Long-awaited proposals on ‘third country’ rules arrive

Non-EU fund managers have been provided a brief window to submit their feedback on how EU regulators are proposing to supervise their access to EU institutional investors.

The European Securities and Markets Authority (ESMA) has released detailed proposals on the supervision of foreign GPs (dubbed third country entities) wishing to market their funds in the European Union.

In a 30-page consultation document the recently rebranded markets watchdog proposed it and other national regulatory agencies establish an extensive framework to collaborate efforts in sniffing out market abuse and systematic risk.

ESMA “envisages that the arrangements should take the form of written agreements allowing for exchange of information for both supervisory and enforcement purposes”, said the body. It added that such agreements should impose a duty on third country authorities to assist their EU counterparts in enforcing its rules.

A major industry concern is how EU regulators will test the regulation quality of managers outside their jurisdiction. The proposals say third country managers should be “regulated based on criteria equivalent to those established under EU legislation”, explained Edward Devenport of offshore law firm Mourant Ozannes.

Looking at ESMA’s other released technical guidance, an “equivalence test” should not however be taken to mean third country regulators would need to adopt “exactly the same” criteria set out in AIFMD, added James Mulholland of offshore law firm Carey Olsen.

“If that was the case, and given the US Securities and Exchange Commission’s approach to regulating funds, US managers would struggle to achieve AIFMD equivalency. A degree of pragmatism will be inevitably be required since there will be discrepancies between EU member states in interpreting the Directive.”

ESMA further fleshed out provisions on the delegation of portfolio or risk management functions to third country entities and how the regular would judge the fitness of third country depositary frameworks.

The latest proposals complement earlier proposals released last July which covered the other major areas of the Directive and relate more to domestic private fund activity. ESMA did not include the much discussed third-country rules in its July proposals as they would not be operational until 2015 at the earliest and were thus viewed as less urgent.

Consultation responses are due by 23 September. A short one month consultation time window was used to ensure ESMA would be able to digest the responses and submit its final proposals to EU policymakers by its own 16 November deadline. 

How outside regulatory bodies view the proposals would be particularly welcome, said in a statement Steven Maijoor, chair of ESMA.