Investment Funds Update: Europe - Issue 8, 2016

October 17, 2016

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.



AMF Communication – Brexit – Launch of the AGILITY program

Pursuant to the Brexit, the Autorité des Marchés Financiers (the French Financial Markets Authority, the “AMF”) launched a dedicated program called “AGILITY” for management firms and FinTech companies based in the United Kingdom on 28 September 2016. The goal of this program is to welcome British firms wishing to act in France. It is composed of three main elements: 

  • The “2WeekTicket” which permits to receive a pre-authorization from the AMF in two weeks after a facilitated formalities. 
  • The access to English-speaking “coaches”. 
  • The coordinated access to a single contact point at the AMF and ACPR for concerned innovative companies.

The AMF and the Autorité de Contrôle Prudentiel et de Résolution (which is the regulatory authority for banking and insurance companies) also undertook to facilitate the licensing of British-based institutions wishing to locate their business in France.

Read the AMF press release on AGILITY. 

Read the AMF press release on AMF and ACPR initiative. 

AMF Consultation – Consultation on funding of research

The AMF launched a public consultation on 12 September 2016, regarding the implementation of the MiFID II provisions relating to the payment of research costs. Within the framework of this consultation, the AMF gives its reading on MiFID II principles on this issue. The main issues are (i) to determine who is liable for such costs (i.e., either the client or the investment firm) and (ii) to define precisely the services covered by the term “research”.

Read the AMF consultation. 

AMF Study – Efficiency of cross-border distribution of funds in Europe

The AMF published a study on 19 September 2016 on the efficiency of the European passports for distributions of funds in Europe. This study has been conducted within the framework of the public consultation published by the European Commission. In this study, the AMF has identified several entry barriers related to the cross-border distribution in Europe (both for UCITS and AIFs) and provides several proposals to resolve such barriers to improve European competition. 

Read the AMF study. 

Update of the AMF General Regulations

An Arrêté was published on 14 September 2016 to enact an update of the AMF General Regulations (Règlement Général de l’Autorité des Marchés Financiers) related to the implementation under French law of EU Regulations 596/2014 dated 16 April 204 regarding market abuse.

Read the Arrêté.



Exception from the License Requirement for Investment Intermediaries in the Future Only in Case of a First Public Offer of Investment Assets (Vermögensanlagen)

As of 31 December 2016, investment advisors and intermediaries, which exclusively provide investment advice and investment intermediation with regard to certain financial instruments (Vermögensanlagen) in the meaning of section 1 (2) of the Asset Investment Act (Vermögensanlagegesetz) (e.g., shareholder loans, subordinated loans, profit participation rights, registered bonds) are only exempt from the license requirement pursuant to section 32 of the German Banking Act (Gesetz über Kreditwesen) in case of the initial public offering. Especially intermediaries and secondary market platforms, which provide their services in the secondary market are affected by this modification. The legal basis for this modification is the First Act Amending Financial Market Regulations (Erstes Finanzmarktnovellierungsgesetz) which changed the exception for intermediaries and issuers of investment assets pursuant to section 2 (6) sentence 1 number 8 lit. e of the German Banking Act. The BaFin guidance on this subject has also been updated accordingly.

Read the updated guidance here (in German). 

BaFin Updates FAQ on the Investment of Own Funds of German Fund Management Companies According to Section 25 (7) KAGB

The German Financial Supervisory Authority BaFin updated its FAQ on 31 August 2016, on the requirements of the investments of own funds by German Fund Management Companies. Section 25 (7) of the German Investment Code (Kapitalanlagegesetzbuch - KAGB), implementing Art. 9 (8) AFMD, provides that own funds shall be held in liquid assets or assets readily convertible to cash in the short term and shall not include speculative positions. BaFin has now clarified that “speculative positions” include shares or units in funds that use leverage on a substantial basis in the meaning of section 283 KAGB (Art. 111 Level 2 Regulation) which is why an investment in hedge funds is not deemed compliant with section 25 (7) KAGB. BaFin furthermore states that not only investments in hedge funds are deemed speculative positions but also any investment in an investment fund whose exposure calculated in accordance with the gross method exceeds its NAV by two times are speculative positions and therefore not in compliance with the KAGB.

Read the updated FAQ here (in German). 

Federal Ministry of Finance Consults Draft Second Act Amending Financial Market Regulations (Zweites Finanzmarktnovellierungsgesetz)

The Second Act Amending Financial Market Regulations (Zweites Finanzmarktnovellierungsgesetz - 2. FiMaNoG) will primarily change the Securities Trading Act (Wertpapierhandelsgesetz) and will, inter alia, implement MiFID II and MiFIR in Germany. For German MiFID regulated entities and German Fund Management Companies providing MiFID regulated investment services in Germany (i.e., individual portfolio management, investment advice, management of accounts, intermediation of investments in financial instruments), the 2. FiMaNoG will, inter alia, cover the following MiFID II requirements: general rules of conduct for investment services including investment advice and portfolio management and provisions regarding the disclosure of costs, inducements and research and recording obligations when handling client orders. Furthermore, the draft bill is making use of the possibility provided in the MiFID II Level 2 Directive to expand the presumptive examples for inducements: according to the draft bill, inducements enhance the quality of the service to the client if the access to investment advice services is facilitated and ensured in particular in rural regions, for example through the establishment of local branches.

Latest Investment Fund Statistics for Germany 

The German Investment Fund Association BVI has issued its latest investment statistics report dated July 2016, giving 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 Issues "Dear Chairman" Letter Regarding Directors' Time Commitments for Each Sub Fund

The Central Bank of Ireland issued a “Dear Chairman” letter on 8 September 2016, concerning its review of the number of directorships held by Individuals within the Investment Funds Industry. The Central Bank found that the amount of time allocated by directors annually to sub-funds varied significantly from 2 hours to 11 hours per sub-fund.

Central Bank Releases 14th UCITS Q&A

The Central Bank has released its latest update to the UCITS Q&A. The fourteenth update contains updates mainly concerning account submissions and umbrella cash accounts. In respect of umbrella cash accounts, the central bank confirmed that:

  • Its guidance in respect of umbrella cash accounts did not apply to cash accounts established at the sub-fund level of an umbrella fund.
  • It is possible to establish more than one umbrella cash account at the level of the umbrella fund.
  • An umbrella cash account cannot be opened for more than one umbrella fund.

Central Bank: Organisational Update

Governor of the Central Bank, Philip Lane, has proposed to split the Central Bank’s key markets supervision division into two units as it deals with a surge of enquiries from London-based investment funds and firms following the Brexit referendum.

The proposed change includes the establishment of two new directorates to replace the current Markets Supervision Directorate; an Asset Management Supervision Directorate (AMSD) and a Securities and Markets Directorate (SMD). Recruitment for the head of each division has commenced.

This will be the Governor’s first major organisational overhaul since he took over the helm of the Central Bank last November. Staff were told about the restructure late last week.

Central Bank Issues Cross Industry Guidance in Respect of Information Technology and Cybersecurity Risks

The Central Bank issued a guidance paper on 13 September 2016, setting out the Central Bank’s guidance in relation to information technology and cybersecurity governance and risk management by regulated firms in Ireland.

The risks associated with IT and cybersecurity are a key concern for the Central Bank given their potential to have serious implications for prudential soundness, consumer protection, financial stability and the reputation of the Irish financial system. Accordingly, the Central Bank expects that the Boards and Senior Management of regulated firms fully recognise their responsibilities in relation to IT and cybersecurity governance and risk management and place these among their top priorities.



CSSF Newsletter – August 2016

The CSSF published its September 2016 newsletter (number 188), which provides updates in relation to recent national regulation and statistics.

The newsletter is available on the CSSF website (in French).

CSSF Press Release - 14 September 2016

The CSSF assesses the profit (before provisions) of the Luxembourg banking sector at EUR 3,040 million for the first half of 2016, an increase of 1.5% compared to last year’s results.

This communiqué is available on the CSSF website.

ALFI's 2015 - 2016 Annual Report

ALFI published its 2015-2016 annual report. This is currently available only in French. 

ALFI Supports MEPs’ Calls for Postponement of PRIIPs Regulation

ALFI’s press release dated 16 September 2016 is currently available in French.  

Luxembourg VAT authorities: Circular on VAT Treatment of Director Services

The Luxembourg VAT authorities published Circular n° 781 on 30 September 2016 regarding the VAT treatment of director services and a comprehensive list of “frequently asked questions”. The Circular confirms that director services constitute an economic activity, leading to the status of taxable person for VAT purposes.

Read the circular and questions here (in French). 



FCA Publishes Third MiFID II Consultation Paper

The FCA published its third consultation paper on 29 September 2016, on the implementation of the Markets in Financial Instruments Directive (MiFID II).

The consultation paper is in two parts. Part 1 deals with conduct of business issues and Part II covers a range of issues not covered in the two earlier consultations, including product governance and additional perimeter guidance.

Its key proposals include:

  • New inducements rules, including the ban on research as an inducement where received by portfolio managers and independent advisers. The FCA will replace the current rules on the use of dealing commission in COBS 11.6 with a new section in COBS 2. Significantly, the proposed rules would apply to firms carrying out collective portfolio management, including UCITS management companies and AIFMs, which are currently outside the scope of MiFID II but which are currently subject to the COBS rules on dealing commission. The new rules on research payment accounts (brought in under the MiFID II implementing directives as an alternative to commission sharing arrangements which are banned under MiFID II) will continue the FCA’s ban on corporate access payments found in the current dealing commission rules.
  • Implementing requirements of full disclosure of costs and charges, including information about the firm and the products it sells, and the provision of periodic reports to clients.
  • New rules for product governance for firms carrying on MiFID business and guidance for non-MiFID firms manufacturing or distributing MiFID financial instruments.
  • Extending the requirement of telephone taping to a wider range of firms than is required by MiFID II. The requirement to record calls is proposed to be extended to discretionary investment managers, corporate finance business, UCITS management companies and AIFMs and financial advice firms that are exempt from MiFID. The aim is to provide benefits to both firms and their clients in resolving disputes in a quick and cost effective manner. The FCA is open to receiving and exploring suggestions on alternative proposals for smaller financial advisers.
  • New perimeter guidance is proposed on the scope of MiFID II. Guidance is to be provided on the application of the new rules to foreign exchange derivatives and commodity derivatives, among others. Guidance will also be provided on exemptions from MiFID II for professional firms and firms trading in commodity derivatives.

The consultation is open until 4 January 2017, except for comments on Chapter 16 - Supervision manual, authorisation and approved persons - which should reach the FCA by 31 October 2016.

A fourth MiFID II consultation paper is expected towards the end of this year.

Read the third consultation paper in full. 

HM Treasury Consults on Amendments to the Definition of Investment Advice

HM Treasury published a consultation paper on 20 September 2016 on amending the definition of investment advice in the Financial Services and Markets Act 2000 (Regulated Activities) Order (SI 2001/544) (RAO).

One of the recommendations made in the final report of last year’s Financial Advice Market Review (FAMR), published in March this year, was that the government should consult on amending the definition of regulated investment advice in the RAO, to bring it in line with the definition set out in the Markets in Financial Instruments Directive (2004/39/EC) (MiFID).

The amendment would mean that only advice that makes a personal recommendation is regulated. Amending the definition is intended to remove uncertainty and to help firms better understand the regulatory requirements.

The consultation will end on 15 November 2016.

The FCA also intends to produce new guidance to support firms offering services that help consumers to make their own investment decisions without a personal recommendation. This will include a series of case studies highlighting the main considerations firms need to take into account when developing such services and dealing with specific areas of uncertainty identified during the FAMR. The guidance will set out the FCA's view on what providers of guidance services need to do to treat customers fairly. It is intended to complement the change to the definition of advice.

Read the consultation paper in full. 

FCA Publishes Occasional Paper on Dark Pool Reference Prices

The FCA published occasional paper 21 on 15 September 2016, on asymmetries in dark pool reference prices.

A dark pool is a trading venue with no pre-trade transparency, where all orders are hidden. In "lit" venues, market participants can observe the orders submitted by other participants.

The paper sets out the results of a study analysing two important aspects of reference prices in dark pools. The first aspect is the prevalence of trades at stale reference prices, their costs and their impact on different market participants. The second aspect is the choice of reference price. In particular, the extent to which participants are implementing best execution practices when a dark pool references a worse price than the lit market, and whether this is influenced by conflicts of interest within dark pools and participation sophistication.

Overall, the study found asymmetric outcomes across participants when the reference price is "stale", and when it is inferior to other available prices. This may result from participants' differing abilities to observe and manage latency, and differing abilities to engage in effective smart order routing in a fragmented market. These costs are more substantially borne by types of participant that are less capable of managing them. However, it is likely that these outcomes are the result of individual participant decisions on the basis of their own analysis of costs and benefits of investment in reduction in latency. Also, while the effects are highly statistically significant across participant types, the economic impacts are small.

As a consequence, the study concludes that dark pools may still offer a valuable service to market participants. In most cases they provide price improvement, and in all cases they allow investors not to show their hand to the market. However, evidence was found that suggests dark pools sometimes experience significant delays in accessing data from other venues, and it is only the most sophisticated participants that systematically benefit from these delays.

The paper has been prepared by FCA economists and academics.

Read the paper in full



AIFMD – Updated ESMA Advice and New Q&A on the Application of AIFMD

ESMA updated its advice to the European Parliament, the Council and the Commission on 12 September 2016, on the application of the AIFMD passport to non-EU AIFMs and AIFs, specifically in relation to the position of the Isle of Man.

Read the article in full. 

ESMA updated its Q&As on the application of the AIFMD on 6 October 2016. 

The new Q&As address one new question and answer on the commencement of periodical reporting pursuant to Article 13 of the Securities Financing Transactions Regulation for AIFMs. 

Read the new Q&As in full.  

Read the press release relating to the updated Q&As. 

EMIR – Revised List of CCPs and New Rules to Mitigate Risks in Non-Cleared OTC Derivative Transactions

ESMA updated its list on 29 September 2016 of third-country central counterparties recognised to offer services and activities in the EU.

View the updated list in full. 

Read the press release relating to the updated list.  

The European Commission issued a new delegated regulation on 4 October 2016 setting out new rules to mitigate risks in non-cleared OTC derivative transactions.

The regulation and annexes are available here:

Read the regulation.  

Read the annexes to the regulation. 

Read the relevant press release.

MiFID II – ESMA Guidance on Transaction Reporting, Order Record Keeping and Clock Synchronisation

ESMA released “Level 3” guidelines on 10 October 2016, on transaction reporting, order record keeping and clock synchronisation under MiFID II and its associated report.

These Guidelines include:

  • General principles to apply to transaction reporting and order record keeping.
  • General principles to apply to transaction reporting and order record keeping.
  • Reporting specific financial instruments: most examples are focused on derivatives given that these financial instruments have a more complex reporting pattern.
  • Clock synchronisation clarifications: the Guidelines provide further guidance on specific legislative provisions, e.g. the concepts of “reportable events” and “gateway-to-gateway latency”. 

Read the guidelines in full.

Read the relevant press release.



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