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ALFI Regulatory Update: SFDR and Liquidity Key Focus Points



Now in it’s 12th year, the ‘Regulatory Update’ session at ALFI’s annual European Asset Management Conference has become something of a tradition for attendees, providing a whirlwind tour of the regulatory landscape for Luxembourg and European asset managers.


This year’s all-female panel, hosted on the 18th of March, was no exception, with the panellists looking at issues as diverse as market abuse, cross-border distribution, costs and fees, SFDR and, of course, liquidity risk management. Here’s a snapshot of what was covered – and what regulators are likely to focus on this year.


Market abuse

Despite ESMA believing that the overall market abuse framework works well, there are continued efforts tostrengthen Suspicious Transaction Reporting, or (STOR). So far, at least, many asset managers find these rules of little relevance. But that is likely to change, warned Silke Bernard, a partner in the Luxembourg Investment Funds Group at law firm Linklaters.‘This year we are expecting a renewed focus on this topic,’ she explained. ‘The CSSF is already engaging with the industry. There will be a pilot project looking into the application of STOR rules for asset managers, which is likely to be rolled out on a larger scale soon.’ That could include potential on-site visits by the CSSF too.


Money market funds

Money market funds (MMFs) became a major flashpoint during the Covid-19 crisis in March 2020, where many US funds had to be bailed out, and have understandably attracted the attention of regulators.‘The original review of the MMF stress tests was slated for mid-2022, but was brought forward withESMA updating the guidelineslast year in the wake of the Covid-19 crisis,’ explained Nathalie Dogniez, Partner at PWC Luxembourg. ‘In the US, you saw a huge liquidity event, and there were even some actions to bailout certain money market funds and a range of Federal Reserve measures. This concerned regulators.’Although European money market funds were not as badly hit, even despite the lack of assistance from the ECB in Europe, there is now a belief that regulators must revisit the existing MMF regulations, and discussions have restarted again, Dogniez pointed out.‘European money market funds did fare a lot better, but the topic is in the air,’ said Dogniez. ‘So I would say watch this space.’


Cross-border distribution

After much uncertainty, there’s finally some clarity when it comes to cross-border distribution, with both good and bad news, according to Linklaters’ Silke Bernard.‘The CBDF framework will apply to both UCITS and AIF and will apply from August this year,’ she said. ‘There’s a number of key changes. In terms of pre-marketing, if you want to do some investment sounding in Europe, there will be a harmonised pre-marketing frameworking going forward. So you won’t need to check with each regulator about various limits and requirements.’The bad news? ‘There is a need to notify each regulator about your intention to pre-market,’ she added.‘Luckily, however, there will be an EU-wide register available covering all the NCAs and their marketing requirements, including fees, documents, any local requirements. This should be available via ESMA shortly, so that’s certainly a positive.’


Costs and fees

A major focus for ESMA and EU NCA’s last year, costs and fees are likely to remain a key issue, said Michele Eisenhuth, partner at business law firm Arendt and Medernach.‘We’ve seen a lot of work in this area, with the ESMA supervisory briefing in June 2020 and the Common Supervisory Action (CSA) with NCAs earlier this year,’ she noted. ‘Firms will have to put in a framework to ensure that there’s no “undue costs”, which will be supervised by the NCAs.’In Luxembourg, the CSSF has sent two questionnaires to 39 management companies in order to gain more information.‘The good news here is that the questions issued by the CSSF are the same as the original ESMA paper,’ Eisenhuth added. ‘The data to be collected will be the same as ESMA before, and ManCos in Luxembourg will only fill it out for two share classes among their fund classes. Submissions will be open soon via a portal, but ManCos will have 6 weeks to answer these questions.’‘There will certainly be a lot more work done in this area,’ Eisenhuth added.



2021 may well go down as the year of sustainable finance, driven, in no small part, by the implementation of the EU Sustainable Finance Disclosure Regulation, which finally went live on 10 March 2021.The sweeping new rules require asset managers and financial advisers to provide clients with certain ESG-related information when it comes to the provision of their services and the marketing of certain financial products.Such disclosures are required to be made in pre-contractual communications, such as websites and periodic reports, and will require firms to make changes to their policies in order to comply with the new requirements, such as being able to capture the relevant information and data. Regulators hope that the new rules will add some much-needed transparency for clients, while cutting down on rampant greenwashing.‘This is not a compliance regulation,’ said PWC’s Dogniez. ‘It is really about addressing disclosure and transparency, rather than defining what is and isn’t ESG, what’s a good proces, or what a sustainable fund should look like.’‘It’s really telling you that as soon as you promote an ESG fund, this is how you should be transparent in order to deliver on your sustainability process, how you’ll measure this going forward etc,’ she added.ESG Firms must be compliant with the majority of the SFDR from 10 March 2021, Dogniez warned, with periodic reporting requirements applying from 1 January 2022, including updated product disclosures in prospectus’ and annual reports.


Liquidity risk management

And finally, fund liquidity is set to be a dominant theme once again in 2021. Although funds are now up to speed with the ESMA liquidity stress test guidelines, which went live in September 2020, NCAs will have to observe whether appropriate liquidity tools have been put in place, claimed Arendt and Medernach’s Eisenhuth.Last November the European regulator said policymakers should act toimprove funds’ access to liquidity management tools (LMTs), so that they’re better prepared to withstand future shocks. That also means increased focus on harmonising these tools across jurisdictions, with some national regulators, such as the Autorite des Marches Financiers (AMF), already encouraging funds to use a wide range of LMTs in times of stress.Going forward, ESMA has organised regular data collection on the use of LMTs by EEA UCITS and AIFs, and is likely to coordinate further actions in a bid to expand and harmonise the LMTs open to EU funds in the future.