1. Welcome to Euro Shorts, a short briefing on some of the week’s developments in the financial services
industry in Europe.
If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers.
Claire Cummings
020 7585 1406
claire.cummings@cummingslaw.com
AIFMD: Depositary-lite regime
Germany, France and Denmark have decided to gold-plate the AIFMD with regard to their
national private placement regimes, which means that non-EU managers marketing non-EU
funds into these countries will be forced to comply with the AIFMD’s ‘depositary-lite’ regime.
Under ‘depositary-lite’ managers must appoint a third-party supervisor, which does not have to
be a credit institution, to act as a depositary under the AIFMD and be responsible for the
safekeeping of assets, daily cash flow monitoring and oversight. It is envisaged that Italy and
Spain may follow suit. Commentators consider that the expense of appointing a depositary may
either require non-EU managers to apply for the AIFMD passport if they intend to market in any
of these Member States or to be obliged to rely on reverse solicitation.
AIFMD: Late transposition
ESMA has published an opinion proposing practical arrangements for competent authorities in
dealing with the issue of late transposition of the AIFMD. The scope of the opinion is confined to
the provisions of collective portfolio management services and ESMA has identified two
scenarios that could be addressed by means of practical arrangements between competent
authorities to minimise the impact of late transposition, namely: (i) an AIFM in a Member State
where the AIFMD has been transposed may not be able to manage an EU AIF established in
another Member State where the AIFMD has not been transposed; and (ii) AIFMs and competent
authorities in Member States which have transposed the AIFMD may have difficulties notifying
the marketing of EU AIFs to relevant competent authorities if the host Member State has not
transposed the AIFMD.

2. AIFMD: The Alternative Investment Fund Managers Regulations 2013
These amending regulations implement those provisions of the AIFM Directive which, while
they were transposed by 22 July 2013, do not come into effect until a later date which will be
specified by the European Commission. Some provisions, for example those relating to: (i) the
authorisation of non-EEA managers of AIFs that have the UK as their member state of reference;
(ii) the management and marketing of AIFs by these managers; and (iiii) the marketing of non-
EEA AIFs by UK managers, will come into force on the date on which Articles 35, and Articles
37 to 41 of AIFMD (ie those relating to "third country" activities) will become applicable.
OTC derivatives reform
The Macroeconomic Assessment Group on Derivatives (MAGD) issued a report on the
macroeconomic effects of OTC regulatory reforms. In the report, MAGD assesses and compares
the economic benefits and costs of the planned OTC derivatives regulatory reforms, focusing on
the consequences for output in the long run and has found that the main benefit of the reforms
arises from reduced counterparty exposures, both through netting as central clearing becomes
more widespread, and through more comprehensive collateralisation. MAGD concludes in the
report that the economic benefits of the reforms are likely to exceed their costs and to maximise
the net benefit of the reforms, it advises regulators and market participants to work to make as
many OTC derivatives as possible safely centrally clearable, with either a modest number of
central counterparties (CCPs) or with CCPs that interoperate. This should include efforts to
harmonise the rules governing cross-border transactions, so that market participants have equal
access to CCPs.
EMIR
ESMA has published a discussion paper on draft RTS relating to the requirement to centrally
clear certain OTC derivatives under EMIR. EMIR requires certain classes of OTC derivatives
contracts to be cleared through a CCP. The requirement will have a significant impact on a large
number of counterparties that engage in derivatives trading, including both regulated and
unregulated entities. The paper outlines ESMA’s approach in determining: (i) the characteristics
of OTC derivatives classes which should be subject to the clearing obligation; (ii) the date from
which the clearing obligation takes effect; and (iii) the minimum remaining maturity of the OTC
contracts to be subject to the clearing obligation.
MiFID II
In contrast to the recent adoption by the CFTC of swap execution facility rules, equivalent EU
rules for swap trading facilities under MiFID II are not yet final and are not expected to become
effective until possibly as late as 2016. In the meantime, the EU and the US have announced an
initiative to harmonise their approaches to swap execution, known as the Path Forward, which, it
is hoped, will provide incentive for the EU rules to converge sufficiently to be comparable to the
CFTC’s rules.

3. LIBOR
Despite the fact that NYSE Euronext will be taking over the Libor administration duties from the
British Bankers’ Association following the Libor rigging scandal, the EU appears to consider that
Libor falls within its jurisdiction to regulate important market benchmarks, their contributors and
their administrators. The EU is scheduled to present plans later this month for toughening
benchmark-setting rules, which, in addition to assigning responsibility for supervision, will, it is
believed, also give investors a right to sue for loss relating to poor benchmark-setting and
empower regulators to force banks to submit data to administrators. The EU is reconsidering its
initial proposal handing oversight of critical benchmarks, including Libor, from the FCA to
ESMA. Under the revised plan, a a group of national regulators, including the FCA, would
oversee Libor, while ESMA would mediate disputes.
FATCA
The Cayman Islands has concluded negotiations with the US on a Model 1 intergovernmental
agreement (IGA) and a new tax information exchange agreement, thus paving the way for
automatic exchange of information under FATCA. The benefits of the Model 1 IGA for foreign
financial institutions in the Cayman Islands is that it will streamline the reporting of information
regarding accounts and non-financial entities substantially owned by US citizens and residents.
The Cayman Islands government will then relay the information to the US IRS. Industry will
benefit from the government managing the implementation of a standardised framework for the
reporting of data, as the FATCA model is likely to be adopted as a broader template for
multilateral tax agreements in the future. Following the signing with the US, the Cayman Islands
government will have further discussions with HM Treasury in order to finalise the terms of the
UK Model 1 IGA FATCA agreement.
EU financial system
The joint committee of the European Supervisory Authorities has published its second report on
the cross-sector risks and vulnerabilities in the EU financial system. The key risks set out in the
first report continue to challenge stability and subsequent developments have highlighted these,
including increased volatility in longer-term interest rates combined with the current low interest
rate environment, the resolution and recapitalisation of Cyprus banks and cyber-attacks on the
internet and mobile services of various banks in April and June 2013.
Italian Financial Transaction Tax (IFTT)
Italy has introduced a tax on high-frequency trading and equity derivatives amidst warnings by
brokers that the new taxes could further damage liquidity in the Italian market. For high-
frequency traders, order changes and cancellations will be taxed at 0.02 per cent when they occur
within a timeframe shorter than half a second, once above a threshold. For equity derivatives,
there will be fixed charges, depending on the type of contract, and deals executed off-exchange
will subject to a higher tax band. The tax will apply regardless of where the transaction is
executed, or the country of residence of the counterparty. Intermediaries such as market makers
are exempt from the tax. In the meantime, EU legal advisors have said that the proposed
European FTT could infringe the rights of non-participating Member States and violate the
region’s competition rules.

4. ISDA interest rate swap enquiry
The FCA is working with the CFTC to investigate alleged manipulation of ISDAfix, benchmark
measure tied to interest rate swaps. The CFTC has issued subpoenas to current and former
brokers at ICAP (IAP) Plc, ISDA and fifteen Wall Street dealers, as recorded telephone calls and
e-mails reviewed by the CFTC show that traders at Wall Street banks instructed ICAP brokers to
buy or sell as many interest rate swaps as necessary to move the ISDAfix rate to a predetermined
level. By rigging the measure, the banks stood to profit on separate derivatives trades they had
with clients who were seeking to hedge against moves in interest rates.
Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
13 September 2013