EU Regulatory Update
Council of the EU Agrees on Position on Green Finance Proposals
On 19 December, the Council of the EU agreed on its position on two proposals aimed at “making finance greener and more in line with the objectives of the Paris agreement on climate change”:
o A proposal (2018/0179 (COD)) introducing disclosure obligations on how financial companies integrate environmental, social and governance (“ESG”) factors in their investment decisions; the Council supports the development of a “harmonised EU approach to the integration of sustainability risks and opportunities into the procedures of institutional investors”; and
o A proposal (2018/0180 (COD)) creating a new category of financial benchmarks aimed at giving greater information on an investment portfolio's carbon footprint; the Council supports the European Commission's “proposal to provide a reliable tool to pursue low-carbon investment strategies by establishing a new category, comprising two types of financial benchmarks,” namely low-carbon benchmarks and positive-carbon impact benchmarks.
The Council of the EU and European Parliament will now begin their negotiations on these proposals.
ECON Tables Collective Investment Funds Report for Plenary
On 6 December, the European Parliament’s Committee on Economic and Monetary Affairs (“ECON”) tabled for plenary discussion its reports regarding proposed amendments to the European Commission’s March 2018 proposals regarding the cross-border distribution of collective investment funds. The draft reports tabled for plenary discussion (dated 6 December 2018) contain proposed amendments to the Commission’s proposals for:
o A Directive amending the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”) and Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) (“UCITS”); and
o A Regulation amending the Regulation on European Venture Capital Funds (EU) 345/2013 (“EuVECA”) and Regulation on European Social Entrepreneurship Funds (EU) 346/2013 (“EuSEF”).
EIOPA Publishes Result of 2018 EU-Wide Insurance Stress Test
On 14 December, EIOPA published a report containing the results of its 2018 EU-wide insurance stress test. The report concludes that: (i) “overall, the stress test exercise confirms the significant sensitivity to market shocks for the European insurance sector,” such as being “vulnerable to not only low yields and longevity risk, but also to a sudden and abrupt reversal of risk premia combined with an instantaneous shock to lapse rates and claims inflation”; but (ii) that the “sector is adequately capitalised to absorb the prescribed shocks.” EIOPA indicated that it will conduct further analysis of the results to examine the risks and vulnerabilities of the sector and will issue specific recommendations on relevant aspects where appropriate.
On 14 December, EIOPA published a report to the European Commission regarding group supervision and capital management within insurance undertakings and regarding specific matters related to cross-border business under the Solvency II Directive (2009/138/EC). The report concludes that while substantial progress has been made with regards to the development of tools by EIOPA to strengthen group supervision and the use of such tools by national authorities, such as through EIOPA’s development of opinions, guidelines, and other communications on key Solvency II topics, substantial gaps in the regulatory framework for group supervision and capital management remain, leading to divergent supervisory practices such as the inconsistent definition of intra-group transactions (“IGTs”) and reporting of IGTs and the inconsistent assessment of availability of eligible own funds at the group level. Lastly, the report identified a number of areas that would benefit from further harmonization, including: (i) early regulatory intervention powers and measures; (ii) recovery and resolution; (iii) the assessment of group own funds; (iv) supervisory colleges; and (v) cross-border business activities provided by groups and solo undertakings through the freedom to provide services and freedom of establishment.
On 19 December, EIOPA published a call for input regarding the reporting and disclosure requirements under Solvency II as part of EIOPA’s 2020 Solvency II review. EIOPA indicated that it “will review the reporting and disclosure requirements with the aim to assess if the requirements remain fit-for-purpose and in particular if the requirements allow a risk-based and proportionate approach.” The consultation period closes on 21 February 2019.
On 12 December, the European Parliament published a letter (dated 6 December 2018) from the Chair of the ECON Roberto Gualtieri to Vice-President of the European Commission Valdis Dombrovskis regarding the proposed 2018 amendments to the Solvency II Delegation Regulation (EU/2015/35). In the letter, Mr. Gualtieri highlighted three areas of focus with regards to the amendments, including: (i) reducing “the current risk margin in order to unlock the capacity for more long-term investments”; (ii) the need for additional incentives regarding the newly created equity class for long-term investments beyond the introduction of a 22% calibration; and (iii) the need for a short-term solution to the shortcomings of the current functioning of the national component in relation to the volatility adjustment.
On 18 December, EIOPA published its annual report on long-term guarantee measures (“LTG”) and measures on equity risk under Solvency II. The report examines the impact of the application of the LTG measures and the measures on equity risk. The report concludes that “similar to previous years' analysis, this year's results show that most of the measures are widely used” and that “the volatility adjustment and the transitional measure on technical provisions are particularly widely used.
Insurance Distribution Directive
On 13 December, EIOPA published a report regarding the evaluation of the structure of insurance intermediaries markets in the EU under the Insurance Distribution Directive (EU) 2016/97 (“IDD”), which includes an Annex with a country-by-country analysis of EU insurance intermediaries markets. The report provides an overview of the status of the EU intermediaries markets using data from 2013 to 2017 and generally concludes that the EU insurance intermediation market is “characterised by a very wide diversity of local distribution channels and different definitions adopted at the national level.” The report also notes that there has been a small decrease in the number of registered intermediaries during this period and that the number of intermediaries carrying out cross-border business has increased.
IAIS Publishes Report on 2018 G-SII Identification Process
On 14 December, the International Association of Insurance Supervisors (“IAIS”) published a report regarding the 2018 global systemically important insurers (“G-SII”) identification process. As reported previously, the Financial Stability Board (“FSB”) decided on 14 November 2018 not to engage in the identification of G-SIIs for 2018 based on IAIS’s request, and this report examines only the process for G-SII identification and reports on information collected as part of this process. As noted in the report, the IAIS continues to use the 2016 G-SII Assessment Methodology to complete its G-SII identification exercise.
On 12 December, ESMA published its final report on amending the MiFID II tick size regime under Commission Delegated Regulation (EU) 2017/588 (“RTS 11”). The proposed amendments to RTS 11 would allow national competent authorities of EU trading venues, where third-country shares are traded, to decide on an adjusted average daily number of transactions on a case-by-case basis in order to take into account the liquidity available on third-country venues when calibrating tick sizes. ESMA Chair Steven Maijoor stated that the proposal was designed “to alleviate concerns about an unlevel playing field developing regarding tick sizes between third-country and EU trading venues.” ESMA has submitted the final report to the European Commission, which now has three months to decide whether to endorse the proposed amendments to RTS 11.
On 12 December, the European Commission adopted a Delegated Regulation (C(2018) 8390 final) amending and correcting Commission Delegated Regulation (EU) 2017/587 supplementing MiFIR to specify the requirement for prices to reflect prevailing market conditions. The Delegated Regulation removes securities financing transactions from the scope of the transparency provisions for trading venues and systematic internalisers in applying Regulation (EU) 2016/1033 and clarifies that “prices quoted by systematic internalisers for shares and depositary receipts shall be deemed to reflect prevailing market conditions only where those prices . . . are subject to minimum price increments corresponding to the tick sizes applicable to prices published by trading venues.” The Delegated Regulation will now be considered by the European Parliament and the Council of the EU and, if they do not object, will enter into force 20 days after publication in the Official Journal of the EU.
On 13 December, the European Commission adopted three Delegated Regulations regarding trade repositories under the European Market Infrastructure Regulation (“EMIR”) and STFR:
Commission Delegated Regulation amending Delegated Regulation (EU) No 150/2013 regarding RTSs specifying the details of the application for registration as a trade repository;
Commission Delegated Regulation amending Delegated Regulation (EU) No 151/2013 with regard to access by supervisory authorities to the data held in trade repositories.
Commission Delegated Regulation supplementing the SFTR regarding RTSs specifying the details of the application for registration and extension of registration as a trade repository; and
On 19 December, the European Commission published a Commission Delegated Regulation (C(2018) 9047) amending Delegated Regulation (EU) 2015/2205, Delegated Regulation (EU) 2016/592 and Delegated Regulation (EU) 2016/1178 supplementing EMIR to extend the dates of deferred application of the clearing obligation for certain over-the-counter (“OTC”) derivatives contracts. For interest rate derivative classes, the dates of application have been deferred from 9 July 2019 to 21 December 2020. For credit derivative classes, the dates of application have been deferred from 9 May 2019 to 21 December 2020.
On 18 December, the European Supervisory Authorities (“ESAs”) published a draft RTS and final report regarding amendments to the current RTS on the clearing obligation and risk mitigation techniques for OTC derivates that are not cleared by central counterparties (“CCPs”) under EMIR. The draft RTS on risk mitigation techniques would amend the existing RTS under Delegated Regulation (EU) 2016/2251 by extending the special treatment currently associated with covered bonds to simple, transparent and standardized (“STS”) securitizations. The special treatment would be applicable only where an STS securitization structure meets a specific set of conditions equivalent to those established for covered bond issuers. The European Commission has three months to decide whether to endorse the RTS.
European Commission Publishes for Consultation Evaluation Roadmap Regarding the Distance Marketing Directive
On 7 December, the European Commission published for consultation an evaluation roadmap regarding the Distance Marketing of Financial Services Directive (2002/65/EC), which “aims at ensuring the free movement of financial services in the single market by harmonising consumer protection rules.” The evaluation roadmap notes that “distance marketing of financial services has changed in light of the digitalisation and the commercial practices used online by providers,” and the Commission is seeking feedback regarding whether the Directive has achieved its objectives, how the Directive is functioning from a cost/benefits and burden reduction perspective, and how the Directive interacts with other retail financial services, consumer protection and data protection legislation. The consultation period closes on 4 January 2019.
European Commission Publishes Delegated Regulations Regarding Securities Financing Transaction Regulation
On 13 December 2018, the European Commission published two Commission Implementing Regulations and three Commission Delegated Regulations containing implementing and regulatory technical standards (“ITSs and RTSs”) regarding the Securities Financing Transaction Regulation (EU) 2015/2365 (“SFTR”):
Commission Implementing Regulation laying down ITSs with regard to the format and frequency of reports on the details of SFTs to trade repositories in accordance with the SFTR and amending Implementing Regulation (EU) No 1247/2012 with regard to the use of reporting codes in the reporting of derivative contracts;
Commission Implementing Regulation laying down ITSs with regard to the procedures and forms for exchange of information on sanctions, measures and investigations in accordance with the SFTR;
European Commission Publishes Delegated Regulations Regarding Transparency Directive
On 17 December, the European Commission published a Commission Delegated Regulation and annex supplementing the Transparency Directive (2004/109/EC) containing RTSs regarding the specification of a single electronic format. The Transparency Directive mandated ESMA to develop RTSs specifying a single electronic format. ESMA published a final report on the RTSs on the European Single Electronic Format (dated 18 December 2017) and the Regulation would implement these RTSs, which proposed to make use of the eXtensible HyperText Markup Language (“XHTML”) for the human readable representation of annual financial reports.
European Commission Proposes to Extend Equivalence for Swiss Trading Venues
On 17 December, the European Commission proposed to extend its decision to recognize Swiss trading venues as eligible for compliance with the trading obligation for shares set out in MiFID (2014/65/EU) and MiFIR/MiFID II ((EU) 600/2014). The proposed extension would last for six months, from 1 January 2018 to 30 June 2018 and is subject to approval by member states.
ESMA Publishes Consultation Papers Regarding Sustainability Risks and Factors for Securities Trading, Investment Funds and Credit Rating Agencies
On 19 December, ESMA published three Consultation Papers regarding sustainability risks and factors for securities trading, investment funds, and credit rating agencies. ESMA will host an open hearing for all three consultation papers on 4 February 2018. The comment period for the Consultation Papers on MiFID II and UCITS/AIFMD close on 19 February 2019. The comment period for the Consultation Paper on credit ratings guidelines closes on 19 March 2019.
A Consultation Paper on integrating sustainability risks and factors in MiFID II. The paper covers topics on which the European Commission requested that ESMA provide technical advice, including: (i) risk management; (ii) organizational requirements; and (iii) product governance. The paper also includes suggested amendments to the ESMA guidelines on MiFID II product governance requirements and MiFID II suitability requirements. ESMA anticipates publishing a final report by 30 April 2019.
A Consultation Paper on integrating sustainability risks and factors in UCITS IV and the Alternative Investment Fund Managers Directive (“AIFMD”). ESMA proposes changes to the UCITS and AIFMD frameworks by integrating sustainability risks and factors with regard to: (i) general organizational requirements; (ii) resources; (iii) senior management responsibilities; (iv) conflicts of interest; (v) due diligence requirements; and (vi) risk management.
A Consultation Paper regarding guidelines on disclosure requirements applicable to credit ratings. The paper is aimed at improving the quality and consistency of disclosures of ESG factors when considered as part of a rating action. ESMA anticipates publishing a final report by 30 July 2019.
ESMA Publishes Guidelines for Non-Significant Benchmarks Under the Benchmarks Regulation
On December 20, ESMA published its final report on Guidelines for non-significant benchmarks under Benchmarks Regulation (EU) 2016/1101. The final report proposes lighter requirements for non-significant benchmarks, their administrators, and their supervised contributors in relation to: (i) procedures and characteristics of the oversight function (Article 5); (ii) the appropriateness and verifiability of input data (Article 11); (iii) transparency of methodology (Article 13); and (iv) governance and control requirements for supervised contributors (Article 16).
ESMA Renews Restriction on Contracts for Difference Offered to Retail Investors
On December 20, ESMA agreed to renew the restriction on the marketing, distribution or sale of contracts for difference (“CFDs”) to retail clients until 1 February 2019. This agreement extends the restriction, which has been in place since 1 August 2018, for a further three months.
ESMA Updates Q&As
On 18 December, ESMA updated its Q&As on the implementation of the Credit Rating Agencies Regulation (EU) 462/2013 (“CRAR”) to classify ESMA’s view as to what constitutes an “error” within the meaning of Article 8(7) of CRAR.
o 31 December: ESAs’ consultation closes regarding amending the implementing regulations on the mapping of the external credit assessment institutions.
o 4 January 2019: European Commission consultation closes regarding evaluation roadmap on the distance marketing directive.
o 7 January 2019: IAIS consultation closes regarding recovery planning for insurers.
o 11 January 2019: ESMA call for evidence closes regarding frequent batch auctions.
o 14 January 2019: Legal Entity Identifier (“LEI”) Regulatory Oversight Committee consultation closes regarding the relationship of funds in the global LEI system.
o 15 January 2019: ESMA Consultative Working Group expression of interest closes.
o 25 January 2019: IAIS consultation closes regarding the development of a holistic framework to assess and mitigate systemic risk in the insurance sector.
o 30 January 2019: EIOPA consultation closes regarding technical advice on the integration of sustainability risks and factors in the delegated acts under Solvency II and the Insurance Distribution Directive.
o 1 February 2019: FSB consultation closes regarding CCP resolution and CCP equity in resolution.
o 1 February 2019: IOSCO consultation closes regarding a proposed framework to assess leverage used by investment funds and the financial stability risks that could be caused by use of leverage.
o 19 February 2019: ESMA consultation closes regarding integrating sustainability risks and factors in MiFID II and UCITS/AIFMD.
o 21 February 2019: EIOPA call for input closes regarding Solvency II reporting and disclosure requirements.