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.
European Supervisory Authorities Updates
On 27 May, the Central Bank published its annual report and performance statement, which provides an overview of the Central Bank’s key activities during 2019. With respect to asset management authorisations, the annual report notes that during 2019 the Central Bank authorised 773 investment funds, in addition to granting 16 extensions to MiFID investment funds.
With respect to supervision of the funds sector, in 2019 the Central Bank issued 76 formal Risk Mitigation Programmes (RMPs) addressing matters such as reporting requirements, governance structures, due diligence processes and risk monitoring procedures. The Central Bank also concluded follow-up actions resulting from its review of performance fees during 2018.
The report also mentions the Central Bank’s supervisory review of the Irish funds industry in respect of closet indexing, in which data analysis was performed on over 2,500 actively-managed UCITS funds, and which identified 182 funds that had been closely moving with a benchmark for periods of up to five years. The Central Bank found that investors were not always given sufficient information about the funds’ investment strategy and as a result, RMPs were issued requiring UCITS to revise their fund documentation. The Central Bank notes that it will continue to engage with UCITS during 2020.
Finally, the report notes that the Central Bank’s wholesale conduct risk regulatory framework was reviewed during 2019, with specific examinations of benchmarks, best execution, client assets and client categorisation rules, which will continue into 2020.
On 20 May, the Central Bank of Ireland formally confirmed that it will apply the measures outlined in various statements issued by the European Supervisory Authorities (ESAs) in recent weeks in response to the COVID-19 pandemic. In particular, the Central Bank has confirmed its application of two recent EBA statements to MiFID investment firms subject to CRR/CRD IV, one on the application of the prudential framework on targeted aspects in the area of market risk in the COVID-19 outbreak, and another on additional supervisory measures in the COVID-19 pandemic.
In addition, the Central Bank has confirmed its approach to certain deadlines for bilateral margining under EMIR, in accordance with a recent ESA publication. Full details of the measures adopted are provided here.
On 30 April, the Central Bank of Ireland issued a formal notice of intention in respect of the ESMA Guidelines on stress test scenarios under the MMF Regulation, which apply from 4 May 2020. The notice states that the Central Bank will consult on the incorporation of a provision in the Central Bank’s UCITS Regulations and AIF Rulebook requiring that all managers of MMFs adhere to the Guidelines, and that in the interim, the Central Bank expects full compliance with the Guidelines from 4 May 2020.
On 20 May, ESMA issued a public statement which calls for issuers to provide updated information that is useful to investors in order to adequately reflect the current and expected impact of COVID-19 on issuers’ financial position, performance and cashflows, as well as information on the principal risks and uncertainties to which issuers are exposed.
Consequently, ESMA has called on the management, administrative and supervisory bodies of issuers, as well as their auditors, to take due consideration of a number of recommendations when preparing the interim financial reports in order to ensure that they provide comparable, relevant and reliable information, and an adequate degree of transparency to market participants. In this regard, ESMA acknowledges that some issuers may consider setting the time of publication of half-yearly financial reports later than usual (although within the prescribed period) in order to provide timely, relevant and reliable information to investors and market participants.
ESMA expects updates to the latest annual financial statements to be particularly extensive having regard to the application of IAS 34, and urges issuers to update the assessment made at year-end regarding future assumptions and other major sources of estimation uncertainty. ESMA also reminds issuers to assess whether there are indications that an asset may be impaired on the basis of a set of internal and external sources of information, and in this regard, should carefully consider the effects of COVID-19.
Furthermore, ESMA recommends that issuers provide detailed and entity-specific information in their management reports regarding:
On 3 June, ESMA published a consultation paper on guidelines on outsourcing to cloud service providers, which aims to assist firms and competent authorities to identify, address and monitor the risks and challenges arising from cloud outsourcing arrangements.
The proposed guidelines (9 in total) are directed to AIFMs, UCITS management companies, depositaries of UCITS/AIFs, central counterparties, trade repositories, investment firms, as well as other financial market participants, and address a number of areas, including:
The deadline for submissions is 1 September 2020, with a target publication date for the Final Report on the Guidelines by Q1 2021.
On 28 May, ESMA updated its Questions and Answers on the Securitisation Regulation (Regulation 2017/2402) with 21 new Q&As, and modified answers in respect of 20 Q&As. The majority of the new Q&As added provide clarification in respect of the reporting templates relating to the draft technical standards on disclosure, and also contains clarifications in respect of securitisation repositories.
On 28 May, ESMA updated its Questions and Answers on the implementation of investor protection topics under MiFID II / MiFIR, with one new Q&A being added on the subject of inducements. This Q&A clarifies that investment firms should consider acceptable minor non-monetary benefits, as defined under Article 12 of the MiFID II Delegated Directive, as also being applicable to investment or ancillary services other than portfolio management and independent investment advice. ESMA further notes that minor non-monetary benefits may be described in a generic way for all services provided.
On 28 May, ESMA updated its Questions and Answers on the implementation of EMIR, with one new Q&A (TR 54), which provides clarification on reporting of OTC derivatives by a financial counterparty on behalf of a non-financial counterparty below the clearing threshold under the EMIR Refit. The Q&A clarifies the reportable details to be provided to the financial counterparty, in addition to how the financial counterparty should proceed under certain circumstances, such as when the non-financial counterparty does not renew its Legal Entity Identifier (LEI).
With respect to market structures, the new Q&A addresses multilateral and bilateral systems, and ESMA clarifies that entities operating a system in which multiple third-party buying and selling trading interests in securities financing transactions relating to financial instruments are able to interact, should seek authorisation to operate a trading venue, with the relevant provisions applying.
With respect to transparency issues, two new and one updated Q&A provides clarification on non-equity transparency matters with respect to the default liquidity status, SSTI (size specific to the instrument), and LIS (large-in-scale) thresholds of non-equity instruments, the publication of transactions in aggregated form, and the conversion of LIS/SSTI thresholds in lots.
On 3 June, ESMA issued an updated opinion in respect of post-trade transparency requirements under MiFID II / MiFIR following a concern that an absence of clarity may result in different supervisory approaches emerging across the EU.
The opinion states that information on transactions concluded by EU investment firms that are truly OTC, i.e. bilateral transactions with non-EU firms, or that are concluded on third country trading venues that would not be subject to a certain degree of post-trade transparency should be made public in the EU through an approved publication arrangement. However, the opinion also states that the post-trade transparency requirements under Articles 20 and 21 of MiFIR should not be interpreted as requiring EU investment firms to systematically republish information in the EU about transactions concluded on third-country trading venues, which are subject to transparency provisions similar to those applicable under MiFID II / MiFIR.
The opinion goes on to set out objective criteria which must be met by third country trading venues in order to be considered as a trading venue for the purposes of the MiFIR post-trade transparency regime. To this end, the annex to the opinion sets out a list of 136 trading venues that meet such criteria, which will be updated on an ongoing basis. Investment firms concluding transactions in financial instruments on third country trading venues not included in the annex are required to make those transactions post-trade transparent through an approved publication arrangement by 3 October 2020.
Similarly, on 3 June, ESMA issued an updated opinion determining third-country trading venues for the purpose of position limits under MiFID II having regard to the question of whether a contract in commodity derivatives traded on a third-country venue should be considered as traded OTC such as to qualify as an economically equivalent OTC contract and counted towards the EU position limit regime.
The opinion states that positions limits should only apply to contracts in commodity derivatives traded on EU trading venues and to OTC contracts economically equivalent to such contracts, and that contracts in commodity derivatives traded on a third-country facility, which is considered as a trading venue, should not be regarded as OTC.
The opinion sets out objective criteria by which third-country trading facilities should be considered as a trading venue under the MiFID II position limit regime, and the annex to the opinion sets out a list of 7 venues from 4 countries which meet such criteria, for which commodity derivatives traded on such venues should not be considered as OTC trades under the position limit regime. Commodity derivatives traded on venues that are absent from the list should be considered as OTC trades for the purposes of the position limit regime from 3 October 2020.
On 4 June, ESMA published a supervisory briefing by national competent authorities (NCAs) on the cost applicable to UCITS and AIFS in order to promote supervisory convergence across the EU. This follows a survey circulated by ESMA in July 2019 among NCAs on national approaches to the supervision of cost-related provisions under the UCITS and AIFMD frameworks, prompted by an earlier statistical report which showed the significant impact of costs on the final returns for investors.
The survey addressed how NCAs supervise cost-related provisions under the UCITS and AIFMD frameworks and the obligation to prevent undue costs being charged to investors. Responses indicated that there was a lack of convergence on the interpretation of “undue costs”, which left room for regulatory arbitrage and which risked competition within the EU and created disparity in investor protection.
To address this issue, ESMA has now developed criteria to support NCAs in assessing the notion of “undue costs” and supervising the obligation to prevent undue costs being charged to investors. NCAs are now expected to require that management companies develop and periodically review a structured pricing process addressing the following issues:
NCAs are also expected to review management companies’ pricing processes as part of their supervisory activity at different stages (e.g. authorisation, on-site inspections, thematic reviews) to cover an assessment of cost disclosure and transparency, as well as business conduct, strategic and reputational risk. NCAs are also expected to ensure that management companies develop documented pricing processes that clearly set out responsibilities among the management bodies of the firm, address conflicts of interest and the risk of damage to investors, which should be periodically reviewed.
On 5 June, ESMA published the final guidelines on the MiFID II compliance function, in respect of which competent authorities and firms must make every effort to comply with. The guidelines are addressed to investment firms and credit institutions providing investment services and activities, investment firms and credit institutions selling or advising clients in relation to structured deposits, UCITS management companies in addition to external AIFMs when providing investment services and activities in accordance with the UCITS Directive and the AIFMD, and replace the previous guidelines on the same topic.
The guidelines set out requirements in respect of a number of areas, including:
On 26 May, the European Commission launched a public consultation on the protection and facilitation of cross-border investment within the EU. The consultation seeks stakeholders’ views on the strengths and weaknesses of cross-border investing in the EU in order to assess the current framework of investment protection, to include an assessment of the current rules in place, as well as dispute settlement arrangements.
The deadline for submissions is 8 September 2020.
On 22 May, the European Fund and Asset Management Association (EFAMA) submitted its response the European Commission’s consultation on the review of the MiFID II / MiFIR regulatory framework, which sought feedback on the general experience of MiFID II, as well as potential changes to investor protection rules in order to achieve the right balance between promoting investor participation, safeguarding investors’ interests, and maintaining the competitiveness of the EU’s financial services sector.
EFAMA’s response proposes revisions to the Level 1 texts only in respect of ‘semi-professional’ investor issues as well as opt-outs for professional investors for certain requirements, and considers that any required flexibility can be achieved through targeted revisions to the Level 2 framework and ESMA Q&As. Specific recommendations were provided in respect of investor protection, namely:
With respect to capital markets and infrastructures, EFAMA recommended the following:
On 27 May, EFAMA published its latest Market Insights Report and Investment Funds Industry Fact Sheet for March 2020. EFAMA notes that “despite one of the sharpest market downturns in modern history, the European investment fund industry remained resilient in March 2020”, which it attributes to, inter alia, a robust regulatory framework, central bank liquidity measures, close cooperation with supervisory bodies, market infrastructure resilience, as well as government intervention. Looking ahead, EFAMA notes that the COVID-19 pandemic has accelerated the adoption of liquidity management tools in a number of EU member states, which it considers will increase the ability of fund managers to effectively manage redemptions and liquidity risk in the future.
The report also notes that bond funds recorded the largest net outflows (€150bn), while equity and multi-asset funds suffered moderate net outflows (€60bn and €44bn respectively), which EFAMA states as suggesting that many investors avoided taking money out of these funds at low valuations. The report also notes that money market funds also suffered relatively strong net outflows (€43bn) during this period.
On 6 May, the Department of Finance opened a public consultation in respect of the exercise of national discretions under the Investment Firm Directive (Directive (EU) 2019/2034). Stakeholders’ views are sought on a number of issues, which include:
The deadline for submissions is 6 July 2020.
In May, Irish Funds published a high-level document setting out the key requirements and timeframes for funds, UCITS Management Companies and AIFMs based on adopted or draft texts currently available.
For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management.