UK/EU Investment Management Update (October 2020)
1. Brexit update
ESMA and FCA statements on post-trade transparency and position limits
On 1 October 2020, ESMA published an update to its statement Impact of Brexit on the application of MiFID II/MiFIR.
The statement relates to the status of UK trading venues following the end of the Brexit transition period on 31 December 2020, in particular, the obligations of EU firms concluding transactions on UK trading venues under the post-trade transparency requirements pursuant to Articles 20 and 21 of the Markets in Financial Instruments Regulation (MiFIR) as well as the status of commodity derivatives traded on UK trading venues.
2. COVID-19 update
10% Depreciation Rule – FCA extends notification relief
On 30 September 2020, the FCA extended its decision not to take enforcement action against firms that do not provide 10% depreciation reports to investors. The extension applies for six months, starting 1 October 2020 and running until 30 March 2021.
The FCA qualified its original decision with slight amendments. To be insulated from enforcement action, firms must have issued at least one notification in the current reporting period indicating to investors that their portfolio or position has decreased in value by at least 10%. They must also have informed investors they may not receive further notifications for further decreases, referred them to non-personalised communications outlining general updates on market conditions, and reminded them how to check their portfolio value and contact the firm.
3. Cayman Islands removed from list of EU non-cooperative tax jurisdictions
On 6 October 2020, the Council of the European Union announced that it had removed the Cayman Islands (and Oman) from the EU list of non-cooperative jurisdictions for tax purposes (the Non-Cooperative List). Anguilla and Barbados have been added to the list.
As we had discussed in our February 2020 Update, being placed on the Non-Cooperative List means that three types of EU “defensive measures” become applicable: (i) non-tax defensive measures; (ii) administrative tax defensive measures; and (iii) legislative tax defensive measures.
4. EU Short Selling Regulation
ESMA extends decision reducing net short reporting threshold
On 17 September 2020, ESMA announced an extension of its 16 March 2020 decision to reduce the net short reporting threshold for shares traded on an EU-regulated market from 0.2% to 0.1%. The extension applies from 18 September 2020 for a period of three months. Accordingly, the lower 0.1% threshold continues to apply until 18 December 2020.
5. MiFIR/MiFID II
MiFID II research unbundling
On 2 September 2020, ESMA published its second Trends, Risks and Vulnerabilities (TRV) Report of 2020.
ESMA continues to identify very high risks throughout its remit. It emphasises the scope for potential further market corrections and calls the sustainability of the current market rebound into question.
Of particular note, the report includes ESMA’s first detailed analysis of the MiFID II research unbundling provisions’ effect on sell-side research in the EU. Previously, research costs were typically bundled with order execution services. Now, “research unbundling” requires investment managers to pay a separately identified sum for the research they obtain (either themselves or by passing the charge on to clients). This aims to reduce conflict-of-interest risks alongside incentives to produce excess low-quality research.
6. Execution quality in fixed income, currency, and commodities (FICC) markets
On 7 September 2020, the FICC Markets Standards Board (FMSB) published its Spotlight Review “Measuring execution quality in FICC markets,” finalizing its market structure review series.
The review responds to recent heightened focus on execution quality and transaction cost analysis (TCA) amongst market participants and regulators.
7. Market Abuse and Financial Crime
Statistics in FCA 2019/20 Annual Report
On 10 September 2020, the FCA published its 2019/20 Annual Report. It cites market abuse (along with LIBOR transition and conflicts of interest) as a “key priority” for the FCA.
The Annual Report highlights 15 financial penalties imposed on financial services firms in the past year, totalling £224 million. It also details the FCA’s activities supporting its key priorities in wholesale financial markets. The following may be of interest to investment managers.
8. LIBOR transition
FCA launches new LIBOR transition webpage for firms
On 17 September 2020, the FCA launched its webpage LIBOR transition: getting my firm ready. The new webpage reminds firms that they cannot rely on LIBOR after end-2021 and details the actions that the FCA considers to be essential for firms to prepare for the transition.
New ESMA SMSG advice on ESG disclosures
On 14 September 2020, ESMA’s Securities and Markets Stakeholder Group (SMSG) published advice to the European Supervisory Authorities (ESAs) on ESG disclosures.
The SMSG recognises the importance of taking a significant first step on ESG disclosures now. However, it advocates a phased, iterative approach to their introduction. This would likely last at least two to three years and initially involve a smaller set of reference indicators to describe “adverse impacts” (as used in article 8 of the draft RTS for ESG disclosures). An unphased introduction (a “big bang”) would cause data availability issues and have knock-on negative effects to future development in the area.
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