11 Mar 2019

Brexit Update: Additional clarity received from the Central Bank of Ireland

briefing

Asset Management and Investment Funds

For further information on any of the issues discussed in this publication please contact the related contact(s) on this page.

Following on from our recent publication, the Central Bank of Ireland (the “Central Bank”) has now provided additional clarity on a number of key Brexit related matters that will be of relevance to participants in the Irish funds industry affected by Brexit.

UCITS and RIAIF investment restrictions

The Central Bank has, by way of publication of a ‘notice of intention’, confirmed its approach to certain of the UCITS and RIAIF investment restrictions which would be impacted in the event of a hard Brexit.

UCITS and RIAIFs investment in UK investment funds

Regulation 68(1)(e) of Ireland’s European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2011, as amended (“UCITS Regulations”), provides that UCITS may invest in AIFs provided, inter alia, that the AIFs are authorised under laws which provide that they “are subject to supervision considered by the Central Bank to be equivalent to that laid down in Community law”.

Chapter 1 of the Central Bank’s AIF Rulebook (the “AIF Rulebook”) permits Retail Investor AIFs (“RIAIFs”) to invest in regulated investment funds, defined as an investment fund which is either a ‘category 1’ investment fund or a ‘category 2’ investment fund.

In the event of a hard Brexit the eligibility of UK investment funds would not fit squarely within their rules.

However, pending its consideration of the matter in full, the Central Bank has confirmed that it will not treat UK investment funds as ineligible investments for Irish UCITS and RIAIFs notwithstanding the rules set down in the UCITS Regulations and the AIF Rulebook.

However, the Central Bank has confirmed that Irish UCITS will need to ensure that investment in UK investment funds respects the UCITS investment restriction which sets an aggregate limit of 30% for investment in AIFs.

Counterparty exposure rules for UCITS and RIAIFs

Regulation 8(3) of the UCITS Regulations prohibits UCITS from entering into an OTC derivative unless the derivative counterparty falls within certain categories. Chapter 1 of the AIF Rulebook applies a similar prohibition to RIAIFs. Again, the eligibility of UK authorised counterparties has been an issue as non-EEA investment firms are not included in those categories.

However, the Central Bank has confirmed that, pending its consideration of the matter in full, UCITS and RIAIFs can continue to treat UK investment firms authorised under MiFID, as implemented in the UK, as eligible financial counterparties for the purposes of Regulation 8(3) of the UCITS Regulations and Chapter 1 of the AIF Rulebook.

In addition, the Central Bank has issued revised Q&As on both AIFMD and Investment Firms with the following clarifications:

Depositary regime will be applicable to QIAIFs with non-EU AIFMs

The Central Bank has confirmed in its revised AIFMD Q&A that if an Irish QIAIF continues to use a UK AIFM in a hard Brexit scenario, such QIAIFs will be subject to the full AIFMD depositary regime, including the AIFMD depositary liability provisions.

Rules on Tied Agents

The Central Bank has added two new questions to its revised Investment Firms Q&A which deal with the appointment of tied agents under MiFID II and confirmed that:

(i) Only EEA MiFID firms can appoint tied agents (i.e. that a UK investment firm cannot appoint an Irish tied agent to provide services on its behalf); and

(ii) Tied agents appointed by EEA investment firms must be established in the EEA (i.e. it is not possible for an EEA investment firm to appoint a UK tied agent).

The clarifications noted above are all to be welcomed as they assist market participants in their Brexit contingency planning and decision making and allow for additional time to fully assess the impact of a hard Brexit on their Irish fund offerings.

Should you have any queries in relation to this article, please contact the authors or your usual contact in the Dillon Eustace Asset Management and Investment Funds Team for further information.

DISCLAIMER: This document is for information purposes only and does not purport to represent legal advice. If you have any queries or would like further information relating to any of the above matters, please refer to the contacts above or your usual contact in Dillon Eustace.