Each month, FactSet's Regulatory team offers a rundown of the most important developments in compliance and regulatory news. Read on to see which stories dominated the conversation last month.

EU

ESRB Takes Steps to Mitigate the Impact of the Pandemic

The European Systemic Risk Board (ESRB), the EU body responsible for macro-prudential oversight and the mitigation of systemic risk within the financial system, published a press release on May 14, 2020, setting out five steps it is taking in response to the pandemic. These steps include reviewing the macro-prudential implications of Member State fiscal measures at the cross-border and EU level and declaring its support for measures introduced by EU and Member State agencies requiring banks and insurance companies to preserve capital by not issuing dividends, bonuses, or buybacks during the pandemic.  

The remaining steps address potential pandemic-related sources of systemic risk the ESRB has identified. Specifically, investment funds exposed to real estate and corporate bonds have been identified as a potential source of systemic risk (including spill-over risks) given recent liquidity pressures, and the ESRB has recommended that the European Securities and Markets Authority (ESMA) coordinate with national EU member state supervisors to assess the current preparedness of such funds should further macroeconomic deterioration occur.

The ESRB has also recommended that ESMA and local agencies consider additional steps to enhance the fund preparedness, including the prompt deployment of liquidity management tools such as swing pricing and redemption gates to overcome "first-mover advantage" dynamics and the risk of fire sales, especially for funds invested in less liquid assets or that have short redemption periods.

The ESRB stated that a potential wave of corporate bond credit rating downgrades has the capacity to cause systemic risk and as such it will undertake further steps with the European Supervisory Agencies (ESAs) and the European Central Bank (ECB), to assess the scope and impact of large-scale downgrades across the sector and potential mitigants should such an event occur.

Finally, the ESRB noted the potential for systemic risk arising from the high number of margin calls, particularly in oil derivative contracts that have occurred since mid-February, together with the possible adverse liquidity impact on bank and non-bank entities these calls can engender. In response, the ESRB emphasizes the importance of (i) mitigating procyclicality that could be linked to the provision of clearing services and to the exchange of margins in bilaterally cleared markets; (ii) enhancing central counterparty stress test scenarios for the assessment of liquidity needs; and (iii) limiting excessive liquidity constraints related to margin collection.

ESAs Push Back OTC Derivative Risk Mitigation Rules by a Year in Response to Pandemic

On May 4, 2020, the European Supervisory Authorities published an updated version of the Draft RTS on risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty (the EMIR ‘Margin RTS’) in response to the pandemic. The update includes a proposed deferral of the implementation phases of the initial margining requirements by a year, as agreed upon by IOSCO and the BCBS on April 3, 2020.

U.S.

The SEC Adopted Amendments to Financial Disclosures about Acquired and Disposed Businesses

On May 20, 2020, the SEC adopted a final rule amending financial disclosures about acquired and disposed of businesses, centered on the definition of “significant subsidiary.” As the impetus for the amendments, the SEC cited (i) improved financial disclosures for investors in relation to acquisitions and dispositions, (ii) more timely access to capital, (iii) reduced report preparation costs and complexity. The changed standards apply to registrants, generally, but include specific amendments for real estate operations and investment companies.

Most of the amendments concern Reg S-X, but they involve coordinate changes to various ’33 Act and ’34 Act forms and Rule 8b-2 under the Investment Company Act of 1940.

Among a host of other changes, in connection with acquisitions and dispositions, the amendments: (i) update the “significance” tests under relevant rules, (ii) expand the use of pro forma financials, (iii) harmonize the significance threshold and tests for dispositions and acquisitions, and (iv) require only up to two most recent fiscal years of financial statements for the acquired business.

The final rules will be effective January 1, 2021.

The SEC Issued an Order Calling for a New National Market System Plan Regarding Consolidated Equity Market Data

On May 6, 2020, the SEC issued an order directing the equity exchanges and FINRA to submit a new national market system plan for consolidated equity market data. In brief, the SEC order requires the affected exchanges to submit a new single national market system plan to replace the three existing national market system plans that govern real-time consolidated equity market data publication.

In the order, the SEC cited “significant concerns” about whether the existing consolidated feeds continue to fulfill their purpose as a fundamental component of the national market system, particularly in light of conflicts of interest between the exchanges that oversee the plans and their interests in maximizing the proprietary data products they sell to market participants.

The current order is intended to yield a revised governance structure for the national market system (NMS) plans that will address the conflicts of interest between the exchanges’ interests in proprietary data products and their obligations to ensure fair dissemination of consolidated market data to market participants. The new NMS plan submitted pursuant to the order will be published for notice and comment prior to action by the SEC.

UK

Inaugural UK Multi-Agency Regulatory Developments Grid Published

On May 7, 2020, the UK FCA, Bank of England (BoE), Prudential Regulatory Authority (PRA), Competition and Markets Authority (CMA), and Payment Systems Regulator (PSR) published their inaugural cross-agency semi-annual regulatory initiatives grid, setting out an indicative list of upcoming regulatory developments that are most likely to impact UK firms in the coming year (in response to the pandemic, the grid was published earlier than planned and only covers the next 12 rather than 24 months as originally specified).

An enormous range of initiatives is covered in the grid including cross-sectoral initiatives involving operational resilience, Brexit arrangements, and Libor transition. Sector-specific measures include proposed FCA’s ESG related measures, the PRA "Open Finance" initiative, and the postponement of the upcoming BoE/PRA stress tests. Other important topics covered include a proposed "Gibraltar Market Access Regime" and a consultation on a proposed new duty of care for consumers in retail markets.

Proposals for Post Brexit Rules on Selling Funds into the UK

HM Treasury recently published a consultation paper on a proposed overseas fund regime (OFR) for the UK post Brexit to replace the current Temporary Marketing Permissions Regime (TPR). The proposed OFR sets out how overseas retail (UCITS) and money market funds (MMFs) can be sold to UK investors.

A key driver for the proposals is the large number of firms domiciled in EU jurisdictions such as Luxembourg and Ireland and passporting their funds into the UK; a pattern demonstrated by the influx of such funds notifying the FCA of their intention to enter into the TPR.

In the event that an EU/UK agreement on funds is not immediately forthcoming following the end of the Brexit transition period (currently set for December 31, 2020), the consultation proposes a streamlined process for recognition and distribution of such funds to replace the existing, burdensome individual fund recognition assessment under Section 272 of the Financial Services and Markets Act 2000 (FSMA).

Under the proposed OFR, HM Treasury would be assigned the task of determining whether a regulatory framework is equivalent to the UK’s "on an outcomes basis" in terms of investor protection measures and other considerations such as adequate supervisory cooperation arrangements. Following an equivalence declaration, funds would need to register with the FCA before commencing marketing and distribution.

The consultation contains several detailed rule proposals including complex equivalence and recognition arrangements for MMFs that depend on, among other matters, whether they are marketed to retail or (exclusively) professional clients and the "equivalence" status of the jurisdiction in which the fund is domiciled. Other proposals include minor modifications to the existing Section 272 process applicable to non-OFR recognized funds.

The UK government intends to bring forward a Financial Services Bill in due course which will include the OFR.

FCA Publishes Market Watch 63 on the Market Abuse Threat During the Pandemic

In May 2020, the FCA published Market Watch 63, on "Market Conduct and Discipline in the Context of Coronavirus," which reiterates inside information handling obligations in anticipation of a spike in capital raising in response to the pandemic.

The paper discusses the increased volume and new types of inside information that the pandemic is expected to yield including information relating to exposure to certain coronavirus outcomes, eligibility of corporates for state funding support, exercise of force majeure terms, or termination rights within contracts including M&A deal contracts and decisions to suspend usual patterns of corporate activity such as dividend distributions and share buy-backs.

The FCA also instructs firms to consider whether the omission of a statement could mislead the markets where the firm is planning to deviate from its usual pattern of conduct or timing in relation to matters such as publication of its financial reports. In this context, the FCA reiterates the importance of prompt disclosures to the market of inside information by corporates and suggests that firms reevaluate their existing controls and arrangements so that they are adequate to cope with the anticipated increased volume of inside information and new types of inside information.

Market Watch 63 is published alongside Primary Market Bulletin 28, which provides an update for listed companies on an extension to the timetable for publication of half-yearly financial reports.