Summary and implications
There is an inescapable flow of new European legal and regulatory measures coming our way and which potentially affect the real estate and funds sector. Of particular interest are recent developments in:
- The Alternative Investment Fund Managers 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 the Autumn, to allow more time for negotiations; and
- Solvency II. Despite an expected one year delay in implementation, to January 2014, the FSA is still working towards being ready in January 2013.
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 European Union. Member states have up to 22 July 2013 to comply.
The detail for implementing the 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.
There are a number of material and detailed issues to resolve as part of these ongoing “Level 2” discussions. These are being led in the UK by the FSA and focus around implementation aspects such as authorisation of fund managers, transparency, leverage levels and the requirements for depositaries. A consultation on detailed "Level 2" requirements with a two month response time is expected to be released this month. Industry groups continue to lobby the regulators as part of this process.
It also still remains to be seen what further clarification there may be on what is an alternative investment fund, a fund manager and in particular how certain arrangements, such as joint ventures, will be treated.
For our background briefings on the Directive and its application:
- To real estate, click here, and real estate outside Europe, click here
- To hedge funds, click here, and hedge funds outside Europe, click here
- To private equity, click here, and private equity outside Europe, click here
EMIR – vote in Europe postponed
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 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. One important area 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.
On the positive side, it is expected that OTC Derivative contracts entered into before 2012 will not be caught.
Discussions on the draft wording of EMIR continue and there is still scope for change. For our background briefing on EMIR, click here
Treatment of pension schemes under EMIR
There is a draft transitional provision that removes some pension schemes from the clearing obligation in EMIR for a five year period (to the extent that the OTC Derivative contract entered into by a pension scheme reduces its risks or capital costs). This provision may be extended or amended, depending on the outcome of a report on pension funds’ use of central counter-parties, to be produced by 31 December 2015 by the European Commission, in conjunction with ESMA and the European Insurance and Occupational Pensions Authority.
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.
For our background briefing on Solvency II, click here