EU Regulatory Research
European Parliament’s ECON Tables Report on Relationships Between the EU and Third Countries Regarding Financial Regulation and Supervision
On 29 August, the European Parliament’s Committee on Economic and Monetary Affairs (“ECON”) tabled a report (dated July 18, 2018) on the relationships between the EU and third countries regarding financial regulation and supervision. The report follows the European Parliament’s 19 January 2016 resolution on “Stocktaking and challenges of the EU Financial Services Regulation,” which asked the European Commission to “propose a consistent, coherent, transparent and practical framework for procedures and decisions on third-country equivalence, taking into account an outcome-based analysis and international standards or agreements.” The report addresses: (i) the EU’s relationships with third countries regarding financial regulation and supervision since the global financial crisis; (ii) EU equivalence procedures; and (iii) the “EU’s role in global standard-setting for financial regulation.” With respect to equivalence, the report: (i) calls on the European Commission to report annually to the European Parliament all decisions on equivalence, including explanations of the rationale for such decisions; (ii) calls on “the Commission to consider the current equivalence regime and to assess whether it contributes to achieving a level playing field between EU and third-country financial institutions”; and (iii) calls “for equivalence decisions to be subject to ongoing monitoring by the relevant [European Supervisory Authority, or ESA] and for the outcome of such monitoring to be made public.” European Parliament is scheduled to vote on the report on 11 September 2018.
EBA, EIOPA and ESMA Publish Report on Automation in Financial Advice
On 5 September, the European Banking Authority (“EBA”), the European Insurance and Occupational Pensions Authority (“EIOPA”) and the European Securities and Markets Authority (“ESMA”) published a Joint Committee Report “on the results of the monitoring exercise on ‘automation in financial advice.’” The report “shows that while the phenomenon of automation in financial advice seems to be slowly growing, the overall number of firms and customers involved still seems to be quite limited.” In light of the results of the analysis, the ESAs noted that “in terms of limited growth of the phenomenon and
lack of materialisation of the identified risks,” no immediate action is required by supervisory authorities. The report concluded that “[a] new monitoring exercise will be done if and when the development of the market and market risks warrant this work.”
ESMA Issues Trends, Risks, and Vulnerabilities Report
On 6 September, ESMA published its latest Trends, Risks, and Vulnerabilities Report, finding that, while overall risk for EU securities markets remains at high but stable levels, “[e]quity and bond volatility spikes in February and May reflected growing sensitivities.” The report, which covered the first half of 2018, provided outlook on numerous risk categories affecting EU securities markets, including: (i) market risk, which it rated “very high” with a “stable” outlook; (ii) liquidity, contagion, and credit risks, which were all rated “high” with a “stable” outlook; and (iii) operational risk, which it rated “elevated” with a “deteriorating” outlook. The report noted that market and operational risk categories are affected by Brexit, and operational risk is particularly affected by cyber threats. ESMA also found that investor risk persists across a range of products and, with regard to financial benchmarks, “the number of EURIBOR panel contributors remained stable at 20 banks, and the dispersion of EURIBOR quotes submitted decreased overall.”
CFTC Challenges EU Proposal for Regulation of Third-Country CCPs
On 6 September, U.S. Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo spoke at a closed-door meeting of policy makers and financial industry executives, during which he stated that the EU’s proposal to tighten oversight of third-country central counterparties (“CCPs”) would lead to “overlapping and confounding cross-border regulation, with its high regulatory cost and constraints on economic growth.”
FSB, BCBS, CPMI, and IOSCO Publish Consultation Regarding Incentives to Clear OTC Derivatives
On 7 August, the FSB, the Basel Committee on Banking Supervision (“BCBS”), the Committee on Payments and Market Infrastructures (“CPMI”) and the International Organization of Securities Commissions (“IOSCO”) jointly published a consultation paper regarding incentives to centrally clear over-the-counter (“OTC”) derivatives with a view of using the evaluation as a basis for fine-tuning reforms made in response to the global financial crisis. According to the consultation paper: (i) “[t]he changes observed in OTC derivatives markets are consistent with the G20 Leaders’ objective of promoting central clearing as part of mitigating systemic risk and making derivatives markets safer”; (ii) “[t]he relevant post-crisis reforms, in particular the capital, margin and clearing reforms, taken together, appear to create an overall incentive, at least for dealers and larger and more active clients, to centrally clear OTC derivatives”; (iii) “[n]on-regulatory factors, such as market liquidity, counterparty credit risk management and netting efficiencies, are also important and can interact with regulatory factors to affect incentives to centrally clear”; and (iv) “[t]he provision of client clearing services is concentrated in a relatively small number of bank-affiliated clearing firms.” The consultation paper requests comments generally, as well as: (i) whether “there are strong incentives for dealers and larger (in terms of level of derivatives activity) clients to centrally clear OTC derivatives”; (ii) whether “the consultative report’s characterisation of the shift of activity and trading liquidity towards centrally cleared products, and the consequent impact on uncleared products, [is] consistent or inconsistent with [stakeholder] experience”; and (iii) whether there are “any areas where potential policy adjustments should be considered which would enhance the incentives for or access to central clearing of OTC derivatives, or the incentives to provide client clearing services.” The consultation period closes on 7 September 2018 and the final report is expected to be published around the time of the G20 Summit at end-November 2018.
FSB, BCBS, CPMI, and IOSCO Publish Report Regarding Central Clearing Dependencies
On 9 August, the FSB, BCBS, CPMI, and IOSCO jointly published their second report regarding interdependencies of CCPs. Key findings from the report include: (i) “[p]refunded financial resources are concentrated at a small number of CCPs”; (ii) “[e]xposures to CCPs are concentrated among a small number of entities”; (iii) “[t]he relationships mapped in th[e] report are all characterised, to varying degrees, by a core of highly connected CCPs and entities and a periphery of less highly connected CCPs and entities”; (iv) “[a]mong the different types of relationships between CCPs and other financial institutions, a small number of entities tend to dominate each of the critical services required by CCPs, . . . [which] suggest that a failure at one of these central elements of a CCP network would likely have significant consequences for the rest of the network”; and (v) “[c]learing members and clearing member affiliates are also important providers of other critical services required by CCPs and can maintain numerous types of relationships with several CCPs simultaneously.” The analysis provided in the report is intended to provide useful inputs for designing stress tests and has informed the policy work as set out in the standard-setting bodies’ joint 2015 CCP Workplan.
IOSCO Publishes Final Report Regarding Mechanisms Used by Trading Venues to Manage Extreme Volatility
On 1 August, IOSCO published a final report regarding mechanisms used by trading venues to manage extreme volatility and preserve orderly trading. The report analyses the mechanisms currently used by trading venues to manage risk associated with extreme volatility events and presents eight recommendations to assist trading venues and regulatory authorities in making decisions regarding the implementation, operation, and monitoring of volatility control mechanism. Among other things, the report recommended that: (i) “trading venues should have volatility control mechanisms to manage extreme volatility and that these mechanisms should be appropriately calibrated and monitored”; (ii) “regulatory authorities should consider what information they require to effectively monitor the overall volatility control mechanism framework in their jurisdiction, and make sure that trading venues maintain relevant records”; (iii) “information about volatility control mechanisms and when they are triggered should be made available to regulatory authorities, market participants, and if appropriate, the public”; and (iv) “appropriate communication amongst trading venues should be considered where the same or related securities are traded on multiple trading venues in a particular jurisdiction or in different jurisdictions.”
FSB Launches Thematic Peer Review of LEIs
On 16 August, the Financial Stability Board (“FSB”) launched a thematic peer review on the implementation of the legal entity identifier (“LEI”). The peer review aims to: (i) “[t]ake stock of the approaches and strategies used by FSB members to implement the LEI, including its adoption for regulatory requirements by FSB member jurisdictions”; (ii) “[a]ssess whether current levels and rates of LEI adoption are sufficient to support the ongoing and anticipated needs (particularly financial stability objectives) of FSB member authorities”; and (iii) “[i]dentify the challenges FSB members face in further advancing the implementation and use of the LEI, and make recommendations (as appropriate) to address common challenges.” The consultation period closes on 21 September 2018 and the FSB expects to publish the results of the peer review in the first half of 2019.
CPMI and IOSCO Publish Consultative Report on Governance Arrangements of OTC Derivatives Data Elements
On 16 August, the CPMI and IOSCO published a consultative report on governance arrangements of key OTC derivatives data elements (known as “CDE”) other than the unique transaction identifier (“UTI”) and unique product identifier (“UPI”). The consultation report discusses: (i) “key criteria for the CDE maintenance and governance”; (ii) “the different areas of CDE governance and governance functions”; (iii) “a proposed allocation of the governance functions to different bodies, (i.e., the Maintenance Body, the International Governance Body and Authorities)”; (iv) “governance arrangements for the execution of maintenance functions by a Maintenance Body”; (v) “factors relevant for the identification of the International Governance Body”; and (vi) the CPMI and IOSCO’s approach to CDE implementation. The consultation period closes on 27 September 2018.
ESMA Responds to EIOPA Questions Regarding AIFMD
On 7 August, ESMA published a letter (dated 25 July 2018) sent by Steven Maijoor, Chair of ESMA, to Gabriel Bernardino, Chair of EIOPA, in response to two questions raised by EIOPA in its second set of advice to the European Commission on specific items in the Solvency II Delegated Regulation (EU) 2015/35 relating to the interpretation of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”). The two questions addressed in the letter concerned: (i) whether certain alternative investment funds (“AIFs”) are considered “leveraged” under the AIFMD; and (ii) whether “registered” or “sub-threshold” AIFMs are considered to be AIFs under the AIFMD.
ECB Publishes Opinion on Prudential Treatment of Investment Firms
On 24 August, the ECB published an Opinion on the review of prudential treatment of investment firms expressing its support for two legislative proposals to create a more tailored prudential regime for investment firms and to include large systemic firms within the ECB’s supervision. The ECB notes that while it “generally supports the purpose of subjecting systemically important investment firms to the same prudential rules as credit institutions, the proposed acts should be carefully assessed” to avoid unintended consequences.” With regard to the provision of services by third country firms, the ECB emphasized a need for “further consideration to the possibility of applying the harmonised rules to all branches” of third country investment firms and “consider[ation of] whether the equivalence regime in Regulation (EU) No 600/2014 should be limited (e.g., by limiting this regime to the provision of investment advice and the placing of financial instruments without a firm commitment basis to professional clients and eligible counterparties).”
European Parliament Publishes Draft Report on Sustainable Investments and Sustainability Risks
On 8 August, the European Parliament published a draft report on a proposal regarding regulation of disclosures relating to sustainable investments and sustainability risks, and amending the European Parliament and Council’s Directive on the supervision of institutions for occupation retirement provisions (EU) 2016/2341. The draft report suggests amendments to the European Commission’s proposal, such as: (i) extending the scope to all insurance companies and to credit institutions; (ii) requiring that financial market participants “have in place written policies on the integration of sustainability risks in the areas of governance, asset allocation, investment strategy, risk management, the exercise of shareholder voting and company engagement”; (iii) requiring that insurance companies and credit institutions “have in place policies on the integration of sustainability risks in the risk-management and corporate loan origination process”; and (iv) requiring that financial market participants and insurance intermediaries “have in place due diligence processes that ensure that the identification and management of sustainability risks are sufficiently integrated in investment decision-making, requiring investors to identify, prevent, mitigate and account for [environmental, social and governance] factors.”
ECON Publishes Draft Report Regarding Covered Bonds Framework
On 21 August, ECON published a draft report, which includes proposed amendments to the European Commission’s March 2018 proposals to amend the Capital Requirements Regulation (EU) 575/2013 to create a framework for covered bonds. The report addresses specific shortcomings of the European Parliament’s 4 July 2017 resolution regarding the creation of a European framework (2017/2005 (INI)), including aiming to establish: (i) a clear distinction between premium covered bonds (“PCBs”) and ordinary covered bonds (“OCBs”); (ii) “regulatory preference of OCBs over other forms of collateralized debt”; (iii) “PCBs and OCBs being highly liquid and close to risk-free assets”; (iv) “a ‘European Secured Notes’ . . . framework as a third tier after PCBs and OCBs”; and (v) “transparency of covered bond structures to facilitate risk assessment.”
ECB Publishes Opinion on Covered Bonds Proposals
On 22 August, the European Central Bank (“ECB”) published an Opinion, at the request of the European Parliament and the Council of the EU, on two Commission proposals on covered bonds. The ECB “welcomes the objectives” of the proposals and “sees the proposed directive as an important step” toward creating a developed, harmonised, high-quality and transparent covered bond market. The ECB notes, however, that the “implementation of the proposed directive might not lead to full harmonisation to the extent that Member States will have flexibility in its implementation.” As such, the ECB recommends that the provided degree of flexibility not endanger further convergence in this area.
EIOPA Publishes Report Regarding Cyber Insurance
On 2 August, EIOPA published a report examining the state of cyber insurance in the EU. The report is based on a survey with responses to fourteen qualitative questions, including those related to products and services and cyber insurance underwriting and risk management, provided by a sample of eight insurers and five reinsurers located in the EU who were selected according to their expertise and current exposures in cyber insurance. Key findings of the report include: (i) “[t]here is a clear need for a deeper understanding of cyber risk, both on the supply and demand side, in order for the European cyber insurance industry to develop further”; (ii) “[i]n terms of products and services, coverage is mainly focused on commercial business”; (iii) “[t]he cyber insurance industry expects a gradual increase in the demand for cyber insurance, mainly driven by new regulations, increased awareness of risks and by a higher frequency of cyber events”; (iv) “[q]ualitative models are more frequently used than quantitative models to estimate pricing, risk exposures and risk accumulations [with a l]ack of data [being] a relevant obstacle in the context of most models”; (v) “[n]on-affirmative exposures are identified as a key concern regarding the proper estimation of accumulation of risks”; (vi) “lack of specialised underwriters, data and quantitative tools are key obstacles to the development of the industry and the provision of proper coverage to the economy”; and (vii) “[r]egulation may be welcomed by the industry in a moderate fashion, as it could help to address some of the identified challenges notwithstanding the need for compliance with the Solvency II Directive (2009/138/EU).”
On 10 August, EIOPA updated and published new Q&As regarding:
- Commission Implementing Regulation establishing ITS regarding the templates for the submission of information to the supervisory authorities;
- Commission Implementing Regulation laying down ITS relating to the lists of regional governments’ local authorities to be considered as entities such that exposures to them are to be treated as exposures to the central government of the jurisdiction in which they are established under Solvency II;
- Commission Delegated Regulation supplementing Solvency II;
- Guidelines on loss-absorbing capacity of technical provisions and deferred taxes under the Regulation Establishing EIOPA; and
- Solvency II relating to unit-linked contracts, the combination of insurance subgroups, derivatives and facilitating effective portfolio management, and external credit assessments.
ECON Adopts Report on Proposal for Pan-European PEPP
On 3 September, ECON announced its adoption of a report on the proposal for creating a pan-European personal pension product (“PEPP”). The outcome of this proposal “will be subject to the upcoming negotiations between the European Parliament, the Austrian Presidency and the Commission.”
On 6 August, ESMA updated its list of MiFID II/MiFIR transitional transparency calculations for equity derivatives, equity and equity-like instruments, and tick size band assessments. Trading venues are expected to apply the new results from 13 August 2018.
On 10 August, the European Commission published a Communication establishing the Commission’s intention to endorse with amendments the draft revisions to Delegated Regulation (EU) 2017/587, which would supplement MiFIR “on transparency requirements for trading venues and investment firms in respect of shares, depositary receipts, exchange-traded funds, certificates.” The Communication states that “[c]onfining the proposed amendments to shares and depositary receipts addresses concerns about efficient price formation while remaining in line with the legislative intent not to introduce a general obligation that all quotes by systematic internalisers have to respect the tick size increments.”
On 8 August, ESMA issued an updated statement on the clearing obligation for pension scheme arrangements (“PSAs”), which was originally issued on 3 July 2018. The original statement notes that there is a timing gap between the expiration of a temporary exemption introduced by the European Market Infrastructure Regulation (“EMIR”) for certain PSAs from the clearing obligation and the potential implementation of a new exemption envisioned by the European Commission’s 4 May 2017 proposal to amend EMIR. The updated statement further notes that “MiFIR exempts financial counterparties temporarily exempted under EMIR from the clearing obligation from the trading obligation for derivatives . . . [and that] with the expiration of the current exemption for PSAs from the clearing obligation under EMIR and pending the finalisation of the [4 May 2017 proposal], PSAs trading certain OTC-derivative contracts would [also] be subject to the trading obligation under MiFIR.” ESMA reiterated that it “expects competent authorities to not prioritise their supervisory actions towards entities that are expected to be exempted again in a relatively short period of time.”
On 9 August, ESMA updated its validation rules for certain fields, including: (i) reporting timestamp; (ii) reporting counterparty identifier; (iii) identifier of the other counterparty; (iv) underlying identification; and (v) confirmation means for submitted reports relating to revised technical standards on reporting under Article 9 of EMIR. The amendments will become applicable from 5 November 2018.
ESMA Renews Temporary Product Intervention Measures for Binary Options
On 24 August, ESMA issued a decision to renew the temporary product intervention measures prohibiting the marketing, distribution, or sale of binary options to retail clients, currently in effect from 2 July 2018 to 2 October 2018, for an additional three-month period. In renewing the temporary measures, ESMA indicated that significant investor protection concerns related to the offer of binary options to retail clients continue to exist. ESMA determined, however, that certain binary options have specific features which mitigate the risk of investor detriment and excluded such binary options from the temporary measures, including “a binary option for which the lower of the two predetermined fixed amounts is at least equal to the total payment made by a retail client for the binary option, including any commissions, transaction fees and other related costs.”
ESMA Publishes Opinion on Proposed Amendments to SFTR Technical Standards
On 4 September, ESMA published an Opinion in response to the European Commission’s proposed amendments of the technical standards on reporting under the Securities Financing Transactions Regulation (“SFTR”). The Opinion states that “ESMA does not agree with the [European Commission’s] proposed material amendments to the SFTR standards”; the proposed amendments relate to provisions on the use of LEIs for branches and UTIs for reporting to trade repositories. ESMA disagreed with the proposed amendments because: (i) “[t]hey prevent ESMA from fulfilling its mandate under SFTR Article 4(10) by eliminating the possibility to take into account international developments and reporting standards agreed at global level and risk timely alignment with international reporting standards”; (ii) they lack “integral” certainty, clarity, predictability and consistency in relation to reporting standards; (iii) “[t]hey deviate from and create inconsistency with current EMIR reporting standards . . . for the endorsement of UPI and UTI”; and (iv) “[t]hey would result in a significantly extended timeline for the introduction of global standards in the EU.” The Opinion was accompanied by a letter from ESMA in response to the European Commission’s 24 July 2018 letter, which originally set out its proposals.
Securitisation Regulation – ESMA Issues Draft RTS/ITS Regarding Details of a Securitisation
On 22 August, ESMA issued a set of draft regulatory and implementing technical standards (“RTS” and “ITS”) regarding the details of a securitisation to be made available by the originator, sponsor and Securitisation Special Purpose Entity (“SSPE”), as well as the format and templates for doing so. The draft RTS specifies information to be provided regarding the underlying exposures templates, investor report templates, inside information templates, and significant event templates. The draft ITS specify the format and templates that are expected to be used for making this information available. ESMA published the reporting templates as annexes.
o 7 September: ESMA consultation closes regarding amendments to the tick size regime under MiFID II.
o 7 September: FSB, BCBS, CPMI, and IOSCO consultation closes regarding incentives to clear OTC derivatives.
o 21 September: FSB consultation closes regarding the thematic peer review on implementation of the LEI.
o 24 September: ESMA consultation closes regarding its revisions to its 2015 guidelines on the submission of periodic information to ESMA by credit rating agencies.
o 27 September: CPMI and IOSCO consultation closes regarding governance arrangements of OTC derivatives data elements other than the UTI and UPI.
o 5 October: ESMA consultation closes regarding the Prospectus Regulation.
o 26 October: EIOPA consultation closes regarding a discussion paper on resolution funding and national insurance guarantee schemes.