EUROPE

AIFM - ESMA Q&A update

  • Background

    The Alternative Investment Fund Managers Directive ("AIFMD" available here) puts in place a comprehensive framework for the regulation of alternative investment fund managers within Europe.

    ESMA is required to play an active role in building a common supervisory culture by promoting common supervisory approaches and practices. It does this by providing responses to questions raised by the general public and competent authorities in relation to the practical application of the AIFMD.

    What's new?

    On 24 May 2017, ESMA has published an updated questions and answers (ESMA34-32-352, the "Q&A") on the application of the AIFMD including three new Q&As:

    • As long as AIFs are concerned, the exemption as regards the clearing obligation under EMIR for intragroup transactions should be construed narrowly, and in most cases it will not be possible for the exemption to be used. An exemption to the clearing obligation can only be granted after a thorough case-by-case assessment, which will have to take into account whether the AIF complies with the different requirements of the exemption, including the fact that the AIF and its counterpart are included in the same consolidation on a full basis.
    • When the information on the breakdown of shareholders between retail and professional investors is not available, AIFMs should report ‘0’ for questions 119 and 120 of the reporting template for AIF-specific information and use the assumption boxes to indicate that the information is not available.
    • When an AIFM wants to manage AIFs domiciled in another Member State by way of the AIF management passport, the information to be provided in the programme of operations should be as follows:
      • Where specific AIFs cannot be identified at the time of the notification, the AIFs to be managed may be identified by their investment strategy (cf template for identification purposes at Annex IV of Delegated Regulation No 231/2013).
      • Where the AIFM is able to identify specific AIFs, these should be identified in the programme of operations by their name and national identifier.

    The Q&A is available here.

    What's next?

    This Q&A on the AIFMD is intended to be continually edited and updated as and when new questions are received.

  • BREXIT - ESMA issues its principles on supervisory approach to relocations from the UK

  • Background

    The United Kingdom on 29 March 2017 notified the Council of the EU of its intention to withdraw from the EU pursuant to Article 50 of the Treaty on EU.

    As the UK plays a prominent role in the EU Single Market, the relocation of entities, activities and functions following the UK’s decision to withdraw creates a unique situation.

    According to Article 29(1)(a) of Regulation (EU) No 1095/2010 of the EU Parliament and of the Council (the "ESMA Regulation" available here),  ESMA is competent to deliver opinions aimed at providing national competent authorities ("NCAs") and stakeholders with guidance on how it intends to achieve supervisory convergence.

    What's new ?

    On 31 May 2017, ESMA  published an opinion on the General principles to support supervisory convergence in the context of UK withdrawing from EU (the "Opinion").

    The Opinion addresses regulatory and supervisory arbitrage risks that arise as a result of increased requests from financial market participants seeking to relocate in the EU27. It covers all legislation referred to in the ESMA Regulation, in particular the AIFMD, the UCITS Directive, MiFID I and MiFID II.

    ESMA’s Opinion sets out nine general principles aimed at fostering consistency in authorisation, supervision and enforcement related to the relocation of entities, activities and functions from the UK:

    • No automatic recognition of existing authorisations.
    • Authorisations granted by EU27 NCAs should be rigorous and efficient.
    • NCAs should be able to verify the objective reasons for relocation.
    • Special attention should be granted to avoid letter-box entities in the EU27.
    • Outsourcing and delegation to third countries is only possible under strict conditions.
    • NCAs should ensure that substance requirements are met.
    • NCAs should ensure sound governance of EU entities.
    • NCAs must be in a position to effectively supervise and enforce EU law.
    • Coordination to ensure effective monitoring by ESMA.

    The Opinion is available here.

    What's next?

    In its Opinion, ESMA states that it intends to develop further guidance to asset managers, investment firms and secondary markets to provide sector specific details on the aspects described in the Opinion.

  • CMU - Trilogue agreement reached on the new framework for STS securitisation

  • Background

    Securitisation refers to the process of packaging and converting loans into securities, which can then be sold to investors. In contrast to US markets that recovered rapidly from the subprime crisis, EU securitisation markets remain subdued, despite the fact that far fewer EU securitised products defaulted.

    At the global level, the Basel Committee on Banking Supervision ("BCBS") and the International Organisation of Securities Commissions ("IOSCO") jointly lead a task force on the obstacles to securitisation. Its main task is to develop criteria to identify simple, transparent and comparable ("STC") securitisation instruments. On 23 July 2015, the task force issued a set of global criteria for identifying STC securitisations (available here).

    The current EU framework relating to securitisation is composed of provisions in various areas, such as banking (e.g. "CRR" available here and the "LCR Delegated Regulation" available here), insurance (e.g. "Solvency II" available here and the "Delegated Regulation relative to prudential requirements for insurers" available here), asset management (e.g. "AIFMD", available here), credit ratings (e.g. "CRA III" available here), and prospectuses (e.g. "Regulation 809/2004" available here).

    On 7 July 2015, the European Banking Authority ("EBA") delivered its opinion, requested by the EU Commission, on an EU framework for qualifying securitisation (EBA/Op/2015/14, available here).

    As part of the Capital Markets Union ("CMU"), on 30 September 2015, the EU Commission proposed new common rules on securitisation, which are simple, transparent and standardised ("STS"), and subject to adequate supervisory control (available here).

    What's new?

    On 30 May 2017, a trilogue agreement between the EU Commission, the EU Parliament and the Council of the EU was reached on the new framework for securitisation (the "Agreement").

    In the Agreement, three main political issues were resolved:

    • The risk retention requirements is set at 5%, in accordance with existing international standards and in line with the Council of the EU’s negotiating position;
    • In order to increase market transparency, a data repository system for securitisation transactions shall be created;
    • In order to prevent conflicts of interest, a "light-touch" authorisation process for third parties that assist in verifying compliance with STS securitisation requirements shall be introduced.
    • The Agreement covers the following two draft regulations:
    • One draft regulation setting out rules on securitisations and establishing criteria to define STS securitisation;
    • One draft regulation amending CRR, so as to set out capital requirements for positions in securitisation.

    The Agreement is available here.

    What's next?

    The Agreement will be followed by further technical talks to finalise the new securitisation framework.

    The Permanent Representatives Committee ("COREPER") of the Council of Ministers is expected to endorse the Agreement ahead of the EU Parliament’s plenary vote.

  • CRA - ESMA fines Moody’s for credit ratings breaches

  • Background

    Regulation 1060/2009 on credit rating agencies ("CRAs" available here) lays down obligations for CRAs in the conduct of their activities. In conjunction with its role as supervisor of CRAs under the Regulation, ESMA has functions and powers to take enforcement action in relation to infringements of the Regulation by CRAs.

    What's new?

    On 1 June 2017, ESMA has fined Moody’s Germany and Moody’s UK for two negligent breaches of the CRAs Regulation (the "CRAR" and the "Public Notice").

    ESMA found that Moody’s Germany and Moody’s UK negligently committed two infringements of the CRAR regarding their public announcement of certain ratings and their public disclosure of methodologies used to determine those ratings.

    These failures concern nineteen ratings issued between June 2011 and December 2013 for nine supranational entities including the European Investment Bank ("EIB"), the European Investment Fund ("EIF"), the European Stability Mechanism ("ESM"), the European Financial Stability Facility ("EFSF") and the European Union ("EU").

    ESMA has therefore fined Moody’s Deutschland GmbH ("Moody’s Germany") €750,000 and Moody’s Investors Service Limited ("Moody’s UK") €490,000, and issued a public notice, for two negligent breaches of the CRAR.

    The Public Notice is available here .

    What's next?

    Moody’s Germany and Moody’s UK may appeal against this decision to the Board of Appeal of the ESA.

    Such an appeal does not have suspensive effect, although it is possible for the Board of Appeal to suspend the application of the decision.

  • EMIR - ESMA consults on measures for CCPs to manage conflicts

  • Background

    Under EMIR, Central Counterparty ("CCPs") have to act in the best interests of their clearing members and the clients. Somehow, EMIR only prescribes generic provisions in relation to the management by CCPs of conflicts of interest.

    Conflicts of interest exist when a stakeholder’s own interests interfere with the CCP’s interests or the CCP’s clearing members’ or clients’ interests.

    Building on its experience in CCP colleges, ESMA is of view that further guidance on CCPs management of conflicts of interest would be beneficial and further facilitate supervisory convergence on this area.

    What's new?

    On 1 June 2017, ESMA opened a public consultation on future guidelines, which would further clarify provisions stemming from EMIR with regard to measures for CCPs to manage conflicts (ESMA70-151-291, the"Consultation").

    The Consultation deals with provisions on the management of conflicts of interest such as:

    • written arrangements to identify and manage any potential conflicts of interest between CCPs, clearing members and clients;
    • where written arrangements are not sufficient, disclosure of conflicts of interest to the clearing members or clients prior to new transactions; and
    • taking into account possible conflicts with a CCP’s parent undertaking or subsidiary.

    The Consultation is available here .

    What's next?

    ESMA will consider all comments received to its Consultation by 24 August 2017, which it will use to finalise the guidelines by the end of 2017.

  • EMIR - ESMA registers Bloomberg as a Trade Repository

  • Background

    EMIR introduced provisions to improve transparency, establish common rules for CCPs and for trade repositories ("TRs") and to reduce the risks associated with the OTC derivatives market.

    It provides for the obligation to centrally clear OTC derivative contracts or to apply risk mitigation techniques to non-centrally cleared OTC derivative such as the exchange of collateral. It also provides for the direct supervision and the registration of TRs by ESMA as well as the recognition of non-EU TRs.

    In order to be registered as a TR a company must be able to demonstrate to ESMA that it can comply with the requirements of EMIR, including, most importantly, on:

    • operational reliability;
    • safeguarding and recording; and
    • transparency and data availability.

    What's new?

    On 31 May 2017, ESMA has published a press release indicating that it has registered Bloomberg Trade Repository Limited as a TR under EMIR (the "Press Release").

    Bloomberg TR Limited is based in the UK and covers the following derivative asset classes: commodities, credit, foreign exchange, equities and interest rates.

    The registration will take effect from 7 June 2017.

    The Bloomberg Trade Repository Limited registration brings the total number of TRs registered in the EU to seven TRs, which can be used for trade reporting under EMIR.

    Press Release is available here.

    What's next?

    ESMA will continue to evaluate whether other companies should be registered as a TRs under EMIR.

  • EMIR - EU Commission extends the list of exempted entities

  • Background

    The regulation (EU) 648/2012 dealing with over-the-counter ("OTC") derivatives, central counterparties ("CCPs") and trade repositories ("TRs") applies since 16 August 2012 ("EMIR", available here).

    EU central banks and other EU public bodies are exempted from the clearing and reporting obligations set forth under EMIR, to preserve their ability to perform tasks of common interest such as the exercise of monetary responsibilities and the managing of sovereign debt. The application of different rules to such functions when they are performed by third-country entities would be detrimental to their effectiveness. Hence, EMIR also excludes third-countries public bodies performing such common interest tasks.

    What's new?

    On 10 June 2017, the EU Commission published a Commission Delegated Regulation (EU) 2017/979 amending EMIR with regard to the list of exempted entities (the "List").

    In this context, the List is extended to the following third-countries: Australia, Canada, Hong Kong, Mexico, Singapore and Switzerland.

    The List is available here.

    What's next?

    The List will be updated from time to time.

  • ESMA - Opinion on short selling ban by Spanish CNMV

  • Background

    On 14 March 2012, the EU Parliament and the Council of the EU  adopted Regulation (EU) No 236/2012 of on short selling and certain aspects of credit default swaps1 (the "Short Selling Regulation") . According to the Short Selling Regulation, national competent authorities ("NCAs") can make use of powers of intervention in exceptional circumstances to introduce emergency measure to tackle financial stability risks. Under that mechanism, ESMA shall within 24 hours of the notification made by the NCA issue an opinion on whether it considers the measure or proposed measure necessary to address the exceptional circumstances.

    The recent Banco Popular demise seems to have highly impacted Liberbank - a "significant supervised entity" directly supervised by the Single Supervisory Mechanism/European central Bank (the "SSM/ECB").

    On 11 June 2017 the Spanish Comisión Nacional del Mercado de Valores ("CNMV") notified ESMA of its intention to make use of its powers of intervention in exceptional circumstances and to introduce a ban on net short positions on shares issued by Liberbank.

    What's new?

    On 12 June 2017, ESMA has issued a positive opinion (ESMA70-146-10) agreeing to an emergency short selling prohibition, for a period of one month, by the CNMV on net short positions in Liberbank shares under the Short Selling Regulation (the "Opinion").

    ESMA considers that the current Liberbank situation related to the Banco Popular demise constitutes an adverse scenario for the Spanish financial system, and that the proposed measure is appropriate and proportionate to address the threat in the Spanish financial markets.

    The ban temporarily prohibits transactions in any shares, either directly or through related instruments and irrespective of the venue or market in which the transactions leading to those positions are conducted.

    The Opinion is available here.

    What's next?

    The measure has entered into force on 12 June 2017 at 08:15 a.m. CET and will be applicable until 23:59 of 12 July 2017.

  • MAR - ESMA Q&A update

  • Background

    The Market Abuse Regulation ("MAR") came into effect on 3 July 2016. It aims at increasing market integrity and investor protection, enhancing the attractiveness of securities markets for capital raising.

    ESMA is required to play an active role in building a common supervisory culture by promoting common supervisory approaches and practices. It does this by providing responses to questions raised by the general public and competent authorities in relation to the practical application of MAR.

    What's new?

    On 30 May 2017 ESMA has published an updated version of its Q&A (ESMA70-145-11, the "Q&A") on MAR.

    The updated section refers to the following:

    • Blanket cancellation of orders policy - ESMA concludes that the blanket order cancellation policy should not be considered as insider dealing and therefore not be subject to the insider dealing prohibition under MAR of the person in possession of inside information.
    • Disclosure of inside information related to Pillar II requirements  - ESMA considers that the disclosure of inside information is a matter of national supervision.

    The Q&A is available here.

    What's next?

    This Q&A is intended to be continually edited and updated as and when new questions are received.

  • MiFID II/MiFIR - 5 ITS and 1 RTS published in the OJEU

  • Background

    Directive 2014/65/EU as amended by Directive (EU) 2016/1034 ("MiFID II", respectively available here and here) and Regulation (EU) 600/2014 as amended by Regulation (EU) 2016/1033 ("MiFIR", respectively available here and here) entered into force on 2 July 2014. MiFID II and MiFIR, together with most of the EU Commission delegated acts as well as regulatory and implementing technical standards ("RTS/ITS"), shall apply as from 3 January 2018.

    What's new?

    Between 7 June 2017 and 17 June 2017, the following RTS and 5 ITS pursuant to MiFID II/MiFIR were published in the Official Journal of the EU ("OJEU"):

    • Commission implementing regulation (EU) 2017/953 of 6 June 2017 laying down ITS with regard to the format and the timing of position reports by investment firms and market operators of trading venues - having regard to Article 58(1)(a) of MiFID II cited above - ("ITS 5");
    • Commission implementing regulation (EU) 2017/980 of 7 June 2017 laying down ITS with regard to standard forms, templates and procedures for cooperation in supervisory activities, for on-site verifications, and investigations and exchange of information between competent authorities - having regard to Article 80 (1) of MiFID II cited above - ("ITS 6");
    • Commission implementing regulation (EU) 2017/981 of 7 June 2017 laying down ITS with regard to standard forms, templates and procedures for the consultation of other competent authorities prior to granting an authorisation - having regard to Article 84(4) of MiFID II cited above - ("ITS 7");
    • Commission implementing regulation (EU) 2017/988 of 6 June 2017 laying down ITS with regard to standard forms, templates and procedures for cooperation arrangements in respect of a trading venue whose operations are of substantial importance in a host Member State - having regard to Article 79(2) of MiFID II cited above - ("ITS 1");
    • Commission implementing regulation (EU) 2017/1005 of 15 June 2017 laying down ITS with regard to the format and timing of the communications and the publication of the suspension and removal of financial instruments - having regard to Article 32(2) of MiFID II cited above - ("ITS 2"); and
    • Commission delegated regulation (EU) 2017/1018 of 29 June 2016 with regard to RTS specifying information to be notified by investment firms, market operators and credit institutions - having regard to Article 34(1) of MiFID II cited above - ("RTS on passporting").

    ITS 5 is available here, ITS 6 is available here, ITS 7 is available here, ITS 1 is available here, ITS 2 is available here  and RTS on passporting is available here.

    What's next?

    ITS 5 will enter into force on 27 June 2017.

    ITS 6 and ITS 7 will enter into force on 30 June 2017.

    ITS 1 will enter into force on 3 July 2017.

    ITS 2 will enter into force on 6 July 2017.

    RTS on passporting will enter into force on 7 July 2017.

    The ITS 5, ITS 6, ITS 7, ITS 2, ITS 1 and the RTS on passporting will apply as from 3 January 2018.

  • MiFID II/MiFIR - ESMA clarifies the concept of "traded on a trading venue"

  • Background

    The concept of "traded on a trading venue" ("TOTV") is referred to and is relevant for the scope of application of a number of provisions of MiFIR. In particular, these include the following provisions:

    •  Requirements imposing pre-trade and post-trade transparency requirements on market operators and investment firms operating a trading venue as well as investment firms (including systematic internalisers) operating OTC;
    • Requirements  setting  out  trading  obligations  for  shares  and  derivatives; and
    • Requirements imposing transaction reporting and reference data obligations on investment firms and operators of trading venues.

    However, the concept of TOTV is not defined in MiFID II/MiFIR.

    National competent authorities and market participants have asked ESMA to clarify the meaning of this concept for the purpose of the correct application of the above-mentioned provisions in respect of OTC derivatives.

    What's new?

    On 22 May 2017, ESMA issued an opinion regarding the concept of "traded on a trading venue", which is relevant for a number of provisions under MIFID II and MiFIR ((ESMA70-156-117, the "Opinion").

    ESMA is of the view that only OTC derivatives sharing the same reference data details as the derivatives traded on a trading venue should be considered to be TOTV and, hence, subject to the MiFIR transparency requirements and to transaction reporting according to Article 26(2)(a) of MiFIR.

    In this context, "sharing the same reference data details" should mean that the OTC derivatives should share the same values as the ones reported in accordance with the fields of Table 3 of the Annex of Regulation (EU) 2017/585 for derivatives admitted to trading or traded on a trading venue. These reference data details depend on the type of derivative and pertain, inter alia, to the instrument identification, the nominal amount, the notional currency, the maturity date, the identifier of the index, the underlying instrument...

    The Opinion is available here.

    What's next?

    In its Opinion, ESMA says it is aware that what is to be considered the "same" reference data details may need to be revisited by ESMA taking into account the evolution of markets post January 2018

    ESMA intends to ensure that such evolution does not undermine market transparency and efficiency, does not result in information asymmetries between market participants and does not create incentives to move trading to the OTCspace as this would run counter to the legislative goals expressed in MiFID II/MiFIR.

    ESMA therefore plans to monitor the application of the concept of TOTV and the ratio of derivatives that are considered TOTV compared to overall OTC derivatives trading.

  • MiFID II/MiFIR - ESMA clarifies the situation of contracts traded on non-EU trading venues

  • Background

    The post-trade transparency requirements MiFIR require EU investment firms to make information on transactions in financial instruments traded on a trading venue public through approved publication arrangements ("APA").

    Correspondingly, MiFID II requires competent authorities to set limits on the position that a person can hold at any time in a contract in commodity derivatives traded on a trading venue.

    However, neither MiFIR nor MiFID II clarify whether these obligations apply when such transactions are concluded on a third-country venue.

    What's new?

    On 31 May 2017 ESMA has published two opinions, one opinion on determining third-country trading venues for the purpose of transparency under MiFID II / MiFIR (ESMA70-154-165, the "Opinion 1") and an another opinion on determining third-country trading venues for the purpose of position limits under MiFID II (ESMA70-156-112, the "Opinion 2", together the "Opinions").

    On the same date ESMA also updated its Q&A on MiFID II and MiFIR commodity derivatives topics in order to clarify transparency and position limit regimes for instruments traded on non-EU trading venues under MiFID II and MiFIR (ESMA70-872942901-28, the "Q&A").

    The Opinions define that, where non-EU trading venues meet the below-listed criteria, EU market participants concluding transactions on these trading venues:

    • do not have to make those transactions public in the EU under MiFIR; and
    • do not have to consider commodity derivative contracts as economically equivalent over-the-counter ("EEOTC") contracts for the purpose of the position limit and position reporting regimes under MiFID II.

    Criteria that third-country trading venue shall meet in order to be considered as a trading venue for the purposes of the MiFIR post-trade transparency regime and the MiFID II position limit regime are defined as follows:

    • It operates a multilateral system.
    • It is subject to authorisation in accordance with the legal and supervisory framework of the third-country.
    • It is subject to supervision and enforcement on an ongoing basis in accordance with the legal and supervisory framework of the third-country by a competent authority that is a full signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information.
    • It has a post trade transparency regime in place which ensures that transactionsconcludedon that trading venue are published as soon as possible after the transaction was executed or, in clearly defined situations, after a deferral period.

    In addition to these two Opinions, ESMA has updated its Q&A in order to provide further technical guidance on the process that ESMA asks market participants to follow.

    ESMA’s Opinion 1 is available here.

    ESMA’s Opinion 2 is available here .

    ESMA’s Q&A is available here .

    What's next?

    ESMA will publish a list of trading venues that meet the criteria stated in its Opinions.

    That list will be updated on an ongoing basis.

  • MiFID II/MiFIR - ESMA Q&A updates on implementation, transparency and commodity derivatives

  • Background

    The MiFID II Directive encompasses the rules on governance, products, investor protection and information disclosure.

    MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

    The purpose of the Questions and Answers ("Q&A") is to promote common supervisory approaches and practices in the application of MiFID II and MiFIR.

    What's new?

    On 31 May 2017 ESMA has updated 3 of its Q&A on practical questions regarding the implementation of MiFID II.

    1. Q&A on MiFID II and MiFIR market structures topics (esma70-872942901-38, the "Updated Q&A 1")

    • 1 new Q&A relating to the process to put in place to ensure a continuous assessment and monitoring of Market and Credit risk when engaged in algorithmic trading.

    The Updated Q&A 1 is available here.

    2. Q&A on MiFID II and MiFIR transparency topics (ESMA70-872942901-35, the "Updated Q&A 2")

    • 1 new Q&A stating that financial instruments are not to be considered as physical assets for the definition of "Exchanged for Physical";
    • 1 new Q&A on the calculation of "current volume weighted spread" reflected in the order book;
    • 2 new Q&A on the operational processes for systematic internaliser as regards their obligation when providing quotes and (ii) as regards the notification to their NCAs;
    • 2 new Q&A on the relationship between an investment firm and their Approved Publication Arrangement ("APAs");

    The Updated Q&A 2 is available here.

    3. Q&A on MiFID II and MiFIR commodity derivatives topics (ESMA70-872942901-28, the "Updated Q&A 3")

    • 1 new Q&A on the definition of a "lot" for energy products in order to determine position limits;
    • 6 new Q&A on the principles applying to the definition of ancillary activity.

    The Updated Q&A 3 is available here.

    What's next?

    ESMA will periodically review these Q&A and update them where required.

  • MiFID II/MIFIR - ESMA Q&A update on investor protection

  • Background

    The MiFID II Directive encompasses the rules on governance, products, investor protection and information disclosure.

    MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

    The purpose of the Questions and Answers ("Q&A") is to promote common supervisory approaches and practices in the application of MiFID II and MiFIR.

    What's new?

    On 6 June 2017, ESMA has updated its Q&A on the implementation of investor protection topics under MiFID II and MiFIR including 14 new questions (esma35-43-349, the "Q&A").

    These questions deal with the following:

    Costs and charges - Articulation MiFID II / PRIIPs
    The 9 new questions address some articulation issues between the MiFID II framework and the PRIIPs Regulation, which is to apply from January 2018 as well, taking into account that the PRIIPs calculation methodology covers product cost components that need to be disclosed under MiFID II cost disclosure.

    Therefore, ESMA clarifies that the PRIIPs methodology is to be applied when calculating cost and charges related to any financial instruments, even if (i) they do not fall within the scope of PRIIPs because they are sold to professional investors or (ii) they fall within the PRIIPs transition period, i.e. UCITS from 3 January 2018 to 31 December 2019. The questions also defines how investment firms should obtain the relevant information from the manufacturers and/or provide reasonable estimates when such information is not available.

    Post-sale reporting
    The 4 new Q&A define the way to take into account any new cash invested in a portfolio as well as the need for a fair value estimate for investments with no daily price reference. They also confirm the need (i) to start daily valuation of portfolios as from the 3 January 2018 and (ii) to assess potential losses of more than 10 % based on the portfolio valuation as at the beginning of the reporting period.

    Complex / non-complex financial instruments
    In its last new question, ESMA confirms that non UCITS funds cannot be considered as non-complex financial instruments and therefore investment firms need to carry out the appropriateness test before providing any execution services in relation to these instruments.

    The Q&A is available here.

    What's next?

    This Q&A on MiFID II and MiFIR investor protection topics is intended to be continually edited and updated as and when new questions are received.

  • MiFID II - ESMA publishes its final report on product governance guidelines

  • Background

    MiFID II has introduced product governance requirements to ensure that firms which manufacture and distribute financial instruments act in the clients’ best interests during all the stages of the life-cycle of products or services.

    While the MiFID II product governance requirements cover a broad range of topics, ESMA has decided to develop guidelines which mainly address the ‘target market assessment’, as this aspect was identified as the most important one for ensuring the common, uniform and consistent application of the product governance rules.

    On 5 October 2016, ESMA published a Consultation Paper on the draft guidelines on certain aspects of the MiFID II product governance requirements. The consultation period closed on 5 January 2017.

    What's new?

    On 2 June 2017, ESMA has published its final report on its guidelines on product governance to safeguard investors (esma35-43-620, the "Final Report" encompassing  the " Guidelines"). The proposed Guidelines address issues specific to manufacturers and distributors as well as issues common to both. In particular, it specifies the categories which must be taken into account by manufacturers and by distributors when they identify the product’s target-market.

    Guidelines of the target market for manufacturers:
    When identifying the target market, manufacturers should use the following list of five categories:

    1. The type of clients to whom the product is targeted: The firm should specify to which type of client the product is targeted. This specification should be made according to the MiFID II client categorisation of "retail client", "professional client" and/or " eligible counterparty".
    2. Knowledge and experience: The firm should specify the knowledge that the target clients should have about elements such as: the relevant product type, product features and/or knowledge in thematically related areas that help to understand the product.
    3. Financial situation with a focus on the ability to bear losses: The firm should specify the percentage of  losses  target  clients  should  be  able  and  willing  to  afford  (for example, from minor losses to total loss) and if there are any additional payment obligations that might exceed the amount invested (for example, margin calls).
    4. Risk tolerance and compatibility of the risk/reward profile of the product with the target market: The firm should specify the general attitude that target clients should have in relation to the risks of investment.
    5. Clients’ Objectives and Needs: The firm should specify the investment objectives and needs of target clients that a product is designed to meet, including the wider financial goals of target clients or the overall strategy they follow when investing.

    Guidelines of the target market for distributors:
    Distributors should use the same list of categories used by manufacturers, as a basis for defining the target market for their products. However, distributors should define the target market on a more concrete level and should take into account the type of clients they provide investment services to, the nature of the investment products and the type of investment services they provide.

    Guidelines on issues applicable to both manufacturers and distributors:
    The Guidelines also defines the following:

    • Identification of the ‘negative’ target market and sales outside the positive target market;
    • Application of the target market requirements to firms dealing in wholesale markets (i.e. with professional clients and eligible counterparties).

    ESMA specifies that these Guidelines should be applied in a way that is appropriate and proportionate, taking into account the nature of the investment product, the investment service and the target market of the product.

    The Final Report is available here.  

    What's next?

    The Guidelines apply from 3 January 2018.

  • MMF - ESMA consults on Money Market Funds rules

  • Background

    The proposal for a Regulation on Money Market Funds ("MMFs") was published by the EU Commission in September 2013.

    On 16 May 2017, the final text of the Regulation negotiated between the Council, the EU Parliament and the EU Commission was adopted by the General Affairs Council. The publication of the Regulation in the EU Official Journal is expected in the second quarter of 2017.

    In the final consolidated text, there are a number of deliverables explicitly allocated to ESMA, as well as empowerments for delegated acts on which ESMA has been asked to provide technical advice to the EU Commission. These deliverables include a Technical advice and Implementing technical standards on various issues such as rules on the assessment of credit quality, or the central database, as well as Guidelines on stress-testing.

    What's new?

    On 24 May 2017, ESMA has published a consultation paper on proposals of draft Technical advice, draft Implementing technical standards, and Guidelines under the MMF Regulation (ESMA34-49-82, the "Consultation Paper").

    The key draft proposals under the different policy tools include:

    • Technical advice
      • the liquidity and credit quality requirements applicable to assets received as part of a reverse repurchase agreement;
      • the criteria for (i) the validation of the credit quality assessment methodologies, (ii) the criteria for quantification of the credit risk and the relative risk of default of an issuer and of the instrument in which the MMF invests, as well as (iii) the criteria to establish qualitative indicators on the issuer of the instrument;
    • Implementing technical standards ("ITS")
    • The development of a reporting template containing all the information managers of MMFs are required to send to the competent authority of the MMF, including information on the characteristics, portfolio indicators, assets and liabilities of the MMF. This information will be submitted to NCAs and then transmitted to ESMA; and
    • Guidelines
    • The Guidelines on the presentation of the common reference parameters of the scenarios to be included in the stress tests that managers of MMFs are required to conduct. This takes into account factors such as hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF, movements of interest rates and exchange rates or levels of redemption.

    The Consultation Paper is available here.

    What's next?

    The Consultation Paper will terminate by 7 August 2017.

    ESMA is expected to finalize the Technical advice and Implementing technical standards to be submitted to the EU Commission for a publication by the end of the year.

  • UCITS - ESMA Q&A update

  • Background

    The Undertakings for Collective Investment in Transferable Securities ("UCITS") Directive puts in place a comprehensive framework for the regulation of harmonised investment funds within Europe.

    ESMA is required to play an active role in building a common supervisory culture by promoting common supervisory approaches and practices. It does this by providing responses to questions posed by the general public and competent authorities in relation to the practical application of the UCITS Directive.

    What's new?

    On 24 May 2017, ESMA has published an updated questions and answers on the application of the UCITS Directive, including one new question and answer (ESMA34-43-392, the "Q&A").

    As long as UCITS funds are concerned, the exemption as regards the clearing obligation under EMIR for intragroup transactions should be construed narrowly, and in most cases it will not be possible for the exemption to be used.

    An exemption to the clearing obligation can only be granted after a thorough case-by-case assessment, which will have to take into account whether the UCITS complies with the different requirements of the exemption, including the fact that the UCITS and its counterpart are included in the same consolidation on a full basis.

    The Q&A is available here.

    What's next?

    This Q&A is intended to be continually edited and updated as and when new questions are received.

  • LUXEMBOURG

    CRS - ALFI issues its FAQs on CRS reporting for investment funds

  • Background

    On 24 December 2015, a law implementing the CRS in Luxembourg law has been enacted (the "CRS law"). The CRS law transposes into Luxembourg national law the Council Directive 2014/107/UE of 9 December 2014, amending Directive 2011/16/EU regarding the mandatory exchange of information in the field of taxation ("DAC 2"). The DAC 2 provides that EU Member States require their financial institutions to implement reporting and due diligence rules consistent with those set out in the CRS developed by the Organization for Economic Co-operation and Development ("OECD").

    Much like FATCA’s provisions, the CRS imposes obligations on Financial Institutions to review and collect information on their clients/investors in an effort to identify their tax residence and to provide certain specified account information to the relevant foreign tax authorities on an annual basis.

    What's new?

    On 23 May 2017, the Association of the Luxembourg Funds Industry ("ALFI") published its FAQ on reporting under CRS for investment funds, which focuses on three points: operational stream- delegation, data to be reported and format of file transmission (the "FAQ"). The FAQ starts with an exhaustive list of the key resources on CRS guidance.

    Regarding delegation, among several other points, ALFI provides a prudent answer to delegation of the reporting obligation by financial institutions. The FAQ further deals with the question of umbrella funds and mergers. In particular, a flexibility is given as the reporting obligation can occur at the umbrella fund level or at the sub-funds level. In case of merger the consequences are different, depending the option chosen.

    For data reporting, it is pointed out that Luxembourg authorities decided to opt for the ‘Wider Approach’ whereby CRS due diligence if performed for all accounts (reportable or not). Besides, several particular cases are considered in the FAQ, among others: dormant account, closed account, stock dividends paid by a fund, change of residency, liquidation.

    Finally, detailed guidance about the format file is provided in the third part of the FAQ. An important point of the development is that the XML schema published by the Luxembourg tax authorities contains certain specific information that have not been included in the schema published by the OECD. Financial institutions will have to comply with the specificity of Luxembourg.

    The FAQ is only accessible to ALFI members. It is available here, under the "Tax" section.

    What's next?

    The 1st reporting deadline is the 30 June 2017 regarding 2016 data.

  • TAX UPDATES

    ATAD II – Council Directive adopted

  • Background

    In response to the OECD BEPS conclusions, the EU Commission presented the Anti-Tax Avoidance Package on 28 January 2016. As a part of this package the Council Directive (EU) 2016/11641 on rules against tax avoidance ("ATAD I") was adopted.

    As ATAD I provides for a framework to tackle hybrid mismatch arrangements that arise in the interaction between the corporate tax systems of Member States, ECOFIN Council further requested to put forward a proposal on hybrid mismatches involving third countries in order to provide for rules consistent with and no less effective than the rules recommended by the OECD BEPS report on Action 2 ("ATAD II").

    What's new?

    On 29 May 2017, the Council of the EU finally adopted the ATAD II.

    The Directive aims to tackle the mismatches between the different tax rules in third countries which give rise to loopholes and allow firms to escape tax in both jurisdictions. These mismatches, for example, allow corporations established in two jurisdictions (inside and outside the EU) to use the lack of coordination between national tax systems either to have the same expenditure deducted in both jurisdictions (so the firm enjoys a double tax deduction), or to have a payment recognised as tax deductible in one jurisdiction but not recognised as taxable income in the other.

    The link is available here.

    What's next?

    The Directive must be effectively applied by 1 January 2020 while the reverse hybrid rules benefit from an additional time, since their application will be mandatory as from 1 January 2022.

  • This publication is produced by Legal and Compliance teams of CACEIS with the kind support of Communication teams and Group Business Development Support teams.

    Editors
    Gaëlle Kerboeuf, Group General Counsel
    Chantal Slim, Compliance and Regulatory Watch Manager (France)

    Permanent Editorial Committee
    Gaëlle Kerboeuf, Group General Counsel, Head of Legal Group
    Chantal Slim, Compliance and Regulatory Watch Manager (France)
    Eliane Meziani-Landez, Head of Legal (France)
    Emilie Zaracki, Legal Officer (France)
    Ana Vazquez, Head of Legal (Luxembourg)
    Véronique Bastin, Head of Compliance (Luxembourg)
    Stefan Ullrich, Head of Legal (Germany)
    Costanza Bucci, Legal and Compliance Manager (Italy)
    Mireille Mol, Legal and Compliance Manager (Netherlands)
    Charles du Maisnil, Head of Legal - Risk & Compliance (CACEIS Belgium)
    Helen Martin, Head of Legal (Ireland)
    Samuel Zemp, Head of Legal and Compliance (CACEIS Bank Luxembourg - Swiss Branch)
    Sandra Czich, Head of Legal and Compliance (CACEIS Switzerland)
    Corinne Brand, Marketing and Communication Specialist (France)
    Arianna Arzeni, Head of Group Business Development Support
    Malgorzata Journo, Legal Officer (France)

    Design
    Sylvie Revest-Debeuré, CACEIS, Communications

    Photos credit
    Yves Maisonneuve, Yves Collinet, CACEIS, Fotolia

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    This publication is provided by CACEIS from sources believed to be reliable. The present publication is not intended as an offer to sell or a commercial solicitation and may be amended at any time by CACEIS. Information contained in the present newsletter are not a substitute to legal, taxation or investment consultation or advice from an appropriately qualified professional. CACEIS does not warrant the accuracy and completeness of this newsletter, nor endorse or make any interpretation about its content. In no event will CACEIS be liable for any damages whatsoever arising out of the use of, or reliance on the content of this newsletter. Unauthorized used or distribution without the prior written permission of CACEIS is prohibited.