Asset Management & Investment Funds: EU & International Developments - January 2018
The Securitisation Regulation
On January 17, 2018 two Regulations which, together, establish a new framework for European securitisations came into force.
- Regulation (EU) 2017/2402 (the STS Regulation) which lays down a general framework for securitisation. It establishes due- diligence, risk-retention and transparency requirements for securitisations and conditions for securitisation repositories. It creates a specific framework for simple, transparent and standardised (STS) securitisations.
- Regulation (EU) 2017/2401 (the Securitisation Prudential Regulation) which replaces the provisions of the Capital Requirements Regulation so as to make the capital treatment of securitisations for banks and investment firms more risk-sensitive and reflective of the specific features of STS securitisations.
This development has been flagged for some time.
Key issues for Irish AIFMs and UCITS and their service providers are:
- Provisions apply from 1 January, 2019.
- The European Supervisory Authorities are consulting on implementing measures which need to be in place by the time that most provisions apply on 1 January, 2019.
- The AIFMD and the UCITS Directives will be amended as of 1 January 2019 to align with the new regime.
- Article 17 of AIFMD will be replaced with a new provision that where AIFMs are exposed to securitisation positions which do not meet the requirements, the AIFM shall, the best interest of the investors in the relevant AIFs, act and take corrective action, if appropriate.
- Article 50a of the UCITS Directive will be replaced with a new provision that where UCITS are exposed to securitisation positions which do not meet the requirements, they shall, in the best interest of the investors in the relevant UCITS, act and take corrective action, if appropriate. The anomaly whereby UCITS were not subject to due diligence, transparency and risk retention requirements for investments in securitisations will be corrected.
- Existing sector-specific due diligence, transparency and risk retention requirements are replaced by new harmonised due diligence obligations which institutional investors (including AIFMs, UCITS and self- managed UCITS) will be required to meet both before investing in securitisations and on an on-going basis. The extent to which these obligations will be eased in practice for investments in STS securitisations remains to be seen.
- The risk retention rules have been changed but the requirement that the originator / sponsor / lender retain an economic interest of not less than 5% in the securitisation has been retained.
- There are transitional provisions for securitisations issued prior to 1 January 2019.
The Benchmarks Regulation
The following Delegated Regulations which supplement the Benchmarks Regulation were published in the Official Journal of the EU and will enter into force on 6 February 2018:
- Commission Delegated Regulation (EU) 2018/64, 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.
- Commission Delegated Regulation (EU) 2018/65, specifies technical elements of the definitions in Article 3(1).
- Commission Delegated Regulation (EU) 2018/66, 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 (EU) 2018/67, sets out criteria for assessing the impact resulting from the cessation of or change to existing benchmarks.
IOSCO statement on financial benchmarks
The International Organisation of Security Commissions (IOSCO) issued a useful statement setting out issues for users of financial benchmarks to consider in selecting an appropriate benchmark and in contingency planning, particularly for scenarios in which a benchmark is no longer available.
Proposed new prudential regime for investment firms
The European Commission published proposals for a new prudential regime for investment firms. This is expected to remove the regulation of MiFID-licensed asset managers from the CRD/CRR framework, which is more suited to financial institutions such as banks.
The proposal contains a series of remuneration principles aimed at the remuneration of staff within investment firms, which would be better suited to an agency business, such as (individual) portfolio management and which may result in the absence of a “bonus cap”.
Money Market Fund Regulation (MMFR)
The European Commission published a roadmap relating to a delegated act under the MMFR, which specifies quantitative and qualitative liquidity requirements applicable to assets received as part of a reverse repurchase agreement and on credit quality assessment. Under Articles 11, 15 and 22 of the MMFR, the Commission is to adopt three delegated acts following technical advice from ESMA.
The first two acts concern the introduction of detailed requirements for the methodology for a proper credit risk assessment. The third act is to link the MMFR with the Securitisation Regulation. The Commission will consolidate the three acts into a single delegated act. The Commission is open to receiving additional feedback until 12 February 2018.
EU Commission notice on Brexit and data protection issues
The EU Commission published a notice to stakeholders concerning the withdrawal of the United Kingdom from the EU and EU Rules in the area of data protection and reminded stakeholders who process personal data of legal repercussions which need to be considered when the United Kingdom becomes a third country.
AFME paper on key Brexit cliff-edge risks in wholesale financial services
On 22 January 2018, the Association for Financial Markets in Europe (AFME) published a paper on key cliff-edge risks in wholesale financial services arising from Brexit. AFME defines a cliff-edge risk as an issue that is expected to create market disruption or material impediments to business activities on the day of Brexit if no legislative or regulatory intervention is undertaken. AFME focuses on risks that require intervention from policymakers or regulators and considers that the Withdrawal Agreement between the UK and the EU is the most appropriate mechanism to address the following risks:
- cross-border personal data transfers
- continuity of contracts
- choice of jurisdiction and recognition and enforcement of judgments
- access to market infrastructure and recognition of central counterparties (CCPs)
- recognition of resolution actions (under the Bank Recovery and Resolution Directive)
Anti-Money Laundering/ Combating the Financing of Terror/ Corruption
The European Parliament is scheduled to debate 5AMLD in April 2018. The European Commissions press release stated that the Council of the EU and the European Parliament reached political agreement on 5AMLD. Once both the Parliament and the Council have formally adopted 5AMLD, it will enter into force 20 days after its publication in the Official Journal of the EU. Member states will then have 18 months to transpose it. See our December summary here.
Delegated Regulation amending list of high-risk third countries under 4AMLD published in OJ
On 24 January 2018, Commission Delegated Regulation (EU) 2018/105 amending the Commission Delegated Regulation (EU) 2016/1675, which supplements 4AMLD by identifying high-risk third countries with strategic deficiencies, was published in the Official Journal of the EU. It was adopted in October 2017.
It will enter into force on 13 February 2018. It adds Ethiopia to the list of high-risk third countries presenting strategic deficiencies in their AML/CFT regime that pose significant threats to the financial system of the EU. 4AMLD has not yet been transposed into Irish law.
ESAs Opinion on the use of innovative solutions by credit and financial institutions in the customer due diligence process
The Joint Committee of the three European Supervisory Authorities published an Opinion on the use of innovative solutions by credit and financial institutions when complying with their customer due diligence obligations. In the Opinion, the ESAs explore how innovative solutions currently used by credit and financial institutions can help them meet their AML/CFT obligations more effectively.
Wolfsberg Group update on work on correspondence banking due diligence questionnaire
On 24 December 2017, the Wolfsberg Group updated its website with information regarding its work on correspondent banking and, in particular, the due diligence questionnaire 2017.
For more information please contact a member of the Asset Management and Investment Funds Team.
Date Published: 31 January 2018