Asset management: reviewing the big topics of autumn 2015 and upcoming European regulations
The regulatory agenda for autumn 2015 includes AIFM implementation, AMF policy, the Macron law, the energy transition law, ELTIF, UCITS 5, MiFID 2, and more. What new opportunities await asset managers? What European regulations are nearly complete and in need of attention? We take a look at the season's noteworthy regulatory topics with Xavier Parain, Managing Director and Head of the AMF's Asset Management Directorate.
What are the most important topics of autumn 2015?
Xavier Parain: To begin with, given the backdrop of exceptionally low interest rates and fluctuating liquidity, I think it is vital for management companies to consider, if they haven’t already, whether they are doing enough to monitor risk. It may now be necessary to adjust certain parameters to ensure that controls are effective. These include alert thresholds, frequency, and so on. Also, before tackling the upcoming regulations, we can’t forget about the ones that have taken effect these past two years! This is especially true of the AIFM directive.
The 327 management companies authorised by the AMF have to have executed the measures stipulated when they were authorised, i.e. stress tests, reporting to the AMF, remuneration policies, etc. In each area, the management companies must verify that all aspects are in compliance with current regulations and that they work in practice. Each new mechanism must be formally documented, implemented and traceable.
I would also like management companies to pay attention to some other major regulations that now need to be taken into account, such as the ETF guidelines published in February 2013 (DOC-2013-06), the AMF policy on securities lending published in February 2015 (DOC-2012-19), and the policy on portfolio management mandates (DOC-2007-21) published last July.
Will any new regulations take effect this autumn?
Xavier Parain: Yes, in fact; we should mention two French laws passed in August 2015 for which we are awaiting implementation decrees.
First of all, the Macron law has created a new category of specialised funds for professionals: the open partnership company, or société de libre partenariat (SLP). We are poised to modify our General Regulation and our Policy (DOC-2012-06) to allow companies to launch more quickly. I think that this development is an opportunity to attract large French and foreign investors because, like limited partnerships, SLPs allow flexibility in management while strengthening governance. This new addition to the range of French funds is likely to appeal to many managers of private equity funds and other asset classes.
On the other hand, the energy transition law, which has an “asset management” aspect, requires that investment funds disclose their exposure to climate change-related risks and their investments’ environmental impact. An implementation decree will specify the exact information they need to supply to investors.
There has been talk of a “regulatory pause” at the European level, but what does that really mean?
Xavier Parain: The European Commission has not launched any new regulatory initiatives in the field of asset management in recent months. However, there is still work to be done to coordinate all of the regulations enacted in recent years, both those targeting the asset management industry specifically and those dealing with financial markets generally. Asset managers thus need to get ready for the numerous directives and regulations directly or indirectly impacting their activity that are scheduled to take effect between now and the end of 2016.
December 2015: ELTIF
The regulation on European long-term investment funds (ELTIF) is intended to channel European savings towards long-term investments in Europe’s real economy. The regulation was adopted last April and consultation on implementation measures (level 2) is under way. Among the possibilities offered by this regulation, there is the fact that passports will make it possible to market ELTIFs to professional investors throughout Europe and, if the management company chooses, to certain individuals. It will also allow “ELTIF-certified” funds to grant loans under certain specific conditions. The regulation will enter into force at the end of the year. I encourage management companies to familiarise themselves with this instrument, because it represents a great opportunity.
January 2016: SFTR
The Securities Financing Transactions Regulation (SFTR) stems from the Commission’s work on shadow banking. It aims to reduce the risk associated with temporary exchanges of assets such as repurchase agreements and securities lending. To do so, the regulation lays out requirements for transparency and disclosure that will translate into reporting obligations for management companies. These are scheduled to take effect in early 2016. The effective implementation of the various obligations will be staggered over time. It is interesting to note that every kind of transaction that management companies could potentially use is now regulated: SFTR complements MiFID 2, which notably governs direct investment in financial securities, and EMIR, which regulates dérivatives.
March 2016: UCITS 5
The newest version of the UCITS directive adjusts the rules governing the regime depositaries, remuneration for managers, and administrative sanctions. The regulation aims to align rules for UCITS managers with those of AIFM managers to prevent a double standard under European law. The Treasury Directorate General will soon begin a consultation on measures for implementing UCITS 5, and the regulation is scheduled to take effect in March 2016. I think that companies that manage both UCITS and AIFs will be able to incorporate the new provisions quickly because they can draw on their experience with the AIFM. On the other hand, companies that only manage UCITS will have to make some adjustments in order to comply. I encourage those companies to plan for how they will implement the new obligations.
July 2016: MiFID 2
The provisions of the MiFID 2 directive notably cover rules of good conduct, or what is referred to as product governance. They will not take effect until January 2017, but in France, the transposition of MiFID 2 is seen as a chance to “clean up” French regulations. What I mean is that in France, the 634 management companies authorised by the AMF have historically also held the status of investment firms, to which MiFID 2 is supposed to apply. But the directive is not intended to cover collective investment schemes, and one of our goals, along with the Treasury, is to ensure that management companies are not subject to measures not required under European law. This is why management companies are no longer automatically considered investment firms – in order to limit the impact of MiFID 2 solely to entities that provide investment services such as investment advice, discretionary portfolio management and order execution. This project will, for example, allow management companies to be exempt from transaction reporting obligations. Naturally, there will be public consultation on these planned changes. I encourage those with a stake in the outcome to participate in these consultations when they occur.
|Transposition of MiFID 2: deciphering plans to adapt French régulations
The changes being made to French law can be explained as follows: companies that manage collective investment schemes and are authorised as UCITS or AIFMs will no longer have investment firm status. Those that are not authorised as UCITS or AIFMs and that conduct the business of individual portfolio management under mandates would be subject to the provisions of MiFID 2. Regardless of their authorisation, if companies that manage collective investment schemes also offer advisory services, order execution and discretionary portfolio management, those business activities would be subject to MiFID 2. Lastly, the MiFID 1 rules that apply to management, notably regarding information transparency, would naturally remain in the Monetary and Financial Code and continue to apply to all management companies.
October 2016: EMIR
European regulations on over-the-counter derivatives, central counterparties and trade repositories, called the European Market and Infrastructure Regulation (EMIR), aim to enhance security and transparency. EMIR took effect in 2013, on a sequenced basis as a function of the target area. One aspect of the regulation is to introduce a clearing obligation initially applicable to interest rate derivative contracts for alternative investment funds. This obligation is scheduled to come into force sometime around October 2016 for companies whose over-the-counter derivatives business exceeds €8 billion (calculated fund by fund), and in April 2017 for everyone else. I would suggest that management companies take stock of their funds so that they can do whatever is necessary to bring their contracts into compliance, if need be.
December 2016: PRIIPS
The aim of the regulation on key information documents for Packaged Retail Investment And Insurance Products (PRIIPS) is to standardise the information provided to non-professional investors prior to contracting for investment products whose performance is a function of underlying assets. In all likelihood, there will be impacts on the information supplied by companies who market UCITS and AIFs. Management companies who already produce a KIID will have until 31 December 2019 to comply with the regulation. But this regulation may also affect funds that do not currently produce a KIID. Thus, I strongly encourage sector participants to look into this subject and respond to consultations on the technical standards now being devised so that the texts will take the specific needs of asset management companies into consideration.
What proposed European regulations do asset managers need to be preparing for?
Regulations still being debated
Xavier Parain: There are a few European regulations currently being debated to which asset managers should pay particularly close attention. The first that springs to mind is the Shareholder’s Rights directive; there is a proposal to strengthen reporting obligations regarding voting rights. The Benchmark regulation is also important given that asset managers often incorporate indices into their management strategies. Lastly, there is the “Securitisation” initiative undertaken as part of the Capital Markets Union. These projects are expected to be finished in late 2017 or 2018. Between now and then, I encourage management companies to take part in the debates and respond to consultations on these proposals.
Furthermore, it will be interesting to keep an eye on the work being done on European regulations governing money market funds (MMFs), which the AMF has been waiting and hoping for. Given the colossal volumes managed in the French money market and how much is at stake in the reform, I firmly believe that market participants’ involvement will be invaluable in the upcoming negotiations, which we expect to happen soon.
What about future regulations?
Xavier Parain: We could see new initiatives coming out of Brussels in the coming months. Among the topics that might interest the asset management sector, one that springs to mind in particular is the digital transition that some companies have already begun in France and abroad. The new practices and offerings that we have seen lately are forcing lawmakers and regulators to reflect on the new channels for distributing products and investment advice. Questions dealing with the way funds are marketed in Europe and internationally should also give management companies a chance to engage in a very real exchange of views with the AMF over the next few months.
Head of publications: The Executive Director of AMF Communication Directorate. Contact: Communication Directorate – Autorité des marches financiers 17 place de la Bourse – 75082 Paris cedex 02