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February 2020

Welcome to our monthly KPMG Asset Management Insights newsletter, which has been designed to keep you up to date on topical issues within the Asset Management sector.

Contents

  1. Central Bank of Ireland’s Director General of Financial Conduct announces consumer and investor protection priorities for 2020
  2. Central Bank publishes 28th Edition of UCITS Q&A
  3. Central Bank issues “Dear CEO” Letter on Securities Markets Conduct Risk
  4. ESMA launches Common Supervisory Action with National Competent Authorities on UCITS Liquidity Risk Management
  5. ESMA Publishes Strategy on Sustainable Finance
  6. ESMA Publishes The Final Report On MiFIR Alignments Following The Introduction Of EMIR Refit
  7. ESMA Advises The European Commission On Product Intervention
  8. ESMA speech re ESG factors and greenwashing
  9. ESMA Makes New Bond Liquidity Data Available
  10. ESMA Begins to Publish Q&As Received
  11. ESMA Issues Opinion on Accepted Market Practice on Liquidity Contracts
  12. ESMA Consults on Draft Technical Standards on the Provision of Investment Services and Activities in the EU by Third-Country Firms under MiFID II and MiFIR
  13. ESMA Consults on the MiFID II / MiFIR review report on the transparency regime for equity, ETFs and other related instruments
  14. ESMA Consults on the MiFIR report on Systematic Internalisers in non-equity instruments
  15. ESMA Consults on Securitisation Repository Data Completeness and Consistency Thresholds
  16. ESMA Publishes Responses to Joint Consultation Paper on PRIIPS Key Information Document
  17. ESMA Publishes Responses to its Consultation on MiFID II report on position limits
  18. EFAMA Updates Report on Fund Liquidity Risk Management
  19. EFAMA – Reasonable Market Data Costs benefits the Real Economy
  20. Other ESMA Consultations
  21. Irish Funds Industry Association opens Brussels Office
  22. Key Dates

 

1. Central Bank of Ireland’s Director General of Financial Conduct announces consumer and investor protection priorities for 2020

In a speech delivered on 15 January 2020, Derville Rowland, the Central Bank of Ireland’s Director General of Financial Conduct, outlined the Central Bank’s consumer and investor protection priorities for 2020. Noting the growing prominence of Ireland’s funds industry, Ms Rowland noted that a key priority for this year is to work closely with ESMA in order to drive supervisory convergence across the EU and raise supervisory standards. In addition, the Central Bank is currently in the process of scoping a thematic review that will build on the recent deployment of the new approach to wholesale market conduct supervision, and a letter will shortly issue to industry outlining some of the Central Bank’s key findings. 

Ms Rowland highlighted a number of particular topics that will be targeted by the Central Bank in the field of funds, in particular, UCITS:

  1. Concluding the review of how the funds sector is implementing rules and guidance relating to fund management company effectiveness; (See further the Central Bank of Ireland’s webpage on CP86)
  2. Cooperating with EU regulators and ESMA in order to complete a common supervisory action on liquidity management in UCITS.
  3. Commencing a review of UCITS’ use of securities lending.

In this respect, Ms Rowland noted that liquidity management in the funds sector was a prominent theme arising at EU and international fora; the recent experience of Woodford Asset Management has raised questions as to whether existing liquidity rules are fit for purpose. In this regard, Ms Rowland indicated that a deep-dive would be conducted on property funds in order to assess their resilience.

Having regard to firms’ AML/CTF obligations, Ms Rowland stated that 2020 would see the Central Bank focus on transaction monitoring and risk assessments. In particular, attention would be focused on IT systems for transaction monitoring in higher risk firms, and on the design and operation of risk assessments employed. Fund managers should be aware of the previous administrative sanctions imposed by the Central Bank on other financial services firms for failing to meet AML/CFT obligations under the Criminal Justice Act 2010.

Further, the Central Bank will focus on Schedule 2 Firms and Virtual Asset Service providers. In this respect, Ms Rowland reminded industry that Schedule 2 firms were obliged to register with the Central Bank following legislative changes in 2018, suggesting that the Central Bank is already aware of specific instances of non-registration.

With respect to the Central Bank’s policy priorities, Ms Rowland noted that 2020 will see a substantial review of the Consumer Protection Code, for which industry should expect to see significant consultation and engagement. In addition, having regard to the recent passing of the Sustainability Disclosure Regulation in 2019, Ms Rowland advises that the ESAs will publish a consultation paper in the coming months in respect of the relevant obligations imposed. However, it is well-advised that firms affected by this Regulation begin to consider its impact now.
 

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2. Central Bank publishes 28th Edition of UCITS Q&A

On 29 January 2020, the Central Bank published the 28th Edition of its UCITS Questions and Answers

One new Q&A has been added (ID 1094), which asks whether a UCITS can invest in Contracts for Difference (CFDs), Collateralised Loan Obligations (CLOs), Contingent Convertible Securities (CoCos) or Binary Options. The Answer provides that where a UCITS proposes to invest in such instruments, it may be subject to enhanced scrutiny at the authorisation phase with a view to ensuring that the proposal is appropriate taking into account the overall portfolio of assets proposed. This may include a review of: (i) model portfolio information; (ii) due diligence carried out in respect of the underlying portfolio; and (iii) evidence to support that the proposed investment portfolio is suitable, taking account of risk management requirements as specified under the UCITS Regulations. 

In particular, Regulation 69 of the UCITS Regulations requires that “a management company or an investment company shall employ a risk-management process which enables it to monitor and measure at any time the risk of the UCITS’ positions and their contribution to the overall risk profile of the portfolio of assets of the UCITS.” Such a risk-management process must take account of:

  • appropriate liquidity risk management processes;
  • a risk management policy that enables an assessment of the UCITS’ exposure to market, liquidity, operational, and counterparty risks, and all other risks;
  • stress tests that enable an assessment of liquidity risk under exceptional circumstances; and
  • periodic stress tests and scenario analyses to address risks arising from potential changes in market conditions that might adversely impact the UCITS.

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3. Central Bank issues “Dear CEO” Letter on Securities Markets Conduct Risk

On 21 January 2020, the Central Bank issued a “Dear CEO” Letter in relation to wholesale market conduct risk. This follows its “Industry Communication” issued in March 2019 setting out its expectations surrounding market conduct strategy, governance and organisation, risk management, culture and people, and metrics and monitoring. 

The “Dear CEO” Letter sets out key findings from the Central Bank’s engagement with 24 regulated entities, underpinned by a key theme that entities may not have been adequately identifying the market conduct risks to which they are exposed such that they are unable to appropriately mitigate and manage the risks arising. Such failure arise from:

  • Inadequate market conduct risk frameworks;
  • Inadequate governance of market conduct risk; and
  • Failure to identify the risk of market abuse. 

This letter is expected to be brought to the attention of the board at its next meeting. The letter further notes that the Central Bank’s supervisory work in 2020 will include focussing on regulated entities’ ability to identify market conduct risk; the extent to which they are sufficiently well controlled to govern wholesale market conduct risk; and the flow and escalation of conduct-specific information within and across regulated entities and groups.
 

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4. ESMA launches Common Supervisory Action with National Competent Authorities on UCITS Liquidity Risk Management

On 30 January 2020, ESMA announced the launch of a ‘Common Supervisory Action’ with NCAs on the supervision of UCITS’ managers liquidity risk management across the EU, to be conducted during 2020. The first stage of the CSA will involve NCAs requesting quantitative data from a large majority of UCITS managers in each of the Member States in order to provide an overview of supervisory risks. The second stage will entail NCAs focusing on a sample of UCITS managers and UCITS, and carrying out more in-depth analysis. 

As noted in our January Newsletter, the Central Bank has already identified the CSA as a tool to be deployed in achieving risk-based approach to supervisory convergence, one of the Central Bank’s strategic priorities for 2020-2022. 

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5. ESAs publish joint draft RTS amending Regulation on risk mitigation techniques for non-cleared OTC derivatives

On 6 February 2020, ESMA published its Strategy on Sustainable Finance. ESMA highlighted a number of key priorities for 2020, including:

  1. Completing the regulatory framework relating to transparency obligations under the Disclosure Regulation, and working with the other ESAs to produce the required technical standards;
  2. Building common approaches for incorporating ESG factors into supervisory practices of NCAs to ensure supervisory convergence, with a focus on mitigating the risk of greenwashing, preventing mis-selling practices, and fostering transparency and reliability in the reporting of non-financial information;
  3. Reporting on trends, risks and vulnerabilities (TRV) of sustainable finance by including a dedicated chapter in its TRV Report, including indicators related to green bonds, ESG investing, and emission allowance trading;
  4. Analyse financial risks from climate change, including potentially climate-related stress testing in different market segments;
  5. Participating in the EU Platform on Sustainable Finance to develop and maintain the EU taxonomy and monitor capital flows to sustainable finance; and
  6. Ensuring ESG guidelines are adhered to in the entities that ESMA supervises directly.

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6. ESMA Publishes The Final Report On MiFIR Alignments Following The Introduction Of EMIR Refit

On 7 February 2020, ESMA published its final report on the alignment of MiFIR with the changes introduced by the EMIR Refit. As readers may be aware, the EMIR Refit was not accompanied by direct amendments to MiFIR, which currently leads to a misalignment between the scope of the counterparties subject to the clearing obligation (CO) and the derivatives trading obligation (DTO). This was the subject of Consultation Paper issued in October 2019.

In its report, ESMA makes three recommendations to the European Commission:

  1. To align the scope of the clearing obligation for non-financial parties by replicating under MiFIR the changes introduced by the EMIR Refit;
  2. To align the scope of the clearing obligation for financial counterparties by replicating under MiFIR the changes introduced by the EMIR Refit. As such, references to financial counterparties subject to both obligations should be exactly the same in EMIR and MiFIR.
  3. To mirror the possibility to suspend the clearing obligation under the EMIR Refit for the trading obligation under MiFIR, adapting the criteria to trigger such a mechanism to the specificities of the DTO. 

The ESMA report will form the basis of the European Commission’s report to be submitted to the European Parliament and to the Council by 18 December 2020.

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7. ESMA Advises The European Commission On Product Intervention

On 3 February 2020, ESMA published its technical advice to the Commission on the effects of product intervention measures under MiFIR. This report outlines ESMA’s experience with new product intervention powers, taking into account the number of times the mechanism was triggered. The main elements addressed include:

  • A recommendation to the Commission to address the risk of arbitrage between MiFID firms and fund management companies where a type of financial instrument is restricted or banned under MiFID;
  • Advice on how to improve convergence and the level playing field across the EU single market through facilitating the transformation of temporary measures into permanent ones, and alternatively, extending ESMA’s powers to allow the introduction of temporary bans for 18 months (currently set at 3 months);
  • Requesting further clarification of the application of product intervention measures to firms acting on a cross-border basis;
  • Measures to facilitate the adoption by an NCA of a measure already adopted by ESMA; and
  • Requesting further clarification of the wording of Article 40(3) of MiFIR, relating to the taking of measures by NCAs or ESMA without the issuance of an opinion under Article 43, a situation ESMA considers unlikely to occur.

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8. ESMA speech re ESG factors and greenwashing

In a speech delivered on 12 February 2020, Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA), discussed on the role of regulators in tackling climate change and ensuring the need to have reliable and consistent ESG standards across the EU.

Addressing the European Financial Forum in Dublin, Mr Maijoor stated that it was a high priority for securities regulators to avoid financial instability through materialisation of climate-related risks. To this end, it was necessary to ensure that reliable and relevant information on ESG factors be available in order to assess the risks, returns and value of investments across the entire investment chain. To this end, Mr Maijoor signalled the need for a more specific rules in Europe relating to corporate disclosure principles as a means to reduce divergence currently observed in the market. Further, Mr Maijoor advocated for the development of a European standard for green bonds as a means to drive green bond issuance onto a more sustainable path.

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9. ESMA Makes New Bond Liquidity Data Available

On 31 January 2020, ESMA began to make available new data for bonds subject to pre- and post-trade requirements under MiFID II and MiFIR through its data register. The transparency requirements for bonds deemed liquid from 31 January 2020 will apply from 16 February to 15 May 2020. 

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10. ESMA begins to publish Q&As received

On 10 January 2020, ESMA announced that it will now publish a list of Questions received through its Q&A process. This comes following the coming into force of the revised ESMA Regulation requiring ESMA to set up a web-based tool to facilitate the submission of questions and publication of answers to admissible questions (similar to that already provided by the European Banking Authority’s Q&A process). The roll-out of the IT infrastructure will be done on a phased basis during the course of 2020; in the interim, questions received will be published on a spreadsheet, which will updated every Friday afternoon.

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11. ESMA Issues Opinion on Accepted Market Practice on Liquidity Contracts

On 22 January 2020, ESMA issued an Opinion on an intended Accepted Market Practice on Liquidity Contracts notified by the Italian Regulator (CONSOB). In the Opinion, ESMA states that it considers CONSOB’s Accepted Market Practice (AMP) as being compatible with Article 13(2) of the Market Abuse Regulation and Commission Delegated Regulation (2018/908).

CONSOB notified ESMA in 2019 of its intention to establish an AMP relating to liquidity contracts, which aims at replacing the existing AMP on Liquidity Enhancement Agreements (LEAs) previously established by Consob in 2009 under the Market Abuse Directive. The Opinion states that the AMP proposal contained various mechanisms aimed at addressing the potential risk of market manipulation and limiting the threats to market confidence.

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12. ESMA Consults on Draft Technical Standards on the Provision of Investment Services and Activities in the EU by Third-Country Firms under MiFID II and MiFIR

On 31 January 2020, ESMA published a consultation paper on the draft technical standards on the provision of investment services and activities in the EU by third country firms under MiFID II / MiFIR. This consultation paper arises following the introduction of changes to MiFIR and MiFID II for third country firms under the Investment Firms Regulation (Regulation (EU) No. 2019/2033) (IFR). These include new annual reporting requirements from third-country firms to ESMA, and the power to request data relating to all orders and transactions in the EU for a period of 5 years.

The proposed standards relate to the information that would be required by third countries if seeking to provide investment services within the EU, and the information to be reported annually by such firms to ESMA. This will of course be of some relevance to UK firms post-Brexit.

The deadline for submissions is 31 March 2020. ESMA expects to publish the draft technical standards and submit its final report to the European Commission in Q3 2020. 

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13. ESMA Consults on the MiFID II / MiFIR review report on the transparency regime for equity, ETFs and other related instruments

On 4 February 2020, ESMA published a consultation paper reviewing the MiFIR transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares. ESMA has stated that the objective of the consultation paper is to simplify the current trade reporting regime while also improving trade transparency available to market participants.

The consultation paper provides an analysis of the pre-trade transparency regime for equity and equity-like instruments, in particular the evolution of trading executed on- and off-venue, the split between lit and dark trading on-venue through the use of waivers, and the evolution in the use of the different types of waivers. ESMA’s analysis revealed a number of developments since 2018:

  1. Contrary to expectations, there has not been a significant change in the share of trading volume executed on-venue, on SIs and OTC, and a large portion of the trading volume is still executed off-venue;
  2. A large share of trading volume executed on-venue is not subject to pre-trade transparency;
  3. The use of waivers, mainly due to the application of the Double Volume Cap (DVC), has changed. The Large-in-scale (LIS) waiver is now the one most in use.

The key proposals under consultation include:

  1. Pre-trade transparency and waivers: In order to address the high volume of dark trading, ESMA proposes to either reduce the number of waivers available to market participants or to make the use of waivers subject to stricter requirements;
  2. The DVC mechanism: ESMA proposes to simplify the DVC regime (if maintained) and apply it in a wider and stricter way in order to further curb ‘dark trading’;
  3. The Systematic Internaliser (SI) regime:  ESMA proposes an increase of minimum quoting obligations subject to pre-trade transparency, a revised methodology for determining quoting sizes, and/or an extension of the SI obligations to illiquid instruments;
  4. The trading obligation for shares: ESMA proposes to clarify the scope of the trading obligation in respect of third-country shares.

The deadline for submissions is 17 March 2020. ESMA will consider the feedback provided during Q1/Q2 2020, and expects to publish a final report to the European Commission in July 2020.

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14. ESMA publishes report calling for strengthened supervision on suspicious transaction reporting

On 3 February 2020, ESMA published a consultation paper on Systematic Internalisers in non-equity instruments as part of its monitoring obligations under MiFIR. The monitoring focuses on the sizes at which quotes are made available to clients of the investment firm and to other market participants relative to other trading activity of the firm, and the degree to which the quotes reflect prevailing market conditions.

Section 3 of the consultation paper sets out the legal framework and gives an overview of European Systematic Internalisers (SIs). It also provides an assessment of the effectiveness of the SI regime on liquid and illiquid instruments and exposes preliminary recommendations to address possible inefficiencies. Section 4 provides the outcome of the quantitative monitoring of sizes at which quotes are made available to clients and other market participants.

The deadline for submissions is 18 March 2020. ESMA expects to publish its report to the European Commission in July 2020. 

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15. ESMA Consults on Securitisation Repository Data Completeness and Consistency Thresholds

On 17 January 2020, ESMA published a consultation paper to help understand ESMA’s expected maximum use of No Data options contained within a securitisation data submission. The proposed guidelines would apply to securitisation repositories directly supervised by ESMA under Article 10 of the Securitisation Regulation (Regulation (EU) 2017/24021).

The proposed guidelines set out an initial calibration of thresholds to be applied by securitisation repositories when verifying the completeness and consistency of disclosure templates submitted to them under the technical standards recently published by the European Commission, setting out the key elements of the disclosure obligations for securitisation transactions as well the operational standards of securitisation repositories.

The deadline for submissions is 16 March 2020 and responses are sought from securitisation repositories, providers of securitisation information to repositories, as well as trade associations, investors, and consumer groups. ESMA aims to publish the Final Report on the Guidelines as close as possible to the publication of the technical standards in the Official Journal.

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16. ESMA Publishes Responses to Joint Consultation Paper on PRIIPS Key Information Document

As noted in our December Newsletter, in October 2019 the European Supervisory Authorities (ESMA, EBA, EIOPA) issued a joint Consultation Paper on proposed amendments to existing rules on the Key Information Document for Packaged Retail and Insurance-based Investment Products (PRIIPs). This aimed to address issues already identified by stakeholders and supervisors since the inception of the KID in 2018, and to make specific changes to allow the rules to be applied to investment funds expected to be required to prepare a KID from 1 January 2022.

In particular, the Consultation Paper proposed changes in relation to the following:

  • performance scenarios which illustrate what the retail investor might receive in return from their investment;
  • information on the costs of the investment;
  • specific issues for different types of investment funds; and,
  • specific issues for PRIIPs offering a range of options for investment (‘Multi-Option Products’).

ESMA has now published all 78 responses received in respect of the consultation. ESMA has stated that the ESAs intend to conclude their review by Q1 2020 and submit final proposals to the European Commission shortly afterwards.

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17. ESMA Publishes Responses to its Consultation on MiFID II report on position limits

As noted in our December 2019 Newsletter, ESMA recently launched a consultation on the impact of position limits on liquidity, market abuse and orderly pricing and settlement conditions in commodity derivative markets, and seeks stakeholders’ views on some proposed amendments to the legal framework. ESMA’s proposals included the revision of the Technical Advice provided to the Commission on the MIFID II delegated acts on position reporting by categories of position holders, and suggested revising the minimum number and size of open positions to be met by commodity derivatives, emission allowances and derivatives thereof to be subject to weekly position reports by the relevant trading venue.

On 13 January 2020, ESMA published all 42 responses to the consultation, as provided by various stakeholders. ESMA expects to deliver its final report to the European Commission by end-March 2020. 

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18. EFAMA Updates Report on Fund Liquidity Risk Management

On 6 January 2020, European Fund and Asset Management Association (EFAMA) published its updated report on Fund Liquidity Risk Management, first published in 2016. The purpose of the updated report is to outline the practical liquidity risk management processes that fund management companies follow when setting up a fund and operate during its life, as well as to highlight existing European and international regulatory frameworks in the area of liquidity risk management. The updated report states that since 2016, the EU regulatory framework was further enhanced through policy developments, such as the EU Regulation on MMFs and ESMA’s Guidelines on Stress Testing and Liquidity Stress Testing Scenarios.

The report also makes a number of recommendations, namely:

  • Focusing on supervision and enforcement of the current EU rules in order to ensure an effective and consistent implementation of existing liquidity provisions under the UCITS Directive;
  • The making available of the full International Organization of Securities Commissions (IOSCO) suggested Liquidity Management Tools across the EU;
  • Improvement of transparency and managers’ knowledge of end-investors to enhance liquidity stress tests and ease the management of potential redemption shocks;
  • Enhancement of market liquidity for corporate bonds and small and medium cap stocks.

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19. EFAMA – Reasonable Market Data Costs benefits the Real Economy

On 10 February 2020, the European Fund and Asset Management Association (EFAMA) expressed concern about negative effects of increased market data costs, which they claim to have forced many data users to scale back data purchase to sometimes sub-optimal levels, resulting in reduced transparency, decreased levels of cross-border competition, lower market integration, less informed markets, higher costs for investors and potential higher cost of capital. As a result, EFAMA have made a number of recommendations, including:

  • Enforcement of the MiFID II and MiFIR requirements;
  • Harmonisation of fee schedules provided by trading venues;
  • Simplification of market data arrangements;
  • Harmonisation and simplification of audit procedures; and
  • The role of data vendors to be given a higher level of regulatory attention.

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20. Other ESMA Consultations

On 5 December 2019, ESMA opened a public consultation on proposed guidelines on internal controls for credit rating agencies. The deadline for submissions is 16 March 2020.

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21. Irish Funds Industry Association opens Brussels Office

On 29 January 2020, Irish Funds reported that it had opened a Brussels office, which will serve as a hub to engage with EU policymakers and legislators in Brussels and with ESMA in Paris on key EU financial services legislation and regulation. This comes at a time when total net assets in Irish domiciled funds surpassed €3tn for the first time.

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22. Key Dates

Fund managers should keep in mind the following upcoming dates:

  • 19 February 2020 – Deadline for updated KIIDs to be filed with the Central Bank. As always, UCITS mangers should consult the ESMA Q&As for specific guidance.
  • 28 February 2020 – Annual Fund Profile return for Irish-authorised sub-funds. Central Bank Guidance available online.
  • 28 February 2020 – Likely submission date for investment funds to submit their annual PCF confirmation.
  • 31 March 2020 – Following the Central Bank of Ireland’s thematic review of Irish UCITS and closet indexing, a “Dear CEO” letter was issued on 18 July 2019. Further to the key findings identified, the Central Bank of Ireland required Boards of UCITS and their managers to ensure the following when considering the accuracy and content of its Prospectus and KIID, with any necessary updates to be submitted to the Central Bank by 31 March 2020:
  1. Compliance with the applicable legislative requirements and guidance, including ESMA Q&As;
  2. Consistency of marketing material and information contained in the Prospectus and KIID;
  3. Disclosure of benchmark constraints in the KIID and Prospectus (where applicable);
  4. Disclosure in KIID and Prospectus of performance targets under which the fund is managed (where applicable).The list can be viewed here.

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Contact us for more

For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management

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