There is an inescapable flow of new legal and regulatory developments emerging from the UK and US governments, from global bodies and from the European Union (EU) and which potentially affect the real estate and funds sector. Of particular interest are recent developments in some EU measures:
- The Alternative Investment Fund Managers Directive (the AIFM Directive). This comes into force on 21 July 2011. Member states have to transpose the Directive into their national laws by 22 July 2013;
- The European Market Infrastructure Regulation (EMIR) on Over the Counter (OTC) Derivatives. The European Parliament vote on EMIR has been postponed until later this year, to allow more time for negotiations; and
- Solvency II. Despite an expected one year delay in implementation, to January 2014, the UK Financial Services Authority (FSA) is still working towards being ready in January 2013.
This briefing provides an overview and recent key developments in each of the AIFM Directive, EMIR on OTC Derivatives and Solvency II.
1. AIFM Directive – the background
The intention of the AIFM Directive is to create a comprehensive and effective regulatory framework for Alternative Investment Fund Managers (AIFMs), being the managers of collective investment vehicles other than Undertakings for Collective Investments in Transferable Securities (UCITS) in the EU. It establishes the framework for the authorisation, operation and transparency of AIFMs that manage and/or market these funds into the EU. The Directive captures closed-ended, open-ended and listed funds and other vehicles.
For our background briefings on the Directive and its application:
- To real estate outside Europe, click here, and real estate, click here
- To hedge funds outside Europe, click here and hedge funds, click here
- To private equity outside Europe, click here and private equity, click here
AIFM Directive – to go live in member states by 22 July 2013
The AIFM Directive comes into force on 21 July 2011, which is 20 days after its publication (on 1 July 2011) in the Official Journal of the EU. Member states have up to 22 July 2013 to comply.
The detail for implementing the AIFM Directive is now being fleshed out under “Level 2” discussions between national regulators and the European Commission. The European Securities and Markets Authority (ESMA) is to provide the European Commission with technical advice on the content of the implementing measures by 16 November 2011. Industry groups continue to lobby the regulators as part of this process.
2. EMIR – what is its scope?
A fundamental concept in EMIR is who is a financial counterparty and therefore within the scope of EMIR. EMIR includes for these purposes alternative investment funds managed by a fund manager within the AIFM Directive, as well as banks and other financial institutions. As a result any such fund manager will need to comply with the relevant capital and reporting requirements of EMIR for its OTC Derivatives. There is lobbying to take real estate and venture capital out of the scope of EMIR. Indeed, the European Commission recently published a public consultation in the case of venture capital fund managers.
In the meantime it remains the case that OTC Derivative contracts (primarily interest rate swaps or hedges for loans) used by real estate businesses that fall within the AIFM definition will need to be cleared through external exchanges. They will also need to provide liquid collateral (not real estate itself) to back their OTC Derivative contract activities.
For our background briefing on EMIR, click here
EMIR – vote postponed to Autumn 2011
The European Parliament’s vote on EMIR has been postponed and is now likely to be held in September 2011. This is to allow more time for negotiations with EU member states.
EMIR is subject to the usual European legislation co-decision process. This involves approval by both the European Parliament and the Council of the EU. There is a conciliation process by the European Commission if agreement is not reached at EMIR’s second reading.
EMIR is expected to apply from late 2012. It will have direct national effect once it is adopted in Europe.
For a table of the Presidents of the Council of the EU, click here
3. Solvency II – the background
Solvency II seeks to impose a harmonised risk-based capital adequacy regime for insurers and reinsurers across Europe. The main objective of the Directive is better protection of policy holders, so that the probability of insurers meeting their obligations to policyholders over a one year horizon is 99.5 per cent. Insurers in the EU will have to review their regulatory capital structures (for property, equity, bonds and derivatives) to establish whether they will have adequate solvency capital to satisfy the new requirements and minimise investment risks.
Click here for a table that sets out proposed standard solvency capital requirements for some example assets, by applying the standard formula calculation in the draft Directive.
For our background briefing on Solvency II, click here
Solvency II – recent developments
A group of industry bodies (led by INREV and including EPRA, BPF, IPF, ABI, BVI and ZIA) jointly commissioned research by IPD to review Solvency II. This was to more accurately determine the true risk profile of a number of real estate markets throughout Europe. The research results, released in April 2011, showed that most respondents thought that the proposed capital requirements to be introduced through Solvency II for insurance companies investing in real estate (currently 25 per cent) was too high and the consensus was that a 15 per cent pan-European capital charge would be more realistic, with the possibility of a +/- 10 per cent dampener.
Insurers will be able to tailor their own models for solvency capital requirements, which require approval of the insurer’s regulator. Despite an expected one year delay in implementation, to January 2014, the FSA has said it continues to work on the assumption that the implementation date is 1 January 2013. The FSA will be open for applications for internal models for two months from 30 March 2012. The pre-application process has now closed. For those intending to use their own internal models, they would be wise to both submit their application early and have a contingency plan in place for January 2013 if their model is not approved.