Financial regulatory response to COVID-19 in the Netherlands

What is this about?

Over the last few days, the European and Dutch regulators have published statements and implemented measures in response to the impact of COVID-19 on the financial markets.

Which parties should care?

The regulators’ statements and measures are generally relevant for all financial market participants, including investment firms, infrastructures, issuers, asset managers, traders such as hedge funds and banks.

What should they do?

They should familiarise themselves with the following statements and measures and assess whether they need to take immediate action.

AFM endorses ESMA statement on COVID-19

The Dutch Authority for the Financial Markets (AFM) endorses the call for action by financial market participants for COVID-19 impact as recommended by the European Securities and Markets Authority (ESMA) in its statement on COVID-19 published on 11 March 2020. ESMA makes the following recommendations:

• Business continuity planning - all financial market participants, including infrastructures should be ready to apply their contingency plans, including deployment of business continuity measures, to ensure operational continuity in line with regulatory obligations;

• Market disclosure - issuers should disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation;

• Financial reporting - issuers should provide transparency on the actual and potential impacts of COVID-19, to the extent possible based on both a qualitative and quantitative assessment on their business activities, financial situation and economic performance in their 2019 year-end financial report if these have not yet been finalised or otherwise in their interim financial reporting disclosures; and

• Fund management - asset managers should continue to apply the requirements on risk management, and react accordingly.

ESMA decision on lowering the net short position reporting threshold

In light of the impact COVID-19 has on the financial markets, on 16 March 2020, ESMA has decided to temporarily lower the threshold for net short position reporting from 0.2% to 0.1%. The lower threshold applies to private notifications only. The public disclosure threshold of 0.5% remains unchanged for now.

The temporary transparency obligations apply to any natural or legal person, irrespective of their country of residence. They do not apply to (i) shares admitted to trading on a regulated market where the principal venue for the trading of the shares is located in a third country; (ii) market making; or (iii) stabilisation activities.

The implementation of an additional threshold is a precautionary action to allow authorities to monitor developments in markets in the exceptional circumstances linked to the ongoing COVID-19 pandemic. We note that the lower threshold for net short position reporting does not apply to shares traded on a multilateral trading facility.

The AFM does not require a baseline disclosure, but rather requires a movement between 0.1% and 0.19% to be notified with respect to positions that have not been previously disclosed.

ESMA approach to SFTR implementation

On 19 March 2020, ESMA published a statement to ensure coordinated supervisory actions on the application of Securities Finance Transactions Regulation (SFTR), in particular, on the requirements regarding the reporting start date, as well as the registration of trade repositories.

Reporting obligations for credit institutions, investment firms, and relevant third-country entities become applicable as of 13 April 2020. However, acknowledging the resource restriction in implementing the reporting of securities finance transactions caused by the COVID-19 pandemic, ESMA expects competent authorities not to prioritise their supervisory actions towards entities subject to securities finance transaction reporting from 13 April 2020 until 13 July 2020. Furthermore, ESMA does not consider it necessary to register any trade repository ahead of 13 April 2020.

The date on which most buy-side firms become subject to securities finance transaction reporting, 12 October 2020, remains unchanged for now.

ECB measures to provide capital and operational relief

On 12 March 2020, the European Central Bank (ECB) announced a number of measures to ensure that significant banks can continue to fulfil their role in funding the real economy. As such, the ECB:

• will allow significant banks to temporarily operate below the level of capital defined by (i) the Pillar 2 Guidance, (ii) the capital conservation buffer and (iii) the liquidity coverage ratio;

• will allow significant banks to partially use capital instruments that do not qualify as Common Equity Tier 1 capital to meet the Pillar 2 Requirements; and

• is discussing individual measures with significant banks. 

ECB announces Pandemic Emergency Purchase Programme

On 18 March 2020, the ECB announced a €750bn Pandemic Emergency Purchase Programme (PEPP) in light of COVID-19 developments. The ECB will:

• conduct asset purchases until the end of 2020 that will include all the asset categories eligible under the existing asset purchase programme (APP), which includes (among other assets) covered bonds, asset-backed securities and corporate bonds. The ECB will, if necessary, deviate from its usual capital key of the national central banks (eg allowing relatively more Southern European asset purchases) and permitting Greek government securities purchases.

• expand the range of eligible assets under the corporate sector purchase programme (CSPP) to include non-financial commercial paper, making all commercial papers of sufficient credit quality eligible for purchase under CSPP.

• ease the collateral standards by adjusting the main risk parameters of the collateral framework. In particular, the ECB intends to expand the scope of Additional Credit Claims (ACC) to include claims related to the financing of the corporate sector. This will ensure that counterparties can continue to make full use of the Eurosystem's refinancing operations.

The measures are intended to boost corporate lending by enabling banks to use their loans, securities and other assets for sale and/or collateral posting to the ECB.

EBA measures

On 12 March 2020, the European Banking Authority (EBA) published its decision to take the following measures:

• the postponement of the EU-wide stress test exercise to 2021; and

• the recommendation to national regulators to plan supervisory activities in a pragmatic and flexible way and possible postpone those deemed non-essential.  

DNB on business continuity plans

On 6 March 2020, the Dutch Central Bank (DNB) issued a press release in which it emphasised the (potential) impact on the continuity of a pandemic (specifically COVID-19) on financial firms. Furthermore, DNB expects that the following items are addressed in financial firms' business continuity planning:

• pro-actively tracking the developments of COVID-19 and setting up a multidisciplinary team;

• mapping and analysing potential consequences of COVID-19;

• assessing the adequacy existing business continuity plans (BCPs), also taking into account potential operation consequences of COVID-19;

• explicitly including pandemic scenarios in test strategies of BCPs;

• taking into account the changing behaviour of customers and staff; and

• verifying that external (critical) service providers have in place adequate measures and are sufficiently prepared for COVID-19.

DNB measures to lower buffer requirements

On 17 March 2020, the DNB published its decision to take the following measures:

• the current systemic buffers of 3% of global risk-weighted exposures will be lowered to 2.5% for ING, 2% for Rabobank and 1.5% for ABN Amro; and   

• the introduction of a floor for mortgage loan risk-weighting in IRB approaches (which floor was consulted by DNB in October 2019) will be postponed.

These measures are intended to enable banks to continue lending to the real economy in the face of rising losses. DNB emphasises that banks should use the capital that is freed up by these measures to support lending and not to pay dividends or share repurchases.

Furthermore, DNB states that it is considering measures to limit the impact of COVID-19 on the pension fund and insurance sector as well.

In relation to the pension fund sector, DNB stated it:

• will take into account the availability of pension funds' staff when executing (or initiating) supervisory investigations;

• is considering individual requests for postponement in relation to recovery plans; and

• is evaluating and considering measures in relation to funding ratios and payment arrangements for fund contributions.

When does this become relevant?

EMSA's recommendations and statements are relevant immediately.

The additional net short position reporting threshold initially applies from 16 March 2020 until 16 June 2020, but this term may be extended if necessary.

The EBA's, the ECB's and DNB's measures have immediate effect and will remain in force as long as necessary. Once the situation is back to normal, DNB will compensate the systemic buffer reduction by gradually increasing the countercyclical capital buffer to 2% of Dutch risk-weighted exposures.

Any further thoughts?

As regards the additional net short position reporting threshold, we are aware of differing approaches from various regulators in different jurisdictions regarding whether or not 'baseline' disclosures (those made in respect of existing positions above the new 0.1% threshold) are required.