EU Regulatory Update
ESRB Annual Report 2016
On 28 July, the European Systemic Risk Board (“ESRB”) published its Annual Report 2016 on the financial stability of the EU from 1 April 2016 to 31 March 2017. The Report states that the ESRB “continued to identify four main risks to financial stability in the EU”: (i) “a re-pricing of risk premia in global financial markets”; (ii) “weaknesses in balance sheets of banks, insurers and pension funds”; (iii) “debt sustainability challenges in sovereign, corporate and household sectors”; and (iv) “shocks and contagion from the non-bank financial sectors to the wider financial system.” The ESRB used these findings as the basis for its “design of adverse scenarios for the EU-wide stress tests of the European Supervisory Authorities” (“ESAs”). It also indicated that during the review period it provided “adverse scenarios for the stress test of central counterparties . . . by the European Securities and Markets Authority . . . and the stress test of occupational pension funds by the European Insurance and Occupational Pensions Authority.”
Solvency II – Updated Q&As
On 18 August, EIOPA published two sets of updated Q&As relating to Solvency II (2009/138/EC):
o Q&As on Commission Implementing Regulation (EU) 2015/2450 regarding the templates for the submission of information to supervisory authorities.
o Q&As on Commission Delegated Regulation (EU) 2015/35 supplementing Solvency II.
ESRB – Reports on Macroprudential Aspects of Insurance
On 17 August, the ESRB published two reports on the macroprudential aspects of insurance:
o Recovery and Resolution for the EU Insurance Sector: a Macroprudential Perspective. The report “focuses on a recovery and resolution (RR) framework for insurers from a macroprudential perspective” and primarily (i) “discusses the need for comprehensive RR policies to complement supervisory and macroprudential policies”; (ii) “identifies and describes a number of potential RR tools”; (iii) “highlights funding aspects of the resolution process”; and (iv) “considers cross-sectoral and cross-border implications and contagion channels that arise when resolution tools are applied.” Based on its findings, the report “advocates the development of a harmonised effective RR framework for insurers across the EU,” which includes: (i) “[e]xisting RR frameworks should be evaluated and, if appropriate, enhanced and harmonised at EU level”; (ii) “[t]he existing RR toolkit should be expanded and the multiple use of RR tools should be allowed”; (iii) “[t]he RR framework should cover the whole insurance sector, while allowing for proportionality”; (iv) “[t]he financial stability objectives of the RR framework should be recognised, with a majority of ESRB member institutions taking the view that it should be put on an equal footing with the objective of policyholder protection”; and (v) “work on RR frameworks should go hand-in-hand with a discussion of how resolution should be funded.”
o Regulatory Risk-Free Yield Curve Properties and Macroprudential Consequences. The report addresses the “macroprudential consequences of the regulatory risk-free yield curve with a view to informing the ongoing work at EIOPA on the methodology for deriving this yield curve, as well as the upcoming Solvency II reviews.” The report makes three proposals regarding the regulatory risk-free yield curve, including: (i) establishing “a new method to derive the [last liquid point (“LLP”)] and to extend the LLP for the euro regulatory risk-free yield curve from 20 to 30 years, [as] [a]ccording to common liquidity measures, there is little difference in liquidity between euro swap rates at 20-year and 30-year maturities and [t]he same holds for liquidity in euro sovereign bond markets”; (ii) “[e]xtending the convergence period (from LLP to [ultimate forward rate (“UFR”)]) from 40 years to 100 year [as] [t]his would reduce the weight of the UFR and increase the weight of the liquid part of the regulatory risk-free yield curve when deriving the illiquid part of the regulatory risk-free yield curve”; and (iii) “[b]lending the extrapolated part of the curve partly with market data, provided that sufficiently reliable market data are available, as, for instance, is done in the regulation of Swedish and Dutch pension funds.”
IAIS – Consultation on ICP 24 on Macroprudential Surveillance and Insurance Supervision
On 1 August, the International Association of Insurance Supervisors (“IAIS”) published for consultation revisions to its Insurance Core Principle (“ICP”) 24 on Macroprudential Surveillance and Insurance Supervision. The ICP 24 relates to whether “[t]he supervisor identifies, monitors and analyses market and financial developments and other environmental factors that may impact insurers and insurance markets and uses this information to have a macroprudential perspective in the supervision of individual insurers.” The consultation period closes on 1 October 2017.
MiFID II – Guidelines on Transaction Reporting, Order Record Keeping, and Clock Synchronisation
On 8 August, ESMA published an update of its Guidelines on transaction reporting, order record keeping, and clock synchronisation under MiFID II. The guidelines provide guidance on the implementation of the regulatory technical standards (“RTS”) on transaction reporting (Commission Delegated Regulation (EU) 2017/590), order record keeping (Commission Delegated Regulation (EU) 2017/580), and clock synchronisation (Commission Delegated Regulation (EU) 2017/574). A red lined version of the updated guidelines can be found here.
MiFID II – ESMA Agrees to First Position Limits
On 10 August, ESMA published its first three opinions on position limits regarding commodity derivatives under MiFID II. As noted by the press release, ESMA agreed with proposed limits by the Autorité des Marchés Financiers (“AMF”) regarding: (i) rapeseed; (ii) corn; and (iii) milling wheat. The release explains that as of 3 January and MiFID II application, national competent authorities “have to set position limits for commodity derivatives and notify ESMA of the specific position limits they plan to introduce for liquid contracts.” ESMA indicated that it will “continue to assess the notifications received and issue opinions in order to ensure that the position limits are set in accordance with the MiFID II framework.”
MiFIR – Draft Delegated Regulation Regarding Package Orders
On 14 August, the European Commission published a Commission Delegated Regulation (C(2017) 5611) supplementing the Markets in Financial Instruments Regulation (600/2014/EU) (“MiFIR”) with regard to “establishing a methodology for determining those package orders for which there is a liquid market.” MiFIR established “pre-trade and post-trade transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives, subject to certain conditions and to certain waivers.” Specifically, MiFIR provides waivers for packaged orders from having to satisfy pre-trade transparency requirements, although “the use of that waiver is more limited when the package order is considered liquid.” In accordance with MiFIR, the Commission Delegated Regulation sets out the methodology for determining whether there is a liquid market for: (i) package orders as a whole: (ii) package orders consisting exclusively of interest rate derivatives; (iii) package orders consisting exclusively of equity derivatives; (iv) package orders consisting exclusively of credit derivatives; and (v) package orders consisting exclusively of commodity derivatives. The Commission Delegated Regulation will now be considered by the Council of the EU and European Parliament and come into force 20 days after its publication in the Official Journal if neither bodies object. The Commission Delegated Regulation will apply from 3 January 2018.
Capital Market Union – European Commission Consults on Further Reducing Barriers to Post-Trade Services Across Markets
On 23 August, The European Commission published a consultation document titled “post-trade in a Capital Market Union: dismantling barriers and strategy for the future.” The consultation aims to receive stakeholder input regarding: (i) “the current state of post-trade markets”; (ii) “the main trends and challenges faced by post-trade services providers and their users”; and (iii) how to “determine the existence and scale of remaining or new barriers, the risks associated with such barriers and the best ways to address them.” In addition, the European Commission published a report (dated 15 May 2017) by the European Post-Trade Forum, “an informal expert group on post-trading” established by the European Commission, that identified 12 barriers to the post-trade markets, including those relating to: (i) “inefficient withholding tax collection procedures”; (ii) “legal inconsistencies and uncertainties”; (iii) “fragmented corporation actions and general meeting processes”; (iv) “inconsistent application of asset segregation rules”; (v) “lack of harmonisation in registration and investor identification rules and processes”; and (vi) “complexity of post-trade reporting structure.” The consultation period closes on 15 November 2017. The European Commission indicated that “the results of th[e] consultation will feed into future legislative reviews and contribute to the communication on post-trade planned for the end of 2017.”
EMIR – Final Guidelines on Data Transfer Between Trade Repositories
On 24 August, ESMA published final Guidelines on transfer of data between Trade Repositories (“TRs”). The Guidelines aim to: (i) “set the necessary arrangements to foster and facilitate a consistent application of the relevant EMIR requirements that underpin a competitive TR environment”; (ii) “set out the basis to ensure high quality data available to authorities, including the aggregations carried out by TRs, even in those cases where the TR participant changes the TR to which their derivatives are reported”’ and (iii) “establish a consistent and harmonised way to transfer records from one TR to another TR and support the continuity of reporting and reconciliation in all cases including the withdrawal of registration of a TR.” The Guidelines cover: (i) the “conditions of transfer of data”; (ii) “transfer of data requested by a TR participant”; and (iii) “transfer of data in the case of withdrawal of registration.”
PRIIPs Regulation – PRIIPs with environmental and social objectives
On 28 July, the ESAs published its Final Technical Advice “on the procedures used to establish whether a packed retail and insurance-based investment products [(“PRIIPs”)] targets specific environmental or social objectives pursuant” to the key information documents (“KID”) under the PRIIPS Regulation (1286/2014/EU). The Final Technical Advice provides broad guidelines that PRIIPs targeting environmental or social objectives should follow “sufficient processes to be able to demonstrate to potential retail investors and other stakeholders…the substance of these objectives, and how these specific objectives are to be met” including: (i) “where a PRIIP manufacturer targets environmental or social objectives, these objectives and how they are to be achieved should be specific, and the strategy for achieving the objectives should be appropriate and proportionate to the objectives”; (ii) “the PRIIP manufacturer should clearly disclose the objectives and how they are to be achieved to retail investors”; (iii) “governance and monitoring measures should be put in place, be proportionate to the objectives and strategy, and be well documented”; and (iv) “regular reviews should be undertaken on progress.” The ESAs note, however, that in light of several key considerations, including recent regulatory shifts, “it would not in general be proportionate to establish specific and detailed standalone obligations at this time for PRIIPs that target specific environmental or social objectives” as such “an approach would introduce legal uncertainty without heightening investor protection, given measures of a very similar kind applying already to such PRIIPs.” Instead, the ESA indicate that “existing sectoral measures in fact offer already, or are in the process of putting in place, a sufficiently stringent and flexible basis for the sound regulation of PRIIPs targeting environmental or social objectives, including such PRIIPs’ activities.”
PRIIPs Regulation – Q&As on KID Requirements
On 18 August, the ESAs published new Q&As on the key information documents (“KID”) requirements for PRIIPs under EU Commission Delegated Regulation 2017/653 supplementing the PRIIPs Regulation. The additional Q&As supplement those published on 4 July 2017. The ESAs also published a documentcontaining “flow diagram[s] for the risk and reward calculations in the PRIIPs KID,” which “set out the calculation steps for the Summary Risk Indicator (market risk and credit risk assessment) and Performance Scenario calculations.”
World Economic Forum – Report on Disruptive Potential in Financial Services
On 22 August, the World Economic Forum, in collaboration with Deloitte, published a report on the global impact of FinTech and FinTech firms on the financial services industry and regulators. The report provides in depth analysis covering: (i) payments; (ii) insurance; (iii) digital banking; (iv) lending; (v) investment management; (vi) equity crowdfunding; and (vii) market infrastructure. Based the key findings in these sectors, the report concludes that fintech firms “have changed how financial services are structures, provisioned, and consumed, but have not successfully established themselves as dominant players” in part because they “have struggled to create new infrastructure and establish new financial services ecosystems.” The report notes, however, that despite its “fail[ure] to disrupt the competitive landscape,” fintech firms have “laid the foundation for future disruption,” including disruption stemming from: (i) “cost commoditization”; (ii) “profit redistribution”; (iii) “experience ownership”; (iv) “platform rising”; (v) “data monetization”; (vi) “bionic workforce”; (vii) “systemically important techs”; and (viii) “financial regionalization.
UPCOMING EVENTS AND DEADLINES
o 4 September: ESMA consultation on technical advice for its Short Selling Regulation closes.
o 14 September: ESMA consultation on internalized settlement reporting under the Central Securities Depositories Regulation closes.
o 18 September: International Organization of Securities Commissions consultation on structural vulnerabilities arising from asset management activities closes.
o 18 September: Joint Committee of three European Banking Authorities (EBA, EIOPA, and ESMA) consultation on amending the Implementing Regulations on the mapping of credit assessments of External Credit Assessment Institutions for credit risk to reflect the recognition of five new credit rating agencies and the deregistration of one credit rating agency closes.
o 22 September: Committee on Payments and Market Infrastructures and International Organization of Securities Commissions consultation on a framework for supervisory stress tests for central counterparties closes.
o 28 September: ESMA consultation on the technical advice for the Prospectus Regulation closes.
o 1 October: International Association of Insurance Supervisors consultation on its Insurance Core Principle 24 regarding Macroprudential Surveillance and Insurance Supervision closes.
o 5 October: Basel Committee on Banking Supervision and International Organization of Securities Commissions consultation on “criteria for identifying simple, transparent and comparable short-term securitisations” closes.
o 13 October: ESMA consultation on “guidelines on certain aspects of the MiFID II Suitability Requirement closes.”