EU Regulations
Impacting Investment
Management and
Funds
IMAS Lunchtime Talk Series
Diana Quinn
29th April 2015
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
1
Agenda
Investment Management Horizon Scanning
• Regulatory Themes
• The EU Regulatory Pipeline
2015/2016 Key EU regulations for Singapore firms
• MiFID II
• AIFMD
• EMIR
• UCITS
The SIFI debate
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
2
Horizon Scanning: The investment management canvas
KPMG performs continuous scanning and analysis of the global, regional and national regulatory
horizon, identifying drivers and themes, and potential impacts on firms, markets and clients.
Insurance
Funds Pension
Funds
Other
Institutions
HNW &
Charities
Distributors
Fund
Accounting
Fund Admin
Depositary
Payment
Systems
CustodySettlement
& Clearing
Dealing
Admin
Trading
Venues
Brokers
Data Vendors
Index
Providers
Listing
Authority
Financial
Reporting
Credit Ratings
Banks
Segregated Mandates
Issuers
Investment Funds
Capital Markets
Market Infrastructure
Investment & Fund
Management
Risk governance
Data and reporting
Conduct
Structural market change
Remuneration
Culture
Growing coherence & co-operation
The industry has entered in a new era of regulatory clarity, although its growing stature
in the global economy will drag it further under the regulatory spotlight. There are some key areas
where regulation and other pressures are forcing asset managers to make significant changes.
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
3
Theme Singapore EU
Remuneration/
Costs & Charges
Transparency
Risk Management
TCF / Conduct
AML / ABC
Market Abuse
Regulatory themes: Singapore & EU
Source
AIFMD MiFID II
AMLD
MAD II
AIFMD MiFID II CRD IV
MMF,
EuSEF,
EuVECA,
ELTIF
MiFID II /
MiFIR EMIR AIFMD
MiFID II UCITS V AIFMD CRD IV PRIIP KID /
UCITS KIID
MMF,
EuSEF,
EuVECA,
ELTIF
UCITS VI
UCITS VI
KYC & AML
Short selling
disclosure
ASEAN CIS
Conflicts of
Interest
Conflicts of
Interest
Conflicts of
Interest
RMF/ RBC2
Licensing &
Conduct of
Business
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
4
EU regulation pipeline
IM Firms/IM services Key points 2014 2015 2016<
CRD IV
• EU Basel 3 rules
• Bonus cap
• Leverage and liquidity
ratios
• Limited national
discretions
MiFID II / MiFIR
• Market structure
• Transparency
requirements
• Investor protection
• Third Countries
AMLD II • Additional requirements re
terrorist funding
Shareholder Rights
Directive
• Additional disclosures for
listed firms & AIFs, and for
IMs
Key: RTS/ITS – Regulatory/Implementing Technical Standard; DA – Delegated Act
Insurance clients &
distribution Key points 2014 2015 2016<
Solvency II • Risk based capital
• Governance
• Reporting
IMD II • Increased disclosure
• Ban on commission
IORPD II • Improved governance
• Increased transparency
• Cross border
Intended as high-level summary and not a comprehensive listing
FINREP reporting
begins (Sept)
COREP reporting
begins (Jan)
Leverage ratio
(2018)
Liquidity ratio
(2018)
Adopted (March) Draft RTS and Guidelines Implementation
(Mar/Apr 2017)
RTS CVA risk own
funds (Jun)
EBA benchmark
internal models
(Apr)
EBA guidelines on
governance/ suitability of
management (Dec)
RTS regulatory
capital (Dec)
RTS liquidity risk
(Jan)
Final technical
requirements
Implementation
(2016)
In trialogue
Final advice to EC on
Das (Dec)
Draft RTS / ITS (Dec)
Implementation
(Jan 2017)
Under negotiation
Implementation
(2016 -
unlikely)
Final DAs (June) Final RTS / ITS
(Dec)
Under negotiation
Implementation
(Dec 2016 -
unlikely)
Implementation
(2017)
Draft RTS / ITS
(Feb)
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
5
EU regulation pipeline cont.
Capital Markets &
infrastructure Key points 2014 2015 2016<
EMIR • Clearing
• Reporting
• Risk mitigation
MAD II / MAR • Tougher requirements
• Additional sanctions
Benchmarks
Regulation
• Technical standards and
interoperability
• Cap interchange fees
Central Securities
Depositories
• Timing and conduct of
securities settlement
FTT • 11 Euro-zone countries
• UK legal challenge
Non-Bank/CCP
Resolution • Treatment of client assets
Securitisations
New proposal under “CMU”
Prospectus
Directive Review New proposal under “CMU”
Covered Bonds
Regulation New proposal under “CMU”
Consultation Document
Consultation Document
Consultation Document
NOTE: in addition to new requirements directly applicable to IMs, MiFID II & MiFIR also herald significant changes to e.g. trading
venues, which the front and back offices of IMs will need to monitor and navigate
Clearing obligation in
force (Dec)
Under negotiation
Draft rules Implementation
(July 2016)
Implementation (July) Final requirements
Implementation
(2017)
Final Advice on DAs and
RTSs
Book-keeping
Implementation
(2023/25)
Proposal expected Q3
Negotiations
on-going
Implementation
(2016 - unlikely)
Proposal expected Q3
Proposal expected Q3
Implementation of
T+2 (Jan 2015)
Proposal expected Q3
Intended as high-level summary and not a comprehensive listing
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
6
EU regulation pipeline cont.
Funds & Fund
Managers Key points 2014 2015 2016<
AIFMD
• Investor protection
• Transparency
• Regulatory capital
UCITS V
• Depositaries
• Manager Remuneration
• Sanctions
“UCITS VI”
Likely topics:
• Eligible investment
strategies
• Performance fees
• MiFID II alignment
issues
PRIIP KID
• Key Information
Document
• Investor protection
EuSEFs/EuVECAs
ELTIFs
• Limited assets
• Restricted access
Money Market Funds
• Severe restrictions for
CNAVs
• Liquidity requirements
• Credit quality
Intended as high-level summary and not a comprehensive listing
ESMA report on functioning of EU AIF/AIFM passports and on application of passports to
non-EU AIF/AIFM (July)
Draft RTS / DA drafting In force from Q4 (optional regime)
Likely termination of national private placement regimes
(2018)
Trialogue to begin
Implementation (July 2013)
Final Advice to EC on DAs
Implementation (Mar 2016)
Implementation (Dec 2016)
Draft DA / RTS / ITS
In force from 2013 (optional regimes)
Final Advice to EC on DAs & draft ITS
Under construction
ESAs Consultation 2nd Consultation
Under CMU: encourage
take-up
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
8
Overview of MiFID II
MiFID II is the long awaited update to the existing MiFID framework aimed at improving
transparency and reducing risk in the financial markets. It is comprised of:
• MiFIR: A regulation addressing issues related to transparency and market infrastructure
• MiFID II: A directive addressing issues related to business conduct
MiFID II combined with EMIR completes the European response to the G20 commitment made in
Pittsburgh in 2009 to manage the risks associated with OTC derivatives trades
What is MiFID II?
MiFID II/
MiFIR
Transparency
Market Infrastructure, Trading and
Clearing
Governance
Transaction Reporting
Authorisation, Branches and
Passporting
Data Publication and Access
Investor Protection
Micro- structural
Issues
Commodity Derivatives
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
9
MiFID II: Key themes and business impact
Market structure and
transparency requirements
could lead to fragmentation of
liquidity and increased cost
Commodity markets – position
limits will apply but the
methodology has yet to be
worked out
The market structure changes
are likely to introduce greater
complexity for managers in terms
of data points and feeds
High Frequency Trading
definition proposed by ESMA
will have a much wider
impact than was originally
envisaged
Systems and processes will need
to be adjusted for both MiFID II
and MAD, including trade and
transaction reporting
Consolidated tape provisions
could deter some investment
banks from making quotes, driving
liquidity away from the market
Limitations on dark pools may
reduce ability to transact large
trades without suffering large
market impact costs
Reporting requirements are
Numerous – could cause
Duplication with each other and
With other Directives e.g. EMIR
Disclosure of cost requirements
means that vertically integrated
firms will need to make more of a
separation between costs
The intention of the Directive is
that the client facing firm
must aggregate the cost of
the product and provide a £/%
amount
Firms will need to identify and
disclose conflicts of interest in
sufficient detail to enable
the client to make an informed
decision
Revised best execution
provisions will require firms to
annually publish their top five
trading venues and repapering of
client agreements may be needed
Many Member States are already
intervening around products,
but the Directive will enhance the
focus on this
There is likely to be further debate
around the respective
responsibilities of the product
manufacturer and the distributor
Tightening of execution only
regime through narrower
definition of non complex
products
Ban on inducements will require
managers to consider their
processes and their
adherence to the requirements
Market structure Investor
protection
Transparency Disclosure
MiFID II
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
10
MiFID II impacts every department and function
Clearing Settlement Collateral
management
Transparency
deferral
management
Trade
reporting
Transaction
reporting Custody
Confirms and
statements
disclosures
Authorisation Client
categorisation
Suitability and
appropriateness
Client
disclosures and
unbundling
Client static
data collection
Trading
controls
Advisory
Mandates
Discretionary
Mandates
Investment Risk
Monitoring
Client
Reporting
Client onboarding
Broker/Venue Selection
Order Management
Clearing and settlement
Post-trade
Portfolio Management
Reception /
transmission of
orders
Algorithmic
trading / HFT
Trade specific
data
collection
Trade specific
disclosures
Order
allocation Controls
Third party
conflicts
Legal
agreements
Client assets
Risk
monitoring
Policies
Compliance
monitoring
Product
governance
Conflicts of
interest
management
Inducements
Execution
factors and
client experience
Transparency
waiver
management
Trading
capacity
(MM / LP / SI)
Mode of
execution
(TV / SI / OTC)
Operating
conditions for
venues
Market
Access
Broker –
Terms and
Conditions
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
11
MiFID II: Estimated timeline
Apr 2014
Plenary vote to
adopt MiFID II
12 Jun 2014 published
in OJ
1 Aug 2014
CP & DP close
19 Dec 2014
Advice on Delegated
Acts
Jun 2015
‘Final’ RTS
Dec 2015
‘Final’ ITS
Jun 2016
Transposition into national
law of member states
Jan 2017
Implementation
2014 2015 2016 2017 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2
22 May 2014
ESMA publish DP & CP
Implementation timeline Estimated dates Parliamentary approval
3 Jul 2015
Draft Technical Standards
submitted by ESMA on various
matters
3 Jan 2016
ESMA guidelines on management
body, client knowledge and
competence, transaction reporting to
competent authorities
19 Feb 2014
Final texts published for
national consideration YOU
ARE
HERE
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
12
Challenges
Market Impact / Trading venues / Trading
• Identify all markets & platforms you trade on
• Existing counterparties services
• Governance & controls requirements
• Trade placement strategy
• Third country firms accessibility to retail clients
• Overlap with AIFMD and EMIR
• More onerous conditions for establishing branches
and subsidiaries in EU
• Outsourcing and delegation
Data Collection and Reporting
• Identify all products
• Data retention capabilities for 5 years
• Transaction reporting
• Static data and referential data
• Repapering of clients
• Best execution requirements
• Complex products for retail clients
• Distribution arrangements and new product manufacturing
Investor Protection Third Country Access & Passporting
Some key considerations
Commissions Non-monetary benefits
Independent advice Prohibited Generally
prohibited
Minor non-monetary benefits are permissible under
certain circumstances
Portfolio management Prohibited Generally
prohibited
Minor non-monetary benefits are permissible under certain
circumstances
Non-independent advice (and
other investment services)
Member States can impose
stricter requirements
Generally prohibited– only permissible if designed to enhance the quality of the
relevant service to the client
Eg UK, Netherlands, Belgium: Prohibited for retail clients
Generally prohibited– only permissible if designed to enhance the quality of the relevant service to the client
Eg UK: Review of hospitaltity & distributor training led to stricter guidance
on what is permissible
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
14
Overview of AIFMD
• AIFMD stands for Alternative Investment Fund Managers Directive
• European Commission proposed the AIFMD in April 2009 as a response to the financial
crisis and it entered into force in July 2011 with a two year transposition deadline
• Alternative Investment Fund Managers (AIFM) will have to apply for authorisation in
order to manage an Alternative Investment Fund (AIF), if the amount of assets under
management exceeds certain thresholds (€ 500 million unleveraged / € 100 million
leveraged)
• Authorised EU-AIFM managing/marketing EU-AIF will in return be provided with two
passports enabling them to offer their management services (Management Passport)
and market their AIF throughout the EU (Marketing Passport)
What is the AIFMD?
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
15
Overview of AIFMD cont.
• Any Undertaking for Collective Investment (UCI) other than UCITS which raises capital
from a number of investors with a view to investing it in accordance with a defined
investment policy for the benefit of those investors
• Legal person whose regular business is managing one or more AIFs
• An entity performing either portfolio management and/or risk management is
‘managing an AIF’ and must seek authorisation as AIFM
• In addition, an AIFM may also perform other functions such as administration, marketing
or activities related to the assets of AIF
• UCITS management companies can obtain an additional AIFM licence
• External AIFM = legal person appointed by or on behalf of the AIF
• Self-managed AIFM = where the corporate legal form allows it
What is an AIF?
Who is the AIFM?
Which types of AIFMs exist?
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
16
AIFMD
• Markets and instruments
• Illiquid assets, actual
riskprofile and risk
management tools
• Results of stress tests
• Leverage
• Systemic risk information
• Cash flow monitoring
• Monitoring role and custody
• Liability
• Externally managed:
EUR 125.000
when more than EUR 250 mln
AUM, 0,02% over this, capped
on EUR 10 mln
• Objective reasons
• No letterbox entity
• Co-operation agreement
• Monitoring role manager
• Functionally and
hierarchically separate
• Due diligence investments
• Limits on leverage
• Stress tests
• Includes senior staff incl.
senior management, portfolio
manager and functions with
an impact on risk profile
• Multi year framework, and
variable elements, at least
40% deferred over 3 to 5 yrs
• Policy: adjustment needed to
included further disclosure
on Preferential treatment
• Extension of scope
• Guarantees for independent
valuation
• Functionally independent
from portfolio management
Remuneration
Conflict
of interest
Risk and
Liquidity
management
Valuation
Depositary
Transparency
Capital
requirements
Delegation
AIFMD: Key themes and business impact
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
17
July
2011
Sept
2011
July
2013
Jan
2019
July
2014
July
2015
Oct
2015
Jul
2017
Nov
2011
2012
Transparency Reporting is
effective for ALL impacted
firms, including Non-EU Firms
Strategic analysis >> >> Implementation >>>>> Authorization and ongoing compliance
YOU
ARE
HERE
Publication in the
Official Journal
(1 July 2011)
Entry into Force
(21 July 2011)
ESMA technical advice on
Delegated Acts (Level II)
Deadline for
authorisation of
existing AIFMs
EU passport may be
made available for
non-EU AIFMs and
non-EU AIFs
Possible withdrawal
of national PPRs on
ESMA’s advice
Deadlines for
responses on ESMA
consultations
AIFMD draft law was
deposited in Luxembourg
Parliament
Passport
introduction
for EU AIFMs
managing
EU AIFs
ESMA opinion on the
passport regime for
non-EU funds and
managers
Deadline for
transposition
into EU
national laws
EU Commission
published Delegated
Regulation
(May 2013)
Q4
2013
Oct
2018
Review of the
Directive by the EU
Commission and
possible start of
AIFMD II
ESMA advice on the
functioning of the
passport and whether
to turn off NPPRs
AIFMD: Estimated timeline
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
18
Private Placement
(subject to additional AIFMD
requirements)
AIFMD - Marketing Passport
+ Private Placement
AIFMD - Marketing Passport
+ Private Placement ???
AIFMD - Management Passport
+ Delegation arrangements
Delegation arrangements
(subject to AIFMD requirements)
AIFMD - Management Passport
+ Delegation arrangements
Routes
Non-EU Managers
Marketing AIF in the EU Managing EU AIF
From 2015
From 2013
From 2018
Non-EU Managers: Routes to access the EU market
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
19
What is marketing ?
‘Marketing‘ in accordance with Article 4 of the AIFMD means:
• direct or indirect offering or placement
• at the initiative of the AIFM or on behalf of the AIFM
• of units or shares of an AIF it manages
• to (professional) investors domiciled or with a registered office in the Union
NOT covered:
• Passive marketing
• Marketing to retail investors
Non-EU Managers: Marketing definition
National Law
AIFMD
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
20
Non-EU Managers: Marketing Private Placement
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022...
Option 1:
AIFMD-Passport
Option 2:
Private Placement
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
21
Non-EU Managers: Marketing Private Placement cont.
Dual AIF marketing regime in the EU: Private Placement & AIFMD Passport
AIFMD Passport
Private
Placement
Regimes
AIF private placement allowed, but in some cases strict local requirements will apply (e.g. France and Germany). AIF private placement not yet possible (e.g. Croatia, Greece, Latvia and Poland). More clarification needed whether the private placement allowed (e.g. Spain).
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
23
Overview of EMIR
• EMIR stands for European Markets Infrastructure Regulation
• European legislation aimed at increasing stability and enhancing transparency of the
OTC derivatives market.
What is the EMIR?
High levels of counterparty risk in
OTC derivatives market space.
Low transparency on OTC derivatives
trading and exposures.
Expansive volumes in OTC derivatives
market.
Asymmetric valuations of OTC
derivatives across counterparties.
Need for Structural reforms (based on
collateralisation) aimed at creating a
structured and responsible OTC derivatives
market.
Growing consensus among G20 countries
about the need for more transparency in the
financial system. (EMIR is just the start...)
Need to closely regulate the growing OTC
derivatives market due to its emerging
systemic importance.
Growing consensus among regulators and
stakeholders for fair and accurate valuation of
derivative positions across the industry.
Why EMIR?
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
24
EMIR: Key themes and business impacts
• Fund Managers;
• Asset Managers;
• Hedge Funds;
• Investment Banks;
• Brokers;
• Commodities Firms (Trading Arms);
• Clearers;
• Custodians;
• Corporates (NFCs – specific timelines coming).
Who does it affect
• Central clearing of all standardised OTC derivative contracts.
• Collateralisation of all OTC derivative contracts.
• Individual and omnibus segregation of client money.
• Enhanced risk mitigation techniques for non-centrally cleared
OTC derivatives including:
– Daily valuations. (Mark-to – market, mark-to-model)
– Timely Confirmation requirements.
– Dispute resolution
• Daily trade and position reporting of all derivative contracts to
trade repositories.
What does it mean?
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
25
EMIR: Estimated timeline
2013 2015 2018
15 March 2013
Confirmations, daily
valuation, NFC+
reporting
1 December 2015
Variation margin applies and
phase-in of initial margin starts:
1 Dec 2015: €3tn
1 Dec 2016: €2.25tn
1 Dec 2017: €1.5tn
1 Dec 2018: €0.75tn
1 Dec 2019: €8bn
March 2016
1st clearing obligation
Category 2
2017
Sept 2016
1st clearing
obligation
Category 3 12 Feb / 11 Aug 2014
Reporting to TRs
March 2018
1st Clearing
obligation
Category 4
2014
15 Sept 2013
Portfolio reconciliation,
dispute resolution,
trade compression
>>> >>> >>> >>> >>> >>>
18 Mar 2014
First CCP authorised
2016
March 2015
1st clearing obligation RTS
published in OJ
1st clearing obligation RTS
published in OJ and in force
Sept 2015
1st clearing
obligation
Category 1
10 Apr / Oct 2014
Application to TCE –
TCE trades
Frontloading starts
for Cat1 in May
2015 and for Cat2
in Aug 2015
YOU
ARE
HERE
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
26
Central Clearing: SFA vs EMIR
Timing
Entity reqs
Scope
Collateral
Intra group
Extra
territoriality
Reporting
Non-financials
Singapore’s Securities and Futures Act (SFA) EU’s EMIR
SFA was amended in 2012 to implement OTC derivatives reforms in relation
to reporting and clearing of OTC derivatives transactions and the regulation of
OTC derivatives trade repositories and clearing facilities
A corporation seeking to operate a clearing facility in Singapore must be either
an “approved clearing house” or a “recognised clearing house” (RCH)
Derivative contracts encompass commodities, credit, equities, foreign exchange
and interest rates
Any money, letter of credit, banker’s draft, certified cheque, guarantee or other
similar instrument; any securities; any futures contract, derivatives contract or
other similar financial contract, arrangement or transaction; or any other asset of
value acceptable to an approved clearing house or a recognised clearing house
Intra-group transactions are exempt from the clearing mandate (but subject to
collateralisation requirements)
Overseas clearing facilities are required to comply with the SFA and seek
authorisation under the SFA regime as overseas RCHs if their acts are treated
as carried out in Singapore for the purposes of section 339 SFA
A party subject to the reporting mandate is required to report OTC derivatives
contract to an eligible Trade Repository (TR) within one business day of the
contract being entered into or amended if the contract relates to any product
that is required to be reported and the contract is booked / traded in Singapore
Hedging transactions by non-financial entities will be excluded from
derivative exposure when determining whether non-financial entities
have exceeded the threshold
EMIR came into force on 16 August 2012, although the
clearing requirements have not yet taken effect
Potential for duplicated entity requirements
Excludes listed derivatives but currently includes FX forwards
Wider definition to include Cash, Gov Securities, gold, high
quality corp bonds, equities
Excluded from clearing requirements and uncleared
potentially excluded from collateral requirements
Awaiting detail on extra territorial application
Extensive data set. Reporting by EOD following working day.
Confirmations EOD
Trades for commercial hedging exempt
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
28
UCITS Regulation: constant evolution
The big question:
Will the UCITS depositary be able to be in the same group as the Management Company?
ESMA consultation seeking to align national
regulatory approaches
Interest rate hedged share classes will not be
allowed (they must be separate sub-funds)
Share Classes vs Sub-funds
A growing contents list:
• MiFID rules applied to ManCos (and AIFMs)
• Tightening of eligible investment strategies
• Costs disclosure & Performance Fees
“UCITS VI”
UCITS V – depositaries, manager
remuneration & sanctions
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
30
Non-Bank Non-Insurer Global Systemically Important
Financial Institutions
NBNI G-SIFIs: the longest acronym? Could include both IMs and individual Funds
IOSCO Consultation Paper, January 2014:
“….to identify NBNI financial entities whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause
significant disruption to the global financial system and economic activity across jurisdictions”
“…an indicator-based measurement approach where multiple indicators are selected to reflect the different aspects of what generates negative externalities and
makes the distress or disorderly failure of a financial entity critical for the stability of the financial system”
Impact Factors The indicators used will be tailored to specific sector/entity
types
Size: The importance of a single entity for the stability of the
financial system generally increases with the scale of financial
activity that the entity undertakes.
Complexity: The systemic impact of a financial entity’s distress
or failure is expected to be positively related to its overall
complexity, i.e. its business, structural and operational
complexity. That is, in principle, the more complex a financial
entity, the more difficult, costly and time-consuming it will be to
resolve the failing institution.
Interconnectedness: Systemic risk can arise through direct and
indirect inter-linkages between entities within the financial
system so that individual failure or distress can have
repercussions throughout the financial system.
.
Substitutability: The systemic importance of a single financial
entity increases in cases where it is difficult for other entities in
the system to provide the same or similar services in a
particular business line or segment in the global market in the
event of a failure.
Global activities (cross-jurisdictional activities): The global
impact from a financial entity’s distress or failure should vary in
line with its share of cross-border assets and liabilities. The
greater the global reach of a financial entity, the more
widespread the spill-over effects from its failure.
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
31
NBNI G-SIFIs: the latest vibes
• The FSB plenary has recently approved a second consultation draft. Another consultation document will be published around end-2014 with a 90-day consultation
period. Specifically, the industry will be asked for types of activities that would be considered systemically important if conducted by IMs. Leverage will be of
particular importance.
• The FSB and IOSCO aim to finalise the assessment methodology in 2015 (Phase 1). In phase 2, they will elaborate on the implications of being identified as SIFI
(i.e. policy measures). Potential policy measures will be subject to public consultation and will be different from those applied to banks or insurance companies. In
phase 3, the individual countries will finally conduct the analysis and identify NBNI G-SIFIs.
• The possibility of ending with a null set was confirmed.
Comments at EFAMA’s Annual Forum, November 2014
Comments at IIF Annual membership Meeting, November 2014
The discussion has moved focus from
individual institutions to IM activities. This
is correct because IMs are not balance
sheet businesses. Size has different a
connotation in IM than in banking. Instead,
leverage, stock lending, repos etc. are the
important considerations
(ESMA)
IMs are intermediaries; banks are
principals. If IMs are SI, in what
way? Policy-makers are only just
beginning to get their heads around
this question
(Central Bank of Ireland)
This is increasing
understanding within the
FSB that IM is different
(Commission)
The discussion started from “too big to fail”
questions but now is about entities whose
failure could cause a systemic impact in
the market. Therefore, we have to look at
entities (the “FIs” in “SIFIs”) whose size or
nature make them SI
(IOSCO)
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
32
FSB/IOSCO 2nd Consultation Paper on NBNI G-SIFIs
• Extract from FS Regulatory CoE Blog, 5 March
• This second consultation paper is marginally better than the January 2014 paper in discussing what might make these types of firm systemically
important. However, it does not really pick up on, or develop, the arguments around the potential systemic importance of … investment funds, as put
forward most recently by Mark Carney and the IMF. It reads like it is stuck in a time warp from three years ago.
• Even where potential sources of systemic importance are identified (not always convincingly), the proposed metrics are not always closely related to
them. For example, … for investment funds, only the size metric – out of a long list of metrics - really picks up on the “fire sale of assets” source of systemic
importance, and even then only imperfectly (because the key issue here is size relative to the depth of the market(s) in which the fund is investing).
1. Balance sheet of $100bn or more; or
2. AuM of $1trn or more
Investment
Managers
1. $30bn NAV and leverage of 3x NAV, plus any over $100bn NAV; or
2. Over $200bn gross assets, unless can demonstrate that not dominant
player in its market
Investment
Funds
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
34
MiFID II: Definitions
Retail and elective professional clients (Annex II, Section II of MiFID II)
Retail clients may be treated as professionals on request. This will result in
waiving some of the protections afforded by the conduct of business rules.
An investment firm may opt a client up only if it has assessed the client’s
expertise and knowledge and is satisfied that the client is capable of making its
own investment decisions and understanding the risks involved regarding the
types of transactions and services envisaged.
During this assessment, the firm must be satisfied that at least two of the
following criteria are satisfied:
• the client must have carried out transactions, in significant size, on the
relevant market at an average frequency of 10 per quarter over the
previous four quarters;
• the size of the client’s securities portfolio (including cash deposits and
financial instruments) exceeds €500,000;
• the client works or has worked in the financial sector for at least one year in
a professional position, which requires knowledge of the transactions or
services envisaged.
Professional client
A client who possesses the experience, knowledge and expertise to make its
own investment decisions and properly assess the risks that it incurs.
Examples
• Entities which are required to be authorised or regulated to operate in the
financial markets:
(a) Credit institutions;
(b) Investment firms;
(c) Other authorised or regulated financial institutions;
(d) Insurance companies;
(e) Collective investment schemes and management companies of such
schemes;
(f) Pension funds and management companies of such funds;
(g) Commodity and commodity derivatives dealers;
(h) Locals; and
(i) Other institutional investors.
• Large undertakings (subject to size requirements)
• International organisation (e.g. ECB and IMF)
MiFID II brings changes to client categorisation and now local public authorities
and municipalities can no longer be treated as professional clients or eligible
counterparties by default.
Professional clients (Annex II, Section I of MiFID II)
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
35
MiFID II: third country provisions
The term “third country” refers to jurisdictions outside the EU and “third country
firms” refers to entities incorporated outside the EU.
Access to regulated markets (Article 36 MiFID II)
Third country firms may seek to do business by way of:
(i) a branch established in the EU, or
(ii) on a cross-border basis, that is providing services to persons in one
jurisdiction from a place of business in another jurisdiction without any
establishment in the client's jurisdiction.
Access through establishment of an EU branch (Art. 39 MiFID II)
Member States may require that firms intending to provide investment services
to retail clients and elective professional clients on their territories establish
branches in those Member States. Various conditions will need to be met for the
establishment of a branch, including the existence of appropriate co-operation
arrangements between the two countries.
Where a Member State implements MiFID II to require the establishment of
branches, a third country firm that has not established a branch in that Member
State will not be able to provide investment services to retail clients or elective
professional clients.
Where a Member State does not implement that requirement, the provision of
services to retail clients and elective professional clients will be subject to its
national laws, rather than the provisions of MiFID II.
Passporting
Once a third country firm has established an authorised branch in an EU
Member State (if required to do so to access retail clients) and that firm is
established in a country whose legal and supervisory framework is recognised
as broadly equivalent by the EU Commission, the firm will be permitted to
provide its investment services and to perform activities throughout the EU to
eligible counterparties and professional clients without the need to establish
further branches. This is called ‘Passporting’.
The branch would need to comply with the information requirements for the
cross-border provision of services and activities under Art. 34 of MiFID II. In
these circumstances, there is no requirement for the branch to register with
ESMA as a permitted third country firm. Also, none of the restrictions would
prevent a third country firm from providing its services at the ‘own exclusive
initiative’ of the prospective client (Art. 42 MiFID II).
Retail and elective professional clients
Professional clients and eligible counterparties
Access from outside the EU (Art. 46 MiFIR)
A third country firm is permitted to provide investment services or perform
activities directly to eligible counterparties and to those categories of clients
considered to be professionals in the EU without the requirement to establish an
EU branch provided the EU Commission has first determined that the third
country‘s legal and supervisory regime is broadly equivalent to the EU’s in
certain respects.
A firm based in a third country deemed equivalent will need to apply to the
European Securities and Markets Authority (ESMA) to be included in a register
of permitted third country firms, and ESMA will duly register it provided that (i)
the firm is authorised to provide the relevant investment services or activities in
the jurisdiction of its head office and (ii) appropriate co-operation arrangements
are in place with the relevant third country.
Access through an EU branch (Passporting)
As an alternative to ESMA registration, third country firms can – subject to
certain conditions – provide investment advice to eligible counterparties or
professional clients in all Member States through an EU branch authorised by
the competent Member State authority (Art. 39 MiFID II).
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.
36
Market Impact / Trading venues / Trading
• Can you identify all markets & platforms you trade on, including SIs, and
activity that may be defined as market making, or require you to face new
counterparty?
• Will your existing counterparties continue to provide same service i.e. desk
execution, direct market access?
• Governance & controls requirements for Trading Venues:
circuit breakers, OTR, increased fees, non-discriminate
access, direct market access
• Impact on trade placement strategy and achieving and
evidencing best execution.
• Third country firms dealing with retail clients in EU face
uncertainty over access.
• Third country equivalence assessment to be undertaken; may
duplicate EMIR equivalence assessment.
• Overlap with AIFMD timeline on EU access for third country firms.
• More onerous conditions for establishing branches and subsidiaries in EU
• Impacts on delegation and outsourcing?
Data Collection and Reporting
• Can you identify all products within your clients’ portfolios that will meet the
new MiFID definitions?
• Do you have the capacity and budget to store and retain relevant telephone
conversations and electronic communications for
five years?
• Transaction reporting – reliance on broker goes, number of fields
per transaction significantly increased. How will you build the system? Can
you source the data for all the (new) fields?
Do you have more than one data warehouse?
• More static data and referential data needed from
clients, including end-client legal identifier.
• Repaper clients for new MiFID products and services, new
suitability requirements.
• Can you meet best execution requirements on new products
under MiFID and prove the same to customers?
• Do inducements demonstrably enhance the quality of the service?
• Review product offering and assess viability of offering complex products to
retail clients given additional product governance and distribution processes.
• Review distribution arrangements and new product manufacturing to assess
areas of enhancement – MI, oversight and reporting.
Investor Protection Third Country Access & Passporting Challenges
MiFID II: Some key questions for asset managers
The information contained herein is of a general nature and is not intended to address
the circumstances of any particular individual or entity. Although we endeavour to
provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate
in the future. No one should act upon such information without appropriate professional
advice after a thorough examination of the particular situation.
© 2015 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore
incorporated company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved.
Presentation by:
Diana Quinn
Director, Head of Investment Management, Financial Risk Management
Email: [email protected]
Tel: +65 6411 8443
Mob: +65 9388 3401
Other contacts
David Waller
Partner, Financial Services
Larry Sim
Partner, Financial Services Tax
Shahid Zaheer
Director, Financial Services Regulatory Compliance