International and European Union Directives, Regulation and Guidance Flashcards
Harmonising EU financial services - 3 Objectives of Financial Services Action Plan (FSAP)
- Create ‘single EU wholesale market’
- Achieve ‘open and secure retail markets’
- Create state of art ‘prudential rules’ and ‘structures of supervision’
Ultimately to increase competition amongst financial firms
Harmonising EU financial services - Direct Effect Directives
Vertical
- Between an EU Member State and an individual/company
- provision of EU directive must be given precedence over national law
Horizontal
- however does not apply between two individuals/companies
- Court should interpret national law to achieve EU directive
Harmonising EU financial services - Directives vs Regulations
Directives - require EUMS to amend their national law to comply with directives
Regulations - have binding legal force in EUMS as soon as they are passed, on par with national laws. Passed jointly by EU Council and European Parliament or Commission alone
European Securities and Markets Authority (ESMA) - Objective
Ensure integrity, transparency and orderly functions of securities markets in Europe.
Enhance investor protection
ESMA - Levels and Powers
Level 1 - May be asked for technical advice as EU develops directives / regulation
Level 2 - Draft ‘subordinated acts’ which are legally binding in EUMS (content and measures)
Level 3 - Establish ‘consistent and efficient supervisory practices’.
Level 4 - Launch ‘fast track procedure’ (enquiry and recommendation within 2 months)
MiFID I - Developing from ISD Single Passport and Branch Rules
UK development of ISD’s single passport, where an authorised firm in EUMS can engage in investment services throughout EEA without separate authorisations.
- advice including a personal recommendation a core service for passporting
- operating MTF covered by passport
- commodity and credit derivatives and contracts for differences covered by passport
Company offering services through a branch, follows rules of home state. From a branch, follow rules of host state
MiFID II - Key Changes
Introduced OTFs
Rules for very high speed tech (HFT and Algo)
Limited size of positions held in commodity derivatives to reduce speculation (e.g. agriculture)
Investor/Client protection - increased information to client and firms and transparency before and after trade
Distinguishes between ‘investment services / activities’ and ‘ancillary services’. Ancillary alone firms do not benefit from MiFID passport, whilst firms performing both are subject to MiFID in both regards
MiFIR - reporting regulations
Unlike MiFID II, does not need to be implemented into national law.
Sets out reporting requirements for disclosure of trade data to public and competent authorities
Extend MiFID scope to cover more asset classes which no have reporting obligations
Undertakings for Collective Investment in Transferable Securities (UCITS) - Objectives
A CIS can be marketed without further authorisation in any other EUMS, subject only to local marketing laws
(E.g. The FCA gives automatic recognition to certain CIS constituted in a EUMS other than UK)
UCITS III - Two Parts
- Management Directive
Increases scope of management companies’ activities that can be passported (e.g. safekeepimg and fund administration)
Protects investors by suitability capitalising management companies
- Product Directive
Expands range of financial instruments permitted within UCITS funds, particularly derivatives for investment and risk reduction
Increases investment limits for particular instruments, whilst introducing a combined limit on the fund’s exposure to any one group of companies
UCITS IV - Key Changes
Introduces a passport for management companies
Procedure for cross-border fund mergers and marketing
Replacement of UCITS III ‘simplified prospective’ with KIID
Introduced master feeder structures to permit asset pooling
UCITS V - Key Changes
Enhanced rules on responsibilities of depositaries
Remuneration requirements for UCITS fund managers
Alternative Investment Fund Managers Directive (AIFMD) - AIF definition, Objectives
AIFs are collective investment undertakings, which are not subject to UCITS (hedge, PE, real estate etc)
Covers management, admin and marketing of AIFs, and in particularly regulating AIF managers.
AIFMD passport allows authorised fund managers to market their EU funds to investors in any EUMS
AIFMD - Authorisation of AIFMs
AIF manager must be authorised with home regulator if they have AUM above:
€100m - if any of the AIF uses leverage
€500m - if AIFs do not use leverage, and do not give investors right of redemption within 5 years of initial investment
If below these, it is considered ‘sub-threshold’
AIFMD - Sub-threshold AIFMs
- Small ‘Authorised’ AIFM - FCA authorised and has not opted into AIFMD. (most small private fund managers)
- Small ‘Registered’ AIFM
ST AIFMs cannot benefit from UK marketing passport under AIFMD, therefore must comply with local regimes
AIFMD - Reporting Requirements
Reporting
- AIF should be named using series of codes
- Amount of leverage within fund is disclosed
- Annual reports to EUMS regulator with financial statements , activities and remuneration to employees
European Market Infrastructure Regulation (EMIR) - Objectives
Covers OTC derivatives, central counterparties and trade repositories
Requires anyone entered into derivative contract to report to trade repository and manage risk on their positions
Foreign Account Tax Compliance Act (FATCA) - Objectives
US law to prevent tax evasion by US citizens using offshore banking
FATCA applies to non-US / foreign financial institutions (FFIs) and imposes 30% withholding tax on US source income
Non-US institutions / FFIs can however disclose information about their US account holders to the IRS (UK institutions disclose to HMRC to pass on)
FATCA - FFIs Definition and Obligation
FFIs accept deposits / hold assets / trade / insure
Must disclose details of accounts maintained by FFI, where account holder is:
- Specified US person
- non-US entity, but controlling persons include US persons (e.g. in a trust - settlor, trustees, beneficiaries)
Reporting to IRS takes place in annual report on each US account
Common Reporting Standard (CRS) - Objectives and Obligations
Automatic exchange of tax and financial information on a global level (like FATCA but hundreds of countries)
Overseas financial institutions will be obliged to provide details to HMRC about anyone who owns foreign investments as a UK resident
Tax advisers are required to inform clients that HMRC will soon be getting data about there foreign investments
EU Benchmarks Regulation (BMR) - Objectives and Benchmark Definition
Created to address risk that benchmarks are susceptible to manipulation and is largely aimed at ‘benchmark administrators’
Benchmark is defined as a ’publicly available and regularly determined’:
- index which the amount payable / value of financial instrument is determined
- index measures performance of a fund
(Benchmarks provided by central banks or public authority for policy are exempt (e.g. CPI))
BMR - 3 Defined Entities
- Benchmark Administrator
- has control over provision of a benchmark - Supervised Contributor
- authorised person that contributes input data for the purpose of benchmark determination - Benchmark User
BMR - 6 Types of Benchmarks
- Critical - value of underlying contracts is €500bn or deemed critical in EUMS
- Significant - value of €50bn, few market-led substitutes and has impact on financial stability if removed
- Commodity - underlying asset is defined as a commodity in MiFID II. Cannot be classified as signif or non signif
- Regulated Data - input data is provided directly from regulated venues. Cannot be classified as critical
- Interest rate - determined on rate which banks lend to and from other banks. Cannot be classified as signif or non signif
- Non-Significant - value of less than €50bn, not a commodity or interest rate
