UK/EU Investment Management Update (April 2021)
- FCA Compliance Matters
- UK Market Abuse, Financial Crime, and Non-financial Misconduct
- EU Short Selling Regulation
- EU Securitisation Regulation (SECR)
- UK/EU MiFID II
- EU AIFMD
- UK EMIR
- ESG – EU Sustainable Finance Disclosure Regulation (SFDR)
- LIBOR Transition
HM Treasury statement on the EU-UK memorandum of understanding
On 26 March 2021, HM Treasury issued a statement on the conclusion of technical negotiations on the EU-UK memorandum of understanding (MoU) on voluntary regulatory cooperation in financial services. This follows the Joint Declaration on Financial Services Cooperation that accompanied the Trade Cooperation Agreement in December 2020 (see our January 2021 Update).
HM Treasury states that formal steps need to be undertaken before the MoU can be signed. The MoU will establish the Joint UK-EU Financial Regulatory Forum to facilitate dialogue on financial services issues.
The MoU merely creates the framework for voluntary regulatory cooperation in financial services between the UK and the EU; a similar framework exists between the EU and the U.S. The MoU could form the basis for discussions on, and possible development of, future equivalence assessments made by the UK and the EU in relation to financial services legislation such as MiFID. However, at this time, there is still no equivalence framework in place that is of direct relevance for investment managers.
FCA speech – a forward look at regulation of the UK’s wholesale financial markets
On 16 March 2021, the FCA published a speech by Edwin Schooling Latter, the FCA’s Director of Markets and Wholesale Policy, addressing potential divergences between the UK’s financial markets and the EU’s regime. In particular, the following were considered:
- Potential changes to the existing regime under the UK Securities Financing Transaction Regulation (SFTR). The FCA is considering the removal of commodities lending transactions from the scope of the regime as well as adopting single-sided reporting. Before making such changes, the FCA intends to give the new regime time to mature as it came into force in the UK only in July 2020. It acknowledged that many UK firms are also subject to the EU regime, making any significant divergences undesirable.
- Changes to the UK MiFID II rules. As the UK’s MiFID II regime will not be amended by the EU’s “Quick Fix” changes (see below), the FCA recognises that there is an opportunity to consult for similar changes in the UK. Consideration is being given to the MiFID transparency regime and how elements of this might be implemented in the UK. Notably, the FCA’s initial approach to “dark trading” is to not have automated caps. The FCA is also considering simplifying post-trade and pretrade transparency threshold calculations and application to allow for flexibility and alignment with other jurisdictions.
- Central Securities Depository Regulation (CSDR) settlement discipline regime. Whilst the EU’s CSDR was onshored into UK legislation, the settlement discipline regime did not begin to apply until after the end of the transition period, meaning that it was not included as part of the onshoring process. The FCA and Treasury have decided to not implement the EU settlement discipline regime in light of a potential negative impact on market liquidity. However, they remain open to ideas for refreshing the UK’s settlement arrangements and supporting market liquidity and settlement efficiency.
FCA statement on UK MiFID II derivatives trading obligation
On 24 March 2021, the FCA released a statement to confirm that it would not revise the way in which the FCA’s Temporary Transitional Power (TTP) currently applies to the MiFID II derivatives trading obligation (DTO) in the UK for the time being. The regulator had previously noted its interest in avoiding conflicting UK and EU DTO obligations to minimise disruption for market participants and avoid fragmentation of liquidity in DTO products.
A summary of how the FCA modified the UK DTO to minimise post-Brexit conflict can be found in our January 2021 Update.
Submission of Directory Persons data for the Financial Services Register
On 31 March 2021, the deadline passed for all solo-regulated firms to conclude the certification of their staff in compliance with the UK Senior Managers and Certification Regime (SMCR) and submit their Directory Persons data to the FCA’s Connect platform.
The FCA’s intention is to allow consumers and professionals to check the details of key individuals working in financial services, and it has provided additional information and FAQs on this topic.
FCA extends flexibility for 10% depreciation notifications and MiFID RTS 27 reports
On 19 March 2021, the FCA issued a statement announcing the extension of temporary COVID-19 measures for 10% depreciation notifications and MiFID regulatory technical standards (RTS) 27 reports until the end of 2021.
Later this year, the FCA will conduct a consultation on the effectiveness of these requirements. However, the regulator has already indicated its intention to end the RTS 27 reporting obligations, which currently impose certain reporting requirements on execution venues. The FCA has warned that as the next set of RTS 27 reports will be based on pre-Brexit data, they are likely to be of limited use and could even be misleading to market participants. As such, the regulator will not take action against firms that do not prepare a report for the rest of this year.
Of note, UK investment managers are required to produce RTS 28 reports (rather than RTS 27 reports), but there are no proposals from the FCA to end the RTS 28 reporting obligation.
Additionally, UK firms that do not issue 10% depreciation notification to investors will not be in breach of the requirement to provide such notifications, provided that they 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%. Firms must also warn investors that they may not receive a similar notification should the portfolio decrease by a further 10% during the current reporting period. In addition, investors must be directed towards non-personalised communications containing general market conditions updates, reminded to check their portfolio value, and informed of how they may contact the firm.
Change to filings in UK of large shareholdings under DTR 5
Effective from 22 March 2021, all positions reportable to the FCA under FCA disclosure and transparency rule (DTR) 5 must be made via the Electronic Submission System (ESS).
Under DTR 5, notifications of positions in UK-listed shares must be reported at 3% and each 1% thereafter. However, broadly, asset managers may benefit from an exemption and report at 5%, 10%, and each 1% thereafter. Both the person subject to the notification obligations (termed as Position Holder) and the individuals submitting TR-1 Forms on their behalf (termed as Reporting Persons or Position Holder Individuals) must register with the ESS.
For more information, the FCA has also published guidance for reporting under DTR 5.
New FCA invoicing portal
On 12 April 2021, the FCA will be launching its online invoicing portal for firms to access their invoices and arrange for payment of their fees. The existing portal will no longer be available after 31 March 2021. For more information, the FCA has published its guidance to the new portal.
3. UK Market Abuse, Financial Crime, and Non-financial Misconduct
FCA publishes a speech on tackling market abuse
On 8 March 2021, the FCA published a speech by Mark Steward, the Executive Director of Enforcement and Market Enforcement, on the regulator’s work to tackle market abuse.
The FCA highlighted the following:
- Changes in transaction volumes and suspicious transaction and order reports (STORs). While the FCA saw an overall increase in transactions in 2020, there was a reduction in STORs during this period. The FCA notes that its surveillance and investigation work has reduced trading by certain actors whose trading prompted high numbers of STORs. Moreover, it notes that the STORs it receives have remained of high quality.
- Increase in the FCA’s proactive market monitoring in view of the pandemic. In addition, the FCA introduced a new approach to short selling reporting via the ESS. This new system introduces faster validation and automated alerts to help identify delayed notifications or other issues. The FCA intends to introduce this system for long position reporting as well.
- Introduction of a new market cleanliness measure, the Potentially Anomalous Trading Ratio (PATR). The PATR focuses on the underlying trading behaviour around specified price sensitive announcements and assesses whether the behaviour can be deemed anomalous (whilst the term is more neutral than suspicious, the behaviour may also be suspicious).
- Significant strides in taking enforcement action. The speech sets out various key market abuse cases brought against individuals and firms, which includes proceedings relating to public censure, market abuse, insider dealing, and failure to meet notification and disclosure requirements. Most notably, Steward underlined the success and complexity of the insider dealing case against Fabiana Abdel-Malek and Walid Choucair, the latter of whom was sentenced to three years of imprisonment and an order to pay £3.9 million.
FCA launches whistleblowing campaign
On 24 March 2021, the FCA announced a campaign to encourage individuals working in financial services to report potential wrongdoing. To support this campaign, the FCA has developed a new web page where a digital toolkit for industry bodies, consumer groups, and whistleblowing groups can be found.
The web page also contains advice on when to get in touch with the FCA and practical steps for coming forward. Individuals will be appointed a dedicated case manager as their point of contact throughout an investigation. The FCA will protect the identity of whistleblowers by limiting access to information to the rest of the whistleblowing team, and it will not confirm the existence of a whistleblower when making enquiries (unless legally obliged to do so). The whistleblowing team has received specialist training and is in the process of developing a confidential web form.
Firms are reminded of the FCA whistleblowing rules that require firms to have arrangements for employees to raise their concerns and for concerns to be dealt with appropriately and confidentially. Firms must also appoint a whistleblowing champion to ensure that senior management has oversight of these arrangements.
Nonfinancial misconduct: FCA withdraws approvals for convicted independent financial adviser
On 29 March 2021, the FCA published a Decision Notice dated 1 October 2020, setting out its decision to withdraw its approval for Jon Frensham, a financial adviser, to perform certain senior management functions and to take on any regulated role in the future. The FCA considers that Frensham is not a “fit and proper” person to perform regulated activities following his criminal conviction for attempting to meet a child following sexual grooming in March 2017. It also considers that Frensham poses a risk to consumers and to confidence in the financial system.
The action remains pending following Frensham’s appeal of the decision to the Upper Tribunal.
The case demonstrates the FCA’s continued focus on nonfinancial misconduct in light of its announcement in November 2020 that it had banned three individuals on account of convictions for sexual offences. Similarly, each individual was found to not be “fit and proper” and prohibited from working in the financial services.
4. EU Short Selling Regulation
The lower reportable net short position disclosure threshold introduced as a result of the pandemic no longer applies
On 15 March 2021, the European Securities and Markets Authority (ESMA) announced that it will not renew its decision to require holders of net short positions in shares traded on an EU regulated market to notify the relevant national competent authority if the position reaches, exceeds, or falls below 0.1% of the issued share capital for the purposes of the EU Short Selling Regulation (SSR).
This means that effective from 20 March 2021, positions holders need to send notifications only if they reach or exceed the EU SSR’s original 0.2% threshold for shares on EU trading venues, while any outstanding net short position between 0.1% and 0.2% will not have to be reported.
Our readers should note that the reportable net short position disclosure threshold under the UK’s SSR is different. Since 1 February 2021, the notification threshold for issued share capital of an issuer that has shares on UK trading venues is 0.1%.
5. EU Securitisation Regulation (SECR)
ESAs publish joint opinion on the jurisdictional scope of non-EU party obligations
On 26 March 2021, the European Supervisory Authorities (ESAs) published a joint opinion (the Opinion), addressed to the European Commission, to clarify the potential obligations of third-country entities where they become parties to a securitisation regulated under the EU’s SECR. Of particular relevance to investment managers is that the ESAs considered how the definition of “institutional investors” under the SECR applies to non-EU alternative investment fund managers (AIFMs). The Opinion acknowledged that the wording of the definition may create uncertainties regarding the application of due diligence obligations for non-EU AIFMs and may cause inconsistencies in regard to the requirements set out for AIFMs exposed to securitisation under the AIFMD.
The ESAs have thus proposed to the Commission that the SECR and the AIFMD’s text should be amended to avoid divergences in their application and ensure that non-EU AIFMs comply with their due diligence obligations in respect of the AIFs that are marketed in the EU. Furthermore, the ESAs are of the view that the SECR should clarify whether such non-EU AIFMs should be regarded as “institutional investors.”
The ESAs also considered the application of other SECR provisions for non-EU AIFMs and made the following additional recommendations for the Commission to consider:
- EU national regulators and non-EU AIFM enforcement. Clarify the relevant competent authorities and ensure that they have the required supervisory and administrative powers to enforce the SECR’s due diligence in respect of the non-EU AIFM.
- “Institutional investors” and subthreshold AIFMs. Clarify whether subthreshold AIFMs fall within the definition of an “institutional investor” subject to the due diligence requirements (the ESAs express the view that they should fall within scope).
- Delegation of active portfolio management by sponsors to non-EU AIFMs. Amend the definition of a “sponsor” to clarify that sponsors may delegate day-to-day active portfolio management involved with a securitisation only to a servicer that is an EU authorised investment firm, AIFM, or Undertakings for the Collective Investment in Transferable Securities (UCITS) management company (i.e., not a third-country or subthreshold AIFM).
- Delegation of due diligence activity. Clarify the ability of a fund manager to delegate the due diligence activity to another manager.
UK – annual transparency calculations for equity and equitylike instruments
On 9 March 2021, the FCA published its annual transparency calculations for UK equity and equitylike financial instruments, which will be effective from 1 April 2021. The calculations are available through the FCA’s Financial Instrument Transparency Reference System and include liquidity assessment, the determination of the most relevant market in terms of liquidity, and average daily turnover, among others. Market participants are expected to monitor the release of such transparency calculations daily to obtain the calculations for newly traded instruments. Notably, the FCA has found that there are 497 liquid shares and 341 liquid equitylike instruments (such as exchange-traded funds and depositary receipts).
UK investment managers that are MiFID firms will need to refer to such information for producing their annual RTS 28 reports.
EU – ESMA publishes supervisory approach to commodity derivatives position limits and MiFID II “quick fixes”
As noted in our March 2021 Update, the EU recently adopted the MiFID II “quick fixes” Directive that will, from 28 February 2022, introduce changes to commodity derivatives position limits. This will be relevant to all position holders to commodity derivatives traded in the EU (and not just EU firms).
On 19 March 2021, ESMA published a statement regarding the application of position limits in the meantime. Under current legislation, competent authorities must establish position limits on the size of a net position that a person can hold at all times in commodity derivatives. Given the delay in relaxing such rules until the “quick fixes” Directive’s implementation date, ESMA has stated that it would see merit in introducing a more “favourable environment” for the development of nonsignificant commodity derivatives that will no longer be subject to position limits after early 2022. Most notably, ESMA states that it expects national competent authorities to not prioritise (i) supervisory actions towards entities holding positions in commodity derivatives, other than agricultural commodity derivatives, with a net open interest below 300,000 lots and (ii) supervisory actions towards positions that are objectively measurable as resulting from transactions entered into to fulfil obligations to provide liquidity on a trading venue as per MiFID II.
Whilst the MiFID II “quick fixes” will also bring about changes in other areas, such as to the research unbundling provisions and certain client information requirements (as last discussed in our January 2021 Update), these revised rules will apply only to EU firms on account of Brexit. The UK has yet to propose such changes as would be applicable to UK firms.
EU – ESMA publishes updated MiFID II Q&As on inducements
ESMA has published an updated version of its Q&As on MiFID II and MiFIR investor protection and intermediaries topics. It includes an additional question on the conditions that must be met for inducements to be considered. The answer contains guidance on the meaning of the three conditions contained in Article 11(2)(a) of MiFID II: an “additional or higher level service;” “provided to the relevant client;” and “proportional level of inducements received.”
Note that whilst the FCA has previously stated that it will continue to apply guidance issued by the ESAs prior to Brexit, this is not the case for guidance issued by the ESAs after Brexit.
Accordingly, UK firms should treat these new ESMA Q&As as merely informative until the FCA announces its expectations in this regard for UK firms (that is, should the FCA ever make such an announcement).
French financial markets authority publishes its position on the AIFMD review
On 17 March 2021, France’s financial regulator, Autorité des Marchés Financiers (AMF), published its position in response to the European Commission’s consultation on the AIFMD. The AMF provided various proposals, ranging from further harmonisation among the AIFMD, UCITS, and MiFID, to introducing the possibility of barring client withdrawals during crises (i.e., “gating”).
Most notably, the AMF drew attention to the practice of delegation from AIFMs and UCITS management companies to non-EU firms. Whilst it acknowledged the benefits of delegation, the AMF proposed that certain types of extensive delegation arrangements need to be scrutinised to ensure that AIFMs and UCITS management companies ultimately remain in charge of the key business functions and decisions. In particular, the AMF highlighted (as an area of concern) delegation arrangements where fund managers solely provide middle and back-office services without retaining any portfolio management expertise.
PRA and FCA consult on margin requirements for non-centrally cleared derivatives under UK EMIR
On 9 March 2021, the PRA and FCA published a joint consultation paper on amending the binding technical standards for non-centrally cleared derivatives under the UK’s onshored version of EMIR (UK EMIR). The consultation paper sets out the following proposals, which aim to provide further clarity on margin requirements:
- changing the implementation dates and thresholds for the phase-in of initial margin requirements
- requiring the exchange of variation margin for physically settled foreign exchange forwards and swaps to specified counterparties only
- extending the temporary exemption for single-stock equity options and index options until 4 January 2024
The regulators will accept comments on the proposals until 19 May 2021, and all subsequent changes are scheduled to come into effect on 1 July 2021.
Changes to UK EMIR should only be of direct application to UK AIFMs and UK derivatives counterparties. However, non-UK AIFMs and non-UK derivatives counterparties may still be indirectly affected by changes to the collateral rules where trading with UK derivatives dealers.
9. ESG – EU Sustainable Finance Disclosure Regulation (SFDR)
ESAs consult on draft RTS for sustainability disclosures under SFDR
The disclosure obligations under the SFDR came into effect on 10 March 2021 (for a discussion of action points for non-EU fund managers, please see our March 2021 Update). On 15 March 2021, the ESAs published a joint consultation paper on draft regulatory technical standards (RTS) in respect of the content and presentation of taxonomy-related sustainability disclosures under the SFDR.
The proposals include providing a graphical representation on how investments of a financial product are taxonomy-aligned, a key performance indicator calculation for such alignment, and a statement that the environmentally sustainable activities funded by the financial product are compliant with the criteria of the Taxonomy Regulation. In addition, the draft RTS will include Taxonomy Regulation disclosure templates to standardise the presentation of the disclosures.
Responses to the consultation will be accepted until 12 May 2021, and a final report containing the final draft RTS is expected to be published by early July 2021.
This draft RTS, once it is finalised and takes effect, will be of relevance to (amongst others) non-EU managers that market funds in the EU (and hence are treated by the private funds industry as being caught in scope of the EU SFDR) and, in particular, where those funds have sustainability as an investment objective or otherwise promote an environmental or social characteristic. Further information on the SFDR can be found in our SFDR Update on Action Points for Non-EU Fund Managers.
PRA and FCA publish Dear CEO letter on priority areas for LIBOR transition
On 26 March 2021, the PRA and FCA jointly released a Dear CEO letter regarding the transition from LIBOR to risk-free rates (RFRs). It set out its expectations for firms and warned that the onus is on firms and responsible Senior Manager Function holders to take appropriate steps to mitigate their firm’s LIBOR exposure and ensure an orderly transition with good client outcomes. The key priority areas of action for firms include:
- Ending new sterling LIBOR business from 1 April 2021. The regulators cautioned that any new issuances of sterling LIBOR referencing securities after this date may be viewed as an indication of poor risk management and poor governance of transition.
- Amending legacy sterling LIBOR contracts. Legacy LIBOR-linked contracts should be amended by the end of Q3 2021 to include, at least, a contractually robust fallback or an agreed conversion to an alternative RFR.
- Conducting risk mitigation. Firms should identify and mitigate conduct risks. In addition, they should ensure that clients are treated fairly and are appropriately informed so they are able to make informed decisions about the products and risks.
- Selecting appropriate alternatives to LIBOR. The regulators note that for sterling, the appropriate alternative will often be the sterling overnight interbank average rate (SONIA) compounded in arears in line with existing market practice in derivative and bond markets. Nevertheless, firms must take care that the selected replacement rate meets the customers’ needs and that customers are well informed of the nature and implications of the replacement rate.
In the interim, the PRA and the FCA will monitor firms’ progress. The regulators cautioned that supervisory action may be taken where there is insufficient progress or poor risk management or governance of transition.
The Bank of England revises its best practice guide for GBP loans
On 18 March 2021, the Bank of England’s industry-led Working Group on Sterling Risk-Free Reference Rates (the Working Group) published a revised best practice guide for GBP loans to further assist with the market’s transition from the interest rate benchmark LIBOR towards SONIA in sterling markets. The guidance provides additional recommendations on conventions for loans that reference SONIA and other relevant technical information for implementation. In addition, the Working Group published updated information slides on detailed loan conventions.
FCA and Bank of England encourage switch to SONIA in sterling nonlinear derivatives market
The FCA and Bank of England have published a joint statement encouraging dealers to quote derivatives using SONIA (rather than LIBOR) from 11 May 2021 to increase the usage of SONIA.
This announcement follows the roadmap published by the Working Group, which sets quarterly targets in 2021 for the LIBOR transition. For more information, see our February 2021 Update.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.
合伙人律师lng@sidley.com +44 20 7360 3667伦敦
合伙人律师kstehl@sidley.com +44 20 7360 2550 +49 89 24440 9132伦敦, 慕尼黑