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AQMetrics Regulatory Round-Up: January 2020


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


January has already proved a busy month: the European Securities and Markets Authority (ESMA) unveiled its strategic orientation for 2020-2022 and dropped its latest AIF Statistics Report; the Central Bank of Ireland followed suit with its priorities for 2020; the Woodford fallout continues; and Brexit finally looms after three extensions and three and a half years of anticipation and planning.With an eye on the upcoming year, compliance teams and fund managers will also have to gear up for new liquidity rules coming into effect from September this year.


Operational Resilience becomes a major feature

5 December 2019 –setting the scene for 2020, the Financial Conduct Authority (FCA), Bank of England (BoE) and Prudential Regulation Authority (PRA) published a joint consultationpaperin December focusing on “Operational Resilience”.Under the proposals, firms and FMIs would be expected to:

  • Identify their important business services that if disrupted could cause harm to consumers or market integrity, threaten the viability of firms or cause instability in the financial system.
  • Set impact tolerances for each important business service, which would quantify the maximum tolerable level of disruption they would tolerate.
  • Identify and document the people, processes, technology, facilities and information that support their important business services.
  • Take actions to be able to remain within their impact tolerances through a range of severe but plausible disruption scenarios.


UK financial institutions are seemingly in good shape, with the Bank of Englanddeclaring last year that, ‘the UK banking system remains well-capitalised and able to support the real economy in a severe macroeconomic stress.’ Given this, the regulator has in recent years shifted its attention toward operational risks, including culture, governance and use of new technology.Firms are therefore expected to identify critical outsourcing services and show they can recover from disruptions. Final policy directives are yet to be announced, however.


ESMA finalises SFTR guidelines with LEI reprieve

6 January –ESMA released its final SFTR reportingguidelines. The first phase will come into force on 13 April for investment firms and credit institutions, while central counterparties and central securities depositories will have to comply from July.Crucially, the regulator will allow a 12-month grace period for the legal entity identifiers (LEI) requirement, which was initially set to come in as part of phase one.The delay to the “no LEI – no trade” stance was somewhat expected but was still welcomed by industry leaders, with more than 12% of affected EU instruments not having an LEI at present.


ESMA outlines strategic direction

9 January –ESMA published its lateststrategic orientation for 2020-2022, set against the background of the largest capital market, the UK, leaving the EU. Particular emphasis is placed on stepping up its risk-based approach to supervision, with liquidity and leverage highlighted as major risks.As ESMA chair, Steven Maijoor, said in outlining the orientation last year: ‘ESMA will continue its focus on promoting supervisory convergence and assessing risks with a continued emphasis on the implementation of MiFID II/MiFIR, tackling the issue of cost and performance of retail investment products and facilitating data-driven supervision.’The increased role of technology, data management and sustainability are also set to become major themes, especially as regulators and asset managers embrace innovation to better fulfil their roles and responsibilities.As ESMA remarked in the report: ‘Data has become essential for supervision in providing regulators with additional insights on market developments, and tools such as RegTech and SupTech provide promising opportunities.’


ESMA AIF Statistical Report highlights liquidity, leverage risks

10 January –ESMA published its second major analysis of the AIFs market, with the reportshedding further light on the overall AIF landscape. Following its inaugural report in March 2019, the sweeping study covers nearly the entire market, and includes data from 30,357 AIFs. Liquidity and leverage were unsurprisingly themajor themes.


Woodford fallout deepens

11 January –theFCA has begun its review of authorisedcorporate directors(ACDs), following the high-profile collapse of Neil Woodford’s UK Equity Income Fund, the Financial Times reported. The Financial Times had earlierwarnedthat an ACD assessment would be carried out back in August last year.The probe will reportedly focus on external ACDs, like Woodford’s beleaguered ACD, Link Fund Solutions, rather than the internal function used by most large asset managers.


Central Bank of Ireland outlines priorities for 2020

15 January– The CBIsharedits key priorities for the year, with a focus on conduct regulation, consumer protection and liquidity. Other important highlights included:(i) The role of the CBI as gatekeeper will become ‘ever-more risk-based’ and will include ‘implementing important new legislative mandates to strengthen the regulatory framework’ in the future.

(ii) The CBI is concluding its review of how the sector is implementing its rules and guidance related to fund management company effectiveness.

(iii) The CBI is commencing a review of UCITS’ use of securities lending.

(iv) The CBI is working together with ESMA to complete a common supervisory action on liquidity management in certain investment vehicles such as UCITS.


Stricter reporting for MMFs in Q1

Beginning at the end of Q1, European Money Market Funds (MMFs) will have to disclose certain information under the Money Market Fund Regulation (MMFR) through reporting to their National Competent Authorities (NCAs).You can read ESMA’s statementhere.What is clear is that the NCAs have yet to publish the implementation readiness dates and the full technical guidelines for the new MMF reporting requirements. AQMetrics has engaged in ongoing communications with the NCAs to confirm readiness plans, and will keep our readers and clients posted.



Liquidity top priority for FCA and ESMA

Liquidity is set to become a major theme in 2020 and beyond. Last year, the FCA announced that from 30 September 2020, non-UCITS retail schemes (NURS) funds will have to provide investors with ‘clear and prominent’ information on liquidity risks, and place additional obligations on managers to manage liquidity risks.ESMA has undertaken similar actions. The regulator published itsfinal guidancein September 2019, with funds required to stress test the assets and liabilities they manage, which includes potential redemption requests. Like the FCA’s new liquidity rules, ESMA’s guidelines go live on 30 September.


Regulators embrace technological change

And finally, an interesting and ongoing theme has been the emergence of the regulators themselves embracing new technologies, both to communicate with the market and to offer data services to regulated firms.ESMA recently moved to a web-based Q&A portal, for instance, which will help facilitate the submission of questions. Both the questions and answers will be published, while alistof questions is currently under development through its Q&A process. Major topics include fund management, MiFID and investor protection.The FCA has also been preparing for some time to migrate toAmazon Web Services,and will offer MiFID access to FIRDS data via Elasticsearch.‘The functionality of the search engine is comparable to ESMA’s, but we will be using a different search engine, Amazon’s Elasticsearch,’ the FCA explained. It provides an interesting insight into how the regulators are adopting and innovating with technology.