EU Regulatory Update
FSB Plenary Meeting
On 25 June, the Financial Stability Board (“FSB”) held a plenary meeting to discuss risks and vulnerability from market developments and to assess progress made against its 2018 work plan to be delivered to the G20 Summit in November 2018. The participants discussed, among other things: (i) market development and vulnerabilities, such as the increase of interest rates after a prolonged period of low-interest rates; (ii) crypto-assets, including agreeing on a framework to monitor potential emerging financial stability risks of crypto-assets; (iii) cyber resilience; (iv) an evaluation of the effect of reforms on the financing of infrastructure investment and incentives to centrally clear over-the-counter (“OTC”) derivatives; (v) the International Organization of Securities Commission’s (“IOSCO”) work to develop consistent leverage measures for investment funds; (vi) a draft framework for FSB collection and handling of firm-level non-public data; and (vii) a review of FSB processes and transparency.
Council of the EU invites COREPER to Agree on Negotiating Mandate on Proposed Directive and Regulation Regarding the Cross-Border Distribution of Investment Funds
On 15 June, the Council of the EU invited its Permanent Representatives Committee (“COREPER”) to agree on the negotiating mandate about the proposed Directive (2018/0041(COD)) and Regulation (2015/0045(COD)) regarding the cross-border distribution of investment funds. The Council also invited COREPER to authorize the Council’s presidency to enter into negotiations with the European Parliament on the basis of the mandate with a view to reaching an agreement at first reading.
EIOPA Publishes 2017 Annual Report
On 15 June, the European Insurance and Occupational Pensions Authority (“EIOPA”) published its 2017 annual report. EIOPA indicated that in 2018, it will focus on issues related to digitalization, InsurTech, and sustainable finance, as well as continue to support the European Commission's actions in the European financial services agenda, including the Capital Markets Union.
IAIS Publishes Issues Paper Regarding Index-Based Insurance
On 18 June, the International Association of Insurance Supervisors (“IAIS”) published an issues paper regarding index-based insurance, particularly focusing on inclusive insurance markets and weather-related or natural catastrophe event risks. The paper discusses a number of issues, including: (i) the roles of various stakeholders in such markets and, in particular, those not usually seen in conventional insurance, such as government agencies; (ii) legal certainty, insurable interest, and the nature of the insurance products; and (iii) consumer protection, including the development of insurance products and importance of proper consideration of basis risk, the setting of a sound and credible index, and the role of subsidies.
Council of EU Agrees on Negotiating Stance for the PEPP
On 19 June, the Council of the EU announced that it has agreed on its negotiating stance on the proposed pan-European pension product (“PEPP”). Negotiations with the European Parliament on the proposal are expected to proceed once the European Parliament has agreed on its stance.
Committee on the Internal Market and Consumer Protection Publishes Opinion on the PEPP
On 25 June, the European Parliament has published an opinion of the Committee on the Internal Market and Consumer Protection for the European Parliament’s Committee on Economic and Monetary Affairs (“ECON”) regarding the PEPP. The opinion provides a number of amendments and clarifications to the text of the PEPP, including extending the applicability period of the PEPP from three years to five years.
EIOPA Launches InsurTech Survey
On 27 June, EIOPA launched a survey seeking views of the insurance industry and firms not directly affected by InsurTech regarding technology-enabled innovation in insurance that could result in new business models, applications, processes, or products. EIOPA indicated that it is particularly interested in views regarding licensing requirements, barriers to InsurTech, and InsurTech facilitation.
On 20 June, the European Securities and Markets Authority (“ESMA”) issued a statement indicating that the transition period for the reporting of legal entity identifiers (“LEI”) under the Markets in Financial Instruments Regulation (600/2014/EU) (“MiFIR”) will close on 2 July 2018. ESMA noted it had issued a statement on 20 December 2017 that provided for trading venues to report their own LEI codes instead of LEI codes of non-EU issuers that do not have their own LEI codes, and that because ESMA has observed a significant increase in the LEI coverage for both issuers and clients, there is no need to extend the initial six-month period granted to support the introduction of the LEI requirements under MiFIR.
On 22 June, ESMA published a letter (dated 31 May 2018) sent by Valdis Dombrovskis, Vice-President of the European Commission, to Steven Maijoor, Chair of ESMA, regarding the application of the ancillary activity test under Article2(1)(j) of the Markets in Financial Instruments Directive (“MiFID II”). The letter indicates that: (i) in order to benefit from the ancillary activity exemption, a firm that deals for its own accounts and provides investment services in relation to commodity derivatives must pass the ancillary test for both activities; (ii) the ancillary activity test compares the MiFID II activities of a firm with the commercial activities of the firm or the group of which the firm is in; and (iii) the ancillary activities test must be calculated for each person within a group that engages in either of the two relevant MiFID II activities under Article2(1)(j).
On 27 June, the Council of the EU published a compromise text on the European Commission’s proposal for a regulation amending (i) the regulation establishing ESMA and (ii) the European Market Infrastructure Regulation (648/2012/EU) (“EMIR”) regarding the procedures and authorities involved for the authorization of CCPs and requirements for the recognition of third-country CCPs. Among others, amendments include those to relating to requirements that could be imposed on CCPs during “exceptional situations.”
On 22 June, ESMA published an opinion addressed to national competent authorities regarding CCP Liquidity Risk Assessment under Article 44(1) of EMIR. Article 44(1) of EMIR requires CCPs to have “access to adequate liquidity to perform its services and activities.” The opinion outlines how CCPs should assess liquidity risk when a clearing member also acts as a liquidity provider, as well as when a liquidity provider is not a clearing member.
On 12 June, the European Parliament voted to adopt the proposed regulation amending EMIR regarding “the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for [over-the-counter (“OTC”)] derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories.” Among other things, the amendments would: (i) exempt small financial counterparties from the clearing obligation under certain circumstances; (ii) grant ESMA the authority to develop distinct clearing thresholds for financial and non-financial counterparties and require such thresholds to be regularly updated; and (iii) extend by two years the exemption of a majority of pension scheme arrangements from the clearing obligation.
On 13 June, ESMA published its first annual report regarding supervisory measures carried out and penalties imposed by national competent authorities (“NCAs”) under EMIR. The report presents findings in a number of areas, including: (i) NCAs’ structure and allocation of competences; (ii) NCAs’ interaction with market participants; (iii) sources of information checked by NCAs; (iv) supervisory activities; (v) investigations conducted in 2017; (vi) enforcement actions; (vii) enforcement procedures; (viii) criminal penalties; and (ix) penalties imposed in relation to Articles 4, 9, 10 and 11 of EMIR. The report concludes that while some areas appear to be highly harmonized, such as the sources of information used by NCAs, other areas appear to be highly unharmonized, such as the level of fines.
Council of the EU Publishes Proposed Presidency Compromise Regarding the Proposed EMIR 2.2
On 14 June, the Council of the EU published a proposed presidency compromise regarding a proposal for a regulation amending (i) the regulation establishing ESMA and (ii) EMIR regarding the procedures and authorities involved for the authorization of CCPs and requirements for the recognition of third-country CCPs (also known as EMIR 2.2). Among other things, the compromise text includes new language to indicate that: (i) “the access criteria and requirements of central bank of issue for opening an overnight deposit account should not amount to an obligation to relocate all or part of the clearing services of the CCP”; and (ii) “the requirements for systemically-important CCPs should therefore be applied in a manner proportionate to the risks that the CCP may present to the Union.”
ECON and AFCO Adopt Draft Report Regarding the ECB’s Regulatory Powers over Clearing and Payment Systems
On 19 June, the ECON and the Committee on Constitutional Affairs (“AFCO”) adopted a draft report regarding amendments to Statute of the European System of Central Banks and of the European Central Bank: clearing and payment systems (2017/0810(COD)). The amendments would, among other things, grant the European Central Bank (“ECB”) the authority to promulgate regulations over clearing and payment systems (including CCPs), such as “imposing requirements relating to liquidity risk controls, settlement arrangements, margins, collateral or interoperability arrangements” in order to address potential harm to EU financial institutions and markets. The draft report will be voted on by the European Parliament plenary session in July or September 2018.
ECB Launches Consultation on Potential Successor to the Euro Overnight Index Average
On 21 June, the ECB and the working group on euro risk-free rates launched a consultation regarding potential replacements for the Euro Overnight Index Average (“EONIA”). The consultation focuses on three potential candidates, including: (i) “the euro short-term rate (“ESTER”), a new wholesale unsecured overnight bank borrowing rate, which the ECB will produce before 2020”; (ii) “GC Pooling Deferred, a one-day secured, centrally cleared, general collateral repo rate, which is produced by STOXX, a wholly owned subsidiary of Deutsche Börse Group”; and (iii) “RepoFunds Rate, a one-day secured, centrally cleared, combined general and specific collateral repo rate, which is produced by NEX Data Services Limited, a wholly owned subsidiary of NEX Group plc, soon to be acquired by CME Group.” The consultation period closes on 13 July 2018.
Council of EU Agrees on Negotiating Stance for Proposed Regulation Regarding Cross-Border Payments and Currency Conversion Charges
On 27 June, the Council of the EU announced that it has agreed in its negotiating stance on the European Commission’s proposed regulation amending Regulation (EC) 924/2009 regarding certain charges on cross-border payments in the EU and currency conversion charges. The proposed regulation seeks to align the cost of intra-EU cross-border transactions, extend such alignment to certain non-EU areas, and increase the transparency requirements for the costs of currency conversion. Negotiations with the European Parliament will begin as soon as the European Parliament agrees on its stance.
o 13 July: European Central Bank consultation regarding the potential replacements for the Euro Overnight Index Average closes.
o 20 July: European Banking Authority consultation on draft guidelines regarding simple, transparent, and standardized securitization closes.
o 24 July: European Commission consultation on a proposed regulation amending the Market Abuse Regulation and Prospectus Regulation regarding the promotion of the use of SME growth markets closes.
o 24 July: European Commission consultation on a proposed regulation on sovereign bond-backed securities closes.
o 25 July: European Commission consultation on a proposal for a regulation on the establishment of a framework to facilitate sustainable investment closes.
o 25 July: European Commission consultation on a proposal for a regulation on low carbon benchmarks and positive carbon impact benchmarks closes.
o 25 July: European Commission consultation on disclosures relating to sustainable investments and sustainability risks and amendments of the Directive on the activities and supervision of institutions for occupational retirement provisions closes.
o 12 August: European Insurance and Occupational Pensions Authority survey on InsurTech closes