Asset Management & Investment Funds: EU & International Developments - Oct 2020

AIFMD consultation

The EU Commission launched a consultation relating to its review of the AIFMD (ESMA's recommendations were discussed in our August Bulletin).

The consultation invites responses on the following topics:

  • Authorisation/scope: 
    • Scope of the AIFM licence and its potential extension to smaller AIFMs.
    • Level playing field concerns for the regulation of other financial intermediaries, such as MiFID firms, credit institutions and UCITS managers that provide similar services.
  • Investor protection:
    • Investor access that takes into account the differences between retail and professional investors.
    • Potential for an EU AIF that would be suitable for marketing to retail.
    • Adequacy of disclosure requirements including specific requirements that could be added, changed or removed from the current rules.
    • Possible ambiguities in the depositary regime and the lack of the depositary passport.
    • Potential improvements to AIFMD rules on valuation.
  • International issues:
    • How best to achieve the equitable treatment of non-EU AIFs and secure a wider choice of AIFs for investors while at the same time ensuring that EU AIFMs are not exposed to unfair competition or are otherwise disadvantaged. This topic includes questions on delegation, including whether the delegation rules are sufficiently clear to prevent the creation of letterbox entities in the EU and whether delegation rules should be complemented by way of quantitative criteria, or a list of core or critical functions that would always be performed internally.
  • Financial stability:
    • How to ensure NCAs and AIFMs have the tools necessary to effectively mitigate and deal with systemic risks. Specific input regarding improvements to the AIFMD supervisory reporting template is invited with a particular focus on the increased activities of AIFs in the credit market. The consultation suggests more centralised supervisory reporting and improved information sharing among the relevant supervisors. A revised supervisory structure and cooperation measures among the competent authorities are another focus of this consultation.
  • Investment in private companies:
    • Potential improvements, effectiveness of the current rules and their potential enhancement.
  • Sustainability:
    • How the alternative investment sector can participate effectively in the areas of responsible investing and the preservation of our planet.
  • UCITS:
    • A more "coherent" approach may be warranted. This includes the question of a single licence for AIF and UCITS managers, harmonised metrics for leverage calculation and reporting on the use of liquidity management tools.
  • AOB:
    • Stakeholders are invited to raise other AIFMD related issues and submit proposals on how to otherwise improve the AIFMD legal framework with regard to any issues not directly addressed in the consultation.

The Commission notes that the process may also lead it to adjust the existing EU rules on UCITS. The consultation closes on 29 January 2021. The Commission intends to put forward a legislative proposal amending the AIFMD in the form of a Directive in Q3 2021.

Benchmarks and LIBOR 

 ESMA issued a statement in relation to the consequences of Brexit for the ESMA register for benchmark administrators and third country benchmarks under the BMR. 

  • At the end of the Brexit transition period (on 31 December 2020), the UK will officially become a third country. UK benchmark administrators will then be removed from the ESMA register of administrators and third-country benchmarks as the BMR will no longer apply to them. Such UK administrators will then qualify as third country administrators (for which the BMR foresees different regimes to be included in the ESMA register, namely: equivalence, recognition or endorsement).  ESMA issued a statement in relation to the consequences of Brexit for the ESMA register. The statement clarifies that EU supervised entities (including UCITS, UCITS management companies and AIFMs) will be permitted to use such third country benchmarks during the BMR transitional period until 31 December 2021, if the benchmark is already used in the EU. So EU supervised entities can use third country UK benchmarks, even if they have been removed from the ESMA register, until 31 December 2021.
  • Absent an equivalence decision by the European Commission, UK administrators will have until the end of the BMR transitional period of 31 December 2021 to apply for recognition or endorsement in the EU, in order for the benchmarks provided by these UK administrators to be included in the ESMA register again. 
  • Similarly, if some UK third country benchmarks were included in the ESMA register before the end of the Brexit transition period because of a recognition or an endorsement status granted by the UK, those third country benchmarks will be removed from the ESMA register at the end of the Brexit transition period. The BMR transitional period to 31 December 2021 also applies to these third country benchmarks which were endorsed or recognised in the UK. Therefore, for the BMR transitional period, the removal from the ESMA register would not have an effect on the ability of EU supervised entities to use those third country benchmarks.
  • Again, absent an equivalence decision by the European Commission, these third country benchmarks previously endorsed or recognised in the UK, will have until the end of the BMR transitional period of 31 December 2021 to apply again for recognition or endorsement in the EU in order to be included in the ESMA register. 

Meanwhile the EU Commission's July proposal for a regulation amending the BMR as regards the exemption of certain third-country foreign exchange (FX) benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation continues through the legislative process. The Council of the EU issued a press release on the BMR and amendments addressing LIBOR cessation (among other issues).

ESMA work programme for 2021

ESMA published its work programme for 2021. ESMA's key priorities in 2021 include the following.

  • Supervisory convergence and building an EU common risk-based and outcome-focused supervisory culture. Areas of focus will include: 
    • fund liquidity risk and liquidity management tools
    • retail investment product costs and performance
    • ESG reporting
    • guidelines on marketing communications and a report on marketing requirements and marketing communications (for the Regulation on facilitating cross-border distribution of collective investment undertakings)
    • ESMA's annual reports on UCITS and AIFMD sanctions
    • peer review on supervising the cross-border activities of investment firms
    • NCAs' handling of relocation to the EU27 in the context Brexit
    • peer review on NCAs' handling of relocation to the EU27 in the context Brexit
    • workshops with NCAs on investment management matters
    • AIFMD co-operation arrangements with relevant third-country authorities;
    • common supervisory actions
    • supervisory briefings, opinions, statements and Q&As
  • Risk assessment: ESMA's emphasis will be on integrating the new focus on financial innovation and ESG into its risk analysis, providing data for risk-based supervision and supporting policy and convergence work. It will continue to monitor the impact on markets of the COVID-19 pandemic and Brexit.
  • Single rulebook: ESMA intends to contribute to the development of the single rulebook following the upcoming AIFMD review (if required). 

European Commission FAQs on platform on sustainable finance

On 1 October 2020, the European Commission published a set of FAQs on the setting-up and work of the platform on sustainable finance.

As required by the Taxonomy Regulation, the platform on sustainable finance will advise the Commission on issues such as the development of robust and science-based technical screening criteria for the EU taxonomy, and policy development. The platform webpage is here.

ESMA instructions for MMFR reporting

ESMA issued an update of the validations of the technical instructions for reporting under the Money Market Funds Regulation (MMFR). The changes are not related to the published XML schemas. They add new warning type validations or provide clarifications on existing validation rules to fix inconsistencies or ease the understanding of the rules. As the updates in the validation rules have no effect on data processing, the deadline for reporting remains unchanged. Press report is here. 

ESMA final draft technical standards on MiFID II third-country firm regime

ESMA published its final report containing draft regulatory and implementing technical standards relating to the provision of investment services and activities in the EU by third-country firms under MiFID II and MiFIR. MiFID II and MiFIR were amended by the Investment Firms Regulation and the Investment Firms Directive and these amendments included new reporting requirements.

ESMA review of the Market Abuse Regime

ESMA published its review of the Market Abuse Regime.  The report's recommendations will feed into the European Commission's review of MAR. The report concludes that overall MAR has worked well in practice and is fit for purpose. The report includes a significant number of proposals for specific amendments and clarifications rather than a major overhaul of the legislative framework.

For more information in relation to any of these topics please speak with your usual contact on the A&L Goodbody Asset Management & Investment Funds team.

Date published: 29 October 2020