29.06.2018 | KPMG Law Insights

Alternative Investments Legal | Issue 06/2018

Dear Readers,

may the weather fluctuate somewhat with the onset of summer, in June the summer has us firmly in its grip and gave warmest temperatures and almost tropical atmosphere. Even though the German team was unfortunately eliminated from the preliminary round of the current World Cup, we will continue to keep our regulatory eye on the ball for you. Because there is news in the field of alternative investments again, which we would like to present to you in this issue.

Among other things, the European Securities and Markets Authority (ESMA) has updated its Q&A on the Short Selling Regulation, transparency and market structures under MiFID II and MiFIR; the German banking industry has commented on the planned amendment to MiFID II; and ESMA has also published its first annual report on supervisory measures and penalties executed under EMIR.

With best regards
Dr. Ulrich Keunecke


Publication of final guidelines on anti-procyclicality measures for central counterparties in accordance with EMIR

On May 28, 2018, the European Securities and Markets Authority (ESMA) published final guidelines on measures to prevent procyclicality at central counterparties (CCPs) under the European Market Infrastructure Regulation (EMIR).

The guidelines aim to establish consistent, efficient and effective supervisory practices and to ensure a common, uniform and consistent application of EMIR in order to limit procyclicality of CCP margins.

The adoption of the guidelines should enable national competent authorities to better monitor their central counterparties in this respect. CCPs may also need to adapt their models and processes to comply with the guidelines. Margin procyclicality refers to the fact that margin requirements for the same portfolio are higher during periods of market stress and lower during calm conditions.

The guidelines will go into effect on December 3, 2018. The existing CCP Q&A 9 (c) will be deleted on the same date as the new guidance covers its purpose.

The publication can be viewed here (in English).


Publication of updated Q&As on transparency and market structures in connection with MiFID II/ MiFIR and the Short Selling Regulation.

The European Securities and Markets Authority (ESMA) updated its Q&A on short selling regulation, transparency and market structures issues under the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR) on May 28-29, 2018.

With respect to the short sale regulation questions, the general SSR Q&A revises an existing response regarding locator agreements and clarifies the requirements for “readily borrowable and purchasable” listings. The purpose of this Q&A is to promote common supervisory approaches and practices in the application of SSR. The goal is to provide clarity to investors and other market participants on the applicable requirements.

On transparency and market structures in the context of MiFID II/ MiFIR, the Q&A provides clarification on the following topics:

  • the requirements to publish information on post-trade data 15 minutes after the free publication;
  • the publication of transactions and how the “Publication date and time” field should be filled in;
  • Pre-trade transparency requirements for voice trading systems;
  • Pre-trade transparency requirements for RFQ systems;
  • OTFs arrange trading in strategies that include an equity leg.

The purpose of this Q&A is to promote common supervisory approaches and practices in the application of MiFID II and MiFIR.

The publication can be viewed here and here (in English).

EU Commission

Facilitation of investments in securitization instruments for insurance companies

On June 1, 2018, the European Commission adopted a draft delegated regulation entitled “Commission delegated regulation (EU) …/…of XXX amending Delegated Regulation (EU) 2015/35 as regards the calculation of regulatory capital requirements for securitizations and simple, transparent and standardized securitizations held by insurance and reinsurance undertakings.”

The amending regulation to Regulation (EU) 2015/35 is intended to make it easier for insurance companies to invest in simple and transparent securitization instruments. The Solvency II framework is thus simultaneously aligned with the harmonized EU securitization rules and the treatment for insurance companies is made consistent with that in the banking sector.

The new rules are to be applied as of January 1, 2019.

The draft regulation can be viewed here.


Adoption of prohibition regarding binary options to retail investors and limited contracts for differences

The Official Journal of the European Union (OJ) published on 01.06.2018 the Decision of the European Securities and Markets Authority (ESMA) on formal new measures on the allocation of contracts for difference (CFDs) and binary options to retail investors.

They will be available from the July 2, 2018 for binary options and from August 1, 2018 for CFDs apply and this as follows:

  1. Binary options (effective July 2, 2018) – prohibiting the marketing, distribution, or sale of binary options to retail investors; and
  2. Contracts for Differences (as of August 1, 2018) – 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.

ESMA has adopted these measures in the official languages of the EU and will remain in force for a period of three months from the date of application.

The decision can be viewed here (in English).


Publication of the first annual report on supervisory measures and sanctions under EMIR

The European Securities and Markets Authority (ESMA) published its first annual report on supervisory actions and penalties carried out by national competent authorities (NCAs) under the European Market Infrastructure Regulation (EMIR) on June 13, 2018.

In particular, the report focuses on the supervisory actions of NCAs, their supervisory powers, and the interaction between NCAs and market participants in monitoring compliance with the following EMIR requirements:

  • the clearing obligation for certain OTC derivatives (Art. 4 EMIR);
  • the obligation to report derivatives transactions to TRs (Art. 9 EMIR);
  • Requirements for non-financial counterparties (Art. 10 EMIR); and
  • Risk mitigation techniques for non-cleared OTC derivatives (Art. 11 EMIR).

ESMA has sent its report to the European Parliament, the Council and the Commission, informing them of the findings, which will also help to look for and identify best practices and potential areas that could benefit from a higher level of harmonization.

The annual report can be viewed here (in English).


Publication of key issues paper on index-based insurance

The International Association of Insurance Supervisors (IAIS) published a paper titled “Issues paper on Index-based Insurances particularly in Inclusive Insurance Markets” on June 18, 2018.

Index-based insurance is an insurance contract in which a claim is defined in terms of a specific index (sometimes referred to as parametric insurance). As index-based insurance is increasingly viewed as a means to address weather and catastrophic events, support food security, and improve access to insurance, this paper provides background on this product, describes practices and actual examples, and identifies related regulatory and supervisory issues and challenges. The paper focuses on weather or natural disaster events.

This paper addresses several issues that are common to index-based products, such as:

  • The way the product is designed as a micro, meso and macro system that influences the role of the policyholder and the expectations of the end customer;
  • Legal security, insurable interest and the nature of the product as insurance.

The key issues paper can be viewed here (in English).


Expiry of the MiFID II transition period for LEIs

The European Securities and Markets Authority (ESMA) confirmed on June 20, 2018 that the transition period for a smooth rollout of the use of Legal Identity Identifiers (LEIs), originally introduced in December 2017, will not be further extended and will be discontinued in July 2018.

Reporting entities must use LEIs to report trades in accordance with the Markets in Financial Instruments Regulation (MiFIR). The six-month period was introduced because not all companies managed to obtain LEIs in time for the start of MiFID II.

ESMA and the National Competent Authorities (NCAs) have since observed a significant increase in LEI coverage for both issuers and clients. Based on these observations, ESMA and the NCAs concluded that there is no need to extend the initial six months originally granted for the smooth implementation of the LEI requirements under MiFIR.

The transition period lasts up to and including July 2, 2018.

The statement can be viewed here (in English).


Statement on the planned amendment of MiFID I

The German banking industry (DK) commented on the planned amendment to MiFID II on June 21, 2018.

DK supports the EU Commission’s move to promote sustainable financial products and considers the inclusion of sustainability considerations in investment advice to be sensible. From DK’s point of view, however, it is essential that the classification for sustainable investments is available before any changes are made to the existing legal situation. Only in a second step should consideration be given to new regulations for securities distribution based on the previously established criteria.

From DK’s point of view, a renewed revision of the processes in the securities business, which were only extensively adjusted as of January 3, 2018, should – provided that a taxonomy is available – take place at the earliest in the context of the planned review of MiFID II.

The statement can be viewed here (in English).


Publication of comments on the interpretative and application notes to the Money Laundering Act

The German Federal Financial Supervisory Authority (BaFin) has issued the following notification dated June 14, 2018, made the comments on the above interpretation and application notes available on your website. The interpretation and application notes to the Money Laundering Act were published by BaFin with consultation 05/2018 on March 15, 2018 for discussion. Comments could be submitted until May 11, 2018.

You can find the consultation page with further links to the interpretation and application notes as well as to the comments here.

Publication of the Canadian Institute of Certified Public Accountants (CPA Canada)

Introduction to accounting for cryptocurrencies

The Canadian Institute of Certified Public Accountants (CPA Canada) has published an introduction to accounting for cryptocurrencies under IFRS. The paper points out that the current application of IFRS, in particular the application of IAS 38 “Intangible Assets” and the measurement of cryptocurrencies at cost, does not reflect their economic substance and does not provide relevant information to users of financial statements. The authors of the guidance encourage accounting standard setters to conduct research in this area to better understand and assess the potential impact of cryptocurrencies and to ensure that cryptocurrency accounting is relevant and useful for decision-making.

The English-language publication can be found at this link.

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Dr. Ulrich Keunecke

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