Asset Management & Investment Funds: EU & International Developments – Mar 2022
Asset Management & Investment Funds: EU & International Developments – Mar 2022
Updated supervisory statement on the application of SFDR
The ESAs updated their joint supervisory statement on the application of the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation (TR). This includes a new timeline and expectations about the explicit quantification of the product disclosures under Article 5 and 6 of the TR.
The statement deals with the application of SFDR and Article 5 and 6 of TR for the period from 10 March 2021 (the application date of most of the provisions of the SFDR) to the application date of the SFDR RTS on 1 January 2023. The statement covers the content, methodologies and presentation of sustainability-related disclosures which will be specified in the RTS covering; do no significant harm, principal adverse impacts, Articles 8 and 9 pre-contractual disclosures, product website disclosures and periodic report disclosures.
FMPs and financial advisers must apply most of the SFDR disclosures from 10 March 2021, while the application of the RTS is delayed to a later date.
All 13 of the SFDR RTS (including the new provision for RTS introduced by the TR) will be bundled into one delegated act. The application date of the RTS will be delayed to 1 January 2023.
The TR alignment related product disclosures apply in respect of the first two environmental objectives from 1 January 2022.
The statement sets out supervisory expectations, general guidance for the interim period, and an Annex with specific guidance as a reminder of the application timeline of some specific provisions of the SFDR, the TR and the related RTS.
This follows ESMA's helpful implementation timeline for the SFDR, the SFDR RTS, the TR, the TR Article 8 Delegated Act, the Corporate Sustainability Reporting Directive (draft), MiFID, IDD, UCITS and AIFMD.
Currently, the CBI is conducting a review of SFDR disclosures and may issue a Q&A dealing with level 1 disclosure obligations. For this reason, some impacted funds may choose to await the outcome of that before making any updates. Please speak with your usual contact on the Asset Management & Investment Funds team for advice.
PRIIPS "Quick Fix" delegated regulation
The EU Commission adopted the PRIIPS Quick Fix delegated regulation. This will allow manufacturers of PRIIPs that offer investment funds to continue using UCITS KIIDs until 31 December 2022. The scrutiny period for Parliament and Council has been set at 3 months. This was discussed in our November 2021 bulletin here.
ESMA's recommendations to financial market participants in response to the war in Ukraine
ESMA issued a summary of its supervisory and coordination activity in response to the war in Ukraine, as well as recommendations to financial market participants
Supervisory and coordinating activities
CCPs – ESMA is closely monitoring CCP related volatility and margin developments in energy and commodities market segments. It is also in close contact with National Competent Authorities (NCAs) focussing on the impact on clearing members and their clients in those markets
Credit Rating Agencies – ESMA continues to actively engage with CRAs to ensure sufficient transparency around ratings and is monitoring the impact of sanctions on CRAs' operations in close cooperation with other regulators
Benchmarks – ESMA is engaging with its supervised benchmarks administrators to verify the impact of market developments and sanctions on the provided benchmarks. It is also engaging and coordinating with NCAs regarding the impact on benchmarks provided by the administrators under NCAs' supervisory remit
Investment Management – ESMA has reinforced its coordination role by monitoring investment funds, organising frequent exchanges with NCAs to analyse market developments and supervisory risks linked to the crisis, focusing on liquidity issues and the use of liquidity management tools and monitoring issues relating to valuation of assets and potential suspension of redemptions
Secondary markets – ESMA and NCAs are monitoring the market situation, and ESMA is assisting NCAs with the consistent implementation of sanctions by market operators including the suspension of trading in instruments by venues
Central Securities Depositories – ESMA is monitoring, in coordination with NCAs, the impact of sanctions on CSDs' operations and assisting with their implementation in a consistent manner. It is also consolidating data on the levels of settlement fails as one of the indicators to monitor market developments
Cyber Security – ESMA is facilitating the collection and sharing of information and experiences among NCAs regarding cyber incidents
Risk assessment – ESMA continuously monitors the risks to market participants and financial stability and exchanges its risk assessment regularly with policy makers and authorities at national, EU and international level
Sanctions Compliance – financial market participants should ensure they comply with the relevant EU sanctions and monitor for any further restrictions. The European Commission will provide clarity and answer queries on the scope and implementation of these and ESMA is supporting the EC in collecting such queries
Market disclosure – issuers should disclose as soon as possible any inside information concerning the impacts of the crisis on their fundamentals, prospects, and financial situation in line with their transparency obligations under the Market Abuse Regulation, unless the conditions for a delayed disclosure are met
Financial Reporting – issuers should provide transparency, to the extent possible on both a qualitative and quantitative basis, on the actual and foreseeable direct and indirect impacts of the crisis on their business activities, exposures to the affected markets, supply chains, financial situation and economic performance in their 2021 year-end financial report if these have not yet been finalised and in the annual shareholders' meeting or otherwise in their interim financial reporting disclosures.
ESMA, in coordination with NCAs, is closely monitoring the impact of the Ukraine crisis on financial markets and is prepared to use its relevant tools to ensure the orderly functioning of markets, financial stability and investor protection. This is part of the European Union's overall response. ESMA provides a forum for supervisors to discuss questions and coordinate responses arising from the current situation.
ESMA analysis finds that actively managed funds did not on average outperform benchmarks during the market stress of end February- end June 2020
ESMA issued the outcome of a study analysing the performance of actively managed equity UCITS relative to their prospectus and market benchmark indices, between 19 February 2020 and the end of June 2020.
The results look at equity fund performance by type of management, especially during a period of stress such as the first wave of COVID-19. ESMA found that actively managed funds did not consistently outperform passive during this period.
The strong market downturn at the beginning of the period followed by a fast recovery and then stabilisation offered a real-life opportunity to test the accepted hypothesis that active equity UCITS outperform their benchmarks during stressed market conditions.
The main findings show that the sample of funds considered active funds, net of ongoing costs, did not on average outperform their related benchmarks. More than half of the active UCITS analysed underperformed their benchmarks during the stressed period (between 19 February and 31 March) and more than 40% during the post-stress period (between 1 April and 30 June). Only funds belonging to the highest-rated class consistently outperformed the benchmarks. For the rest of the funds analysed, benchmark-adjusted performance hovered around zero or was clearly negative.
ESAs warn consumers on the risks of crypto-assets and list key risks
The ESAs warn consumers that many crypto-assets are high risk and speculative. These are not suited for most retail consumers as an investment or as a means of payment or exchange. Risks may include:
Extreme price movements
Absence of protection
Fraud and malicious activities
Hacks, operational risks and security issues
Currently, there are more than 17,000 different crypto-assets, some of them being sometimes referred to as so-called 'virtual currencies' or digital 'coins' or 'tokens'. The most prominent crypto-assets include bitcoin and ether, which together represent about 60% of the total market capitalisation of crypto-assets. The energy consumption of some crypto-assets is high, e.g., from mining and validation processes, and consumers should be aware of their environmental impact. The warning includes a list of issues which consumers should know and check.
Study on Standards for ESG Benchmarks
The European Commission is considering introducing EU standards for ESG benchmarks used by asset managers and other investors. The Commission has engaged PwC to perform an analysis of the current situation with regard to ESG benchmarks in Europe and internationally. Please speak with your usual contact on the Asset Management & Investment Funds team if you would like to contribute to the survey of benchmark users.