regulatory agenda for european asset management and funds: efama’s priorities presented by peter...

Regulatory Agenda for European Asset Management and Funds:

EFAMA’s Priorities

Presented by Peter De Proft

Director General of EFAMA

UAIB, 3rd CEE Workshop “Challenges of Collective Investment Business in CEE”

27 October 2011 - Kyiv

Agenda

1. Presentation of EFAMA

2. Regulatory Priorities• AIFMD• Responsible Investment• FATCA• Complex Products• MiFID Review• Corporate Governance

3. Conclusion

23rd CEE Workshop, 27 October 2011, Kyiv


"EFAMA Land"

26 Countries:

– 22 EU Members, and– Liechtenstein– Norway– Switzerland– Turkey

56 Corporate Members19 Associate Members

= Investment Management: EUR 13.8 trillion of which EUR 8.1 trillion through over 54,000 investment funds (end June 2011)

EFAMA Membership

26 National Associations + 1 Observer


EFAMA Membership56 Corporate Members

3rd CEE Workshop, 27 October 2011, Kyiv 5

EFAMA Membership19 Associate Members


EFAMA’s “Partners in Dialogue” - Europe


EFAMAEFAMA

EU Commissionesp. Internal Market DG

EU Parliamentesp. Committee on Economic and Monetary Affairs (ECON)

EU Council

Permanent Representations of EU Member States

ESMA

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8

EFAMA’s International “Partners in Dialogue”


EFAMAEFAMA

IOSCO

US Treasury

I.R.S.

S.E.C.

IIFA

• Call for Evidence• Working Groups: all Members• Drafts• Common Position send for comments• Final Draft send for comments• Board Approval

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EFAMA Functioning


Agenda



3. Conclusion


• After the Financial Crisis, clear political message, enhanced by Euro-government crisis

– Self-regulation does not work

– Better regulation is necessary to avoid a new crisis of the same proportion or contain it

– Aim: more efficient monitoring of systemic risks and better investor protection

– EU Commissioner Barnier for Internal Market: Agenda: Implementation of G20 Proposals before the end of 2011

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Political Message at EU Level


• New powers after Lisbon Treaty• Post-crisis trauma: taxpayers money• SME statements• Social and budgetary crisis in Europe• Social & Responsible Investment + Corporate

Governance

Financial Sector Revisited

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European Parliament: the Untouchables


Everything is on the Move

Regulatory initiatives with direct influence on EU asset managers and their products:


AIFMD

UCITS IV & V

Depositary regime review

MiFID

Corporate Governance

PRIPs

ICSD

Remuneration

IMD

Pensions

EMIR/OTC Derivatives

Short selling

Supervisory Framework

CRA

Single Market Act

FATCA

Taxation of Financial Sector

VAT

Dodd Frank

Responsible Investment

Audit Policy

• EFAMA currently focuses intensively on:– MiFID II– ETFs– UCITS IV & V– PRIPs– Pensions Green Paper– EMIR / OTC Derivatives– FATCA– Dodd Frank– Responsible Investment / Corporate Governance– AIFMD– VAT / Financial Sector Taxation

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EFAMA’s Areas of Focus


• Relations with Commission Services:– e.g. : UCITS IV & V; Corporate Governance; ETFs;

Shadow Banking; Pensions; MiFID; Solvency II

• Relations with Council:– e.g. : AIFMD; VAT; FTT; EMIR

• Relations with ESMA:– e.g. : AIFMD; Structured funds; ETFs; PRIPs

• Relations with Parliament:– e.g. : UCITS IV; AIFMD; ICSD

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EU Dialogue Partners


Wave has fully started & will impact industry even if uncertainty on how this will “go live”

Initiative

▪ PRIPs▪ MiFID review▪ EMIR▪ Supervision▪ Short-selling▪ CSR/social entrepreneurship▪ Contract law green paper

▪ UCITS IV▪ UCITS V▪ AIFMD▪ ICSD▪ Money market funds

▪ FATCA▪ Dodd Frank▪ RDR

▪ Basel III▪ Solvency II▪ IMD review▪ Revision of IORP▪ Green paper on pensions ▪ Contract law green paper▪ SLD▪ CSD

Preliminary consultation

Rule making

National translation/ implementation

Today

2008 2009 2010 2012 20132011 2014


Agenda



3. Conclusion


AIFMD: Timing

Level 1

• 21 July 2011: Entry into force of Level 1 (20 days after publication in the Official Journal)

Level 2 and Level 3

• August – September 2011: 2 Consultations by ESMA on Implementing Measures

• 16 November 2011: Deadline for advice by ESMA to the Commission

• Early 2012 (expected): Commission to submit proposals on Implementing measures to European Parliament and Council

• Aim: Level 2 and parts of Level 3 adopted by mid-2012


AIFMD: Timing

National Legislation in Member States

– 22 July 2013: Deadline for transposition by Member States into National Law

Deadline for the Industry

– 22 July 2013: New AIFM and AIF must comply with requirements of AIFMD

– 22 July 2014: AIFM existing before 22 July 2013 must submit application for authorisation and comply with requirements of AIFMD


AIFMD: ESMA Consultations on Implementing Measures

2 ESMA Consultations covering implementing measures on:

•Scope•Authorisation and General Operating Conditions

- Capital Requirements- Conflicts of Interest- Risk Management- Liquidity Management- Organisational Requirements- Valuation- Delegation

•Depositaries•Leverage•Transparency•Supervision and Delegation of functions to 3rd Countries


AIFMD: EFAMA Members Priorities

EFAMA Working Group has identified as key priorities:

•Aim/Benchmark of Regulation– ESMA Proposals seem to aim at regulating funds for

retail investors. Benchmark should be regulation for funds for professional investors. Member States may add additional layer for retail investors.

•Consultation text boxes versus explanatory text– Important information throughout the explanatory text

should be included into the boxes.




• Initial capital and own funds, in particular additional capital requirements or PII– Additional Capital should be calculated based on AUM not on Income of the

AIFM– Additional Capital should be capped– PII requirements should be better aligned with existing practices in

insurance industry

• Inducements– Indirect Distribution should not be regulated in the same way as direct

distribution

• Transparency– Transparency Proposals are designed in a one-size fits all approach with

requirements too detailed, burdensome and frequent.– Transparency requirements towards investors also apply to (privately

placed) third country AIF and will require disclosure on conditions these funds do not necessarily fulfil.




• Depositary

– Detailed description of safekeeping functions should be pragmatic, based on best market practices, proportional to the functions and duties of other service providers and not going beyond the requirements of the Level 1 text

– Oversight duties should consist in ex-post controls and verifications of the appropriateness of procedures put in place by the AIFM

– Definition of “financial instruments held in custody” is crucial– Liability regime: to what extent should a loss of financial resulting

from an act or omission of a sub-custodian be considered an “internal” event to the depositary?

– Liability regime: the “objective reason” for the depositary to discharge its liability should not be reduced to a pure formality – best interest of investors to be taken into account




• Delegation– ESMA Proposals regarding delegation to third countries problematic as they

require MoU between authorities to allow among other on-site inspections of EU home MS authority.

• Liquidity Management– Gates and Side-pockets, if properly disclosed to investors, should be

considered as normal liquidity management tools.

• Leverage– Calculation of Leverage according to several methods considered too

burdensome.– VAR should be considered as a possible methodology for Advanced

Method. Gross method not meaningful and Commitment method must allow for hedging/netting.


Agenda


2. Regulatory Priorities• AIFMD• FATCA• Complex Products• MiFID Review• Corporate Governance

3. Conclusion


FATCA: EFAMA’s aim

• Minimising the impact of FATCA through deemed compliant categories for certain types of funds– No or limited reporting– No passthru withholding obligation at fund level

• A lighter compliance system for appropriate entities encourages compliance whereas a more onerous regime encourages divestment from U.S. assets


FATCA: Notice 2011-34

• Deemed compliant status for certain investment vehicles– Funds where all direct unit holders are PFFIs,

deemed compliant FFIs or, broadly, low risk investors• E.g. German mutual fund model

– Under continued consideration: • Funds traded on established securities market

– E.g. ETFs

• Funds with U.S. Person sales restrictions – All direct account holders must be USFIs, PFFIs, deemed

compliant FFIs or non-participating distributors– Other direct account holders not permitted

• Low risk investors, in particular retirement plans– More information requested


FATCA: Continued concerns of the U.S. authorities

• Use of “blockers” to circumvent FATCA• Risk of tax avoidance through “deemed

compliant” entities if exemptions are drafted too broadly

• Due diligence and enforcement throughout the distribution chain

• Customer identification, especially non-financial entities


Key issues

• Deemed compliant category for funds restricted to non-US investors– Notice 2011-34 required all direct investors to be PFFIs, deemed compliant FFIs

or, broadly, low risk investors– Direct retail investors?– Contractual control of distribution chain through deemed compliant FFIs?– Compliance and enforcement of such contractual controls? Pass-through

withholding?– Pre-existing accounts? Redemption? Existing selling prohibitions under SEC

rules?• Deemed compliant category for local distributors

– Extension of "local bank" status to regulated distributors acting in an FFI capacity– Definition of local? Under EU law unable to exclude EU residents– Size requirement?

• Deemed compliant category for retirement plans/low risk investors– What definition would be appropriate?

• Platforms; contractual arrangements; umbrella/sub-funds


Agenda


2. Regulatory Priorities• AIFMD• FATCA• Complex Products• MiFID Review• Corporate Governance

3. Conclusion


ETFs - Regulatory Activities (I)

• FSB Note on Potential Financial Stability Issues arising from Recent Trends in Exchange-Traded Funds (ETFs) – Consultation closed in May

• Main concerns for FSB are stability risks, as well as some fund-specific issues (use of swaps and counterparty risks, collateral management risks, conflicts of interest; use of securities lending and related counterparty, collateral risks), plus transparency

• Focus for ESMA is on ETFs as UCITS, less systemic risks

• Consultation launched in July on Discussion Paper on UCITS ETFs and Structured UCITS links ETF issues to concerns regarding other UCITS (Structured UCITS, “complex” UCITS in general) – Deadline: 22 September


ETFs: ESMA Discussion Paper (I)

• General policy issues:– Distinction between complex and non-complex UCITS– Restrictions to retail marketing– Systemic risks– Extension to non-UCITS

• ETFs:– Definition– Index tracking issues– Synthetic ETFs: counterparty risk– Securities Lending– Actively managed ETFs– Secondary market investors

• Structured UCITS:– Total Return Swaps– Strategy Indices


ETFs: ESMA Discussion Paper (II)

Complex – Non-complex UCITS

•Concerns on ETFs are coming together with concerns on “complex UCITS” and Structured UCITS

•Obvious link to MiFID categorisation of UCITS

•ESMA view from UCITS perspective, with focus on synthetic ETFs, structured UCITS and other UCITS employing “complex portfolio management techniques”. Both limitations to marketing to retail investors and warnings mentioned

•UCITS Guidelines being considered to split UCITS into complex and non-complex, but approach would not warrant a Level Playing Field. NO comprehensive, horizontal proposals for investor protection

•EFAMA members’ position: no UCITS-specific guidelines. All financial instruments should be treated equally, UCITS included. If UCITS are no longer automatically non-complex, criteria in Art. 38 of MiFID Level 2 should apply


ETFs: ESMA Discussion Paper (III)

EFAMA members’ positions on other issues:

•ETF Identifier – Should ETF definition be limited to UCITS? How to capture only

true ETFs?– Identifier should not distinguish between synthetic and physical

ETFs – disclosure in KIID and prospectus

•Collateral for synthetic ETFs – no further regulation necessary

•Agreement to extension of collateral rules for OTC derivatives to securities lending

•Concern for treatment of secondary market investors and their right to redeem – investors have right to redeem with the fund and situation of exchange-traded funds is not different from other funds


Agenda


2. Regulatory Priorities• AIFMD• FATCA• Complex Products• PRIPS/MiFID Review/IMD Review• Corporate Governance

3. Conclusion


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PRIPs/MiFID Review/IMD Review: Next Steps

• Legislative approach: – One horizontal measure (PRIPs) for investor disclosure

only; – Selling rules included in the reviews of MiFID and

Insurance Mediation Directive (IMD) respectively. MiFID as benchmark for rules on distribution of insurance products in IMD.

• Maintaining coherence among legislative proposals will be very challenging for the Commission and regulators, especially between MiFID and IMD


PRIPs – Key Issues

PRIPS Key Investor Information Document (KIID):

• Harmonised pre-contractual disclosure based on UCITS KID. • Tailored to product characteristics but with common key elements

allowing comparison among PRIPs

Key Issues:

• Scope and PRIPs definition, based on economic elements and packaging – no fixed lists or legalistic definition, which would allow loopholes and arbitrage– Inclusion of insurance products, in particular annuities– Inclusion of pensions– Inclusion of structured deposits

• Same key elements as UCITS KID


MiFID II Draft – Key Issues Directive (I)

• Advice: introduction of advice «provided on an independent basis»: – Assessment of a sufficiently large number of financial

instruments, diversified with regard to type and issuer, not limited to instruments issued or provided by entities with close links to adviser

– No inducements (except for training)– Proposals in line with Consultation

• Information to clients on advice: – Whether advice on independent basis– Whether on broad or restricted analysis of market– Whether ongoing assessment of suitability will be provided– How advice meets personal characteristics of the client– Proposals slightly better than Consultation


MiFID II Draft – Key Issues Directive (II)

• Among reports on the service provided, «periodic communications to clients, taking into account the type and complexity of instruments and the nature of services provided» – No details. Difficult to judge whether better than

burdensome proposals in Consultation on « ongoing services»

• Portfolio Management: NO inducements (from any source)– In line with Consultation – no explanation


MiFID II Draft – Key Issues Directive (III)

• Complex or non-complex? UCITS remain non-complex, except for structured UCITS – ESMA guidelines on assessment of instruments with

‘structure that makes it difficult for client to understand the risk’

– «Complex» UCITS are limited (positive), but assessment category is arbitrary – no explanation

• Corporate governance: very prescriptive requirements for management body – New and extremely detailed (limits to cumulation of

Directorships, diversity requirements)

• Inclusion of structured deposits under MiFID– VERY positive – part of PRIPs


MiFID II Draft – Key Issues Regulation (I)

• Clear intent to extend pre- and post-trade transparency to bonds, structured finance products and derivatives– Details left to Level 2, therefore difficult to object

• Creation of Organised Trading Facility (OTF) covering all venues besides RMs and MTFs– Broker Crossing Networks covered, with trading limited to

crossing of client orders– Trading against proprietary book falls under «Systematic

Internaliser» definition

• Same transparency rules for all types of venues – Details left to Level 2


MiFID II Draft – Key Issues Regulation (II)

• Obligation to trade derivatives on trading venues (including OTFs)– ESMA determination of class or derivatives (or subset)

subject to trading obligation– Proposals in line with Consultation

• Extension of equity transparency to ETFs– Welcome provision, but definition still a problem, as it will

catch other funds as well

• Data reporting and consolidation provisions– ESMA Technical Standards on data standards and format

are foreseen– No mandatory European Consolidated Tape


MiFID II Draft – Key Issues Regulation (III)

• ESMA powers to temporarily intervene– Provisions too broad – no Level 2 foreseen– Possibility to ban distribution or services– Proposals in line with Consultation

• Product intervention powers by Competent Authorities– ESMA only has coordination role

• ESMA powers to set position limits on derivatives (ref. to position reporting provisions in Directive)


MiFID II – Next steps

• Modifications proposed in all areas discussed in the Consultation– Issues can be broadly divided into «market-related»

and investor protection

• Drafts currently in inter-service consultation but public debate has already started in some cases

• Two Working Groups could be used to deal with proposal: one on Financial Markets and one on the rest, which could also deal with PRIPs later


Agenda



3. Conclusion


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Corporate Social Responsibility

Commissioner Barnier envisages creation of a new 3rd category of funds (next to UCITS and AIF) instead of labeling existing ones.

European Commission Consultation on Corporate Social Responsibility ongoing.

Commission’s use of term “Social Responsible Fund” and expectations show fundamental differences from terminology and expectations in the industry!



1st Workstream - Green Paper on Corporate Governance in Financial Institutions:

•Green Paper by European Commission in Summer 2010

•Issues addressed:– Current deficiencies and weaknesses

Conflicts of interestEffective implementation of corporate governance principlesBoard of Directors not fulfilling its role as principle seat of powerRisk managementThe role of shareholders not fulfilling their functionThe role of supervisors and auditors

•Legislative proposals to be expected in the second half of 2011/beginning 2012


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2nd Workstream - Green Paper on EU Corporate Governance Framework:

•Consultation at EU Level until end July 2011 regarding Corporate Governance Framework for all listed companies and potentially all companies

•Topics of particular interest: Board of Directors (including composition, board evaluation and directors

remuneration) Shareholders (including in particular the agency relationship between institutional

investors and asset managers) “Comply or Explain” Framework – Monitoring and implementing corporate

governance codes


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3rd Workstream - EFAMA Code for External Governance:

Adoption of the EFAMA Code by Board of Directors in April 2011

•Self regulation•High level principles and best practice recommendations regarding engagement between institutional investors and companies in which they invest significantly•Based on the 2006 EFAMA Code of Conduct and inspired by the UK “FRC Stewardship Code” for institutional investors•To be implemented on comply or explain basis


Agenda



3. Conclusion


• Partners in dialogue: an ongoing process

• Scientific approach:– Respectful & discreet– Anticipation of possible topics & issues

THE ART OF COMPROMISE & CONSENSUS

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Asset Managers & Regulators


Contact

Peter De Proft

Director General

EFAMA

Rue Montoyer, 47

B-1000 Brussels, Belgium

Tel. +32 (2) 513 3969

Fax + 32 (2) 513 2643

E-mail: [email protected]

www.efama.org

UAIB, 3rd CEE Workshop “Challenges of Collective Investment Business in CEE”

27 October 2011 - Kyiv

regulatory agenda for european asset management and funds: efama’s priorities presented by peter...

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