AIFMD takes shape for global custodians
28 September 2011 Brussels
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Global custodians are weighing in on the Alternative Investment Fund Managers Directive (AIFMD) as the regulation makes its way to the European Commission.
Consultations published by the European Securities Markets Authority (ESMA) highlight concerns of global custodians with regards to the regulator’s guidance on assessments of third country custodians, capital requirements, among other issues in the draft proposal.
Under AIFMD, in order for a custodian to be located in a third country, that third country custodian must be "subject to effective prudential regulation, including minimum capital requirements and supervision which have the same effect" as EU law and are effectively enforced.
In response, the Association of Global Custodians (AGC), an informal group of 11 global banking institutions such as BNY Mellon, State Street, among others, made a call for flexibility in implementation of this aspect of ESMA’s draft proposal, noting elements of custody law and regulation outside the EU that “invite contract-based methods for achieving principled equivalence”.
“ESMA’s advice should recognise legal and regulatory regimes as capable of equivalence which allow the parties to agree contractually to legal protections that have the same effect as [European] Union law,” wrote AGC.
Additional criteria will call for capital requirements imposed in the third country to be equivalent to those applicable in the EU to a credit institution or an investment firm. AGC notes that most major third country financial centres, like Hong Kong, Singapore and Zurich, are members of the Basel Committee, while jurisdictions such as the British Virgin Islands, Bahamas, Guernsey, Jersey and the Cayman Islands have implemented Basel principles in regulations.
Basel III proposals set a minimum bank capital ratio at seven per cent with staggered stages of compliance until full implementation by the end of 2018.
“It is not known today how many third countries are capable of applying the capital adequacy ratio directive…Accordingly, in view of the evolving and uneven global work on capital requirements, how will the test for equivalence regarding capital be computed?” AGC notes in its consultation response.
ESMA will be delivering its final advice to the European Commission by 16 November.
Consultations published by the European Securities Markets Authority (ESMA) highlight concerns of global custodians with regards to the regulator’s guidance on assessments of third country custodians, capital requirements, among other issues in the draft proposal.
Under AIFMD, in order for a custodian to be located in a third country, that third country custodian must be "subject to effective prudential regulation, including minimum capital requirements and supervision which have the same effect" as EU law and are effectively enforced.
In response, the Association of Global Custodians (AGC), an informal group of 11 global banking institutions such as BNY Mellon, State Street, among others, made a call for flexibility in implementation of this aspect of ESMA’s draft proposal, noting elements of custody law and regulation outside the EU that “invite contract-based methods for achieving principled equivalence”.
“ESMA’s advice should recognise legal and regulatory regimes as capable of equivalence which allow the parties to agree contractually to legal protections that have the same effect as [European] Union law,” wrote AGC.
Additional criteria will call for capital requirements imposed in the third country to be equivalent to those applicable in the EU to a credit institution or an investment firm. AGC notes that most major third country financial centres, like Hong Kong, Singapore and Zurich, are members of the Basel Committee, while jurisdictions such as the British Virgin Islands, Bahamas, Guernsey, Jersey and the Cayman Islands have implemented Basel principles in regulations.
Basel III proposals set a minimum bank capital ratio at seven per cent with staggered stages of compliance until full implementation by the end of 2018.
“It is not known today how many third countries are capable of applying the capital adequacy ratio directive…Accordingly, in view of the evolving and uneven global work on capital requirements, how will the test for equivalence regarding capital be computed?” AGC notes in its consultation response.
ESMA will be delivering its final advice to the European Commission by 16 November.
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