Anne-Gaëlle Delabye
Partner | Legal
Luxembourg Legal Services
Partner
Luxembourg Legal Services
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The Luxembourg Commission de Surveillance du Secteur Financier (CSSF) and the European Securities and Markets Authority (ESMA) have issued a number of COVID-19 related updates.
As new information and recommendations are released we will update this briefing.
In earlier briefings, we covered the ESMA and CSSF guidance on the impact of COVID-19 on financial markets as well as the CSSF extension of the deadline for annual online AML/CFT surveys.
16/04/2020 – Update of the Covid 19 FAQ concerning UCITS Value At Risk (VaR) breaches
16/04/2020 - Update of the COVID-19 FAQ – extension of reporting deadlines
14/04/2020 - Update of the Covid-19 FAQ concerning periodic reports for investment funds
10/04/2020 – CSSF Circular 20/740 on the AML/CTF implications during the COVID-19 pandemic
09/04/2020 – CSSF launches a weekly questionnaire to investment fund managers
09/04/2020 – Circular and communication on the SFTR implementation
07/04/2020 – Update of the Covid-19 FAQ concerning swing pricing
02/04/2020 - Postponement of the reporting under Article 37 of the Money Market Funds Regulation
27/03/2020 - disclosure of information by issuers of securities under Transparency law
26/03/2020 – procedure for complaint handling / electronic communications
25/03/2020 – Long form audit reports
23/03/2020 - Leeway on regulatory reporting deadlines
22/03/2020 - Immediate review of organisational setups required
20/03/2020 – Update of the FAQ on the swing pricing mechanism
20/03/2020 – Clarified its position on call taping under MiFID II
19/03/2020 - SFTR phase 1 reporting delayed
16/03/2020 - Reporting threshold for holders of net short positions lowered
The CSSF has remained active as recent public health events have unfolded and has provided its stakeholders with other relevant guidelines and information.
On 16 April 2020, the CSSF provided several clarifications on active and passive investment breaches of VaR limits.
The main takeaway is that passive breaches (ie those that occur beyond the fund's control) of the global exposure limits laid down in Article 42(3) of the Law of 17 December 2010 relating to undertakings for collective investment (among other investment restrictions applicable to UCI) do not have to be notified to the CSSF.
The second takeaway is that breaches of the regulatory VaR limit (ie 20% for absolute VaR or 200% for relative VaR, as the case may be), or any other more restrictive internal VaR threshold, which occur as a result of the increased market volatility (and not as a result of new positions that may increase the portfolio risk) will be viewed as passive breaches.
The CSSF also clarified that when it comes to both regulatory or internal VaR limits set out in the prospectus, UCITS managers should closely monitor the situation of the fund and the defined remediation plan in order to meet the limits within a reasonable time period, all while taking into account the market conditions and the best interest of the investors.
Once a passive breach has occurred, however, eg due to increased market volatility, the CSSF will consider any additional risk exposure taken by the fund, which has the effect of increasing VaR usage, as an active investment breach.
Still, the CSSF took care to note that passive breaches should not prevent the management of UCITS (eg making investments following new subscriptions), and that new positions that do not increase the risk level, will still be allowed.
The CSSF announced the possibility of extending certain reporting deadlines for UCIs, SIFs, SICARs, IFMs, pension funds and securitisation undertakings, provided that the CSSF is duly informed thereof via email (to be sent to opc@cssf.lu). Previous clarifications on deadline extensions were provided on 2 April 2020 and 26 March 2020.
Deadlines may be extended for the following documents:
Following the ESMA release dated 31 March 2020, money market funds may, by way of derogation from their obligations under Circular CSSF 20/736, postpone the submission of their quarterly reports for the first and second quarters of 2020 until September 2020.
In relation to the banking sector, it was announced that the extension of certain deadlines may be granted on an exceptional basis, following a reasoned request sent via email to the usual CSSF contact person. For banks of significant importance, these requests will, if necessary, be dealt with by the CSSF in consultation with the European Central Bank.
A deadline extension may be requested for the following documents[1]:
Concerning specialised professionals of the financial sector, deadlines for submitting monthly or quarterly prudential reportings may also be extended, upon a reasoned request sent by email to the usual contact person at the CSSF.
Finally, the CSSF reminded all relevant entities that it encourages submissions to be made on time, should it be possible without compromising the quality of the reporting or interfering with the rules laid down by the authorities in the fight against the COVID-19 pandemic.
Following ESMA's public statement of 9 April on supervisory expectations related to the yearly and half-yearly reports for investment funds (see update below), the CSSF has confirmed its intention to comply with the guidance provided therein, and will not prioritise supervisory actions in respect of the upcoming deadlines.
It has, however, informed investment fund managers that, where a delay in reporting can be foreseen, the investors and the CSSF itself must be promptly informed of it, the reasons behind it, and the estimated date of publication.
Considering the heightened risk of money laundering and terrorism financing (ML/TF) threats to the financial sector and the general public in the current context, professionals subject to the anti-money laundering and counter-terrorism financing (AML/CFT) supervision of the CSSF were provided with additional guidance on how to identify and effectively thwart the new schemes and scams that criminals might deploy to take advantage of the ongoing crisis.
In its Circular, the CSSF reviewed new tendencies and presented case studies on emerging ML/TF threats due to COVID-19, such as cybercrime, fraud, bribery and corruption related to government support schemes, insider trading and market manipulation; and identified emerging market vulnerabilities related to online payment services, clients in financial distress, mortgages and other forms of collateralised lending, credit backed by government guarantees and distressed investment products.
The CSSF also provided guidance on mitigating the risks posed by these new threats, emphasized the need to implement and maintain effective systems and controls and drew particular attention on areas such as business continuity and governance, transaction monitoring, customer due diligence, performing risk assessments and cooperating with authorities.
You can access the full text of the Circular here.
The CSSF launched a new weekly questionnaire for investment fund managers with the aim of gathering relevant financial (ie net assets, subscriptions, redemptions) and governance data in light of the specific circumstances and risks to which such managers are exposed in the current health crisis context. The information collected will be aggregated in order to assist the CSSF in its discussions with other European or international governing bodies and also with market participants to identify potential issues at an early stage and resolve them.
Investment fund managers established in Luxembourg or in other EU/non-EU country and managing at least one UCITS, AIF and/or any other UCI which does not qualify as an AIF will have to submit their first questionnaire, covering the week from 13 to 17 April, by 22 April 2020 COB. The deadline for subsequent weeks will be on the following Wednesdays and this process will continue until further notice by the CSSF.
The channel designated for information submission is the CSSF's eDesk portal, using the LuxTrust certification. A Luxembourg based service provider may be mandated for the transmission, should the IFM not dispose of the LuxTrust authentication.
Additional information may be found here.
On 9 April, the CSSF informed entities under its supervision as well as non-financial counterparties[1] that it had integrated the provisions of ESMA Guidelines on Reporting under Articles 4 and 12 of the SFTR into its administrative practice and regulatory approach.
Citing ESMA's statement dated 26 March 2020 regarding the significant challenges posed by SFTR in the context of the COVID-19 pandemic, the CSSF announced that it would "not prioritise its supervisory actions towards counterparties, entities responsible for reporting and investment firms in respect of their reporting obligations pursuant to SFTR or MiFIR, regarding (i) SFTs concluded between 13 April 2020 and 13 July 2020, and (ii) SFTs subject to backloading under SFTR".
[1] As defined un Article 3(4) of the SFTR
The CSSF provided additional clarifications regarding the possibility to increase the swing factor beyond the maximum level laid down in the fund prospectus, in two specific instances, namely: (i) where the prospectus allows for the possibility of such an increase, and (ii) where it does not.
In the first case, the CSSF indicated that the decision to increase the swing factor must be made in accordance with the terms and conditions of the prospectus, be duly justified, and take into account the best interest of the investors.
In the second case, the CSSF noted that the decision to increase the swing factor (even though not envisaged or permitted by the prospectus) must also be duly justified, and take into account the best interest of the investors. In addition, however, the prospectus must also be updated at the earliest convenience to formally allow such an action since the CSSF permission is only granted on a temporary basis.
In both cases, the decision to increase the swing factor must be communicated to investors (as mentioned in our earlier update dated 20/03/2020); note, however, that in the second case, such notification must be made before applying the increase of the swing factor, and the CSSF must simultaneously receive a copy of such notification to investors.
Following a statement from ESMA dated 31 March 2020, the CSSF issued a communication notifying managers of money market funds domiciled in Luxembourg that the deadline for their quarterly reports for Q1 and Q2 2020 was postponed until September 2020, while also noting that submission of reports before the revised September deadline was still encouraged.
Taking into account the practical difficulties that issuers and their auditors could face in the current context, the CSSF decided not to take any administrative measures against issuers that fail to comply with the deadlines for publishing periodic information under the Transparency law. In addition, issuers may make use of an additional period of two months, if they deem it appropriate, to publish the necessary periodic information. This temporary measure applies to issuers whose reporting periods end on 31 December 2019, or before 1 April 2020.
Issuers that anticipate delays in their financial reports should inform the market and the CSSF (via transparency@cssf.lu) as soon as possible and in any case before the expiry of the legal deadline, stating the reasons leading to it, and the expected publication date. Issuers are expected to pay particular attention to compliance with ongoing disclosure requirements laid down by the Transparency law and the Market Abuse Regulation[2] (eg disclosure of inside information, notification and publication of major holdings and managers' transactions).
Acknowledging that exceptional COVID-19 related delays granted by national governments may not align with its own measures, the CSSF has pledged to take such factors into account when conducting its assessment.
[1] Law of 11 January 2008 on transparency requirements for issuers
[2] Regulation (EU) No 596/2014 on market abuse
Following the communication released on 17 March in relation to the operational continuity of the CSSF itself, it was announced that all communications regarding complaints' handling, whether pertaining to existing procedures or new ones, should be sent by email to reclamation@cssf.lu or filed using the online complaint form (dated and signed, with all the required documentation attached), instead of regular mail, or in addition to it.
On an exceptional basis, audited entities and funds are allowed to submit the long form reports within a time frame of up to four months after their annual general meeting (AGM). Should delays for such AGMs be granted by way of exceptional measures introduced by the government, such delays will not be applied in addition to the grace period already granted to the long form reports.
Prior authorisations / notifications to the CSSF for cloud-based outsourcing, as required by the Circular CSSF 17/654 (as amended) are not required so long as the exceptional situation prevails – a simple email notification by the concerned entity to the CSSF contact agent will suffice.
This measure was implemented in order to facilitate the adaptation of the working environment to the exceptional situation and does not affect due diligence and risk assessment obligations and the recording of such outsourcing in the cloud register.
On 23 March 2020, the CSSF issued a communiqué on regulatory reporting reminding supervised entities of the importance of their regulatory reporting obligations, particularly in times of crisis, while also informing them that leeway would be granted, when justified.
The CSSF insisted that reporting deadlines should still be respected, but noted that supervised entities that experienced difficulties to prepare or validate their reporting due to operational reasons (e.g. staff unavailability) should inform the CSSF, and that strict enforcement policy would not be applied for delays that were justified, during the COVID-19 crisis.
The CSSF indicated that it would be applying its leeway in close coordination with national and European authorities.
On Sunday, 22 March 2020, the CSSF issued a communiqué urging all entities under its supervision to immediately review their organisational setups in order to give precedence to remote working from home over any other forms of working.
This approach includes ensuring that staff are deployed to the usual workplace or the backup site as little as possible, that such deployment be limited to only carry out vital functions essential to maintain missions which are critical for the entities to remain operational, and only on the condition that such functions cannot be performed remotely.
Moreover, entities should implement virtual desktops and other remote access solutions, even cloud-based, in case their staff are not equipped with laptops or other mobile devices.
Finally, the CSSF emphasised the importance for the Luxembourg financial centre to contribute as much as possible to the protection of the health system by heeding the advice of doctors and the government to stay home.
Following the latest market developments relating to COVID-19 and questions received from industry participants, the CSSF has updated its FAQ on the swing pricing mechanism, so as to include the following clarifications (applied similarly to dilution levy) for UCIs (UCITS[6], UCI Part II[7] & SIFs):
In any of the above scenarios, the decision made by the Board or the Management Company must be duly justified and take into account the best interest of the investors; such decision must also be communicated to (i) current and future investors through the usual communication channel laid down in the prospectus and, (ii) the CSSF, by way of a notification of the resolution containing a detailed specific explanation on the reasons for such resolution.
Should an adjustment go beyond the maximum level envisaged in the prospectus, the CSSF made clear that it could require a UCI to justify, on an ex-post basis, the levels of swing factors applied. In such a case, the UCI would be required to provide the CSSF with documentary evidence that the factor applied was at any time representative of the prevailing market conditions.
The European financial watchdog has issued several opinions approving emergency short selling prohibitions in several countries (France, Spain, Belgium, Italy, Greece). Noting that the current diverging national measures certain Member States have recently taken in an effort to restrict short selling have undermined the internal market, the Securities and Markets Stakeholder Group has invited ESMA to use its power to coordinate such measures and publish them on a dedicated webpage.
ESMA has also been closely monitoring recent market developments and has issued several communications to market participants in relation thereto, including:
On 9 April, ESMA issued a public statement directed at National Competent Authorities (NCAs), concerning the obligations of UCITS management companies, self-managed UCITS investment companies, authorised AIFM-s, Non-EU AIFMs marketing AIFs pursuant to article 42 of the AIFMD, EuVECA and EuSEF managers to publish annual and half-yearly reports in respect of the funds they manage.
Mindful of the fact that measures taken by Member States and their respective NCAs could pose an additional burden to fund managers in terms of carrying out audits and publishing results in a timely manner, ESMA announced that it was releasing its public statement to promote a coordinated response of the NCAs and provide clarity to fund managers.
ESMA noted that annual and half-annual reports were still required to be prepared and published in accordance with the provisions of applicable regulation, while also acknowledging that the current public health context presented managers and auditors with significant challenges to fulfil their obligations due to unprecedented national measures taken by Member States to prevent contagion.
NCAs were, therefore, encouraged to act in accordance with respective national rules and "when possible during this specific period not prioritise supervisory actions against these market participants in respect of the upcoming deadlines which applies to them under the provisions of the applicable legislation:
NCAs were also called upon to exercise their supervisory powers in a proportionate manner and to take a risk-based approach in relation to the publication deadlines.
Fund managers, for their part, were expected to inform their NCA and their investors as soon as possible, where they anticipate a delay in publication of their reports beyond the regulatory deadlines, making sure to state the reasons for the delay and the expected publication date.
ESMA issued a public statement acknowledging potential issues that may arise during the COVID-19 outbreak and due to which relevant firms may not be able to record voice communications, in a manner which they are required to do under MiFID II. In this context, ESMA has reminded firms of their obligations and noted that it expects them to consider alternative measures they could take in order to mitigate risks related to the lack of ability to record relevant conversations and encouraged them to undertake all possible efforts to ensure that such measures remain temporary.
ESMA issued a public statement recognising that the reporting obligations under the Securities Financing Transactions Regulation (SFTR)[5], which should apply from 13 April 2020, may encounter implementation difficulties due to firms being impacted by increased market volatility as well as personnel pressure.
The EU regulator has therefore issued a statement encouraging NCAs not to prioritise supervisory actions under the SFTR until 13 July 2020, and to apply instead a risk-based and proportionate approach when enforcing the applicable legislation. ESMA also indicated that it expects the trade repositories to be registered ahead of time, ie before 13 July 2020 (and not 13 April 2020), in order to provide the repositories with sufficient time to adapt to the current circumstances and be ready to support the new reporting regime as of this date.
ESMA has issued a decision introducing temporary transparency obligations, requiring holders of net short positions in shares traded on an EU regulated market to notify the relevant national competent authority (NCA) if the position reaches or exceeds 0.1% of the issued share capital after the entry into force of the decision. Such reporting is considered essential, under the current exceptional circumstances, as it will enable NCAs to monitor developments and deploy more stringent actions in a timely manner, if needed. This decision, rendered under the EU Short Selling Regulation[8], will apply for three months following its publication.
[1] Undertakings for Collective Investments
[2] Specialised Investment Funds
[3] Investment Company in Risk Capital
[4] Investment Fund Managers
[5] The list may be periodically updated
[6] Undertakings for Collective Investments in Transferrable Securities
[7] Undertakings for Collective Investments governed by the Part II of the Law of 17 December 2010 relating to undertakings for collective investment
[8] Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps
[9] Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012
Anne-Gaëlle Delabye
Partner | Legal
Luxembourg Legal Services
Partner
Luxembourg Legal Services
Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.
This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.
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