18 January 2021

Industry update: 18 Jan 2021

In our latest regulatory update: ESMA’s request for urgent SFDR clarification from the European Commission, Funds face ‘investor challenges’ after transaction costs soar, TURN MiFID II reporting platform goes live and ESMA launch UCITS Costs CSA with regulators.

1. ESAs: request ‘urgent’ SFDR clarification from the European Commission

Fund managers were expecting the European Securities and Markets Authority (ESMA) to supply them with an indication of what their regulators are generally expecting from them, ahead of the level 1 deadline of the Sustainable Finance Disclosure Regulation (SFDR) in a matter of weeks.

Instead, it emerged on Friday that ESMA and their European Supervisory Authority associates have sent a letter to the European Commission, having “encountered several important areas of uncertainty in the interpretation of SFDR” and now seeking “urgent clarification” at the earliest.

“Priority areas” of SFDR application listed in an annex by the ESA include:

  • non-EU Alternative Investment Fund Managers (AIFMs) and registered AIFMs;
  • the 500-employee thresholdfor principal adverse impact reporting
  • the context of products promoting environmental or social characteristics(e.g. whether fund names including the words ‘sustainable’, ‘sustainability’ or ‘ESG’ automatically qualify them as “Article 8” SFDR products
  • “Article 9” SFDR products (i.e. funds pursuing sustainable investment as its objective)
  • SFDR product rulesto portfolios and dedicated funds (i.e. “tailored” per MiFID II)

Judging by the elemental nature of most queries raised by the ESAs, and with less than 2 months now remaining, the European Commission (EC) appear to face a huge task if they are to enable an “orderly application of SFDR from 10 March 2021”.

2. Funds face ‘investor challenges’ after transaction costs soar

“Increases in transaction costs over the past year underline even more how important it is for asset managers to pay close attention to their cost calculations and the results presented to the market.”: Ulf Herbig, Head of Product at Kneip

The leading article in last Friday’s edition of Ignites Europe was a feature covering the recent dramatic increases in some fund transaction costs (following coronavirus-stricken market conditions).

Deloitte in Luxembourg (analysing 4,000 funds and 18,000 share classes) conclude that while MiFID II ex-Ante costs have increased by 7% on average, ex-post transaction costs rose sharply by an average of 25% over the past year.

In the same article, our Ulf Herbig our Head of Product also pointed out Kneip’s Transaction Cost solution processed 43% more transactions in Q2 2020 (i.e. during pandemic market dislocation) when compared to same period, previous year.

3. TURN MiFID II reporting platform goes live

Last week, Investment & Pensions Europe (IPE) reported of the Investing and Savings Alliance (TISA) announcement of their TISA Universal Reporting Network (TURN) launch.

TURN (including Kneip as a founding partner) is a platform aimed at easing regulatory reporting requirements of MiFID II that is now available across Europe, enabling all relevant parties in a transaction access to European MiFID II Template (EMT) data on a real-time basis, with the templates of high and consistent quality substantially reducing participating firms’ data management costs.

4. ESMA launch UCITS Costs CSA with regulators

Finally, ESMA has recently initiated a Common Supervisory Action (CSA) with national competent authorities (NCAs) on the supervision of costs and fees of UCITS across the EU. Throughout 2021, NCAs will “share knowledge and experiences through ESMA to ensure supervisory convergence in how they supervise cost-related issues, and ultimately enhance the protection of investors across the EU”. They will take a lead from the Supervisory cost briefing (UCITS, AIFs) issued by ESMA in June last year.

How Kneip can help

  • UCITS compliance: Manage the creation, approval workflow and maintenance of UCITS KIID documents in compliance with the UCITS Directive and relevant jurisdictional requirements.
  • Transaction cost calculation: Calculate transaction costs for PRIIPs and MiFID II compliance, including Arrival Price methodology.

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