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 http://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.

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 http://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
FCA makes changes to GABRIEL
The FCA has updated its GABRIEL webpage to include the following changes: (i) updates to the
validation and filing rules applicable to reporting under CRD IV; (ii) a new data item to collect
remuneration benchmarking information in accordance with section SUP 16.17; (iii) new group
structures to enable scheduling of financial reporting (FINREP) in line with existing group
functionality; and (iv) improvements in the resubmission process - items will not appear on firms'
schedules for reporting as soon as the firm has submitted its request in GABRIEL.
FCA roundtable on MiFID II
The FCA has published the minutes of its MiFID II implementation roundtable held on 30
November 2015. Points of interest include: (i) the MiFID II timetable, including the possible
delay in the overall date of application; (ii) the content of the FCA's firms consultation paper on
MiFID II, which is due for publication mid-December 2015; (iii) the timing of a second FCA
consultation paper on MiFID II implementation (in light of the proposed delays); (iv) ESMA’s
work on level 3 measures; and (v) third country issues.
AML Regulations
The FCA is considering the future of AML regulations and has published a speech by Rob
Gruppetta, the head of the FCA’s financial crime department, in which Mr Gruppetta considers:
(i) the Fourth Money Laundering Directive (MLD4); (ii) the proposed new FCA financial crime
data return, on which it is currently consulting; (iii) the senior managers regime (SMR) and
financial crime; (iv) derisking; (v) innovation and new technology; (vi) the IMF and Financial

2. Action Task Force (FATF); and (vii) FCA enforcement relating to financial crime issues.
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.
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.
FCA thematic review on wealth management firms
The FCA has published its report of its thematic review (TR15/12) of wealth management firms
and private banks and the suitability of investment portfolios. The report sets out the FCA's
findings following its review of the suitability of discretionary and advisory investment portfolios
managed by wealth management and private banking firms for retail customers. The FCA's key
messages following the review are that: (i) many firms still have to make substantial
improvements in gathering, recording and regularly updating customer information to support the
investment portfolios they manage for customers; (ii) firms must do more to ensure the
composition of the portfolios they manage truly reflects the investment needs and risk appetite of
their customers; and (iii) firms need to ensure that their governance, monitoring and assessment
arrangements are sufficient to meet their regulatory responsibilities in relation to suitability. The
FCA reminds firms that some of the provisions of MiFID II will apply to firms providing
portfolio management services to retail customers and advises firms to start planning for the
changes to be brought in under MiFID II ahead of its implementation.
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.

3. SFO considers bribery prosecution
The Serious Fraud Office has considered the first UK deferred prosecution agreement (DPA),
which was approved by Leveson LJ at the Royal Courts of Justice on 30 November 2015. The
subject matter of the indictment was, for the first time, the failure of a commercial organisation to
prevent bribery, contrary to section 7 of the Bribery Act 2010. Ben Morgan, SFO joint head of
bribery and corruption has discussed the implications of the first DPA and provided his views,
from the SFO's perspective, on the first DPA case, what the SFO has learned about using DPAs
and the significance of the first charge under section 7 of the Bribery Act 2010.
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
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.
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

4. http://safemailer.safeserve.com/admin/index.php?Page=Newsletters&Action=View&id=4870[11/12/2015 11:32:18]
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.
Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
11 December 2015