26 March 2020

COVID-19: Five things to look out for

At the time of writing, all of the following listed items are currently awaiting resolution. Hence, the need to keep a watchful eye on:

*Since this article was published, the CSSF extended fund reporting deadlines for local asset managers. Join our webinar on 2 April, as we will be discussing the impact of this announcement.

European Markets: open, but with regional variations
The Securities and Markets Stakeholder Group (SMSG) supplies ESMA with consultation and technical advice. This week, they issued a set of recommendations on measures now required from ESMA, given the unfolding Covid-19 crisis. One of the more prominent items was the need for ESMA to coordinate national competent authorities (NCAs) to ensure that “European markets will remain open and continue to operate efficiently in this challenging environment.”

Pending ESMA’s formal response, NCAs are already applying variable local measures they currently see appropriate. This includes interim Short-Selling bans (applied in France, Italy and Spain, but not in the UK or Germany).SMSG also strongly recommend that ESMA assist supervisory convergence covering those interim difficulties faced by firms deploying widespread Working from Home (WFM).

They also cite additional, generic risks that now have to be addressed, i.e. operational, latency, cyber-security, confidentiality, conduct /conflict of interest / market integrity and traceability. The UK Financial Conduct Authority (FCA), BaFIN (German regulator) and U.S. Commodity Futures Trading Commission (CFTC) are mentioned for potential temporary disruptions referrals.

There continues to be extensive reportage of NCAs directly approaching investment firms, requesting additional information (e.g. daily net redemptions exceeding 10% of a fund net asset value). In the meantime, unlike most other economic sectors, the financial markets – fragmented, turbulent, or otherwise – will most probably remain open for business, for now.

Interim product developments
The UCITS Directive (level 1, p.41-42) enables a fund to be temporarily suspended in exceptional cases where this is deemed to be in the best interests of the shareholders, provided home and host regulators are notified “without delay”.

The FCA handbook Chapter 7 contains clear guidance in relation to suspension of dealing of authorised UK funds.In the event of suspension, the fund firm would need to be mindful of interim impact on their UCITS Key Investor Information Documents and / or PRIIPS Key information Documents (i.e. respective performance calculations and risk indicators).

Some local fund associations recommend adopting a pragmatic approach where necessary (including proactive contact with the regulator).Meanwhile, the FCA has reportedly already approached UK firms for advance notification of funds at risk of suspension.

Pending reporting deadlines
The SMSG strongly urged ESMA to postponed Reporting Deadlines or enable Regulatory Forbearance. ESMA had recently confirmed an interim 3 x month postponement of Securities Finance Transactions Regulation (SFTR) reporting until July 2020.

Awaiting ESMA’s responses elsewhere, some prominent local NCAs have proceeded with their local measures deemed necessary.For example, the French AMF have already stated their expectations, announcing their decision to grant participants time extensions (e.g. “in the case of non-critical requirements”). There is also a 2 x month postponement of the Chief Investment Services Compliance Officer annual report (aka RCSI Annual Questionnaire) until 15 May 2020. Otherwise: “…as a general rule, and unless explicitly stated to the contrary, the due submission of questionnaires or reports to the AMF may be reasonably deferred”.

In Luxembourg, the CSSF announced that while they expect supervised entities to perform regulatory reporting when it is due, they will not strictly enforce regulatory reporting deadlines (i.e. where delays are duly justified and notified in advance), for the duration of the crisis.

As a rule, all regulators are urging fund firms to apply their best endeavours to meet their regulatory obligations (i.e. to protect their investors and maintain market integrity) during the Covid-19 epidemic.

Up until now, as neither ESMA nor local regulators have specified any deferral to end-Q1 AIFMD Annex IV reporting, we should assume the associated production and filing deadline has to be met (until further notice). As before, in the event of difficulty, the regulator should be contacted at the earliest. Meantime, continued scrutiny of regulatory websites for updates remains of key importance.

Financial Statements
ESMA issued a statement this week addressing International Financial Reporting Standards (IFRS) impact on Financial Statements (currently pending from listed EU financial firms). This was coordinated along with updates from the European Banking Authority (EBA) and the Committee of European Auditing Oversight Bodies (CEAOB).

The FCA is granting an additional two months for listed companies to publish their audited financial statements due to the coronavirus pandemic. They will apply additional forbearance if these are now published within six months of the corporate year-end. This follows appeals for a temporary respite from top accountancy firms currently facing additional pending firm rotation obligations (c/o EU Statutory Audit legislation).

In an earlier “unprecedented” move, the FCA enabled these firms to delay publication of their preliminary results for “at least two weeks”. This was to prevent un-audited results misleading investors (i.e. ahead of final statements issuance).The CSSF have also recently announced an exceptional delay of long form reporting (i.e. as remitted by the Auditor) up to four months after the AGM of the entity or fund). The communiqué refers to the CEAOB statement (mentioned by ESMA above).

Shifting Legislation & Consultations
Finally, the SMSG advised ESMA to review all regulations and directive applications falling within the next 12 months to be assessed for postponement (if deemed necessary). Ironically, perhaps the most prominent is the application of ESMA’s Liquidity Stress Testing in UCITS & AIFs guidelines currently slated for 30th September 2020.

It remains to be seen whether there will be interim pushback of any EC Sustainable Finance Action Plan components (incl. pending Disclosure regulation and Delegated Acts to update UCITS, AIFMD and MiFID II).ESMA had already delayed a number of consultations by 4 weeks, including a paper covering Draft MiFID II technical standards on investment services by 3rd country firms. Given the SMSG recommendation for postponement until after the C-19 crisis has abated, these are most likely to be moved again.

The FCA has decided to extend the closure dates of several Consultation Papers and Calls for Input until 1st October 2020. This includes Proposals for listed firms to enhance climate-related disclosure obligations.


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