Asset ManagementMay 2020 Newsletter

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Contents

1. Regulatory Updates 01

• ESMA extends four trade repositories registrations to include securities financing transactions reporting.

• ESMA published a thematic review highlighting challenges for rating collateralised loan obligations.

• Potential decoupling of financial market performance and underlying economic activity.

• ESMA announces open hearing on Benchmarks Consultation Paper.

• EFAMA calls for changes to investor protection rules in the MIFID II / MIFIR Review.

• EFAMA published its factsheet for March 2020.

• Q&A updates.

• ESAs' consultation paper on Environmental, Social, and Governance (ESG) disclosure rules.

• IOSCO consults on outsourcing principles to ensure operational resilience.

2. COVID-19 – Regulatory Announcements 04

• ESMA calls for transparency on COVID-19 effects in half-yearly financial reports.

• Joint RTS on amendments to the bilateral margin requirements under EMIR in response to the COVID-19 outbreak.

• ESMA reminds firms of conduct of business obligations under MiFID II.

• ESMA – non-renewal and termination of short selling bans by Austrian FMA, Belgian FSMA, French AMF, Greek HCMC, Italian CONSOB and Spanish CNMV.

• ESMA supports ESRB actions to address COVID-19-related systemic vulnerabilities.

• Deloitte COVID-19 page.

3. June/Q3 2020 Compliance Deadlines 06

• 17 June 2020 - Annual EMIR Calculations to be determined.

• 1 September 2020 - EMIR Initial Margin Requirements (Date Deferral).

• 30 September 2020 - Liquidity Stress Testing.

01

ESMA extends four trade repositories registrations to include securities financing transactions reporting

On 6 May 2020, ESMA approved the extension of registrations of four trade repositories (effective 7 May 2020) to include securities financing transactions (SFT) reporting under the Securities Financing Transactions Regulation (SFTR), the trade repositories (TR) included:

• DTCC Derivatives Repository plc;

• UnaVista TRADEcho B.V.;

• Krajowy Depozyt Papierów Wartościowych S.A; and

• REGIS-TR S.A.

All four TRs have been registered for all types of securities financing transactions, including:

• Repurchase transactions;

• Securities or commodities lending and securities or commodities borrowing transactions;

• Buy-sell back or sell-buy back transactions; and

• Margin lending transactions.

ESMA published a thematic review highlighting challenges for rating Collateralised Loan Obligations

On 13 May 2020, ESMA published a thematic report on Collateralised Loan Obligations (CLOs) credit ratings in the EU. The report provides an overview of CLO rating practices and identifies the main supervisory concerns, and medium-term risks, in this asset class which include credit rating agencies’ (CRAs) internal organisation, their interactions with CLO issuers, operational risks, commercial influence on the rating process and the need for proper analysis of CLOs.

The report also highlights the impact that COVID-19 may have on CLO methodologies. ESMA expects CRAs to continue to perform regular stress-testing simulations and to provide market participants with granular information on the sensitivity of CLO credit ratings to key economic variables affected by the pandemic.

The main supervisory concerns are:1. The internal organisation of CRAs;2. The interactions with CLO issuers;3. Model/third party dependencies leading to

potential operational risks;4. Rating methodologies, modelling risks and

commercial influence; and5. The thorough analysis of CLOs.

1. Regulatory Updates

02

Potential decoupling of financial market performance and underlying economic activity

On 14 May 2020, ESMA published its first risk dashboard for 2020 which reflects the high risk areas under ESMA’s remit. The dashboard reflects a potential decoupling of financial market performance and underlying economic activity as a result of the drop in Q1 markets and rebound thereafter. ESMA see these variances as a risk to institutional and retail investors.

ESMA announces open hearing on Benchmarks Consultation Paper

On 15 May 2020, ESMA announce that they will hold an open hearing, via a conference call on 29 May 2020, for its consultation paper on draft Regulatory Technical Standards (RTS) under the Benchmarks Regulation (BMR). The consultation period ended on 8 June 2020.

EFAMA calls for changes to investor protection rules in the MIFID II / MIFIR Review

On 22 May 2020, EFAMA issued their responses to the European Commission's MIFID II / MIFIR regulatory framework, where it has outlined its recommendations on investor protection and capital markets and infrastructure.

EFAMA published its factsheet for March 2020

On 27 May 2020 EFAMA published its factsheet for March 2020. The factsheet reflects how COVID-19 pandemic significantly impacted financial markets driven by lower economic growth and corporate profits. EFAMA noted that the vast majority of UCITS were able to function normally with only a few having to suspend trading for a limited period of time. This predominantly resulted from a strong UCITS liquidity risk management framework.

Q&A updates

ESMA made update in the period to the following Question & Answers:

• 29 May 2020 – Updates to the MIFID II and MIFIR transparency and market structure topics Q&A

• 28 May 2020 – Updates to the EMIR Q&A

• 28 May 2020 – Updates to MIFID II investor protection Q&A

• 28 May 2020 – Updates to Securitisation Regulation Q&A

ESAs' consultation paper on Environmental, Social, and Governance (ESG) disclosure rules

The three European Supervisory Authorities (EBA, EIOPA, and ESMA) have issued a consultation paper seeking input on proposed ESG disclosure standards for financial market participants, advisers, and products.

These standards have been developed under the EU Regulation on Sustainable Financial Disclosure Regulation (SFDR) in the financial services sector, aiming to:

• Strengthen protection for end-investors;

• Improve the disclosures to investors from a broad range of financial market participants and financial advisers; and

• Improve the disclosures to investors regarding financial products.

The SFDR empowers the ESAs to develop RTSs on the content, methodology and presentation of ESG disclosures both at entity level and at product level. In addition, the consultation paper contains proposals under the recently agreed Regulation on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation), on the do not significantly harm (DNSH) principle.

03

IOSCO consults on outsourcing principles to ensure operational resilience

On 28 May 2020, The Board of the International Organisation of Securities Commissions (IOSCO) has requested feedback on proposed updates to its principles for regulated entities that outsource tasks to service providers.

The principles cover the following areas:

• Due diligence in the selection and monitoring of a service provider;

• The contract with a service provider;

• Information security, business resilience, continuity and disaster recovery;

• Confidentiality Issues;

• Concentration of outsourcing arrangements;

• Access to data, premises, personnel and associated rights of inspection; and

• Termination of outsourcing arrangements.

Each of these principles is supplemented with guidance for implementation. The consultation report includes a set of questions, including one of particular relevance during the current COVID-19 pandemic.

IOSCO prepared their report before the COVID-19 outbreak. However, to account for the ongoing resource constraints on financial institutions, the consultation period will end on 1 October 2020.

04

ESMA calls for transparency on COVID-19 effects in half-yearly financial reports

On 20 May 2020, ESMA issued a public statement providing recommendations on themes they identified for key focus as result of the COVID-19 effects on half yearly financial reports. The statement calls on management, administrative and supervisory bodies, (audit committees, auditors), to take due consideration of the recommendations included within the statement, as follows:

• The importance of providing relevant and reliable information, which may require issuers to make use of the time allowed by national law to publish half-yearly financial reports while not unduly delaying the timing of publication;

• The importance of updating the information included in the latest annual accounts to adequately inform stakeholders of the impacts of COVID-19, in particular in relation to significant uncertainties and risks, going concern, impairment of non-financial assets and presentation in the statement of profit or loss; and

• The need for entity-specific information on the past and expected future impact of COVID-19 on the strategic orientation and targets, operations, performance of issuers as well as any mitigating actions put in place to address the effects of the pandemic.

Joint RTS on amendments to the bilateral margin requirements under EMIR in response to the COVID-19 outbreak

On 4 May 2020, the European Supervisory Authorities (ESA), which comprises of the EBA, EIOPA and ESMA, in response to the COVID-19 outbreak published a Joint Draft RTS to amend the Delegated Regulation on the risk mitigation techniques for non-centrally cleared OTC derivatives (bilateral margining), under

the European Markets Infrastructure Regulation (EMIR), to incorporate a one-year deferral of the two implementation phases of the bilateral margining requirements.

The revised RTS addressed the following points:

• Deferral, for Counterparties with an aggregate average notional amount (AANA) of non-centrally cleared derivatives above €50 billion will become subject to the requirement to exchange initial margin from 1 September 2021, whilst counterparties with an AANA of non-centrally cleared derivatives above €8 billion will become subject to the requirement from 1 September 2022. The AANA calculation window for each of Phases 5 and 6 is also deferred by one year;

• Deferral, until 4 January 2021, for the requirement to exchange variation margin for single equity and index options;

• Deferral, until 20 December 2020, of the requirement to exchange initial margin for intragroup transactions within groups with third-country entities; and

• Exemption, from the mandatory exchange of variation margin in respect of physically-settled FX forwards and swaps between institutions and end-users where at least one of the counterparties is not a credit institution or a MiFID investment firm (or any third country equivalent).

ESMA reminds firms of conduct of business obligations under MiFID II

On 6 May 2020, ESMA issued a public statement on the risks for retail investors when trading under the highly uncertain market circumstances due to the COVID-19 pandemic. ESMA also reminded investment firms of the key conduct of business obligations under MiFID when providing services to retail investors.

2. COVID-19 Regulatory Announcements

05

ESMA – non-renewal and termination of short selling bans by Austrian FMA, Belgian FSMA, French AMF, Greek HCMC, Italian CONSOB and Spanish CNMV

As outlined in the April edition of our newsletter, as a result of COVID-19 emergency restrictions on short selling were put in place and reporting of net short position reporting threshold exceeding 1% of share capital to the relevant NCA.

Following the above announcements, on 18 May 2020, ESMA communicated the non-renewal of these emergency restrictions, which will remain in place until 16 June 2020, at which time the timeframe will be reviewed.

ESMA supports ESRB actions to address COVID-19-related systemic vulnerabilities

On 14 May 2020, the European Systemic Risk Board (ESRB) made a recommendation to ESMA, which ESMA welcomed, that relevant NCAs across Europe, coordinated by ESMA, undertake focused supervisory engagement with investment funds that have significant exposures to corporate debt and real estate - which are less liquid asset categories.

ESMA also welcomes the ESRB public communication on the importance of the timely and effective use of liquidity management tools by investment funds with exposures to less liquid assets.

Deloitte COVID-19 Page

At Deloitte, we are assisting our clients as how best to adapt to these changing conditions. For further information please click to view Deloitte Ireland COVID-19 webpage.

06

3. June/Q3 2020 Compliance Deadlines

17 June 2020 - Annual EMIR Calculations to be determined

On 17 June 2019, the European Market Infrastructure Regulation Refit regulation (EMIR Refit) was published. Under EMIR Refit, the definition of a Financial Counterparty was widened to capture all AIFs and their AIFMs.

EMIR Refit allows for an exemption for the clearing obligations of small financial counterparties (SFC) where the below thresholds are not exceeded:

• €1 billion in gross notional value for credit derivatives contracts;

• €1 billion in gross notional value for equity derivatives contracts;

• €3 billion in gross notional value for interest rate derivative contracts;

• €3 billion in gross notional value for foreign exchange derivative contracts; and

• €3 billion in gross notional value for commodity and other OTC derivative contracts.

In line with the annual calculation to check threshold limits, each Irish UCITS / Irish AIF should complete the following checks by 17 June 2020:

• Perform their annual assessment to determine whether fund exceeds the above clearing thresholds; and

• Determine that it does not wish to calculate the fund’s position against the clearing thresholds.

Any sub-fund which exceeds the clearing threshold or chooses not to calculate their positions will have to notify ESMA and the CBI.

1 September 2020 - EMIR Initial Margin Requirements (Date Deferral)

On 1 September 2020, initial margin requirements were due to be fully phased in. As reported on page 4, this date has been deferred by one year to 1 September 2021. This deferral was due to the impacts of COVID-19 and decision from the Basel Committee on Banking Supervision (“BCBS”) and the International Organisation of Securities Commissions (“IOSCO”).

30 September 2020 - Liquidity Stress Testing

On 5 February 2019, ESMA issued a consultation paper on draft guidelines on liquidity stress testing for both UCITs and AIFs. The aim of the consultation paper adds to the existing requirements on liquidity stress testing and sets out parameters with regard to designing and conducting liquidity stress testing. These guidelines will come into effect on 30 September 2020.

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