EU Regulatory Update
ESMA Publishes Response to Consultation on Draft Guidelines on Article 49 of the GDPR
On 13 April, EMSA published its response (dated 22 March 2018) to the Article 29 Working Party’s February 2018 consultation (which closed on 26 March 2018) regarding draft guidelines on Article 49 of the General Data Protection Regulation (2016/679/EU) (“GDPR”). ESMA focused its response on the “public interest derogation” aspect of the GDPR, which relates to the “international transfers of personal data necessary for important reasons of public interest.” ESMA highlighted a number of issue areas for which further clarification would be useful, including matters related to: (i) “the fact that the ‘not repetitive’ condition does not apply to the Public Interest Derogation in the final Guidelines”; and (ii) the fact that “in the context of derogations (such as the Public Interest Derogation), the compliance with other provisions of the GDPR only applies to transferring Authorities.” ESMA’s response also states that “from a practical perspective . . . EU authorities should abstain from transferring personal data to third country authorities where serious indications of facts liable to constitute breaches of fundamental rights under Union law exist.”
FSB Publishes Report Providing Tools to Mitigate Misconduct Risk
On 20 April, the Financial Stability Board (“FSB”) published a report providing a “toolkit that firms and supervisors can use to mitigate misconduct risk.” The report sets forth three broad types of tools aimed at either: (i) “mitigating cultural drivers of misconduct”; (ii) “strengthening individual responsibility and accountability; and (iii) “addressing the ‘rolling bad apples’ phenomenon.”
European Commission Publishes for Consultation Proposal for a Directive Regarding Whistleblower Protection
On 23 April, the European Commission published for consultation a proposal for a directive (adopted on 17 April 2018) regarding “the protection of persons reporting on breaches of Union law” (2018/0106 (COD)). According to an accompanying factsheet, the proposed directive will: (i) “establish safe channels for reporting both within an organisation and to public authorities”; (ii) “protect whistleblowers against dismissal, demotion and other forms of retaliation”; and (iii) “require national authorities to inform citizens and provide training for public authorities on how to deal with whistleblowers.” The consultation period closes on 18 June 2018.
ECON Publishes Draft Resolutions on Proposed Directive and Regulation regarding Prudential Supervision of Investment Firms
On 11 April, the European Parliament’s Committee on Economic and Monetary Affairs (“ECON”) published two draft legislative resolutions regarding:
o A proposal for a Directive (2017/0358(COD)) on the “prudential supervision of investment firms” and amending the Capital Requirements Directive (2013/36/EU) (“CRD IV”) and Markets in Financial Instruments Directive (“MiFID II”); and
o A proposal for a Regulation (2017/0359(COD)) on the “prudential supervision of investment firms” and amending the Capital Requirements Regulation (575/2013/EU) (“CRR”), the Markets in Financial Instruments Regulation (“MiFIR”), and the Regulation (1093/2010/EU) establishing the European Banking Authority (“EBA”).
According to the accompanying explanatory statements, the two proposals “aim to differentiate the prudential regime [under CRR and CRD] according to the size, nature and complexity of investment firms” so that: (i) “the largest and most systemic investment firms would remain under the prudential and supervisory regime of banks as set out in the CRR/CRD”; and (ii) “all other investment firms in the EU would no longer be subject to CRR/CRD rules but would enjoy a new bespoke regime with dedicated prudential and supervisory requirements.” The explanatory statements note that the European Parliament Rapporteur supports the “objectives pursued in th[e] two proposals to create a dedicated, tailor-made, regime for investment firms in the EU,” but also include a number of recommendations by the Rapporteur aimed at enhancing the proposed legislations.
European Commission Publishes Final Report on the Distribution of Retail Investment Products Across the EU
On 24 April, the European Commission published a final report on its study of the distribution systems of retail investment products across the EU. The report provides observations and recommendations across a number of topics, including: (i) the “mapping of the distribution systems for retail investment products”; (ii) the “accessibility of Exchange-Traded Funds (ETFs) to retail investors in the EU”; (iii) costs and charges of various types of investment products; (iv) “outcomes of different types of advice”; (v) “initiatives to guide the distribution process of retail investment products”; (vi) “challenges for consumers with regard to investment products”; (vii) the “impact of on-line platforms and new FinTech solutions on retail investment distribution”; and (viii) “views of stakeholders pertaining to online investment platforms.” As explained by an accompanying overview, key conclusions of the report include: (i) “retail investors have access to a wide range of products through various distribution channels but face huge challenges in collecting information, comparing data or getting independent advice on the different products on offer”; (ii) “the costs for similar product categories vary strongly across EU countries”; (iii) “in most EU countries, investors seek advice mainly from non-independent advisors (i.e. banks and insurers) who tend to propose between two and three in-house products”; and (iv) “the potential for new distribution models based on FinTech is promising but needs still to be monitored carefully.” The European Commission also published an accompanying executive summary of the report.
On 17 April, the European Commission published for consultation a draft regulation (Ares(2018)2037113) amending the Solvency II Delegated Regulation (2015/35/EU) regarding the “calculation of regulatory capital requirements for securitisations and simple, transparent and standardised [(“STS”)] securitisations held by insurance and reinsurance undertakings.” The draft regulation proposes a number of amendments to the Solvency II Delegated Regulation in order to achieve consistency with the Commission’s December 2017 STS Regulation, including: (i) alignment of securitisation-related definitions used in the Solvency II Delegated Act with those in the STS Regulation; (ii) repeal of the risk retention and due diligence requirements in the Solvency II Delegated Act to avoid duplication with the STS Regulation; (iii) the adoption of “new calibration for non-senior tranches of STS securitisations”; and (iv) “technical improvements . . . to the methodology of the calculation of the calibrations for the senior tranches” of STS securitisations. The consultation period closes on 15 May 2018.
On 5 April, the European Commission published a report to the European Parliament and Council (COM(2018) 169 final) on the application of the Solvency II Directive (2009/138/EC) regarding “the supervision of insurance and reinsurance undertakings in a group” and, separately, “the assessment of the transitional period for the occupational retirement provision business of life insurance undertakings.” The report states that issues related to group internal models require legislative change, as divergences among member states with regards to this issue “have been identified and EIOPA needs enhanced powers to bring about convergence.” The report also recognizes, however, that action regarding this matter was taken via the adoption of a legislative proposal (COM(2017)537) to amend Solvency II. With regards to Solvency II’s directive setting forth provisions on institutions for occupational retirement provision, which as the report explains, allows life insurers’ occupational retirement provision business to be “exempt from full application of the solvency capital requirement . . . in Solvency II for a transition period,” the report states that the Commission may want to make a decision nearer to the end of 2022 concerning a possible transition period extension.
Council of the EU Publishes Second Proposed Presidency Compromise Regarding the Pan-European Personal Pension Product
On 23 April, the Council of the EU published its second proposed presidency compromise regarding a regulatory proposal related to the proposed pan-European personal pension product (“PEPP”). Among other things, the compromise proposes amendments that would: (i) “lay down uniform rules on the registration, manufacturing, distribution and supervision of PEPP”; (ii) require alternative investment fund managers and institutions for occupational retirement provision (“IORPs”), “when providing PEPP as collective investment management UCITS management companies . . . [to] create a designated PEPP fund that is targeted only to PEPP savers; and (iii) set out specific standard contract terms.
EIOPA Publishes 2018-19 Supervisory Convergence Plan
On 23 April, EIOPA published its supervisory convergence plan for 2018-19. According to the release document, EIOPA will prioritize three key areas of supervisory convergence for 2018-19, including: (i) implementing a “common supervisory culture and new supervisory tools” through efforts such as developing “common benchmarks for the supervision of internal models,” working on “a common basis for the supervisory assessment of conduct risks throughout a product’s life cycle,” performing “a thematic review on travel insurance,” and defining “good practices for the supervision of intra-group transactions and risks concentrations”; (ii) addressing “risks to the internal market and the level playing field which may lead to supervisory arbitrage”; and (iii) supervising emerging risks, such as IT security and governance and cybersecurity,” and conducting “a thematic review of the insurance industry’s use of big data.”
EIOPA Publishes 2017 Oversight Activities Report
On 18 April, EIOPA published its annual oversight activities report providing an overview of its 2017 oversight activities and its oversight priorities for 2018. According to the report, 2018 oversight priorities for EIOPA include: (i) enhancing “the efficiency and effectiveness of the European supervisory system with a particular focus on cross border activities”; (ii) examining “supervisory practices in the authorisation process . . . and in the assessment of fitness and propriety of key staff in/or owners of the insurance undertaking”; and (iii) “support[ing] reviews of business models in order to be able to have appropriate and timely supervisory actions by the concerned national supervisory authority where business models pose material prudential and/ or conduct risks.”
EU-U.S. Covered Agreement Entered into Force
On 4 April, the Official Journal of the European Union published a notice stating that the Covered Agreement between the EU and U.S. on prudential measures regarding insurance and reinsurance entered into force on 4 April 2018. The agreement addresses three areas of prudential insurance oversight: (i) reinsurance; (ii) group supervision; and (iii) the exchange of insurance information between regulators.
MiFID II/MiFIR – Transitional Transparency Calculations
On 18 April, ESMA updated its list of MiFID II/MiFIR transitional transparency calculations for bonds. As noted in the accompanying release, the update relates to the “liquidity assessment for bond instruments except for ETCs and ETNs.” As further explained by the accompanying release, trading venues “are expected to apply the new results from 23 April 2018.”
CRR and EMIR – European Commission Publishes Draft Implementing Regulation to Extend Transitional Period Related to Own Fund Requirements for Exposures to CCPs
On 17 April, the European Commission published for consultation a draft regulation (Ares(2018)2044238) regarding the “extension of the transitional periods related to own funds requirements for exposures to central counterparties” under the CRR and the European Market Infrastructure Regulation (648/2012/EU) (“EMIR”). Noting that certain third-party central counterparties (“CCPs”) are still awaiting recognition as required by EMIR and that this recognition process will not be completed by 15 June 2018, the original end-date for the transition period, the European Commission’s draft regulation proposes to extend the transitional period end-date to 15 December 2018. The consultation period closes on 15 May 2018.
ECON and AFCO Publish Draft Legislative Resolution Regarding ECB Regulatory Authority over CCPs
On 19 April, the European Parliament’s ECON and Committee on Constitutional Affairs published a draft legislative resolution proposing amendments to the draft decision amending Article 22 of the Statute of the European System of Central Banks and of the European Central Bank (“ECB”) (2017/0810 (COD)). The amendments would explicitly grant the ECB the power to regulate “clearing systems for financial instruments within the Union and with third countries.”
CPMI and IOSCO Publishes Framework for Supervisory Stress Testing of CCPs
On 10 April, the Committee on Payments and Market Infrastructures (“CPMI”) and the International Organization of Securities Commissions (“IOSCO”) jointly published a framework for conducting supervisory stress tests (“SSTs”) of CCPs. According to the framework document, the framework “is intended to serve as a guide for one or more [national] authorities to design and run a multi-CCP SST with a macroprudential orientation” and sets out six steps that national authorities should follow when designing and conducting a multi-CCP SST, including: (i) “setting the purpose and exercise specifications (Component 1)”; (ii) “establishing governance arrangements (Component 2)”; (iii) “developing stress scenarios (Component 3)”; (iv) data collection and protection (Component 4)”; (v) “aggregating results and developing analytical metrics (Component 5)”; and (vi) “determining the use of results and disclosure (Component 6).”
IOSCO Publishes Final Report Providing Recommendations to Improve Regulatory Reporting and Transparency in Secondary Corporate Bond Markets
On 5 April, IOSCO published its final report providing recommendations to improve regulatory reporting and transparency in secondary corporate bond markets. The report recommends that regulatory authorities should: (i) “be able to obtain the information necessary to develop a comprehensive understanding of the corporate bond market in their jurisdiction”; (ii) “facilitate cross-border understanding amongst regulators of corporate bond markets, make a clear framework and underlying methodology of regulatory reporting and transparency available”; (iii) “have access, either directly or upon request, to pre-trade information where it is available, relating to corporate bonds”; (iv) “implement post-trade (transaction) regulatory reporting requirements for secondary market trading in corporate bonds”; (v) “consider steps to enhance the public availability of appropriate pre-trade information relating to corporate bonds, taking into account the potential impact that pre-trade transparency may have on market liquidity”; (vi) “implement post-trade transparency requirements for secondary market trading in corporate bonds”; and (vii) “where there is transparency of post-trade data relating to corporate bonds, take steps to facilitate the consolidation of that data.”
Securitisation Regulation – EBA Publishes for Consultation Draft Guidelines for Interpreting the STS Criteria
On 20 April, the EBA published for consultation two sets of draft guidelines that, according to the accompanying release, aim to provide “a harmonised interpretation of the criteria for the securitisation to be eligible as simple, transparent and standardised” (STS) under the EU’s new securitization framework. The two sets of guidelines cover STS securitisation criteria for: (i) asset-backed commercial paper (“ABCP”); and (ii) non-ABCP. The EBA will hold a public hearing on these matters on 11 June 2018. The consultation period closes 20 July 2018.
Prospectus Regulation – ESMA Publishes Technical Advice
On 3 April, ESMA published a report (dated 28 March 2018) containing the “first part of its Technical Advice under the Prospectus Regulation” (2017/1129/EU). The report’s technical advice coverers: (i) “the format and content of the prospectus”; (ii) “the content, format and sequence of the EU Growth prospectus”; and (iii) “the scrutiny and approval of the prospectus.” As explained in the report’s accompanying release, “subject to endorsement by the [European Council], the technical advice will form the basis for the delegated acts to be adopted by the [European Council] by 21 January 2019.”
CPMI and IOSCO Publishes Technical Guidance on the Harmonization of OTC Derivatives Data Elements
On 9 April, the CPMI and IOSCO jointly published technical guidance on the harmonization of over-the-counter (“OTC”) derivatives data elements besides the unique transaction identifier (“UTI”) and the unique product identifier (“UPI”). The technical guidance provides “technical guidance on the definition, format and allowable values of critical data elements, other than UTI and UPI . . . reported to [trade repositories] and important to aggregation by authorities,” but does not address the “harmonisation of data elements related to lifecycle events, because of the existence of different conceptual models to meet authorities’ needs.”
FSB Publishes Second Consultation on Unique Product Identifier Governance
On 26 April, the FSB published a second consultation document on proposed governance arrangements for the UPI. According to the release document, this second consultation is seeking comments related to: (i) “fee models and cost recovery”; (ii) intellectual property; (iii) standardisation; (iv) “competition among UPI Service Providers”; and (v) “arrangements for a UPI Reference Data Library.” The consultation period closes on 28 May 2018.
ESMA Seeks Clarification from European Commission on Use of Ancillary Activity Test
On 9 April, ESMA sent a letter to European Commission Vice President Valdis Dombrovskis, Commissioner for Financial Stability, Financial Services and Capital Markets Union, seeking clarification “regarding the exemption from authorisation as [an] investment firm which non-financial entities are eligible for [under MiFID II] when their commodity derivative trading activity is ancillary to their main business.” The letter states that there is uncertainty regarding how tests to determine whether such trading activity is ancillary should be conducted, and “whether those tests should be performed at group or single entity level.” The letter invites the European Commission to provide further guidance on the matter.
ECB Publishes for Consultation its Cyber Resilience Oversight Expectations Report
On 10 April, the ECB published for consultation its draft cyber resilience oversight expectations (“CROE”) report for financial market infrastructures (“FMIs”). According to the draft report, the CROE is based on the June 2016 CPMI-IOSCO guidance regarding cyber resilience for FMIs and aims to provide: (i) “overseers with clear expectations to assess the FMIs under their responsibility and determine their cyber resilience maturity levels”; (ii) “FMIs with detailed steps on how to operationalise the [June 2016 CPMI-IOSCO guidance], ensuring they are able to foster improvements and enhance their cyber resilience over a sustained period of time”; and (iii) a “basis for a meaningful discussion between the FMIs and their respective overseers.” As further explained, the draft report outlines “five primary risk management categories” for FMIs, namely (i) governance; (ii) identification; (iii) protection; (iv) detection; and (v) response and recovery. It also sets forth “three overarching components that should be addressed across an FMI’s cyber resilience framework”: (i) testing; (ii) situational awareness; and (iii) learning and evolving, that should be “addressed across an FMI’s cyber resilience framework.” The consultation period closes on 5 June 2018.
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 15 May: European Commission consultation regarding the extension of the transitional periods related to own funds requirements for exposures to central counterparties under CRR and EMIR closes.
o 15 May: European Commission consultation regarding the “calculation of regulatory capital requirements for securitisations and STS securitisations held by insurance and reinsurance undertakings 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.
o 28 May: FSB consultation on proposed governance arrangements for the unique product identifier closes.
o 5 June: ECB consultation regarding its cyber resilience oversight expectations report closes.