Banking Briefing Brochure 10-2016

Banking BriefingQ3 2016New QI agreementWatch: Brexit with the ABBLT2S securities settlement platformEU Audit Reform

October 2016

kpmg.lu

© 2016 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

All rights reserved.

Banking Briefing Q3 2016 1

Contents

Introduction 2

New QI agreement 3

Watch: Brexit with the ABBL 4

T2S securities settlement platform 5

EU Audit Reform 7

Developments of a different kind

The banking news in Luxembourg is often dominated by the continuing impact of disruption and innovation, as leaders search for more efficient ways of deploying technology to power change initiatives in their organizations. This edition of the Banking Briefing, however, may offer a pleasant antidote to the slew of articles on FinTech and Blockchain. Here, the focus is rather on developments of a different kind, including initiatives which may benefit your organisation.

Our securities specialists bring you an update on T2S, a securities clearing platform which is already offering liquidity benefits, and may, in the future, lead to a reduction in costs. Our tax experts have taken up their pens to offer further news about the Luxembourg QI agreement with the IRS, which is set to lighten reporting and other requirements for non-US institutions. This is followed by a concise summary of the EU Audit Reform, which has introduced a series of requirements governing every statutory audit in the EU. To top it all off, we have a reminder for you to visit our YouTube channel where Philippe Von Restoff of the ABBL has been interviewed about the local view on Brexit for bankers.

We hope you’ll enjoy reading this publication, and encourage you to contact me with any feedback or ideas for topics for future editions.

Kind regards,

Anne-Sophie Minaldo Stanislas Chambourdon

Introduction

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A new 'QI' Agreement between banks and the IRS as from 2017

Periodic review and certifications of compliance

The 2014 QIA introduced the so-called internal compliance and review program. The responsible officer may decide, however, to hire an external reviewer and to define the scope of such an engagement. As part of this compliance program, the responsible officer is required to make periodic compliance certifications and provide certain factual information (regarding its documentation, withholding, reporting, and other obligations under the QIA) to the IRS. It is also worth mentioning that smaller QIs that do not have reportable amounts exceeding $5 million in each year covered by the certification period can apply for a waiver of the requirement to conduct the periodic review; such QIs could also set up a consolidated compliance program, subject to the approval of the IRS. The initial certification period is the period ending on the third full calendar year that the 2014 QIA and any superseding revenue procedure is in effect.

Qualified derivative dealers and Section 871(m)

Previously, foreign-to-foreign substitute payments made under securities loans and equity-linked derivatives were treated merely as contractual fees rather than actual dividends. As a result, certain return-enhancing strategies led to undue reduction of taxes or exemptions. The proposed QIA incorporates

IR Section 871(m), which features rules that treat ‘dividend equivalent’ payments—made under derivatives/products whose price sensitivity to US underlying stock(s) exceeds 80% (‘delta’)— as US-source dividends, and thus subject to US withholding. However, securities dealers typically hedge their exposure to their clients’ transactions. Thus, the application of US withholding taxes on substitute payments could lead to multiple withholding on the same dividend stream (for instance in a back-to-back dealer transaction). To mitigate such a risk of overwithholding, banks can opt for the Qualified Derivative Dealer (QDD) status and thus avoid being withheld upon provided that they agree to inter alia assume primary withholding responsibility on such substitute payments.

Limitation on benefits (LOB) for treaty claims

Going forward, QIs will be required to collect certain information and certifications regarding a beneficial owner’s claim for treaty benefits (on IRS W-8 forms or in addition to documentary evidence) and include this information on their annual Form 1042-S reports.

by Gérard Laures

On 1 July 2016, the US Internal Revenue Services (IRS) released Notice 2016-42 to propose new/ modified qualified intermediary (QI) rules. The QI Agreement (QIA), which was initially introduced in 2001, and subsequently amended in 2014 to accommodate FATCA rules, generally allows non-US banks to enter into an agreement with the IRS to simplify their US documentation, as well as their withholding and reporting obligations. The proposed changes to the QIA described in Notice 2016-42, which are subject to future modifications, will apply as of 1 January 2017. The key changes proposed are outlined below.

New QI agreement I Brexit I T2S securities settlement platform I EU Audit Reform

Watch: Luxembourg takes supportive stance on Brexit with the ABBL

KPMG TV caught up with the Luxembourg fund and banking associations to find out the financial sector’s take on passporting, Luxembourg-UK relations and more.

Philipp VON RESTORFFHead of Media & Communication,

ABBL

“ Banks have [historically] coped very well with new realities. I don’t see why they shouldn’t cope with the challenging environment today.”

“ Luxembourg banks consider London, and the UK, to be a long-lasting partner.”

“ Luxembourg banks want to maintain their mutual, beneficial relationship with London, which they have had for decades now.“

KPMG TVKPMG TV

Visit our YouTube channel to see the full interview!

Here are our banking highlights from the video.

4 by Anne-Sophie Minaldo

T2S securities settlement platform

What is it?

Target2-Securities (T2S) is a pan-European platform for securities settlement in central bank money that went live in June 2015 after being initially launched in 2007. The aim of T2S is to standardise and commoditise settlement in Europe through a shared settlement platform operated by the Eurosystem. The European Central Bank (ECB) also intends to remove some of the so-called ‘Giovannini barriers’ through this initiative. The central securities depositories (CSDs) that signed the framework agreement with the ECB will outsource their settlement activities on the common platform, thus giving up part of their revenues since the platform will be operated on a ‘cost recovery’ basis.

Where are we now?

As of the present moment three migration waves have happened and two more, containing some of the biggest markets, in particular Germany with 40% of the total volume, are still to come. Below are shown the scheduled migration waves and the countries of the CSDs involved.


Italy

Switzerland

Greece

Romania

Malta

22 June 2015

W1

Belgium*

Portugal

28 March 2016

W2

France

Belgium*

Netherlands

Luxembourg*

Denmark

12 Sept 2016

W3

Slovakia

Germany

Slovenia

Hungary

Luxembourg*

Austria

6 Feb 2017

W4

Estonia

Latvia

Lithuania

Finland

Spain

18 Sept 2017

W5

T2S: Migration waves


* Belgium and Luxembourg appear in two migration waves as both countries host 2 CSDs that will migrate to T2S.

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optimisation algorithms and dedicated functionalities (single cash account for multiple markets, auto-collateralisation, limit management, and others).Competition between CSDs and global custodians will increase in the coming years due to the level playing field introduced by the platform in conjunction with the CSD regulation. We also expect to see the development of true investor CSD offerings leveraging the capability to perform cross-border settlement at the same cost as domestic settlements.

Collateral movements will be easier with a common platform in Europe compared to before, and on this front ICSDs and large CSDs will compete more and more with the usual suspects operating in the collateral management space.

by Vincent Koller

What to expect from T2S?

One of the benefits of T2S should be a reduction in settlement costs. However, this will probably not materialise for some time still, due to delays in the project which may increase the settlement fees for a period, not to mention the fact that the institutions already on the platform have heavily invested, and these investments still need to be recovered.

Liquidity benefits have, however, already been recognised: major banks operating on the platform have noticed lower liquidity requirements to settle transactions which is due to highly efficient

EU Audit Reform SeriesSeries 1 – Introduction and General Background

What is the background to the EU legislation?

Following the global financial crisis, governments and regulators began questioning the role played by the audit profession, thus firmly putting the subject of audit reform on the political agenda. The European Commission subsequently made policy proposals relating to the auditing profession in November 2011 and, following a public consultation, these proposals were finally adopted by the Council and Parliament and published in June 2014. The final provisions therefore deal with a wide range of matters relating to audits.

What form does the legislation take?

The legislation is in the form of a directive and a regulation.

The directive defines a series of requirements governing every statutory audit in the EU and amends the existing Statutory Audit Directive of 2006.

The regulation contains a series of additional requirements that relate only to the statutory audits of public interest entities (PIEs). For example, the provisions on mandatory firm rotation (MFR), tendering, and the list of prohibited non-audit services (NAS) are included in the regulation and only apply to PIEs.

When will this new legislation come into effect?

The effective date is the first financial year starting on or after 17 June 2016. Luxembourg adopted the EU legislation with the law of 23 July 2016 and has opted for the most flexible of the implementation options offered to EU member states.

What are the implications for banks in Luxembourg?

As all Luxembourg banks are considered to be PIEs, all provisions of the directive and the regulation will apply: mandatory rotation of the statutory auditor and restrictions of non-audit-services provided by the statutory auditor

new format and content of audit opinion new legal audit committee requirements for certain banks

additional report to audit committee or board of directors from the statutory auditor

sanctions regime for audit committee members and other directors

Practical implications could potentially arise from: inconsistent rules across the EU due to different options chosen by the EU member states

banks headquartered outside the EU (e.g. Switzerland, China) having to implement the EU legislation for their EU subsidiaries

Want to learn more about the audit reform? Check out the next edition of Banking Briefing, which will contain more insights on audit committees and their new reporting requirements.

by Pia Schanz and Marco Weber



Contact us

Stanislas Chambourdon Partner T: +352 22 51 51 6206 E: [email protected]

Anne-Sophie Minaldo Partner T: +352 22 51 51 7909 E: [email protected]

Vincent KollerPartnerT: +352 22 51 51 7922 E: [email protected]

Pia SchanzPartnerT: +352 22 51 51 6642 E: [email protected]

Gerard LauresPartnerT: +352 22 51 51 5549 E: [email protected]

Marko WeberPartnerT: +352 22 51 51 6652 E: [email protected]

KPMG Luxembourg, Société coopérative39, Avenue John F. KennedyL-1855 LuxembourgTel: +352 22 51 51 1

www.kpmg.lu

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2016 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Banking Briefing Brochure 10-2016