What will happen if the UK leaves the EU without any withdrawal agreement remains subject to the changeable political winds. Nevertheless, the following should help organisations in the asset management and investment funds industry to navigate the choppy waters of Brexit uncertainty.

Marketing

If UK UCITS and UK alternative investment fund managers (AIFMs) wish to continue marketing alternative investment funds (AIFs) in the EU, they will need to rely on:

• National private placement rules (NPPR) under the laws of each EU Member State

• Reverse solicitation, i.e. investors seeking to purchase units without any prompt from the fund promoter or distributor

• Re-location to the EU, or

• Wait for the European Commission to extend marketing passport rights to the UK

EU AIFs and UCITS being marketed into the UK will be able to continue as normal for up to three years post-Brexit if they make an application under the UK’s Temporary Permissions Regime (TPR). It is unclear if the TPR will be extended after the three years is up or if the UK’s NPPR or another arrangement will apply.

UK AIFMs

An Irish retail investor AIF (RIAIF) can only have an EU AIFM; however, UK AIFMs may act as AIFMs to other Irish AIFs but will no longer be able to market these AIFs in the EU.

UK UCITS management companies

To continue doing business in the EU, they will need to re-locate to the EU.

UK investment managers

Existing UK investment managers of Irish funds can continue to carry out investment management.

UK investment managers appointed to Irish funds up until Brexit can avail of the Central Bank of Ireland’s fast-track approval process provided they meet the required pre-conditions. UK investment managers appointed to Irish funds after Brexit will need to go through the full review process.

Eligible investments

A UCITS can continue to invest in deposits, or cash booked in accounts and held as ancillary liquidity, with a UK credit institution provided the UK remains a signatory of the Basle Capital Convergence Agreement of July 1988 or the European Commission adopts an equivalence decision in this area. Deposits with UK credit institutions will not be eligible investments for EU money market funds unless an equivalence decision is adopted in this regard.

It is likely that the Central Bank will consider investment by an Irish UCITS in units of a UK AIF, which was considered a UK UCITS pre-Brexit, to be an eligible investment for that UCITS.

Investment by a RIAIF in units of a UK AIF, which was a UK UCITS pre-Brexit, will be an eligible investment for that RIAIF.

A UCITS investing in units of a former UK UCITS will need to adjust the composition of its portfolio in order to comply with the 30% of assets limit applying to investments in AIFs.

Derivatives

UCITS and RIAIFs will be able to enter over-the-counter (OTC) derivative transactions with UK investment firms. However, derivative reporting cannot be made to UK trade repositories. ESMA has set out the process for reporting derivatives post-Brexit.

LCH Limited, ICE Clear Europe Limited and LME Clear Limited can continue to act as derivatives clearing houses to EU clients until 30 March 2020.

For one year post-Brexit, OTC derivative contracts pre-dating the European Market Infrastructure Regulation (EMIR) can be novated from a UK counterparty to an EU counterparty without triggering any reporting obligation under EMIR. In other words, an EU counterparty can “step into the shoes” of the UK counterparty.

UK benchmark indices

Until 1 January 2020, EU funds will be permitted to measure their performance against, match or track these. Following that date, EU funds can only use UK benchmark indices for such purposes if an Equivalence Decision has been adopted in this regard.

Securities transfer and settlement

Until 2021, EU participants will still be able to transfer and settle securities in UK central securities depositories (CSDs). For two years after Brexit, Irish entities may be able to make payments and transfers through certain UK CSDs that are assessed and determined by the Central Bank as being subject to equivalent requirements as exist under Irish and EU law in this area.

Conclusion

Brexit will create challenges, uncertainty and, for some, opportunities. To ensure compliance with applicable laws in the event of a No-Deal Brexit, fund documents and marketing activities will need to be reviewed and, if necessary updated, with applicable submissions to be made to the Central Bank before their Brexit-specific deadlines.

If you would like further information from the Investment Funds team, please contact Conor Durkin or Rowena Fitzgerald.

This article was contributed by Ronan Dunne, Associate.

The content of this article is provided for information purposes only and does not constitute legal or other advice.