UK/EU Investment Management Update (April 2020)

ESMA asks the NCAs to consider the possibility that:

• Execution venues unable to publish RTS 27 reports due by 31 March 2020 may only be able to publish them as soon as reasonably practicable after that date and no later than by the following reporting deadline (i.e., 30 June 2020).
• MiFID investment firms may only be able to publish the RTS 28 reports due by 30 April 2020 on or before 30 June 2020.

ESMA encourages NCAs not to prioritise supervisory action against execution venues and firms in respect of the deadlines of the general best execution reports. However, ESMA recommends that firms and execution venues keep records of the internal decisions taken in relation to the expected delay.

ESMA reminded firms of the MiFID II requirements in this area, although recognising that due to the unique circumstances created by the COVID-19 outbreak, the recording of relevant conversations required by MiFID II may not be practicable in every situation. However, firms are still expected to consider what alternative steps they can take to mitigate the risks related to the lack of recording.

Firms are expected to deploy all possible efforts to ensure that any disruption to telephone recordkeeping is kept to a minimum and that recording of telephone conversations is restored as soon as possible.

ESMA will continue to monitor developments in financial markets in coordination with national competent authorities, including the application of relevant EU requirements by market participants, as a result of the COVID-19 situation and is prepared to use its powers to ensure financial stability, orderly functioning of EU markets and investor protection.

ESMA expects competent authorities not to prioritise their supervisory actions towards entities subject to SFT reporting obligations from 13 April until 13 July 2020.

ESMA acknowledges the challenges that TRs and their counterparties may face in SFTR implementation and expects TRs to be registered sufficiently ahead of the next phase of the reporting regime — 13 July 2020 — for credit institutions, investment firms, central clearing counterparties and CSDs and relevant third-country entities to start reporting as of that date but no earlier than 13 April 2020.

ESMA will continue to monitor the implementation of SFTR by the relevant market participants as well as the impact of the relevant measures taken with regards to COVID-19 to ensure alignment of SFT reporting requirements and supervisory practices in the EU.

For more information, please refer to our Update of 28 February 2020, EU SFTR Reporting for Investment Managers — Top Five Things to Know.

First, referring to item 1 (COVID-19 – MiFID II – ESMA statement on best execution reports) above, the FCA states:

“[W]e have no intention of taking enforcement action where a firm:

• does not publish RTS 27 by 1 April 2020, provided it is published no later than 30 June 2020
• does not publish RTS 28 and Article 65(6) reports, provided they are published by 30 June 2020”

Secondly, under the FCA rules (implementing MiFID), firms providing portfolio management (and certain other) services are required to inform investors where the value of their portfolio falls by 10% or more compared with its value in their last periodic statement, and for each subsequent 10% fall in value. Given the highly volatile market, the FCA states:

“We have no intention of taking enforcement action where a firm: …

• chooses to cease providing 10% depreciation reports for any professional clients”

The FCA will adopt this approach for a period of 6 months (to 1 October 2020).

Amongst other things, the FCA has made it clear (here) that “only those workers who cannot work from home, continue to travel to and from work,” and that it is the responsibility of senior managers at the firm (under the Senior Managers and Certification Regime) to ensure that the firm is in compliance with the FCA’s expectations under the current health crisis.

As for the FCA’s expectations on firms in terms of their ongoing regulatory obligations, the FCA notes the following:

• Firms should continue to record calls (as required by the FCA rules), but the FCA accepts that some scenarios may emerge where this is not possible. Firms should make the FCA aware if they are unable to meet these requirements.
• Firms may experience difficulties in submitting their regulatory data, in which case the FCA expects firms to maintain appropriate records during this period and submit the data as soon as possible.
• Firms should continue to take all steps to prevent market abuse risks. This could include enhanced monitoring or retrospective reviews.
  
  

• This change may affect some trade associations’ members, stakeholders or clients. For example, LIBOR may be used in bank loans to companies or in contracts between nonfinancial companies that have arrangements for payments that add interest.
• The working group established by the FCA and BoE to oversee this change (RFRWG) has chosen the Sterling Overnight Index Average (SONIA) as its preferred successor for UK wholesale financial markets. SONIA is based on transactions that firms report to the BoE. It reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions.
• By the end of September 2020, banks and lenders are to stop making new LIBOR-based loans that mature beyond the end of 2021. Firms with existing LIBOR-based arrangements that mature after 2021 will have to convert them to new benchmarks such as SONIA.
• For more information on the LIBOR transition and next steps, see this factsheet published by the RFRWG.

The proposals set out in the Consultation Paper build upon the recommendations of the TCFD, an existing global standard. The FCA aims, through the new rule, to provide the transparency the market needs to be able to assess how well companies are adjusting to the risks of climate change.

In addition to comments on the new rule, the FCA is also seeking feedback on clarifications to how existing requirements applicable to all listed companies already require climate and other sustainability-related disclosure. The FCA is asking for any feedback on the Consultation Paper to be provided by 1 October 2020.

This new regulatory body forms part of the UK government’s bid to overhaul financial services rulemaking after Brexit and provide for greater co-ordination between regulators, following complaints that financial services companies were overburdened by legislation from overlapping regulators.

The forum will comprise the BoE, the Prudential Regulation Authority, the FCA, the Payment Systems Regulator and the Competition and Markets Authority. The UK Treasury will act as an observer member.

On 19 March 2020, Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, delivered a speech on potential changes for UCITS funds. Key takeaways:

• Certain funds might no longer be considered liquid merely because they invest in listed securities.
• Whilst daily redemption promises are attractive for many fund investors, this is not appropriate for all fund structures.
• The availability of daily redemptions in open-ended funds creates a risk when fund assets cannot be liquidated without material loss of value, that is, where this is an asset-liability mismatch. This risk becomes especially apparent in times such as these when phenomena such as COVID-19 create a precarious financial environment.
• This mismatch can be addressed either through the asset side or the liability side:
  • Asset-side management would mean restricting the assets daily dealing open-ended funds may invest in to those that have sufficient liquidity to be sold same day without material loss of value. The FCA believes this is unlikely to be the optimal solution, given the importance of promoting long-term investment in achieving stable economic growth.
  • Liability-side management can be achieved through the use of swing pricing mechanisms and notice periods. Swing pricing, used in a fair and appropriate manner, can benefit investors by preserving liquidity while removing first mover advantage, whilst notice periods help to promote investor understanding of the risks involved with investing in less-liquid assets and discourage panic-selling.
• From 9 December 2019, almost all FCA solo-authorised firms became subject to the Senior Managers and Certification Regime (SMCR). That serves to reinforce the responsibility of senior management and boards at authorised fund managers. It is the responsibility of relevant managers in authorised firms selling and operating funds to make sure they are designed and run so that the promises made to investors are met.
• The FCA and BoE continue work to evaluate potential policy measures to achieve greater consistency of fund redemptions and welcome input from industry members into this work.