December 2023
Welcome to our monthly KPMG Asset Management Insights newsletter, which has been designed to keep you up to date on topical issues within the Asset Management sector.
Central Bank of Ireland updates
Funds Sector 2030 Review
On the 17th of October 2023, the Central Bank of Ireland (‘Central Bank’) published a response paper (PDF, 1.3 MB) to the Department of Finance (‘the Department’) consultation on the Funds Sector 2030 Review. The paper sets out five key areas that the Central Bank believes are critical for further development of the Irish funds sector and should be considered fully within the Funds Sector 2030 Review. The key focus areas of the paper are:
- Delivering Positive Outcomes for the Domestic Economy and Investors;
- Developing a Macroprudential Framework for Investment Funds;
- Maintaining Regulatory Effectiveness;
- Sustainable Finance;
- Digital Transformation.
This response was just one of the 199 submissions which were received by the Department prior to the deadline of 29 September 2023. The Department will conduct the review and plans to report to the Minister of Finance in the Summer of 2024.
AIF Rulebook – CP 155
On the 1st of November 2023, the Central Bank published Consultation Paper 155 (PDF, 838 KB) on its intention to add a new chapter to the Alternative Investment Fund (‘AIF’) Rulebook on European Long-Term Investment Funds (‘ELTIFs’). The ELTIF is designed to provide long-term stable returns by investing primarily in long-term assets and can be made available to both retail and professional investors across the EEA. By introducing a separate chapter in the AIF Rulebook, the Central Bank has confirmed that the ELTIF will be a standalone investment product and will not require authorisation as a QIAIF or UCITs. The new ELTIF chapter will be introduced as Chapter 6 and will consist of two main sections:
- Part I: General ELTIF restrictions, supervisory requirements, prospectus requirements, general operational requirements and requirements regarding financial reports.
- Part II: Requirements related to the marketing of ELTIFs to retail investors.
Responses to the Consultation Paper should be submitted to the Central Bank by no later than 13 December 2023. This 6-week consultation period is shorter than normal and reflects the Central Bank’s intention that Ireland will be ELTIF-ready by the effective date of Regulation 2023/606/EU (“ELTIF 2.0’) which is 10 January 2024.
Dear CEO Letter on MiFID II Requirements for Algorithmic Trading
On the 2nd of November 2023, the Central Bank published a ‘Dear CEO’ letter (PDF, 825 KB) on it’s thematic review of the annual self-assessment and validation process across firms performing algorithmic trading activity. This letter built on the publication of the previous ‘Dear CEO’ letter (PDF, 371 KB) from 2021 which assessed how firms undertaking algorithmic trading incorporated within their risk management and control frameworks the requirements set out in MiFID II and the associated delegated legislation. The Central Bank found that, in a number of instances, firms had given appropriate consideration to the feedback released in the previous letter, including in relation to the following areas:
- Formalised processes and controls in respect of the development, testing and monitoring of algorithms that clearly evidence second line oversight of algorithmic trading activity;
- Greater ownership of the requirements at a local entity level evidenced through entity level policies and procedures; and
- A clear distinction of roles and responsibilities between the first and second lines of defence, and, within the second line, between risk and compliance.
However, the Central Bank did note the following key concerns arising from the thematic review:
- Lack of detail in algorithmic trading activity self-assessments due to deficient governance frameworks;
- Lack of formalised arrangements for continuous training and development of staff;
- Failure to maintain sufficient records of material changes and comprehensive procedures for conformance testing;
- Insufficient documentation around the procedures for assessment and escalation of market surveillance alerts; and
- Lack of adequate business continuity arrangements.
The Central Bank concluded that all findings in the letter should be addressed by the CEOs of relevant firms conducting algorithmic trading activity in Ireland and that each firm should conduct a gap analysis against the findings in this letter and ensure that the subject be discussed, minuted and actioned by Boards before 31 March 2024.
ESA updates
Timeline for MiCA
On the 17th of October 2023, the European Securities and Markets Authority (‘ESMA’) released a statement (PDF, 200 KB) which provides clarification on the implementation timeline for the Regulation on Markets in CryptoAssets (‘MiCA’). For holders of cryptoassets and clients of cryptoassets services in the EU, ESMA states that MiCA requirements will not apply until December 2024 at the earliest. Once requirements become applicable, relevant authorities in Member States (‘MS’) can grant an additional 18-month transitional period before a MiCA licence is required (also known as the ‘grandfathering clause’). However, within the statement ESMA still urges market participants and MS competent authorities to prepare for the transition and begin prepare for the administration of consistent practices that will be required under MiCA.
Consultation: Guidelines on MiCA
On the 20th of October 2023, the European Banking Authority (‘EBA’) and ESMA published a joint consultation paper (PDF, 589 KB) on Guidelines on ‘Suitability Assessments of the Management Body and Holders of Qualifying Holdings under MiCA’. Chapters 4 and 5 of the consultation paper contain the draft guidelines and have been extracted from sections within MiCA.
In terms of the draft guidelines on the suitability assessment, members of management bodies of firms which issue Asset Referenced Tokens (‘ARTs’) and Crypto Asset Service Providers (‘CASPs’) must be able to demonstrate that members of management can commit sufficient time to perform their duties, as well as having the appropriate knowledge, good repute, honesty and integrity. Draft guidelines which relate to the suitability assessment of shareholders and members with qualifying holdings in issuers of ARTs or of CASPs will enable National Competent Authorities (‘NCAs’) to evaluate the suitability of shareholders with direct and indirect holdings for the purpose of authorisation and assessment of potential acquisitions by NCAs. Consultation will close to comments on the 22nd of January 2024.
Reporting practices under Taxonomy Regulation
On the 25th of October 2023, ESMA published a summary report (PDF, 316 KB) on its fact-finding exercise on corporate reporting under the Taxonomy Regulation. Working along with NCAs, ESMA collected non-financial statements published by EU non-financial undertakings listed in regulated markets for the previous fiscal year. After an examination of the quality of the disclosures, ESMA has noted the following key findings:
- From the sample provided by NCAs, 96% of the issuers active in the four main sectors covered by the Taxonomy Climate Delegated Act disclosed the mandatory Taxonomy alignment KPIs.
- Whilst the mandatory reporting templates were generally used, they were modified or not fully completed in 30% of the sample cases.
- Mandatory qualitative reporting information (e.g. technical screening criteria, DNSH criteria, min. safeguards) was missing or deficient for more than 40% of the assessed issuers. In addition, only 40% of the issuers in the sample provided comments on their eligibility or alignment rates.
- Further areas of incorrect application or implementation related to transparency on the avoidance of double counting, the screening of activities against one climate objective only or the reconciliation with financial reporting.
Following the fact-finding exercise, ESMA may complete further analysis on areas of reporting for which greater clarity is required or where it identifies material incorrect application.
MiFID Q&As
On the 27th of October 2023, ESMA released an updated version (PDF, 849 KB) of it’s Q&As on transparency topics under the Markets in Financial Instruments Directive (‘MiFID II’) and the Markets in Financial Instruments Regulation (‘MiFIR’). The previous version was last updated in March 2023. With this version, ESMA has removed as the section on the minimum size of orders held in an order management facility for non-equity financial instruments.
Contact us for more
For further information on the issues mentioned above, or any related issues, please contact Jorge Fernandez Revilla, Head of Asset Management.
