forex derivatives.
The EBA, EIPOPA and ESMA launched a second consultation on 10 June 2015 on draft Regulatory Technical Standards (“RTS”) on risk-mitigation techniques for OTC-derivative contracts not cleared by a central clearing counterparty (“CCP”).
For those over-the-counter (OTC) derivative transactions that will not be subject to central clearing, these draft RTS prescribe the regulatory amount of initial and variation margin that counterparties should exchange as well as the methodologies for their calculation. In addition, these draft RTS outline the criteria for the eligible collateral and establish the criteria to ensure that such collateral is sufficiently diversified and not subject to wrong-way risk.
Furthermore, following the amendments of the standards issued by the Basel Committee on Banking Supervision (BCBS) and IOSCO in March 2015, these RTS include a revised phase-in for initial margin requirements and a new phase-in for variation margin.
- Second Consultation Paper published by the EBA, EIPOPA and ESMA
- Press release: "Second Joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP" (10 June 2015)
The consultation runs until 10 July 2015.
MiFID II – Ross Comments on Transparency Regime for Derivatives, Maijoor Emphasises Non-Equity Transparency
ESMA published a speech on 9 June 2015, by Verena Ross, ESMA Executive Director, on ESMA's work relating to EMIR and MiFID II.
On MiFID II, Ms. Ross explained that ESMA is still at the rule-making stage. She also comments on:
- The transparency regime for derivatives under MiFID II. Ms Ross highlights ESMA's four main focus points while finalising its regulatory technical standards (RTS) in this area and explains that feedback from ESMA's consultations has triggered "significant changes" to the draft RTS.
- Position limits for commodity derivatives under MiFID II, which is recognised as one of the most controversial areas of MiFID II.
- The trading obligation for derivatives under MiFID II, and the "problematic" timetable envisaged in MiFIR.
Steven Maijoor delivered opening remarks to the Economic and Monetary Affairs Committee of the European Parliament hearing on MiFID II on 16 June 2015, emphasising the need for transparency in non-equity markets and MiFID II’s proposals relating to the same.