Regulatory Update UCITS and AIFMDFund Forum Asia 2013, Hong Kong, 16 April 2013Stephane Karolczuk, Head of Hong Kong Office

AgendaSection 1 – UCITS (10’)

a) Luxembourg fund industry at a glanceb) Cross-border distribution of UCITSb) Cross border distribution of UCITSc) Evolution of UCITS rulesd) Chinese strategies under UCITS rulese) New developments in the EU and Luxembourgf) UCITS Vg) UCITS VI

Section 2 – AIFMD (15’)a) Introduction and timelineb) Timeline for non-EU countriesc) EU AIFM and non EU AIFc) EU AIFM and non-EU AIFd) Non-EU AIFM and EU AIF or non-EU AIFe) How do offshore jurisdictions prepare?f) Current status regarding cooperation arrangements

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f) Current status regarding cooperation arrangementsg) The Luxembourg Model

Section 1 UCITSSection 1 - UCITS

a) Luxembourg fund industry at a glance

The big picture

) g y g

3,849 investment funds

13 518 f d it 13,518 fund units

EUR 2,468.07 billion of AUM in Luxembourg funds

4Figures as at February 28, 2013 Source: CSSF

a) Luxembourg fund industry at a glance (continued)

Net assets of Luxembourg domiciled UCIs

) g y g ( )

EUR 283 billion

EUR 194 billion

SIFs / IFsUCIsUCITSEUR 1,991 billion

5Figures as at February 28, 2013 Source: CSSF

a) Luxembourg fund industry at a glance (continued)

EU AuM in UCITS and Non-UCITS (by domicile)

) g y g ( )

UCITS and Non-UCITS UCITS only

LuxembourgFranceGermany

26.7%10.8%

17.5%26.7%

10.8%

17.5%LuxembourgFranceIreland

31.8%12.1%

3.9%

19.1%

yUKOthers

16.8%

14.4%

13.7% 16.8%

14.4%

13.7%

IrelandGermanyOthers17.7%15.4%

6 Figures as at February 28, 2013 Source: CSSF

b) Cross-border distribution of UCITS

Market share of Luxembourg UCITS

72% of all UCITS registeredin at least 3 countries are Luxembourg funds

7 Sources: Lipper Hindsight December 31, 2011, PwC Global Fund Distribution March 2012

b) Cross-border distribution of UCITS (continued)

UCITS beyond EU borders

Sweden, 71%

Germany, 67%

France, 70%Switzerland, 70%

South Korea, 100%Japan, 61%

Taiwan 75%

Peru, 64%

Bahrain, 76%

Singapore, 71%

Taiwan, 75%Hong Kong, 73%

Chile, 73%

8 Sources: Lipper LIM and PwC analysis, 31 December 2011

c) Evolution of UCITS rules)

Council Directive 85/611/EEC on the coordination of laws, regulations andadministrative provisions relating to undertakings for collective investment inp g gtransferable securities (UCITS )

Directives 2001/107/EC and 2001/108/EC of the European Parliament and of theCouncil of 21 January 2002 amending Council Directive 85/611/EEC on theCouncil of 21 January 2002 amending Council Directive 85/611/EEC on thecoordination of laws, regulations and administrative provisions relating to UCITS,with regard to the investments of the UCITS and with a view to regulatingmanagement companies and simplified prospectuses, respectively

Directive 2007/16/EC on eligible assets for investment by UCITS funds and theCESR Guidelines in relation thereto

Directive 2009/65/EC the UCITS IV Directive

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d) Chinese strategies under UCITS rules) g

UCITS are widely used to market PRC and Greater China asset managementcapabilities to European institutional and retail investorscapabilities to European institutional and retail investors

Possibility to invest in / take exposure to a wide range of assets securitieslisted in Hong Kong, Singapore or securities traded on other regulatedmarkets (such as Dim Sum bonds issued in Hong Kong), A-Shares, A-( g g), ,Shares financial indices, etc

Possibility to invest directly in the PRC using QFII quotas, huge potentialconsidering recent developments of the QFII regime (weekly liquidity, still 3months lock-up)

Possibility to connect a UCITS structure to R-QFII funds. Potentially,allocation of R-QFII quotas to be used by non-Hong Kong based funds

Possibility to distribute UCITS in the PRC through the QDII scheme

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e) New developments in EU and in Luxembourge) New developments in EU and in Luxembourg

Regulation (EU) No 648/2012 on OTC derivatives, central counterparties andt d it i (k th E M k t I f t t R l titrade repositories (known as the European Market Infrastructure Regulation orEMIR)

ESMA Guidelines on ETFs and other UCITS Issues

ESMA O i i f A ti l 50 2 f th UCITS Di ti ESMA Opinion of Article 50 par. 2 of the UCITS Directive

ESMA Q&A regarding the Regulation on Short Selling and CDS

Luxembourg CSSF Circular 12/546 on substance

Luxembourg CSSF Regulation 12-02 on anti-money laundering

Luxembourg CSSF Circular on ESMA guidelines on ETFs and other UCITS Issues

Luxembourg CSSF press release 12/46 on trash ratiog p

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f) UCITS V

Implement new rules on remuneration of risk takers

Harmonise UCITS depositary role and duties

In a nutshell

and senior personnel

UCITS V

RemunerationDepositary role

p yand create a new EU-wide standard of depositary liability, should assets be lost in custody

Sanctions regime

Create a new, harmonized regulatory sanctions regime for EU regulators to adhere to(minimum administrative sanctions that are to be available to supervisory authorities in case ofkey violation of the UCITS rules)

The proposal was published on 3 July 2012. The vote in ECON Committeetook place on 21 March 2013. The exact timeframe for adoption of UCITS V isnot known: possibly Q2 or Q3 2013, with a further two years required for national

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p y y qimplementation

g) UCITS VI

Back to the origins of UCITS

The original UCITS objectives were to remove the barriers to cross-bordermarketing, by allowing funds to invest in a wider range of financial instruments. Theresult being a single EU market, with greater investor protection, where economiesof scale are passed onto consumers.

‘UCITS VI’ – Consultation rather than Legislative Proposal

Complementary to recent EU Commission and ESMA papers

Open questions to stakeholders. No EU Commission views

A ‘catch-all’ tidy up exercise

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g) UCITS VI (continued)

Th EU C i i i illi t h b tt d t di

Purpose of the consultation

The EU Commission is willing to have a better understanding in relation to

Eligible assets and use of derivatives Eligible assets and use of derivatives Efficient portfolio management tools Over the Counter derivatives Extraordinary liquidity management tools Extraordinary liquidity management tools Depositary passport Money Market Funds Long term investments Long-term investments

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g) UCITS VI (continued)

Improvements to UCITS IV

Revisions to improve operations or fill perceived gaps?

Self-managed investment companies Master-Feeder structures Fund mergers Notification procedures Further alignment with the AIFMD

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Section 2 AIFMDSection 2 - AIFMD

a) Introduction and timeline

Creation of a harmonized regulatory framework for managers of alternativeinvestment funds (AIFs)investment funds (AIFs)

AIFMD is a directive regulating managers but also indirectly regulating AIFs

No Impact on UCITS funds and UCITS fund managers, to the extent theyl di ib UCITSonly manage or distribute UCITS

Regulates all Managers of AIFs where

o the AIFM is based in the EU, and/oro the AIFM is based in the EU, and/oro the AIF is based in the EU, and/oro the AIF is marketed in the EU.

Some exemptions for (i) "small" AIFM (de minimis exemptions) and (ii) some Some exemptions for (i) "small" AIFM (de minimis exemptions) and (ii) someinvestment vehicles which do not qualify as AIF

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a) Introduction and timeline (continued)

Rules regarding the AIFM such as authorisation, capital, organisationaland operational requirements similar than for UCITS rules applicable to

t imanagement companies

Certain requirements are applicable to the AIF directly such as:

o Depositary rules;o epos ta y u es;o Transparency, Reporting, Control, Asset Stripping;o Valuation.

Creation of a European passport for AIF managers (AIFMs) Creation of a European passport for AIF managers (AIFMs)

Unlike UCITS passport, non-EU AIFM may benefit from the Europeanpassport.

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a) Introduction and timeline (continued)

The decade ahead

20152011 2012 2013 2014 20162010 2017 20182015

Review of co existing PPM regime

Entry intoForce

Implementation measuresproduced

2011 2012 2013 2014 20162010 2017 2018

EU AIFMs – Full AIFMD Compliance

Non EU AIFM and Non EU AIF : AIFMD = transparency provisions + 3rd country specific req’s

EU AIFMs managing EU AIF - Access through Passport

Non EU AIFM and Non EU AIF: If use of Passport Full AIFMD compliance + 3rd country specific req’s

Technical Standards produced

Non EU AIFM and Non EU AIF access through Private Placement – AIFMD = transparency provisions

EU AIFM and EU AIF access through Private Placement regime subject to grandfathering

Non EU AIFM and Non EU AIF: Possible access to Passport.

Non EU AIFM and Non EU AIF access through Private Placement regime – no AIFMD impact

Likely termination of PP regimes

Non EU EU

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b) Timeline for non-EU countries

July 2013 2015 2018

Implementation into national law /

ESMA report on EU Passport

EC to issue Level 2

ESMA report on third country passport

EC to issue Level 2 a o a a /Passport for EU AIFM

managing EU AIF

EC to issue Level 2 measure to enablePassport for third

country AIFM + AIF

C to ssue e emeasure for

End of private placement regimes (?)

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c) EU AIFM and non-EU AIF

ManagingNon-EU AIFEU AIFM

NOT marketed in the EU Marketed in the EU

AIFM licence requirement AIFMD rules on depositaries are

AIFM licence requirement Distribution (to professional investors)p

not applicable / reporting Private placement / public offer

outside of EU

( p ) EU passport (from 2015) OR National

private placement rules (NPPR) rules on depositaries not applicable (quid in 2018?)

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2018?)

d) Non-EU AIFM and EU AIF or non-EU AIF)

Managing

EU AIF Non-EU AIF

AIFM licence requirements as from 2015(choice of the MSR)

Distribution in EU (to professionalinvestors)

Distribution (to professional investors),EU passport (from 2015) OR privateplacement (NPPR) until 2018 (?)

) EU passport (from 2015) OR private

placement (local rules) until 2018, ruleson depositaries not applicable, however,transparency, reporting, control and asset

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p ( ) ( ) transparency, reporting, control and assetstripping rules are applicable.

EU National Private Placement RulesEU National Private Placement Rules

private placement is (anticipated to be)less restricted

private placement is (anticipated to be) not permitted or highly restricted

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Non-EU AIFM – non-EU AIF: Marketing in the EUNon-EU AIFM – non-EU AIF: Marketing in the EU

Co-operation agreements based on international standards and in line with Level 2 Regulation must be in place

Certain provisions of the AIFMD need to be complied with: Transparency requirements (Art. 22 - annual report, Art. 23 -disclosure to

investors)investors) Reporting (Art. 24 - reporting to competent authorities of EU marketing

countries) Acquisition of control (Art. 26, Art. 27, Art. 28, Art. 29) Asset stripping (Art. 30)

And not FATF black-listed country: Iran, Democratic People's Republic of Korea (DPRK), Bolivia, Cuba, Ecuador, Ethiopia, Indonesia, Kenya, Myanmar, Nigeria, ( ) y y gPakistan, São Tomé and Príncipe, Sri Lanka, Syria, Tanzania, Thailand, Turkey, Vietnam, Yemen [red=not IOSCO member]

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Co-operation ArrangementsCo operation Arrangements

Written agreement Information exchange procedureg p Right to forward information to other EU regulators and the ESMA Possibility to make on-site inspections Data transfer security/protection standards

AIF subject to appropriate degree of regulatory supervision as condition foreffectiveness of co-operation agreement?

Current ESMA position regarding international standards: IOSCO Principles onCross-Border Supervisory Cooperation of 2010, complements the terms andconditions of the IOSCO Multilateral MoU Concerning Consultation and Co-operation and the Exchange of Information of 2002operation and the Exchange of Information of 2002

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e) How do offshore jurisdictions prepare?e) How do offshore jurisdictions prepare?

Offshore funds often delegate the portfolio management function and the riskmanagement function to another jurisdiction onshore (e.g. Hong Kong, UK,Singapore, Luxembourg), there is no substance left in the offshore fundjurisdiction

Appointment of e.g. a non EU AIFM such as Hong Kong manager or SingaporeAppointment of e.g. a non EU AIFM such as Hong Kong manager or Singaporemanager, then non-EU AIFM marketing a non-EU AIF scenario

Appointment of e.g. UK AIFM or Luxembourg AIFM, then EU AIFM marketing anon EU AIF scenarionon-EU AIF scenario

Offshore centres in negotiations with ESMA to have the cooperationarrangements and tax exchange of information agreements entered into as soong g gas possible

Offshore centres doing internal work in order to amend the local legislation toaccommodate AIFMD requirements for transparency and disclosure reporting

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accommodate AIFMD requirements for transparency and disclosure, reporting,acquisition of control and asset stripping

f) Current status regarding cooperation arrangements

Brazil: MMoU agreed with ESMA (ESMA News of 16 January 2013)

f) Current status regarding cooperation arrangements

Switzerland: MMoU agreed with ESMA (ESMA Press Release of 3 December2012)

J G C BVI B d ? Jersey, Guernsey, Cayman, BVI, Bermuda?“ESMA is currently in contact with other non-EU authorities that are membersof IOSCO [almost all countries’ regulators are members; e.g. not: Iran, Cuba,North Korea, Yemen], and is continuing to negotiate co-operationarrangements with the relevant authorities with a view to having these in placebefore July 2013.” (ESMA News of 16 January 2013)

Each EU regulator needs to enter into MMoU (using the template MMoUEach EU regulator needs to enter into MMoU (using the template MMoUapproved by ESMA) with third country regulator

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e) The Luxembourg Model) g

Passport available as from 2013

Delegation of the PM functionpossible however has to be notified to

Luxembourg FundLux Manco

poss b e o e e as o be o ed othe Luxembourg regulator, justified,and the Hong Kong / Singaporemanager must have sufficientresources and good repute, subject tothe supervision of the local regulator,

Delegates Portfolio Management

p g ,the Luxembourg AIFM must perform adue diligence on the PM andsupervise its activities

Investors

MManager

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Contact Us

Stephane Karolczuk – Head of Hong Kong OfficeStephane Karolczuk – Head of Hong Kong OfficeEmail : stephane.karolczuk@arendt.comWebsite : www.arendt.comTel. (Hong Kong): (+852) 2801 58 33Fax (Hong Kong): (+852) 2801 58 18Fax (Hong Kong): (+852) 2801 58 18

Disclaimer

This presentation of Arendt & Medernach is designed to provide with summarized information and illustrations regarding the topics coveredby such a presentation. This information and those illustrations are not intended to constitute legal advice and do not substitute for theconsultation with legal counsel required before any actual undertakings.

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