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August 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.


Central Bank of Ireland Updates

European Supervisory Authorities Updates

Other Articles

Central Bank of Ireland Updates

1. Central Bank of Ireland issues Notice of Intention in relation to application of guidelines on liquidity stress testing in UCITS and AIFs and updates Q&As

On 13 July the Central Bank of Ireland issued a Notice of Intention in respect of ESMA’s final report on guidelines on liquidity stress testing on UCITS and AIFs published in September 2019. The guidelines apply from 30 September 2020, and are supplementary to the requirements on stress testing within the AIFMD and UCITS Directives, and seek to promote supervisory convergence and provide guidance on the practices to be followed by fund management companies for the stress testing of liquidity risk.

The Central Bank advises that it will consult on the incorporation of a requirement in the Central Bank’s UCITS Regulations and AIF Rulebook that UCITS management companies, AIFMs and depositaries adhere to these guidelines. In the interim, the Central Bank expects full compliance with the guidelines from 30 September 2020.

Following the publication of its Notice of Intention, the Central Bank also updated its UCITS and AIFMD Q&As. The 34th Edition of Questions and Answers on AIFMD has been updated to include two new questions on liquidity stress testing (LST):-

  • ID 1131 provides that LST should generally be performed on at least a quarterly basis, with the determination of a higher or lower frequency to be based on the fund’s characteristics, and the reasons for such a determination to be recorded in the liquidity stress testing policy.
  • ID 1132 provides that AIFMs should conduct LST at the design phase of the fund’s lifecycle in order to adequately understand the potential risks that may impact the AIF in various market conditions throughout its lifecycle.

The 29th edition of Questions and Answers on UCITS has also been updated to include three new questions on LST:-

  • ID 1095 states that the liquidity stress testing policy should be documented within the UCITS Risk Management Process, although it may be appropriate in some circumstances for the liquidity stress testing policy to be documented within the risk management policy of the UCITS management company.
  • ID 1096 states that LST should generally be performed on at least a quarterly basis, with the determination of a higher or lower frequency to be based on the fund’s characteristics and the reasons for such a determination to be recorded in the liquidity stress testing policy.
  • ID 1097 states LST should be conducted at the design phase of the fund’s lifecycle in order to adequately understand the potential risks that may impact the UCITS in various market conditions throughout its lifecycle.

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European Supervisory Authorities Updates

2. ESMA promotes consistent application of prospectus disclosure requirements

On 15 July, the European Securities and Markets Authority (ESMA) published the final guidelines on disclosure requirements under the Prospectus Regulation, which is of relevance to listed closed-ended funds. These guidelines provide guidance on the disclosure of both financial and non-financial information in the prospectus and seek to ensure that market participants have a uniform understanding of the relevant disclosures required in the various Annexes included in the Commission Delegated Regulation.  The guidelines address a range of financial and non-financial topics, including:-

  • pro-forma financial information;
  • working capital statements;
  • capitalisation and indebtedness;
  • profit forecasts and estimates;
  • historical financial information;
  • operating and financial review;
  • options agreements; and
  • collective investment undertakings.

The guidelines will apply from two months after the date of their publication on ESMA’s website in all official languages of the EU

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3. ESMA, Irish Funds and EFAMA respond to European Commission consultation on renewed sustainable finance strategy

On 15 July, ESMA published its response to the Commission’s consultation on the renewed sustainable finance strategy. On 6 February 2020, ESMA published its own Strategy on Sustainable Finance, which highlighted a number of key priorities for ESMA 2020, including:-

  • completing the regulatory framework relating to transparency obligations under the Disclosure Regulation;
  • building common approaches for incorporating ESG factors into supervisory practices of NCAs to ensure supervisory convergence;
  • reporting on trends, risks and vulnerabilities (TRV) of sustainable finance by including a dedicated chapter in its TRV Report;
  • analysing financial risks from climate change;
  • participating in the EU Platform on Sustainable Finance to develop and maintain the EU taxonomy and monitor capital flows to sustainable finance; and
  • ensuring ESG guidelines are adhered to in the entities that ESMA supervises directly.

ESMA focused on a number of aspects in its response to the Commission’s consultation, including:-

  • the lack of a standardised ESG disclosure regime for issuers;
  • the lack of a legally-binding definition for ESG ratings, with no legal requirements to ensure transparency of underlying methodologies;
  • the need for ESG benchmarks that encompass the entire ESG spectrum; and
  • the need to establish third-party verifiers of EU green bonds.

On 15 July, the Chairs of the European Supervisory Authorities (ESMA, EBA and EIOPA) issued a joint letter to the Commission with common messages deemed to be of particular importance for Europe’s strategy in the area of sustainable finance. Among the issues identified were the need to enhance easy access to sustainability data and the establishment of a single EU data platform, the need to support a more robust regulatory framework to promote risk management and long-term financial decision making, and the role of ESG ratings, benchmarks and ecolabels.

Similarly, on 15 July, Irish Funds responded to the consultation, highlighting the opportunities of strong investor demand for ESG products, the European Green Deal and the correlation between ESG products and return. Irish Funds’ response notes what it considers as the three main challenges for mainstreaming sustainability in the financial sector over the coming 10 years, namely:-

  • the availability of high quality consistent ESG data reporting, which may be prohibitive for small- to medium-sized managers;
  • the ability of investee companies and the wider economies to transition, requiring a whole-economy and cross-sectoral approach to transition; and
  • the implementation of the EU sustainable finance regime and the need to allow sufficient time to allow the industry to do this.

On 15 July, EFAMA also published its reply to the Commission’s consultation, reiterating its support for the objectives of the EU Green Deal and making a number of recommendations on the Renewed Sustainable Finance Strategy, which include:-

  • improving the availability of ESG data and the relevance of non-financial reporting, which is crucial for asset managers to satisfy investors’ demands and meet ESG regulatory requirements. EFAMA suggests that an EU-wide ESG database be established to alleviate any data gaps over the short- to medium-term.
  • ensuring that the preferences of retail investors are taken into account, and that consideration of adverse impacts of investment decisions on sustainability should only be required where this is in line with end-investors’ preferences;
  • enhancing the transparency of sustainability research and ratings, reducing reliance on third-party providers;
  • prioritising the finalisation of ‘Do No Significant Harm’ criteria instead of the development of a ‘Brown Taxonomy’, as ESMA believes that the DNSH criteria will de facto fulfil the purpose of a system that identifies harmful activities, and that a separate and exhaustive list would significantly increase complexity; and
  • promoting long-termism and investor engagement with a proper implementation of the Shareholder Rights Directive II through national transposition.

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4. ESMA publishes first review reports on the MiFIR transparency regime

On 16 July, ESMA published two final reports reviewing provisions of the MiFID II/MiFIR transparency regime. The first report relates to the MiFIR transparency regime for equity instruments and contains proposals for targeted amendments on transparency obligations for trading venues and the double volume cap mechanism, as well as other recommendations for transparency provisions, such as the trading obligation for shares and the transparency provisions that apply to systematic internalisers in equity instruments. The second report concerns pre-trade transparency obligations applicable to  systematic internalisers in non-equity instruments.

Both reports contain a number of recommendations, which include:-

  • restricting the use of the reference price waiver to larger orders;
  • increasing the minimum quoting obligations and a revised methodology for determining the standard market sizes relevant for the quoting by internalisers;
  • simplifying the regime and transforming the mechanism into a single volume cap with the deletion of the trading venue threshold of 4%; and
  • improving transparency by lowering the EU-level threshold.

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5. ESMA clarifies external support within the meaning of Article 35 of the Money Market Funds Regulation

On 9 July, ESMA issued a public statement on external support under Article 35 of the Money Market Funds Regulation against the backdrop of the impact of COVID-19 on the EU’s financial markets and the significant liquidity challenges faced by certain money market funds. ESMA’s statement was issued in order to coordinate the supervisory approaches of national competent authorities (NCAs) in light of these challenges, as well as future liquidity challenges, and notes that MMFs may enter into transactions with third parties, including affiliated or related parties, provided the requirements of Article 35 of the MMF Regulation are met. 

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6. ESMA provides guidance on waivers from pre-trade transparency requirements

On 17 July, ESMA published an opinion on the assessment of pre-trade transparency waivers for equity and non-equity instruments. The opinion replaces the former CESR guidance and ESMA opinions on waivers from pre-trade transparency under MiFID I. In particular, the opinion address the application of:-

  • large-in-scale waiver (equity/non-equity instruments);
  • order management facility waiver (equity/non-equity instruments);
  • negotiated transactions waiver (equity instruments);
  • size specific to the financial instrument (SSTI) waiver (non-equity instruments);
  • combination of waivers (equity/non-equity instruments);
  • package waiver (non-equity).

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7. ESMA advises market participants to continue preparations for end of UK-transition period

On 17 July, ESMA urged financial market participants to finalise preparations and implement suitable contingency plans in advance of the end of the UK transition period on 31 December 2020. ESMA confirmed that the Memoranda of Understandings agreed on 1 February 2019 on cooperation and information exchange with the UK’s Financial Conduct Authority remain valid and will come into effect at the end of the transition period. ESMA notes that from 1 January 2021, financial market participants whose activity might be impacted should have fully implemented their preparatory measures in order to mitigate any risks stemming from the end of the transition period.

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8. ESAs publish letter on the outcome of the review of the PRIIPs Delegated Regulation

On 20 July, the European Supervisory Authorities published a joint letter on the outcome of a review on the PRIIPs Delegated Regulation, which aimed to address regulatory issues identified since the implementation of the key information document (KID), in particular the information on performance and costs, and to allow the application of the KID by UCITS. This follows the submission of a draft final report in June, which was approved by the EBA and ESMA Boards, but not the EIOPA Board.

Those Board members that did not support the RTS generally argued that a partial revision of the PRIIPs Delegation Regulation was not appropriate at this time, prior to a comprehensive review of the PRIIPs Regulation. Some Board Members also indicated that for investment funds, they would prefer the past performance graph from the UCITS key investor information document to be included in the PRIIPs KID itself, rather than in a separate publication.

In response to the ESA letter, on 4 August EFAMA called for an urgent review of the Level 1 legislation and an extension of the UCITS exemption. Considering that the inability of the ESAs to agree a revised PRIIPs draft RTS had left the entire PRIIPs regime in unchartered territory, EFAMA stated that the fundamental issues with the PRIIP KID remained, which cannot be solved through Level 2 technical changes alone. EFAMA believes that such a review is long overdue and now unavoidable, and should be initiated with urgency in order to prevent harm to retail investors’ interests. EFAMA also calls for the current exemption for funds producing a UCITS KIID to be extended until a full PRIIPs review has been completed.

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9. ESMA updates Q&As on MiFID II and MiFIR transparency

On 8 July, ESMA published a new Q&A to provide technical clarifications for the performance of the mandatory systematic internaliser (SI) test. The new answer provides that “investment firms shall perform the SI test for all financial instruments (ISINs) traded over the 6-month observation period and which have not expired on the first day of February, May, August, December which are the months by which the publication of the relevant data of the denominator are published by ESMA”. Once the investment firm has identified the instruments for which the test is to be performed, it may then follow either a one or two-step approach, further detailed in the Q&A. 

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10. ESMA issues second report on sanctions under MiFID II

On 13 July, ESMA published its second report on sanctions and measures imposed by NCAs under MiFID II during 2019. Overall, in 15 Member States, NCAs imposed a total of 371 sanctions and measures, with an aggregated value of €1.8m. Due to differences in the identification of sanctions and measures for reporting purposes, clear trends do not emerge at this time, although there were no sanctions imposed by the Central Bank of Ireland during 2019 under MiFID II.

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11. European Commission proposes capital markets recovery package, with changes to MiFID II, the Securitisation Framework and the Prospectus Regulation to aid recovery from COVID-19

On 24 July, the European Commission published proposals for a Directive amending MiFID II, a Regulation amending the Securitisation framework, and a Regulation amending the Prospectus Regulation, in order to provide for the best possible conditions for European economies to emerge from the COVID-19 pandemic.

The proposed MiFID amendments address specific requirements in order to strike a more appropriate balance between investor protection and the provision of high-quality investment services, the majority of which focus on providing alleviations for professional clients and eligible counterparties, including:-

  • phasing-out of the paper-based default method for communication, to be replaced with electronic formats;
  • introduction of an exemption for eligible counterparties and professional clients regarding costs and charges disclosure requirements;
  • alleviation of ex-post reporting requirements, in particular end-of-day loss reporting;
  • suspension of best execution reports;
  • alleviation of cost-benefit analysis; and
  • exemption of corporate bonds with make-whole clauses from product governance regime.

Although the securitisation framework will be subject to a comprehensive review with possible legislative amendments, if appropriate, due by January 2022, the targeted amendments seek to contribute to the resilience of the financial system by extending the simple, transparent and standardised (STS) securitisation to on-balance sheet securitisations.

The changes to the Prospectus Regulation introduces a 30-page “EU Recovery Prospectus” for well-known issuers, which will be easy-to-read for investors, and aims to allow companies to issue capital more easily, thereby reducing their debt-to-equity ratios.

The proposals will be reviewed by the European Parliament and Council for approval.

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12. EFAMA responds to European Commission consultations on sustainability for MiFID, UCITS and AIFMD Delegated Acts

On 6 July, EFAMA published responses to the European Commissions’ consultations on delegated acts which seek to integrate sustainability risks and sustainability factors into UCITS, AIFMD and MiFID.

With respect to EFAMA’s response to the consultation on UCITS and AIFMD, EFAMA notes that it fully supported the integration of sustainability risks as part of funds’ risk management policies, but that there was no reason to single out sustainability risks in this respect. EFAMA also provides detailed comments on the risk of conflict with fund managers’ fiduciary duties and the recognition of a possible qualitative approach to sustainability in risk management.

Regarding the response to the Commission’s consultation on sustainability for MiFID II, EFAMA expressed a concern that the proposed amendments will hinder the availability of ESG products to investors as it considers that the Commission’s proposals create additional requirements for Article 8 (promoting environmental and social characteristics) and Article 9 products (pursuing sustainability objectives) under the Sustainable Finance Disclosures Regulation (SFDR), which are not currently part of the SFDR framework. EFAMA therefore considers it essential that the Commission makes changes to these proposals to ensure full alignment with SFDR, with a clear distinction between Article 8 and Article 9 products.

In this regard, on 23 July, EFAMA, together with seven other EU trade associations, issued a joint letter to the European Commission highlighting concerns with the proposed changes to the delegated acts under MiFID II, IDD and Solvency II on the introduction of the new definition of “sustainability preferences” across the directives. The letter identifies serious concerns that the proposals will restrict customers’ access to sustainable finance by unduly limiting the range of products that banks, fund managers and insurers can offer, jeopardising the Capital Markets Union objective of improving investor access to markets. In this regard, the trade associations consider it paramount to align the proposals to the SFDR framework so that the same products be considered as sustainable throughout all EU legislation

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13. EFAMA reports net sales maintained momentum in May, while AIFs returned to positive

On 23 July, EFAMA published its latest Investment Fund Industry Factsheet for May, which showed net inflows for UCITS and AIFs of €84bn, mainly driven by UCITS net sales of €78bn (€96bn in April) with AIF net inflows of €6bn (€12bn in April). Total net assets of UCITS and AIFS increased by 1.4% to €16.83tn. 

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14. EFAMA calls for greater scrutiny over credit rating agency affiliates and the development of the European Rating Platform

Following ESMA’s call for evidence on the availability and use of credit rating information and data, on 3 August, EFAMA issued a letter calling for greater scrutiny over credit rating agency affiliates and the development of the European Rating Platform (ERP). Specifically, EFAMA considers that credit rating agency affiliates, insofar as their licensing agreements and “bundling” practices are concerned, should be scoped into the CRA Regulation, and called on ESMA and national competent authorities to increase supervision and enforcement of existing market data cost regulation. EFAMA also called on ESMA to develop the ERP as a single access point for credit rating information that is open to all registered CRAs, free of charge, to allow end-users to share ratings information with regulators and clients. 

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15. EFAMA responds to ESA draft guidelines on risk factors to be considered when assessing money laundering and terrorist financing risk

On 6 July, EFAMA responded to the ESA consultation on customer due diligence and risk factors to be considered when assessing money laundering and terrorist financing (ML/TF) risk. The consultation follows the guidelines issued by the European Supervisory Authorities (ESAs) on risk factors and simplified and enhanced customer due diligence, which set out factors that firms should consider when assessing the ML/TF risk associated with a business relationship or occasional transactions.

EFAMA notes in its response that it was important to ensure a proportionate approach be taken in the review of such guidelines, and also crucial to consider the different distribution and business models related to the distribution of units/shares in investment funds and the different intermediaries used for distribution purposes. In this regard, EFAMA highlights as particularly problematic the request in point 16.20 of the consultation paper for the fund or fund manager to “take risk-sensitive measures to identify, and verify the identity of, the investors underlying the financial intermediary, as these investors could be beneficial owners of the funds invested through the intermediary”, which EFAMA considers as suggesting that intermediaries were underperforming in their own due diligence requirements, for which asset managers are then asked to take over this responsibility. EFAMA points to the 2018 FATF Guidance for a risk-based approach to the securities sector, which acknowledges that UCITS do not always have access to the information related to the identity of the investor due to the different distribution and acquisition models, and have suggested a number of amendments. 

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16. EFAMA responds to ESMA’s consultation paper on trade repositories under EMIR Refit

On 3 July, EFAMA responded to ESMA’s consultation on draft Implementing and Regulatory Technical Standards under the EMIR Refit. ESMA’s proposals build on existing rules and the experience in implementing EMIR since 2012, and address several aspects on the enhancement of the quality of the reported derivatives data. EFAMA notes that several areas should be reviewed prior to publication of the final report and submission of final draft technical standards to the Commission, including:-

  • insistence on the use of ISINs and CPI Codes in the identification of derivatives financial instruments;
  • the implementation of ISO 22022 for reporting purposes as soon as possible;
  • use of a “Hybrid Transaction Reporting Mechanism” (HTRM) to reduce the regulatory reporting burden; and
  • harmonisation of reporting standards.

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Other Articles

17. International Organisation of Securities Commissions launches consultation on the use of artificial intelligence and machine learning by market intermediaries and asset managers

In June 2020, the International Organisation of Securities Commissions (IOSCO) published a consultation report to assist its members in providing appropriate regulatory frameworks in respect of market intermediaries and asset managers that utilise artificial intelligence (AI) and machine learning (ML). The report notes that the use of AI and ML by market intermediaries and asset managers may be altering business models, e.g. to support advisory and support services, risk management, client identification and monitoring, selection of trading algorithms and portfolio management, which may also alter risk profiles. A number of potential risks and harms were identified in relation to the development, testing and deployment of AI and ML, namely:-

  • governance and oversight;
  • algorithm development, testing and monitoring;
  • data quality and bias;
  • transparency and explainability; and
  • ethical concerns.

Further to the identification of these risks, six measures, directed at regulators, are included in the proposed guidance to reflect expected standards of conduct by market intermediaries and asset managers. These are:-

  • regulators should consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and ML, including a documented internal governance framework;
  • regulators should require firms to adequately test and monitor algorithms to validate the results of an AI and ML technique on a continuous basis;
  • regulators should require firms to have adequate skills, expertise and experience to develop, test, deploy, monitor and oversee the controls over the AI and ML utilised by the firm;
  • regulators should consider what level of disclosure of AI/ML utilisation by firms is required; and
  • regulators should consider requiring firms to have appropriate controls in place to ensure that the data that the performance of the AI and ML is dependent on is of sufficient quality to prevent biases, and are sufficiently broad.

The consultation is open to submissions until 26 October 2020.

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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