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March Investment Management Update

March Investment Management Update

  • United Kingdom
  • Financial institutions - Asset managers and funds


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What were February’s highlights?

FCA discussion paper on illiquid assets and open-ended investment funds

On 8 February 2017, the FCA published a discussion paper (DP17/1) which seeks stakeholder views on the practice of investing in illiquid assets through open-ended funds and the challenges to managers and investors. The FCA explains that illiquid assets in the context of this paper may include land and buildings, infrastructure and financial assets such as unlisted securities.

In the paper the FCA:

  • describes the liquidity management issues that some UK property funds experienced in 2016 and explains how it responded to them;
  • describes how current regulations apply to funds investing in illiquid assets and offer their managers a variety of liquidity management tools;
  • suggests some possible approaches to developing the regulation of liquidity, to support fund managers in meeting their obligations and ensure good outcomes for investors;
  • in an accompanying press release, the FCA states it is publishing the discussion paper to gather more evidence to decide whether changes to its regulatory approach are needed to enhance market stability and promote competition in the sector, while protecting consumers. The FCA sets out some examples of possible policy approaches to stimulate debate. It will draw on the responses received, together with the further supervisory work it is currently undertaking, to decide whether or not it needs to propose any changes to Handbook rules and guidance.

The FCA requests feedback on DP17/1 by 8 May 2017.

IOSCO final report on loan funds survey

On 20 February 2017, the International Organization of Securities Commissions (IOSCO) published a final report (FR03/2017) on its loan fund survey.

IOSCO launched a questionnaire, in December 2015, to gather information from the members of its Committee on Investment Management on existing practices and experience as regards loan funds in the area of investment funds. The report clarifies that there are loan originating funds and loan participating funds. These include open-ended funds and closed-ended funds, and are marketed to retail and professional investors.

Twenty-four jurisdictions, including the UK, participated in the survey. The report identifies the current position in each jurisdiction and explains how the markets have evolved. It also explains how regulators are addressing the risks associated with funds, including:

  • liquidity risk;
  • credit risk;
  • systemic risks from excessive credit growth; and 
  • regulatory arbitrage.

The report explains that current data on the level of investment in loan origination and participation indicates that the market is predominantly located in the United States. However, even in a jurisdiction such as the US, where loan funds have long been permitted, loan fund assets represent a very small fraction of total assets invest in funds. In Europe, where interest in this asset class has increased in recent years, Luxembourg and the UK are the main players.
The report concludes that further work on loan funds is not warranted at this stage. However, IOSCO will continue to monitor this sector with a view to possibly revisiting it for further work, should it be called for by market developments.

Statements on variation margin under EMIR

On 7 February 2017, ISDA and a number of other trade bodies wrote an open letter to a range of regulators calling for regulatory forbearance in respect of the new rules on variation margin.

In response, on 23 February 2017, the International Organization of Securities Commissions (IOSCO), the Joint Committee of the European Supervisory Authorities (ESAs) and the FCA published statements on variation margin exchange under the EMIR regulatory technical standards (RTS):

IOSCO statement: IOSCO explains that some market participants have reported facing difficulty in completing the necessary credit support documentation and operational processes to settle variation margin in accordance with the requirements, despite efforts to do so. Nevertheless, IOSCO expects all affected parties to make every effort to fulfil the necessary variation margin requirements by the deadlines. IOSCO adds though that it believes that relevant IOSCO members, together with other relevant authorities, should consider taking appropriate measures available to them to ensure fair and orderly markets during the introduction and application of such variation margin requirements.

Joint Committee of the ESAs statement: The ESAs explain that neither they nor competent authorities have the power to disapply directly applicable EU legal text (for example, by issuing non-action letters). As a result, any further delays of the application of the EU rules would formally need to be implemented through EU legislation, which the ESAs state is not possible due to the lengthy process for adopting EU legislation.

FCA statement: The FCA confirmed it welcomed the statements made by the Joint Committee of ESAs and IOSCO regarding firms' ability to meet the deadline for complying with the EMIR RTS. It is aware that some firms may not be in a position to exchange variation margin fully in compliance with the RTS by 1 March 2017 despite their efforts to date. The FCA explains that it will take a risk-based approach to supervising firms’ progress towards meeting the deadline and will use judgement as to the adequacy of progress, taking into account the position of particular firms and the credibility of the plans they have made.

For more information, see our recent briefing on the FCA's statement on EMIR the variation margin deadline.


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