Legal shorts 21.02.14 including definition of derivative contract under EMIR and modification of FCA handbook


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Legal shorts 21.02.14 including definition of derivative contract under EMIR and modification of FCA handbook

  1. 1. Welcome to Legal Shorts, a short briefing on some of the week’s developments in the financial services industry. Listen to this week's Legal Shorts on CLTV by going to If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers. Claire Cummings 020 7585 1406 Available on CLTV from Monday: 'EMIR - THE BARE FACTS' A short video in which Dominique White discusses the bare facts about EMIR will be available on CLTV as from Monday at Definition of derivative contract under EMIR ESMA has sent a letter to the European Commission asking it to clarify the definition of a derivative or derivative contract under EMIR on the basis that the issue could have a significant detrimental effect on the consistent application of EMIR. In particular, ESMA states it is important to clarify: (i) the definition of currency derivatives in relation to the frontier between spot and forward and their conclusion for commercial purposes; and (ii) the definition of commodity forwards that can be physically settled. The annex to the letter sets out further background to the issue and the consequences that it has on the direct applicability of EMIR. To avoid the inconsistent application of EMIR across the EU, ESMA understands that until the Commission provides clarification, national competent authorities will not implement the relevant provisions of EMIR for contracts that are not clearly
  2. 2. identified as derivatives contracts across the EU. AIFMD: FCA update on calculation of own funds The FCA has updated its AIFMD webpage with a section about the calculation of additional own funds. The FCA is currently considering its interpretation of ‘funds under management’ under the AIFMD, which is used to calculate the amount of “additional own funds” a manager must hold once the value of the portfolio of AIFs exceeds €250 million. The FCA will consult on amending the requirement in a quarterly consultation later in 2014. The proposed change will allow for derivatives to be valued at their market value rather than requiring them to be converted to their underlying positions when calculating the value of portfolios. So that firms do not have to wait for the rule change in order to progress with their applications for authorisation as an AIFM, the FCA has made available a "modification by consent" to allow individual AIFMs to take advantage of the proposed change. AIFMD: ESMA Q&As ESMA has published Q&As on the application of the AIFMD to provide clarity the content of the AIFMD rules. The questions relate to the following: (i) first application of the remuneration rules; (ii) remuneration rules in the case of delegation of portfolio management or risk management activities; (iii) notification of AIFs; (iv) reporting under Article 42 of the AIFMD; and (v) Annex IV of the AIFMD. The aim of the Q&A is to promote common supervisory approaches and practices in the application of the AIFMD and its implementing measures. MiFID II The EU Council has published the text for the proposed MiFID II Directive and the proposed MiFIR. The Council has also announced that COREPER has approved the final compromise text, which will allow the Presidency to indicate to the European Parliament that, should the Parliament adopt its position at first reading, the Council would approve the Parliament’s position. The Council and the Parliament reached political agreement in trialogue on the MiFID II legislative proposals last month.
  3. 3. CRD IV The European Banking Authority has published its final draft RTS on classes of instruments that are appropriate for the purposes of variable remuneration under CRD IV. The aim of the draft RTS is to ensure that instruments for variable remuneration reflect the credit quality of an institution and incentivise prudent risk-taking. In particular, the draft RTS specify the classes of instrument that can be used for variable remuneration and introduce specific requirements for additional Tier 1, Tier 2 and other instruments. The EBA has submitted the draft RTS to the Commission for adoption and they will enter into force following publication in the OJ. Modification of FCA Handbook The FCA has published new webpages announcing modifications of consent relating to CASS, COLL and COBS. Amongst other things, the modifications relate to certain rules in the COBS and COLL, which allow alternative fund managers of a non-UCITS retail scheme (NURS) to choose to produce an equivalent document to the UCITS key investor information document (KIID). This document can then be used by the manager and all other firms selling or advising on the NURS, instead of the key features document or the simplified prospectus. It is referred to as the "NURS-KII" document. IMA report on dealing commission The Investment Management Association has published a report on the use of dealing commission for the purchase of investment research. The report reviews the current market for the purchase of externally sourced equity research by investment managers in the UK, with a particular focus on what type of arrangement benefits clients most. In particular, the report looks at payment for research by means of dealing commission, bundled with execution costs and paid out of client funds (which is the most common approach), and which can give rise to conflicts of interest. Among other things, the report proposes a framework of eight measures against which the current regime and any alternatives might be assessed and compared and makes recommendations to improve current practice and lists the actions that the IMA intends to undertake.
  4. 4. FX benchmark review The Financial Stability Board has announced that it will review FX benchmarks due to concerns regarding the integrity of FX rate benchmarks. The review will form part of the FSB's on-going programme of financial benchmark analysis. The work will be carried out by a newly formed Foreign Exchange Benchmarks sub-group, which will review the FX benchmarks and will analyse market practices relating to their use and the functioning of the FX market. The FSB will submit conclusions and recommendations of the review to the G20 Brisbane summit to be held on 15 and 16 November 2014. CLLS response on HM Treasury’s review of financial services The City of London Law Society has published the response of its Regulatory Law Committee to HM Treasury’s review on financial services and free movement of capital. The response sets out the CLLS' ‘many serious concerns’ about the current approach to law making and implementation for the single market in financial services. In its response, the CLLS provides examples to illustrate its points and states that HM Treasury, the FCA and the PRA should do more to assist firms by providing their interpretation of EU rules, as they do in respect of UK legislation. FCA wins case against unauthorised CISs The FCA has won a High Court judgment against two firms illegally operating and promoting collective investment schemes without authorisation. The defendants in the case had structured their schemes to try to avoid the need to be regulated by the FCA. However, the High Court agreed with the FCA that the schemes were unauthorised collective investment schemes and could not be lawfully operated by the defendants. The FCA said that it has an objective to protect consumers and enhance the integrity of the financial system and that the Court’s ruling shows that even if operators have deliberately tried to structure their scheme to avoid regulation, the court will still look at whether those operating the scheme should in fact be regulated for consumer protection.
  5. 5. Cummings Tel: + 44 20 7585 1406 Mob: + 44 7734 057 327 21 February 2014