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AQMetrics Regulatory Round-up: February 2020


Welcome to AQMetrics regulatory round-up, a monthly initiative that keeps readers abreast of all the latest regulatory news and events.


After a jam-packed January, regulators were busy again last month, with 2020 looking to be one of the busiest years in recent memory. Liquidity remains front and centre for regulators, with the Commission de Surveillance du Secteur Financier (CSSF) starting ESMA’s common supervisory action on fund liquidity.But there were other issues on the agenda too. Elsewhere, the Financial Conduct Authority (FCA) reiterated the risks retail investors face in their annual Sector Views, and the European Securities and Markets Authority (ESMA) released a series of reports on bond liquidity and market risks.Late January, ESMA consults on new regimes for third-country firms

  • ESMA launched aconsultationon draft technical standards relating to investment services and activities in the European Union (EU) by third-country firms under MiFIR and MiFID II.
  • According to the pan-European regulator, ‘these changes include new reporting requirements from third-country firms to ESMA on an annual basis in accordance with Article 46 of MiFIR, and also grants ESMA the power to ask third-country firms in the ESMA register to provide data relating to all orders and all transactions in the EU, whether on their own account or on behalf of a client, for a period of five years.’
  • The closing date for responses is 31 March 2020, with stakeholders able to submit their replies.


Late January, ESMA shares bond liquidity data, number of liquid bonds shrinks

  • ESMA published a newly available liquidity dataset for bonds subject to the pre- and post-trade requirements under MiFID II and MiFIR.
  • Its quarterly liquidity review covers bonds available for trading on EU venues, with some 520 liquid bonds included this time, down from nearly double that in May 2018. The full list of assessed bonds is available through FITRS in the XML files with publication date from 31 January 2020 and through the ESMA Register web interface.


6 February, Funds Congress, Regulators outline priorities and ‘intrusive,’ ‘hands-on’ approach to fund liquidity

  • The late morning Funds Congress panel, bringing together leading policymakers from the Financial Conduct Authority (FCA), Central Bank of Ireland (CBI), Autorite des Marches Financiers (AMF) and the Commission de Surveillance du Secteur Financier (CSSF), proved insightful.
  • CSSF Director, Marco Zwick, confirmed that European regulators are continuing their review of the Alternative Investment Fund Managers Directive (AIFMD), promising to look at some micro and macro issues. ‘On the macro side,’ he said, ‘There are all different types of reporting being produced and no harmonised definition of leverage between UCITS and AIFMD.’
  • When it comes to the upcoming liquidity Common Supervisory Action and stress tests, meanwhile, AMF Deputy Executive Director Frederic Pelese warned ‘Asset managers can expect the process to be quite intrusive.’ However, he added that, ‘it is in the spirit of an audit, and is quite different from prudential regulators. We generally take a positive view of the regulations, so it is more about making sure that UCITS firms are compliant.’


12 February, CSSF calls for better quality transaction reports

  • Luxembourg’s regulator published a press release looking at the quality of transaction reports submitted over the last two years under MiFIR.
  • ‘The CSSF not only carried out the standardised quality tests developed together with the other competent authorities and ESMA, but also conducted a series of data completeness and quality enhancement campaigns with a focus on the different topics listed below,’ the regulator said.
  • 128 registered investment firms currently report to the CSSF. Among some of the problems raised were a lack of understanding of reporting obligations, incomplete and poor quality reports. The CSSF asked all investment firms to review whether their systems are in compliance with MiFIR and, where reporting does not comply, contact the CSSF as soon as possible in order to define a reasonable time frame to make sure its system is compliant.


13 February, CSSF launches ESMA CSA on fund liquidity

  • The CSSF announced that it has launched the first stage of ESMA’s Common Supervisory Action (CSA) looking at the of UCITS’ managers liquidity risk management. This move comes barely two weeks after ESMA launched its widely anticipated CSA, and underlines the importance regulators are placing on the management of fund liquidity after a series of high-profile fund crises last year.
  • An initial questionnaire requesting quantitative data will be followed by in-depth supervisory analyses. Other national competent authorities (NCAs) are expected to follow the CSSF shortly.


18 February, FCA publishes Sector Views, underlines risks to retail

  • The FCA published its latest Sector Views, an assessment of the risks and potential harm to consumers across financial services markets. According to the regulator, ‘Sector Views look at the impact of macroeconomic developments and common drivers of change emerging across financial markets. They also outline areas where there may be a negative impact on consumers or the integrity of the financial system in that sector.’
  • Pricing and quality of investment products remains a concern, while the FCA again made note of the danger of liquidity mismatches in some daily dealing funds that invest in less liquid assets. Poor risk management at alternative funds and a disorderly transition away from Libor were other concerns mentioned.
  • When it came to using Regtech in order to address some of these challenges, the FCA said that ‘technology could simplify risk management but generally firms need to do significantly more work to protect themselves from online threats to their business.’


19 February, ESMA releases its first Trends, Risks and Vulnerabilities (TRV) report for 2020

  • ESMA published its first TRV report, noting high market risks and a weak economic outlook – risks that largely played out in the final days of February as the coronavirus finally hit markets.
  • ‘Macroeconomic conditions deteriorated in the second half of 2019, with EU and global growth forecasts being cut,’ the regulator said. ‘More recently the coronavirus outbreak has also increased uncertainty and could dampen short-run economic activity.’
  • ‘Corporate bond spreads remained tight in a worrying sign of continued search for yield,’ ESMA added. ‘Credit risk… remains elevated, with deteriorating corporate debt quality. Liquidity and credit risks [are] concentrated in high yield.’
  • US high yield indices lost nearly -3% last week before staging a recovery on Friday, while European high yield indices lost nearly -1% for the week, as spreads over government bonds widened. That sent investors fleeing, with high yield funds suffering their worst weekly outflows in more than a year.
  • Concerns about fund liquidity will grow louder again if the outlook worsens and redemptions continue apace. Late in the week, Tony Rodriguez, head of fixed income strategy at Nuveen, told the Financial Times that the dramatic sell-off in junk bonds was reminiscent of the financial crisis.
  • Federal Reserve Chairman, Jerome Powell, said last Friday the 28th of February that the Fed stands ready to cut rates if the coronavirus fallout worsens, buoying markets somewhat. However, his ECB counterpart, Christine Lagarde, maintained that the virus was not yet at the stage of needing ECB action. G7 finance ministers are set to meet today to plot a potential joint response.