18 July, 2017
SIFMA AMG’s Feedback on European Commission’s EMIR Proposal
The Securities Industry and Financial Markets Association’s Asset Management Group (“SIFMA AMG”)1 appreciates the opportunity to provide feedback on the European Commission’s legislative proposal to amend EMIR.2 Overall, SIFMA AMG members welcome the efforts of the Commission to improve the current EMIR regime, in particular, by simplifying the rules and reducing the costs and burdens for end-users of derivatives. However, we have a number of concerns with the Commission’s legislative proposal, which are outlined below.
1. Definition of Financial Counterparty
According to the Commission’s legislative proposal “an AIF as defined in Article 4(1)(a) of directive 2011/61/EU” would fall within the definition of “financial counterparty”. Currently, only “an alternative investment fund managed by AIFMs authorised or registered in accordance with Directive 2011/61/EU” is in scope of the “financial counterparty” definition.
The definition of alternative investment fund, or “AIF”, in the Alternative Investment Fund Managers Directive (the “AIFMD”)3 reads as follows:
“collective investment undertakings, including investment compartments thereof, which:
(i) raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and
(ii) do not require authorisation pursuant to Article 5 of Directive 2009/65/EC”.
The definition is not limited in territorial scope. If the Commission’s proposal were to be enacted in its current form, read literally, all types of fund, other than those that are regulated in the EU under the UCITS Directive,4 including hedge funds, private equity funds, real estate funds and mutual funds, regardless of whether or not they are established in the EU, would be brought directly in scope of EMIR as “financial counterparties”. By way of example, a US mutual fund dealing in OTC derivatives with a US bank or dealer counterparty would have to comply with the full set of requirements in EMIR (subject only to the proposed relief from the EMIR clearing obligation for “small financial counterparties”), despite neither the parties nor the transactions having any connection with the EU. Currently, only if it was managed by an alternative investment fund manager, or “AIFM”, authorised or registered in accordance with the AIFMD, would a US mutual fund have to comply with EMIR to this extent.
Given the difficulties in applying the EMIR regime to non-EU entities (e.g., taking our example, the US mutual fund, not being managed by an AIFM authorised or registered in accordance with the AIFMD, would not have a national competent authority in the EU), we doubt whether the Commission foresaw the extra-territorial and far-reaching consequences of its proposed change to the “financial counterparty” definition. Rather, we imagine that the intention of the Commission was to bring in scope of the “financial counterparty” definition those EU AIFs that are currently classed as “non-financial counterparties” under EMIR, because they are not “managed by AIFMs authorised or registered in accordance with Directive 2011/61/EU”.
If the Commission is intent on amending the current “financial counterparty” definition to capture all EU AIFs, we propose the following wording for the AIF limb of the “financial counterparty” definition:
“an alternative investment fund as defined in Article 4(1)(a) of directive 2011/61/EU which is either established in the Union or managed by an AIFM authorised or registered in accordance with that Directive…”.
If this approach were followed, existing AIFs currently caught by the “financial counterparty” definition would continue to be treated as financial counterparties, and the status of those EU AIFs that are not managed by AIFMs authorised or registered in accordance with the AIFMD would change from non-financial counterparty to financial counterparty. It is worth noting that non-EU AIFs that are not managed by AIFMs authorised or registered in accordance with the AIFMD would still be affected by this approach. If the above language were adopted, all non-EU AIFs would need to declare themselves to their EU bank and dealer counterparties as “third country financial counterparties”, with the result that OTC derivatives entered into by any non EU AIF with an EU bank or dealer counterparty will potentially be in scope of the EMIR clearing obligation and margin requirements for non-cleared OTC derivatives.
1 SIFMA AMG’s members represent U.S. and multinational asset management firms whose combined global assets under management exceed $34 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.
2 Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories.
3 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010.
4 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS).