COVID-19: Financial Services Round-Up for 27 April – 3 May 2020

Asset Management and Investment Funds

On 30 April 2020, the Central Bank of Ireland (“CBI”) published an industry communication to investment funds in light of ongoing market uncertainty due to COVID-19 (here).

Publication of the letter follows the CBI’s previous statement on regulatory flexibility measures for Securities Markets, Investment Management, Investment Firms and Fund Service Providers.  It highlights certain key considerations for fund management companies (“FMCs”).  The update includes the following:

• Liquidity management.  In the context of current market conditions, the CBI expects effective liquidity management to include an assessment as to whether a UCITS or AIF has appropriate liquidity management tools in place, taking into account dealing frequency, investment strategy, portfolio composition and investor profile of the fund.  Where it is considered necessary to expand the range of such tools, or make other changes to address liquidity risk, the FMC should take the necessary steps to amend the relevant fund documentation. Investors should be provided with sufficient information (including information on any potential risks or costs) and sufficient time to redeem prior to the implementation of any such change.
• Central Bank UCITS Regulations / AIF Rulebook. The CBI understands that, in light of recent market volatility, breaches of requirements set out in the Central Bank UCITS Regulations or the AIF Rulebook may be identified. The CBI expects FMCs to minimise the potential for such breaches.  Where breaches have occurred, they should be reported to the CBI in the normal course and may be subject to supervisory engagement.  Any breach should be remedied by the FMC as a priority, taking due account of the interests of investors.  FMCs should consider the appropriateness of communicating the occurrence of any breaches arising to their investors whether by way of disclosure in financial statements or by way of other separate communication.
• Investor disclosure.  The CBI expects FMCs to ensure there is full, accurate and timely disclosure of risks and other information which is material to investors’ decisions. As part of an FMC’s obligation to ensure risks are identified, monitored and managed during this time, it may have identified a risk (or potential risk) which could possibly warrant additional disclosure to investors (or potential investors). Where such risk may materially affect the investment made by an investor in a fund which is not already covered by existing prospectus disclosure, the FMC should consider the extent to which the additional risk (or potential risk) should be brought to the attention of investors in prospectus documentation. The CBI expects that an application for authorisation of a new fund would contain relevant risk factors in documentation as a matter of course.
• Minimum of two directors that are Irish residents.  In the event that an Irish resident director on the board of a FMC or fund is incapacitated, the CBI recognises that there may be a delay in finding a replacement due to COVID-19.  The FMC or fund should refer to the CBI’s website for information on addressing vacancies which might arise for Pre-Approval Controlled Functions (PCFs) during this period and engage with the relevant supervisor at the CBI.
• Data collection. The CBI notes the importance of reliable supervisory reporting in the context of the COVID-19 pandemic.

Banking Package Communication – EU Commission

On 28 April 2020, the European Commission (EC) adopted a banking package aimed at facilitating bank lending to support the economy and help mitigate the economic impact of the Coronavirus. The package includes an Interpretative Communication on the application of the EU's accounting and prudential frameworks (here) as well as targeted amendments to EU banking rules (here).

The Communication confirms recent statements on using flexibility within accounting and prudential rules made by the Basel Committee of Banking Supervision, the EBA and the ECB, among others.

Its purpose is to provide clarification on how the existing rules can be applied more flexibly and in a coherent manner across the EU, while also maintaining a prudent approach so as to preserve financial stability.  In the Communication, the Commission sets out its views on the following:

• Flexibility available to banks in respect of the implementation of International Financial Reporting Standard (IFRS) 9 and rules concerning the prudential classification of non-performing loans.
• The role and responsibility of the banking sector in limiting the economic impact of the COVID-19 crisis and promoting a rapid recovery.

The Communication follows on from the Commission’s March 2020 communication in which it invited prudential and accounting authorities to further specify how to make best use of the flexibility provided for in the existing regulatory framework.  The Commission has also published a Q&A on the Communication (here).

The targeted amendments to EU banking rules are set out in a legislative proposal for a Regulation containing amendments to the Capital Requirements Regulation and the CRR II Regulation as regards adjustments in response to the COVID-19 pandemic. The amendments seek to introduce targeted changes relating to the following:

• Extending the transitional arrangements for expected credit loss (ECL) accounting under IFRS 9;
• Treatment of publicly guaranteed loans under the prudential backstop for non-performing loans;
• Offsetting the impact of excluding certain exposures from the calculation of the leverage ratio; and
• Deferring the application date for the leverage ratio buffer to 1 January 2023.

The next step is for the Commission and European Parliament to consider the legislative proposal.  The Commission calls on them to adopt the amending Regulation before the end of June 2020.  The amending Regulation will enter into force and apply on the day following that of its publication in the EU’s Official Journal, with the exception of the amendments to the calculation of leverage ratio which will apply from 28 June 2021.  A Q&A on the legislative proposal is available here.

Data Protection

The Data Protection Commission has published Tips for Avoiding Data Breaches (here) to help keep personal data safe and avoid data breaches during the COVID-19 period.

EIOPA

On 27 April 2020, EIOPA published an interview with Gabriel Bernardino, EIOPA Chairman on EIOPA’s response to the COVID-19 crisis (here).  The interview focused on the following topics:

• Impact of COVID-19 on the insurance and pensions sector in Europe
• EIOPA’s response
• EIOPA’s expectations from the insurance sector
• Whether the current crisis will change the insurance and pensions sector

EMIR - Margin Requirements

The European Supervisory Authorities (“ESAs”) have published a revised version of their joint draft regulatory technical standards (“RTS”) to amend the Delegated Regulation on the risk mitigation techniques for non-centrally cleared OTC derivatives under EMIR, to incorporate a one-year deferral of the final two implementation phases of the margin requirements for non-centrally cleared derivatives (here).

These changes will postpone by one year the requirement to implement initial margins for Phase 5 counterparties (those not already in scope and with an aggregate average notional amount of non-centrally cleared OTC derivatives, or “AANA”, above €50 billion  – previously due to start September 2020) and Phase 6 counterparties (those not already in scope and with an AANA above €8 billion  – previously due to start September 2021).  The AANA calculation window for each of Phases 5 and 6 is also deferred by one year.

By way of background, on 3 April 2020, the BCBS/IOSCO announced its intention to allow a deferral of the final two implementation phases of the initial margin requirements for non-centrally cleared OTC derivatives, in order to provide in scope counterparties with increased operational capacity to respond to the COVID-19 crisis.  The original BCBS/IOSCO announcement suggested that the AANA calculation window for Phase 5 counterparties would remain at March, April, and May of 2020 but this was promptly corrected to reflect the position now adopted by the ESAs in the revised draft RTS.

An earlier version of the draft RTS was published by the ESAs in December 2019, addressing the treatment of physically settled FX forward and swap contracts, intragroup contracts, equity option contracts and the implementation of the initial margin requirements.  This revised version has now been submitted by the ESAs to the European Commission for endorsement in the form of a Commission Delegated Regulation. Once endorsed, the RTS are subject to non-objection by the European Parliament and the Council.

EMIR Reporting

On 27 April 2020, ISDA published a joint letter it has submitted to ESMA on behalf of ISDA, the Association for Financial Markets in Europe (AFME), the Asia Securities Industry and Financial Markets Association (ASIFMA), the Global Financial Markets Association (GFMA) and the Securities Industry and Financial Markets Association (SIFMA) regarding the mandatory delegated reporting effective date under the EMIR Refit Regulation ((EU) 2019/834) in the context of the COVID-19 pandemic (here).

According to the letter, the COVID-19 crisis is impeding the ability of market participants to comply with the EMIR Refit requirement for financial counterparties (FCs) to be responsible and legally liable for reporting (as of 18 June 2020) on behalf of non-financial counterparties that are not subject to the clearing obligation (NFCs-) with which they trade.  This is due to the fact that NFC- clients are unable to provide the data needed by the FCs to report, or FCs have been unable to make the required preparations to support taking on this additional reporting obligation.

The various trade associations request that ESMA set out an expectation that national competent authorities should not prioritise supervisory actions in relation to the EMIR Refit mandatory delegated reporting requirement and that they should generally apply their risk-based supervisory powers in day-to-day enforcement of this requirement in a proportionate manner for a period of just over 5 months (i.e. until 21 November 2020).

The letter also covers the major challenges and constraints currently faced by market participants as a result of COVID-19.

FATF

On 28 April 2020, the Financial Action Task Force published a press release announcing that it has agreed to temporarily postpone all remaining FATF mutual evaluations and follow-up deadlines (here) in response to difficulties posed by COVID-19 and the challenges faced by many countries.

The FATF has also decided on a general pause in the review process for the list of high-risk jurisdictions subject to a call for action and jurisdictions subject to increased monitoring, by granting jurisdictions an additional four months for deadlines.  The FATF will review the deadlines as necessary.

Payment Breaks

On 30 April 2020, the CBI published a statement on extension of payment breaks (here).  The statement follows an announcement by the Banking and Payments Federation Ireland (BPFI) that its members are to extend available payment breaks from three to six months for affected borrowers.  The CBI is working to ensure that these extensions operate in borrowers’ best interests.  The statement also notes that a payment break of six months will not specifically be identified on the borrower’s credit report recorded on the Central Bank Credit Register.

The CBI has also published FAQs on payment breaks (here).  Among other things, the FAQs cover how payment breaks will be treated on a borrower’s credit report.

Solvency II

EIOPA has announced that it is revising its timetable for providing advice on the review of the Solvency II Directive (here).  It will now send its advice to the European Commission by end of December 2020.  This follows a statement by EIOPA in March 2020 that extended the deadline of the impact assessment for the review to 1 June 2020.

Strong Customer Authentication (SCA)

The European Payment Institutions Federation has published a Joint Industry Letter seeking at least a six month delay in the implementation of SCA (here). The UK’s Financial Conduct Authority has published a press release (here) giving industry until 14 September 2021 to implement SCA replacing its earler 14 March 2021 deadline.

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The McCann FitzGerald website has a dedicated COVID-19 section containing FAQs, briefings and guidance on a range of legal and business issues that may need to be addressed (here).