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.

1.
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.
Claire Cummings
020 7585 1406
claire.cummings@cummingslaw.com
www.cummingslaw.com
Financial transaction tax update
Ten EU finance ministers have agreed on ‘core principles’ for the financial transaction tax this
week, but Estonia has pulled out, reportedly due to concerns that most of the shares traded by its
financial institutions are issued outside the participating group, meaning that the cost of collecting
the tax compared to revenues would not make it worthwhile. Details of the exact tax rate, its
application and the allocation of its proceeds still need to be agreed before a final deal is signed
by the new deadline of June 2016. George Osborne has since voiced his opposition to the tax,
stating that the UK was ready to take legal action if the proposal implicates the UK, other non-
participating states and impacts on the single markets.
BaFin tightens regulation of crowdlending
It has been reported that BaFin, Germany's federal financial supervisory authority, is aiming to
achieve more oversight of crowdlending financial and distribution services. Firms involved in
crowdlending activities will need to consider whether they need to be licensed by BaFin and there
will be increased scrutiny from the regulator in this sector. Press reports indicate that BaFin will
take a much stricter approach, than it has to date, formally assessing contractual arrangements
connected to crowdlending before a permit is granted.
Credit default swaps investigation closed
The European Commission announced that it has closed proceedings brought against all 13
investment banks (BoA Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Citigroup, Credit
Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Royal Bank of
Scotland and UBS) involved in an investigation into alleged anti-competitive practices in the

2. credit default swaps market. The Commission has closed the proceedings following a thorough
analysis of all information received from the parties, concluding that the evidence was not
sufficiently conclusive to confirm the Commission's concerns with regards to the 13 investment
banks. The Commission notes that this closure decision does not prejudge the outcome of the
Commission's investigation regarding Markit and ISDA, which is ongoing.
Cybersecurity directive update
The European Parliament and the EU Council have reached an agreement on the text of the
cybersecurity directive, although the compromise text has not yet been published. The agreed text
will be presented for approval by Permanent Representatives Committee on 18 December 2015.
The Parliament and the Council will then still have to approve the text formally before it can
enter into force. Member States will then have 21 months to implement the directive into their
national laws.
COREPER approves Benchmark Regulation
The Permanent Representatives Committee (COREPER) has approved, on behalf of the EU
Council, the final compromise text of the proposed Benchmark Regulation. The final compromise
text reflects the agreement reached between the Council and the European Parliament in trialogue
on 24 November 2015, which the Council had subsequently invited COREPER to approve. The
Benchmark Regulation will now be submitted to the European Parliament for a vote at first
reading and to the Council for final adoption.
ESRB update
Mark Carney, in his role as vice-chair of the European Systemic Risk Board, has recently
discussed ESRB contributions to maintaining financial stability. Points of interest include the
following. (i) the ESRB is currently surveying market makers and asset managers as part of a
broader study into the risks from a reduction in market liquidity, including whether open-ended
funds have liquidity sufficient to meet redemptions in the event of market stress. Stress testing of
the investment fund sector can be expected in the future, complementing existing stress tests of
banks, insurers and pension funds; and (ii) the ESRB is also starting to access detailed derivative
trade reports from trade repositories across the EU to better understand the complex webs of
derivative transactions and how they could propagate and dampen risk across the system.
ESMA agrees to extension of Greek emergency short selling prohibition
ESMA has agreed to an extension of the emergency short selling prohibition by the Hellenic
Capital Market Commission (HCMC) from 7 December to 21 December. The measure
temporarily prohibits short sales in any shares of five credit institutions admitted to trading on the
Athens Exchange and the Multilateral Trading Facility of “EN.A” (Alternative Market of the
Athens Exchange). It will also concern all depository receipts representing those shares. This ban
includes sales which are covered with subsequent intraday purchases. ESMA considers that
adverse developments which constitute a serious threat to market confidence in the Greek market

3. still persist and that the proposed measure is appropriate and proportionate to address those
threats.
BIS report on supervising clearers
The Bank for International Settlements considers that regulators should take more of a system-
wide approach to assessing the risks of forcing more derivative trades through clearing houses.
According to a paper released by it this week, the BIS has looked at how clearers form a web of
links between themselves and their customers such as banks, raising the risk of a "domino effect"
if one clearer went bust without the resources to contain the fallout. BIS also supports concerns of
regulators that CCPs could become a new generation of "too big to fail" firms and states that more
needs to be done to supervise them. According to the paper, it is possible that clearers may
underestimate the initial margins required to back transactions and competition between CCPs
may result in weaker risk management standards and that "Certain challenges stand in the way of
designing and implementing sound CCP risk management".
GUEST SHORTS
This week, Natalia Danilochkina, director at Sigmania Limited, a consultancy firm that provides
risk management and due diligence services, discusses the calculation of leverage under the
AIFMD, as follows:
“The annual Annex IV regulatory reporting season is soon upon us when AIFMs (whether large or
small) will report for December year-end. Managers should be aware of their obligation under
AIFMD to correctly disclose a fund’s leverage to investors and regulators. Although in practice
various risk and leverage measures are used for portfolio management, only “gross” and
“commitment” methods, as defined in the AIFMD text, must be used: (a) to report to
competent authorities: and (b) to disclose maximum leverage to investors. It’s clear that both (a)
and (b) should be consistent with each other.
An incorrect level of leverage has repercussions for the content and frequency of Annex 4
reporting. However, we find that the commitment method definition is often misunderstood. The
AIFMD has a very strict definition of netting and hedging for the purposes of the commitment
method and must satisfy the following criteria:
1. the positions involved within the hedging relationship do not aim to generate a return and
general and specific risks are offset;
2. there is a verifiable reduction of market risk at the level of the AIF;
3. the risks linked to derivative instruments, general and specific, if any, are offset;
4. the hedging arrangements relate to the same asset class; and
5. they are efficient in stressed market conditions.
Compliance with these conditions cannot be ascertained in a mechanical way. What we often
think of as a “hedge” may not meet the AIFMD criteria above. For example, a popular stress
hedge (S&P puts) very often cannot be counted because the underlying equity portfolio is not
diversified enough, as only general risks, and not specific stock/sector risks, are offset.
Some managers have outsourced the reporting task to their administrator or a third party provider
and relied upon that third party’s interpretation of leverage. We argue that such an important
measure should not be decided by software or the administrator. In our view, the overall
responsibility for Annex IV reporting is best placed within the risk management function of an
AIFM.”
If you would like to discuss the above or receive any further information regarding Annex IV
reporting, please contact Natalia Danilochkina at: natalia@sigmania.co.uk.

4. http://safemailer.safeserve.com/admin/index.php?Page=Newsletters&Action=View&id=4871[11/12/2015 11:34:54]
Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
11 December 2015