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
FMLC response to client asset review
The FMLA has published its response to the FCA’s consultation paper on its
review of the client asset regime for investment business (CP 13/5),
published in July 2013. In CP13/5, the FCA set out its proposals for material
and consequential changes to the FCA's client money, custody assets and
mandates rules in CASS. In its response, the FMLC highlights areas of legal
uncertainty arising from the proposals in the context of their implications for
financial markets and invites further clarification on the following areas: (i)
records based distribution; (ii) the overlap between the CASS rules, central
clearing structures and EMIR; (iii) client reporting and information; (iv) the
banking exemption; (v) acknowledgment letters; (vi) multiple pools and the
identification of beneficiaries; and (vii) the need to take into account, as part
of the CASS review, the operational realities of the trading of securities in
financial markets. The FMLC concludes that, while it acknowledges that the
far-reaching changes proposed by the FCA are reflective of the need for
change to the existing client asset regime, they need to be clarified in light of
existing European legislation and other regulations they are designed to
complement.

2. IOSCO final report on protection of client assets
IOSCO has published its final report on recommendations regarding the
protection of client assets. The report contains eight principles that provide
guidance to regulators on how to enhance their supervision of intermediaries
holding client assets by clarifying the roles of the intermediary and the
regulator in protecting those assets. The principles also outline the
intermediaries’ responsibility to ensure compliance with applicable domestic
rules and regulations (including in the areas of recordkeeping, providing
statements of account, and arrangements to safeguard client assets and
minimise the risk of loss and misuse), including through the development of
internal systems and controls to monitor compliance. IOSCO consulted on
the principles in February 2013.
EMIR
ESMA has published its final report on procedural rules to impose fines and
periodic penalty payments on trade repositories. Under EMIR, where ESMA
finds that a TR has, intentionally or negligently, committed one of the
infringements listed in Annex I of EMIR, it must impose a fine. ESMA is
also required to impose periodic penalty payments in order to compel TRs or
other relevant persons to put an end to an infringement or respectively to
comply with their obligations in accordance with EMIR. In the meantime,
EMIR’s reporting obligation will come into full effect on 12 February 2014.
EC reporting and transparency proposal
The European Commission has published a legislative proposal for a
Regulation on reporting and transparency of securities financing transactions
(SFTs). The proposed Regulation sets out proposals for requirements for: (i)
financial or non-financial counterparties of SFTs to report the details of SFT
transactions to trade repositories; (ii) UCITS management companies,
UCITS investment companies and AIFMs to provide information to
investors on their use of SFTs and other financing structures; and (iii)
counterparties seeking to engage in rehypothecation to ensure certain
conditions are satisfied before they have the right to rehypothecation. The
proposal stems from the Commission’s work on risks posed by shadow
banking.

3. EC proposal for banking structural reforms
The European Commission has published a legislative proposal for a
Regulation introducing structural reforms to the EU banking sector. The
proposal is aimed at banks that are deemed to be too big to fail because the
consequences of their failure are considered detrimental for the financial
system as a whole. The Regulation will apply to EU banks deemed to be of
global systemic importance or those exceeding certain specified thresholds.
The EC is proposing to introduce a ban on proprietary trading with effect
from 1 January 2017 and a power for supervisors to require banks to separate
certain trading activities from a deposit-taking entity as of 1 July 2018.
EBA on CRR own funds requirement
The European Banking Authority has published final draft RTS on own
funds requirements for investment firms based on fixed overheads under the
CRR. These firms are required to hold eligible capital of at least one-quarter
of the fixed overheads of the previous year, or projected fixed overheads in
the case of an investment firm not having completed business for one year.
The draft RTS harmonise calculations of capital requirements, use a
subtractive approach for calculating fixed overheads and propose the
inclusion of the use of tied agents in the calculation. The EBA has confirmed
that these final draft RTS have been sent to the Commission for adoption.
CRD IV
The European Systemic Risk Board has published its decision on a
framework for national macro-prudential policy notifications and the
provision of opinions and the issuing of recommendations by the ESRB, as
required by CRD IV. ESRB must provide opinions and issue
recommendations on specific macro-prudential measures within one month
of receiving notification of such measures. The decision sets out the process
it will follow for assessing notified measures and delivering opinions or
recommendations. It also sets out the process notifying authorities must
follow when providing notifications, including the use of a specific template.

4. EU-US trade deal
The European Commission has proposed a framework for regulatory cooperation in financial services in the context of negotiations for an EU-US
trade deal, known as the Transatlantic Trade and Investment Partnership
(TTIP). The EU is proposing to establish, within the TTIP framework, a
transparent, accountable and rule-based process that would commit the two
parties to work together towards strengthening financial stability. The
regulatory co-operation would be based on a number of general principles
would be backed up by specific arrangements for the governance of the EUUS regulatory co-operation, guidelines on equivalence assessments and
commitments to exchange necessary and appropriate data between
regulators. The proposal includes the commitment to outcome-based
assessments of whether the other party's regulatory and supervisory
framework is equivalent, which could potentially lead to mutual reliance on
the rules of the other party.
ISDAfix benchmark
ICAP plc, a London based broker, is to be stripped of its function setting a
US benchmark for interest rate swaps by ISDA This comes amid
investigation by the FCA and the CFTC of alleged manipulation of ISDAfix.
ISDA has transferred the function to Thomson Reuters Corp., which will
calculate all ISDAfix rates in the future and all rates will be set based on
actual trades, rather than based on data reported from banks.
GUEST SHORTS
In a previous Guest Short, Bill Prew, CEO of independent AIFMD
depositary, INDOS Financial, provided an update on the depositary-lite
regime which will apply to UK hedge fund managers seeking to market nonEU funds into Europe from 22 July 2014. This week, Bill has provided an
update focussing on on-boarding considerations for managers, as follows:
(i) current FCA guidance states managers should notify the FCA of their
chosen depositary provider(s) by 21 June 2014;
(ii) managers and providers need to allow sufficient time to undertake
respective due diligence;
(iii) it can take time to agree the roles and responsibilities of the depositary,

5. prime brokers and administrator;
(iv) legal terms require negotiation and disclosures are required in offering
documents;
(v) in normal circumstances, 2 to 3 months would typically be sufficient to
complete on-boarding in a controlled way;
(vi) given the number of funds expected to comply with depositary-lite,
providers may experience capacity constraints or impose a cut-off for onboarding;
(vii) considering these factors, we advise managers to select their depositary
providers in the near future; and
(viii) delaying decisions could result in depositary-lite compliance becoming
increasingly more difficult than it needs to be.
For more information on the above and/or the depositary-lite regime, please
contact Bill Prew billprew@indosgroup.com or visit www.indosgroup.com.
Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
31 January 2014