Worldwide: Funds Bulletin - November 2015

Last Updated: 1 March 2016
Article by Hogan Lovells


1.1 Custody of CIS assets: IOSCO report on standards

The International Organisation of Securities Commissions (IOSCO) has published its final report on standards for the custody of collective investment scheme (CIS) assets.

The report aims to clarify, modernise and further develop international guidance for the custody of CIS assets, consistent with IOSCO's core objectives and principles of securities regulation.

The report sets out standards aimed at identifying the core issues that should be kept under review by the regulatory framework to ensure investors' assets are effectively protected. It reaffirms the importance for the regulatory framework to provide for suitable custodial arrangements to be in place, clear segregation requirements and appropriate independence. The standards also relate to the appointment and on-going monitoring of custodians.

The report also identifies some of the key risks associated with the custody of CIS assets, such as operational risk, misuse of CIS assets, risk of fraud or theft, and information technology risk.

1.2 Responses to ESMA's UCITS remuneration guidelines

AIMA has responded to the European Securities and Markets Authority (ESMA) consultation paper on guidelines on sound remuneration policies under UCITS V and the Alternative Investment Fund Managers Directive (AIFMD). AIMA supports ESMA's approach to the application of the proportionality principle and encourages ESMA to retain the possibility for firms to dis-apply certain remuneration principles, where it is proportionate for them to do so.

INREV has also responded to ESMA's consultation recommending adoption of the AIFMD Guidelines, including the proportionality principle.

1.3 MiFID II – Delayed implementation until January 2018

The European Commission has stated that implementation of MiFID II is likely to be delayed until January 2018. ESMA's Steven Maijoor has said that the timing for the implementation of MiFID II would be "extremely tight" and delays to the finalisation of regulatory technical standards mean that some of the IT systems that are required for the implementation of MiFID II will not be ready by January 2017. He acknowledged that ESMA itself faces significant challenges in building a "substantial" IT system to compile a list of all financial instruments traded in the EU.

According to Maijoor, ESMA has raised with the Commission the possibility of delaying certain parts of MiFID II, mainly related to transparency, transaction reporting and position reporting. A spokesman for the Commission has separately confirmed that its preliminary view is that a delay in the implementation of MiFID II may be necessary.

Michael Thomas, partner in our financial institutions group, said:

"Up until now the European institutions have been consistent in stating that the January 2017 deadline for MiFID II implementation would be met. However, the industry has been increasingly vociferous in calling for a delay, especially over the last couple of months. ESMA has now bitten the bullet, by recognising that it's not just investment firms, but also the regulatory authorities, who will struggle to get their systems ready in time for January."

See further our MiFID II microsite: .

1.4 Shadow Banking: ECB Report on financial structures and FSB report

In a recent consultation paper on limiting banks' exposure to shadow banking, the European Banking Association (EBA) defined "shadow bank" as including alternative investment funds (AIFs) and money market funds (MMFs). No UCITS, other than MMFs, would be covered by this definition. Various organisations, such as the Association of Real Estate Funds (AREF) and InvestEurope (formerly EVCA) have objected to the fact that AIFs form part of this definition (see July Funds Bulletin). Classifying AIFs as shadow banks would mean that they will also be subject to potentially conflicting banking regulation; there is evidence of policy differences between ESMA (the securities regulator) and EBA/ the European Central Bank (ECB) and the Financial Stability Board (FSB).

More recent shadow banking developments are ECB's Report on financial structures, including investment funds. Points to note:

  • The shadow banking sector growth over the past year has been driven primarily by non-MMF investment funds (i.e. AIFs), which expanded owing to net inflows and rising valuations. The weakening of the euro vis-à-vis other currencies contributed to this, as the share of assets invested outside the euro area amounts to 40%.
  • Euro area MMFs expanded as well, following a protracted period of decline, with net flows into these funds having stabilised since mid-2014.

1.5 HFSB issues revised Hedge Fund Standards

The Hedge Fund Standards Board (HFSB) has issued a revised version of its Hedge Fund Standards, following a public consultation launched in March 2015 on managing conflicts of interest.

The HFSB has also made available a tracked changes version of the Standards, for comparison purposes.

The amendments that have been made to the Standards are designed to strengthen internal compliance procedures and improve disclosure of conflicts of interest, specifically in the areas of parallel funds, including employee funds and the aggregate size of employee and partner co-investment in those funds.

The revised Standards will come into force on 2 May 2016 to allow HFSB signatories sufficient time to achieve conformity with them.

1.6 PRIIPs Regulation: Joint Committee of the ESAs consults on key information documents

The Joint Committee of the European Supervisory Authorities (ESAs) (ie EBA, ESMA and the European Insurance and Occupational Pensions Authority) have published a consultation paper on draft regulatory technical standards (RTS) which the Joint Committee is mandated to develop under Article 8 (5) of the Regulation on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) (PRIIPs Regulation).

The European Commission has also published a report (plus executive summary) on the consumer testing study that it has carried out relating to the possible new format and content for the PRIIPs KID.

Comments are requested by 29 January 2016. The Joint Committee will hold a public hearing on the consultation in Frankfurt on 9 December 2015. The RTS and accompanying impact assessment will be submitted for endorsement by the European Commission by 31 March 2016. Feedback on the consultation will also be published at this time.

1.7 Commission Work Programme – 2016 and Call for evidence on the EU regulatory framework for financial services

The Commission has launched its 2016 Work Programme which sets out the measures it intends to pursue in the coming year. There is a great deal of focus on geopolitical issues such as migration, the EU's role on the global stage, and terrorism. The financial services priorities listed are predominantly presented in the context of driving growth and achieving the Capital Markets Union (CMU).

Key areas of interest are:

  • The review of the Prospectus Directive
  • Reviews of the functioning of the European Venture Capital Fund (EuVECA) and European Social Entrepreneurship Fund (EuSEF) Regulations
  • Completion of Banking Union with legislative proposals with legislative proposals outlining steps towards a European Bank Deposit Insurance Scheme based on a reinsurance mechanism
  • A legislative initiative framing a new approach to business failure and insolvency
  • A new corporate tax legislative package including measures to enhance transparency and fight tax avoidance, including implementing international standards on BEPS, and a staged approach starting with a mandatory tax base together with the withdrawal of the existing CCCTB proposal

As part of its CMU project, the European Commission has launched a Call for Evidence on the EU regulatory framework for financial services. This provides an opportunity to highlight current rules that are disproportionate relative to the benefits that they deliver. The Commission will consider changing rules where industry highlights specific concerns.

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