This month’s regulatory round-up, pulls together some of the interesting regulatory developments we have tracked throughout May.
It’s no surprise that liquidity continues to dominate the headlines with the CSSF launching the IFM notifications on fund issues and large redemptions, EU Member States publishing their intentions regarding the Money Market Fund Stress Tests, and the ESRB making recommendations regarding liquidity risk in investment funds.
Additionally, foreign investment restrictions are increasingly on the radar with a number of regulators making changes to their foreign investment regimes in response to the COVID-19 pandemic.
For a full list of the developments click here.
The European Systemic Risk Board (ESRB) has published a statement setting out its recommendation to ESMA regarding liquidity risks in investment funds.
The ESRB cite the sharp fall in asset prices observed at the onset of the coronavirus pandemic accompanied by significant redemptions from some investment funds and deterioration in financial market liquidity resulting in liquidity concerns. In particular, the ERSB has identified two segments which it considers are at greater risk of liquidity issues and require greater scrutiny from a financial stability perspective:
- The first segment comprises investment funds with significant exposures to corporate debt
- The second segment identified by the General Board comprises investment funds with significant exposures to real estate.
In the Recommendations, ESMA has been tasked with coordinating with NCAs a focused piece of supervisory engagement with investment funds that have significant exposures to corporate debt and real estate assets by 31st October 2020. The objective of the engagement is to assess the current state of preparedness of these two fund segments to potential future redemption pressures, further declines in market liquidity or increased valuation uncertainty, while also considering any steps that could enhance that preparedness.
The ESRB also highlighted that liquidity management tools available to fund managers can help to mitigate ‘first-mover advantage’ dynamics and the risk of asset fire sales. To mitigate this, the ESRB has emphasised that it is important that liquidity management tools are used in a timely manner, as necessary in such circumstances, especially by funds that invest in less liquid assets or assets that become temporarily illiquid and have short redemption periods.
On 19th May the to the Korean government approved the revisions enforcement decree of the Financial Investment Services and Capital Markets Act in preparation for the implementation of the Asia Region Funds Passport (ARFP) on May 27.
The Asia Region Funds Passport is a multilateral framework to facilitate the cross-border marketing of managed funds across participating economies in Australia, New Zealand, Japan, the Republic of Korea and Thailand.
In early April, the CSSF introduced a weekly questionnaire requiring IFMs to provide the CSSF with weekly update on financial data, including total net assets, subscriptions and redemptions.
Additionally, from 2nd June, certain IFMs will have to notify the CSSF via eDesk when larger redemptions at the level of Luxembourg regulated investment funds occurs. For example, when daily net redemptions exceed 5% of the NAV or when weekly net redemptions exceed 15%.
The Central Bank of Ireland published a notice of intention in relation to the application of the ESMA Guidelines on stress test scenarios under the Money Market Fund (MMF) Regulation (EU) 2017/1131.
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 Central Bank of Ireland will, in due course, consult on the incorporation of a provision in the Central Bank UCITS Regulations and AIF Rulebook that all managers of MMFs adhere to the Guidelines. In the interim, the Central Bank expects full compliance with the Guidelines.
The German Government has extended the list of companies for which the acquisition of a stake by a purchaser from outside the European Union can be examined. The new list includes companies that develop or manufacture goods that are “indispensable for the maintenance of a properly functioning health system in Germany”, such as personal protective equipment (PPE), drugs and vaccines.
Any acquisition of a stake of ten per cent or more in security-relevant businesses in the health branch must be reported and can be examined.
In response to the impact of COVID-19, New Zealand has amended the Overseas Investment Act 2005 by putting in place temporary requirements for foreign investors to notify an intention to take a controlling investment in any New Zealand business, if that results in more than a 25% ownership interest, or increases an existing interest to or beyond 50, 75 or 100%.
After two months, Austria, Belgium, France, Greece, Italy and Spain lifted their respective short selling bans. One point to note is that 0.1% reporting threshold is set to remain in force until 16th June and may be renewed.
On 8th May 2020, the Modifications to the Foreign Exchange and Foreign Trade Act (FEFTA) Rules and Regulations in Japan entered into force. Full implementation starts on 7th June 2020 (30 days after the entry into force of the amended Act).
The FEFTA revisions require overseas investors to submit a prior notification of stock purchases to the government via the BOJ (Bank of Japan) if they plan to acquire a stake of 1% or higher in companies in designated sectors. The previous threshold was 10%.
The list of over 3000 companies of which 518 are in 12 sectors deemed important to Japan’s national security is available here.
There are blanket exemptions for certain foreign financial institution – read more here.
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