1. Welcome to Legal Shorts, a short briefing on some of the week’s developments in the
financial services industry.
Listen to this week's Legal Shorts on CLTV by going to ttp://vimeo.com/cummingslaw
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
www.cummingslaw.com
AIFMD: FCA update on proportionality
The FCA has updated its AIFMD webpage to clarify how AIFMs can
comply in a proportionate way with the AIFMD's requirement for
hierarchical and functional segregation of a firm's risk management
function. The FCA states that there is scope for AIFMs to devise effective
risk management functions that comply with the separation requirements of
Article 15(1), subject to the principle of proportionality. The FCA also states
that the principle of proportionality is intended to ensure that regulatory
measures go no further than is required to achieve a stated objective. The
second paragraph of Article 15(1) suggests that the objective is to ensure an
AIFM has specific safeguards against conflicts of interest, to allow for the
independent performance of risk-management activities. The FCA
understands that achieving functional and hierarchical separation may be
disproportionate for some firms, taking into account their size, internal
organisation and the nature, scale and complexity of their business (or
possibly other factors, to the extent the firm regards such factors as
relevant). However, to satisfy the requirements of Article 15, the FCA
considers that an AIFM must be able to demonstrate that it has specific
safeguards against conflicts of interest that allow for the independent
performance of risk-management activities. The FCA will review and assess
the safeguards implemented by the firm to ensure that conflicts of interest do
not compromise that independence.

2. FCA publishes approved persons information
The FCA has announced on a new webpage that, in keeping with its
transparency agenda, it will publish more detailed information on the
volumes of approved persons applications for controlled functions that it has
received and on which it has taken a decision. The FCA will publish this
information every six months, starting with the period from 1 April 2013 to
30 September 2013. The detailed information relates to: (i) significant
influence function (SIF) applications for approval from FCA-authorised
firms; (ii) CF30 applications from FCA-authorised firms and PRAauthorised firm (the FCA is responsible for all CF30 applications); and (iii)
applications received and determined under the enhanced SIF process. These
figures cover applications made by FCA-authorised firms, and also PRAauthorised firms where the controlled function to which the application
relates is for an FCA-designated controlled function.
EMIR
The European Commission has confirmed that it does not intend to endorse
ESMA’s draft implementing technical standards (ITS) which would delay
the reporting date for exchange traded derivatives until 1 January 2015. The
reporting of all derivative contracts is required under EMIR and the
requirement is expected to come into effect from February 2014, but ESMA
had suggested that this be delayed for ETDs to give it more time to develop
guidelines and recommendations to ensure a common, uniform and
consistent application of the EMIR reporting requirement. ESMA had been
anticipating such a refusal on the Commission’s part. In the meantime,
ESMA has announced that it has approved the registrations of the first four
trade repositories, namely: DTCC Derivatives Repository Limited and
UnaVista Limited, each based in the UK, Krajowy Depozyt Papierów
Wartosciowych S.A. based in Poland and Regis-TR S.A., based in
Luxembourg. Registration means that the TRs can be used by counterparties
to derivatives transactions to fulfil their trade reporting obligations under
EMIR. The registrations will take effect on 14 November 2013, triggering
the start of the EMIR reporting obligation on 12 February 2014 (i.e. 90 days
after the official registration date).
Short Selling Regulation
The Advocate General has concluded in United Kingdom v Council and
Parliament that Article 28 of the Short Selling Regulation should be
annulled. Under Article 28, ESMA is granted powers to intervene in the
financial market of a Member State in the event of a threat to the orderly
functioning and integrity of financial markets or to the stability of the whole

3. or part of the financial system in the EU. During the legislative process for
the Regulation, the UK had expressed concerns that Article 28 would be
unlawful, abstaining during the EU Council vote on adoption of the
Regulation, and had brought an action against the Council. In the case, the
Advocate General concluded that Article 114 of the Treaty on the
Functioning of the European Union (TFEU) should not have been relied
upon as a basis for conferring decision making powers on ESMA under
Article 28, but that Article 352 TFEU would, instead, have been an
appropriate legal basis for Article 28 and Article 28 should therefore be
annulled. The annulment is unlikely to be of great significance to market
participants, given that ESMA's powers under the Article could only have
been exercised in the limited circumstances above.
EMIR Q&As
ESMA has also updated its Q&As on the implementation of EMIR, which
are aimed at competent authorities to promote common supervisory
approaches and practices to the application of EMIR across the EU. The
updated or modified Q&As relate to the calculation of the clearing
threshold, risk mitigation techniques for contracts not cleared by a CCP,
segregation and portability, reporting of collateral and valuation and
portfolio reconciliation. The Q&As were originally published in March 2013
and were last updated in October 2013.
Basel III
The Financial Stability Board has said that JP Morgan and HSBC topped the
list of the world's top 29 banks that must hold extra capital from 2016
because of their size and reach. The two banks are in the top ‘bucket’ and
will have to hold an extra 2.5% of risk-weighted core capital on top of the
7% minimum which all banks must hold by 2019 under the Basel III accord.
Barclays, BNP Paribas, Citigroup and Deutsche Bank have been placed into
the 2% surcharge bucket and BoA, Credit Suisse, Goldman Sachs, Credit
Agricole, Mitsubishi UFJ, Morgan Stanley and Royal Bank of Scotland and
UBS face a 1.5% surcharge. Next year's list from the FSB in November will
determine which banks will actually have to comply with the new surcharge
rule from 2016.

4. UCITS V
The Presidency of the EU Council has published a compromise proposal
relating to the Commission’s legislative proposal on UCITS V, published on
3 July 2012. UCITS V consists of proposed reforms to the UCITS regime
intended to address issues relating to the depositary function, manager
remuneration and administrative sanctions. The cover note for the
compromise proposal states that only the changes introduced following the
working party meeting of 21 October 2013 have been marked up. This
follows an earlier compromise proposal published on 11 December 2012.
BoE ‘Waking Shark II’ exercise
The Bank of England has updated its financial community webpage with a
statement on its Waking Shark II cyber attack exercise. The exercise took
place on 12 November 2013 to test the financial sector’s response to a
sustained and intensive cyber attack. The participants were investment
banks, financial market infrastructure, the UK financial authorities (i.e. the
FCA, BoE and HM Treasury) and relevant government agencies. During the
exercise, communications between firms, and firms and the authorities, were
tested. The aim was to improve understanding of the impact of a cyber
attack on the participants and wider financial system. A report will be
published in early 2014 to inform the participants and wider financial sector
of the outcomes and lessons learned.
Unauthorised unit trusts tax treatment
The Unauthorised Unit Trusts (Tax) Regulations 2013 have been published
and are intended as both tax anti-avoidance and simplification measures.
The new Regulations will replace the existing primary legislation applicable
to UUTs, with the objective of closing the tax gap by introducing rules to
prevent UUTs being used for tax avoidance. The rules do this by defining
and providing different treatment for exempt UUTs and non-exempt UUTs.
Exempt UUTs are defined as those UUTs where all unitholders are wholly
exempt from CGT (for reasons other than residence) for the relevant
financial period, the trustees are UK resident and HMRC has approved the
UUT as exempt. The latter requirement has been introduced by the new
Regulations. Although exempt UUTs will continue to be subject to income
tax (and exempt from CGT), the new Regulations make a number of
modifications, including that unitholders will now receive payments gross
and account for tax through self-assessment. The changes to the treatment of
non-exempt UUTs, and in particular their taxation at the main rate of
corporation tax, reflect the perception that, generally, non-exempt UUTs
have been used for tax avoidance while exempt UUTs have been used as

5. genuine investment vehicles. Given the unfavourable treatment of nonexempt UUTs under the new regime, it seems unlikely that UUTs will be
established in future other than to qualify as exempt UUTs. The Regulations
come into force on 6 April 2014.
GUEST SHORTS
This week, James Lasry, partner and head of funds at Hassans law firm,
Gibraltar, reports on Gibraltar as an alternative fund jurisdiction for non-EU
funds following the implementation of the AIFMD, as follows:
“The AIFMD has separated the funds industry into EU and non-EU funds
jurisdictions for the purposes of the AIFMD passport. This has put Gibraltar,
which was one of a dozen such domiciles, into a category of one of just four
European alternative fund domiciles. This is interesting for UK managers
with AIFM licenses who want a European vehicle for their funds in order to
market to European investors. Those managers who wish to use their newly
earned passporting rights may want to structure their funds in European
vehicles and Gibraltar is the only EU funds jurisdiction that allows for the
pre-authorisation launch of a fund, as Cayman does. The other jurisdictions
all require funds to be licensed before they can be promoted. This means
that in Gibraltar there is no regulatory down-time. Furthermore, in its
implementation of the AIFMD, Gibraltar has adopted helpful policies both
in the implementation of the Directive and in its interpretation of the policy
on remuneration. For example, it largely follows the FCA’s proportionality
approach. The policy on delegation is likely to allow substantial delegation
of both investment and risk management as long as the local directors have
the capacity and substance to approve and take responsibility for the
delegated work product. Finally, the depositary provisions have been
deferred until 2017 so that any European depositaries may be used until that
time.”
If you would like to discuss the above or receive further information
regarding the investment funds industry in Gibraltar, please contact James
Lasry at james.lasry@hassans.gi.

6. Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
14 November 2013