Financial Services Alerter February 2016

This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should

be obtained before taking or refraining from any action as a result of the contents of this document

February 2016

Welcome to Simmons & Simmons' Financial Services Alerter, our monthly bulletin containing brief details of significant legal and regulatory developments of relevance to the fund management and investment banking communities.

Although the primary focus of Financial Services Alerter is the UK, we also cover EU and other international developments of relevance to the UK.

The information contained in Financial Services Alerter is based exclusively on publicly available sources and relates to developments taking place in February 2016.

• UK developments

• EU and international developments

• elexica and other client items

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Financial Services Alerter

Introduction

House of Commons debates FCA's fitness for purpose

On 01 February 2016, the House of Commons held a debate on whether the Financial Conduct Authority (FCA) is fit for purpose, in its current form. The debate included the issue of the FCA’s handling of interest swap mis-selling and its decision to cancel its review into banking culture. As the debate did not conclude before close of business in the House of Commons, no vote was taken on the motion.

Bank of England and Financial Services Bill 2015-16

On 01 February 2016, the Bank of England and Financial Services Bill 2015-16 had its second reading in the House of Commons. MPs will next consider the Bill in a Public Bill Committee. This is scheduled in the programme motion to conclude by 23 February 2016, but could finish earlier. On 04 February 2016, the UK Parliament published a document containing proposed government amendments to the Bank of England and Financial Services Bill that have been tabled by Harriett Baldwin, Economic Secretary to HM Treasury, for consideration in the committee stage in the House of Commons.

Draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2016 published

On 02 February 2016, a draft version of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2016 was published alongside an explanatory memorandum on the legislation.gov.uk website. Some amendments relate to the regulated activity of operating an electronic system in relation to lending and other amendments relate to the regulated activities connected with regulated credit agreements and regulated mortgage contracts. Most provisions in the Order will come into force in March 2016 with some coming into force in April 2016.

FCA reviews the procedures for taking on new clients in a sample of ten firms that offer CFD products

On 02 February 2016, the FCA published a letter entitled “Client take-on review in firms offering contract for difference (CFD) products”. The FCA has recently reviewed the procedures for taking on new clients in a sample of ten firms that offer CFD products, including: (i) the firms’ approaches to assessing the appropriateness of CFD trading for prospective clients; (ii) initial disclosures to clients; (iii) anti-money laundering controls; and (iv) client categorisation. The review showed a range of approaches to completing the appropriateness assessment were not in line with COBS 10, most risk warnings issued to clients who failed the appropriateness assessments were not adequate and anti-money laundering controls in place to manage the increased risks posed by higher risk clients were insufficient. These findings also suggest that firms may not be acting in the best interests of their clients and treating them fairly, bringing into question firms’ compliance with COBS 2.1.1R and the Principles. Given the poor results that the FCA observed across its sample, it is concerned that there is a high risk that CFD providers industry-wide are not meeting the requirements of the rules when taking on new clients and/or are failing to do enough to prevent financial crime. In particular, it appears that firms may not have

Financial Services Alerter UK developments

processes that allow them to assess the appropriateness of CFD trading for prospective clients, which could result in firms failing to identify clients for whom CFDs are not appropriate. The FCA was also concerned to find that firms’ communications did not meet its expectations. As an example, risk warnings given to clients did not convey in a clear and fair way that the product was not appropriate for the customer.

FCA policy statement on final rules on extending the certification regime to wholesale market activities and interim rules on referencing

On 04 February 2016, the FCA published a policy statement (PS 16/3) which sets out final rules for the new accountability framework on which the FCA consulted in July 2015 (CP 15/22). The FCA provides initial feedback on CP15/31 (October 2015) as well as final rules on an interim regime for referencing, pending a permanent set of rules for references, including transitional arrangements, which it aims to publish in the summer. As well as ensuring that, in future, senior managers can be held accountable for any misconduct that falls within their area of responsibility, the FCA aims to hold individuals working at all levels in banks and other relevant firms to appropriate standards of conduct.

PRA regulatory references update

On 04 February 2016, the Prudential Regulation Authority (PRA) published an update on regulatory references with regard to the consultation paper (CP36/15) on “Strengthening accountability in banking and insurance: regulatory references”. The consultation proposed requirements relating to the content and format of employment references for individuals subject to the Senior Managers and Certification regimes. The PRA intends to issue a first tranche of rules in mid-February 2016, which will apply from 07 March 2016 and as soon as possible issue, with the FCA, a second tranche of rules that will cover areas where consultation feedback indicated that there may be possible gaps.

FCA policy statement on fair, reasonable and non-discriminatory access to regulated benchmarks

On 08 February 2016, the FCA published a policy statement (PS16/4) on fair, reasonable and non-discriminatory access to regulated benchmarks. The policy statement summarises the responses received to consultation paper (CP15/18) and presents the amended Handbook text that will apply to benchmark administrators. The proposals required regulated benchmark administrators to grant access to and licences to use benchmarks on a fair reasonable and non-discriminatory basis. The FCA proposed that such access should be provided within three months following a written request. The FCA proposed that different fees should be charged to different users only where this is objectively justified, having regard to reasonable commercial grounds such as the quantity, scope or field of use requested. The proposals also set out a list of non-exhaustive factors that the FCA may consider in assessing whether the terms of access to a benchmark are fair, reasonable and non-discriminatory.

Treasury Committee letter containing economic and financial questions on EU membership

On 11 February 2016, the House of Commons Treasury Committee published a letter to George Osborne, Chancellor of the Exchequer from Andrew Tyrie, Committee Chair, which includes questions on the economic and financial costs and benefits of EU membership.

FCA policy statement: implementation of SM&CR and SIMR and PRA requirements on regulatory references

On 15 February 2016, the FCA and the PRA jointly published a policy statement (PS 16/5), “Strengthening accountability in banking and insurance: implementation of SM&CR and SIMR, and PRA requirements on regulatory references”. PS 16/5 contains: (i) PRA rules to implement the first set of proposals on regulatory references following PRA CP36/15, which will be supplemented with the PRA’s full policy at a later date; (ii) the PRA and FCA final rules to implement the proposals for the application of the Senior Insurance Managers Regime (SIMR) to Swiss general insurers; and (ii) final PRA rules to

implement the remaining proposals made in Chapter 4 of PRA CP36/15, and in PRA CP41/15. The new rules become effective on 07 March 2016, with the exception of those in relation to the grandfathering provisions for current approved persons, which came into effect on 15 February 2016.

PRA and FCA statement on compliance with the EBA guidelines on Sound Remuneration Policies

On 29 February 2016, the PRA and the FCA notified the European Banking Authority (EBA) that they will comply with all aspects of the EBA Guidelines on Sound Remuneration Policies, except for the provision that the limit on awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval (the bonus cap), must be applied to all firms subject to the Capital Requirements Directive (CRD).

FCA note on liquidity management for investment firms

On 29 February 2016, the FCA published a note on liquidity management for investment firms. At the request of the Bank of England’s (BoE) Financial Policy Committee, the Financial Conduct Authority (FCA) and BoE have been assessing risks posed by open-ended investment funds investing in the fixed income sector. The work included engagement with a number of large investment management firms to understand how they manage liquidity in their funds. The note includes: (i) why managing liquidity risk is important; (ii) disclosure of liquidity risks to investors; (iii) good practice on liquidity risk management and oversight; (iv) good practice on fund dealing; and (v) implementation of exceptional liquidity tools and measures.

ESMA publishes consolidated UCITS Q&A

On 01 February 2016, the European Securities and Markets Authority (ESMA) published consolidated Q&As on the application of UCITS. The consolidated Q&As include new questions on documentational requirements which funds need to follow for UCITS V with regard to remuneration and depositaries. The new Q&A also brings together the following four existing ESMA Q&As on UCITS: (i) the Key Investor Information Document (KIID) for UCITS (2015/631); (ii) Q&A on ESMA’s guidelines on ETFs and other UCITS issues (2015/12); (iii) notification of UCITS and exchange of information between competent authorities (2012/428); and (iv) risk measurement and calculation of global exposure and counterparty risk for UCITS (2013/1950). The UCITS V Directive comes into force on 18 March 2016.

ESMA updates on supervisory work on closet indexing

On 02 February 2016, ESMA published a statement providing details of its work on closet index tracking funds. ESMA conducted research on a sample of 2,600 funds for the period 2012-2014 to determine whether it could find any indication of closet indexing at an EU-wide level. Quantitative metrics, such as the percentage of a UCITS’ portfolio that does not coincide with the underlying equity benchmark, indicated between 5 and 15% of UCITS equity funds could potentially be closet indexers. ESMA then reviewed the investor disclosure documents of the funds concerned, to see how they described their management strategy and found they tended to confirm the quantitative analysis results. ESMA will continue to work with national regulators to determine further actions as the analysis gives only a first indication of whether particular funds are closet index trackers. This work will include an active role for ESMA in the coordination of further analysis carried out at the national level, while fuller investigations on a fund-by-fund basis will necessarily fall in the remit of national competent authorities, as part of their regular supervisory work. Together with national competent authorities, ESMA will also assess the need for further steps to ensure that all market participants comply with disclosure obligations to the full extent.

Financial Services Alerter EU and international developments

Responses to European Commission’s call for evidence on EU regulatory framework for financial services

On 30 September 2015, the European Commission published a call for evidence on the EU regulatory framework for financial services to which it has received the following responses: (i) on 01 February 2016, the Bank of England published a cover note, high-level overview and detailed answers to its response; (ii) on 05 February 2016, the FCA published its response; (iii) on 04 February 2016, the European Central Bank published the response of the Eurosystem; and (iv) on 04 February 2016 HM Treasury published the UK government’s response.

ESMA issues opinions on UK pension schemes to be exempt from central clearing under EMIR

On 02 February 2016, ESMA issued a set of opinions regarding the exemption of 16 UK pension schemes from the obligation to centrally clear OTC derivative contracts under the European Market Infrastructure Regulation (EMIR). Pensions schemes have to ask their national competent authority for exemption from the clearing obligation. Before deciding on an exemption, the relevant competent authority (the FCA for the UK) must obtain the opinion of ESMA, which, in turn, must consult the European Insurance and Occupational Pensions Authority (EIOPA). After the exemptions are granted by the FCA, ESMA will publish the list of the types of entities/ arrangements that have been exempted.

ESMA publishes translations of its guidelines on complex debt instruments and structured deposits

On 04 February 2016, ESMA published translations of its guidelines on complex debt instruments and structured deposits. Competent authorities to which these guidelines apply must, by 04 April 2016, notify ESMA whether they comply or intend to comply with the guidelines, with reasons for non-compliance. In the absence of a response by this deadline, competent authorities will be considered as non-compliant.

ESMA publishes responses to the EMIR consultation on MPOR client accounts

On 04 February 2016, ESMA published the responses received to the consultation (2015/1867) on review of Article 26 of RTS No 153/2013 with respect to margin period of risk (MPOR) for client accounts.

ESMA updates its EMIR Q&A

On 04 February 2016, ESMA published updated Q&As on EMIR implementation. The updated Q&As include new answers regarding: (i) CCP’s default management (Article 48 EMIR); (ii) competent authorities’ access to trade repository data (Article 81 EMIR); and reporting of notional in position reports.

Clearing of deliverable FX instruments

On 05 February 2016, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a statement on clearing of deliverable FX instruments. The statement was issued in light of industry developments with respect to CCP clearing of deliverable FX instruments.

Change to WMBA benchmark calculation methodology

On 10 February 2016, the Wholesale Markets Brokers' Association issued a market notice (dated 27 January 2016) on changes to its benchmark calculation methodology.

ESMA publishes responses to the consultation on PRIIPs Key Information Documents

On 10 February 2016, ESMA published the responses received to the joint consultation paper (2015/073) on PRIIPs Key Information Documents. The final draft RTS will be submitted to the European Commission for endorsement by 31 March 2016.

European Commission and the United States Commodity Futures Commission: common approach for transatlantic CCPs

On 10 February 2016, the European Commission and the US Commodity Futures Trading Commission (CFTC) announced their common approach regarding transatlantic Central Counterparties (CCPs) together with a joint statement. In order to implement the common approach are: (i) the CFTC will need to finalise a substituted compliance regime for EU CCPs; and (ii) the European Commission will need to adopt an equivalence decision for the CFTC's regime. Prior to this, EU Member State authorities must vote on the proposal through the European Securities Committee.

European Commission extends by one year the application date for the MiFID2 package

On 10 February 2016, the European Commission announced that it is extending the application date for MiFID2 by one year. The reason given for the extension is the complex technical infrastructure that needs to be set up for the MiFID2 package to work effectively. ESMA must collect data from approximately 300 trading venues on somewhere in the region of 15 million financial instruments. To achieve this, ESMA must work closely with national competent authorities and the trading venues themselves. However, the European Commission was informed by ESMA that neither competent authorities, nor market participants, would have the necessary systems ready by 03 January 2017, the date on which the MiFID2 package was initially scheduled to become operational. In light of these exceptional circumstances and in order to avoid legal uncertainty and potential market disruption, an extension was deemed necessary. The new deadline is 03 January 2018.

ESMA publishes responses to consultation on access, aggregation and comparison of TR data under EMIR

On 10 February 2016, ESMA published the responses received to its consultation paper (2015/1866) on access, aggregation and comparison of TR data under Article 81 of EMIR.

ESRB response to ESMA on the temporary exclusion of exchange-traded derivatives from Articles 35 and 36 of MiFIR

On 10 February 2016, the European Systemic Risk Board (ESRB) published its opinion (dated 09 February 2016) on the temporary exclusion of exchange-traded derivatives (ETDs) from Articles 35 and 36 of MiFIR. The ESRB is of the opinion that the balance between the different financial stability implications, in the light of the relevant risk containment measures, does not lead to the identification of significant macroprudential risks or benefits that would clearly argue either in favour of or against a temporary exclusion of ETDs from Articles 35 and 36 of MiFIR. This conclusion follows the qualitative analysis, as relevant data for a reliable quantitative analysis are not available. The ESRB proposes that ESMA should take into account the macroprudential considerations put forward in its opinion when preparing the report to the Commission.

ESMA announces open hearing on MAR guidelines

On 12 February 2016, ESMA announced an open hearing on its consultation paper (2016/162) on Market Abuse Regulation guidelines regarding market soundings and delayed disclosure of inside information. The open hearing will take place on 29 February 2016.

Financial markets regulatory dialogue joint statement

On 12 February 2016, the European Commission published a joint statement regarding the recent US and EU participants in the Financial Markets Regulatory Dialogue (FMRD) meeting on 03 February 2016.

The statement reports that EU and CFTC participants noted progress towards an agreement on a common approach regarding requirements for CCPs. EU and Securities and Exchange Commission discussions regarding CCPs are also ongoing. In addition, EU and CFTC participants reported that they

are engaged in discussions regarding equivalence of U.S. trading platforms under the Markets in Financial Instruments Directive framework. More generally, U.S. and EU participants will continue to cooperate, where appropriate, with regard to international discussions on CCP regulation.

EU participants reported that ESMA is presently examining factors to inform the issuance of its advice to the European Commission regarding the extension of the EU passport to U.S. fund managers. This advice is due by summer 2016. Participants noted recent useful exchanges to help clarify the effect of the Volcker Rule on foreign funds, and committed to continue discussions to review outstanding concerns, with a view to finding solutions.

U.S. participants welcomed European progress on benchmark reform that reflects the International Organization of Securities Commissions (IOSCO) principles on benchmarks and intends to address benchmark manipulation. U.S. participants expressed concern about the manner of application of the forthcoming Regulation’s “proportionality” provisions to third-country administrators.

Indices used as benchmarks: European Commission request to ESMA for technical advice on possible delegated acts

On 12 February 2016, the European Commission published a mandate (dated 08 February 2016), accompanied by a cover letter, which it has sent to ESMA requesting technical advice on possible delegated acts concerning the regulation of the European Parliament and of the Council on indices used as benchmarks in financial instruments and financial contracts. On 25 November 2015, the European Parliament and the Council reached political agreement on a compromise text of the Commission's proposal for a Regulation. This compromise text was endorsed by COREPER on 09 December 2015. The European Parliament is expected to vote on the text in April 2016 and the Regulation is expected to enter into force in late May or early June 2016.

Draft report on the proposal for a regulation of the EP and of the Council amending Regulation (EU) as regards exemptions for commodity dealers

On 12 February 2016, the European Parliament (Committee on Economic and Monetary Affairs) published a draft report on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards exemptions for commodity dealers (dated 11 February 2016).

ESMA consults on implementation of the Benchmarks Regulation

On 15 February 2016, ESMA published a discussion paper (2016/288) (the DP) regarding the technical implementation of the incoming Benchmarks Regulation. ESMA is seeking stakeholder input on its future draft Regulatory Technical Standards and Technical Advice to the European Commission. The DP seeks feedback on the: (i) definition of benchmarks; (ii) requirements for the benchmark oversight function; (iii) requirements for the benchmark input data; (iv) governance and control requirements for supervised benchmark contributors; (v) authorisation and registration of an administrator; and (vi) transparency requirements regarding the benchmark methodology. The exact date when the Benchmarks Regulation will enter into force is still unknown as it has not yet been published in the Official Journal of the EU. ESMA held an open hearing on the DP on 29 February 2016 in Paris and will use the responses to the DP to develop detailed implementing measures on which it will publish a follow-up consultation in Q3 2016.

ESMA updates EMIR Q&A

On 16 February 2016, ESMA updated its Question and Answers (Q&As) regarding the implementation of EMIR. The Q&A clarify how the clearing obligation should apply to swaps resulting for the exercise of a swaption, including during the frontloading period and the approach on frontloading that was adopted in the ESMA’s first RTS on the clearing obligation, which entered into force on 21 December 2015. ESMA’s

EMIR Q&As aim to provide clarity to market participants ahead of the various compliance deadlines resulting from the first RTS on the clearing obligation.

ESMA issues follow-up review on money market fund guidelines

On 16 February 2016, ESMA issued a follow-up peer review into compliance by national competent authorities (NCAs) with guidelines regarding money market funds. This report follows up an earlier peer review published in April 2013, focusing on eight NCAs that were not compliant with the guidelines. The review covers the period from 01 May 2014 to 01 May 2015. Peer reviews and their follow up are an important means of identifying areas for further convergence in the application of EU law and of incentivising convergence. This report updates the findings of the first peer review and sets out the results of the eight jurisdictions subject to this follow-up peer review assessment. Seven now apply the guidelines: Bulgaria, Cyprus, Liechtenstein, Lithuania, Latvia, Malta and Portugal.

ESMA adds to list of clearing members to its public register on EMIR

On 19 February 2016, ESMA published an update of its Public Register for the Clearing Obligation. The update concerns the so-called ‘category 1’ clearing members, compromising either financial counterparties or non-financial counterparties above the clearing threshold who are clearing members of a central clearinghouse (CCP). Category 1 firms will be the first to start the central clearing of certain types of derivative contracts by 21 June 2016.

elexica and other client items

01 February 2016 Marketing financial instruments to retail clients - Spain introduces a stricter regime

01 February 2016 Listed interests in financial institutions caught by Common Reporting Standard

02 February 2016 UCITS - ESMA publishes Q&As on updating documents under UCITS V

03 February 2016 Legal Headwinds NL/EU - Quarterly Report - Q1 2016

04 February 2016 Taking the long view: the taxation of performance-linked rewards for asset managers

10 February 2016 Brexit: the legal implications

10 February 2016 Securities Financing Transactions (SFTR)

10 February 2016 European Commission extends application of MiFID2 by one year

11 February 2016 EMIR Newsflash: US/EU "Common approach for transatlantic CCPs"

15 February 2016 Brave new world: MiFID2 and MiFIR - The changes facing the financial markets

16 February 2016 Let us in! AIFMD - The establishment and marketing of Funds in the EU under the AIFMD

16 February 2016 PRA - first tranche of rules on regulatory references issued

16 February 2016 LGPS and derivatives - removing the ambiguity?

16 February 2016 EMIR Newsflash: ESMA publishes updated Q&As

17 February 2016 Is it the end of the beginning for credit funds in Italy?

18 February 2016 The impact of regional instability in the Middle East on asset allocation

18 February 2016 Brexit: the implications for financial services

22 February 2016 The whistleblowers’ champion - the new non-executive director role

26 February 2016 The New Settlement for the United Kingdom within the European Union

29 February 2016 Legal Headwinds: Asia - Quarterly Report - Q1 2016

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