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Funds Update - Ireland
Quarterly Update | October - December 2016

1 Legal & Regulatory

1.1 UCITS Update

1.2 AIFMD Update

1.3 CP86: Fund Management Company Effectiveness Outcome

1.4 Companies' Beneficial Ownership Structure - New Obligations 

1.5 EMIR Update

1.6 Companies (Accounting) Bill 2016

1.7 Chinese RQFII Licences

1.8 Investment via Shenzhen Connect

1.9 Money Market Funds

1.10 Capital Requirements Regulation

1.11 EU General Data Protection Regulation

1.12 MiFID II/MiFIR Update

1.13 PRIIPs KID Regulation

1.14 European Venture Capital Funds and Social Entrepreneurship Funds

1.15 SFTR 

1.16 Benchmark Regulation

1.17 CSDR: Regulating Central Securities Depositories

1.18 Investment Funds Statistics: Q3 2016

1.19 Anti-Money Laundering Update

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2 Tax

2.1 Tax Treaty Entitlement for Investment Funds: OECD Consultation

2.2 Irish Real Estate Funds

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3 Listings

3.1 Market Abuse Regulation

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1 Legal & Regulatory

1.1 UCITS Update

There have been a number of developments over the quarter:

UCITS V 

The The European Union (Undertakings for Collective Investment in Transferable Securities) (Amendment) Regulations 2016 implemented the UCITS V Directive 2014/91/EU ("UCITS V") into law in Ireland. The European Commission Delegated Regulation 2016/438 supplementing the UCITS V Directive 2009/65/EC with regard to obligations imposed on depositaries ("UCITS V Level 2") came into effect on 13 October 2016 and also sets out certain provisions that must be included in depositary agreements.

ESMA and Central Bank Q&As

On 12 October 2016 the European Securities and Markets Authority ("ESMA") published an updated Q&A on the application of the UCITS Directive. It includes four new questions and answers on: the meaning of a "regulated market" under the UCITS Directive; translation requirements in relation to the remuneration disclosure; reinvestment of cash collateral; and the commencement of periodical reporting under Article 13 of the Securities Financing Transactions Regulation 2015/2365 ("SFTR") (which requires UCITS management companies ("Mancos") and UCITS investment companies to provide information to investors on the use made of SFTs and total return swaps in the annual report of each UCITS under management, as well as in each half-yearly report for UCITS in the next annual or half-yearly report to be published after 13 January 2017 which may relate to a reporting period beginning before that date).

On 21 November 2016 ESMA published another Q&A with two new Q&As on how investment limits in Articles 55(1) (a UCITS may acquire the units of UCITS or other collective investment undertakings referred to in Article 50(1)(e), provided that no more that 10% of its assets are invested in units of a single UCITS of other collective investment undertaking)  and Article 56(2)(c) (a UCITS may acquire no more than 25% of the units of any single UCITS or other collective investment undertaking) of the UCITS Directive should be applied where a UCITS wants to invest in an umbrella fund. It is consistent with the existing Irish position applied by the Central Bank and states that the limitations in Article 56(2)(c) and Article 55(1) should apply at the sub-fund level rather than at the umbrella fund level.

On 19 December 2016 the Central Bank of Ireland (the "Central Bank") published a 15th edition of the UCITS Q&A. It updates a question on the requirements for an Irish authorised UCITS to acquire Chinese shares through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect infrastructure (see also 1.8 below) and replaces a question and adds two new questions on the transitional arrangements for an authorised UCITS/Manco to comply with the final CP86 rules and guidance (see 1.3 below) including clarification that changes to a UCITS business plan only need to be cleared in advance by the Central Bank where the Manco proposes to "engage in any significant new activities".  Another question is added confirming that the Central Bank does not allow sub-funds within umbrella funds (including ICAVs) to have separate auditors.

Guidelines on sound remuneration policies

On 14 October 2016 ESMA published guidelines on sound remuneration policies under the UCITS Directive. They apply to Mancos and investment companies without a designated Manco. The guidelines provide clarity on the requirements under the UCITS Directive for Mancos when establishing and applying a remuneration policy for key staff. The guidelines will ensure a convergent application of these provisions and provide guidance on the governance of remuneration, requirements on risk alignment and disclosure and apply from 1 January 2017.

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1.2 AIFMD Update

There have been a number of developments in relation to the Alternative Investment Fund Managers Directive 2011/61/EU ("AIFMD") over this quarter:

ESMA Q&As

On 6 October 2016 ESMA published an updated Q&A on the application of AIFMD. It includes one new Q&A on the commencement of periodical reporting under Article 13 of the SFTR for alternative investment fund managers ("AIFMs") which requires AIFMs to provide information to investors on the use made of SFTs and total return swaps in the annual report of each alternative investment fund ("AIF") under management in the next annual report to be published after 13 January 2017 which may relate to a reporting period beginning before that date.

On 16 November 2016, ESMA published another updated Q&A to include questions relating to the notification of AIFs and delegation. It states that the creation of a share class, which is to be marketed cross-border within an already notified (sub-)fund, does not constitute a material change of a notification and therefore does not require a new notification. Material changes to existing notifications require the AIFM to hand in a full set of documentation with the revised notification letter and AIFMs must highlight any amendment to the original notification letter and accompanying documents.

It also provides that where a third party performs a function stated in Annex I of AIFMD, this function should be considered as delegated by the AIFM to the third party. Therefore, the AIFM is responsible for ensuring compliance with the AIFMD delegation requirements. Also it clarifies that the performance of Annex I functions is only permitted for AIFs which are internally-managed under Article 5(1)(b). Where the AIF appoints an external AIFM pursuant to Article 5(1)(a), the external AIFM is through its appointment as AIFM of the AIF responsible for providing the functions in Annex I. The external AIFM may delegate to third parties the 

task of carrying out functions on its behalf in accordance with Article 20. The AIF is, however, not a ‘third party’ in accordance with Article 20(1).

On 16 December 2016 ESMA published a further version of its Q&A. It updates one Q&A on reporting obligations by non-EU AIFMs under Article 42 of AIFMD clarifying the circumstances under which information on EU master AIFs should be reported to competent authorities. 

Central Bank Q&As

On 25 November 2016, the Central Bank published the 21st edition of its AIFMD Q&A.  A new question relating to pension scheme arrangements under EMIR is included which states that it may be possible for a retail investor alternative investment fund ("RIAIF") or a qualifying investor alternative investment fund ("QIAIF") (or a sub-fund in the case of an umbrella RIAIF or QIAIF) which meets the relevant requirements to qualify as a pension scheme arrangement under Article 2(10)(a) of EMIR. Accordingly, the RIAIF or the QIAIF (or sub-fund) which qualifies as a pension scheme arrangement will limit investment in it to such institutions. 

On 19 December 2016 the Central Bank published a further AIFMD Q&A.  It updates a question on the requirements for an Irish authorised AIF must meet to acquire Chinese shares through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect infrastructure (see also 1.8 below) and adds two new questions on the transitional arrangements for an authorised external AIFM or an authorised internally managed AIF to comply with the final CP86 rules and guidance (see 1.3 below) including clarification that changes to an AIFM programmes of activity only need to be cleared in advance  by the Central Bank where the AIFM proposes to "engage in any significant new activities".  Two other questions are added confirming that the Central Bank does not allow sub-funds within umbrella funds (including ICAVs) to have separate auditors and setting out requirements for an existing QIAIF with a wholly owned Irish subsidiary that is converting to a private company limited by shares.

On 3 January 2017 the Central Bank published the 23rd edition of its AIFMD Q&A.  New questions are added on loan originating QIAIFs which clarify the scope of the extension of permitted activity – see further below.

AIF Rulebook update - LQIAIFs

On 2 December 2016 the Central Bank published a notice of intention to increase the range of investments an Irish authorised loan originating QIAIFs ("LQIAIFs") may make from 3 January 2017. On this date the Central Bank published another version of its AIF Rulebook which extends the scope of permitted activity for LQIAIFs. It states: "The loan originating Qualifying Investor AIF shall limit its operations to the business of issuing loans, participating in loans, participations in lending and to operations relating thereto, including investing in debt and equity securities of entities or groups to which the loan originating Qualifying Investor AIF lends or which are held for treasury, cash management or hedging purposes."

In addition, the ID 1118 in the updated Q&A effectively widens the remit of an LQIAIF's lending activity from granting and participating in bilateral loans only to also permitting investment in debt securities (and loan syndications).

Extending the passport to non-EU AIFMs and AIFs 

On 11 October 2016, Steven Maijoor, ESMA Chair told the Economic and Monetary Affairs Committee ("ECON") of the European Parliament that ESMA in its advice on extending the AIFMD passport in the short term is focusing on its assessment of Bermuda and the Cayman Islands in order to decide on whether to extend the passport to them; will assess an additional group of non-EU countries when it has more clarity on the next steps envisaged by co-legislators; and will also focus on putting in place a framework in case the passport is extended to one or more non-EU countries.

Guidelines on sound remuneration policies

On 14 October 2016 ESMA published guidelines on sound remuneration policies on sound remuneration policies under AIFMD. They amend the current guidelines on sound remuneration policies under AIFMD (ESMA/2013/232). The amendment relates to the section of these guidelines dealing with the application of the remuneration rules in a group context and is intended to acknowledge the potential outreach of the Capital Requirements Directive rules in a banking group. The guidelines apply from 1 January 2017.

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1.3 CP86: Fund Management Company Effectiveness Outcome

The Central Bank has been examining fund management company effectiveness (CP86) since early 2014. On 19 December 2016 it published guidance for fund management companies on managerial functions, operational issues and procedural matters.  It has also published new rules for fund management companies on an effective supervision requirement and on the retrievability of records.  Those rules are summarised in the Feedback Statement to CP86 – third consultation which the Central Bank has also published. 

The rules and guidance set out how designated persons should carry out their role. They describe how fund management companies should manage their records and communicate with the Central Bank. They also set out the extent to which the boards and management of Irish authorised and supervised fund management companies’ need to have local presence.

For more information see our client update, CP86 Concludes as CBI Resets Governance Framework for Irish Fund Boards

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1.4 Companies' Beneficial Ownership Structure - New Obligations

With effect from 15 November 2016 most Irish companies are obliged to obtain and hold information about their beneficial owners. This is because of the early transposition of certain provisions of the Fourth Money Laundering Directive (EU) 2015/849  into Irish law by the European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2016 . These apply to every company or other legal entity incorporated in Ireland (a "Relevant Entity"). They do not apply to a company listed on a regulated market and subject to disclosure requirements consistent with EU law or subject to equivalent international standards that ensure adequate transparency of ownership information. A "beneficial owner" is defined as the natural person who ultimately owns or controls in excess of 25% of the Relevant Entity.

Investment companies and Irish collective asset-management vehicles or ICAVs, Irish UCITS management companies and Irish AIFMs are all Relevant Entities. However, investment companies and ICAVs established as umbrella funds need only enter beneficial owners in their register where they own/control (directly or indirectly) in excess of 25% of shares across the umbrella as a whole (not per sub-fund).

For more information see our client update, The Beneficial Ownership Regulations 2016: Implications and Recommended Actions for Funds

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1.5 EMIR Update

The European Market Infrastructure Regulation (Regulation on over the counter ("OTC") derivative transactions, central counterparties ("CCPs") and trade repositories (Regulation 648/2012)) ("EMIR") is relevant to all Irish funds trading in financial derivative instruments ("FDI") whether on an exchange or otherwise. UCITS and AIFs are financial counterparties for EMIR purposes, subject to the full scope of EMIR obligations.

There have been a number of developments over the quarter (with particular focus within industry on the new margining requirements for uncleared OTC derivatives contracts outlined below):

On 19 October 2016, the European Commission adopted a delegated regulation amending Delegated Regulation 148/2013 on EMIR as regards regulatory technical standards ("RTS") on the minimum details of the data to be reported to trade repositories. It clarifies data fields, their description or both; adapts existing fields to the reporting logic prescribed in existing Q&As or reflect specific ways of populating them and introduces new fields and values to reflect market practice and is now subject to Council and European Parliament approval.

On 27 October 2016, the European Commission published an implementing regulation amending Implementing Regulation (EU) No 1247/2012 laying down implementing technical standards ("ITS") on the format and frequency of trade reports under EMIR. It will enter into force 20 days following its publication in the Official Journal of the EU and will apply from the first day of the ninth month its date of entry into force (except for Article 1(5), which will apply from the date of entry into force).

On 14 November 2016 ESMA published its final report on the amended application of the clearing obligation for financial counterparties with a limited activity volume under EMIR. It proposes amending the three EMIR delegated regulations on the clearing obligation to prolong, by two years, the phase-in period for financial counterparties with a limited volume of derivatives activity. It also proposes to align the three compliance dates for category 3 firms in the delegated regulations regarding interest rate swaps and credit default swaps. The new proposed compliance date is 21 June 2019. The draft RTS in the report are with the European Commission for endorsement. 

On 23 November 2016 the European Commission published an EMIR review report which concludes that that no fundamental change should be made to the EMIR core requirements. It states that in some areas the EMIR requirements could be adjusted without compromising on its overall objectives, to increase the efficiencies and reduce disproportionate burdens. Industry concerns around backfilling trade reports for historic transactions were noted.

On 28 November 2016 the European Commission published a legislative proposal for a Regulation that it has adopted on the resolution and recovery of CCPs. 

On 15 December 2016 Commission Delegated Regulation EU/2016/2251 supplementing EMIR with RTS on risk mitigation techniques for uncleared OTC derivative contracts under Article 11(15) of EMIR was published in the Official Journal of the EU. It comes into force on 4 January 2017 and introduces margin and collateral requirements where affected entities engage in OTC derivative contracts. These include requirements to exchange initial and variation margins and to ensure collateral meets certain qualitative criteria. It also introduces haircut rules to apply in respect of the valuation of received collateral and detailed elements to be covered in each entity's risk management processes. Variation margining will be required on both sides of a relevant transaction from 1 March 2017.

On 15 December 2016 ESMA published a consultation paper on draft RTS on data to be made publicly available by trade repositories.

On 16 December 2016, ten European Commission Implementing Decisions confirming the equivalence of the regulatory regimes of certain third countries for CCPs and trading venues under EMIR were published in the Official Journal of the EU and come into force on 5 January 2017. The regulatory framework for non-EU CCPs in the following jurisdictions meets the EU's regulatory standards: India; New Zealand; Brazil; Dubai International Financial Centre; United Arab Emirates; and Japan. Also the rules governing certain financial markets in the following jurisdictions can be deemed equivalent to those in the EU: Singapore; Japan; Australia; and Canada.

Also in December 2016 the European Commission further extended the transitional relief for pension scheme arrangements from central clearing for their OTC derivative transactions until 16 August 2018.

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1.6 Companies (Accounting) Bill 2016

This Bill gives further effect to the Accounting Directive 2013/34/EU. A key change is that many Irish unlimited companies will be required to publicly file their financial statements in the Companies Registration Office ("CRO") as it broadens the definition of "designated unlimited company" in the Companies Act 2014 (the "Act"). Consequently, non-filing unlimited company structures which are currently exempt from filing their financial statements with the CRO will be obliged to file their financial statements with their annual returns thereby making them publicly accessible.

The Bill also amends the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 and the Act to provide that both UCITS and AIF investment companies will be obliged to file financial statements and directors' reports with the CRO (meaning financial reports will be a public record), noting they have to date been exempt from filing any such financial reports.

Further the Bill clarifies that accounts of UCITS investment companies should be audited in accordance with the Statutory Audit Directive 2014/56/EU and extends section 336 of the Act (statutory auditors' report) to both UCITS and AIF investment companies. 

ICAVs are not in scope of the Bill and do not have to file their accounts with the CRO. Although the Bill is in in draft form we do not expect any change to the foregoing and the Bill is currently expected to become law in Q1 of 2017.

The Bill does not specify the effective date for filing financial statements for designated unlimited companies. Directive 2013/34/EU does state that the new rules must apply for financial years commencing on or after 1 January 2016, however, this could be extended to 1 January 2017 given the delay in transposing the Directive.

For more information see our client update, Major Changes to Filing Obligations for Unlimited Companies 

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1.7 Chinese RQFII Licences

On 21 December 2016, the People's Bank of China ("PBoC") announced that Ireland had been granted a RMB 50 billion Renminbi Qualified Foreign Institutional Investor ("RQFII") quota. Ireland is only the sixth European country to be granted an RQFII quota after the UK, France, Germany, Switzerland and, most recently, Luxembourg.

The RQFII regime was introduced in 2011 to further open up mainland China's securities market to foreign investment. Under RQFII, foreign entities can invest offshore RMB in domestic securities in mainland China provided certain eligibility requirements are met. To date, Irish fund structures could only access the quota via a licence held by an asset manager in an RQFII eligible jurisdiction. This announcement means that Irish fund structures will now be able to gain direct access to the RQFII regime through an Irish RQFII quota.

For more information see our client update, Irish Fund Managers now eligible for Chinese RQFII Licence

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1.8 Investment via Shenzhen Connect

The Central Bank can now accept applications from Irish domiciled UCITS and AIFs to invest through the Shenzhen-Hong Kong Stock Connect ("Shenzhen Connect") programme, which launched on 5 December 2016. This is a joint initiative between the Stock Exchange of Hong Kong ("SEHK") and the Shenzhen Stock Exchange ("SZSE") and their respective clearing entities, and enables international investors to purchase SZSE listing shares. The market infrastructure arrangements under Shenzhen Connect replicate those in the original Shanghai-Hong Kong Stock Connect ("Shanghai Connect") model launched in 2014.

The Central Bank will accept applications allowing Irish UCITS and AIFs to invest via Shenzhen Connect on the same basis as provided for under Shanghai Connect. The applicable conditions are in the Central Bank’s UCITS Q&A at ID 1015 and AIFMD Q&A at ID 1094 and the Q&As will be updated in early 2017 to reflect the addition of Shenzhen Connect.

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1.9 Money Market Funds

On 8 December 2016 the Council of the EU published a note from the Council's General Secretariat to its Permanent Representatives Committee ("COREPER") on the approval of the final compromise text of the proposed Regulation on Money Market Funds ("MMF Regulation") It states that a provisional agreement was reached between the Council and the European Parliament and that COREPER is invited to approve that text which was published on 2 December 2016. It is expected that the MMF Regulation will be approved by the European Parliament at first reading.

The draft regulation lays down rules for MMFs, in particular, the composition of their portfolios and the valuation of their assets, to ensure the stability of their structure and to guarantee that they invest in well diversified assets of a good credit quality. It also introduces common standards to increase the liquidity of MMFs, to ensure that they can face sudden redemption requests.

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1.10 Capital Requirements Regulation

The Capital Requirements Regulation 575/2013/EU ("CRR") applies to credit institutions and investment firms and contains provisions relating to, among other things, own funds and capital requirements, large exposures, securitisations, liquidity, leverage and supervisory reporting.

On 23 November 2016 the European Commission published legislative proposals for a Regulation amending CRR and for a Directive amending the CRD IV Directive 2013/36/EU. The amendments proposed address the introduction of binding leverage ratio and net stable funding ratio requirements; the implementation of Basel Committee on Banking Supervision standards relating to equity investment in funds counterparty credit risk, exposures to CCPs, market risk and large exposures and measures to improve lending to small and medium-sized enterprises (and to infrastructure) and the CRD IV remuneration requirements.

On 21 December 2016, European Commission Implementing Decision (EU) 2016/2358 on the lists of third countries considered equivalent for the purposes of the treatment of exposures under the CRR was published in the Official Journal of the EU and comes into force on 9 January 2017. Turkey, New Zealand, Faroe Island and Greenland are added to the list.

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1.11 EU General Data Protection Regulation

Regulation (EU) 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (the "General Data Protection Regulation" or "GDPR") which was adopted in May 2016 comes into force on 25 May 2018.

The GDPR introduces substantial changes to EU data protection law coupled with severe financial penalties for non-compliance (fines of up to 4% of global turnover (or €20 million) whichever is higher)) will be imposed for certain breaches. It gives individuals greater rights regarding how their personal information is used and stored and tightens the provisions on consent (for example, the validity of consent will expire once the purpose for which it was sought ceases). Therefore, it is important for affected firms to start taking steps to prepare for its implementation.

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1.12 MiFID II/MiFIR Update

The Markets in Financial Instruments Directive (2014/65/EU) ("MiFID II") and the Markets in Financial Instruments Regulation (Regulation 600/2014) ("MiFIR") repeal the Markets in Financial Instruments Directive (2004/39/EC) ("MiFID"). They apply from 3 January 2018. 

On 5 October 2016 ESMA published a number of consultation papers including one on product governance guidelines under MiFID II Directive which closes on 5 January 2017.  The draft guidelines in Annex 3 of the consultation paper mainly address the target market assessment, as this was identified as the most important for ensuring a consistent application of Articles 16(3) and 24(2) of MiFID II and Articles 9 and 10 of the Delegated Directive supplementing MiFID II.

On 10 October 2016, ESMA published its final guidelines on transaction reporting, order record keeping and clock synchronisation and a new set of Q&As on investor protection topics under the MiFID II and MiFIR on best execution; recording telephone conversations and electronic communications; record keeping; investment advice on an independent basis; underwriting and placement of a financial instrument; and inducements. On 27 October 2016, ESMA published a number of trade reporting instructions for entities involved in trade reporting.

On 18 November 2016 ESMA published other sets of Q&As on transparency topics and on market structures topics on data disaggregation and the tick size regime. 

On 1 December 2016 the European Commission adopted delegated regulations supplementing MiFID II with regard to RTS on the criteria for establishing when an activity is considered to be ancillary to a firm's main business and for the application of position limits to commodity derivatives. The Council of the EU and the European Parliament are currently considering the delegated regulations.

On 11 December 2016 three delegated regulations under MiFIR entered into force. The two RTS relating to the information for registration of third-country firms and the format of information to be provided to clients; and criteria for determining whether derivatives subject to the clearing obligation should be subject to the trading obligation apply from 3 January 2018 and the RTS on access in respect of benchmarks applies from 3 January 2020. 

In December 2016 ESMA updated its MiFID II and MiFIR Q&As on commodity derivatives topics, investor protection topics, market structures and transparency and published new Q&As relating to data reporting under MiFID II and MiFIR.

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1.13 PRIIPs KID Regulation

The Regulation on key information documents ("KIDs") for packaged retail and insurance-based investment products ("PRIIPs") ("PRIIPs KID Regulation") will introduce a new pan-European pre-contractual product disclosure document for PRIIPS in EU Member States. 

On 1 December 2016 the European Parliament voted to delay the PRIIPs KID Regulation. The main reason is to give additional time for those concerned to comply with the new requirements. On 24 December 2016 Regulation EU/2016/2340 postponing its application date entered into force. The PRIIPs Regulation now applies from 1 January 2018 instead of 31 December 2016. 

On 22 December 2016, the Joint Committee of the European Supervisory Authorities ("ESAs") (that is, the EBA, ESMA and EIOPA) wrote to the European Commission following its request for an opinion on the proposed amendments to the draft regulatory technical standards ("RTS") it submitted to the Commission under the PRIIPs Regulation. The letter states that the ESAs presented an opinion to the three boards covering all of the areas addressed by the Commission's letter and the amendments in the RTS. The opinion was adopted by the EBA and ESMA boards but not the EIOPA board. The different views related to the treatment of multi-option products; the criteria to determine whether a comprehension alert should be included in a KID; and the credit risk mitigation factors for insurers provisions in the RTS. Consequently, the ESAs cannot give an agreed opinion on the draft RTS.

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1.14 European Venture Capital Funds and Social Entrepreneurship Funds

The European Venture Capital Funds Regulation 345/2013/EU ("EuVECA Regulation") sets out a marketing passport to allow fund managers to market qualifying venture capital funds to EU investors using the EuVECA designation. The European Social Entrepreneurship Funds Regulation 346/2013/EU ("EuSEF Regulation") sets out a marketing passport to allow fund managers to market qualifying social entrepreneurship funds to EU investors using the EuSEF designation. 

On 29 November 2016 the Presidency of the Council of the EU published another compromise proposal relating to the proposed Regulation amending the EuVECA and EuSEF Regulations which was originally published in July 2016. 

On 16 December 2016, the Council of the EU announced that it has agreed its negotiating stance on the proposed amending Regulation and that COREPER has asked the incoming Maltese Council presidency to start negotiations with the European Parliament, with a view to reaching an agreement at first reading.

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1.15 SFTR

The SFTR (or Regulation on securities financing transactions ("SFTs") EU/2015/2365) covers all forms of lending, borrowing and re-use of securities in the EU and in all the branches of counterparties to SFTs no matter where they are located. It requires market participants to report details of SFTs to an approved EU trade repository. It came into force on 12 January 2016 with the exception of certain transitional provisions in Article 33.

On 4 October 2016 ESMA published a report on SFTs and leverage in the EU under Article 29(3) of the SFT Regulation which recommends that:

 •  The FSB qualitative standards on the methodology used to calculate haircuts in non-centrally cleared SFTs should be introduced to improve the transparency and stability of haircuts and the resilience of financial institutions. 

 •  The procyclicality of collateral haircuts used by CCPs should be addressed in the review of EMIR.

 •  Numerical haircut floors for non-centrally cleared transactions can only be introduced following a thorough analysis using granular SFT data and following careful assessment of scope. 

 •  Other macro-prudential instruments, including countercyclical ones, should be agreed at international level first, and can only be introduced after a careful assessment that the existing measures are not sufficient to limit the leverage in the system. 

On 4 November 2016, ESMA updated its webpage on its September 2016 consultation paper on draft RTS and ITS implementing SFTR correcting errors relating to the deadline for reporting of the collateral component of a SFT and the timeline for reporting of the details of the collateral component of an SFT.

On 12 December 2016 Irish Funds, through the Industry Financial Reporting Working Group, produced a Q&A in relation to Article 13 disclosures. The Q&A is a follow up to the general update in the Financial Reporting Brief of August 2016 and provides further guidance on a number of areas.

SFTR introduced new transparency requirements for prospectuses and financial statements for investment funds using securities financing transactions and total return swaps. 

UCITS and AIFs must ensure prospectuses clearly disclose the intention to use these techniques (including maximum and expected exposure levels) and describe the risks they entail – SFTR is detailed and prescriptive in relation to the information to be disclosed. While the prospectus disclosure requirements applies immediately for new umbrellas/standalone funds from 12 January 2016, umbrella/standalone funds constituted before 12 January 2016 have up to 13 July 2017 to comply. 

In the context of UCITS (and Retail Investor AIFs) where the Central Bank must review and clear prospectus changes in advance, the Central Bank has indicated that it the responsibility of the funds themselves to ensure draft documentation is submitted sufficiently in advance so that the updates can be noted by the deadline. Given the likelihood of a high volume of such submissions, Maples recommends that affected UCITS (and Retail Investor AIFs) proceed with the required updates in Q1 2017. Affected QIAIFs can attend to updates any time up until 13 July 2017.

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1.16 Benchmark Regulation

The Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds 2016/1011/EU ("Benchmark Regulation") entered into force on 30 June 2016 and applies from 1 January 2018, with the exception of certain provisions (in Article 59) that apply from 30 June 2016 and one provision that applied from 3 July 2016.

On 7 November 2016, ESMA published a list of five EU national competent authorities that have been designated as being the authorities responsible for carrying out relevant duties under the Regulation – Ireland was not included.

On 10 November 2016 ESMA published its final report setting out technical advice under the Benchmarks Regulation which addresses: how benchmarks’ reference values can be calculated by using data reporting structures under existing EU rules, such as MiFID II and EMIR; criteria for deciding whether third country benchmarks can be endorsed for use in the EU; and what constitutes making a benchmark figure available to the public.

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1.17 CSDR: Regulating Central Securities Depositories

The Regulation on improving securities settlement and regulating CSDs (Regulation 909/2014/EU) ("CSDR") is in effect since September 2014. However, Article 3(1) will apply from 1 January 2023 to transferable securities issued after that date, and from 1 January 2025 to all transferable securities. Certain other implementing measures will apply from the date that they enter into force.

On 11 November 2016 the European Commission adopted a package of six legislative acts to implement specific provisions of CSDR: a Commission Delegated Act, three RTS and two ITS. These set out specific requirements to ensure that CSDs are prudentially sound, have high-quality risk management and corporate governance standards and meet appropriate capital requirements. They also clarify the framework under which supervisors should co-operate and exchange information and set penalties for settlement failures as well as measures to ensure the transparency of internalised settlements that take place outside CSDs.

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1.18 Investment Funds Statistics: Q3 2016

The main points to note in the Central Bank's November 2016 update for Q3 2016 are:

(a) The net asset value of investment funds resident in Ireland increased by 5.6% (€81 billion) over the third quarter of 2016, reaching €1,538 billion. The total value of assets held by IFs increased by €83 billion to €1,867 billion.

(b) The third quarter saw strong investor inflows to investment funds, amounting to €42 billion, continuing the general trend of recent quarters.  Portfolio revaluations were strongly positive, at €39 billion, reflected in both debt and equity holdings.

(c) Exchange traded funds ("ETFs") domiciled in Ireland had total assets of €282 billion at end Q3 2016. ETFs have grown by 61% in the last two years up from €176 billion in Q3 2014.

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1.19 Anti-Money Laundering Update

EU Member States must transpose the Fourth Money Laundering Directive ((EU) 2015/849) ("MLD4") into national law by 26 June 2017 and the revised Wire Transfer Regulation ((EU) 2015/847) ("WTR") applies from the same date.

On 16 November 2016, the Joint Committee of the ESAs published its final guidelines on risk based supervision under MLD4. Addressed to NCAs, they define the characteristics of a risk based approach to anti-money laundering ("AML") and counter-terrorist financing ("CTF") supervision. They state what NCAs should do to ensure that their allocation of supervisory resources is proportionate to the level of money laundering and terrorist financing risk associated with credit and financial institutions in their sector and to assess those risks and adjust the focus, intensity and frequency of supervisory actions in line with the risk based approach. They apply a year from the date they are issued.

On 28 November 2016 the European Commission adopted a Delegated Regulation amending its list of high risk third countries with strategic deficiencies under MLD4. It will enter into force the day after publication the Official Journal of the EU.

On 6 December 2016 Central Bank issued the first in series of AML bulletins focussing on the use of relevant third parties as part of AML/CTF frameworks in relation to outsourcing of functions to third parties. The Central Bank expects that there is an agreement in place between the firm and the third party; firms only rely on third parties to perform customer due diligence; and  firms should regularly test that documents can be retrieved quickly and that the quality of the documents obtained is sufficient.

On 12 December 2016 Irish Funds, through its Anti-Money Laundering Working Group has produced an industry Q&A paper on the application of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended) in relation to keeping customer due diligence up to date.

On 16 December 2016 Council Directive EU/2016/2258 amending Directive 2011/16/EU as regards access to AML information by tax authorities was published in the Official Journal. It will ensure that EU tax authorities have access to data collected under current AML rules. This includes information such as customer due diligence records and information held in national beneficial ownership registries. Member states will have to implement this Directive by 31 December 2017 and apply those measures from 1 January 2018.

On 20 December 2016 the Council of the EU published its fifth Presidency compromise proposal on the proposed MLD5 or Fifth Money Laundering Directive and announced that it has agreed its negotiating stance with the Parliament. MLD5 amends MLD4 as part of the Commission's action plan to strengthen the fight against terrorist financing.

On 22 December 2016 the ESAs wrote to the European Commission explaining that draft RTS on measures that credit and financial institutions must take to manage the risk of money laundering and terrorist financing where they have branches/subsidiaries in third countries that prohibit the implementation of AML and CTF measures consistent with MLD4 will be delayed until December 2017 because there are no such third countries meeting the relevant description in the Directive. Proposed amendments to MLD4 will extend the scope to third countries that have not been captured.

On 22 December 2016 the European Commission published proposals for a countering money laundering directive which acknowledges that all Member States criminalise money laundering but there are some differences that require change.

See also 1.4 above on Companies' Beneficial Ownership Structure - New Obligations.

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2 Tax

2.1 Tax Treaty Entitlement for Investment Funds: OECD Consultation 

There have been a number of developments recently regarding tax treaty entitlement for investment funds. On 5 December 2015, the OECD produced a set of measures to empower countries to tackle tax avoidance (the "BEPS package").  This included developing a new legal instrument (the "Multilateral Instrument" or "MLI") that facilitates the swift and consistent implementation of the tax treaty related BEPS measures.  

On 24 November 2016 the OECD produced the final text of the MLI which was approved by 100 countries (but yet to be signed and ratified). Where the MLI is ratified by two parties to a bilateral treaty that treaty will be automatically updated with the provisions of the MLI.  Up to 2,000 treaties could be updated in this way without the need for bilateral negotiations.  In particular, the MLI includes a principal purpose test ("PPT") which would deny treaty relief if a "principal purpose" for establishing in a treaty country is to obtain the benefits of the treaty. 

On 6 January 2017 the OECD published a discussion draft on the PPT test as to how it would apply to investment funds. The consultation closes on 3 February 2017. The OECD recognised that the treatment of funds (and specifically alternative funds) and their SPVs is complex. The new discussion draft sets out three case studies / fact patterns as to when the PPT test may be said to be satisfied: (i) a regional investment platform example; (ii) a securitisation company example; and (iii) an immovable property non-CIV fund example. These will be helpful in interpreting and consistently applying the PPT test.  The OECD has invited submissions on the examples and Maples and Calder will be involved in submissions with industry groups. 

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2.2 Irish Real Estate Funds

Significant changes to the taxation of Irish investment funds come into effect on 1 January 2017. The new regime applies to regulated funds that invest, or may invest, in Irish real estate and related assets. These are termed Irish Real Estate Funds (or IREFs). It introduces a potential 20% withholding tax on certain events, including the sale of units, distributions and redemptions from such funds, and additional reporting and compliance requirements.  Funds carrying on a business of renting, developing or trading in Irish real estate are the primary focus of the legislation and should take advice on the impact of the changes.    

The changes do not affect non-Irish funds, funds that are UCITS or funds that have an international investment focus, including funds holding non-Irish real estate.  As a result the vast majority of Irish regulated funds continue to enjoy the traditional beneficial Irish tax regime, being broadly, tax exempt status for the fund and no Irish tax for non-Irish resident investors, subject to certain conditions being satisfied.

Certain investors in an IREF, including pension funds, regulated investment funds or life assurance companies, whether in Ireland or their EU/EEA equivalents are subject to specific treatment, including an exemption from withholding tax and an ability to reclaim any tax withheld. Such exemptions are subject to a number of conditions and it will be important to review the investor's relationship with the fund in order to assess the availability of these reliefs. 

Where a fund is classified as an IREF, there are a number of provisions which should encourage and incentivise a transition to a non-regulated corporate structure, including a REIT (Real Estate Investment Trust) and we anticipate that a number of funds will consider restructuring during 2017.

For more information see our client update, Irish Real Estate Funds – Tax Changes

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3 Listings

3.1 Market Abuse Regulation

The Market Abuse Regulation (Regulation 596/2014) ("MAR") and the Directive on criminal sanctions for insider dealing and market manipulation (2014/57/EU) ("CSMAD") (together, MAD II) apply from 3 July 2016.  The European Union (Market Abuse) Regulations 2016 transposed CSMAD (and elements of MAR) into Irish law. 

On 20 October 2016 ESMA has published final versions of guidelines under MAR relating to market soundings and delayed disclosure of inside information in the official languages of the EU. On 10 November 2016 ESMA published a revised version of both following a linguistic issue in a translation. They both apply from 10 January 2017.

On 26 October 2016 ESMA published another version of its Q&A under MAR.  New topics covered include: the PDMR (persons discharging managerial responsibilities) threshold calculations in non-Euro currencies and the timing of the ‘closed period’ for managers’ transactions around the announcement of financial results; and what constitutes an investment recommendation. On 27 October 2016 ESMA published a number of trade reporting instructions for entities involved in trade reporting under MiFIR.

On 20 December 2016 ESMA published a further version of its MAR Q&A to include three new Q&As on managers' transactions and four on investment recommendations and information recommending or suggesting an investment strategy.

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Contacts

Dublin

Maples and Calder Dublin
Barry McGrath
work +353 1 619 2029
Maples and Calder Dublin
Peter Stapleton
work +353 1 619 2024
Maples and Calder Dublin
Stephen Carty
work +353 1 619 2023
Maples and Calder Dublin
Carol Widger
work +353 1 619 2762
Maples and Calder Dublin
Emma Conaty
work +353 1 619 2708
Maples and Calder Dublin
Adam Donoghue
work +353 1 619 2718
Maples and Calder Dublin
Andrew Quinn
work +353 1 619 2038