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ESMA advises on extension of AIFMD passport to non-EU jurisdictions

First Published 30th July 2015

ESMA advises on extension of AIFMD passport to non-EU jurisdictions.

ESMA advises on extension of AIFMD passport to non-EU jurisdictions
The European Securities and Markets Authority (ESMA) has published its Advice in relation to the application of the AIFMD (Alternative Investment Fund Managers Directive) passport to non-EU Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs) and its Opinion on the functioning of the passport for EU AIFMs and the national private placement regimes (NPPRs). The Advice and Opinion, required under AIFMD, will now be considered by the European Commission, Parliament and Council.

ESMA Advice - Extension of AIFMD Passport to non-EU AIFMs and AIFs
The Advice relates to the possible extension of the passport, currently only available to EU entities, to non-EU AIFMs and AIFs which are currently subject to EU NPPRs. ESMA conducted a country-by-country assessment, as this allowed it flexibility to take into account the different circumstances of each non-EU jurisdiction regarding the regulatory issues to be considered i.e. investor protection, competition, potential market disruption and the monitoring of systemic risk.

ESMA assessed six jurisdictions - Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the United States of America (USA) - who were selected based on a number of factors including the amount of activity already being carried out by entities from these countries under the NPPRs, EU national authorities' knowledge and experience of dealing with their counterparts and the efforts by stakeholders from these countries to engage with ESMA's process.

The Advice concludes that no obstacles exist to the extension of the passport to Guernsey and Jersey, while Switzerland will remove any remaining obstacles with the enactment of pending legislation. No definitive view has been reached on the other three jurisdictions due to concerns related to competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria.

Next Steps
The Advice and Opinion have been sent to the Commission, Parliament and Council for their consideration on whether to activate the relevant provision in the AIFMD extending the passport through a Delegated Act.

However, the institutions may wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EU countries, before introducing the passport in order to avoid any adverse market impact that a decision to extend the passport to only a few non-EU countries might have.

ESMA aims to finalise the assessments of Hong Kong, Singapore and the USA as soon as practicable and to assess further groups of non-EU countries until it has provided advice on all the non-EU countries that it considers should be included in the extension of the passport.

ESMA Opinion - Functioning of the EU AIFMD passport and NPPRs
The opinion on the functioning of the EU passport and the NPPRs contains ESMA's preliminary assessment of the operation of these two mechanisms. Its preliminary view is that, given the short time period that has elapsed since the implementation of the AIFMD in Member States, a definitive assessment of their functioning is difficult and would recommend preparing a further opinion after a longer period.

Matt Keogh, partner in the Linklaters Investment Management group commented: "The key takeaway from the ESMA advice is that the widespread introduction of the passport still looks some way off.

"Jersey, Guernsey and Switzerland will clearly be happy that the marketing passport looks likely to be extended to them when it is introduced. However those hoping that today's announcement would provide more certainty on when introduction might occur will be a bit disappointed.

"Looking forward, the advice is good news for those EU based private equity, real estate and infrastructure managers who have traditionally based some operations in the Channel Islands and wish to use the passport when it is introduced, though the global hedge fund industry, most of which is established or managed from the US or Cayman Islands, may need to wait a little longer to discover its EU marketing fate."

Andrew Shrimpton, managing director and global head of Compliance Consulting at Duff & Phelps' Kinetic Partners division, commented:

"We welcome ESMA's opinions and advice to the EU Commission on AIFMD arrangements, many of which reflect previous views published by the organisation. In particular, ESMA has taken an individual country approach, rather than prescribing a 'one size fits all' basis. This will be good for the development of fund management in Jersey, Guernsey and Switzerland in particular. We are surprised that the Cayman Islands, as the largest non-EEA domicile of hedge funds, was not assessed at this time."