EMIR Refit: 17 June 2019 calculation deadline for investment funds

Central Bank communication

All investment funds that are counterparty to any derivative contract should establish as a matter of priority whether they are subject to the clearing obligation for OTC derivatives under EMIR. They can do so by calculating, by 17 June 2019, their aggregate month-end average OTC derivative position for the previous 12 months. There are exemptions from the clearing obligation if the OTC derivatives are below certain thresholds. This is the small financial counterparty or SFC clearing exemption and the thresholds are:

  • €1bn in gross notional value for credit derivatives or equity derivatives contracts
  • €3bn in gross notional value for interest rate derivative, foreign exchange derivatives, commodity derivatives and any other OTC derivatives contracts.

If an investment fund exceeds the threshold or if an investment fund does not conduct the calculation, it must immediately notify ESMA and the relevant competent authority. It will need to start clearing for the OTC derivative contracts entered into, or novated, from 18 October 2019.

An SFC which can avail of the clearing exemption will remain subject to the requirement to exchange collateral as part of EMIR's risk mitigation objectives. The SFC clearing exemption does not exempt a financial counterparty or FC from EMIR reporting obligations. EMIR Refit does contain some minor concessions in relation to the reporting obligations.

The Central Bank of Ireland (Central Bank) contacted Irish investment funds on 30 May 2019 to remind them of EMIR and EMIR Refit requirements. The Central Bank advised investment funds to identify, by 17 June 2019, if they are subject to the clearing obligations for FCs. It also set out the Central Bank and ESMA notification procedure for an investment fund which concludes it is required to adhere to the clearing obligation or which chooses not to conduct the threshold calculation.

Some practical points

  • The threshold calculation needs to be available on 17 June 2019. FCs are expected to collect all the necessary data and information before then.
  • The calculation is the aggregate month end average notional position in OTC derivatives for the previous 12 months. This is understood to mean the sum of all positions for the relevant class of derivatives at the end of each month, divided by 12.
  • The EMIR Refit regulation states that for UCITS and AIFs the positions should be calculated at the level of the fund. The EMIR Refit article stating this does not specify sub-fund or umbrella. It is likely that we can conclude that, where the derivative contract is concluded at the level of the sub-fund, we can interpret the reference to "fund" in the calculation requirement to be at the level of the sub-fund. This is an interpretation by reference to the rest of that article and the ESMA EMIR Q&A.
  • Where a UCITS ManCo manages one or more UCITS or an AIFM manages one or more AIFs, they must be able to demonstrate that the calculation at fund level does not result in;
    • a systemic underestimate of the positions of the funds that they manage, or the positions of the manager; and
    • the clearing obligation being circumvented.
  • Under EMIR Refit, all EU AIFs, irrespective of their manager's status, will be considered FCs unless they are a securitisation special purpose entity or set up solely for employee share purchase plans.

Summary background and references

The European Market Infrastructure Regulation or EMIR entered into force on 16 August 2012. Its aim was to contribute to reducing systemic risk by increasing the transparency of the OTC derivatives market and reducing the counterparty credit risk and operational risk associated with OTC derivatives. EMIR is being amended and the changes, known as EMIR Refit, will enter into force on 17 June 2019. The aim of EMIR Refit is to simplify the EMIR regime and reduce regulatory and administrative burdens. The EMIR framework is made up of the primary EMIR regulation, 10 regulatory technical standards and the EMIR Refit regulation. The European Commission released some frequently asked questions on EMIR to clarify the timing and the scope of EMIR, together with certain issues related to third country CCPs and trade repositories. ESMA also issued an EMIR Q&A which was last updated on 28 May 2019. That ESMA Q&A update included an explanation that the SFC threshold calculation requirement discussed here will become effective immediately once EMIR Refit enters into force.

Please speak with your usual contact on our A&L Goodbody Asset Management & Investment Funds team if you need assistance in relation to the clearing threshold calculation or any Central Bank or ESMA notification.

New Central Register of Beneficial Ownership of Companies and Industrial and Provident Societies website launched.

The new Central Register of Beneficial Ownership of Companies and Industrial and Provident Societies website launched.

It includes FAQs on a variety of issues. A guide and instruction video on completing the Beneficial Ownership submission will be available on the website or on the RBO’s YouTube channel before the opening of the Register on 22 June 2019.

Central Bank Speeches

Deputy Governor Ed Sibley delivered a speech on The Irish Funds Industry: Opportunities and Challenges. Key messages for Funds included:

  • Far too many fund ManCos are, in effect, ceding key decisions and control to investment management companies to such an extent that serious questions have to be raised about the substance of the firm. The Central Bank has not stood for this in applications for new authorisations, and it is equally unacceptable for existing firms.
  • In 2019, the Central Bank will be undertaking a thematic review to assess how firms have implemented the package of Fund Management Company Effectiveness measures introduced on foot of CP86. The broad aim of this work will be to identify standards of industry compliance, to inform the supervisory approach and to ensure that ManCos have systems of governance in place to protect investors' best interests.
  • Some detail on the following topics:
    • Sustainable finance / ESG (Environmental, Social & Governance) Investing
    • Transformative technology
    • Enhancing the quality and use of data. Deputy Governor Sibley referenced the Central Bank letter to EMIR counterparties which provided feedback on the main issues identified from reviews on data quality in 2018 so as to ensure complete, accurate and timely reporting.

Seana Cunningham, Director of Enforcement and Anti-Money Laundering delivered a speech on developments in AML, the enforcement investigative process, fitness and probity, protected disclosures and proposals for reform

Key messages for Funds included:

  • It is not enough for regulated firms and those who work for them to comply with the letter of the law, they must also comply with the kinds of fundamental principles set out in the Corporate Governance Code or the Fitness and Probity Standards.
  • The speech highlights recent enforcement actions taken by the Central Bank against individuals and gave some context on one of the primary enforcement tools, the Administrative Sanctions Procedure or ASP.
  • In AML / CFT, the Central Bank performs three basic regulatory tasks: authorisation, supervision and enforcement. In AML the Central Bank supervises credit and financial institutions' compliance with relevant requirements, and acts to secure compliance by such institutions with their obligations. The Central Bank is currently in the process of finalising Anti-Money Laundering and Countering the Financing of Terrorism Guidelines for the Financial Sector, the aim of which is to assist credit and financial institutions in understanding their obligations under the CJA 2010, as amended.
  • Ms Cunningham gave some colour on the investigative work of the Central Bank's enforcement teams, and trends. The Central Bank relies increasingly on artificial intelligence and sophisticated document management software. It recruited a team of specialist data analytics professionals to manage this process. It is using powers to compel information to an ever greater extent, including through compelled interviews. Ms Cunningham highlighted that in the investigative process, co-operation with the regulator is important, and extends well beyond engaging in settlement discussions.
  • In fitness and probity, the Central Bank has a role as investigator of issues, as gatekeeper for PCF roles and as standard setter for CF roles. The Central Bank has noted a lack of general awareness in the industry regarding the scope of the Fitness and Probity Regime, particularly as to the extent of a firm's own legal obligations. Ms Cunningham referenced the "Dear CEO" letter sent to regulated firms to emphasise to firms that they have significant compliance obligations and first line responsibility under the Fitness and Probity regime, and to highlight some of the main areas of compliance which have been found to be lacking. Amongst other matters, the letter noted a failure to carry out ongoing due diligence, in that certain firms are not assessing, on an ongoing basis, whether those carrying on controlled function roles remain 'fit and proper' to do so. The Central Bank has seen failures to notify concerns and failures to obtain PCF approval.
  • Ms Cunningham highlighted that the Protected Disclosures regime allows members of the public or staff of regulated firms to provide information on suspected regulatory wrongdoing in a confidential form to the Central Bank. Senior individuals are under an obligation to report wrongdoing to the Central Bank.

Ms Cunningham also referenced the proposed Individual Accountability Framework comprising four elements:

  • Enforceable Conduct Standards which set out the behaviour the Central Bank expects of regulated firms and the individuals working within them. Examples of such standards include the binding obligations on firms and individuals to conduct themselves with honesty and integrity, act with due skill, care and diligence in relation to the conduct of their business and co-operate with relevant regulatory authorities.
  • A Senior Executive Accountability Regime, or "SEAR", to ensure clearer responsibility and accountability by placing obligations on firms and senior individuals within them to set out clearly where responsibility and decision-making lie for their business. Taking a risk-based approach, the central bank proposed that the initial introduction of a SEAR would focus on a sub-set of the financial services industry.
  • Further enhancements to the current F&P Regime, to strengthen the onus on firms to proactively assess individuals in controlled functions on an ongoing basis. The Central Bank also proposed enhancements to overcome some current limitations of the Central Bank's F&P oversight function (for example giving the Central Bank the ability to investigate people who performed controlled function roles in the past).
  • A unified enforcement process, which would apply to all breaches by firms or individuals of financial services legislation. The Central Bank also recommended that the hurdle of participation be removed so that the Central Bank could pursue individuals directly for their misconduct under the Administrative Sanctions Procedure, rather than only where they are proven to have participated in a firm's wrongdoing.

Gerry Cross, Director Financial Regulation Policy and Risk delivered a speech on the proposed enhanced individual accountability framework and on sustainability (environmental and of financial firms' business).

Mr Cross discussed the Central Bank's proposal for the introduction of an Individual Accountability Framework (discussed above). The proposals will require legislative change in order to be effective and the Central Bank is currently working with the Department of Finance on this. Following the finalisation of the legislation the Central Bank will hold a consultation. The Department hope to have draft heads of bill before the Summer recess and to publicly consult early next year.

Mr Cross also discussed sustainability in terms of sustainability of financial firms' business and environmental sustainability. In terms of environmental sustainability, Mr Cross noted that developments include:

  • An EU taxonomy, or classification system, of commonly agreed principles and metrics for assessing if economic activities can be considered sustainable or "green" for investment purposes is currently being finalised in the European legislative process.
  • The integration and disclosure of sustainability risks by institutional investors, such as asset managers, insurance companies, pension funds, or investment advisors. Firms (including UCITS ManCos and AIFMs) will have to assess the risks arising from sustainability factors in their investment and advisory processes and to disclose to end investors the result of this assessment and any potential impact on returns. It will also be incumbent on firms to have risk policies in place addressing sustainability risks. This means that firms can no longer use a client's indifference to sustainability as a reason not to consider ESG factors. These new rules will require firms, whether they are manufacturers or distributors of investment products, to be able to determine whether a product has ESG characteristics or not and if so how they would be compatible for their target market. These are discussed further below.
  • The creation of two categories of voluntary benchmarks designed to orient the choice of investors who wish to adopt a climate-conscious investment strategy. The climate-transition benchmark will offer a low-carbon alternative to the commonly used benchmarks. And, a "Paris-aligned" benchmark will only comprise companies that can demonstrate that they are aligned with a 1.5˚ Paris target. These new benchmarks are designed to give assurances to investors who wish to invest in companies on the basis of sustainable activity. Alongside these developments, we can shortly expect guidance on the green bond standard and the use of Ecolabel framework for green financial products.

Colm Kincaid, Director of Securities and Markets Supervision delivered a speech on Transparency in Securities Lending

Key messages for Funds included:

  • Central Bank focus this year will include:
    • Supervisory issues.
    • Closing out its follow up engagement on the thematic review of UCITS' performance fees through risk mitigation programmes imposed on relevant firms and redress to investors where required.
    • Continuing closet indexing review.
    • A thematic review to assess how firms have implemented CP86. The broad aim of this work will be to identify standards of industry compliance in order to inform the supervisory approach and ensure that the requisite systems of governance are in place to protect investors' best interests. This includes the governance of securities lending activity.
  • The Central Bank EMIR Letter to Industry highlighted the need for boards to focus on oversight of reporting, especially where the reporting tasks have been delegated to third parties, including making reporting a standing agenda item at board meetings.
  • The Central Bank found significant scope for improvement to make SFTR disclosures more comprehensive (particularly around costs impacting on the SFT revenue) and to adopt formatting and content that investors can more easily understand.
  • Compliance with the transparency obligations of SFTR is an area that will remain under scrutiny by the Central Bank. The Central Bank strongly urges firms to review the manner in which they are complying with this legislation and consider if they are truly and meaningfully adhering to the spirit of enhanced investor protection that informs its provisions. It is incumbent on regulated entities to put themselves in the shoes of the investor to whom the disclosure is directed and ask themselves whether it is truly framed to properly explain the issues and risks.
  • Firms should expect greater scrutiny and challenge on the treatment of fees and income received from stock lending activities and compliance with ESMA's Guidelines which require that all the revenues arising from EPM, net of direct and indirect operational costs, should be returned to the UCITS.
  • Specific initiatives underway in the field of securities and markets supervision included assertive risk-based supervision of the funds sector.
  • The Central Bank's evolution of its supervisory approaches to take account of the changing financial services landscape including, in particular, the Central Bank's supervision of conduct in funds.
  • How the Central Bank is enhancing its use of data.

Colm Kincaid, Director of Securities and Markets Supervision delivered a speech on: How Diversity and Inclusion can contribute to successful decision making in the Funds Industry.

Key messages for Funds included:

  • In a funds context, the role and importance of independence of thought and challenge is especially pertinent given the scale of outsourcing by funds and their reliance on service providers.
  • The Central Bank is also scoping a review of how firms have implemented the measures introduced under the CP86 Fund Management Companies Guidance. This work will aim to identify standards of industry compliance in order to inform its supervisory approach and ensure that the required systems of governance are in place to protect investors' best interests. As well as its normal thematic tools such as questionnaires, desk-based reviews and on-site inspections, the Central Bank's CP86 review will be informed by the knowledge it has gained through engagement at a European level, its experience in assessing applications for authorisation received due to Brexit and its ongoing supervisory experiences with the funds that it regulates.
  • Since the start of 2018, the Central Bank's conduct supervision of funds has overseen almost €5.2m being refunded by Irish funds to investors and imposed 18 formal risk mitigation programmes. The Central Bank is also in the process of closing out its follow up engagement on the thematic review of UCITS performance fees and it continues to engage with funds on areas of concern arising in its review of closet indexing.

Michael Hodson, Director of Asset Management and Investment Banking, delivered a speech on Brexit, Outsourcing, CP86,CP119, Asset Segregation Regulations, CP119, Benchmark Regulation, the new prudential regime for investment firms and diversity.

Key messages for Funds included:


  • The MOUs agreed with the FCA has ensured that Irish AIFMS, UCITS ManCos and Irish funds can delegate their portfolio management to UK investment managers.
  • The FCA's window for notifications under their temporary permissions regime is open until 30 May (now extended to 30 October).
  • ESMA has decided to recognise three UK Central Counterparties (CCPs) to provide their services into the EU27 which means that there will be limited disruption to central clearing under a no-deal Brexit scenario.
  • Remaining risks include:
    • Authorisations risk – authorisation could take up to 12 months, depending on the complexity of the business model.
    • "Reverse solicitation" is under review and is not a viable business model over the long term.
    • Continued access of the Irish market to a CSD. The European Commission's granting of temporary equivalence to the UK's legal and supervisory arrangements for CSDs together with ESMA's approval of Euroclear UK and Ireland Limited as a third country CSD, means that the Irish market will have continued access to a CSD in the event of a no-deal Brexit. This alleviates the short-term risk but an alternative long-term CSD solution must be put in place. Euroclear published a CSD White Paper with proposals which need to be progressed.
    • A fourth risk concerns those firms that have now received their authorisation or have gone substantially through the process and are at the final stage. Firms must understand that their authorisation was granted on the basis of the information they provided and the Central Bank expects that firms comply with the conditions agreed upon. Firms which are close to authorisation, where the Central Bank has communicated the last requirements, and which do not complete the process, run the risk of the Central Bank having to revisit the application if too much time has elapsed.
    • On the use of secondments, Mr Hodson recommended that the best proposal is to establish an EU27 entity with the relevant authorisation to avail of the EU passport. In the area of distribution of funds, the Central Bank has seen proposals to use secondments of former UK staff into Irish entities. This can work, but only where, in the opinion of the Central Bank, there is sufficient management resource and organisational structure, and where no other risks are present (such as, for example, conflicts of interest), so that overall the structure in relation to control and risk management satisfies the Central Bank.


  • Mr Hodson referenced the Central Bank paper on "Outsourcing – Findings and Issues for Discussion". The findings in the paper are concerning and point to:
    • Poor governance and controls around risk assessment and management of outsourcing.
    • Inadequate monitoring and reporting of outsourcing.
    • A failure to consider outsourced service providers in business continuity planning and testing.
    • An absence of exit strategies.
  • Outsourcing will continue to be a supervisory focus of the Central Bank. It is for each regulated firm to ensure that they have appropriate governance and risk management measures in place in respect of their outsourcing arrangements.

Fund Management Company Effectiveness (better known as CP86)

  • The Central Bank is currently scoping a thematic review to assess how firms have implemented the package of measures introduced on foot of CP86. As a first step the Central Bank will issue a questionnaire to fund ManCos and Self Managed Investment Companies, will analyse the responses and follow up with desk based reviews and onsite inspections for selected firms.

Asset Segregation Regulations

  • Two Delegated Regulations (the Asset Segregation Regulations) will impact depositaries, particularly in relation to record keeping and asset registration. The new requirements will apply to depositaries from 1 April 2020. The Central Bank has commenced a process of industry engagement to assess readiness in advance of April 2020, expecting that depositaries have specific and detailed plans in place in order to ensure compliance with the new requirements by April 2020.

CP119 (a consultation paper on amendments to the Central Bank UCITS Regulations). The outcome of CP119 is due to be published imminently and will cover:

  • general amendments arising from a review of the Central Bank UCITS Regulations
  • amendments to UCITS Share Class Provisions to reflect the ESMA Opinion
  • amendments related to UCITS performance fees
  • amendments arising from the implementation of the EU Money Market Fund Regulation.

New prudential regime for investment firms

  • This EU legislative package is expected to be published over the Summer and will impact on the way in which the Central Bank supervises in-scope investment firms. The Central Bank urges firms to start to consider and plan for the new requirements at an early date. The framework includes a new categorisation of firms, with differing regimes and requirements applying depending on the category that a firm falls under, so this will be important for firms to understand as a first step.


  • A lot more needs to be done by firms to tackle this lack of diversity.

Derville Rowland, Director General, Financial Conduct spoke on The Senior Executive Accountability Regime: The Central Bank's Expectations and Insights for Boards (with particular reference to the banking sector). Key messages for Funds included the proposals for individual accountability (discussed above and in previous bulletins).

  • The Central Bank expects regulated firms to achieve a sustained improvement in culture by focusing on values and conduct that are the building blocks of culture. The Central Bank expects firms' 'desired' values and conduct to be reflected in the daily habits and practices of their employees. Ms Rowland gives examples of what an effective culture looks like.

Martina Kelly, Head of Markets Policy, Central Bank of Ireland contributed to a panel discussion at the IBA's 30th Annual Conference on the Globalisation of Investment Funds. Key messages for Funds included:

  • the Central Bank's intention to adopt formal rules on investment fund errors, breaches and compensation
  • the Central Bank finding that, generally, secondment arrangements within authorised entities may be acceptable where satisfactory arrangements are in place. However, secondment related proposals are often not satisfactory. Michael Hodson, Director of Asset Management and Investment Banking, also stressed this point in his Reflections on Brexit, insights on supervision and enhancing diversity, (referenced above) where he noted:
    • Brexit – the use of secondments: Furthermore, as the date for Brexit comes closer, we have seen numerous proposals to avoid the worst impacts of Brexit. The best proposal is of course to establish an EU27 entity with the relevant authorisation to avail of the EU passport. That is one of the main tenets of the EU: mutual recognition of Member State firms. In the area of distribution of funds, we have seen proposals to use secondments of former UK staff into Irish entities. This can work, but only where, in the opinion of the Central Bank, there is sufficient management resource and organisational structure, and where no other risks are present, (such as, for example, conflicts of interest), so that overall the structure in relation to control and risk management satisfies the Central Bank. However, if the secondment is structured simply as a device to circumvent the EU rules then we will have no appetite to approve such arrangements. Indeed, we have not approved a number of arrangements which we saw as legalistic, technical or indeed even artificial attempts to do just that.

Irish Funds FATCA and DAC2-CRS Reporting and Technical Update The AEOI (FATCA and CRS) Working Group issued the 2019 Annual FATCA and DAC2-CRS Reporting and Technical Update. Please speak with your usual contact on our Asset Management & Investment Funds team for more information.