October 2008
Irish domiciled investment funds are now available for distribution to Chinese investors
The Irish Financial Regulator signed a Memorandum of Understanding ( MOU) 23rd October 2008 with the China Securities Regulatory Commission (CSRC) and the China Banking Regulatory Commission (CBRC).This MOU is significant as Irish domiciled investment funds ( both UCITS and non UCITS) will now be able to avail of the Chinese Qualified Domestic Institutional Investor (QDII) regime which will allow Chinese investors to invest in those funds .The QDII regime is only available to investment funds that are domiciled in a jurisdiction that has an MOU with China. This represents a very significant opportunity for Irish domiciled investment funds as China is seen as one of the world’s largest pools of ( largely untapped) private capital.
Money market funds - valuing paper with a residual maturity of less than 3 months
The Financial Regulator has announced that it will permit Money Market Funds using an amortised cost valuation methodology to derogate from its requirement under Guidance Note 1/08 to carry out a weekly review of discrepancies between market value and amortised cost value for money market instruments with a residual maturity of three months and under. For the purpose of the mark to market calculation, these money market instruments may be valued at amortised cost, subject to a number of conditions. The Financial Regulator is permitting this derogation on a temporary and exceptional basis and will review the position quarterly.
Money Market Funds which have a rating will need to liaise with their own rating agency. It appears that while the rating agencies are likely to impose conditions and deal with each fund on a case by case basis, in general the temporary suspension of the mark to market requirement is unlikely to affect a funds rating in a negative way.
Money Market Fund remedies
The A&L Goodbody Funds team are seeing an increasing use of various remedies by money market funds who are affected by the market turmoil and are working to maintain their AAA ratings, and we are also seeing a pragmatic approach to such proposals being taken by the Financial Regulator. Some of the issues involve an increasing use of side pockets on a temporary and exceptional basis, dealing with collateral (received under stocklending or repurchase agreements) which has been invested in daily dealing money market funds rated AAA or equivalent where the fund is downgraded by the relevant rating agency and we are also seeing some suspensions of Funds.
CESR amends guidelines on UCITS eligible assets to clarify prohibition on physical short selling
As mentioned in our October news alert, on 2 October, 2008 CESR issued updated Guidelines on UCITS eligible assets. As expected, the changes make clear that physical short selling, whether or not backed by stock borrowing, is not permitted in a UCITS. The EU Commission had requested CESR to clarify the position regarding physical short selling in the context of the UCITS Directive (85/611/EEC) and ensure coherent treatment of the issue of physical short selling and borrowing throughout the Guidelines. As a result of this change, the Irish Financial Regulator moved quickly to clarify that a UCITS may not enter into a stock borrowing arrangement and, consequently, the use of borrowed stock to cover a physical short sale position is not possible. The Financial Regulator’s Policy Note of 5 October 2007 has been withdrawn.
Budget increased rates of exit tax for Irish Investor
On Budget Day a Financial Resolution was passed which has the effect of increasing the rates of exit tax payable on "chargeable events" happening on or after 1st January 2009. From that date the exit tax deductible from income distributions will increase to 23% from the current 20% and the rate of exit tax payable on redemptions, transfers and on the 8 year deemed disposal will be 26% up from the current 23%. Of course the existing exemptions remain in place so that, in effect, it should only be Irish resident investors who suffer this tax.
CESR has issued a Consultation Paper setting out its draft advice for the introduction of the UCITS Management Company passport. This can be accessed on the CESR website.
CESR response to recent market turmoilCESR has announced its intention to accelerate various initiatives in the light of market turmoil and will promote convergence of national decisions related to short selling; monitor the impact of recent market events on investment funds; review investor protection initiatives through studying the impact of the default of Lehman Brothers; issue a final statement on fair value measurement and related disclosure requirements for financial instruments in illiquid markets (see below); and closely monitor the orderly functioning of post trading infrastructures to ensure stability of clearing and settlement.
CESR issues second consultation on third set of guidance on Market Abuse
On 3 October 2008, CESR published a second consultation on its third set of guidance on the common operation of the Market Abuse Directive (2003/6/EC) in relation to insider lists and suspicious transaction reporting. The Consultation also deals with stabilisation and buyback programmes and the treatment of rumours. The Consultation closes on 9 January 2009.
CESR publishes MiFID supervisory briefings on conflicts of interest, best execution and inducements
On 6 October 2008, CESR published three MiFID Supervisory Briefings to help supervisors in looking at the arrangements that firms have put in place to ensure compliance with the MiFID requirements in relation to conflicts of interest, best execution and inducements. The briefings list the questions a supervisor may wish to ask to satisfy itself about a firm's approach to applying the rules such as how firms identify and manage conflicts of interests ,how firms put in place arrangements for best execution and demonstrate adherence to their policy and how firms classify payments and set up arrangements and procedures so as to ensure that they are compliant regarding inducements.
CESR publishes statement on fair value measurement and related disclosures on financial instruments in illiquid markets
On 3 October 2008, CESR published a statement on fair value measurement and related disclosures of financial instruments in illiquid markets The Statement is useful to securities regulators who monitor compliance with the Transparency Directive and the Market Abuse Directive. Responsibility for setting standards, formally interpreting standards and issuing general interpretation of existing standards lies with the International Accounting Standards Board (IASB). The statement will be used when CESR responds on this topic to the ECOFIN Council.
CEBS and CESR issue advice to the Commission on commodity derivatives business
On 15 October 2008, CEBS and CESR issued technical advice to the EU Commission following on the EU Commission's call for advice on the regulatory treatment of firms that provide investment services on commodity and exotic derivatives. In light of the treatment of specialist commodity derivatives firms under the Markets in Financial Instruments Directive (MiFID) and the Capital Requirements Directive (CRD), CEBS and CESR identified the potential for market and regulatory failures in the commodity derivatives markets, and propose detailed recommendations which include revision of MiFID exemptions, and the possible application of the full CRD regime to commodity derivative firms.
EU Commission will review derivatives market
On 17 October 2008, the EU Commission published a statement made by Charlie McCreevy, Commissioner for Internal Market and Services, announcing that the EU Commission will look at the derivatives market and, in particular, at issues such as complexity, lack of transparency, risks, establishing a central clearing agency for derivatives trades and standardising derivatives. Mr McCreevy wants to have concrete proposals on the derivatives market by the end of 2008.
IOSCO task force on commodities markets
On 1 October 2008, the International Organisation of Securities Commissions (IOSCO) announced that it has established a task force on commodities markets, following concerns about increased volatility in the commodity futures markets. The task force will look at commodities futures markets, and, in particular, technology, globalisation, product developments and investor base.
IOSCO consultation on regulatory standards for Funds of Hedge Funds
On 6 October 2008 IOSCO issued a consultation on “Proposed Elements of International Regulatory Standards on Funds of Hedge Funds Related Issues Based on Best Market Practices". The consultation proposes international regulatory standards so as to address investor protection issues, because of increasing retail investment in hedge funds through funds of hedge funds. The consultation will close on 5 January 2009.
CESR, CEBS and CEIOPS clarify EU requirements for payer information accompanying electronic transfers of funds
On 16 October 2008, CESR, CEBS and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) issued their common understanding of the requirements of the Regulation regarding information on the payer accompanying transfers of funds (2006/1781/EC) (Regulation).This will help payment service providers deal with payments which lack the payer information which the Regulation requires.
Energy Markets
On 1 October 2008, the European Regulators' Group for Electricity and Gas (ERGEG) and CESR published their final advice to the EU Commission on market abuse issues related to trading in the energy markets. The advice recommends the implementation of an EU market abuse framework for electricity and gas products not covered by the Market Abuse Directive and disclosure obligations in energy sector regulation. ERGEG and CESR are now consulting on the remaining issues under the Commission's mandate (transparency, record keeping and information exchange) and are to issue final advice to the Commission by the end of 2008.
Irish Financial Services Regulatory Authority
7 new platforms and 57 new funds were authorised by the Irish Financial Services Regulatory Authority in September 2008.
Irish Stock Exchange
The share/units of 16 new sub-funds of existing funds, 6 new single funds, 80 additional new classes and 4 new umbrella fund were admitted to the Official List of the ISE during September 2008.
The contents of this Newsletter are necessarily expressed in broad terms and limited to general information rather than detailed analyses or legal advice. Specialist professional advice should always be obtained to address legal and other issues arising in specific contexts.
© A&L Goodbody 2008
A&L Goodbody International Financial Services Centre North Wall Quay Dublin 1 Tel: +353 1 649 2000 Fax: +353 1 649 2649