1. Welcome to Legal Shorts, a short briefing on some of the week’s developments in
the financial services industry.
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If you would like to discuss any of the points we raise below, please contact me or
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Claire Cummings
020 7585 1406
claire.cummings@cummingslaw.com
www.cummingslaw.com
Available on CLTV from Monday: 'EMIR - THE BARE FACTS'
A short video in which Dominique White discusses the bare facts about
EMIR will be available on CLTV as from Monday at
https://vimeo.com/86817774
Definition of derivative contract under EMIR
ESMA has sent a letter to the European Commission asking it to clarify the
definition of a derivative or derivative contract under EMIR on the basis that
the issue could have a significant detrimental effect on the consistent
application of EMIR. In particular, ESMA states it is important to clarify: (i)
the definition of currency derivatives in relation to the frontier between spot
and forward and their conclusion for commercial purposes; and (ii) the
definition of commodity forwards that can be physically settled. The annex
to the letter sets out further background to the issue and the consequences
that it has on the direct applicability of EMIR. To avoid the inconsistent
application of EMIR across the EU, ESMA understands that until the
Commission provides clarification, national competent authorities will not
implement the relevant provisions of EMIR for contracts that are not clearly

2. identified as derivatives contracts across the EU.
AIFMD: FCA update on calculation of own funds
The FCA has updated its AIFMD webpage with a section about the
calculation of additional own funds. The FCA is currently considering its
interpretation of ‘funds under management’ under the AIFMD, which is
used to calculate the amount of “additional own funds” a manager must hold
once the value of the portfolio of AIFs exceeds €250 million. The FCA will
consult on amending the requirement in a quarterly consultation later in
2014. The proposed change will allow for derivatives to be valued at their
market value rather than requiring them to be converted to their underlying
positions when calculating the value of portfolios. So that firms do not have
to wait for the rule change in order to progress with their applications for
authorisation as an AIFM, the FCA has made available a "modification by
consent" to allow individual AIFMs to take advantage of the proposed
change.
AIFMD: ESMA Q&As
ESMA has published Q&As on the application of the AIFMD to provide
clarity the content of the AIFMD rules. The questions relate to the
following: (i) first application of the remuneration rules; (ii) remuneration
rules in the case of delegation of portfolio management or risk management
activities; (iii) notification of AIFs; (iv) reporting under Article 42 of the
AIFMD; and (v) Annex IV of the AIFMD. The aim of the Q&A is to
promote common supervisory approaches and practices in the application of
the AIFMD and its implementing measures.
MiFID II
The EU Council has published the text for the proposed MiFID II Directive
and the proposed MiFIR. The Council has also announced that COREPER
has approved the final compromise text, which will allow the Presidency to
indicate to the European Parliament that, should the Parliament adopt its
position at first reading, the Council would approve the Parliament’s
position. The Council and the Parliament reached political agreement in
trialogue on the MiFID II legislative proposals last month.

3. CRD IV
The European Banking Authority has published its final draft RTS on
classes of instruments that are appropriate for the purposes of variable
remuneration under CRD IV. The aim of the draft RTS is to ensure that
instruments for variable remuneration reflect the credit quality of an
institution and incentivise prudent risk-taking. In particular, the draft RTS
specify the classes of instrument that can be used for variable remuneration
and introduce specific requirements for additional Tier 1, Tier 2 and other
instruments. The EBA has submitted the draft RTS to the Commission for
adoption and they will enter into force following publication in the OJ.
Modification of FCA Handbook
The FCA has published new webpages announcing modifications of consent
relating to CASS, COLL and COBS. Amongst other things, the
modifications relate to certain rules in the COBS and COLL, which allow
alternative fund managers of a non-UCITS retail scheme (NURS) to choose
to produce an equivalent document to the UCITS key investor information
document (KIID). This document can then be used by the manager and all
other firms selling or advising on the NURS, instead of the key features
document or the simplified prospectus. It is referred to as the "NURS-KII"
document.
IMA report on dealing commission
The Investment Management Association has published a report on the use
of dealing commission for the purchase of investment research. The report
reviews the current market for the purchase of externally sourced equity
research by investment managers in the UK, with a particular focus on what
type of arrangement benefits clients most. In particular, the report looks at
payment for research by means of dealing commission, bundled with
execution costs and paid out of client funds (which is the most common
approach), and which can give rise to conflicts of interest. Among other
things, the report proposes a framework of eight measures against which the
current regime and any alternatives might be assessed and compared and
makes recommendations to improve current practice and lists the actions
that the IMA intends to undertake.

4. FX benchmark review
The Financial Stability Board has announced that it will review FX
benchmarks due to concerns regarding the integrity of FX rate benchmarks.
The review will form part of the FSB's on-going programme of financial
benchmark analysis. The work will be carried out by a newly formed
Foreign Exchange Benchmarks sub-group, which will review the FX
benchmarks and will analyse market practices relating to their use and the
functioning of the FX market. The FSB will submit conclusions and
recommendations of the review to the G20 Brisbane summit to be held on
15 and 16 November 2014.
CLLS response on HM Treasury’s review of financial services
The City of London Law Society has published the response of its
Regulatory Law Committee to HM Treasury’s review on financial services
and free movement of capital. The response sets out the CLLS' ‘many
serious concerns’ about the current approach to law making and
implementation for the single market in financial services. In its response,
the CLLS provides examples to illustrate its points and states that HM
Treasury, the FCA and the PRA should do more to assist firms by providing
their interpretation of EU rules, as they do in respect of UK legislation.
FCA wins case against unauthorised CISs
The FCA has won a High Court judgment against two firms illegally
operating and promoting collective investment schemes without
authorisation. The defendants in the case had structured their schemes to try
to avoid the need to be regulated by the FCA. However, the High Court
agreed with the FCA that the schemes were unauthorised collective
investment schemes and could not be lawfully operated by the defendants.
The FCA said that it has an objective to protect consumers and enhance the
integrity of the financial system and that the Court’s ruling shows that even
if operators have deliberately tried to structure their scheme to avoid
regulation, the court will still look at whether those operating the scheme
should in fact be regulated for consumer protection.

5. Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
21 February 2014