Investment Funds Update Europe - Issue 2, 2018

February 23, 2018

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



Implementation of MiFID 

The FSMA issued on 18 July 2017 a communication (the “Communication”) on the preparation for the entry into force of the Directive 2014/65/EU on Markets in Financial Instruments (“MiFID II”). Such Communication (FSMA_2017_11) aimed at facilitating the identification and the understanding of the new rules of conduct entering into force on 3 January 2018. 

For this purpose, the Communication: 

  • Identifies the most relevant texts with regard to the rules of conduct laid down in MiFID II. 
  • Summarizes the main changes brought by MiFID II. 
  • Draws the attention of the regulated entities on the importance of an action plan identifying the measures to adopt in order to meet the requirements resulting from MiFID II. 

In the meantime, MiFID II has been implemented in Belgium by the law dated 21 November 2017 on infrastructure for markets in financial instruments and on the implementation of Directive 2014/65/EU (“MiFID II Law”) which entered into force on 3 January 2018. A Royal Decree dated 19 December 2017 contains further detailed rules on the implementation of the Directive (the “MiFID II Royal Decree”).

As a consequence of MiFID II Law, the payment of commissions, fees or retrocession payments by funds or fund managers to fund distributors is now restricted (Art. 105 of MiFID II Law transposing Art. 23 to 30 of the Directive). The MiFID II Royal Decree implements Art. 11-13 of the Commission Delegated Directive 2017/593/EU (Level 2 of EU regulatory framework). 

Read the FSMA Communication on the preparation for MiFID II (in Dutch). 

Read the FSMA Communication on the preparation for MiFID II (in French). 

Belgian FSMA Communication Related to the Ancillary Activity Exemption and Position Limits in Commodity Derivatives 

This Communication dated 1st December 2017 (FSMA_2017_22) details the procedure to be followed by entities whose trading activity is ancillary to their main business and that wish to be exempted from the obligation to hold an authorization as an investment firm. It also explains certain aspects of the position limits regime introduced pursuant to MiFID II and that applies to commodity derivatives. The method for setting position limits is laid down in Commission Delegated Regulation 2017/591 (‘RTS 21’). 

In order to be eligible for the exemption from authorization as an investment firm, the relevant entity must complete the notification form attached to the Communication and send it by email to the FSMA, on an annual basis. 

Read the FSMA Communication on the implementation of MiFID II: ancillary activity exemption and position limits in commodity derivatives in full. 

Further Implementation of the Market Abuse Regulation in Belgium 

On 31 July 2017, a new law was adopted to further implement and ensure the effectiveness of Regulation 596/2014 on market abuse ("Market Abuse Regulation"). This new law amends the law of 2 August 2002 on the supervision of the financial sector and on financial services ("Financial Law") and aims, among others, at: 

  • Introducing and refining the FSMA’s investigation powers (including professional bans, home searches and seizure of documents or electronic data). 
  • Implementing the Directive 2014/57 on criminal sanctions for market abuse ("Market Abuse Directive on Criminal Sanctions"). To this end, the law introduces several changes to the Financial Law to align the notions of "insider trading", "market manipulation" and "unlawful disclosure of inside information" to the Market Abuse Regulation and the Market Abuse Directive on Criminal Sanctions. In addition, the law introduces new sanctions: the FSMA may cumulatively impose administrative sanctions on both the legal person and any physical person who committed such infringement on behalf of the legal person or who participated in the decision-making process leading to such infringement. 
  • Partially implementing the Directive 2015/2392 as regards reporting to competent authorities of actual or potential infringements of the Market Abuse Regulation. Pursuant to Article 32 of the Market Abuse Regulation, Member States must ensure that competent authorities establish effective mechanisms to enable reporting of actual or potential infringements of the Market Abuse Regulation to such authorities. In this perspective, the law introduces a new article 69bis in the Financial Law allowing any individual, acting in good faith, to report infringements to the Market Abuse Regulation while being protected from any civil, criminal or disciplinary action or professional sanctions. The FSMA will ensure that the identity of such individual remains confidential. 

The new law on market abuse entered into force on 21 August 2017.



AMF Study on Fees Charged in 2015 by UCITS Distributed in France 

The Autorité des Marchés Financiers (the French financial regulator, AMF) conducted a study based on the fees disclosed in the KIID distributed to investors of such funds. From a general perspective, French UCITS seem less costly than foreign funds distributed in France. The AMF further regrets that there is no common policy in the EU in relation to surperformance fees and notes that most UCITS do not rigorously apply the Good Practice for fees and expenses of collective investment schemes set by IOSCO. 

View the fees charged in 2015 by UCITS distributed in France. 

AMF Issues Updated Guide to the Organization of Risk Management Systems for Asset Managers 

The purpose of Position-Recommendation DOC-2014-06 is to clarify the AMF’s expectations regarding the operation and organization of the compliance, risk management, internal control and periodic control functions in portfolio management companies. This guide specifies in particular how the various control functions are structured. It should be noted that this update does not include a MiFID II update. 

Read the guide to the organisation of the risk management system within asset management companies. 

AMF Updated Programme of Operations Guide for Asset Managers and Self-Managed Collective Investments 

Position-recommendation DOC-2012-19 indicates how to fill in the sections of the authorization application. In terms of approval grid and authorized instruments, any reference to futures (financial contract) has been removed and replaced by the terms of “financial contract” or “financial securities including a financial contract”. It should be noted that this update does not include a MiFID II update.



BaFin Decision Regarding the Duties of Management Companies in Respect to Externally Managed Investment Companies 

After a long consultation period, BaFin published its new interpretative decision on 21 December 2017 regarding the duties of management companies in respect to externally managed investment companies (Auslegungsentscheidung zu den Tätigkeiten einer Kapitalverwaltungsgesellschaft und der von ihr extern verwalteten AIF-Investmentgesellschaft). 

The interpretative decision was published by BaFin to provide further interpretation and guidance in respect to the question whether a management company of a German investment company, i.e. a German investment limited partnership (Investmentkommanditgesellschaft) or a German investment limited company (Investmentaktiengesellschaft) acts in respect to specific tasks either on behalf of the investment company or in the name of the management company for account of the investment company. Such distinction can from our perspective also be of relevance for asset managers acting as delegate of the management company. 

As a consequence of the corporate incorporation under German law, a German investment company has own legal capacity. Therefore, the interpretative decision gives also guidance when an investment company acts on its own behalf (i.e. in its own name) or when it has to be represented by its management company. 

Read the interpretative decision (in German) 

BaFin Introduces New Derivative Reporting 

For the reporting year of 2018, BaFin has issued new requirements for derivative reports for UCITS subject to Sec. 38 of the German Derivative Ordinance (Derivateverordnung). 

Key changes for management companies of UCITS investment funds are additional reporting requirements in respect of the BaFin ID and of the average leverage amount of all relevant UCITS pursuant to the cross method. As a consequence, all management companies have to determine the cross leverage amount for the relevant UCITS even if the relevant UCITS previously determined its leverage amount in accordance with the commitment approach pursuant to Art. 42 of Directive 2010/43/EU. 

The updated instructions by BaFin as well as the relevant reporting template will be provided by BaFin upon request or can be downloaded by members of the BVI: 

Latest Investment Statistics for Germany

In Feburary 2018, the German Investment Fund Association BVI has issued its latest investment statistics report dated 05 February 2018, 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 to Amend the Requirements for Loan Origination 

QIAIFs The Central Bank has published a notice of intention to amend the requirements for loan origination Qualifying Investor AIF set out in the AIF Rulebook. The amendment currently proposed would permit lending within a broader credit focused strategy. The change outlined therein will come into effect from 7 March 2018 when the Central Bank will publish a revised AIF Rulebook. 

Read the notice of intention for a rule change to the AIF Rulebook. 

GDPR and the Data Protection Bill 2018 

The General Data Protection Regulation (“GDPR”) (Regulation (EU) 2016/679) will replace the 1995 Data Protection Directive on 25 May 2018, and EU member states’ national implementation laws related thereto. GDPR represents a paradigm shift in the approach to EU privacy law and will pose significant compliance and operational challenges for asset managers that have any EU and/or UK operations. An Irish Funds GDPR Working Group have published a bulletin outlining the scope and key impacts of the GDPR. 

The Irish Government has published the Data Protection Bill 2018 (the “Bill”) to give effect to GDPR and to provide, in the limited areas permitted, for national derogations. The Bill repeals the Data Protection Acts 1988 and 2003 (the Acts), except for those provisions relating to the processing of personal data for the purposes of national security, defence and the international relations of the State. 

Read the General Data Protection Regulation.

Read the Directive of the European Parliament and of the Council. 

Read the Data Protection Bill 2018. 

Central Bank Communication to Firms Seeking Authorisation in 2018 

The Central Bank has issued a communication to firms seeking authorisation in 2018. In light of the UK’s decision to withdraw from the European Union and an uptake in firms therefore engaging with the Central Bank, the Bank has offered an encouragement to proceed with any application process in good time and has committed significant further resources to deal with the additional enquiries. 

The Central Bank has updated its FAQs to reflect the above. 

Read the communication in full. 

Enhancements to the Regulated Disclosures Submission Process 

The Regulated Disclosures teams within the Central Bank are in the process of upgrading their document management and workflow system. The Bank has provided that user testing of the new system is underway, deployment of Excel templates required with each submission is planned for early April and website instructions related to the Excel templates are planned for 10 to 14 days prior to adoption. It is anticipated that the new system will go fully live in mid Q2 2018. 

In addition, an update on the new submission process will be provided at the Prospectus Regulations Stakeholder Meeting on 5 March 2017. 

Read the Enhancements to the Regulated Disclosures Submission Process - Update.



Luxembourg Parliament Votes on New AML Legislation

The Luxembourg Parliament has voted in bill 7128 which implements certain provisions of the fourth anti-money laundering directive (Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC) into national law as the law of 13 February 2018. The new law was published on 14 February 2018 and amends, inter alia, the law of 12 November 2004 on the fight against money laundering and terrorist financing, as amended.

Read the law in full on the Luxembourg official gazette website (in French).

CSSF Circular to Clarify Changes Brought by MAR

The CSSF issued circular 18/679 in relation to the law of 11 January 2008 on transparency requirements for issuers to comply with changes brought by regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC.

Read the circular in full on the CSSF website (in French).

CSSF Issues Press Release on Global Situation of UCIs

The CSSF published a press release regarding the global situation of undertakings for collective investment at the end of December 2018.

Read the press release in full on the CSSF website (in French).



FCA Report on Algorithmic Trading Compliance in the Wholesale Markets 

The FCA published a report on “Algorithmic Trading Compliance in Wholesale Markets” on 12 February 2018. The report followed certain research into algorithmic trading carried out by the FCA ahead of the implementation of MiFID II, including the new rules in Chapter 7A of the Market Conduct Sourcebook (MAR). MiFID II introduced substantially increased regulation of algorithmic trading and high frequency trading. 

The report was based on a number of cross-firm in-depth reviews conducted by the FCA and includes examples of good and poor practices, organised in five key areas of focus: 

  • Defining algorithmic trading: firms must establish an appropriate process to identify algorithmic trading, manage ‘material changes’ and maintain a comprehensive inventory of algorithmic trading across the business. 
  • Development and testing: firms are to maintain robust, consistent and well understood development and testing processes which identify potential issues across trading algorithms prior to full deployment. 
  • Risk controls: firms must develop suitable and robust pre- and post-trade controls to monitor, identify and reduce potential trading risks across algorithmic trading activity. 
  • Governance and oversight: firms must maintain an appropriate governance and oversight framework that demonstrates effective challenge from senior management, risk management and compliance. 
  • Market conduct: firms must consider the potential impact of their algorithmic trading on market integrity, and must monitor for potential conduct issues and reduce market abuse risks. 

The FCA said it would continue to assess whether firms have taken sufficient steps to reduce risks arising from algorithmic trading. The PRA has also issued a consultation paper setting out expectations for the prudential aspects of risk management and governance of algorithmic trading at PRA regulated firms. 

Read the report in full. 

HM Treasury Regulations Partly Implementing EU Benchmarks Regulation 

HM Treasury laid before Parliament the Financial Service and Markets Act 2000 (Benchmarks) Regulations 2018 (S.I. 2018/35) (the “UK Regulations”) on 5 February, together with an explanatory memorandum. As the name suggests, the UK Regulations implement in the UK aspects of the EU Benchmarks Regulation (Regulation no. EU 2016/1011). 

Amongst other things, the UK Regulations amend the Financial Service and Markets Act 2000 (Regulated Activities) Order 2001 (the “RAO”) to add a new regulated activity of “administering a benchmark”. 

They also enable the FCA to exercise powers over persons who are involved in the provision of a benchmark but are not benchmark administrators as defined in the EU Benchmarks Regulation, and give the FCA the power impose requirements on persons requiring them to administer or contribute to a benchmark and make provision for the FCA to regulate benchmark administrators, including the recognition of third country administrators. They amend other secondary legislation, including the FSMA (Exemption) Order 2001 to reflect the Benchmarks Regulation; and make a minor amendment to FSMA relating to the implementation of the Cyber-security Directive. 

The UK Regulations are expected to come into force on 27 February 2018, except for certain consumer credit provisions coming into force on 1 July 2018 and certain revocations of UK domestic benchmark regulations coming into force on 1 May 2020. 

Read the UK Regulations. 

Read the explanatory memorandum. 

FCA and ICO Issue Joint Update on GDPR Compliance 

The FCA and the Information Commissioner’s Office (ICO) issued a joint update on 8 February on compliance with the EU General Data Protection Regulation (GDPR), which comes into force on 25 May 2018. The GDPR introduces new harmonised EU regulation of personal data processing and will replace the UK’s Data Protection Act 1998. 

Whilst UK regulation and enforcement of the GDPR will be the responsibility of the ICO, FCA regulated firms processing personal data will be in scope of the GDPR and their preparedness for this implicates certain requirements in the FCA’s Senior Management Arrangements Systems and Controls sourcebook (SYSC). 

The FCA considers that the GDPR is not incompatible with the FCA’s rules. The joint update states that compliance with the GDPR is now a board level responsibility and firms must be able to produce evidence to demonstrate the steps they have taken to comply. As part of their obligations under SYSC, firms should establish, maintain and improve appropriate technology and cyber resilience systems and controls. 

Read the FCA and ICO update in full.



MiFID II – Member State Transposition and Updated Q&A on Market Transparency 

The European Commission updated its webpage on 13 February 2018 setting out member state transposition of MiFID II. 

As of this date, only the following member states still have to transpose fully MiFID II: 

  • Bulgaria 
  • Croatia 
  • Latvia 
  • Romania 
  • Slovenia 

View the table in full. 

ESMA published updated Q&As on MiFID II and MiFIR transparency topics on 7 February 2018. 

Read the associated press release in full. 

EMIR – ESMA Updates Q&As 

ESMA updated its Q&As regarding EMIR implementation on 5 February. The updated Q&As address operational aspects of access to trade repository data. 

Read the updated Q&As in full. 

Read the associated press release in full. 

Crypto-currencies, Consequences of Brexit and Benchmark Regulation Q&A 

A formal question was raised on 31 January, from the European Parliament to the European Commission regarding the regulatory status of crypto-currencies, specifically asking for the following confirmations: 

  • Is it of the view that this market should increasingly be regulated? 
  • Is it preparing any initiatives other than studies? 
  • If little or no effort is being made to regulate crypto-currencies, can it explain why? 

Read the questions in full. 

The European Commission issued various notices on 8 February, setting out its position on the application of current “passporting” rights enjoyed by UK regulated firms post-Brexit. 

Whilst firms should note that the notices simply state the European Commissions’ view of the legal position of these firms post Brexit, it is noteworthy that at no point does the European Commission mention or envisage any transitional period for UK firms during which these rights would be retained, nor does it give any further information on the status of “third country” passporting rights, as envisaged under the AIFMD. 

The relevant notices are below: 

Withdrawal of the United Kingdom and EU rules in the field of banking and finance. 

Markets in financial instruments. 

Post-trade financial services. 

Asset management:

ESMA updated its Q&As on 5 February 2018 on the: Benchmarks Regulation (BMR) 

The new Q&A’s include two new answers regarding the following topics: 

  • Commodity benchmarks: how the threshold in the exemption under Article 2(2)(g) of BMR should be calculated; and 
  • Definition of a benchmark and investment funds: clarification of the cases in which a benchmark is used to measure the performance of an investment fund 

Read the new Q&As in full. 

Read the associated press release.

Subscribe to Dechert Updates