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.
On 17 April, in recognition of the challenges facing firms and market participants arising from COVID-19, the Central Bank of Ireland introduced a number of flexibility measures for securities markets, investment management, investment firms and fund service providers. These measures include extension periods within which specific returns may be submitted, including annual audited accounts, capital adequacy returns, and management/interim accounts. The announcement specifies, however, that where firms are in a position to meet existing reporting deadlines, they should continue to do so.
The announcement further specifies that in line with the EBA statement on supervisory reporting and Pillar 3 disclosures in light of COVID-19 issued on 31 March, MiFID investment firms subject to the Capital Requirements Regulation and Directive are to advise the Central Bank of any delay in the publication of Pillar 3 reports, and to assess the need for additional Pillar 3 disclosures that may be necessary to properly convey a firm’s risk profile in the context of challenges brought about by COVID-19.
With respect to the requirement for investment funds and fund services providers to submit assurance reports concerning arrangements for the safeguarding of client assets or investor money, the Central Bank will allow flexibility for such submissions falling due from April to July 2020 inclusive, provided that such assurance reports are submitted within two months of the original reporting obligation due date. Firms should engage with the Central Bank when seeking to rely on this extension.
Similar extensions are made available for UCITS and AIF firms for annual and semi-annual financial statements to be submitted, provided that the Central Bank and investors are promptly notified of the delay and the reasons for same, in addition to the estimated publication date. This follows a public statement issued by ESMA on 9 April regarding the publication of periodic accounts by fund managers in which it encouraged national competent authorities to apply a risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of the sectoral acts in a proportionate manner in respect of the publication of annual and half-yearly reports.
Against the above background, the Central Bank further advises that it will require additional targeted information to be submitted by investment firms, investment funds and fund service providers during the COVID-19 period, and expects such firms to continue to engage constructively to respond to requests in an expedient manner. Where investment firms and fund service providers are subject to risk mitigation programmes (RMPs), the Central Bank has advised that it expects firms who are in a position to meet existing RMP implementation dates to continue to do so, and that firms should engage directly with supervisors where difficulties arise.
Finally, the Central Bank has advised that it will delay updates to its domestic regulatory policy frameworks in respect of investment firms, fund service providers and investment funds during the COVID-19 period, including the publication of its feedback statement arising from CP130 on the Treatment, Correction and Redress of Errors in Investment Funds.
On 14 May, the Central Bank of Ireland’s Director of Financial Regulation, Policy and Risk, Gerry Cross, delivered an address to the Department of Finance and the European Commission on the latter’s recent consultation on its digital finance strategy for Europe. Acknowledging the far-sighted role taken by the European Commission in this area in respect of the initiatives undertaken, Mr Cross set out some of the Central Bank’s own priorities in the area of FinTech and technological innovation, including:
The deadline for submissions on the Commission’s consultation is 26 June 2020.
Further to the Central Bank of Ireland’s announcement on 17 April, Patricia Dunne, Head of the Central Bank’s Securities and Markets Supervision Division, published a letter concerning fund management companies (to include any self-managed investment company which is itself regulated as an AIFM or UCITS management company) to provide additional information on flexibility measures. The letter specifies that the content of the letter to fund management companies in August 2019 on the importance of ongoing effective liquidity management and compliance with regulatory obligations remains fully applicable in the context of COVID-19. The Central Bank further specified its expectation that UCITS and AIFs assess whether appropriate liquidity management tools are place, to include account dealing frequency, investment strategy, portfolio composition, and the investor profile of the fund.
The letter also sets out the Central Bank’s expectation that the potential for breaches of the UCITS Regulations or AIF Rulebook be minimised during the COVID-19 period; where breaches do occur, they should be reported in the ordinary way and remedied as a priority objective. In addition, fund managers should consider informing its investors of such breaches by way of disclosure in financial statements or by way of separate communication. Furthermore, with respect to investor disclosures generally, where fund management companies have identified a risk (or potential risks) that may materially affect the investment made by an investor not already covered by an existing prospectus disclosure, these should be brought to the attention of investors in prospectus documentation.
Finally, recognising the potential for delays in finding replacement directors during the COVID-19 pandemic, the Central Bank advises that fund management companies and funds should refer to the Central Bank’s website for information on addressing PCF vacancies, as well as to engage with the firm’s relevant supervisor.
In an interview with the Business Post published on 12 April, the Governor of the Central Bank, Gabriel Makhlouf, stated that it was the Central Bank’s intention to examine funds more generally following the commencement of a deep dive review into property funds during 2019.
Mr Makhlouf stated that the Central Bank was engaged in managing the impact of the COVID-19 crisis on funds and on volatility, but also wished to examine the size of the funds sector and the risks it poses to financial stability. In particular, Mr Makhlouf stated that he wished to understand the resilience of non-bank financial intermediation to large shocks, and indicated a preference for the potential development of a macroprudential framework for the non-bank sector over the long-term.
(i) Extension of consultation on MiFIR Transparency regime for non-equity instruments: As noted in the March Newsletter, on 10 March 2020 ESMA launched a consultation reviewing the transparency regime for non-equity instruments and the trading obligation for derivatives under MiFIR. The purpose of the proposals within the consultation paper is to simplify the current trade reporting regime by creating a uniform set of rules while trying to improve the overall trade transparency available to market participants for non-equity instruments. On 9 April, ESMA announced that the deadline for submissions has now been extended to 14 June 2020 in light of the ongoing COVID-19 pandemic.
(ii) ESAs consult on environmental, social and governance disclosure rules: On 23 April, the European Supervisory Authorities issued a joint consultation paper in respect of the proposed environmental, social and governance (ESG) disclosure standards for financial market participants, advisers and products. The draft regulatory technical standards concern disclosure obligations at an entity and product level under the Sustainable Finance Disclosure Regulation (SFDR), which applies to AIFMs and UCITS management companies. The standards aim to strengthen protection for end-investors, improve disclosures to investors from a broad range of financial market participants and financial advisors, as well as to improve disclosures to investors in respect of financial products.
Among the disclosure obligations concerned include:
The deadline for submissions is 1 September 2020.
(iii) Consultation on SME growth markets: On 6 May, ESMA launched a consultation on the functioning of the small and medium-sized enterprises’ growth market regime in the EU, which contains draft technical standards relating to liquidity contracts and separate technical standards on insider lists for SME growth markets issuers. The consultation paper first provides an assessment of the current state of play of the SME growth market regime under section 3, and sets out proposals on suggested initiatives to improve the attractiveness of the growth market regime from issuers’, investors’ and venues’ perspectives in the context of MiFID II, which are contained under section 4.
The draft RTS on liquidity contracts sets out the elements of such contracts, limits to the resources allocated to the performance of such contracts, obligations of liquidity providers, in addition to transparency obligations. The draft ITS on insider lists sets out the format for drawing up and updating insider lists for issuers whose financial instruments are admitted to trading on an SME growth market.
The deadline for submissions is 15 July 2020.
On 9 April, ESMA issued a public statement postponing the application of the annual non-equity transparency calculations and the calculations for the systematic internaliser test for derivatives, ETCs, ETNs, emission allowances and structured finance products (SFPs) under MiFID II, initially scheduled for publication on 30 April and 1 May. In recognition of the difficulties posed by the COVID-19 pandemic, publication of these calculations are postponed until 15 July 2020, and their application postponed to 15 September 2020 (originally 1 June 2020). ESMA also advised that up to and including 14 September 2020, the transitional transparency calculations will continue to apply. With respect to bonds, the application and publication of the annual transparency calculations remains unchanged and will continue to apply from 1 June 2020.
On 15 April, ESMA renewed five positive opinions originally issued during March 2020 agreeing to emergency restrictions on short selling on transactions which might constitute or increase net short positions on shares traded on regulated markets in Austria, France, Belgium, Spain and Greece, as well as to related instruments relevant for the calculation of the net short position. The restrictions remained in effect until 18 May 2020, and were not renewed further.
On 17 April, ESMA published a Q&A (Question 18) providing guidance to issuers on the application of ESMA Guidelines on Alternative Performance Measures in the context of the COVID-19 pandemic. The Q&A encourages issuers to use caution when adjusting Alternative Performance Measures (APMs) and/or when including new APMs solely with the objective of depicting the impacts that COVID-19 may have on their performance and cashflows. The Q&A provides that issuers should ensure that these measures provide a fair review of the development and performance of the business and of the position of the issuer, and do not provide an incorrect depiction of the performance of the issuer which would give a misleading signal on the price of the corresponding financial instruments.
ESMA reminds issuers that before making adjustments to previously used APMs or including new APMs, they should carefully assess whether these would provide transparent and useful information to the market, improve comparability, reliability and/or comprehensibility of APMs. ESMA notes that it may not be appropriate to include new APMs or to adjust previously used APMs when the impacts of COVID-19 have a pervasive effect on the overall financial performance, position, and/or cash flows of an issuer, and urges issuers to include narrative information in their communication documents in order to explain the impact or expected impact of COVID-19 on operations and performance, and the measures adopted to address COVID-19 impacts.
On 9 April, in recognition of the difficulties encountered by interest rate benchmark administrators and contributors in fulfilling the external audit requirements under the Benchmarks Regulation (BMR), ESMA issued a public statement in which it clarified that it expects national competent authorities (NCAs) not to prioritise supervisory actions against such entities relating to the timeliness of fulfilling external audit requirements where these are carried out by 30 September 2020. Further, ESMA encourages NCAs to adopt a risk-based approach in their day-to-day enforcement of the BMR.
On 29 April, ESMA issued a ‘No Action Letter’ in respect of the new environmental, social and governance (ESG) disclosure requirements for benchmark administrators under the BMR, which apply from 30 April 2020. The letter states that in ESMA’s opinion, national competent authorities should not prioritise supervisory or enforcement action against administrators regarding these new requirements until the Delegated Acts apply. On the same date ESMA also issued an Opinion addressed to the European Commission, stating its view that the Delegated Acts under the BMR, which set down the minimum content and format of the explanation on how key elements of methodologies reflect ESG factors for each benchmark, should be adopted without delay in order to avoid divergences of approach across the EU.
On 4 May, the European Supervisory Authorities published joint draft Regulatory Technical Standards amending the Delegated Regulation on risk mitigation techniques for non-centrally cleared OTC derivatives (bilateral margining) under EMIR to incorporate a one-year deferral of the two implementation phases of the requirements in order to provide additional operational capacity for counterparties to respond to the effects of COVID-19. This follows the announcement on 3 April by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commission (IOSCO) to defer by one year the deadline for completing the final two implementation phases of the bilateral margin requirements.
The draft RTS aims to facilitate an internationally coordinated approach on how to adapt the implementation of the bilateral margin requirements, and would result in covered counterparties with an aggregate average notional amount of non-centrally cleared derivatives above €50 billion becoming subject to the requirement to exchange initial margin from 1 September 2021, with covered counterparties with an aggregate average notional amount of non-centrally cleared derivatives above €8 billion becoming subject to the requirement from 1 September 2022. The draft RTS have now been sent to the European Commission for endorsement by way of Delegated Regulation.
On 6 May, ESMA issued a reminder to firms that are subject to MiFID II conduct of business requirements following a surge in trading by retail clients. In such highly uncertain market conditions, ESMA draws investment firms’ attention to their conduct of business obligations under MiFID II and considers that firms have even greater duties when providing investment or ancillary services to investors, especially when they are new to investing or have limited investment knowledge or experience. In this regard, ESMA reminds firms of their obligation to act honestly, fairly and professionally in accordance with the best interests of their clients when providing investment or ancillary services and to comply with all relevant MiFID II conduct of business and related requirements, in particular with respect to product governance, information disclosure, suitability and appropriateness requirements.
On 13 May, ESMA published a thematic report on collateralised loan obligations’ credit ratings in the EU. This report follows a review launched by ESMA in May 2019 in respect of the arrangements adopted by credit rating agencies (CRAs) in order to assign and monitor credit ratings on CLO instruments issued and rated in the EU. The report reveals a number of observations on risks relating to:
The report also notes that while it is too early to assess the aggregated consequences of the COVID-19 pandemic, ESMA expects CRAs to continue to perform regular stress testing simulations and to provide market participants with detailed information on the sensitivity of CLO credit ratings to key economic variables. Reverse stress testing may also provide relevant information in this regard.
On 14 May, ESMA published a statement expressing support for the recommendation issued by the European Systemic Risk Board (ESRB) aimed at addressing the COVID-19 pandemic from a macroprudential perspective that competent authorities across the EU, coordinated by ESMA, undertake focused supervisory engagement with investment funds with significant exposure to corporate debt and real estate as being less liquid asset classes. The ESRB action complements ESMA’s ongoing coordination role having regard to the common supervisory action on UCITS liquidity risk management, launched in January 2020, which is being undertaken on the basis of a common methodology, with competent authorities sharing knowledge and experience with ESMA on the manner in which UCITS liquidity risk management is being supervised in each jurisdiction.
On 14 May, ESMA published its first complete risk dashboard for Q1 2020. The assessment maintains the same ratings levels per the risk update published on 2 April 2020, and notes that during Q1 equity markets saw very large corrections due to the combination of the COVID-19 pandemic and existing valuation risks. Despite high levels of uncertainty and a worsening economic outlook, the report notes that markets have seen a rebound in light of the policy interventions made at an EU level. The report goes on to note that ESMA foresees a prolonged period of risk to institutional and retail investors of further, and potentially significant, market corrections and very high risks across all areas within ESMA’s remit. These risks will be driven by the economic impact of the pandemic, and the occurrence of any additional external events in the already fragile global environment.
On 7 May, the European Commission launched a consultation on its action plan for a comprehensive EU policy on preventing money laundering and terrorist financing. The action plan reflects the growing consensus that the AML/CFT framework requires significant improvement, notwithstanding recent legislative changes, in particular with respect to the application and enforcement of rules. The Commission notes that it intends to implement a comprehensive AML/CFT policy and framework by 2021, which it considers necessary to complete the implementation of the Banking and Economic and Monetary Unions. The action plan proposed sets out how the Commission intends to deliver on its objective, through six pillars, namely:
The deadline for submissions is 29 July 2020.
On 8 April, the European Fund and Asset Management Association (EFAMA) issued a statement on the European Commission’s recent consultation on the Renewed Sustainable Finance Strategy. Although EFAMA states that a detailed response will be filed by the consultation deadline, EFAMA’s initial reaction notes the following:
The consultation closes on 15 July 2020.
On 21 April, EFAMA published its latest monthly Investment Fund Industry Fact Sheet for February 2020. EFAMA notes that “despite a turnaround in flows experienced by equity funds, net sales of UCITS and AIFs remained positive in February”, with COVID-19 breaking out at the end of that month. Net sales of UCITS and AIFs in February totalled €42bn, down from €137bn in January. While UCITS recorded net inflows of €25bn (€108bn in January), AIFs recorded net inflows of €17bn (€29bn in January). Total net assets of UCITS and AIFs decreased by 2.9% to EUR 17.5tn.
On 23 April, EFAMA issued a public statement which states that the current PRIIP KID remains fundamentally flawed, and provides retail investors with misleading information. EFAMA asserts that there is an inherent conflict in the KID to provide clear, fair and non-misleading information as well as comparability between widely different investment products. EFAMA notes that the current framework is misleading for retail investors, and is therefore damaging for the industry and the UCITS brand. Consequently, EFAMA considers that an urgent review of the current PRIIP KID is crucial to protect retail investors, identifying three main areas for improvement, namely:
While EFAMA states that it is confident that most issues can be successfully addressed through Level 2 technical changes, it is concerned that if the ESAs’ final report concludes that necessary improvements are not possible within the current Level 2 constraints, then a targeted Level 1 review becomes even more urgent.
On 27 April, EFAMA published its feedback statement on the European Commission’s consultation on a classification system for sustainable economic activities as part of the EU’s energy targets for 2030 and 2050. The feedback statement notes that the availability, quality and reliability of publicly available ESG data on investee companies remains a key challenge for which a public EU-central database has the potential to alleviate over the short and long-term horizons. In this respect, EFAMA considers that the revision of the Non-Financial Reporting Directive should be given priority within the EU’s sustainable finance strategy, and should not be delayed despite the existence of challenges posed by COVID-19. EFAMA also considers that more clarity and further work is required on certain aspects of the Technical Expert Group on sustainable finance proposals in order to ensure that an EU taxonomy can be applied and work in practice, e.g. in respect of sustainability-related disclosures and in addressing cliff-edge effects.
All feedback submitted to the European Commission can be viewed here.
For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management.