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AQMetrics Regulatory Round-up: May 2021

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

May proved to be another busy month for regulators, with liquidity again a key focus. Following an ESMA consultation two months ago, the CBI issued an important Dear Chair letter to UCITS firms, urging them to do more to bolster their liquidity management frameworks. Firms will have until the end of the year to show they’ve made the necessary changes and considerations.

ESMA also issued a number of technical guidelines, as well as proposing to permanently lower the threshold to notify NCAs of net short positions on shares if they surpass 0.1% of the portfolio. The move is likely to irk some hedge funds, and is a continuation of the emergency measures put in place after the Covid-19 pandemic saw markets tumble in March last year.

But it was the FCA that outlined the most sweeping changes, after publishing a major MiFID II consultation on research and execution reporting in April. As well as publishing their roadmap for the next six months, the UK regulator issued an important statement on liquidity mismatches in open-ended funds and launched a much-anticipated consultation on a new fund type for so-called long-term assets.

The proposal has proven controversial. If implemented, however, it promises to shake-up UK investment in venture capital, private equity, private debt, real estate, and infrastructure.

FCA – all reporting firms now moved to FCA’s new data collection platform Regdata

On 19 May the FCA confirmed that all reporting firms have now been moved to its new reporting platform, Regdata, which replaced its longstanding Gabriel portal. Over 55,000 firms have made the move in recent months.

The new platform is central to the regulator’s push to become more technologically advanced. According to the watchdog, Regdata will help it harness the power of data and advanced analytics to transform financial regulation. You can view a range of short explainer videos here.

FCA publishes feedback to consultation paper on longer redemptive notice periods in authorised open-ended property funds

On 7 May the FCA published feedback to its August consultation on liquidity mismatches in open-ended property funds, a hot topic within the UK investment industry. The FCA had proposed having notice periods of between 80 to 180 days before an investment can be redeemed, rather than the usual daily liquidity that was previously offered – and led to the gating of over a dozen property funds following Brexit and the Covid-19 pandemic.

However, in reply the FCA said it won’t make a final decision until Q3 2021, at the earliest. ‘This is because we have taken the feedback into consideration, specifically around the operational work necessary for fund managers and most other firms to support notice periods,’ the regulator said.

It added: ‘We also need to address some of these operational challenges to make progress on new options for a Long-Term Asset Fund (LTAF), on which we are currently consulting. We will therefore continue to work with industry stakeholders, including through the Productive Finance Working Group (PFWG) jointly set up by the FCA, the Bank of England and Her Majesty’s Treasury (the Treasury) to overcome these operational barriers.’

FCA consults on Long-Term Asset Fund (LTAF) for illiquid assets

The same day (7 May) the FCA announced that it was launching a consultation on a new type of fund to support investment in so-called long-term assets, including venture capital, private equity, private debt, real estate and infrastructure.

‘The aim of this new long-term asset fund (LTAF) would be to provide a fund structure through which investors can invest with appropriate confidence in less liquid assets because the fund structure is specifically designed to accommodate relatively illiquid assets,’ the regulator said.

That would require large operational changes, since the FCA is proposing that LTAF rules embed longer redemption periods, high levels of disclosure, and specific liquidity management and governance features.

The FCA has opened feedback until 25 June, with the working group expected to draw its conclusions a month later in July. While many of these illiquid assets are held in investment trusts, rather than open-ended funds, the proposed changes would still herald a major shake-up of the UK investment industry.

FCA publishes its regulatory roadmap

Also on 7 May, the FCA published the third edition of the Regulatory Initiatives Grid, outlining its regulatory roadmap for the next six months in its latest bi-annual report. 

Upcoming work listed in the 40-page document includes eight new ESG initiatives, the Bank of England and FCA’s work to transform data collection, and a review – and possible overhaul – of fund liquidity across the UK’s funds regime (outlined above).

A consultation on climate-related disclosures affecting asset managers, life insurers and FCA regulated pension providers is set to be released in June. The new rules are set to codify many of the recommendations of the Taskforce on Climate related Financial Disclosures (TCFD), and the final rules will be published later in Q4.

ESG disclosures are also under the spotlight, with the regulator in the process of developing guiding principles for the design, delivery and disclosure of ESG / sustainable fund products. A consultation paper will be released this month, and it’s hoped this will ensure firms are clear about their existing obligations, including their responsibility to provide clear information to consumers.

And in what’s likely to herald the biggest ESG shift for UK fund managers and consumers, the FCA confirmed that it will be working closely with the Bank of England to produce a UK green taxonomy that’s somewhat similar to the EU’s, although an exact timeline has not been announced.

ESMA consults on guidelines for data transfer between trade repositories under EMIR and SFTR 

On 28 May, ESMA launched a consultation on amendments to its Guidelines on data transfer between Trade Repositories (TRs) under EMIR, as well as on Guidelines regarding data transfer between TRs under SFTR.

The new set of Guidelines establishes a framework for data transfer of Securities Financing Transactions (SFTs) between TRs under SFTR. They will also change the current Guidelines on data transfer between TRs under EMIR, with a view to maintaining access to historical data for regulatory authorities and ensuring a high degree of data quality as well as a competitive TR environment. The changes are designed to enhance the quality of data available to authorities.

The closing date for responses is 27 August 2021, with ESMA looking to finalise the proposed Guidelines and publish a final report by Q1-2022.

ESMA publishes guidelines for fund’s marketing communications

On 27 May, ESMA published its final report on its Guidelines under the Regulation on cross-border distribution of funds. The purpose of the Guidelines is to clarify the requirements that funds’ marketing communications must meet, which is to:

  • be identifiable as such;
  • describe the risks and rewards of purchasing units or shares of an AIF or units of a UCITS in an equally prominent manner; and
  • contain clear, fair and not misleading information, taking into account the on-line aspects of marketing communications.

The publication of the translations will trigger a two-month period during which national competent authorities must notify ESMA whether they comply or intend to comply with the Guidelines. The guidelines will apply 6 months after the date of the publication of the translations.

ESMA publishes guidelines on the calculation of positions under SFTR

On 25 May, ESMA released its Final Report and Guidelines on the calculation of positions in SFTs by Trade Repositories (TRs) under the Securities Financing Transactions Regulation (SFTR).

The purpose of the Guidelines is to ensure that a uniform methodology is used under EMIR and SFTR, while taking into account the specificities of Securities Financing Transactions (SFT) Reporting.

The Guidelines aim to ensure consistency of position calculation across TRs, with regard to the time of calculations, the scope of the data used in calculations, the data preparation, the recordkeeping of data and the calculation methodologies.

The Guidelines will apply from 31 January 2022.

ESMA proposes permanently lowering threshold for reporting short positions to 0.1% 

In a move that’s likely to irk many AIF funds, ESMA has recommended to the European Commission (EC) that it permanently lower the threshold to notify NCAs of short positions. The threshold had been lowered from 0.2% to 0.1% during the Covid-19 crisis in March 2020, when regulators were concerned about financial stability.

In its 20 May recommendation, ESMA noted that regulators were able to glean a ‘substantial amount of additional and essential information became available to NCAs due to the reporting of net short positions at the level of 0.1%.’

It added that, ‘this additional transparency to NCAs of the real level of net short positions established in the market translates into an improved ability by NCAs to conduct market oversight. ESMA therefore considers it essential to lower the reporting threshold to 0.1% on a permanent basis.’

Following the recommendation, the EC may adopt a delegated act modifying the notification threshold in Article 5(2) of the Short Selling Regulation, in a move that would permanently lower the threshold to 0.1%.

CBI Dear Chair Letter warns UCITS firms to do more on liquidity frameworks

And on 18 May, the CBI put Irish UCITS firms on notice, warning in a Dear Chair Letter that they must do more to bolster their Liquidity Risk Management (LRM) frameworks before the end of the year.

The letter came just two months after ESMA released a sweeping review that underlined a number of shortcomings among AIF and UCITS funds, although it noted that the overall level of compliance was generally satisfactory.

Irish UCITS firms will now have until the end of the year to show that they’ve addressed the concerns outlined in the letter and have worked to bolster their liquidity frameworks.

CBI publishes review of algorithmic trading firms

On 11 May, the CBI published a thematic review of firms undertaking algorithmic trading. The review assessed how firms undertaking algorithmic trading have incorporated MiFID II requirements into their risk management and control frameworks.

While some positive practices were identified, the regulator said risk and control frameworks require continued improvement, and that it will continue to engage with firms where specific concerns were identified. All firms engaging in algorithmic trading should read the review and take all necessary remedial action, it added.

CSSF says UCI assets have grown 20% over the last year

In its monthly global situation of undertakings for collective investments report, Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF) said total UCI, specialist investment and SICAR assets increased 0.85% month over month, to nearly €5.3 trillion now. That represents a 20.21% increase over the past year.

The total number of UCIs also increased to 3,554, the CSSF said, up from 3,548 the previous month.

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