Asset Management & Investment Funds: EU & International Developments
ESMA Q&As on the application of AIFMD and the UCITS Directive
The European Securities and Markets Authority (ESMA) has updated:
- its Q&A on the application of the AIFMD with new Q&As on the:
- Application of remuneration disclosure requirements to staff of the delegate of an AIFM to whom portfolio management or risk management activities have been delegated
- Disclosure of AIFM delegates' staff remuneration in annual reports
- Periodic reporting (under Article 13 of the Regulation on reporting and transparency of Securities Financing Transactions ) for UCITS and AIFs to investors on the use of securities financing transactions and total return swaps
- its Q&A on the application of the UCITS Directive with a new Q&A on periodic reporting (under Article 13 of the Regulation on reporting and transparency of Securities Financing Transactions) for UCITS and AIFs to investors on the use of securities financing transactions and total return swaps.
MiFID II and MiFIR apply from 3 January 2018.
MiFID II - authorisation of investment firms
The following legislation relating to technical standards required under the MiFID II Directive (2014/65/EU) was published:
- Commission Delegated Regulation (EU) 2017/1943 which sets out regulatory technical standards (RTS) on information and requirements for the authorisation of investment firms. The RTS contain a harmonised list of information to be provided to the competent authorities by investment firms as part of their authorisation process. They also set out the authorisation requirements applicable to the management of investment firms, and the requirements applicable to shareholders and members with qualifying holdings, as well as the identification of obstacles that may prevent effective exercise of the supervisory functions of the competent authority.
- Commission Implementing Regulation (EU) 2017/1945 which sets out implementing technical standards (ITS) on notifications by and to applicant and authorised investment firms. The ITS set out standard forms, templates and procedures for the notification or provision of information concerning applications for the authorisation of investment firms.
MiFID II - acquisitions of qualifying holdings in investment firms
The following legislation relating to technical standards required under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID) and the MiFID II Directive (2014/65/EU) was published:
- Commission Delegated Regulation (EU) 2017/1946 which sets out RTS on an exhaustive list of information to be included by proposed acquirers in the notification of a proposed acquisition of a qualifying holding in an investment firm. The RTS set out the information to be provided by a proposed acquirer to the competent authority of the target entity.
- Commission Implementing Regulation (EU) 2017/1944 which sets out ITS on standard forms, templates and procedures for the consultation process between relevant competent authorities in relation to the notification of a proposed acquisition of a qualifying holding in an investment firm. The ITS set out the procedures that should be followed during the notification process for the exchange of information between the competent authority of the target entity and the competent authority of the proposed acquirer. They also contain standard forms and templates to be used by competent authorities.
The Delegated Regulation was adopted by the European Commission on 11 July 2017 and the Implementing Regulation was adopted by the Commission on 13 June 2017.
MiFID II - EU investment firms' obligations when sourcing brokerage and research services from broker-dealers in non-EU countries
The European Commission issued FAQs that clarify EU investment firms' obligations when they source brokerage and research services from broker-dealers in non-EU countries. The FAQs were published following discussions between the EU Commission, the US Securities and Exchange Commission (US SEC) and other non-EU jurisdictions. They do not purport to represent an authoritative interpretation of the law. The FAQs clarify how EU firms can procure international research and brokerage services in full compliance with their obligations under MiFID II.
The Commission's FAQs are not restricted to sourcing brokerage and research services from US brokers, but explain how such services might be sourced from third country jurisdictions, which may include the UK post-Brexit. The US SEC also published a related press release explaining the steps it has taken (in the form of "no-action letters") to facilitate the cross-border implementation of the MiFID II research provisions. This development is very welcome and will enable US regulated groups to comply with MifID II rules.
ESMA MiFID II Q&As
ESMA has updated:
- its Q&A on MiFID II and MiFIR investor protection and intermediaries topics with new Q&As on:
- client categorisation
- post-sale reporting
- recording of telephone conversations and electronic communications
- best execution
- information on costs and charges
- its Q&As on MiFID II and MiFIR market structures topics with new Q&As on:
- direct electronic access and algorithmic trading
- multilateral and bilateral systems
- its Q&As on MiFID II and MiFIR transparency topics with new Q&As on:
- transparency requirements
- non-equity transparency
- the systematic internaliser regime
- its Q&As on MiFID II and MiFIR post trading topics. The first Q&A published relates to straight-through processing
ESMA has updated its Q&A on the Implementation of the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) with:
- an amended answer to general question 1 on funds and counterparties (the amended answer applies from 1 November 2017)
- an amended Q&A on the definition of OTC derivatives
- a new Q&A on the ongoing monitoring of collateral requirements
- the clearing obligation
- the suspension of the clearing obligation
- the reporting requirements
- the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty
- the registration and supervision of trade repositories
- the requirements for trade repositories.
ESMA has updated its Q&A on the implementation of the Regulation (EU) No 909/2014 on improving securities settlement in the EU and on central securities depositories (CSDR) with new Q&As on:
- the protection of securities of participants and those of their clients
- the provision of banking-type ancillary services
- requirements for CSD links
ESMA work on the impact of charges on mutual fund returns
ESMA published an article (in its latest Trends, Risks and Vulnerabilities No.2 2017) on The impact of charges on mutual fund returns which included a preliminary analysis of the impact of ongoing fees, one-off charges and inflation on the returns of mutual funds. Key preliminary results for the EU fund industry show a substantial reduction in net returns available to investors, especially in the retail sector and weak cost or price sensitive investment decisions by retail investors. ESMA then received a mandate from the European Commission requesting the European Supervisory Authorities (ESAs), which include ESMA, to produce recurrent reports on the cost and past performance of the main categories of retail investment, insurance and pension products. ESMA will now embark on a large-scale study assessing the reporting of costs and past performance of retail investment products. For securities markets ESMA will initially focus on the costs and performance of UCITS funds. In that context, it will also examine the differences between active and passive investing, and the impact on costs and charges, and long-term return.
ESMA Compliance tables for the guidelines on sound remuneration policies
ESMA issued a compliance table for the guidelines on sound remuneration policies under the UCITS Directive. All member states are in compliance other than Hungary, Slovenia, Italy (who intend to comply) and Denmark which has an exempt threshold for minor severance payments. Of the EEA/EFTA states, Lichtenstein is in compliance and Norway and Iceland intend to comply.
ESMA also issued a compliance table for the guidelines on sound remuneration policies under the AIFMD. All member states are in compliance other than Hungary, Slovenia and Italy (who intend to comply). Of the EEA/EFTA states, Lichtenstein is in compliance and Norway and Iceland intend to comply.
European Supervisory Authorities
Andrea Enria, Chairperson of the Joint Committee of the ESAs, gave an introductory statement to the Committee on Economic and Monetary Affairs (ECON) of the European Parliament. This statement outlined the ESA's achievements, supporting an expansion of the ESA's role and welcoming the EU Commission's proposals for a review of the ESA's founding regulations (and possible streamlining of the decision making processes).
ESMA launched a consultation (closing 30 November 2017) on guidelines detailing the obligations which apply to non-significant benchmarks under the Benchmarks Regulation. The consultation paper proposes lighter requirements for non-significant benchmarks, their administrators and their supervised contributors in relation to four areas:
- procedures, characteristics and positioning of oversight function
- appropriateness and verifiability of input data
- transparency of methodology
- governance and control requirements for supervised contributors
ESMA updated its Q&As on the Benchmarks Regulation. Four new Q&As have been added relating to:
- application of the Benchmarks Regulation to EU and third country central banks
- exemption relating to single reference price
- definition of "family of benchmarks"
- definition of "use of a benchmark"
Additional questions on the Benchmarks Regulation may be submitted to ESMA through the Q&A tool on the ESMA website.
ESMA updated its webpage on benchmarks in relation to the register of administrators and third country benchmarks (required under Article 36 of the Benchmarks Regulation).
The European Commission has adopted three Delegated Regulations supplementing the Benchmarks Regulation:
- Commission Delegated Regulation specifies technical elements of the definitions in the Benchmarks Regulation on public availability and administering the arrangements for determining a benchmark.
- Commission Delegated Regulation specifies how the nominal amount of financial instruments other than derivatives, the notional amount of derivatives and the net asset value of investment funds are to be assessed.
- Commission Delegated Regulation specifies how the criteria of Article 20(1)(c)(iii) are to be applied for assessing whether certain events would result in significant and adverse impacts on market integrity, financial stability, consumers, the real economy or the financing of households and businesses in one or more member states.
The Council of the EU and the European Parliament will consider the Delegated Regulations. If neither of them objects, the Delegated Regulations will enter into force 20 days after their publication. They will be directly applicable in all member states.
- 9 October 2017, Steven Maijoor, ESMA Chair, addressed the ECON as part of the annual hearing of the chairs of the three ESAs.
- the ESMA work on MiFID II (pointing out ESMA's resource constraints)
- the ESMA work on Brexit (suggesting that ESMA opinions relied strictly on existing EU legislation), noting that ESMA had launched the Supervisory Cooperation Network (which allows NCAs to discuss individual relocation cases on an anonymous basis) and noting that ESMA would require contingency plans from individual supervised entities to cater for a scenario where the UK would leave without any arrangements in place.
- whether the current 3rd country equivalence model is fit for purpose, concluding that some significant legislative changes need to be considered soon, potentially in a horizontal manner and welcoming the proposals to centralise the third country supervision.
- ESMA also published key facts and figures for the work carried out by ESMA between October 2016 and September 2017.
17 October 2017. Steven Maijoor, ESMA Chair, delivered a speech at the ESMA Conference on the State of European Financial Markets. He spoke of MiFID II, the European system of Financial Supervision , CMU, PRIIPs, Supervisory convergence, Brexit, EMIR 2.2, the ESMA Regulation on centralisation of 3rd country supervision and that,
"we need a common EU financial data strategy amongst EU and National Authorities, paving the way to a more streamlined approach to the collection, transfer and usage of data in the EU". As regards Supervisory Convergence, Mr Maijoor notes that "we need to step up" and "our Board with 28 National Competent Authorities (NCAs) works very well for standard-setting but has its limitations for supervisory convergence work: we need to have a governance of our convergence work which ensures sufficient independence." Mr Maijoor welcomed the Commission's legislative proposals on this topic.
ESMA work programme
ESMA published its 2018 work programme, which sets out ESMA's priorities and areas of focus for 2018. Supervisory convergence and the assessment of risks are the two headline areas identified by ESMA. For Investment Management, ESMA has identified a key objective of achieving measurable improvements in the level of convergence regarding the application by NCAs of EU legislation on investment management through the development of guidance and application of supervisory convergence tools.
As part of this overall review, ESMA will conduct a peer review on the Guidelines on ETFs and Other UCITS Issues which it originally published in 2012.
The main Investment Management outputs are listed as:
- guidance on investment fund legislation
- peer review on Guidelines on ETFs and other UCITS issues
- ongoing identification of areas of non-convergence and mitigating them
- stress testing
- Money Market Fund database (to be finalised in 2019)
ESMA summarises its main areas of focus for 2018 in its press release.
EuVECA and EuSEF Regulations
The Council of the EU announced that it has adopted the Regulation amending the European Venture Capital Funds Regulation (EuVECA Regulation) and the European Social Entrepreneurship Funds Regulation (EuSEF Regulation). The Council's adoption of the Regulation follows the European Parliament's adoption of it on 14 September 2017 The Regulation will enter into force 20 days after its publication. It will apply three months from the date of its entry into force.
Anti-Money Laundering/ Combating the Financing of Terror/ Corruption
European Commission consultation on broadening access to centralised bank account registries
On 17 October 2017, the European Commission published a consultation on broadening law enforcement access to centralised bank account registries. The Commission states that there is a need to speed up financial investigations, so that the proceeds of crime (including money deposited in bank accounts) can be traced, frozen and confiscated even when transferred to bank accounts located in different countries.
The aim of the consultation is to collect opinions on possible new EU legislation broadening the access to centralised bank and payment account registries to a targeted number of public authorities to disrupt the activities of organised crime groups and terrorists.
The Commission has also published a paper setting out background information to the consultation. It explains that the proposed Fifth Money Laundering Directive (5AMLD) includes provisions that would require member states to establish automated centralised mechanisms, such as central registries or central electronic data retrieval systems, of bank and payment accounts.
Member states would be required to grant access to these registries to financial intelligence units and NCAs to prevent money laundering and terrorist financing. The Commission is considering also granting access to these registries to the police when investigating crimes and to other law enforcement authorities that identify and trace criminal assets, or investigate corruption and financial crime cases, at national level. The consultation closes on 9 January 2018.
The EU Parliament Committee of Inquiry into Money Laundering, Tax Avoidance and Tax Evasion which was formed after the Panama Papers leaks, has approved its final report, after an 18-month probe into breaches of EU law in relation to money laundering, tax avoidance and evasion.
The Committee found a “lack of political will among some member states to advance on reforms and enforcement.” It wants the EU Commission to use its authority to change the unanimity requirement on tax matters, it supports a common international definition of what constitutes an Offshore Financial Centre, tax haven, secrecy haven, noncooperative tax jurisdiction and high-risk country.
It supports the establishment of a list of EU member states with “where Non-cooperative Tax Jurisdictions exist" and also supports a proposal that any entity with an offshore structure should have to justify this to authorities. It stressed the need for “regularly updated, standardised, interconnected and publicly accessible beneficial ownership (BO) registers.”
It also called for proposals to close loopholes which allow for aggressive tax planning as well as more dissuasive sanctions at both EU and national level against banks and intermediaries “that are knowingly, wilfully and systematically involved in illegal tax or money laundering schemes.”
The Wolfsberg Group announced the completion and publication of its updated Correspondent Banking Due Diligence Questionnaire and its Payment Transparency Standards.
For more information please contact a member of the Asset Management & Investment Funds Team.
Date published: 02 November 2017