AIMA Regulatory Update - Q2 2016

By AIMA’s Government and Regulatory Affairs Team

Published: 30 June 2016

The AIMA Regulatory Update strives to provide a succinct update to members on the current state of play on the most important files in the Government and Regulatory Affairs space. It is a one-stop-shop for members seeking to gain a quick overview of the main points of interest to the hedge fund industry while also providing links to a number of internal and external documents for those interested in greater detail. The issues treated in the update do not provide an exhaustive list of AIMA’s work in the area and we encourage members to contact AIMA’s Government and Regulatory Affairs team if they wish to be informed on the progress of work on issues which are not covered. 


The European Securities and Markets Authority (ESMA) has published final Guidelines on sound remuneration policies under the fifth Undertakings for Collective Investments in Transferable Securities Directive (UCITS V) and the Alternative Investment Fund Managers Directive (AIFMD). The UCITS Remuneration Guidelines provide clarity on the requirements under the UCITS Directive for management companies when establishing and applying a remuneration policy for key staff. The Guidelines will apply to UCITS management companies and national competent authorities from 1 January 2017. 

ESMA has also written to the European Commission, European Council and European Parliament on the proportionality principle and remuneration rules in the financial sector. In the letter, ESMA highlights that a key element of the UCITS Remuneration Guidelines relates to proportionality and, in particular, whether proportionality can lead to a situation in which the specific requirements on the pay-out process (i.e. the requirements on variable remuneration in instruments, retention, deferral and ex-post incorporation of risk for variable remuneration) set out in the Directive may be disapplied.  ESMA considers that the disapplication scenarios should remain possible in certain situations and, in its letter to the European institutions, suggests that further legal clarity on this possibility could be beneficial to all the interested parties. The amendment to the AIFMD guidelines, which relates to the section of these guidelines dealing with the application of the remuneration rules in a group context, will also come into force on 1 January 2017. However, the current AIFMD Guidelines will not be amended to bring them into line with the UCITS Guidelines pending clarification on the application of the proportionality principle. AIMA has produced a summary of the final guidelines. 

In the U.S., the Securities and Exchange Commission (SEC) is requesting comment on a joint proposed rule (the ‘proposed rule’) to revise the proposed rule published in the Federal Register on 14 April 2011, and to implement section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 956 generally requires that the SEC and other agencies jointly issue regulations or guidelines: (1) prohibiting incentive-based payment arrangements that they determine encourage inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss; and (2) requiring those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate Federal regulator.  The proposed rule will apply to investment advisers with $1 billion or more of total assets (exclusive of non-proprietary assets) shown on the investment adviser’s balance sheet for the most recent fiscal year end.  

The SEC will presumably be looking to investment advisers’ responses to Item 1.O of Form ADV which asks if the investment adviser has $1 billion or more of total assets and “assets” for this purpose are the investment adviser’s balance sheet assets, as is the case in the proposed rule. Client assets under management do not count toward the $1 billion for purposes of the proposed rule or the reporting requirement on Form ADV. All covered investment advisers would be prohibited from having an incentive compensation plan that encourages inappropriate risks by paying excessive compensation or benefits or leading to material financial loss.  The proposed rule also contains oversight, disclosure and recordkeeping requirements.  The proposed requirements become more onerous as total assets reach $50 billion and again at $250 billion.

AIMA contacts: Jennifer Wood ( and Anna Washington (


The Delegated Regulation supplementing Directive 2009/65 (the UCITS Directive) has been published in the EU’s Official Journal. There has been no extension of the three-month scrutiny period by the Parliament and pursuant to Article 25, this Delegated Regulation will apply from 13 October 2016. The delegated act sets out further details on the UCITS depositary requirements, such as (i) the particulars that need to be included in the written contract between the UCITS management company and the depositary, (ii) the duties of the depositary and (iii) the conditions for performing the depositary functions.  AIMA has produced a summary of the Delegated Regulation, which is available here.  

AIMA has responded to the European Securities and Markets Authority (ESMA) discussion paper on UCITS share classes (the ‘consultation’). In the response, welcomed ESMA’s consideration of the merits of developing a common understanding of what constitutes a share class of a UCITS, but shared concerns in relation to the types of hedging arrangements that should be permitted in different share classes and the transition period for share classes that will be required to be closed down by firms seeking to come into compliance.   

AIMA contacts: Jennifer Wood ( and Anna Washington (


The European Securities and Markets Authority (ESMA) has published an updated version of its Questions and Answers (Q&As) on the Alternative Investment Fund Managers Directive (AIFMD). The document adds one new question on the notifications of alternative investment funds (question 3). This document is intended to be continually edited and updated as and when new questions are received.

AIMA contacts: Jennifer Wood ( and Anna Washington (


AIMA has produced a briefing note setting out its comments on the answers to the technical questions that were posed to the European Commission (the ‘Commission’) for which the Commission provided a response to in its questions and answers (the ‘Q&As’) on the simple, transparent and standardised (‘STS’) Securitisation Proposal (COM(2015)472). In the briefing note, AIMA provides additional information in response to questions posed regarding collateralised loan obligations and the definition of ‘sponsor’, as AIMA disagrees with the answers provided by the Commission.

AIMA contacts: Jennifer Wood ( and Anna Washington (

Loan origination

ESMA has published an opinion setting out its view on the necessary elements for a common European framework for loan origination by investment funds. ESMA states that it is of the view that a common approach at EU level would contribute to a level playing field for stakeholders, as well as reducing the potential for regulatory arbitrage. This could in turn facilitate the take-up of loan origination by investment funds, in line with the objectives of the Capital Markets Union. This opinion will inform a future European Commission consultation in this area. ESMA intimates in the opinion that some harmonisation is necessary but keeps open the possibility that any such regime could be ‘opt-in’. The AIFMD is the most likely framework for this and ESMA advises the Commission to consider whether ‘additional requirements which exceed those already contained in AIFMD’ may be required. The opinion also suggests that any such loan origination vehicles should be closed ended and not engage in maturity transformation. On leverage, ESMA does not suggest a specific limit, only that one is likely to be required. However, they also invite the industry to submit further evidence on what the need for leverage in such funds is. Finally, they also invite the Commission to consider the implications of loan origination funds for systemic risk and therefore what additional macro-prudential tools may be required.  

AIMA has also submitted a response to the Trésor in relation to the proposed French decree fixing the conditions on which certain investment funds may grant loans to companies (Décret Fixant les conditions dans lesquelles certains fonds d’investissement peuvent octroyer des prêts aux entreprises, the ‘Decree’). In the response, AIMA agreed with Trésor that loan origination requires certain risks to be addressed suggested that the Trésor reconsider the two key issues of the limitations on the investment of proceeds from borrowing and the restriction on the domicile of the fund vehicle.

AIMA contact: Jennifer Wood ( and Anna Washington (

Cross-border distribution of funds

The European Commission has published a consultation document entitled “CMU Action on Cross-Border Distribution of Funds (UCITS, AIF, ELTIF, EuVECA and EuSEF) Across the EU”.  The consultation covers all types of funds as well as tax issues. Amongst other things, the consultation asks a number of questions about (i) marketing restrictions; (ii) the imposition of fees and other requirements in connection with the use of the passport; and (ii) notifications processes.  The public consultation runs until 2 October 2016. 

AIMA contacts: Jennifer Wood ( and Anna Washington (

SEC Proposed Rule on the Use of Derivatives

AIMA and Managed Funds Association (MFA, together the Associations) have submitted a joint response to the Securities and Exchange Commission’s (SEC’s) Proposed Rule on the Use of Derivatives by Registered Investment Companies and Business Development Companies (the Proposed Rule).  While generally supporting several aspects of the SEC’s proposal, including asset segregation requirements and an activities-based approach to regulation, the Associations expressed concerns with the adverse effects of the Proposed Rule’s imposition of a new notional-based leverage limit on registered funds. The response also questions the SEC’s attempt to redefine and regulate derivatives as “senior securities” under Section 18 of the Investment Company Act of 1940.

AIMA contact: Jennifer Wood (


The European Securities and Markets Authority (ESMA) has published its Final Report and draft Regulatory Technical Standards (RTS) for Regulation (EU) 2015/760, the European Long-Term Investment Fund Regulation (ELTIF).  The RTS set out in the final report have been submitted to the European Commission for endorsement. The European Commission should take a decision on whether to endorse the RTS within three months. ESMA’s key proposals include (i) the criteria to determine the circumstances in which financial derivatives are used solely for hedging purposes; (ii) the life of an ELTIF should be determined with reference to the individual asset within the ELTIF portfolio which has the longest investment horizon; and a grandfathering provision, whereby ELTIFs have one year after the RTS come into force to comply with these rules.

AIMA contacts: Jennifer Wood ( and Anna Washington (

EBA report concerning categorisation of investment firms

The EBA has published a report on investment firms in response to the Commission’s call for advice of December 2014 on the suitability of certain aspects of the prudential regime for investment firms.  The EBA report recommends that the European Commission (Commission) reconsider the categorisation of investment firms, creating a new category of investment firms to which only certain aspects of CRD IV would apply.  This new categorisation could apply to many AIMA members.  We are now preparing to engage proactively with stakeholders at the EBA and the Commission to try to inform the development of these new categories, and the regulations that would apply to them. AIMA has prepared a detailed note, setting out further background to these changes, and in particular, the areas of prudential regulation that are being re-examined by the EBA, which members can view here

AIMA contacts: Jennifer Wood ( and Anna Washington (


AIMA has submitted a response to the European Commission's consultation on an effective insolvency framework within the EU.  In the response, AIMA commented, amongst other things, that measures ensuring that individual creditors, particularly secured creditors, have the right to enforce debts may need to be balanced with those designed to preserve value for all creditors.

AIMA contacts: Jennifer Wood ( and Anna Washington (

Australia - Portfolio holdings disclosure for super funds

ASIC has issued ASIC Corporations (Amendment) Instrument 2016/351 which defers the commencement date of the choice product dashboard regime for super funds to 1 July 2017 and the first reporting date for portfolio holdings disclosure by super trustees to 31 December 2017.

The instrument also means the obligations of certain intermediaries to provide a notification that an asset invested is a super fund asset or derives from a super fund asset, do not need to be complied with until 1 July 2017 and that intermediaries receiving such a notification do not need to provide investment information to the super trustee until on or after 1 July 2017.

The deferral is to allow further time for the amending legislation and regulations to be made, which propose to remove or make some significant changes to some of these requirements.  For the background on this issue, please see our 7 March 2016 newsletter.

AIMA contact: Kher Sheng Lee (

Hong Kong - SFC Circular on Cyber security 

The Hong Kong Securities and Futures Commission (SFC) has issued a circular to all licensed corporations following its recent review of cyber security within selected larger licensed corporations.  The SFC states that:

"[C]yber security within licensed corporations has, for some time, been of concern to the SFC and is increasingly being viewed by the SFC as a matter of priority given the ongoing occurrence of cybersecurity incidents being reported across the financial services industry."

The SFC intends to focus on firms’ cyber security preparedness given the persistence of threats and the continuing need for firms to improve their cyber security defences and expects them to take appropriate measures to critically review and assess their cybersecurity controls.  Whilst the SFC found that most of the licensed corporations had prioritised resources for maintaining cybersecurity controls, its review identified some key areas of concern including:

  • inadequate coverage of cyber security risk assessment exercises;
  • inadequate cyber security risk assessment of service providers;
  • insufficient cybersecurity awareness training;
  • inadequate cybersecurity incident management arrangements; and
  • inadequate data protection programs.

The SFC’s circular sets out the SFC's recommendations regarding appropriate cyber security controls, which including ensuring that (i) the review and assessment of cyber security risks have been, or are in the process of being, comprehensively and effectively undertaken, (ii) any weaknesses identified as a consequence of such review and assessment have been, or are in the process of being, rectified, and (iii) the enhancement of cyber security controls is being treated as a matter of priority.

AIMA contact: Kher Sheng Lee (

China – New fund raising rules for private funds

The Asset Management Association of China (AMAC) announced on 15 April 2016 new rules relating to fund raising by private funds.  The new rules will come into effect on 15 July 2016.  AMAC, which is China’s self-regulatory body for the funds industry, announced the new administrative measures to govern all non-public fund offerings within mainland China.  These measures aim to regulate conduct around fund raising by private fund managers (“PFMs”) as well as distribution conducted by third party agents on behalf of the PFMs.

The measures cover all major stages of the fundraising life cycle, i.e., fund promotion, fund distribution, fund subscription and redemption etc. and seek to comprehensively address the roles and responsibilities of Fundraising Institutions (“FIs”) at each stage. Key highlights:

  • The new measures stipulate that the regulatory obligations owed by PFMs to investors shall not be transferred or abrogated by the mere delegation to a third party distribution agent. 
  • It spells out in explicit terms the regulatory obligations of FIs around preventing conflicts of interest, duties of clear explanation and disclosure to investors, as well as anti-money laundering requirements.
  • There are also detailed obligations around ensuring investor suitability.   For example, Article 15 sets out six procedural gateways to navigate before a subscription contract is deemed completed and the monies raised can be transferred to the FIs.  FIs are expected to qualify and assess prospects for eligibility taking into account their risk appetite.  A 24-hour mandatory cooling-off period has also been introduced.  There is also a concept of a “return visit” which mirrors a call-back safeguard procedure in some jurisdictions allowing for validation or reconfirmation of the investor’s instructions. 
  • Aside for PFMs who may raise private funds they have established themselves, all fund raising activities must be conducted by onshore institutions that are concurrently registered with the China Securities Regulatory Commission to carry on the private fund distribution business and are members of AMAC. Individuals employed by FIs that are engaged in fundraising must possess the requisite regulatory registrations and qualifications.  
  • Article 24 stipulates prohibited conduct around fund raising including the use of false and misleading language as well as descriptive expressions which may give rise to wrong impressions of safety around a particular investment e.g., “safe”, “guaranteed”, “high returns” etc.
  • Article 25 provides guidance on the different media and communication channels which are prohibited for private fund raising.  

AIMA contact: Kher Sheng Lee (

Capital Markets Union

In May the European Commission held a Public Hearing on its Call for Evidence on the EU Regulatory Framework. The public hearing consisted of a series of panel sessions, focusing on the gaps, overlaps and inconsistencies in reforms since the crisis, and the impact of regulation on economic growth. Lord Hill also gave a speech on his key areas of focus. In particular, he reiterated his drive to achieve de-regulation and to take a more proportionate approach to reduce the burden on smaller financial firms, including for example, through the EMIR review. 

At the Public Hearing, the Commission released a Summary of contributions to the ‘Call for Evidence’. The summary provides a factual overview of the contributions to the Call for Evidence, and does not provide insight into the Commission’s position on the issues raised. A number of the issues raised in AIMA’s written submission to the Call for Evidence have been highlighted in the summary. In particular, inconsistencies and duplications with regard to the various reporting and disclosure obligations across key reforms has been raised by a number of stakeholders. The Commission have indicated that they are likely to complete their analysis of the issues raised through the Call for Evidence in the summer, at which time they can be clearer about any further actions they will take. 

AIMA contacts: Adam Jacobs (, Oliver Robinson (, Adele Rentsch (


The European Commission, Parliament and Council have now reached agreement on a legislative amendment to delay the application of MiFID2 until 3 January 2018, with the transposition date for member states also shifting back a year until July 2017. The amendment also includes a number of “quick fixes” to the primary legislation, including a new empowerment for the European Securities and Markets Authority to develop tailored transparency rules for packaged transactions – a welcome addition from AIMA’s perspective. 

The European Commission continues to adopt a steady stream of MiFID2/MiFIR implementing measures, which are then subject to review by the Parliament and Council (who have the possibility of vetoing drafting). It is therefore likely that the bulk of the MiFID2 legislative framework won’t be in place until the end of 2016, with domestic implementation continuing into 2017.

AIMA has kicked off a project to develop guidance on a number of aspects of the MiFID2/MiFIR framework, with new drafting groups established on best execution, algorithmic trading, commodities markets, and product governance. We hope to realise the first round of guides later this year.

AIMA contacts: Adam Jacobs (, Oliver Robinson (, Adele Rentsch (


In early June, the European Commission stated publicly that it does not intend to meet the current timeline for implementation of EU margin for non-cleared OTC derivatives rules – with the first round of variation and initial margin standards having been due to enter into effect on 1 September 2016. The draft technical standards were due to be endorsed by the Commission in the next month or so, however, they are now expected to be delivered by the end of the year. There is some uncertainty regarding the new implementation timeframe, but it is expected that the first phase of initial and variation margin for entities with a group gross amount of derivatives of €3tn will become effective in the middle of 2017. The US implementation timeline is not anticipated to change. 

In May, EU Commission Delegated Regulation 2016/592 with regard to regulatory technical standards (RTS) on the clearing obligation came into effect. The Regulation confirms the phase-in dates for the mandatory clearing of certain credit derivatives contracts (untranched iTraxx Index credit default swaps (Europe Main and Europe Crossover: five year tenor, series 17 onwards, denominated in Euros)): 

  • 9 February 2017 for Category 1 counterparties; 
  • 9 August 2017 for Category 2 counterparties;
  • 9 February 2018 for Category 3 counterparties; and
  • 9 May 2019 for Category 4 counterparties.

The Commission has subsequently adopted a further draft Delegated Regulation with regard to RTS on the clearing obligation, confirming phase-in dates for the mandatory clearing of interest rate swaps in several non-G4 European currencies (Swedish Krona, Polish Zloty and Norwegian Krone). The new RTS will be subject to a period of scrutiny by the Parliament and the Council and will then similarly take effect over a three-year period:

  • Six months after entry into force of RTS for Category 1 counterparties;
  • 12 months after entry into force of RTS for Category 2 counterparties;
  • 18 months after entry into force of RTS for Category 3 counterparties; and
  • Three years after entry into force of RTS for Category 4 counterparties.

In addition, Commission Delegated Regulation EU 2016/822 will come into effect on 15 June 2016, amending the RTS to reduce the margin period of risk (MPOR) for central counterparty client accounts from two days to one day for exchange-traded derivatives and securities held in gross omnibus accounts or individual segregated client accounts (where certain conditions are met). The amended RTS aims to align the MPOR time horizons with that of the US, following the equivalence decision by the EU Commission in respect of CFTC clearing rules. 

AIMA has also co-signed a paper prepared by the International Swaps and Derivatives Association (ISDA) on improving derivatives transparency espousing the benefits of single-sided reporting, published on 12 April. The paper had a total of 13 signatories (including ISDA, AIMA, the Investment Association and the Managed Funds Association) and has also been sent directly key legislators and policymakers in relevant jurisdictions. The paper advocates in favour of single-sided reporting on the basis that it will reduce costs, avoid duplication, streamline reporting obligations and make it easier to harmonise international reporting requirements. While early indications are that reporting will be an area of focus under the EMIR Review, the authorities currently appear committed to retaining dual-sided reporting, but improving it where possible. The Commission has not yet taken a position on the scope of the changes that it might put forward.  

AIMA contacts: Adam Jacobs (, Oliver Robinson (, Adele Rentsch (

CFTC Regulation AT proposals

Back in March, AIMA submitted a response to the CFTC’s Regulation Automated Trading (Regulation AT) proposals.  Regulation AT is a significant rulemaking intended to regulate the entire algorithmic trading landscape of futures on US Designated Contract Markets (DCMs) – from trading firms through to the DCMs themselves. AIMA’s response built on our position supporting proportionate and well-tailored regulation of all participants in the algorithmic trading chain – ensuring that all ‘AT Persons’, Clearing FCMs and DCMs maintain their own pre-trade and other risk controls, as well as utilising robust testing and development processes.  Nonetheless, we expressed specific concerns about the current definitions contained within Regulation AT – for example, the fundamental definition of ‘Algorithmic Trading’ which we argue is far too broad and would capture activities which are demonstrably not algorithmic trading.  The principal source of concern for AIMA members were the CFTC’s proposals to obtain summary access to all AT Persons’ source code as part of the Regulation AT ‘source code repositories’ framework. AIMA’s response strongly pushed back on this proposal on the basis of security risks to extremely commercially sensitive information and the lack of any commensurate supervisory benefit.  

Further to its Regulation AT work, the CFTC reopened its comment period on certain aspects of the Regulation AT proposals for a two week period commencing 10 June. This followed and is focused on the topics posed for public discussion during a CFTC Public Roundtable on 10 June that discussed topics including: (i) the definition of DEA; (ii) the determination of AT Persons; (iii) alternatives to imposing direct obligations on AT Persons; (iv) compliance when using third-party algorithms or systems; and (v) source code access and retention. 

AIMA contacts: Adam Jacobs (, Oliver Robinson (, Adele Rentsch (

Market Abuse Regulation

EU Market Abuse Regulation

As we move towards the entry into effect of the EU Market Abuse Regulation (MAR) on 3 July this year, AIMA manager members have been looking to finalise their updated compliance procedures. AIMA held a breakfast briefing event at the beginning of June hosted by Simmons and Simmons to flag key areas of interest under MAR for hedge fund managers. The key areas of focus were the obligations for systems for to detect and report suspicious transaction and orders, obligations for receiving market soundings, scope of investment recommendation rules for alpha capture systems, application of MAR to secondary listings and legality of blanket order cancellation policies upon the receipt of inside information.

Level 2 

The Level 2 legislation necessary to implement MAR has been published gradually over the last few months, with many measures undergoing their period of scrutiny by the European Parliament and Council. Measures published in March, April and May include delegated regulations on requirements for persons making market soundings, systems and procedures to detect and report suspicious orders and transactions and the technical arrangements for the objective presentation of investment recommendations. Particular concerns exist regarding the availability of systems to enable compliance with the obligations for persons professionally arranging orders and transactions to detect and report suspicious orders and transactions. ESMA has confirmed though its first Questions and Answers document on MAR that this obligation applies to all buy-side firms placing orders professionally, including proprietary traders. Limited best-endeavours forbearance is likely to be applied by the FCA for certain RFQ systems, in particular. Although in all other cases compliance is expected in full as of 3 July. 

Level 3

In March, AIMA submitted a response to ESMA’s draft guidelines on the obligations to be applied to recipients of market soundings under MAR. The response was broadly supportive of the proposed guidelines, including a robust internal analysis of information received, internal procedures for information distribution on a ‘need to know basis’ and recordkeeping. However, the response did push back strongly against the proposed obligation for all recipients to maintain lists of all staff members in possession of information passed during the course of a market sounding, for all soundings. The draft guidelines also covered circumstances whereby a delay in disclosure of inside information is necessary to prevent the legitimate interests of an issuer being prejudiced and when a delay is likely to mislead the public, although our response did not provide comments. A second ESMA Level 3 consultation was also conducted during Q2 2016 regarding guidelines on the definition of inside information for commodity derivatives, namely the type of information that can be reasonably expected or required to be disclosed by law, regulation or market convention. The final ‘comply or explain’ guidelines on all of the above topics will not be published until after the entry into effect of MAR. It remains unclear as to how the guidelines for market soundings recipients, in particular, will be amended in light of ours and other industry feedback.


In May, AIMA submitted targeted comments to the FCA’s most recent CP on MAR implementation dealing with its Decision Procedure and Penalties manual (DEPP) and enforcement guide (EG). The response focused on the UK’s proposals to delete the defences against market abuse penalties currently available in cases where a person can prove that they believed on reasonable grounds that their actions were not illegal, or that they had taken all reasonable precautions to prevent illegal behaviour. The response argued that the reasonableness provisions are legal under MAR and, importantly, are vital bearing in mind the broadened scope of MAR and ease with which liability can be incurred.

AIMA contacts: Adam Jacobs (, Oliver Robinson (, Adele Rentsch (

EU rules on benchmarks

Both the EU Council and the Parliament have now approved the Level 1 text for the Benchmarks Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds.  The Regulation, first proposed in 2013 in response to the LIBOR rigging scandals, is intended to place particular requirements on the administrators of any EU benchmark or any third-country benchmark used by a supervised entity in the EU.  The Regulation is expected to enter into force by the end of June 2016, and will take effect 18 months after it applies. 

ESMA released a broad Discussion Paper on the Level 2 measures in February for public consultation. AIMA submitted a response to highlight that the interpretation of an index being ‘made available to the public’ should be limited to where an index is made available without charge to the general public, to avoid inadvertently capturing routine communication of information to clients or investors. ESMA has now released its Consultation Paper, which is proposing draft technical advice narrowing the interpretation by clarifying that an index will be deemed to be made to the public when it is accessible by a large or potentially indeterminate number of recipients, either directly or indirectly, where a supervised entity’s (including investment firms, AIFMs and UCITS) use of an index (e.g. tracking performance by reference to an index, or referencing an index in a financial instrument or contract) makes it available to an indeterminate number of people. 

AIMA contacts: Adam Jacobs (, Oliver Robinson (, Adele Rentsch (

EU short-selling rules

AIMA are currently in the process of developing a letter to the European Commission to highlight key areas of the EU Short Selling Regulation which merit attention to improve efficiencies and reduce regulatory burdens on industry in light of the current Capital Markets Union initiative. The issues to be covered by the letter include, among other things, the need for a centralised data source for the purposes of making net short position calculations, as well as additional time to submit private notifications for significant net short positions in shares and sovereign debt. 

AIMA also still awaits ESMA questions and answers covering the matter of differing Member State interpretation and enforcement of the SSR's rules since its implementation. This issue was brought into sharp relief recently as numerous managers were fined by the Greek HCMC under the Article 12 prohibition on uncovered short selling when selling their allocations in the rights issues of certain Greek financial institutions listed on the Athens exchange. AIMA submitted a letter to both the HCMC and ESMA highlighting the need for further guidance and harmonisation wherever possible to improve legal certainty for participants. 

AIMA contacts: Adam Jacobs (, Oliver Robinson (, Adele Rentsch (

Securities financing transactions

In April, AIMA submitted a response to ESMA’s initial Discussion Paper covering RTS and ITS under Regulation 2015/2365 on transparency of SFTs and of reuse (SFTR). The Discussion Paper was focused on SFT reporting issues, in particular the content and format of SFT reports themselves. It did not cover either periodic or pre-contractual disclosures of SFT permissibility and use by AIFMs or UCITS managers, with ESMA expressing its intention to rely on the Level 1 text alone for the details of such disclosures for the time being.  

The response to the Discussion Paper reiterated AIMA members’ concerns about dual-sided reporting of SFTs representing the largest unnecessary cost of SFT reporting under SFTR, although the response also noted that AIMA members will fall outside of SFT reporting and recordkeeping if they manage a fund or account entering SFTs that is established outside of the EU. The Response also made more technical points, including: our disagreement with the need to report both transactions and positions for CCP cleared SFTs; noting the inability for margin borrowers to report collateral for specific loans in a prime brokerage relationship when these loans are collateralised on a portfolio basis; and describing the disproportionality of requiring borrowers to report the particular collateral assets for a loan that have been reused. We now await the publication of ESMA’s Consultation Paper on RTS and ITS under SFTR which should build upon industry responses, and will continue to engage on this file going forward. 

AIMA contacts: Adam Jacobs (, Oliver Robinson (, Adele Rentsch (

Basel III leverage ratio

In April, the Basel Committee on Banking Supervision released a consultative document entitled Revisions to the Basel III leverage ratio framework, asking for feedback by 6 July. The Basel III framework introduced a transparent, non-risk-based leverage ratio to act as a supplementary measure to the risk-based capital ratio. The latest consultative document proposes a set of changes to the standard released in January 2014, and includes suggested changes to the measurement of derivative exposures, for which the Committee is proposing to use a modified version of the standardised approach for measuring counterparty credit risk exposures (SA-CCR) instead of the Current Exposure Method (CEM). AIMA is working with other associations with a view to submitting a response to the consultation.

AIMA contacts: Adam Jacobs (, Oliver Robinson (, Adele Rentsch (

Hong Kong - SFC publishes consultation conclusions on expansion of the scope of short position reporting

The Securities and Futures Commission (SFC) released its Conclusions on a consultation regarding new rules to expand the scope of Hong Kong short position reporting.   As a recap, key highlights of the policy proposals were as follows:

  • expanding the present short position regime to cover all securities that are determined by The  Stock Exchange of Hong Kong Limited (SEHK) to be “Designated Securities”;
  • the reporting threshold trigger for Designated Securities that are stocks remains the same i.e. equals to or exceeds 0.02% of the market capitalisation of the listed issuer concerned or HKD$30 million, whichever is lower; and
  • for CISs that are now caught under the expanded scope, the reporting threshold trigger is proposed to be set at HK$30 million.

The SFC has concluded that short position reporting will be expanded to cover all securities that can be short sold under the rules of The Stock Exchange of Hong Kong Limited. The reporting threshold for stocks will remain unchanged (being the lower of 0.02% of the stock’s market capitalisation, or HK$30 million), while the threshold for collective investment schemes will be set at HK$30 million.

The proposed amendments to the rules will be submitted to the Legislative Council for negative vetting. To give the market a reasonable lead time for preparation, the SFC plans for the amended rules to come into effect on 15 March 2017, subject to the legislative process. The SFC will make further announcements regarding operational reporting arrangements for the expanded regime in due course.

AIMA contact: Kher Sheng Lee (

Singapore - AIMA responds to MAS Consultation on OTC Derivative Trade Reporting

AIMA has submitted a response to the Monetary Authority of Singapore's recent consultations on proposals to implement reporting of commodity derivative contracts and equity derivatives contracts (other than exchange-traded equity derivatives contracts), as well as revisions to fine-tune the reporting obligations for certain non-bank financial institutions.

AIMA contact: Kher Sheng Lee (

EU – Anti Tax Avoidance Package 

The EU Commission presented in January, an Anti-Tax Avoidance Package intended to reform corporation tax within the EU. Primarily, there is a proposal for a Council Directive (ATA Directive) laying down rules against tax avoidance practices (which should be approved in June’s ECOFIN) including: (1) a limitation on relief for interest payments; (2) an exit taxation provision and switch over clause which will limit tax exemption on profits received from companies in low tax jurisdictions; (3) a general anti-abuse rule (GAAR); (4) controlled foreign company rules; and (5) a framework to tackle hybrid mismatch arrangements. In addition, the Commission proposed to amend the Directive on administrative cooperation (to become DAC4) to include the exchange of tax-related information on multinationals (and so enacting the OECD’s country-by-country reporting rules). 

With regard to DAC4, the Council has formally adopted the Directive to amend the DAC (2011/16/EU). The DAC has been the subject of a series of amendments in recent years, and its current form can be explained (as the EU has done here) as follows: (1) the original DAC(2011) set out to enhance administrative cooperation in the field of direct taxation, and included provision for the exchange of tax information on request; (2) in December 2014, the DAC was amended to incorporate the OECD’s Common Reporting Standard (CRS) framework, which facilitates automatic exchange of financial account information (DAC2); and (3) the latest text agreed is DAC3 which extended automatic exchange of information to advance cross border rulings and advance pricing arrangements (applying from 2018). To this will be added the new Directive DAC4, which will apply country-by-country reporting to certain MNEs from 2017.

AIMA contacts: Paul Hale ( or Enrique Clemente (

Non-cooperative jurisdiction list

The EU Commission published Council conclusions endorsing the Commission’s Communication on external strategy and Recommendation on measures to prevent treaty access in inappropriate circumstances which were part of the Commission’s January 2016 package of anti-tax avoidance measures (ATAP).  The conclusions call for a swift and comprehensive implementation of the internationally agreed standards on transparency and exchange of information developed by the OECD and encourage all jurisdictions to commit to implement international standards as soon as possible. They also agree the establishment by the Council of an EU list of third country non-cooperative jurisdictions and to explore coordinated defensive measures at EU level without prejudice to Member State competence, while stressing the need to work with the OECD to draw up the international criteria in this area and to take into account the work of the Global Forum when developing the EU list of non-cooperative jurisdictions. The criteria on transparency for establishing a list of non-cooperative jurisdictions would have to be compliant with internationally agreed standards on transparency, both on exchange of information on request and automatic exchange of information. The conclusions also welcome the proposed provisions with regard to a principal purpose test and permanent establishments to be included in bilateral tax treaties agreed by a Member State, while acknowledging that bilateral tax treaties remain the competence of the Member States and that other measures elaborated in the context of OECD BEPS Action 6 may be helpful, such as limitation on benefits (LOB) clauses (if compliant with EU law).

AIMA contacts: Paul Hale ( or Enrique Clemente (

Financial Transaction Tax (FTT)

FTT has not seen any significant progress in the second quarter of 2016. The ECP Member States, now reduced to ten as Estonia has withdrawn from the group, have not met their self-imposed deadline for application of the FTT as from January 2016, and at this point even meeting a January 2017 deadline seems to be unlikely. The ECP Member States disagree on core aspects of the FTT and differences remain in satisfying the different needs of small and large participating jurisdictions. There must be progress at a technical level before any negotiations are taken forward to the representatives of the Member States. 

AIMA contacts: Paul Hale ( or Enrique Clemente (

Base Erosion and Profit Shifting (BEPS)

The OECD released in 2015 the Base Erosion and Profit Shifting (BEPS) deliverables which form a comprehensive set of changes to the international basis of corporate taxation. The proposed framework operates as a combination of minimum standards, reinforced international principles and best practices, and includes these areas: (i) the interaction between different domestic tax rules  (such as controlled foreign company regimes, hybrid mismatch arrangements); (ii) the substance of international tax provisions and model tax conventions (anti-avoidance provisions to prevent treaty abuse, changes in the definition of a permanent establishment, transfer pricing principles); and (iii) transparency and certainty of MNE tax liabilities (country-by-country reporting).

Action 6 – Prevent the granting of treaty benefits in inappropriate circumstances (treaty abuse)

In its final report on BEPS Action 6 (concerned with preventing access to tax treaty benefits inappropriately) the Organisation for Economic Cooperation and Development (OECD) acknowledged in response to issues raised by the asset management sector that further work was required on the tax treaty entitlement of those funds (non-CIVs) such as alternative investment funds which are not classified by the OECD as collective investment vehicles (CIVs, broadly UCITS and equivalent funds). Further, in April 2016 a consultation was published to seek views on the issues raised, in particular threshold qualifications for regulation and widely held ownership that might qualify non-CIVs for treaty access, the treatment of non-CIVs which are tax transparent entities, and means of identification of ultimate investors in a non-CIV.

AIMA submitted its response to the OECD consultation on tax treaty entitlement for non-CIV funds (broadly, collective investment vehicles that are not UCITS or equivalents). The discussion draft for the most part is seeking comments on the limitation on benefits (LOB) provision, in particular proposals put forward by commentators on earlier discussion drafts, although issues around the principle purpose test (PPT) are also discussed. AIMA welcomes the effort that the OECD has made on this issue, but sees this as an ongoing process where different practical complexities and governing interests will need to be taken into consideration, and this should be reflected in the recommendations incorporated into the Model Tax Convention and the Commentary that accompanies it. 

Action 15 – multilateral instrument

The OECD released a consultation paper on the development of a multilateral instrument to implement those BEPS measures which are related to tax treaties. Public comments are invited on technical issues identified in a request for input from stakeholders. The report on Action 15 of the BEPS Action Plan (Developing a Multilateral Instrument to Modify Bilateral Tax Treaties) concluded that a multilateral instrument was both feasible and desirable. The Ad Hoc Group established on 27 May 2015 with the objective of developing the multilateral instrument now includes 96 countries, all participating on an equal footing, as well as a number of non-state jurisdictions and international organisations participating as observers. The Ad Hoc Group aims to conclude its work and open the multilateral instrument for signature by 31 December 2016. Responses are invited to the specific questions included in the request for input, as well as other technical issues that may arise from implementing the treaty-related BEPS measures in the context of the network of existing bilateral tax treaties. Comments and input should be received by the OECD by 30 June 2016. 

Action 4 - UK HMRC consultation response

HMRC issued a second UK consultation paper on tax deductibility of corporate interest expense. The consultation provides details of the policy design and implementation of the interest restriction rules which are intended to be introduced from 1 April 2017 in line with BEPS recommendations (Action 4). AIMA responded to the first consultation paper and will now evaluate whether to react to this more complete set of proposals. The new rules will cap the amount of relief for interest to 30% of taxable earnings before interest, depreciation and amortisation (EBITDA) in the UK, or based on the net interest to EBITDA ratio for the worldwide group. To ensure the rules are targeted where the greatest risk lies, there will be a de minimis threshold of £2 million net UK interest expense per annum and provisions for public benefit infrastructure. The proposed framework will take account of specific regimes for sectors such as the oil and gas industry and the position of the banking and insurance sector. This consultation is open until 4 August 2016 and the government will consider responses in the drafting of the legislation for Finance Bill 2017.

AIMA contacts: Paul Hale ( or Enrique Clemente (

Transparency/ Automatic Exchange of Information (AEOI)

On the policy side, the OECD is aiming to converge two of the key international tax projects. The Base Erosion and Profit Shifting (BEPS) project and the measures for exchange of tax information among jurisdictions have a single objective of global tax transparency. The outcomes of the BEPS project are now starting to be adopted at national level, the Global forum on transparency and exchange of information has now 130 members, and 101 jurisdictions have committed to implement the Common Reporting Standard (CRS), with the first automatic exchange of information beginning by 2017. In the backlash from the Panama Papers, the G20 has mandated the OECD to establish criteria to identify non-cooperative jurisdictions (which will add to the comparable EU initiative on external strategy). The OECD and the Global Forum, in partnership with the Financial Action Task Force (FATF), have been mandated by the G20 and the Anti-Corruption Summit to work on improving the availability of beneficial ownership information to ensure effective implementation of the standard that will enable tax and other authorities to identify the true owners behind shell companies and other arrangements.

On the practical side, the OECD’s Common Reporting Standard (CRS) went live on 1 January 2016. Financial institutions (FIs) established in participating jurisdictions are required to implement due diligence procedures when new accounts are opened and to review existing accounts. Reporting will commence in 2017.  The evolution from FATCA to the broader automatic exchange of information under CRS will be challenging, and AIMA will continue to take up members’ concerns with the OECD, the EU Commission and tax authorities, while encouraging sound practices in the industry.

An example of industry’s concerns can be found with regards to controlling persons, when those are from a non-participating jurisdiction (as is the case for the US). In the context of asset management structures, identifying and evidencing the ultimate underlying investors may be a challenge in various circumstances.

AIMA contacts: Paul Hale ( or Enrique Clemente (

HM Revenue & Customs (HMRC) consultations

HMRC has published consultation documents on renewing and extending the scope of the Double Taxation Treaty Passport (DTTP) scheme (here), and potential Reform of the Substantial Shareholdings Exemption (SSE). DTTP was introduced as an administrative simplification in late 2010 for corporate-to-corporate lending into the UK in order to reduce the administrative burden of obtaining reduced rates of withholding tax (WHT) under tax treaties which can act as a barrier to overseas investors making investments in the UK. An overseas corporate lender may obtain a treaty passport under the scheme which can be used in respect of multiple loans to UK borrowers. This consultation is intended to ensure that the DTTP scheme still meets the needs of UK borrowers and foreign investors but also asks whether the DTTP scheme should be extended to investors entitled to sovereign immunity from UK tax, pension funds or non-corporate entities such as partnerships. The consultation is open until 12 August 2016. 

The consultation on the SSE looks at its original policy intent, that the tax treatment of share disposal gains does not discourage trading groups from restructuring or making disposals and that it contributes to the UK’s competitiveness as a holding company location, against fundamental changes in UK domestic and international tax laws (in particular, BEPS). 

A number of proposals are put forward, for a more comprehensive exemption, a removal of the investor trading test or the reduction of the substantial shareholding requirement. Further, the consultation notes that the SSE does not extend to UK resident companies owned by tax exempt funds such as sovereign wealth funds or pension funds that generally are outside the scope of UK corporation tax on their investment gains (irrespective of whether the SSE applies). These UK subsidiary companies would be subject to corporation tax on gains relating to share disposals and cannot generally benefit from the SSE because of the substantial non-trading activities in the groups of which they are a part. Consequently, sovereign wealth funds and pension funds often choose to locate their holding platforms outside of the UK in countries where share disposals are exempt from corporation tax under a comprehensive participation exemption. The consultation asks whether there is a case for reform of the SSE to be targeted towards the funds sector and, if so, how SSE-qualifying funds should be defined. The consultation will run until 18 August. 

AIMA contacts: Paul Hale ( or Enrique Clemente (

Partnership WG

AIMA’s Partnership Tax WG was set up to consider changes to the UK taxation of partnerships which were subsequently enacted in Finance Act 2014. It is apparent that some members are experiencing difficulties in agreeing with HMRC the interpretation of the rules relating to the treatment of some members of LLPs as salaried members and therefore employees. This WG has been refreshed with the mandate to engage with HMRC on some of the practical implications that the legislation has produced. 

AIMA contacts: Paul Hale ( or Enrique Clemente (

Reform of the German regime for investor tax reporting

Revised draft legislation to amend the German Investment Tax Act (GITA) on fund reporting is currently under the legislative process. If adopted, the proposed framework would introduce significant changes to the tax treatment of investment funds and their investors. There would be layers of taxation both at the fund and at investor level, while the current rules allow for transparency treatment at the entity level. The reason for the amendments appears to be the need to comply with EU law. While the new regime may provide a greater degree of certainty of treatment, it involves a fundamental shift in taxation that will need to be appropriately considered. Investment funds will be able to make an election on whether the existing or new proposed rules will apply to them. Under the proposed timetable, the new rules would come into force from 1 January 2018.

AIMA contacts: Paul Hale ( or Enrique Clemente (

US tax 

The Internal Revenue Service (IRS) and US Treasury published Proposed Regulations regarding deemed stock distributions under section 305(c) of the Internal Revenue Code (IRC). Section 305(b) of the IRC establishes five non-cash transactions that have a dividend effect for income tax purposes, although no actual dividend is paid. Further, section 305(c) refers to deemed dividend rules for persons who only hold rights to acquire the stock such as holders of convertible securities (‘deemed shareholders’) and provides that “a change in a conversion ratio (CRA) that has the effect of increasing a deemed shareholder’s interest in the assets or earnings and profits of a corporation is treated as a distribution”. Due to uncertainty on whether tax reporting or withholding was required, and also on the amount of the deemed distribution, market practice has been that issuers of convertible securities and intermediaries have not reported or withheld on taxable CRAs.

The proposed regulations are intended to address these issues: (1) the amount of the deemed distribution would be the excess of (a) the fair market value of the right to acquire stock over (b) the fair market value of the right to acquire stock without the applicable adjustment, both determined immediately after the applicable adjustment; (2) new reporting rules require an issuer of convertible securities either to provide specified information on taxable CRAs to withholding agents and the IRS or to publish the information on its website. This is intended to capture the information necessary to collect tax on taxable CRAs; and (3) on withholding, the Proposed Regulations expand the responsibilities of withholding agents (derived from the enactment in 2010 of section 871(m) ‘dividend equivalent’ payment rules), but also provide relief by deferring the withholding obligation until such time as the agents have adequate information regarding the deemed distribution, which should clarify their position in situations where there is no cash payment corresponding to a deemed distribution or a withholding agent lacks  knowledge of the transaction.

The Proposed Regulations would apply to deemed distributions occurring on or after the publication date of final regulations but do not offer guidance on the withholding treatment of deemed distributions prior to 2016. A criticism of the section 305 rules is that they do not distinguish between bona fide adjustments to convertible securities issued by publicly held corporations which protect the benefit of the bargain for the holder of the security and potentially abusive transactions by privately held companies which seek to disguise distributions of earnings. The Proposed Regulations, if adopted, will impose costs on the financial industry that may well exceed the amount of revenue that the government will collect.

Further, in the context of the well-publicised regulations against corporate inversions, the Treasury Department and IRS also issued new proposed rules under Section 385 Internal Revenue Code (IRC). These raise a number of technical issues which may affect arrangements for related party financing. There are two main categories of rules envisaged: (i) prospective new administrative requirements for most intercompany debt instruments in order to be classified as debt for tax purposes; and (ii) a new regime that will recharacterise certain instruments as equity regardless of whether they would currently be so considered or documentation requirements have been met, with an effective date from 4 April 2016. This new regime could have a significant impact on the financing by funds of portfolio companies, and how credit funds and other structures in the private debt fund space operate, including the loss of interest deductions, added complexity to intra group operations and arbitrary results for entities in scope.

AIMA contacts: Paul Hale ( or Enrique Clemente (

Hong Kong - Introduction of a HK Open-Ended Fund Company (OFC)

The Hong Kong Government commenced last January the legislative process to implement the OFC regime.  It introduced the relevant bill into the Legislative Council (LegCo) with a view to securing the passage of the bill before the summer of 2016.

As part of this process, the Financial Services Treasury Bureau (FSTB) issued a concept paper to gauge views on the possible extension of the profits tax exemption to onshore privately offered OFCs.  The Hong Kong tax committee along with the OFC working group which AIMA formed  made a submission (April) stressing the outstanding issues that the proposed framework still face, and offering possible improvements/amendments to the draft rules in relation to ‘investment scope’ or ‘custodian requirements’.

The Inland Revenue Department (IRD) of Hong Kong issued on 2 June the Departmental Interpretation and Practice Notes No. 51 (DIPN) (“Profits Tax Exemption for Offshore Private Equity Funds”) which sets out the Department’s interpretation and practice in relation to the relevant provisions in the Inland Revenue (Amendment) (No. 2) Ordinance 2015. The rules include some guidance on the salaries tax treatment of performance fees and carried interest distributed to executives or employees of a fund management company. The IRD’s new guidance establishes that unless the allocation of such performance fees and carried interest represent a genuine investment return that is equivalent to the return on investments received by other third party investors, such allocations could be subject to salaries tax as employment income through application of general anti-avoidance provisions. The investment return will be deemed by the IRD as at arm’s length if: (i) the return is on an investment which is of the same kind as investments made by third party investors; (ii) the return on the investment is reasonably comparable to the return to third party investors on those investments; and (iii) the terms governing the return on the investment are reasonably comparable to the terms governing the return to third party investors. Hong Kong based fund management companies should evaluate their executive and employee incentive arrangements surrounding carried interest allocations in order to estimate the salaries tax implications (penalties may apply).

AIMA contact: Kher Sheng Lee (

Australian developments 

The Australian government introduced in its budget a new tax system for managed investment trusts (MIT). The implementing Bill has been passed by both the House of Representatives and Senate without any amendments. The explanatory memorandum to the Bill as well as the final Bill (upon Royal Assent) is available on the Parliament website (here). A MIT is a collective investment vehicle which is a trust that is widely held and primarily makes passive investments. MITs will be able to be treated as transparent vehicles for tax purposes, that is, ‘character flow through’ structures where the MIT’s income will be taxed upon receipt by or attribution to its members on the basis of its character. Double taxation that might otherwise arise will be reduced because members will be able to make annual upward and downward adjustments to the cost bases of their interest in the trust. Examples of MITs are real estate investment trusts, trusts for managed funds and infrastructure trusts where the main source of return is in the form of dividend, interest, rent and/or capital gains on sale. The taxation treatment of tax deferred and tax free distributions made by the trust is clarified. The new tax system is intended to increase certainty, allow greater flexibility and reduce compliance costs, and enhance the competitiveness of Australia’s funds management industry.

AIMA contacts: Paul Hale ( or Enrique Clemente (

India - Mauritius Double Tax Agreement (DTA) - Singapore implications 

India and Mauritius have signed a protocol to their treaty for the avoidance of double taxation.  From 1 April 2017, India will have the right to tax capital gains on the transfer of shares of Indian companies realised by residents of Mauritius, so that the present exemption from tax in India has been removed and the Indian domestic tax rules will apply instead. The protocol protects investments in shares acquired before 1 April 2017, so that investments made before 1 April 2017 will not be subject to capital gains taxation in India. The Protocol also provides for a transitional period in which capital gains arising to Mauritius residents from alienation of Indian shares between 1 April 2017 and 31 March 2019 will be subject to tax in India at no more than 50% of the domestic tax rate. However, this benefit has been made subject to a “limitation of benefits” article that will be introduced into the treaty. Since the capital gains exemption under the India - Singapore tax treaty is linked with the treatment under the India - Mauritius tax treaty, these changes would also have implications for residents of Singapore.  

The 2005 Protocol to the India - Singapore Tax Treaty provides that the benefit of the capital gains exemption under the treaty is to remain in force only while the Mauritius - India tax treaty provides for capital gains exemption. Accordingly, the exemption will be lost for residents of Singapore also, but it is not clear that the equivalent protection for investments made before 1 April 2017 or the transitional measures will be available. The Indian government is said to be discussing this issue with Singapore, and AIMA has made submissions to the MAS/IRAS which raise potential concerns and identify situations that require special protection, such as the need for a grandfathering provision for investments made prior to 31 March 2017, revision of the withholding rates applied to interest and a transitional regime.

AIMA contact: Kher Sheng Lee (