Investment Funds Update: Europe - Issue 6, 2016

July 06, 2016

Legal and regulatory updates for the funds industry from the key asset management centres and primary European fund domiciles.



AMF Doctrine – Direct Lending by French Funds

The Autorité des Marchés Financiers (the French financial markets regulator, the “AMF”) has published on 27 June 2016 an Instruction n° 2016-02. This instruction is published within the new regulatory framework in France pursuant to which certain French AIFs and ELTIFs can now grant loans directly (it should be noted that, as of today, only ELTIF can grant loans directly. Other forms of French AIFs will be authorized to do so upon publication of a decree which should occur in the coming weeks). The Instruction provides information regarding the regulatory requirements for management companies which manage such AIFs. As a result, it details the procedure to be followed with the AMF and the Banque de France (with respect to reporting requirements).

AMF Doctrine – TRACFIN requirements

The AMF updated its Position-Recommandation n° 2010-23 on the reporting obligation to TRACFIN in the context of recent legal and regulatory updates (including the update of the AMF General Regulations with respect of the implementation of the AIFMD, the French Banking Law on the separation and regulation of banking activities and the authorization under French law of crowdfunding). The update relates mainly to the reporting process to TRACFIN.

MiFID 2 Implementation

The Directive 2014/65/UE dated 15 May 2014 (“MiFID 2”) was recently implemented under French law by an Ordinance n° 2016-827 dated 23 June 2016. Among others, the Ordinance amends the French Monetary and Financial Code with respect to the new provisions applicable with respect to the information obligations regarding remunerations for financial services providers and the new legal framework on the good practices rules. The provisions of MiFID 2 will be applicable as of 3 January 2018.

Read Ordinance n°2016-827 dated 23 June 2016 (in French). 

Read the AMF Guide on the Implementation of MiFID 2 (in French).

PRIIPs - Update of the AMF General Regulations

The AMF General Regulations have been updated in the context of EU Regulations n° 1286/2014 dated 26 November 2014 pursuant to which a key information document for packaged retail and insurance-based investment products (PRIIPs) shall be prepared for all financial product marketed to retail investors. The Regulations will be applicable as from 1 January 2017, it being provided that UCITS and AIFs publishing a KIID compliant with the UCITS V Directive benefit from a delay until 31 December 2019. Certain categories of French AIFs couldn’t draft KIIDs and would therefore had been subject to the Regulations as of next year. As a result, an Arrêté dated 20 June 2016 update the AMF General Regulations in order to authorize certain AIFs (i.e., including, among others, specialised professional funds (fonds professionnels spécialisés), professional private equity funds (fonds professionnels de capital investissement) and real estate funds (organisms de placement collectif immobilier) to publish a KIID compliant with the UCITS V Directive, which allows such funds to benefit from the delay under the Regulations.

Read the Arrêté (in French). 



General Administrative Act to Ensure Legal Certainty for Netting Agreements in the Scope of German Insolvency Law

As of June 9th 2016 BaFin issued a General Administrative Act to ensure legal certainty for netting agreements in regard of German insolvency law. BaFin is reacting to a Court ruling on that same day (9 June 2016) of the Federal Court of Justice (Bundesgerichtshof – BGH).

The decision of the BGH ruled that German law governed settlement arrangements in option transactions which are in contradiction to the German Insolvency Code (Insolvenzordnung) are invalid.

Contractual netting agreements underlying the matter ruled on by the BGH are used in numerous master agreements. They are model clauses which are not only used in the German master agreement ruled on by the BGH but in the same or a slightly altered form in numerous other model agreements as well. These model clauses are intended for model master agreements such as those issued by the International Swaps and Derivatives Association (ISDA). BaFin as well as market participants assume that this type of contractual clauses are used in a very high number of contracts which are subject to the InsO in the case of insolvency.

Given that the consequences of the BGH's decision cannot yet be conclusively estimated and that this raises many open questions regarding the application of European legal provisions which could lead to significant uncertainty for financial market participants and thus to a loss of confidence in the proper functioning of financial markets, BaFin in consultation with the Deutsche Bundesbank therefore has decided to issue a preliminary General Administrative Act in order to prevent such an undesirable development.

BaFin takes the view that a possible invalidity of contractual netting agreements might contravene amongst others with Article 7(1) of Directive 2002/47/EC ("Financial Collateral Arrangements Directive"). Pursuant to this, the Federal Republic of Germany would be obliged to ensure that a close-out netting provision based on a contractual agreement can take effect in accordance with its terms notwithstanding the commencement of insolvency proceedings in respect of a counterparty. The Financial Collateral Arrangements Directive was transposed into German law by the German Act Transposing Directive 2002/47/EC of 6 June 2002 on Financial Collateral Arrangements and Amending the Mortgage Bank Act and other Acts of 5 April 2004.

In order to combat uncertainty arising BGH’s ruling, BaFin has issued a General Administrative Act with the ordinance that netting under the existing master agreements which fall under the scope of this administrative act must be carried out in accordance with the wording of the contractual agreements until further notice.

Read the General Administrative Act by BaFin.

BaFin Suspicious Transaction Order Reporting

The requirement to report suspicious orders and transactions to the competent authorities as set out in Art. 16 of the European Market Abuse Regulation (EU) No. 596/2014 becomes effective on 3 July 2016 and replaces the respective national notification obligations pursuant to Sec. 10 of 9 June of the German Securities Act (Wertpapierhandelsgesetzbuch –WpHG).

As of 9 June, 2016 BaFin expects that the future notifications (so called "Suspicious Transaction and Order Reports", - STORs) shall be provided electronically. For this reason BaFin facilitates a new electronic reporting channel within the already existing MVP-Portal. During a workshop in Frankfurt BaFin answered several questions in regard of access to the MVP-Portal and how to register for STORs.

View the presentation from the BaFin STOR Workshop 2016 (in German). 

Latest Investment Fund Statistics for Germany

The German Investment Fund Association BVI issued its latest investment statistics report in June 2016. The report provides 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 Statement on Brexit

The Central Bank of Ireland issued a statement regarding the results of the UK’s referendum on membership of the European Union on June 24th.

Central Bank Publishes Amended UCITS Regulations

The Central Bank published the first set of amending Central Bank UCITS Regulations on 22 June 2016 - the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1))(Undertakings for Collective Investment in Transferable Securities)(Amendment) Regulations 2016 which were signed on 8 June 2016.

CP86 Update

The Central Bank of Ireland has been “engaged in an initiative to examine and improve fund management company effectiveness since early 2014 (known as “CP86”)”.

The third phase of the initiative has just been published in the form of a Consultation Paper on “Fund Management Company Effectiveness – Managerial Functions, Operational Issues and Procedural Matters”.

Central Bank Issues Revised Market Abuse Rules and Guidance

The new Market Abuse Regime, which consists of the Market Abuse Regulation (EU 596/2014 - ‘MAR’) and the Market Abuse Directive on criminal sanctions for market abuse (Directive 2014/57/EU or 'CSMAD' or ‘MAD II’) became applicable in Ireland and across the European Union on 3 July 2016.

In Ireland, the European Union (Market Abuse) Regulations 2016 (2016 Regulations) is the Irish statutory instrument transposing CSMAD (and elements of MAR including the delegated acts) into Irish law. It replaces the previous Market Abuse (Directive 2003/6/EC) Regulations 2005 (S.I. 342 of 2005).

The Central Bank of Ireland has issued revised Market Abuse Rules (the “Rules”) and Guidance on the "Market Abuse Regulatory Framework" (the “Guidance”), effective July 3 to reflect the implementation of the new Market Abuse Regime.

The Rules and Guidance are available here.

Anti-Money Laundering Update

Following the publication of the Central Bank Report on Anti-Money Laundering/Countering the Financing of Terrorism and Financial Sanctions Compliance in the Irish Funds Sector in November 2015, the Irish Funds AML/CTF working group is in the process of preparing a Q&A update with respect to the requirements to keep customer due diligence documentation up-to-date. Further guidance on this is expected.

In addition, the Central Bank is engaging with industry as part of a data gathering exercise referred to as the CBI Redemption and Investor Concentration Survey”. Irish Funds has written to the CBI expressing industry concerns with the collation of this level of data and is seeking an additional time of 4 weeks, until the end of July, to comply with the data gathering request.

Investor Money Regulations Update

The Investor Money Regulations (IMR) became effective on 1 July 2016.

The Irish Funds IMR Working Group is in the process of finalising an IMR Q&A document due to be released shortly.




The Commission de Surveillance du Secteur Financier (CSSF) issued an updated version (number 10) of the Frequently Asked Questions in relation to the law of 12 July 2013 on Alternative Investment Fund Managers (AIFM Law) on 9 June 2016. The updated FAQ contains a new section (Nr. 22) on loan origination.

Read version number 10 of the FAQ relating to the AIFM Law. 

Risk Management - A Key Component of Asset Managers’ Governance Framework

The seventh annual Association of the Luxembourg Fund Industry (ALFI) and Luxembourg Association for Risk Management (ALRiM) European Risk Management Conference, which took place on 26 May 2016, highlighted the fact that risk management is a key component of the governance framework for asset managers. The conference also emphasized that Luxembourg remains a center of excellence in risk management.

CSSF Issues Press Release on the Global Situation of UCIs and SIFs

CSSF press release 16/26 of 3 June 2016 summarizes the global situation of Undertakings for Collective Investment and Specialised Investment Funds at the end of April 2016 and contains an indication of the number of net assets of Undertakings for Collective Investment in accordance with, respectively, part I and II of the 2010 Law and the 2007 Law.

Read the CSSF press release (in French).

CSSF Newsletters – May and June 2016

The CSSF published its May 2016 newsletter (number 184) and its June 2016 newsletter (number 185), which provide updates in relation to recent national regulation and statistics.

Read the CSSF newsletters number 184 and number 185 (in French). 



Brexit: UK Votes to Leave EU

The 23 June 2016 referendum on the UK’s continued membership of the EU resulted in a vote to leave the EU.

Under the EU Treaty, the exit process should take at least two years. During this two-year period, UK-based asset management entities, including UK subsidiaries of US and other overseas firms, will continue to take advantage of current EU rights but will need to adapt their businesses to the new reality.

In the absence of any special arrangements agreed in the final terms of separation, this will include:

  • UK-domiciled Undertakings for Collective Investment in Transferable Securities (UCITS) funds and alternative investment funds (AIFs) would lose their EU marketing passports. UK UCITS funds would become AIFs. If EU marketing is required, UK funds could either be marketed under the Alternative Investment Fund Managers Directive (AIFMD) national private placement regimes (where these are permitted) or they could be re-domiciled to an EU member state. Extending the AIFMD third country passport to the UK would mean UK AIFs could continue to be marketed into the EU without substantial change, and UK UCITS funds could be marketed to professional investors in the EU as AIFs. Existing and new Irish, Luxembourg and other EU-based UCITS and AIFs will, subject to the following, continue largely as before and the two-year period will allow plenty of time to add new ones where required. Dechert is uniquely positioned to help here with our Luxembourg and Irish on-the-ground fund teams.
  • UK-based UCITS management companies and AIFMs of EU funds established outside the UK would lose their EU management passports. To preserve these, funds will need to become self-managed or appoint a (non-UK) EU UCITS management company or AIFM. If the AIFMD third country passport is extended to the UK, UK AIFMs will be able to continue as before without substantial change.
  • UK-based distributors would lose their EU passports to provide cross-border marketing services. To continue marketing into the EU, distributors would need to comply with local third country exemptions. Alternatively, a new distribution entity could be established in an EU member state. However, if the UK is designated as equivalent under the Markets in Financial Instruments Directive (MiFID II) (and the UK should implement MiFID II itself before the end of the two-year exit period), MiFID II’s new third country regime should permit UK distributors to continue to market to professional clients throughout the EU, which may avoid substantial change to their current business.
  • UK-based portfolio managers of separately managed accounts would be in a similar position to UK-based distributors. To continue managing EU accounts, they would need to comply with local third country exemptions, but some investors are prohibited from contracting with third country managers. Alternatively, a new portfolio management entity could be established in an EU member state. However, if the UK is designated as equivalent under MiFID II as can be expected, UK portfolio managers would be able to continue to manage the assets of EU professional clients without substantial change.
  • EU UCITS funds and EU AIFs would lose their rights under EU directives to be marketed in the UK. However, the UK is likely to continue to permit these funds to be marketed in the UK broadly as they are now, especially where they have a UK investment manager.

For further information please refer to the Dechert update: "Brexit: What Does it Mean for Asset Managers?

Visit Dechert's dedicated Brexit resource centre.

Questions about how Brexit might impact you? Call Dechert’s hotline: +44 20 7184 7575.

FCA Consults on a New Wind-Down Planning Guide

The FCA published a consultation (GC 16/5) on 23 May 2016 on a proposed new FCA guidance release: the Wind-Down Planning Guide (WDPG).

The FCA explained that firms and their professional advisors have asked for clarification on what wind-down planning should cover. The FCA has discussed this with individual firms as part of its supervisory response to identified concerns. In May 2015, the FCA provided feedback to the wider industry as part of its prudential forum. The FCA now believes that a non-binding approach document would benefit firms and their advisors, and lead to better outcomes.

The FCA believes that an effective wind-down plan should help a failing firm to cease its regulated activities and achieve cancellation of permission with minimal adverse impact on its clients, counterparties and the winder markets. As a consequence, the approach document aims to help a firm factor these considerations into its wind-down planning. The FCA explains that the approach document does not impose an obligation on firms to create wind-down plans. It merely suggests a logical approach for firms that have decided to engage in wind-down planning. As a result, the proposed approach document is not subject to cost-benefit analysis. The FCA accepts that there are many different approaches to wind-down planning, and encourages firms to take the approach document into consideration as a starting point to tailoring a model that best suits their circumstances.

The approach document will become general guidance under section 139A of the Financial Services and Markets Act 2000 (FSMA). As such, it will take the form of a "regulatory guide" and will not be part of the Handbook.

Comments can be made on the proposals until 22 July 2016.

Read "GC16/5 - Proposed guidance on winddown planning".

FCA Consults on Further Changes to Implement UCITS V and the SFT Regulation

The FCA published a consultation (CP16/14) on 19 May 2016 on proposals to amend the Client Assets sourcebook (CASS) and the Collective Investment Schemes sourcebook (COLL) following the adoption of the UCITS V Level 2 Regulation.

The UCITS V Level 2 Regulation introduces new requirements for UCITS depositaries. The consultation proposes amendments intended to ensure consistency with the UCITS V Level 2 Regulation. Affected firms must comply with the new requirements by 13 October 2016.

The consultation also proposes minor changes to the Senior Management Arrangements Systems and Controls sourcebook (SYSC), and consequential amendments to COLL and the Investment Funds sourcebook (FUND), to reflect certain measures in the Regulation on reporting and transparency of securities financing transactions ((EU) 2015/2365) (SFT Regulation).

Proposals include:

  • Amendments to CASS 6.6 to dis-apply certain rules and guidance for consistency with the requirements under the UCITS V Level 2 Regulation. 
  • New guidance in COLL 6.9 to highlight the conditions for meeting the independence requirements introduced by the UCITS V Level 2 Regulation. 
  • Amendment to SYSC 19E.2.9R(1) to set out the circumstances in which a UCITS management company must appoint a remuneration committee. 
  • Copying out into COLL, the provisions of the SFT Regulation that require managers of UCITS funds and alternative investment funds (AIFs) to disclose details of their use of securities financing transactions and total return swaps in the funds' pre-contractual documents and periodical reports to investors.

Comments can be made until 19 July 2016 and a policy statement is expected in the third quarter of 2016.

Read the Consultation Paper CP16/14: "UCITS V Level 2 Regulation, SFTR and Consequential Changes to the Handbook". 



AIFMD – ESMA Updates Q&A on the Application of the AIFMD

ESMA updated its questions and answers on the application of the AIFMD on 3 June 2016.

The new content includes a new question and answer on requirements regarding the domicile of EU Alternative Investment Funds (AIFs) which are marketed in the home Member State of the AIFM, as well as a new question and answer relating to the marketing of EU feeder AIFs which have a non-EU master AIF.

Read the associated press release. 

EMIR – New Regulatory Technical Standards on Indirect Clearing, New Q&A, Final Rules for Clearing of Interest Rate Derivative Contracts Denominated in Specific European Currencies and an Updated List of CCPs

ESMA issued its final report on draft regulatory technical standards (“RTS”) on indirect clearing arrangements under EMIR and MiFIR on 26 May 2016. 

The draft RTS provide guidance on the following points:

  • Default management: in order to take into account that there can be a conflict of law between EU regulation and certain national insolvency regimes, the draft RTS propose an obligation of means, i.e. relying on having appropriate default procedures and committing to trigger them.
  • Choice of account structures to be offered to indirect clients: the draft RTS provide a choice of possible account structures that reflect the current practice in the OTC derivative and the exchange traded derivative markets in terms of level of segregation. Furthermore, the number of accounts required has been simplified to minimise the operational burden for market participants.
  • Long chains: the draft RTS, under certain conditions, allow indirect clearing chains that are longer than the standard chains of four entities.

ESMA has sent its draft RTS on indirect clients for endorsement to the European Commission which has three month to accept or reject them.

Read ESMA's final report.

Read the associated press release.

ESMA updated its questions and answers on EMIR on 6 June 2016.  

The new content includes new answers in relation to the clearing obligation, specifically about the self-categorisation that is necessary in order to establish which counterparties belong to which categories.

The Q&A also provides clarifications on how counterparties should handle the situation where some of their counterparties have not provided the information on the category they belong to.

Read the new Q&A.

Read the associated press release. 

The European Commission formally endorsed central clearing of interest rate derivative contracts denominated in Norwegian Krone (NOK), Polish Zloty (PLN) and Swedish Krona (SEK) on 10 June 2016.  

Read the relevant annex to EMIR. 

ESMA updated its list of third-country central counterparties recognised to offer services and activities in the EU on 14 June 2016. 

The Chicago Mercantile Exchange has now been added.

MiFID II – Regulatory Technical Standards on Ancillary Activity, Derivatives Trading and Best Execution

ESMA issued its opinion in response to a letter sent by the European Commission asking it to amend its draft RTS 20 on 26 May 2016. RTS 20 provides criteria to establish when a non-financial firm’s commodity derivatives trading activity is considered to be ancillary to its main business.

Read the associated press release.

Read the opinion.

The European Commission published a delegated regulation supporting the best execution obligation in MiFID II on 8 June 2016.

The regulation specifies the content, the format and the periodicity of data relating to the quality of execution to be published by execution venues.

Read the delegated regulation and associated annexes. 

Consultation on Cross-Border Distribution of Investment Funds and Draft Regulatory Technical Standards under the ELTIF Regulation

The European Commission launched a consultation on cross-border distribution of investment funds, focussed on the main barriers to the cross-border distribution of investment funds (UCITS and AIF) on 2 June 2016.

The consultation closes on 2 October. 

ESMA issued draft regulatory technical standards (RTS) for European Long-Term Investment Funds under the ELTIF Regulation on 8 June 2016. 

The RTS propose:

  • Criteria to determine the circumstances in which financial derivatives are used solely for hedging purposes. 
  • The life of an ELTIF should be determined with reference to the individual asset within the ELTIF portfolio which has the longest investment horizon. 
  • A non-exhaustive list of the types of market risk ELTIF managers should take into account when assessing the market for potential buyers. 
  • The criteria for the valuation of the ELTIF assets ahead of their divestment.
  • A grandfathering provision, whereby ELTIFs have one year after the RTS come into force to comply with these rules

Read the RTS. 

Read the associated press release. 




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