October 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 Commission and Supervisory Authorities updates

Industry and other updates

Central Bank of Ireland Updates

1. Deputy Governor of the Central Bank of Ireland delivers speech highlighting future focus on liquidity mismatches and leverage in the funds sector

On 1 October, Sharon Donnery, Deputy Governor of the Central Bank of Ireland gave a speech on Ireland’s engagement in Europe and deeper European integration, in which she addressed the issue of financial stability as one of shared concern. Noting that non-bank financial institutions now accounted for almost 60% of total euro area financial assets, Ms Donnery stated that the shock from COVID-19 resulted in a sharp increase in redemptions and challenges in liquidity management across global financial markets, including funds resident in Ireland.

In particular, the Central Bank’s figures showed that there were around €72bn in net redemptions from Irish-resident funds in March. Ms Donnery noted that at an individual level, the vast majority of funds managed to meet investor redemption requests, with limited use of tools such as suspensions and gating observed. Ms Donnery warned, however, that that needed to be viewed in the context of unprecedented central bank interventions that helped to restore market functioning. Consequently, Ms Donnery stated that the focus was now on the extent to which structural vulnerabilities from liquidity mismatches and leverage in the global funds sector contributed to market disruption, although not setting out any specifics in relation to this.

These comments echo those made in June by Governor Makhlouf in which he highlighted the need to develop macroprudential tools to be applied to market-based finance, as well as those contained a later speech delivered by the Central Bank’s Deputy Governor, Sharon Donnery on 17 June, where she stated that “over time, the question over the extent to which structural vulnerabilities from liquidity mismatches and leverage in the global funds sector contributed to market disruption will need to be addressed”. The possibility of a future macro-prudential framework for non-banks was again mentioned by Governor Makhlouf on 28 September 2020 in an interview with the Irish Times. These public statements indicate that this is a topic which is being given increased attention by the Central Bank, and therefore funds should expect further developments in this area in the coming years. 

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2. Central Bank of Ireland issues statement on use of electronic signatures

On 24 August, the Central Bank of Ireland issued a statement regarding the admissibility of electronic signatures in relation to regulatory documents submitted to it. The Central Bank confirmed its policy that in the absence of any specific legal provisions to the contrary, regulated firms may use electronic signatures in submitting regulatory documents and forms; however, the Central Bank has stated that it reserves the right to request a ‘wet ink’ signature where deemed appropriate in all the circumstances.

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European Commission and Supervisory Authorities updates

3. European Commission publishes revised Capital Markets Union (CMU) Action Plan

On 24 September, the European Commission published its new and ambitious Action Plan to boost the EU’s CMU over the coming years. The European Commission considers that large and integrated capital markets will facilitate the EU’s financial recovery, making sure that businesses, in particular small and medium-sized businesses, have access to sources of funding and that savers have confidence to invest in their future. The Action Plan has three key objectives:

(1)  Ensuring that the EU's economic recovery is green, digital, inclusive and resilient by making financing more accessible for European companies, in particular SMEs.

(2)  Making the EU an even safer place for individuals to save and invest long-term;

(3)  Integrating national capital markets into a genuine EU-wide single market for capital.

The Action Plan states that these objectives will be achieved through 16 actions, including:

  • Setting up an EU-wide platform that provides investors with seamless access to financial and sustainability-related company information;
  • Simplifying the listing rules for public markets;
  • Conducting a review of the legislative framework for European long-term investment funds.

The introduction of the Action Plan is considered to be important at this time given the EU’s top priority to recover from the unprecedented economic crisis caused by the COVID-19 outbreak. The CMU will also play a vital role in tackling the climate and biodiversity emergencies, as well as the broader environmental challenges as part of the European Green Deal, in addition to making Europe fit for a digital age as part of the Commission’s Digital Finance Strategy, also launched on 24 September.

The European Commission notes that the establishment of the CMU is a long-term project, requiring continuous and determined efforts, and building on the progress made since the introduction of the first CMU action plan in 2015. The Commission will begin work on these actions by launching public consultations on the legal framework for European long-term investment funds and non-bank insolvency in the future. In its response to the Action Plan, the European Fund and Asset Management Association (EFAMA) considered this to be an ambitious yet essential project requiring long-term political vision, determination and perseverance. The 16 actions contained in the Action Plan were largely welcomed by EFAMA members as having the potential to remove the remaining obstacles to cross-border investments, with its members standing ready to play their part in contributing to the relevant workstreams as they arise.

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4. European Commission proposes digital finance package

On 24 September, the European Commission adopted a new Digital Finance Package, comprising Digital Finance and Retail Payments Strategies, in addition to legislative proposals on crypto-assets and digital operational resilience. The package has the aim of boosting the EU’s competitiveness and innovation in the financial sector, as well as providing consumers with more choice and opportunities for financial services and payments.

The Digital Finance Strategy seeks to stimulate responsible financial innovation and competition among financial services providers through four key priorities that will guide the EU’s actions in this area up to 2024, namely:

  • Tackling fragmentation in the Digital Single Market for financial services and facilitating cross-border services.
  • Facilitating digital innovation in the interests of consumers, and not market efficiency.
  • Creating a European financial data space to promote data-driven innovation, building on the European Data Strategy.
  • Addressing new challenges and risks associated with the digital transformation, adopting the principle “same activity, same risk, same rules”.

The Retail Payments Strategy aims to bring safe, fast and reliable payment services to European citizens and businesses against the backdrop of a risk of inconsistencies and further market fragmentation. The strategy consists of four key and closely interlinked pillars, each comprising key actions:

  • Increasingly digital and instant payment solutions with pan-European reach, with a review of adherence to the requirements of the SEPA Instant Credit Transfer Scheme.
  • Innovative and competitive retail payment markets, which reap the full potential of the Payment Services Directive (PSD2), foster consumer protection, and ensure a high level of security for retail payments in Europe.
  • Efficient and interoperable retail payment systems and other support infrastructures, with the Commission to consider extending the scope of the SPD to include e-money and payment institutions.
  • Efficient international payments, including remittances.

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5. ESMA publishes 2021 Work Programme setting out its priorities for next 12 months

On 2 October, the European Securities and Markets Authority (ESMA) published its 2021 Work Programme, developed against the movement of the regulatory cycle towards supervision and enforcement. The programme details ESMA’s priorities and areas of focus for the coming 12 months, specifically:

(1)   Supervisory convergence and building a common EU risk-based and outcome-focused supervisory culture. Areas of focus are to include fund liquidity risk, liquidity management tools, retail investment products cost and performance, supervision of ESG reporting and data usage, as well as the implementation of EMIR. ESMA also expects to conduct peer reviews on the supervision of cross-border activities of investment firms and on the scrutiny and approval procedures of prospectuses.

(2)  Risk assessment and integration of financial innovation and ESG factors into its risk analysis, in addition to focussing on data for risk-based supervision, and continued monitoring of the impact on markets of the COVID-19 pandemic and the UK’s withdrawal from the EU.

(3)  Contributing to the development of a single rulebook, in particular, having regard to the legislative reviews of MiFID and AIFMD, identifying possible rulebook changes in support of the Capital Markets Union, and reviewing technical standards following the EMIR review and EMIR Refit changes.

(4)  Direct supervision of third country central counterparties as critical market infrastructures under EMIR 2.2, in addition to preparing for supervisory mandates in relation to Benchmarks and Data Service Providers. 

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6. ESAs launch survey on environmental and/or social financial product templates

On 21 September, the European Supervisory Authorities (EBA, EIOPA and ESMA) launched a survey on the presentation of information to be disclosed under provisions of the Sustainability-Related Disclosures in the Financial Services sector (SFDR). The ESAs propose to standardise the disclosure of information for financial products that promote environmental and/or social characteristics or have a sustainable objective, to be included in existing disclosures provided by AIFMs and UCITS. With that purpose, the ESAs are inviting stakeholders to comment on the layout of the templates, following a recent public consultation on the SFDR.

The survey is open for comments until 16 October 2020.

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7. ESAs publish joint risk assessment highlighting heightened liquidity challenges in segments of the investment fund sector in addition to economic and market uncertainty

On 22 September, the European Supervisory Authorities (EBA, EIOPA and ESMA) published a report on risks and vulnerabilities in the EU financial system. The report states that the outbreak of COVID-19 has brought unprecedented economic challenges, with an inevitable impact on the EU financial sector. In particular, the report notes that the EU investment fund industry faced a significant deterioration of asset liquidity in some segments combined with substantial outflows from investors in selected asset classes, leading to liquidity challenges in certain segments and amplifying profitability concerns for all financial sectors. Against this backdrop, the report recommends that NCAs, financial institutions and market participants adopt a number of policy actions, namely:

  • Monitor risks and perform stress testing, taking account of various scenarios in order to map the impact of potential shocks. In particular, monitoring of liquidity management tool adequacy and usage should be done by firms in the investment fund sector.
  • Financial institutions should ensure the assessment of their capital positions is forward-looking, taking account of current uncertainties.
  • Provide support to the real economy through continued lending. Supervisors and financial institutions should accommodate a further prolonged “low-for-long” interest rate environment, which is the main risk for the life insurance and pension fund sectors, contributing to the further build-up of valuation risk in securities markets.
  • Ensure appropriate management of Information and Communication Technology (ICT) and security risks, in particular where those are outsourced.

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8. ESMA proposes amendments to the MiFIR transparency regime for non-equity financial instruments

On 29 September, ESMA published its final report on the MiFID II/MiFIR transparency regime for non-equity instruments following a consultation launched earlier this year. Having regard to what is considered an overly complex regime, ESMA has made a number of proposals aimed at simplifying the regime in order to increase post-trade transparency and fostering a harmonised application across the EU, including:

  • deleting the waiver for orders and deferral for transactions above the “size-specific to the instrument threshold”;
  • streamlining the deferral regime, with both a simplified system based on volume masking and full publication after two weeks, as well as removing the supplementary deferral options left to NCAs under the current MiFIR text;
  • changing the possibility granted to NCAs to temporarily suspend MiFIR transparency provisions into a mechanism coordinated at EU-level;
  • including the possibility to suspend, on short notice, the application of the derivative trading obligation similarly to the mechanism available in EMIR; and
  • complementing the criteria used to grant equivalence to third-country trading venues for the purpose of the derivative trading obligation with conditions relating to transparency and non-discriminatory access.

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9. ESMA updates regulatory technical standards under the Benchmarks Regulation (BMR)

On 29 September, ESMA published its final report containing proposed new regulatory technical standards under the Benchmarks Regulation, aimed at ensuring the accuracy and integrity of benchmarks across the EU. The draft technical standards include provisions relating to a number of areas, including:

  • governance arrangements for administrators;
  • methodologies to be used by administrators for determining benchmarks;
  • reporting of infringements, especially in relation to benchmark manipulation;
  • mandatory administration of critical benchmarks;
  • non-significant benchmarks, and the basis upon which competent authorities may require changes to the compliance statements made by administrators in relation to same under the BMR.

The draft regulatory technical standards will be submitted to the European Commission on 1 October 2020, which then has three months to determine whether to adopt them.

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10. ESMA and EFAMA respond to European Commission’s targeted consultation on the establishment of an EU Green Bond Standard (GBS)

On 2 October, responses were provided by both ESMA and EFAMA in respect of the European Commission’s targeted consultation on the establishment of an EU green bond standard, which builds upon the European Green Deal.

In its response, ESMA noted that green and social bonds were likely to play an important role in creating a sustainable economic recovery following the COVID-19 pandemic, and stated that it saw clear value in creating a robust standard for green bonds to ensure consistency in the market for issuances aimed at investing in taxonomy-aligned projects. Indicating its support for the Commission’s work in this area, ESMA highlighted the following key considerations:

  • The success of the EU green bond standard will be largely determined by whether it is seen to be a reliable indicator of investment in sustainable economic activities. This will require external reviewers conducting rigorous assessments of issuers’ green bond frameworks.
  • A formal EU registration and supervision regime of such external reviewers is the best way to ensure high quality assessments.
  • The final regime should not result in market concentration of external reviewers, which may disadvantage issuers, particularly SMEs, as well a smaller external reviewers.

EFAMA stated that it strongly supported the initiative to establish an EU green bond standard, and considered that the GBS has great potential to effectively play a role in financing assets needed for the low-carbon transition. EFAMA also stated that in order for the GBS to be effective, in particular in the near-term, the right balance must be struck between having strict criteria to fight greenwashing, as well as sufficient flexibility to avoid placing barriers to the evolution of market practices and to encourage coverage of more sectors of the economy. EFAMA also identified a number of key messages in response to the consultation, namely:

  • A GBS would solve many of the problems and barriers that currently exist in the EU green bond market, by introducing greater certainty regarding green definitions and eligibility of certain assets, and help to avoid greenwashing.
  • EFAMA considered it essential to have the final allocation report and the Green Bond framework verified to ensure transparency and credibility.
  • There should be some flexibility on what percentage of the use of proceeds should be linked with eligible activities under the EU taxonomy.
  • EU Green Bonds should maintain their status for their entire term to maturity, which should be a pre-condition for investors in order to fulfil end-investors preferences in specific mandates.

These responses, and others, will inform the Commission’s formal proposals on GBSs in the future.

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11. ESMA issues public statement on the impact of Brexit on the Benchmarks Regulation

On 1 October, ESMA issued a public statement in relation to the consequences of Brexit for the ESMA register of benchmark administrators and third country benchmarks under the BMR. The statement provides that after the Brexit transition period ending on 31 December 2020, UK administrators included in the “ESMA register of administrators and third-country benchmarks” will be deleted from the register as the BMR will no longer be applicable to UK benchmark administrators. Such UK administrators that were originally included in the ESMA register as EU administrators will then qualify as third country administrators (for which the BMR foresees different regimes to be included in the ESMA register, being equivalence, recognition or endorsement).

However, the statement goes on to provide that during the BMR transitional period until 31 December 2021, this change in the ESMA register would not have an effect on the ability of EU27 supervised entities to use the benchmarks provided by those third country UK administrators. Further details are included in the statement.

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12. ESMA updates Q&As on data reporting under MiFIR and EMIR

On 28 September, ESMA updated its Questions and Answers document on data reporting under MiFIR, to include two amendments to existing Q&As. The first amended Q&A clarifies the reporting requirements under Article 26 of MiFIR, providing an additional reporting scenario where an investment firm executes a transaction through an execution algorithm using the membership of its client to execute the order. The second amended Q&A concerns national client identifiers for natural persons, and clarifies how these are represented.

In respect of the Questions and Answers document on data reporting under EMIR, two new Q&As were added, in addition to an update of an existing Q&A in relation to the classification of total return swaps. The two new questions (TR 55 and 56) relate to the reporting of the reference entity for credit derivatives, and the population of specific fields for forward rate agreement derivatives.

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13. ESMA renews decision requiring net short position holders to report positions of 0.1% and above

On 16 September, ESMA renewed its decision to require net short position holders to report positions of 0.1% and above. This follows the previous decision by ESMA temporarily requiring net short position holders to report such positions of the issued share capital of companies admitted to trading on a regulated market to the relevant national competent authority.

ESMA considers that this measure will maintain the ability of NCAs to deal with threats to market integrity, the orderly functioning of markets and financial stability at an early stage and allow National Competent Authorities (NCAs) to address these in the event of signs of market stress. The measure applies from 18 September 2020 for a period of three months

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Industry and other updates

14. Irish Funds welcomes publication of the Investment Limited Partnership (Amendment) Bill 2020

On 21 September, the Minister for Finance published the draft text of the Investment Limited Partnership (Amendment) Bill 2020, which proposes changes to the Investment Limited Partnerships Act 1994 to bring it into alignment with more recent domestic and EU legislation. Irish Funds welcomed the publication of the Bill, with its CEO stating that its completion will add an important capability to the offering Ireland has for investors globally, and will make investing in the transition to a green economy and post-pandemic recovery much easier.

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15. Irish Funds announces change by US Securities and Exchange Commission to the definition of “accredited investor”

On 14 September, Irish Funds issued a press release, referring to a decision taken by the US Securities and Exchange Commission on 26 August to adopt amendments to the definition of “accredited investor” to add new categories of investors. Irish Funds notes that all Irish-domiciled funds that offer and sell shares to US residents will be affected by this change. The change in definition includes an alternative to the wealth test for natural persons, to include persons who hold certain professional certifications, designations and other credentials, in addition to other categories, such as knowledgeable employees of private funds. It is noted that the amendments and order only become effective 60 days after publication in the Federal Register.

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16. EFAMA calls for the use of KPIs to monitor national progress in household participation in capital markets

On 14 September, Irish Funds issued a press release, referring to a decision taken by the US Securities and Exchange Commission on 26 August to adopt amendments to the definition of “accredited investor” to add new categories of investors. Irish Funds notes that all Irish-domiciled funds that offer and sell shares to US residents will be affected by this change. The change in definition includes an alternative to the wealth test for natural persons, to include persons who hold certain professional certifications, designations and other credentials, in addition to other categories, such as knowledgeable employees of private funds. It is noted that the amendments and order only become effective 60 days after publication in the Federal Register.

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17. EFAMA reports investors remained confident in investment outlook in July

On 28 August, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing net sales data of UCITS and AIFs for July 2020. EFAMA notes that “solid net inflows into long-term UCITS indicate overall investors’ confidence about the investment outlook in July, despite the risks posed by the COVID-19 crisis. At the same time, the sustained net inflows into money market funds confirm that a certain degree of caution prevailed among investors”.

Net sales of UCITS and AIFs in July totalled €124bn, up from €108bn in June. While UCITS recorded net inflows of €109bn (€100bn in June), AIFs recorded net inflows of €15bn (€7bn in June). Total net assets of UCITS and AIFs increased by 1.1% to €17.35tn.

Further, on 24 September, EFAMA released its latest international statistical release, describing trends in the worldwide investment fund industry in Q2 2020. The report indicates that worldwide regulated open-ended fund assets increased by 9.8% to €51.7tn in Q2 2020, while worldwide net cashflow to all funds amounted to €818bn during Q2 (€617bn during Q1).

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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