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February Investment Management Update

February Investment Management Update

  • United Kingdom
  • Financial institutions - Asset managers and funds


Download the full February Investment Management Update

What were January’s highlights?

FSB recommendations to address structural vulnerabilities from asset management activities

On 12 January 2017, the Financial Stability Board (FSB) published a report containing policy recommendations to address structural vulnerabilities from asset management activities, together with a press release.

In the report, the FSB sets out 14 recommendations relating to the following structural vulnerabilities:

  • Liquidity mismatch between fund investment assets and redemption terms and conditions for fund units. These recommendations apply to all open-ended funds.
  • Leverage within funds. These recommendations apply to all types of funds that may use leverage.
  • Operational risk and challenges in transferring investment mandates or client accounts. These recommendations apply to all asset managers commensurate with the level of risks their activities pose to the financial system.
  • Securities lending activities of asset managers and funds. These recommendations apply to asset managers that provide indemnifications to clients.

The FSB has asked IOSCO to complete its work on the liquidity mismatch recommendations by the end of 2017 and on the leverage measures by the end of 2018.

The draft Legislative Reform (Private Fund Limited Partnerships) Order 2017

On 16 January 2017, HM Treasury published a revised draft legislative reform order on proposed amendments to the Limited Partnerships Act 1907 in respect of private investment funds, such as venture capital and private equity funds.

The government has concluded that it is appropriate to proceed with the proposals set out in the order, which would establish the private fund limited partnership as a new form of limited partnership.

The revised draft order differs in numerous respects from the draft Legislative Reform (Limited Partnerships) Order 2015, which was published at the same time as HM Treasury's consultation paper in July 2015. In large part, these changes reflect the government's March 2016 response to comments received in connection with the consultation.

The government is recommending that the revised draft order and accompanying explanatory document be laid in Parliament under the affirmative resolution procedure. The intention is that the order will come into force on 6 April 2017.

ESMA opinion on UCITS share classes

On 30 January 2017, the European Securities and Markets Authority (ESMA) published an opinion setting out common principles for setting up and operating share classes within UCITS funds.  The opinion paper follows ESMA’s previous discussion papers on share classes, issued in 2014 and 2016.

The UCITS Directive is silent on the definition and scope of share classes so national practice diverges greatly as to the types of share class which are permitted – ranging from no share classes to sophisticated classes which potentially have different investment strategies. ESMA is of the view that a common framework is required to protect investors and ensure a harmonised approach.

The opinion, which is addressed to national regulators, focuses on four high-level principles which must be followed when setting up and operating share classes in a UCITS. These principles closely follow the proposals of the 2016 paper, so there should be little of surprise for the industry. Nevertheless, all hedged share classes will be impacted and so it is important that management companies take notice. Further, although the ESMA opinion applies only to UCITS it remains to be seen whether the FCA will extend its application to non-UCITS.

In addition to the principles, ESMA states that share classes should never be set up to circumvent the rules of the UCITS Directive, particularly those on diversification, derivative eligibility and liquidity.

For more information on this opinion paper, see our recent briefing. For additional information on the April 2016 paper, see our previous briefing.

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