Ireland: Investment Funds Legal & Regulatory Update, March 2019

As reported in our February update, a number preparations are underway at EU, UK and Irish level for a potential "nodeal" Brexit. With the crucial "meaningful vote" on the withdrawal agreement between the UK and the EU scheduled for March 12, we consider some recent legal and regulatory developments of relevance in the event that the UK leaves the EU without a deal in place.

CENTRAL BANK UPDATES

Issue 3 of the Central Bank's Markets Update (published on 7 March) contains a number of Brexit related clarifications. These include a Notice of Intention that, in the event of a no-deal Brexit, the Central Bank will consider whether UK UCITS, which will become UK AIFs at that point, should be included as a category of eligible investment for UCITS and retail AIFs. The Central Bank notes that while this is under consideration that it will not adopt a default position that they are ineligible. However, in the case of UCITS, any investment in UK AIFs must fall within with the aggregate limit of 30% for investments in all AIFs.

MiFID investment firms are eligible OTC derivative counterparties for Irish UCITS and retail AIFs. In the event of hard-Brexit, UK authorised investment firms, as non-EU country non-banking entities would not be eligible OTC counterparties for Irish UCITS and/or retail AIFs. Again, the Central Bank will not immediately determine these entities to be ineligible counterparties while it decides whether to include them as an eligible category of OTC derivative counterparty.

The update also clarifies that the Multilateral Memoranda of Understanding that were agreed between European securities regulators and the FCA on 1 February 2019 facilitate delegation or outsourcing arrangements between Irish UCITS Management Companies/AIFMs/MiFID Firms and UK entities. Additionally, the AIFMD Q&A has been updated to clarify that QIAIFs with UK AIFMs (which become non-EU AIFMs) are subject to the full AIFMD depositary regime including the AIFMD depositary liability provisions (ID #1129).

OMNIBUS BREXIT LEGISLATION

On 6 March 2019, the Irish Government's omnibus Bill for a no-deal Brexit - the Miscellaneous Provisions (Withdrawal of the United Kingdom from the European Union on 29 March 2019) Bill (the "Bill") - was passed by the Irish parliament (Dáil) and will go through the Irish senate (Seanad) in the week commencing 11 March.

The Bill is intended to be consistent with and complementary to the EU's preparations for the UK's withdrawal from the EU. Part 7 of the Bill, which contains 17 parts in all, introduces legislative amendments to support the implementation of the European Commission's temporary equivalence decision with regard to UK authorised central securities depositories (for more information, please see below) and to extend the protections in the Settlement Finality Directive to Irish participants in relevant non-EU country domiciled settlement systems (for more information please see our recent Derivatives Group briefing here).

DATA PROTECTION COMMISSION'S GUIDANCE ON DATA TRANSFERS

On 8 February, the Data Protection Commission published guidance on transfers of personal data from Ireland to the UK in the event of a 'No-Deal' Brexit'. The guidance includes information on the extra measures that can be put in place to legally transfer personal data to the UK in the event the UK becomes a non-EU country.

RECOGNITION OF UK ENTITIES BY ESMA

The European Commission's temporary equivalence decision ("Decision") under Article 25 of the Central Securities Depositories Regulation (EU/2014/909) in respect of UK authorised central securities depositories (CSDs) entered into force on 20 December 2018. Without this Decision, in the event of a hard-Brexit there would have been significant disruption to the Irish securities market as most trades in Irish securities are settled in the UK. The adoption of the Decision and the agreement of a Memorandum of Understanding between ESMA and the Bank of England, means that UK CSDs can apply to ESMA for recognition as a third country CSD.

On 1 March, ESMA confirmed that in the event of a "no-deal" Brexit, that Euroclear UK and Ireland Limited is recognised to provide its services as a CSD in the EU.

ESMA has also recognised three UK established central clearing counterparties ("CCPs) as third country CCPs under EMIR. In the event of a hard-Brexit LCH Limited, ICE Clear Europe Limited and LME Clear Limited may provide their services in the EU.

In addition, ESMA has also registered DTCC Data Repository (Ireland) PLC as a trade repository under EMIR with effect from 1 March 2019.

EMIR Reporting and Funds: Central Bank Outlines its Expectations for Compliance

The European Market Infrastructure Regulation (EU/648/2012) ("EMIR") imposes, amongst other obligations, a reporting requirement on financial and non-financial counterparties, including investment funds (both UCITS and AIFs) that transact derivatives. The reporting obligation means that information on trades must be reported to a trade repository by the end of the working day following the conclusion, modification or termination of the derivative contract. A counterparty may delegate this reporting task to the trade counterparty or a third party, but the responsibility to report cannot be delegated.

In Ireland, the Central Bank is responsible for supervising EMIR compliance and in 2018 it conducted a quality review on reported EMIR data across a cross-section of counterparties. Following this review, the Central Bank has written (20 February) to the boards of counterparties, including investment fund boards, to remind them of their EMIR reporting obligations and to highlight certain deficiencies that were identified during this exercise. Although the Central Bank acknowledges in its letter that the standard of reporting is improving, it notes that significant issues remain and has also set out a number of recommendations for counterparties to address these issues. Further, the Central Bank expects boards to include "EMIR Reporting" as a standing agenda item for all board meetings and is reminding counterparties that failure to comply with the EMIR reporting requirements is a prescribed contravention, which may result in the Central Bank taking supervisory or enforcement action.

The Central Bank's findings highlight issues in relation to delegated reporting, the completeness and accuracy of trade reporting, legal entity identifiers and unique trade identifiers. Some of the key issues and Central Bank recommendations for all counterparties, including investment funds, are set out below:

DELEGATED REPORTING

Identified Issues

The Central Bank noted several instances where, having delegated EMIR reporting, counterparties did not take appropriate steps to ensure compliance with the reporting requirements. As noted above, the responsibility for reporting cannot be delegated and so counterparties remain responsible for ensuring that all required information is reported accurately and in a timely manner to the trade repository.

The Central Bank also identified instances where counterparties were not aware of rejection reports or their contents and so were not in a position to ensure that remedial action could be taken to rectify the issues giving rise to rejection. Therefore, they could not verify that their reporting obligation had been met.

Recommendations

Counterparties should:

  • ensure that regular reports are received from the delegate to include details of rejection reports;
  • reconcile data reported by the trade repository to the delegate with its own internal systems to ensure that all relevant trading has been reported;
  • regularly review rejection reports to ensure all trade submissions are successfully reported to a trade repository, ensure revised correct data submissions are made on a timely basis, and remedial action is taken to eliminate rejected reports in the future; and
  • undertake remedial action to address any deficiencies and non-compliance with the EMIR reporting requirements. If a fund does not delegate reporting to its counterparty, it should still liaise with the counterparty to ensure the consistency of the contents of each report.

COMPLETENESS AND ACCURACY OF TRADE REPORTING

Issues Identified

The Central Bank identified a number of recurring issues in this regard primarily relating to valuations, collateral and outstanding and expired/matured contracts. These issues include the failure to report daily valuation updates; failure to report details of collateral received/posted with respect to trades; and failure to reflect that expired/matured trades are no longer outstanding, resulting in these contracts remaining outstanding indefinitely with the trade repository.

Recommendations

Counterparties should:

  • regularly review the accuracy and completeness of reports;
  • submit daily valuations for all outstanding trades/ positions; and
  • submit data on collateral held/posted for all outstanding trades/positions.

LEGAL ENTITY IDENTIFIERS

All trade reports must include a Legal Entity Identifier ("LEI") (where the counterparty is a legal entity) and the Central Bank recommends that:

  • counterparties share details of their LEI with any entity with which they trades or to which they have delegated reporting;
  • all reviews of trade repository data (whether by the counterparty or its delegate) should confirm that the counterparty is correctly identified with its LEI; and
  • LEIs should be reviewed annually as lapsed LEIs are invalid for reporting purposes.

UNIQUE TRADE IDENTIFIERS

Under EMIR a Unique Trade Identifier ("UTI") must be generated and agreed between the counterparties. The Central Bank recommends that:

  • counterparties should ensure that a UTI is applied to all individual trades and that it is communicated to all relevant parties in advance of the trade being reported to the trade repository; and
  • where responsibility for generating the UTI is delegated, the counterparty must ensure that it is advised of the UTI in a timely manner. The counterparty must also be aware of how it can be deemed unique.

Fund boards should now review their EMIR reporting arrangements to ensure compliance with the requirements and add EMIR reporting as a standing agenda item to be discussed at all board meetings. Funds and their managers should also be aware of the changes that the EMIR REFIT Regulation will introduce with regard to the reporting obligation. This regulation will amend EMIR to provide that where an OTC derivative transaction is entered into by a UCITS, its management company is responsible for meeting the reporting obligation and ensuring the accuracy of the reports. An AIFM will be similarly responsible where the OTC derivative contract is entered into by an AIF.

Regulatory Statements on EMIR Clearing Obligation of Small Financial Counterparties

On 21 June 2019 the EMIR clearing obligation for category 3 financial counterparties is due to take effect. Category 3 financial counterparties are those financial counterparties whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is equal to or below the clearing threshold of €8 billion. Therefore, although they may have a limited clearing volume, UCITS and AIFs in this category would be required to start CCP clearing some of their OTC derivative contracts.

However, proposed amendments to EMIR, (known as EMIR REFIT), will create a category of financial counterparties whose derivative positions are below the clearing thresholds1 and exempt these small financial counterparties from the clearing obligation. The clearing threshold for this exemption is €1 billion in gross notional value for credit and equity derivatives contracts, and €3 billion for interest rate, foreign exchange, commodity and other OTC derivative contracts. Should EMIR REFIT not come into force before 21 June 2019, certain small financial counterparties whose derivative positions are below the EMIR REFIT clearing thresholds would still have to comply with the EMIR clearing (and MiFIR trading) obligations (for further information on these requirements and on EMIR REFIT, please see our Derivatives Group briefing here).

On 31 January 2019, ESMA issued a public statement noting the challenges that certain small financial counterparties would face to prepare for the 21 June 2019 deadline and stated that although neither ESMA nor national competent authorities ("NCAs"), such as the Central Bank, have power to dis-apply legislation such as EMIR or delay the onset of its obligations, ESMA expects NCAs not to prioritise their supervisory actions towards the clearing obligation to be imposed on affected small financial counterparties who will subsequently be outside the scope of the clearing obligation once EMIR REFIT comes into force, and to generally apply their risk-based supervisory powers in their day-to-day enforcement of this framework in a proportionate manner. On 4 February the Central Bank confirmed that it would apply its risk-based supervisory powers in the manner suggested in ESMA's statement.

ESMA's 2019 Supervisory Convergence Work Programme

On 6 February 2019, ESMA published its supervisory convergence work programme for the coming year. Unsurprisingly, supervisory convergence measures in the context of Brexit remain at the forefront of ESMA's priorities. From an investment management perspective, ESMA's key supervisory convergence objectives and outputs for 2019 will focus on:

  • performance fees;
  • closet indexing;
  • liquidity stress testing and leverage;
  • money market funds; and
  • developing and reviewing ESMA's AIFMD and UCITS Q&As.

ESMA's over-arching identified priorities are:

  • safeguarding the free movement of services in the EU through adequate investor protection in the context of cross-border provision of services;
  • fostering supervisory convergence in the field of financial innovation;
  • making data and its use more robust and consistent by developing and further clarifying reporting methodologies and providing guidance to ensure complete and highquality data; and
  • driving forward consistency in the application of the Markets in Financial Instruments Directive and Regulation (MiFID II/MiFIR) and reaching a common understanding on related supervisory challenges.

Anti-Money Laundering Update

The Department of Justice and Equality has published the General Scheme of the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2019. This bill will transpose the requirements of the 5th EU Money Laundering Directive ("5MLD") into Irish Law. 5MLD extends the deadlines for the establishment by Member States of central registers of beneficial ownership to 10 January 2020 for corporates and 10 March 2020 for trusts. It also provides for public access to the central corporate register; while access to the central trust register will be limited to those persons that can demonstrate a legitimate interest.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions