International and European Union Directives, Regulation and Guidance

Question 1

Harmonising EU financial services - 3 Objectives of Financial Services Action Plan (FSAP)

Answer 1

1. Create ‘single EU wholesale market’
2. Achieve ‘open and secure retail markets’
3. Create state of art ‘prudential rules’ and ‘structures of supervision’

Ultimately to increase competition amongst financial firms

Question 2

Harmonising EU financial services - Direct Effect Directives

Answer 2

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

Question 3

Harmonising EU financial services - Directives vs Regulations

Answer 3

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

Question 4

European Securities and Markets Authority (ESMA) - Objective

Answer 4

Ensure integrity, transparency and orderly functions of securities markets in Europe.

Enhance investor protection

Question 5

ESMA - Levels and Powers

Answer 5

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)

Question 6

MiFID I - Developing from ISD Single Passport and Branch Rules

Answer 6

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

Question 7

MiFID II - Key Changes

Answer 7

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

Question 8

MiFIR - reporting regulations

Answer 8

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

Question 9

Undertakings for Collective Investment in Transferable Securities (UCITS) - Objectives

Answer 9

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)

Question 10

UCITS III - Two Parts

Answer 10

1. 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

2. 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

Question 11

UCITS IV - Key Changes

Answer 11

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

Question 12

UCITS V - Key Changes

Answer 12

Enhanced rules on responsibilities of depositaries

Remuneration requirements for UCITS fund managers

Question 13

Alternative Investment Fund Managers Directive (AIFMD) - AIF definition, Objectives

Answer 13

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

Question 14

AIFMD - Authorisation of AIFMs

Answer 14

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’

Question 15

AIFMD - Sub-threshold AIFMs

Answer 15

1. Small ‘Authorised’ AIFM - FCA authorised and has not opted into AIFMD. (most small private fund managers)
2. Small ‘Registered’ AIFM

ST AIFMs cannot benefit from UK marketing passport under AIFMD, therefore must comply with local regimes

Question 16

AIFMD - Reporting Requirements

Answer 16

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

Question 17

European Market Infrastructure Regulation (EMIR) - Objectives

Answer 17

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

Question 18

Foreign Account Tax Compliance Act (FATCA) - Objectives

Answer 18

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)

Question 19

FATCA - FFIs Definition and Obligation

Answer 19

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

Question 20

Common Reporting Standard (CRS) - Objectives and Obligations

Answer 20

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

Question 21

EU Benchmarks Regulation (BMR) - Objectives and Benchmark Definition

Answer 21

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))

Question 22

BMR - 3 Defined Entities

Answer 22

1. Benchmark Administrator
   - has control over provision of a benchmark
2. Supervised Contributor
   - authorised person that contributes input data for the purpose of benchmark determination
3. Benchmark User

Question 23

BMR - 6 Types of Benchmarks

Answer 23

1. Critical - value of underlying contracts is €500bn or deemed critical in EUMS
2. Significant - value of €50bn, few market-led substitutes and has impact on financial stability if removed
3. Commodity - underlying asset is defined as a commodity in MiFID II. Cannot be classified as signif or non signif
4. Regulated Data - input data is provided directly from regulated venues. Cannot be classified as critical
5. Interest rate - determined on rate which banks lend to and from other banks. Cannot be classified as signif or non signif
6. Non-Significant - value of less than €50bn, not a commodity or interest rate