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This month’s briefing covers the latest developments impacting asset managers in the wake of the COVID-19 pandemic. The spread of COVID-19 has significantly and adversely impacted global financial markets.
The recent market turmoil caused by the COVID-19 has had regulators around the world in overdrive. In view of the market volatility, regulators have attempted to shore up the markets with a number of initiatives.
Fund liquidity dominated the headlines throughout 2019 due to a number of fund suspensions – with COVID-19 continuing to have a harrowing impact on the market, the liquidity issues doesn’t appear to be going away any time soon and remains a priority for regulators.
The recent instability in the market has put increasing liquidity pressure on prime money market mutual funds. Some money market mutual funds have experienced significant demands for redemptions by investors. Under ordinary circumstances, they would have been able to meet those demands by selling assets. Recently, however, many money markets have become extremely illiquid due to uncertainty relating to the COVID-19 outbreak.
In response to the impact of the outbreak, the Federal Reserve established the Money Market Mutual Fund Liquidity Facility, or MMLF, on 18th March 2020. The MMLF will enhance the liquidity and functioning of prime money markets.
Under the MMLF, the Federal Reserve will provide a non-recourse advance to an eligible borrower to purchase certain types of assets from an eligible money market mutual fund.
This program was established to respond to uncertainty related to the coronavirus and is authorised until 30th September 2020.
Following the unprecedented challenges brought by the pandemic, standing independent valuers have determined that there is currently “material uncertainty” over the value of commercial real estate (CRE). As a result, there was a wave of UK property funds suspended, trapping almost £13 billion of investor cash.
Due to the suspensions, the FCA published a statement stating “suspensions can be used by managers of open-ended funds, in line with their obligations under applicable regulations. In these circumstances, suspension is likely to be in the best interests of fund investors”.
On 16th March, the European Securities and Markets Authority (ESMA) issued a decision temporarily requiring the holders of net short positions in shares traded on a European Union (EU) regulated market to notify the relevant national competent authority (NCA) if their position reaches or exceeds 0.1% of the issued share capital.
This reduction from the standard 0.2% initial threshold was an attempt by ESMA to not only stem short selling, but also allow greater monitoring of any threat that may derive from short selling and the building up of net short positions which may harm the orderly functioning of markets.
The temporary threshold will apply for an initial period of three months.
Regulators across the EU and in some jurisdictions further afield have banned short selling for varying periods. Some opted for a ban of one month, whilst others including Italy went further and opted for a ban of three months:
- Austria FMA – Short selling banned until 18th April
- Belgium FSMA – Short selling banned until 17th April
- France AMF – Short selling banned 16th April
- Greece HCMC – Short selling banned until 24th April
- Italy Consob – Short selling banned until 18th June
- Malaysia SC – Short selling banned until 30th April
- Taiwan FSC – Under review based on the COVID-19 pandemic situation
- Spain CNMV – Short selling banned until 17th April
Notably, the FCA has thus far has not followed suit and has only fulfilled its obligations under the EU Short Selling Regulation to mirror bans on specific shares as required by its counterparts on the continent.
Additionally, the German investment funds association BVI has fired back at calls for a pan-EU ban currently demanded by some regulators and market participants stating that “A general pan-EU ban on short-selling for securities traded in the EU only makes sense selectively for certain companies and sectors and even then its effectiveness is doubtful”.
Following a similar mindset of the FCA and BVI, the World Federation of Exchanges also issued a statement criticising recent bans on short-selling as damaging to markets and failing to achieve their desired effect.
Short Selling notification thresholds weren’t the only threshold lowered in Italy last month. In addition to the three-month short selling ban CONSOB introduced, they have also lowered the initial threshold for major shareholding disclosures. For a period of three months, the minimum thresholds for disclosure are lowered from:
In contrast to the EU ramping up pressure with lower thresholds, in the US the regulators have issued a number of Orders providing filing relief and extensions to deadlines.
Under the Advisers Act Release, provided certain conditions are met, Form PF and From ADV have been extended by 45 days.
Pursuant to CFTC Regulation 4.27, small and midsize CPOs are required to file a report on Form CPO-PQR within 90 days of year end, and large CPOs are required to file a report on Form CPO-PQR within 60 days of year end.
Providing some respite to commodity-focused investment funds, the Commodity Futures Trading Commission (CFTC) has announced the extension of the deadlines. For small and midsize CPOs, the deadline has been extended to 15th May 2020, and for large CPOs, the deadline has been extended until 15th July 2020.
Further exemptions providing in two Orders on 4th and 25th March include relief of filing requirements required under the Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, Regulation 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1. The relief extends to the 1st July and allows filings to be submitted 45 days after the original due date.
In a class action brought by the Norwegian Consumer Council as class representative for 180 000 unitholders in three mutual funds managed by DNB Asset Management AS, the Supreme Court found, like the Court of Appeal, that the unitholders were entitled to a reduction of the management fee.
After an individual interpretation of the fund’s statutes and other investor information, it was accepted that the management of the funds had not been in accordance with the agreement entered into with the unitholders. The funds had not been managed in a way that gave the unitholders the financial risk exposure – and thus the opportunity to yields beyond the funds’ reference index – for which they had paid. The conditions for a price reduction were met, although it was not possible to demonstrate a market price for the deficient performance. The price reduction was set to 0.8 percent of the individual group member’s unit.
DNB were required to refund the 180,000 investors around $37 million for paying for management services they did not receive.
The guidelines apply in relation to Article 28 of the MMF Regulation and establish common reference parameters for the stress test scenarios to be included in the stress tests conducted by MMFs or managers of MMFs in accordance with that Article.
The purpose of the guidelines is to ensure common, uniform and consistent application of the provisions in Article 28 of the MMF Regulation. In particular, and as specified in Article 28(7) of the MMF Regulation, they establish common reference parameters of the stress test scenarios to be included in the stress tests, taking into account the following factors specified in Article 28(1) of the MMF Regulation:
- hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF;
- hypothetical changes in the level of credit risk of the assets held in the portfolio of the MMF, including credit events and rating events;
- hypothetical movements of the interest rates and exchange rates;
- hypothetical levels of redemption;
- hypothetical widening or narrowing of spreads among indexes to which interest rates of portfolio securities are tied;
- hypothetical macro systemic shocks affecting the economy as a whole.
ESMA has delayed the deadline for the first reports by Money Market Funds (MMF) managers under the MMF Regulation. These should now be submitted by September 2020. The original date for submission was April 2020.
The change of timeline is not due to COVID-19, but as a result of an update to the XML schemas that should be used for the reporting. In turn, ESMA felt MMF managers will need additional time to comply with the reporting obligation.
In response to the recommendations of the ESRB issued back in 2018, ESMA has launched a consultation on the draft guidance to address leverage risks in the AIF sector. The proposed Guidelines address the assessment of leverage-related systemic risk and aim at ensuring that NCAs adopt a consistent approach. The guidelines provide that NCAs should impose leverage limits on AIFs posing risks to financial stability. When deciding to impose leverage limits NCAs should consider:
- risks posed by funds according to their type (hedge funds, private equity, real estate, fund of funds or any other relevant type) and risk profile, as defined by the risk assessment; and
- risks posed by common exposures. Where the NCA determines that a group of funds of the same type and similar risk profiles may collectively pose leverage-related systemic risks, the NCA should apply leverage limits in a similar or identical manner to all funds in that group.
The consultation closes on 1st September 2020.
The FCA will be moving to a new data collection platform which will replace Gabriel. Gabriel is the FCA’s main regulatory data collection system, facilitating the collection of over 500,000 submissions annually, across 120,000 users and 52,000 firms.
From 2nd April 2020, Gabriel users will be asked to complete a mandatory one-time registration activity the next time you log in. After registration, users can continue to use Gabriel as normal until the FCA move the user to the new system.
In a Dear CEO letter, the FCA stated that that they have no intention of taking enforcement action where a firm:
- has issued at least one notification to a retail clients within a current reporting period indicating their portfolio has decreased in value by at least 10%; and
- subsequently provides general updates through its website, other public channels (such as social media) and/or generic, non-personalised client communications. These communications should update clients on market conditions, explain how clients can check their portfolio value and invite clients to contact the firm if they wish; or
- chooses to cease providing 10% depreciation reports for any professional clients
The FCA will adopt this approach for a period of 6 months (to 1st October 2020).