Regulatory Insights Autumn 2014...SOLVENCY II DIRECTIVE UPDATE The Solvency II Directive 2009/138/EC...

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STATE STREET GLOBAL SERVICES REGULATORY INSIGHTS AUTUMN 2014

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FOREWORD

Welcome to the autumn edition of the State Street Regulatory Insights Newsletter, our quarterly overview of important legislative and regulatory developments in the European Union (EU). We have made some further changes to the document, by including France in the coverage and by introducing a feature article on a topic of particular relevance and/or interest. In this edition our focus is on Solvency II.

Despite the summer shut down of the European institutions, the industry had a pretty busy time. Above all, there was the challenge of responding to more than 800 questions on the re‑cast Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) consultation and discussion papers, ahead of the 1 August deadline. The European Securities and Markets Authority (ESMA) is now considering the responses. Providing technical advice to the European Commission by January 2015 will be a priority.

More generally, ESMA continues to produce output at an impressive rate. It has published a consultation on depositary-related aspects of the UCITS V Level 2 implementing measures and a consultation on the clearing of Foreign Exchange (FX) Non-Deliverable Forwards (NDFs). It has also finalised the work on the clearing obligation for interest rate swaps (IRS) and credit default swaps (CDS). Unfortunately, no progress has been made on the critical definition of spot versus forward contracts, which will determine the applicability of the obligations and requirements of the European Markets Infrastructure Regulation (EMIR).

In terms of legislation, the last months have continued to be dominated by the European elections and their aftermath. The new Commission President and former Luxembourg Prime Minister, Jean-Claude Juncker and his college of Commissioners assumed office on 1 November 2014. Compared to its predecessor, the new Commission has been restructured by creating six Vice-President roles. They will be tasked with coordinating teams of several Commissioners. The composition of these teams may vary over time, according to need. Importantly, and to widespread surprise, Commission President Juncker appointed the British Lord Jonathan Hill to become the Commissioner for the newly created Directorate General for Financial Stability, Financial Services and Capital Markets Union. His brief will include Financial Markets, Financial Institutions, Financial Services Policy, as well as Financial Markets and Infrastructures and Financial Integration and Regulatory Policy.

Among Lord Hill’s priorities, as set out in the mission letter from Commission President Juncker, will be the continued implementation of the Commission’s regulatory framework, including Banking Union and the establishment of the Single Resolution Board; a mission to seek appropriate ways to revive sustainable securitisation markets; a focus on consumers and retail investors in financial services regulation; and the creation of an integrated Capital Markets Union, encompassing all Member States by 2019.

In the Commission structure, Lord Hill’s portfolio will be overseen by the former Prime Ministers, Jyrki Katainen of Finland and Valdis Dombrovskis of Latvia – the Vice-Presidents with responsibility for Jobs, Growth, Investment and Competitiveness and the Euro and Social Dialogue.


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FOREWORD (CONTINUED)

The European Parliament has also resumed its legislative work. The political group coordinators and relevant rapporteurs and shadow rapporteurs, including those with responsibility for important files such as a Money Market Funds (MMF) Regulation and the Benchmarks Regulation, have all been appointed.

As the post-election institutional processes come to an end, the focus is shifting back to pending legislative initiatives, with a clear spotlight on the money markets fund regulation, the Benchmarks Regulation, and the revision of the Shareholder Rights Directive. At the same time, work continues on the EU11 Financial Transaction Tax.

Alongside these developments, we see new and important requirements coming into force. As the 1 January 2015 deadline, signposted in the Central Securities Depositories (CSD) Regulation, approaches, a large number of European markets moved to a T+2 settlement cycle on 6 October. In August, the EMIR collateral and valuation data reporting went live.

Also, a significant milestone for the EU’s banking union project has arrived. On 4 November 2014, the European Central Bank (ECB) assumes direct supervision of approximately 120 banks, representing almost 85 per cent of total banking assets in the Euro area. This was preceded by the publication of the Asset Quality Review (AQR) and the stress test results.

It’s clear that things are not going to be boring in the foreseeable future. We hope this newsletter gives you a useful overview of the most significant developments.

SIMON FIRBANK VICE PRESIDENT CLIENT REGULATORY & PRODUCT SUPPORT – IRELAND STATE STREET GLOBAL SERVICES

SVEN KASPER DIRECTOR EMEA REGULATORY, INDUSTRY & GOVERNMENT AFFAIRS STATE STREET


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CONTENTS

FEATURE ARTICLE1 Solvency II Directive Update

GLOBAL3 OECD BEPS Project

EUROPE4 Alternative Investment Fund Managers Directive5 Single Supervisory Mechanism6 Foreign Exchange Transactions7 European Market Infrastructure Regulation8 ESMA Guidelines on ETFs and Other UCITS Issues9 Money Market Funds10 Institutions for Occupational Retirement Provision Directive II11 Bank Structural Reform12 UCITS V13 Central Securities Depository Regulation14 Benchmarks15 Banking Recovery and Resolution Directive

CHANNEL ISLANDS16 MONEYVAL ‘Local Regulation – International Evaluation’18 Markets in Financial Instruments Directive II

FRANCE19 Update on the French Transposition of the CRD IV20 FATCA, Update on Local IGA

GERMANY21 Fee-based Investment Advice Act22 Information from the German Federal Tax Office on FATCA

BaFin Draft Depositary Circular23 BaFin Guidance Note on Marketing Investment Code24 BaFin Consultation on Disclosure of costs of Closed-ended Funds

IRELAND25 Update to Alternative Investment Fund Managers Directive Q&A26 Loan Originating AIFs

Consultation on Collateral Diversification27 Publication of ICAV Bill

European Market Infrastructure Regulation28 Central Bank Consultation on Fund Management Company Effectiveness

ITALY29 Amendments to the Consolidated Financial Law: Establishment of Credit Funds30 Alternative Investment Fund Managers Directive

CONTENTS


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CONTENTS (CONTINUED)

LUXEMBOURG31 New CSSF Circular 14/59132 Law of 28 July 2014 on the Immobilisation of Bearer Shares and Units

UNITED KINGDOM33 Benchmarks34 Dealing Commission Discussion Paper35 Retrospective Application of Regulatory Rules – Call for Examples36 FCA Publishes Letters Clarifying its use of Attestations

Best Execution Thematic Findings37 Skilled Persons Review under FSMA, PRA and FCA Letters

ABBREVIATIONS38 Abbreviations

REGULATORY TIMELINE41 Regulatory Timeline Autumn 2014


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SOLVENCY II DIRECTIVE UPDATE

The Solvency II Directive 2009/138/EC aims to establish a revised set of market‑consistent, EU‑wide capital requirements and risk management standards for the insurance industry. The new regulatory regime is designed to increase policyholder protection and reduce the possibility of consumer loss or disruption.

In order to give reasonable assurance to policyholders that payments will be made as they become due, regulators will direct insurers to make sure they have enough capital set aside to provide reserve funds and to cover all insurance claims they are likely to receive. All insurance companies operating in the EU will be required to comply with the Directive when it comes into force on 1 January 2016. The Directive covers three main areas:

■■ Valuation of assets, liabilities and capital requirements govern how assets and liabilities are valued by insurance companies. The rules also cover the amount of funds insurers need to hold in reserve to make sure they can pay policyholders’ claims

■■ Governance and risk management provisions will enable insurers to manage businesses to a high standard. They address how insurance businesses are governed, enabling insurers to identify, measure, monitor, manage and report risks to which they are exposed

■■ Reporting and disclosure obligations harmonise reporting, promote comparability of valuation and reporting rules with International Accounting Standards (IAS), and ensure efficient supervision of the insurance groups and financial conglomerates subject to the Directive. Some reports are to be made public and some are to be reported to the local national competent authority. More information and transparency allow the public (and the competent authorities) to better understand

the businesses insurers provide to individuals and institutions.

LATEST FROM THE EUROPEAN COMMISSIONOn 10 October, the Commission adopted a Delegated Act containing implementing rules for Solvency II. The implementing rules include:

■■ Valuation of assets and liabilities, including the so-called ‘long-term guarantee measures’

■■ How to set the level of capital for asset classes in which an insurer may invest

■■ Eligibility of insurers’ own fund assets to cover capital requirements

■■ How insurance companies should be managed and governed

■■ Equivalence assessments of third-country solvency regimes

■■ Internal model framework

■■ Rules related to insurance groups.

Simplified methods and exemptions apply in some cases to make the application of Solvency II easier for smaller insurers in particular. This will enter into force once the European Parliament and Council have both approved it, following their review, for which a maximum period of six months can be taken.

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http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32009L0138

http://ec.europa.eu/internal_market/insurance/solvency/solvency2/index_en.htm


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SOLVENCY II DIRECTIVE UPDATE (CONTINUED)

LATEST FROM EIOPAThe European Insurance and Occupational Pensions Authority (EIOPA) – one of the three European Supervisory Authorities (ESAs) – core responsibilities are to support the stability of the financial system, transparency of markets and financial products as well as the protection of insurance policyholders, pension scheme members and beneficiaries.

On 18 September, Carlos Montalvo Rebuelta, Executive Director of EIOPA, shared his views on the extent to which Solvency II Regulation changes the objectives of risk management. Many insurers should expect significant changes in the current risk culture as it is important not only to monitor risks, but also to manage them. Under the Solvency framework, risk management is not just a point in time procedure, but a continuous process integral to the undertaking’s overall strategy.

It will be essential for insurance companies and asset managers to work together to meet the new reporting standards. Insurers will require the appropriate level of transparency to underlying holdings, the calculation of key analytics and reporting measures all available in a timely manner. This will require a joint effort from both the insurers and their asset managers. State Street has been working closely with a number of clients to support their Solvency II requirements. Our Solvency Data Cube provides solutions for Pillar I, II and III data sourcing, governance and reporting for both insurance companies and asset managers. We are pleased to be supporters of the Tripartite Data Exchange Template recently published by The Investment Management Association (IMA) in the UK, BVI in Germany and Club AMPERE sponsored by the French Asset Management Association (AFG). The template supports the data needed for solvency capital calculations as well as look through reporting for investment funds.

State Street’s truView Investment Analytics Solution already supports the aggregation of data from multiple sources across asset classes and the calculation of market risk exposures and analytics of which the Solvency Capital Ratio (SCR) is the key analytic. Our truView solution supports the calculation of SCR – Market Risk module under the Standard Approach. Together, these capabilities in data gathering and aggregation combined with analytics provide our insurance clients with a deep understanding of the impact of the regulatory change and our asset manager clients with the tools and data they need to develop capital efficient funds for their insurance clients.

STATE STREET GLOBAL SERVICES REGULATORY INSIGHTS AUTUMN 2014 3

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OECD BEPS PROJECT

In our last edition, we highlighted the Organisation for Economic Co-operation and Development (OECD) action plan on Base Erosion and Profit Shifting (BEPS) aimed at addressing concerns on the ability of multinational enterprises (MNEs) to artificially shift profits out of countries where profits are earned resulting in non-taxation or unduly low taxation. In September, the OECD Committee on Fiscal Affairs (CFA) adopted a first set of seven deliverables as set out in the 2013 action plan. The seven deliverables (“2014 deliverables”) focus on the following:

■■ Addressing the tax challenges of the digital economy (Action 1)

■■ Designing new international standards to neutralise the effect of hybrid mismatch arrangements (Action 2)

■■ Progress made to counter harmful tax practices more effectively (Action 5)

■■ Recommendations on changes to double tax treaties and domestic rules to prevent the granting of treaty benefits in inappropriate circumstances (Action 6)

■■ Recommendations in the area of transfer pricing and intangibles (Action 8)

■■ Proposals in the area of country-by-country reporting and transfer pricing documentation (Action 13)

■■ The feasibility of the development of a multilateral instrument as one of the means enabling jurisdictions to implement the measures arising out of the BEPS project (Action 15).

The first set of deliverables was presented to the G20 Finance Ministers in September and will be presented to leaders in November. The 2014 deliverables are closely connected to remaining deliverables due in 2015 and, as a result, will remain in draft form so that

the potential impact of the 2015 deliverables can be taken into account before finalising them.

The 2014 deliverables impact corporations (including asset managers) operating in an international environment. In addition, the proposals included in the 2014 deliverables on Action 2 (hybrid mismatch arrangements) and Action 6 (granting of treaty benefits in appropriate circumstances) may have implications to collective investment vehicles (CIVs) and the way they operate.

Action 6 includes a specific limitation of benefit provision impacting the ability of persons to claim treaty benefits unless the person fell within the definition of ’qualified persons‘. The original draft proposals on Action 6 did not recognise the position of CIVs and their ability to claim treaty benefits. After numerous representations and submissions to the OECD by industry participants (including many fund industry associations) the OECD recognised the fact that CIVs were not adequately dealt with in the original proposals. The revised proposals on Action 6 included in the 2014 deliverables attempt to deal with the issue of CIVs and provide recommendations and alternatives approaches open to tax authorities in dealing with the issue of treaty access for CIVs. However, the OECD has recognised that further work is required on the policy considerations relevant to the treaty entitlements of CIVs (including other funds types not falling within the CIV definition).

Similarly, the proposals on Action 2 dealing with hybrid mismatch arrangements raised concerns about the impact of the measures to CIVs including, inter alia, the ability of CIVs to use securities lending and repo transactions for efficient portfolio management (e.g. the hedging of risks and managing liquidity). The revised proposals in the 2014 deliverables included a set of rules dealing with hybrid mismatch arrangements with more work to occur in 2015 on dealing key issues such as CIVs.


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On 8 August, ESMA published the official translations of the Guidelines on Reporting Obligations under Articles 3(3)(d) and 24(1), (2) and (4) of the Alternative Investment Fund Managers Directive (AIFMD). This publication marks the beginning of the two‑month window for Member State competent authorities to incorporate the guidelines into their local rules. If they do not incorporate them they will need to give reasons for their non‑compliance.

The content of the guidelines is similar to the content agreed and issued in ESMA’s final report on reporting obligations in October 2013. The guidelines provide information to Alternative Investment Fund Managers (AIFMs) on:

■■ When to make first filings

■■ What to do when the frequency of reporting obligation changes

■■ How to report on feeder, fund of funds and umbrella Alternative Investment Funds (AIFs)

■■ How to report specific data elements

■■ The codes to be used in identifying the AIFM and the markets, instruments and strategies in which the AIFs invest.

On 30 September, ESMA issued an updated version of its Questions and Answers (Q&A) on AIFMD. The updates focus mostly on the technical requirements for reporting to national competent authorities under Articles 3, 24 and 42 of the AIFMD.

New Developments Highlighted in the Questions and Answers:

■■ Non-EU AIFMs, marketing their AIFs in the EU under national private placement regimes (NPPRs), are required to report on those AIFs to national competent authorities, only to the extent that they have EU investors from those jurisdictions, rather than on the basis of continued marketing activity

■■ A non-EU AIFM should use the same reporting frequency for all of its reporting to the different national competent authorities, based on the total assets of all the AIFs under management, rather than assessing the frequency, based on the asset size of each AIF

■■ If the official net asset value (NAV) of an AIF is not available by the reporting deadline for any reporting period, the AIFM should report using estimates of the NAV. The AIFM should provide updated figures, if they are different, as soon as the final NAV is calculated.

The Q&A also introduces a new section on delegation. The assessment as to whether an AIFM has delegated portfolio and/or risk management to the extent that it has become a letter-box entity, needs to be made in respect of each AIF that the AIFM manages, rather than on all AIFs as a group.

ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE


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PE On 4 September 2014, European Central Bank (ECB) published the final list of the 120 significant credit institutions which are being directly supervised by the ECB from 4 November 2014 onwards. The ECB will directly supervise credit institutions, financial holding companies or mixed financial holding companies that are deemed significant at the highest level of consolidation within participating Member States.

The significance of banks has been determined based on banks’ year-end 2013 figures, the total value of their assets, the importance for the economy of the country in which they are located or the EU as a whole, the scale of their cross-border activities and whether they have requested or received public financial assistance from European Stability Mechanism (ESM) or the European Financial Stability Facility (EFSF). This will be assessed on a frequent basis and at least once a year following the release of their full year results. Where banks have entered into mergers, assessments will be made on an ad hoc basis. It is possible for the ECB to change the status of a bank from ‘less significant’ to ‘significant’ at any time whilst a change from ‘significant’ to ‘less significant’ will be based on an analysis of the relevant criteria over a period of three years.

Ahead of the ECB assuming the direct supervision of significant banks, it had undertaken the AQR and the stress test to ensure that it has a clear picture of the firms and their financial situation before assuming responsibility for them.

SINGLE SUPERVISORY MECHANISM


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PE In light of existing, differing interpretations of what constitutes a spot MFX transaction and what constitutes a forward FX transaction, ESMA had requested the EU Commission to clarify the definition. Following a public consultation, the Commission issued a letter to ESMA, in response to the request. Though the Commission’s response indicates that it cannot make a legislative amendment to clarify the definition, it acknowledged that a general consensus emerged from the consultation process on what constitutes a spot FX transaction:

■■ FX with a settlement period of trade date plus two (T+2) for most major currency pairs

■■ FX with a settlement period in line with the standard delivery period for all other currency pairs

■■ FX used to fund the trading of transferable securities, provided that the FX has a settlement period in line with that of the traded security and does not in any event exceed T+5

■■ FX used to facilitate a payment for goods or services.

The determination of an FX transaction as either a spot or a forward transaction is an important distinction. It clarifies the question of whether or not the transaction is reportable to trade repository under the requirements of EMIR. ESMA will now consider the Commission’s response and will decide whether to issue guidance in the form of an update to its Q&As.

FOREIGN EXCHANGE TRANSACTIONS


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EUROPEAN MARKET INFRASTRUCTURE REGULATION

On 4 September, ESMA issued its Guidelines and Recommendations regarding the implementation of the CPSS‑IOSCO Principles for Financial Market Infrastructures in respect of Central Counterparties (CCPs).

Since the operative language in the two is not always the same there was a risk that EU CCPs could have been assessed as non-compliant with these principles. The Guidelines and Regulations will ensure that there is a link between the requirements for CCPs under EMIR and those in the CPSS-IOSCO Principles.

ESMA issued a discussion paper on 22 July on the calculation of counterparty risk by UCITS for over the counter (OTC) financial derivative transactions that are subject to central clearing obligations. The paper seeks views on potential exposures to be considered by UCITS against the CCP and their clearing members (CMs). The paper suggests that exposure to ESMA-recognised CCPs could be deemed to be generally counterparty risk free. In relation to exposure to the CMs, the paper distinguishes between CMs operating individual and omnibus segregated client accounts, suggesting that the former could be considered relatively free of counterparty risk, but the latter would generate counterparty exposure against the CM. The discussion paper was open to responses until 22 October.

ESMA further published a consultation paper on draft regulatory technical standards (RTS) concerning the clearing of FX NDFs. The paper considers the class of OTC derivatives that should be subject to the clearing obligation, the date or dates from which the clearing obligation takes effect, including any phase in and the categories of counterparties to which the obligation applies, and the minimum remaining maturity of the OTC derivative contracts referred to in Article 4(1)(b)(ii). The deadline for comments is 6 November 2014.

Lastly, ESMA has published its final draft RTS for the central clearing of IRS. The RTS define those types of IRS contracts which will have to be centrally cleared, the types of counterparties covered by the obligation and the dates by which central clearing of IRS will become mandatory for them. The RTS define the following four IRS classes to be subject to central clearing: basis swaps denominated in EUR, GBP, JPY, USD; fixed-to-float swaps denominated in EUR, GBP, JPY, USD; forward rate agreements denominated in EUR, GBP, USD; and overnight index swaps denominated in EUR, GBP, USD. The RTS have been submitted to the European Commission, which has up to three months to endorse them. Following the non-objection period of the European Parliament and Council, the RTS will enter into force 20 days after publication in the Official Journal (OJ).


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ESMA GUIDELINES ON ETFS AND OTHER UCITS ISSUES

Following its consultation on the relaxation of the collateral diversification rule for UCITS in receipt of government collateral, ESMA published on 1 August the official translations of the updated guidelines. The revised guidelines permit a UCITS to accept collateral in the form of issues of a single Member State, local authority, a third country or a public international body up to 100% of the higher of the UCITS’ NAV or of the collateral pool, provided that in such circumstances the pool consists of at least six issues and that no single issue exceeds more than 30% of the NAV of the UCITS. To avail of this derogation from the general 20% limit, the UCITS must disclose the collateral types it will accept in excess of 20%. Additional disclosure will also be required in the UCITS’ annual report.

Member States’ competent authorities had until 1 October to adopt the amended provisions or to explain why they have not.


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MONEY MARKET FUNDS

The Italian Presidency of the EU began on 1 July. They held two preliminary meetings within the Council in July and early indications were that the MMF Regulation would be one of their priorities during their Presidency. The European Parliament and the various committees have reconvened, following the elections earlier in the year.

During September, the Economic and Monetary Affairs (ECON) Committee, which is leading the MMF Regulation through Parliament, announced the new rapporteur and shadow rapporteurs on the dossier. The rapporteur for the Socialists and Democrats Group will be the UK Labour Member of the European Parliament (MEP) Neena Gill. The shadow rapporteurs are Irish Fine Gael MEP, Brian Hayes, UK Conservative MEP, Syed Kamall, Czech Liberal MEP, Petr Ježek, and Belgian Green MEP, Philippe Lamberts. A first exchange of views in ECON took place on 13 October and a first draft report should be available by 10 November. The deadline for amendments will be 11 December and ECON is currently scheduled to vote on 23 or 24 February 2015. A plenary vote will take place in March 2015.

In November 2013, the three European Supervisory Authorities (ESAs) issued a joint consultation on the mechanistic references to credit ratings in their guidelines and recommendations. The consultation was issued in response to the amended provisions of the Credit Rating Agency Regulations, which directed the ESAs to avoid such references.

On 22 August, ESMA published an Opinion based on its review of the Committee of European Securities Regulators (CESR) Guidelines on a Common Definition of European Money Market Funds. The CESR was the precursor of ESMA. The guidelines, according to ESMA, are the only guidelines containing mechanistic references to credit ratings.

The Opinion explains to national competent authorities the modifications to the guidelines which should be incorporated into local rules. The amendments to the guidelines involve the removal of what constitutes an eligible sovereign issuance and the definition of ‘high quality’ being determined by the credit ratings awarded to a money market instrument.

ESMA does not intend to republish the amended guidelines in full.


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INSTITUTIONS FOR OCCUPATIONAL RETIREMENT PROVISION DIRECTIVE II

The Italian Presidency of the Council has been working to gain agreement on the Proposal for a revision of the Institutions for Occupational Retirement Provision Directive (IORP II).

In March, the European Commission published its proposal for a revision of the Directive. The proposal’s primary aim is to improve the governance and transparency of occupational pension schemes, as well as to promote cross-border activity and to help long-term investment.

In September, the Italian Presidency published a compromise text for the revised Directive, following a number of expert group meetings. Most of the changes to the original Proposal relate to giving further detail to the functioning of IORPs, especially in relation to cross-border activities.

One of the most notable additional changes is that the compromise text states that IORPs can appoint one or more depositaries for safe-keeping of assets and oversight duties.

The Italians are hoping to adopt a General Approach on the text at the Economic and Financial Affairs (ECOFIN) Council meeting of 9 December.


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BANK STRUCTURAL REFORM

The European Parliament is about to begin its consideration of the EU’s Bank Structural Reform Proposal and a draft timetable for the work of the European Parliament’s ECON Committee on the Proposal has been released.

The Proposal for a regulation on structural measures improving the resilience of EU credit institutions was published in January 2014. It is perceived as being broadly reflective of the US Volcker rule and takes into account much of the work done by the High Level Group, chaired by the Governor of the Bank of Finland, Erkki Liikanen.

In essence, the draft Regulation aims to increase the resilience of the EU’s financial system by forcing banks deemed to be ‘too big to fail’ to implement structural reform. Such reforms could include a ban on speculative activities such as proprietary trading. They could empower supervisors to require banks to separate certain trading activities, such as market making, from traditional retail activities such as deposit taking.

Gunnar Hökmark (EPP Sweden) has been appointed as Rapporteur for the file in the ECON Committee and the current timetable would see the Committee issue its draft report on the Proposal in December with a vote in Spring 2015. At Council level, the Italian Presidency has held monthly Working Groups on the Proposal where a number of ‘non-papers’ have been discussed.


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UCITS V

On 28 August, the fifth revision of the UCITS Directive was published in the OJ. Member States have until 18 March 2016 to implement the Directive. The revised Directive contains provisions on remuneration, sanctions and the use of depositaries. UCITS managers or management companies who have appointed a non-compliant depositary before the 18 March 2016 deadline are granted a 24-month transition period to appoint a fully eligible depositary.

Attention is now turning to Level 2 rulemaking. In September ESMA issued a consultation on draft technical advice to the EU Commission on possible delegated acts in relation to the depositary function and insolvency protection requirements under UCITS V.

The consultation proposes a number of measures in relation to third parties with delegated custody, including:

■■ Verifying that the applicable legal system recognises the segregation of the UCITS’ assets from those of the third party (which is not located in the EU) and that of the depositary

■■ Recognising that the UCITS’ segregated assets do not form part of the third party’s estate in the case of insolvency and are unavailable for distribution among or realisation for the benefit of creditors of the third party (if the latter is not located in the EU)

■■ Always maintaining accurate and up-to-date records and accounts of UCITS’ assets that readily establish the precise nature, amount, location and ownership status of those assets

■■ Maintaining appropriate arrangements to safeguard the UCITS’ rights in its assets and minimise the risk of loss and misuse.

ESMA is also seeking responses in relation to the depositary function, with UCITS V specifying that both the management company and its depositary need to act independently and solely in the interest of the fund and its investors. In order to fulfil this independence requirement, ESMA proposes a combination of measures, based on the management and governance structure.

Either:

■■ The management company/investment company shall not have a direct or indirect holding in the depositary or vice-versa

■■ The management company/investment company and the depositary shall not be included in the same group for the purposes of consolidated accounts

Or:

■■ If the management company/investment company has a direct or indirect holding in the depositary or vice-versa, or if the management company/investment company and the depositary are included in the same group for the purposes of consolidated accounts the choice of the depositary should be justified to investors on request

■■ In case the management company/investment company and the depositary are included in the same group for the purposes of consolidated accounts, at least one third of the members of the management bodies of these entities shall be independent. They will not be members of the management body or the body in charge of the supervisory function or be employees of any of the undertakings within the group.

The consultation closed on 24 October and ESMA plans to submit technical advice to the European Commission by the end of November 2014.


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CENTRAL SECURITIES DEPOSITORY REGULATION

On 28 August, the Central Securities Depository (CSD) Regulation was published in the OJ of the EU and the Regulation entered into force on 17 September 2014.

The CSD Regulation introduces a pan-EU authorisation and supervision regime, to ensure high prudential standards for national and international CSDs. It is intended to complement MiFID II and EMIR by encouraging more securities trading, clearing and settlement though trading venues, CCPs, trade repositories and CSDs.

Most significantly, the Regulation aims to harmonise settlement cycles by moving to a T+2 settlement cycle. Twenty seven markets have moved to T+2 on 6 October 2014 ahead of the formal legislative deadline of 1 January 2015.

A number of the other measures contained in the Regulation will be implemented as the Level 2 rules are finalised by ESMA, the European Banking Authority (EBA) and the Commission. The settlement discipline regime will begin to apply from the date that the relevant implementing measures come into force. This is expected to happen in late 2015 or early 2016. The obligation to record securities in book entry form applies from 1 January 2023 for securities issued after that date and from 1 January 2025 for all others.


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BENCHMARKS

The Italian Presidency of the Council has held a number of Working Groups on the proposed indices used as Benchmarks and Financial Instruments and Financial Contracts Regulation while the Parliament has unveiled its timetable for its consideration of the file.

In reaction to the London Interbank Offered Rate (LIBOR) scandal, the EU is attempting to introduce a new regulation governing the authorisation, supervision and governance of financial benchmarks. The Regulation would prohibit the use of unauthorised benchmarks in the EU and require benchmarks administrators to seek authorisation from their national competent authority.

The Italians have committed to reaching a general approach by the end of the year and the Council negotiations are focussing on resolving differences on a number of key areas, such as the definition of what constitutes a critical benchmark, the requirements for mandatory contributions to benchmarks and the issue of non‑significant benchmarks.

Cora van Nieuwenhuizen (ALDE Netherlands) has been appointed as Rapporteur for the draft Regulation and the Parliament is due to begin its deliberations on the file in November, with a vote on the committee’s report due in January 2015.


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BANKING RECOVERY AND RESOLUTION DIRECTIVE

In September and October the EBA published a number of guidelines and draft guidelines relating to the implementation of the Banking Recovery and Resolution Directive (BRRD).

The Directive is designed to provide authorities with a common toolkit for dealing with failing financial institutions. It requires them to draw up recovery plans, with the aim of preserving the safety of the financial system and preventing the use of public funds as much as possible.

The published guidelines and draft guidelines include:

■■ Guidelines on extraordinary public support measures

■■ Draft guidelines for failing or likely to fail institutions and the triggers for resolution

■■ Draft guidelines on triggers for using early intervention measures

■■ Draft guidelines on the application of simplified obligations for recovery and resolution planning

■■ Draft guidelines for the implementation of the sale of business tool and asset separation tool under the BRRD

■■ Guidelines on treatment of liabilities in bail-in

■■ Draft guidelines on recovery plan indicators

■■ Draft guidelines on minimum list of services and facilities.


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MONEYVAL ‘LOCAL REGULATION – INTERNATIONAL EVALUATION’

For many years, both Jersey and Guernsey have been working closely with the International Monetary Fund (IMF) on the implementation of the Financial Action Task Force (FATF) 40+9 recommendations. In October 2012, the Committee of Ministers of the Council of Europe adopted a resolution allowing Jersey and Guernsey to participate fully in the evaluation processes of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) and to become subject to its procedures.

A lot of work has been done in recent years by both the Guernsey Financial Services Commission (GFSC) and the Jersey Financial Services Commission (JFSC) in updating the anti-money laundering (AML) strategy and the legal requirements and structures within the islands, in order to comply with the FATF 40+9 recommendations.

Following evaluations by the IMF, the first progress reports, for both Guernsey and Jersey, were presented to MONEYVAL in December 2013. The reports set out updates, made by both the GFSC and the JFSC, on the progress made towards the core and non-core recommendations of the IMF, along with continuing action plans.

With the next MONEYVAL visit due in Guernsey in late 2014, and Jersey in early 2015, it is relevant to reflect on the significant strengthening of both islands’ AML framework, undertaken in the run‑up to the December 2013 report and the work being progressed in 2014.

JERSEYJersey has made several major changes to its AML strategy and legislation. One of the most significant changes relates to the ability to place reliance upon another to have applied identification measures and the application of simplified due diligence, specifically in relation to third party introduced/intermediate relationships. A first step in this new direction has been the removal of the terms ‘Intermediary’ and ‘Introducer’ from the legislation.

Considerable changes have been made to clarify the application of simplified due diligence measures on the criteria that must be met. These include a documented assessment of the risk of placing reliance upon another. This change was made in the AML legislation and the JFSC has engaged with the industry on the proposed changes to the regulations, in order to assist the industry in their implementation.

A particular area of interest is the clarification of the confirmations and assurances required of the third party being relied upon and the enhanced risk assessment considerations required when applying simplified due diligence. It is expected that, as in Guernsey, the documented risk assessment will have to consider any failure of a third party to make good on the assurances provided and documented when entering into such relationships.

The JFSC is consulting with the Industry on all the proposed changes that will be required to implement the new legislation already in force. Feedback was expected in October 2014.


CHAN

NEL

ISLA

NDS

MONEYVAL ‘LOCAL REGULATION – INTERNATIONAL EVALUATION’(CONTINUED)

GUERNSEYThe GFSC undertook substantial structural changes prior to the issue of the December 2013 MONEYVAL report. This included the introduction of a dedicated Division, the Financial Crime Supervision & Policy Division (FC&A). The role of this Division is to provide a consistent approach to AML across all financial services businesses.

A particular area of interest to the FC&A team currently is the use and application of risk assessments by financial services businesses in the round, with a particular focus on the cumulative effect on risk in a relationship.

In May 2014, the GFSC invited CEOs of financial services businesses to consider this point as part of its ongoing requirement to take into account the risks faced by a financial services business.

An example highlighted by the FC&A team was that of the cumulative effect of third party/introduced business in a relationship. As noted, a Guernsey financial services business must undertake a risk assessment of any such relationship. However, the FC&A team wants Guernsey financial services businesses to ensure they consider this risk in the whole, rather than in isolation.

As the JFSC is doing, the GFSC is currently reviewing with industry changes to its AML Regulation to ensure that it meets the requirements of the FATF 40+9 recommendations and a report to industry is expected by the end of 2014.

Both Jersey and Guernsey continue to evolve at the leading edge of world AML Regulation. As noted above, more changes to strengthen and improve current legislation and regulation are expected from both the GFSC and the JFSC in the coming months.

To stay on top of this issue and for more details about the AML Regulations in Guernsey or Jersey, visit the GFSC or JFSC websites.


CHAN

NEL

ISLA

NDS

MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE II

MiFID II is the recently approved revision of the Market in Financial Instruments Directive (MiFID) and includes the introduction of a new regulation the Market in Financial Instruments Regulation (MiFIR) from the European Commission. Together they are commonly known as MiFID II.

MiFID II/MiFIR will apply variously to:

■■ Investment firms

■■ Credit institutions providing investment services and/or performing investment activities

■■ Market operators

■■ In-scope financial counterparties under EMIR

■■ Certain non-financial counterparties falling under EMIR

■■ CCPs

■■ Persons with proprietary rights to benchmarks.

Of particular interest in the Channel Islands, is the inclusion of third country firms providing investment services or activities within the EU.

So what would this mean for the Channel Islands Funds Industry?

The first step to a continued provision of any in-scope service within the European Economic Area (EEA) will be the equivalence discussion between both the JFSC and the GFSC and ESMA. To that end, it is expected that both the GFSC and the JFSC will be engaging with the financial services sector and ESMA over the coming months.

The next step for financial services businesses will be to consider what it would mean to comply with the relevant provisions of MiFID or MiFIR. There are several notable requirements, such as the establishment of branches in EEA Member States, EU style investor protection measures and the expected reporting requirements, all of which would need careful legal and operational consideration.

All in all, MiFID II and particularly MiFIR may well impact on the servicing of EEA clients within the Channel Islands. What remains to be seen, is the extent of the impact as both the JFSC and GFSC enter discussions with industry and ESMA over the coming months.


FRAN

CE

UPDATE ON THE FRENCH TRANSPOSITION OF THE CRD IV

Ordinance No 2014-158, dated 20 February 2014, transposed into French law the legislative provisions of the fourth Capital Requirements Directive (CRD IV).

The Directive and the Ordinance provide amongst their key provisions enhanced corporate governance rules. In that respect, the Autorité de contrôle prudentiel et de résolution (ACPR), the French prudential regulator, has issued two Positions aimed at clarifying some of the new governance provisions.

With regard to Article 88 of the CRD IV prohibiting the chairman from exercising simultaneously the functions of a chief executive officer within the same institution, unless justified by the institution and authorised by competent authorities, the ACPR specifies the criteria it will take into account when considering any exemption to this prohibition, namely:

■■ The nature and variety of the activities of the entity: the more complex the activities, the less likely the ACPR will grant any exemption

■■ The size of the entity based on its balance sheet

■■ The international reach of the entity’s operations (via its affiliates, branches, etc.)

■■ The number, quality and nature of the shareholders (the more limited the number of shareholders, the more inclined the ACPR will be to grant an exemption).

Position 2014 P-07, dated 20 June 2014 confirms that, in accordance with the Directive:

■■ Credit institutions shall be effectively directed by at least two persons (in a Société Anonyme, these would be the Managing Director/CEO (Directeur Général) and the Deputy Managing Director (Directeur General Délégué))

■■ The Chairman (Président) cannot be one of the “effective managers”, i.e. cannot act as managing director or deputy managing director

■■ All the members of the board shall now be subject to requirements in terms of skills and honorability, which may be monitored by the ACPR.

The ACPR also highlights the strengthened and crucial supervisory and surveillance role of the board and of the chairman of the board and explicitly refers to the chairman as having a key role and responsibility in managing the board and supervising the management of the company. As such, the ACPR views the chairman as its main contact, alongside the ‘effective managers’, in connection with its functions.


FRAN

CE

FATCA, UPDATE ON LOCAL IGA

The French Ministry of Economy and Finance (Ministère de l’Economie et des Finances) has responded to a letter from the Fédération Bancaire Française (FBF), the French banking federation, dated 1 July 2014, regarding some points that need to be clarified on the application of the Foreign Account Tax Compliant Act (FATCA), following the disclosure of IRS Notice 2014-33. This Notice mentioned that a reporting Model 1 Inter-Governmental Agreement (IGA) Foreign Financial Institution (FFI) may apply the exemptions contained in the Notice, only if the Model 1 jurisdiction allows it through the revision of its guidance and adopts this transition relief.

The French Ministry published its response, through a letter dated 31 July 2014.

The French Ministry confirmed that an FFI is able to treat entity (and not individual) accounts opened during the second half of 2014 as ‘pre‑existing’ accounts for FATCA purposes. Pre‑existing entity account status generally gives an FFI until 30 June 2014 to document the account for FATCA purposes, instead of having to document the entity at account opening.

According to the IGA signed between France and the US in November 2013, financial institutions shall obtain a self-certification from individuals to determine whether the account holder is a citizen of the United States or a tax resident of that country. Banking institutions have stated that it is difficult to obtain this certification from their clients and have requested to be exempted. The French Ministry has taken this into consideration. However, it considers that the provision shall be applied and has provided a template to be used for the self-certification.

2014 and 2015 will be regarded as a transition period for the enforcement of FATCA requirements, i.e. due diligence, reporting and withholding. Consequently, fines will not be applied when failure to conform arises from a refusal of the taxpayer to provide the requested information despite good faith efforts of the FFI to comply with the requirements (see article 1736 from the Code Général des Impôts).

The French Ministry of Economy and Finance has also provided clarification on how to deal with fully registered shares (‘nominatif pur’). Regarding exchange traded funds (ETFs) with fully registered shares, there is no need to report pre-existing clients but only new registered shareholders. Accounts opened for new shareholders on-boarded before December 2015, will be considered as financial accounts only as from 1 January 2016 and will not have to be reported until 2017.

For all other type of securities held as fully registered shares (i.e. that are not shares of ETFs) the issue is not yet resolved and is still under discussion.


GERM

ANY

FEE‑BASED INVESTMENT ADVICE ACT

On 1 August, the new Fee-based Investment Advice Act came into force. It requires such advice to consider the following requirements (which go beyond those for conventional investment advice):

■■ The advisor is only remunerated by the client

■■ Access is given to a sufficient range of financial instruments available in the market

■■ The advisors should also recommend issues from other issuers/providers

■■ There should be no fixed-price transactions except in relation to the advisor’s own issues

■■ There must be separation of organisation, functions and staff

■■ The advisor must be registered as a fee-based investment advisor.

The new rules are intended to increase transparency with respect to fees or commissions paid for investment advice. They enable clients to understand who pays for advice and allow them to distinguish between commission-based investment advice and fee-based investment advice. Commission-based investment advising is currently the predominant model in the German market. Under this model, the advisor is paid by the providers or issuers of financial instruments. Although advisors are legally obliged to disclose to clients any inducements received, many clients remain unaware of this relationship.


GERM

ANY

INFORMATION FROM THE GERMAN FEDERAL TAX OFFICE ON FATCA

BAFIN DRAFT DEPOSITARY CIRCULAR

The German Federal Central Tax Office published the first pieces of information regarding FATCA implementation in Germany on its website, including:

■■ Registration of financial institutions at the German Federal Central Tax Office

■■ Further submission to the German Federal Central Tax Office.

The process is expected to start on 15 April 2015.

A final version of the depositary circular is still pending and is not expected before November/December 2014. The reason for not publishing the new circular now is that the still open topic of the required level of segregation is with ESMA. BaFin has not yet decided to publish the circular without covering the issue of segregation topic or to wait for further detail and clarification from ESMA. The circular will include all topics of the current circular adapted/amended by the AIFMD specifics, e.g. look through (e.g. fund of funds, private equity investments), meaning of outsourcing and all the other hot topics which are not yet clear in the German market.

http://www.bzst.de/DE/Steuern_International/FATCA/FATCA_node.html


GERM

ANY

BAFIN GUIDANCE NOTE ON MARKETING INVESTMENT CODE

On 12 August, the Federal Financial Supervisory Authority (BaFin) published a guidance notice on marketing units or shares in a foreign AIF or an EU AIF, managed by a foreign AIFM to professional or semi‑professional investors in the Federal Republic of Germany, pursuant to Section 330 of the Kapitalanlagegesetzbuch (KAGB).

This guidance notice sets out the basic features of the notification procedure, pursuant to Section 330 KAGB of 4 July 2013 and explains the conditions. The guidelines include explanations on:

■■ Submission of notice/documents and notification letters

■■ Specific requirements for umbrella structures

■■ Content of notification pursuant to Section 330 KAGB (particulars and documents).


GERM

ANY

BAFIN CONSULTATION ON DISCLOSURE OF COSTS OF CLOSED‑ENDED FUNDS

On 31 July, the BaFin published its draft ‘Sample Modules for Terms and Conditions on Costs of Closed-ended Mutual Investment Funds’. The document contains sample wording and instructions explaining the administrative practice of the BaFin in approving cost clauses. It enables companies to formulate approvable costs clauses, and helps accelerate the processes with the BaFin. The main focus is on the adequate basis of assessment for the calculation of appropriate ongoing remuneration of the management company. Further key topics are:

■■ Initial costs

■■ Performance-related remuneration

■■ Costs of special purpose companies

■■ Catalogue of separately billable expenses.

It is not the intention of the BaFin to require a word-for-word adaption of the sample modules, but the sample wording is to be seen as the minimum standard with regard to transparency and appropriateness when assessing alternative wordings.


IREL

AND

UPDATE TO ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE Q&A

The Central Bank of Ireland (CBI) updated its Q&A on local interpretations of the requirements of the AIFMD in late July. In relation to remuneration, the CBI confirmed that any delegates subject to the requirements of CRD and MiFID could be deemed to be subject to remuneration provisions equally as effective as AIFMD. This also extends to non EU firms which have internal remuneration policies which are equally effective as CRD or MiFID.

The Q&A also confirms that it is not necessary to include shares in the underlying AIF as part of the pay-out provisions for a delegate’s variable remuneration if there are any legal, regulatory or tax reasons why this would not be appropriate, provided some other appropriate proxy is found.

The CBI also clarifies in this update that the governing law between an Irish AIF and a non-Irish AIFM is a matter for the parties to agree. Finally, the CBI confirms that an Irish AIF must disclose leverage limits in its offering documents on both a gross and commitment basis.


IREL

AND

LOAN ORIGINATING AIFS

CONSULTATION ON COLLATERAL DIVERSIFICATION

In September the CBI issue an updated AIF Rulebook. The purpose of this update was to include a section establishing a framework for Irish regulated loan originating Qualifying Investor AIFs (QIAFs).

The new rules mark a change in the CBI’s general prohibition on lending by Irish funds for this specific type of QIAIF, in recognition of the potential valuable non-bank financing that such products can bring to borrowers. The loan originating QIAIF will be subject to additional rules around credit assessment, diversification, liquidity, due diligence, leverage, disclosure, reporting and stress testing. The CBI has indicated that it will accept applications for loan originating QIAIFs from 1 October 2014.

In advance of its adoption of the revised ESMA Guidelines on ETFs and other UCITS Issues, the CBI launched a consultation on the local application of the relaxed collateral diversification rules.

In its consultation, the CBI is proposing to apply the new guidelines permitting collateral from a sovereign issuer to exceed 20% of the NAV of the UCITS, provided that the UCITS puts in place procedures designed to include a more detailed assessment of any such collateral and ongoing monitoring of the credit quality of the collateral.

The CBI expects that a UCITS will put in place a plan to deal with collateral of a deteriorating quality. The CBI also expects that a UCITS will not accept new or replacement collateral, carrying a credit rating lower than one of the two highest credit ratings awarded by each agency rating the instrument, unless specifically approved by the board.

The consultation was open for responses until 17 October.


IREL

AND

PUBLICATION OF ICAV BILL

EUROPEAN MARKET INFRASTRUCTURE REGULATION

During the summer, Ireland saw the publication of the Irish Collective Asset-management Vehicles (ICAV) Bill. The legislation will create a new corporate vehicle specifically for investment funds. The separate legislation will mean that any changes to legislation impacting a corporate entity, established as a public limited company (plc), will not automatically impact an ICAV. The ICAV will also be able to qualify as a ‘check-the-box’ entity for U.S. taxable investors, meaning that, unlike a plc, an ICAV can elect to be taxed as a partnership for US federal tax purposes, rather than as an opaque company subject to the Passive Foreign Investment Company (PFIC) regime.

The legislation is expected to be enacted before the end of the year. The CBI has indicated that it will be in a position to accept applications for ICAVs within two weeks of this date.

Following the publication of the EU Commission’s response to ESMA on the definition of spot FX transactions, the CBI, which is expected to be appointed as the national competent authority for EMIR in Ireland imminently, amended its FAQ on EMIR to align its position with that in the Commission letter. The FAQ now clarifies what FX transactions should be deemed to be reportable or not under EMIR for Irish entities:

■■ FX transactions with settlement on or before the relevant spot date are not to be reported

■■ FX transactions with settlement beyond seven days are to be reported

■■ FX transactions between the spot date and seven days should only be reported if they are required to be so by the rules of the jurisdiction of any non-Irish counterparty with which the Irish firm trades.


IREL

AND

CENTRAL BANK CONSULTATION ON FUND MANAGEMENT COMPANY EFFECTIVENESS

The CBI issued a consultation paper (CP86) on 19 September into the effectiveness of fund management companies, including self-managed investment companies, of both UCITS and AIFs.

The consultation has been issued in light of the increasing amount of regulation and the need for a management company to maintain substantive control over the activities of the fund and its delegates. It covers four main areas:

GUIDANCE ON DELEGATE OVERSIGHTThe CBI is considering issuing guidance to encourage industry best practice in relation to how management companies conduct oversight of entities to which it has delegated functions such as investment and risk management, administration and distribution. As a basis for this guidance, the CBI had invited a group of fund professionals to compile a document on good governance standards and on how a management company should discharge its obligations where activities have been delegated.

STREAMLINING THE MANAGEMENT FUNCTIONSCurrently, a UCITS management company must fulfil ten prescribed management functions and an AIFM must fulfil sixteen. The CBI plans to re-define these functions into six core managerial oversight tasks.

REQUIREMENT FOR IRISH RESIDENT DIRECTORSExisting requirements, imposed by the CBI, are that all management companies and fund boards must have at least two Irish resident directors. The CBI suggests replacing this requirement with a requirement which would see the appointment of two directors, who are in Ireland for at least 110 working days per year. A management company could substitute one of those directors for an individual who is available to meet the CBI at short notice (within 24 hours) and who is independent of the depositary or any service provider and is competent in one of the management functions.

RATIONALE FOR BOARD COMPOSITIONIn light of the increased focus on governance and the competence of board members, the CBI intends to introduce a new rule requiring a management company, as part of its authorisation process, to submit details as to how the composition of the board provides it with sufficient expertise to fulfil all the duties expected of the directors.

CP86 is open for responses until 12 December 2014.


ITAL

Y

AMENDMENTS TO THE CONSOLIDATED FINANCIAL LAW: ESTABLISHMENT OF CREDIT FUNDS

An important innovation was recently introduced in the Italian investment funds market, establishing a new category of investment funds called ‘Credit Funds’. These funds differ from private equity funds, since the new legislation enables them to lend money to firms instead of contributing to their capital.

The first step in the implementation was taken through Ministerial Decree number 91 of 24 June 2014, which amended the Consolidated Financial Law establishing these new funds and providing that they will provide information to the Central Credit Register.

More detailed provisions have been anticipated by the review of Ministerial Decree Number 228/1999 and of the secondary discipline of asset management regulation, which has not been completed yet.

These regulations, which are subject to public consultation, provide that such credit funds should be set up in closed-ended form and introduce some prudential rules with regard to concentration and leverage limits. The legislation also allows these credit funds to be offered to retail investors.

In order to launch these new credit funds, the market will have to wait for the final issue of the above regulations.


ITAL

Y

ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE

The AIMFD is yet to be implemented in Italy. The deadline of 22 July 2014 has not been met and the Italian Government agreed to grant more time to the industry to comply with the Directive requirements (until 31 December 2014).

Italian industry associations replied to the Commissione Nazionale per le Società e la Borsa (CONSOB) and Bank of Italy public consultation, which expired on 25 August, on the following regulatory provisions:

■■ Bank of Italy Regulation on Collective Investment Schemes

■■ CONSOB Regulation implementing the provisions on Intermediaries (CONSOB Regulation no. 16190/2007) and Issuers (CONSOB Regulation no.11971/1999)

■■ Bank of Italy – CONSOB Joint Regulation on the organisation and intermediary procedures providing investment services or collective investment management services.

No news of the outcomes are known so far, but industry associations are working closely with the regulators in order to reach the full implementation.


LUXE

MBO

URG

NEW CSSF CIRCULAR 14/591

According to an existing, well-established supervisory practice, the Commission de Surveillance du Secteur Financier (CSSF) requires that sufficient time is provided to investors when there is a material change to their interests in an open-ended undertaking for collective investment (UCI) governed by the Luxembourg law of 17 December 2010 relating to UCIs (the Law of 2010). This should enable them to make an informed decision on the envisaged change and, in the event they disagree, they are given the possibility to present their holding for redemption or conversion free of redemption or conversion charges. The purpose of this circular is to explicitly lay down this administrative practice in writing and to provide clarifications in relation to it.


LUXE

MBO

URG

LAW OF 28 JULY 2014 ON THE IMMOBILISATION OF BEARER SHARES AND UNITS

Entering into force on 18 August 2014, the Law follows the recommendations of FATF and the Global Forum on Transparency and Exchange of Information for Tax Purposes relating to the identification of holders of bearer shares and units. It adopts the compulsory deposit and immobilisation of bearer shares and units with a depositary allowing identification of the holders thereof.

SCOPEThe Law applies to Luxembourg law commercial companies (under the form of sociétés anonymes (SA) and sociétés en commandite par actions (SCA)) that have issued or intend to issue bearer shares or units, including investment companies in risk capital (SICAR), investment companies with variable capital (SICAV), investment companies with fixed capital (SICAF) and specialised investment funds (SIF). It further applies to contractual type vehicles issuing bearer units such as mutual investment funds (FCP) or mutual securitisation vehicles.

COMPULSORY DEPOSIT AND IMMOBILISATIONBearer shares or units, whether already in issue or to be issued, need to be deposited with a professional depositary appointed by the issuer.

DEPOSITARYThe depositary cannot be a shareholder of the issuer and must be chosen from one of the Luxembourg established professionals listed in the Law (which are all subject to anti-money laundering and financing of terrorism legislations) such as credit institutions.


UNIT

ED K

INGD

OM

BENCHMARKS

Her Majesty’s (HM) Treasury has launched a consultation on extending the regulatory framework implemented for the regulation of LIBOR to other benchmarks in the foreign exchange, fixed income and commodity markets. The consultation follows a report from the Fair and Effective Markets Review, which was launched in June 2014 to review the operation of wholesale financial markets, which is a joint exercise between HM Treasury, the Bank of England (BoE) and the Financial Conduct Authority (FCA).

The consultation sets out the regulatory proposals for seven designated major benchmarks:

■■ Sterling Oversight Index Average (SONIA)

■■ Repurchase Overnight Index Average (RONIA)

■■ WM/Reuters 4pm London Fix

■■ ISDAFix

■■ London Gold Fixing

■■ LMBA Silver Price

■■ ICE Brent futures contract, traded on the ICE Futures Europe (IFEU) exchange.

The Government intends to introduce the new regime for the designated benchmarks by the end of 2014. Comments on the consultation were due by 23 October 2014.


UNIT

ED K

INGD

OM

DEALING COMMISSION DISCUSSION PAPER

The FCA has published a Discussion Paper (DP) following its thematic supervisory review on how the use of dealing commission for the purposes of research currently works.

The DP looks how the current use of dealing commission regime is working and its impact on the wider market and whether reform is needed to ensure investment managers are managing costs in the most effective way for the benefits of their clients.

The FCA reviewed 30 firms as part of the thematic review which involved 17 investment managers, 13 brokers and a number of corporate issuers. The Key findings were:

■■ Whilst a number of firms have strived to improve their governance arrangements relating around how they purchase research with dealing commissions, only a few were effectively assessing the value of research services they received. Only two firms were currently meeting FCA expectations.

■■ The thematic review findings highlighted how there is a lack of price transparency for research due to the way the market has evolved and the fact that the bundling of execution and research services by brokers makes the price discovery process difficult.

In the DP the FCA also highlights how the existing regulatory framework in this area might be affected by the implementation of MiFID II.


UNIT

ED K

INGD

OM

RETROSPECTIVE APPLICATION OF REGULATORY RULES – CALL FOR EXAMPLES

The FCA has asked for examples of where the retrospective application of regulatory rules has created uncertainty for firms. The request follows work done by the FCA that looked at how differences in understanding between the regulators and firms can have knock-on effects to the quality of services that consumer receive.

Following feedback from the industry the FCA has called for examples of where innovation is being held back by regulatory uncertainty with a specific focus on where the regulator may have applied a more exacting standard for interpretation of the rules with the benefit of hindsight.

The call for examples closed on the 10th October.


UNIT

ED K

INGD

OM

BEST EXECUTION THEMATIC FINDINGS

At the end of July the FCA published its thematic best execution review. The FCA believes that best execution is not being consistently delivered to all clients and that the failings found during its 2009 thematic review have largely gone unaddressed. The FCA has made it clear that it now expects the industry to comply with the review’s findings.

The review’s main findings are:

■■ The majority of firms do not have sufficient management focus, front office practices and supporting controls to deliver best execution

■■ There is a need for firms to improve their understanding of the scope of best practice obligations and the degree of management engagement in execution strategy.

FCA PUBLISHES LETTERS CLARIFYING ITS USE OF ATTESTATIONS

The FCA is revising its guidance on attestations and has committed to publishing quarterly data on how they are used following a number of concerns relating about current practice in this area.

The commitment followed the publication of an exchange of letters between Graham Beale, the Chairman of the FCA Practioner panel and Clive Adamson, the FCA Director of Supervisions, relating to the use of attestations.

The FCA Practioner Panel sought clarification around how the use of attestations operate since the panel had concerns about the practice of asking managers to attest that they would take certain actions. The Panel also said the FCA needs to be more transparent and consistent about the use of attestations as well as the need to monitor how they are used.


UNIT

ED K

INGD

OM

SKILLED PERSONS REVIEW UNDER FSMA, PRA AND FCA LETTERS

The Prudential Regulation Authority (PRA) and FCA have published a number of responses to a letter sent by the House of Commons Chair of the Treasury Select Committee, Andrew Tyrie MP, in which he asked how the two regulators use their powers to require a report by a skilled person in accordance with the Financial Services and Markets Act 2000.

Andrew Bailey, (Deputy Governor Prudential Regulation at the Bank of England and Chief Executive Officer of the PRA) set out the internal system of check and balances to ensure section 166 reports are only instigated when it is economically effective to do so. Martin Weathley (Chief Executive of the FCA) replied in a similar vein stressing the controls used to ensure the effectiveness, consistency and proportionality of using a skilled persons review.


AUTU

MN

2014

ABBREVIATIONS

ACPR Autorité de Contrôle Prudentiel et de Résolution (the French Regulator)

AIF Alternative Investment Fund

AIFMD Alternative Investment Funds Manager Directive

AML Anti-Money Laundering

AQR Asset Quality Review

BaFin Federal Financial Supervisory Authority

BEPS Base Erosion and Profit Shifting

BoE Bank of England

BRRD Banking Recovery and Resolution Directive

CBI Central Bank of Ireland

CCP Central Clearing Party

CDS Credit Default Swaps

CESR Committee of European Securities Regulators

CFA Committee on Fiscal Affairs (OECD)

CIV Collective Investment Vehicles

CM Clearing Member

CPSS-IOSCO Committee on Payment and Settlement Systems and International Organisation of Securities Commissions

COLL UK Collective Investment Schemes sourcebook

CONSOB Commissione Nazionale per le Società e la Borsa

CRD IV Fourth Capital Requirements Directive

CSD Central Securities Depository

CSSF Commission de Surveillance du Secteur Financier

DP Discussion Paper

EBA European Banking Authority

ECB European Central Bank

ECOFIN Economic and Financial Affairs Council

ECON Economic and Monetary Affairs Committee

EEA European Economic Area

EIOPA European Insurance and Occupational Pensions Authority

EMIR European Market Infrastructure Regulation

ESAs European Supervisory Authorities (comprised of EBA, ESMA and EIOPA)


AUTU

MN

2014

ABBREVIATIONS (CONTINUED)

ESMA European Securities and Markets Authority

ETF Exchange Traded Fund

EU European Union

EUSD EU Savings Directive

FATCA Foreign Account Tax Compliance Act

FATF Financial Action Task Force

FBF Fédération Bancaire Française (French Banking Federation)

FC&A Financial Crime Supervision & Policy Division

FCA Financial Conduct Authority

FCP Fonds Commun de Placement (mutual investment fund)

FFI Foreign Financial Institutions

FSA Financial Services Authority

FSMA Financial Services and Markets Act

FX Foreign Exchange

GFSC Guernsey Financial Services Commission

HM Treasury Her Majesty’s Treasury

ICAV Irish Collective Asset-management Vehicle

IFEU ICE Futures Europe

IFIA Irish Funds and Industry Association

IGA Inter-Governmental Agreement

IMF International Monetary Fund

IORP II The second Institutions for Occupational Retirement Provision Directive

IOSCO International Organisation of Securities Commissions

IRS Internal Revenue Service

IRS Interest Rate Swap

JFSC Jersey Financial Services Commission

KAGB Kapitalanlagegesetzbuch

LIBOR London Interbank Offered Rate

LTG Long Term Guarantee

MAR Market Abuse Regulation

MEP Member of European Parliament

MiFID Markets in Financial Instruments Directive


AUTU

MN

2014

ABBREVIATIONS (CONTINUED)

MiFIR Markets in Financial Instruments Regulation

MMF Money Market Fund

MONEYVAL Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism

MNE Multi-National Enterprises

NAV Net Asset Value

NDF Non-Deliverable Forward

NPPR National Private Placement Regime

OECD Organisation for Economic Co-operation and Development

OJ Official Journal

OMD II Omnibus II Directive

OTC Over the Counter

PFIC Passive Foreign Investment Company

PLC Public Limited Company

PRA Prudential Regulation Authority

Q&A Questions and Answers

QIAIF Qualifying Investor Alternative Investment Fund

RDR Retail Distribution Review

RONIA Repurchase Overnight Index Average

RTS Regulatory Technical Standards

SA Société Anonyme

SAR Special Administration Regulations

SCA Société en Commandite par Actions

SCR Solvency Capital Ratio

SICAF (investment company with fixed capital)

SICAR Société d’Investissement en Capital à Risque (investment company in risk capital)

SICAV Société d’Investissement à Capital Variable (investment company with variable capital)

SIF Specialised Investment Fund

SONIA Sterling Oversight Index Average

SSM Single Supervisory Mechanism

UCI Undertaking for Collective Investment

UCITS Undertaking(s) for Collective Investment in Transferable Securities

2012 / Q1 2013 / Q1 2014 / Q1 2015 / Q1 2016 / Q1Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 POST 2016

FTT

DATA PROTECTION

FACTA

SOLVENCY II

IORP

SFT

SHAREHOLDERS RIGHTS DIRECTIVE

ELTIFs

ICSD

PRIIPs

MMF

UCITS V

MAD II / MAR

MiFID II / MIFIR

SLL

CSD

ALL OTHER CLIENTS

EC LEGISLATIVE PROPOSAL

US FATCA REGULATION UK FATCA AGREEMENTSAMENDMENTS TO REGULATION

1ST FFI REGISTRATION DUE DILIGENCE OF PRE-EXISTING CLIENTS

EIOPA REPORT ON LTG

PROVISIONAL LEVEL 1 TEXT










APPLICATION DEADLINE

FULL DEMATERIALISATIONAPPLICATION DEADLINE

TRANSPOSITION DEADLINE


US FATCA EFFECTIVE (ONBOARDING, FDAP WITHHOLDING)UK FATCA EFFECTIVE (ONBOARDING)

FATCA WITHHOLDING APPLIESTO GROSS PROCEEDS PAID TO NON-US ENTITIES

GLOBAL MULTILATERAL FATCA TO START

APPLICATION DEADLINEJANUARY 2017

BY 2023-25

5 YEAR TRANSITIONAL PERIODFOR KID REQUIREMENTUCITS FUNDS

APPLICATION DEADLINEJULY 2016




APPLICATION DEADLINEMARCH 2016

APPLICATION DEADLINEJANUARY 2017

APPLICATION DEADLINETBC




APPLICATION DEADLINESUBMISSION OF SET 1 ITS SUBMISSION OF SET 2 ITSPUBLICATION OF SET 1 GUIDELINES

PUBLICATION OF SET 2 GUIDELINES






FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT

FINAL LEVEL 2 TEXT

UK FATCA GUIDELINESFATCA TAX FORMS

OMNIBUS II VOTED ON IN PARLIAMENT

UK FATCA REPORTING OBLIGATIONS START

FINAL LEVEL 2 TEXT

FINAL LEVEL 2 TEXT

FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT

PRIMA FACIE CLIENTS (FATCA ONLY) HIGH VALUE INDIVIDUAL CLIENTS

FINAL LEVEL 1 TEXT

FINAL LEVEL 1 TEXT EC LEGISLATIVE PROPOSAL









EC LEGISLATIVE PROPOSAL – Q4 2011



FINAL LEVEL 2 TEXT

FINAL LEVEL 2 TEXT EC LEGISLATIVE PROPOSAL

US FATCA REPORTING OBLIGATIONS START

COMPLETED MILESTONES

FUTURE MILESTONES

COMPLIANCE/APPLICATION/TRANSPOSITION DATE


AUT

UMN

2014

REGULATORY TIMELINE

IMPORTANT INFORMATION

This paper is for information purposes only and does not purport to represent legal advice. Recipients must not place reliance upon it without seeking professional advice tailored to meet their specific needs. State Street does not therefore accept any responsibility for any loss occasioned to any person howsoever caused, or arising, or as a result of, or in consequence of action taken in reliance on the contents of this paper.

Contact Information

If you have questions regarding State Street’s Regulatory Insights, please contact:

EUROPE Sven Kasper +44 20 3395 3723 [email protected]

Francis Wood +44 20 3395 3437 [email protected]

CHANNEL ISLANDS Russell Turner +44 1534 609508 [email protected]

FRANCE Tanneguy Cazin +44 203 395 2434 [email protected]

Angdy Ma +33 44 45 43 37 [email protected]

GERMANY Ines Cieslok +49 69 667745 104 [email protected]

IRELAND Simon Firbank +353 1 776 8726 [email protected]

ITALY Alberta Castoldi +39 02 3211 7135 [email protected]

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Tom Pool +44 20 3395 3587 [email protected]

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Regulatory Insights Autumn 2014...SOLVENCY II DIRECTIVE UPDATE The Solvency II Directive 2009/138/EC...

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