Asset Management & Investment Funds: EU & International Developments - Mar 2020

COVID-19

ESMA recommends action by financial market participants for COVID-19 impact​​

Following discussion of the market situation and contingency measures taken by supervised entities in respect of COVID-19, the European Securities and Markets Authority (ESMA) made the following recommendations to financial market participants:

  • Business continuity planning – all financial market participants, including infrastructures should be ready to apply their contingency plans, including deployment of business continuity measures, to ensure operational continuity in line with regulatory obligations
  • Market disclosure – issuers should disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation
  • Financial reporting – issuers should provide transparency on the actual and potential impacts of COVID-19, to the extent possible based on both a qualitative and quantitative assessment on their business activities, financial situation and economic performance in their 2019 year-end financial report if these have not yet been finalised or otherwise in their interim financial reporting disclosures
  • Fund management – asset managers should continue to apply the requirements on risk management, and react accordingly

ESMA, with the National Competent Authorities (NCAs), states that it continues to monitor developments in financial markets as a result of the COVID-19 situation and is prepared to use its powers to ensure the orderly functioning of markets, financial stability and investor protection.​

ESMA requires net short position holders to report positions of 0.1% and above

ESMA issued a decision, ​temporarily requiring the holders of net short positions in shares traded on an EU regulated market to report positions of 0.1% and above. Net short positions holders must notify the relevant NCA if the position reaches or exceeds 0.1% of the issued share capital after the entry into force of the decision. 

ESMA considers that lowering the Short Selling Regulation reporting threshold is a precautionary action that, under the exceptional circumstances linked to the ongoing COVID-19 pandemic, is essential for authorities to monitor developments in markets. The measure applies immediately (for a period of three months), requiring net short position holders to notify NCAs of their relevant positions as at the close of the trading session from Monday 16 March 2020. The temporary transparency obligations apply to any natural or legal person, irrespective of their country of residence. They do not apply to shares admitted to trading on a regulated market where the principal venue for the trading of the shares is located in a third country, market making or stabilisation activities.

Cross-border distribution of funds

ESMA launched a consultation on 31 March 2020 on the standard forms, templates, and procedures that NCAs should use to publish information on their websites to facilitate the cross-border distribution of funds.

Readers will recall the European Directive and Regulation for the cross-border distribution of funds (CBDF) which came into force on 1 August 2019 and which was discussed in detail in our In focus paper on the Harmonisation of cross-border distribution of UCITS and AIFs.

Regulation (EU) 2019/1156  mandates ESMA to draft implementing technical standards (ITS) with standard forms, templates and procedures for the publication and notifications that NCAs make of marketing requirements applicable within their jurisdiction.

The standard information should cover:

  • national laws, regulations and administrative provisions governing marketing requirements for AIFs and UCITS and the summaries thereof
  • regulatory fees and charges they levy for carrying out their duties in relation to the cross-border activities of fund managers
  • central database listing funds marketed on a cross border basis

This consultation will close on 30 June 2020 and ESMA aims to finalise the ITS for submission to the European Commission by 2 February 2021.

The consultation will be of interest to AIFMs, UCITS management companies, UCITS & AIF trade associations, distributors of UCITS and AIFs and institutional and retail investors investing into UCITS, AIFs and their associations.

Money Market Fund reporting deadline delayed to September 2020

ESMA announced​ that the first reports by money market funds (MMF) managers under the MMF Regulation should be submitted in September 2020. The original date for submissions was April 2020. This change in timeline follows market feedback which triggered an update to the reporting schemas and guidelines. These updates will be published by ESMA shortly.  

Article 37 of MMF Regulation requires MMF managers to submit data to NCAs, who will then transmit this to ESMA.

The reference period for the first reporting is still envisaged for Q1 2020. That means that the MMF managers will have to report in September 2020 quarterly reports for both the Q1 and Q2 reporting periods.

ESMA guidelines on stress test scenarios under MMF Regulation

On 3 March 2020, ESMA issued the official translations of its guidelines on stress test scenarios under the MMF Regulation. Effectively, the guidelines will apply from 3 May 2020. The final version of the guidelines was published in July 2019.

The guidelines establish common reference parameters of the stress test scenarios that MMFs or MMF managers should include in their stress scenarios. MMFs and MMF managers must measure the impact of the common reference stress test scenarios specified in the guidelines, and send results using the reporting template to the relevant NCAs with their first quarterly reports.

Please speak with your usual contact on the A&L Goodbody Asset Management & Investment Funds team if you would like more information on these requirements.

ESMA consultation on guidance to address leverage risk in the AIF sector

​ESMA launched a public consultation on its draft guidance to address leverage risks in the AIF sector. The consultation is part of the ESMA response to the recommendations of the European Systemic Risk Board (ESRB) in April 2018 to address liquidity and leverage risk in investment funds.

ESMA's draft guidelines aim to promote supervisory convergence in the way NCAs assess how the use of leverage within the AIF sector contributes to the build-up of systemic risk in the financial system, as well as how they design, calibrate and implement leverage limits.

The ESRB requested ESMA to provide guidance on Article 25 of AIFMD and, among other things, recommended ESMA to provide:

  • guidance on the framework to assess the extent to which the use of leverage within the AIF sector contributes to the build-up of systemic risk in the financial system (guidelines on the assessment of leverage-related systemic risk)
  • guidance on the design, calibration and implementation of macroprudential leverage limits (guidelines on leverage limits)

Stakeholders' input is sought through specific questions, which are summarised in Annex I. The proposed guidelines are set out in Annex II. The consultation will close on 1 September 2020.  

Steven Maijoor, ESMA Chair, said:

"In situations when financial markets are under severe stress, highly leveraged alternative investment funds can further amplify systemic risk. Considering the size of the investment fund sector, achieving supervisory convergence in NCAs' approaches to monitoring and regulating the use of leverage by alternative investment funds is of the utmost importance."

"Our proposed Guidelines address the assessment of leverage-related systemic risk and aim at ensuring that NCAs adopt a consistent approach when assessing whether the condition for imposing leverage-related measures are met."

European Commission report on consumer testing to improve PRIIPs KID

The European Commission published a final report  on consumer testing of the key information document (KID) under the PRIIPs Regulation.

The report sets out the findings from an online consumer testing exercise involving over 7,600 participants in five countries using ten different versions of the KID for three different types of PRIIPs (investment funds, structured products and insurance-based investment products). The versions included potential future performance scenarios, past performance information and illustrative scenarios.

The results of the exercise will be used in the European Supervisory Authorities' (ESAs) review of the PRIIPs Delegated Regulation. UCITS are currently exempt from the obligation to produce a PRIIPs KID until 31 December 2021.

HM Treasury consultation on marketing and overseas funds regime

On 11 March 2020, HM Treasury published a consultation paper ​on fund marketing and an overseas funds regime (OFR).

The consultation contains the government's proposal for a new process to allow investment funds that are domiciled overseas to be marketed and sold to UK investors.

The proposed OFR will be based on the principle of equivalence and will introduce two new regimes for retail investment funds and money market funds (MMFs). The consultation sets out how the OFR will operate, including:

  • how equivalence determinations will be made
  • the process by which investment funds will be registered and recognised
  • how the UK regulatory framework relating to marketing and financial promotions will apply to overseas funds in the OFR

The consultation also contains proposed amendments to section 272 of the UK Financial Services and Markets Act 2000.​​

 AML / CTF

EBA consultation on revised guidelines on money laundering and terrorist financing risk factors

The EBA deadline for its consultation on revised guidelines on money laundering and terrorist financing risk factors has been extended to 6 July 2020, due to the COVID-19 situation. The EBA will hold a public hearing on the draft Guidelines, via conference call, on 15 May 2020 from 2-4pm Paris time.

FATF

On 6 March 2020, the Financial Action Task Force (FATF) published guidance on digital identity. The guidance is intended to clarify how digital ID systems, such as biometric technology, the use of smart phones and distributed ledger technology can be used for customer due diligence. The FATF states that non-face-to-face customer-identification and transactions that rely on reliable, independent digital ID systems with appropriate risk mitigation measures in place, may present a standard level of risk, and may even be lower-risk.

The FATF updated its identified jurisdictions with strategic deficiencies in their frameworks to combat money laundering and the financing of terrorism and proliferation: high-risk jurisdictions subject to a call for action and jurisdictions under increased monitoring.   

For more information in relation to this topic please contact your usual contact on the A&L Goodbody Asset Management & Investment Funds team.

Date published: 1 April 2020