There have been a number of regulatory developments with implications for funds and their managers, since the beginning of 2020. These include the publication of Guidelines on reporting under the Securities Financing Transaction Regulation 2015/2365 (the “SFTR”) by the European Supervisory and Markets Authority (“ESMA”) as well as the following Central Bank of Ireland (“Central Bank”) publications:
- An information note confirming that the Central Bank will be responsible for establishing a central Beneficial Ownership Register in respect of credit unions and certain funds;
- an updated version of the UCITS Q&A;
- an Industry Letter re Funds preparation with regard to interest rate benchmark reforms, dated 28 February 2020 (the “Industry Letter”);
- a notice of intention regarding the introduction of new pre-approval controlled functions (the “Notice of Intention”).
ESMA’s Guidelines on SFTR Reporting
The SFTR introduces, on a phased basis, a reporting requirement for certain counterparties to securities financing transactions (“SFTs”). ESMA published its Guidelines, “Reporting under articles 4 and 12 SFTR” on 6 January 2020, with the aim of clarifying and providing practical guidance on some aspects of the new requirement. It also published an LEI Statement (here).
Pursuant to the reporting requirement, a counterparty to an SFT transaction must report the details of that transaction, as well as any modification or termination thereof, to a registered or recognised trade repository no later than the working day following the conclusion, modification or termination of the transaction.
The SFTR also requires the reporting of certain SFTs to be backloaded, namely SFTs either having (i) a (fixed) remaining maturity exceeding 180 days as of the relevant phase-in date or (ii) an open maturity and remaining outstanding 180 days after that date
Inscope “SFTs” comprise:
- securities or commodities repurchase transactions;
- securities or commodities lending or borrowing transactions;
- securities or commodities buy-sell back or sell buy-back transactions; and
- securities margin lending transactions.
The SFTR and the Guidelines provide further clarification of the ambit of each of these categories.
The SFTR reporting requirement applies to a wide range of EU established counterparties trading in SFTs as well as to non-EU counterparties that trade in SFTs through an EU branch. This includes both EU alternative investment funds (“AIFs”) and undertakings for the collective investment in transferable securities (“UCITS”).
While the Guidelines indicate that the reporting requirement also applies to a non-EU AIF managed by an EU AIFM, both ESMA and the European Commission have since confirmed that this is not the case. Specifically, according to letters sent to the Alternative Investment Management Association by ESMA and the European Commission, a non-EU AIF is not subject to the SFTR reporting requirement, even if managed by an EU AIFM, except in respect of SFTs concluded in the course of the operations of an EU branch of the Non-EU AIF.
The SFTR reporting regime will be phased in between April 2020 and January 2021, with different phase-in dates applying depending on whether the counterparty to the SFT transaction is: a) a UCITS or an EU AIF that is managed by an EU-authorised AIFM; or b) an EU AIF managed by a non-EU investment manager. The applicable phase-in dates are, respectively 11 October 2020 and 11 January 2021, as, contrary to the position under EMIR, an EU AIF falling within b) is treated as non financial counterparty under the SFTR. For its part, the backloading requirement will start to apply within 190 days of the relevant phase-in date.
In the case of a UCITS managed by a management company or an AIF managed by an EU authorised AIFM, the SFTR specifically provides that the management company and the AIFM are responsible for reporting on behalf of the UCITS and AIF respectively. In the case of an AIF managed by a non-EU investment manager or by a registered AIFM (to which the SFTR is not applicable), the responsibility to report SFTs to a trade repository remains with the fund.
Details of the data to be reported are set out in Commission Delegated Regulation 2019/356 and clarified by the Guidelines. In-scope managers of AIFs and UCITS, or, where relevant, inscope AIFs will need to ensure that they put in place the systems necessary to collect and report the relevant information. If they have decided to delegate compliance with SFTR reporting, they will need to put in place appropriate delegation arrangements before the relevant phase-in date.
The correct reporting of a valid Legal Entity Identifier (“LEI”) is a requirement for the compliance of an SFT report with the SFTR reporting obligation. In its Statement on Implementation of the LEI requirements under the SFTR reporting regime, ESMA acknowledges that EU investors will face problems in using securities issued by non-EU issuers, as a significant number of such issuers do not have a LEI code. Consequently, ESMA is allowing for a period of up to 12 months starting from the applicable phase-in dates during which reports of securities which are lent, borrowed or provided as collateral in an SFT will be accepted without the LEI of third-country issuers (that do not have an LEI).
Beneficial Ownership Register
Corporate and other legal entities are required to maintain their beneficial ownership details on an internal register pursuant to the European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2019. A similar obligation is imposed on express trusts under the European Union (Anti-Money Laundering: Beneficial Ownership of Trusts) Regulations 2019.
While certain legal entities are also required to report these beneficial ownership details to the Central Register of Beneficial Ownership of Companies and Industrial and Provident Societies (the “RBO”), this obligation does not apply to Irish Collective Asset-management Vehicles (“ICAVs”).
On 6 March 2020, the Central Bank issued an information note confirming that it will be responsible for establishing a central Beneficial Ownership Register (the “Register”) in respect of credit unions and funds that are ICAVs and Unit Trusts. Common Contractual Funds and Investment Limited Partnerships will also be included on the Register in due course.
The Central Bank expects the Statutory Instrument assigning responsibility to the Central Bank to maintain the Register will be introduced during March 2020 and that there will be a five month lead-in period for entities to submit information to the Central Bank for inclusion in the Register. Once established, the Register will co-exist with the RBO. A third register covering the beneficial ownership of Trusts will be implemented by a separate authority and will be available in due course.
The Central Bank UCITS Q&A
According to a revised UCITS Q&A published by the Central Bank on 29 January 2020, a UCITS may be subject to enhanced scrutiny at the authorisation phase if it intends to invest in Contracts for Difference, Collateralised Loan Obligations, Contingent Convertible Securities or Binary Options. The purpose of the enhanced scrutiny is to ensure that the proposal to invest in these types of assets is appropriate, taking into account the overall portfolio of assets and may include a review of
- model portfolio information;
- the due diligence carried out in respect of the proposed underlying portfolio; and
- evidence to support the view that the proposed investment portfolio is suitable taking into account the above-mentioned requirements.
The Central Bank may request additional information for the purpose of reviewing a specific application and such information should be sufficiently detailed to enable the Central Bank to make an informed judgment with respect to that application.
The Central Bank has also indicated that other instruments may be added to the list of investments that will trigger enhanced scrutiny in the future.
Industry Letter on Benchmark Regulation
The Central Bank issued the Industry Letter to remind those responsible for the management of investment funds of their obligations to adequately prepare for the implementation of a number of on-going global benchmark reforms and any associated risks.
According to the Industry Letter, each Fund Management Company1 board must ensure that appropriate preparations are in place for the impact of the benchmark reforms for each fund it manages. This should include analysis of the extent to which these changes will affect fund investors, day-to-day fund operations such as fee calculations, system changes and delivery of investment strategies. Based on the analysis the Board should develop plans to address any potential risks, documentation or prospectus changes or engagement with investors as appropriate.
Additional Pre-approval Control Functions
As set out in the Notice of Intention, published on 25 February 2020 (here), the Central Bank is proposing to introduce three new Pre-Approval Controlled Functions (PCFs) and to split PCF-39 Designated Person into six PCF roles aligned to the specific managerial functions set out in the Central Bank’s UCITS Regulations, the Central Bank’s AIF Rulebook requirements and the Central Bank’s Fund Management Companies – Guidance 2016.
One of the new PCFs is Chief Information Officer which falls under the “General” category while the other two fall under the “Banking” category, namely Head of Material Business Line and Head of Market Risk.
- PCF-39 Designated Person will be split in the following six new PCF roles:
- PCF-39A: Designated Person with responsibility for Capital and Financial Management;
- PCF-39B: Designated Person with responsibility for Operational Risk Management;
- PCF-39C: Designated Person with responsibility for Fund Risk Management;
- PCF-39D: Designated Person with responsibility for Investment Management;
- PCF-39E: Designated Person with responsibility for Distribution; and
- PCF-39F: Designated Person with responsibility of Regulatory Compliance.
According to the Notice of Intention, the Central Bank will put in place amended regulations reflecting the new roles pursuant to Section 22 of the Central Bank Reform Act 2010 (the “2010 Act”).
In an FAQ in the Notice of Intention’s Annex, the Central Bank states that persons in situ at the date the amended regulations come into effect will not be required to seek the Central Bank’s approval to continue to perform one of the new PCF roles.
However, a regulated financial service provider (“RFSP”) will be required to review its assessment under Section 21 of 2010 Act in respect of any person in situ to ensure that it has reasonable grounds to be satisfied that the person complies with fitness and probity requirements and that he or she has agreed to abide by any such standard. The RFSP must also submit confirmation of such an assessment to the Central Bank.
This process will commence after the amended regulations come into effect and an RFSP will have a six week period to submit the in situ confirmation. Should the person in the role change after the new PCF roles have been introduced, he/she will be required to seek the Central Bank’s prior approval in writing to that appointment by means of a new IQ submission.
Stakeholders can submit comments on the Notice of Intention up until 26 March 2020.