No-Deal Brexit Developments

Formal clearance on delegation of portfolio management to UK managers

One of the eligibility criteria for EU UCITS, AIFS and MiFID firms which wish to delegate portfolio management to third country firms (which would be the status of UK asset managers in a "no deal" Brexit scenario) is that co-operation arrangements (commonly known as memoranda of understanding or "MOUs") must be in place between the relevant supervisory authorities. The putting in place of MOUs by 29 March 2019 has been widely heralded for some months and was formally announced by ESMA and the FCA on 1 February. The MOUs comprise:

  • a multilateral MoU (MMoU) between EU/EEA securities regulators and the FCA covering supervisory cooperation, enforcement and information exchange between individual regulators and the FCA, which will allow them to share information relating to, amongst other things, market surveillance, investment services and asset management activities. This, in turn, will allow certain activities, such as fund manager outsourcing and delegation, to continue to be carried out by UK based entities on behalf of counterparties based in the EEA; and
  • an MoU between ESMA and the FCA concerning the exchange of information in relation to the supervision of credit rating agencies and trade repositories.

These MOUs will only take effect in the event of a no-deal Brexit and are a most welcome development for the asset management and investment funds industry given the continuing uncertainty surrounding the Brexit environment.

Recognition of UK CCPs and the UK CSD

On 4 February 2019, ESMA agreed MoUs with the Bank of England (BOE) for the recognition of central counterparties (CCPs) and the central securities depository (CSD) established in the UK to take effect in a no-deal Brexit scenario. ESMA had previously communicated, in public statements of 23 November and 19 December 2018, that its Board of Supervisors supported continued access to UK CCPs and to the UK CSD, in order to limit the risk of disruption in central clearing and avoid any impact on EU financial stability. It will also allow the UK CSD to continue to serve Irish securities, and to limit the risk of disruption to the Irish securities market. ESMA aims to recognise UK CCPs and the UK CSD in a timely manner, where the recognition conditions under Article 25 of EMIR, and Article 25 of CSDR are met. The conclusion of MoUs between ESMA and the BOE satisfies the third recognition condition (establishment of cooperation arrangements) under both regulations.

The MoUs are a statement of intent to consult, cooperate and exchange information in connection with ESMA’s immediate access, on an on-going basis, to The MOUs set out in detail the scope of cooperation and information-sharing arrangements between ESMA and the BOE. ESMA aims to complete the final steps for the recognition of the UK CCPs and the UK CSD and to adopt the recognition decisions well ahead of Brexit date.

Central Bank publishes guidance in relation to QIAIFs with UK AIFMs

On 4 February 2019 the Central Bank issued a revised AIFMD Q&A which includes a new Q&A ID 1129, in relation to Qualifying Investor AIFs (QIAIFs) with post-Brexit UK AIFMs.

The Q&A clarifies that a QIAIF will be permitted to designate a UK AIFM as its AIFM on the basis that the UK AIFM complies with the Irish rules for sub-threshold AIFMs postBrexit.

The Central Bank has also written to QIAIFs with UK AIFMs advising that QIAIFs migrating to such an arrangement need to assess the impacts arising from the loss of the markting passport under AIFMD including notification to investors, amendments to documentation, filings with the Central Bank or other supervisory authorities and any other operational issues. Notifications must be made to the Central Bank before 22 February of the intention to designate a UK AIFM as a non-EU AIFM after 29 March 2019. Any consequential updates to the QIAIF's documentation must be submitted by 1 March 2019. Likewise if the QIAIF intends to switch to an EU 27 AIFM by 29 March 2019, the relevant change of service provider documentation must be submitted to the Central Bank by 1 March 2019.

Central Bank – muted positive signal on "Location Requirement"

On 4 February, the Central Bank published a "Notice of Intention" in relation to the location requirement for directors and designated persons of fund management companies domiciled in Ireland.

By way of background, where a fund management company has a Central Bank PRISM impact rating of low, the fund management company is required to have at least:

(i) 2 directors resident in Ireland;

(ii) half of its directors resident in the EEA or such other country as the Central Bank may, taking into account criteria regarding effective supervision, determine and advise by notice published on the website of the Central Bank (the "Effective Supervision Requirement"); and

(iii) half of its managerial functions performed by at least 2 designated persons resident in the EEA or such other country that meets the Effective Supervision Requirement.

Where a fund management company has a PRISM impact rating of medium low or above the fund management company is required to have at least:

(i) 3 directors resident in Ireland or, at least, 2 directors resident in Ireland and one designated person resident Ireland;

(ii) half of its directors resident in the EEA or such other country that meets the Effective Supervision Requirement; and

(iii) half of its managerial functions performed by at least 2 designated persons resident in the EEA or such other country that meets the Effective Supervision Requirement.

In the context of Brexit (on the basis of an agreed withdrawal agreement or otherwise), uncertainty has arisen as to whether the Central Bank will determine the UK as a country which meets the Effective Supervision Requirement.

The Notice of Intention does not clear up this uncertainty and, in effect, the Central Bank is giving itself flexibility in making and reviewing this determination in the future by providing: "the Central Bank will consider whether the UK is a country to be determined as meeting the Effective Supervision Requirement. For the period while this is under consideration, the Central Bank does not propose adopting a default position which would treat the UK as not satisfying the Effective Supervision Requirement. After consideration of the above, the Central Bank will determine whether the UK, as a country, continues to satisfy the Effective Supervisory Requirement and the Central Bank will confirm same by publishing a notice on its website. Such determination may be changed, including if circumstances change."

While the Notice of Intention is a little cryptic, it appears to amount to the Central Bank indicating that it will look to avoid a "cliff-edge" situation so that fund management companies will not be deemed non-compliant with the location rule in the event of a no-deal Brexit solely by virtue of having UK-based directors or designated persons.

Ireland produces draft no-deal Brexit legislation

The Irish government published the draft scheme of a Bill to accommodate a no-deal Brexit scenario on 24 January 2019.

As regards financial services, Part 7 of the Bill supports the European Commission's temporary and conditional equivalence decision for UK based Central Securities Depository (CSD) services. In a no-deal Brexit scenario, under the CSD Regulation, Euronext Dublin would not be able to continue using its current system (Ireland uses the UKbased CSD 'Crest') as the UK would become a third country. The Bill proposes to protect payments and transfers of securities made by Irish participants by empowering the Minister of Finance to 'designate' a 'third country system' for the purposes of the Settlement Finality Regulations. This will extend the protections of the Regulations to Irish firms using settlement or payments systems in a designated third country.

Political Agreement on Cross Border Funds Distribution Measures

On 5 February 2019 the Council and the European Parliament reached a preliminary agreement on the legislative package aimed at eliminating existing barriers to the cross-border distribution of investment funds within the EU. The agreement enhances the current regulatory framework applying to investment funds, which is based mainly on the UCITS and AIFM directives, complemented by four fund-specific frameworks (European venture capital funds, European social entrepreneurship funds, European long-term investment funds and money market funds). Rules for EU investment funds allow fund managers to distribute and, with some exceptions, to manage their funds across the EU, while ensuring a high level of investor protection.

The new rules are intended to facilitate the cross-border distribution of investment funds by eliminating current regulatory barriers and making cross-border distribution less costly. The EU Commission press release announcing the agreement indicated that the EU investment fund market is still predominantly organised as a national market with 70 % of all assets under management being held by investment funds registered for sale only in their domestic market. Only 37 % of UCITS and about 3 % of AIFs are registered for sale in more than three Member States

The legislative package agreed forms part of the Capital Markets Union Action Plan and, from a technical perspective, involves a new Directive amending the existing UCITS and AIFM Directives and a new regulation. Parliament and Council will be called on to adopt the proposed directive and regulation at first reading in due course.

ESMA consults on liquidity stress test guidance for investment funds

On 5 February 2019, ESMA commenced a public consultation on its draft guidance regarding liquidity stress tests applicable to AIFs and UCITS.

ESMA’s draft guidelines for fund managers aim to promote convergence in the way national competent authorities supervise funds' liquidity stress testing across the EU. The consultation sets out 14 principle-based criteria for managers’ liquidity stress tests to follow when executing liquidity stress tests on their funds.

The draft principles require stress tests to:

  • be tailored towards the individual fund;
  • reflect the most applicable risks to a fund;
  • be sufficiently extreme or unfavourable (yet plausible);
  • sufficiently model how a manager is likely to act in times of stressed market conditions; and
  •  be embedded into the fund’s overall risk management framework.

One guideline will also apply to depositaries, outlining how they should fulfil their obligations regarding liquidity stress tests.

ESMA is seeking stakeholders’ views on the guidance fund managers should follow, which include:

  • the design of liquidity stress testing scenarios;
  • the liquidity stress test policy, including internal use of liquidity stress test results;
  • considerations for the asset and liability sides of investment fund balance sheets; and
  • the timing and frequency for individual funds to conduct the liquidity stress tests.

The draft guidelines follow recommendations by the European Systemic Risk Board (ESRB) published in April 2018 on how to address liquidity and leverage risk in investment funds. The ESRB mandate asked for the principles to be based on the stress testing requirements set out in the AIFM Directive and how market participants carry out stress testing.

The consultation is open for feedback until 1 April 2019. ESMA will consider the feedback it receives in early Q2 2019 and expects to publish a final report by the summer of 2019.

Public Consultation on Irish Limited Partnerships

On 18 January 2019, the Department of Business, Enterprise and Innovation (DBEI) launched a public consultation on the Limited Partnerships Act, 1907 (1907 Act). The DBEI is seeking views on the 1907 Act as part of its ongoing policy agenda to review and enhance Ireland’s regulation and enforcement regime. Limited partnerships established under the 1907 Act are not regulated in Ireland, although as alternative investment funds they do require an AIFM. Overall their use has been characterised by a steady but relatively very small stream of annual registrations compared to company registrations.

It is anticipated that some of the changes contemplated for the 1907 Act will be similar to the ones introduced in UK legislation and also some of those proposed for the Irish Investment Limited Partnerships Act 1994. The DBEI is seeking submissions from interested parties to its consultation paper by close of business on 1 March 2019.

This is a welcome development for the private equity and venture capital sectors. 

EMIR Refit – ESMA and Central Bank Approach

On 31 January 2019 ESMA published a statement addressing EMIR Refit implementation. The statement addresses issues around the clearing and trading obligations for small financial counterparties and the backloading requirement for reporting entities, ahead of upcoming deadlines, which would otherwise represent challenges for these entities in the context of the ongoing EMIR Refit negotiations.

ESMA is aware of challenges that certain small financial counterparties would face to prepare for the 21 June 2019 deadline to start CCP clearing and trading on trading venues some of their OTC derivative contracts.

Given that the EMIR Refit negotiations (published in May 2017) have not yet been finalised (which would effectively exempt small financial counterparties from the clearing obligation), it is not yet known when the resulting text is expected to start applying, potentially after the phase-in for small financial counterparties expires. Therefore, there could be a timing gap during which small financial counterparties, whose derivative positions are below the clearing thresholds, would need to have clearing arrangements in place and start clearing their derivative contracts, before they are exempt from doing so once Refit comes into force.

ESMA, in its statement, indicates that it expects National Competent Authorities (NCAs) not to prioritise their supervisory actions towards financial counterparties whose positions are expected to be below the clearing thresholds when the EMIR Refit enters into force, and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.

ESMA is also aware of challenges that reporting counterparties would face regarding their compliance with the backloading requirement by 12 February 2019. To meet regulatory needs and to reduce the substantial and costly adjustments that reporting entities need to make to comply with the backloading requirement, the Refit proposals remove the backloading requirement from Article 9 of EMIR.

As the EMIR Refit negotiations have not been finalised and the deadline for the completion of backloading was already extended from 12 February 2017 to 12 February 2019, ESMA is addressing the backloading requirement with respect to the reporting obligation.

ESMA indicates in its statement that it expects NCAs to apply their risk-based supervisory powers in their day-to-day enforcement of EMIR in a proportionate manner. This may include not prioritising counterparties’ reporting of backloaded transactions in their day-to-day supervision and enforcement of EMIR.

Following on from this statement by ESMA, on 4 February the Central Bank confirmed that, in accordance with the recommendation from ESMA and pending the entry into force of EMIR Refit, it would apply its risk-based supervisory powers in the day-to-day enforcement of applicable legislation (i.e. EMIR’s reporting obligation, clearing obligation and MiFIR’s trading obligation) in a proportionate manner.

Recent speech by Michael Hodson, Director of Asset Management and Investment Banking at the Central Bank of Ireland

Michael Hodson, Director of Asset Management and Investment Banking at the Central Bank of Ireland, delivered an interesting and wide-ranging speech on 24 January 2019 at a financial services seminar organised by the British-Irish Chamber of Commerce.

Mr Hodson emphasised that the Central Bank recognises the importance of the relationships that it has developed with its regulatory counterparts in the UK - the FCA / PRA - and that it will be a part of the Central Bank's mentality to maintain and grow these relationships regardless of the Brexit outcome.

The following points from the speech, in relation to asset management and investment fund developments, are of particular interest:

Supervisory Focus

Mr Hodson outlined that the Central Bank has recently completed its supervisory plans for 2019 and firms can expect supervisors to continue to provide robust challenge on the implementation of MiFID II and CP86. In addition, the Central Bank will maintain a high level of visibility with firms on the protection of client assets while also continuing to engage with firms on their contingency planning for Brexit.


In noting an uplift in the number of firms seeking authorisation in Ireland with applications ranging from banks, investment firms, electronic money institutions and insurance companies, Mr Hodson emphasised that the Central Bank will not lower its assessment standards which include ensuring that a firm is properly capitalised, has sufficiently experienced and knowledgeable people based in Ireland, a clear plan for when the firm will be operationalised and robust risk frameworks in place.

Exchange traded funds (ETFs)

In highlighting that Ireland is the largest European domicile for ETFs, Mr Hodson updated the audience on IOSCO’s work on ETFs. It is taking two work streams forward which can be broadly split into two areas. The first work stream will consider product-facing, investor-related issues. The second work stream will consider matters which are more market-facing, including arbitrage and trading issues. The Central Bank is taking a leading role in the second work stream. Mr Hodson also noted that other international regulatory authorities such as the ESRB and the FSB are also considering matters related to ETFs.

Central Bank’s UCITS Regulations

Mr Hodson indicated that the Central Bank will shortly publish a revised set of the UCITS Regulations. They represent a consolidation of all Central Bank UCITS Regulations to date and take account of regulatory and technical updates which the Central Bank consulted on last year.


In the context of outsourcing activities by supervised firms, Mr Hodson stressed the importance of having strong controls in place around the governance and oversight of outsourcing arrangements.

The Central Bank publishing a paper last November entitled ‘Outsourcing – Findings and Issues for Discussion’. The paper outlines the Central Bank’s findings and observations. It also communicates its minimum supervisory expectations around the management of outsourcing risk, as they pertain to the areas considered in its cross sector survey of regulated firms’ outsourcing activity.

The Central Bank intends to follow up on the issue of this paper by organising an outsourcing industry conference to take place in quarter two of 2019. The feedback received on this paper and at that conference will inform on-going discussions on outsourcing and also assist the Central Bank in determining the appropriate regulatory response.