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A. NEW DEPOSITARY RULES

This emphasizes the role of the management company in the rating process. ESMA specifically mentions that it is not re -issuing the CESR guidelines as ESMA guide- lines. This means that national competent au- thorities will not have to notify ESMA whether or not they comply or intend to comply with the amended version of the CESR guidelines. ESMA will however monitor the application of this opin- ion by national competent authorities.

Depositary eligibility requirements Under UCITS V, the entities eligible to act as de- positaries for UCITS funds will be limited to na- tional central banks, credit institutions and other legal entities which (i) are authorised to carry out depositary activities, (ii) are subject to prudential supervision and (iii) meet the CRD IV capital ade- quacy requirements. Furthermore, UCITS V does not a create a “deposi- tary passport”, as UCITS will still have to appoint a single eligible depositary located in the Member State of the UCITS. Under UCITS V, the tasks and responsibilities of the depositary as regards safekeeping are aligned with the relevant AIFMD framework. For example, UCITS depositaries will have to ensure that cash flows are properly monitored and to ensure that all payments by the investor or on behalf of the investor upon the subscription of units have been received and all cash has been booked in cash ac- counts that meet certain conditions. By discharg- ing its tasks, a depositary will be required to act honestly, fairly, professionally, independently and in the interests of the UCITS and its investors. Delegation of depositary duties In line with the AIFMD, UCITS V confines the del- egation of depositary duties to the delegation of safekeeping duties only, subject to specific re- quirements. In the event of a delegation of safe- keeping, the depositary liability may not be con- tractually limited or excluded. Moreover, UCITS prospectuses must identify the delegate, contain a description of any safekeeping function delegated and refer to any conflict of interest that may arise from such delegation. Depositary liability regime The Directive makes depositary liability rules stricter by establishing an enhanced duty of care. The general rule is that the depositary is liable to the UCITS and to the unit holders of the UCITS for the loss of financial instruments held in custody by the depositary or its delegates and for all oth- er losses suffered as a result of the depositary’s negligent or intentional failure to properly fulfil its duties. In the event of a loss of financial instruments held in custody, depositaries will have to return a finan- cial instrument of identical type or the correspond- ing amount to the UCITS or to the management company acting on behalf of the UCITS. Depositar- ies are liable unless they can prove that the loss was the result of an external event beyond their Depositary duties (safekeeping, oversight, cash flow monitoring)

THE REPORT OF THE JOINT COMMITTEE PUBLISHED ON 6 FEBRUARY 2014 IS AVAILABLE HERE.

Review of the CESR guidelines on a Common Definition of European Money Market Funds Background In 2010, the definitions for Money Market Funds were adopted by CESR (ESMA is the legal “an- cestor” of CESR). The CESR guidelines distinguish Short-Term Money Market Funds (ST MMFs) and Money Market Funds (MMFs). On 6 February 2014, the Joint Committee of ESMA, EIOPA and EBA published its final report on mechanistic references to credit ratings in their guidelines and recommendations, setting out the manner in which the Guidelines were to be amended. In particular, reference is made to the assessment of the credit quality of money mar- ket instruments by managers of short-term MMFs and MMFs. What’s in there? The opinion issued by ESMA on 22 August 2014 sets out how national competent authorities should apply the modifications set out in the re- port when monitoring the application of the CESR guidelines by financial market participants. Attention is drawn to two main points: (i) the management company must perform its own doc- umented assessment of credit quality of money market instruments that allows the management company to consider a money market instrument as high quality; (ii) By exception, MMF’s may hold sovereign issuance of a lower internally-assigned credit quality based on the MMF’s manager’s own documented assessment of credit quality.

THE ESMA OPINION PUBLISHED ON 22 AUGUST 2014 IS AVAILABLE HERE.

Publication of the UCITS V Directive in the Official Journal of the EU Background The UCITS V Directive amends Directive 2009/65/ EC on undertakings for collective investment in transferable securities (the UCITS IV Directive) as regards depositary functions, remuneration poli- cies and sanctions. The Directive had been under legislative review for the past two years. The European Parliament adopted its position on 15 April 2014, while the Council approved the draft Directive on 23 July 2014. The Directive was therefore formally adopted by the European Parliament and the Council on 23 July 2014. What’s in there? On 28 August 2014, the Directive (2014/91/EU) was published in the Official Journal of the Eu- ropean Union. The Directive upgrades the depositary duties and liability regime and the managers remu- neration to the requirements of the Alternative Investment Fund Managers Directive (AIFMD). UCITS V also creates a new sanction regime in order to strengthen the fear of sanction and the reputational risk for industry players. The Commission proposal was issued on 3 July 2012.

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