Our Insights

A hat-trick of new regulations

The regulatory marathon continues

A few years ago, asset managers were hoping for a hiatus in regulation, in order to give the industry an opportunity to pause and reflect on the rules passed to date. The possibility of a momentary recess from rule-making has not transpired, judging by the pace of activity in 2018.

At the beginning of January 2018, European asset managers had to ensure their organizations were compliant with the second Markets in Financial Instruments Directive (MiFID II). Barely five months after MiFID II took effect, the same firms were focused on the finer details associated with the European Union's (EU) General Data Protection Regulation, including laying down the groundwork towards formalizing their internal data policies and safeguards.

With potential amendments to the Alternative Investment Fund Managers Directive, and growing concern about a no-deal Brexit, asset managers in Europe are faced with a number of market uncertainties. In conjunction with these challenges, several additional regulations are due to be implemented over the next 18 months, which will also have a material impact on asset managers and their activities.

Key insights

  • Against a backdrop of unpredictable market conditions, Brexit being one of the most pertinent, asset managers should give due consideration to the implications of rules such as MMFR, SRD II and AMLD V
  • At the root of many of the rule changes is enhanced disclosure and transparency

SRD II to inspire investor activism

The Shareholder Rights Directive II (SRD II) will be adopted by EU Member States in June 2019, enacting a number of revisions to the 2007 SRD requirements. The latest rules are designed to further consolidate shareholder transparency and investor engagement with European listed companies, something the European Commission (EC) adamantly believes will help augment corporate sustainability1 and disincentivise short-term risk-taking.2

The EC wants to encourage a more consistent and dynamic dialogue between investors and companies by first giving issuers the right to identify shareholders with an interest in a company greater than 0.5 percent.3 Simultaneously, the rules will require intermediaries such as custodian banks and Central Securities Depositaries to provide company information to shareholders in a standardized format, and timely manner.4 The rules also insist asset managers and institutional investors be more transparent about their approaches towards shareholder engagement.

The EC wants to encourage a more consistent and dynamic dialogue between investors and companies

Asset managers and institutional investors "will have either to develop and publicly disclose a policy on shareholder engagement or explain why they have chosen not to do so. This policy will describe how they integrate shareholder engagement in their investment strategy and the engagement activities they carry out. It will also include policies to manage actual or potential conflicts of interest, in particular in a situation where the institutional investors or asset managers or their affiliated undertakings have a significant business relationship with the investee company".5

Markets such as the UK, through its Stewardship Code, already demand that institutional investors and asset managers make public their policies on stewardship, monitoring and engagement, but SRD II goes much further.6 Whereas only long-term asset owners sign up to the UK's Stewardship Code, SRD II applies to hedge funds and high-frequency traders as well.7 SRD II also imposes transparency requirements on previously unregulated 8 proxy advisers, entities which provide guidance to institutional investors on how to vote at the general meetings held by listed companies.9

AML ratchets up a notch

AMLD V will fortify cooperation between national Financial Intelligence Units

Whereas the fourth iteration of the Anti-Money Laundering Directive (AMLD IV) instituted changes to customer due-diligence processing and onboarding and established central registers for beneficial owners,10 AMLD V simply strengthens the existing framework.11 The new rules were initiated by the European Commission in July 2016, "in the aftermath of the terrible terrorist attacks that struck the EU and the vast financial dealings uncovered by the “Panama Papers".12

AMLD V, which becomes national law in January 2020, will fortify cooperation between national Financial Intelligence Units, which gather and analyze information about anomalous transactions related to money laundering or terror financing at a Member State level.13 The rules also demand that Member States heighten their checks on high money laundering risk countries,14 which could compel firms, including fund managers, to collect additional or more granular information on customers in those impacted markets.15

MMFR to deliver change at asset managers

Having witnessed first-hand the liquidity crises that afflicted a small number of money market funds (MMFs) during the financial crisis and the contagion in the shadow banking sector it subsequently caused ,16 regulators in Europe and the United States are imposing a number of safety measures on the industry designed to prevent such situations from recurring in stressed market conditions. The EU's Money Market Fund Regulation (MMFR) applies to all MMFs marketed or managed in Europe including both Alternative Investment Fund Managers and UCITS funds. 17

New MMFs need to be compliant with the rules already although existing firms have been granted an 18-month window which will close in January 2019

New MMFs need to be compliant with the rules already although existing firms have been granted an 18-month window which will close in January 2019.18 The rules partition MMFs into three subcategories: Public Debt Constant Net Asset Value (Public Debt CNAV); Low Volatility Net Asset Value (LVNAV) and Variable Net Asset Value (VNAV) products, replacing the existing Constant Net Asset Value vehicle.19 However, Moody's predicts that LVNAVs will attract the lion's share of assets that were once held by the soon to expire CNAVs.20

In addition to MMFR's investment restrictions on MMFs, which preclude them from participating in various short-selling activities, entering into securities lending/borrowing transactions or having indirect or direct exposures to equities or commodities,21 the rules sanction the use of liquidity fees and redemption gates under certain circumstances by LVNAVs and public debt CNAVs.22 Regulators hope the availability of such emergency measures will lessen the risk of customer runs during volatile markets and help safeguard credit lines at banks whose short-term funding is conditional on the robust financial health of MMFs.

Transparency is also a focal point for MMFR with MMF managers now obliged “to report quarterly to the relevant national regulator, supply information including the characteristics, portfolio indicators, and liabilities of the MMF. This information is required to enable those national regulators to detect, monitor and respond to risks in the MMF market. It is also forwarded to the European Securities and Markets Authority which maintains a central database of MMFs."23 Meanwhile, MMFRs must also provide weekly disclosures to their end investors.24

Sources

  1. European Council (April 4, 2017) Shareholders' rights in EU companies: Council  formal adoption
  2. Official Journal of the European Union (May 17, 2017) Directive (EU) 2017/828 of the European Parliament and of the Council
  3. Kas Bank (June 19, 2018) Shareholder Rights Directive II is going to change shareholdings
  4. European Council (April 4, 2017) Shareholders' rights in EU companies: Council formal adoption
  5. European Council (April 4, 2017) Shareholders' rights in EU companies: Council  formal adoption
  6. IPE (June 2018) Engagement: Strengthening the rules
  7. Ibid
  8. Ibid
  9. European Council (April 4, 2017) Shareholders' rights in EU companies: Council  formal adoption
  10. JWG (July 5, 2018) AMLD V's top implementation challenges and the fight against financial crime
  11. JWG (May 31, 2018) The 5thAnti Money laundering Directive: Key changes and impact
  12. European Commission (April 19, 2018) European Commission Statement
  13. KPMG (December 22, 2017) Euro tax flash from KPMG's EU tax centre
  14. White & Case (June 20, 2018) Adoption of fifth anti-money laundering directive
  15. JWG (July 5, 2018) AMLD V's top implementation challenges and the fight against financial crime
  16. Dillon Eustace – A Guide to Money Market Funds under the MMFR
  17. European Council – Money Market Funds 
  18. UBS Asset Management (October 2017) European Money Market Reform (PDF)
  19. Treasury Today (September 2017) MMF Reform: The Impact for Treasurers
  20. Moody's Investor Services (July 3, 2017) Moody's: New European LVNAV money market fund could attract most of the CNAV money market fund assets
  21. Maples and Calder (July 13, 2017) MMFR: Introducing a New EU Framework for Money market funds
  22. Moody's Investor Services (July 3, 2017) Moody's: New European LVNAVmoney market fund could attract most of the CNAV money market fund assets
  23. Shearman & Sterling (May 15, 2018) Implementing technical standards published for reporting by money market fund managers
  24. Deloitte (November 2017) Introduction to Money Market Fund Regulation Link n Learn