The big month of liquidity finally arrived where we saw a number of liquidity developments come to fruition at the end of the month, including:
Other developments tracked last month and included in this monthâs regulatory round up involve short selling, ESG, MiFID and major shareholding disclosures.
See below this monthâs regulatory round-up of some of the interesting regulatory developments we have tracked throughout September.
For a full list of the developments click here.
On the 30th September, the ESMA Guidelines on liquidity stress testing in UCITS & AIFs took effect. The guidelines set out a principles-based approach which includes 16 guidelines applicable to fund management companies, one to depositaries and one to national competent authorities.
The aim of the Guidelines is to âincrease the standard, consistency and, in some cases, frequency of liquidity stress testing (LST) already undertaken and promote convergent supervision of LST by NCAsâ.
The Guidelines should be adapted to the nature, scale and complexity of the fund in question but are not intended to provide comprehensive guidance regarding liquidity management issues outside the scope of LST.
See our blog for more details on the guidelines:
The requirements of Article 37 of the MMF regulation require MMF managers to submit data to National Competent Authorities (NCAs), who will then transmit this to ESMA. The original date for submission was April, however, this was delayed due to updates to XML schemas.
Due to the delay, the first reports by Money Market Funds (MMF) managers were expected in September 2020 for both the Q1 and Q2 reporting periods.
For more information on Article 37 MMF Reporting see our blog:
Funds Investing in Inherently Illiquid Assets
On 30 September, new COLL Rules came into effect. The rules introduce new obligations on Authorised Fund Managers (AFMs) regarding their liquidity plans for funds invested in inherently illiquid assets (COLL 6.6.3CR and 6.6.3ER).
In summary, the new rules:
- Create a new category of funds – Funds Investing in Inherently Illiquid Assets (FIIA);
- Introduce a requirement for AFMs to temporarily suspend dealing where there is material uncertainty;
- Improve liquidity management through enhanced contingency planning, rapid sales and depositary oversight; and
- Increase disclosures through standard risk warnings and information on how fund managers will manage the fund should liquidity risks crystallise.
For more information on the new rules on FIIAs, see our following blogs:
At the start of September, the Central Bank of Ireland (CBI) published the first version of their Guidance Note on Reporting Requirements for FMCs of Irish-Authorised Money Market Investment Funds (MMFs). This Guidance Note is relevant to all Irish Authorised MMFs, authorised under EU Money Market Funds Regulation (MMFR) and Fund Management Companies of MMFs.
The main purpose of the Guidance Note is to provide information and direction on the completion of MMF reporting by fund management companies, including:
- The âMoney Market Fund Returnsâ for authorised MMFs under Article 37 of the MMFR;
- Ad-hoc Stress Test Reporting under Article 28 of the MMFR;
- Other Ad-Hoc reporting under MMFR; and
- Daily Reporting for MMFs.
The Guidance Note highlighted that Q1 2020 and Q2 2020 are an exception to the Money Market Fund Return Reporting normal rule of 25 days after the return due date. It stated that the returns must be submitted to ONR by no later than Tuesday, 6 October 2020.
On 18th September, the Canadian Securities Administrators (CSA) published guidance to help investment fund managers (IFMs) develop and maintain effective liquidity risk management (LRM) frameworks for investment funds.
Similar to the ESMA guidelines, a large proportion of the Canadian guidelines extend beyond just liquidity stress testing. Both guidelines cite governance as an essential element for an effective Liquidity Risk Management (LRM) process, and provide that oversight of the liquidity management of the fund should be independent from the portfolio management function.
Further similarities between the two guidelines can be seen in the Canadian guidelines where they set out six principles, and related practical implementation strategies for creating and maintaining an effective Liquidity Risk Management (LRM) framework:
- Align the investment objectives, strategy, and redemption policy of the fund with the liquidity profile of the fundâs underlying portfolio assets and the redemption demands of the investor base at the design stage and on an ongoing basis.
- Create and adhere to robust policies and procedures that integrate Liquidity Risk Management (LRM) considerations.
- Perform active, ongoing portfolio monitoring using qualitative and quantitative metrics to ensure adequate levels of liquidity exist to meet redemption needs and other obligations. All relevant data should be used to actively manage liquidity risks.
- Set internal liquidity thresholds and targets that management of the fund can use to assess the liquidity profile of a fund and make any necessary adjustments.
- Report material liquidity events in a timely manner for consideration by relevant personnel of the IFM.
- Where possible, identify emerging liquidity concerns and potential liquidity shortages.
For more information on the new guidelines, see our blog:
The Financial Conduct Authority (FCA) has published a statement for firms providing portfolio management services. The statement outlines a further 6-month extension and amendments to the temporary COVID-19 measures the FCA issued in March. The FCA will not take action for breach of COBS 16A.4.3 EU for services offered to retail investors provided that the firm has:
- Issued at least one notification in the current reporting period, indicating to retail clients that their portfolio or position has decreased in value by at least 10%
- Informed these clients that they may not receive similar notifications should their portfolio or position values further decrease by 10% in the current reporting period
- Referred these clients to non-personalised communications, perhaps made available on public channels, that outline general updates on market conditions (these could contextualise potential drops in portfolio or position value to help consumers meet their objectives, rather than making impulse decisions about their investments) and
- Reminded clients how to check their portfolio value, and how to get in touch with the firm
The original measures on the relaxation of 10% depreciation notifications took effect on Tuesday 31 March 2020 and were due to end on Wednesday 30 September 2020. The new statement has extended the measures until 30th March 2021.
Hong Kong SFC Changes to the Open-Ended Fund Companies Regime Take Effect
The Hong Kong Securities and Futures Commission (SFC) made changes to Hong Kongâs private open-ended fund companies (OFCs) by removing all investment restrictions on private OFCs and enabling Type 1 licensees to act as their custodians. The revised OFC Code is available on the SFC website.
The amendments are detailed in the SFCâs Consultation Conclusions on Proposed Enhancements to the Open-ended Fund Companies Regime.
The SFC has also issued a Circular on the Implementation of Changes to the OFC Regime setting out further details of how the changes will be implemented, which include updated Information Checklists, Template of Instrument of Incorporation for Umbrella Private OFCs and FAQs.
A statutory re-domiciliation mechanism will also be implemented to allow overseas corporate funds to re-domicile in Hong Kong as OFCs. This requires amendments to Part IVA of the Securities and Futures Ordinance (SFO) which will take effect upon completion of the legislative process.
To enable existing private OFC custodians to ensure compliance with the requirements prescribed in the new Appendix A to the OFC Code, custodians will be given a six-month transition period from 11th September 2020 to 10 March 2021 to comply.
- Issued at least one notification in the current reporting period, indicating to retail clients that their portfolio or position has decreased in value by at least 10%
- Informed these clients that they may not receive similar notifications should their portfolio or position values further decrease by 10% in the current reporting period
- Referred these clients to non-personalised communications, perhaps made available on public channels, that outline general updates on market conditions (these could contextualise potential drops in portfolio or position value to help consumers meet their objectives, rather than making impulse decisions about their investments) and
- Reminded clients how to check their portfolio value, and how to get in touch with the firm
The original measures on the relaxation of 10% depreciation notifications took effect on Tuesday 31 March 2020 and were due to end on Wednesday 30 September 2020. The new statement has extended the measures until 30th March 2021.
New Zealand Mandatory Climate-Related Financial Disclosures
In early September, the New Zealand government announced plans to make climate-related financial disclosures mandatory for some organisations. The requirement would apply to publicly listed companies and large insurers, banks and investment managers.
The new regime will be on a comply-or-explain basis, based on the Task Force on Climate-related Financial Disclosures (TCFD) framework.
Firms in scope will be required to make annual disclosures around four thematic areas that represent core elements of how organisations operate:
- Governance
- Strategy
- Risk management
- Metrics and targets (see recommended disclosures section).
Ireland Minister for Finance Publish Draft Investment Limited Partnerships (Amendment) Bill 2020
On 21st September 2020, the Irish Government announced that it had approved the draft text and publication of the Investment Limited Partnerships (Amendment) Bill 2020.
The Bill incorporates significant amendments to enhance the transparency applied to Irelandâs fund vehicles by extending Anti Money Laundering Beneficial Ownership requirements to both Investment Limited Partnerships and to Common Contractual Funds.
Additionally, the Bill makes a number of technical amendments to the Irish Collective Asset Management Vehicles Act of 2015 to enhance the efficiency of the structure and align it with the Companies Acts.
Finally, the Bill also provides that the Central Bank can verify PPSN information pertaining to beneficial ownership registers it operates by proposing an amendment to the Social Welfare Consolidation Act 2005.
FCA Announces Date for Move Away from Gabriel
The Financial Conduct Authority (FCA) has announced the date for the move away from Gabriel. The first firms will be moved from Gabriel to RegData over the weekend of 17 and 18 October. Those firms will then complete their regulatory reporting on RegData. Firms will continue to be moved to RegData from Gabriel in the coming months as the FCA move users across in stages, based on their reporting requirements.
All 52,000 firms will receive direct emails from Gabriel advising them of their moving date. These 3 emails will be sent to firms 3 weeks, 5 days and 1 day before they move to RegData.
Firms will not be able to access RegData until they and their usersâ data have been moved across from Gabriel. Until then, they should continue to report via Gabriel, using their existing Gabriel login details
BaFin Updates FAQs Regarding Threshold Date for the Acquisition of Instruments
The Federal Financial Supervisory Authority (BaFin) has published the updated version of the FAQs on the transparency requirements under part 6 (section 33 et seq.) and part 7 (section 48 et seq.) of the Securities Trading Act – WpHG.
This update contains explanations on the threshold date for the acquisition of instruments (in rem), guidance on how to withdraw a notification that has already been published and a clarification with regard to the application of the depositary exemption.
Indian Government Raises FDI Cap in Defence Sector
The Department for Promotion of Industry and Internal Trade (DPIIT) has announced that it has raised the limit of Foreign Direct Investment (FDI) Cap in the defence sector under the automatic route from 49% to 74%.
Hong Kong SFC Commences Disciplinary Proceedings for Takeover Code Breach
On 16th September 2020, the Securities and Futures Commissionâs (SFC) commenced disciplinary proceedings against Ms Ngai Lai Ha, the chairperson of International Housewares Retail Company Limited)over a breach of the Code on Takeovers and Mergers.
The SFC alleges that in a number of acquisitions of the Companyâs shares, Ngai acquired on each occasion more than 2% voting rights of the Company from her lowest collective percentage interest in the preceding 12 months without making a mandatory general offer under the Takeovers Code.
In 13 separate instances from March to May 2019, Ngai is alleged to have triggered an obligation to make a mandatory general offer and breached the Takeovers Code.
ESMA Renews Short Selling Notification Threshold
On 17th September 2020, ESMA renewed its decision to temporarily require the holders of net short positions to notify NCAâs if the position reaches or exceeds 0.1% of the issued share capital.
This action extends the measures taken on 11 June and will expire on 18 December 2020.
Swedenâs New Short Selling Online Reporting tool
Swedenâs Financial Conduct Authority (FI) has launched a new short selling online reporting tool to track the reporting of net short positions. The new system replaces the email-based system previously used for disclosing positions. It will no longer be possible to notify net short positions by submitting a form via email. In order to notify net short positions, position holders and rapporteurs must create user accounts in the Reporting Portal and delegate authorisation.
UCITS Eligible Market Due Diligence
A welcome announcement for those investing in Sri Lanka and conducting their annual UCITS eligible market due diligence, is that the Colombo Stock Exchange is working on the implementation of the Delivery Versus Payment (DVP) mechanism for Equity securities Clearing and Settlement.
It is anticipated that the proposed DVP Clearing & Settlement model will go Live in February 2021.
This development will assist authorised fund manager in deciding whether the market is UCITS eligible. Under COLL 5.2.10.2, a market must not be considered appropriate unless it:
- Is regulated;
- Operates regularly;
- Is recognised as a market or exchange or as a self-regulating organisation by an overseas regulator;
- Is open to the public;
- Is adequately liquid; and
- Has adequate arrangements for unimpeded transmission of income and capital to or to the order of investors.
