Worldwide: Funds Bulletin - January 2016

Last Updated: 30 March 2016
Article by Hogan Lovells


1.1 AIFMD: The Commission responds to ESMA's opinion and advice on the Non-EU Passport

The European Commission has responded to the European Securities and Markets Authority (ESMA)'s advice and opinion on the application of the Alternative Investment Fund Managers Directive (AIFMD) passport to non-EU alternative investment fund managers (AIFMs) and alternative investment funds (AIFs) (the Non EU passport). The Commission supports ESMA's country-by-country approach and intends to make a decision about the non EU passport and the national private placement regimes (NPPRs) once a sufficient number of countries have been appropriately assessed. It also agrees that ESMA should produce another opinion on the functioning of the EU passport and NPPRs once the AIFMD has been fully transposed in all of the EU and there is more experience on the functioning of this framework.

ESMA has been asked to complete the following by 30 June 2016:

  • a re-assessment of the regimes of the USA, Hong Kong and Singapore. These countries formed part of ESMA's initial review, but, unlike the other phase one states: Jersey, Guernsey and Switzerland, did not receive a greenlight from ESMA;
  • the assessment of six "phase two" jurisdictions: Japan, Canada, Isle of Man, Cayman Islands, Bermuda and Australia (see letter).

In particular, the Commission has invited ESMA to provide a more detailed assessment of the capacity of supervisory authorities and their track record in ensuring effective enforcement.

1.2 Hedge funds: results of HSFB cyber-attach simulation

The Hedge Funds Standards Board (HSFB) announced that it has held its first table top cyber-attack simulation for hedge fund managers in London; see also HSFB's memo on cyber security.

The objective of the simulation was to explore the response of hedge fund managers to three realistic cyber-attack scenarios:

  • data theft and leakage of internal sensitive data;
  • financial infrastructure attack;
  • crypto ransomware.

Points arising from the simulation were:

  • confusion over responsibilities can prevent an effective response. Managers should not consider cyber security as just an IT issue, given the legal, compliance, investor relations and reputational issues involved;
  • certain types of cyber-attacks may exceed a manager's internal response capabilities. Managers should be prepared to quickly access external legal and IT expertise;
  • preparation in advance, through a cyber security incident response plan, is important. This planning establishes responsibilities, pre-identifies external resources and speeds decisions should there be an actual incident.

1.3 Solvency II Delegated Regulation on treatment of infrastructure and ELTIF investments: scrutiny period extended

The European Parliament has published a letter, to the Commission, relating to the Delegated Regulation amending the Solvency II Delegated Regulation (EU) 2015/35 concerning the calculation of regulatory capital requirements for several categories of assets (including infrastructure) held by insurance and reinsurance undertakings. In response to interventions from Invest Europe and other associations, the European Commission has proposed a new infrastructure definition. Infrastructure investments meeting this definition would enjoy a 30% risk weight.

The deadline for raising objections to the Amending Regulation has been extended by three months to 30 March 2016. A letter has also been sent to the Council of the European Union giving the same information.

1.4 EBA guidelines on limits on exposures to shadow banking entities

The European Banking Authority (EBA) has published its final guidelines entitled "Limits on exposures to shadow banking entities which carry out banking activities outside a regulated framework" under Article 395(2) of the Capital Requirements Regulation'. These Guidelines follow the consultation paper issued last year and introduce an approach that will allow EU institutions to set internal limits for their exposures to shadow banking entities.

In the original proposal, undertakings for collective investment in transferable securities (UCITS) that are money market funds (MMFs) and, notably, all AIFs would fall within the definition of 'shadow banking entity'. In response to industry suggestions, the final guidelines state that AIFs with limited leverage could be considered to fall outside the definition of shadow banking entities. However, only AIFs which are not allowed to originate loans or purchase third parties' lending exposures and add them to their balance sheets would be excluded from the definition of 'shadow banking entity'. This relaxation is a welcome improvement of the original wording and will reduce the number of shadow banking AIFs which would have had to comply with additional, and potentially conflicting, regulation.

1.5 European Commission Securities Financing Transactions Regulation

The Securities Financing Transactions Regulation applies directly in the EU from 12 January 2016 and aims to improve the transparency of the securities financing markets and will apply to UCITS management companies and AIFMs. The Regulation aims to improve transparency in three main ways:

  • By requiring that securities financing transactions (for example any transaction where securities are used to borrow cash) are reported to a central database. The responsibility for doing this will lie with the management company of UCITS and AIFMs.
  • By requiring detailed reporting to investors of investment funds engaged in securities financing transactions and total return swaps. These should be detailed in both regular reports of the funds and in pre-investment documentation.
  • By increasing the requirements for reuse (any pre-default use of collateral by the collateral taker for their own purposes), including written agreement and prior consent from investors; please see our client briefing.

1.6 MAR Level 2 Directive adopted by the Commission

The European Commission has adopted a Level 2 Delegated Regulation supplementing Regulation on market abuse (MAR). Details contained within the Level 2 Regulation include: (i) indicators of market manipulation; (ii) circumstances under which trading during a closed period may be permitted by an issuer; and (iii) types of transaction triggering the duty to notify managers' transactions. The requirements of MAR will come into effect on 3 July this year; see our client briefing.

1.7 Investment firms: EBA response to European Commission call for advice

In response to a European Commission call for advice, EBA (in collaboration with ESMA) has issued a report on the prudential regime for investment firms to tackle its complexity and potential lack of risk sensitivity.

The EBA recommends:

  • a new categorisation of investment firms, distinguishing between systemic and "bank-like" investment firms to which full CRD IV requirements should be applied, and other investment firms, namely those that are considered "not systemic" or "not interconnected", for which specific requirements should be defined;
  • the development of a prudential regime for "non-systemic" investment firms;
  • the extension of the waiver for commodity trading firms, which are currently benefitting from the exemption under both the large exposures and capital adequacy provisions, until 31 December 2020. This extension would allow regulators to assess whether a more proportionate framework is suitable for these firms.

1.8 Liquidity management tools in CIS: IOSCO report

The International Organisation of Securities Commissions (IOSCO) has published a report on liquidity management tools in collective investment schemes (CIS). The report maps existing liquidity management frameworks in 26 member jurisdictions, with a particular focus on tools to help deal with exceptional situations (for example, significant redemption pressure).

The report includes the following observations:

  • many liquidity management tools are available to jurisdictions, some of which are specifically tailored to the features and nature of the funds considered (for example, money market funds, real estate funds, and hedge funds). In particular, most jurisdictions clearly distinguish open-ended schemes from closed-ended ones;
  • the most common tools are redemption fees, redemption gates, redemption in kind, side pockets, and suspension of redemption;
  • funds are generally required to have appropriate risk management and internal quality controls to ensure that all material risks are properly identified, assessed, monitored and controlled;
  • open-ended funds are generally subject to additional regulatory requirements dealing with fund leverage, asset concentration, investor concentration, restrictions on illiquid asset investment and short-term borrowings.

IOSCO, through its committee on investment management, is conducting work on enhancing collection of data about asset management activity and is considering developing guidance on liquidity risk management beyond its 2013 principles.

1.9 Joint Committee of ESAs identifies errors in November 2015 consultation paper on KIDs for PRIIPs

The Joint Committee of the European Supervisory Authorities (ESAs) issued an errata relating to its November 2015 consultation paper on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs).

The errata corrects two formulas relating to the market risk measure (MRM), which are set out in paragraphs 27 and 28 of Annex II to the consultation paper (see pages 37 and 38).

The consultation paper relates to Article 8(5) of the Regulation on KIDs for PRIIPs (PRIIPs Regulation), which requires the committee to develop draft regulatory technical standards (RTS) on the content and presentation of the KIDs for PRIIPs. The consultation closes on 29 January 2016.

The RTS and accompanying impact assessment will be submitted to the European Commission for endorsement by 31 March 2016. The committee will also publish feedback to the consultation at that time.

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