UCITS VI proposals

As flagged in the July Front Page, the European Commission published its UCITS VI Consultation and press release.

The Consultation (closing on 18 October 2012) explores the following topics

  • eligible assets and the use of derivatives,
  • efficient portfolio management (EPM) techniques,
  • over the counter (OTC) derivatives,
  • extraordinary liquidity management rules,
  • depositary passport,
  • Money Market Funds (MMFs),
  • long term investments
  • UCITS IV improvements (including delegation, risk and liquidity management rules, valuation, reporting and calculation of leverage and aligning the UCITS Directive with the AIFMD).


On 27 July 2012, the text of the Regulation on OTC derivatives, central counterparties and trade repositories (Regulation 648/2012) (EMIR) was published in the Official Journal of the European Union (OJ). The Regulation will enter into force 20 days after its publication in the OJ. EMIR is aimed at improving the functioning of OTC derivatives markets in the EU by reducing risks via the use of central clearing and risk mitigation techniques, increasing transparency via trade repositories (TRs) and ensuring sound and resilient central counterparties (CCPs). EMIR provides for the mandatory clearing of standardised OTC derivative contracts and all derivative contracts (not only OTC derivatives) will have to be reported to TRs which will publish aggregate positions by class of derivatives. CCPs will have to apply for authorisation within six months of standards being adopted. ESMA will be able to block the authorisation of CCPs, and CCPs from third countries will be recognised in the EU if the legal regime of the third country provides for an effective equivalent system of recognition. Work on EMIR Level 2 continues.

Market Abuse regime to cover benchmark manipulation

On 25 July 2012 the European Commission published suggested amendments to its proposals for a Regulation on insider dealing and market manipulation (MAR) and a Directive on criminal sanctions for insider dealing and market manipulation (CSMAD) (collectively MAD II). The amendments are intended to bring the manipulation of benchmarks (such as EURIBOR and LIBOR) within the scope of MAD II and to ensure that manipulation of markets becomes a criminal offence.


The European Parliament procedure file indicates that it will consider the proposed UCITS V Directive relating to the depositary function, remuneration requirements and administrative sanctions (as detailed in the July Front Page) at the 11 to 14 March 2013 plenary session.

Shadow Banking

In late July, ESMA published its response to the European Commission's Green Paper on Shadow Banking.

  • ESMA broadly agrees with the definition proposed by the Financial Stability Board (FSB) of shadow banking, it considers that the definition should be more focused on activities than on the entity performing the activity, to ensure a consistent approach across sectors.
  • ESMA broadly agrees with the list of shadow banking entities and activities as a starting point. However, it considers that, for monitoring purposes, it is crucial to have a flexible and evolving framework that would allow the inclusion of financial innovations as long as their features and the risks attached to them are consistent with the definition of the shadow banking system.
  • ESMA also points to a number of entities and practices that the Commission should consider in this context. Examples include an increasing trend towards use of special purpose vehicles (SPVs) and investment funds being created in order to receive impaired bank assets.
  • ESMA agrees with the need for stricter monitoring of the shadow banking system and considers that transparency and adequacy of information are key to achieving this objective, as well as smooth data exchanges between regulators.
  • ESMA believes that it is important to reduce the scope for regulatory arbitrage as much as possible, both at EU and international level. ESMA suggests that it would be inappropriate to focus unduly on exchange traded funds (ETFs) rather than shadow banking activities per se. ESMA suggests that further attention should be given to the manufacture and management of exchange traded products (ETPs) taking a legal form other than that of a UCITS or alternative investment fund on a cross-sectoral basis in the EU.
  • ESMA points to the work it has already completed and the work that it has in train in the context of AIFMD, UCITS, EPM, MMFs, ETFs and collateral and points out that new provisions should complement existing regimes so to achieve a harmonised approach.

In August 2012, the European Parliament's Committee on Economic Affairs (ECON) published a draft report on shadow banking. The draft report contains a draft European Parliament legislative resolution on shadow banking. The draft legislative resolution invites the European Commission to submit a legislative proposal for the creation by the European Central Bank (ECB) of a central EU database for euro repo transactions by the end of 2013. The report suggests proposals including:

  • Imposing capital treatment of liquidity lines to structured investment vehicles, setting the large exposure limit of 25% of own funds to all unregulated entities, and extending to non-banking entities certain CRD IV requirements that will be applicable under the Capital Requirements Regulation (CRR).
  • Making bank balances more reliable by ensuring that entities that are not consolidated from an accounting perspective are consolidated for prudential consolidation purposes.
  • Separation of retail and investment activities of banks; a cap on the number of times a financial product can be securitised; asset valuation and capital requirements of money market funds (MMFs); and addressing risks of ETFs.

Chairman of the Board of International Organization of Securities Commissions (IOSCO) issued a statement following the press release by SEC Chair Mary Schapiro on 22 August 2012 on Money Market Fund Reform. “I have taken careful note of Mary Schapiro’s statement on Money Market Fund Reform in the United States. While refraining from directly commenting on a statement of the Chair of a member organization, I would like to reaffirm that IOSCO will continue its work on the basis of the mandate given to it by the G20 Heads of State and the FSB, to develop policy recommendations for strengthening oversight and regulation of the shadow banking system, including Money Market Funds.

IOSCO Committee 5 on Investment Management will meet at the end of August to consider the extensive public feedback received to its consultation report “Money Market Fund Systemic Risk Analysis and Reform Options” of 27 April 2012, and to elaborate draft final recommendations for addressing regulatory reforms to mitigate MMF’s susceptibility to runs and other systemic risks. The IOSCO Board will determine IOSCO’s further course of action on this important subject at its meeting in Madrid on 3/4 October, and will report to the G20 Finance Ministers meeting in November.