Asset Management & Investment Funds: EU & International Developments - Aug 2020
Asset Management & Investment Funds: EU & International Developments - Aug 2020
ESMA's guidelines on stress test scenarios under the MMFR.
ESMA announced that its 2019 guidelines on stress test scenarios under the MMFR will be updated in 2020 and the risk parameters will be modified in light of the recent market developments. ESMA will work with the ESRB and the ECB for the calibration of the risk parameters. ESMA expects to publish the 2020 update of the guidelines in Q4 2020. The guidelines will be translated after the release of the update. Because the scenarios will reflect the assessment of systemic risk by ESMA, the ESRB and the ECB, ESMA is not planning a public consultation.
In the interim, pending the 2020 update, all the 2019 Guidelines will continue to apply, including the internal stress test exercise to be carried out by managers of MMFs.
ESMA points out that Article 28 (1) of the MMFR provides "Each MMF shall have in place sound stress testing processes that identify possible events or future changes in economic conditions which could have unfavourable effects on the MMF". These internal stress tests could include other factors than those referred to in the 2019 guidelines, and when designing these internal stress tests, ESMA expects that MMFs would factor in the impact of the recent market stress according to the risk profile of their fund.
ESMA's assessment of the current guidelines concludes that applying the 2019 scenarios in the current market environment generally leads to absolute levels of stress similar to the levels observed in March. However, for some parameters, the 2019 scenarios have been exceeded by the extreme market movements observed during the COVID-19 crisis and the relevant factors will be updated accordingly. This is notably the case of the redemption scenario, as some funds exceeded the 25% redemption rate for professional investors specified in the guidelines.
ESMA recommendations for the AIFMD and UCITS Directive.
ESMA wrote a letter to the European Commission suggesting areas to consider during the ongoing review of the AIFMD.
Our June AMIF bulletin reported that the European Commission issued a report on AIFMD and is expected to issue a consultation regarding a review of the AIFMD framework in September. A legislative proposal amending AIFMD is then targeted for publication in Q2 2021. ESMA's letter is feeding into that review process.
ESMA has taken the opportunity to advocate for a further alignment of the UCITS Directive with the AIFMD. While this is outside the scope of a review of the AIFMD, we would not be surprised to see the Commission proposing an update to the UCITS Directive with or shortly after the proposed update to AIFMD.
Some of the more significant proposals include:
Harmonisation of AIFMD and UCITS regimes, including that UCITS reporting should ultimately closely match the revised AIFMD Annex IV reporting. Reporting obligations should cover both manager and fund-specific data while also reflecting the specifics of UCITS.
Scope of additional MiFID services and application of rules should be harmonised.
Delegation and substance. ESMA proposes clarification on the maximum extent of delegation to ensure AIFMs and UCITS management companies maintain sufficient substance in the EU. Specifically, ESMA proposes a review of Art. 82 of Regulation (EU) No 231/2013 to reconsider or complement the qualitative criteria in Art 82 (1) (d) with quantitative criteria or provide a list of core or critical functions that must always be performed internally and may not be delegated to third parties. ESMA also proposes that this be matched in the UCITS Directive. ESMA notes that delegation of portfolio management functions to non-EU entities is likely to increase post Brexit. ESMA suggests that delegation may increase operational and supervisory risks and raises questions as to whether those AIFs and UCITS can still be effectively managed by the licensed AIFMD or UCITS management company. Interestingly, ESMA have not included any concrete examples of this risk impacting funds despite the fact that non-EU managers have been providing portfolio management services to UCITS (for decades) and AIFs since AIFMD came into force. This will become a political issue and may take some time to work through.
Liquidity management. ESMA proposes an EU framework governing the liquidity management tools and that AIFMD should include all liquidity management tools outlined in ESRB recommendation A – and this should similarly be the case for the UCITS Directive. ESMA further argues that ESMA's facilitation, advisory and coordination role should be increased in relation to suspension of redemptions and subscriptions, in particular where there are cross-border financial stability implications.
Leverage ESMA believes IOSCO recommendations trigger a need to amend the current reporting of the gross method calculation. ESMA suggests amending the commitment amount calculation to allow comparability among contracts with different underlying duration, which makes aggregation and comparison possible for systemic risk monitoring purposes.
Harmonisation of supervision of cross-border entities. ESMA proposes clarification of the roles and responsibilities of home and host NCAs where AIFs are managed on a cross-border basis under Art. 33 AIFMD.
Proportionality principle for remuneration requirements- ESMA recommends clarification that the proportionality principle applies to the full set of remuneration requirements in the AIFMD and the UCITS Directive.
External valuer liability. On the basis that external valuers may be unwilling to accept valuation mandates from AIFMs because of the negligence provisions, ESMA proposes that the definition of “negligence” could be limited to “gross negligence” in the legislation. This is a helpful proposal.
Semi-professional investors. ESMA has called for a review of the definition of "professional investor" under AIFMD and this may result in a new category of "semi-professional investor" being introduced.
Loan origination in AIFMD. ESMA proposes that there should be a specific framework for loan origination within the AIFMD. This reflects earlier commentary from ESMA on this subject
Taxonomy-related disclosures by undertakings reporting non-financial information
The Taxonomy Regulation requires certain undertakings to include in non-financial statements (or consolidated non-financial statements) information on how and to what extent their activities are associated with environmentally sustainable economic activities. This requirement applies to undertakings which are obliged to publish non-financial information under the Non-Financial Reporting Directive (NFRD), including large banks and insurance companies, and large listed companies, with more than 500 employees.
This initiative will propose methodologies and indicators to help undertakings determine the extent to which their economic activities can be considered environmentally sustainable according to the EU taxonomy. More transparency about how undertakings’ activities are related to the EU taxonomy is necessary for financial market participants to design financial products and portfolios based on this information.
The deadline for responses is 8 September 2020. The Commission intends to adopt the delegated regulation in the second quarter of 2021.
COVID 19: ESMA's renewed decision requiring net short position holders to report positions of 0.1% and above
In March 2020, ESMA issued a decision temporarily requiring the holders of net short positions in shares traded on an EU regulated market to report positions of 0.1% and above, discussed here. In June 2020, ESMA renewed its decision and this was published in the Official Journal of the EU. The Short Selling Regulation (Article 28(10)) requires ESMA to review its decision at appropriate intervals and at least every three months. The decision entered into force on 17 June 2020 and applies for a period of three months expiring on 17 September 2020.
Low Carbon Benchmarks
The Low Carbon Benchmarks Regulation amended the Benchmarks Regulation to introduce a new category of benchmarks and to provide for sustainability-related disclosures for all benchmarks. It applies to benchmark administrators, but may also have an indirect impact on UCITS or AIFs to the extent they are users of benchmarks. Our Asset Management & Investment Funds team have prepared a summary of the background and requirements.
UCITS & AIFMD Revisions: Draft Sustainability Directive and Regulation
Amendments to the UCITS and AIFMD legislative frameworks have been proposed on sustainability risks and sustainability factors to be taken into account for UCITS and AIFMs. Management companies will be required to expressly take into account sustainability risks as part of compliance with existing organisational and governance rules and to integrate the sustainability risks in the investment decision-making process. Our Asset Management & Investment Funds team prepared a summary of the forthcoming requirements.
Interpol published a report on the impact of COVID-19 on cybercrime showing a significant target shift from individuals and small businesses to major corporations, governments and critical infrastructure.
With organisations and businesses rapidly deploying remote systems and networks to support staff working from home, criminals are also taking advantage of increased security vulnerabilities to steal data, generate profits and cause disruption.
The key findings highlighted by the Interpol assessment of the cybercrime landscape in relation to the COVID-19 pandemic include:
online scams and phishing
disruptive malware (ransomware and DDoS)
data harvesting malware such as remote access Trojan, info stealers, spyware and banking Trojans is on the rise
malicious domains – these fraudulent websites underpin a wide variety of malicious activities including C2 servers, malware deployment and phishing
Future primary areas of concern highlighted by the INTERPOL report include:
a further increase in cybercrime is highly likely in the near future
threat actors are likely to continue proliferating coronavirus-themed online scams and phishing campaigns to leverage public concern about the pandemic
business email compromise schemes will also likely surge due to the economic downturn and shift in the business landscape, generating new opportunities for criminal activities
when a COVID-19 vaccination is available, it is highly probable that there will be another spike in phishing related to these medical products as well as network intrusion and cyberattacks to steal data
The EU Sanctions Blocking Regulation
An ECJ ruling in the case of Bank Melli Iran v Telekom Deutschland GmBH1 should provide welcome clarification for businesses grappling with the challenges of either following US sanctions laws but potentially breaching the Blocking Regulation Council Regulation ((EC) No 2271/96) or vice-versa.
In this briefing note, our colleagues in the A&L Goodbody White Collar Crime team discuss the background to this important case and the questions posed to the ECJ.
The key elements of an effective AML and CTF programme were set out by the group in December 2019. As policy makers and supervisors continue to develop this approach, the group suggests that financial institutions take a number of steps to evolve their AML and CTF programmes, as detailed in the statement.
Wolfsberg Group publishes FAQs for financial institutions on undertaking source of wealth and source of funds checks
The Wolfsberg Group published a frequently asked questions (FAQs) on how financial institutions can identify, mitigate and manage money laundering risks by undertaking source of wealth (SoW) and source of funds (SoF) checks on relevant customers, when appropriate or required by applicable regulations.
The Wolfsberg Group is an association of leading international financial institutions that aims to develop frameworks and guidance for the management of financial crime risks, particularly with respect to know your customer (KYC), AML and CTF policies.