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
http://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
FCA consults on dealing commission
The FCA has published a consultation paper on the use of dealing
commission rules for investment managers (CP13/17). CP 13/17 specifically
addresses the exemption allowing the use of dealing commission to purchase
research and the FCA is proposing to make certain changes to COBS 11.6,
including: (i) defining corporate access and adding it to the list of goods and
services which are not exempt; (ii) clarifying the perimeter of the regime by
introducing a presumption of a breach of the rules if the cumulative criteria
set out in 11.6.4E and 11.6.5E are not met; and (iii) clarifying in a new
guidance provision (COBS 11.6.8AG) how investment managers might
approach judgements around their duty to act in the customer's best interests
and passing charges to the customer through dealing commission. The use of
dealing commission rules in COBS 11.6 therefore also apply to the
investment management activities of AIFMs, as well as MiFID and UCITS
investment managers. Comments are invited by 25 February 2014 and the
FCA intends to publish a policy statement in spring 2014.

2. MiFID II
The European Parliament, the European Commission and the EU Council
met last week to negotiate and progress discussions on MiFID II. An outline
deal was reached to cap off-exchange trading in dark pools, such that trading
in a stock anonymously will be capped at 8% of the total traded of that stock
in the EU and dark pool trading in a stock on an individual platform would
be restricted to no more than 4% of the total EU market for that stock.
ESMA would be responsible for collating data on share trading gathered by
national authorities. According to the IMA, the capping would ultimately hit
end investors as it poses a restriction on the industry’s ability to get the best
price for their clients.
FCA reviewing gold price fixing
It has been reported that the FCA is conducting a review into price-setting in
the London gold market. Question marks have been raised that traders
involved in the price-determining process can glean knowledge which could
give them an unfair advantage when buying and selling gold. The London
fix, the benchmark rate used by mining companies, jewellers and central
banks, is published twice daily after a call between five major banks and the
price-determining process can take from a few minutes to more than one
hour, which means that participants have knowledge which is unavailable to
other market participants. There is, however, no reported evidence of any
actual manipulation of the London fix.
EMIR
IOSCO has published a letter regarding its concerns about the recognition of
non-EU central counterparties (CCPs) under EMIR. IOSCO has received
feedback that further guidance would be useful to provide greater clarity
about the process of non-EU CCP recognition, including detailed
information on the contents, effect and purpose of the ESMA MoU and the
approach to equivalence assessments for jurisdictions that are not currently
covered by reports of technical advice on third country regulatory
equivalence under EMIR published by ESMA. IOSCO is also concerned
that the due process for the non-EU CCP equivalence assessment may not be
completed by 15 June 2014, which means there is a risk that non-EU CCPs
will not be qualified as qualifying CCPs for the purposes of CRD IV. The
European Commission is urged to exercise its discretion to adopt an
implementing act to extend the transitional relief by an additional six
months so that non-EU CCPs continue to qualify as QCCPs up to 15

3. December 2014.
ESMA demands protocol for CCPs
ESMA has noted that there is no clear protocol about how to save or resolve
international CCPs in the event of a financial meltdown. This will become
more important from 2014 onwards and ESMA is pushing for this to be
resolved. While international regulators have pressed banks to prepare
contingency plans, the systematically critical CCPs have failed to keep up
and ESMA plans to set out technical standards in early 2014 for approval by
the European Commission shortly thereafter.
FCA: Broker-operated systems
The FCA has published a statement about broker-operated systems trading
physically settled gas and power forwards. This statement follows a
previous statement issued in September 2013, in which the FCA explained
that brokers offering trading services in physically settled gas and power
forwards are reviewing the appropriate classification of their systems under
MiFID. The reviews are focusing on interpretation of the multilateral trading
facility (MTF) category under MiFID. The FCA advised that it expected
brokers to make the changes necessary to differentiate clearly between their
MTF and non-MTF services by 16 December 2013. Final implementation
should take place no later than 12 February 2014, as the FCA considers that
this will help maintain efficiency and liquidity in gas and power markets by
facilitating an orderly transition to the new systems.
MLD4 Regulation
The UK has issued a paper relating to the Fourth Money Laundering
Directive (MLD4). In the paper, the UK welcomes the MLD4 proposal, but
considers that there are a number of important outstanding issues relating to
MLD4 that merit discussion at ECOFIN. The most important issue is that of
transparency of company beneficial ownership and making this information
publicly accessible is core to the UK's commitment to openness. The UK
strongly encourages other Member States to follow its lead, and encourages
the Council to consider mandating publicly accessible central registries of
company beneficial ownership. The UK also agrees that it is important to
ensure that trusts are not misused for illicit purposes and comments that
through the automatic exchange of information pilot that the UK, France,

4. Italy, Spain and Germany are leading, the EU is already at the forefront of
tackling tax evasion and the potential misuse of trusts and that the EU
therefore has the same opportunity to set the global standard on transparency
of company ownership and control through central registries of company
beneficial ownership.
ETFs and UCITs Q&As
ESMA has published an updated version of its Q&As paper on its guidelines
on exchange traded funds and other UCITS-related issues. The Q&A, which
are intended to promote common supervisory approaches and practices in
the regulation of UCITS, focus specifically on ESMA's December 2012
guidelines on ETFs and other UCITS issues. New questions and answers
have been added to the sections of the Q&A dealing: with collateral
management issues (Q&A 6m) and with financial indices (Q&A 7i).
Although the Q&A are aimed at competent authorities, they are also
intended to help UCITS management companies by providing clarity as to
the content of the UCITS rules.
FPC review into leverage ratio
The Financial Policy Committee is to undertake a review of the role for the
leverage ratio within the capital framework for UK banks, building societies
and large investment firms. The review will consider the leverage standard
required, assess how the leverage standard should apply to ring-fenced
banks and assess the impact of leverage standards on lending generally. The
Basel Committee on Banking Supervision needs to agree exact definitions
for the leverage ratio under Basel III before the terms of reference for the
FPC's review can be finalised. Such agreement is expected early in 2014.
The FPC is expected to complete the leverage ratio review within the
requested 12 month timeframe.
GUEST SHORTS
This week, David Heathfield, general counsel at Baronmead Partners LLP,
reports on professional indemnity policies under the AIFMD, as follows:
“AIFMs are having to spend a significant amount of time on getting their
house in order before the year-long transition period for AIFMD compliance
expires on 22 July 2014. The AIFMD gives an AIFM the option of covering

5. professional liability risks resulting from the negligent performance of
activities, for which the AIFM has legal responsibility, by holding own
funds or by purchasing a professional indemnity policy. If the AIFM
chooses to purchase a professional indemnity policy, it must be compliant
with Articles 12 and 15 of the Level 2 Regulation dated 19th December
2012.
Articles 12 and 15 are prescriptive in nature and do not seek to reinvent the
wheel in terms of what is required by a professional indemnity policy; that
said, there are certain aspects that need to be understood clearly in order to
ensure compliance. Article 15 in particular deals with the structure of cover
that is required, but certain key questions about how policies must work in
practice remain unanswered. The focus for the insurance industry will be
providing guidance on the financial impact that purchasing policies, with a
raft of exclusionary language, will have on AIFMs. It will also look to
advise AIFMs on ensuring that their policies provide exclusivity of cover for
“AIFMD losses” where in the instance that their policies also provide
protection against claims which fall outside the scope of the AIFMD.
As a provider of risk management solutions to the investment management
industry, Baronsmead is spearheading the development of compliant
professional indemnity policies. We are advising our clients on the most cost
effective way of putting measures in place to deal with their exposures to
professional
liability
risks.”
If you would like to discuss the above or receive further information
regarding AIFMD compliant insurance, please contact David Heathfield at
david.heathfield@baronsmead.com.
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Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
29 November 2013