EU Regulatory Update
Progress on EU Financial Services Legislative Proposals
On 16 January, the Council of the EU published a document from the Presidency regarding the current state of EU legislative proposals related to financial regulation. The document provides summaries of, the date of presentation to the EU Commission, and the procedural status of, various legislative items, including: (i) the Capital Requirements Regulation; (ii) the European Market Infrastructure Regulation; (iii) the Pan-European Personal Pension Product Regulation; (iv) the Regulations on European Supervisory Agencies (“ESAs”) and related legislation aimed at enhancing regulatory and supervisory convergence; and (v) the Markets in Financial Instruments Directive and Solvency II Directive.
On 25 January, the European Insurance and Occupational Pensions Authority (“EIOPA”) published a report to the European Commission on the application of group supervision under the Solvency II Directive (dated 22 December 2017). The report assesses the application of Title III of Solvency II (Supervision of Insurance and Reinsurance Undertakings in a Group) regarding: (i) the definitions and scope of group supervision; (ii) the “functionality of the colleges of supervisors and cooperation of authorities within them”; (iii) the group internal models; and (iv) the group capital add-ons. According to the report: (i) “the definition of groups within the Solvency II Directive has generally worked well,” but “one important practical limitation is consistency between the definition of a group and the scope of supervisory powers”; (ii) “colleges [of supervisors] generally function well, but there is scope for colleges to develop further in the direction of collaboration and even sharing of tasks within the college”; (iii) there is a “need for greater consistency . . . for internal models”; and (iv) “capital add-ons have been used by very few supervisory authorities and only one authority has used a group capital add-on.” The report also indicated that “following approval of the first wave of internal models, EIOPA is now running consistency projects to identify and address areas of continuing inconsistency.”
Insurance Distribution Directive
As reported in our previous newsletter, on January 20, the European Commission published a proposal for a Directive (COM(2017) 792 final) to delay the application date of the Insurance Distribution Directive (“IDD”) and a proposal for an amending Delegated Regulation (C(2017) 8681 final) to delay the application date of two IDD Delegated Regulations, (EU) 2017/2358 and (EU) 2017/2359, by seven months to 1 October 2018. On 9 January, The European Parliament’s Committee on Economic and Monetary Affairs (“ECON”) Chair Roberto Gualtieri and the European Parliament’s IDD rapporteur Werner Langen sent a letter to the Council of the EU’s Committee of the Permanent Representatives Committee chair Dimiter Tzantchev expressing support for the proposed directive to delay the application date of the IDD and noting that the European Parliament “is considering positively such a postponement of the date of transposition of this Directive by a few months, such as 1 July 2018.” Additionally, the letter stated that, with respect to the amending Delegated Regulation, the authors “intend to launch a procedure in ECON with a view to adopting a recommendation not to object in order to speed up the entry into force” and that they “trust that the Council will do the same.” Also in January, the European Parliament updated its procedure file for the proposed Directive delaying the application date of the IDD to indicate that it intends to hold an indicative plenary sitting on 28 February 2018.
IAIS Publishes FAQs on the Implementation of ICS Version 2.0
On 26 January, the International Association of Insurance Supervisors (“IAIS”) published FAQs on the implementation of the Insurance Capital Standards (“ICS”) Version 2.0. The FAQs include answers to questions that IAIS has received since it published its plan for the implementation of ICS Version 2.0 on 2 November 2017, including questions related to, among other topics: (i) an approximate starting time for the monitoring period; (ii) whether there will be any “changes to ICS Version 2.0 during the monitoring period”; (iii) the scope of mandatory reporting under the ICS; (iv) what insurance groups will be affected by confidential reporting requirements that it puts in place; and (v) how the IAIS intends to “collect meaningful feedback from supervisory colleges to inform the development/refinement of ICS.” In the recent FAQ release, IAIS notes that “other questions that cannot be answered at this stage will be dealt with in the 2018 ICS consultation document.”
On 9 January, ESMA issued a decision to delay the publication of data on the double volume cap (“DVC”) mechanism for January 2018 as required under the Markets in Financial Instruments Directive (“MiFID II”) and Markets in Financial Instruments Regulation (“MiFIR”). ESMA explains in the decision that “the current quality and completeness of the data does not allow for a sufficiently meaningful and comprehensive publication of double volume cap calculations . . . and ESMA has taken this decision to avoid creating an unlevel playing field.” ESMA’s decision states that in March 2018 it intends to publish “data covering the previous periods in order to ensure the full application of the DVC as of January 2018.”
On 19 January, ESMA published an “extended version” of the MiFID II/MiFIR transitional transparency calculations for equity and bond instruments. As noted in the release, the extended version of the calculations includes those applicable for: (i) “equity instruments, traded for the first time on a trading venue between 13 September 2017 and 2 January 2018”; and (ii) bond instruments (except exchange-traded commodities and exchange-traded notes) “traded for the first time on a trading venue between 01 November 2017 and 2 January 2018.” ESMA also updated its transitional transparency calculation FAQs to reflect the inclusion of new calculations for these instruments.
On 25 January, ESMA published a briefing paper on equivalence decisions for third-country firms under MiFID II/MiFIR. The paper: (i) outlines the MiFID II/MiFIR third-country framework, which requires a third-country firm with professional clients and eligible counterparts to register with ESMA and for its home country to have received a “positive Commission equivalence decision” before being able to engage in cross-border activity; (ii) describes the equivalence determination process; and (iii) lists the equivalence decisions adopted to date under Articles 23 and 28(4) of MiFIR, Article 25(4) of MiFID II, and the transitional provisions under Article 54 of MiFIR.
On 8 January, ESMA launched a public consultation on “draft guidelines on anti-procyclicality margin measures for central counterparties” (“CCPs”). As explained in the draft guidelines, under the European Market Infrastructure Regulation (“EMIR”), CCPs are required to “regularly monitor and, if necessary, revise the level of margins to reflect current market conditions, taking into account any procyclical effects of such revisions.” EMSA explained that it published the draft guidelines “to clarify the application of EMIR in the context of procyclicality of margins with the aim to ensure common, uniform and consistent application of the relevant EMIR provisions.” Specifically, the proposed content in the guidelines includes matters related to: (i) the “regular assessment of procyclicality”; (ii) the application of anti-procyclicality margin measures under Article 28 of Delegated Regulation (EU) No. 153/2013; (iii) the “exhaustion of margin buffer” under Article 28(1)(a); (iv) the “selection of stressed observations” under Article 28(1)(b); (v) the “margin floor” under Article 28(1)(c); and (vi) the “disclosure of Margin Parameters.” The consultation period closes on 28 February 2018 and, according to the consultation, ESMA “expects to publish the final guidelines by the first half of 2018.”
On 24 January, the ECON approved, by a vote of 49-3, a proposed rule for a framework for the recovery and resolution of CCPs that amends Regulation (EU) No 1095/2010 establishing ESMA, Regulation EMIR, and Regulation (EU) 2015/2365 on transparency of securities financing transactions and on the reuse of assets (“SFTR”). An accompanying press release stated that “negotiations between the Parliament, the Council and the Commission and on the final shape rules will follow, once the member states agree their common stance.”
Transparency Directive – ESMA Publishes Guidance on National Rules on Notifications of Major Holdings under the Transparency Directive
On 16 January, ESMA published guidance on national rules on notifications of major holdings under the Transparency Directive. The guidance: (i) “summarises the main rules and practices applicable across the European Economic Area (EEA) in relation to notifications of major holdings under national law in accordance with the Transparency Directive”; and (ii) provides information “in relation to the rules and practices for the filing and publication of notifications of major holdings in EEA countries, [such as] information on notification thresholds, the triggering event, the deadline for learning of the triggering event, the deadline for making a notification as well as permitted channels and format for the filing of such and the deadline for publishing a notification.” In the guidance, ESMA stated that it will continue to “update the Practical Guide on an ad hoc basis as and when necessary based on changes to national rules and practices.”
EMSA Publishes Thematic Report on Fees Charged by Credit Rating Agencies and Trade Repositories
On 11 January, ESMA published a thematic report on fees charged by credit rating agencies (“CRAs”) and trade repositories (“TRs”). In its report, ESMA expressed concerns regarding fees charged for credit rating and trade repository services and highlighted three key areas of concern, including: (i) “transparency and disclosure,” noting that CRAs and TRs “need to ensure sufficiency and clarity of information provided to actual and potential clients as well as to ESMA, aiming at reducing the existing information gap between CRAs/TRs and other stakeholders”; (ii) the “fee-setting process,” noting that CRAs and TRs “need to ensure that cost is a key pricing factor and sufficient controls are in place in order to demonstrate that the regulatory objectives are met”; and (iii) “interaction with related entities,” noting that CRAs and TRs “need to ensure that group support and/or interaction with related entities do not conflict with the non-discrimination and cost-based/cost-related principles.” Going forward, ESMA stated that it will: (i) “continue to engage with both supervised entities and their clients to ensure effective supervision of the fee provisions (e.g. on costs, price deviation, controls in place)”; (ii) “explore possible options to further enhance the clarity in some areas and concepts (e.g. costs of services; comparability of TRs’ fee schedules)”; and (iii) decide whether to “provide further supervisory guidance to ensure compliance with relevant requirements.”
IOSCO Issues Statement on Matters to Consider in the Use of Financial Benchmarks
On 5 January 2018, the International Organization of Securities Commissions (“IOSCO”) issued a statement on matters for “users of financial benchmarks to consider in selecting an appropriate benchmark and in contingency planning, particularly for scenarios in which a benchmark is no longer available.” In its statement, IOSCO emphasized the importance of users selecting a benchmark that is “appropriate for their own current and future needs, as well as (where applicable) those of their clients” and provided several considerations users of financial benchmarks should take into account when selecting an appropriate benchmark, including, among others: (i) “the way in which the benchmark is determined, including the size, liquidity and potential evolution of the market being measured by the benchmark”; (ii) “whether the benchmark provides an appropriately accurate and reliable representation of the market it seeks to measure”; and (iii) “the governance of, and accountability for, the benchmark determination process.”
IOSCO Board Publishes Communication on Concerns Related to Initial Coin Offerings
On 18 January, the Board of IOSCO published a communication on concerns related to digital token issuances, also known as “initial coin offerings” (“ICOs”). In its communication, IOSCO warned of risks associated with ICOs, including the “increased targeting of ICOs to retail investors through online distribution channels by parties often located outside an investor’s home jurisdiction -- which may not be subject to regulation or may be operating illegally in violation of existing laws.” In addition, IOSCO provided samples of communications issued by different authorities related to ICOs and indicated that it has “established an ICO Consultation Network through which members can discuss their experiences and bring their concerns, including any cross-border issues, to the attention of fellow regulators.”
Cryptocurrency Discussions at G20 Summit
On 26 January, Reuters reported that European Central Bank Board Member Benoit Coeure stated that he expects cryptocurrency to be a priority at the 2018 G20 summit. Speaking at the World Economic Forum, Mr. Coeure was quoted stating that “[t]he international community is . . . preparing an answer to [cryptocurrencies] and I would expect, for instance, the G20 discussion in Buenos Aires in March to focus very much on these issues.”
o 15 February: IAIS’s consultation on its development of an activities-based approach to the mitigation of systemic risk in the insurance sector closes.
o 16 February: comment period on European Commission proposal to delay the application date of the Insurance Distribution Directive by seven months to 1 October 2018 closes.
o 28 February: ESMA consultation on draft guidelines on anti-procyclicality margin measures for CCPs closes.
o 28 February: Commission consultation on the fitness check of supervisory reporting requirements closes.
o 9 March: ESMA consultation on draft RTS for the new Prospectus Regulation closes.
o 15 March: EBA consultation on the implementation in the EU of the international revised market risk and counterparty credit risk frameworks closes.