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Main regulations which oblige daily independent valuation

 

With the continuous aim to shape a more stable banking system, European authorities require EU-based Financial institution to be provided independent and daily valuations of the assets deposited in their books in order to be in a position to better manage their risks. Finalyse can help tackling these regulatory challenges by fulfilling requirements such as the Independent Valuation of Assets, supporting compliance with risk management practices and regulatory requirements.

 

 

European Market Infrastructure Regulation (EMIR)

EMIR is part of 2009 G20’s commitment to regulate OTC derivatives market by introducing mandatory clearing and reporting. Financial Counterparties (FC) and Non-Financial counterparties with a gross notional amount exceeding a threshold for a given asset class (NFC+) are required to report the valuation of all outstanding OTC contracts on a daily basis. The regulation came into force in August 2012.

Finalyse proposes a tailor-made reporting solution to comply with it.

As from September 2016 EMIR also requires the exchange of initial margins and variation margins for non-centrally cleared OTC derivatives. Those requirements will now enter into force for the largest market participants and will be phased in over a period of a few years for the other participants. Finalyse can help you tackle those regulatory challenges by fulfilling requirements such as the Independent Valuation of Assets.

Alternative Investments Funds Managers Directive (AIFMD)

AIFMD established within the EU needed authorization by 22 July 2013 (or 22 July 2014 in European Union Member States that use the transitional period). This directive aims at regulating investment funds not yet covered at the EU-level by other norms such as UCITS.

In the actual financial environment, the main goals of the directive are:

  • To ensure a greater protection and regular & accurate information to investors
  • To provide national regulators with detailed information and
  • To enable AIF management to identify potential events on the market and take appropriate actions.

The regulatory framework for these funds will widely change and affect the different actors of the fund industry (managers, depositaries, administrators, etc.).

The directive gives new specifications and rules in the following topics: 

  • Independent valuation of the assets - methodology, policies, procedures, frequency, responsibility and liability of the AIFM (oversight and delegation)
  • AIFM authorisation - identification of AIFM, definition of an AIF, exemptions, registration requirements, capital requirements, authorisation requirements
  • Governance structure - governance principles, operational & organisational conditions, delegation, leverage
  • Depositary Bank – appointments and eligibility, role and duties (safekeeping, oversight duties, etc.), liabilities, delegation
  • Risk and liquidity management – permanent and independent risk management, risk management policy, assessment, monitoring and review of the risk policies, identification & measurement of the risk
  • Transparency and reporting – annual report, reporting to investors, reporting to regulators
  • Marketing – strategy, dual-regime, EU Marketing report

Finalyse can help you tackle this regulatory challenge by fulfilling requirements such as the Independent Valuation of Assets, supporting compliance with risk management practices and regulatory requirements specific for depositary banks or investment managers.

Undertakings for Collective Investments in Transferable (UCITS)

UCITS are norms that seek to give investment managers a ‘European Passport’ to operate throughout the EU whilst ensuring appropriate retail investor protection and risk management practices. Since 1988, the UCITS Directive has been modified to adapt to the rapid evolution of the fund industry. With UCITS V applicable in 2016, the considerations of the overall directive are as follows:

  • Valuation of OTC and assets
  • Extended requirements for Risk management processes
  • Implementation of the Key Investors Document, including calculation of SRRI
  • Extended requirements for depositaries duties and liabilities (UCITS V aimed at aligning with AIFM Directive)
  • Remuneration policies

Further amendments of the UCITS directive are already underway with currently consultation in preparation for UCITS VI. It will be focusing on Efficient portfolio management (EPM), OTC derivatives, Liquidity management, Assets/derivatives eligibility and Money Market Funds (MMF). The latter will require the MMF a more market-based valuation of their assets along with stress-testing to ensure they withstand redemption pressure at times of market stress.

Finalyse can help you tackle this regulatory challenge by fulfilling requirements such as the Independent Valuation of Assets, supporting compliance with risk management practices and regulatory requirements specific for depositary banks or investment managers.

IFRS 13 (Fair Value Measurement)

On 12 May 2011 the IASB issued IFRS 13 Fair Value Measurement which was became effective from on 1st January 2013. IFRS 13 is a new accounting standard aiming at standardizing the measure and the disclosure of assets and liabilities by introducing a more consistent definition of fair value. Under IFRS 13, market participants, where applicable, will be required to measure assets and liabilities using this new standardized definition of fair value. For funds investing in securities traded on-exchange or in an active market, the fair value will be readily available and equal to the exit price. But for more complex products, OTC derivatives, structured deals, illiquid assets, those participants would have to use tailored valuation models using unobservable inputs and the regulator would require to disclose detailed information on the valuation technique to provide transparency. For Alternative Investment Funds, this new accounting requirement will be in closely linked with Asset valuation in the AIFMD directive.

Finalyse can help you tackle this regulatory challenge by fulfilling requirements such as the Independent Valuation of Assets, supporting compliance with risk management practices and regulatory requirements.

Markets in Financial Instruments Directive (MiFID)

Enforced on November 1st, 2007, MIFID aimed at creating a unified European market for financial services and activities. Following the technologic innovation of trading and upcoming concerns on transparency, efficiency and other practices such as commodity trading, MiFID II & MiFIR have been agreed upon and entered into force on July 2nd, 2014 with a delayed implementation deadline until January 3rd, 2017.

MiFID II/MiFIR results from an extensive consultation and review in the wake of the financial crisis: the goal remains the same, but additions are made to the original Directive:

  • Establish a safer, sounder, more transparent, auditable and responsible financial system
  • Increase integration, efficiency and competition within the EU financial market, thus reducing costs to participants
  • Create a single rule market in Europe, with a level playing field for states and participants
  • Improve supervision and transparency on regulated and OTC markets (G20 commitment). Efficient valuation is a key component of such transparency.
  • Protect investors with the duty for investment companies to inform them about the independency and the risk associated with the proposed investment products and strategies.
    Finalyse offers a transparent and independent valuation and risk management service for derivatives and structured products in order for you to comply with all these changes in the legal environment.

Key Information Documents for Packaged Retail and Insurance-based Investment Products (KID PRIIPS)

To be enforced by January 1st, 2018, the KID PRIIPS Regulation obliges PRIIPS manufacturers to provide retail investors pre-trade Key Information Documents. These standardised, succinct and comprehensible documents must describe the nature and features of each PRIIP. KIDs must be revised regularly and require the disclosure of Risk & Costs Indicators and Performance Scenarios amongst others. 

In this regard, Finalyse proposes transparent and independent valuation, SRI and performance scenarios calculation and risk management services to cope with these new requirements.

If you are interested in these services, do not hesitate to contact Marc-Louis Schmitz for more information.