Asset Management & Investment Funds: EU & International Developments: Jan 2020

ESMA SFTR reporting guidelines

The European Securities and Markets Authority (ESMA) published its final report, its Guidelines on reporting under the SFTR, amended SFTR validation rules and a statement on Legal Entity Identifiers on 6 January 2020.​ The SFTR guidelines aim to clarify a number of provisions of SFTR and to provide practical guidance on the implementation of some of those provisions.

As a reminder of the phased commencement basis of the SFTR reporting obligation, the dates are below.

  • MiFID firms, credit institutions – 11 April 2020
  • UCITS, AIFs with authorised/registered AIFMs, IORPs, insurance/reinsurance firms – 11 October 2020
  • Non-financial counterparties – 11 January 2021

The SFTR Guidelines are long (216 pages) and technical. They clarify, amongst many other things, the following:

  • certain market transactions which do not fall under the definition of an SFT due to their nature
  • ESMA also reconfirmed that it identified two situations where a non-EU AIFM would be impacted by SFTR. Non-EU AIFMs with an EU AIF authorised to provide services under passporting regime, retain the responsibility for reporting. In the cases of the national private placement regime, the non-EU AIFM should report if required to by the national rules, or otherwise, the responsibility remains with the EU AIF
  • ESMA did not take on board the feedback by some respondents that non-EU AIFs are not required to report irrespective of the location of the AIFM, as AIFs managed by AIFM registered or authorised under AIFMD are subject to reporting under SFTR.

ESMA annual report on AIFs

​ESMA published its annual statistical report on EU AIFs on 10 January 2020​. The report covers the year 2018. It valued the AIF sector in 2018 at €5.8tn or nearly 40% of the total EU fund industry. The report is based on data from 30,357 AIFs, or almost 100% of the market.

Sector breakdown – funds of funds accounted for 14% of the industry, followed by real estate funds (12%), hedge funds (6%) and private equity funds (6%). The remaining category of other AIFs accounts for close to two-thirds of the industry (61%), covering a range of strategies with fixed income and equity accounting for 67%. Most AIFs are sold to professional investors (84%) but retail participation is significant at 16%, with the highest share in the funds of funds and real estate categories.

Liquidity risk an issue in real estate and funds of funds sectors. The two sectors with the largest percentage of retail investors, funds of funds with 31% and real estate with 21%, are also the sectors where the report finds potential issues linked to liquidity. Many of the funds in the real estate sector offer daily liquidity, which indicates a structural vulnerability risk as they invest in illiquid assets while allowing investors to redeem their shares over a short time-frame. For the funds of funds sector there is a mismatch in liquidity, as 35% of the NAV is redeemable within a day, while only 24% of assets can be liquidated within that timeframe.

Increased use of leverage in the hedge fund sector – The hedge funds sector amounted to €333bn in NAV, or 6% of all AIFs. However, when looking at gross exposure they total 67% of all AIFs due to their increasing reliance on the use of derivatives. These funds are exposed to financing risk, as one third of their financing is overnight. However, the fact that they maintain large cash buffers offers some security.

The report includes three sections, covering:

  • market monitoring – including an analysis of structures and trends in European AIFs markets during each reporting period, building on the indicators developed for risk monitoring;
  • statistical methods – focusing on the classification of funds in the other AIFs category as well as the exposure of AIFs to leveraged loans and collateralised loans obligations
  • AIF statistics – setting out a full list of indicators and metrics currently monitored by ESMA.


The United Kingdom will leave the European Union on Friday night, 31 January 2020 at midnight (Brussels time). See ALG commentary here.

EU Commission Q&A – The EU Commission published Brexit Q&As on topics including:

  • What happens on 1 February 2020
  • Who will lead the negotiations on the EU side
  • What is the transition period
  • What status will the United Kingdom have during the transition period​
  • What is the Withdrawal Agreement (including​​ a lot of detail on the provisions)​
  • Protocol on Ireland / Northern Ireland
  • Protocol on the Sovereign Base Areas in Cyprus
  • Protocol on Gibraltar

FCA – On 20 December 2019, the FCA published details of the implications for financial services regulation if the UK leaves the EU with a withdrawal agreement on 31 January 2020 and consequently the UK enters into a transition period until at least 31 December 2020.

The FCA notes that during the transition period EU law will continue to apply in the UK. This means that passporting will continue and new EU legislation that takes effect before the end of the transition period will also apply to the UK. The FCA expects firms to consider how the end of the transition period will affect them and their customers, and what action they may need to take to be ready for 1 January 2021.

The FCA indicated that it will update its webpage “after 31 January 2020 to reflect the UK’s new status.”

ESMA extended its recognition decisions for 3 UK CCPs in a no-deal Brexit.

ESMA announced that it had extended its recognition decisions for the three Central Counterparties (CCPs) established in the UK – LCH Limited, ICE Clear Europe Limited and LME Clear Limited. In February and April 2019, it announced that it would recognise the CCPs in the event of a no-deal Brexit.

This follows the European Commission’s extension of its temporary equivalence decision (Decision) granted in respect of the UK’s regulatory framework for central counterparties under EMIR, which was due to expire on 30 March 2020. This Decision permits ESMA to temporarily recognise UK CCPs to allow these CCPs to continue to provide clearing services in the EU for a limited period after a no-deal Brexit. In a no-deal Brexit scenario, the Decision will expire on 31 January 2021. The Decision does not apply if a withdrawal agreement is agreed.

ESMA also issued a statement updating the date for Brexit in all of ESMA’s previously published measures and actions, including public statements, issued regarding the possibility of a no-deal Brexit scenario.

UK Treasury letter to EU on financial services equivalence post-Brexit

On 27 January 2020, the Department for Exiting the European Union published a letter from John Glen, Economic Secretary to the Treasury, to Lord Kinnoull, European Union Committee Chair, on equivalence in financial services in the light of the UK’s withdrawal from the EU.

This followed an interview by the Financial Times on 17 January with the UK chancellor, Sajid Javid, who said there would be no alignment with EU regulations once Britain’s exit from the EU was made official. He said: “There will not be alignment, we will not be a rule taker, we will not be in the single market and we will not be in the customs union – and we will do this by the end of the year.”

Mr Glen’s points include the following.

  • The EU Commission adopted temporary equivalence decisions for the UK under EMIR (central counterparties) and CSDR (central securities depositaries). These were adopted to address financial stability and market integrity concerns in the EU. While these decisions only take effect in a “no deal” scenario, it is important that both the UK and the EU can continue to benefit from UK CCPs being able to offer their services to EU counterparties in all circumstances.
  • ​​​The UK ambition is for a future relationship with the EU that respects its and the UK’s autonomy, while providing confidence and protecting financial stability. The government believes that a deep and comprehensive future relationship with the EU remains the best way to further these shared goals. This includes arrangements that encourage the EU and the UK to work together constructively to stabilise the current equivalence framework, as this will help to ensure strong ties to preserve market integration, financial stability and investor protection.
  • The government believes that there is sufficient time for assessing equivalence with respect to the EU and UK under their existing frameworks by the end of June 2020. The government’s priority is to seek equivalence across all of the EU equivalence regimes (approximately 40).
  • Following the UK’s withdrawal from the EU, the UK will not be required to follow the EU’s exercise of equivalence determinations. For example, the UK could make an equivalence decision for a third country that the EU has not. Mr Glen goes on to state that the equivalence process will be one of the key tools to facilitate cross-border financial services in the UK and therefore it is for the UK government to decide how to exercise this in the UK’s best interests.

ESMA’s Strategic Orientation for 2020-22

ESMA published its Strategic Orientation for 2020-22. The Strategic Orientation sets out ESMA’s future focus and objectives and reflects its expanded responsibilities and powers following the ESAs Review, and EMIR 2.2, which increases its focus on supervisory convergence, strengthens its role in building the Capital Markets Union and gives it with more direct supervision responsibilities.

Steven Maijoor, ESMA Chair, said:

“One of our key priorities is ensuring the consistent and coherent implementation of the Single Rulebook and, with our new powers in this area, we will adopt a risk-based approach, in cooperation with national authorities, to supervisory convergence across the EU. While we will evolve further as a direct supervisor, with responsibility for critical benchmarks and data service providers and 3rd country CCPs, prioritising those areas posing the greatest risks to our objectives.”

ESMA’s new powers and responsibilities include:

  • Supervisory Convergence – enhanced supervisory convergence tools, such as peer reviews, Q&As, collective supervisory actions and EU Strategic Supervisory Priorities. It will develop an EU supervisory handbook
  • Investor Protection – it will co-ordinate mystery shopping on retail investment products, develop retail risk indicators, and collect, analyse and report on consumer trends
  • International – new tasks for 3rd country equivalence assessments including monitoring regulatory and supervisory developments in equivalent third countries, assisting the EU Commission in preparing equivalence decisions, and a strengthened role in international fora
  • Transversal topics – ESMA must embed technological innovation, sustainable finance and proportionality in its activities
  • Direct Supervision:
    • 3rd country central counterparties
    • critical benchmarks, 3rd country benchmarks and data service providers from 1 January 2022
    • Securitisation repositories under the Securitisation Regulation
    • Securities financing transactions under the Securities Financing Transactions Regulation.

To accommodate these new responsibilities, ESMA will grow to 384 by 2022 and has published an updated organigramme to reflect the changes in its structure.

ESMA’s Q&A process

​ESMA began publishing a list of questions​ received through its Q&A process on 10 January 2020. The ESMA Q&A process is detailed here. There are 10 categories in the ESMA Q&A classification:

  • Corporate Disclosure
  • Credit Rating Agencies
  • Fund Management
  • MiFID II and Investor Protection
  • Market Abuse
  • MiFID II MiFIR and Secondary Markets
  • Benchmarks
  • Short Selling
  • Post Trading
  • Innovation and Products

Publication of the questions began as a result of the revised ESMA regulation which obliges ESMA to set up a web based tool to facilitate the submission of questions, the publication of questions received as well as answers to admissable questions. The web-based tool will be rolled out on a phased basis. ESMA will endeavour to reply within two months to factual questions received and within four to six months to policy questions that raise new points of interpretation.


The European Commission issued a consultation on the EU regulatory framework for cryptoassets.

The consultation seeks feedback on:​

  • whether and how to classify cryptoassets, covering cryptoassets that fall under existing EU legislation (those that qualify as ‘financial instruments’ under MiFID II and those qualifying as ‘e-money’ under EMD2) and those that do not
  • crypto-assets that currently fall outside the scope of the EU financial services legislation to determine whether an EU regulatory framework for those crypto-assets is needed. The replies will also help identify the main risks raised by unregulated crypto-assets and specific services relating to those assets, as well as the priorities for policy actions
  • ​crypto-assets that currently fall within the scope of EU legislation, i.e. those that qualify as ‘financial instruments’ under MiFID II and those qualifying as ‘e-money’ under EMD2 to assess the impact of possible changes to EU legislation (such as the Prospectus Regulation, MIFID II, the Central Securities Depositaries Regulation).

ALG commentary on 2019 developments surrounding cryptoassets is available here.

SEC proposal to update Accredited Investor definition

​On December 18, 2019, the SEC voted (3-2) to propose amendments to expand the definition of “accredited investor.” The proposed amendments are intended to update and improve the definition to identify more effectively the institutional and individual investors with the knowledge and expertise to participate in the private capital markets. Although the proposed amendments would provide issuers with additional tests for accredited investor status, the extent to which they would result in substantial new sources of capital is unclear.

The revised accredited investor definition would:

  • add new categories of natural persons based on professional knowledge, experience, or certifications
  • add new categories of entities, including a “catch-all” category for any entity owning in excess of $5m in investments
  • add new categories to the definition that would permit natural persons to qualify as accredited investors based on certain professional certifications and designations, such as a Series 7, 65 or 82 license, or other credentials issued by an accredited educational institution
  • with respect to investments in a private fund, add a new category based on the person’s status as a “knowledgeable employee” of the fund
  • add limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies (RBICs) to the current list of entities that may qualify as accredited investors
  • ​add a new category for any entity, including Indian tribes, owning “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5m and that was not formed for the specific purpose of investing in the securities offered
  • ​add “family offices” with at least $5m in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act
  • ​add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors

In addition, the SEC proposed amendments to the definition of “qualified institutional buyer” (QIB) in Rule 144A that would expand the list of entities that qualify as QIBs. These amendments, if adopted, would increase the number of potential buyers of Rule 144A securities, and thereby should promote capital formation by issuers conducting Rule 144A offerings.

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