Regulatory Update - 2Q 2013
Regulatory review and change has continued, with recent focus being placed on preparation for the final stages of implementation of the Alternative Investment Fund Management Directive and continued discussions regarding the EU Financial Transaction Tax.
Alternative Investment Fund Management Directive
The Alternative Investment Fund Management Directive (“AIFMD”) took effect in July 2011, with EU member states having until July 22, 2012 to transpose the directive into their own legislation. Detailed Level 2 Regulations were published by the European Commission in December 2012, which are also now in effect, with direct application in the EU.
The AIFMD aims to create a comprehensive and effective regulatory and supervisory framework for alternative investment funds and their managers within the EU. Within the AIFMD, the role of the depositary in relation to alternative investment funds is set out, including custodial responsibilities. This latter point is of interest to participants in securities lending, as depositaries are now responsible for certain collateral holdings, in which a relevant fund retains an interest, as part of its custodial functions. The new rules provide that certain financial instruments which are taken as collateral by a fund, or are delivered by methods other than by title transfer, will be the legal responsibility of the depositary. The consequence is that collateral managers or custodians holding such assets may need to be treated as sub-custodians of the depositary. This is expected to have operational and practical implications, as depositaries introduce new requirements for account structures, reporting and control over assets on agents holding collateral that is subject to these rules.
Although the main EU markets for alternative investment funds have met the deadline for transposing the Directive – including the U.K., Luxembourg and Ireland – many countries are still in the process of completing the required legislative and regulatory changes.
EU Financial Transaction Tax Proposal
As reported previously, the European Commission (“EC”) published proposals earlier in 2013 for an EU-wide Financial Transaction Tax (“FTT”). The proposal covered 11 member states that had opted for ‘enhanced cooperation’ in order to move the matter forward, as the FTT was set at a minimum 0.1% on all share/bond transactions and 0.01% on all derivative transactions. Securities lending transactions are not exempt from the proposals, as they currently stand.
The EC originally hoped that the FTT would take effect in January 2014, however, it recently stated on its website that it would more likely take effect in “mid 2014” – most likely a reflection of the ongoing discussions that are taking place between member states regarding the scope and application of the FTT.
The securities lending industry is also actively seeking to discuss the proposals with individual member states and the EC, with the goal of obtaining an exemption for these transactions.
The International Securities Lending Association recently published a position paper on the EU FTT. You can access a copy of this at http://www.isla.co.uk/index.php/latest-news/214-islas-analysis-on-the-proposed-european-ftt.
Other Regulatory Headlines
EC Review of the Capital Requirements Package (“CRD4”) – This package is the EU’s implementation of Basel III and comprises a Capital Requirements Regulation (“CRR”) and a revision of the Capital Requirements Directive (“CRD”). Within this review there are provisions covering disclosure requirements to competent authorities for securities lending, repos and all forms of asset encumbrances.
A political agreement was recently reached on CRD4 and the date of entry is planned for January 1, 2014.