Financial services asset management regulation updater

20 April 2012

London office building

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Introduction

The asset management regulation group advises on the full range of legal and regulatory issues for institutional and specialist asset management firms, including advising on documentation and all aspects of compliance with applicable regulatory requirements.

Every month the group publishes an updater which covers the latest regulatory developments that affect those involved in asset management. Welcome to the April 2012 edition of the asset management regulation updater.

Highlights include:

  • Policy options for implementing the AIFMD
  • Shadow banking: Strengthening oversight and regulation

Collective investment schemes

IOSCO consults on ETFs regulation

Exchange-traded products (ETPs) include a wide variety of different investment products, including exchange traded funds (ETFs) that are organised collective investment schemes, exchange traded commodities, exchange traded notes, exchange traded instruments and exchange traded vehicles.

There is increasing interest in ETFs worldwide with significant funds being invested in these types of products. However, the growth of ETFs has also drawn the attention of regulators who are concerned about the potential impact of ETFs on investors and the market place.

On 14 March 2012, the Technical Committee of the International Organization of Securities Commissions (IOSCO) published a Consultation Report, Principles for the Regulation of Exchange Traded Funds.

The Consultation Report examined key regulatory issues regarding ETFs and touched on certain market structure and financial stability issues. It also contained 15 principles against which both the industry and regulators can assess the quality of regulation and industry practices relating to ETFs regarding investor protection, sound functioning of markets and financial stability. Fourteen of the proposed principles are categorised under the following three headings:

  • Principles related to ETF classification and disclosure.
  • Principles related to marketing and sale of ETF shares.
  • Principles related to the structuring of ETFs.

However, the proposed principles should not be taken to mean that a one-size-fits-all approach is being advocated. The principles have been designed to be of such a nature that they are adaptable to different regulatory frameworks. They should, for example, be relevant regardless of the predominant distribution model. In addition, some of the principles may be better suited to industry best practice as opposed to regulatory requirements.

The deadline for comments on the Consultation Report is 27 June 2012.

View IOSCO consults on exchange traded funds regulation, 14 March 2012

View Principles for the Regulation of Exchange Traded Funds - Consultation Report, 14 March 2012

Policy options for implementing the AIFMD

On 14 March 2012, HM Treasury published an informal Discussion Paper highlighting and inviting initial views on a number of the high level policy decisions that will need to be taken as part of the transposition of the Alternative Investment Fund Managers Directive (AIFMD) in the UK.

The transposition issues covered in the Discussion Paper were:

  • Requirements for sub-threshold alternative investment fund managers (AIFMs). The AIFMD requires AIFMs to be authorised but permits Member States to establish a de minimis registration regime for AIFMs managing alternative investment funds (AIFs) with assets under management below certain thresholds. Member States have the option, however, of imposing additional requirements. In the Discussion Paper the Government discusses two possible options: (1) full application of AIFMD requirements to all smaller AIFMs; or (2) apply a lighter regime selectively, differentiating between AIFMs.
  • Proposed Regulations on Venture Capital Funds and European Social Entrepreneurship Funds. The Government invites comments on the extent to which venture capital funds and social investment funds are likely to benefit from the Commission’s proposed Regulations on European Venture Capital Funds and European Social Entrepreneurship Funds.
  • Approved persons regime. The approved persons regime is a UK concept under the Financial Services and Markets Act 2000 (FSMA) and is not required under the AIFMD. The UK is permitted but not compelled, to apply the regime. The Government has to decide whether or not to apply the regime to individuals within AIFMs newly subject to regulation. These include, for example, internally managed listed investment funds. The FSA has indicated that if the regime is applied, it would exercise its powers in a proportionate manner.
  • Marketing to retail investors. The AIFMD prohibits the marketing of AIFs to retail investors but gives Member States the discretion to permit marketing selectively and impose greater restrictions than those for marketing to professional investors. Under the current UK regime, there are two types of UK fund within the scope of the AIFMD that may be marketed to retail investors: (1) collective investment schemes (CIS) that are authorised by the FSA as non-UCITS retail schemes (NURS); and (2) companies that are exempted from the CIS regime but are subject to the general rules of company law (in practice this includes investment companies). CIS that are “recognised schemes” under sections 270 and 272 FSMA, namely schemes from outside the UK which have been recognised as providing comparable protection to NURS, may also be marketed to retail investors in the UK. The transposition of the AIFMD provides an opportunity for the Government to extend or restrict the range of schemes that are permitted to be marketed to retail investors in the UK.
  • Private placement regime. The AIFMD permits Member States to continue national private placement for at least the first five years of the application of the Directive. It requires that non-EU managers of non-EU AIFs that wish to market their funds in a Member State must comply with the AIFMD’s provisions on transparency and (if applicable) the rules on private equity. The Government may opt to apply additional requirements for national private placement in the UK. However, at present the Government is minded not to impose additional requirements for non-EU managers of non-EU funds above the Directive minimum.

The deadline for comments on the Discussion Paper is 4 May 2012.

View Policy options for implementing the Alternative Investment Fund Managers Directive, 14 March 2012

Implementation of the AIFMD: The definition of collective investment scheme

On 11 April 2011, the Financial Markets Law Committee (FMLC) published a letter that it sent to the Investment Funds Team at the FSA, regarding the implementation of the Alternative Investment Fund Managers Directive (AIFMD). The letter related specifically to the regulation of collective investment schemes (CIS) and the FMLC will provide the FSA with a broader paper on the implementation of the AIFMD in due course.

In the letter, the FMLC acknowledged that the AIFMD will regulate CIS operators and that implementation of the AIFMD is likely to result in amendments to the Financial Services and Markets Act 2000 (FSMA). Therefore, the FMLC states that this presents an opportunity to clarify the definition of CIS under section 235 of FSMA.

View Implementation of the AIFMD: The definition of collective investment scheme, 11 April 2012

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FSA Handbook

Finalised guidance - Thematic overview: Regulated covered bond regime

On 6 March 2012, the FSA published finalised guidance concerning its minimum expectations regarding the regulated covered bond regime. The guidance covers the scope and depth of engagement with the programme by the person who signs the annual confirmation of compliance, the content of management information and the appropriateness of systems and controls.

View Finalised guidance - Thematic overview: Regulated covered bond regime, 6 March 2012

Finalised guidance - Financial Promotions, Fund Performance and Image Advertising / Advertising ISAs & Adverts for Investment Professionals

On 30 March 2012, the FSA published finalised guidance concerning financial promotions, fund performance and image advertising. The guidance consolidates previous messages to fund managers and others about what is fair, clear and not misleading in advertising, and how past performance can be dealt with.

The FSA also published finalised guidance which reminds firms of its expectations in relation to financial promotions rules and advertising of ISAs. The guidance also covers adverts targeted at investment professionals and discusses compliance with the fair, clear and not misleading rule and issues of balance (potential benefits and relevant risks).

View Finalised guidance - Financial Promotions, Fund Performance and Image Advertising / Advertising ISAs & Adverts for Investment Professionals, 30 March 2012

Finalised guidance - Transaction Reporting User Pack

The Transaction Reporting User Pack (TRUP) provides firms with guidance on the transaction reporting obligations that come from the Markets in Financial Instruments Directive (MiFID) which were implemented through chapter 17 of the Supervision manual.

On 11 November 2011, the FSA conducted a consultation concerning possible amendments to the second version of TRUP (published in September 2009). The consultation closed on 24 November 2011.

Following the consultation the FSA has now published a new version of the TRUP (version 3). The new version is effective immediately. The purpose of the new version of the TRUP is to:

  • Update the document to remove historical information that is no longer relevant.
  • Update references and incorporate guidelines published by the Committee of European Securities Regulators.
  • Incorporate guidance published elsewhere and guidance issued since version 2 of the TRUP.
  • Provide clarification on areas raised by firms and trade bodies and where it is helpful in assisting the FSA to conduct its market abuse monitoring.

View Finalised guidance - Transaction Reporting User Pack, 1 March 2012

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Market abuse

MAD revision - timing

The European Parliament has updated its legislative observatory procedure files concerning the legislative proposals revising the Market Abuse Directive (MAD).

Both procedure files indicate that the European Parliament will consider the legislative proposals in plenary session from 22 to 23 October 2012.

View Legislative observatory - Financial supervision: Insider dealing and market manipulation, 27 March 2012

View Legislative observatory - Financial supervision: Criminal sanctions for insider dealing and market manipulation, 27 March 2012

Three arrested in FSA insider dealing investigation

On 1 March 2012, the FSA issued a press release stating that, with the assistance of Cheshire and Lancashire Constabularies, it had executed three search warrants at premises in Northwich and Rossendale. Three individuals, two men and a woman were arrested and questioned in connection with an investigation into insider dealing.

View Three arrested in FSA insider dealing investigation, 1 March 2012

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Money laundering

Common understanding between Member States on third country equivalence under the TMLD

On 5 March 2012, the European Commission published a revised version of a list which sets out those third countries that are considered to have equivalent anti-money laundering/counter terrorist financing (AML/CFT) systems to those in the EU under the Third Money Laundering Directive (TMLD).

The third countries listed are: Australia, Brazil, Canada, Hong Kong, India, Japan, Korea, Mexico, Singapore, Switzerland, South Africa and the United States.

However, the list does not override the need to continue to operate the risk-based approach. The fact that a financial institution is based in a third country appearing on the list only constitutes a refutable presumption of the application of simplified client due diligence. In addition, the list does not override the obligation under Article 13 of the TMLD to apply enhanced customer due diligence measures in all situations which by their nature can present a higher risk of money laundering or terrorist financing, when dealing with credit and financial institutions, as customers, based in an equivalent jurisdiction.

View Common understanding between Member States on third country equivalence under the Anti-Money Laundering Directive, 5 March 2012

Statement on money laundering controls in overseas jurisdictions

On 5 March 2012, HM Treasury issued a Financial Sector Advisory Notice regarding the risks posed by unsatisfactory money laundering controls in a number of jurisdictions.

The Notice was split into two parts:

  • Part A covered jurisdictions with ongoing and substantial money laundering and terrorist financing risks. The jurisdictions mentioned were: Iran, The Democratic People’s Republic of Korea, Bolivia, Cuba, Ethiopia, Ghana, Indonesia, Kenya, Nigeria, Myanmar, Pakistan, Sao Tome and Principe, Sri Lanka, Syria, Tanzania, Thailand and Turkey.
  • Part B covered jurisdictions with strategic deficiencies in their anti-money laundering/counter terrorist financing regime, which have developed an action plan with the Financial Action Task Force. The jurisdictions mentioned were: Algeria, Angola, Antigua and Barbuda, Argentina, Brunei Darussalam, Cambodia, Kyrgyzstan, Mongolia, Morocco, Namibia, Nepal, Nicaragua, Sudan, Tajikistan, Turkmenistan, Trinidad & Tobago, Venezuela, Zimbabwe, Bangladesh, Equador, Philippines, Vietnam and Yemen.

View Statement on money laundering controls in overseas jurisdictions, 5 March 2012

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Regulation and compliance

Green Paper - Shadow Banking

On 19 March 2012, the European Commission published a Green Paper which discussed how existing and proposed EU measures already address shadow banking activities. At this stage the Commission is focusing its analysis on the following possible shadow banking entities and activities:

  • Special purpose entities which perform liquidity and/or maturity transformation. For example, securitization vehicles such as Special Investment Vehicles (SIV) and other Special Purpose Vehicles (SPV).
  • Money Market Funds (MMFs) and other types of investment funds or products with deposit-like characteristics, which make them vulnerable to massive redemptions.
  • Investment funds, including Exchange Traded Funds (ETFs) that provide credit or are leveraged.
  • Finance companies and securities entities providing credit or credit guarantees, or performing liquidity and/or maturity transformation without being regulated like a bank.
  • Insurance and reinsurance undertakings which issue or guarantee credit products.
  • Securitisation.
  • Securities lending and repo.

The deadline for comments on the Green Paper is 1 June 2012. Following the consultation on the Green Paper the Commission will decide on the appropriate follow-up including legislative measures where appropriate. The Commission will also continue to engage in ongoing international work, including work to ensure any level playing field concerns are addressed.

A conference on shadow banking is also taking place in Brussels on 27 April 2012.

View Green Paper - Shadow Banking, 19 March 2012

View Taking action on shadow banking: Avoiding new sources of risk in the financial sector,19 March 2012

View Conference - Towards better regulation of the shadow banking system, 19 March 2012

MiFID review - timing

The European Parliament has updated its legislative observatory procedure files concerning the legislative proposals revising the Markets in Financial Instruments Directive (MiFID).

Both procedure files indicate that the European Parliament will consider the legislative proposals in plenary session from 22 to 23 October 2012.

View Legislative observatory - Financial supervision: Markets in financial instruments (recast), 27 March 2012

View Legislative observatory - Financial supervision: Markets in financial instruments; OTC derivatives, central counterparties and trade repositories, 27 March 2012

Draft ECON report - recast MiFID

On 26 March 2012, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report on the proposed recast Markets in Financial Instruments Directive (MiFID).

The draft report contained a draft European Parliament legislative resolution setting out amendments to the proposed recast Directive. The report also contained an explanatory statement by ECON rapporteur, Markus Ferber, which set out his position on the proposal. In the explanatory statement Ferber:

  • Supported the European Commission’s proposal to extend the scope of MiFID and limit the exemptions. In addition he proposed a reporting obligation for persons to explain why their activity is ancillary to their main business.
  • Supported the aim of strengthening the regulatory framework for investor protection. However, he disagreed with the proposed new obligation to specify whether investment advice is independent and if it is based on a broad or a more restricted analysis of the market on the basis that restricting the use of the word “independent” may mean that other forms of advice have a negative connotation.
  • Introduced a new obligation that investment firms shall, when designing a new product, specify a target group within the retail or professional client category and ensure that the product is designed to meet those customers’ needs and marketed to clients within the target group.
  • Questioned whether the creation of a new category of organised execution venue, the Organised Trading Facility (OTF), is the right way to capture organised venues which are not caught by the existing categories (Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) and Systematic Internalisers).
  • Noted that the proposals contain specific obligations imposed on anyone who is carrying out algorithmic trading whilst defining algorithmic trading broadly. Ferber suggested a more differentiated approach and proposed definitions for high frequency trading and a high frequency trading strategy to identify a particular subset of algorithmic trading, and in addition a ban of direct electronic access.
  • Acknowledged the Commission’s proposals for RMs, MTFs and OTFs to ensure that they are resilient in extreme market conditions and that they have in place proper circuit breakers and business continuity arrangements. Ferber welcomed this approach but made three proposals to strengthen it. First, to slow down trading and order flows he proposed that all orders should be valid for at least 500 milliseconds. Second, for all trading venues there should be parameters for halting trading which should be reported to competent authorities and the European Securities and Markets Authority should publish these on its website. Third, to require trading venues to ensure their fee structures contain higher fees for placing an order which is cancelled than for an order which is executed and higher fees for market participants who place a high ratio of cancelled orders.
  • Generally welcomed the Commission’s approach that all trading venues on which commodity derivative contracts are traded should adopt position limits or alternative arrangements in order to ensure the proper functioning of the market. However, Ferber argued that certain adjustments are necessary in that the use of controls on positions should be an addition, not an alternative, to the use of position limits. However, in setting such limits there should be differentiation between positions related to commercial activity as regards to commodity and other positions.

View Draft ECON report - recast MiFID, 26 March 2012

Draft ECON report - MiFIR

On 27 March 2012, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report on the proposed Markets in Financial Instruments Regulation (MiFIR).

The draft report contained a draft European Parliament legislative resolution setting out amendments to the proposed Regulation. The report also contained an explanatory statement by ECON rapporteur, Markus Ferber, which set out his position on the proposal. In the explanatory statement Ferber:

  • Questioned whether the creation of a new category of organised execution venue, the Organised Trading Facility (OTF), was the right way to capture organised venues which are not caught by the existing categories.
  • Proposed to define “bilateral” and “multilateral” system more clearly in order to achieve a precise distinction between bilateral and multilateral trading.
  • Believed that the provisions concerning access to market infrastructure could give rise to problems through liquidity fragmentation or if interoperability were involved. He argued that supervisors needed to be able to intervene to prevent these problems materialising, as was recognised in the European Market Infrastructure Regulation.
  • Supported the measures which increase transparency and supported the MiFIR requirements extending pre- and post-trade transparency to equity like products and non-equities.
  • Welcomed the proposed obligations in relation to transaction reporting which included a new requirement for Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) and OTFs to keep data on orders so that it is accessible to supervisors for at least 5 years.
  • Noted that competent authorities could set permanent bans or restrictions on financial products or activities or practices coordinated by the European Securities and Markets Authority (ESMA). In addition ESMA can temporarily ban or restrict products, practices and services. However, Ferber questioned whether the possibility to ban products or services only ex-post is enough to ensure financial market stability or investor protection and therefore proposed two additions. First, that ESMA or competent authorities should not only monitor financial instruments but additionally investment products which also include structured deposits. Second, in addition to the possibility to impose bans or restrictions on products which have already been marketed, ESMA or competent authorities should also be able to impose restrictions or prohibitions on a precautionary basis before an investment product or financial instrument is placed on the market.

View Draft ECON report - MiFIR, 27 March 2012

ESMA final report on draft RTS and ITS for Regulation on short selling and certain aspects of CDS

On 31 March 2012, the European Securities and Markets Authority (ESMA) published its Final Report concerning draft technical standards on the Regulation on short selling and certain aspects of credit default swaps (the Regulation).

ESMA has considered the feedback it received to its consultation in drafting regulatory technical standards (RTS) and implementing technical standards (ITS) to the Regulation. The Final Report sets out a summary of the responses to the consultation and describes any material changes to the proposed technical standards. It also includes in Annex II a cost benefit analysis on which ESMA was not able to consult on. The Final Report also contains the final draft RTS and ITS which will be submitted to the European Commission.

The Commission has three months to decide whether to endorse the draft technical standards. A further regulatory technical standard, on the method of calculation of the fall in value of a financial instrument, which is required under Article 24(8) of the Regulation, will be submitted in the course of April 2012.

View ESMA Final Report - Draft technical standards on the Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps, 30 March 2012

Securitisation, shadow banking and the value of financial innovation

On 19 April 2012, the FSA published a speech given by Adair Turner (Chairman, FSA) entitled Securitisation, shadow banking and the value of financial innovation.

In his speech Turner first considered how and why the wave of financial innovation in the area of securitised credit ended in the financial crash of 2008. And second, he considered the value of financial innovation and whether it has a systematic tendency to be less valuable than innovation in other sectors of the economy.

At the end of his speech Turner discussed the policy implications of shadow bank financial innovation which are that regulators should seek to constrain the instability created by credit and money creation processes, by credit and asset price cycles. This implies:

  • Much higher bank capital and liquidity requirements than were in place before the financial crisis - the Basel III reforms. These constrain banks’ asset-equity ratios at an institutional level.
  • Appropriate constraints on shadow bank credit and money equivalent creation - for instance through asset-equity controls at the contract level - minimum initial haircuts. These will be considered by the Financial Stability Board this year.
  • The development of macro-prudential countercyclical levers which can lean against the strength of the credit and asset price cycle. The UK’s interim Financial Policy Committee has recently recommended to Parliament that it should have the power to vary across the cycle both total bank capital requirements and the risk weights applied to specific types of asset (such as real estate). It has also flagged that regulating margins on secured financing contracts might be desirable in the future, within the context of internationally agreed approaches.

View Securitisation, shadow banking and the value of financial innovation, 19 April 2012

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Securities

Questions and answers - Transparency Directive

On 2 April 2012, the European Securities and Markets Authority (ESMA) published an updated Q&A on the Transparency Directive (TD). The purpose of the document is to promote common supervisory approaches and practices in the application of the TD and its implementing measures. It does this by providing responses to questions posed by the general public and competent authorities in relation to the practical application of the TD.

The updated Q&A included two new answers covering:

  • Determination of the home Member State for 3rd country issuers in case of delisting and admission to trading in another Member State (Articles 2(1)(i) and 21(3) TD).
  • Designation of an agent for the exercise of financial rights (Articles 17 and 18 TD).

View Questions and answers - Transparency Directive, 2 April 2012

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Seminars

40 minute briefing series - May to September 2012

We are pleased to announce that the invitation for the next series of 40 minute briefings is now available.

If you can not access this link, please copy and paste the address below into your web browser.

www.nortonrose.com/invitations/2012/your-guide-to-the-key-regulatory-challenges-in-2012-65614.aspx

The invite for the next series of 40 minute briefings will be available shortly.

Financial services regulatory products: Phoenix, Pegasus and OTC Oracle

Having difficulty keeping up with the pace of the Government's regulatory reform proposals?

Phoenix is our new financial services product that is an online resource designed to help those who are starting their UK regulatory reform projects. It sets out the latest developments and timing of the Government's reform programme plus the key resource papers from the Treasury, Bank of England, FSA and the ICB. The latest Norton Rose LLP briefing notes, videos and webcasts are also available.

The Phoenix main page can be found here.

Behind the curve on the MiFID review?

We have launched a second online resource product called "Pegasus". Pegasus is a new financial services product that is an online resource designed to assist those starting work on MiFID review projects. 

The Pegasus main page can be found here.

G20 commitment on clearing

Oour third online resource product is OTC Oracle. OTC Oracle is designed to assist clients track the implementation of the G20 commitment to have all standardised OTC derivatives traded on exchanges or electronic trading platforms, where appropriate, and cleared through CCPs by the end of 2012. OTC Oracle sets out the latest developments and timings plus the key resource papers from each of the EU, Canada, Hong Kong and Singapore.

The OTC Oracle main page can be found here.

Financial services Fireside Fridays

Please click on the links below:

  • EMIR Part II (5 April 2012)
  • Twin Peaks - The FSA operational changes (16 March 2012)
  • AIFMD Update (2 March 2012)
  • EMIR (17 February 2012)
  • AIFMD Update (3 February 2012)
  • The regulatory year ahead (20 January 2012)
  • The regulatory year in review (16 December 2011)
  • MiFID review and third country issues (25 November 2011)
  • The MiFID Review (21 October 2011)
  • The regulatory regime for energy and commodity companies (7 October 2011)
  • The final report of the Independent Commission on Banking (23 September 2011)

Financial services & markets webinars

We are currently experiencing significant changes in the European financial services regime that could have a particular impact on both financial firms and non-financial firms that trade energy, commodities and emissions. To assist our clients we have produced a series of short webinars which will look at the forthcoming regulatory changes and their impact on the financial regulation of trading.

Financial services webcasts

Please click on the links below:

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