Section 3.1 - International Regulation: EU Directives, Regulation and Guidance Flashcards
What is the main objective of FSAP 1999
- To create prudential rules and supervision in the market.
- To promote EU wider economy by removing barriers of entry and promoting competition.
What are EU Directives
*Directives are introduced under section 58 in the European Treaty to try and harmonise laws.
*They are either implemented by primary legislation (new law) or by delegated legislation (amended law)
*Problems can arise when a directive has not been implemented by its due date – known as ‘vertical-direct effect ‘ (given precedence over national law)
What is the objective of EU regulation
Most direct form of EU law
Immediately binding in all EU states
In what way does UK sought to mitigate regulatory uncertainty
Through the introduction of TPR - helps EEA financial firms
EEA - Economic European Area
What is the objective of the ESMA
ESMA aims to:
*Ensure orderly function of secruties market
*Enhance investor protection
Supervisory Authority, created in 2011
What are the four levels of ESMA regarding the legislation procedure in the harmonisation process?
- Level 1- ESMA may be asked techincal advice by EU commission
- Level 2 - ESMA plays a primary role in drafting ‘subordinates act’
- Level 3 - ESMA develops guidelines and recommendations of establishing consistent supervision within the ESFS.
- Level 4 - ESMA can launch enquires addressed to the national authority within 2 months of launching its investigations
ESFS- European System of Financial Supervision
MiFID and harmonisation
Single passport
- MiFID allows firms to trade financial services across EEA with the use of a ‘single passport’ and without separate authorisation from host countries
- Can take up to 6 months for a firm to obtain a ‘single passport’
* Investment Services Directive (ISD) created ‘single passport’
When was MiFID II and MiFIR introduced
January 2018
Key changes to MiFID II
TOILEt:
- More transparency requirements
- New OTF facility to capture unregulated trades
- Increased infomation on products and services to clients
- Rules to avoid potential risk in disorderly markets through increased technology
- Limiting size of posotions held in commodity derivatives
What does MiFID distinguihs between as
Distinguishes between investment services and ancillary services
Ancillary Services - Non core (add on) services that compliments the core services.
Companies which perform both services are subject to MiFID, but companies that perform just ancillary services are not subject to MiFID.
What are examples of investment services
- Transmission of orders
- Execution of orders on behalf of clients
- Dealing on own account
- Portfolio Management
- Investment Advice
- Operation of OTF/MTF
What are examples of Ancillary Services
- Safekeeping Investments
- Granting loans to investors
- Advice on capital structure, mergers and purchase of undertakings
- FX services
- Providing investment services related to underlying derivatives
What is the purpose of an OTF being subjected to MiFID
A regulated OTF means it is more transaprent and can be seen by all - helps to capture unregulated trades
How has transparency requirements increased under MiFID II
Trade reporting and transaction reporting has strengthened
What financial instruments fall under MiFID II
- Transferable secruties
- Money-market instruments
- Units in collective investment undertaking
- Derivative contarcts for the transfer of credit risk (E.G. Credit default swaps)
- Financial contarcts for differences
- An investment firm looking to extend its activties, but not granted intial authorization, must submit a request for extension
- Example of money -makret instrument - Product with a life span less than 12 months.
- Example of a financial contract for differences - Cash settled products and non-cash settled prodcuts
What is MiFIR main objective
- Regulated authority for MiFID II
- Sets out reporting requirements to the disclosure of trade data to the public
Difference between MiFID II and MiFIR
- MiFIR is not implemented into national law - third contry firms must establish a branch in a state before providing any service to retail clients
- Under the scope of MiFIR, MiFID II is looking to cover more asset classes so more firms will be caught up by the reporting obligation.
What is UCITS responsible for
Creating a ‘single market’ for collective investment schemes in the EU
What are two types of Collective Investment Schemes (CIS) are there in the UK
Unit trusts and Open-Ended Investment Companies (OEIC)
OEIC issues shares, wheres unit trusts issue units
What does legislation does a unit trust and OEIC operate under
- Unit trust - Common law
- OEIC - Company law
What is Undertakings for Collective Invetsment in Transferable Secruties (UCITS)
- FCA are responsible for recognising UK schemes under UCITS
- Creates cross-boarder invetsment opportunties across the EU
What developments are under UCITS III
UCITS is split into two parts:
* Management Directive - Aim to protect investors by ensuring companies have appropriate risk management measures and are suitably capitalised
- Product Directives - Expands the range of financial instruments
What developments are under UCITS IV
- Implemented 2011, main changes include:
- Passport for management companies
- Strengthneing supervisory corporation
What developments are under UCITS V
- Introduced remuneration policy for fund managers
- Enhances rules on responsbility of depositaries
What is AFMID
- AFMID was implemented in 2013 and covers AIF’s such as Hedge funds and private equity funds
- Focus of AFMID is on AIF managers
The Alternative Investmend Fund Managers Directive (AFMID)
Alternative Investment Funds (AIF’s)
What is the objective of EMIR
- Requires OTC derivative trades to be reported and appropriatley risk managed
- Must report derivative transactions to a trade repositary
European Markets Infrastructure Regulation(EMIR) came into force in 2012
What is the objective of EU Benchmark Regulation
- Came into force in 2018
- BMR groups benchmarks into 6 different catogeries:
Critical benchmarks - Value of coontracts is at least £500bn
*Significant benchmarks - Value of contarcts is at least £50bn
Non significant benchmarks - Value of contracts is less than £50bn.
What is Forgien Account Tax Compliance Act (FACTA)
- Is a US law to prevent tax evasion by US citizens using offshore banking facilties
- 30% witholding tax of US source income must be paid to Non US financial institutions.
What does FACTA require
- Requires all FFI’s to provide infomation about their US customers to the IRS
- The reporting to the IRS takes form of an annual report and must include total gross amount of interest credited to the account.
Forgien Financial Institutions (FFI)
What is the Common Reporting Stanadard
- Developed in 2014 by the OECD
- Main purpose is to combat tax evasion. Any UK resident who has forgien investments must disclose this infomation to HMRC.
