EU Regulatory Update
INTERNATIONAL AND CROSS-BORDER
On 17-18 March, the G20 Finance Ministers and Central Bank Governors held a meeting to discuss several topics, including, among others: (i) progress on its financial sector reform agenda; (ii) FinTech; (iii) cyber-risk; and (iv) financial inclusion.
o Financial Sector Reform Agenda: The participants endorsed the FSB’s 12 January 2017 policy recommendationsto address structural vulnerabilities from asset management activities, which focused on the collection of information, identifying improvements to required disclosures, and increasing the use of liquidity risk management tools. The policy recommendations focused on: (i) increasing information and transparency regarding liquidity mismatch between fund investments and redemption terms and conditions for open-ended fund units; (ii) measuring and monitoring leverage use by investment funds; (iii) ensuring risk management frameworks and practices are proportionate to operational risk and challenges faced by asset managers in stressed conditions; and (iv) indemnifications provided by asset managers to their clients in relation to securities lending activities. The participants: (i) urged IOSCO to develop concrete measures to implement the FSB’s recommendations; and (ii) asked the FSB to report on the progress of the implementation of these recommendations before the G20 Summit in July 2017. They indicated that they will continue to closely monitor and address emerging risks, particularly those systemic risks that could leave financial system vulnerable, such as those associated with “shadow banking” and other market-based financial activities. They also: (i) requested that the FSB present its assessment of the adequacy of the monitoring and policy tools available to address risks from shadow banking and whether there is need for further policy attention by the G20 Summit; (ii) reiterated the importance of the work plan to address misconduct risks in the financial sector, on which a report will be presented by the FSB at the G20 Summit in July 2017; and (iii) stated they look forward to the FSB’s work to develop a structured framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms, on which a report will be presented by the FSB at the G20 Summit in July 2017.
o FinTech: The participants encouraged all countries to closely monitor developments in digital finance, including consideration of cross-border issues. They also welcomed the FSB’s work on identification of key regulatory issues associated with technologically enabled FinTech as discussed in the FSB’s 27-28 February 2017 meeting, which addressed “regulatory and supervisory issues raised by FinTech with respect to financial stability.”
o Cyber-Risk: The participants requested that the FSB assess existing relevant G20 and international regulations and supervisory practices concerning the use of information and communication technologies to disrupt financial services industries. The FSB will report on their progress on assessing these regulations and supervisory practices by the G20 Summit in July 2017 and produce a report by October 2017.
o Financial Inclusion: The participants: (i) encouraged adequate coverage of the opportunities and challenges of digital financial inclusion identified in the updated G20 Financial Inclusion Action Plan; (ii) encouraged countries to implement the G20 High Level Principles for Digital Financial Inclusion; and (iii) emphasized the importance of enhancing financial literacy and consumer protection.
Financial Stability Board (FSB)
On 17 March, the FSB published a letter sent by FSB Chair Carney to the G20 Finance Ministers and Central Bank Governors. The letter established the priorities for the G20 German Presidency, and warned against losing momentum in completing the post-crisis reform agenda. The priorities include: (i) transforming “shadow banking” into resilient market-based finance, including addressing structural vulnerabilities in asset management; (ii) making the derivatives safer by making progress on the post-crisis reforms to OTC derivatives markets, and delivering coordinated guidance on CCP recovery and resolution; (iii) supporting full and consistent implementation of post-crisis reforms, including the development of a structured framework for post-implementation evaluation; and (iv) addressing new and emerging vulnerabilities, including misconduct risks and climate-related financial risks.
On 27-28 February, the FSB held a two day meeting to discuss the implementation progress and effects of financial reforms. Among other topics, the FSB discussed: (i) the implementation and effects of post-crisis reforms, including a review of evolving shadow banking risks, the adequacy of tools established to monitor these risks, as well as a review of the implementation and effects of OTC derivatives market reforms; (ii) an interim report seeking to quantify the systemic implications of interdependencies among CCPs, major clearing members, and financial service providers (which will contribute to the FSB’s work on CCP resilience, recovery planning, and resolvability); (iii) a progress report on the governance arrangements for the unique transaction identifiers (UTI) and unique product identifiers (UPI), on which the FSB intends to publish a consultation paper; (iv) an update on the FSB’s development of a consistent framework for evaluating the post-implementation effects of the G20 reforms, which will be subject to a consultation and published before the G20 Summit in July 2017; (v) updates on work to address misconduct risk, such as the FSB’s 2014 recommendations for reform of major interest rate benchmarks, a draft consultation paper on the use of compensation tools to address misconduct, and international efforts to strengthen governance frameworks to mitigate misconduct risks; (vi) regulatory and supervisory issues raised by FinTech with respect to financial stability; and (vii) IAIS’s workplan to advance its systemic risk assessment for insurers.
European Supervisory Authorities (ESAs)
On 9 March, European Parliament’s Economic and Monetary Affairs Committee (ECON) discussed third-country equivalence, with the European Commission and the ESAs. Among other things, the European Parliament addressed third-country issues in its resolution on “Stocktaking and Challenges of the EU Financial Services Legislation” in January 2016. In connection with the exchange, European Commission Director-General Guersent delivered a statement about the European Commission’s work regarding equivalency, outlining the EU’s approach to third-country equivalence. EIOPA Chair Bernardino also delivered a statement regarding EIOPA’s work on equivalence, describing the European Commission’s power under Solvency II to make equivalence decisions with respect to group solvency, group supervision, and reinsurance. Bernardino’s statement included information on the duration of equivalence decisions, equivalence criteria, EIOPA’s assessment process, and EIOPA’s equivalence assessments.
On 21 March, the European Commission launched a consultation on the operation of the ESAs. The consultation focuses on the tasks, powers, governance, supervisory architecture, and funding of the ESAs. The consultation also requests comment on granting new powers to the ESAs, including, among others: (i) granting EIOPA authority to approve and monitor the internal models of cross-border groups; and (ii) extending ESMA’s powers to direct supervision of data providers, pan-European investment fund schemes, and post trading market infrastructure. The consultation period closes on 16 May 2017.
International Association of Insurance Supervisors (IAIS)
On 28 February, the IAIS announced that it currently is developing an activities-based approach to assessing potentially systemically risky activities in the insurance sector as part of its systemic risk assessment and policy workplan. The workplan consists of four elements: (i) developing an activities based-approach at the insurance sector level; (ii) finalizing any policy measures to address potential systemically risky activities as part of ComFrame to be adopted in 2019 (including those contained in the Insurance Capital Standards (ICS) Version 2.0); (iii) releasing the revised 2019 systemic risk assessment methodology for public consultation by the end of 2018 (to be adopted in 2019); and (iv) making the planned revisions to higher loss absorbency (HLA) requirements based on ICS Version 2.0 rather than on the predecessor Basic Capital Requirement, as well as applying the revised HLA requirements to any global systemically important insurers identified in 2020 (with an implementation date of 2022).
On 3 March 2017, the IAIS launched a consultation on revising the Insurance Core Principles (ICPs) and integrating into them the ComFrame framework, or the common framework for the supervision of internationally active insurance groups (IAIGs). In June 2016, the IAIS restructured and integrated the ComFrame framework into the relevant ICPs. IAIS is now seeking feedback on revised ICPs and draft ComFrame material covering: (i) the structure and assessment methodologies of the ICPs and ComFrame framework; (ii) governance of IAIGs, including ComFrame-specific material integrated with ICP 5 (Suitability of Persons), ICP 7 (Corporate Governance) and ICP 8 (Risk Management and Internal Controls); (iii) supervisor and supervisory measures relating to IAIGs, including revised ICP 9 (Supervisory Review and Reporting) and revised ICP 10 (Preventive Measures, Corrective Measures and Sanctions); (iv) supervisory cooperation and coordination, including revised ICP 3 (Information Sharing and Confidentiality Requirements) as well as revised ICP 25 (Supervisory Cooperation and Coordination); and (v) resolution of IAIGs, including revised ICP 12 (Exit from the Market and Resolution). The consultation period closes on 1 June 2017.
IOSCO: Cross-Border Enforcement Cooperation
On March 31, IOSCO approved the Enhanced Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (EMMoU). The EMMoU provides a mechanism for securities regulators to share investigative information by granting enforcement powers that enable IOSCO members to: (i) access and share audit work papers and related information; (ii) compel physical attendance for testimony; (iii) freeze assets or provide advice or information on how to freeze assets; (iv) obtain and share existing internet service provider records; and (v) obtain and share existing telephone records.
On 29 March, UK Prime Minister Theresa May triggered Article 50, starting the multi-year process for the UK’s exit from the EU. European Council President Tusk announced an EU summit on 29 April 2017 to adopt guidelines for the Brexit talks. Tusk emphasized that the EU’s main priority for negotiations must be creating as much certainty and clarity as possible for all citizens, companies, and Member States.
EuVECA and EuSEF Amending Regulation
On 22 March, the European Parliament’s ECON voted to adopt amendments to the European Commission’s proposal (COM (2016) 0461) to amend the regulations on European venture capital funds (EU) 345/2013 (EuVECA) and European social entrepreneurship funds (EU) 346/2013 (EuSEF). Among other things, the amendments propose to: (i) extend the range of managers eligible to set up and manage EuVECA and EuSEF funds; (ii) extend the range of companies in which EuVECA funds can invest, to include unlisted companies with up to 499 employees; (iii) make the cross-border marketing of the funds easier and cheaper; and (iv) enhance the supervisory role of ESMA.
INSURANCE & PENSION
Report on Functioning of Colleges of Supervisors and Priorities for 2017
On 1 March, EIOPA published its 2016 year-end report on the “functioning of Colleges of Supervisors” and the supervisor’s priorities for 2017. EIOPA observed that during the first year of Solvency II’s implementation, the Colleges of Supervisors had increased interactions and discussions, as well as higher quality on the information exchanged during the meetings of Colleges of Supervisors. EIOPA notes however, that particular attention should be made: (i) to the consistency and quality of the Own Risk and Solvency Assessment reports and internal models; (ii) to the practices for enhanced risk assessment; (iii) to the sub-group supervision; and (iv) to the optimization of EIOPA’s Central Repository. For 2017, EIOPA urges the Colleges of Supervisors to increase their effectiveness and efficiency in the supervision of cross-border groups, in the exchange of information, and in the assessment of joint risks. To ensure the robustness and reliability of the Solvency II balance sheets, EIOPA indicated that it intends to address the differences in the application of valuation, the use of options, and the impact of options on financial and solvency positions
On 3 March, in order to assist with EIOPA’s second Long-Term Guarantees Report due later this year, EIOPArequested insurance and reinsurance undertakings information from the European Economic Area (EEA) that is subject to Solvency II. EIOPA seeks information related to: (i) the impact of the symmetric adjustment mechanism to the equity risk charge on the financial position of undertakings; (ii) the impact of the extrapolation of risk-free interest rates on the financial position of undertakings; and (iii) losses due to bond defaults and downgrades of bonds in matching adjustment portfolios. The consultation period for information to be submitted to national supervisory authorities closes on 15 June 2017. National supervisory authorities should report to EIOPA by 16 July 2017.
Initiatives to Empower the Pensions Sector
On 27 March, EIOPA Chair Bernardino delivered a[European%20Parliament%20Public%20Hearing%20on%20CCP%20recovery%20and%20resolution]speechon EIOPA’s initiatives to empower the pensions sector. Among other things, he: (i) stressed the need to promote consistency and supervisory convergence in key areas of the EU regulation of pension funds, particularly regarding risk assessment and transparency of defined benefit schemes; (ii) indicated that he expects the standardised risk assessments established by the opinion on a common framework for risk assessment and transparency of Institutions for Occupational Retirement Provision (IORPs), published in April 2016, to be applied proportionately to minimize the burden on smaller IORPs; (iii) stated that the objectives of the second stress test that EIOPA will launch in May 2017 are to assess the resilience of IORPS to an adverse market scenario and to analyse the transmission mechanism of pension funds; (iv) believed that the design of a simple and transparent regime for defined contribution occupational pension schemes could significantly improve the functioning of the internal market by strengthening the role, development, and geographical spread of cross-border defined contribution pensions across the EU; and (v) indicated that the pan-European personal pension product should allow EU citizens to invest in a balanced portfolio including assets such as equities, properties, infrastructure, and green technology.
Methodology to Derive the Ultimate Forward Rate
On 24 March, the European Parliament’s ECON published correspondence (dated 14 March 2017), with EIOPA Chair Bernardino concerning EIOPA’s work on the methodology to derive the ultimate forward rate (UFR). EIOPAconsulted on this topic in April 2016 and requested additional impact assessments to be conducted on the impact of the proposed UFR methodology. In response to the request, Bernardino stated that the results of calculations on a representative sample of 336 insurance and reinsurance undertakings from 29 countries in the EEA show that the impact of the changes to the UFR is “very small and manageable” by insurance and reinsurance undertakings. Bernardino indicated, however, that EIOPA’s methodology seeks to strike the right balance between stability over time and changes in long term expectations and indicated that EIOPA’s Board of Supervisors intends to decide on the URF methodology at its 30 March 2017 meeting, although EIOPA has yet to publish the methodology.
FinTech Developments in the Insurance Industry
On 14 March 2017, IAIS published a report on the potential impact of FinTech on insurance sector competitiveness, consumer choice, interconnectedness, business model viability, and regulatory oversight. The report includes: (i) a description of main types of innovation that fall within the scope of InsurTech; (ii) factors that promote InsurTech innovations, such as the increased use of new technologies within the financial sector, entrepreneurial activity, and increased availability of data and analytical tools; and (iii) possible impacts of FinTech based on a scenario analysis. The scenario analysis is designed to draw out possible implications for insurance supervision (capturing prudential and business conduct issues), and to identify challenges facing supervisors.
Capital Markets Union and National Barriers to Capital Flows
On 27 February, as part of its CMU initiative, the European Commission published a report on addressing national barriers to capital flows. The report examines and discusses several barriers to capital flows across the EU, and proposes a roadmap for member states to adopt. Among others, the barriers examined include: (i) barriers to the cross-border distribution of investment funds, such as marketing requirements, administrative arrangements, and regulatory fees for cross-border marketing; (ii) requirements on investments by pension funds; (iii) differing national approaches to crowdfunding; (iv) residence requirements imposed on the managers of financial market players; (v) insufficient financial literacy; (vi) differences in national insolvency regimes; and (vii) discrimination and burdensome procedures for withholding tax relief. The report also indicated several barriers that might be examined in the future, including: (i) national reporting requirements imposed on top of existing EU legislation; (ii) barriers to the online distribution of investment funds; (iii) barriers faced by smaller institutional investors which are not eligible for a MiFID passport; and (iv) barriers related to the distribution of retail financial products.
EMIR: Clearing Obligations for Counterparties
On 16 March, the European Commission adopted a Delegated Regulation (C(2017) 1658) under EMIR. The Regulation extended the date of application of the clearing obligation for counterparties in “Category 3” from 21 June 2017 and 9 February 2018 (depending on the type of transaction) to 21 June 2019. “Category 3” signifies financial counterparties belonging to a group whose aggregate positions in OTC derivatives are €8 billion or below.
On 3 April, ESMA published an updated set of Q&As to facilitate the implementation of revised reporting RTS and ITS adopted on 21 January 2017 that will become applicable on 1 November 2017 under EMIR. The Q&As also include an updated question regarding the obligation to report outstanding trades under EMIR.
Central Securities Depository Regulation
On 23 March, ESMA published final reports on two set of guidelines relating to the implementation of the Central Securities Depository Regulation (909/2014/EU) (CSDR). The guidelines concern: (i) access by a central securities depository (CSD) to the transaction feeds of a CCP or a trading venue; and (ii) CSD participant default rules and procedures.
Credit Rating Agencies Regulation
On 4 April, ESMA published a consultation paper updating its guidelines on the application of the endorsement regime under the Credit Rating Agencies Regulation (EC) 1060/2009 (CRA Regulation). The endorsement regime allows credit ratings issued by a third-country CRA that are endorsed by an EU CRA to be used for regulatory purposes in the EU. The consultation paper: (i) clarifies that the endorsing EU CRA must be able to demonstrate that the conduct of the third-country CRA fulfils requirements that are as stringent as the EU requirements and that ESMA will no longer consider this condition automatically satisfied when a third-country CRA is based in a country whose legal and supervisory framework has been positively assessed by ESMA; and (ii) clarifies that ESMA has the authority to request information directly from the endorsing EU CRA regarding the conduct of the third-country CRA. The consultation period closes on 3 July 2017 and the revised guidelines are expected to be published in Q4 of 2017.
On 30 March, ESMA published an updated version of its Q&As on the implementation of Regulation (EU) 462/2013 (CRA III). The updated Q&As include a new section on disclosure and presentation of credit ratings.
Non-Equity Consolidated Tape RTS
On 31 March, ESMA published its RTS specifying the scope of the consolidated tape for bonds, structured financial products, emission allowances, and derivatives under MiFID II. Consolidated tape providers collect post-trade information published by trading venues and approved publication arrangements and consolidate them into a continuous live data stream available to the public. The RTS specify: (i) the possibility for consolidated tape providers to specialize in one or more asset classes; and (ii) the approved publication arrangements and trading venues that have to be included in the consolidated tape based on the required coverage ratio of 80 percent of all transactions published in an asset class in the EU. The European Commission has three months to endorse the RTS.
Benchmarks Regulation RTS/ITS
On 30 March, ESMA published its final report containing the draft regulatory and implementing technical standards (RTS and ITS) under the Benchmarks Regulation (EU) 2016/1011. The draft RTS and ITS set out the behaviors and standards expected of administrators and contributors, and will ensure that financial benchmarks are produced in a transparent and reliable manner.
Reporting Standards for SFTR
On 31 March, ESMA published a final report on standards implementing the Securities Financing Transaction Regulation, which require market participants to report details of securities financing transactions (SFTs) to approved trade repositories. The final standards provide detailed provisions on: (i) SFT reporting; (ii) data collection and availability; (iii) defined access levels for different public authorities; (iv) registration of trade repositories; and (v) exchange of data on sanctions between authorities. ESMA is also proposing certain amendments to the existing standards implementing EMIR to ensure a level playing field for market participants with regards to registration and access rules. The European Commission has three months to endorse the final standards, and if endorsed, the final standards are expected to enter into force by the end of 2017.
Governance Arrangements for the Unique Transaction Identifier
On 13 March, the FSB published a consultation document on proposed governance arrangements for the global UTI. The consultation document identifies: (i) key criteria for the UTI governance arrangements; (ii) the rationale for a number of those criteria; (iii) UTI governance functions to be performed, including mapping those functions into three broad areas of governance; (iv) a proposal for the allocation of some functions to specific bodies; and (v) options for the allocation of other functions. As part of the key criteria, the FSB proposes that governance arrangements seek to avoid unnecessary complexity and take into account existing resources and arrangements where possible. The consultation period closes on 5 May 2017 and the FSB intends to hold a stakeholder roundtable on UTI governance on 25 April 2017.
Consumer Financial Services
On 23 March, the European Commission published its Action Plan which detailed its strategy to strengthen the EU Single Market for retail financial services. The Commission aims to harness the potential of digitalization and FinTech developments to improve consumer access to financial services across the EU. The Action Plan contains three work streams: (i) increasing consumer trust and empowering consumers when buying services at home or from other Member States; (ii) reducing legal and regulatory obstacles to cross-border business; and (iii) supporting the development of innovative digital technologies. The Commission also published an Annex and FAQsfor the Action Plan.
MiFID II and MiFIR Q&As
On 4 April, ESMA published an updated set of Q&As on the implementation of investor protection standards, such as best execution, suitability, post sales reporting, and inducements, under MiFID II and MiFIR.
On 31 March, ESMA published an updated set of Q&As on the application of MiFID to the marketing and sale of financial contracts for difference and other speculative products to retail clients, such as binary options and rolling spot forex.
FINTECH AND MARKET REGULATION
On 23 March, the European Commission launched a consultation on FinTech to assess whether current regulatory and supervisory rules are supporting developments in FinTech in line with the Commission’s three core principles of technological neutrality, proportionality, and integrity. The consultation contains four broad themes, which include: (i) fostering access to financial services for consumers and businesses; (ii) reducing operating costs and increasing efficiency; (iii) making the EU Single Market more competitive by lowering barriers to entry; and (iv) balancing greater data sharing and transparency, security, and privacy needs. The consultation period closes on 15 June 2017, and the Commission intends to present the results of the consultation as an EU strategy sometime in the future.
FinTech and Digital Innovation
On 28 February, European Commission Vice President Dombrovskis delivered a speech on FinTech and Digital Innovation. Vice President Dombrovskis mentioned the work of the Commission’s Task Force on Financial Technology and indicated that it will soon launch a public consultation on the challenges and opportunities that FinTech offers to consumers, the industry, and the market. He also indicated that the Commission will soon publish its Action Plan, resulting from the Commission’s 2015 Green Paper consultation on retail financial services. Building on the use of e-ID and e-signature schemes that member states have adopted, the Action Plan will include provisions on new methods of remote identification in compliance with anti-money laundering rules.
Distributed Ledger Technology
On 27 February, the CPMI published a report which presented an analytical framework for central banks and other authorities to review and analyze the use of blockchain and other distributed ledger technology (DLT) in payment, clearing, and settlement activities. The report focused on four aspects of DLT arrangements, which include: (i) understanding the scope of the arrangements, such as the functionality and nature of the arrangements; (ii) analyzing the arrangement’s implications for efficiency; (iii) analyzing the arrangements’ implications for safety; and (iv) analyzing the arrangement’s border financial market implications. The report indicated that the framework should be viewed as a starting point for understanding DLT arrangements and that it does not prescribe or suggest particular design elements.
UPCOMING EVENTS AND DEADLINES
o 25 April: FSB UTI governance roundtable.
o 28 April: EIOPA consultation on complex insurance-based investment products under the Insurance Distribution Directive closes.
o 1 May: IAIS consultation on group corporate governance closes (extended from 3 April).
o 5 May: FSB consultation on UTI governance closes.
o 16 May: European Commission consultation on the operation of the ESAs closes.