Having reached political agreement with the European Commission in February 2014, the European Parliament formally approved the proposed UCITS V Directive ("UCITS V") on 15 April 2014.

The following are the key elements of UCITS V:

  • Remuneration policies for all risk takers involved in managing UCITS funds so that remuneration practises do not encourage excessive risk-taking and instead promote sound and effective risk management and enhanced transparency of remuneration practices. The UCITS V remuneration policy provisions are similar to those in the Alternative Investment Funds Directive ("AIFMD");
  • Depositary liability has been strengthened and a list of entities that are eligible to act as a UCITS depositary has been set out;
  • UCITS assets will be protected in the event of the insolvency of the depositary through clear segregation rules and safeguards provided by Member States' insolvency law; and
  • The existing UCITS regime has been strengthened in order to ensure effective and harmonised administrative sanctions, by setting down an exhaustive list of breaches which require sanctions by competent authorities and specifying a minimum list of administrative sanctions and measures which may be applied in the event of such a breach, including prescriptive limits on fines which may be imposed by competent authorities.

Formal adoption of UCITS V is now subject to formal approval by the Council of the EU.

Once approved, Member States will have 18 months to transpose the UCITS V Directive into national law. Following the transposition into national law, depositaries will be given a 24 month transitional period to implement the required changes.

ESMA is due to publish guidelines on the scope of UCITS V, including guidelines regarding identified staff to whom the remuneration rules will apply.

The European Commission has published a set of FAQs on UCITS V, which are available via the following link:


In addition, Dillon Eustace has prepared an update on UCITS V which is available via the following link:


(ii) Central Bank publishes UCITS Questions and Answers ("UCITS Q&A") – 2nd edition

On 30 May 2014, the Central Bank of Ireland (the "Central Bank") published the second edition of their UCITS Q&A. The 2nd edition UCITS Q&A contains two new questions, ID1009 and ID1010, which relate to Permitted markets for UCITS:

ID 1009

Q. Pending the outcome of the Central Bank's consultation on the publication of the UCITS Rulebook (CP 77), will the Central Bank consider the inclusion of additional Regulated Markets in Appendix 1 to Guidance Note 1/96 (Permitted Markets for Retail Collective Investment Schemes)?

A. As set out in Consultation Paper CP 77 the Central Bank intends to withdraw Guidance Note 1/96. Pending the issue of a final UCITS Rulebook we are not undertaking to review any submissions in relation to proposed markets. In the interim, UCITS which wish to refer to a regulated market in a prospectus should carry out the appropriate assessments to ensure compliance with the statutory requirements. Regard should continue to be had to the standards referred to in the Guidance Note. The Central Bank may seek sight of such assessments at any time and UCITS should be in a position to explain their decisions in relation to these matters.

ID 1010

Q. The UCITS Regulations and the AIF Rulebook provide for investment by UCITS and Retail Investor AIF respectively of up to 100% of their net assets in the securities of certain issuers, details on which are set out in the investment fund application forms. Will this list include securities and instruments issued by the government of the People's Republic of China?

A. The Central Bank will not object if UCITS and AIFs provide for investment of up to 100% of their net assets in securities and instruments issued or guaranteed by the government of the People's Republic of China. This position has been reflected in the investment fund application forms.

The first edition of UCITS Q&A was published in February 2014. The document sets out answers to queries deemed likely to arise in relation to UCITS and is intended to assist in limiting uncertainty. The UCITS Q&A will be updated from time to time by the Central Bank.

The 2nd edition UCITS Q&A is available at the following link:


(iii) New Central Bank Investment Manager Application Form

There is a new Central Bank Investment Manager Application Form for investment managers or sub-investment managers which do not fall within one of the following categories:

  • UCITS management companies authorised under Directive 2009/65/EC;
  • Investment firms authorised under Directive 2004/39/EC (MiFID) to provide portfolio management;
  • Credit institutions authorised under Directive 2006/48/EC having the approval to provide portfolio management under MiFID;
  • Externally-appointed AIFMs authorised under the AIFMD.

The new application form is available via the following link:



(i) ESMA informs European Commission of its intention to ease certain frontloading requirements under EMIR

On 8 May 2014 ESMA sent a letter to the European Commission proposing to limit the scope of the frontloading requirement under EMIR.

The frontloading requirement imposes an obligation on counterparties to clear OTC derivative contracts which have been executed after a CCP has been authorised under EMIR (the first of which was authorised on 18 March 2014) and before the date of application of the clearing obligation (i.e. the date specified for the clearing obligation to apply by ESMA in the relevant regulatory technical standards).

In this way under the frontloading rules an OTC derivative contract concluded after the authorisation of a CCP might at a later date become subject to the clearing obligation before its expiration date. According to Recital 20 of EMIR, the objective of the frontloading requirement is to ensure a uniform and coherent application of EMIR and a level playing field for stakeholders when a class of OTC derivative contracts is declared subject to the clearing obligation.

The period during which frontloading is relevant can be divided into two separate periods:

  • Period A: the period between the notification of the classes to ESMA and the entry into force of the relevant regulatory technical standards ("RTS") on the clearing obligation; and
  • Period B: the period between the entry into force of the RTS and the date of application of the clearing obligation.

In the letter, ESMA observes that the frontloading procedure creates uncertainties for OTC derivatives end-users because counterparties will not know whether the notified class of derivatives will be subject to the clearing obligation; i.e. an OTC derivative contract entered into after the authorisation of a CCP might become subject to the clearing obligation during Period A. ESMA informed the European Commission that it intends to establish the frontloading requirement in a manner that will minimise uncertainty. At the start of Period B these uncertainties will no longer be present.

ESMA has suggested that the frontloading requirement should not apply to transactions that are entered into during Period A and should only apply to transactions entered into during Period B. ESMA has stated that further details on this rule will be outlined later this summer.

ESMA's letter to the European Commission is available at this link:


(ii) Updated EMIR implementation Q&As

On 21 May and 23 June 2014, ESMA published an updated version of its questions and answers ("Q&A") document on the implementation of EMIR. The updated version of the Q&A includes a table detailing which questions and answers have been added or updated and also includes a table which indicates the relevant Article in EMIR to which the questions relate.

Areas covered by the updated Q&A (whether as a new question or as a revision to an existing question) include:

Whether an umbrella fund or its sub-funds should be treated as a counterparty under EMIR;

  • Status of counterparties under EMIR as defined by reference to AIFMD;
  • Intra-group exemptions;
  • Calculation of the clearing threshold;
  • Public register;
  • Treatment of non-EU non-exempt central banks;
  • Segregation and portability and CCP organisational requirements;
  • Risk committee requirements for a CCP;
  • Prudential requirements of a CCP;
  • Reporting of collateral; and
  • Reporting of valuations.

The latest set of EMIR implementation Q&As can be found here:


(iii) Treatment of FX Forwards under EMIR

As reported in our previous Legal and Regulatory Update, the treatment by regulators of FX Forwards under EMIR varies across the European Union. The reason for these diverging approaches is the fact that a derivative under EMIR is defined by reference to Directive 2004/39/EC (the "MiFID Directive") and Member States transposed the MiFID Directive differently; i.e. different transpositions of the MiFID Directive across Member States mean that there is no single, commonly adopted definition of a derivative or a derivative contract in the European Union.

Concerns have been expressed about the lack of consistency between EU Member States with regards to the definition of an FX Forward. Indeed, ESMA published a letter (dated 14 February 2014) which it wrote to the European Commission whereby it asked the European Commission to clarify the exact definition of what constitutes a forward for EMIR purposes, in particular for FX Forwards with a settlement date up to 7 days and FX Forwards concluded for commercial purposes.

In light of this letter, the European Commission launched a short consultation paper on FX Forwards regarding the delineation between FX Forward contracts and FX spot contracts under MiFID (the "Consultation Paper"). Ten questions were raised in the Consultation Paper as follows:

  1. Do you agree that a clarification of the definition of an FX spot contract is necessary?;
  2. What are the main uses for and users of the FX spot market? How does use affect considerations of whether a contract should be considered a financial instrument?;
  3. What settlement period should be used to delineate between spot contracts? Is it better to use one single cut-off period or apply different periods for different currencies? If so, what should those settlement periods be and for which currencies?;
  4. Do you agree that non-deliverable forwards be considered financial instruments regardless of their settlement period?;
  5. What have been the main developments in the FX market since the implementation of MiFID?;
  6. What other risks do FX instruments pose and how should this help determine the boundary of a spot contract?;
  7. Do you think a transition period is necessary for the implementation of harmonised standards?;
  8. What is the approach to this issue in other jurisdictions outside the EU? Where there are divergent approaches, what problems do these create?;
  9. Are there additional implications to those set out above of the delineation of a spot FX contract for these and other applicable legislation?; and
  10. Are there any additional issues in relation to the definition of FX as financial instruments that should be considered?

The European Commission received 79 responses to the Consultation Paper including responses from the Investment Management Association ("IMA"), ESMA's Securities and Markets Stakeholder Group ("SMSG") and the Financial Markets Law Committee ("FMLC"). The complete list of the responses received can be found at this link:


It is interesting to note that the Alternative Investment Management Association ("AIMA") in its response suggests a definition of FX spot contracts which include any instruments with a settlement period of T+7 or less. This is because the Central Bank have indicated on their website that all FX transactions with settlement beyond the Spot date are to be considered Forward contracts and therefore are subject to the requirements of EMIR. In this regard the Central Bank has stated that for the vast majority of currency pairs the market convention for settling spot transactions is T+2, accordingly the Central Bank have stated that any trade with settlement T+3 should be treated as a Forward transaction ((except in those rare cases where the market convention for the specific currency pair is unequivocally different from T+2).

It is hoped that the responses received by the European Commission will help formulate the European Commission's formal proposal on this area.

(iv) European Commission extends CRR transitional period to 15 December 2014

Under the Capital Requirements Regulation (Regulation 575/2013) ("CRR"), exposures to qualifying central counterparties ("QCCPs") attract a lower charge than exposures to CCPs that do not have QCCP status. While many third country CCPs obtained QCCP status under a transitional provision in the CRR, that transitional period is due to expire on 15 June 2014. In order to achieve such QCCP status, third country CCPs must register with ESMA in accordance with EMIR. In order to register with ESMA, the European Commission must have adopted a positive equivalence determination in respect of the clearing rules of the CCP's home jurisdiction. As yet, no third country CCPs has registered with ESMA because the European Commission has not adopted a positive determination in respect of any jurisdiction.

On 4 June 2014, the European Commission updated its webpage to announce that on 3 June 2014, it adopted the implementing Regulation (Regulation 591/2014), (the "Regulation") on the extension of transitional periods related to own funds requirements for exposures to CCPs. In this way the European Commission extended the deadline relating to QCCP status until 15 December 2014. This extension now permits institutions to consider a CCP as a QCCP for an additional period up to 15 December 2014.

The text of the Regulation was published in the Official Journal of the European Union on 4 June 2014.

To read this Update in full, please click here.

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