This briefing outlines a number of the recent developments in the CLO space and considers how the Irish regulatory regime might mitigate some of the impact of Brexit for UK collateral managers. If you would like any further detail, please do not hesitate to get in touch with your usual Arthur Cox contact.
PROPOSED CHANGES TO SECTION 110 REGIME
On 6 September 2016, the Department of Finance published draft legislation which it is proposed will amend the Section 110 regime in Ireland. Amended legislation was published in the Finance Bill on 20 October 2016. Further refinements are to be proposed at Committee Stage. The draft legislation is narrowly focussed and designed to apply to those Section 110 companies which derive all or part of their profits directly and indirectly from Irish land. There are specific exemptions for CLO transactions, CMBS/RMBS and loan origination so most public transactions and all transactions with non-Irish assets are unaffected. This is consistent with the Irish government's public statements of support for the financial services industry in general and securitisation in particular. We expect the legislation to become law in December. A link to the draft legislation is here and a link to the amendments proposed by the Government is here.
VAT ON COLLATERAL MANAGEMENT FEES
Irish VAT law contains a specific exemption for the management of specified forms of "special investment funds", including Section 110 companies. Defining which entities qualify as "special investment funds" for VAT purposes is a matter for each member state, subject to the parameters given by the European Court of Justice. We consider that the vast majority of Section 110 transactions would fall within those parameters and, as a result, Ireland has appropriately and correctly exercised its discretion in this area by including Section 110 companies in the list of "special investment funds". Accordingly, the Fiscale eenheid case should not apply to change this position as a matter of Irish law. This means that the servicing and management of an Irish Section 110 CLO vehicle should remain exempt from VAT.
IMPACT OF BREXIT - MIFID SAFE HARBOUR AND COLLATERAL MANAGER AUTHORISATION
On 23 June 2016, the UK voted to leave the European Union. While the exact timing and form of the exit is still unknown, it appears that the UK will leave the European Union in early 2019 (assuming the UK government makes its Article 50 notification by the end of March 2017, which PM Theresa May indicated it would at the Conservative Party Conference) and there appears to be a strong possibility that UK authorised collateral managers will no longer enjoy the benefits of the MiFID passport in order to provide their services to CLOs in European Union countries. Accordingly, collateral managers are keen to understand how best they can insulate their activities and transactions from the resulting uncertainty.
- MiFID Safe Harbour
One key consideration for collateral managers will be whether they can continue to manage CLO issuers if they no longer have the requisite passport under MiFID. Ireland has implemented MiFID in a manner which prohibits any person from acting as, or claiming to be, an investment firm in Ireland without due authorisation (i.e. the holder of a MiFID authorisation from the Central Bank of Ireland or a passported MiFID authorisation from another EU member state regulator). However, the Irish MiFID implementing regulations also incorporate a "safe harbour" which provide that an investment firm will not be regarded as operating in Ireland where:
- its head or registered office is in a non-EU country;
- it has not established a branch in Ireland; and
- it is not providing investment services to Irish individuals.
If, as a result of Brexit, UK-based collateral managers lose their MiFID authorisations, they would nonetheless be permitted (under the current legislative regime) to continue to provide collateral management services to Irish CLO issuers without the need for a specific authorisation in Ireland. It remains to be seen whether the exemption will survive the implementation of the MiFID II third-country regime in 2018 – the Department of Finance has just finished a public consultation on the issue.
- Becoming authorised as a Collateral Manager in Ireland
One option for UK collateral managers to mitigate the impact of Brexit is to establish a MiFID authorised firm in Ireland. The process for obtaining a licence from the Central Bank of Ireland takes between 6-12 months (including preparation time, which tends to be the most significant variable in the process) and involves submission of a detailed application form and supporting documentation. The Central Bank requires applicants to have a pre-application meeting with it following submission of a "key facts document" summarising the applicant's business plan. This meeting is a useful step in the process and allows both the Central Bank and the applicant to raises and discuss issues of concern in advance of a formal application being made. There is no filing fee for the application, so the main cost is professional advisor fees. The Central Bank is particularly focused on the concept of "mind and management" and requires a firm's senior management, risk functions and decision-making to be in Ireland, albeit outsourcing is permitted (and common place).
Some background information, including a useful guidance note is available at this link: CBI MiFID Guidance
Market Abuse Regulation
The recently enacted Market Abuse Regulation will include an additional burden on SPVs with debt listed on the Main Securities Market or Global Exchange Market (GEM) of the Irish Stock Exchange. In particular, this is an issue for CLO vehicles which were listed on the GEM (or other exchange regulated market) at the date of enactment as they were not subject to the previous market abuse law regime. Directors and corporate services providers should ensure that they have adequate procedures in place to ensure compliance, in particular that they maintain insider lists, notify the relevant PDMRs (persons discharging managerial responsibility) and disclose inside information as soon as possible. In addition, where SPVs are delaying the disclosure of inside information in reliance on the "legitimate interests exemption" then they should also be mindful of minuting their decisions and the requirement to notify the Central Bank of the delay when the information is finally announced.
For further information on MAR please see our recent client briefings: New Market Abuse Regime - Impact on issuers of MSM-listed debt securities and Issuers of debt securities on GEM to be subject to new market abuse regime.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.