Legal Shorts 31.01.14, including FMLC response to client asset review and iosco final report on protection of client assets
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Legal Shorts 31.01.14, including FMLC response to client asset review and iosco final report on protection of client assets






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Legal Shorts 31.01.14, including FMLC response to client asset review and iosco final report on protection of client assets Legal Shorts 31.01.14, including FMLC response to client asset review and iosco final report on protection of client assets Document Transcript

  • 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 FMLC response to client asset review The FMLA has published its response to the FCA’s consultation paper on its review of the client asset regime for investment business (CP 13/5), published in July 2013. In CP13/5, the FCA set out its proposals for material and consequential changes to the FCA's client money, custody assets and mandates rules in CASS. In its response, the FMLC highlights areas of legal uncertainty arising from the proposals in the context of their implications for financial markets and invites further clarification on the following areas: (i) records based distribution; (ii) the overlap between the CASS rules, central clearing structures and EMIR; (iii) client reporting and information; (iv) the banking exemption; (v) acknowledgment letters; (vi) multiple pools and the identification of beneficiaries; and (vii) the need to take into account, as part of the CASS review, the operational realities of the trading of securities in financial markets. The FMLC concludes that, while it acknowledges that the far-reaching changes proposed by the FCA are reflective of the need for change to the existing client asset regime, they need to be clarified in light of existing European legislation and other regulations they are designed to complement.
  • IOSCO final report on protection of client assets IOSCO has published its final report on recommendations regarding the protection of client assets. The report contains eight principles that provide guidance to regulators on how to enhance their supervision of intermediaries holding client assets by clarifying the roles of the intermediary and the regulator in protecting those assets. The principles also outline the intermediaries’ responsibility to ensure compliance with applicable domestic rules and regulations (including in the areas of recordkeeping, providing statements of account, and arrangements to safeguard client assets and minimise the risk of loss and misuse), including through the development of internal systems and controls to monitor compliance. IOSCO consulted on the principles in February 2013. EMIR ESMA has published its final report on procedural rules to impose fines and periodic penalty payments on trade repositories. Under EMIR, where ESMA finds that a TR has, intentionally or negligently, committed one of the infringements listed in Annex I of EMIR, it must impose a fine. ESMA is also required to impose periodic penalty payments in order to compel TRs or other relevant persons to put an end to an infringement or respectively to comply with their obligations in accordance with EMIR. In the meantime, EMIR’s reporting obligation will come into full effect on 12 February 2014. EC reporting and transparency proposal The European Commission has published a legislative proposal for a Regulation on reporting and transparency of securities financing transactions (SFTs). The proposed Regulation sets out proposals for requirements for: (i) financial or non-financial counterparties of SFTs to report the details of SFT transactions to trade repositories; (ii) UCITS management companies, UCITS investment companies and AIFMs to provide information to investors on their use of SFTs and other financing structures; and (iii) counterparties seeking to engage in rehypothecation to ensure certain conditions are satisfied before they have the right to rehypothecation. The proposal stems from the Commission’s work on risks posed by shadow banking.
  • EC proposal for banking structural reforms The European Commission has published a legislative proposal for a Regulation introducing structural reforms to the EU banking sector. The proposal is aimed at banks that are deemed to be too big to fail because the consequences of their failure are considered detrimental for the financial system as a whole. The Regulation will apply to EU banks deemed to be of global systemic importance or those exceeding certain specified thresholds. The EC is proposing to introduce a ban on proprietary trading with effect from 1 January 2017 and a power for supervisors to require banks to separate certain trading activities from a deposit-taking entity as of 1 July 2018. EBA on CRR own funds requirement The European Banking Authority has published final draft RTS on own funds requirements for investment firms based on fixed overheads under the CRR. These firms are required to hold eligible capital of at least one-quarter of the fixed overheads of the previous year, or projected fixed overheads in the case of an investment firm not having completed business for one year. The draft RTS harmonise calculations of capital requirements, use a subtractive approach for calculating fixed overheads and propose the inclusion of the use of tied agents in the calculation. The EBA has confirmed that these final draft RTS have been sent to the Commission for adoption. CRD IV The European Systemic Risk Board has published its decision on a framework for national macro-prudential policy notifications and the provision of opinions and the issuing of recommendations by the ESRB, as required by CRD IV. ESRB must provide opinions and issue recommendations on specific macro-prudential measures within one month of receiving notification of such measures. The decision sets out the process it will follow for assessing notified measures and delivering opinions or recommendations. It also sets out the process notifying authorities must follow when providing notifications, including the use of a specific template.
  • EU-US trade deal The European Commission has proposed a framework for regulatory cooperation in financial services in the context of negotiations for an EU-US trade deal, known as the Transatlantic Trade and Investment Partnership (TTIP). The EU is proposing to establish, within the TTIP framework, a transparent, accountable and rule-based process that would commit the two parties to work together towards strengthening financial stability. The regulatory co-operation would be based on a number of general principles would be backed up by specific arrangements for the governance of the EUUS regulatory co-operation, guidelines on equivalence assessments and commitments to exchange necessary and appropriate data between regulators. The proposal includes the commitment to outcome-based assessments of whether the other party's regulatory and supervisory framework is equivalent, which could potentially lead to mutual reliance on the rules of the other party. ISDAfix benchmark ICAP plc, a London based broker, is to be stripped of its function setting a US benchmark for interest rate swaps by ISDA This comes amid investigation by the FCA and the CFTC of alleged manipulation of ISDAfix. ISDA has transferred the function to Thomson Reuters Corp., which will calculate all ISDAfix rates in the future and all rates will be set based on actual trades, rather than based on data reported from banks. GUEST SHORTS In a previous Guest Short, Bill Prew, CEO of independent AIFMD depositary, INDOS Financial, provided an update on the depositary-lite regime which will apply to UK hedge fund managers seeking to market nonEU funds into Europe from 22 July 2014. This week, Bill has provided an update focussing on on-boarding considerations for managers, as follows: (i) current FCA guidance states managers should notify the FCA of their chosen depositary provider(s) by 21 June 2014; (ii) managers and providers need to allow sufficient time to undertake respective due diligence; (iii) it can take time to agree the roles and responsibilities of the depositary,
  • prime brokers and administrator; (iv) legal terms require negotiation and disclosures are required in offering documents; (v) in normal circumstances, 2 to 3 months would typically be sufficient to complete on-boarding in a controlled way; (vi) given the number of funds expected to comply with depositary-lite, providers may experience capacity constraints or impose a cut-off for onboarding; (vii) considering these factors, we advise managers to select their depositary providers in the near future; and (viii) delaying decisions could result in depositary-lite compliance becoming increasingly more difficult than it needs to be. For more information on the above and/or the depositary-lite regime, please contact Bill Prew or visit Cummings Tel: + 44 20 7585 1406 Mob: + 44 7734 057 327 31 January 2014