ESMA recently published updated versions of four Q&As.
The updated Q&As relate to the following areas:
- Application of the AIFMD.
- The European crowdfunding service providers for business Regulation.
- Application of the EuSEF and EuVECA Regulations.
- Implementation of the Regulation (EU) No 909/2014 on improving securities settlement in the EU and on central securities depositories.
This article discusses the new and updated questions of particular interest to AIFMs, crowdfunding service providers, central securities depositaries, European Venture Capital Funds and European Social Entrepreneurship Funds.
Application of AIFMD: Notion of “substantive direct or indirect holding” in the context of registered AIFMs.
Question 1 of new Section XVI of this Q&A refers to Article 3(2)of AIFMD which states that only paragraphs 3 and 4 of Article 3(2) apply to:
- AIFMs which either directly or indirectly, through a company with which the AIFM is linked by common management or control, or by a substantive direct or indirect holding, manage portfolios of AIFs whose assets under management, including any assets acquired through use of leverage, in total do not exceed a threshold of EUR 100 million.
- AIFMs which either directly or indirectly, through a company with which the AIFM is linked by common management or control, or by a substantive direct or indirect holding, manage portfolios of AIFs whose assets under management in total do not exceed a threshold of EUR 500 million when the portfolios of AIFs consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF.
It also queries how the notion of “substantive direct or indirect holding” in the Article should be interpreted and, in particular, if there is a quantitative threshold above which the criterion of substantive direct or indirect holding could be considered as met, and, if yes, what this threshold would be?
ESMA clarified that the notion of “substantive direct or indirect holding” refers to situations where the AIFM manages the portfolios of AIFs through its direct or indirect holding in a company, including situations whereby the AIFM de facto has the power to impose decisions on the AIF portfolio composition, its asset allocation or its risk management. Article 3(2)(a) AIFMD does not set a quantitative threshold and the notion of “substantive direct or indirect holding” shall be assessed on a case-by-case basis by the AIFM’s supervisors.
AIFMD Q&As are available here.
Crowdfunding: Use of PSD2 exemption
Question 3.14 asked whether a MiFID firm benefiting from the exemption under Article 3(i) of Directive (EU) 2015/2366 (PSD2) and authorised under Regulation (EU) 2020/1503 on European crowdfunding service providers for business (ECSPR) may use the exemption to perform payment services under Article 10 of ECSPR in relation to its activities as a Crowdfunding Service Provider (CSP).
ESMA clarified as follows:
- Article 10(4) of ECSPR states that a crowdfunding service provider may itself or through a third party provide payment services, provided that it (or the third party) is a payment service provider under PSD2.
- Article 3(i) of PSD2 exempts from its scope payment transactions related to securities asset servicing, including dividends, income or other distributions, or redemption or sale, carried out by persons referred to in point (h) or by investment firms, credit institutions, collective investment undertakings or asset management companies providing investment services and any other entities allowed to have the custody of financial instruments.
- A MiFID firm authorised as a CSP may rely on the Article 3(i) exemption, insofar as the MiFID firm carries out the transactions referred to in Article 3(i) in the context of the provision of crowdfunding services.
Crowdfunding Q&As are available here.
EuSEF and EuVECA Regulations: Investment in another (unregistered) qualifying venture capital fund/social entrepreneurship fund.
A new Question 5 of the Q&A queries if:
- a EuVECA fund can invest in another qualifying venture capital fund (VC Fund) which has not been registered as EuVECA as long as that VC Fund materially complies with the criteria of the definition of qualifying VC funds; and
- if a EuSEF fund can invest in another qualifying social entrepreneurship fund (SE Fund) which has not been registered as EuSEF as long as that SE Fund materially complies with the criteria of the definition of qualifying SE Fund?
ESMA clarified that the answer is yes to (1) and (2), provided that the qualifying venture capital (or social entrepreneurship) fund has not itself invested more than 10% of its aggregate capital contributions and uncalled committed capital in other qualifying venture capital (or social entrepreneurship) funds.
EuSEF and EuVECA Q&As available here.
Implementation of the Regulation (EU) No 909/2014 on improving securities settlement in the EU and on central securities depositaries.
A new Question 8 regarding partial settlement functionality has been introduced to the Q&A. This new question has three new and specific subsections:
- When should central securities depositaries (CSDs) start offering a partial settlement functionality as per Article 10 of the Regulatory Technical Standards (RTS) on settlement discipline?
- How should field 19 of table 1 of Annex II to the RTS on Settlement discipline be filled in if a CSD has no intention to use the derogation provided for in Article 12 of the RTS on Settlement Discipline?
- Should a CSD set up its partial settlement functionality as a proper functionality or could it be an outcome-based feature?
ESMA provided the following three answers relating to each of the questions above;
- Article 10 of the RTS on Settlement Discipline requires CSDs to allow for the partial settlement of settlement instructions. Article 12 of the same RTS provides for a derogation to that requirement, if both the value and the rate of settlement fails in a securities settlement system operated by a CSD are below certain thresholds. CSDs that want to benefit from the derogation in Article 12 of the RTS on Settlement Discipline should perform the required calculations by 20 January of the year following that of the entry into force of the RTS on Settlement Discipline. If the calculation shows that a CSD reaches one of the above-mentioned thresholds, that CSD should start offering a partial settlement functionality within one year following the notification of the results of the calculation to the competent authority.
- If a CSD does not intend to use the derogation provided for in Article 12 of the RTS on Settlement Discipline, the CSD should specify “NO” in field 19 of table 1 of Annex II to the same RTS. In such a case, the CSD would not need to provide any justification.
- The answer provided by the European Commission in accordance with Article 16b(5) of the ESMA Regulation Article 10 of Commission Delegated Regulation (EU) 2018, requires that a CSD allow for the partial settlement of settlement instructions. Furthermore, Article 23 of the RTS on settlement discipline states that where on the last business day of the extension period some of the relevant financial instruments are available for delivery to the receiving participant, the receiving and failing clearing members, trading venue members or trading parties, as applicable, shall partially settle the initial settlement instruction, unless the instruction is put on hold. However, neither the CSDR Regulation nor the RTS on settlement discipline provide a detailed explanation or set instructions as to how to proceed with a partial settlement, implying a certain degree of flexibility in how CSDs are to achieve this outcome. Therefore, CSDs are free to determine how the partial settlement functionality and its related features are implemented in practice. CSDs should nevertheless actively undertake all necessary steps to make partial settlement available, rather than solely rely on the participants’ initiative.
Securities settlement Q&As are available here.
AIFMs, crowdfunding service providers, CSDs, EuVECA and EuSEF funds should keep up to date on ESMA Q&As.
For further information, please contact one of our Financial Services team: David Naughton, David Williams, Katrina Smyth, Narita Woods or Mina Dawood.