The regulatory tsunami shows no sign of relenting anytime soon. The Independent Investment Management Initiative(IIMI) looks at some of the regulations, which could affect its members in 2022.
- ESG – no let up yet
The introduction of new ESG rules in both the EU and UK will have an impact on some IIMI members’ operations. Although the EU has delayed the SFDR’s (Sustainable Finance Disclosure Regulation’s) Level 2 obligations until January 2023, managers should be thinking about their next steps in terms of compliance. Under the Level 2 rules, asset managers will need to report on 18 compulsory PAIS (Principle Adverse Impacts) in addition to a number of voluntary disclosures covering sustainability. Elsewhere, the UK is adopting its own provisions around ESG having published its “Roadmap to Sustainable Investing” report at the tail-end of last year. The UK’s report outlined plans to subject asset managers to ESG disclosure requirements and pledged to establish a taxonomy – with the latter likely to have some overlap with the EU’s benchmark. Nonetheless, it is clear that different countries will impose their own ESG rules in what is likely to fuel further arbitrage and cause confusion.
- Phase six of UMR (uncleared margining rules) takes effect
Having introduced phases one through to five of EMIR’s (European Market Infrastructure Regulation) initial margining rules for uncleared OTC derivatives, Phase 6 will be felt by a much greater number of buy-side firms including UCITS and AIFMs. Firstly, the final phase will apply to financial institutions with an AANA (average aggregate notional amount) in excess of €8 billion. According to ISDA (International Swaps and Derivatives Association), around 775 firms will be affected by Phase 6, which is more than double that of Phase 5, and will most likely include a number of boutique asset managers. Affected managers must ensure they have processes in place to facilitate the posting of initial margin.
- CSDR – settlement efficiency is now paramount
Although EU regulators have confirmed that mandatory buy-in requirements under the CSDR (Central Securities Depositories Regulation) have been postponed (potentially by several years), cash penalties for settlement fails will apply from February 2022. Most asset managers have historically presumed that it is their custodians or brokers who are primarily responsible for ensuring trades settle on a timely basis. Not anymore. Under CSDR, CSDs (central securities depositories) will be entrusted with imposing fines for settlement fails on brokers and custodians, who unless they are themselves at fault – will offload these costs to underlying clients responsible for the fails, namely asset managers. As such, managers need to augment their settlement processes if they are to avoid CSDR cash penalties.
- AIFMD – not the overhaul many expected
Many of the proposed amendments by the EC to AIFMD have been welcomed by the industry. It was widely feared that non-EU asset managers would find their access to EU investors heavily restricted were AIFMD’s delegation requirements to be tightened up, but this has not happened. Instead, the delegation rules remain largely unchanged much to the industry’s relief. It is true the National Private Placement Regime (NPPR) rules have been toughened up but only marginally so. Right now, non-EU AIFMs and AIFs using NPPR cannot be based in countries designated by the Financial Action Task Force as being a non-cooperative country or territory. The EC has since said that third country AIFs cannot market into the EU if they are based in a country on the EU’s list of non -cooperative jurisdictions for tax purposes and AML. While this will not apply to high-profile financial hubs like the UK or US, it could impact some offshore centres – with the Cayman Islands having been on such a list as recently as 2020. In a worst-case scenario, restrictions could be imposed on managers running offshore funds in certain domiciles.