(i) ESMA Issues Technical Advice to the European Commission on Insolvency protection when Delegating Safekeeping Functions and Depositary Independence

UCITS V provides that the European Commission may issue delegated legislation (level 2 legislation) in order to address certain of its provisions in a more detailed manner, namely:

  • Insolvency Protection: the requirement that a third party to whom safekeeping functions (i.e. the custody of financial instruments or verification of ownership of other assets) have been delegated, take all necessary steps to ensure that in the event of its insolvency, assets held by it for a UCITS are not available for the benefit of its creditors; and
  • Independence Requirement: the requirement for the UCITS management company and depositary to act independently of each other.

The European Commission requested that ESMA provide it with technical advice upon possible implementation measures which could be introduced by means of level 2 legislation in respect of these two UCITS V requirements. On 26 September 2014 (shortly after UCITS V came into effect), ESMA issued a consultation paper containing draft proposals for such measures and sought feedback on these proposals. This consultation process ended on 24 October 2014.

On 28 November 2014, ESMA issued its final technical advice to the European Commission and made available a list of responses that it has received to its September 2014 consultation paper (ESMA/2014/1183) (the "Consultation Paper") on technical advice on delegated acts required by the Directive 2014/91/EU ("UCITS V").

ESMA's Consultation Paper and the list of responses received can be viewed via the following link:

http://www.esma.europa.eu/consultation/Consultation-delegated-acts-required-UCITS-VDirective# responses

Technical Advice on Insolvency Protection.

UCITS V provides that the third party to which custody of UCITS assets has been delegated is required to take all necessary steps to ensure that in the event of insolvency of the third party, assets of a UCITS held in custody by it are unavailable to its creditors. ESMA's technical advice sets out the necessary steps in the form of a non-exhaustive list of the measures, arrangements and tasks that the third party to which custody is delegated should put in place and perform on an on-going basis in order to ensure that the assets of such UCITS are adequately protected.

Technical Advice on Depositary Independence Requirements

In accordance with UCITS V, no company may act as both UCITS management company and depositary. Further, a depositary shall not carry out activities with regard to the UCITS management company which may create conflicts of interest between the UCITS, the investors in the UCITS, the UCITS management company and the depositary itself, unless the depositary has functional and hierarchically separated the performance of its depositary tasks from its other conflicting tasks and the potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.

ESMA's technical advice outlines certain minimum requirements in relation to structures and operational procedures which it proposes should be adhered to in order to enable the depositary and UCITS management company to be deemed to be acting independently of each other.

In particular, ESMA considers that the independence of the management company / investment company and the depositary (together the "Relevant Entities") may be jeopardised by the existence of certain links between these parties. In the Consultation Paper, ESMA had identified the following categories of links for these purposes –

  • Common management / supervision; and
  • Cross-shareholdings / group inclusion.

While several respondents agreed that common management / supervision may to a certain extent interfere with independence of the Relevant Entities, criticism was expressed by a large number of respondents on the possible approaches envisaged on cross-shareholdings, however ESMA in its final technical advice sets out that is considers that the links it had identified in the Consultation Paper are the right ones and have decided not to modify its overall approach.

ESMA will assist the European Commission in preparing level 2 legislation based upon its technical advice. It is currently anticipated that the formal level 2 legislation will be in place by next July at the latest. EU Member States must adopt and publish the laws and regulations necessary to comply with UCITS V by 18 March 2016.

(ii) Responses to ESMA Discussion Paper on the Calculation of Counterparty Risk by UCITS for OTC Derivative Transactions subject to Clearing Obligations

On 28 October 2014, ESMA made available a list of responses that it has received to its July 2014 discussion paper on the calculation of counterparty risk by UCITS for over-the-counter ("OTC") derivative transactions subject to clearing obligations (ESMA/2014/876) (the "Discussion Paper").

The Discussion Paper concerned the calculation of the limits on counterparty risk in centrally cleared OTC derivative transactions under Directive 2014/91/EU ("UCITS V") in light of the requirement under the European Market Infrastructure Regulation ("EMIR") that certain OTC derivative transactions will become subject to clearing obligations.

Feedback on the Discussion Paper included responses from the following:

  • European Association of CCP Clearing Houses;
  • European Fund and Asset Management Association;
  • International Swaps and Derivatives Association;
  • Investment Management Association; and
  • Securities Industry and Financial Markets Association.

The link to the Discussion Paper and the responses to same can be viewed via the following links respectively:



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