EU Regulatory Update
FSB Publishes 2019 Work Programme
On 12 February, the Financial Stability Board (“FSB”) published its 2019 work programme, which details FSB’s planned work and includes, as an annex attached to the work programme, a timetable of FSB’s planned publications for 2019. FSB identified the following areas of work for 2019: (i) addressing new and emerging vulnerabilities in the financial system; (ii) finalizing and operationalizing post-crisis reforms, which involves “work[ing] on a few final issues in the main reform areas”; (iii) the implementation of post-crisis reforms, which involves “work[ing] on implementation monitoring through regular progress reports and peer reviews”; and (iv) evaluating the effects of the reforms.
On 10 February, FSB Chair and Vice Chairman for Supervision of the Board of Governors of the U.S. Federal Reserve System, Randal Quarles, gave a speech titled “Ideas of Order: Charting a Course for the Financial Stability Board.” He stated that the work of the FSB must evolve and he outlined “a few core principles that should guide [its] pivot forward.” These principles include: (i) improving the outreach and transparency of the FSB; (ii) reviewing and enhancing the FSB’s framework for assessing vulnerabilities to ensure that the FSB is “at the cutting edge of financial stability vulnerability assessment”; and (iii) the “continual, critical analysis of the effects of regulation with an eye to making useful improvements where possible.”
EDPB Adopts Opinion on Transfer of Personal Data Between EEA and non-EEA Financial Supervisory Authorities
On 12 February, the European Data Protection Board (“EDPB”) adopted its first opinion on the draft administrative arrangement under the General Data Protection Regulation (EU) 2016/679 (“GDPR”) for the transfer of personal data between EEA financial supervisory authorities, including ESMA and the NCAs, and their non-EU counterparts. The EDPB concluded that the draft administrative arrangement ensures that there are “appropriate safeguards when personal data will be transferred on the basis of this AA to public bodies in third countries not covered by a European Commission adequacy decision.”
o On 15 February, ESMA and IOSCO published a statement welcoming the EDPB’s opinion, noting that the opinion is “the first of its kind and will enable the continued exchange of enforcement and supervisory information between securities regulators . . . to promote orderly markets and protect investors, while providing the protection of personal data.”
European System of Financial Supervision Omnibus Proposal
On 14 February, the omnibus proposal on the European System of Financial Supervision (“ESFS”), which comprises the European Systemic Risk Board (“ESRB”), the European Banking Authority (“EBA”), the European Securities and Markets Authority (“ESMA”) and the European Insurance and Occupational Pensions Authority (“EIOPA”), was scheduled for a plenary sitting date of 19 April 2019. The omnibus proposal aims to strengthen the ESFS and to improve the mandates, governance and funding of the EBA, ESMA, EIOPA and ESRB and 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”); and
o A proposal for a regulation to amend the regulations establishing the European Supervisory Authorities (“ESAs”) and other financial markets regulations.
On 12 February, the Council of the EU published a press release confirming its position on the omnibus proposal regarding the ESFS ahead of trilogue negotiations that took place on 14 February 2019 and urging the Romanian Presidency of the Council of the EU to start negotiations with the European Parliament as soon as possible. Vice President of the European Commission, Valdis Dombrovskis, also delivered remarks on 12 February commending the Romanian Presidency for “reaching a general approach on the review of the European System of Financial Supervision” and emphasizing the importance of “allow[ing] for trialogues to start as quickly as possible . . . before the European elections.”
ESAs Issue Report and Supervisory Statement on KID to PRIIPs
On 8 February, the Joint Committee of the ESAs published a final report following a consultation on targeted amendments to Commission delegated regulation (EU) 2017/653 of 8 March 2017 covering rules regarding the KID for PRIIPs. Taking into account consultation feedback and the implications of a possible decision to defer the KID by certain types of investment funds beyond 2020, the ESAs decided not to propose targeted amendments at this stage and to initiate a more comprehensive review of the delegated regulation during 2019, including by launching a consultation on draft RTS. The ESAs also issued a supervisory statement addressing concerns that the information in the KID for PRIIPs regarding performance scenarios can, in certain cases, provide retail investors with “with inappropriate expectations about the possible returns they may receive.” The statement recommends that PRIIP manufacturers include a specific disclosure statement in the KID to ensure that retail investors are made fully aware of the limitations of performance scenarios.
Council of the EU Publishes Cross-Border Distribution of Collective Investment Funds Compromise Text
On 22 February, the Council of the EU invited its Committee of Permanent Representatives (“COREPER”) to approve the final compromise texts regarding: (i) the proposal for a Directive amending the Undertakings for the Collective Investments in Transferable Securities (“UCITS”) Directive (2009/65/EC) (“UCITS IV”) and the Alternative Investment Fund Managers (“AIFMs”) Directive (2011/61/EU) (“AIFMD”) in relation to cross-border distribution of collective investment funds, which aims to remove restrictions on the free movement of units and shares of collective investment undertakings; and (ii) the proposal for a Regulation on facilitating cross-border distribution of collective investment funds and amending the European venture capital funds Regulation (EU) 345/2013 (“EuVECA”) and the European social entrepreneurship funds Regulation (EU) 346/2016 (“EuSEF”), which establishes additional rules and procedures concerning UCITS and AIFMs, such as rules requiring ESMA to develop draft technical standards regarding the marketing of collective investment undertakings. The proposals aim to collectively coordinate the conditions for fund managers operating in the EU market and facilitate the cross-border distribution of the funds managed by them.
European Parliament and Council Reach Political Agreement on Prudential and Supervisory Requirements for Investment Firms
On 26 February, the Council of the EU and the European Parliament reached a political agreement regarding the proposed Investment Firms Directive (“IFD”) (2017/0358 (COD)) and Investment Firms Regulation (“IFR”) (2017/0359 (COD)), which set out new prudential requirements and supervisory arrangements for investment firms. The IFD amends the Capital Requirements Directive (2013/36/EU) (“CRD IV”) and the Markets in Financial Instruments Directive (2014/65/EU) (“MiFID II”), and the IFR amends the Capital Requirements Regulation (EU) 575/2013 (“CRR”), the Markets in Financial Instruments Regulation (EU) 600/2014 (“MiFIR”) and the Regulation (EU) 1093/2010 establishing the EBA. Until now, investment firms have been subject to the same capital, liquidity and risk management requirements as banks. According to the agreement, the requirements applicable to investment firms would be differentiated according to firms’ size, nature and complexity. The agreement also strengthens the equivalence regime that would apply to third-country investment firms and grants additional powers to the European Commission. In particular, the Commission would be charged with assessing capital requirements applicable to firms providing bank-like services to ensure that they are equivalent to those applicable in the EU and the Commission would be able to apply specific operational conditions to an equivalence decision to ensure that ESMA and national competent authorities (“NCAs”) have the requisite tools to monitor the activities of third-country firms. The agreement will be followed by further technical work before the IFD and IFR are officially adopted.
European Parliament and Romanian Presidency Reach Political Agreement on Proposed Directive and Regulation Regarding Covered Bonds
On 27 February, the European Parliament and the Romanian Presidency reached a political agreement on (i) a proposal for a directive on the issue of covered bonds and covered bond public supervision and (ii) a proposal for a regulation on amending the Capital Requirements Regulation (EU/575/2013) regarding exposures in the form of covered bonds. The proposed framework aims to set minimum harmonisation requirements that all covered bonds marketed in the EU will have to meet, which includes, among other things: (i) providing a common definition of covered bonds; (ii) defining the structural features of the covered bonds; (iii) defining the tasks and responsibilities of supervisors of covered bonds; and (iv) strengthening the conditions for granting preferential prudential treatment to covered bonds under the Capital Requirements Regulation. Among other things, the European Parliament seems to have accepted the latest compromise by the Presidency on two issues relating to the treatment of loans by public entities and the threshold for derivatives and short-term deposits to qualify as eligible assets. The European Parliament and Council will be called on to adopt the proposals at first reading.
On 15 February, EIOPA published a letter (dated 11 February 2019) from Olivier Guersent, the Director General of the Financial Services and Capital Markets Union at the European Commission, to Gabriel Bernadino, the Chair of EIOPA, requesting technical advice on the review of the Solvency II Directive (2009/138/EC). Mr. Guersent’s letter notes that the Directive provides that certain areas must be reviewed by the European Commission in 2020, including: (i) “long term guarantees measures and measures on equity risk”; (ii) “methods, assumptions and standard parameters used when calculating the Solvency Capital Requirement standard formula”; (iii) “Member States’ rules and supervisory authorities’ practices regarding the calculation of the Minimum Capital Requirement”; and (iv) “group supervision and capital management within a group of insurance or reinsurance undertakings.” The letter also notes that additional parts of the Solvency II framework have been identified by Commission services and stakeholders as warranting reassessment, including the supervision of cross-border activity and the enhancement of proportionality principles.
On 1 February, EIOPA published a letter from Olivier Guersent to Gabriel Bernadino in response to Mr. Bernadino’s 10 December 2018 letter that communicated his concerns regarding the review of Solvency II implementing measures. Mr. Guersent’s letter addressed the European Commission’s decision not to take up EIOPA’s advice on the calibration for the interest rate risk module, noting that the Commission favours revisiting the topic during its review of the directive in 2020. The letter also notes that the European Commission plans to provide in the near future a working document to explain the economic rationale for the calibration and criteria for the interest rate risk module, as well as the potential impact on long-term equity investments; and clarifies that notwithstanding the amendments, the methodology for deriving risk-free interest rates may change as market data changes.
On 7 February, the European Commission published a letter asking EIOPA to review the methodology for the activation of the “country component” of the volatility adjustment under Solvency II. The European Commission notes that while changes to the country component of the volatility adjustment “can be” considered as part of the Solvency II review in 2020, EIOPA can take immediate action to “start exploring if there are other possibilities to improve the functioning and efficiency of the country component of the volatility adjustment that would be in line with the current legal framework.”
EIOPA Published Framework for Assessing Conduct Risk
On 20 February, EIOPA published a framework for assessing conduct risk through the insurance product lifecycle, which aims to clarify the drivers of conduct risk and any related negative impact on consumers. To achieve this, the framework “sets a common starting point for more practical supervision of particular products, services or market segments” and provides an aid for understanding the types of conduct risks that EIOPA and NCAs should focus on. The framework covers risks arising from: (i) insurance undertakings’ business model and management; (ii) how products are manufactured by undertakings and how they are targeted to customers; (iii) how products are brought to the market; and (iv) how products are managed after sale of the insurance product and how undertakings or intermediaries interact with customers until obligations under the contract have ceased. Although the framework does not set out a national supervisory process, it aims to help NCAs identify conduct and consumer protection risks and provides a catalogue of risks to consider in a practical supervisory framework.
Committee of Permanent Representatives Confirms Agreement on Pan-European Pension Product
On 8 February, the Committee of Permanent Representatives (“COREPER”) approved the final compromise text on the proposed regulation on a pan-European pension product (“PEPP”). The text will now undergo legal and linguistic review, after which point it must be formally adopted by the European Parliament and the Council of the EU before it can enter into force. According to the procedure file for the proposed regulation, a plenary sitting date is currently scheduled for 3 April 2019.
IAIS Publishes Application Paper on Supervision of Corporate Governance
On 27 February, the International Association of Insurance Supervisors (“IAIS”) published an application paper aimed at insurance supervisors on the proactive supervision of corporate governance. The paper aims to provide “good practices” relating to the organisation and function of insurance supervisors and highlights practices to help provide insurance supervisors a better understanding of proactive supervision of corporate governance-related issues. The paper also supports the practical application of corporate governance-related Insurance Core Principles (“ICPs”), including ICP 7 on corporate governance and ICP 8 on risk management and internal controls.
ESMA Issues Report on Trends, Risks and Vulnerabilities
On 28 February, ESMA published its latest Trends, Risks and Vulnerabilities Report, which emphasized market sensitivity “amid global trade tensions, weakening growth prospects, reduced global monetary policy stimulus and political uncertainty in the EU related to Brexit.” According to the report, overall risk levels for the EU’s financial markets remained at stable but high levels for most risk categories, including market risk (which remains “very high”) and liquidity, market contagion and credit risks (which also remain high). The report noted that “[g]oing forward, weakened economic fundamentals and continued political uncertainty can be expected to provide an increasingly risky backdrop for financial market activity.” The report looked at the following issues in further detail: (i) technology used in financial supervision (“SupTech”) and regulatory issues (“RegTech”), particularly regarding the use of automation by market participants and surveillance tools by regulators; (ii) heterogeneity of the EU market for Alternative Investment Funds (“AIFs”) sold to retail investors, including harmonization of AIF marketing to retail investors across EU countries, particularly in the context of PRIIPs; (iii) the impact of the Double Volume Cap mechanism on market liquidity in lit EU equity markets, showing improved liquidity in terms of breadth and depth but worsening liquidity in terms of tightness; and (iv) stress testing requirements for money market funds in the EU, including an overview of potential financial stability risks posed by the funds and how stress test guidelines aim at increasing the sector’s resiliency by addressing issues such as the “first-mover advantage.”
ESMA Publishes 2018 Annual Report and 2019 Work Programme on Credit Rating Agencies, Trade Repositories, and Third-Country CCPs
On 19 February, ESMA published its 2018 annual report and 2019 work programme on credit rating agencies, trade repositories and third-country central counterparties (“CCPs”). According to the press release, ESMA’s main supervisory priorities for 2019 include: (i) trade repositories’ data quality and access by public authorities; (ii) trade repositories’ business continuity planning, IT processes and system reliability, and information security function; (iii) credit rating agencies’ portfolio risk and quality of the rating process; (iv) cybersecurity for credit rating agencies; (v) recognition of UK CCPs in a no-deal Brexit scenario; and (vi) assessment of the pending applications for recognition as a third-country CCP or third-country central securities depository.
GFXC Publishes Results of Second Annual Survey
On 14 February, the Global Foreign Exchange Committee (“GFXC”) published the results of its second annual survey of the Foreign Exchange (“FX”) Global Code. Key findings of GFXC’s 2018 survey indicate that: (i) 95% of respondents had read part or all of the FX Global Code and more than two-thirds were aware of updates made to the Code since its initial launch in 2017; (ii) adoption of the Code by market participants increased significantly from 2017 (11% of survey respondents) to 2018 (55%); and (iii) 80-90% of respondents believed the Code had a positive impact on their firm and the wider FX markets. The survey results were accompanied by the publication of: (i) a report on the role of “cover and deal” arrangements in the global FX market, which describes aspects of “cover and deal” arrangements and highlights principles within the FX Global Code relevant to such practices; and (ii) a report on the role of disclosure and transparency in the global FX market, which describes eight characteristics to help market participants develop and review FX disclosures and provides GFXC’s initial views around disclosures on anonymous e-trading platforms.
European Commission Launches Consultation on Equivalence of Japan Financial Services Agency Under EMIR
On 26 February, the European Commission launched a consultation regarding the draft Commission Implementing Decision on the legal, supervisory and enforcement arrangement of Japan for derivatives transactions supervised by the Japan Financial Services Agency as equivalent to the valuation, dispute resolution and margin requirements of Article 11 of the European Market Infrastructure Regulation (EU) 648/2012 (“EMIR”). The consultation closes on 26 March 2019.
European Commission Published Amending Delegated Regulation on the Tick Size Regime
On 13 February, the European Commission published a Commission delegated regulation (C(2019) 904 final) amending Delegated Regulation (EU) 2017/588 regarding the “possibility to adjust the average daily number of transactions for a share where the trading venue with the highest turnover of that share is located outside the [European] Union.” The delegated regulation is based on the draft regulatory technical standards (“RTS”) submitted by ESMA to the European Commission on 12 December 2018, following a consultation period.
European Parliament and Council Reach Political Agreement on Low Carbon Benchmarks
On 25 February, the Council of the EU and the European Parliament reached a political agreement on the proposal for a regulation to amend the Benchmarks Regulation (EU) 2016/2011 (“BMR”) regarding low carbon benchmarks and positive impact benchmarks. The proposal would create two new types of financial benchmarks: (i) EU climate transition benchmarks, “which aim to lower the carbon footprint of a standard investment portfolio”; and (ii) EU benchmarks aligned with the Paris climate agreement, which “select only components that contribute to attaining the 2°C reduction set out in the Paris climate agreement.” The agreement also grants providers of “critical benchmarks” a two-year extension to comply with the new BMR requirements for critical and third-country benchmarks until the end of 2021. The European Commission and Association for Financial Markets in Europe (“AFME”) issued press releases indicating support for the agreement. The agreement will be submitted to EU ambassadors for endorsement, after which point the European Parliament and the Council of the EU will be called on to adopt the proposed regulation.
ESMA Publishes List of Prospectus Thresholds
ESMA Renews Prohibition on Sales of Binary Options to Retail Clients
On 18 February, ESMA announced its agreement to renew the prohibition on the marketing, distribution and sale of binary options to retail clients for a further three-month period from 2 April 2019. The prohibition has been in effect since 2 July 2018.
FSB Publishes Report on FinTech and Market Structure in Financial Services
On 14 February, the FSB published a report on FinTech and market structure in financial services. The report is part of the FSB’s ongoing work to “monitor FinTech market developments and their potential implications for financial stability.” The FSB’s analysis of the link between technological innovation and market structure highlighted several key considerations: (i) the relationship between FinTech firms and incumbent financial institutions appears to be complementary and cooperative; (ii) the competitive impact of large, established technology companies may be greater than that of FinTech firms; and (iii) financial institutions’ reliance on third-party data service providers for core operations is estimated to be low but “warrants ongoing attention from authorities.”
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 26 March: European Commission consultation closes on draft Implementing Decision on equivalence of the Japan Financial Services Agency under EMIR.
o 1 April: ESMA consultation closes on liquidity stress test guidance.