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AQMetrics Regulatory Round-up: July 2020


Welcome to AQMetrics regulatory round-up, a monthly initiative that keeps readers abreast of all the latest regulatory news and events.

Last month seemed relatively quiet compared to an action packed April and May, when the Covid-19 crisis was dominating headlines. Now, however, regulators have the new liquidity stress tests and a possible “no deal” Brexit in their sights, while there is also a potential MiFID II rollback that would ease pressures on asset managers when it comes to research unbundling and best execution. A welcome relief given everything that’s happened in 2020.

All in all, July saw a resurgence in regulator activity, proving there’s never a summer lull when it comes to regulations. And with only 6 weeks to get ready for the new liquidity stress tests, European UCITS and AIF funds should now be putting the finishing touches to their new tests.

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7 July, European Commission updates webpage

The European Commission (EC) has updated its webpage on getting ready for the end of the Brexit transition period. The EC is reviewing and updating more than 100 sector specific stakeholder preparedness notices that it published during the Article 50 notices. The latest state of play in relation to financial services can be found here.

While it will largely be business as usual until the end of this year, provided firms obtained a single authorisation passport, it’s never too early to prepare, with the EC stating that firms ‘should finalise and implement their preparatory measures by 31 December 2020 at the latest to be ready for the changes that will happen under all scenarios.’

17 July, ESMA tells market participants to prepare for end of transition period

Similarly, ESMA has urged market participants to finalise preparations and implement suitable contingency plans ahead of the end of the UK’s transition period on 31 December 2020. It also confirmed that previously agreed Memoranda of Understandings (MoUs) on cooperation and information exchange concluded with the UK’s Financial Conduct Authority (FCA) remain valid and will come into effect at the end of the transition period. That will bring welcome certainty to the Irish funds industry.

‘Once the UK’s transition period ends, financial market participants whose activity might be impacted should have fully implemented their preparatory measures to mitigate any risks stemming from the end of the transition period,’ ESMA said. ‘All entities should also have provided appropriate information to their clients on any resulting consequences.’

Liquidity regulations

10 July, CSSF launches new ESMA supervisory exercise

The Commission de Surveillance du Secteur Financier (CSSF) announced the launch of a new ESMA supervisory exercise in relation to the ESRB Recommendation on Liquidity Risk in Investment Funds.

On 6 May 2020, the ESRB recommended that ESMA, together with national competent authorities, undertake a focused piece of supervisory engagement with those investment funds having significant exposure to corporate debt and real estate assets. Fund managers were required to complete the questionnaire by 31 July 2020.

The CSSF’s wider supervisory action into liquidity has been ongoing since February.

13 July, CBI issues notice on liquidity stress testing for UCITS and AIFs

The CBI recently published a notice of intention to follow ESMA’s Guidelines on liquidity stress testing for UCITS and AIFs.

The Irish regulator said it plans to consult on the incorporation of specific requirements. Until then, however, it expects full compliance with the Guidelines from 30 September, when ESMA’s liquidity stress test rules come into force. You can read more about the guidelines in our Whitepaper here.

16 July, ESMA publishes translations for liquidity guidelines

ESMA issued the official translations of its guidelines on standardised procedures and messaging protocols.

Importantly, National Competent Authorities (NCAs) to which the Guidelines apply must notify ESMA whether they comply or intend to comply with the Guidelines within two months of the date of publication by ESMA of the Guidelines in all EU official languages.

MiFID II rollback review

24 July, European Commission considers MiFID II research and reporting rollback

In a move that surprised many, the European Commission announced that it’s considering rolling back several key MiFID II regulations in an attempt to ease the regulatory burdens on asset managers and recapitalise the real economy, particularly small and medium sized enterprises. The proposed rollbacks include research rebundling and the doing away with detailed best execution reports under MiFID II.


The proposals would certainly be welcome. Research unbundling, for instance, has been a controversial rule that has attracted the ire of brokers and asset managers alike, while potentially hindering parts of the real economy as well. With asset managers forced to pay for research that is seperate from their trading fees in a bid to remove any conflicts of interest, many have cut back on their overall research spend.

That’s meant the amount of research, particularly into small or medium sized companies, has plummeted, making markets less efficient but also hindering the capital raising of these smaller companies – many of whom rely on research reports to garner interest from would-be investors.

The unbundling rule was already subject to an ongoing consultation, where the industry strongly advocated for the removal of such rules. Under the new proposals, firms would be allowed to ‘re-bundle’ research and trading costs to all fixed income trading and for companies with a market cap of less than €1 billion.

Best execution reporting

Elsewhere, the European Commission is also considering doing away with MiFID II best-execution reports, which require asset managers to publicly disclose the quality of transaction executions periodically. That includes things like trade prices, costs, speed, liquidity, and requires significant data aggregation and reporting in a bid to make sure that firms are getting the best outcomes for their clients.

Like unbundling, though, best execution has also been heavily criticised: very few investors read them, and most asset managers say they’re not useful overall. In light of the Covid-19 crisis, ESMA had told national competent authorities not to prioritise supervisory action against venues and firms in respect to their execution reporting anyway. The new proposal will extend those suspensions, while a review of MiFID II in 2021 could see best execution reports become a thing of the past permanently.

The Commission’s proposals require approval by the parliament and Council, and will likely become effective in early 2021. It would certainly be a welcome move among asset managers.

SEC expands compliance Inspections and Examinations (OCIE)

On 28 July, the SEC announced the creation of the Event and Emerging Risks Examination Team (EERT) in the Office of Compliance Inspections and Examinations (OCIE).

The EERT will proactively engage with financial firms about emerging threats and current market events, and quickly mobilize to provide expertise and resources to the SEC’s regional offices when critical matters arise.

According to the SEC, it will also ‘help ensure, through examinations and other firm engagement and monitoring activities, that firms are better prepared to address exigent threats, incidents, and emerging risks.’

It added that, ‘The EERT will also work with OCIE staff to provide expertise and support in response to significant market events that could have a systemic impact or that place investor assets at risk, such as exchange outages, liquidity events, and cyber-security or operational resiliency concerns.’

While markets have recovered since the dramatic March sell-off as central banks have sought to shore up markets, regulators remain concerned that such incidents could reoccur, and that some firms and participants are ill-prepared to deal with another crisis.


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