Fund Regulation – Key Updates for 2015

Strictly Confidential – the content poof this document may not be disclosed to third parties without

prior consent from Global Perspectives

January 22nd 2014

Shane Brett

Founder, GLOBAL PERSPECTIVES

Fund Regulation – Key Updates 2015

• Shane Brett – Introduction

• Topics:-

AIFMD – general update on authorisation, reporting, dates for decisions (July 2015)

FATCA & CRS – latest updates and key dates ahead…

UCITS V – update with implementation & UCITS VI

EMIR – latest requirements

Solvency 2 – impact

MiFID 2 – Update, Research impact, fee impact & MiFID Reporting

Regulation impact on the Funds Industry

• Global Perspectives – how can we help?

Shane Brett

Author

“The Future of Hedge Funds”“The AIFMD Cheat Sheet”

19 years in Investment Funds

London, Dublin, Edinburgh, Sydney & Wellington

BNP Paribas, Daiwa, State Street, RBS, UBS Operations (FA/TA etc.), Middle Office,

Operational Due Diligence

Founded Global Perspectives (2011)• Clients – Fund Managers, Administrators,

Software Vendors• Operational consulting, Bespoke Research, IT

development & regulatory implementation

Contact• shane@globalperspective.co.uk• +353 87 115 2173

Currently…..

Updating & assisting clients with regulatory updates and implementation

CBI – Annex IV AIFMD Reporting industry Taskforce

- Living and breathing multiple regulations 24/7 Recent book about AIFMD

Global Perspectives

AIFMD - Updates for 2015

Global Perspectives

Reporting – As At Dec 31st 2014 is first major pan-European submission to ESMA.

• 1 October 2014 - FCA published a Q&A document on reporting transparency information to provide information to Alternative Investment Fund Managers (AIFM) about:

Who is required to report transparency information, What transparency information must be reported, How the FCA will collect transparency information, Registering and using GABRIEL to report transparency information, and Key dates on which FCA systems will support reporting of transparency information.

The FCA has outlined an initial schedule of reporting obligations but stresses it should not be relied upon as being correct.

- Full-scope UK AIFMs Half-yearly- Small authorised UK AIFMs Annual- Small registered UK AIFMs Annual- Above-threshold non-EEA AIFM Half-yearly- Small non-EEA AIFM Annual

• 9 January 2015 - ESMA published an update to its Q&A on the AIFMD. Questions 50-53 relate to how AIFMs should report information on:

• Subscriptions and redemptions over the reporting period;

• The change in NAV per month;

• The percentage of gross and net investment returns per month;

• when the AIFM (managing both funds and funds of funds) should report aggregated information at the level of the AIFM.

AIFMD - Updates

• Authorisation – Largely complete.

• 23 July 2014 the FCA updated website stating FCA had received 1,130 applications - 644 have been approved and a further 129 were ready for imminent approval.

• Remuneration – “Proportionality” - The FCA expects firms to implement the AIFMD remuneration regime for new awards of variable remuneration to relevant staff for performance periods following that in which the firm becomes authorised.

• FCA - General guidance on the AIFM Remuneration Code (SYSC 19B)

• Risk Policy - “Proportionality”

Global Perspectives

AIFMD – Key Dates for 2015

FATCA - What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) is a new US law aimed at Foreign Financial Institutions (FFIs) and other financial intermediaries to prevent tax evasion by US citizens and residents through use of offshore accounts.

•Under the new provisions, a FFI may enter into an agreement with US tax authorities (a.k.a. the Internal Revenue Service, or IRS) requiring it, among other things, to report information on the FFI's US accounts.

What is the “cost” of non-compliance?

• If a FFI does not enter into an agreement with the IRS, all relevant US-sourced payments, such as dividends and interest paid by US corporations, will be subject to a 30% withholding tax.

• In addition, USFIs and FFIs will also be liable for any tax that they failed to withhold, plus interest and potential penalties.

• FATCA GIIN number becomes standard part of onboarding new clients or opening accounts

Intergovernmental Agreement Models

• Under Model I, the Reporting FI will report the requested information to its Local Tax Authorities;

• Under Model II, the Reporting FI will have to report directly to the IRS.

• If the FFI is incorporated in a country that did not enter into an IGA, the FFI will have to enter into an FFI Agreement with the IRS directly.

FATCA– What PFFI’s will need to do internally

•Reporting

– Annual report and filing for US investors and recalcitrant investors

– Building and sustaining an annual reporting model for all US individuals to cover account balances and gross payments

– Consider local country disclosure requirements or data protection laws that impact ability to make disclosures to IRS

•Tax Withholding

– PFFI required to withhold tax on withholding payments and other types of payments

– Assess whether current systems have capability to perform withholding functions

– Assess types and frequency of payments to determine where withholdable payments are made

– Building functionality for withholding on recalcitrant account holders.

•Governance

– Certification to IRS and ongoing review of compliance.

– Identify who will perform certification function and the back-up documentation they need – i.e. the FATCA “Responsible Officer”

FATCA Updates

Implementation very far advanced at most fund managers.

Initial Registration Period on the IRS website finished in 2014.

Foreign Financial Institutions (FFI’s) need to be registered to :-

get their GIIN number and

be on the first global list of compliant entities (published 2014)

July 1st Deadline – FATCA Withholding Begins - the hard and fast deadline for implementation of the Foreign Account Tax Compliance Act.

Start date for FACTA compliance has been pushed back many times. Currently the start date for withholding on new customers was July 1, 2014.

May 15th IRS Important News Release - the Internal Revenue Service (IRS) announced that calendar years 2014 and 2015 will be regarded as a "transition period" for purposes of IRS enforcement and administration of the due diligence, reporting, and withholding provisions under the Foreign Account Tax Compliance Act (FATCA).

During 2014-2015, IRS enforcement will take into account the extent to which a deemed-compliant FFI or other affected party has made “good faith” efforts to comply with FATCA regulations.

If an entity has not made a good faith effort to comply, however, it will not be given any relief from IRS enforcement.

18 month “Transitional Period of Good Faith” is good news - it should not be considered a free pass.

Key question – will the US Senate allow the reciprocal exchange of data on US account the IRS has promised. We doubt it –this could throw FATCA into disarray globally (depends if US passes the OECD CRD)

Global Perspectives

OECD Reporting Agreement – CRS - “FATCA-like”

• On 13 February 2014, the Organization for Economic Co-operation and Development (OECD) agree Common Reporting Standard (CRS) designed to create a global standard for the automatic exchange of financial account information.

• The publication of the CAA and the CRS is a significant structural step in governments’ efforts to improve cross border tax compliance.

• The countries which endorsed the declaration were the 34 OECD member countries, along with Argentina,

Brazil, China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Malaysia, Saudi Arabia, Singapore

and South Africa. Switzerland has signed up to automatic exchange of tax information

• The CRS represents another global compliance burden for financial institutions and increases the risks and costs of servicing globally mobile wealthy customers.

• The good news for financial institutions is that the OECD has modelled the CRS on FATCA, which means it should be possible to leverage existing and planned FATCA processes and systems.

• However, the data required is different, and the volume of reporting required is likely to be significantly greater under the CRS.

• The standard has no direct legal force but it is expected that jurisdictions will follow the model CAA and CRS closely when implementing bilateral agreements.

• There is significant political will to implement this standard, with more than 40 jurisdictions signing up for early adoption. The expected timeframe could see jurisdictions seeking to sign agreements in 2014, with new customer due diligence procedures required in 2015 and reporting in 2016.

• Implementation timelines are likely to be very tight. OECD commentary is not due to be released until around the middle of 2014!

• FATCA programs can be leveraged but there are differences that may require additional processes / procedures in order to comply. Global Perspectives

UCITS V – Moving to implementation…

Global Perspectives

UCITS V has now been approved and fund managers and depositaries are beginning implementing the new rules under the Directive.

UCITS V – 19 March 2014 – The EU approved the final compromise text of UCITS V.

Parliament adopted its final position on the text on April 14th.

Brings UCITS in line with AIFMD

Depositary - clear segregation rules in the event of depositary insolvency

Remuneration – bring in line with AIFMD – defer 60% of “very high bonuses”

Sanctions - strengthen existing sanctions for breach of UCITS rules.

These new sanctions include hefty fines, withdrawal of Management Company authorisation and recording of all sanctions on a central database for 5 years.

UCITS V contains important changes to the rules around remuneration and also sanctions for breach of the regulations.

But the key focus of change under the Directive is wide scope of new responsibilities Depositaries must undertake.

UCITS V – Expanded Depositary Implications

Global Perspectives

Key focus of change under the Directive is wide scope of new responsibilities Depositaries must undertake.

These include important new rules regarding:-

Who is eligible to act as a depositary, Rules for the segregation of assets in the event of a depositary insolvency, Requirements for depositaries to monitor cash flows and complete asset verification.

As was expected Depositary liability has been strengthened under UCITS V to bring it in line with AIFMD. This means that the Depositaries will be liable for the loss of UCITS assets held in custody and through-out their sub-custody network.

However unlike under AIFMD, UCITS V reaches down to the central securities depositary (CSD) level, which means that depositaries are on the hook for losses here as well.

Also under UCITS V, there is no way for the depositary to discharge its liability to a third party. With the only exception if the depositary can prove that losses were due to an external events beyond its control – for example a natural disaster. Very difficult to prove.

Finally under the new rules Depositories must also demonstrate that sub-custodians are fit for purpose. This mean they will have to conduct enhanced due diligence on an on-going basis and they must also show that delegation to their sub-custodian’s is justified and that the proper due diligence was completed in the selection process.

UCITS V – Operational considerations

Global Perspectives

In implementing UCITS V, fund managers should be preparing to complete a number of key operational and

fund governance requirements.

These include:-

Completing a business impact analysis to understand exactly how the new depositary, remuneration

and sanction rules will impact the organisation.

Reviewing existing depositary agreements in detail, to ensure they meet the large number of new

depositary requirements.

Drafting any required changes to their remuneration policies to bring them in line with the new rules.

This may include changes relating to conflicts of Interest, disclosure requirements and the requirement to

establish a remuneration committee.

Ensure their depositaries have completed sufficient updated due diligence on their sub-custodians and

service providers.

And lastly!……….

UCITS VI will follow – ESMA Consultation Paper (July 2013)

• Depositary passport,

• Use of OTC investments & derivatives.

• Continue alignment with AIFMD.

MiFID 2 – Key points of the Regulation

Global Perspectives

Scope of the directive – Much wider scope than MIFID 1.

Effective Date - The rules will enter into force 2 July 2014 with the implementation date being January 2017.

Governance & Conduct of business - Enhanced requirements around governing bodies of investment firms

Transaction and transaction reporting – MIFIR reporting from 2017

Electronic and exchange trading – Limits on using “dark pools”.

Algorithmic traders - New controls around high frequency and algorithmic traders

Investor Protection - EU-wide ban on independent financial advisers or discretionary portfolio managers accepting or retaining

payments/inducements Regulatory power to ban products Enhanced provisions around suitability and appropriateness of “complex” products

Market Structure and transparency – Increasing requirements for formalisation of internal matching and crossing systems across different financial

instruments. Open, non-discriminatory access to trading venues and central counterparties – vertically integrated trading

venues and central counterparties (CCPs).

Access by third country firms - A harmonized regime (passport) for granting access to EU markets for firms operating from third countries

Research – cost of research must be transparent and potentially unbundled from other fees impact

Fee disclosure- fees charges to managers must be reported by them impact

MiFID 2 – Impact on the Investment Fund Industry

Global Perspectives

• Agreement 2014 final text of MiFID2 - aims to change how trillions of euros-worth of stocks and bonds, derivatives and commodities are traded, cleared and reported.

• Will force trading across all asset classes into open and transparent markets—not just equities, the focus of MiFID 1, or derivatives, the focus of EMIR’s clearing rules.

• Fund Industry are looking to MiFID 2 with interest to see how it will impact the trading execution style of some fund managers.

• Algorithmic traders being forced to register their formulae with regulators and introduce circuit-breakers.

• This means MIFID2 will impact so-called “Dark Pools”. These are off-exchange trading books used which are used for trading some assets – which many fund managers have used to dispose of large blocks of securities in a discrete and price sensitive manner.

• The Investment Fund Industry will be looking with particular interest to see how the rules will impact the trading and trade execution style of some fund managers – particularly high frequency traders and those that use “dark pools” to shift large holdings of stock.

• For the first time algorithmic traders being forced to register their formulae with regulators and introduce circuit-breakers into their programmes.

• Many of our clients are actually still interpreting the MiFID 2 text to understand how it will impact their business.

• Potential impact on fee unbundling (e.g. Research)– watch this space.

• Implications of MiFID 2 on the investment fund industry are potentially wide-ranging and larger than has been noted to date.

MiFID 2 – Implementation challenges for the asset management industry

Global Perspectives

• Research – how will fund manager’s price and purchase research in future? Will it be paid from the funds management fee?

• Fee disclosure - transparency means providing annual granularity of all fees – implicit and explicit.

• Internal Business Review– identify key shareholders approve MIFID 2 budgets etc.

• Strategic impact review of MiFID2 across the entire company.

• Governance review – will be required as part of MiFID2 adoption

• Client base – review of clients to understand MiFIDs impact.

• System and operational processes - change to technology, operational models, operational processes, new distribution models.

• Pricing and costs –greater awareness of cost base and product profitability will be required by managers. Potential impact of MIFID on fund manager profitability

• Reporting – formulate company reporting (MIFIR) strategy – proprietary or vendor. Selection, testing and implementation process.

• Product Management & Distribution – impact on platforms and providers, independents and technology

MiFID 2 – MiFIR reporting

Global Perspectives

Transaction reporting is a key element to MiFIR which looks to harmonise the transaction reporting requirements brought in under MiFID in 2007 and bring consistency with EMIR.

The main objectives of MiFIR transaction reporting are to:

• Harmonise Transaction Reporting obligations across jurisdictions• Ensure fair and orderly functioning of the Financial Markets and Institutions• Allow regulators to detect potential cases of market abuse and monitor the activities of investment funds

The number of fields required for transaction reporting under MiFIR will also increase significantly to a staggering 92 (based on initial proposals):

Diagram 1: The impact of the proposed MiFIR reporting requirements on the current MiFID regime.

MiFID 2 – MiFIR reporting (cont.)

Global Perspectives

Some of the new requirements introduced in MiFIR are:

• A more prescriptive approach to reporting underlying client data; such as Passport Number, National Identity Number and country of residence. MiFIR will also prescribe a hierarchical approach to how these are reported• The reporting of short sale flags (how will banks capture this?)• Details of not only the transaction executor, but also the decision maker behind the transaction • Increased product scope to include FX and Commodity Derivatives which are not currently reportable under MiFIDregulation

Whilst the implementation of MiFIR seems some way away, now is the time for organisations to ensure there is a robust existing platform and capability for transaction reporting which can be scalable to meet MiFIR in a timely and cost effective manner.

Firms should consider identifying synergies between various trade/transaction reporting obligations (e.g. Dodd Frank, MiFID, EMIR) to define and build the optimal governance and system & controls.

Finally, as a reminder firms should ensure they continue to meet their existing transaction reporting obligations under MiFID and these reports remain complete, accurate and timely.

MiFID 2 – 2015 update

Global Perspectives

Updated MiFID II draft rules published, deadline for comments 2 March 2015

19 Dec 2014 - ESMA published its final technical advice and launches consultation on its draft regulatory technical and implementing standards.

The key proposals stemming from ESMA’s TA/draft RTS cover the following issues:

• A trading obligation for shares and a double volume cap mechanism for shares and equity-like instruments, introducing a major change to the framework for trading these instruments in the Union;

• An obligation to trade derivatives on MiFID venues (regulated markets, multilateral (MTFs) or organised trading facilities (OTFs)) only, in line with G20 requirements;increased trade transparency, for non-equity instruments, in particular bonds, derivatives, structured finance products and emission allowances;

• Newly introduced position limits and reporting requirements for commodity derivatives;• Rules governing high frequency trading, imposing a strict set of organisational requirements on investment firms and trading venues;• Provisions regulating access to central counterparties (CCPs), trading venues and benchmarks, designed to increase competition in the

Union; and• Requirements for a consolidated tape of trading data, including rules for tape providers, reporting, publication and sales of data.• ESMA’s TA proposes that the Commission adopts a number of measures that will further the protection of investors across the EU. The

main proposals relating to the improved protection of investors, especially retail, include:• Clarifications about the circumstances in which portfolio managers can receive research from third parties;• Clarifications under which circumstances inducements meet the quality enhancement requirement for the provision of advice;• Requirements for investment firms manufacturing and/or distributing financial instruments and structured deposits to have product

governance arrangements in place in order to assess the robustness of their manufacture and/or distribution;• Requirements for firms to provide clients with details of all costs and charges related to their investment, including cost aggregations, the

timing of disclosure (ex-ante and ex-post); information to non-retail clients; the scope of firms subject to this obligation;• Information on the cumulative effect of costs on the return;• Organisational requirements for firms providing investments advice on an independent basis; and• Specification of powers for ESMA and national regulators with regards to prohibiting or restricting the marketing and distribution of

financial instruments.

Source: http://www.esma.europa.eu/news/Press-Release-ESMA-provides-implementing-rules-MiFID-II

European Markets Infrastructure Regulation (EMIR)

EMIR:-

A reporting obligation for OTC derivatives;

A clearing obligation for eligible OTC derivatives;

Measures to reduce counterparty credit risk and operational risk for bilaterally cleared

OTC derivatives;

Common rules for central counterparties (CCPs) and for trade repositories; and

Rules on the establishment of interoperability between CCPs.

Derivative reporting to regulators via Trade Repositories (e.g. DTCC) – up to 80 data points for

each trade

Daily reporting - Trade Repositories (e.g. DTCC )

Feb 11th 2014 – ESMA issued more guidance – material changes to the reporting template.

Feb 12th 2014 - Original Date for implementation:-

From this date all new trades had to be reported – DTCC fell over the first day!

May 2014 - All pre-existing trades must be reported

11 August 2014: All financial counterparties/NFC+s required to provide daily reports on

mark-to-market valuations of positions and on collateral value.

1 December 2015: Variation requirements for non-centrally cleared trades will apply.

1 December 2015 - 1 December 2019: Initial margining requirements will be phased in

between these dates.

11 February 2017: All OTC derivative contracts entered into before or after 16 August

2012, no longer outstanding as of 12 February 2014 to be reported to a TR.Global Perspectives

EMIR – Bungled implementation….

Rules requiring reporting of derivative transactions to trade repositories started to be phased in

from February 2014 and are now largely implemented.

There were, however, some difficulties in implementation of the rules which represented a

logistical and administrative challenge for many market participants.

Many of these issues have now been resolved, but in November 2014 ESMA proposed various

changes to the relevant technical standards to seek to resolve certain issues. It is therefore

likely that there will be some technical amendments to the derivatives reporting regime in early

2015.

Infrequent users of derivatives like corporate firms and smaller investment managers have not

been fully aware of how and what to report.

Some administrators coming under pressure to provide this data reporting service for their

manager clients. Reluctance to assume this responsibility. Rate card unclear.

More IT vendors starting to bring reporting products to market.

Global Perspectives

2015 Update

9 January 2015 - ESMA has published an update of its list of central clearinghouses (CCPs) which are authorised under EMIR.

8 January 2015 - ESMA published a peer review report on its participation in the supervisory colleges set up under the EMIR to authorise and supervise EU-based central counterparties (CCPs). Under EMIR, ESMA is required to coordinate between national competent authorities and across colleges with a view to building a common supervisory culture and consistent supervisory practices, ensuring uniform procedures and consistent approaches, and strengthening consistency in supervisory outcomes. To this end ESMA must, at least annually, conduct a peer review analysis of the supervisory activities of all competent authoritiesin relation to the authorisation and the supervision of CCPs in accordance with Article 30 of Regulation (EU) No 1095/2010 (ESMA Regulation).

Solvency 2 – Reporting back in focus..

Insurance Company regulation - been around for years with many delays. Latest push happening

now following Oct 31st 2013 regulatory guidance.

It is primarily huge piece of complex Insurance Company regulation that impacts many aspects of their

business.

The European Insurance and Occupational Pensions Authority (EIOPA) has set up the timeline for

the delivery of the Solvency II Implementing Technical Standards (ITS) and Guidelines.

The overall goal of the project is to deliver the regulatory and supervisory framework for the

technical implementation of the Solvency II regime from the first day of application, 1 January 2016

Insurers are required to demonstrate that they have fully defined, assessed, governed, quality

tested internal and ‘external data’, i.e. data provided to the insurer from a third party (e.g. asset

managers), must also be held to these standards.

Solvency II has also created new requirements for the provision of asset data in the form of new

data fields, new data coding conventions, greater granularity of data and increased frequency of

reporting.

Insurers will typically have no more than six weeks at each quarter end to complete their Solvency

II reporting. Very short operational window for asset managers to quality assure and deliver data

to support these cycles

They may ask their administrator to provide this data to insurance companies

Dec 31st 2014 – First annual submission

Dec 31st 2015 – First quarterly submissions

Insurers must be able to ‘look-through’ fund of fund and other investment structures to identify

the ultimate asset. This will necessitate a dramatic increase in data exchange between asset

managers and require an increased level of disclosure between asset managers. Global Perspectives

Impact of regulation on the funds industry

1. AIFM Passport

– AIFM Marketing Passport– AIFM Management Passport

o Will it be as successful as the UCITS passport?

o Mark of qualityo Help industry to continue growing

3. Increased cost/ Burden = Industry consolidation – Managers

High cost of compliance Less Managers but managing larger funds

– Fund AdministratorsNeed for scale (“One stop shop”)Deep pockets (e.g. Depositary)Consolidation

2. Better regulated industry?

o Reflects a more mature alternative industry- More transparent

o Less risk of fraud (E.g. Madoff etc)?o Better regulator understanding of systemic risko Managers more dependant on their administrators &

Service Providers

4. Strategic change

o Service Providers using AIFMD, EMIR, MiFID2 and FATCA as an opportunity to:-

o Review company strategyo Launch new products,o Look at different marketso Ensure “Best Practise” controls

Global Perspectives

FUTURE OUTLOOK - Long term growing global demand for investment funds…

Future pension crisis. Traditional pension managers will need to allocate more to alternative funds.Savings glut in Asia. Hedge Funds going mainstream.

Global Perspectives - how can we help?

Global Perspectives have assisted multiple clients with their new regulatory requirements including:-

• Advising EU& non-EU managers of their AIFMD, FATCA MiFID2 & EMIR requirements

• Assisting fund managers with their applications for AIFM authorisation

• Ensuring operational compliance with FATCA requirements

• Implementing AIFMD Reporting requirements

• Selecting suitable software vendors for regulatory reporting (e.g. AIFMD, Form PF, CFTC).

• Supporting the Depositary selection process

We would be happy to assist you with your regulatory requirements.

Please contact:-

• Shane Brett

• shane@globalperspective.co.uk

• +353 87 115 2173

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