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Calculation of counterparty risk by UCITS for OTC financial derivative transactions subject to clearing obligations Background UCITS may invest in exchange-traded derivatives and OTC derivatives. However, UCITS may only in- vest in OTC derivatives transactions to the extent that their counterparty risk exposure does not ex- ceed 5% of their assets or 10% when the counter- party is a credit institution (cf. Art. 52 of the UCITS Directive). Under EMIR, certain OTC derivative transactions will become subject to clearing obligations. On 19 December 2013, ESMA published a revised version of its Q&A on risk measurement and calcu- lation of global exposure and counterparty risk for UCITS ( ESMA/2013/950 - AVAILABLE HERE) . What’s in there? ESMA issued on 22 July 2014 a discussion paper (ESMA/2014/876) in order to get the stakeholders’ feedback on: « How to calculate the UCITS’counterparty risk expo- sure in OTC transactions that are centrally cleared; and « Whether the same rule should apply to both OTC transactions that are centrally cleared and ex- change-traded derivatives in respect of the calcu- lation of counterparty risk exposure. What’s next? Stakeholders shall provide their feedback to the 18 questions raised by ESMA on the above topics by 22 October 2014.

ECB Opinion on Proposed Money Market Funds Regulation Background

A first discussion paper on the clearing obligation under EMIR was published on 12 July 2013. What’s in there? On 11 July 2014, ESMA published two consultation papers concerning draft regulatory technical stand- ards (RTS) on the clearing obligation of certain class- es of OTC derivatives, incorporating the feedback and comments received from stakeholders respond- ing to the discussion paper of 12 July 2013. The two consultation papers seek stakeholders’ views on draft RTS for the clearing of Interest Rate Swaps (IRS) and Credit Default Swaps (CDS) that ESMA has to develop under the European Markets Infrastructure Regulation (EMIR). Regarding IRS, ESMA’s draft RTS propose the fol- lowing four classes, on a range of currencies and underlying indices, to be subject to central clearing: Regarding CDS, ESMA’s draft RTS proposes Euro- pean untranched Index CDS (for two indices) to be subject to central clearing. ESMA invites responses from the main stakeholders to the specific questions listed in these consultation papers. What’s next? The IRS Consultation Paper is open for feedback until 18 August 2014 and the CDS Consultation Paper un- til 18 September 2014. ESMA will use the answers received to draft its final RTSs on the clearing obliga- tion for IRS and CDS and send them for endorsement to the European Commission. The clearing obligation will take effect following a phased implementation, with the current proposal ranging from six months to three years after the en- try into force of the RTS, depending on the types of counterparties concerned. THE IRS CONSULTATION PAPER IS AVAILABLE HERE. THE CDS CONSULTATION PAPER IS AVAILABLE HERE. « Basis swaps; « Fixed-to-float interest rate swaps; « Forward rate agreements; and « Overnight index swaps.

On 13 November 2013, the European Central Bank (“ECB”) received a request from the Council for an opinion on a proposal for a regulation of the Eu- ropean Parliament and of the Council on money market funds (“the Regulation”). This request took place in the context of the recent wider international effort to develop a regulatory framework for shadow banking entities. What’s in there? On 6 August 2014, the ECB opinion dated 21 May 2014 on a proposal for a regulation on money market funds (2014/C 255/04) was published in the OJEU. NAV BUFFER The Regulation will introduce a net asset value buffer (“NAV buffer”). The ECB considers that the 3% NAV buffer does not take into account the dis- tinctive profiles of money market funds (“MMFs”) and that the Regulation should allow for more flexibility in the means used to maintain the NAV buffer. THE ROLE OF MMFS IN INTERMEDIATION The ECB welcomes the Regulation from a financial stability perspective, whilst raising concerns that the intermediation capacity of MMFs is potentially reduced. In addition, the ECB is of the view that it should be assessed whether the reallocation of funds from MMFs to the banking system is sub- stantial and whether this would in fact impact short-term money markets. INTERNAL RATING SYSTEMS The Regulation proposes that credit rating agen- cies be banned from assigning ratings to MMFs. The ECB notes that internal rating models may yield similar credit assessments to those of rating agencies, meaning that the number of highly-rated issuers would remain limited. OTHER PROVISIONS In addition, the ECB suggests a number of tech- nical amendments to the proposed Regulation, relating in particular to ensuring the appropriate involvement of ESMA in all relevant fields, for ex- ample access to the reports of MMF Managers.

THE ESMA DISCUSSION PAPER IS AVAILABLE HERE.

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