SCANNING AUGUST 2018

European Regulatory Watch Newsletter


Summary

EUROPE

From above
AIFMD - ESMA responds to EIOPA questions on AIFMD

  • Background

    On 18 July 2016, the European Commission asked the European Insurance and Occupational Pensions Authority (“EIOPA”) to provide technical advice as part of its review of the Solvency Capital Requirements, making use of the experience gained by insurance and reinsurance undertakings during the transitional period and the first years of application of Solvency II.

    On 30 October 2017 and 28 February 2018, the EIOPA respectively issued its first and second set of advice.

    In the latter, the EIOPA addressed several questions to the ESMA with respect to the provisions of the Alternative Investment Fund Managers Directive ("AIFMD", available here) and its implementing measures.

    What's new?

    On 7 August 2018, the ESMA published the letter sent to the EIOPA on 25 July 2018.

    First, the ESMA clarified under which conditions an AIF could be considered as "leveraged". In particular, the ESMA is of the view that AIFs using borrowing arrangements that are "temporary in nature and fully covered by contractual capital commitment from investors" should be considered unleveraged. In addition, the ESMA considers that currency hedging are not excluded from the gross method, which should be used to give the overall exposure of the AIF

    Second, the ESMA answered a question about the AIF that are managed by "sub-threshold" or "registered" AIFMs. In this regard, the ESMA considers that all collective investment undertakings managed by these managers should be considered "AIF" provided they meet the definition set out in the AIFMD directive.

    The ESMA letter to EIOPA is available here.

  • AIFMD - ESMA updates its Q&As

  • Background

    The Alternative Investment Fund Manager Directive ("AIFMD", available here) establishes a comprehensive framework for the authorisation, supervision and oversight of managers of alternative investment funds in Europe.

    The 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 AIFMD.

    What's new?

    On 23 July 2018, the ESMA issued an update of its Q&As on the supervision of branches of AIFMs providing MiFID investment services.

    The ESMA answered a new question on the supervision of branches of AIFMs providing MiFID investment services through a branch established in a host Member State. Indeed, the AIFMD does not provide an explicit framework for the allocation of supervisory responsibilities and powers for those cases where AIFMs are authorised to carry out investment services and have branches providing those services in other Member States.

    The ESMA Q&As is available here.

    What's next?

    The ESMA will periodically review this Q&As and update it where required.

  • BMR - 2 ITS published in the OJEU

  • Background

    The regulation (EU) 2016/1011 of the European Parliament and the Council of the EU on indices used as benchmark in financial instruments and financial contracts applies since 1 January 2018 (the "BMR", available here). It introduces a common framework to ensure the accuracy and integrity of indices used as benchmarks in financial instruments and financial contracts. The BMR is relevant for any investment fund that uses any benchmark for the determination of its performance, or to define asset allocation of its portfolio, or to compute its performance fees.

    Article 25(7) of the BMR obliges administrators of significant benchmarks who choose not to comply with one or more particular requirements of the BMR to publish and maintain a compliance statement stating why it is not appropriate for them to comply with those requirements. Article 26(3) of the BMR imposes a similar obligation on administrators of non-significant benchmarks, but in respect of a broader range of requirements.

    Article 47(2) of the BMR requires competent authorities ("CAs") to provide the ESMA with all information necessary to carry out its duties. To ensure efficient and effective communication, CAs and the ESMA should use defined channels of communication, including designated contact persons and standardised forms, for requesting information, acknowledging receipt of the requests and responding to the requests.

    According to the BMR, the ESMA had to develop a number of draft regulatory and implementing technical standards ("RTS" and "ITS") to be submitted to the European Commission (the "Commission") by 1 April 2017. That encompassed also technical standards requested in Articles 25(8) and 26(5) as well as Article 47(3) of the BMR.

    On 15 February 2016, the ESMA published a discussion paper on the BMR (ESMA/2016/288 - the "Discussion Paper", available here). It considered the ESMA’s policy orientations and initial proposals for potential draft technical standards. It was addressed to the administrators of benchmarks and to any investor dealing with financial instruments and financial contracts whose value is determined by a benchmark or with investment funds whose performance are measured by means of a benchmark.

    On 29 September 2016, the ESMA published a Consultation Paper on the draft technical standards under the BMR (ESMA/2016/1406 - the "CP", available here). On 30 March 2017, the ESMA published a final report on draft technical standards under the BMR (ESMA70-145-48 - the "Final Report", available here). It provided guidance as regards various articles of the BMR, including:

    • Articles 25 and 26 of the BMR concerning the template for compliance statement for significant and non-significant benchmarks; and
    • Article 47 of the BMR concerning the minimum content of the cooperation arrangements between the ESMA and CAs.

    The Annex I to the Final Report comprised 11 draft technical standards which were submitted to the Commission for endorsement. Among them were 2 draft Commission implementing regulations under (i) Articles 25 and 26 of the BMR as well as under (ii) Article 47 of the BMR:

    • Supplementing the BMR with regard to ITS to develop a template for compliance statements to be used by administrators of significant and non-significant benchmarks; and
    • Laying down ITS with regard to the procedures and forms for exchange of information between CAs and the ESMA in accordance with the BMR.

    What's new?

    On 9 August 2018, the following Commission Implementing Regulations were published in the Official Journal of the EU (the "OJEU"):

    • (EU) 2018/1105 laying down ITS with regard to procedures and forms for the provision of information by CAs to the ESMA under the BMR (the "Regulation 2018/1105"); and
    • (EU) 2018/1106 laying down ITS with regard to templates for the compliance statement to be published and maintained by administrators of significant and non-significant benchmarks pursuant to the BMR (the "Regulation 2018/1106").

    The Regulation 2018/1105 is available here.

    The Regulation 2018/1106 is available here.

    What's next?

    The Regulation 2018/1105 and the Regulation 2018/1106 shall enter into force on 29 August 2018 and apply from 29 October 2018.

  • EMIR - ESMA updates validation rules for TRs

  • Background

    The EMIR regulation (available here) entered into force on 16 August 2012 and lays down rules on OTC derivatives, Central Counterparties and Trade Repositories ("TRs").

    In particular, EMIR mandates reporting of all derivatives to TRs who centrally collect and maintain the records of all derivative contracts.

    What's new?

    On 9 August 2018, the ESMA updated its validation rules for the submitted reports for the following fields:

    • Reporting Timestamp;
    • Reporting Counterparty ID;
    • ID of the Other Counterparty;
    • Underlying Identification;
    • Confirmation means.

    The ESMA updated validation rules are available here.

    What's next?

    The amendments will be applicable from 5 November 2018.

  • UCITS - ESMA updates its Q&As

  • Background

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

    The 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 UCITS Directive.

    What's new?

    On 23 July 2018, the ESMA issued an update of its Q&As.

    The ESMA answered 4 new questions:

    • UCITS investing in other UCITS with different investment policies - The ESMA considers that the prospectus of a UCITS should clearly disclose whether in fund-of-fund investments, the target fund(s) have different strategies or restrictions. Where the fund rules/prospectus of a UCITS expressly rule out certain types of assets or derivative use without any reservations, proportionate due diligence has to be carried out to ensure that fund-of-fund investments do not result in a circumvention of the investment strategies/restrictions;
    • Calculation of issuer concentration limits - The ESMA specifies that only netting arrangements can be taken into account for the purposes of calculating issuer concentration limits, and not hedging arrangements;
    • Reuse of assets by a UCITS depositary - The ESMA is of the view that a depositary (or a delegated third party) should be able to act as counterparties in a transaction of assets that they hold in custody, provided that: the depositary complies with its obligations as set out in the UCITS directive, conflicts of interest are properly managed, and the transaction is conducted on an arm-length basis; and
    • Supervision of branches of UCITS Management Companies providing investment services through a branch established in a host Member State.

    The ESMA Q&As is available here.

    What's next?

    The ESMA will periodically review this Q&As and update it where required.

  • UCITS - ESMA’s peer review on the guidelines on ETFs and other UCITS issues

  • Background

    On 18 December 2012, the ESMA published guidelines on ETFs and other UCITS issues (the "Guidelines" - available here). The main goal of such Guidelines is to promote common supervisory approaches and practices in the application of the UCITS Directive and its implementing measures. The Guidelines carve out requirements and guidance for index-tracking UCITS, UCITS ETFs and UCITS engaging in Efficient Portfolio Management Techniques and Instruments ("EPM"). The Guidelines apply to UCITS management companies and self-managed SICAV, with effect as from 18 February 2013.

    On 24 March 2014, the ESMA published a revised version of the Guidelines which has been translated in all European languages on 1 August 2014 (ESMA/2014/937, available here). As a reminder, the update introduced a new subparagraph under Paragraph 43(e) laying down the derogative rules under which a UCITS may be may be fully collateralised in different transferable securities and money market instruments issued or guaranteed by a Member State, one or more of its local authorities, a third country, or a public international body to which one or more Member States belong. Furthermore, the updated version provided clarification on the information to be included in UCITS’ annual reports.

    What's new?

    On 30 July 2018, the ESMA issued its peer review final report, which assesses the level of compliance of six national competent authorities ("NCAs") with the Guidelines (ESMA42-111-4479, the "Final Report"). In particular, the peer review focuses on requirements applicable to UCITS engaging in EPMs.

    The Final Report groups the requirements under the Guidelines in the following 4 main categories:

    • Disclosure to End-Investors of the UCITS;
    • Internal Risk Management and Compliance with the Investment Mandate;
    • Operational Aspects; and
    • Collateral Management.

    The outcome of ESMA’s peer review is based on the answers of 6 NCAs (i.e. DE, EE, FR, IE, LU, UK) to an ESMA self-assessment questionnaire as well as on the outcome of on-site visits conducted by ESMA’s experts.

    The Final Report is available here.

    What's next?

    ESMA called on NCAs to:

    • Ensure a more systematic and formalised review of the required EPM disclosures;
    • Provide more comprehensive internal supervisory guidance on costs, fees and revenues regarding EPM;
    • Ensure that all net revenues from EPM are returned to the investors; and
    • Revise existing national exemptions to the Guidelines on collateral requirements.
  • LUXEMBOURG

    AML/CFT - Further legislative steps (Bill 7216A)

  • Background

    The Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing applies since 26 June 2017 ("4AMLD", available here).

    According to Article 31(1) of 4AMLD, EU Member States shall require that trustees of any express trust governed under their law obtain and hold adequate, accurate and up-to-date information on beneficial ownership regarding the trust.

    On 6 December 2017, the Luxembourg Minister of Justice submitted the bill 7216 establishing a register of "express" trusts and transposing Article 31 of 4AMLD to the Luxembourg Parliament (the "Bill 7216", available here only in French).

    On 18 February 2018, the Luxembourg law of 13 February 2018 transposing most of the provisions of 4AMLD (excluding Articles 30 and 31 of 4AMLD) entered into force (the "4AMLD Transposition Law", available here only in French).

    On 19 June 2018, the Directive (EU) 2018/843 amending 4AMLD was published in the OJEU ("5AMLD", available here). In particular, Article 1(16) of 5AMLD modifies Article 31 of 4AMLD. 5AMLD entered into force on 9 July 2018.

    On 29 June 2018, the President of the Luxembourg Parliament sent a letter to the President of the Luxembourg Conseil d’État ("CE"), which explains the rationale behind the split of the Bill 7216 into the following two bills (the "Letter"):

    • "Bill 7216A" relates to the information to be obtained and kept by trustees and transposes Article 31 of 4AMLD; whereas
    • "Bill 7216B" establishes a register of "express" trusts and transposes Article 31 of 4AMLD. Noteworthy is here that 5AMLD makes substantial amendments to 4AMLD concerning the scope and operational provisions of the central register. Article 1(45) of 5AMLD provides that registers mentioned under Article 31 of 4AMLD shall be set up by 10 March 2020 (and hence postpones the transposition deadline foreseen in 4AMLD).

    On 10 July 2018, the CE issued its opinion on the Bill 7216A (the "Opinion", available here only in French).

    On 17 July 2018, the Luxembourg Finance and Budget Commission issued its report on the Bill 7216A (the "Report", available here only in French).

    What's new?

    On 26 July 2018, the Luxembourg Parliament voted at first reading on the Bill 7216A, and the CE waived the second constitutional vote on the Bill 7216A on 27 July 2018.

    All the legislative steps in relation to the adopted Bill 7216A are available here (only in French).

    What's next?

    The Bill 7216A as adopted by the Luxembourg Parliament shall be published in the Memorial A shortly.

  • AML/CFT - Further legislative steps (Bill 7217)

  • Background

    The Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing applies since 26 June 2017 ("4AMLD", available here).

    On 18 February 2018, the Luxembourg Law of 13 January 2018 resulting from the adopted Bill 7128 (available here in French only) and mostly transposing 4AMLD provisions entered into force (the "4AMLD Transposition Law", available here only in French).

    Further, in order to transpose Articles 30 and 31 of 4AMLD, the Luxembourg Government submitted the following bills to the Luxembourg Parliament for adoption on 6 December 2017:

    • The bill 7216 establishing a register of "express" trusts ("Bill 7216", available here only in French); and
    • The bill 7217 relating to the register of information on beneficial owners of companies and other legal entities (i.e. "Registre des bénéficiaires effectifs" or "BO Register") and their obligations in relation to their beneficial owner(s) ("Bill 7217", available here only in French).

    On 26 April 2018, five Luxembourg judicial authorities opinions in relation to the Bill 7217 were transmitted to the Luxembourg Parliament (N° 7217/08 - the "Opinions", available here). In particular, the Opinions comment the provisions of the Bill 7217 concerning (i) the access (and consequences resulting from access) to the BO Register for the judicial authorities, (ii) the information contained in the BO Register, and (iii) criminal law provisions (mostly Articles 23 to 25 of the Bill 7217).

    On 9 July 2018, the Directive (EU) 2018/843 of the Parliament and of the Council amending 4AMLD entered into force ("5AMLD", available here). The main changes introduced by 5AMLD involve: (i) broadening access to information on beneficial ownership ("BO"), improving transparency in the ownership of companies and trusts; (ii) addressing risks linked to prepaid cards and virtual currencies; (iii) cooperation between FIUs; and (iv) improved checks on transactions involving high-risk 3rd countries.

    On 10 July 2018, the Luxembourg Government submitted an updated version of the Bill 7217 to the Luxembourg Parliament (N° 7217/09 - the "Updated Bill 7217", available here). The objective of such amendments was to implement 5AMLD provisions relating to access to information on BO. In this context, the main evolution was the opening to the public of the access to the BO Register, without having to justify a legitimate interest (i.e. amendment 5 to the Bill 7217).

    What's new?

    On 24 July 2018, the Luxembourg Conseil d’État issued its opinion on the Updated Bill 7217, in which it expressed formal objections to Articles 1, 4, 11, 16, 20, 21, 22, 23 and 24 of the Updated Bill 7217 (N° 7217/10, available here only in French).

    On 2 August 2018, the Institut des Réviseurs d’Entreprises raised its complementary opinion on the Updated Bill 7217 (N° 7217/11, available here only in French).

    On 7 August 2018, the Board of Notaries raised its complementary opinion on the Updated Bill 7217 (N° 7217/12, available here only in French).

    What's next?

    The Updated Bill 7217 is still under discussion at the Luxembourg Parliament.

    5AMLD will apply as from 10 January 2020.

  • Brexit - CSSF urges fund management companies to submit their Brexit-related applications

  • Background

    On 13 July 2017, the ESMA published an opinion to support supervisory convergence in the area of investment management in the context of the UK withdrawing from the EU (ESMA34-45-344 - the "Opinion", available here).

    On 12 July 2018, the ESMA issued a public statement to emphasise the importance of the timeline to submit requests for authorisation to the national competent authorities and ESMA for regulated entities wishing to relocate in the context of Brexit (ESMA42-110-998 - the "Statement", available here).

    On 19 July 2018, the European Commission issued a Communication entitled "Preparing for the withdrawal of the UK from the EU on 30 March 2019" (available here).

    What's new?

    On 25 July 2018, based on the Opinion and the Statement, the CSSF published the press release 18/25 "to urge investment management companies addressed by this press release to submit their applications to the CSSF [in the context of Brexit] as soon as possible" (the "Press Release 18/25").

    The Press Release 18/25 is addressed to "any investment fund manager (alternative investment fund manager or UCITS fund manager) wishing to relocate business in Luxembourg in the context of Brexit".

    Noteworthy is that "existing entities already authorised by the CSSF, but wishing to receive additional licenses or substantially changing operational models to cope with Brexit-related aspects are also addressed" by the Press Release 18/25.

    The Press Release 18/25 is available here.

    What's next?

    Based on the current state of negotiations, entities needs to consider the scenario where a "hard Brexit" would take place on 30 March 2019.

    The time required for the CSSF to analyse Brexit-related authorisation requests can be "substantial and depends on numerous factors".

  • EuSEF/EuVECA/ELTIF/MMF and Securitisation Regulations - Implementing Bill 7349 submitted to Parliament

  • Background

    The Regulation (EU) 2015/760 of the European Parliament and of the Council on European long-term investment funds applies since 9 December 2015 ("ELTIF Regulation", available here).

    On 10 November 2017, the Regulation (EU) 2017/1991 (available here) amended the following two regulations:

    • Regulation (EU) No 345/2013 of the European Parliament and of the Council on European venture capital funds ("EuVECA Regulation", available here); and
    • Regulation (EU) No 346/2013 of the European Parliament and of the Council on European social entrepreneurship funds ("EuSEF Regulation", available here).

    On 20 July 2017, the Regulation (EU) 2017/1131 on money market funds entered into force ("MMF Regulation", available here). The MMF Regulation applies since 21 July 2018.

    On 17 January 2018, the regulation (EU) 2017/2402 of the European Parliament and of the Council laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardized ("STS") securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 entered into force (the "STS Securitisation Regulation", available here). The STS Securitisation Regulation will apply as from 1 January 2019.

    On 30 June 2018, the Luxembourg Law of 22 June 2018 on green covered bonds (available here only in French) amended certain provisions of the Luxembourg Law of 5 April 1993 on the financial sector ("LSF", available here only in French).

    What's new?

    On 6 August 2018, the Luxembourg Finance Minister submitted the Bill 7349, which implements relevant provisions of the ELTIF, EuSEF/EuVECA, MMF and STS Securitisation Regulations and corrects certain provisions of the LSF, to the Luxembourg Parliament (the "Bill 7349").

    In order to operationalize the above-mentioned Regulations, the Bill 7349 designates the CSSF (and the Commissariat aux Assurances or "CAA" in the context of the STS Securitisation Regulation) as competent authority. For this purpose, the CSSF and the CAA shall have the powers of control and investigation necessary for the exercise of their respective tasks, within the limits defined by the said Regulations.

    As laid out in Articles 3, 8, 13 and 18 of the Bill 7349, the CSSF may impose various administrative penalties on entities which are in scope of the said Regulation(s) and in breach of the relevant provision(s) (e.g., for legal persons, the CSSF can impose administrative fines of up to EUR 5 million or 10% of its total annual turnover).

    The Bill 7349 is available here (only in French).

    What's next?

    The Luxembourg Conference of Presidents will order the referral of the Bill 7349 to a parliamentary committee for discussion.

  • Financial Supervision - Bill 7348 on inactive accounts, safe-deposit boxes, and unclaimed insurance contracts submitted to Parliament

  • Background

    On 28 December 2015, the CSSF issued its circular 15/631 on dormant or inactive accounts addressed to all professionals under its supervision, pending specific Luxembourg legislation (the "Circular 15/631", available here only in French).

    Contrary to France and Belgium, "dormant" or "inactive" accounts and safe-deposit boxes, and unclaimed insurance contracts in Luxembourg are currently subject to ordinary legislation and applicable contractual provisions.

    What's new?

    On 6 August 2018, the Luxembourg Finance Minister submitted the bill 7348 on inactive accounts, safe- deposit boxes, and unclaimed insurance contracts to the Luxembourg Parliament (the "Bill 7348").

    The aim of the Bill 7348 is twofold:

    • Strengthening the protection of savers and beneficiaries of certain insurance benefits by facilitating the search for their accounts, safe-deposit boxes and insurance contracts (e.g., by establishing a central register with relevant information, as foreseen in Article 32 of the Bill 7348); and
    • Strengthening legal certainty for Luxembourg credit institutions (as defined under Article 1 8. of the Bill 7348) and insurance undertakings (as defined under Article 1 7. of the Bill 7348) by clarifying their professional obligations.

    In this context, the Bill 7348 has 3 main components:

    • A preventive component, which defines a series of measures aimed at preventing respectively inactive accounts and safe-deposit boxes as well as unclaimed insurance contracts, to restore the contact via additional information and search procedures;
    • A deposit component ("consignation"), which defines the obligation to deposit assets/funds after a prolonged inactivity (e.g., 10 years after the starting point of inactivity for accounts and safe-deposit boxes) or unclaimed period (e.g., 6 years after the date of knowledge of the due date/term of the insurance benefit by the insurance undertaking, and in the absence of claim by a beneficiary), as well as the specific procedures to be followed for depositing assets/funds; and
    • A restitution component, which provides for the return of the deposited assets/funds by the Luxembourg "Caisse de Consignation".

    For the first two components, the CSSF and the Commissariat aux Assurances ("CAA") shall have the powers of control and investigation necessary to exercise their new tasks (respectively introduced in the new Article 2(7) of the CSSF amended Law of 23 December 1998 and the new Article 2(1)(l) of the amended Law of 7 December 2015 on the insurance sector). Specific provisions concerning administrative sanctions (e.g., administrative fines up to EUR 1 million for legal persons), and criminal sanctions (e.g., criminal fines up to EUR 1 million for legal persons) are laid in out in Articles 41, 42, 45 and 46 of the Bill 7348.

    Noteworthy are also the annual reporting obligations to the CSSF, CAA and the "Administration des contributions directes" for Luxembourg credit institutions and insurance undertakings in Article 27 of the Bill 7348, the detailed transitional provisions laid out in Articles 49 to 52 of the Bill 7348, and the 5 Annexes to the Bill 7348.

    The Bill 7348 is available here (only in French).

    What's next?

    The Luxembourg Conference of Presidents will order the referral of the Bill 7348 to a parliamentary committee for discussion.

    It is foreseen that the final version of the law on inactive accounts, inactive safe-deposit boxes and unclaimed insurance contracts ("loi du [date de la présente loi] relative aux comptes inactifs, aux coffres-forts inactifs et aux contrats d'assurance en déshérence") will enter into force on the 1st day of the 7th month following its publication in the Luxembourg Memorial A.

  • Financial Supervision - CSSF issues extensive Circular 18/698 on authorisation and organisation of Investment Fund Managers entering into force on 23 August 2018

  • Background

    Until 22 August 2018, the Commission de Surveillance du Secteur Financier ("CSSF") applied its Circular 12/546 (available here) to authorise and organise the following types of Luxembourg management companies:

    • Management companies subject to Chapter 15 of the Law of 17 December 2010 relating to undertakings for collective investment ("Chapter 15 ManCos"); and
    • Investment companies, which have not designated a management company within the meaning of Article 27 of the Law of 17 December 2010 relating to undertakings for collective investment ("société d'investissement autogérée" or "SIAG").


    On 12 June 2018, the law of 17 December 2010 relating to undertakings for collective investment (the "2010 Law", available here in French and here in English) and the law of 12 July 2013 on alternative investment fund managers (the "2013 Law", available here in French and here in English) were lastly amended. In particular, Articles 5 to 19 of the 2013 Law lay down the legal conditions, which must be met to be granted authorisation as alternative investment fund manager ("AIFM") by the CSSF. The Commission delegated regulation (EU) No 231/2013 of 19 December 2012 (the "Delegated Regulation", available here) further details how certain Articles of the 2013 Law shall be applied.

    On 25 July 2018, the CSSF urged fund management companies (e.g., AIFMs and UCITS fund managers) to submit their Brexit-related applications as soon as possible (the "Press Release 18/25", available here).

    Taking into account the rapid evolution of the EU and Luxembourg legislation concerning AIFs and the latest supervisory market practices, the CSSF has worked on a new circular to replace and extend the scope of the Circular 12/546 to "Investment Fund Managers" ("IFMs" or "gestionnaires de fonds d'investssement"), including UCITS management companies and AIFMs.

    Who is concerned?

    On 23 August 2018, the CSSF issued the circular 18/698 concerning the (i) authorisation and organisation of IFMs incorporated under Luxembourg law and (ii) specific provisions on the fight against money laundering and terrorist financing applicable to IFMs and entities carrying out the activity of registrar agent (the "Circular 18/698").

    In this context, the Circular 18/698 applies to the following IFMs:

    • Chapter 15 ManCos;
    • Management companies incorporated under Luxembourg law subject to Article 125-1 or Article 125- 2 of Chapter 16 of the 2010 Law ("Chapter 16 ManCos");
    • Luxembourg branches of IFMs subject to Chapter 17 of the 2010 Law ("Chapter 17 ManCos");
    • SIAG;
    • Authorised AIFMs under Chapter 2 of the 2013 Law; and
    • Internally managed AIFs within the meaning of Article 4(1)(b) of the 2013 Law ("fonds d'investissement alternatifs gérés de manière interne" or "FIAAG").

    The CSSF notes that the Circular 18/698 also applies to branches and representative offices ("bureaux de representation"), as the case may be, which have been established by an IFM in Luxembourg and/or abroad.

    However, the CSSF highlights that the Circular 18/698 does not apply to IFMs subject to Chapter 18 of the 2010 Law and entities that are subject to Article 3 of the 2013 Law and not mentioned in the above list of IFMs.

    What's new?

    The main purpose of the Circular 18/698 is to define the conditions for obtaining and maintaining the authorization for all IFMs presented within one single document. In addition, the Circular 18/698 aims at providing further clarifications on certain conditions for authorization, more particularly in the area of the shareholder structure, own fund requirements, management bodies of the IFM, arrangements concerning the central administration and governance, and rules of delegation.

    With regards to the activity of registrar agent, credit institutions, investment firms, professionals of the financial sectors, and IFMs incorporated under Luxembourg law, as well as Luxembourg branches of foreign establishments shall refer to the Sub-Chapter 5.4. of the Circular 18/698 entitled "Organisation of the fight against money laundering and terrorist financing", most notably point 304 on page 48.

    Besides, the Circular 18/698 incorporates, with reference to the CSSF Regulation N° 10-04 (available here) and the Delegated Regulation, the rules concerning the compliance and internal audit functions, as previously laid down in the CSSF Circulars 04/155 (available here) and IML 98/143 (available here).

    The Circular 18/698 consists of the following 9 Parts and 3 Annexes:

    • Part I – Definitions and abbreviations;
    • Part II – Conditions for obtaining and maintaining the authorization of an IFM, which only engages in the management of Undertakings for Collective Investment ("UCIs"), as specified in Article 101(2) of the 2010 Law and Article 5(2) of the 2013 Law (main part from page 11 to 88);
    • Part III – Condition for obtaining and maintaining the authorization of IFMs, which engage in the management of UCIs and the management of investment portfolios in accordance with mandates given by investors on a discretionary client-by-client basis, as specified in Article 101(3) of the 2010 Law and Article 5(4) of the 2013 Law;
    • Part IV – The IFM and the right of establishment and the freedom to provide services;
    • Part V – Proportionality principle;
    • Part VI – Chapter 16 ManCos under Article 125-1 of the 2010 Law and Chapter 17 ManCos;
    • Part VII – SIAG and FIAAG;
    • Part VIII – Communication with the CSSF;
    • Part IX – Entry into force and other provisions;
    • Annex 1 –Risk management procedure to be communicated to the CSSF by AIFs (as defined under point 1.13 of the Circular 18/698);
    • Annex 2 – Summary table of the conditions of communication to the CSSF according to the nature of the change (the list is non-exhaustive); and
    • Annex 3 – Specific information applying to SIAG and FIAAG.

    More specifically, the Part II of the Circular 18/698 contains the following changes:

    • Definition of a minimum substance standard for management companies for number of local conducting officers (subject to the Asset under Management, i.e. 1.5 bn EUR) and core administrative functions personnel (i.e. 3 FTE including the conducting officers);
    • Definition of a rule of conduct for independent directors in terms of hours (i.e. 1920 hours spent on professional activities p.a.) and number of mandates (i.e. 20 mandates in regulated entities and operational companies);
    • Outline of the AML requirements applicable to all management companies (distinct from the distribution delegation obligations as applicable to the management companies depending on their distribution set-up);
    • Formalization of the obligations relative to EMIR and MMF Regulation; and
    • Formalization of principles governing the use of "investment advisors".

    The Circular 18/698 is available here (only in French at the time of this publication).

    What's next?

    The Circular 18/698 enters into force on 23 August 2018 and repeals the Circular 12/546 from this date.

    Final provisions of the Circular 18/698 also amend certain provisions of other CSSF circulars (e.g., CSSF Circular 11/512 on risk management, available here, or CSSF Circular 17/671 on the out-of-court resolution of complaints, available here only in French, as described under points 619 and 620 of the Circular 18/698).

    The CSSF notes that the Circulars 04/155 and IML 98/143 are no longer applicable for IFMs in scope of the Circular 18/698.

    Existing authorised IFMs and companies applying for any IFM authorisation should carefully consider the content and new requirements introduced by the Circular 18/698.

  • Financial Supervision - CSSF Forms Updates

  • Background

    The CSSF is most notably the Luxembourg competent authority of the prudential supervision of professionals of the financial sector (investment firms, specialised PFS, support PFS), undertakings for collective investment ("UCI"), UCITS, specialised investment funds ("SIF"), investment company in risk and capital ("SICAR").

    What's new?

    From 20 July to 31 July 2018, the following forms were updated and uploaded on the CSSF’s website:

    Supervision Area

    CSSF Form Description

    Hyperlink

    Investment Firm

    Application form for authorisation as an investment firm - 26.07.2018

    Available here

    Investment Firm

    Notification of information on changes to the membership of the management body - 26.07.2018

    Available here

    Specialised PFS/ Support PFS

    Main application form for authorisation as specialised PFS or support PFS  - 26.07.2018

    Available here

    SIF/SICAR/UCI Part II

    Application questionnaire to set up a SIF or UCI Part II or SICAR - 25.07.2018

    Available here

    SIF/SICAR/UCI Part II/UCITS

    Benchmark Regulation questionnaire - 31.07.2018

    Available here

    SIF/UCI/UCITS

    Application questionnaire for additional sub-fund(s)  - 25.07.2018

    Available here

    SIF/UCI/UCITS

    Application questionnaire for money market fund - 20.07.2018

    Available here

    UCITS

    Application questionnaire to set up a UCITS - 25.07.2018

    Available here

    What's next?

    The relevant CSSF forms will be updated and uploaded on its website if need be.

  • Financial Supervision - CSSF Forms and FAQ Updates

  • Background

    The CSSF is most notably the Luxembourg competent authority of the prudential supervision of professionals of the financial sector (investment firms, specialised PFS, support PFS), management companies, alternative investment fund managers ("AIFM"), undertakings for collective investment ("UCI"), UCITS, specialised investment funds ("SIF"), investment company in risk and capital ("SICAR").

    What's new?

    From 1 to 20 August 2018, the following forms and frequently asked questions' documents were updated and uploaded on the CSSF's website:

    Supervision Area CSSF Form/FAQ Description Hyperlink
    AIFM Application questionnaire for the set-up of a fully licensed alternative investment fund manager - 03.08.2018 Available here
    AIFM / Management companies - Chapter 15 and Chapter 16 IFM EMIR questionnaire - 03.08.2018 Available here
    UCITS/UCI/SIF Application questionnaire for money market fund - 07.08.2018 Available here
    SIF/SICAR that do not qualify as AIF Frequently Asked Questions concerning specialised investment funds under the law of 13 February 2007 and investment companies in risk capital under the law of 15 June 2004 that do not qualify as alternative investment funds – (Version 2) 14.08.2018 Available here

    What's next?

    The relevant CSSF Forms and FAQ will be updated and uploaded on its website in due course.

  • GDPD/GDPR - Implementing and Transposition Laws enter into force on 20 August 2018

  • Background

    The regulation (EU) 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data applies since 25 May 2018 ("GDPR", available here).

    In parallel, EU Member States had to transpose the Directive (EU) 2016/680 on the protection of natural persons with regard to the processing of personal data by competent authorities for the purposes of the prevention, investigation, detection or prosecution of criminal offences or the execution of criminal penalties, and on the free movement of such data by 6 May 2018 ("GDPD", available here).

    On 10 August 2017, the Luxembourg Minister of Justice submitted the bill 7168 transposing certain provisions of GDPD to the Luxembourg Parliament (the "Bill 7168", available here only in French). All legislative steps in relation to the Bill 7168 as adopted by the Luxembourg Parliament on 26 July 2018 are available here (only in French).

    On 12 September 2017, the Luxembourg Minister for Communications and Media submitted the bill 7184 implementing certain provisions of GDPR to the Luxembourg Parliament (the "Bill 7184", available here only in French). All legislative steps in relation to the Bill 7184 as adopted by the Luxembourg Parliament on 26 July 2018 are available here (only in French).

    On 14 August 2018, the Luxembourg Commission Nationale pour la Protection des Données ("CNPD") issued guidelines on video-surveillance in the context of GDPR (the "Guidelines", available here only in French).

    What's new?

    On 16 August 2018, based on the Bill 7184, the Luxembourg law of 1 August 2018 implementing certain provisions of GDPR was published in Memorial A N°686 ("Loi du 1er août 2018 portant organisation de la Commission nationale pour la protection des données et du régime général sur la protection des données" or the "GDPR Implementing Law"). In this context, Articles 12 to 14 of the GDPR Implementing Law give the CNPD new regulatory powers in relation to GDPR (most notably the powers defined in Article 58 of GDPR).

    On 16 August 2018, based on the Bill 7168, the Luxembourg law of 1 August 2018 transposing certain provisions of GDPD was published in Memorial A N°689 ("Loi du 1er août 2018 relative à la protection des personnes physiques à l’égard du traitement des données à caractère personnel en matière pénale ainsi qu’en matière de sécurité nationale" or the "GDPD Transposition Law"). The GDPD Transposition Law shall be read in conjunction with the GDPR Implementing Law. In particular, Article 40(2) of the GDPD Transposition Law introduces an exemption to the CNPD’s powers, where personal data processing operations carried out by the courts of the judiciary and the administrative order in the exercise of their judicial functions are subject to the supervision of the "judicial supervisory authority" ("autorité de contrôle judiciaire").

    The GDPR Implementing Law is available here (only in French).

    The GDPD Transposition Law is available here (only in French).

    On 16 August 2018, two Grand-Ducal Regulations concerning the CNPD were also published in the Memorial A N° 687 and N°688 (respectively available here and here only in French).

    What's next?

    The GDPR Implementing Law and the GDPD Transposition Law enter into force on 20 August 2018.

    From that date, the amended Luxembourg law of 2 August 2002 on the protection of persons with regard to the processing of personal data shall be repealed (available here). Therefore, all Luxembourg companies are discharged of the administrative burden of active declaration or notification of personal data processing to the CNPD before the actual processing. However, they should be ready to be controlled by the CNPD and to demonstrate accountability towards relevant GDPR provisions.

  • GDPR - CNPD issues Guidelines on video-surveillance

  • Background

    The Regulation (EU) 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data applies since 25 May 2018 ("GDPR", available here).

    On 12 September 2017, the Luxembourg Minister for Communications and Media submitted the bill 7184 implementing certain provisions of GDPR to the Luxembourg Parliament (the "Bill 7184", available here only in French).

    What's new?

    On 14 August 2018, the Luxembourg Commission Nationale pour la Protection des Données ("CNPD") issued guidelines on video-surveillance in the context of GDPR (the "Guidelines").

    In the Guidelines, the CNPD provides examples on the following topics:

    • Lawfulness of processing (especially when the processing is necessary for the purposes of the legitimate interests pursued by the controller);
    • Purpose limitation (the controller shall collect personal data for specified, explicit and legitimate purposes and not further processed in a manner that is incompatible with those purposes);
    • Transparent information (the controller shall not implement hidden surveillance measures having regard to Article 5(1)(a) of GDPR);
    • Data minimisation is detailed in Sections 4.1 to 4.7 of the Guidelines; and
    • Specific legal provisions in relation to the processing of personal data in the employment context (i.e. the new Article L. 261-1 of the Luxembourg Labour Code).

    The Guidelines are available here (only in French).

    What's next?

    On 16 August 2018, based on the adopted Bill 7184, the Luxembourg law of 1 August 2018 implementing certain provisions of GDPR was published in Memorial A686 ("Loi du 1er août 2018 portant organisation de la Commission nationale pour la protection des données et du régime général sur la protection des données" or the "Law", available here only in French). The Law will enter into force on 20 August 2018.

  • IDD - Further legislative steps before publication (Bill 7215)

  • Background

    The Directive (EU) 2016/97 on insurance distribution recast ("IDD", available here) entered into force on 23 February 2016. Initially planned to be transposed and applied before 23 February 2018, the Directive (EU) 2018/411 postponed the transposition date of IDD to 1 July 2018 and the application date of IDD to 1 October 2018 (available here).

    IDD provides updated rules applicable to the distribution of insurance and reinsurance products, including insurance-based investment products ("IBIPs"). It aims most notably at ensuring a greater transparency of insurance distributors with regard to the price and costs of insurance products, better and more comprehensible product information and improved conduct of business rules, in particular with regard to advice. The new rules will be applicable to all distribution channels, including direct sales by insurance companies to create a level playing field for all distributors and guarantee uniform high standards of protection for consumers.

    On 6 December 2017, the Luxembourg Finance Minister submitted the bill 7215 transposing certain provisions of IDD to the Luxembourg Parliament (the "Bill 7215", available here only in French).

    What's new?

    On 26 July 2018, the Luxembourg Parliament voted at first reading on the Bill 7215, and on 27 July 2018, the Luxembourg Council of State waived the second constitutional vote on the Bill 7215.

    All the legislative steps in relation to the Bill 7215 are available here (only in French).

    What's next?

    Based on the adopted Bill 7215, the IDD transposition law modifying the Law of 7 December 2015 on the insurance sector shall be published in the Memorial A in the coming weeks.

  • BELGIUM

    Publication of the law on the Caisse des Dépôts et Consignations

  • Background

    The Caisse des Dépôts et Consignations (“CDC”), as a distinct service of the general administration of the Federal Public Service Finance, manages the reception, the preservation and the return to the beneficiaries of the deposited movable properties. Since 2015, the CDC has started a significant reorganisation with the aim of streamline its activities. For this purpose, a new law on the Caisse des Dépôts et Consignations has been published on 20th July 2018, repealing the Royal Decree n°150 dated 1935, which was the legal framework of the CDC until then.

    What's new?

    The new law simplifies and modernizes the entire system, digitalising processes via MyMinfin, harmonizing the terminology, etc.

  • Introduction of the register of Ultimate Beneficial Owners (“UBO register”)

  • Background

    Following the law of 18th September 2017 on prevention of money laundering and terrorist financing and on limitation of the use of cash, a Royal Decree defining the modalities for the functioning of the UBO register, dated 30th July 2018, has been published on 14th August 2018.

    What's new?

    The Royal Decree specifies the following points, amongst others:

    1. which beneficial owners’ information must be communicated: surname, first name, date of birth, nationality, address, etc.
    2. who will be allowed to access to the UBO register: the competent authorities, the relevant entities, general public or any person who invokes a legitimate interest, etc.
    3. the control modalities to guarantee the respect of this obligation;
    4. the applicable administrative sanctions in case of disrespect.

    What's next?

    The Royal Decree will come into force on 31st October 2018. In the meantime, all the entities are requested to identify their ultimate beneficial owners, collect the appropriate, accurate information and support them by providing relevant documents, implement internal processes to ensure any update of the UBO register within one month in case of information’s modification.

  • FSMA Regulation on prevention of ML/FT

  • Background

    In application with the law of 18th September 2017 on prevention of money laundering and terrorist financing and on limitation of the use of cash (The AML/CFT Law), the FSMA drew up a regulation on prevention of ML/FT dated 3 July 2018, which has been approved on 30th July 2018 by a Royal decree.

    What's new?

    The regulation specifies the rules related to the global assessment process the entities listed by the AML/CFT Law (art. 5, §1, 11° to 20°, including Ucits, AIF and Management Companies) must conduct, and several measures to combat ML/FT risks regarding their internal organisation.

    What's next?

    The regulation will come into force as from 1st January 2019, except the General dispositions and the provisions on Global assessment process and classification of the risks, which are immediately applicable.

  • FSMA Circular 2018_12: Implementation of a risk-based approach to ML/FT

  • Background

    According to art. 7 of the AML/CFT Law, the entities listed (art. 5, §1, 11° to 20°, including Ucits, AIF and Management Companies) have to implement a “risk-based approach” in order to identify, evaluate and understand the ML/FT risks they incur. In this context, the FSMA published on 7th August 2018 the Circular 2018_12 with the aim of fixing the relevant measures of the application of this approach. This circular also specifies the FSMA expectations regarding its implementation.

    What's new?

    To sum up, the ML/FT risk evaluation occurs at two levels: entities shall conduct a business-wide risk assessment and an individual assessment of customers, identifying, evaluating and categorizing the risks. In conformity with art. 17 of the AML/CFT Law, the global assessment must be documented, kept up-to-date and made available to the FSMA.

    What's next?

    The FSMA will verify the concrete application of the risk-based approach by a two-step evaluation: first, on the beginning of the last 2018 trimester, the authority will introduce an annual compulsory questionnaire about ML/FT; second, the authority will conduct on-sites inspections during all year 2019.

  • FSMA Circular 2018_13: Periodic questionnaire on the prevention of ML/FT

  • Background

    By the publication of the Circular 2018_13 dated 9th August 2018, the FSMA introduced a periodic questionnaire on the prevention of ML/FT as the first step of its evaluation of the risk-based approach. This questionnaire allows FSMA to collect standardized information on the ML/FT risks incurred by the relevant entities and assess the compliance and efficiency of their implemented mechanisms for combating it.

    What's new?

    Eight distinct questionnaires have been introduced, according to the category the entity belongs to. The questionnaires are available in French and Dutch, and shall be completed online each year. The questionnaire n°1 concerns management companies and non-public AIF, whereas the questionnaire n°2 concerns Ucits and public AIF.

    What's next?

    The first questionnaire is available on the FiMiS platform since the 24th August 2018, and must be completed as soon as possible before the 15th October 2018 (official deadline).

  • WORLD

    Financial Stability - FSB launches thematic peer review on LEI implementation and invites feedback on implementation of LEI

  • Background

    In 3 November 2011 - 4 November 2011 Cannes Summit, the G20 leaders supported the creation of a global legal entity identifier ("LEI") and called in the Financial Stability Board (the "FSB") to take the lead in helping coordinate work among the regulatory community to prepare recommendations for the appropriate governance framework, representing the public interest, for a global LEI by G20 next summit (the "Cannes Summit Final Declaration", available here). The LEI is a 20-character, alpha-numeric code for uniquely identifying legally distinct counterparties to financial transactions and for providing high quality reference data on them (as the name, address and basic ownership information).

    On 8 June 2012, the FSB published its report on a global LEI for financial markets, which set out recommendations and proposals to implement a global LEI system (the "2012 Report", available here).

    In 18 June 2012 - 19 June 2012 Los Cabos Summit, the G20 leaders endorsed the global LEI system’s high level principles and recommendations set out in the 2012 Report and called for global adoption of the LEI to support authorities and market participants in identifying and managing financial risks (the "Los Cabos Summit Final Declaration", available here). Since then, the FSB has continued to support the LEI implementation, including by establishing in 2014 the Global LEI Foundation ("GLEIF"), which serves as the operational arm of the system and federates local LEI issuers under the oversight of the LEI Regulatory Oversight Committee (more information is available here).

    Progress in the global LEI system implementation includes the completion of the governance framework, gradual enrichment of its reference data (the collection of data on direct and ultimate parents of legal entities and of data on international/foreign branches) and the increase in issued LEIs.

    The FSB Standing Committee on Standards Implementation ("SCSI") agreed to launch a thematic peer review on implementation of the LEI (the "Peer Review on Implementation of the LEI") to evaluate the progress made by the FSB members - both national authorities and international bodies - in response to the G20 Leaders call at the Los Cabos Summit. It is to be conducted according to the handbook for FSB Peer Reviews (the "Handbook", available here).

    The Peer Review on Implementation of the LEI is intended: (i) to consider the approaches followed by jurisdictions to promote LEI expansion; (ii) identify areas where members face implementation challenges; and (iii) document practices that have advanced the adoption and use of the LEI in improving the usability of financial data for financial stability purposes. It is also intended to include an assessment of current levels of LEI coverage across sectors and geographies in order to provide a factual basis for the analysis.

    What's new?

    On 16 August 2018, the FSB announced the Peer Review on Implementation of the LEI and published summary terms of reference outlining its objectives, scope, approach and process (the "Summary Terms of Reference").

    According to the Summary Terms of Reference, the primary source of information for the Peer Review on Implementation of the LEI will be responses to a questionnaire by FSB jurisdictions. In addition to the questionnaire to national authorities, the information will be collected from standard setting bodies and international financial institutions. The team will also seek input from GLEIF and draw information from policy papers, guidance and other documents published by authorities and market participants.

    As part of the Peer Review on Implementation of the LEI, the FSB now invites feedback from financial institutions, industry and consumer associations as well as other stakeholders on implementation of the LEI. That could include comments, for instance, on:

    • Identifiers used by financial institutions for legal entities established in their or foreign jurisdictions, and the extent to which they are mapped to the LEI;
    • Awareness and adoption of the LEI in their jurisdiction, especially the existence or prospect of any market-driven or voluntary adoption of the LEI by market participants;
    • Types of private sector uses of the LEI and the benefits measured or anticipated from them;
    • Challenges and costs faced in acquiring and maintaining LEIs;
    • Main obstacles faced in adoption and implementation of the LEI; and
    • Ways to promote further adoption of the LEI.

    The Summary Terms of Reference are available here.

    What's next?

    The deadline for feedback on the Peer Review on Implementation of the LEI is 21 September 2018.

    The Peer Review on Implementation of the LEI report is expected to be published in the 1st half of 2019. It may draw lessons and make recommendations to address common implementation challenges. The report will not set new policies but could recommend actions for consideration by the relevant bodies (e.g. FSB or standard setting bodies) to address the identified common challenges.

  • Financial Stability - FSB, IOSCO, CPMI and BCBS consult on effects of reforms on incentives to centrally clear OTC derivatives

  • Background

    In 2009, in response to the global financial crisis, the G20 Leaders agreed to 5 five areas of reforms to over-the-counter ("OTC") derivatives markets: (i) trade reporting of OTC derivatives; (ii) central clearing of standardised OTC derivatives; (iii) exchange or electronic platform trading of standardised OTC derivatives; (iv) higher capital requirements for non-centrally cleared derivatives; and (v) initial variation margin requirements for non-centrally cleared derivatives (the "Post-crisis Reforms").

    Since 2009, global standard-setting bodies have advanced a number of regulatory reforms that are likely to affect the incentives for central clearing of standardised OTC derivatives contracts.

    On 3 October 2014, the Bank of International Settlements (the "BIS") published a report on regulatory reform of OTC derivatives: an assessment of incentives to clear centrally (the "2014 Report", available here).

    On 3 July 2017, the Financial Stability Board ("FSB") published a framework for post-implementation evaluation of the effects of the Post-crisis Reforms (the "2017 Framework", available here). The 2017 Framework is intended to guide analysis of whether the Post-crisis Reforms are achieving their intended outcomes, and to help identify material unintended consequences that may have to be addressed, without compromising on the objectives of that reforms. The 2017 Framework clarifies concepts and terms, describes analytical approaches and specifies the processes to be followed for operationalising evaluations.

    The FSB, the International Organization of Securities Commissions (the "IOSCO"), the Committee on Payments and Market Infrastructures (the "CPMI") and the Basel Committee on Banking Supervision (the "BCBS") convened derivatives assessment team ("DAT") agreed to undertake a study to examine whether adequate incentives to centrally clear OTC derivatives are in place. This was intended to be one of the first evaluations under the 2017 Framework and to help inform the standard setting bodies regarding any subsequent policy efforts and potential adjustments bearing in mind the original objectives of the original Post-crisis Reforms.

    What's new?

    On 7 August 2018, the FSB, the IOSCO, the CPMI and the BCBS published a consultative report on incentives to centrally clear OTC derivatives: a post-implementation evaluation of the effects of the Post-crisis Reforms (the "Consultative Report").

    The Consultative Report describes the data collected, methodologies applied and analyses conducted that support the following findings:

    • Changes observed in OTC derivatives markets are consistent with the G20 Leaders’ objective of promoting central clearing as part of mitigating systemic risk and making derivatives markets safer;
    • Relevant Post-crisis Reforms taken together, appear to create an overall incentive, at least for dealers and larger and more active clients, to centrally clear OTC derivatives;
    • Non-regulatory factors are also important and can interact with regulatory factors to affect incentives to centrally clear;
    • Some categories of clients have less strong incentives to use central clearing, and may have a lower degree of access to it;
    • Provision of client clearing services in concentrated in a relatively small number of bank-affiliated clearing firms; and
    • Some aspects of regulatory reform may not incentivize provision of client clearing services. The Consultative Report is available here.

    What's next?

    The FSB, the IOSCO, the CPMI and the BCBS invite comments on the Consultative Report and responses to specific questions set out in it by 7 September 2018. Responses should be sent to fsb@fsb.org.

    The final evaluation report will be published around the time of the G20 Buenos Aires Summit at the end-November 2018.

  • Financial Stability - FSB, IOSCO, CPMI and BCBS publish 2nd report on central clearing interdependencies

  • Background

    In 2009, in response to the global financial crisis, the G20 Leaders agreed to 5 five areas of reforms to over-the-counter ("OTC") derivatives markets: (i) trade reporting of OTC derivatives; (ii) central clearing of standardised OTC derivatives; (iii) exchange or electronic platform trading of standardised OTC derivatives; (iv) higher capital requirements for non-centrally cleared derivatives; and (v) initial variation margin requirements for non-centrally cleared derivatives (the "Post-crisis Reforms").

    Particularly following the Post-crisis Reforms that mandated central clearing of standardised OTC derivatives, increasingly important part of the financial system are central counterparties ("CCPs"). Central clearing helps to mitigate systemic risk and provides transparency by replacing the complex and opaque web of ties between market participants with simpler links between CCPs and their clearing members.

    In 2016, the Financial Stability Board (the "FSB"), the International Organization of Securities Commissions (the "IOSCO"), the Committee on Payments and Market Infrastructures (the "CPMI") and the Basel Committee on Banking Supervision (the "BCBS") launched a comprehensive data collection project to identify, quantify and analyse interdependencies between CCPs and major clearing members and financial service providers, and the resulting systemic implications (the "1st Data Collection Exercise"). The data were collected as of 30 September 2016 (representing a snapshot in time) from 26 CCPs from jurisdictions in North America, South America, Europe and Asia-Pacific.

    On 5 July 2017, the FSB, the IOSCO, the CPMI and the BCBS published the 1st report on central clearing interdependencies (the "1st Report", available here). The network relationships analyzed in the 1st Report are generally characterized by a core of highly connected CCPs and financial institutions and a periphery of less highly connected CCPs and financial institutions. Financial resources provided to CCPs are concentrated at a small number of CCPs and exposures to CCPs are concentrated among a small number of institutions.

    Following the 1st Report, it was agreed to conduct a further more streamlined data collection to assess whether the 2016 Data Collection Exercise findings reflected in the 1st Report were stable over time. Data were collected as of 31 October 2017 from the same 26 CCPs across 15 jurisdictions in order to enable comparability with results of the 1st Data Collection Exercise (the "2nd Data Collection Exercise").

    What's new?

     

    On 9 August 2018, the FSB, the IOSCO, the CPMI and the BCBS published the 2nd report that maps interdependencies between CCPs and their clearing members and other financial service providers (the 2nd Report").

    The 2nd Report covers the results of the 2nd Data Collection Exercise and shows that the findings are broadly consistent with the high level conclusions of the 1st Data Collection Exercise:

    • Prefunded financial resources are concentrated at a small number of CCPs;
    • Exposures to CCPs are concentrated among a small number of entities;
    • Relationships mapped in the 2nd Report are all characterised, by a core of highly connected CCPs and entities and a periphery of less highly connected CCPs and entities;
    • Small number of entities tend to dominate each of the critical services required by CCPs; and
    • Clearing members and clearing member affiliates are also important providers of other critical services required by CCPs and can maintain numerous types of relationships with several CCPs simultaneously; and
    • There are, however, some changes, for instance, the concentration of client clearing activity has decreased. Initial margins from clients are now concentrated in two CCPs, comparing to only one in the 1st Report.

    The 2nd Report is available here.

    What's next?

    The studies conducted for the 1st Report and the 2nd Report shall inform ongoing policy work on CCP resilience, recovery planning and resolution, and possibly provide useful inputs for designing a supervisory stress testing framework.

  • OTC Derivatives - CPMI and IOSCO issue consultative report on governance arrangements for critical OTC derivatives data elements (other than UTI and UPI)

  • Background

    In order to improve transparency, mitigate systemic risk and prevent market risk, in 2009 the G20 leaders agreed that all over-the-counter ("OTC") derivative transactions should be reported to trade repositories. According to the Financial Stability Board's (the "FSB") 2014 feasibility study on approaches to meaningfully aggregate OTC derivatives data, authorities would have a comprehensive view of the OTC derivatives market and its activity if aggregated data elements would be harmonised (the "FSB Study", available here).

    Since November 2014, the Harmonisation Group set up by the Committee on Payments and Market Infrastructures (the "CPMI") and the International Organization of Securities Commission (the "IOSCO") has worked on developing global guidance to authorities regarding the definition, format and usage of key OTC derivatives data elements reported to trade repositories, including the unique transaction identifier ("UTI"), the unique product identifier ("UPI") and other critical data elements.

    On 9 April 2018, the CPMI and the IOSCO issued their technical guidance report on harmonisation of critical OTC derivatives data elements other than UTI and UPI (the "Guidance", available here), which:

    • Guides authorities in setting the definitions, format and allowable values concerning data elements to be reported in order to facilitate consistent aggregation of data at global level (but does not prescribe which data elements should be reported in a jurisdiction);
    • Sets out a table for the harmonisation of each data element, grouped by common characteristics (e.g. dates and timestamps) or by topic (e.g. data elements related to margins and to prices);
    • Illustrates the reporting of certain data elements in different reporting scenarios (e.g. principal and agency central clearing);
    • Gives a non-exhaustive list of examples, showing how each data element could be used to support authorities’ data needs and to achieve the G20 goals.

    The definition, the allowable values and possibly the format of critical data elements need maintenance to ensure that they remain up-to-date and evolve according to market practices and regulatory needs, hence, the Guidance indicated that the CPMI and the IOSCO intends to develop a framework for maintenance and governance of the critical data elements covered by the Guidance.

    What's new?

    On 16 August 2018, the CPMI and the IOSCO released for public comment a consultative report on governance arrangements for critical OTC derivatives data elements other than UTI and UPI (the "Consultative Report"). It refers to Critical Data Elements other than UTI and UPI as "CDE" (including the definition, format and allowable values).

    The Consultative Report discusses the key criteria of CDE maintenance and governance, including that:

    • Market participants should be appropriately involved in consultative change process;
    • Proposals of revisions should be developed on basis of their contribution to the public interest;
    • Bodies maintaining and governing CDE should be able to perform their assigned functions timely and efficiently and have access to necessary resources and information;
    • Change requests to CDE should be managed on a need-only basis and consider benefits and costs of such revisions, to minimise impact on various stakeholders;
    • Access to and use of CDEs as published in the CDE technical guidance and in the CDE data standards should be unrestricted and available free of charge;
    • Use of the CDE should not be subject to intellectual property restrictions;
    • CDE governance arrangements should not be unduly costly and complex;
    • CDE maintenance should be agnostic to existing communication protocols and should be implementable in any existing syntax;
    • CDE governance arrangements should take into account arrangements for other data elements.

    The Consultative Report discusses also:

    • Different areas of CDE governance and governance functions;
    • Proposed allocation of the governance functions to different bodies (maintenance body, international governance body and authorities);
    • Assessment of CDE against other OTC derivatives data elements;
    • Governance arrangements for the execution of maintenance functions by a maintenance body;
    • Factors relevant for the identification of the international governance body;
    • The CPMI and the IOSCO’s approach to CDE implementation.

    The Consultative Report is available here.

    The Response Form is available here.

    What's next?

    The Consultative Report seeks comments from respondents by 27 September 2018.

    The Response Form should be sent to both the CPMI and the IOSCO secretariats.

  • 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 Legal Manager - Projects & Regulatory Monitoring

    Permanent Editorial Committee
    Gaëlle Kerboeuf, Group Legal Manager - Projects & Regulatory Monitoring
    Elisabeth Raisson, CACEIS Group Compliance
    Corinne Brand, CACEIS Group Communications Specialist
    Alice Broussard, CACEIS Compliance and Regulatory Watch

    Support
    Stefan Ullrich, Head of Legal (Germany)
    Isabella Guscetti, Legal and Compliance (Switzerland)
    Thibault Rhenter, Legal Fund Structuring (Switzerland)
    Robin Donagh, Legal Advisor (Ireland)
    Jérôme Slangen, Legal (France)
    Charles du Maisnil, Head Compliance, risk  and Legal (Belgium)
    Domitille Jeanson, Legal (Belgium)
    Jennifer Yeboah, Legal (Belgium)
    Michele Tuen, Head of Trustee and Legal Hong Kong)

    Design
    CACEIS Group Communications

    Photos credit
    CACEIS, Adobe Stock

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