26.04.2018 | KPMG Law Insights

Alternative Investments Legal | Issue 04/2018

Dear Readers,

with now already some midsummer days the warm time of the year announces itself and slowly parks and gardens fill again. The spring-like atmosphere did not hold back Alternative Investment, however, and there has been a lot going on this month as well, which we would like to present to you in this issue.

Among other things, BaFin has published an interpretative decision on the acquirability of an alternative investment fund (AIF) for real estate investment trusts.

There are also current developments in connection with guidelines on central counterparties, MIFID/MiFIR and Solvency II; you will find a corresponding compilation in this issue.

We wish you an insightful reading
and remain with best regards

Dr. Ulrich Keunecke


Publication of document on reducing systemic risk with the help of Solvency II

On March 21, 2018, the European Insurance and Occupational Pensions Authority (EIOPA) published the second report in a series of writings contributing to the debate on systemic risk and macroprudential measures.

So far, the debate has focused mainly on the banking sector because of its prominent role in the recent financial crisis. Through this series of writings, EIOPA is ensuring that any further expansion of the debate in relation to the insurance sector reflects the specific characteristics of the industry.This second document provides a preliminary assessment of the tools or measures already in place under Solvency II that can mitigate any sources of systemic risk identified in EIOPA’s first document published in February of this year.

The paper also includes a retained annex on the macroprudential implications of some stressed long-term guarantees.

The report can be viewed here (in English).


Publication of updated FAQs on MiFID/MiFIR, Benchmark Regulation, Market Abuse and Central Securities Depositories

The European Securities and Markets Authority (ESMA) on 21. and March 22 updated its lists of “Frequently Asked Questions” on MiFID/MiFIR, benchmark regulation, market abuse and central securities depositories. The inclusion of a question and corresponding answer on the term “Ongoing Relationship” under section 15 “Other Issues” (p. 92) should be highlighted.

Under MiFID II, this concept of ongoing business relationship is relevant, among other things, to the question of whether investment services firms are obliged to provide their investors with annual ex-post cost information, cf. Art. 50 para. 9 Del. Regulation on MiFID II (EU 2017/565).

In its response, ESMA lists a number of (non-exhaustive) criteria which are supposed to indicate an ongoing business relationship.

The updated FAQs can be viewed here (in English).


Decision of product intervention measures for speculative products.

On March 27, 2018, the European Securities and Markets Authority (ESMA) adopted measures on the allocation of contracts for difference (CFDs) and binary options to retail investors in the European Union (EU).

Agreed upon measures include:

  1. Binary options – prohibiting the marketing, distribution or sale of binary options to retail investors; and
  2. Contracts for Difference – a restriction on the marketing, distribution or sale of CFDs to retail investors. This restriction consists of: Leverage restrictions on opening positions; a margin close-out rule on a per account basis; a negative account balance for each account; prevention of the use of incentives by a CFD provider; and a firm-specific risk warning delivered in a standardized manner.

Under the MiFIR Regulation, ESMA can only take temporary intervention measures for three months. Before the end of the three months, ESMA will assess whether the intervention measures need to be extended for another three months.

ESMA intends to adopt these measures in the official languages of the EU in the coming weeks, after which ESMA will make an official announcement on its website.

The decision can be viewed here (in English).


Publication of the Interpretative Decision on the Treatment of Risks under Solvency II of Infrastructure Investments

On March 28, 2018, BaFin published an interpretative decision on the treatment of infrastructure investments under the principle of entrepreneurial prudence.

The Interpretative Decision is addressed to all insurance and reinsurance undertakings subject to the Solvency II rules. This means that death funds, pension funds and small insurance companies are not affected.

In principle, BaFin assumes that infrastructure investments are not to be classified in principle as “non-ordinary investments” within the meaning of EIOPA Guideline 28 on the system of governance. Nonetheless, BaFin believes that infrastructure investments are likely to be treated as a “non-ordinary investment” for most insurers due to their complexity and regularly high volumes.

In this context, the Interpretative Decision identifies principles and processes for the implementation of the aforementioned EIOPA Guideline that are to be understood as “good practice approaches” in this regard.

Furthermore, BaFin is of the opinion that infrastructure investments are complex products that are difficult to evaluate in accordance with EIOPA Guideline 33 on the governance system. Accordingly, appropriate risk management and assessment procedures must be implemented.

The decision can be viewed here.


Publication of recommendations to improve regulatory reporting and transparency in the corporate bond market

The Board of the “International Organization of Securities Commissions” (IOSCO) published on 05.04.2018 its recommendations to improve the information on secondary markets for corporate bonds, available to both regulators and the public.

The recommendations are intended to ensure that regulators gain better access to information in order to perform their duties more efficiently and improve cross-border information sharing.

The recommendations are intended to support the pricing process and facilitate an informed investment decision. The 2004 IOSCO Report Update includes seven recommendations that emphasize ensuring the availability of information to regulators through reporting and to the public through transparency requirements.

The report recommended that regulators ensure they have access to sufficient information to effectively carry out their regulatory functions. In addition, regulators are recommended to have clearer regulatory reporting and transparency frameworks to enable better cross-border understanding of corporate bond markets.

The report also recommends that regulators consider steps to improve pre-trade transparency in corporate bond markets and implement regulations that require post-trade transparency.

The recommendations can be viewed here.


Publication of technical guidance on standardization of critical data elements on OTC derivatives

The Committee on Payments and Market Infrastructures CPMI and the International Organization of Securities Commissions IOSCO published on 09.04.2018 a guidance document on the so-called critical data elements of OTC derivatives in addition to the Technical Guides on Harmonization of Unique Transaction Identifier (UTI) and Unique Product Identifier (UPI) already published last year.

The Guide provides detailed guidance on the harmonization of definitions, formats and the use of all data elements that CPMI and IOSCO, in addition to UTI and UPI, consider critical to adequately describe the substantive characteristics of an OTC derivatives contract. This includes, for example, information on the trading date and time, counterparties to the contract, payments made and still owed, as well as the valuation and collateralization of the contract. In total, the guidelines contain over 100 different data fields.

However, the guideline itself does not have any direct effect. The requirements must therefore first be transposed into European law by adapting the relevant Technical Regulation and Implementing Standards for the European Market Infrastructure Regulation (EMIR). When this will happen is still open.

The guide can be viewed here (in English).


Interpretative Decision on Alternative Investment Funds: Acquireability of Assets under the KAGB

On April 9, 2018, BaFin published its interpretative decision on the acquirability of an alternative investment fund (AIF) for real estate investment trusts.

The background to the interpretative decision is the question of whether a real estate AIF can be regarded as an investment in a real estate company and, to that extent, can also be acquired for a real estate investment fund. This is significant insofar as the list of acquirable assets pursuant to Sections 231 et seq. KAGB does not directly name investment units. This also applies analogously to the open-ended special AIFs with fixed investment conditions pursuant to section 284 KAGB.

In its interpretative letter, BaFin takes the following legal view:

  • The concept of a real estate company as defined in Sec. 1 para. 19 No. 22 KAGB does not exclude that a real estate company cannot also be an AIF at the same time.
  • The acquisition is only permitted if the AIF is an AIF in corporate form and if the (majority) shareholding in the AIF grants membership rights.

In addition, the other acquisition requirements of the KAGB for real estate companies must be observed.

The decision can be viewed here.


Publication of a Guideline on Stress Testing for Central Counterparties

The Committee on Payment and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published the Framework for Supervisory Stress Testing of Central Counterparties (CCPs) on April 10, 2018. The framework provides assistance to authorities in designing and conducting supervisory stress tests for CCPs.

The CCP stress testing monitoring framework is intended to support tests conducted by one or more authorities that examine the potential macro-level impact of a common stress event affecting multiple CCPs. Among other things, such supervisory stress tests could help authorities better understand the scope and extent of interdependencies among markets, CCPs, and other entities such as participants, liquidity providers, and custodians.

This type of supervisory stress test differs from other stress tests conducted by authorities seeking to assess the resilience of individual CCPs

The guideline can be viewed here.

European Commission

Progress in tightening the EU Money Laundering Directive

On 19/04/2018, the European Commission welcomed the European Parliament’s decision to amend the Fifth Money Laundering Directive.

Under the impression of the terrible terrorist attacks in the EU and the extensive financial transactions revealed by the ‘Panama Papers’, the Commission had decided in July 2016 to initiate countermeasures as quickly as possible; the revised directive is part of this action plan.

The Parliament’s opinion can be viewed here (in English).

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Dr. Ulrich Keunecke

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