EU Regulatory Update
Investment Governance and Environmental, Social, and Governance Factors
On 2 May, the Organization for Economic Co-operation and Development (“OECD”) published a report on the integration of Environmental, Social, and Governance (“ESG”) factors into institutional investor governance and regulation. The report examines how pension funds, insurance companies, and asset managers approach ESG governance risks and opportunities; it also analyzes whether regulatory frameworks obstruct institutions from integrating ESG considerations into their governance frameworks. The report concludes that: (i) regulatory frameworks generally do not act as obstacles to the integration of ESG factors into investment governance; (ii) regulators have taken steps to “clarify that institutional investors may consider ESG factors in their investment decisions, where such considerations are consistent with their financial obligations,” but “institutional investors may benefit from greater clarity about the role of ESG integration in prudent investment governance”; (iii) institutional investors approach ESG issues differently, with some being more concerned about “practical barriers,” such as the “cost and complexity” of integrating ESG considerations into their investment strategies, and others being more concerned with “behavioural barriers, such as the concern that ESG factors are considered ‘non-financial’”; and (iv) regulators should develop standardized investment terminology and consistent corporate ESG reporting to assist institutional investors in obtaining and assessing the impact of ESG data.
IOSCO Annual Conference
On 17 May, ISOCO published a summary of topics discussed at its Annual Conference. During the Conference, the IOSCO Board: (i) “progressed its initiatives on liquidity risk management of collective investment schemes”; (ii) agreed to examine whether regulatory reforms in derivatives markets have produced any unintended consequences; (iii) discussed IOSCO’s and CPMI’s work on CCP resilience and recovery issues, as well as the FSB’s work on CCP resolution; (iv) agreed to develop a public statement on topics that should be considered by institutions when selecting benchmarks; and (v) discussed the role of regulation in financial technology and automation, including “a possible framework for the regulatory use of penetration testing, which allows firms in the financial industry to evaluate their systems and controls, identify vulnerabilities, and strengthen their infrastructure against cyber threats.” Additionally, national authorities from Panama, Kuwait, Qatar, Abu Dhabi, and Uganda signed the IOSCO Multilateral Memorandum of Understanding, which promotes the exchange of information between national authorities.
ASSET MANAGEMENT AND PENSIONS
FSB Global Shadow Banking Monitoring Report
On 10 May, the FSB published its 2016 Global Shadow Banking Monitoring Reportassessing global trends and risks in the “shadow banking” system. Among other things, the report found that: (i) non-bank financial intermediation continued to grow in 2015, although at a lesser rate than prior years; (ii) in general, financial institutions not categorized as “banks, insurance corporations, pension funds, public financial institutions, central banks, or financial auxiliaries” – identified as Other Financial Institutions (“OFIs”) by the report – outpaced the GDP growth of most jurisdictions examined and “exceed[ed] the previous high-point prior to the financial crisis”; (iii) while the interconnectedness between banks and OFIs has declined since the financial crisis, it remains above “pre-crisis levels”; and (iv) the “narrow measure of shadow banking,” which “includes non-bank financial entity types that are not considered by authorities to be involved in credit intermediation,” continued to grow in 2015 (this measure was $34 trillion in 2015, up 3.2% from 2014, and equal to 13% of total financial system assets; credit intermediation by collective investment vehicles made up 65% of this measure of shadow banking). The FSB indicated that it intends to publish an assessment of the “evolution of shadow banking activities since the financial crisis and whether the policies and monitoring put in place since then are adequate to address these risks” to the G20 Leaders’ Summit in July 2017.
EU Financial Transaction Tax Involving Pensions
On 17 May, according to Bloomberg, Belgium and Slovakia agreed to a compromise on the proposed EU financial transaction tax. Earlier this year, both countries raised concerns regarding the impact that the tax would have on pensions funds and were granted a May deadline to agree to a compromise that would exempt them from taxation of certain pension fund transactions.
On 16 May, the Council of the EU adopted the text of a new Regulation2015/0268 (COD) on prospectuses to be published for the issuing and offering of securities to the public or on a regulated market. The new Regulation repeals and replaces directive 2003/71/EC to ensure that there is a uniform and harmonized set of prospectus rules throughout the EU. Most provisions of the Regulation will not go into effect until 2019.
Central Counterparties (“CCP”) Regulation and Supervision
On 4 May, the European Commission published a proposal (COM(2017) 208) for aregulation amending derivatives clearing rules under EMIR (648/2012/EU). The proposed amendments: (i) streamline reporting requirements for all counterparties to reduce administrative costs; (ii) require trade repositories to implement procedures to verify the completeness and accuracy of the data reported; (iii) require non-financial counterparties to clear asset classes for which they have exceeded the clearing threshold; (iv) introduce a clearing threshold for small financial counterparties; (v) temporarily exempt pension funds from clearing obligations for three years; and (vi) grant authority to the European Supervisory Authorities (“ESAs”) to develop implementation and validation standards for risk management procedures.
The European Commission also published a communication on CCP regulation and supervision. The communication describes current challenges for CCP regulation and supervision in the EU, such as Brexit and the growing importance of clearing, the context of the current regulatory and supervisory environment, and addresses further steps needed to ensure the safety and soundness of CCPs, including additional supervision of CCPs and integration of “third-country CCPs.” The Commission also indicated that it intends to present further legislative proposals in June 2017 “to ensure financial stability and the safety and soundness of CCPs … and to support the further development of the Capital Market Union.”
On 10 May, FSB Secretary General Svein Andersen delivered a speech on CCP and derivatives market reform at the International Swaps and Derivatives Association, Inc. (ISDA) Annual General Meeting. FSB Secretary General Andersen indicated that the FSB intends to publish in June 2017: (i) final guidance on CCP resolution and resolution planning, alongside additional guidance on CCP resilience and recovery planning from IOSCO and CPMI; (ii) a summary of a joint report conducted by the FSB, IOSCO, and CPMI examining the interdependencies between CCPs and key CCP participants; (iii) a progress report on FSB members’ work regarding legal barriers to trade repository reporting; and (iv) the FSB’s third annual report on the effects and implementation of derivatives markets reform. He also addressed other topics, including: (i) the ISDA’s work on the Resolution Stay Protocol; (ii) FSB members’ engagement with FinTech innovations and “RegTech applications”; and (iii) international cooperation between derivatives regulators.
FINTECH AND MARKET REGULATION
FinTech and the Influence of Technology Report
On 17 May, the European Commission adopted a resolution on financial technology’s influence on the future of the EU financial sector. The report urges the Commission to establish a set of rules that would develop a “comprehensive FinTech Action Plan in the framework of the Capital Markets Union and Digital Single Market  strategies” regarding: (i) cybersecurity and data protection; (ii) “facilitating ease access for new market entrants and preventing regulatory arbitrage across member states and legal statuses”; (iii) interoperability and passporting among member states; and (iv) creating room for controlled innovation and fostering financial education and IT skills.
Adoption of RegTech within the Financial Services Industry
On 16 May, European Securities and Markets Authority Senior Risk Analysis Officer Patrick Armstrong delivered a speech on the adoption of RegTech within the financial services industry. He noted the following post-crisis market trends: (i) increased regulatory requirements on market participants; (ii) a movement towards a more “data-driven approach” to regulation; and (iii) a decrease in the cost of computing power and data storage. Armstrong also stated that RegTech, if implemented correctly and monitored properly, has the potential to allow market participants to more efficiently satisfy regulatory requirements while also allowing regulators to more effectively oversee market activities. He cautioned market participants and regulators to be aware of risks associated with: (i) the delegation of responsibilities to maintain systems and data; (ii) digital security; and (iii) institutions that do not adopt new technologies.
UPCOMING EVENTS AND DEADLINES
o 24 May: The European Insurance and Occupational Pensions Authority’s call for evidence on the treatment of unlisted equity and debt without external rating in the standard formula closes
o 1 June: International Association of Insurance Supervisors consultation on its revision of ICPs and ComFrame comment period closes
o 15 June: European Commission consultation on fintech response period closes
o 30 June: European Commission consultation on conflict of laws rules for securities ownership and third-party effects of the assignment of claims response period closes
o 3 July: European Securities and Markets Authority consultation on the endorsement regime under the Credit Rating Agencies Regulation response period closes