01 May 2020

FCA issues updated statement on the impact of Coronavirus on LIBOR transition plans

Date: 30 April 2020

By Ciara Davies

The FCA and the Bank of England have been working with members of the Working Group on Sterling Risk-Free Reference Rates (RFRWG) to consider how firms transitioning from LIBOR have been impacted by Coronavirus.

In its updated statement the FCA recognises the challenges posed by the current environment and notes that it was pleased to have seen continued progress on LIBOR transition (developments include the first syndicated loan that will link to SONIA and SOFR and the first bilateral loan referencing SONIA in the social housing sector).

In the statement, the RFRWG make the following recommendations:

  • By end of Q3 2020, lenders should be able to offer non-LIBOR products to customers;
  • After the end of Q3 2020, lenders, working alongside their borrowers, should include clear contractual arrangements in all new and re-financed LIBOR referencing loan products to facilitate conversion ahead of the end of 2021. It is envisaged that this will be through pre-agreed conversion terms or an agreed process for renegotiation to SONIA or other alternatives; and
  • All new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021.

The FCA, the Bank of England and the Chair of the RFRWG will support the delivery of a RFRWG workplan in key areas that will continue the momentum on LIBOR transition. Key actions include:

  • Publishing the RFRWG's analysis on, and considerations for, dealing with 'tough legacy' contracts;
  • Building on the strong consensus on how to calculate a fair credit spread adjustment in legacy cash products to assist transition from LIBOR in cash markets; and
  • When plans and working arrangements disrupted by the Coronavirus begin to stabilise, the RFRWG and its members will intensify communication with customers needing to move away from LIBOR as part of transition.

For further details, a copy of the statement can be found here.


Trade associations request ESMA consider flexible and pragmatic approach to mandatory delegated reporting effective date under EMIR Refit Regulation, to reflect the difficulties posed by the coronavirus pandemic

Date: 28 April 2020

By Ciara Davies

On 27 April 2020, the International Swaps and Derivatives Association (ISDA) published a letter that it sent to the European Securities and Markets Authority regarding the mandatory delegated reporting effective date under the EMIR Refit Regulation ((EU) 2019/834)), in the context of the coronavirus pandemic. The letter was sent on its own behalf as well as on behalf of the Association for Financial Markets in Europe, the Asia Securities Industry and Financial Markets Association, the Global Financial Markets Association and the Securities Industry and Financial Markets Association.

Under the EMIR Refit Regulation there is a requirement for financial counterparties (FC) to be responsible and legally liable for reporting on behalf of the non-financial counterparties (NFC) that are not subject to the clearing obligations, with which they trade (as of 18 June 2020). Issues arise if:

  • NFC clients are unable to provide the data needed by the FCs in order to report; and/or
  • FCs have been unable to make the required preparations to support taking on this additional reporting obligation.

The Trade Associations request that ESMA state an expectation that the National Competent Authorities should not prioritise supervisory actions in respect of the mandatory delegated reporting requirements 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 (until 21 November 2020). This approach would only apply in the scenario where the relevant market participants are not able to comply with the mandatory delegated reporting requirements.

For the avoidance of doubt, where NFCs have fulfilled their obligations to provide all relevant data to FCs before 18 June 2020, they will no longer be responsible for reporting its trades, because the FC will have assumed responsibility for reporting OTC derivative trades on behalf of the NFC. That will be the case even if the FC is not itself in a position to report the NFC trades as of 18 June 2020.

The letter provides an outline of the challenges that market participants are currently expiring as a result of the COVID 19 crisis, which, the trade associations believe justify such a pragmatic and flexible position being taken.

For further details, a copy of the letter can be found here.


Investment Associations publishes circular on accounting for dividends cancelled due to COVID-19

27 April 2020

By Natalie Lim.

The IA on 24 April 2020 published circular 177-20, setting out the implications for distributions due to be paid by funds and the steps to be taken to avoid pricing errors.

The circular is published as many of the companies in which funds invest have suspended or cancelled dividend payments due to COVID-19. In summary:

Managers’ obligations

Fund managers are responsible for calculating income available for distribution. They should ensure that robust procedures are in place to evaluate the risk of not receiving the income accrued at the end of the period and make appropriate provisions. In doing so, fund managers should consider the risk of pricing errors where income is initially recognised and subsequently cancelled. It may also be necessary to keep the available distribution amount under review for longer than the standard timeframe anticipated by auditors’ rate clearance practices. 

As previously highlighted in circular 114-20, fund managers should have regard for the income provisions in the SORP, in particular paragraph 2.27 (providing for income not expected to be received). Moreover, the implications for bond funds of coupon payment defaults on interest received and amortisation schedules should be considered in light of paragraphs 2.44 (income from bonds should reflect reasonable commercial expectations) 2.49 (income from bonds should be accrued at the appropriate rate) and 2.51 (providing against income in the light of uncertain coupon payments and amortisation schedules) of the SORP. 

Dividend cancellation scenarios and steps to avoid pricing errors

Due to the relationship between the timing of the dividend cancellation and the fund’s XD and pay dates, there are a number of scenarios which arise, all of which require procedures to be in place to ensure that dividend cancellations are identified and recorded in a timely manner in order to avoid pricing errors. In particular:

  1. Where a dividend is accrued and cancelled during a single distribution period, the cancellation will cause there to be a fall in the income accrued in the net asset value. 
  2. Where a dividend is accrued in one distribution period and cancelled in a subsequent period before the distribution for the first period is paid, it will be necessary to adjust the amount of the fund’s distribution. There will also be a corresponding accounting adjustment to the net revenue underpinning the amount available for distribution. There will be no change to the net asset value of income shares because the value of the dividend would already have been removed on the fund’s XD date. However, the cancellation will cause the net asset value of accumulation shares to fall.
  3. Where a dividend is accrued in one distribution period and cancelled in a subsequent period after the distribution for the first period is paid, it will not be possible to adjust the amount of the fund’s distribution. In such cases the corresponding accounting adjustment to the net revenue will cause the amount available for distribution to be less than the actual amount distributed resulting in a deficit on the income property.
    1. In the case of an interim distribution, the deficit should be carried forward to the next distribution period within the same annual accounting period and will cause a reduction in the next distribution. There will be no change to the net asset value of income shares, but the net asset value of accumulation shares will fall.
    2. In the case of the final distribution, the deficit should be made good from capital in accordance with COLL 6.7.10R(2). This will cause there to be a fall in the net asset value of both income and accumulation shares.

The IA recommends engaging with auditors and fund accountants at the earliest opportunity. It intends to issue further guidance concerning disclosures by funds with income objectives shortly.

Investment Association (IA) issues new guidance on equity income sectors in light of COVID-19

Date: 24 April 2020

By Natalie Lim.

On 22 April 2020, the IA released new guidelines on the UK equity income and global equity income sectors in light of the COVID-19 outbreak.

The pandemic has prompted many companies to review their dividends, with some suspending or postponing payments. This has impacted on equity income funds as some are unable to meet the requirements to be included in the equity income sectors, including two tests based on the annual and three year rolling average yields of the FTSE All Share and the MSCI World indices. 

In response, the IA has issued new guidelines designed to prevent any short-term disruption to these sectors, so that savers can continue to easily identify and compare equity income funds. They will also enable fund managers to focus on long-term outcomes for savers, instead of potentially needing to make immediate changes to meet sector requirements. 

The following measures have been introduced with immediate effect:

  • For funds with a year end after the end of February 2020, the enforcement of the annual 90 per cent yield threshold test will be suspended. This suspension will last twelve (12) months and means that any fund currently in these sectors which does not meet the annual yield limit will not be automatically removed from the sector.
  • The enforcement of the three year test will be similarly suspended, subject to further review.
  • Monthly monitoring data will continue to be published publicly on the IA’s website to ensure ongoing transparency.

FCA updates its expectations of funds

Date: 16 April 2020

By Natalie Lim.

On 15 April 2020, the FCA updated its webpage setting out its expectations of funds. The webpage was first published on 6 April and covered a range of topics in light of the COVID-19 crisis.

The regulator has now added information to the page on the following:

1. 10 per cent portfolio value reporting – The FCA previously published a Dear CEO letter addressed to firms providing services to retail clients on COVID-19 issues. The letter included statements on supervisory flexibility concerning firms’ obligations to notify investors about depreciation of values of portfolios or leveraged positions by 10 per cent or more. The FCA has now confirmed that the statements in the letter, including 10 per cent portfolio value reporting, apply to non-retail client business performed by MiFID investment firms and collective portfolio management investment firms to the extent that the requirements are applicable to those firms.

2. Repo use for liquidity management – Firms have queried whether repo transactions can be used within UCITS schemes and non-UCITS retail schemes for liquidity management purposes and the regulator has confirmed that these should only be used for efficient portfolio management. It goes on to state that, if repo transactions are entered into for the sole purpose of liquidity management, it is unlikely that they will meet the requirements under applicable rules (COLL 5.4). 

Authorised fund managers (AFMs) should refer to paragraphs 32 to 33 of ESMA’s guidelines concerning the use of repos.

3. Client assets – Firms should refer to the FCA guidance on client assets (CASS) compliance published on 6 April 2020.

4. Paper-based and manual processes – The FCA expects AFMs not to prejudice the interests of certain unitholders versus others’. AFMs may allow unitholders or potential investors to deal in units in an authorised fund by post, fax or other physical means. Where dealing by one or all of these physical means ceases to be possible due to the coronavirus pandemic, AFMs should consider whether they can provide alternative means for unitholders to deal in units in the fund and how such alternative processes can be managed without disadvantaging unitholders. If AFMs cannot provide alternative means for unitholders to deal, and this results in the interests of some unitholders being prejudiced, AFMs should consider whether there are any other options for ensuring that all unitholders in the fund are treated fairly.

AFMs are also reminded of their duties and obligations to unitholders under the terms of the Prospectus and instrument constituting the fund, which are not derived from FCA rules.

ESMA publishes statement to mitigate impact on fund managers’ periodic reporting deadlines

Date: 09 April 2020

By Natalie Lim.

The statement relates to fund managers’ obligations to publish annual and half-yearly reports in respect of the funds they manage, specifically in relation to reporting period ending from 31 December 2019 to 30 April 2020 inclusive. In this context, fund managers include:

  • UCITS management companies
  • Self-managed UCITS investment companies
  • Authorised AIFMs
  • Non-EU AIFMs marketing AIFs pursuant to Article 42 of the AIFMD
  • EuVECA managers
  • EuSEF managers.

ESMA recognises that the actions taken by EU member states to prevent COVID-19 contagion present significant difficulties and challenges for fund managers and auditors in preparing their funds’ annual and half-yearly reports, carrying out timely audits, and publishing them within the reporting deadlines set out in the relevant Directives and Regulations.

While acknowledging the importance of periodic reports for timely and transparent disclosure, ESMA considers that the burdens on fund managers resulting from the COVID-19 outbreak should be taken into account by national competent authorities ('NCAs') in a co-ordinated way. ESMA expects NCAs to act in accordance with national rules applicable in their respective member states and, where possible, not to prioritise supervisory actions against market participants in respect of the upcoming deadlines set out in the regulations regarding:

  • Annual reports referring to a year-end occurring on or after 31 December 2019 but before 1 April 2020 for a period of two months following the relevant deadline
  • Annual reports referring to a year-end occurring on or after 1 April 2020 but before 1 May for a period of one month following the relevant deadline
  • Half-yearly reports of UCITS referring to a reporting period ending on or after 31 January 2020 but before 1 April 2020 for a period of one month following the deadline set out in the UCITS Directive.

NCAs are further encouraged to adopt a risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of the sectoral acts.

However, fund managers are reminded that certain funds continue to be subject to the disclosure obligations laid down in Article 17 of the Market Abuse Regulation (596/2014). Such funds must continue to disclose any inside information as soon as possible. 

ESMA will continue to closely monitor the situation and will take or recommend any measure necessary to mitigate the impact of COVID-19 timely and appropriate periodic disclosure by fund managers in respect of the funds they manage or market. ESMA will also, as necessary, reassess any potential need to amend the timelines the NCAs are expected to apply under the statement.

FCA sets out expectation for funds in light of COVID-19

Date: 7 April 2020

By Natalie Lim.

While acknowledging the significant challenge firms are facing in the current environment, the regulator has made clear that it expects firms to continue to uphold the best interest of their investors at all times.

On 6 April 2020, the FCA published a new webpage setting out its expectations for funds in light of the COVID-19 outbreak. The webpage focuses on key queries from firms and the FCA’s responses. 

In summary:

1. Delaying annual and half-yearly fund reports – the FCA has agreed for the publishing of annual and half-year fund reports to be delayed.

2. Virtual general meetings – The FCA has been asked whether firms can hold general meetings of fund unitholders virtually, and whether a unitholder could be considered to be present at the meeting if they are participating in or have joined a virtual meeting. The regulator recognises the operational challenges faced by firms in the current situation, and in that context, confirms it does not have a supervisory concern about meetings being held virtually. However, the FCA cautions that fund documentation may contain details about arrangements that are additional to what is prescribed by the FCA’s rules. The regulator cannot forbear on private law obligations owed by authorised fund managers (AFMs) to unitholders or claims which they might bring. AFMs are therefore reminded to consider the terms of their fund documentation, including prospectuses and instrument of incorporation, when making arrangements for meetings. 

3. Ensuring compliance with limits on value at risk (VaR) – The FCA understands some AFMs have experienced issues ensuring compliance with limits on VaR as part of their risk-limit systems. Firms are expected to already have plans in place to deal with such events and to take appropriate remediation action, considering market conditions and what is in the best interests of their customers.

Where individual firms continue to face issues managing their funds within risk limits generally, and VaR limits specifically, they should speak to their FCA supervisory contacts in the first instance or email firm.queries@fca.org.uk

4. Electronic signatures – The regulator is aware that some firms are struggling to obtain wet ink signatures on their application documents. During the COVID-19 crisis, the FCA is willing to accept electronic signatures on applications to authorise funds or approve changes to funds. Applicants may use electronic signatures where appropriate and relevant forms should be construed accordingly. Applicants may also validate accompanying documentation electronically, where possible. In all cases where an electronic signature is used, the FCA will need to be assured that the signatory has seen and agreed with all the information in the form.

COVID-19: fund reports and account deadlines extended

Date: 6 April

By Christopher Walker

The FCA has updated firms that it can confirm that annual and half-yearly fund reports as prescribed by COLL 4.5.7R and COLL 4.5.1R can be temporarily delayed.

This measure is aimed to ease an additional operational burden on fund managers and auditors alike during the coronavirus pandemic. The temporary relief, however, will not apply to requirements to produce half-yearly and annual reports in other countries and the FCA remarks that firms with concerns about their ability to comply with any such requirements should raise these with the relevant authority.

Extension periods

The following temporary extensions apply:

  • AFMs of UCITS and NURS will be permitted an additional two months to publish annual reports and should notify the FCA if they require use of this extension and take the steps set out on the webpage
  • for half-yearly reports, firms are permitted one month extra to publish and should again notify the FCA of their intention to use this extension and take the steps set out on the webpage.

Firms should remember their obligation under Principle 11 in relation to any issues of material concern. The FCA expects that AFMs will work 'closely with their depositaries' and that firms will ensure any decisions made are taken in light of good governance standards.

The extension policy is a temporary one and is intended to be in force for the duration of the disruption caused by the COVID-19 pandemic. The FCA will keep this under review as to ensure that the policy may be ended in a 'fair, orderly and transparent' fashion.

Next steps

AFMs seeking to make use of either optional extension period should:

  • 'promptly' inform the fund’s depositary and auditors
  • email the FCA with details of the funds this will apply to and the intended new date of publication.

AFMs should publish a 'prominent statement' on their website by no later than the original publishing date of the annual or half-yearly report. The prominent statement should explain the logic behind the AFM’s decision and state the revised publication date.

Firms are also encouraged to contact unitholders/investors in the funds they manage to explain the publishing delay, in particular considering other steps they could take to bring the deferred publication date to the attention of unitholders. The FCA emphasises that they do not envisage any change to the dates on which distributions are to be made for classes of units that distribute income.

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