Investment Management Update
The European Commission has issued a Notice to Stakeholders on withdrawal of the UK from the EU, and EU rules in the field of asset management.
The Commission reminds managers of investment funds and investors of the legal repercussions which need to be considered when the UK becomes a third country.
The Commission notes that the UCITS and AIFM Directives will no longer apply and that therefore all collective investment undertakings registered or authorised in the United Kingdom will become non-EU alternative investment funds (non-EU AIFs). Passporting will go and marketing of non – EU AIFs in Member States will be limited by National Private Placement Rules.
On the issue of delegation, the Commission notes that delegation of certain operational functions to providers established in the United Kingdom may be undertaken provided that the relevant requirements of UCITS and AIFMD are complied with. In particular, where the delegation concerns portfolio management or risk management and is conferred on an undertaking established in a non-EU country, a cooperation agreement between the competent authority of the home Member State of the UCITS management company or AIF manager and the supervisory authority of the undertaking carrying out the delegated function in the non-EU country must be in place.
The Commission refers to the opinion issued by the European Securities and Markets Authority (ESMA) with specific clarifications on these matters, in particular on the risks of letter-box entities which may arise from the use of outsourcing arrangements or from the use of non-EU branches for the performance of functions/services with respect to EU clients.
The use of non-EU branches needs to be based on objective reasons linked to the services provided in the non-EU country and may not result in a situation where such non-EU branches perform material functions or provide material services back into the EU.
The Board of the International Organization of Securities Commissions (IOSCO) has issued recommendations that seek to improve liquidity risk management practices of open-ended collective investment schemes.
Building on earlier work with additional recommendations, IOSCO reiterates its belief that in the first instance, the best line of defence against any structural vulnerabilities that could potentially develop into extended market dislocations and financial instability is for responsible entities to have robust liquidity risk management programs. Notable additional recommendations included the consideration of underlying liquidity throughout the entire life cycle of the fund; the alignment between asset portfolio and redemption terms; availability and effectiveness of liquidity risk management tools; fund level stress testing; detailed guidance on disclosure to investors; and additional recommendations on contingency planning.
IOSCO expects securities regulators to implement the recommendations and intends to assess implementation across relevant jurisdictions in two to three years’ time.
The European Systemic Risk Board (ESRB) has also issued recommendations on fund liquidity. The ESRB’s recommendations take into account the recommendations of IOSCO. The ESRB has recommended that Union legislation incorporates a legal framework governing the inclusion of additional liquidity management tools; additional provisions to reduce the likelihood of excessive liquidity mismatches; guidance on the practice to be followed by managers for the stress testing of liquidity risk for individual AIFs and UCITS; that Union legislation should require UCITS and UCITS management companies to regularly report data, especially regarding liquidity risk and leverage, to the competent authority.
Andrew Bailey, the Chief Executive of the FCA has delivered a speech at the Future of the City dinner. He centred on Brexit addressing both the transition and the aftermath. Financial stability was presented as a primary common objective.
The Transition to Brexit - Mr Bailey outlined that there are operational issues that arise from Brexit, which could create financial stability risks. These risks include contract continuity and data sharing concerns. A well-defined transition period is necessary for putting practical solutions in place to achieve a functioning regulatory regime.
The Post-Brexit Future - Mr Bailey emphasised that the key to a steady future is continued open markets and a mutual recognition of regulatory standards.