EU Regulatory Update
Council of the European Union Work Programme
Recently in January, the Maltese Presidency of the Council of the European Union published its work programme for 1 January 2017 to 30 June 2017. With regard to financial services, the Presidency intends to: (i) continue work on implementing the Action Plan for building the Capital Markets Union, including finalizing discussions with the European Parliament on developing new common rules on securitization and creating a European framework for simple, transparent, and standardized securitization; (ii) continue negotiations with the European Parliament to reach a political agreement on the proposed amendment to the Regulation on European Venture Capital Funds (345/2013/EU) (EuVECA Regulation) and the Regulation on European Social Entrepreneurship Funds (346/2013/EU) (EuSEF Regulation); (iii) continue work on the Commission’s proposed Regulation on the recovery and resolution of central counterparties (CCPs); and (iv) launch a planned review of the European Market Infrastructure Regulation (648/2012/EU) (EMIR) in the first quarter of 2017.
Privacy and Electronic Communications
On 10 January, as part of the Digital Single Market Strategy, the European Commission published a proposed Regulation (COM(2017)10) concerning the protection of personal data in electronic communications that would repeal the Privacy and Electronic Communications Directive (2002/58/EC)(ePrivacy Directive) to ensure consistency with the General Data Protection Regulation (EU) 2016/679. In a Regulatory Fitness and Performance Programme (REFIT Evaluation) conducted by the Commission, the Commission found that the ePrivacy Directive had failed to fully meet its objective. The Commission indicated that the unclear drafting of certain provisions and ambiguity in legal concepts jeopardized cross-border harmonization of data privacy and that certain provisions, such as the consent rule established to protect the confidentiality of terminal equipment, created unnecessary burden on businesses and consumers. In addition, the Commission published a Communication to the Council of the EU and European Parliament setting out a strategic approach to the issue of international personal data transfers, and a proposed Regulation on the protection of individuals with regard to the processing of personal data by the Union institutions, bodies, offices, and agencies.
On 17 January, Prime Minister Theresa May delivered a speech setting out the plan for the UK with respect to Brexit. Among other matters, Prime Minister May indicated that the UK will not retain membership in the EU single market, but will seek the “freest possible trade” with the European countries and to sign new deals with others around the world. Prime Minister May also indicated that the UK government will put the final agreement between the UK and EU to a vote in both Houses of Parliament before the agreement comes into force.
Product Intervention Powers
On 12 January 2017, the European Securities and Markets Authority (ESMA)published an opinion seeking to amend the scope and application of product intervention powers under the Markets in Financial Instruments Regulation (600/2014/EU) (MiFIR). As of 3 January 2018, ESMA and national competent authorities will have the ability to apply MiFIR intervention powers to temporarily prohibit or restrict, within the EU, the marketing, distribution, or sale of certain financial instruments, including units or shares in undertakings for the collective investment in transferable securities (UCITS) and alternative investment funds (AIFs). However, ESMA and the national competent authorities may only apply those intervention powers to Markets in Financial Instruments Directive (2004/39/EC) (MiFID) firms and credit institutions, and not to UCITS management companies and alternative investment fund managers (AIFMs). ESMA noted that this has the potential of creating regulatory arbitrage between MiFID firms and credit institutions, and UCITS management companies and AIFMs in the offering of financial instruments, and issued an opinion stating that ESMA and the national competent authorities should have the power to apply the intervention power to UCITS management companies and AIFMs as well.
On 12 January, the Financial Stability Board (FSB) published its policyrecommendations to address structural vulnerabilities from asset management activities. The FSB noted that asset management activities have increased significantly over the past decade, especially through open-ended funds that offer daily redemptions to their investors and in certain asset classes on less actively traded markets. While historical evidence has not suggested that these developments would create financial instability in periods of stress, the FSB highlighted that growth in the sector and increasing holdings of less liquid assets by investment funds suggest that risks may have increased in recent years. In response, the FSB issued 14 policy recommendations to address structural vulnerabilities from asset management activities that could potentially present financial stability risks. These include recommendations addressing: (i) liquidity mismatch between fund investments and redemption terms and conditions for open-ended fund units; (ii) leverage within investment funds; (iii) operational risk and challenges at asset managers in stressed conditions; and (iv) securities lending activities of asset managers and funds. In addition, the FSB recommends that relevant authorities review their existing regimes and consider adjusting them, as appropriate, to ensure potential financial stability risks are addressed in a forward-looking and internationally consistent manner.
Limitations and Exemptions of Regulatory Reporting
On 23 December 2016, the European Insurance and Occupational Pensions Authority (EIOPA) published a report assessing the use by insurance and reinsurance undertakings of exemptions and limitations allowed by national competent authorities on regular supervision reporting under Solvency II (2009/138/EC). EIOPA noted that the report provided only factual information based on the first Solvency II reporting submissions, and did not identify any trends or provide any conclusions. Among other findings, the report indicated that: (i) more than 900 insurers, accounting for almost 30% of all undertakings, benefited from limitations from quarterly reporting; (ii) eleven national competent authorities have granted limitations from reporting; and (iii) in all member states, the market share of undertakings benefiting from limitations remains below the maximum of 20% as mandated by Solvency II. EIOPA indicated that it intends to conduct follow-up analyses on the application of exemptions and limitations from reporting by engaging on a bilateral basis with national competent authorities.
EU-U.S. Insurance Dialogue Project
On 9 January, the EU – U.S. Insurance Dialogue Project held a meeting, with experts from the EU and U.S. Department of the Treasury, to discuss cybersecurity efforts in financial services and to enhance Transatlantic coordination on these and related issues. Participants were updated on current insurance cybersecurity initiatives in both the EU and U.S. and identified the common priorities of monitoring emerging risks, protecting critical infrastructure, and engaging with insurer sector stakeholders. The Insurance Dialogue Project intends to hold further sessions throughout 2017 to obtain expert and technical input with respect to cybersecurity issues.
Bermuda Memorandum of Understanding
On 17 January, EIOPA and the Bermuda Monetary Authority (BMA) signed aMemorandum of Understanding (MoU) providing the framework for regular exchanges of information between the regulatory agencies. In addition, the MoU sets out the basis for further cooperation and increased mutual understanding with the goal of ensuring optimal supervision for insurance and reinsurance groups with international activities in the EU and Bermuda.
On 11 January, ESMA published a follow-up report to its February 2015 peer review on how national competent authorities should supervise and enforce the best execution obligation under MiFID. The report indicated that there were clear improvements in the level of attention paid to the supervision of best execution requirements, and that in general regulators are adopting a more pro-active supervisory approach to monitoring compliance as well as giving such requirements higher prioritization as a conduct of business issue.
MiFID II and MiFIR
On 16 January, ESMA released a briefing summarizing the technical requirements and templates of the transaction reporting requirements under the Markets in Financial Instruments Directive (2014/65/EU)(MiFID II) and MiFIR. The briefing covers requirements regarding: (i) instrument reference data; (ii) data reporting for transparency and double volume cap; and (iii) transaction reporting.
On 22 December 2016, the Chairs of the European Supervisory Authorities (ESAs)published a response to the European Commission’s proposed amendments of 10 November 2016 to draft regulatory technical standards (RTS) jointly submitted by the ESAs on the key information documents (KIDs) for the Packaged Retail and Insurance-Based Investment Products (1286/2014/EU) (PRIIPs Regulation). The ESAs indicated that they could not reach a consensus on the amended draft RTS, especially with regard to the treatment of multi-option products, the criteria to determine whether a comprehension alert should be included in a KID, and the provisions in the RTS on the credit risk mitigation factors for insurers. The ESAs did, however, reach a consensus on performance scenarios, raising concerns over the credibility of the “moderate” scenario in the amended draft RTS and recommending the Commission adopt the methodology contained in the original draft RTS. The ESAs also provided an alternative option for the Commission to consider as part of the review of the PRIIPs Regulation, due by 31 December 2018, should the Commission amend the RTS along the lines it has proposed.
On 23 December 2016, Regulation (EU) 2016/2340 (Amending Regulation) waspublished in the Official Journal. This Regulation delayed the application of the Regulation on KIDs for PRIIPs Regulation by 1 year from 31 December 2016 to 1 January 2018. The Amending Regulation became effective on 24 December 2016.
Mandatory Peer Review Methodology for CCPs
On 5 January, ESMA published the methodology for conducting mandatory peer reviews of competent authorities in relation to the authorization and supervision of CCPs under EMIR. The methodology covers: (i) the topic for a peer review; (ii) the assessment specifications; (iii) the questionnaire to be completed by respondents; (iv) the report generated from the questionnaires; (v) and implementation and follow-up of the report.
On 17 January, ESMA published the official translations of its final guidelines on commodity derivatives under the Market Abuse Regulation (596/2014/EU)(MAR). The guidelines clarify one element of the definition of “inside information” with regard to commodity derivatives under MAR, and establish a non-exhaustive list of information that is reasonably expected or required to be disclosed in accordance with legal or regulatory provisions in EU or national law, market rules, contract, practice or custom, on the relevant commodity derivatives markets or spot markets.
Duplicative Requirements under CRR and EMIR
On 18 January, the European Banking Authority (EBA) and ESMA published a jointreport on the functioning of the Capital Requirements Regulation (575/2013/EU) (CRR) with EMIR. The report focused on institutions operating as CCPs and assessed potential duplication of requirements for derivatives transactions between the CRR and EMIR with the aim of avoiding regulatory risks and undue monitoring costs. Among other topics, the report addressed the duplication of requirements with respect to: (i) capital requirements for CCPs holding a bank licence; (ii) leverage and liquidity for CCPs; (iii) large exposures that affect the credit risk mitigation of CCPs; (iv) differences in the application of margin period of risk; and (v) clients’ exposures to clearing members. Based on their analysis, the EBA and ESMA found that the application of the CRR could generate certain duplicative requirements already covered under EMIR, and recommended the European Commission provide exceptions to those requirements.
UPCOMING EVENTS AND DEADLINES
o 20 January: IAIS consultation on its draft stakeholder engagement plan closes (extended from 30 December).
o 31 January: ESMA consultation on supervision fees for trade repositories under SFTR and EMIR closes.
o 15 February: ESMA consultation on draft RTS for data to be made publicly available by trade repositories and to the relevant authorities under EMIR closes.
o 21 February: International Organization of Securities Commissions (IOSCO) consultation on practices by market regulators in relation to incentives for order routing that may influence the treatment of clients by intermediaries closes.
o 28 February: EIOPA consultation on the potential harmonization of recovery and resolution frameworks for insurers closes.