EU Regulatory Research
ESAs Publish 2019 Work Programme
On 10 October, the Joint Committee of the European Supervisory Authorities (“ESAs”) published its 2019 Work Programme, which establishes its priorities and areas of focus for the coming year. According to the Programme, the ESAs will continue to focus its work in the areas of: (i) consumer protection; (ii) cross-sector risk analysis; (iii) anti-money laundering and counter terrorist financing (“AML” and “CFT”); (iv) financial conglomerates; and (v) accounting and auditing. In particular, the ESAs intend to focus on: (i) reviewing the Packaged Retail Investment and Insurance-Based Products (“PRIIPs”) Regulation and Delegated Regulations; (ii) sustainable investments and sustainability risks; (iii) Fintech and digitalization of financial services; (iv) cross-sector risk analyses and assessment; (v) revisions to the ESA’s June 2017 guidelines on money laundering and terrorist financing risk factors; (vi) supervisory cooperation and information exchange relating to AML/CFT; and (vii) addressing cross-sectoral consistency in the application of the Securitization Regulation.
FSB Publishes Meeting Outcome Regarding Financial Vulnerabilities and Deliverables for G20 Summit
On 22 October, the Financial Stability Board (“FSB”) published the outcome of its plenary meeting held on 22 October 2018. The participants discussed a number of issues, including, among other things: (i) market developments and vulnerabilities in the global financial system; (ii) removing legal barriers to trade reporting of over-the-counter (“OTC”) derivatives; (iii) progress made by the International Association of Insurance Supervisors (“IAIS”) in developing a holistic framework to assess and mitigate systemic risk in the insurance sector; (iv) a review of the FSB’s processes and transparency, the conclusions of which will be published in November 2018; and (v) the FSB work programme for 2019 and beyond, an overview of which will be published once a final version has been agreed to by the plenary. In addition, the participants discussed and endorsed a number of reports to be delivered to the G20 Summit, including: (i) the fourth Annual Report on Implementation and Effects of G20 Financial Regulatory Reforms; (ii) a report examining the incentives to centrally clear OTC derivatives; (iii) a report regarding the evaluation on infrastructure finance; (iv) a progress report on the FSB’s coordinated action plan to assess and address the risks from the decline in correspondent banking relationships; (v) a “Cyber Lexicon”; and (vi) a discussion paper setting out considerations for evaluating the adequacy of financial resources for central counterparty (“CCP”) resolution and the treatment of CCP equity in resolution.
European Commission Publishes Overview of Consultation Plans Regarding Sustainable Finance Initiatives
On 15 October, the European Commission published an overview of the Commission Technical Expert Group on Sustainable Finance’s (“TEG”) consultation plans regarding its initiatives. According to the overview, the TEG will assist the Commission in the development of: (i) “technical screening criteria for environmentally sustainable economic activities under the EU taxonomy”; (ii) “an EU Green Bond Standard”; (iii) “minimum standards for the methodology of ‘low carbon’ and ‘positive carbon impact’ indices, and minimum disclosure requirements on ESG integration in the methodology of benchmarks”; and (iv) “metrics allowing improving disclosure on climate-related information.” The TEG intends to begin targeted consultations to gather technical input for the initiatives in October and November 2018 and to begin open consultations to gather broader stakeholder feedback in late 2018 and early 2019.
GFXC Launches Survey on FX Global Code
On 4 October, the Global Foreign Exchange Committee (“GFXC”) launched a survey aimed at measuring market participants’ awareness and adoption of the FX Global Code, a set of global principles of good practices in the foreign exchange market. The GFXC stated that the information collected will be used to promote, maintain, and update the Code for market participants.
European Commission Adopts Proposal for a Council Decision Regarding the Amendment to Annex XI (Financial Services) of the EEA Agreement
On 12 October, the European Commission adopted a proposal (COM(2018) 682 final) for a Council of the EU decision regarding the incorporation of the Omnibus II Directive (2014/51/EU) (“Omnibus II”), which sets out the powers of the European Insurance and Occupational Pensions Authority (“EIOPA”) and ESMA, into Annex IX (Financial Services) of the European Economic Area (“EEA”) Agreement. According to the Annex of the proposal, the amendments would extend certain provisions of the EEA Agreement to the European Free Trade Association (“EFTA”) states, which consist of Iceland, Liechtenstein, Norway, and Switzerland, thus giving EIOPA and ESMA jurisdiction.
EIOPA Publishes Decision Regarding Co-operation of National Competent Authorities under the IDD
On 10 October, EIOPA published a decision of its Board of Supervisors (dated 28 September 2018) regarding the cooperation of national competent authorities (“NCAs”) with regard to the supervision of cross-border insurance distribution activities of insurance undertakings and insurance intermediaries. According to the press release, the decision replaces the former Luxembourg Protocol, which needed to be revised as a result of: (i) “the new regulatory framework for insurance distribution activities
under the Insurance Distribution Directive”; and (ii) “the recent supervisory experience with cross-border insurance distribution activities.” EIOPA aims to strengthen cooperation between NCAs and to enhance the exchange of all relevant information between regulators.
EIOPA Issues Request for Feedback of Long-Term Illiquid Insurance Liabilities
On 29 October, EIOPA issued a request for feedback on the short and long-term risk associated with illiquid insurance liabilities. EIOPA is seeking comments regarding: (i) the illiquidity characteristics of insurance liabilities; (ii) the actual holding periods of assets of insurers; and (iii) the risks of holding on to assets over a longer term. The consultation period closes on 7 December 2018.
European Commission Publishes 2019 Work Programme
On 23 October, the European Commission published its 2019 Work Programme. As noted in the Annexes of the Programme, the new work programme includes 15 new initiatives and 10 new regulatory fitness and performance review (“REFIT”) evaluations, although none of the new initiatives relate to financial regulations. Overall, only two of the REFIT initiatives relate to financial regulations: (i) a review of the “cross-sectoral reporting requirements to supervisory authorities stemming from EU Financial Services Legislation,” such as MiFID II, EMIR, Capital Requirements Directive, and CRR/CRD IV; and (ii) a review of the Consumer Credit Directive (2008/48/EC) and Distance Marketing of Consumer Financial Services Directive (2002/65/EC).
On 11 October, ESMA published two decisions from its Board of Supervisors (ESMA70-155-5775 and ESMA70-155-5905, both dated 26 September 2018) regarding the delegation to the Chair of ESMA the task of assessing whether a third-country trading venue satisfies the criteria set out in Articles 20 and 21 of the Markets in Financial Instruments Regulation (EU) 600/2014 (“MiFIR”) and Article 57(4) of the Markets in Financial Instruments Directive (204/65/EU) (“MiFID”).
Council of the EU Publish Presidency Compromise Proposals Regarding CCP Supervision and Regulation
On 25 October, the Council of the EU published the text of two Presidency compromise proposals relating to CCP supervision and regulation:
A proposal relating to the procedures and authorities involved in the authorization of CCPs and requirements for the recognition of third-country CCPs. Among other things, the proposal provides: (i) clarification of the composition of the CCP Supervisory Committee; (ii) clarification of the activities and responsibilities of the CCP Convergence Committee; and (iii) further emphasis that ESMA should focus on supervisory areas which have a cross-border dimension or impact; and
A proposal to amend Article 22 of the Statute of the European System of Central Banks and of the European Central Bank. Among other things, the proposal includes provisions which would grant the European Central Bank (“ECB”) certain authority over third-country CCPs that are considered systemically important to the financial stability of the EU, including the authority to: (i) “contribute to the enactment of procedures” relating to the denial of recognition of third-country CCPs or some of the CCPs’ clearing services; and (ii) require third-country CCPs to submit information, cooperate in the assessment of their resilience to adverse market conditions, open overnight deposit accounts and, in extreme cases, comply with requirements of limited duration to address temporary systemic liquidity risks.
EMIR - ESMA Issues Statement On Clearing Obligation for NFC+
On 31 October, ESMA issued a statement on the requirement for certain non-financial counterparties above the clearing threshold (“NFCs+”) to start clearing and trading some of their OTC derivatives contracts on trading venues beginning 21 December 2018. ESMA notes that: (i) there is a timing gap between the expiration of exemptions introduced by the European Market Infrastructure Regulation (“EMIR”) regarding the clearing and trading of interest rate derivative classes denominated in the G4 currencies subject to the clearing obligation traded by NFCs+ and the potential extension of such exemptions proposed in ESMA’s 27 September 2018 final report regarding the clearing obligation under EMIR; and (ii) that there are differences in requirements between the exemptions introduced by EMIR and requirements contained in the European Commission’s 4 May 2017 proposal to amend EMIR, which would only subject NFCs+ to the clearing obligation in asset classes where their level of activity is above the clearing threshold. In light of these findings, ESMA indicated that it “expects competent authorities to not prioritise their supervisory actions towards group entities that benefit from the [exemptions] meeting certain conditions on and after 21 December 2018, and towards NFCs+ that are not above the clearing threshold . . . in the interest rate derivative asset class on or after 21 December 2018.”
EMSA Adopts Decision to Renew the Restriction on Contracts for Differences
On 31 October, ESMA published a statement indicating that on 23 October 2018 it had adopted a decision under Article 40 of MiFIR to restrict the marketing, distribution or sale of contracts for differences to retail clients. This decision renews and amends ESMA Decision (EU) 2018/796 adopted on 22 May 2018.
ESAs Launches Public Consultation on Amending the Implementing Regulations on the Mapping of the ECAIs
On 26 October, the ESAs launched a public consultation on amending the Implementing Regulations on the mapping of credit assessments of External Credit Assessment Institutions (“ECAIs”) for credit risk. In particular, the amendments seek to adopt the outcomes of a monitoring exercise on the adequacy of existing mappings, which included changes to the Credit Quality Steps (“CQS”) allocation for two ECAIs and the introduction of new credit rating scales for ten ECAIs. The consultation period closes on 31 December 2018.
On 9 October, the Council of the EU published the outcomes of a meeting held on 9 October 2018. Among other non-financial matters, the Council indicated that it has no intention to object to the 10 delegated acts submitted by the European Commission on 13 July 2018 supplementing the Benchmarks Regulation, which included:
o Delegated Regulation (C(2018) 4425) specifying further the governance and control requirements for supervised contributors;
o Delegated Regulation (C(2018) 4426) for the form and content of the application for recognition with the competent authority of the Member State of reference and of the presentation of information in the notification to ESMA;
o Delegated Regulation (C(2018) 4427) determining the minimum content of cooperation arrangements with competent authorities of third countries whose legal framework and supervisory practices have been recognized as equivalent;
o Delegated Regulation (C(2018) 4430) for the procedures and characteristics of the oversight function;
o Delegated Regulation (C(2018) 4431) specifying further how to ensure that input data is appropriate and verifiable, and, where the input data is contributed from a front office function, specifying the internal oversight and verification procedures that the administrator of a critical or significant benchmark has to ensure are in place at the contributor;
o Delegated Regulation (C(2018) 4432) specifying further the elements of the code of conduct to be developed by administrators of benchmarks that are based on input data from contributors;
o Delegated Regulation (C(2018) 4434) specifying further the criteria to be taken into account by competent authorities when assessing whether administrators of significant benchmarks should apply certain requirements, including, among others, “vulnerability of the benchmark to manipulation”; “nature of the input data”; “conflicts of interest”; the administrator’s size, structure, and degree of discretion; impact of the benchmark on markets; and complexity and importance of the benchmark;
o Delegated Regulation (C(2018) 4435) specifying further the information to be provided by administrators of critical or significant benchmarks on the methodology used to determine the benchmark, the internal review and approval of the methodology, and the procedures for making material changes in the methodology;
o Delegated Regulation (C(2018) 4438) for the information to be provided in an application for authorization and in an application for registration as a benchmark administrator; and
o Delegated Regulation (C(2018) 4439) specifying further the contents of, and cases where updates are required to, the benchmark statement to be published by the administrator of a benchmark.
EMIR’s First Annual Report on EU Derivatives Market
On 18 October, ESMA published its first annual statistical report on the EU derivatives market based on data received under the EMIR. According to the report, key market trends include: (i) “the European derivatives markets as a whole increased in size during 2017, starting with a notional amount of EUR 605tn and reaching EUR 660tn in 4Q17”; (ii) “central clearing rates increased, from 25% to 27% for credit derivatives (‘CDs’) and from 40% to 58% for interest rate derivatives (‘IRDs’)”; (iii) “OTC derivatives still dominated the market overall, however the share of exchange traded derivatives (‘ETD’) increased from 13% to 17% (notional)”; (iv) “concentration and the level of interconnectedness increased significantly in commodity derivatives markets, and to a lesser extent in IRD markets”; and (v) “the share of short-term maturities (less than one year) increased for IRDs, going from 35% to 48% while it decreased for currency derivatives, going from 95% to 85%.”
Council of the EU Publish Presidency Compromise Proposals Regarding Prudential Supervision of Investment Firms
On 9 October, the Council of the EU published the text of Presidency compromise proposals relating to:
The proposed Regulation on the prudential requirements for investment firms and amending the Capital Requirement Regulation (EU) 575/2013 (“CRR”) and MiFIR; and
The proposed Directive on the prudential supervision of investment firms amending the Capital Requirements Directive (2013/36/EU) (“CRD IV”) and MiFID.
ESMA’s SMSG Report on Level 3 Guidelines and Possible Legislative Reforms Regarding Initial Coin Offerings and Crypto-Assets
On 19 October, ESMA’s Securities and Markets Stakeholder Group (“SMSG”) submitted an own initiative report advising ESMA on steps it can take to contain the risks of initial coin offerings (“ICOs”) and crypto-assets, on top of existing regulation. Among other things, the report advises ESMA to: (i) provide level 3 guidelines or to aim at supervisory convergence on, among other things, the interpretation of the MIFID definition of “transferable securities,” the interpretation of the MiFID definition of “commodities,” and the interpretation of the multilateral trading facilities (“MTF”) and organized trading facility (“OTF”) concepts; (ii) send a letter to the European Commission asking it to consider adding these tokens to the MiFID list of financial instruments as the SMSG recognizes that ESMA does not have the authority to change the level 1 MiFID II text listing the MiFID II financial instruments; and (iii) provide guidelines with minimum criteria for national authorities which operate or want to operate a sandbox or innovation hub.
European Parliament Adopts Provisional Text of Resolution Regarding Distributed Ledger Technology and Blockchains
On 3 October, the European Parliament adopted the provisional text of a non-legislative resolution regarding the application of distributed ledger technology (“DLT”) and blockchains across a range of sectors within the EU, including the financial sector. The resolution highlights a number of benefits that can be gained through the use of DLT and blockchains, such as improving transaction cost efficiencies by removing intermediaries and intermediation costs and establishing a framework of transparency, reducing corruption, and allowing the tracking of unlawful payments. The text recommends that regulators take an innovation-friendly approach to regulation based on the principles of technology neutrality.
o 7 December: EIOPA’s consultation closes regarding the risk of long-term illiquid insurance liabilities.
o 31 December: ESAs’ consultation closes regarding amending the implementing regulations on the mapping of the external credit assessment institutions.