Regulatory Reporting Roundup 2021: UCITS, AIFMD, MiFID II transaction reporting, and more.
Welcome to the AQMETRICS annual regulatory round-up, an initiative to keep you abreast of this year’s regulatory reporting news and events.
Working towards harmonisation
In September 2021 the European Securities and Markets Authority (ESMA) published its second Trends, Risks and Vulnerabilities (TRV) Report of the year, warning of the potential of a market correction amid an uneven global economic recovery. In the same month, ESMA published its 2022 Annual Work Programme (AWP), outlining priority areas for the next 12 months. The key areas of focus for 2022 include supervision; sustainability; digitalisation and the capital markets union. Of interest for 2022 is ESMA’s ongoing review of AIFMD, with a number of areas of potential harmonisation across the EU, such as AIFMD and UCITS risk management and liquidity control and rules around the use of leverage by both AIFMD and UCITS funds.
Harmonisation is not only a hot regulatory topic in Europe. In July, the US Securities and Exchange Commission (SEC) announced its intentions to implement much-anticipated rules for the regulation of security-based swap execution facilities, in a move that would bring it in alignment with the Commodity Futures Trading Commission (CFTC). Gary Gensler said he wanted to see the SEC harmonise its derivatives rules with similar laws already in place at the CFTC, which would spell stricter oversight to the derivatives market overall, as directed by the Dodd-Frank Act.
A focus on green initiatives and ESG
There was much focus on green and ESG initiatives throughout 2021. On November 15, 2021 ESMA published its Preliminary Report the EU Carbon Market. The report presents an overview of the financial regulatory environment for the carbon market under MAR, MiFID II transaction reporting and EMIR, and the tools available to securities supervisors to fulfill their responsibilities. It also provides an analysis of price evolution and volatility in European emission allowances (EUAs) and derivatives on EUAs.
ESMA actively contributes to the development of the sustainable finance rulebook and to its consistent application and supervision taking the necessary measures to promote investor protection across the EU. On November 4, 2021 ESMA set out how it engages in risk assessment and market monitoring activities, focusing on potential financial stability risks stemming from ESG factors.
In August 2021 the FCA announced a programme of works aimed at supporting firms and regulators in overcoming challenges relating to sustainable finance and climate change. The regulator and industry actors explored the use of technology on ESG data and disclosures in its ‘TechSprint’ from 18-21 October.
In August 2021 the Commission Delegated Regulation (EU) 2021/1255 and Commission Delegated Directive (EU) 2021/1270 were published in the Official Journal of the European Union. The Directive and Regulation are concerned with sustainability risks and sustainability factors to be taken into account for AIFMs and UCITS respectively. The measures will apply from 1 August 2022. Also in August the European Commission’s Platform on Sustainable Finance published a draft report on preliminary recommendations for technical screening criteria for the EU taxonomy. The working document focuses on presenting a set of preliminary priority economic activities and draft recommendations for ‘associated substantial contribution’ and ‘do no significant harm’ technical screening criteria in relation to the four non-climate environmental objectives.
John Berrigan, the head of the European Commission’s financial services unit, said in a letter to the European Parliament in July that the second phase of the landmark SFDR rules were being delayed. The dates of application of 1 January 2022 were delayed by six months to 1 July 2022. ‘Due to the length and technical detail of those regulatory technical standards, he said, ‘we deem it necessary to facilitate the smooth implementation of the standards by product manufacturers, financial advisers and supervisors.’
Regulators embrace technology
In October 2021 the SEC Modernized Filing Fee Disclosure and Payment Methods. Operating companies and investment companies (funds) pay filing fees when engaging in certain transactions, including registered securities offerings, tender offers, and mergers and acquisitions. The amendments revise most fee-bearing forms, schedules, and related rules to require companies and funds to include all required information for filing fee calculation in a structured format. The amendments also add new options for Automated Clearing House (ACH) and debit and credit card payment of filing fees and eliminate infrequently used options for filing fee payment via paper checks and money orders. The amendments are intended to improve filing fee preparation and payment processing by facilitating both enhanced validation through filing fee structuring and lower-cost, easily routable payments through the ACH payment option. The amendments generally will be effective on Jan. 31, 2022. The amendments that will add the options for filing fee payment via ACH and debit and credit cards and eliminate the option for filing fee payment via paper checks and money orders will be effective on May 31, 2022. The Commission is providing an extended transition period to give filers additional time to comply with the Inline XBRL structuring requirements for filing fee information.
Like the SEC, the Central Bank of Ireland (CBI) embraced XBRL reporting technology. In September 2021, the CBI announced that it has adopted XBRL for PRISM Impact Metrics Data return (‘PIMD’) and FINREP+ returns currently submitted on the online reporting portal (ONR).
The FCA made a number of key announcements on the orderly wind-down of Libor and set out a major new plan to tackle investment harm. In a speech delivered at the Lord Mayor’s City Banquet at Mansion House, in September 2021, the FCA’s CEO, Nikhil Rathi, promised a more assertive role of the FCA, underpinned by new technology and a data-driven approach.
Increasing regulatory focus on Liquidity Risk
The FCA feedback for a proposal to introduce notice periods for open ended daily dealt property funds, was published in May 2021. This proved a controversial plan. The proposal comes after dozens of UK property funds, with over £5.2bn in assets, were suspended for over a year, with some funds only reopening in April 2021. The FCA said it was ‘considering its next steps’ and would not make a decision until Q3 at the earliest. Concerns were initially raised that retail investors would be unable to access alternative or niche investments. The FCA launched a consultation on Long Term Asset Funds (LTAF) , also on 7 May, aimed at boosting long-term investing. The new type of open-ended LTAF fund is designed to invest efficiently in long-term, illiquid assets, giving retail investors access to niche assets such as venture capital, private equity, private debt, real estate and infrastructure - but avoiding the liquidity mismatches that has befallen many funds. Meanwhile, calls for feedback on the UK Funds Regime Review closed on 25 April. The UK government plans to analyse responses on issues such as tax and fund structures, and will then consult on specific proposals for reform.
In a Dear Chair letter on May 18, 2021 the Irish regulator cautioned that ‘ESMA’s public statement details a number of adverse supervisory findings.’ It added that ESMA’s CSA also highlighted the importance of market participants reviewing their own Liquidity Risk Management frameworks, to ensure that none of the adverse findings are found in their frameworks. Throughout 2021 it became clear that further actions will be undertaken by NCAs, it said, to ensure that regulatory breaches as well as other shortcomings or weaknesses identified are remedied. In the case of the CBI, supervisory engagement commenced with UCITS managers where specific concerns were identified, with the central bank issuing 35 Risk Mitigation Programmes by mid 2021.
Third Party ManCos
On September 10, 2021, the Central Bank published new UCITS and AIFMD Q&As clarifying its resourcing expectations for new and existing so-called third party or white-label management companies (Third-Party ManCos).
Transaction reporting - MiFIDII and EMIR
Throughout 2021 ESMA published consultations on MiFID II best execution reporting and short selling; a MiFID II report on algorithmic trading and new Q&As.
ESMA’s public consultation on its draft Guidelines for derivatives reporting under EMIR was launched in July with a final report due in Q1 2022.
In February 2021 ESMA launched a common supervisory action (CSA) with national competent authorities (NCAs) looking at the application of MiFID II product governance rules across the EU. The CSA was carried out over 2021 with an aim to allow ESMA and the NCAs to assess the progress made by manufacturers and distributors of financial products in the application of the key requirements of the MiFID II governance rules. The CSA has focused on three main components of the guidelines. It has examined how manufacturers ensure financial products’ costs and charges are compatible with the needs, objectives and characteristics of their target market; how manufacturers and distributors identify and periodically review the target market and distribution strategy of financial products; and what information is exchanged between manufacturers and distributors and how frequently this is done.
Disclosures and a drive for transparency
On November 18, 2021 the SEC published proposed Exchange Act Rule 10c-1, which would require lenders of securities to provide the material terms of securities lending transactions to a registered national securities association, such as the Financial Industry Regulatory Authority. The registered national securities association would then make the material terms of the securities lending transaction available to the public. The proposed rule is consistent with Congress’s mandate in the Dodd-Frank Act that the Commission increase transparency regarding the loan or borrowing of securities for brokers, dealers, and investors by ensuring that market participants, the public, and regulators have access to timely and comprehensive information about the market for securities lending.
In September 2021 the SEC delayed certain assets from enforcement actions under its new disclosure rule. The delay is until January 3, 2022.
Penalties and sanctions under UCITS, AIFMD and MiFID II.
In July ESMA released reports on penalties and sanctions under UCITS, AIFMD and MiFID II. Sanctions and fines increased across the board. MiFID II fines were most notable, with NCAs issuing a total of 613 sanctions, reaching a value of €8.4 million across 23 of the 30 EEA member states. That was a more than fourfold increase from 2019, when total fines were €1.8 million. For AIFMD firms, meanwhile, a total of 11 NCAs imposed 61 penalties, totaling some €3.35 million. 13 NCAs imposed a total of 57 penalties relating to UCITS failings in 2020, totaling some €1.1m.
