The Front Page, Asset Management & Investment Funds: EU & International Developments
The European Parliament's Committee on Economic and Monetary Affairs (ECON) published its report (which includes the draft regulation) (dated 4 March 2015) on the proposed Regulation on Money Market Funds (MMF Regulation). The EU Parliament is scheduled to consider the legislative proposal on 27 to 30 April 2015. For more information on the MMF Regulation see here.
ESMA AIFMD Q&A
ESMA has published updated AIFMD Q&A with new reporting issues and some additional guidance on marketing.
The new Q&As are located in the following sections of the paper:
- Section III: Reporting to national competent authorities under Articles 3, 24 and 42.
- Section IV: Notification of AIFMs.
- Section VII: Calculation of leverage.
- Section X: Additional own funds.
- Section X1: Scope.
ESMA KIID Q&A
ESMA published updated KIID Q&A. The paper includes a new Q&A 4g on the treatment of past performance information in the event of fund mergers.
ESMA guidelines and technical standards
ESMA has a new webpage for its guidelines and technical standards. Each of the following titles comprises a table that lists and links to documents relating to ESMA guidelines and technical standards (including discussion papers, consultation papers, consultation responses and final reports). The tables will be updated regularly.
- Guidelines under consultation.
- Final guidelines.
- Technical standards under public consultation.
- Technical standards submitted to the European Commission.
- Technical standards in force.
The European Parliament published its Texts Adopted which includes the provisional versions of the texts on 10 March 2015 of the Regulation on European Long-Term Investment Funds (ELTIF Regulation). The ELTIF Regulation now needs to be formally adopted by the Council of the EU. It will enter into force 20 days after it is published in the Official Journal of the EU (OJ) and is expected to apply six months after it has entered into force. ELTIFs are vehicles designed to boost non-bank investment in the real economy across the EU. ELTIFs will facilitate investors to invest into companies and projects that need long-term capital. Long-term capital and finances tangible assets (such as energy, transport, communication infrastructures, industrial and service facilities, housing and climate change technologies), as well as intangible assets (such as education and research and development). The ELTIF Regulation lays down uniform rules on the authorisation, investment policies, and operating conditions of EU AIFs that are marketed as ELTIFs.
ELTIFs will have to apply for authorisation, have a regulated structure and comply with uniform rules to ensure that they offer long-term and stable returns. The ELTIF Regulation provides that ELTIFs are not to be invested in speculative assets, and that any retail investors putting money into them are properly informed and protected. ELTIF investors will have to make a long-term commitment as they will not be able to withdraw their money easily. However, to protect retail investors, the Parliament and the Council of the EU agreed "redemption" rules that would enable an ELTIF that has enough liquid assets to return an investor's money at the investor's request.
Capital Markets Union
The Capital Markets Union (CMU) is a plan of the European Commission that aims to create deeper and more integrated capital markets in the 28 Member States of the EU. The key aims include:
- Providing alternatives to bank finance and greater diversification of funding to the EU economy.
- Improving access to finance in Europe for corporates, particularly for SMEs.
- Boosting the flow of institutional, retail and international investment into the EU’s capital markets.
- Promoting greater competition and choice in capital markets.
The priorities identified for immediate action include:
- A review of the current prospectus regime.
- The development of an efficient and sustainable capital market for SMEs by building a common set of comparable information for credit reporting, scoring and assessment of SMEs.
- The promotion of a high quality securitisation market.
- Promotion of ELTIFs to boost long term investment.
- Development of a European private placement regime to encourage direct investment in smaller businesses, focussing on standardisation of documentation and legal frameworks.
From a funds industry perspective, proposals include:
- Reducing the cost of setting up funds and cross-border marketing more generally.
- Encouraging the growth of private equity and venture capital in Europe.
- Promoting the take-up of EuVECAs and EuSEFs
- Facilitating the direct marketing of EU investment funds in non-EU markets.
- Encouraging greater cross-border retail participation in UCITS.
- Addressing requirements imposed by host Member States under European marketing passports that could constitute an unjustified barrier to the free movement of capital.
The Commission also aims to identify the main obstacles to integrated capital markets arising from company law, corporate governance, insolvency and taxation frameworks.
Shadow Banking Consultation (all MMFs and AIFs in scope)
The European Banking Authority (EBA) is holding a consultation on draft guidelines on limits on exposures to shadow banking entities that carry out banking activities outside a regulated framework under Article 395 of the Capital Requirements Regulation (CRR). Under the current draft guidelines, all funds would be considered as falling in the scope of the definition of shadow banking entities except if they are non-MMF UCITS (and third country firms subject to equivalent requirements). All MMFs (being UCITS or AIFs), all AIFs and unregulated funds would fall in scope. The draft guidelines set out requirements for institutions to set limits to their individual exposures to shadow banking entities and to the shadow banking sector in its entirety (so as to minimise the risks from such exposures). The approach aims to ensure that institutions have sufficient information about their counterparties in the shadow banking sector so they can make informed decisions about their exposures. Those institutions without adequate information on their exposures to shadow banking or the capacity to use such information will set an aggregate limit of 25% of their eligible capital. A press release indicates that EU competent authorities will implement the guidelines by end 2015. A public hearing is scheduled for 28 May 2015.
Anti- Money Laundering and Countering the Financing of Terrorism
The Financial Action Task Force (FATF) published the outcomes of its 25-27 February meeting. FATF is also working to improve the United Nation's consolidated sanctions list.
The Egmont Group published a paper which sets out 100 sanitised cases to highlight the anti-money laundering work carried out by its member financial intelligence units. The cases have been divided into six categories:
- Concealment within business structures.
- Misuse of legitimate businesses.
- Use of false identities, documents or straw men.
- Exploiting international jurisdictional issues.
- Use of anonymous asset types.
- Effective use of intelligence exchanges.
Funds may find the paper of interest in the context of anti-money laundering and counter terrorist financing responsibilities.
Market abuse and inside information
On 11 March, the Court of Justice of the EU gave a preliminary ruling on the meaning of information of a "precise nature" in the context of two Directives, namely Directive 2003/6/EC on insider dealing and market manipulation, and Directive 2003/124/EC on the definition and public disclosure of inside information and the definition of market manipulation. The case considered the following point: "Must Article 1(1) of MAD and Article 1(1) of MAD Implementing Directive 2003/124/EC be interpreted as meaning that only information in respect of which it may be determined, with a sufficient degree of probability, that, once it is made public, its potential effect on the prices of the financial instruments concerned will be in a particular direction may constitute inside information?" In effect the preliminary ruling found that MAD requires information to be made public even if the information holder does not know precisely how it will influence the price of financial instruments. The market abuse regime applies to listed funds. Read more.
Conflicts of interest
The Hedge Fund Standards Board (HFSB) launched a consultation paper on managing conflicts of interest.The paper outlines a number of proposed amendments to the HFSB's existing Standards so as to ensure:
- Disclosure to investors of similar funds, accounts or vehicles, including employee or partner funds (upon request).
- Disclosure of trade allocation policies to investors (upon request).
- Sound internal arrangements to mitigate conflicts of interest.
The proposals build on the existing Standards introduced in 2012 and are likely to be of assistance to all funds.
ESMA risk dashboard
ESMA published its risk dashboard analysing liquidity, market, contagion and credit risks in European financial markets (no 1, 2015, covering the fourth quarter of 2014). ESMA also published a report on trends, risks and vulnerabilities in the EU securities markets (no 1, 2015, covering the second half of 2014). In its press release, ESMA noted that market conditions in the EU have remained tense, with high asset valuations, stable asset prices over time, but with rising short-term price volatility across key markets. There were strong price movements in foreign exchange and commodity markets, and overall capital market issuance for corporate funding continued to increase.
ESMA looked particularly at:
- Fund investments in loans
- Smart beta strategies
- Monitoring systemic risk in the hedge funds industry
ESMA updates its report semi-annually, complemented by its quarterly Risk Dashboard.
ESMA regulatory work programme
ESMA published its 2015 regulatory work programme pointing out that it has been revised due to budget constraints that ESMA will operate under in 2015, as a result of which the deadlines associated with some guidelines have been delayed. Deadlines of note include;
- AIFMD technical advice on the application of passport to marketing of non-EU AIFs by EU AIFMs in Member States and management and/or marketing of AIFs by non-EU AIFMs in Member States; by 22 July 2015.
- UCITS V Guidelines and Recommendations on Remuneration (Art 14a(4) and Art 16); deadline N/A. UCITS V must be transposed into national law by Member States by 18 March 2016.
- UCITS V implementing technical standards (Art 99e(3)) for the procedure and forms to be used by Competent Authorities submitting information to ESMA on penalties and enforcement measures; by 18 September 2015.
- PRIIPs Regulatory Technical Standards (Art 10) on the review, revision and the provision of the KID; likely to be 12 months after entry into force (c December 2015).
- PRIIPs Regulatory Technical Standards (Art 10) on the calculation of risk/reward, cost disclosure, and content and format of the KID; likely to be 15 months after entry into force (c March 2016).
- EuSEF Technical Advice (Arts 3(2), 9(5), 14(4)) on definition of social business, conflicts of interest, social impact measurement and information to investors; April 2015.
- EuSEF Guidelines and Recommendations (Arts 12 (3) and 16); 31 December 2016.
- EuVECA Technical Advice on conflicts of interest; by April 2015.
- ELTIFs, various Regulatory Technical Standards; expected August 2016.
- MiFID, MIFIR, EMIR, Transparency, Market Abuse, CRR, CDR, CRA 3, Omnibus, Solvency II, CSRD and Take Over Bids Directive; various deliverables with various deadlines.
Own funds requirements for firms based on fixed overheads
Commission Delegated Regulation 2015/488 on the own funds requirements for firms based on fixed overheads, under Article 97(4) of Capital Requirements Regulation.
(Regulation 575/2013), was published in the OJ on 24 March. The Commission adopted the Delegated Regulation in September 2014 It will come into force 20 days after publication in the OJ and apply directly to member states from that date.
For more information please contact Nollaig Greene or a member of the Asset Management & Investment Funds Team.
Date published: 31 March 2015