Euro shorts 28.03.14 including emir derivative definition and cayman proposes registration and licence regime for directors
Welcome to Euro Shorts, a short briefing on some of the week’s developments in the
financial services industry in Europe.
If you would like to discuss any of the points we raise below, please contact me or one of
our other lawyers.
020 7585 1406
EMIR derivative definition
The European Commission has responded to ESMA’s request for clarification on
the definition of derivative under EMIR. The Commission agrees that there is a
lack of clarity about the precise delineation between FX forward contracts and
currency spot contracts and its preliminary views are: (i) the Commission will
need to consider which delivery periods are appropriate when delineating
derivative and spot contracts; (ii) ‘commercial purpose’ is only a criterion for
physically settled commodity derivative contracts; and (iii) further work is
required on the definition of commodity forwards that can be physically settled.
The Global Financial Markets Association has also weighed in and addressed a
letter to the EC and ESMA requesting consistent treatment for FX security
conversions, which it considers to be bona fide spot transactions where the
settlement period is greater than two days.
Cayman proposes registration and licence regime for directors
The Cayman Islands government has announced its intention to introduce a
registration and licensing regime for directors of certain regulated entities in the
Cayman Islands. The proposed new law has been published in the form of The
Directors Registration and Licensing Bill 2014 and there is a short consultation
period. The proposed law will require all directors of regulated mutual funds and
companies which maintain a registration as an excluded person pursuant to the
Securities Investment Business Law to register with CIMA. The requirement will
apply to both resident and non-resident directors. Directors who hold more than
20 such directorships will need to be licensed by CIMA and will be subject to
enhanced regulatory requirements. Corporate directors, irrespective of
directorship numbers held, will also need to be licensed by CIMA. Directors to
whom the new law will apply will have three months from the date the new law
is passed to complete their respective applications and be registered or licensed.
The new law could come into effect by mid-April 2014.
FCA PEPs reminder following events in Ukraine
The FCA has warned that developments in Ukraine have served to highlight the
continuing need for vigilance and robust systems and controls in dealing with
actual or potential politically exposed persons (PEPs). Financial institutions
should be aware of the possible impact the developments may have on patterns
of financial activity when they assess risks related to particular customers and
flows of funds. Authorised firms are expected to establish and maintain systems
and controls to counter the risk that they might be used to further financial crime.
In addition, firms are reminded to comply with their legal obligations under the
Proceeds of Crime Act 2002 (POCA).
EMIR clearing obligation
According to SwapClear, large volumes of European clients are clearing interest
rate swaps and related derivatives on a voluntary basis ahead of the EMIR
clearing obligation coming into force. SwapClear is the OTC clearing unit of
LCH Clearnet and its application to be authorised as a CCP under EMIR is
currently under review; this follows the news last week that Nasdaq OMX has
become the first CCP in Europe to receive authorisation. The EMIR clearing
obligation is expected to take effect later this year.
ISDA survey on swap reforms
ISDA has published the responses to its survey seeking views on various reforms
of the derivatives markets, including the execution mandate. According to its
report, the overwhelming response of end-users was that they expected greater
transparency but, on the other hand, also thought there would be a negative
impact on price and liquidity. At its annual meeting, the ISDA board
acknowledged that it supported the notion that the reforms will create greater,
broadly available transparency, but noted that the reforms were still a work in
progress and expressed the hope that current stresses are a passing phase.
EU firms given more time to meet US derivative rules
EU trading platforms have been given more time by the CFTC to register and
meet the new US swap rules. The CFTC has delayed the new curbs on
derivatives trading until May 15. European trading platforms originally had until
March 24 to certify they follow certain transparency and other rules that mirror
those in the US and now have until 14 May to register. This follows the
agreement last month between the CFTC and the EU whereby US banks
operating overseas could trade swaps on European platforms as long as those
systems are governed by rules largely similar to those in the US.
BoE stress tests include housing market shock
The Bank of England will place the ability of UK lenders to weather a housing
market shock and the impact of higher interest rates at the heart of its upcoming
bank stress tests. The Financial Policy Committee (FPC) has said that the
number of Britons borrowing more than four times their income for a mortgage
was now at its highest level since records began in 2005. The FPC, which is
chaired by Governor Mark Carney, said that it remains ‘vigilant to emerging
vulnerabilities’ in the housing market and was prepared to take further
proportionate and graduated action where necessary. The Bank is currently
finalising a framework that will test UK lenders' resilience to a number of market
shocks, which will be published in addition to the EU-wide framework being
constructed by the European Systemic Risk Board and the EBA.
Fall in UK inflation rate eases interest rate pressure
The UK inflation rate has fallen to a new 4-year low of 1.7%, according to last
month’s figures. This is the second consecutive month that the CPI index has
been below the Bank of England’s 2% target, having stood at 1.9% in January.
Economists said the fall in the inflation rate was likely to underline the Bank of
England's message that there is no rush to raise interest rates and prevailing
views consider that rates are now likely to stay at 0.5% until early next year,
despite the improved growth in the economy.
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28 March 2014