Caught in the EU FINREG WAKE

Citi Custody & Fund Services – Caught in the EU FinReg Wake 25 24 IF DIRECTIVE EU Council votes on proposal Member states transpose into national law within deadline set in directive IF REGULATION Becomes law in all member states immediately Trialogues (reconcile differences) EU Parliament votes EU Commission makes legislative proposal EU Council agrees to amended proposal EU Parliament agrees to amended proposal If approved, proposal becomes law 20 days after publication in Official Journal decide the appropriate level of governance and oversight for the UCITS funds they authorize. In practice, this has led to a lot of asset management activities, including portfolio management, being delegated to countries outside of the fund domicile. However, there is a cohort of EU policymakers who would like to see this changed, and have the UCITS rules incorporate third-country provisions. These provisions would govern what activity can be conducted in non-EU countries, and what must be done within the EU. The catalyst for this push is the UK’s decision to leave the EU. A large percentage of the assets held in UCITS funds are managed from London. Some policymakers think that once the UK exits the EU it should no longer be able to be a major asset management hub for European funds. Any changes to the UCITS delegation rules could have a significant impact on the global asset management ecosystem. UCITS funds have become a truly global product without third-country provisions. UCITS funds domiciled in Ireland or Luxembourg are just as likely to be managed in New York or Hong Kong as they are in London or Paris. The industry is concerned that any changes made to restrict the UK’s access to UCITS may have unintended global ramifications. CLOSING THE MIFID LOOPHOLE In the run up to the implementation of Markets in Financial Instruments Directive (MiFID) 2, a number of high-profile hedge funds exchanged their MiFID authorization for an AIFMD authorization. By changing to the AIFMD license, hedge funds can avoid MiFID 2’s detailed transaction reporting and annual public trading execution disclosures. This move did not go unnoticed by policymakers. Markus Ferber, the chief architect of MiFID 2, has noted that he expects the differences between AIFMD and MiFID 2 to be closed as quickly as possible. Given one of the key policy goals of regulators is to reduce so-called regulatory arbitrage, the use of AIFMD to avoid MiFID 2 reporting requirements is likely to be short-lived. THE CLOCK IS TICKING All proposed changes to regulatory frameworks need to be approved before the EU Parliamentary elections in May 2019. Any changes that are not approved by May 2019 will have to go back to square one after the new Parliament is formed. Beyond the time pressure, amending the AIFMD and UCITS frameworks is a complicated process because it also requires input from the Parliament and Council. There is a concern that the Council and Parliament’s input may increase the scope beyond the Commission’s distribution points. For example, it’s possible that there may now be a debate about reviving the UCITS bonus cap that was abandoned with UCITS 5. The broader the scope of the changes the more likely it is that the negotiations get bogged down and the changes won’t be finalized in time. Nonetheless, given the potential impact of some of the proposals, asset managers should be engaged from the outset to ensure their voices are heard as newproposals are drafted. EU LEGISLATIVE PROCESS