Bovill - the UK financial services regulatory consultancy - held a breakfast seminar in New York for US investment managers and regulatory experts to 'unravel' EU regulation. For more information visit www.bovill.com. Further information on the event is below: Unraveling EU regulation for US Managers Any financial services firm doing business in Europe needs a firm grasp of EU regulation. Whether you are establishing an office in one country, marketing into several, or simply investing in a firm regulated in the UK, you will need to understand how EU-wide directives are translated into local rules. Bovill – the London-based regulatory compliance experts – hosted a seminar in New York to give US firms an overview and update on European regulation. The breakfast event covered: The structure of the EU regulatory landscape – how EU directives are implemented by member states The parallels and crossovers between EU and US regulation The practical steps to consider, including a brief introduction to - Alternative Investment Fund Manager Directive (AIFMD) - European Markets Infrastructure Regulation (EMIR) - Markets in Financial Instruments Directives (MiFID I & II)

1. Unraveling EU Regulation
June 2014
Ben Blackett-Ord
Richard Cross

2. 2
Agenda
• Overview of EU regulatory structure
• AIFMD
• EMIR
• MiFID II
• Questions

3. 3
Overview of the EU regulatory structure

4. The European Union
4

5. EU Regulatory Structure
• Directives – implemented in each EU Member State through domestic
legislation
• Regulations – directly applicable in each Member State and thus apply
to firms directly
5
European
Commission
European Parliament
Represents citizens
European Council
Represents national
governments
Proposes
legislation
Co-decision

6. European System of Financial Supervision
(ESFS)
6
European Banking
Authority (EBA)
European Insurance
and Occupational
Pensions Authority
(EIOPA)
European Security
and Markets
Authority (ESMA)
National supervisors in Member States (PRA / FCA in the UK)
Joint Ctee of European
Supervisory Authorities
European Systemic Risk
Board (ESRB)

7. EU regulation in the UK
UK regulators
• PRA – 2,500 banks and insurers
• FCA – 28,000 firms, including the above
The role of the FCA / PRA in relation to Directives and Regulations is to:
• implement directives
• provide guidance
• supervise and monitor compliance with the Directives / Regulations
• report on compliance to the European Commission and/or ESAs as
required
• take enforcement action where appropriate
7

8. 8
Alternative Investment Fund Managers
Directive (AIFMD)

9. Introducing AIFMD
• Seeks to control:
- management of “alternative investment funds” in the EU;
- management of AIFs from the EU;
- marketing of AIFs in the EU
• AIF – means a collective investment undertaking, including
investment compartments of such an undertaking, which raises
capital from a number of investors, with a view to investing it in
accordance with a defined investment policy for the benefit of
these investors; and does not require authorisation pursuant to
Article 5 of the UCITS Directive.
Included: hedge funds, private equity, real estate funds
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10. Who’s affected by AIFMD
• Anyone who manages an AIF based in the EU
• Anyone in the EU who manages an AIF based outside the EU
• Anyone who markets an AIF in the EU
Knock-on effects on related parties – delegates, service providers,
placement agents, etc.
10

11. 11
Transitional relief is coming to an end
• AIFMD came into effect on July 22 2013
• Most member states took advantage of ‘transitional relief’
Transitional relief expires July 22 2014

12. Establishing how you're affected
Thresholds for inclusion in AIFMD:
• total managed AIF assets (including those acquired through
use of leverage) is less than or equal to €100m
or
• total assets are under €500m if all the AIFs managed are
unleveraged and have no redemption rights for the first
five years
12

13. Calculating AuM
• Undrawn commitments are not counted in the AUM.
• There are some provisions which allow certain AIFs to be
excluded from the calculation of an AIFM’s AUM:
• If an AIF is closed-ended and makes no additional
investments after July 22, 2013
• If a closed-end AIF had its final closing by July 21, 2011 and
will terminate in accordance with its constitution
by July 22, 2016.
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14. Different AIFMs
14
EU AIFMs Third-Country AIFMs (e.g.
US managers)
Below-threshold • Sub-threshold AIFM
• Not subject to AIFMD
• No marketing passport
• Market under NPPR if EU
member state permits
• Small Third-Country AIFM
• No marketing passport
• Market under NPPR
• Notification to EU member
state in order to market
under NPPR
Above-threshold • Full-Scope AIFM
• EU-wide marketing
passport for EU AIFs
• Subject to full AIFMD
• No marketing passport
• Market under NPPR
• Subject to transparency
and disclosure
requirements of AIFMD
• Annex IV reporting
• Private Equity provisions

15. AIFMD and Marketing
“a direct or indirect offering or placement at the initiative of the AIFM or on
behalf of the AIFM of units or shares of an AIF it manages to or with
investors domiciled or with a registered office in the EU”
• does not include reverse solicitation or passive marketing
• does not include marketing using draft documentation
• includes controls on intermediary marketing
EU-wide marketing passport available to EU full-scope AIFMs for
marketing to “professional” investors.
15

16. Marketing in EU by US Managers
• Up to EU Member State concerned to allow marketing from US manager
• Currently permissible in the UK
(NB – additional requirements imposed by AIFMD implementation)
Small US AIFMs – simple notification to UK FCA
Above threshold US AIFMs:
• “Transparency and disclosure” requirements for each fund:
• annual report contents (some remuneration disclosure)
• investor disclosure
• notification and reporting to EU regulators
• ‘private equity’ provisions where relevant
• Co-operation agreements between the regulators of countries
• in which the fund is to be marketed
• where the manager is established
• where the fund is established
• The US manager and the fund must not be based in FATF non-cooperative
countries or territories
16

17. EU Member states – categorisation
Straightforward
• UK
• Ireland
• Luxembourg
• Finland
• Sweden
• Netherlands
More demanding (Goldplating)
• Germany
Difficult / Uncertain
• The rest ….
17

18. Marketing and US Managers – Disclosure Reporting
• Information about US managers and their funds to be disclosed to both
their investors and to European regulators.
• Annual report which must be provided to investors. Must contain
total of remuneration paid to staff and details of the management fees of
the fund.
• Before investors come into the fund the US manager must make specific
information available to them regarding both fees and special
arrangements in place with other investors.
• Regular reporting to the regulator in the EU country where the fund is
marketed (most likely the FCA in the UK). The reporting template is quite
similar to Form PF in the US (eg. type of asset held, exposure, leverage
etc).
18

19. Private Equity Provisions
• US managers of funds which acquire control of listed and unlisted
companies in the EEA will, subject to certain exceptions, be required to
comply with AIFMD provisions specific to private equity, including:
• A requirement to notify the company, shareholders and regulators of
acquisitions of major holdings in unlisted companies when
certain thresholds are passed (starting at 10%).
• A requirement to include additional information in the annual
report (including future development plans).
• The so-called “asset stripping” provisions which restrict dividend
recapitalisations and other returns of capital for the first two years of
portfolio company ownership.
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20. “Asset stripping” provisions
• Application of “asset stripping” provisions to US AIFMs marketing in
Europe.
• AIFMD imposes restrictions on distributions, capital reductions,
share redemptions and purchases of own shares by a “controlled”
portfolio company during the first two years of ownership of that
company by a fund.
• The restriction affects only portfolio companies who have a registered
office in the EU and that are not “small and medium enterprises”.
• Whether a portfolio company is “controlled” for these purposes
depends on whether it is unlisted or listed. An unlisted company is
generally “controlled” if the AIF holds more than 50% of voting rights.
The test for when a listed company is controlled varies from member
state to member state.
20

21. Marketing Passport for US Managers
• Planned for 2015/16
• Manager must be authorised by their “Member State of reference” and
have a “legal representative” there
• Certain co-operation agreements and tax exchange information
agreements must be in place
• Must comply with all Directive requirements except where:
- it would conflict with the law applying to the manager or the fund to do
so; and
- those laws provides an “equivalent rule having the same regulatory
purpose and offering the same level of protection to the investors”
21

22. Full scope requirements
For a full scope EU manager of an EU fund:
• general organisational requirements
• capital requirements
• conflicts of interest controls
• risk management controls
• due diligence requirements
• depositary
• leverage limits
• liquidity management systems
• delegation controls
• investor disclosure requirements
• regulatory reporting requirements (equivalent for Form PF)
• remuneration controls
• ‘private equity’ requirements.
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23. AIFMD Summary Time Line
23
Date Event
July 2013 • AIFMD implemented in Member States
• Marketing via NPPR
July 2014 • End of transitional period (most member states)
• Marketing via NPPR plus Directive minimum disclosure / reg
• Marketing passport available for EU AIFMs
July 2015 • ESMA issues opinion on whether to extend passport to third
countries
October
2015
• Marketing passport available for non-EU AIFMs via member
state of reference mechanism
July 2017 • EC starts a review of AIFMD
October
2018
• ESMA issues opinion on third party marketing passport
Jan 2019 • Potential switch off of NPPR

24. AIFMD and US Managers: a summary
• Are you above or below thresholds?
• If a small third country AIFM, fairly simple but still need to:
• notify FCA (or other EEA regulator) of marketing;
• comply with national private placement regime; and
• complete minimal reporting
• If above threshold (some refer to as Article 42 AIFM), you will need to:
• Register marketing with FCA (or other EEA regulator)
• Check whether you need to create/update documentation to comply
with transparency and disclosure requirements
• Look at reporting requirements and find solution.
24

25. 25
European Market Infrastructure Regulation
(EMIR)

26. EMIR
• EU Regulation - came into effect August 2012.
• Three key requirements on those trading derivatives:
• To clear derivatives that are subject to the clearing obligation
through a central counterparty
• To implement risk mitigation measures for OTC transactions
that are not cleared
• To report derivatives trades to a trade repository.
26

27. The clearing obligation
• Obligations depend of categorisation of counterparties as
“financial” or “non-financial”.
• Obligations in respect of non-financial counterparties are subject
to volumes “clearing threshold”.
• CCPs become “the buyer to every seller” and “the seller to every
buyer”.
• Applies to all derivative contracts not executed on a regulated
market under MiFID or on a non-EU exchange declared as
“equivalent” by the Commission.
• Currently 8 CCPs approved by ESMA.
27

28. The risk mitigation obligation
• Applies to trades not cleared by a CCP
• Parties must ensure “appropriate procedures and arrangements
are in place to measure, monitor and mitigate operational risk
and counterparty credit risk”. Must include:
• Timely confirmation of terms of the transaction; and
• Formalised processes to reconcile portfolios, manage risk,
identify and resolve disputes and monitor the value of
outstanding contracts.
• ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and
Disclosure Protocol
28

29. The reporting obligation
• Applies to all counterparties (including NFCs and CCPs) and to
all derivative contracts (whether or not centrally cleared).
• Reporting is to trade repositories (6 currently approved)
• Derivatives entered into before 16th August 2012 and remain
outstanding at that date
• Entered into on or after 16th August 2012
• EMIR Reporting Delegation Agreement.
29

30. Extraterritoriality
• The clearing obligation and the risk mitigation obligation apply to
transactions between two third country entities, which would be
subject to the obligations if established in the EU, if either of the
following apply:
• The contracts have direct, substantial and foreseeable effect
with in the EU; or
• Such obligations are necessary or appropriate to prevent the
evasion of the provisions of EMIR.
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31. EMIR: Direct, substantial and foreseeable effect (1)
1. Guaranteed by an EU financial counterparty
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EU
Third Country
(Non-EU + Non-
equivalent)
Financial
Counterparty
Counterparty
Counterparty
Guarantee
Derivative

32. EMIR: Direct, substantial and foreseeable effect (2)
2. Entered into through EU branches of financial counterparties
32
EU
Branch
Branch
Derivative
Third Country
(Non-EU + Non-
equivalent)
“Quasi”
Financial
Counterparty
“Quasi”
Financial
Counterparty

33. EMIR – current issues
• Considerable teething issues arising from lack of Trade
Repositories
• Confusion over whether FX forwards are considered derivatives
under the MiFID definition; clarification sought from ESMA
• Impact of AIFMD registration on financial counterparty/non-
financial counterparty/third country status of fund counterparties.
33

34. 34
Markets in Financial Instruments Directive
II (MiFID II)

35. 35
MiFID II: main changes
• Review of MiFID – impact Europe-wide with knock-on effect
internationally
• Increased scrutiny over algorithmic trading together with more
detailed reporting
• Regulation of Organised Trading Facilities (OTFs) and new
permissions
• ESMA powers to impose commodity position limits
• Structured UCITS no longer to be ‘non-complex’ so will not be
able to be sold Execution Only

36. MiFID II: Third country firms
• A third country firm based and authorised in a third country
deemed equivalent, can perform investment activities or provide
investment services to ECPs and professional clients across
all EU Member States from their local jurisdiction once
registered with ESMA
• Alternative to ESMA registration, establish an EU branch to
perform investment activities or provide investment services to
ECPs and professional clients
• Member States may require establishment of a branch to access
retail clients and certain professional clients.
36

37. 37
The world is shrinking
• You no longer need a physical presence in the EU to be affected
by EU regulatory requirements
• Managing money for EU investors and undertaking derivative
transactions with EU counterparties are sufficient to trigger
EU regulatory obligations
• Looking on the bright side…

38. Questions
38