Shadow banking regime: assessment of investment funds

To explain the shadow banking regime that will be enforced in the European Union by local regulators starting in January 2017.

Recognising the regulatory-induced difficulties in the process of identifying certain types of clients (investment funds) as shadow banking entities, this article provides a decision tree for the shadow banking classification process in order to aid the impacted institutions with the assessment of their clients. With this in mind, the article advises the impacted institutions on the specific steps that should be taken when assessing investment funds for shadow banking flags. Furthermore, the article provides insights into the information required to conduct the shadow banking classification process.

The regime requires the impacted institutions to assess their clients for shadow banking flags in order to impose limits on credit lines to clients classified as shadow banking entities. The US regulatory jurisdiction will be impacted over a longer term.

The recommendations in this article will be especially useful for investment funds to ensure that the relevant information is clearly stated in their prospectuses in order to avoid being classified as shadow banking entities.