Asset Management & Investment Funds: EU & International Developments – July 2020

Counterparties to FDI and SFTs and issuers of financial instruments with a UK CSD need to assess Brexit impact and act to ensure compliance with EMIR, MIFIR, SFTR, CSDR, SFD

On 14 July 2020, the European Commission published an updated notice to stakeholders: withdrawal of the UK and EU rules in the field of post-trade financial services

From 1 January 2021 the UK will be a third country as regards the implementation and application of EU law in the EU. To date, equivalence assessments have not deemed UK equivalent.

Counterparties to derivatives and securities financing transactions (SFTs) and issuers of financial instruments with a UK CSD therefore need to assess the consequences of Brexit and act to ensure compliance with EMIR, MIFIR, SFTR, CSDR, SFD.


  • Stakeholders should prepare for a scenario where derivatives traded in the UK regulated markets are treated as OTC derivatives.
  • A derivative that becomes an OTC derivative will become subject to all EMIR requirements applicable to OTC derivatives transactions. This may impact the calculation of the clearing threshold for EMIR, EMIR clearing obligations and some risk mitigation techniques (notably the exchange of margins). Stakeholders should prepare for a scenario where counterparties will not be able to fulfil their clearing obligation under EMIR in UK CCPs.
  • The obligation to clear transactions through an authorised EU CCP or a recognised third country CCP also applies to counterparties established in third countries, where the contract has a direct, substantial and foreseeable effect within the EU or where such an obligation is necessary or appropriate to prevent the evasion of any provisions of EMIR.
  • The loss of EU authorisation of CCPs established in the UK will affect their ability to continue performing certain activities (e.g. compression) and fulfilling certain obligations (e.g. default management) for contracts concluded before the end of the transition period.
  • A higher capital charge will apply to exposures resulting from positions in derivatives held by credit institutions and investment firms established in the EU in non-recognised CCPs established in third countries. This is because only authorised CCPs established in the EU and recognised third country CCPs are qualifying CCPs (QCCPs), which have a favourable capital treatment under CRR.
  • EU Counterparties and third country counterparties to which the clearing obligation applies should examine their derivatives portfolios. All counterparties (including third country counterparties), be they a financial institution or a non-financial company above the clearing threshold, should ensure that they fulfil the clearing requirements. Where derivatives are concluded via an intermediary or cleared via an intermediary (i.e. clearing member, client of a clearing member or an indirect client), counterparties should ensure that their contract with that intermediary complies with the applicable legal requirements. This also applies to clearing relationships within banking groups.

Trade repositories and reporting

  • Stakeholders should prepare for a scenario where UK established trade repositories cannot be used to fulfil the reporting obligation under EMIR and SFTR.
  • The obligation to report a derivative contract to a duly registered or recognised trade repository is addressed to the CCPs and to the counterparties (including AIFMs and UCITS management companies as discussed here). Counterparties responsible for the reporting, be they financial or non-financial, must ensure that this requirement is fulfilled. Where reporting to a trade repository is delegated to a third party, counterparties should ensure that their contract guarantees compliance with all applicable legal requirements in EMIR and/or SFTR.
  • The requirement for counterparties to keep a record of any derivative contract that has been concluded and of any modification thereto must continue to be fulfilled by counterparties for at least five years following the termination of the contract.

Central securities depositories and securities settlement systems

  • CSDs operate securities settlement systems. They settle (finalise) transactions concluded on the market. CSDs also ensure the maintenance of securities accounts that record how many securities have been issued by whom and each change in the holding of those securities.
  • Third-country CSDs must apply for recognition to ESMA where they intend to provide certain core CSD services (issuance and central maintenance services related to financial instruments governed by the law of an EU Member State) or where they intend to provide their services in the EU through a branch set up in a Member State.
  • Stakeholders should prepare for a scenario where UK established CSDs cannot provide issuance and central maintenance services related to financial instruments governed by the law of an EU Member State or provide their services in the EU through a branch in an EU Member State.
  • After the end of the transition period, systems currently designated by the UK will lose their designation under the Settlement Finality Directive along with the rights and benefits that entails for them

The website of the Commission on Post-trade services provides for general information concerning post-trade services. These pages will be updated, where necessary.


The European Supervisory Authorities (ESAs) have informed the European Commission of the outcome of the review conducted by the ESAs of the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs). This follows the ESAs’ consultation paper published on 16 October 2019 on draft regulatory technical standards (RTS) to amend the technical rules on the presentation, content, review and revision of the KID.

The ESAs issued a draft (unapproved) report with draft RTS which was adopted at the EBA and ESMA Boards but not the EIOPA board. EIOPA board members who did not support the RTS argued that a partial revision of the PRIIPs Delegated Regulation is not appropriate at this stage, ahead of a comprehensive review of the PRIIPs Regulation. The European Parliament and the Council will be given the opportunity to object to the RTS.

The draft amending RTS includes proposals in the following main areas:

  • New methodologies to calculate appropriate performance scenarios and a revised presentation of these scenarios, with a view to ensuring that retail investors are not given inappropriate expectations about the possible returns they may receive.
  • Revisions to the summary cost indicators and changes to the content and presentation of information on the costs of PRIIPs, to allow retail investors to better understand the different types of cost structures, as well as to better facilitate the use of this information by persons selling or advising on PRIIPs.
  • Modifications to the methodology to calculate transaction costs to address practical challenges that have arisen when applying the existing rules, and address issues regarding the application to certain types of underlying investments.
  • Refinements to the rules for PRIIPs offering a range of options for investment (MOPs) reflecting experience of challenges regarding the clarity and usefulness of the information, in particular to identify the product’s full cost implications.
  • The incorporation of existing provisions applying to investment funds into the PRIIPs framework, given the expiry of the exemption in Article 32 of the PRIIPs Regulation on 31 December 2021.
  • The requirement for certain types of investment funds and insurance-based investment products to publish information on the past performance of the product and refer to this within the KID so that the availability of this information is known, and the information is published in a standardised and comparable format.

The report also contains recommendations for targeted amendments to the PRIIPs Regulation.

  • The ESAs would prefer to include past performance information within the main contents of the KID on the basis that it is key information to inform retail investors about the risk-reward profile of certain types of PRIIPs. A targeted amendment to the PRIIPs Regulation would be needed.
  • To avoid the co-existence of the PRIIPs KID and the UCITS Key Investor Information Document (KIID); this would involve an amendment to the UCITS Directive so that UCITS managers no longer have to provide a UCITS KIID to retail investors.
  • A change to the PRIIPs Regulation, which addresses successive transactions for the same PRIIP given significant practical challenges to apply the existing approach to UCITS regular savings plans
  • A suggestion that the co-legislators consider a minor change to facilitate the non-paper delivery of the KID.

ESMA issued the official translations of its Guidelines on liquidity stress testing in UCITS and AIFs.

ESMA issued the official translations of its Guidelines on liquidity stress testing in UCITS and AIFs. They become effective on 30 September 2020. In August 2019, the CBI issued a letter reminding UCITS management companies, SMICs, AIFMs and internally managed AIFs of the importance of ongoing and effective liquidity management. Liquidity management for investment funds is a current priority on the regulatory agenda in Ireland and the rest of Europe. Please see Domestic & Practice Developments for more detail.

COVID-19: ESMA statement on external support under MMF Regulation

Regulation on money market funds (MMF Regulation) in the light of actions by financial markets authorities to mitigate the impact of the COVID-19 pandemic on financial markets.

Under Article 35, MMFs are not allowed to receive external support, which is defined as “direct or indirect support offered to an MMF by a third party, including a sponsor of the MMF, that is intended for or in effect would result in guaranteeing the liquidity of the MMF or stabilising the NAV per unit or share of the MMF“.

ESMA explains that the market liquidity brought by certain measures taken by central banks and securities and markets regulators may have indirectly benefited MMFs through the intermediation of credit institutions, including through the purchasing of short-term assets held by MMFs.

The statement therefore seeks to clarify the potential interaction between the intermediation of credit institutions and the requirements of Article 35 on external support. ESMA clarifies that MMFs may enter into transactions with third parties, including affiliated or related parties, provided the requirements of Article 35 of the MMF Regulation are met.

The statement is also intended to co-ordinate the supervisory approaches of national competent authorities (NCAs) in the light of these and any future liquidity challenges for MMFs in the context of the COVID-19 pandemic.

CMU action plan

The European Commission published, for consultation, a roadmap on a communication on an action plan for the capital markets union (CMU). The deadline for providing feedback is 4 August 2020. The related consultation webpage states that the Commission plans on adopting its communication on the CMU action plan in Q3 2020.


ESMA announced that reports from trade repositories (TRs) indicated that the first day of reporting by financial and non-financial market participants under the Securities Financing Transactions Regulation (SFTR), went smoothly. ESMA expects that (as with any new reporting regime) issues will be identified in the first months following go-live, in particular as reporting systems continue to be improved and stabilised. ESMA will supervise the implementation of any corrective and/or remediation measures by TRs as well as coordinating targeted actions by NCAs towards reporting entities.

ESMA is holding a consultation (closing 15 September 2020) on draft Guidelines on the calculation of positions by Trade Repositories (TRs) under SFTR. The aim of the Guidelines is to ensure consistency of position calculation across TRs, with regard to the time of calculations, the scope of the data used in calculations, the data preparation, the recordkeeping of data and the calculation methodologies. The proposed Guidelines cover two main types of aggregation – the named positions between counterparties and the sectorial positions for the purposes of FSB reporting.


The European Commission updated its webpage on its AML/ CTF action plan to state that it has extended the deadline for feedback on the action plan to 26 August 2020. (The original deadline was 29 July 2020.)

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