1.1 UCITS Update

There have been a number of developments over the quarter:

Central Bank UCITS Regulations – CP105

On 19 January 2017 the Central Bank of Ireland ("Central Bank") issued a Feedback Statement on CP105 - Consultation on amendments to the Central Bank UCITS Regulations. This summarises the responses received along with the Central Bank's comments and indicates that amending regulations are expected to issue "in Quarter 1 2017".

UCITS Share Classes – ESMA Opinion

The European Securities and Markets Authority ("ESMA") issued an opinion on share classes in UCITS on 30 January 2017 (ESMA34-43-296). It outlines four principles that should be adhered to when operating multiple share classes in UCITS as follows:

  • Common investment objective. Share classes of the same fund should have a common investment objective reflected by a common pool of assets. ESMA considers that hedging arrangements at share class level (with the exception of currency risk hedging) are not compatible with the requirement for a fund to have a common investment objective.
  • Non-contagion. UCITS management companies should implement appropriate procedures to minimise the risk that features specific to one share class could have a potentially adverse impact on other share classes of the same fund.
  • Pre-determination. All features of the share class should be pre-determined before the fund is set up.
  • Transparency. Differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes.

It also provides that share classes should not be set up to circumvent the UCITS Directive rules, particularly those on diversification, derivative eligibility and liquidity. Any non-conforming share classes have to be closed to new investors within six months of the publication of the opinion (that is, 30 July 2017) and closed to investments from existing investors within 18 months of the publication of the opinion (that is, 30 July 2018).

In summary, ESMA endorses the utilisation of share classes and the application of features and techniques at share class level but prohibits any share class hedging techniques with the exception of currency hedging. This will effectively terminate practices such as interest rate hedging and volatility hedging at share class level in UCITS.

The opinion also presents a number of points to be clarified. To this end, the Irish Funds' UCITS Rulebook Working Group has engaged with the Central Bank and it has indicated that it will shortly be amending the UCITS rules to implement the requirements in the opinion and update its UCITS Q&A.

Central Bank Q&A

On 13 March 2017 the Central Bank published the 16th edition of its UCITS Q&A. Existing question, ID 1056 - Central Bank (UCITS) Regulations - Transitional arrangements, is amended as a consequence of the publication of the Central Bank (Supervision and Enforcement Act) 2013 (Section 48(1))(Investment Firms) Regulations 2017 stating that fund administrators are now subject to Parts 2-5 of those Regulations (see 1.6 below "Outsourcing of Fund Administration Activities").

1.2 AIFMD Update

There have been a number of developments in relation to the Directive 2011/61/EU ("AIFMD") over this quarter:

AIF Rulebook

On 2 December 2016 the Central Bank published a notice of intention to increase the range of investments an Irish authorised loan originating QIAIFs ("LQIAIFs") may make from 3 January 2017. On this date the Central Bank published another version of its AIF Rulebook which extends the scope of permitted activity for LQIAIFs. On 13 March 2017 the Central Bank published a further version of the AIF Rulebook.

Central Bank Q&As

On 3 January 2017 the Central Bank published the 23rd edition of its AIFMD Q&A. New questions are added on loan originating QIAIFs which clarify the scope of the extension of permitted activity.

On 13 March 2017 the Central Bank published its 24th edition with amendments made to ID 1021, Depositary Services. This amendment was made as a consequence of the publication of the Central Bank (Supervision and Enforcement Act) 2013 (Section 48(1))(Investment Firms) Regulations 2017 (see 1.6 below re "Outsourcing of Fund Administration Activities"). ID 1021 clarifies that entities authorised under the Investment Intermediaries Act 1995 may be appointed by an alternative investment fund manager ("AIFM") to provide certain services without prior authorisation.

1.3 EMIR Update

The European Market Infrastructure Regulation (Regulation on over the counter ("OTC") derivative transactions, central counterparties ("CCPs") and trade repositories (Regulation 648/2012)) ("EMIR") is relevant to all Irish funds trading in financial derivative instruments ("FDI") whether on an exchange or otherwise. UCITS and AIFs are financial counterparties for EMIR purposes, subject to the full scope of EMIR obligations.

There have been a number of developments over the quarter:

Two regulations came into force on 10 February 2017 amending and supplementing the data reporting requirements under Article 9 of EMIR (Commission Delegated Regulations (EU) 2017/104 and 2017/105). The updates include clarifications around collateral reporting and an extension of the deadline for backfilling legacy trades (i.e. trades still open on 16 August 2012, or entered into thereafter but expired prior to the commencement of reporting on 12 February 2014) to 12 February 2019. They both apply from 1 November 2017 (with the exception of the extension of the deadline for reporting legacy trades, which took effect immediately). On 2 February 2017 ESMA published an updated EMIR Q&A clarifying that reporting entities are not obliged to update all outstanding trade reports on the application date of the revised standards and are required to submit the reports related to the old outstanding trades only when a reportable event takes place (for example, when the trade is modified). It also explains how those reports will be validated by the trade repositories.

On 23 February 2017 the Joint Committee of the European Supervisory Authorities ("ESAs") (the European Banking Authority ("EBA"), ESMA and EIOPA) published a statement on the requirement under EMIR to exchange variation margin exchange for uncleared OTC derivative contracts, in response to industry requests relating to operational challenges in meeting the 1 March 2017 deadline for exchanging variation margin. It explains that neither they nor competent authorities have the power to disapply directly applicable EU legal text. The Central Bank then issued a Q&A acknowledging the difficulties facing market participants in meeting the 1 March 2017 deadline, stating it does not expect market participants to unwind or avoid transactions that they would have otherwise entered into, but it expects to see evidence of robust planning to achieve compliance at the earliest possible time for all in-scope transactions entered into from 1 March 2017.

The US Commodity Futures and Trading Commission ("CFTC") issued a 'no action' letter in respect of non-compliance with the 1 March 2017 deadline giving CFTC-regulated firms a further six months to put in place regulation-compliant documentation.

On 25 February 2017 Commission Delegated Regulation (EU) 2017/323 correcting Delegated Regulation (EU) 2016/2251 (prescribing collateral requirements for non-cleared OTC contracts) was published in the Official Journal of the EU and also came into force. It applies retrospectively from 4 January 2017 and clarifies the applicable transitional periods for intragroup transactions where the counterparty to the transaction is located in a third country, pending an equivalence decision in respect of margining requirements in that third country.

On 16 March 2017 the European Commission adopted a Delegated Regulation relating to the EMIR clearing obligation to prolong, by two years, the phase-in period for financial counterparties with a limited volume of OTC derivatives activity (that is, those counterparties classified in category 3 under the Delegated Regulation). Category 3 counterparties include UCITS and AIFs that do not have existing OTC clearing arrangements in place and have non-cleared OTC derivatives exposure levels under €8 billion. The new start date for the clearing obligation for category 3 counterparties is 21 June 2019. The Delegated Regulation amends three EMIR Delegated Regulations which had specified start dates of 21 June 2017 for OTC interest rate derivatives referencing major indices denominated in EUR, GBP, JPY, and USD and 9 February 2018 for OTC index credit default swaps and OTC interest rate derivatives referencing major indices denominated in NOK, PLN and SEK. The next step is for the Council of the EU and the European Parliament to consider it.

On 31 March 2017 ESMA published its final report setting out policy decisions and the final text of eight sets of regulatory technical standards ("RTS") and implementing technical standards ("ITS") implementing the SFTR and related amendments to EMIR RTS, see 1.8 on the SFTR below for further detail. The Commission has three months (extendable by one month) to decide whether to endorse them.

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