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EU Adopts AIFM, Derivatives Rules

by Ulrika Lomas,, Brussels

26 December 2012

On December 19, 2012, the European Commission (EC) adopted the delegated regulation supplementing the Directive on Alternative Investment Fund Managers (AIFMD), as well as the technical standards to complement the European Markets Infrastructure Regulation (EMIR) on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories.

The AIFMD, although controversial for many in the fund management industry, has been formulated as part of the response by the European Union (EU) to the financial crisis, and aims to create a comprehensive and effective regulatory and supervisory environment for alternative investment fund managers (AIFMs) in Europe.

Although it applies primarily to EU Member States, it inevitably also involves funds established in low-tax jurisdictions such as the UK's offshore dependencies, since they will have to be regulated via a Member State if they want to market products in the EU.

The directive was agreed by the European Parliament and the European Council in October 2010 and will impose registration, reporting and initial capital requirements on a financial industry sector which until now has been subject only to "light touch" regulation. It is hoped that, following its introduction, the enhanced regulatory oversight over AIFM will enhance investor protection and financial stability.

Under the directive, a European AIFM with a portfolio of more than EUR100m (USD132m) will be required to obtain an authorization from national authorities to operate. This permit will entitle them to market funds throughout the EU single market.

The delegated regulation is a precondition for the application of the AIFMD in the EU member states, and was adopted to supplement certain elements of the AIFMD. Its rules concern the conditions and procedure for the determination and authorisation of AIFMs; and operating conditions for AIFMs, including rules on remuneration, conflicts of interest, risk management, liquidity management, investment in and securitisation positions, organisational requirements and rules on valuation.

In addition, it contains rules on depositaries, including the depositary's tasks and liability, reporting requirements and leverage calculation, and rules for cooperation arrangements.

It is subject to a three-month scrutiny period by the European Parliament and the Council, and will enter into force, provided that neither co-legislator objects, at the end of this period and the day following publication in the EU’s Official Journal.

The EC has also adopted nine regulatory and implementing technical standards to complement the obligations defined under the EMIR, which was adopted on July 4 and entered into force on August 16, 2012. They were developed by the European Supervisory Authorities and have been endorsed by the EC without modification.

With regard to OTC derivatives, the technical standards specify the provisions of the EMIR related to indirect clearing arrangements, the clearing obligation procedure, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP.

With regard to those CCPs, the standards specify EMIR’s provisions related to the requirements for CCPs, as well as the capital, retained earnings and reserves of a CCP. The implementing technical standards specify the format of the records to be maintained by them.

The adoption of the technical standards finalises requirements for the mandatory clearing and reporting of transactions, in line with the EU's G20 commitment made in Pittsburgh in September 2009.

The Internal Market and Services Commissioner Michel Barnier said: "The adoption of these technical standards is the final step in achieving the mandatory clearing and reporting of OTC derivatives and in meeting our G20 commitments. This will improve transparency in the trading of derivatives."

The technical standards will enter into force on the twentieth day following publication in the Official Journal. Their provisions will be directly applicable from the day of entry into force.

TAGS: tax | investment | European Commission | law | capital markets | investment funds | legislation | G20 | standards | regulation | alternative investment | European Union (EU) | Europe

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