Each month, FactSet's Regulatory team offers a rundown of the most important developments in compliance and regulatory news, including pandemic response. Read on to see which stories dominated the conversation last month.
On March 20, 2020, the Financial Stability Board (FSB) announced it was overseeing coordinated activity in response to the pandemic between its members including central banks and other national and international bodies. On the same day, the Basel Committee on Banking Supervision (BCBS) issued a press release announcing the suspension of a number of its programs and reminding the sector that its prudential framework was specifically designed to accommodate situations such as the current pandemic.
On March 25, 2020, the International Organisation of Securities Commissions (IOSCO) issued a press release stating that it was overseeing coordinated activity among its members and was also co-operating with the FSB and BCBS with the other two key international institutions operative in the broader financial sector: the Committee on Payments and Market Infrastructures and the International Association of Insurance Supervisors.
IOSCO confirmed that its members were focused on maintaining "the operational and financial resilience of market infrastructures, the operational capability of market users, and the continued flow of information to these markets" and that its members were seeking a balance of regulatory flexibility to help market participants address challenges posed by COVID-19, while ensuring market integrity and investor protection principles are maintained.
The rapid spread of the coronavirus and economic fallout has been met with an intense regulatory response in the United States. Financial regulators and self-regulatory organizations have issued scores of statements, press releases, no-action letters, guidance, and temporary relief measures directed at essentially all aspects and actors in the U.S. financial system. The Securities and Exchange Commission (SEC), Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Commodity Futures Trading Commission (CFTC), Municipal Securities Rulemaking Board (MSRB) and FINRA, among others, have established dedicated COVID-19 webpages enumerating related actions.
The pace of pandemic-related agency action has been so intense that it has led to a burst of online COVID-19 resource centers, published by law firms and consultancies, attempting to collate and summarize regulatory updates that proliferate daily.
Among the major themes of the regulatory updates are changes to leverage ratios, new liquidity facilities and investment programs, business continuity planning, temporary regulatory forbearance, market monitoring, cross-agency collaboration, and industry communication.
Multiple UK agencies have taken steps to manage the impact of the pandemic on the economy and financial markets in the UK including measures to support businesses and individuals announced by HM Treasury, and measures taken by the Bank of England such as cutting interest rates to their lowest ever levels, extending credit and providing financial support to firms through various measures including quantitative easing. The Prudential Regulatory Authority (PRA), the regulatory arm of the Bank of England, has taken steps to ensure that banks remain financially resilient by suspending various corporate actions and activities including dividends, share buy-backs, and cash bonuses to senior employees. The PRA also issued a statement permitting delayed Pillar 3 disclosures and associated reporting and has published a Dear CEO to banks on the approach they should concerning IFRS 9 accounting, capital requirements, and loan covenant breaches.
The FCA has a dedicated webpage for firms on the pandemic, which confirms that the Government, Bank of England, the Payment Systems Regulator, the FCA, and the PRA are all working in concert in response to the pandemic.
At present, the FCA webpage sets out the regulators expectations during the pandemic, which include taking reasonable steps to ensure firms can meet the challenges and risks posed by the pandemic while noting areas where regulatory forbearance may be forthcoming.
The webpage also contains links to various other of its announcements made in relation to the pandemic over the past number of weeks including a Dear CEO letter of March 31, 2020, setting out services firms must provide to retail investors during the relevant period; a March 29, 2020, Statement on work-related travel in relation to the responsibilities of Senior Managers; a Statement of Policy on March 26, 2020, permitting annual company accounts to be reported up to two months late during the pandemic, as further outlined in a Joint Statement by the FCA, PRA, and Financial Reporting Council on the same day on the same subject with the latter setting out additional relief, guidance, and measures on the topic; a Statement on bank branch opening published on March 24, 2020, a Statement on banks and building societies’ obligation to provide branch access for essential services dated March 25, 2020, a Statement on the impact of the pandemic on firms’ LIBOR transition plans, and a Statement on March 20, 2020, on key workers in financial services.
In a statement on UK Markets on March 23, 2020, the FCA confirmed that it was not intending to introduce a wider short-selling ban in the same way other EU Member States had, but on March 31, in an updated statement, it confirmed that it would reduce the short-selling notification threshold from 0.2 to 0.1% of issued share capital.
The FCA and the Payment Services Regulator have also issued a Statement welcoming the guidance from the Competition and Markets Authority (CMA) published on March 25, 2020, which permits necessary collaboration between industry participants when taking steps to mitigate the effects of the pandemic.
On March 26, mirroring a Statement from ESMA, the FCA published a Statement on its supervisory approach to SFTR implementation, supporting ESMA's position that firms should focus on critical functions during the outbreak and as such, the FCA will not prioritize supervision of SFTR reporting requirements until at least July 13, 2020, and nor will it require firms to "back report" any transactions concluded between April 13 and July 13, 2020. The FCA further confirmed that it will not prioritize the supervision of SFTR Article 4(1)(a) backloading requirements during the period. Nevertheless, the FCA confirmed that firms in the first two application phase-in dates (including credit institutions and investment firms) should plan to report from July 13, 2020.
Finally, for retail consumers, the FCA has sought further relief for retail clients in relation to interest payments and extension of emergency credit arrangements. On its webpage for firms, the FCA stated that firms could expect further measures in response to the pandemic over the coming weeks and months.
On March 11, 2020, European Securities and Markets Authority (ESMA), together with the EU National Competent Authorities (NCAs), issued a Press Release recommending actions that financial market participants should take in response to the pandemic, which focused on business continuity arrangements and contingency plans to ensure operational continuity.
The Press Release accompanies a dedicated COVID Webpage where ESMA states that it is working together with National Competent Authorities (NCAs) and that following a Board of Supervisors discussion, recommends that firms ready and deploy business continuity planning. The webpage also reminds issuers to disclose any significant information regarding their business in accordance with the Market Abuse Regulation, including sufficiently impactful pandemic-related matters. In terms of financial reporting, issuers are required to disclose the actual and potential impacts of COVID-19 on their business, to the extent possible on a qualitative and quantitative basis, in their 2019 year-end financial report if they have not yet been finalized or otherwise in their interim financial reporting disclosures.
ESMA has updated its Risk Dashboard risk assessment of the EU financial markets on April 3, 2020, to account for the impact of the pandemic where it notes enormous trading volumes in equity markets and record volatility over and above what was seen during the Financial Crisis, together with a "Massive Jump" in circuit breaker triggers and large outflows from certain fund types (e.g., fixed income UCITS and ETFs) and deteriorating liquidity in corporate bonds.
On March 16, 2020, ESMA published a Decision reducing the short-selling notification threshold from 0.2 to 0.1% of issued share capital under the Short Selling Regulation. The rule change applied immediately to all natural and legal persons, irrespective of their jurisdiction for relevant positions in shares admitted to trading on an EU venue. This measure accompanied several ESMA approved decisions to ban short selling in Italy, France, Belgium, Greece, and Austria (see here for instance).
ESMA also announced that it had extended by four weeks the response dates for all ongoing consultations with a closing date on or after March 16.
On March 26, 2020, ESMA published a Revised Public Statement mandating regulatory forbearance from NCAs in respect of compliance with SFTR reporting, noting specifically that it "expects competent authorities not to prioritize their supervisory actions towards counterparties, entities responsible for reporting, and investment firms in respect of their reporting obligations pursuant to SFTR or MIFIR, regarding SFTs concluded between April 13, 2020 and July 13, 2020, and SFTs subject to backloading under SFTR," and further that "ESMA is also not available to record the details of SFTs. As a result, counterparties, entities responsible for reporting and report submitting entities, will be unable to report by the reporting start date."
In respect of Trade Repositories (TR) (which receive the reports), ESMA stated that it "does not consider it necessary to register any TR ahead of April 13, 2020." Nevertheless, in its statement ESMA stated that it expects TRs to be registered sufficiently ahead of the next phase of the reporting regime, i.e., July 13, 2020, when credit institutions, investment firms, central counterparties and central securities depositories, and relevant third-country entities start reporting.
On March 20, 2020, ESMA published a statement on the new MiFIR systematic internalizer (SI) tick size regime, stating: "ESMA expects competent authorities not to prioritize their supervisory actions in relation to the new tick-size regime introduced in MiFIR towards SIs, as of March 26, 2020 and until June 26, 2020."
On the same day, ESMA issued another Statement stating that firms should use all means possible to comply with the communication recording obligations in Article 16(7) of MiFID II.
On March 31, 2020, ESMA issued a statement recommending that NCAs consider regulatory forbearance and permit delays be several months in relation to the publication of RTS 27 and 28 best execution reports but refused to delay the date of application of the transparency calculations for equity instruments on April 1, 2020.
Finally, ESMA also issued a statement on March 27, 2020 urging NCAs to show regulatory forbearance in relation to the publication of audited reports beyond legislative timelines in the Transparency Directive. This followed a separate Statement on March 25, 2020, which was accompanied by a counterpart Statement from the EBA (on related prudential matters and accounting implications) on the same date, on the implications for, and providing guidance in relation to, calculating expected credit losses in accordance with IFRS 9 in relation to the economic support and relief measures adopted by EU Member States in response to the pandemic such as the moratoria on repayment of loans.
The EBA has a dedicated webpage on the pandemic where it sets out all the measures it has undertaken to mitigate the effects of the pandemic. The measures, published on various dates between March 12 and April 2, 2020 include publication of Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis, a Statement on supervisory reporting and Pillar 3 disclosures in light of COVID-19, a Statement on Actions to Mitigate the Impact of the Pandemic on the Banking Sector, a statement on consumer and payment issues in light of COVID19, and a statement on dividends distribution, share buybacks and variable remuneration, with the later asking banks not to pay dividends, commence share buy-backs, or pay cash bonuses to senior employees during the pandemic.
Meanwhile, on March 18, 2020 the Europe Central Bank (ECB) announced details of quantitative easing measures referred to as the "Pandemic Emergency Purchase Programme" and the following day, March 19, Christine Lagarde, President of the ECB, summarized the other measures the Bank was undertaking including the provision of "€3 trillion in liquidity through our refinancing operations, including at the lowest interest rate we have ever offered, -0.75%."
The day after Lagarde’s statement, on March 20, 2020, the ECB made a further announcement on coordinated efforts it was taking together with several other major central banks to ensure the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements (which serve as an important liquidity backstop to ease strains in global funding markets). The measures seek to improve the swap lines’ effectiveness in providing U.S. dollar funding by increasing the frequency of 7-day maturity operations from weekly to daily, at least until the end of April.
As in the U.S. and the EU, financial regulators throughout the Asia Pacific region have been issuing guidance and temporary relief measures to combat the economic and financial industry impacts of the pandemic. Due to their prior experience with SARS, regulators such as the Hong Kong Monetary Authority (HKMA) and Hong Kong Securities and Futures Commission (SFC) had promulgated best practices in the event of a disease outbreak as early as 2003. Financial regulators throughout the Asia Pacific region have been issuing supplementary guidance, particularly with respect to business continuity planning, and are continuing to monitor developments closely.
On March 10, 2020, the European Securities and Markets Authority (ESMA) published a Consultation Paper (CP) on the Market in Financial Instruments Regulation (MiFIR) non-equity transparency regime and the derivatives trading obligation. The review meets ESMA’s legislative obligation under MIFIR and RTS 2 (the Commission Delegated Regulation on the non-equity transparency regime).
The two objectives of the review (of which the CP forms a part) are to introduce changes that diminish the complexity currently dogging the system by creating a simplified, more uniform set of rules across the Union and to improve trade transparency across EU non-equity markets.
The proposals are based on detailed analyses undertaken by ESMA, which revealed, unsurprisingly, that overall transparency had been "limited" because of the numbers of trades pushed through pre-trade waivers and post-trade deferrals.
The report also analyses the progress made under the derivatives trading obligation recommending that, among other measures, a swift suspension mechanism of the obligation be introduced that mirrors the mechanism in EMIR Refit in relation to the suspension of the EMIR clearing obligation.
The MiFIR non-equity transparency regime is one of the most complex areas within the entire EU financial regulatory field. Nevertheless, right in the middle of a global pandemic, ESMA has given a response deadline of May 17, 2020, inclusive of a four-week extension given in light of the pandemic.
Thereafter, in July 2020, ESMA will submit a Final Report to the European Commission with its recommendations for regulatory reform.
On March 11, 2020, the UK FCA, Bank of England, Prudential Regulatory Authority, Competition and Markets Authority (CMA), and the Payment Systems Regulator (PSR) published a Joint Statement welcoming the launch of the Financial Services Regulatory Initiatives Forum announced by HM Treasury on the same day in its Response to its Call for Evidence on Regulatory Coordination, as part of its broader Financial Services Future Regulatory Framework Review, which is considering how the UK’s regulatory framework should be adapted in the future, especially in response to Brexit.
The Forum will be comprised of representatives of all the aforementioned authorities together with other relevant observers. The Forum will allow the authorities to act in concert and regulate the flow of new developments so that peaks are smoothed, easing the burden on regulated firms. The initiative should also allow members to identify inconsistent, conflicting, overlapping, or duplicative measures that arise across the regulators’ collective suite of rules.
To further assist regulated firms in managing the regulatory burden, the Forum will publish a semi-annual "Regulatory Initiatives Grid" from summer 2020, setting out an indicative two-year list of upcoming regulatory developments from across the suite of authorities that are likely to have a significant impact on firms.
As part of the government White Paper on Financial Services, the second phase of the Financial Services Future Regulatory Framework Review, due to be published sometime in Q2 2020, will focus on developing a more coherent approach to financial regulation and policy formulation including stakeholder engagement.
On March 6, 2020, the FCA issued a Press Release stating that it had published a Consultation Paper on proposals to expand climate-related disclosure requirements for premium listed issuers. The consultation closes on June 5, 2020. The proposals would require all premium listed commercial companies (thus excluding premium listed funds) to make climate-related disclosures consistent with the FSB-sponsored Taskforce on Climate-related Financial Disclosures (TCFD) on a comply or explain basis.
The Press Release discloses that the FCA is working more broadly on climate-related initiatives with the UK Government and other regulators, including through a Treasury Taskforce established under the Government’s Green Finance strategy. According to the Press Release further the Climate Financial Risk Forum (an industry group the FCA launched with the PRA in March 2019) “will soon be publishing industry guidance, covering climate-related disclosures, risk management, scenario analysis, and innovation. These guidance materials are also grounded in the TCFD’s recommendations and will complement the proposed new rule."
Many of the proposed disclosures exist under the EU Non-Financial Reporting Directive (NFRD) and equally, those that expanded on existing NFRD proposals are not dissimilar to those in the EU’s current consultation on expanding the NFRD requirements. The measures appear to be a deliberate effort by the UK regulator to develop a different regulatory framework to the EU’s nascent ESG regulatory regime by opting for a voluntary industry-led initiative (the TCFD) over a mandatory expert-driven legislative regime, which the EU has opted for.
On March 13, 2020, the Autorité des Marchés Financiers (AMF) issued a Press Release stating that to combat concerns over greenwashing the authority had published a new set of rules (a "policy") aimed at ensuring proportionality between the reality of how a fund is managed from an ESG perspective and how it is marketed and disclosed. Specifically, the policy requires minimum disclosure standards when funds emphasize ESG considerations in communications or include such references in a fund’s name.
Henceforth, such funds will now have to include measurable objectives for their consideration of ESG criteria that ensure a genuine distinction between regular investment strategies and their ESG specific approach, details of which will need to be disclosed in regulatory documents such as the prospectus and benchmarked against objective metrics.
The policy applies immediately for new collective investment products, modifications of existing products, and new notifications to the AMF of foreign UCITS marketed in France. For existing products, necessary updates to a product’s name, its marketing materials and its Key Investor Information Document (KIID) must be completed by November 30, 2020.