EU Regulatory Update
FSB Publishes Supplemental Guidance to the FSB Principles and Standards on Sound Compensation Practices
On 9 March, the Financial Stability Board (“FSB”) published the final version of its supplemental guidance to the FSB Principles and Standards on Sound Compensation Practices. As explained by the accompanying release, the guidance: (i) “supplements the FSB’s Principles and Standards on compensation at significant financial institutions, published in 2009, which note that compensation should be adjusted for all types of risk”; and (ii) “provides firms and supervisors with a framework to consider how compensation practices and tools, such as in-year bonus adjustments, malus or clawback, can be used to reduce misconduct risk and address misconduct incidents.”
ESAs Publishes Final Report on Use of Big Data
On 15 March, the Joint Committee of the European Supervisor Authorities (“ESAs”) published its final report on the use of big data across the banking, insurance and securities sectors. In its report, the ESAs note that existing legislative requirements in areas such as data protection, cyber security and consumer protection “constitute an already quite solid framework to mitigate the risks identified” in the report, and that “this framework will be further strengthened with the entry into application of several key pieces of legislation in the financial sector,” such as the Insurance Distribution Directive, Markets in Financial Instruments Directive, and the Payment Services Directive, “as well as in the data protection sector,” notably, the General Data Protection Regulation. Consequently, the report concludes that “a legislative intervention at this point would be premature, given that some key pieces of legislation are yet to be implemented or have just entered into application” and that the ESAs will “monitor how and to which extent these additional requirements will contribute to mitigate further the risks identified in the context of this work.” The ESAs published a consumer-oriented fact sheet alongside the report.
Keynote Address of ESMA Chair Steven Maijoor
On 20 March, ESMA Chair Steven Maijoor delivered the keynote address before the BVI 2018 Annual Reception. Topics covered by the address include: (i) Brexit; (ii) cost and charges related to MiFID II and Regulation (1286/2014/EU) on key information documents (“KIDs”) for Packaged Retail and Insurance-based Investment Products (“PRIIPs”) Regulation; and (iii) the review of the ESAs.
- Brexit: ESMA Chair Maijoor clarified that ESMA’s 2017 opinion on general principles to support supervisory convergence in the context of Brexit and its opinions setting out sector-specific principles in the areas of investment firms, investment management, and secondary markets with regards to Brexit did not seek “to question, undermine or put in doubt the delegation model,” but sought to address “the risk of letterbox entities.” He further stated that “financial centres in the EU27 should be free to compete based on the particular strengths they can offer relocating firms, like speed and efficiency, but in all cases the EU rulebook should be consistently applied.”
- Cost and Charges: ESMA Chair Maijoor highlighted his belief that the “changes to cost transparency introduced by [MiFID II and PRIIPs Regulation] are already having a positive impact.” With regards to MiFID II, he stated that “the new model of payments for research gives strong incentives to portfolio managers to identify more clearly the research they need and the value it adds in informing their investment decisions.” With regards to the PRIIPs Regulation, he acknowledged criticism of potential flaws within the methodology for the calculation of costs, but emphasized his view that the “methodology is sound.”
- ESAs Review: ESMA Chair Maijoor discussed a number of topics related to the September 2017 legislative proposal (COM(2017) 536) aimed at improving the governance and funding of ESAs, including: (i) concerns about “additional complications and burdens from a strengthen role for ESMA on delegation”; (ii) the “new funding model”; and (iii) ESMA’s “level 3 measures” and its “process governing [its] guidelines and Q&As.”
FSB Publishes 2017 Global Shadow Banking Monitor Report
On 5 March, the FSB published its 2017 global shadow banking monitor report. Key observations from the report include, among others: (i) “non-bank financial intermediation, comprising insurance corporations, pension funds, other financial intermediaries [(‘OFIs’)] and financial auxiliaries . . . grew in 2016 at a slightly faster rate than in 2015 to an aggregate $160 trillion”; (ii) “insurance corporations’ and pension funds’ assets have increased since 2009 to $29 trillion and $31 trillion respectively, each now separately representing around 9% of total global financial assets”; (iii) “OFI assets as a whole rose by 8.0% to $99 trillion in 2016, faster than the assets of banks, insurance corporations and pension funds, but not as fast as those of central banks”; (iv) “OFIs have overall become less reliant on wholesale funding and repo, while banks’ overall reliance on wholesale funding and repo as a source of funding has changed little since 2011”; (v) “aggregate interconnectedness between banks and OFIs through credit and funding relationships were at 2003-2006 levels”; (vi) “the narrow measure of shadow banking . . . which include non-bank financial entity types that authorities have assessed as being involved in credit intermediation that may pose financial stability risks . . . grew by 7.6%, to $45.2 trillion in 2016 for the 29 jurisdictions”; (vii) “collective investment vehicles . . . with features that make them susceptible to runs,” e.g., open-ended fixed income funds, credit hedge funds and money market funds, grew at 11.0% in 2016; and (viii) “the level of securitisation-based credit intermediation, which represents 10% of the narrow measure, increased slightly in 2016 after having fallen in recent years.” In addition, the report includes “a set of collaborative case studies written by groups of experts from national and regional authorities” that discuss various types of non-bank financial entities and activities in greater detail.
Insurance Distribution Directive (IDD)
On 9 March, the Council of the EU and the European Parliament approved a Directive to delay the application date of the IDD by seven months to 1 October 2018. The Directive was signed on 14 March 2018 and published in Official Journal on 19 March 2018.
Council of the EU Adopts Decision to Conclude EU-U.S. Covered Agreement
On 20 March, the Council of the EU adopted a decision to approve the Covered Agreement between the EU and U.S. on prudential measures regarding insurance and reinsurance. The agreement will address three areas of prudential insurance oversight: (i) reinsurance; (ii) group supervision; and (iii) the exchange of insurance information between regulators. The decision will enter into force once it is published in the Official Journal.
EIOPA Publishes Second Paper on Systemic Risk and Macro-Prudential Policy in the Insurance Sector
On 21 March, EIOPA published “the second in a series of papers with the aim of contributing to the debate on systemic risk and macroprudential policy” in the insurance sector. The paper explains that it “aims to identify, classify and provide a preliminary assessment of the tools or measures already existing within the Solvency II framework, which could mitigate any of the systemic risk sources that were identified in” EIOPA’s first paper of the series, published in February 2018. This preliminary assessment includes: (i) the “identification of the most relevant instruments/measures in Solvency II“; (ii) a “description of the way in which each tool works”; (iii) “mapping of the tool against a source of systemic risk”; and (iv) “initial/preliminary assessment of the impact of such tools, to the extent possible with the existing information.”
IAIS Publishes Update on ComFrame Development
On 2 March, the International Association of Insurance Supervisors (“IAIS”) published a document containing information on the development status of the IAIS’s Common Framework for the Supervision of Internationally Active Insurance Groups (“ComFrame”). The document also includes information about how the elements of the 2014 draft ComFrame were or will be integrated into each of the IAIS’s Insurance Core Principles (“ICPs”).
On 15 March, the IAIS published a document containing a timeline on the development status of the ComFrame and ICP revisions from March 2018 to November 2019.
Solvency II – EIOPA Publishes for Consultation Draft Amendments and Corrections to Implementing Technical Standards on Reporting and Disclosure
On 28 March, EIOPA published for consultation a draft proposal for amendments and corrections to implementing technical standards on reporting and disclosure under the Solvency II Directive. According to the consultation paper, the draft proposal “include[s] only the minimum amendments correcting existing mistakes and improving the understanding of the current requirements, and facilitate[s] the reporting and quality of the information reported.” The consultation period closes on 11 May 2018.
Capital Markets Union – European Commission Presents Measures Regarding the Completion of the Capital Markets Union
On 8 March, the European Commission published a communication to the European Parliament and the Council of the EU regarding completing the Capital Markets Union (“CMU”) by 2019. The communication sets out a series of adopted and proposed measures aimed at completing the CMU by mid-2019, including: (i) adopting a FinTech action plan; (ii) adopting a sustainable finance action plan; (iii) adopting a proposed Regulation and a proposed Directive amending MiFID II regarding crowdfunding; (iv) a proposal for a Regulation and a Directive on covered bonds; (v) a proposal for a Regulation and a Directive aimed at reducing barriers to cross-border distribution of investment funds; and (vi) a proposal for a Regulation and a communication regarding cross-border transactions in claims and securities. The communication also calls on legislators to focus on the completion of a number of tasks and proposals, including: (i) the European Commission’s proposal for a new pan-European personal pensions label (“PEPP”); (ii) the Commission’s proposal for “a Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures”; (iii) the Commission’s proposal to “address the bias in the tax system towards debt over equity”; (iv) adoption of a “Review of the European Supervisory Authorities”; and (v) the Commission’s proposed “reforms to strengthen the supervision of CCPs.”
On 21 March, ESMA issued an opinion providing further guidance on when components of a package transaction that includes derivatives transactions subject to the trading obligation under the Markets in Financial Instruments Regulation (“MiFIR”) must be traded on an exchange. As explained in the opinion, ESMA recognizes that package transactions may include components that are subject to the trading obligation, and thus must be traded on an exchange, as well as those components that are not. To ensure smooth execution of such package transactions, ESMA “suggests a tailored approach ensuring that, only where it is feasible to trade components of a package that are subject to the [trading obligation] on a trading venue without creating undue operational or execution risk, those components need to be concluded on a trading venue.” This approach applies when: (i) “all components of the package are subject” to the trading obligation; (ii) “at least one component is subject to the [trading obligation] and all other components are subject to the clearing obligation for derivatives”; and (iii) “at least one component is an [interest rate swap] subject to the [trading obligation] and all other components are government bonds denominated in the same currency (‘spread overs’).”
On 26 March, ESMA published its final report on proposed amendments to the Commission Delegated Regulation supplementing Regulation No. 600/2014EU regarding “quoting obligations for systematic internalisers” (“SIs”). The report describes the feedback ESMA received from its public consultation proposing to “clarify that SIs’ quotes would only adequately reflect prevailing market conditions where such quotes mirror the minimum price increment applicable to on-venue trading.” ESMA stated that it has not amended any aspect of its original proposal based on the feedback received and that the final report was submitted to the European Commission on 26 March 2018.
EMIR – ESMA Publishes Final Report on Guidelines for Position Calculation by Trade Repositories under EMIR
On 27 March, ESMA published its final report on guidelines for derivatives position calculation by trade repositories (“TRs”) under the European Market Infrastructure Regulation (“EMIR”). As explained in the report, the guidelines aim to ensure: (i) consistency of position calculation across TRs, with regards to the time of calculations, the scope of the data used in calculations and the calculation methodologies; (ii) a consistent methodology is used to calculate collateral relating to positions; and (iii) “that data made available to authorities in the form of aggregations carried out by TRs is of a high standard.” The report proposes that TRs “calculate position data and make it available in four separate datasets,” namely: (i) Position Set; (ii) Collateral Position Set; (iii) Currency Position Set; and (iv) Currency Collateral Position Set. It also establishes high-level principles regarding the calculation and reporting of position data generally across and specifically under each set.
IOSCO Publishes Consultation Report on Mechanisms used by Trading Venues to Manage Extreme Volatility and Preserve Orderly Trading
On 7 March, IOSCO published a consultation report “explor[ing] the measures currently being used by trading venues in member jurisdictions to address the risks to orderly markets resulting from extreme volatility events.” The report sets out eight recommendations to “assist trading venues and regulatory authorities when making decisions about the implementation, operation and monitoring of volatility control mechanisms,” including: (i) “trading venues should establish and maintain appropriate volatility control mechanisms during trading hours in order to manage extreme volatility and preserve orderly trading in a financial instrument on the market”; (ii) “trading venues should ensure that volatility control mechanisms are appropriately calibrated”; (iii) “trading venues should regularly monitor volatility control mechanism to make sure they are working as designed and to identify circumstances that would require the mechanisms to be re-calibrated”; (iv) “regulatory authorities should consider what information they require to effectively monitor the overall volatility mechanism framework in their jurisdiction, and make sure that trading venues maintain relevant records”; (v) “trading venues should make available upon request by their regulatory authorities information about the execution of any volatility control mechanism”; (vi) “trading venues should communicate sufficient information to market participants and, if appropriate, the public to understand the nature and operation of the volatility control mechanisms used”; (vii) “trading venues should make available to market participants and, if appropriate, the public information regarding the triggering of a volatility control mechanism”; and (viii) “where the same or related instruments are traded on multiple trading venues in the same jurisdiction, trading venues should communicate as appropriate when volatility mechanisms are triggered.”
ECB Launches Second Consultation on the Development of an Unsecured Overnight Interest Rate
On 15 March, the European Central Bank (“ECB”) launched its second public consultation on the development of a new unsecured overnight interest rate. According to the consultation, “the interest rate, which would be produced by 2020, would complement existing benchmark rates produced by the private sector and would serve as a backstop reference rate.” As further explained in the consultation, the ECB is seeking comments regarding the “methodology of the new rate, as well as key operational and technical parameters, on the basis of the above definition of the rate’s underlying interest.” The consultation period closes on 20 April 2018.
ESMA Agrees on Temporary Product Intervention Measures for Contracts for Differences and Binary Options
On 27 March, ESMA agreed on temporary measures restricting the sale of contracts for differences (“CFDs”) to retail investors in the EU and prohibiting binary options to these investors. Measures to be implemented for CFDs include: (i) “leverage limits on the opening of a CFD by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying; (ii) “a margin close out rule on a per account basis”; (iii) “negative balance protection on a per account basis”; (vi) “a restriction on the incentives offered to trade CFDs”; and (v) “a firm-specific risk warning, including the percentage of losses on a CFD provider’s retail investor accounts, delivered in a standardised way.” The sale or distribution of binary options to retail investors will be prohibited for three months.
CRA Regulation – ESMA Publishes Consultation Paper Regarding Guidelines on the Application of the Endorsement Regime under Article 4(3) of the CRA Regulation
On 27 March, ESMA published a consultation paper regarding guidelines on the application of the endorsement regime under Article 4(3) of the Credit Rating Agency (“CRA”) Regulation. As explained in the paper, CRA Regulation “allows an EU CRA to endorse a credit rating issued by a third-country CRA if the endorsing CRA can demonstrate that the conduct of the third-country CRA ‘fulfils requirements which are at least as stringent as’ those set out” in the CRA Regulation. The guidelines “aim to provide clarity regarding the general principle ESMA relies on when assessing whether an alternative internal requirement can be considered as stringent as a requirement set out” in the CRA Regulation. The consultation period closes on 25 May 2018.
CSDR – ESMA Publishes Final Report Regarding Guidelines on Internalised Reporting Under Article 9 of CSDR
On 28 March, ESMA published its final report regarding guidelines on how to report internalised settlements under Article 9 of the Central Securities Depository Regulation (“CSDR”). The report describes the feedback ESMA received from its public consultation on “Guidelines on Internalised Settlement Reporting under CSDR” and presents ESMA’s responses to the feedback received.
Securitisation Regulation – ESMA Publishes Consultation Papers on Draft Technical Standards
On 23 March, ESMA published two consultation papers on draft technical standards implementing the Securitisation Regulation. The consultation period closes on 23 May 2018.
- Consultation Paper on “draft technical standards on the application for registration as a securitisation repository,” which covers the “contents [and format] of the application to be submitted to ESMA by firms seeking to provide repository services.”
- Consultation Paper on “ESMA’s technical advice to the Commission on fees for securitisation repositories,” which aims to assist the Commission in “formulating a regulation on fees for securitisation repositories.”
MiFID II/MiFIR – ESMA Updates Q&As on Investor Protection Topics under MiFID II/MiFIR
On 23 March, ESMA updated its Q&As on investor protection topics under MiFID II/MiFIR. The updated Q&As contain three updated Q&As regarding: (i) whether “macro-economic analysis [can] be considered research that can be paid for from an RPA and client research charges under Article 13(1)(b) of the MiFID II Delegated Directive”; (ii) “how should research related to fixed income, currencies or commodities (FICC) be treated for the purposes of the MiFID II inducements restriction for firms providing portfolio management or independent investment advice (Article 24(7) and (8))”; and (iii) “how should investment firms use the product’s costs as presented in the PRIIPs KID.” The updated document also includes four new Q&As regarding: (i) the definition of “hold a retail client account” . . . in the context of Article 62(2) of the MiFID II Delegated Regulation”; (ii) whether “for the purpose of Article 62(1) of the MiFID II Delegated Regulation, if the same threshold is exceeded again and again during the same reporting period, should the firm report the fact to the client each time the threshold is exceeded”; (iii) how “investment firms providing the investment service of portfolio management [should] treat inducements received after 3 January 2018 with regards to financial instruments in which the firm has invested on behalf of the client before that date”; and (vi) how the term “‘ongoing relationship’ [should] be used in various articles in the MiFID II Directive and the MiFID II Delegated Regulation.”
MiFID II/MiFIR – ESMA Updates Q&As on Commodity Derivatives Topics under MiFID II/MiFIR
On 27 March, ESMA updated its Q&As on commodity derivatives topics under MiFID II/MiFIR. The updated document contains four revised Q&As regarding: (i) “how . . . the position limits regime [is] applied to the various underlying [commodities] listed in Annex I, Section C(10) of MIFID II”; (ii) “how . . . limits [can] be set for contracts with an open interest between 5,000 and 10,000 lots which have a low number of market participants or market makers as described in Article 19(2) of RTS 21”; (iii) “how . . . position limits [are] applied to intercommodity ‘spread’ or ‘diff’ contracts”; and (vi) “in cases where an OTC contract is economically equivalent to more than one [exchange traded derivative (“ETD”)] contract traded on an EU trading venue and where those ETD contracts are not the same derivative contract, to which [National Competent Authority (“NCA”)] should the reporting of the [Economically-Equivalent OTC] contracts be addressed.”
MiFID II/MiFIR – ESMA Updates Q&As on Market Structure Topics under MiFID II/MiFIR
On 28 March, ESMA updated its Q&As on market structure topics under MiFID II/MiFIR. The updated Q&As contain two updated Q&As regarding: (i) whether “if the [average daily number of transactions (“ADNT”)] for an instrument is not available, which liquidity band should trading venues apply until the ADNT is published by NCA or ESMA”; and (ii) the extent to which systematic internalisers can “engage in other types of riskless back-to-back transactions.” The updated document also includes one new Q&A regarding whether “a trading venue [can] control access to the fee and other information required to be published by Article 4 of RTS 10.”
MiFID II/MiFIR – ESMA Updates Q&As on Transparency Topics under MiFID II/MiFIR
On 28 March, ESMA updated its Q&As on transparency topics under MiFID II/MiFIR. The updated document contains one updated Q&A regarding whether “the trading obligation for derivatives as specified in Commission Delegated Regulation (CDR) (2017/2417) appl[ies] to non-par swaps.”
Benchmarks Regulation – ESMA Updates Q&As on the Implementation of the Benchmarks Regulation
On 22 March, ESMA updated its Q&As on the implementation of the Benchmarks Regulation (EU) 2016/1011. The updated document contains one updated Q&A on “how . . . supervised contributors [should] apply Article 16 [(which sets out a number of requirements that apply directly to supervised entities when they contribute input data to an administrator located in the EU)] during the transitional period . . . until the administrator of a benchmark is authorised or registered.”
Market Abuse Regulation – ESMA Updates Q&As on the Implementation of the Market Abuse Regulation
On 23 March, ESMA updated its Q&As on the implementation of the Market Abuse Regulation (596/2014/EU) (“MAR”). The updated document contains one updated Q&A regarding whether “credit institutions under MAR [are required] to publish systematically the results of the Pillar II assessment and/or any information received in relation to the Minimum Requirement for own funds and Eligible Liabilities (MREL) exercise.”
CSDR - ESMA Updates Q&As on the Implementation of the CSDR
On 23 March, ESMA updated its Q&As on the implementation of the CSDR. The updated document contains two new Q&As regarding: (i) whether “the CSD links a CSD has established or intends to establish at the time of its application for authorisation under Article 16 of CSDR [should] be assessed for the purpose of granting authorisation to that applicant CSD”; and (ii) whether “links between CSDs participating in T2S [are] interoperable links as defined in the CSDR.” The document also contains one updated Q&A regarding whether Article 35 of CSDR allows CSDs “to use internal or proprietary messaging standards in their communication procedures with the participants of the securities settlement system they operate and the market infrastructures they interface with.”
Prospectus Regulation - ESMA Updates Q&As on the Implementation of the Prospectus Regulation
On 28 March, ESMA updated its Q&As on the implementation of the Prospectus Regulation (2017/1129/EU). The updated document contains a new Q&A on the definition of profit forecasts under the Prospectus Regulation. As explained in the accompanying release, the “purpose of this Q&A is to enhance supervisory convergence in the area of prospectus approval.”
Remarks by Benoît Cœuré, Member of the Executive Board of the ECB, on the Euro Cyber Resilience Board
On 9 March, Benoît Cœuré, Member of the Executive Board of the ECB, delivered remarks at the first meeting of the Euro Cyber Resilience Board (“ECRB”) for pan-European Financial Infrastructures on the establishment of and recent initiatives launched by the ECRB. As noted in his remarks, the ECRB is chaired by the ECB and aims to “enhance the cyber resilience of financial market infrastructures and their critical service provider” across the EU, but will have “no formal powers to impose binding measures and will not make supervisory judgements.” Mr. Cœuré introduced two initiatives that the ECRB recently launched, including: (i) a “cyber resilience survey” which will “highlight[t] a number of very pertinent issues for discussion, such as cyber governance, training and awareness, and cyber incident response”; and (ii) “finalising the main elements of the European Threat Intelligence-Based Ethical Red-Teaming (“TIBER-EU”) Framework . . . which we hope will raise the level of cyber resilience in Europe and enable cross-border, cross-authority testing.”
o 4 April: IOSCO consultation on proposed guidance regarding conflicts of interest and associated conduct risks during the equity capital raising process closes.
o 20 April: ECB consultation on the development on a new unsecured overnight interest rate closes.
o 11 May: EIOPA consultation on draft proposal for amendments and corrections to implementing technical standards on reporting and on disclosure under the Solvency II Directive closes.
o 25 May: ESMA consultation regarding guidelines on the application of the endorsement regime under Article 4(3) of the Credit Rating Agency Regulation closes