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EU Regulatory Research

EU Regulatory Update



EMSA Publishes Letter to European Commission Regarding the Hedging Exemption in the Calculation of Clearing Thresholds for Non-financial Groups

On 7 June, Steven Maijoor, European Securities and Markets Authority (“ESMA”) Chair, sent a letter to Olivier Guersent, European Commission Director General for Financial Stability, Financial Services, and the Capital Markets Union, regarding the implementation of the new Regulation (EU) 2019/834 amending the European Market Infrastructure Regulation (“EMIR”) with respect to the clearing obligation, reporting requirements, risk-mitigation techniques and trade repositories (“EMIR Refit”) and the calculation of clearing thresholds for financial counterparties (“FCs”) in non-financial groups. According to the letter, ESMA has identified an issue with regards to the calculation of the month-end average positions of FCs in non-financial groups in that while FCs are required to take into account all OTC contracts entered into by FCs and non-financial counterparties (“NFCs”) within the group in which they belong, a NFC only needs to take into account OTC contracts “which are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity (i.e. hedging)“ entered into by that NFC or other NFCs within the group in which they belong (“Hedging Exemption”). Based on this issue, ESMA argues that “from a policy point of view it would make sense that if an NFC can apply the [H]edging [E]xemption for its positions, then the FCs in their group could also apply the same [H]edging [E]xemption when taking into account the position of the NFCs at group level.” EMSA notes, however, that the EMIR Refit does not contain a legal basis for providing the Hedging Exemption for FCs and recommended that the European Commission clarify the interpretation of the relevant provisions in the EMIR Refit.

G20 Leaders Publish Finance Meeting Communique

On 9 June, the G20 Finance Ministers and Central Bank Governors published a communique regarding their 9 June 2019 meeting in Fukuoka, Japan. With regards to financial regulatory matters, the communique stated that the G20 Leaders: (i) “continue to evaluate their effects and welcome the FSB’s public consultation report on [small and medium-enterprise (“SME”)] financing”; (ii) “continue to monitor and, as necessary, address vulnerabilities and emerging risks to financial stability, including with macroprudential tools”; (iii) “continue to identify, monitor and address related financial stability risks” regarding non-bank financing; (iv) will “address unintended, negative effects of market fragmentation, including through regulatory and supervisory cooperation”; (v) “continue to monitor and address the causes and consequences of the withdrawal of correspondent banking relationships, and issues on remittance firms’ access to banking services”; (vi) will remain vigilant to the risks of crypto-assets, although “they do not pose a threat to global financial stability at this point”; and (vii) “continue to step up efforts to enhance cyber resilience, and welcome progress on the FSB’s initiative to identify effective practices for response to and recovery from cyber incidents.”

ISDA Publishes Master Regulatory Disclosure Letter and Guidance Note

On 7 June, the International Swaps and Derivatives Association (“ISDA”) published a master regulatory disclosure letter and related guidance note. The disclosure letter is intended to allow market participants to exchange information regarding counterparty status as required under relevant regulatory regimes, which currently includes requirements under EMIR (as amended by the EMIR Refit). 

FSB Publishes Sixth Progress Report Regarding Compensation Practices

On 17 June, the Financial Stability Board (“FSB”) published its sixth progress report regarding the implementation of its Principles for Sound Compensation Practices and Implementation Standards for the FSB Principles for Sound Compensation Practices (“P&S”) in financial institutions. Among other things, the report found that: (i) “all FSB jurisdictions have implemented the P&S for sound compensation for all banks considered significant for the purposes of the P&S”; (ii) “[w]hile most banks have put in place practices and procedures which reduce the potential for inappropriate risk-taking, their effectiveness is still being tested”; and (iii) “[f]ewer jurisdictions have implemented the requirements for the insurance and asset management sectors.”

European Commission Publishes Guidelines on Climate-related Information Reporting

On 20 June, the European Commission published guidelines on reporting climate-related information, supplementing the guidelines on non-financial reporting adopted by the European Commission in 2017 (C(2017) 4234 final). The guidelines are intended to provide “companies with practical recommendations on how to better report the impact that their activities are having on the climate as well as the impact of climate change on their business.” 

In addition, the European Commission’s Technical Expert Group on sustainable finance also published three reports on sustainable finance, including: (i) a technical report regarding the taxonomy for environmentally-sustainable economic activities; (ii) an expert report on an EU green bond standard, which recommends establishing clear and comparable criteria for issuing green bonds; and (iii) an interim report regarding EU climate benchmarks and benchmarks' ESG disclosures.


Council of the EU Adopts New AIFMD and UCITS Directive and Regulation Regarding Cross-border Distribution of Collective Investment Funds

On 14 June, the Council of the EU adopted: (i) a Directive amending the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) (“UCITS”) and the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”) regarding the cross-border distribution of collective investment undertakings (2018/0041 (COD)); and (ii) a Regulation amending Regulation (EU) 345/2013, (EU) 346/2013, and (EU) 1286/2014 on facilitating cross-border distribution of collective investment undertakings (2018/0045 (COD)). The directive and regulation aim to remove restrictions on the free movement of units and shares of collective investment undertakings across the EU by, among other things: (i) harmonizing the EU rules on the provision of facilities, such as facilities for payment of subscriptions and redemptions; (ii) harmonizing the process for when a UCITS is de-registered for marketing in a host Member State; and (iii) introducing disclosure obligations for marketing communications. 


ESAs Publish Consultation Paper Regarding Amending ITS on the Allocation of ECAI’s Credit Assessments under Solvency II

On 7 June, the European Supervisory Authorities (“ESAs”) published a consultation paper regarding draft implementing technical standards amending Implementing Regulation (EU/2016/1800) on the allocation of credit assessments of external credit institutions (“ECAIs”) to an objective scale of credit quality steps in accordance with the Solvency II Directive (2009/138/EC) (Solvency II). The ESAs note that they previous launched a consultation in October 2018 to address the “outcomes of a monitoring exercise on the adequacy of existing allocations, namely changes to the Credit Quality Steps (CQS) allocation for two ECAIs and the introduction of new credit rating scales for ten ECAIs.” According to the ESAs, a re-review of the allocations of ECAIs is necessary as deficiencies in the process by which respondents provided comments in the first consultation have been identified and some references to the Capital Requirements Regulation (EU/575/2013) (“CRR”) and elements in the mapping table needed to be updated to take into account the latest assessments performed. The consultation period closes on 10 July 2019.

EIOPA and ECB Publishes Common Minimum Standards for Data Revision

On 13 June, European Insurance and Occupational Pensions Authority (“EIOPA”) and the European Central Bank (“ECB”) published a set of common minimum standards for data revisions agreed between the ECB, EIOPA, national central banks (“NCBs”) and national competent authorities (“NCAs”). The common minimum standards specify: (i) “when NCAs or NCBs should request financial institutions to revise the data previously submitted”; (ii) that “the same data has to be available at all levels (i.e. financial institutions, NCAs/NCBs, EIOPA, ECB) at all times”; (iii) “the time when the revisions should be sent by NCAs and NCBs to EIOPA and the ECB respectively”; and (iv) “when an issue is identified which would lead to significant revisions and which also affects back-data and how to provide the revisions.” 

IAIS Publishes Strategic Plan for 2020-2024

On 13 June, the International Association of Insurance Supervisors (“IAIS”) published its strategic plan for 2020-2024. The IAIS states that it has made “significant progress on its post-crisis reform agenda, with the finalisation of the Common Framework for the Supervision of Internationally Active Insurance Group [(“ComFrame”)] and a holistic framework for the mitigation of systemic risk in the global insurance sector expected before the end of 2019.” Looking forward, the IAIS indicated that it will continue to work on finalizing the implementation of post-crisis reform agenda, but will also shift its attention towards addressing trends and developments regarding “FinTech, cyber risk, climate risk, and the challenge of sustainable development. 

IAIS Launches Further Public Consultation Regarding Holistic Framework for Systemic Risk in the Insurance Sector

On 14 June, IAIS launched a further public consultation regarding a draft holistic framework for systemic risk in the insurance sector following a public consultation that ended on 25 January 2019. The consultation is seeking feedback regarding revisions to a number of Insurance Core Principles (“ICPs”) and sections of the ComFrame, including: (i) ICP 9 (regarding supervisory review and reporting) and the ComFrame in ICP 9; (ii) ICP 10 (regarding preventive measures, corrective measures, and sanctions); (iii) ICP 16 (regarding enterprise risk management for solvency purposes) and the ComFrame in ICP 16; ICP 20 (regarding public disclosure); and ICP 24 (regarding macroprudential supervision). The consultation period closes on 15 August 2019.

IAIS Launches Public Consultation Regarding Supervisory Material

On 16 June, IAIS launched a public consultation seeking feedback regarding its: (i) draft revised IAIS Glossary; (ii) draft ComFrame assessment methodology; (iii) changes in the introduction to ICPs and ICP 7 (regarding corporate governance) for consistency with ComFrame development; and (iv) draft revised ICP 22 (regarding anti-money laundering and combatting the financing of terrorism). The consultation period closes on 15 August 2019. 

Council of the EU Adopts PEPP

On 14 June, the Council of the EU adopted a Regulation on a pan-European Personal Pension Product (“PEPP”) (2017/0143(COD)). The PEPP aims to provide a simple alternative to personal pension products currently available in EU markets with standard features and transparent costs. The regulation was signed on 20 June 2019.

European Commission Publishes Report to European Parliament and Council of the EU Regarding Group Supervision and Capital Management within a Group of Insurance or Reinsurance Undertakings

On 27 June, the European Commission published a report to the European Parliament and Council of the EU on the application of Solvency II regarding group supervision and capital management within a group of insurance or reinsurance undertakings. The report assesses the “benefit of enhancing group supervision and capital management within a group of insurance or reinsurance undertakings” under Solvency II. Specifically, the report: (i) “analyses supervisory practices and challenges related to the determination of the scope and the exercise of supervisory powers over groups”; (ii) “assess challenges and legal uncertainties related to group solvency calculation, group governance and group reporting”; and (iii) “provides a brief overview of developments in the fields of mediation of supervisory disputes and insurance guarantee schemes, which are not directly related to group supervision.” 

IAIS Publishes Public Roadmap for 2019

On 28 June, the IAIS published its key projects public roadmap for 2019. The roadmap sets out the steps IAIS has taken and upcoming milestones with regards to a number of project in 2019, including, among others: (i) the comprehensive review and revision of the ICPs; (ii) the finalization of the ComFrame; (iii) the finalization of the holistic framework for the mitigation of systemic risk; (iv) assessment and monitoring of G-SII policy measures implementation; (v) cybersecurity; and (vi) FinTech.

EIOPA Publishes June 2019 Financial Stability Report

On 1 July, EIOPA published its June 2019 Financial Stability Report of the (re)insurance and occupational pensions sectors in the European Economic Area. Among other things, the report found that: (i) “[i]n the past months, the economic environment has become more challenging due to ongoing political uncertainty around Brexit, growing trade tensions, a slowdown in the world economy and an unstable economic outlook in certain emerging markets”; (ii) “[d]espite some increase in volatility toward the end of 2018, financial markets have recovered in the beginning of 2019 and valuations remain stretched in certain equity, bond and real estate markets, indicating that market prices may not fully reflect underlying vulnerabilities; (iii) “[e]merging risks, such as climate-related risk and cyber risks, also continue to demand attention” and that “[c]limate-related physical risks remain present in the underwriting activities of insurers, while transition risks affect the investment portfolios of insurers and pension funds; (iv) “[o]verall Solvency ratios of European insurers have slightly improved further in 2018 and remain high around 200%, but the profitability of insurers is under increased pressure”; and (v) “[t]he European occupational pension fund sector continues to be negatively affected by the persistent low interest rate environment, in particular for the Defined Benefit (DB) pension schemes.”

EIOPA Publishes Consultation Paper Regarding the Outsourcing of Services to Cloud Service Providers

On 1 July, EIOPA published a consultation paper on guidelines regarding the outsourcing of services to cloud service providers in relation to Solvency II, Commission Delegated Regulation (EU 2015/35) supplementing Solvency II, and EIOPA’s guidelines on system of governance. Among other things, EIOPA is seeking feedback on the following areas covered by the guidelines: (i) “[c]riteria to distinguish whether cloud services should be considered within the scope of outsourcing”; (ii) “[p]rinciples and elements of governance of cloud outsourcing including documentation requirements and list of information part of the notification to supervisory authorities”; (iii) “[m]anagement of access and audit rights; security of data and systems; sub-outsourcing, monitoring and oversight of cloud outsourcing and exit strategies”; and (iv) “[p]rinciple based instructions for the national supervisory authorities on the supervision of cloud outsourcing arrangements including, where applicable, at group level.” The consultation period closes on 30 September 2019.

EIOPA Publishes Q&As

On 4 July, EIOPA published the answers to a number of different topics, including:

o    Solvency II and Regulation (EU) 2015/35 supplementing Solvency II;

o    Regulation (EU) 2015/2450 regarding templates for the submission of information to the supervisory authorities;

o    Guidelines on Health Catastrophe Risk Sub-Module;

o    Guidelines on basis risk; and

o    Other questions 

EIOPA Establishes Panel on PEPP

On 5 July, EIOPA announced that it has established a new Expert Practitioner Panel on the PEPP. According to the press release, the panel will: (i) inform EIOPA's policy work; (ii) test policy proposals; and (iii) act as sounding board supporting EIOPA delivering on its mandate.


European Commission Publishes Draft Implementing Decisions on the Equivalence of Third Country Credit Rating Frameworks

On 11 June, the European Commission published and requested feedback regarding draft implementing decisions regarding the recognition of several third country legal and supervisory frameworks as equivalent to the requirements under the Credit Rating Agencies Regulation (EC/1060/2009) (“CRAR”). The legal and supervisory frameworks include those of: (i) Mexico; (ii) the U.S.; (iii) Japan; and (iv) Hong Kong. In addition, the European Commission also repealed the equivalence determinations of a number of third countries under the CRAR, which include: (i) Australia; (ii) Singapore; (iii) Argentina; (iv) Canada; and (v) Brazil. The consultation period closes on 9 July 2019.

ESMA Publishes Report on Frequent Batch Auctions

On 11 June, ESMA published a final report on frequent batch auctions (“FBAs”) and whether and to which extent these systems are used to circumvent the double volume cap (“DVC”) under the Markets in Financial Instruments Directive (2014/65/EU) (“MiFID II”). The report summarizes the results of a call for evidence on FBAs launched by ESMA in November 2018, which examined whether FBAs were being used to circumvent the suspension of trading under the DVC, and presents ESMA’s assessment of four main characteristics of FBA trading systems: (i) limited pre-trade transparency; (ii) short auction duration; (iii) price determination within the best bid and offer price; and (iv) self-matching features. Based on the evidence received, ESMA indicated that it identified follow-up items regarding pre-trade transparency and the price determination process of the FBAs and that it will issue supervisory guidance relating to these topics in the coming months.

ESMA Publishes Updated Q&As Related to EMIR Refit

On 14 June, ESMA published updated Q&As regarding data reporting under EMIR as amended by the EMIR Refit. The updated Q&As provide clarification regarding: (i) “the calculation framework towards the clearing thresholds”; and (ii) “the notifications to be made by market participants to their competent authorities to apply an intragroup exemption from reporting.”

ESMA Publishes Updated Q&As Related to CSDR

On 28 May, ESMA published updated Q&As on the implementation of the Central Securities Depository Regulation (EU) 909/2014 (“CSDR”). The updated Q&As provide clarification regarding: (i) “the interaction between the main authorisation procedure (CSDR Art 17) and the passporting procedure (CSDR Art 23(2)), and the benefit of the grandfathering rule for notary and central maintenance services provided on a cross-border basis prior to the authorisation of the CSD”; (ii) the “[d]etails [of] what should be considered as a change in the range of services provided on a cross-border basis; (iii) “how ‘where relevant’ used in Article 23(3)(e) of CSDR should be understood”; and (iv) “the process to be followed in case a host Member State authority disapproves the assessment of the measures proposed by the CSD to comply with the law of that host Member State.”

ESMA Updates Results of the Annual Transparency Calculations for Equity and Equity-like Instruments

On 21 June, ESMA began publicly making available the updated annual transparency calculations for equity and equity-like instruments under MiFID II and MiFIR. The calculations cover: (i) the liquidity assessment; (ii) the determination of the most relevant market in terms of liquidity; (iii) the determination of the average daily turnover relevant for the determination of the pre-trade and post-trade large in scale thresholds; (iv) the determination of the average value of the transactions and the related the standard market size; and (v) the determination of the average daily number of transactions on the most relevant market in terms of liquidity relevant for the determination of the tick-size regime. The updated calculations will apply from 8 July 2019 to 31 March 2020.

o    On 7 July, ESMA published updated results of the 21 June 2019 annual equity transparency calculations. ESMA stated that it has “recently been made aware of an issue with the updated calculations which appears to affect the results for shares whose main pool of liquidity is in a third country while having less than one transaction a day on average on the most relevant market in the EU” and has published the updated results while it is investigating the issue. ESMA also clarified that “European trading venues are until further notice not bound by the tick sizes deriving from the ESMA publication of 21 June 2019 for third-country shares with an average daily number of transactions lower than one on the most relevant market in the EU.”

IOSCO Publishes Report Regarding Liquidity in Corporate Bond Markets Under Stressed Conditions

On 21 June, the International Organization of Securities Commissions (“IOSCO”) published a report examining the factors affecting liquidity in corporate bond markets under stressed conditions. Generally, the report found that “changes in the structure of secondary corporate bond markets have altered the way that liquidity is provided in these markets,” which have resulted from, among other things: (i) “post crisis regulations that have reduced the capacity of intermediaries to provide liquidity in secondary corporate bond markets”; (ii) “greater risk aversion on the part of intermediaries”; (iii) “the gradual introduction of electronic trading”; and (iv) “significant growth in the size of these markets resulting from central banks’ quantitative easing policies and low rates of return on other financial assets.” In addition, the report also found that: (i) “[a] reduction in the capacity and desire of dealers to participate in corporate bond markets as principals could mean that future movements in bond prices in times of stress will be more acute than before”; (ii) characteristics of corporate bond markets, such as “effective liquidity management by issuers of corporate debt”, “should reduce the risk that strong price movements in bond markets will generate broader economic stress”; and (iii) “mutual funds are unlikely to be a source of either considerable selling or price volatility under stress, particularly those funds with managers who have instituted strong liquidity management processes, including plans for operating under stressed conditions.”

ESMA Consults on Short-Termism in Financial Markets

On 24 June, ESMA published a questionnaire aimed at gathering evidence on potential short-term pressures on corporations stemming from the financial sector. ESMA indicated that the results of the questionnaire will contribute to ESMA’s “analysis of potential sources of undue short-termism on corporations with an aim to identifying areas in which existing rules may contribute to mitigating undue short-termism and areas where the rules may exacerbate short-term pressures.” The consultation period closes on 29 July 2019.

Couuncil of the EU Agrees on Positions Regarding EU Framework for Operation of Crowdfunding Platform

On 24 June, the Council of the EU announced the agreement by its Permanent Representatives Committee (“COREPER”) on its positions regarding: (i) a proposal for a regulation on European Crowdfunding Service Providers (“ECSP”) for Business and amending Regulation (EU) 2017/1129; and (ii) a proposal for a directive amending MiFID II. According to the press release, the Council’s position: (i) “removes barriers for crowdfunding platforms operating cross-border”; (ii) “provides tailored rules for EU crowdfunding businesses depending on whether they provide their funding in the form of a loan or an investment (through shares and bonds issued by the company that raises funds)”; (iii) “provides a common set of prudential, information and transparency requirements to ensure a high level of investor protection”; and (iv) “defines common authorisation and supervision rules for national competent authorities.”

ESMA Does Not Renews Prohibition on Sales of Binary Options to Retail Clients

On 1 July, ESMA announced its decision not to renew the prohibition on the marketing, distribution and sale of binary options to retail clients because “most [NCAs] have taken permanent national product intervention measures relating to binary options that are at least as stringent as ESMA’s measure.” The prohibition had previously been in effect since 2 July 2018.

ESMA Updates Q&As Regarding the Implementation of the CSDR

On 1 July, ESMA published updated Q&As on the CSDR. The new Q&As clarify certain “aspects regarding the scope of financial instruments subject to internalised settlement reporting.”

ESMA Publishes Latest Double Volume Cap Data

On 5 July, ESMA updated its public register to include the latest set of double volume cap (“DVC”) data under MiFID II. MiFID II “introduced the DVC to limit the amount of dark trading in equities allowed under the reference price waiver and the negotiated transaction waiver.” The update covers DVC data and calculations for the period 1 June 2018 to 31 May 2019 as well as updates to already published DVC periods. ESMA notes it has suspended a total of 285 instruments as of 5 July 2019.


IOSCO Issues Final Report Urging Authorities to use Existing Standards to Address Cyber Risk

On 18 June, the IOSCO issued a final report produced by IOSCO’s Cyber Task Force that provides an overview of three internationally recognized cyber standards and frameworks used by IOSCO members, namely: (i) the Committee on Payments and Market Infrastructures (“CPMI”)-IOSCO Guidance on Cyber Resilience for Financial Market Infrastructures; (ii) the National Institute of Standards and Technology Framework for improving Critical Infrastructure Cybersecurity; and (iii) the International Organization for Standardization 27000 Series Standards. According to the press release, the Cyber Task Force “hopes more members will review their own cyber standards against the practices of the Core Standards and, where relevant, use the Core Standards as a model to further enhance their cyber regimes.


o    12 July: Two ISDA consultations closes on benchmark fallbacks regarding: (i) adjustments that would apply to fallback rates in the event certain interbank offered rates are permanently discontinued; and (ii) pre-cessation issues for LIBOR and certain other IBORs.

o    26 July: EIOPA consultation closes on draft opinion on sustainability under Solvency II.

o    29 July: IOSCO consultation closes on key considerations for regulating crypto-asset trading platforms.

o    29 July: ESMA consultation closes on draft guidelines regarding how to report securities financing transactions under the STFR.

o    29 July: Three ESMA consultations close on EMIR 2.2 tiering, comparable compliance, and fee.

o    29 July: ESMA consultation closes on short-termism in financial markets.

o    9 August: IOSCO and CPMI consultation closes regarding CCP default management auctions.

o    15 August: IAIS Public Consultation closes on holistic framework for systemic risk in the insurance sector.

o    15 August: IAIS Public Consultation closes on supervisory material.

o    15 August: ESA consultation closes regarding the reporting of intra-group transactions and risk concentration for financial conglomerates.

o    27 August: ESMA consultation closes regarding periodic reporting rules for trade repositories.

Ianthe Zabel
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