Welcome to Legal Shorts, a short briefing on some of the week’s developments in the
financial services industry.
Listen to...
FCA publishes approved persons information
The FCA has announced on a new webpage that, in keeping with its
transparency a...
or part of the financial system in the EU. During the legislative process for
the Regulation, the UK had expressed concern...
UCITS V
The Presidency of the EU Council has published a compromise proposal
relating to the Commission’s legislative prop...
genuine investment vehicles. Given the unfavourable treatment of nonexempt UUTs under the new regime, it seems unlikely th...
Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
14 November 2013
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Legal shorts 14.11.13 including AIFMD proportionality and EMIR implementation

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Legal shorts 14.11.13 including AIFMD proportionality and EMIR implementation

  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 ttp://vimeo.com/cummingslaw 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 claire.cummings@cummingslaw.com www.cummingslaw.com AIFMD: FCA update on proportionality The FCA has updated its AIFMD webpage to clarify how AIFMs can comply in a proportionate way with the AIFMD's requirement for hierarchical and functional segregation of a firm's risk management function. The FCA states that there is scope for AIFMs to devise effective risk management functions that comply with the separation requirements of Article 15(1), subject to the principle of proportionality. The FCA also states that the principle of proportionality is intended to ensure that regulatory measures go no further than is required to achieve a stated objective. The second paragraph of Article 15(1) suggests that the objective is to ensure an AIFM has specific safeguards against conflicts of interest, to allow for the independent performance of risk-management activities. The FCA understands that achieving functional and hierarchical separation may be disproportionate for some firms, taking into account their size, internal organisation and the nature, scale and complexity of their business (or possibly other factors, to the extent the firm regards such factors as relevant). However, to satisfy the requirements of Article 15, the FCA considers that an AIFM must be able to demonstrate that it has specific safeguards against conflicts of interest that allow for the independent performance of risk-management activities. The FCA will review and assess the safeguards implemented by the firm to ensure that conflicts of interest do not compromise that independence.
  2. 2. FCA publishes approved persons information The FCA has announced on a new webpage that, in keeping with its transparency agenda, it will publish more detailed information on the volumes of approved persons applications for controlled functions that it has received and on which it has taken a decision. The FCA will publish this information every six months, starting with the period from 1 April 2013 to 30 September 2013. The detailed information relates to: (i) significant influence function (SIF) applications for approval from FCA-authorised firms; (ii) CF30 applications from FCA-authorised firms and PRAauthorised firm (the FCA is responsible for all CF30 applications); and (iii) applications received and determined under the enhanced SIF process. These figures cover applications made by FCA-authorised firms, and also PRAauthorised firms where the controlled function to which the application relates is for an FCA-designated controlled function. EMIR The European Commission has confirmed that it does not intend to endorse ESMA’s draft implementing technical standards (ITS) which would delay the reporting date for exchange traded derivatives until 1 January 2015. The reporting of all derivative contracts is required under EMIR and the requirement is expected to come into effect from February 2014, but ESMA had suggested that this be delayed for ETDs to give it more time to develop guidelines and recommendations to ensure a common, uniform and consistent application of the EMIR reporting requirement. ESMA had been anticipating such a refusal on the Commission’s part. In the meantime, ESMA has announced that it has approved the registrations of the first four trade repositories, namely: DTCC Derivatives Repository Limited and UnaVista Limited, each based in the UK, Krajowy Depozyt Papierów Wartosciowych S.A. based in Poland and Regis-TR S.A., based in Luxembourg. Registration means that the TRs can be used by counterparties to derivatives transactions to fulfil their trade reporting obligations under EMIR. The registrations will take effect on 14 November 2013, triggering the start of the EMIR reporting obligation on 12 February 2014 (i.e. 90 days after the official registration date). Short Selling Regulation The Advocate General has concluded in United Kingdom v Council and Parliament that Article 28 of the Short Selling Regulation should be annulled. Under Article 28, ESMA is granted powers to intervene in the financial market of a Member State in the event of a threat to the orderly functioning and integrity of financial markets or to the stability of the whole
  3. 3. or part of the financial system in the EU. During the legislative process for the Regulation, the UK had expressed concerns that Article 28 would be unlawful, abstaining during the EU Council vote on adoption of the Regulation, and had brought an action against the Council. In the case, the Advocate General concluded that Article 114 of the Treaty on the Functioning of the European Union (TFEU) should not have been relied upon as a basis for conferring decision making powers on ESMA under Article 28, but that Article 352 TFEU would, instead, have been an appropriate legal basis for Article 28 and Article 28 should therefore be annulled. The annulment is unlikely to be of great significance to market participants, given that ESMA's powers under the Article could only have been exercised in the limited circumstances above. EMIR Q&As ESMA has also updated its Q&As on the implementation of EMIR, which are aimed at competent authorities to promote common supervisory approaches and practices to the application of EMIR across the EU. The updated or modified Q&As relate to the calculation of the clearing threshold, risk mitigation techniques for contracts not cleared by a CCP, segregation and portability, reporting of collateral and valuation and portfolio reconciliation. The Q&As were originally published in March 2013 and were last updated in October 2013. Basel III The Financial Stability Board has said that JP Morgan and HSBC topped the list of the world's top 29 banks that must hold extra capital from 2016 because of their size and reach. The two banks are in the top ‘bucket’ and will have to hold an extra 2.5% of risk-weighted core capital on top of the 7% minimum which all banks must hold by 2019 under the Basel III accord. Barclays, BNP Paribas, Citigroup and Deutsche Bank have been placed into the 2% surcharge bucket and BoA, Credit Suisse, Goldman Sachs, Credit Agricole, Mitsubishi UFJ, Morgan Stanley and Royal Bank of Scotland and UBS face a 1.5% surcharge. Next year's list from the FSB in November will determine which banks will actually have to comply with the new surcharge rule from 2016.
  4. 4. UCITS V The Presidency of the EU Council has published a compromise proposal relating to the Commission’s legislative proposal on UCITS V, published on 3 July 2012. UCITS V consists of proposed reforms to the UCITS regime intended to address issues relating to the depositary function, manager remuneration and administrative sanctions. The cover note for the compromise proposal states that only the changes introduced following the working party meeting of 21 October 2013 have been marked up. This follows an earlier compromise proposal published on 11 December 2012. BoE ‘Waking Shark II’ exercise The Bank of England has updated its financial community webpage with a statement on its Waking Shark II cyber attack exercise. The exercise took place on 12 November 2013 to test the financial sector’s response to a sustained and intensive cyber attack. The participants were investment banks, financial market infrastructure, the UK financial authorities (i.e. the FCA, BoE and HM Treasury) and relevant government agencies. During the exercise, communications between firms, and firms and the authorities, were tested. The aim was to improve understanding of the impact of a cyber attack on the participants and wider financial system. A report will be published in early 2014 to inform the participants and wider financial sector of the outcomes and lessons learned. Unauthorised unit trusts tax treatment The Unauthorised Unit Trusts (Tax) Regulations 2013 have been published and are intended as both tax anti-avoidance and simplification measures. The new Regulations will replace the existing primary legislation applicable to UUTs, with the objective of closing the tax gap by introducing rules to prevent UUTs being used for tax avoidance. The rules do this by defining and providing different treatment for exempt UUTs and non-exempt UUTs. Exempt UUTs are defined as those UUTs where all unitholders are wholly exempt from CGT (for reasons other than residence) for the relevant financial period, the trustees are UK resident and HMRC has approved the UUT as exempt. The latter requirement has been introduced by the new Regulations. Although exempt UUTs will continue to be subject to income tax (and exempt from CGT), the new Regulations make a number of modifications, including that unitholders will now receive payments gross and account for tax through self-assessment. The changes to the treatment of non-exempt UUTs, and in particular their taxation at the main rate of corporation tax, reflect the perception that, generally, non-exempt UUTs have been used for tax avoidance while exempt UUTs have been used as
  5. 5. genuine investment vehicles. Given the unfavourable treatment of nonexempt UUTs under the new regime, it seems unlikely that UUTs will be established in future other than to qualify as exempt UUTs. The Regulations come into force on 6 April 2014. GUEST SHORTS This week, James Lasry, partner and head of funds at Hassans law firm, Gibraltar, reports on Gibraltar as an alternative fund jurisdiction for non-EU funds following the implementation of the AIFMD, as follows: “The AIFMD has separated the funds industry into EU and non-EU funds jurisdictions for the purposes of the AIFMD passport. This has put Gibraltar, which was one of a dozen such domiciles, into a category of one of just four European alternative fund domiciles. This is interesting for UK managers with AIFM licenses who want a European vehicle for their funds in order to market to European investors. Those managers who wish to use their newly earned passporting rights may want to structure their funds in European vehicles and Gibraltar is the only EU funds jurisdiction that allows for the pre-authorisation launch of a fund, as Cayman does. The other jurisdictions all require funds to be licensed before they can be promoted. This means that in Gibraltar there is no regulatory down-time. Furthermore, in its implementation of the AIFMD, Gibraltar has adopted helpful policies both in the implementation of the Directive and in its interpretation of the policy on remuneration. For example, it largely follows the FCA’s proportionality approach. The policy on delegation is likely to allow substantial delegation of both investment and risk management as long as the local directors have the capacity and substance to approve and take responsibility for the delegated work product. Finally, the depositary provisions have been deferred until 2017 so that any European depositaries may be used until that time.” If you would like to discuss the above or receive further information regarding the investment funds industry in Gibraltar, please contact James Lasry at james.lasry@hassans.gi.
  6. 6. Cummings Tel: + 44 20 7585 1406 Mob: + 44 7734 057 327 www.cummingslaw.com 14 November 2013

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