EU Regulatory Update
European System of Financial Supervision Omnibus Proposal
On 22 January, the Council of the EU published the outcome of a meeting of the Economic and Financial Affairs Council held on the same day to discuss, among other items, the European System of Financial Supervision (“ESFS”) omnibus proposal, which includes:
o A proposal for a regulation to amend Regulation (EU) No 1092/2010 on European Union macroprudential oversight of the financial system and establishing a European Systemic Risk Board;
o A proposal for a directive to amend Directive 2014/65/EU on markets in financial instruments and Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II);
o A proposal for a regulation to amend the regulations establishing the European Supervisory Authorities (“ESA”) and other financial markets regulations.
Among other things, the Presidency proposed “prioritising the provisions on strengthening the supervision of anti-money laundering (“AML”) and terrorist financing activities, while the negotiations on the rest of the review of the European system will continue at both [the] technical and political level as a matter of priority.” The Presidency indicated that it will be in a position to “start negotiations with the European Parliament in view of reaching a political agreement on the file by the end of the current legislative term” and the omnibus proposal is expected to be included in the agenda of the Economic and Financial Affairs Council meeting in February.
Prudential Treatment of Investment Firms
On 4 January, the Committee of Permanent Representatives (“COREPER”), on behalf of the European Council, approved the presidency compromise texts on the prudential treatment of investment firms, with a view to reaching agreement with the European Parliament at the first reading. The texts consist of two proposals: (i) a proposal for a Regulation on the prudential treatment of investment firms and amending Regulations (EU) 575/2013 (“CRR”), (EU) 600/2014 (“MiFIR”) and (EU) 1093/2010 (establishing the European Banking Authority (“EBA”)); and (ii) a proposal for a Directive on the prudential treatment of investment firms and amending Directives 2013/36/EU (“CRD IV”) and 2014/65/EU (“MiFID II”). Among other things, the amendments: (i) strengthen ESMA’s role and include an obligation for firms to extend their information to ESMA to include “any other information necessary to enable ESMA or the competent authorities to carry out their tasks”; and (ii) clarify the obligations that should be included under equivalence decisions for firms that perform activities that are of systemic importance, including that firms have to comply with requirements that are equivalent to post-trade disclosure rules, with the obligation to report transactions, and with rules applicable to trading obligations and derivatives.
On 24 January, the EBA published a letter sent to the Council of the EU, the European Parliament and the European Commission suggesting extended deadlines for the delivery of draft technical standards under the proposal for the Regulation and the Directive noted above. According to the EBA’s letter, the current timeline for delivery “risks compromising the quality of all regulatory products” and a full list of the recommended deadlines is attached in the Annex to the letter.
European Commission Publishes Report on AIFMD’s Operation
On 10 January, the European Commission published a report (dated 10 December 2018) on the operation of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”). The report, which was prepared by KPMG, found that “AIFMD has played a major role in helping to create an internal market for [alternative investment funds (“AIFs”)] and a harmonised and stringent regulatory and supervisory framework for [managers of AIFs].” The report represents the first step in the AIFMD review process; the European Commission will continue its review and will report to the European Parliament and Council as required by the Directive.
ESMA Launches Public Consultation on Liquidity Stress Test Guidance
On 5 February, ESMA launched a public consultation on draft guidance regarding liquidity stress tests of investment funds with regards to AIFMD and undertakings for collective investment in transferable securities (“UCITS”). The consultation sets out 14 principle-based criteria for liquidity stress tests for managers executing liquidity stress tests on their funds and seeks stakeholders’ views on the guidance fund managers should follow, including: (i) on the design of the scenarios; (ii) the liquidity stress test policy; (iii) considerations for the asset and liability sides of investment fund balance sheets; and (iv) the timing and frequency to conduct the tests. The consultation period closes on 1 April 2019.
ESMA Publishes Report Regarding Costs and Performance of Retail Investment Products
On 10 January 2019, ESMA published its first annual statistical report regarding the cost and past performance of retail investment products. The report covers three types of products: UCITS, AIFs sold to retail investors (“Retail AIFs”), and structured retail products (“SRPs”). Key findings in the report include: (i) “UCITS hold 76% of overall share in terms of retail market size compared to 15% and 9% for Retail AIFs and SRPs”; (ii) with regards to UCITS, “the largest cost impact comes from ongoing costs, while subscription and redemption fees have a significantly lower impact” and “costs are higher for retail compared to institutional investors”; (iii) “Retail AIF investments account for 18% of the AIF market” and although there are “potential risks related to liquidity transformation and liquidity mismatch . . . no significant sign of liquidity mismatch for those AIFs with 100% retail client participation [have been] identified”; and (iv) with regards to SRPs, “the scope for conclusive analysis is also severely constrained by data availability, as no regulatory data are available” and “to the extent that data on performance may become available in future, they may be hard to interpret, as the scope for any measures of relative or risk-adjusted performance appears limited.”
BIS Publishes Paper Regarding Establishing Viable Capital Markets
On 23 January, the Bank of International Settlements (“BIS”) published a report regarding the establishment of viable capital markets globally. The report assesses the trends and drivers of capital market development as well as policy implications and sets out the following 6 policy recommendations: (i) greater market autonomy would enhance capital market pricing and funding allocations; (ii) capital market development can be placed on firmer foundations by strengthening legal and judicial systems for investor protection; (iii) enhancing regulatory independence and effectiveness is a key factor in striking a balance between investor protection and issuer costs; (iv) many economies have scope to increase the depth and diversity of the domestic institutional investor base; (v) a broad and bi-directional opening of capital markets can exert a general positive influence on domestic capital market development; and (vi) enhancing market ecosystems by developing deep complementary markets for derivative, repo and securities lending requires a coordinated effort along multiple dimensions.
Indicative Plenary Sitting Dates for Cross-border Distribution of Collective Investment Funds
On 24 January, the European Parliament updated the procedural files for the proposals regarding the cross-border distribution of collective investment funds to indicate plenary sitting dates for:
o a Directive amending UCITS and AIFMD regarding cross-border distribution of collective investment funds: pre-marketing and de-notification, which has a plenary sitting date of 15 April 2019; and
o a Regulation amending Regulations (EU) 345/2013 and Regulation (EU) 346/2013 on the cross-border distribution of collective investment funds: marketing and regulatory fees, which has a plenary sitting date of 16 April 2019.
On 20 December, EIOPA published its third annual report on the use of limitations and exemptions from regular supervisory reporting during 2017 and the first quarter of 2018 by national competent authorities (“NCAs”) under the Solvency II Directive (2009/138/EC). The report identifies the top countries allowing exemptions by number of undertakings and uses two examples, derivatives and look-through templates, to show that the different tools used to ensure proportionality for reporting requirements complement each other and result in a proportionate and risk-based approach.
On 16 January, EIOPA published a call for evidence regarding the integration of sustainability risks and factors in the prudential assessment of assets and liabilities for (re)insurers under Solvency II. EIOPA will use the information collected to analyze how sustainability risks affect (re)insurers' investments, with particular focus on climate change and market practices on insurance underwriting. The consultation period closes on 8 March 2019.
On 22 January, the European Parliament published an announcement by Robert Gualtieri, Chair of the European Parliament’s Committee on Economic and Monetary Affairs (“ECON”), calling on the European Commission to present amendments to the Solvency II Delegated Regulation (EU) 2015/35 (“Solvency II DA”), related to the review of the Solvency Capital Requirement (“SCR”) standard formula (“SCR review”) under Solvency II. Noting that the amendments were due to be adopted in December 2018 but are still being prepared by the European Commission, Mr. Gualtieri described a number of concerns expressed by ECON relating to the amendments, including (i) “reiterat[ing] [ECON’s] support for a reduction of the current risk margin in order to boost the financing of the real economy and to encourage the insurers to invest in long-term projects”; (ii) express[ing] concern that “the current design of the criteria of this new equity class, such as the 12-year duration and the ring-fencing requirements, could prevent the long-term equity class from working in practice”; (iii) “reiterat[ing] [ECON’s] position on the importance of finding a short-term solution to address the shortcomings of the current functioning of the Volatility Adjustment”; and (iv) stating that “the current application date may create non-negligible difficulties for the reporting process due to the very short period of time that will elapse between the expected date of entry into force of the new delegated act and the first application for reporting obligations.”
EIOPA Publishes Report Regarding Costs and Performance of Insurance and Pension Products
On 10 January, EIOPA published its first annual statistical report regarding the cost and past performance of insurance and pension products. The report covers insurance-based investment products (“IBIPs”) across the EU and to a limited extent, certain personal pension products (“PPPs”). The report provides performance data for the period 2013 through 2017. The report contains key findings only for IBIPs, which include: (i) “on weighted average, costs overall reduce yields by 2.50% (250 product/funds) for single premium business”; and (ii) “the majority of products included in the sample achieved net returns between 1% and 4% (unweighted) in 2017.” The report notes, however, that the analysis conducted has been a pilot exercise and there are significant data and comparability limitations. EIOPA indicated that it will continue to develop common definitions of costs and common methods for calculation of past performance to address these limitations.
EIOPA Publishes Findings of Peer Review on NCAs’ Assessment of Managers and Qualifying Shareholders
On 25 January, EIOPA published the findings of its peer review examining how NCAs assess the propriety of administrative, management or supervisory body (“AMSB”) members and qualifying shareholders, along with an accompanying executive summary. The report found that, in general, NCAs dedicate considerable resources to the initial assessment, but very few perform ongoing assessments as part of their supervisory activities. The review resulted in 80 recommended actions for 29 NCAs, including those in Spain, Italy, Germany, and the UK, regarding matters such as: (i) the alignment of national legislation or regulatory frameworks with the overall European framework; (ii) “performing ongoing assessment of [the] propriety of qualifying shareholders and AMSB members”; and (iii) provision of clear guidance and supervisor expectations internally to NCA staff and externally to insurers.
EIOPA Publishes Opinion on Non-Life Cross-Border Insurance Business of a Long-Term Nature and its Supervision
On 21 December, EIOPA published an opinion to NCAs on non-life cross-border insurance business of a long term nature and its supervision. The opinion establishes EIOPA’s expectations regarding: (i) technical provisions, including best estimate calculations; and (ii) key functions and the administrative, management or supervisory body. The opinion also outlines EIOPA’s recommendations on the supervisory review process and collaboration between home and host member supervisory authorities.
Indicative Plenary Sitting Dates for Pan-European Pension Product
On 24 January, the European Parliament updated the procedural file on the proposal for a Regulation regarding the Pan-European Personal Pension Product to indicate a plenary sitting date of 26 March 2019.
On 10 January, the European Commission published for feedback a draft Commission Delegated Regulation (Ares(2019)78378) amending Delegated Regulation (EU) 2017/1799 to exempt the Chinese central bank, the People’s Bank of China, from the pre- and post-trade MiFIR transparency requirements. Feedback on the draft is due by 6 February 2019.
On 23 January, ESMA published six opinions on position limits regarding commodity derivatives under MiFID II/MiFIR. The opinions agree on proposed position limits regarding: (i) Low Sulphur gasoil; (ii) Panamax Freight; (iii) Dutch TTF ICE Endex; (iv) Dutch TTF Powernext; (v) Dutch Power Base; and (vi) Dutch Power Peak.
On 1 February, ESMA published data for the systematic internaliser calculations for equity and equity-like instruments and bonds under MiFID II and MiFIR. Specifically, ESMA published the total number of trades and total volume over the period July to December 2018 for 16,690 equity and equity-like instruments and for 417,288 bonds.
On 1 February, ESMA published the third quarterly liquidity assessment for bonds available for trading on EU trading venues at the end of December 2018 under MiFID II and MiFIR. ESMA noted that for this period, there are currently 439 liquid bonds subject to MiFID II transparency requirements.
UK Government Objects to a General Approach on EMIR CCP Proposal
On 20 December, the Council of the EU published a summary record of the 3 December 2018 meeting of COREPER, which included a statement by the UK government objecting to a general approach on the EMIR central counterparty ("CCP") proposal regarding procedures and authorities involved for the authorization of CCPs and requirements for the recognition of third-country CCPs. The UK stated that “[the] proposal is unprecedented in supervisory cooperation and is not a workable solution for cross border supervisory and regulatory cooperation for internationally active CCPs.” The UK expressed concern that the proposal could become a barrier to market access and stated, “it is unnecessary to require a third-country supervisor to agree to enforce decisions that could potentially conflict with their own statutory objectives.” On 3 December, COREPER endorsed the Council’s negotiating mandate for future talks with the European Parliament and asked the presidency to start trilogue negotiations.
ESMA Publishes Statement on Challenges with EMIR Refit Implementation
On 31 January, ESMA published a public statement to address the upcoming implementation of the proposed Regulation amending EMIR (“EMIR Refit”). ESMA set its expectations regarding the challenges faced by: (i) small financial counterparties to prepare for the 21 June 2019 deadline to start CCP clearing and trading on trading venues for some of their over-the-counter derivative contracts; and (ii) reporting counterparties regarding their compliance with the backloading requirement by 12 February 2019.
European Commission Publishes Two Draft Delegated Regulations Regarding Sustainable Finance
On 4 January, the European Commission published two draft Commission Delegated Regulations:
Delegated Regulation amending Delegated Regulation (EU) 2017/2359 regarding the integration of environmental, social and governance (“ESG”) considerations and preferences into investment advice for insurance-based investment products; and
Delegated Regulation amending Delegated Regulation (EU) 2017/565 as regards the integration of ESG considerations and preferences into investment advice and portfolio management.
The delegated regulations would, among other things, require covered investment firms to carry out a mandatory assessment of ESG preferences of their clients in a questionnaire and take those preferences into account in the selection process of the financial products offered. Furthermore, the investment firms would need to prepare ongoing reports to clients containing post-sale ESG related information.
ESMA Publishes Annual Report on Accepted Market Practices under the Market Abuse Regulation
On 16 January, ESMA published its annual report (dated 18 December 2018) to the European Commission regarding the application of new accepted market practices (“AMPs”) under the Market Abuse Regulation ((EU)596/2014 (“MAR”) and existing AMPs under the Market Abuse Directive (2003/6/EC). In particular, ESMA noted that only two NCAs have decided to establish AMPs under MAR and stated that the following factors may have contributed to this low number of established AMPs: (i) “there are tools that facilitate the provision of liquidity other than AMPs, such as market making schemes and liquidity schemes by trading venues”; (ii) “some NCAs, in the presence of liquidity provision schemes, may not want to introduce another one - by establishing an AMP - which, by nature, may involve orders and transactions that without the protection offered could be considered as manipulative”; and (iii) the process for establishing AMPs under MAR is still relatively new.
ECON Tables Low Carbon and Positive Carbon Impact Benchmark Report for Plenary
On 11 January, the ECON tabled for plenary on 25 March 2019 its report on the proposal for a Regulation amending Regulation (EU)2016/1011 regarding low carbon benchmarks and positive carbon impact benchmarks.
ESMA Publishes Consultation Papers on Settlement Fails Reporting and Standardised Procedures and Messaging Protocols
On 20 December, ESMA published two consultation papers in relation to Articles 6(2) and 7(1) of the Central Securities Depositories Regulation (“CSDR”) (EU) 909/2014: (i) a paper on settlement fails reporting; and (ii) a paper on standardized procedures and messaging protocols used between
investment firms and their professional clients. The consultation period closes on 20 February, and ESMA plans to finalise both sets of guidelines by July 2019.
ESMA Renews Restriction on Contracts for Difference Offered to Retail Investors
On 23 January, ESMA agreed to renew the restriction on the marketing, distribution or sale of contracts for difference (“CFDs”) to retail clients until 1 May 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 4 January, ESMA updated its Q&As on MiFID II and MiFIR transparency topics to provide clarification on several topics, including: (i) publication of request for market data transactions; (ii) default transparency regime for equity instruments; and (iii) default large-in-scale; and (iv) size specific to the instrument thresholds for bonds.
On 30 January, ESMA published updated Q&As on the Benchmarks Regulation (EU) 2016/2011 (“BMR”). The updated document includes a new Q&A providing clarification regarding the scope of the application of Commission Delegated Regulations adopted under the BMR.
On 30 January, ESMA published updated Q&As on the Central Securities Depository Regulation (EU) 909/2014 (“CSDR”). The new Q&As clarify two aspects of the settlement discipline regime in relation to cash penalties: (i) calculation of cash penalties (confirming that cash penalty amounts should be calculated per settlement currency); and (ii) cases of non-application cash penalties (listing situations in which cash penalties should not be applied).
On 1 February, ESMA published updated Q&As on MiFID II and MiFIR market structure and transparency topics. The updated Q&As provide clarification regarding: (i) APA reports to competent authorities and ESMA; and (ii) the identification of high frequency trading techniques.
On 4 February, ESMA published updated Q&As on MiFIR data reporting. The new Q&As clarify certain requirements for submission of reference data under MiFIR regarding: (i) reporting the LEI of the issuers to the Financial Instruments Reference Database System (“FIRDS”) in cases where the issuer of the instrument has a branch that has an LEI; and (ii) reporting maturity, expiry and termination dates to FIRDS.
On 4 February, ESMA published updated Q&As on EMIR data reporting. There are two updated Q&As regarding: (i) contracts with no maturity dates; and (ii) when reports should be submitted with Action Type “N” and Action Type “P” in relation to reporting derivatives that are terminated before the reporting deadline. There is one new Q&A clarifying the approach counterparties should take for reporting the field “Confirmation Means”.
o 19 February: ESMA consultation closes on sustainability risks and factors for MiFID II and UCITS and AIFMD.
o 20 February: ESMA’s consultation closes on papers regarding settlement fails reporting and standardized procedures and messaging protocols.
o 21 February: EIOPA call for input closes on reporting and disclosure requirements under Solvency II as part of EIOPA’s 2020 Solvency II review.
o 8 March: EIOPA call for evidence closes on integration of sustainability risks in Solvency II.
o 19 March: ESMA consultation closes on sustainability risks and factors for credit rating agencies.
o 1 April: ESMA consultation closes on liquidity stress test guidance.