Welcome to the Funds-Axis Regulatory Round Up!
In this month’s round-up, of particular interest, nearly two years after its publication, the EU’s new regulatory framework facilitating the cross-border distribution of collective investment schemes applied from 2nd August. With this we saw several regulators announce the transposition of the new rules.
Elsewhere, liquidity continues to remain in the headlines, with regulators publishing their notices of intention in relation to the application of the ESMA Guidelines on stress test scenarios under the Money Market Fund Regulation.
August also saw the CSSF publish a number of updates to FAQs, including those concerning the treatment of breaches of the UCITS global exposure limits.
This and much more is contained in the August edition of our regulatory round up:
By 2nd August 2021, Member State were required to transpose a new EU Directive and Regulation on the cross-border distribution of collective investment funds.
The CBDF introduces new rules aimed at facilitating the cross-border distribution of both UCITS and Alternative Investment Funds (“AIFs”). This includes new rules governing marketing communications, and cross-border investors’ access to information. The CBDF also harmonises the conditions under which AIFMS, EuSEF Managers and EuVECA Managers can engage in pre-marketing in the EU.
The CSSF has announced the following procedural changes intended to optimise the authorisation process of new UCI and/or new sub-funds added to existing fund structures:
- A new questionnaire named “Fund Pre-Inception Readiness Review” has been introduced and will need to be submitted with the application file.
- The CSSF will no longer request nor assess all agreements concluded between a fund and its service providers during the examination of an application file.
- Two additional new guiding notes have been added on the CSSF website in order to give general considerations to be followed when submitting documents.
The European Supervisory Authorities has issued a Call for Advice for the Joint Committee to provide advice on the following areas concerning the PRIIPs Regulation:
A general survey on the use of the PRIIPs KID across the Union, including, to the extent feasible, evidence on:
- The number and type of products and their market share for which PRIIPs KIDs are produced and distributed.
- The recent developments and trends on the market for PRIIPs and other retail investment products.
- The extent to which PRIIPs KIDs are used by product distributors and financial advisors to choose the products they offer to their clients.
- To the extent feasible, the extent to which marketing information aligns with or differs from the information in the PRIIPs KIDs.
A survey of the practical application of the rules laid down in the PRIIPs Regulation, taking due account of developments in the market for retail investment products
An assessment of the effectiveness of the administrative sanctions, measures, and other enforcement actions for infringements of the PRIIPs Regulation.
An assessment of the extent to which the PRIIPs regulation is adapted to digital media.
On 2 August 2021, the European Securities and Markets Authority (ESMA) published the official translations of its guidelines for funds’ marketing communications under Article 4 of the Regulation on the cross-border distribution of collective investment undertakings.
The guidelines will apply from six months after the date of the publication of the translations.
The Autorité des Marchés Financiers (AMF) has amended its General Regulation and updated three policy documents in order to transpose into French law Directive (EU) 2019/1160 of 20 June 2019 on the cross-border distribution of collective investment undertakings.
The Federal Department of Finance (FDF) will ask the Federal Council to extend the transitional deadline for producing key information documents for complex financial instruments by six months.
The extension requires amendments to Articles 110 and 111 of the Financial Services Ordinance (FinSO) and Article 144 paragraphs 1 and 5 of the Collective Investment Schemes Ordinance.
The Federal Council is expected to decide on these amendments in November 2021.
The FCA are asking UK investment firms to provide feedback on the UK Investment Firm Prudential Regime (IFPR).
The IFPR will introduce a single, proportionate regime reflecting the size and business of MiFID investment firms regulated by the FCA. It should help to improve competition between firms and simplify matters for new entrants.
In the last of the FCA’s 3 consultations they are asking for views on:
- disclosures
- own funds – excess drawings by partners and members
- technical standards
- depositaries
- changes to the FCA Handbook to reflect changes to the UK resolution regime
- other consequential changes to the FCA Handbook
- the FCA use of new powers introduced under Part 9C of FSMA
ASIC has announced the findings from its review of managed funds’ illiquid-asset valuation practices during the early stages of the COVID-19.
ASIC’s review considered how ten fund managers valued different types of illiquid assets as well as the governance frameworks, policies and procedures they used to undertake the valuations.
ASIC found that the fund managers were responsive to the increased valuation risks during the review period. They continued to provide timely valuations of their illiquid assets, including by increasing the frequency of valuations, expanding the sources of information to benchmark valuations and assumptions. The managers also continued to be able to obtain and rely on external valuations.
The review identified some better valuation practices by the fund managers, including:
- close board supervision of valuation processes and involvement in the adoption of the external valuations;
- segregation of roles, involvement of independent committees and the use of multi-level review processes for internal and external valuations to ensure the accuracy of valuations and to support a robust conflicts-of-interest framework;
- recognition of conflicts in valuation processes as a standing organisational conflict and addressing these in compliance frameworks to ensure robustness and independence in the valuation process; and
- clearly defined valuation frequencies and trigger points (such as percentage variation of internal valuation compared to the last external valuation) for external valuations to take place.
- Poor practice in valuation was limited to minor inconsistencies between internal policy and compliance plans.
On 16th August 2021, BaFin published a circular regarding Article 23 of the delegated regulation (EU) 2015/61.
The circular comes into force on September 1, 2021. It specifies the supervisory procedure with regard to the application of Article 23 of DV 2015/61, and the corresponding provisions in DV 2021/451 (Implementing technical standards – ITS on Reporting ) for additional liquidity outflows in relation with other products and Services that do not fall under the categories of Articles 27 to 31a of the DV2015/61.
This month saw a number of regulators published notices of their 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 from 29 August 2021.
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.
ESMA have noted that these Guidelines will be updated at least every year taking into account the latest market developments.
Recent announcement regarding compliance with the MMF guidelines include those made by:
On 17th August 2021, the CSSF updated the FAQs concerning the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment. Section 11, treatment of breaches of the UCITS global exposure limit was added to the FAQs with the following questions:
Q1. Do passive investment breaches (i.e. a breach beyond the control of the UCITS) by a UCITS of the global exposure limit of article 42(3) of the Law of 2010 (and more generally of investment restrictions applicable to UCI) have to be notified to the CSSF?
Q2. Can breaches of the VaR limit (either the maximum limit laid down in regulation (20% for absolute VaR or 200% for relative VaR as the case may be) or any other more restrictive internal limit set below the above regulatory thresholds, as laid down in the sales prospectus) by UCITS as a result of the increase of volatility in financial markets (in the absence of any new positions increasing the risk of the portfolio) be considered as passive breaches?
Q3. What are the expectations of the CSSF in case of a passive breach (i.e. beyond the control of the UCITS, e.g. increase of volatility in the financial markets) of the regulatory VaR limit or the internal VaR limit laid down in the prospectus?
Q4. What information do UCITS have to communicate to the CSSF (opc.prud.sp@cssf.lu) in relation to an active breach of the VaR limit (whether the maximum limit laid down in regulation – 20% for absolute VaR or 200% for relative VaR – or the internal limit, below the above regulatory thresholds, as laid down in the sales prospectus)?
The CSSF has updated the FAQs on swing pricing mechanism. The following question have been added:
Q1. Can UCIs (UCITS, UCI Part II & SIFs) increase the swing factor to be applied on the NAV up to the maximum level laid down in the prospectus without prior notification to the CSSF?
Q2. Can UCIs increase the applied swing factor beyond the maximum swing factor laid down in the fund prospectus?
Q3. Where the fund prospectus formally offers the possibility to the Board of Directors of the UCI or, if applicable, the Management Company to go beyond the maximum swing factor laid down in the prospectus, to what extent can a UCI increase the applied swing factor beyond the maximum swing factor disclosed in the fund prospectus?
Commission Delegated Regulation (EU) 2021/1352 of 6 May 2021 was published in the Official Journal of the European Union on 13th August 2021.
The Commission Delegated Regulation (EU) 2021/1352 of 6 May 2021 supplements Regulation (EU) 2016/1011 of the European Parliament and of the Council with regard to regulatory technical standards specifying the conditions to ensure that the methodology for determining a benchmark complies with the quality requirements.
The Form N-PORT XML Technical Specification (Version 1.10) document describes the valid structure and content of the Form N-PORT Electronic Data Gathering, Analysis, and Retrieval (EDGAR) Extensible Markup Language (XML) submission types.
The Form N-CEN XML Technical Specification (Version 2.8) document describes the valid structure and content of the Form N-CEN Electronic Data Gathering, Analysis, and Retrieval (EDGAR) Extensible Markup Language (XML) submission types.
These specifications provide a basis for creating Form N-PORT and N-CEN submissions.
On September 20, 2021, EDGAR Release 21.3 will introduce a number of changes to the schema:
Pursuant to Article 93 (7) and (8) of Directive 2009/65/EC, a foreign UCITS established in another Member State authorised for marketing in Sweden must submit to Finansinspektionen annual updates of KIID(s) or updated KIID(s) of share class(es) authorised for distribution in Sweden.
The new procedure is that Key Investor Information Document for foreign UCITS must be sent to KIIDs-Inwardmarketing-Sweden@fi.se from the 1 September 2021.
According to Article 7(2) of the Short Selling Regulation, ESMA has to publish a list of the thresholds applicable to the sovereign issuers for the purpose of the notification to competent authorities of significant net short position in sovereign debt.
The way these notification thresholds are defined is further specified in the Commission Delegated Regulation No 918/2012 (the “DR”). The DR specifies that initial threshold categories shall be:
- 1% applicable where the total amount of outstanding issued sovereign debt is between 0 and 500 billion euros;
- 5% applicable where the total amount of outstanding issued sovereign debt is above 500 billion euros or where there is a liquid futures market for the particular sovereign debt.
The table of thresholds contains the name of the sovereign issuer, the amount of outstanding debt duration adjusted, the initial threshold amount and the relevant percentage, the incremental threshold amount and the relevant percentage.
FINRA is requesting comment on potential enhancements to its short sale reporting program. FINRA is considering:
(1) modifications to its short interest reporting requirements (Rule 4560);
(2) a new rule to require that participants of a registered clearing agency report to FINRA information on allocations to correspondent firms of fail-to-deliver positions; and
(3) other potential enhancements related to short sale activity.
FINRA believes that these potential changes could improve the usefulness of short sale-related information to FINRA, other regulators, investors and other market participants.
The Japan Ministry of Finance has published an updated list of classifications of listed companies requiring prior notification on inward direct investment.
The list is prepared based on the surveys to listed companies, and information in their Articles of Associations and Annual Securities Reports. The list provides classifications of Japanese companies listed on the Japanese stock exchanges into the following categories:
- Companies conducting business activities only in non-designated business sectors (subject to post-investment report only)(①);
- Companies conducting business activities in designated business sectors other than core sectors(②); or
- Companies conducting business activities in core sectors(③)
On 19th August 2021, the FCA updated the notification and disclosure of net short positions webpage to amend the UK sovereign debt threshold to as follows:
| Sovereign issuer | Amount of outstanding UK debt (in million €) – Duration adjusted | Initial threshold in % In million € | Incremental level in % In million € |
||
|---|---|---|---|---|---|
| United Kingdom | 28,345,044 | 0.50% | 141,725 | 0.25% | 70,863 |
On 23rd August 2021, the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) published the summary of an independent expert review of the major outage which occurred on ASX on 16th November 2020.
The independent expert identified several key shortcomings, including:
- Factors that suggested the ASX Trade system was not ready to go-live considering ASX’s near zero appetite for service disruption. This was the case even though the formal implementation readiness processes were completed and verified by multiple parties without objection to go-live
- There were gaps in the rigour applied to the project delivery risk and issue management process expected for a project of this nature, and
- Risk and issue management, project compliance to ASX practices, project requirements and the project test strategy/planning did not meet accepted industry practices. It was not reasonable to expect the test plan used would meet the ASX’s near zero appetite for service disruption.
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