AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Solvency II

In December 2009, Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance (recast), (Solvency II), was published in the Official Journal of the European Union. Solvency II updates the regulatory regime for European insurance and reinsurance firms by replacing a previous series of 13 EU Directives (Solvency I) with a new risk-based regulatory framework to increase protection for policyholders.

Solvency II is structured across three 'pillars' - (1) quantification; (2) governance; and (3) disclosure - and includes requirements for insurance companies to:

  • meet a Minimum Capital Requirement (MCR) below which a firm may lose its regulatory authorisation;
  • meet a Solvency Capital Requirement (SCR) below which an insurance firm will be investigated by its market regulator and will be required to take corrective action;
  • calculate its MCR and SCR based on its insurance liabilities, available own funds (assets) and the presence of certain risks, including operational and market risks;
  • have a ‘prudent person approach to investment’, opening up the classes of assets in which insurance companies can invest;
  • undertake extensive reporting to the market and to market regulators; and
  • implement governance procedures and systems and controls to manage their businesses and their risks, including requirements on controlling and understanding outsourced functions.

Solvency II poses certain challenges for hedge fund managers which receive allocations from EU insurance companies. The Pillar 1 capital requirements impose onerous capital standards upon insurance companies which use the ‘standard model’ for their allocations to hedge funds, and the data reporting requirements under Pillars 1 and 3 will demand significant amounts of investment level data to be delivered to insurance companies by fund managers in a very short space of time.

The Level II technical standards, implementing measures and guidance under Solvency II experienced delays whilst an additional Directive - known as ‘Omnibus II’ – was negotiated. Omnibus II was published in the Official Journal of the European Union. It introduces amendments to various EU secondary legislative instruments in order to enable the implementation of Solvency II and provides specific tasks for EIOPA and ESMA, in particular clarifying the role of EIOPA in ensuring harmonised technical approaches on the calculation of technical provisions and capital requirements. The new rules also amend Solvency II itself, as well as the Prospectus Directive, to take account of the new EU financial services supervisory system following the creation of EIOPA and ESMA in 2010. Overall, the amendments can be broadly categorised as: the definition of the appropriate scope of technical standards; enabling EIOPA and ESMA to settle disagreements; enabling the existing rules to operate in the context of the new supervisory system; and, transitional requirements and other amendments to Solvency II. Member States must transpose Omnibus II by 31 March 2015 and apply the rules of Solvency II from 1 January 2016.

 

Key Legislative Texts

Solvency I

Solvency I Directives

Solvency II

Level 1

Level I Text of Solvency II (December 2009)

Directive 2012/23/EC amending the date of transposition and application of Solvency II (September 2012)

Omnibus II

Directive 2014/51/EU amending Directives 2003/71/EC and 2009/138/EC and Regulations (EC) No 1060/2009, (EU) No 1094/2010 and (EU) No 1095/2010 in respect of the powers of the European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA) (May 2014)

 

 

AIMA documents

Summary - Solvency II implications for AIMA's Hedge Fund and Fund of Hedge Funds Managers (December 2011)

Note on the Solvency II Directive (April 2010)

 

Other documents

EIOPA techncial assssment of LTG package (June 2013)

EIOPA technical assessment of the long-term guarantees package (January 2013)

EIOPA publishes Opinion on interim measures regarding Solvency II (December 2012)

 

 

 

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      7. CFTC Automated Trading
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