05 August 2015

Regulatory Update – August 2015

Retail Investor Protection Act passed

On 10 July 2015, the German Retail Investor Protection Act (Kleinanlegerschutzgesetz), which had been passed by parliament (Bundestag) at the end of April, came into force. The Act is meant to implement the government’s catalogue of measures for the improvement of retail investor protection and thereby reduce the risk of financial losses. In particular, the transparency of investments shall be increased. The Act has, inter alia, led to changes to the German Investments Act (Vermögensanlagengesetz) and to the German Securities Prospectus Act (Wertpapierprospektgesetz).

EBA publishes final draft RTS on MREL and contractual recognition of bail-in

On 3 July 2015 the European Banking Authority (EBA) published its final draft Regulatory Technical Standards (RTS) on: 

  • the Minimum Requirements for Own Funds and Eligible Liabilities (MREL); and 
  • the contractual recognition of bail-in.

The EU Bank Recovery and Resolution Directive (BRRD) forms the European response to the problem of  “too-big-to-fail” banks. In this respect, both new RTS publications further specify essential elements to ensure the effectiveness of the Single Resolution Mechanisms (SRM).

With MREL, the BRRD introduces a new minimum requirement which is not RWA (risk-weighted assets)-based and with which European authorities seek to ensure that banks have enough of their own funds and liabilities which are eligible to bail-in in order to absorb losses in case of a bank’s failure. MREL will be set by resolution authorities for each bank so that resolution plans are effective and will be linked to the capital requirements of a firm. The final draft RTS in particular sets the relevant criteria for the determination of MREL and is therefore of importance for the European financial sector.

The RTS on the contractual recognition of bail-in instruments aims to ensure the cross-border recognition and effectiveness of bail-in tools. Liabilities within the scope of the write-down and conversion powers which are governed by the law of a non-EU country are required to contain a contractual recognition clause. However, such a contractual recognition clause requirement does not apply, for example, if the non-EU country has a statutory regime which provides for the recognition of the write-down and conversion powers of an EU resolution authority.

IT Security Act came into force

On 25 July 2015, the German Act for an increase in IT Security (IT-Sicherheitsgesetz) came into force. The addressees of this Act include the owners of so-called “critical infrastructures” from the Financial and Insurance Sectors. They are required to make sure that their IT meets “state of the art” security standards and to check the IT every two years, and major IT security issues have to be reported to the German Federal Office for IT Security (Bundesamt für Sicherheit in der Informationstechnik). The entities covered by the Act will be listed in an ordinance which is being developed by the German Ministry of Internal Affairs (Bundesministerium des Innern). The Act requires compliance within two years of the legislation having been passed.

EBA consults on risk weights inter alia for project and real estate financing

The European Banking Authority has launched a consultation on assigning risk weights to specialised lending exposures under the IRBA. The debt exposure of an SPV, established to finance or operate physical assets, may constitute specialised lending exposure. Therefore, the draft RTS aims to address exposure under project financings, real estate financings, object financings and commodities financings. Within each class, the proposed draft RTS specify how the factors:

  • financial strength 
  • political and legal environment
  • transaction and/or asset characteristics
  • strength of the sponsor and developer and
  • security package 

are to be taken into account. Responses on the consultation are due by 11 August 2015.

Financial Stability Committee submits annual report to the German Parliament and recommends the creation of new macroprudential instruments

In its meeting on 30 June 2015, the Financial Stability Committee (Ausschuss für Finanzstabilität) discussed the current risk situation in the financial markets. It considered the consequences of the market reaction triggered by the events in Greece as minor but regarded the current low interest rate environment as the most challenging factor. Against this background, it discussed in particular the effects of low interest rate environment on the German residential property market, German credit institutions and German life insurers. Furthermore, it issued a recommendation to the federal government to create what it called "national macroprudential instruments for the residential property market". This involves granting supervisors additional intervention powers aimed at preventing any credit-fuelled overheating of the German property market.

China Stock Connect and Mutual Recognition of Funds

The introduction of the Shanghai-Hong Kong Stock Connect programme (Stock Connect) in November 2014 and the announcement of the mutual recognition of public investment funds (MRF) between Mainland China and Hong Kong on 22 March 2015 are the latest significant developments in a series of arrangements in order to relax the tight control of the cross-border capital flow.

Stock Connect has opened mutual stock market access between the Shanghai Stock Exchange and the Stock Exchange of Hong Kong Limited. Chinese law generally recognises so-called nominee holding structures and will recognise legal interest of foreign investors in “A” shares which have been acquired through Stock Connect. There is a general disclosure duty for significant positions in “A” shares which follows similar rules for persons “acting in concert” as in other countries. Margin financing and stock lending and borrowing by foreign investors within Stock Connect is subject to similar restrictions as those applying to investors from Mainland China.

MRF has established a similar link for investment funds, thus enabling the sale of retail mutual funds which are initially offered in Hong Kong or Mainland China on a cross-border basis to retail investors. Hong Kong domiciled investment funds which meet certain eligibility criteria may now also be sold in Mainland China if they comply with the local laws of the place of sale. MRF may be used by standardised funds, including equity funds, bond funds, mixed funds and index funds.
For further information, please see the June edition of “KWM Connect“.

ESMA publishes Guidelines on regular information to be submitted by Credit Rating Agencies

On 23 June 2015, ESMA published guidelines on the periodic information to be submitted by Credit Rating Agencies (CRAs). The guidelines apply to CRAs registered in the EU and specify information that needs to be transmitted by CRAs to allow ESMA’s ongoing supervision of CRAs. The guidelines will become effective two months after their publication on ESMA's website in all official EU languages

ISDA BRRD Implementation Monitor

In order to keep track of the status of implementation, ISDA has launched the EU Bank Recovery and Resolution Directive (BRRD) Implementation Monitor that covers all EU/EFTA/EEA member states. The BRRD Implementation Monitor has a particular focus on derivatives-specific provisions and will be updated on a regular basis to reflect the progress made in each jurisdiction.

Disclosure obligations of a bank in connection with a swap transaction

In a decision of 28 April 2015 (XI ZR 378/13), the German Federal Court of Justice (Bundesgerichtshof, BGH), a local municipality from North Rhine-Westphalia had raised claims against a bank in connection with various interest rate swaps which had been concluded on the basis of a German master agreement for financial derivative transactions. The BGH clarified that no disclosure obligations resulted from the master agreement, since advisory obligations would be contrary to the intention of the parties. Furthermore, the BGH clarified in its ruling that the existence of an initial negative market value does not result in a disclosure obligation. Furthermore, the BGH ruled that where the bank is the seller of the recommended product, the bank is generally not obliged to disclose the fact that it generates a profit with the relevant product. An exception shall however be made with regard to a pure interest bet that is deliberately arranged at the expense of the client.

In a decision of 9 April 2015 (8 U 532/14), the Higher Regional Court of Dresden (OLG Dresden) dealt with the issue of deviating termination rights of a loan agreement and a related interest rate hedging agreement. Regarding the loan-agreement, the customer had a statutory termination right according to § 489 (1) of the German Civil Code (BGB) while the swap agreement did not provide for a corresponding termination right. The court held that this “deviation” was not sufficiently clear, even for an experienced business customer. This applies particularly when the bank promotes the notion of providing the customer with a tailor-made interest floater together with the possibility of an extraordinary termination.

Draft UCITS V Implementation Act submitted

On 25 June 2015, the Fourth Anti-Money Laundering Directive (Directive (EU) 2015/849) as well as the revised Regulation on information accompanying transfers of funds (Regulation (EU) 2015/847) came into force. The member states will have to implement the Directive by 26 June 2017 into national law. The Regulation shall also apply from this date.

The primary objectives of the Fourth Anti-Money Laundering Directive are a greater harmonisation of the existing rules on the prevention of money laundering and terrorist financing in the European Union and an alignment of these rules with the revised global recommendations of the Financial Action Task Force (FATF) of 2012. For this purpose, notably the scope of the Fourth Anti-Money Laundering Directive has been extended, the risk based approach to risk analysis has been intensified and the provisions for customer due diligence have been tightened. The Funds Transfer Regulation specifically tightens the rules on the information which payment service providers in the European Union will have to attach to transfers of funds in order to ensure a better traceability. Thus, in the future not only information on the payer, but also on the beneficiary of a transfer of funds must be submitted and recorded.
Furthermore, on 1 July 2015 the European Securities and Markets Authority (ESMA) issued questions and answers in order to promote the sound, effective and consistent application of rules on anti-money laundering and terrorist financing to investment-based crowdfunding platforms.

Fourth Anti-Money Laundering Directive and new Regulation on information accompanying transfers of funds published

On 25 June 2015, the Fourth Anti-Money Laundering Directive (Directive (EU) 2015/849) as well as the revised Regulation on information accompanying transfers of funds (Regulation (EU) 2015/847) came into force. The member states will have to implement the Directive by 26 June 2017 into national law. The Regulation shall also apply from this date.

The primary objectives of the Fourth Anti-Money Laundering Directive are a greater harmonisation of the existing rules on the prevention of money laundering and terrorist financing in the European Union and an alignment of these rules with the revised global recommendations of the Financial Action Task Force (FATF) of 2012. For this purpose, notably the scope of the Fourth Anti-Money Laundering Directive has been extended, the risk based approach to risk analysis has been intensified and the provisions for customer due diligence have been tightened. The Funds Transfer Regulation specifically tightens the rules on the information which payment service providers in the European Union will have to attach to transfers of funds in order to ensure a better traceability. Thus, in the future not only information on the payer, but also on the beneficiary of a transfer of funds must be submitted and recorded.

Furthermore, on 1 July 2015 the European Securities and Markets Authority (ESMA) issued questions and answers in order to promote the sound, effective and consistent application of rules on anti-money laundering and terrorist financing to investment-based crowdfunding platforms.

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
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