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www.pwc.ie/assetmanagement
Asset
Management
Newsletter
Welcome to the quarterly
PwC Ireland asset
management newsletter. In
it we cover both local and
international topics
affecting the Irish
funds industry.
March 2015
Contents
The Irish Collective Asset Management Vehicle (ICAV) is live. ............................................................ 2
Business leaders see financial regulation as a threat. ......................................................................... 4
IRISH UPDATES.................................................................................................................................... 6
AIFMD ...................................................................................................................................................................................... 6
Exchange Traded Funds .......................................................................................................................................................... 6
EMIR – CBI Consultation on Non Financial Counterparties has concluded. ...................................................................... 7
The Companies Act 2014 has been enacted. ........................................................................................................................... 7
CBI Performance targets -Fitness and Probity Regime, Authorizations ..............................................................................8
MiFID II and its Impact on Asset Managers. ........................................................................................ 9
Money Market Funds – the ongoing debate. ....................................................................................... 11
EUROPEAN UPDATES......................................................................................................................... 13
Capital Markets Union ........................................................................................................................................................... 13
AIFMD Update ....................................................................................................................................................................... 13
ESMA Update ......................................................................................................................................................................... 14
Financial Transaction Tax ..................................................................................................................................................... 14
PRIIPS Update ....................................................................................................................................................................... 15
UCITS V Update ..................................................................................................................................................................... 15
EMIR Updates ........................................................................................................................................................................ 15
MiFID II – Cost Benefit Analysis of Regulatory Plans ......................................................................................................... 16
EU-US FMRD Joint Statement ............................................................................................................................................. 16
Contacts .............................................................................................................................................. 17
The Irish Collective Asset Management Vehicle (ICAV) is live.
Ilona McElroy
Tax – Senior Manager
+353 1792 8768
[email protected]
On March 5th, the Irish Collective Asset Management Vehicle (ICAV) Act was formally enacted. Minister of State,
Simon Harris, TD, welcomed the passage of the Act noting that:
“it is an important part of the Government’s strategy for the continued development of the international financial
services sector and its contribution to job creation in Ireland….
…I believe it will allow Ireland to continue to compete for investment with other key funds domiciles on an equal
footing and further enhance Ireland’s reputation as a safe place to do business”.
The introduction of the ICAV increases the range of fund vehicles in Ireland available to promoters, fulfilling one of
the initiatives outlined in the Irish Government’s IFSC Strategy 2011-2016.
Background
The ICAV is a new corporate vehicle designed for Irish investment funds. It sits alongside the public limited company
(“plc”), which has been the most successful and popular of the existing Irish collective investment fund vehicles to
date. An ICAV can be incorporated with the Central Bank of Ireland and provides a tailor-made corporate fund vehicle
for both UCITS and alternative investment funds.
Meeting the needs of the Asset Management Industry
The ICAV is not a company under the Irish Companies Acts, but rather a corporate entity with its own facilitative
legislation that has been drafted specifically with the needs of Collective Investment Schemes in mind. This should
result in lower administrative costs for an ICAV.
In addition, an ICAV can also select the regulatory regime to apply and can be structured as a UCITS or an alternative
investment fund (“AIF”). The governing requirements for the preparation of financial statements for an ICAV follow
the requirements for UCITS and AIFs and additional requirements have not been prescribed.
The ICAV is governed by an instrument of incorporation (“IOI”), similar to the memorandum and articles of
association of a plc. The IOI is the constitutional document of the ICAV. Like a plc, an ICAV is required to have a board
of directors to govern its affairs and similar to other collective investment schemes, the ICAV may either be managed
by an external management company or be a self-managed entity.
The ICAV also offers flexibility in terms of which accounting standards can be used in the preparation of financial
statements, including Irish, UK, USA, IFRS, Japanese and Canadian. This is a positive development and one welcomed
by the industry.
“Check the Box”
An Irish fund structured as a plc is a ‘per se corporation’ for US tax purposes and is not permitted to “check the box” in
order to be treated as a transparent entity for US tax purposes.
As a result, plcs are generally subject to two levels of taxation from a US tax perspective:


at the fund level (where the income is earned); and
at the investor level (when a distribution is made to investors).
Page 2
Transparent treatment may be preferable in many instances as the character of the underlying income is retained and
losses and tax credits can flow up to the US investor and be used to offset other income of that investor.
The ICAV is able to elect its classification under the US check-the-box taxation rules and as a result can be treated as a
partnership for US tax purposes; this avoids the adverse tax consequences for US taxable investors which arise where
the structure is deemed to be a ‘passive foreign investment company’ (PFIC) for US federal income tax purposes.
Where an ICAV elects to be treated as transparent for US purposes it is likely that a specific identification valuation
method (such as ‘first-in-first-out”) as opposed to an average cost method should be used to value assets held by the
fund. The ICAV should enhance the attractiveness of Irish funds to investment managers seeking to market their funds
in the US.
Re-domiciliation of Offshore Funds to Ireland
Given the ICAV’s ability to “check the box” for US tax purposes, there is an opportunity for existing offshore funds to
re-domicile to Ireland and continue to maintain favourable tax treatment for their US taxable investors.
Irish legislation, introduced in 2010 with the enactment of the Companies (Miscellaneous Provisions) Act, 2009,
provides for the efficient and effective re-domiciliation of funds to Ireland. It allows offshore corporate funds from
certain prescribed jurisdictions to migrate to Ireland by re-registering as an Irish UCITS or AIF authorised by the
Central Bank of Ireland while maintaining its legal identity. Funds from the following jurisdictions can re-domicile to
Ireland in an efficient manner:






The British Virgin Islands
The Cayman Islands
Jersey
Guernsey
Bermuda
The Isle of Man
Existing offshore funds seeking to re-domicile to Ireland are permitted to do so if the legislation of their original
territory allows outward and inward re-domiciliation.
One of the key benefits of the provisions is that, given that there is no change in legal identity, the migration should
not constitute a taxable event for investors. In addition, the fund should retain its performance track record post
migration. The simplified procedure for re-domiciling a corporate fund to Ireland can be measured against other
jurisdictions, where the process is less straightforward.
Conversion
For existing plc structures, there is an option to convert to the new ICAV structure. The impact of such a conversion on
taxable US investors should be considered.
Conclusion
Overall the industry welcomes this new structure which confirms Ireland’s commitment to being a competitive and
pro-active domicile. Both the accounting and tax implications of the ICAV legislation have been developed to meet the
needs of the current environment and we look forward to working with fund promoters to assist them as they avail of
this new opportunity.
The CBI will start to accept ICAV applications from 16th March.
Page 3
Business leaders see financial regulation as a threat.
In PwC’s 18th Annual Global CEO Survey, the overwhelming majority of financial services business leaders believe
that financial regulation is the biggest threat to growth prospects in the next 12 months. According to our annual
global CEO survey, regulation is seen as creating upheaval and more costs on the one hand, while diverting attention
from other strategic challenges on the other.
Regulation is so important today because it influences so much of what financial services firms do, from responding to
competitors, integrating technological innovations or delivering growth and value to shareholders. However it is not
always the case of the 'tail wagging the dog'. Market forces (technology, new competitors) are still a pertinent driver of
financial regulation. Understanding these forces will help firms (and regulators) get ahead of the risk and regulatory
curve, and prepare for the next wave of regulatory interventions.
We have summarized the key insights from the CEO survey below, across asset management, banking and insurance.
Asset management: Raging Bull
CEOs in the asset management sector are optimistic about their prospects. While they've a high level of confidence in
revenue growth over 12 months, they're even more confident over three years. In a fiercely competitive landscape,
industry CEOs see almost as many threats as opportunities. Almost two thirds 'agree' or 'agree strongly' that there are
more opportunities compared with three years ago, but over half see more threats.
Some asset managers are disrupting other areas of financial services. 28% of asset management CEOs have entered a
new business area in the past three years and a further 18% have considered doing so. Among those that have done so,
the highest number reported diversifying into areas of financial services and real estate. While asset management
firms don't make as much use of technology as their peers in other parts of financial services, they're turning to
technology in order to enhance their competitiveness in a range of areas. 88% of asset management CEOs report
leveraging digital technology to increase operational efficiency. But they also regard digital technology as strategically
important in the areas of data mining and analysis (78%), cyber security (77%) and mobile technologies for customer
engagement (71%).
Banking: iGeneration
The majority of CEOs believe that market entrants are disrupting existing models, largely by better-serving customer
needs at distinct points of the value chain. In particular, technology is rapidly evolving, and impacting all areas of
banking – from the way banks understand and engage their customers, the way they enhance their operations, and the
way they manage risk. New entrants are able to use technology to provide a better customer experience, at lower cost,
unencumbered by legacy infrastructure or business models.
While banks see innovation as the most important driver of growth, only 10% of retail banks believe they are
innovation leaders. More than 40% of BCM CEOs see joint ventures, strategic alliances and informal collaborations as
an opportunity to strengthen innovation and gain access to new customers and new/emerging technologies. And 37%
plan to enter into at least one new joint venture or strategic alliance over the next 12 months.
Are banks able to keep up the pace of change, and keep up with more nimble competitors? 68% of banking & capital
markets CEOs see the speed of technological change as a threat to growth, a strong increase from 57% last year.
Insurance: At a cross roads
The insurance marketplace is transforming, creating openings for some and challenges for others. Fifty nine per cent
of insurance CEOs believe there are more opportunities than there were three years ago but 61% see more threats.
Insurance CEOs believe that new regulation, increasing competition, technological developments around service
provision, and changes in distribution will have more of a disruptive impact over the next five years than CEOs in
almost all other industries.
Page 4
Moreover, the fact people are living longer and have more wealth to protect presents insurers with an opportunity. The
threats to insurers include mounting commoditisation, the squeeze on margins and increase in self-insurance. This
reflects both intensifying price competition and difficulties in conveying the true value of the coverage they sell.
Regulation is creating upheaval and more costs on the one side and diverting attention from other strategic challenges
on the other.
A rapidly changing market requires a more diverse workforce with new talents. Eighty per cent of insurance CEOs now
look for a much broader range of skills than before. At the same time they recognise the challenges, with 71% – even
more than last year – seeing the limited availability of key skills as a threat to growth.
Staying ahead of the curve
FS firms face a volatile environment over the next three years. Compared with three years ago, when the financial
crisis’s after effects were even stronger than today, FS CEOs see both greater opportunities and greater threats. But
staying ahead of the regulatory curve remains a challenge for firms. The ability to get on top of regulation is hampered
by lingering uncertainty over details and lacking information on the details on the one hand, and the potential for
reactive, piecemeal and organisationally challenged implementation on the other. It is therefore vital to develop a
proactive approach to regulation, headed by a regulatory leader charged with liaising with regulators, assessing the
strategic impact and co-ordinating the response.
Further information on the asset management survey results can be found here:
http://www.pwc.com/gx/en/ceo-survey/2015/industry/asset-management.jhtml
Page 5
IRISH UPDATES
AIFMD
AIFMD Q&A 12th Edition
Released
The Central Bank of Ireland on 23rd
January issued a new Q&A on the
AIFMD. Topics covered include
definition of registered versus
authorised AIFM. Questions are also
answered regarding the registration
process. Issues concerning Non EU
Investment Managers and
transitional arrangements are also
discussed.
The Q&A is available here:
http://www.centralbank.ie/regulati
on/marketsupdate/Documents/150
123_AIFMD%20QA%20Version%2
012%20FINAL.pdf
ISE releases
Activity Report
The 4th quarter statistical report
shows strong volume growth on the
exchange with equity trades up 30%
to 1.1 million during the quarter.
The total value of these trades was
€63bn as opposed to €57bn for the
same period last year.
The ISE remains a prominent
location for listing Exchange Traded
Funds with the number of individual
funds listed at over 650.
For quarterly and annual report see:
http://www.ise.ie/Market-DataAnnouncements/StatisticalReports/
felt much more widely than
imagined. As such, all financial
services firms should consider
developing an ETF strategy.
In this report, we have surveyed
asset managers, service providers
and other industry participants
around the world in an effort to
better understand regional
developments in ETFs and use their
expertise as a sounding board for
our own perspectives.
Download the report at:
http://www.pwc.com/gx/en/asset
-management/publications/etf2020.jhtml
Exchange Traded
Funds
ETF’s – ISE rule change.
IFIA Responds to AIFMD Asset
Segregation Consultation
The IFIA has responded to ESMA’s
consultation on AIFMD asset
Segregation. ESMA had proposed 2
options. One proposal required the
segregation of AIF and non-AIF
assets and also separate accounts for
each depositary. The other proposal
allows for multiple depositaries in a
single account once AIF and Non –
AIF assets are segregated.
IFIA has noted that each option is
open to various interpretations and
both would result in significant
extra costs for the custodian. IFIA
also questions if sufficient investor
protection is achieved by either of
these methods in the event of a
bankruptcy.
IFIA’s response is available at this
website:
http://www.esma.europa.eu/system
/files/IFIA_Response_to_ESMA_A
IFMD_L2_Consultation_Sept_2011
.pdf
There has been a change of rule
concerning the daily disclosure of
ETF’s portfolio holdings. For the
last 4 years Actively Managed ETF’s
have been required to publish their
holdings each day. This requirement
has now been removed. This brings
the Irish Stock Exchange into line
with practices across Europe.
For the official announcement see:
http://www.ise.ie/ProductsServices/Listing-ETFs/Policy-Note01_14-2-.pdf?v=212015
PwC Publishes ETF 2020
Report
The ETF (Exchange Traded Fund)
market is growing at a rapid pace.
Growing far beyond their initial
function of tracking large liquid
indices in developed markets, ETFs
now hold over $2.6 trillion of assets
globally.
ETFs are no longer a niche product,
and their impact will continue to be
Page 6
EMIR – CBI
Consultation on
Non Financial
Counterparties has
concluded.
The Central Bank has been
nominated
as
the
National
Competent Authority under EMIR
regulations. As a result of this any
institution trading in derivatives will
now be subject to CBI supervision.
The challenge for the CBI is that the
number of potential NFC’s may well
be in the thousands and as many are
unregulated entities they are
unknown to the CBI.
The CBI is proposing to use the
EMIR Regulatory Return (ERR) to
address this challenge. In essence it
is an annual self-assessment by the
NFC dealing with its compliance
with EMIR. The CBI is proposing to
use the ERR for all NFCs which are
below a clearing threshold. The CBI
could also require independent
review of these ERR’s prior to their
submission.
The consultation focused on the
type of derivative, quantities and
risk mitigation strategies used.
The consultation closed on January
30 and we are awaiting the CBI’s
response:
http://www.centralbank.ie/regulati
on/poldocs/consultationpapers/Documents/CP90%20Consu
ltation%20on%20the%20Supervisio
n%20of%20NonFinancial%20Counterparties%20%2
0under%20EMIR/CP90%20Consul
tation%20on%20the%20Supervisio
n%20of%20NonFinancial%20Counterparties%20un
der%20EMIR.pdf
The Companies Act
2014 has been
enacted.
types. Please note the DACs are
subject to the shorter 15 month
transition.
At last, the long awaited Companies
Act, 2014 has come into law on 23
December 2014 with
commencement likely to be June,
2015. This is the largest piece of
legislation lreland has ever seen,
comprising a total of 25 parts (over
1440 sections) and 17 schedules.
The Act consolidates and reforms
Irish company law and every
company, director and shareholder
will be affected and will have choices
to make.
In the past determining the duties
and responsibilities of company
directors has not been clear. In the
new Companies Act 2014 directors
duties are clearly codified. These are
set out in eight fiduciary duties
which will apply to directors,
shadow directors and de facto
directors as follow:
Codification of Directors
Duties



New Types of Company Entities
Existing private limited companies
will have to make a decision on
which of the new entity types they
wish to become. They can opt in and
become a new private company
limited by shares, opt out and
become a designated activity
company or do nothing and be
deemed a designated activity
company for the transition and a
private company limited by shares
thereafter.
Five new company types have been
created, however for most asset
management companies the type of
most interest will be the new
Designated Activity Company
(DAC).
By virtue of being regulated certain
companies will be required to
register as a DAC, e.g. regulated
financial institutions. Others will
need to choose if a DAC vehicle will
suit their current or desired
structure. These DAC companies
will have a two document
constitution and must have two
directors. A name change will be
required.
Commencement date for the act is
expected to be 1 June 2015.
Companies will then enter the 15 18 month transition period for
conversion to the new company





act in good faith
act honestly and responsibly
act in accordance with the
company’s constitution and
to exercise those powers
only for lawful purposes
not to use company
property unless approved by
the members or the
company constitution
not to fetter discretion
unless permitted by the
constitution or unless it’s in
the company’s interest
to avoid conflicts of interest
to exercise care, skill and
diligence and
to have regard for the
interests of members as well
as employees
Directors Compliance
Statement
The directors of certain large private
limited companies and all public
limited companies will be required
to produce a compliance statement
to be included in the director’s
report on the financial statements.
Please see PwC’s explanatory leaflet
at :
http://download.pwc.com/ie/pubs/
2015-pwc-ireland-companies-act2014.pdf
Page 7
CBI Performance
targets -Fitness and
Probity Regime,
Authorizations
The Central Bank has released its
Regulatory Transactions Service
Standards Performance Report for
the period June to December 2014.
The published report measures the
Central Bank’s performance against
targets for promptness. The short
report show’s all targets in relation
to Fitness and Probity checks were
achieved. One target relating to
authorizations was missed out of
three targets in total.
The report can be seen at:
http://www.centralbank.ie/regulati
on/processes/fandp/serviceprovider
s/Documents/Service%20Standards
%20Performance%20Report%20Ja
n%202015%20(2).pdf
Page 8
MiFID II and its Impact on Asset Managers.
David Pasley
Manager, Asset Management Consulting.
+353 1792 5792
[email protected]
MiFID II marks a significant step in the EU’s attempt post-financial crisis to increase market efficiency and choice,
enhance investor protection, strengthen market integrity and to harmonise regulatory standards in Europe.
How will it do this?
MiFID II enhances existing requirements around investor protection and transparency and reforms existing market
infrastructure. It pushes more trading on to regulated trading venues by introducing the concept of an Organised
Trading Facility – a broad category of trading venue that captures a range of currently unregulated electronic
platforms. There are greater requirements for pre- and post-trade transparency, curbs and controls on algorithmic and
high frequency trading and a proposed near total ban on inducements, all applied to an expanded range of financial
instruments, firms and activities. MiFID II, via MiFIR, also prescribes strict implementation measures which leave
little room for interpretation by national competent authorities (NCAs) compared to the original MiFID regime,
however there is still some room for differences in MiFID and this is causing concern for some managers.
Regulators have taken the view that failings in Governance were a contributory factor to the global financial crisis.
Consequently these requirements are strengthened in MiFID II. There is particular focus on board composition, with
directorships restricted and a new focus on diversity. Asset managers will have to review board composition across
divisions or legal entities and may require some directors to step down or be replaced in order to be compliant.
Investor Protection is an area that will be substantially improved under MiFID II with national competent
authorities (NCAs) given greater scope to act, even pre-emptively if necessary, in instances where there are possible
threats to market stability. Powers include the ability to restrict or prohibit the marketing, sale or distribution of a
particular product, meaning that firms will have to stringently ensure compliance. The conduct of business and
conflict of interest requirements have been strengthened while there are stricter provisions around execution-only
services, investment advice and best execution. Firms will now have to be able to demonstrate that they achieved best
execution when requested.
There will be a spotlight on cost disclosure with all charges being broken down and itemised for investors, which is
likely to lead to increased pressure on revenues for asset managers.
The client categorisation regime has been revamped and all client categories will be offered greater protection,
including enhanced requirements for retail clients in several areas, meaning some asset managers may have to review
the economic viability of providing services to certain clients.
Distribution is probably the subject that has caused the most controversy with asset managers. The proposed ban on
most inducements, including commissions and rebates, for independent advisors will force many in the market to rethink their business model and how their funds are distributed. While ESMA, in its technical advice of December 2014,
appears to have stepped back slightly from their original position by adding a ‘wider number of positive situations
justifying the receipt of inducements’, it will be very difficult to legitimately receive commissions.
Page 9
It is still permitted to have inducements for non-independent advisors but they have to be clearly disclosed and any
costs to clients must enhance the service they are provided.
Another issue causing headaches for many managers is the fact that firms may now be required to pay for investment
research. Research was often bundled with other costs and passed on to the investors, which MiFID II aims to stop,
however there is still considerable uncertainty around the topic including what can be paid for research and who will
ultimately foot the cost.
Product governance requirements have been extended; asset managers, when creating a product, must put in place a
formalised approval process and must ensure that the product meets the needs of a specific target segment while being
distributed through the appropriate channels in order to reach that segment.
Transaction reporting requirements have been extended considerably and they cover the increased scope of
instruments and trading venues now captured by MiFID II. There is a hugely expanded number of reporting fields to
be completed (up to 93 compared to 27 under the original regime) and it is expected that some asset managers will
have to make significant technological investment in order for them to be able to comply with the new requirements, if
they choose to report themselves. They can also use Approved Reporting Mechanisms (ARMs) to do the reporting for
them, but it will be the manager who is ultimately responsible for what is submitted. Many EMIR Trade Repositories
(TRs) are expected to act as ARMs.
MiFID II will have a significant impact on trading. While MiFID was primarily concerned with equities, MiFID II
now extends the scope to other instruments including fixed income and derivatives. There are increased transparency
requirements and a new trading venue introduced with the aim of putting all forms of organised trading onto
regulated trading venues.
Organised Trading Facilities (OTFs) have been designed to capture off-exchange trading arrangements which fall
outside of other regulated venues and covers bonds, structured finance products and derivatives. The Systematic
Internaliser (SI) regime has been expanded from just equities and could be used for bond trading. Asset managers
with internal crossing systems may have to consider other options such as converting them to either an OTF or an SI,
while considering the fact that they cannot be both.
Algorithmic Trading and High Frequency Trading (HFT), which have attracted a lot of attention over recent years, are
regulated subject to definitions in MiFID II. Any firms using these techniques must now inform their NCA, keep
additional records and ensure systems resilience such as including circuit breakers with the intention of avoiding the
‘flash crashes’ we have seen in the past. Some managers will have to consider if any current activities could be caught
by the expanded definitions and thus impose the additional requirements.
Pre- and post-trade transparency has, in keeping with the rest of the regime, also been greatly expanded with much
more information being made available to the public across an extended scope of instruments. Again, some managers
will have to consider the cost of increasing systems capability versus the commercial feasibility of continuing to trade
certain instruments.
MiFID II is due to come into effect on 3 January 2017 and will have a fundamental impact on the securities market and
all that interact with it. Asset managers need to start assessing the impact now in order to be ready for
implementation.
Page 10
Money Market Funds – the ongoing debate.
Sarah Murphy
Director
+353 1792 8542
[email protected]
NJ Whelan
Manager
+353 56 770 4958
[email protected]
ECON finalises its position on MMF reform.
The regulatory landscape is continuously changing and money market reform has been at the forefront of the
discussion for a number of years now both in the US and Europe. While there is now some clarity in the US since the
SEC finalised their rules in 2014, the process in Europe is still ongoing and the European Commission proposals
originally issued in September 2013 have not yet been finalised.
The proposed EU regulation is intended to introduce common standards to increase the stability and liquidity of
Money Market Funds (“MMFs”) and also add further transparency and reporting rules. The proposed regulation seeks
to address concerns over the systemic risk that may arise as a result of an investor run. The proposed regulation is
available on: http://ec.europa.eu/finance/investment/money-market-funds/index_en.htm
Some of the key proposed reforms in the initial EC proposal were as follows:



3% Capital Buffer on Constant NAV (“CNAV”) MMFs – otherwise mandatory conversion to Variable NAV
(“VNAV”) MMF;
At least 10% of a MMF’s assets to be comprised of daily maturing assets and 20% of weekly maturing assets;
Detailed rules on the diversification limits of eligible investments and concentration limits that an MMF (as
investor) could hold in a single issuer;
Only CNAV MMFs could value assets at amortised cost.


Since these draft proposals were issued there has been ongoing debate about the nature of the proposed reform and
the impact on the industry. In early 2014 the ECON Committee failed to reach consensus on the proposals and over
that summer with the European elections and a new presidency the process ground to a halt. Over the same period the
SEC issued their final rules on MMF reform giving some clarity to the US market in terms of the way the industry was
going.
Following the formation of a new ECON committee in October 2014 progress has been made. In a first exchange of
views the new Rapporteur stated that she would address the proposed MMF regulation in light of recent developments
which included the SEC final rules that were issued in July 2014. Those rules provided for the following:






Reduced flexibility for government MMFs;
“Retail MMF” definition improved;
More flexibility for MMF boards when imposing fees/gates;
Amortized cost accounting remains for retail and government funds;
Refined stress testing;
Modest relief for municipal MMFs.
Page 11
The Rapporteur issued her draft report in November 2014 which is available at
http://www.europarl.europa.eu/committees/en/econ/draft-reports.html and her amendments in summary provided
for the following:
- A carve out for EU public debt CNAV MMFs or retail CNAV MMFs;
- Buffer not on retail;
- Transition period of 3 months;
- Redemption gates and fees for all MMF other than EU public debt;
- Increased transparency and liquidity;
- Fees and gates.
In the meantime, the Italian presidency published a progress report and a further compromise text on the MMF
proposed reforms before handing over to Latvia on 1 January 2015. This report set out the current position and
acknowledged that while there was some "convergence" among the member states on some of the items under
discussion, there were still "strong reservations" in relation to certain provisions. It also noted that "the definition of
the scope and treatment of constant-NAV MMFs (was) the most disputed issue of this file” and given the difficulties of
pursuing the approach based on NAV buffer, proposed – through a non-paper – an approach based on a mandatory
transformation of CNAV funds into a new class of MMFs called Low Volatility NAV (LVNAV) MMF which would make
use of the “penny-rounding method”. Using “penny-rounding” the NAV is rounded to the nearest cent per share, e.g.
€1.00 share price would remain stable as long as the unrounded NAV remained between €0.995 and €1.005. This
method is also called “10 basis point rounding”.
An impact assessment was speedily conducted by the European Parliamentary Research Service (EPRS) with its scope
limited to some of the specific provisions of the Rapporteur’s report and the results of this were communicated to the
ECON committee whose amendments were due and issued in January 2015. A further 704 amendments were
submitted
in
addition
to
the
96
in
November
draft
report
(available
at
http://www.europarl.europa.eu/committees/en/econ/amendments.html) and views were still divided and diverse on
the main areas. However on 26 February the ECON committee went ahead with the vote and adopted its position by
approving a “draft law that would make MMFs safer, provide for more transparency, investor information and investor
protection”. **
In the draft report approved by the ECON committee, CNAV funds are limited to two types:
I.
II.
Retail CNAV that would be available for subscription only for charities, non-profit organisations, public
authorities and public foundations; and
Public debt CNAV which would invest 99.5% of its assets in public debt instruments.
In addition ECON proposed a new type of MMF – a low volatility net asset value MMF (LVNAV) that might display a
constant NAV but under strict conditions.
Other matters included the following:
I.
II.
III.
IV.
V.
Diversification of asset portfolios, strict liquidity and concentration limits and stress testing processes;
Internal assessment procedures determining the credit quality of money fund instruments;
Valuation of assets to be performed on a daily basis and published;
No external support from third parties, including sponsors;
Application of fees and gates for public debt and retail CNAVs and LVNAVs in certain circumstances.
The ECON committee report has not yet been published and so further details are not yet available.
What’s happening next?
The plenary vote on the draft report issued by ECON is due to take place at the end of April, following which the
Council must approve the Regulation before it becomes law.
** European Parliament press release 26.2.2015
Page 12
•
EUROPEAN UPDATES
AIFMD Update
Capital Markets
Union
The EU Commission has started
to work in earnest on Capital
Markets Union(CMU). CMU aims
to create a single capital market
across all 28 member states. This
would benefit investors looking
for greater market opportunities
and entities looking to source
funds. It is hoped it will lower
investment costs for enterprises
and lead to increased job creation
in the EU.
A green paper issued by the
European Commission on
February 18th identified 5 key
areas to focus on. These areas are
reducing capital market barriers,
widening the investor base,
building sustainable
securitization, long term
investment and the private
placement market.
For more see:
http://ec.europa.eu/news/2015/
01/20150128_en.htm
Call for Evidence on AIFMD
Passport and third country
AIFMs.
ESMA issued a questionnaire
regarding the AIFMD passport
and the practical experience of
AIFM’s who have availed of the
passport.
The questionnaire received
numerous responses from
government bodies, asset
managers and legal firms. The
questions posed relate to the
distribution plans of promoters
and also the ease or otherwise of
acquiring the passport. In general
the process has been seen as well
organised and managed but a
number of respondents have
noted issues of cost and
bureaucracy in some member
states. Some have also indicated
their hope that the National
Private Placement Regimes
(NPPRs) will be allowed to
continue in the EU.
http://www.esma.europa.eu/cons
ultation/Call-evidence-AIFMDpassport-and-third-countryAIFMs
ESMA updated Q&A on
AIFMD Applications
Published
The new Q&A was issued on 9th of
January 2015.
The issue contains a number of
questions relating to
remuneration, notifications and
leverage. There is also a lengthy
section on reporting to national
competent authorities. Several
questions relate to exactly which
AIFs must report, the timeframe
and what happens in the event of
the AIF being liquidated.
The complete Q&A is available
here:
http://www.esma.europa.eu/syst
em/files/201511_qa_aifmd_january_update.pd
f
Both the call for evidence and the
individual responses can be
viewed at:
Page 13
ESMA Update
Cross selling
consultation by
EU supervisory
bodies
The European Banking Authority
(EBA), the European Insurance
and Occupational Pensions
Authority (EIOPA) and the
European Securities and Markets
Authority (ESMA) have published
a joint consultation paper on
draft guidelines for the regulation
of EU cross-selling practices in
the financial sector.
The draft guidelines are aimed at
national competent authorities
and may impact upon how
distributors of UCITS and AIFs
may interact with customers and
prospective clients. The insurance
and banking industries may well
also want to consider the outcome
of this consultation.
The consultation aims to elicit
views from investment firms,
UCITS management companies,
investment companies, credit
institutions etc. on an EU wide
supervisory approach to cross
selling guidelines. It is also
hoped it will allow clients to make
more informed purchasing
decisions.
The consultation, which closes on
March 22nd is available online:
http://www.esma.europa.eu/cont
ent/Joint-CommitteeConsultation-Paper-guidelinescross-selling-practices
ESMA consultation on UCITS
share classes
While the UCITS Directive allows
for different share classes which
can be offered to different classes
of investors it does not prescribe
the limit to which share classes
may differ from each other.
Similarly it does not detail
common features for share
classes of the same UCITS either.
In practice wide variations in
share classes have emerged in
different jurisdictions. In the light
of this ESMA would like to see a
common understanding of what
share classes are and how they
may differ from each other.
In their consultation paper
ESMA details its view of what a
share class is and what common
features should prevail amongst
the share classes of a single
UCITS. It produces examples of
share class differentiation which
go beyond what it believes should
be permitted.
A number of questions in the
consultation seek to understand if
providers choose to create new
share classes rather than launch a
new UCITS which could fulfil the
same purpose. It asks if UCITS
setup and operation costs are a
driving this?
The consultation also seeks
responses concerning the
adequacy of information provided
to investors regarding the
characteristics, risk and return
profile of different classes.
The consultation is available
below and it closes on March
27th.
http://www.esma.europa.eu/syst
em/files/20141577_dp_on_share_classes_for_
publication.pdf
ESMA issues revised
guidelines on ETF’s
Guidelines originally published in
2012 have been revised. The
updated document focuses
mainly on index tracking UCITS,
actively managed ETF’s and the
management of collateral used in
financial derivative transactions.
Guidance is set out regarding
investor disclosures and specific
rules related to derivative
transactions.
National competent authorities
are expected to integrate these
guidelines into their national
supervisory framework. Any
national competent authority
which chooses not to apply some
or all of these guidelines must
notify ESMA. This notification,
stating the reason for noncompliance, must reach ESMA
within 2 months of the
publication date of the guidelines.
http://www.esma.europa.eu/cont
ent/Guidelines-ETFs-and-otherUCITS-issues-0
Financial
Transaction Tax
By the end of 2014, it appeared
that the project to implement an
EU Financial Transaction Tax
(“FTT”) had stalled. The Member
States signed up to implement an
EU FTT had failed to reach
consensus on a number of
fundamental points concerning
the scope and application of the
tax. In January this year, in a
surprise move President Hollande
of France voiced his strong
support for the EU FTT project
and proposed a new model, wider
in scope with a lower rate.
Furthermore, at the most recent
ECOFIN Council meeting, 10
participating Member States
released a Joint Statement
Page 14
reaffirming their commitment to
implementing an EU FTT from 1
January 2016 (although this
target date appears highly
ambitious). Whilst there is little
detail at this stage as to the scope
of any such tax, the Joint
Statement suggests a move back
to a broader scope of tax, but with
lower rates than proposed in the
February 2013 Commission
proposal. Given the lack of
consensus towards the end of
2014 amongst the EU-11, the
developments are somewhat
surprising.
For a more in-depth discussion
see: PwC’s Global Fs Tax
Newsflash:
http://www.pwc.com/en_GX/gx/
financial-services/financialtransaction-taxes/assets/pwcglobal-fs-tax-newsflash-january21-2015.pdf
PRIIPS Update
In early December the Official
Journal of the EU published the
Regulation on Key Information
Documents for Packaged Retail
and Insurance Based Products.
This standardised KID prescribes
the disclosures which must be
made and should help ensure that
investors are better informed as a
result. As the disclosures are
standardised it will also facilitate
greater transparency and ease of
comparison of products from
different vendors.
The Regulation came into force
on December 29th 2014.
Manufacturers and sellers of
PRIIPs will have 2 years to
prepare before the Regulation
becomes applicable. UCITS will
not be subject to the Regulation
for another 3 years after that. The
PRIIPS Regulation will be directly
applicable from 31 December
2016.
The Regulation is available here:
http://eur-lex.europa.eu/legalcontent/EN/TXT/HTML/?uri=O
J:L:2014:352:FULL&from=EN
EMIR Updates
Central Clearing – Non EU
Providers Equivalence
Ruling
UCITS V Update
UCITS V – ESMA Technical
Advice on Delegated Acts.
On November 28th ESMA issued
its advice on two delegated acts
required of UCITS V depositaries.
Back in September, ESMA issued
a consultation paper on
implementing measures
regarding the depositary role of
UCITS funds.
The advice given relates to
insolvency protection when
delegating safekeeping. It states
that in the event of insolvency of a
third party depositary that the
UCITS assets held in custody will
not be available for distribution to
the creditors of the depositary..
The second area advised upon is
independence. It clarifies that the
management company and
depositary shall act
independently and solely in the
interest of the UCITS and the
investors of the UCITS.
On December 4th the European
Commission issued it’s first
“equivalence” decision for Central
Counter Parties (CCP) located
outside the EU. The CCPs which
gained this ruling are located in
Australia, Hong Kong, Japan and
Singapore.
CCPs which gain this recognition
can be used by EU entities to
clear standardised OTC
derivatives as required by EU
regulations but will remain
subject only to their home
country regulations.
While local requirements may
differ in several respects this
ruling came about as the EU
considers the regulatory regimes
of these jurisdictions to be robust.
This assessment is made by
ESMA in co-operation with the
third country regulators. The
assessment is “outcome based”,
i.e. the objectives satisfied must
be the same as EU objectives but
the rules or methods are allowed
to differ.
http://www.esma.europa.eu/syst
em/files/2014-1417.pdf
Once the regulatory regime of a
jurisdiction has gained
“equivalency” then individual
CCP service providers may apply
to provide those services within
the EU.
See the following link for the
September consultation paper:
For further information, please
see:
http://www.esma.europa.eu/cons
ultation/Consultation-delegatedacts-required-UCITS-V-Directive
http://ec.europa.eu/finance/fina
ncialmarkets/derivatives/index_en.ht
m
The ESMA final report can be
found here:
Page 15
Central Counterparties
Listing
For a full list of Central
Counterparties authorised to offer
services and activities in the
Union please see:
http://www.esma.europa.eu/pag
e/Central-Counterparties
MiFID II – Cost
Benefit Analysis of
Regulatory Plans
ESMA has published a Cost
Benefit Analysis (CBA) of the
proposed regulations for MiFIDII.( Markets in Financial
Derivatives.) This is an initial
CBA based on the current
proposed regulations. Once the
final technical standards for
MiFID II are published then a full
CBA will be undertaken.
The CBA is quite a lengthy
document covering investor
protection, transparency, data
reporting, derivatives and other
issues.
number of methodologies giving a
range of results. Further research
is anticipated to determine the
drivers of HFT and the associated
risks and benefits.
The report is available at:
http://www.esma.europa.eu/syst
em/files/esma20141__hft_activity_in_eu_equity_mar
kets.pdf
EU-US FMRD Joint
Statement
The EU and the USA held further
talks on January 12th under the
Financial Markets Regulatory
Dialogue. They reaffirmed their
commitments to continue to
cooperate on standards and
regulatory issues. The statement
noted the efforts which both the
EU and the US have gone to in
order to ensure the stability of
markets during the economic
crisis. It also notes their wish for
regulatory standards to converge
over time.
http://ec.europa.eu/finance/gene
ral-policy/docs/global/150115-useu-joint-statement_en.pdf
The high level CBA can be read
here:
http://www.esma.europa.eu/syst
em/files/consultation_paperannex_a_cba_final.pdf
ESMA report on High
Frequency Trading Issued.
This report was undertaken to
understand the role high
frequency trading (HFT) plays in
EU equity markets. Market trade
data collected by ESMA covering
9 EU countries has been analysed.
The report finds that HFT varies
between venues and tends to be
for high capitalisation stocks.
HFTs are measured using a
Page 16
Contacts
The Regulatory Advisory Services
team are happy to address any
questions you might have on any of
these topics.
Regulation Specialist
Ken Owens
+353 1 792 8542
[email protected]
Corporate Governance
Sarah Hayes
+353 1 792 7323
[email protected]
ETFs
Aoife O’Connor
+353 1 792 8527
[email protected]
Fund Distribution
Anne-Marie Sharkey
+353 1 792 6273
[email protected]
Hedge Funds
James Conaghan
+353 1 792 8522
[email protected]
Loan Funds
Colin Farrell
+353 1 792 6345
[email protected]
UCITS
David O’Connor
+353 1 792 5366
[email protected]
Money Market Funds
Sarah Murphy
+353 1 792 8890
[email protected]
Suzanne Senior
+353 1 792 8547
[email protected]
Private Equity
Catherine Chambers
+353 1 792 8975
[email protected]
Joe O’Neill
+353 1 792 7501
[email protected]
Real Estate
Ilona McElroy
+353 1 792 8768
[email protected]
Tax
Rosaleen Carey
+353 1 792 8756
[email protected]
Page 17
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