A reminder of the 10% rule
In light of the current COVID-19-induced market rollercoaster, we remind firms of the MiFID II “10% rule”. This rule requires that firms providing portfolio management services to clients inform these clients if the overall value of their portfolio depreciates by 10% from the beginning of the last reporting period – and each 10% thereafter.
The disclosure should be made by the end of the business day in which the threshold is exceeded (or the end of the following business day where the threshold is exceeded on a non-business day).
MiFID investment managers and AIFMs providing MiFID portfolio management services to clients (as delegates or to segregated accounts) should keep this requirement in mind where they see significant drops in the value of the portfolios they manage on a day to day basis as a result of the continuing volatility in the markets – and should make sure these disclosures are made in a timely manner.
As a result of the volatility and the sell-off of global equities, EU regulators have also imposed a short-selling ban on 85 (mainly Italian and Spanish) stocks. Regulators in countries such as Turkey, China and South Korea have also restricted short selling in an effort to stabilise their markets and stem outflow of investment from their economies.
The FCA ban became effective immediately on 13 March 2020 and extends to the end of the trading day. We recommend that firms check the short selling restrictions and prohibitions page of the FCA website regularly to look out for further restrictions that may be imposed by the FCA on the short selling of stocks.
This prohibition covers short sales as defined in Article 2.1(b) of the Short Selling Regulation ((EU) No 236/2012); in essence, covered short sales of shares. Unlike certain past prohibitions, this set of restrictions does not presently apply to derivative instruments of the named stocks (a measure available to regulators under the exceptional circumstances provisions in Article 20). Note also that this applies only to taking new positions in the said instrument – there is no obligation to close down existing shorts.
For More Information
To discuss anything covered in this alert, contact Ruth Avenell, Martin Lovick, or your usual ACA consultant.
If you have any queries on preparing for disruptions due to coronavirus (COVID-19) including business continuity planning development and implementation, please click here to view our guidance page.